Atlantic Union Bankshares Corp (AUB) 2014 Q1 法說會逐字稿

(Operator Instructions) It is now my pleasure to turn the webcast over to Bill Cimino, Vice President of Corporate Communications. Mr. Cimino, the floor is yours.

Thank you, Lindsey, and good morning, everyone. I have Union President and CEO Billy Beale and Executive Vice President and CFO Rob Gorman with me today. Also joining us for the question-and-answer period are Elizabeth Bentley, EVP and Chief Retail Officer; Tony Peay, EVP and Chief Banking Officer; and Jeff Farrar, EVP of Wealth Management, Insurance, and Mortgage.

I wanted to note that today's earnings release is available to download on our investor website, investors.bankatunion.com. Before I turn the call over to Billy, I would like to remind everyone that we will make forward-looking statements on today's call which are subject to risks and uncertainties. A full discussion of the Company's risk factors are included in our SEC filings.

At the end of the call we will take questions from the research analyst community. And now I will turn the call over to Billy Beale.

Good morning, everyone. Thanks for being here. I'm sure some of you are out there saying hallelujah, because over the past few quarters we have heard from many of you of your desire to have Union hold a quarterly conference call to discuss our results. And we thought that today's earnings announcement with the first-quarter consolidated results from the StellarOne acquisition would be a good place for us to start.

Rob will go into the financial performance in greater detail, but I wanted to touch on a couple of operational highlights from the first quarter and then provide you with an update on the integration of StellarOne. But before I do that, I want to mention a couple of recognitions that we received during the first quarter.

After a nationwide survey of 600 brands, J.D. Power and Associates has recognized Union as one of 50 Customer Champions. Frankly, we are just really pleased that we would even show up on the radar in a nation-wide story or survey. I think that speaks a lot to the efforts of our teammates in providing a really high-quality service with our customers and that resonates.

Then, we are also pleased to be one of the few banks in the -- I'm sorry, then on April 1 Forbes magazine recognized Union as one of America's 50 Most Trustworthy Financial Companies. We were the second ranked bank in the $1 billion to $5 billion market cap group. Obviously, with integrity and trust being one of our corporate values, we are very pleased to have that recognition as well.

Now on to the first-quarter results. Both banks, Union and StellarOne, delivered another great quarter. If we back out the $9 million in after-tax merger-related expenses for the quarter, the community bank segment earned $18.2 million or an EPS of $0.39 a share.

I want to recap what I see as the highlights and, if you will, the lowlights for the community bank segment during the quarter. First, our average loan growth was annualized at 3.2%. This was less than forecast, but I think in a quarter in which we had come together and we are getting to know each other, if you will, I think that even having positive loan growth as we were trying to put the teams together with some of the disruption that can come with that is still a positive sign.

Underneath that, both production and non-contractual paydowns and payoffs slowed, but the non-contractual segment was running a few basis points higher during the first quarter than last year's median. As Bill mentioned, Tony Peay, our Chief Banking Officer, is here and he will be able to answer specific questions and offer you some color on loan production.

Our net household growth continues to be a bright spot and is trending along the same growth pace as we've seen over the last two years. I want to really highlight this next statement I am going to make is we have seen no indication of deposit runoff within the StellarOne franchise. Credit quality continues to improve and I would draw your attention to a significant recovery resulting from the sale of our interest in Virginia National Bank.

In the asset quality portion of our release we have attempted to be as transparent as possible with the impact of purchase accounting to assist you with -- each of you with your performance models. The competition for loans in our marketplace remains rational with the exception of new entries. And we are still focused as an organization more on rate, margin discipline, as well as loan covenants, then volume as we believe that is in the best interest of our shareholders at this time.

The full company results were tempered by the results of the mortgage company, which posted a $1.4 million loss. The first quarter is typically seasonally a low period and on a pro forma basis origination volumes decreased by over 50% from the prior year. You know, there has been much public commentary about the impact of the adverse weather we saw this winter and the implementation of qualified mortgage rules on the overall mortgage market and its volume.

