Eastern Virginia Bankshares (EVBS) Southern National Bancorp of Virginia and Eastern Virginia Bankshares Announce Transformational Merger of Equals (Transcript)

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About: Eastern Virginia Bankshares, Inc. (EVBS)
by: SA Transcripts

Eastern Virginia Bankshares, Inc. (NASDAQ:EVBS) Southern National Bancorp of Virginia and Eastern Virginia Bankshares Announce Transformational Merger of Equals December 14, 2016 10:00 AM ET

Executives

Georgia Derrico - Chairman and CEO of Southern National

Rod Porter - Vice-Chairman and President of Southern National

Joe Shearin - President and CEO of Eastern Virginia

Analysts

Ross Haberman - Haberman Management

Ben Mackovak - Strategic Value Partners

Catherine Miller - KBW

Austin Nicholas - Stephens Banks

Michael Salzhauer - Benjamin Partners

Operator

Good morning and thank you for joining us today as we discuss the announced merger of Southern National Bancorp of Virginia, Inc. and Eastern Virginia Bankshares, Inc. On this call, we will be discussing the merger as well as the presentation that was filed by each company with effect in advance of this call.

The presentations and statements made on this call include forward-looking statements within the meaning of Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Looking forward statements really the future developments and events, which may or may not actually occur but which the companies respective management teams believe are useful for investors to understand as they consider the merger. These forward-looking statements are based on the current belief, assumption and expectation of the management of Southern National or Eastern Virginia and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond their control.

Actual results could differ materially from results indicated or implied by these statements, due to certain risk factor including those set forth in the Company’s filing with effect. You should not place undue reliance on forward-looking statements and the companies do not intend to correct or update any of the forward-looking statements that we make today. Specific risk which may affect the forward-looking statements made in the presentation materials or during this call, include whether shareholders approve the merger whether the companies received receive regulatory approval, the timing of closing whether the companies have accurately predicted acquisition and consolidation expenses, the timing and an amount of saving from consolidation, the expected earnings contributions of both companies and management’s ability to effectively integrate the two companies. Also this may be deemed to the solicitation materials of Southern National and Eastern Virginia and connection with the proposed merger of Southern National with Eastern Virginia.

Shareholders of both companies are urged to be joined proxy statement/prospectus that will be included in the registration statements on Form S-4, which Southern National and Eastern Virginia will file with effect in connection with proposed merger because it will contain important information about Southern National, Eastern Virginia, the merger and related matters. Their directors and executive officers of Southern Nationals and Eastern Virginia may be deemed to be participants in the solicitation of proxies from their respective shareholders. Information regarding the participants can be found in each of Southern Nationals and Eastern Virginia’s most recent proxy statements filed with effect and the joint proxy statement/prospectus when it is filed with effect.

All documents filed with effect are or will be available for free on SEC's website and the Southern National and Eastern Virginia's website. With me this morning are Georgia Derrico, Chairman and CEO of Southern National; Rod Porter, Vice-Chairman and President of Southern National; Joe Shearin, President and CEO of Eastern Virginia. Early broadcast of this call will be available two hours after the call, by dialing 855-859-2056. This phone number and the access code are also noted in the merger announcement release we issued yesterday.

I will now turn the call over to Georgia Derrico, ma'am the floor is yours.

Georgia Derrico

Thank you very much. We want to welcome everybody on to this presentation. I’m not going on go on through it because I think everybody has it, and I will just briefly outline it on. Needless to say, we’re very-very excited about this and the joint bank will be the seventh largest and located in Virginia. We’ll have 2.4 billion in asset and we’re committed the three of us Joe Shearin, Rod Porter and myself to manage this company into a very-very profitable one. Joe will become the CEO of the joint bank, and I will be the Executive Chairman, and Rod will be Executive Vice Chairman.

I think everybody knows mergers of equals are intrinsically difficult, but we’re committed that we’re going to put egos aside and we’re going to work a lot harder to get to be a winner. Therein a lot of these mergers of equals, there are winners and losers, but this one is the only winner is going to be the total bank, and it’s going to be a profitable bank. We’re going to have cost savings and it’s going to be a very great opportunity for our shareholders. I think those of you that know Rod and myself you know that we’re quite larger shareholders that we have invested into this business.

The Company will be -- name will be Sonabank. It’s a 100% stock deal. The ownership is we’ve been going back and forth on this, its 51.4% and 48.6%. And we will have -- the directors will have six Sonabank Directors and five on Eastern Virginia with one observer. Of course, we have to have regulatory approvals and we anticipate a closing probably at the end of the second quarter. We’re really excited about it and I think Joe, who we’ve known for nine years and we’ve worked with him on Southern Trust Mortgage, which has been incredible success. So, we know each other pretty well, and I think we’re going to work very well together.

And now, I’ll turn it over to Joe.

Joe Shearin

Thanks Georgia. Good morning everyone, and as Georgia has said, we’re extremity excited about this merger of equals as well. Mergers of equals are very difficult. The key is execution at this point in putting them together and the three of us committed to working together on that. And I think you've seen our merged banks are going to have a very diversified unique and attractive branch franchise, stretching from Frederick, Maryland through Washington, Richmond and connecting some of our legacy markets of Northern Neck Middle Peninsula, Shenandoah Valley and Charlottesville and going out only down to the Virginia Beach, Newport News in Norfolk areas, which we think one of the most attractive branch franchises in the United States, it’s very high growth markets.

So by combining our 106 year old community bank at EVB with our loyal customer based, our strong core deposits, our established and wide variety of retail products with SONA's high growth markets and our dynamic lending platforms I think creates the premier bank in the State of Virginia. So, it’s very exciting prospect for us. We also think there are a lot of tremendous synergies between our two companies due to our mutual respect for each other. As Georgia said, we’ve known each other for quite awhile. We’ve work together on other projects. We respect each other, like each other, and I am just excited to be a part of this executive team running this bank with Georgia and Rod as we create an outstanding company.

Because together utilizing the best practices processes, utilizing the best people from our two companies, we’re going to create unique opportunity for future growth and improved profitability. And this merger is going to be good for our communities that we operate in, our employees that work for us, especially our customers and our shareholders. So from our perspective, I think it’s a win-win, it looks like one plus one is going to equal three or maybe four, because we’ve got a great opportunity of creating a wonderful bank. And the three of us are committed to putting our egos aside and making it work together.

With that Rod, I’ll turn it over to you.

Rod Porter

Both Georgia and Joe said, it’s hard to do a merger of equals so well. As [Indiscernible] said you can’t make an omelet without breaking eggs. As Georgia said, we’ve got to go through all the processes on both sides as well as picking the best people and make decisions. We’ve begun that process, and we’ll continue to get over the next couple of months. From a trivial level, we’ve got to decide what the Board package is going to look like. It looks like ours. Georgia hasn’t been peak. Joe’s last one was 217 pages long. And who's at more profound level -- whose strategic capital plan we’re going to use, we're going to use Joe’s, and dozens of other things. We’ve begun that process and our working through it. We’re going to deliver to defer to Joe on retail and on the branches. They have 25,000 accounts and we have 8,000.

With that one very much to bring some of the services offered by EVBS' branches to ours. But we want to streamline the credit and lending function, that doesn’t mean to make it easier to get approvals, but to make it faster and gets structuring advice, pricing guidance and approval from denials to the loan offers as quickly as possible. The objective is to enhance the customer experience by streamlining the process. Sonabank has robust lending platform, which allows for credit scrutiny and guidance to the loan offers or structuring pricing and approvals without delays. Sonabank is a major SBA lender in its footprint, and we want to expand that in a meaningful way to the EVBS footprint. Similarly, we are a significant CRE lender with the merger and the plan so that its deal. We will have the flexibility to do more. That’s all from me.