The combination of a new loan origination system implemented in January and the more laborious QM process certainly contributed to our first-quarter slowdown, as did the weather. We have recently seen a pickup in applications, which seems to be following the national trendlines.

Rob is going to give you some more details on the mortgage business and the steps we are taking to return that business to profitability and Jeff Farrar is also here with us as well to answer any questions, specific questions you have about the mortgage business.

Let me speak a little bit about the integration of StellarOne -- and some of you may have heard this, some of this before. But our teammates are working diligently on the data systems and business process integration, which will occur over the May 9 weekend. We've been planning this conversion since last summer. I have a high degree of confidence in the work our team has done and I expect a successful conversion.

On the commercial credit side, we have been working well together. For example, early in the first quarter we were asked to bid on a large loan that neither Union nor StellarOne could've done independently. And while we didn't get the loan, I was very pleased with the work that both teams did to get us to the table. Our senior loan committees met and worked together very well and the credit cultures of both organizations showed that we are very compatible.

On the retail side of the bank, our two teams have gelled as well. We will close 13 branches over the May 9 weekend and we are fortunate that, as a result of normal retail staff attrition, we have been able to place almost every StellarOne retail teammate within a Union branch or at our operations center.

I have also seen the same meshing of teams occur within our wealth and mortgage areas, so just overall things are going very well and our two teams are -- I think I've used the word playing well together.

I have also been out on the road meeting with key customers, potential customers, and teammates at StellarOne Bank. The response from our current and potential customers has been overwhelmingly positive.

They feel good about the capabilities that Union can bring to the table and that they now have a bank with the size to compete with the regional and national banks. And more importantly, one that is able to deliver quick decisions and is completely invested in their communities. I find that Virginians like the idea of having a bank our size serving the Commonwealth for the first time in over 15 years.

I want to reiterate our teammates are working hard to ensure a successful integration of the StellarOne customers. To date, we have not seen any significant deposit or loan runoff in the StellarOne balance sheet. We are gearing up for a significant advertising campaign to coincide with the integration and feel that we have a great opportunity to build name recognition in the StellarOne areas and deepen our brand in our existing market.

Let me touch on a couple of financial aspects of the StellarOne acquisition before I kick this over to Rob. We have started to redeploy excess capital created by the acquisition through our $65 million share buyback program and have purchased and retired approximately 820,000 shares during the first quarter. And that leaves approximately $44 million of our authorization outstanding.

We remain on track to deliver the $28 million in expense savings. Our merger costs to date are in line with our expectations and the remaining one-time expenses will be incurred over the next two quarters. To date, we have delivered on every metric that we laid out when we announced the acquisition last June and we look forward to delivering on the improved financial performance to our shareholders later this year.

So let me summarize. We had a solid first quarter and the community bank segment delivered strong results. The mortgage company still faces its challenges as we continue to align our expenses with the lower macro environment origination volume.

The StellarOne integration remains on track for completion in the second quarter. And after traveling across Virginia and meeting with customers as well as teammates and seeing the financial results, I am more excited than ever about the future of our organization. With that, I'm going to turn it over to Rob Gorman.

Thank you, Billy, and good morning, everyone. Thanks for joining us today. I am going to take a few minutes to walk through the balance sheet and the results of operation for the quarter.

Since this is our first quarter with consolidated numbers including StellarOne, I don't think that it would be meaningful discuss the year-over-year or linked-quarter trends, although I will make some references to trends in areas that make sense to do so as I go through the numbers. We will have a more robust linked-quarter discussion during our second-quarter call.

Before we get started I would like to share some data points as they relate to the StellarOne acquisition that should be kept in mind as we review the quarter's financial results. The fair value of assets acquired equaled $3 billion and the fair value of liabilities assumed equaled $2.6 billion. Total goodwill arising from the transaction equaled $238 million.

Gross loans acquired amounted to $2.283 billion with a fair value of $2.239 billion. On the deposit side, deposits acquired equaled $2.469 billion with a fair value of $2.480 billion. And as we modeled in our due diligence assumptions, the credit mark came in at approximately 2.5% or $53 million.

With that as context, total assets stood at $7.3 billion at March 31, an increase of $3.1 billion from year-end, obviously reflecting the impact of the StellarOne acquisition. Loans net of unearned income were $5.3 billion at quarter end, up $2.3 billion from December 31 but basically flat on a pro forma period-to-period basis.

However, as Billy mentioned, average loans grew $42 million or 3.2% annualized on a pro forma basis from the fourth quarter. As he also noted, this is below our mid single-digit growth estimates. Our Q1 loan production levels were in line with our lower seasonal expectations. However, non-contractual paydowns and payoffs continued to be a headwind to net loan growth.

At March 31, total deposits were $5.7 billion, an increase of $2.4 billion from year-end levels. Pro forma average deposits declined $55 million, or 3.8%, on an annualized basis during the quarter, primarily driven by an $81 million decline in our high-cost time deposits, partially offset by $35 million increase in our money market balances.

During the quarter, we restructured the StellarOne investment portfolio by selling approximately $260 million, or 60%, of StellarOne's portfolio in securities, earning an acquired yield of 80 basis points for the duration of approximately 2.2 years. The portfolio sold consisted principally of agency bullets. Union reinvested the proceeds into approximately the same amount of securities, but with a yield of 200 basis points and a duration of approximately 3.4 years.

The securities purchase were primarily in fixed and floating rate mortgage-backed securities and munis, in line with our risk tolerance and weighted average life and duration profile. As a result, we picked up 140 basis points of yield in exchange for one year of extension risk. In our due diligence modeling we had targeted a pickup of about 75 basis points with limited extension risk across the post merger investment portfolio.

Now turning to asset quality, nonperforming assets totaled $52 million comprised of $17 million in non-accruing loans and $35 million in OREO balances as of March 31. NPAs as a percentage of total outstanding loans declined 98 basis points from 1%. The nonaccrual loan coverage ratio remained high at 181% at quarter end, compared to 149% from the same quarter last year and 200% at year-end.

Our allowance for loan losses increased approximately $800,000 during the first quarter to just under $31 million. The allowance as a percentage of the total loan portfolio adjusted for purchase accounting was 1.07% at March 31, a slight decline from the 1.1% at year-end. The allowance for loan losses as a percentage of the total loan portfolio was 59 basis points at quarter end, down from 99 basis points at year-end, primarily attributable to the acquisition of StellarOne.

As you know, in acquisition accounting the previously established StellarOne loan loss allowance was eliminated and replaced by the loan credit mark which is carried as a reduction to the acquired loan balances.

The Company's capital ratios continued to be considered well capitalized for regulatory purposes. The Company's estimated ratio of total capital to risk-weighted assets was 13.69% and the Tier 1 capital ratio was a bit over 13% at March 31.

Our tangible common equity to tangible assets ratio at quarter end is 9.29%, up 35 basis points from year-end, which is in line with the capital accretion we expected from the StellarOne transaction. Excess capital at March 31 amounts to approximately $90 million with excess being defined as balances above an 8% tangible common equity ratio.

As previously mentioned, our Board of Directors authorized a share repurchase program to purchase up to $65 million worth of the Company's common stock through year-end 2015. To date, approximately 820,000 common shares have been repurchased at an average price of $25.23 per share leaving approximately $44 million remaining under the two-year repurchase program.

Now turning to the income statement, operating earnings for the first quarter were $16.8 million or $0.36 per share. As you recall, operating earnings exclude the impact of merger-related costs which were $9 million, or $0.19 per share, on an after-tax basis in the quarter. On a GAAP basis, net income was $7.8 million for the quarter or $0.17 per share.

The community bank segment turned in another strong quarter of operating results amounting to $18.2 million, or $0.39 per share, while the mortgage segment reported a net loss of $1.4 million, or $0.03 per share. More on the mortgage segment results in a moment.

Profitability ratios for the Company and the community bank segment again improved during the quarter. Operating return on tangible common equity increased to 10.33% from 9.43% in the prior quarter. From the community bank segment they reported an 11.44% operating return on tangible common.