Georgia Derrico

Okay. I guess, now, we’ll open it up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question that we have comes from the line of Mr. Ross Haberman from Haberman Management. Please ask your question.

Ross Haberman

Morning Rod and morning Georgia. Congratulations to everybody with the deal. I had just a quick question, could you talk about revenue enhancements you touched upon it a little bit? Could you talk about that? And in your suggestion of making up the 4% or 5% dilution to book, is there any revenue enhancement assumptions built into that, that expectation?

Rod Porter

I’ll talk some about the revenue enhancements. We believe the revenue enhancements are going to come out of some of the products and services that we will be looking at from a joint basis. As some of you know, we have a very robust retail division and we have got a very loyal customer base with a lot of various products that provide us with the non-interest income that we need to generate additional revenues. We see the growth markets that SONA has in their branch network is some key essential to put our retail products in with some growth enhancements. We have not built any into this model. We have really looked at what we could do together and what the cost savings would be to make the numbers work.

Georgia Derrico

And I would just might add that, I think everybody realizes as it Sonabank branches only 11 years old, and we really have embedded not our expertise on the retail side and that’s why we are so excited about this merger because we’re going to be able to leverage and chose products and offer that to all our branches, and I think that will increase revenues right away.

Ross Haberman

And just one final question. I don’t think there is any overlap of branches, but do you expect any overlap in savings there in terms of repositioning or closing down overlapping sites?

Rod Porter

Yes, one of the things we will do is we’ll look at our existing branch franchise. When put them together, we’ll do a lot of marketing data, marketing strategies that we do in our branches. We continue to look at our branch network on an annual basis. We’ll look at the new footprint and we’ll take a look at where that we think we are in growth markets where the branch is located in the right spot, and we need to relocate them for more growth. Do we need to close them down because we can’t grow those markets fast enough? We’ll take a look at the whole footprint. But at this point, we don’t have any target for just absolute closings. We are going to take a look at the whole footprint, and also you’ll notice on the map, we’ve got some obvious holes to plug that we think there are some growth opportunities where some additional locations for us to grow into.

Ross Haberman

And just one final sort of general question. In terms of oversight and compliance cost that everyone is talking about is going to be hopefully relaxed under this new administration. Could you give us your thoughts on that possibility?

Georgia Derrico

I don't anticipate it to go down during that. I think we both are structured that we have. You know our compliance costs are in there, and hopefully it would be -- compliance will not increase. But I don’t think it's going to go down very much.

Operator

The next question that we have comes from the line of Mr. Ben Mackovak from Strategic Value Partners. Please ask your question.

Ben Mackovak

Can you please explain the division of labor between McLean and Richmond? And how you see that shaking out?

Georgia Derrico

Our headquarters for the holding company will be McLean. And Rod and I are -- we’re based in Georgetown. Joe is based in Richmond and that's the headquarters for the bank, and I can tell you we’re probably be going back and forth 95 between Richmond and Georgetown quite a bit. And I don’t think that’s a big problem because now with the phones, the internet, we talk daily. Do you want to add anything?

Rod Porter

That’s exactly right. I think the key is that we’re trying to keep the structure that makes most sense to us. We go look at best practices. We’re going to look at operations to try to consolidate and take advantage of any synergies we can get, and so we believe McLean because that’s where Southern National is already headquartered. It's a great spot for us and then because offices are located in Richmond, we thought that would be a bank location as well. And Richmond seems to be more essential for our bank footprint. If you look at the map, we’re all around it and it seems to be a good central location for the bank franchise.

Ben Mackovak

But it doesn’t make sense to consolidate the two headquarters into just Richmond?

Georgia Derrico

I don’t think it's going to make much difference actually.

Rod Porter

Yes, not at this time. We think both can work effectively.

Ben Mackovak

Okay. And can you.

Georgia Derrico

We think it's plus to have a Northern Virginia location.

Ben Mackovak

Okay. And who are the five Board members coming over from Eastern Virginia?