Our operating return on assets ticked up to 94 basis points from an operating ROA of 85 basis points in the prior quarter. And the community banking segment was above 1% at 1.02%. The operating efficiency ratio declined to 68.4% from the prior quarter of 71.6%, while the operating efficiency ratio for the community bank segment was under 65% at 64.6%.

I want to emphasize that we remain committed to achieving top-tier financial performance relative to our peers. On that front, we are targeting an operating ROA at or above 1.2%, return on tangible common equity greater than 13%, and an efficiency ratio below 60%. We continue to believe that once the cost savings from the StellarOne acquisition are fully realized that we will be well above these ranges.

Now let me provide some comments on the components of the income statement.

Net interest income was $65.7 million for the quarter and the net interest margin declined by 13 basis points to 4.14% compared to 4.27% in the previous quarter. Our core net interest margin, which does not include the 15 basis point impact of acquisition accounting accretion, was 3.99%, a decline of 25 basis points from 4.24% from the previous quarter, reflecting the addition of StellarOne's lower yielding loan and investment portfolio.

On that note I should point out that StellarOne's loan pricing model was adjusted to align with Union's pricing model effective March 1 and we have since seen a bit of an uptick in our loan yields.

As mentioned, accretion and purchase accounting adjustments for loans, CDs, and borrowings related to the StellarOne acquisition represented approximately 15 basis points of the net interest margin in the first quarter. For your reference, the first quarter 2014 and remaining estimated net accretion impacts are reflected in the table included in our earnings release. Also, as noted in our earnings release, we do expect that the net interest margin will continue to decline modestly over the next several quarters as decreases in earning asset yields are projected to outpace declines in interest-bearing liability rates.

The provision for loan losses was zero for the quarter, a decrease of $1.2 million from the previous quarter. For the quarter ended March 31, we recorded net loan recoveries of $772,000 compared to net charge-offs of $4.9 million for the fourth quarter of 2013. The net recovery in the current quarter largely relates to recovery of $1.2 million on a commercial loan previously charged off in 2012.

The current quarter's loan provision level was driven by improving asset quality metrics, the impact of lower historical loss factors, and the current quarter's net loan recoveries.

Our noninterest income for the quarter was $14.2 million. Of note, despite lower levels of mortgage production, the gain on sales of mortgages increased almost $1 million as we experienced increased margins and lower indemnification charges versus the fourth quarter of 2013. Our operating noninterest expenses in the first quarter were $54.6 million exclusive of the merger-related costs.

We remain on track to hit our $28 million merger cost savings target with the majority of saves to be realized after the systems conversion and 13 branch consolidations in May. As I mentioned, merger costs totaled $13.3 million during the quarter and we have now incurred approximately $18 million of the estimated $25 million in merger expenses.

Before closing, I would like to add some color around the mortgage unit's results for the quarter. As noted earlier, the mortgage segment recorded a net loss of $1.4 million, or $0.03 per share, for the first quarter as elevated expense levels resulting from excess loan origination process and capacity, restructuring charges, and project-related costs outpace revenue generated by seasonally low mortgage loan origination volumes.

Mortgage loan originations declined by $7 million, or 4.5%, in the current quarter to $149 million from $156 million in the fourth quarter inclusive of StellarOne's mortgage unit in the current quarter, which amounted to be about $33 million of originations for Stellar. However, originations from Union's legacy mortgage declined $40 million, or 26%, from the prior quarter, reflective of sluggish seasonal demand for mortgage financing. Of the originations in the current quarter, 30% were refinances, which was consistent with the prior quarter.

Of note, noninterest expenses incurred by Union's legacy mortgage segment declined from the prior quarter as a result of its continuing efforts to recalibrate its cost structure to align lower mortgage origination levels.