Rod Porter

We have not decided on the Board members at this point. We just of course said the Board meeting to get it approved yesterday. At this point, we’ll start deliberating and that will be announced probably when the time comes from the proxy information.

Ben Mackovak

Okay. One final one for me, can you explain how you've arrived at the exchange ratio?

Georgia Derrico

I think we've used our investment bankers and we looked at the competition. And we think, it’s a pretty ownership -- we looked at our ownership versus EVBS'. We looked at profitability. We looked at capital ratios and then we looked at and the competitor and our market caps.

Rod Porter

And we looked at -- we've strived try to look at all the aspects of who brought what to the table, loans deposits, market cap. All the different things, profitability as you see SONA is so much more profitable than we’ve been. So, we’re going to learn a lot of things from them. So, it’s really I would like to say, it was probably more magic than it was science. It was trying to come up and get a fair price and a fair exchange for both sides and I think we did that. We feel very comfortable with that.

Operator

The next question that we have comes from the line of Mr. Howard Henick. Your may now ask your question.

Unidentified Analyst

Obviously, I know, Joe has done pretty well because they're going to hold up, I know six to seven years. But I don’t know SONA as well and looking at the presentation, I noticed that a tremendous amount of time deposits, the over whelming majority of which is in excess of a $100,000. Why is that and are those brokered or what’s the story there exactly?

Rod Porter

There is just small amount of brokered, but we’re an 11-year-old institution where in a very-very booming lending market. We've been adequately capitalized to grow and we do not have the resources on the deposit side that a 110-year-old institution does. And so, that’s why this is an excellent deal for us.

Joe Shearin

Howard, I think exciting part from our standpoint is the potential their branches out. Rest to put our products and services in it. I think our hope is that we can reverse that very quickly and give more core deposits, more commercial deposits and lower cost funding.

Unidentified Analyst

Are there branches then like are there two few branches on this side or the branches they have just not very productive in terms of getting substantial amounts of the part like are they small branches or they like?

Georgia Derrico

They are relatively small branches. But as Rod said, it takes some time to build up demand deposits than we've been -- everybody asked us and we said, we’re working so hard where when we do loan, we say we want to all your account. But it takes time and we’re in a very competitive market and our costs are not every expensive at these branches, we do have a lot and maybe we have probably -- we will look at that whether we want to consolidate some branches or not. But we run further pretty efficiently.

Unidentified Analyst

No, no, just one thing that fit out for me when I looked at presentation, I let it go. Obviously, you see the cost deposit is 50 basis points where it's lower for EVBS. Obviously I know, I read your presentation that’s the whole -- that’s what you think EVBS brings to the table among other things is the deposits base so.

Unidentified Company Representative

Exactly.

Unidentified Analyst

I hear you. Okay, thank you very much. Good luck.

Operator

The next question that we have comes from the line of Catherine Miller from KBW. You may now ask your questions.

Catherine Miller

Want to dig into the margin a little bit. Clearly, the cost of deposits is an opportunity that you're your brining to the table Joe. How do you think about the pro forma margin? And can I ask this in two ways; one, on a static basis; and then two, as we move into a higher rate environment. How do you expect both of your balance sheets to work and reprise as rates move higher?

Joe Shearin

We’ve looked pretty closely and how we look together. Individually, Sonabank benefits pretty substantially from increases in interest rates that we hopefully will get this afternoon. On Sonabank on loan basis with a 300 basis point increase in interest rates, our net interest income goes up by 11.7%. EVBS goes up under that same scenario of 4.5, together it’s a reasonable 7.7. The interesting thing is looking at the economic value of equity, we are in slightly different positions but they offset each other totally. With a 300 basis point increase, the EVBS goes up by 21% with EVB, with us it goes down by 16. And together, it’s roughly flat, it’s up 4.8%. So, in our press release I guess a couple of quarters ago, we get a pretty detailed analysis of what happens to our net interest income when rates go up without reducible to do then if rates gone up for so long. And you might refer back to the first press release after the last that rate increase.