Management continues to adjust the mortgage segment's cost structure in light of lower mortgage originations and the integration of StellarOne's mortgage operations. We have experienced the declining revenue impact of lower originations in line with the industry, but our cost structure has been relatively inflexible until recently as we incurred duplicate costs related to moving mortgage headquarters from Northern Virginia to lower cost Richmond, while also converting to a new loan origination system that required us to operate two systems until late in the first quarter.

Now that these duplicate project costs are behind us and with an uptick in loan production expected from seasonal lows, we expect to see improvement in the mortgage unit's operating results going forward.

So just to summarize, our first-quarter operating results demonstrate the significant earnings capacity we envisioned the Union and StellarOne combination would produce as the largest community banking institution headquartered in Virginia. The merger integration work is on track and we expect to hit our merger cost savings targets of $28 million. We expect to see improvement in the mortgage segment results in the second quarter as production levels increase and the expense base is further rationalized.

And, finally, please note that Union remains as committed as ever to delivering top-tier financial performance for our shareholders. With that, I will turn it back over to Bill Cimino to open it up for questions from our analysts. Bill?

Thanks, Rob. Now we have time for a few questions. Operator?

(Operator Instructions) Catherine Mealor.

Good morning, everyone. My first question is a little bit on the expenses.

You mentioned that you are on track to hit your cost saves number in this quarter. You clearly show that you made a little bit of progress there. In pro forma we are getting pro forma expenses of around $51 million, once it's all in, by the end of the year.

Now that you are folded in, I guess maybe first does that seem in line with how you are thinking about it? And then two, now that you are folded in with Stellar, are you seeing any higher expenses elsewhere that could offset that?

You mentioned, Billy, that you're about to increase advertising a little bit in the next quarter. Are there maybe higher regulatory costs that could offset that? Anything that we should be thinking about that will just naturally offset some of the cost savings. Or is the $51 million just a good place to go and maybe inclusive of some of that? Thanks.

Thanks, Catherine. This is Rob. The $51 million of quarterly run rate is a good one, as we discussed previously. We are hitting the targeted cost saves of $28 million, as we mentioned in the release. We are on track for that.

You can think about it as we probably hit a run rate basis here, about 40% of that going into the conversions, and we will get the remainder of that in the third quarter with some savings coming out in the fourth quarter. So going into 2015 we will feel very good about that cost-saving target.

In terms of what should offset that, we have in that number -- it's basically a net savings number. We have put in some additional costs associated with beefing up our risk management team. We've also dialed in the advertising expenses that you mentioned in terms of going forward. So I would, again, just reiterate that $51 million is a good run rate number and, again, the offsets are embedded in the cost saves.

Great, thank you. Then maybe an outlook on loan growth. Billy, you talked a little bit about how you put up 3% growth this quarter even when weather was bad and 1Q seasonally flow and you had a lot of distractions with the first quarter of the merger.

So is it safe to say that -- are you still -- do you still think that a mid to high single-digit loan growth is appropriate for you all going forward?

Catherine, I'm going to let Tony answer that one.

Catherine, I would tell you that based on where GDP is around 3% we were looking to exceed that in our combination with Stellar. We felt like the momentum generated in this transaction in Virginia was significant enough that we could do that.

As Billy mentioned, we have been in some ways playing some defense. We have had a couple -- a few people losses. We think we've come to that in pretty good fashion. We have reallocated portfolios and our guys are all looking to -- while they are playing some defense, to keep playing offense. So we are still looking at that the mid-single-digit loan growth figure.

That's helpful; I will jump out. Thank you very much. Good quarter.

William Wallace.

Wanted to maybe get a little bit more clarity on the quarterly expense run rate and then ask a little bit more about the mortgage business. So a $51 million quarterly run rate would be $3.5 million quarterly savings from what you reported in the first quarter after the merger costs. So that would imply you are already 50% of the way there?

As I mentioned, we are probably about 40% of the way there in terms of the full run rate savings. So expect to see the bulk of the remainder of savings to come in after the merger, after the system conversion date.

So if you're 40% of the way there instead of 50% of the way there, that implies you are investing -- you're going to be reinvesting about $4 million of cost saves into risk management, etc., like you just referenced?