Catherine Miller

And so then, we have second question part of margin. I think you mentioned that you’re seeing rising subject alongside the transaction. With how large of the rates are you looking to do?

Joe Shearin

We do not have a plan to raise up that yet. We have gotten a rating because EVB has a rating, and it just gives us flexibility as we look forward in the future.

Operator

The next question that we have comes from the line of Austin Nicholas from Stephens Banks. You may now ask your questions.

Austin Nicholas

Just had a quick question on the commercial real estate exposure at SONA. It’s a little over 50% when you include kind of multifamily. Could you just give some color on what that properties those are? Are they suburban office? Are they more down towards the central business district of DC or really just some color on what type of properties those are?

Georgia Derrico

They’re really diverse. I mean we have assisted living. We have hotels. We don’t have any or very many office buildings. We had mentioned before that we were around when there were all those see-throughs and we keep away from them. We have some retail space. Our portfolio is we are concentrated in commercial real estate, but it is really a diverse portfolio. And that’s the way we guess, we have to do a lot of analytical work with the regulators because we’re over that of their levels. But together we’re going to be fine and we hope to continue to do a lot more commercial real estate because that’s all you can do really in Northern Virginia in Maryland and Richmond.

Austin Nicholas

Right. Okay.

Joe Shearin

We have almost nothing in the central business district. And when Georgia mentioned that our hotels, those are all limited service hotels and they are in our footprint, but none of them in the central business district.

Austin Nicholas

And then just one real quack question on the estimated cost savings. Is that 16%, does is that include an assumption on branch closures at all?

Joe Shearin

Yes, we’ve looked at some consolidations, but most of the -- there might be a little bit in there -- but most of the cost savings have been -- we've looked diligently at our operating expenses, and as you know, SONA has operated a very efficient level while EVBS has been a little top heavy because in the rent agreement we went through, we had to put together a lot of processes and infrastructure. So, we see the opportunity after our process we went through. We transformed in EVB about 18 months ago where we eliminated some jobs. We see a very big push here that we can be more efficient and take a lot of processes, best practices and improve our profitability. So, we’ve spent a lot of time on the cost saves, making sure they were conservative.

Operator

The next question that we have comes from the line of Michael Salzhauer from Benjamin Partners. You may now ask your question. Michael?

Michael Salzhauer

First of all, thank you for doing a good job of shepherding this investment and I am sorry that I was kind off and on, on the call. Do you -- I have two questions. One is, do you have any sense of how long it should take for the combined institution to get to be learning at a good steady state? And second of all, was any thought in putting these two companies together that their value to other institution is ultimately going to be bigger for shareholders because of how they fit together?

Georgia Derrico

I’ll answer the first part. I think we’re really committed to hit the ground running. We really need to do some cost saves and consolidate. We don’t expect to close until the end of June, if depending on regulatory approval. And I would say after that I would hope to be there within a year, a year to 18 months to have all those costs savings in there. And when we look at the payback period it's under two years. Do you want to answer?

Rod Porter

Yes and the only other point I will make is I think we’re going to take the opportunity in the six months while we’re trying to get approvals to look -- to get our teams together that pick the best processes as to pick the best solutions, and hopefully hit the ground running pretty rapidly when this thing is finally approved and we can put it together. We’ll do a lot of the heavy-lifting prior to the final consummation of the merger.

Georgia Derrico

And the second part of your question. Do we think that together we’re more valuables than alone? I think Joe said one in one equals three hopefully that will equal four.

Michael Salzhauer

I’ll take three or four and in the meanwhile I want to thank you for looking after my family’s investment.

Georgia Derrico

Thank you.

Operator

We don’t have any questions as of the moment. Speakers you may continue.

Georgia Derrico

Any other questions that we can answer, if not, I guess we’ll hang up and say thank you very much for your time. I can say that the three of us are committed to work really-really hard the next 12 to 18 months. And thank you again for all your support.

Operator

Thank you for joining today’s conference call. You may now disconnect.