Well, don't think about it as the run rate is fully baked in the first quarter. By the end of the quarter we were basically at that run rate so you will see more savings to come out versus the first quarter.

Then in that -- you also referenced that you've made some additional changes in your mortgage business, so I guess what I'm getting at is 51 seems high to me. I seems like your expenses, your run rate will be less than that and you're referencing more expense savings on the mortgage business. You've got duplicate costs in there in the first quarter as well, so I'm just a little bit I guess confused.

I think when you net it all out it's probably a good run rate, as I mentioned. There are additional costs that will come out of the mortgage business second quarter for the duplicate costs, but it's not driving yield, a material number on the overall company's expense line.

Okay. Then on the mortgage side, the additional changes that you have made and the lapping of the duplicate costs, are we going to see a clean expense in the second quarter or will we see a little bit of overlap in the second quarter as well?

We're going to see -- from a project transition cost basis those should be all out of the quarter, the second-quarter run rate. We are going to see -- we are still doing some restructuring so you may see some severance costs as we close down offices. If we do that you will see some restructuring costs with that, but those will be noise that will be taken out in the second quarter.

I would just add, Wally, that I tend to agree with Rob's comments. I think we will see a much cleaner quarter, although there will still be some noise as we continue to try to right-size and look at making sure that we are doing everything we can to adjust to market conditions.

I will tell you that part of that analysis is to make sure that we are anticipating improving volumes and I will tell you that all the metrics tell us that things are picking up quite a bit. We are seeing a nice improvement in average loan size. Part of that is the pricing decision we made to move the needle on the size of loans that we are generating in the mortgage business.

We are seeing a nice pickup in pipeline. We are seeing nice margins continuing to hold up very well. So a lot of metrics would tell us that things are picking up nicely, so we are kind of modeling that in as we look to move forward with our strategy and move forward with -- again just trying to make sure that we are doing everything we can to focus the business on what we do best.

Thanks, Jeff. Good to hear your voice. It's been too long.

On the mortgage baked in, with the changes that you've made and that you are expecting, what is the annual production rate that you now need to breakeven in that operating segment?

I tend to think about it in terms of monthly volume and, as we are sitting here today, we think that number is in the $50 million to $60 million monthly volume range. A lot of moving parts right now and a few more to come, but that's what we are seeing right now. I certainly would like to think that we can achieve that here pretty soon as I look at what's coming down the pike in terms of production.

Okay, that's very helpful. Then last question on mortgage. In the prepared remarks, I can't remember if it was Billy or Rob, but you highlighted that March production had improved. Have you seen a continued acceleration in production in April so far?

Yes, April would be improved over March, a nice improvement over March, so, yes, we are pretty excited with what we are seeing. Construction, CP program in particular, seems to have some nice momentum and so I'm pleased with that.

I think that one of the things I have been pleased with is that we have a nice CP program in North Carolina, South Carolina that is getting some nice production on the Union side in those two states. And then on the Stellar side we have been pretty strong in Virginia, so that's a nice complement on the CP program that bodes well both for the mortgage company as well as the bank.

Great, I appreciate all the color on that. Then my last question is more of a housekeeping question.

You've changed the way that you are reporting the loans. It looks like you're just giving a consolidated balance rather than acquired and non-acquired. Then there's a table in there that shows the remaining credit mark on the purchase performing loans. So does the -- I assume then that that means that excludes any mark on the PCI loans. But the loan balance that you're using in there includes the PCI balance, is that correct?

That's correct, Wally, yes. Improved the net (multiple speakers) the markdown PCI.

So is there anywhere where I can get that balance of the PCI? I would think that maybe you would exclude that from the denominator to kind of get a look at the adjusted reserves to adjusted loan balance.

Yes, we thought that might be a bit misleading, but we will have that -- all that information in the Q when we file that.

Okay. And so PCI loans are obviously to be runoff loan, so that mid single-digit target for 2014, does that take into account the impact from the running off of the PCI portfolio as for you guys?

Yes, it does, yes.

Okay, fantastic. Thanks, guys. I will let somebody else hop in; I've taken too much time. Thank you.

Evan Hutto.

Thanks for taking my question. Just curious, where are you all putting new loans on the books today in terms of yields?

If you look at the first-quarter numbers, we are probably in the 450 to 470 range.

Okay. And I apologize if you mentioned this in the prepared remarks, but what was the gain on sale percentage in the mortgage segment for the quarter and where do you see that number trending as we move forward?

Yes, the gain on sale in the first quarter was about 1.75% and we are projecting that that would stay pretty stable going forward.

And where are you guys seeing the most strength on the loan growth side, both in terms of sort of the actual underlying category and geography-wise?

Evan, this is Tony Peay. I would say that it is, as is usually the case with us, is there's significant real estate volume. That is picking up both in multifamily and single-family.

As far as geography, the Richmond market has done well; Fredericksburg, Charlottesville. I think all the markets that have historically done well are picking up.

Billy mentioned visiting with customers and the like and we have been hearing a lot of positive feedback anecdotally at receptions and visits about their confidence level and their willingness to invest in their businesses. That said, we are still seeing some deleveraging in our portfolio. We are still having some non-contractual paydowns and payoffs that are I guess impeding our ability to grow at a faster rate, but we think that is subsiding and we will continue to have that good growth in the next quarter.

Evan, this is Billy. Let me postscript that. We are seeing diverse loan growth across the spectrum of real estate and also C&I. And obviously some of the ones Tony mentioned are doing better than the others, but we are seeing a diversity of commercial loan growth let me just -- I will just say it that way.

And at our size we are probably seeing more than we would have a year ago.

Okay. And would you guys -- I know you're still focused on integrating Stellar, but would you kind of look at possibly making other acquisition once you have that closed? If so, would you try to still focus on your Virginia footprint there?

You know, Evan, I have got some people on this call who are working on the integration and they may not want to hear me say anything about another acquisition right now.

Understand.

But we would continue to focus on the Virginia footprint. I think there is sufficient opportunities for us there to look at acquisitions out in, say, 2015. So I think there's some good opportunities out there without having to go out of state.

Okay, thanks for taking my questions.

Bryce Rowe.

Thanks, good morning. Just couple questions. As far as the buyback goes, Rob, and just curious, is it a pretty measured pace in terms of how you deploy that excess capital? And is there a point in which, from a price perspective, where you wouldn't necessarily execute the buyback?

Yes. In answer to your first question, yes, it has been a pretty measured pace of buybacks through the first quarter and continuing in second quarter. And, yes, we also have parameters around where and up to what we will buy our shares back -- at what price we will buy those shares back. So we've got internal models that we look at to gauge that limit, if you will.

Okay, that is helpful. Then, Tony, you mentioned the deleveraging may be impacting growth or net loan growth, I'm sorry, to a certain extent. What is the source of the deleveraging? Is it the newer entrants that Billy mentioned in his remarks or is it more customer preference away from debt?

It's the second of the two, I think. And we are losing some -- there are some competitors who are being a little more aggressive, but that's not most of what we are seeing. Most of what we are seeing is customers with cash reserves paying down debt.

So there is some irrational competition, some aggressive rates, some loosening of standards and lessening of structure, but most of the non-contractual pay downs and payouts are deleveraging for business reasons.

We track those, Bryce, so we track not only the dollars but we also track individually the ones over $1 million. And I think in the last quarter we had one that went conduit and one classified credit that went to another bank and the rest of them were just pay downs.

Then in terms of the competition, how would you kind of characterize the competition, whether they be newer entrants or otherwise? Are they kind of consistent or is it a targeted approach at certain customer segments, collateral segments? Are those newer -- are the competitors smaller banks, larger banks, out of state, etc.?

Yes, I think there's some of each, Bryce. We've had -- I can't say that I've noticed any trend. Obviously some of the folks who left us are going after their customers and we are going to work hard, as you might expect, to keep those customers. But the other new entrants are -- we don't bump into the same one every time, depending on the deal maybe a different bank. Really no observed strategy they are taking, except just to go after what they can go after and bid it aggressively.

Thank you, guys. Appreciate it.

Nathan Race.

Yes, good morning, guys. Just wanted to follow-up on the reserve question. Can you guys comment on kind of what kind of targets you are looking at to have that kind of accrue to you over the course of 2014, assuming charge-off levels remain relatively benign and either inclusive or exclusive of purchase accounting marks?

Yes, we don't really have a hard and fast number on that level. We let our modeling -- our past allowance modeling work, if you will. But one would argue that you shouldn't see too much more deterioration or lower level allowance to loan adjusted for the purchase accounting levels to go too much lower as we look at our historical loss factors and our environmental factors that we add for new loans.

So it's in that range that you are seeing today. As the quality improves, it will naturally come down to that level.

Okay, great. Then just kind of thinking about your interest rate sensitivity, is there any changes over the fourth quarter 2013?

No material changes to speak of, Nate.

Okay, great. I appreciate the color, guys.

Blair Brantley.

Morning, guys. Question on fee income. How would you characterize this quarter relative to maybe what you were projecting? Because it seems like it wasn't just mortgage that was a little light. It looks like some other line items may have been lower than what I was thinking anyway on a combined basis.

In terms of the nonmortgage-related fee income, it came in about where we had budgeted, so we are pretty much in line with where we expected to be in terms of deposit service charges and interchange fee income as well as trust in brokerage commissions. So it's probably a bit lower than the fourth quarter just seasonally lower number of days, that sort of thing.

Okay, so there's nothing kind of one-time in there that --?

No, no. Nothing that would've driven it lower, if that is what you mean.

And I would think, at least on debit cards and credit card interchange, I would think the winter weather may have had an impact on that. Because what I've read is retail sales were down and that would've been -- we would have suffered from that as well.

Yes, you are coming off a higher volume quarter in the fourth quarter.

Because everybody has been out doing their Christmas shopping.

Okay, all right. Then TDRs, you guys -- I didn't see them broken out. Do you guys have that number accruing, restructured loans?

We do. I don't have it at my fingertips here, but we will have it in our Q. I don't know, Brad, do you have that number handy? We will get back to you on that if that's okay.

Sure, sure. And then just going back to the buyback questions earlier. Obviously there was a pretty good activity this quarter; does this kind of imply that maybe your buybacks will be done by the end of this year versus obviously you put a two-year time frame on that? Is that what you are thinking right now or is it just going to be opportunistic?

Yes, we are not projecting that we would be fully -- fully complete the repurchase this year. Of course, it depends on where the stock price goes and that sort of thing, but we will continue to repurchase if we think it's a good price to do so. But we don't have any hard and fast rule that we are going to get that done this year.

Okay, thank you very much.

Operator, we have time for one last question, please.

David West.

Good morning. I noticed that your cost of funds quarter to quarter was up 1 basis point because of the acquisition. What kind of repricing opportunities do you see in the StellarOne deposit base?

In terms of StellarOne rates versus union rates, we are actually very much in line and we have been bringing those in line over the first quarter if they were out of line. So I don't expect we are going to see much in the way of pickup on the cost of funds side just in repricing the Stellar side of deposit base.

Very good. Then lastly, in early January you made an announcement that you were making an investment in the payments company. Just wondering if you could maybe add a little color about that as far as a strategic action and what kind of financial impacts do you anticipate that having on the balance sheet and income statement.

I don't think it's going to have anything on the balance sheet because we only own -- we have a 20% interest in the payments company. We have begun, David, having meetings between their people and our loan officers to try to open up their services to our customer base.

Income wise I just don't think you're going to find it to be significant. Their budget for this year is they continue to invest in software infrastructure to grow their company and continue to expand. We are more in the growth mode than we are in the maximization of generating high levels of net income.

They will be profitable. We will have 20% of that, but it will be negligible from a net income standpoint on our net income.

Very good, thank you.

Thanks, David. Thanks, everyone, for participating in the call. We look forward to talking with you in the second quarter. Goodbye.

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