Atlantic Union Bankshares Corp (AUB) 2008 Q1 法說會逐字稿

Good day and welcome to the StellarOne Corporation earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to [Linda Caldwell], Director of Marketing. Please go ahead.

Thank you, Terry, and good morning, everyone. We are pleased you could join us.

Today we have with us O.R. (Ed) Barham, Jr., President and Chief Executive Officer of StellarOne Corporation, and Jeffrey W. Farrar, Executive Vice President and Chief Financial Officer. Mr. Barham and Mr. Farrar will review results for the first quarter of 2008 and after we hear comments from Ed and Jeff, we will take questions from those listening.

Please note StellarOne Corp. does not offer guidance. However there may be statements made during the course of this call that express management's intentions, beliefs, or expectations. Actual results may differ from those contemplated by these forward-looking statements.

And now it is my pleasure to reduce our President and CEO, Ed Barham.

Thank you. Appreciate that. I am going to go ahead and let Jeff enter into the financial results of the quarter and the press releases out there and we will open it up with those comments.

Thank you, Ed and good morning.

Obviously for our Company a lot of moving parts from a financial perspective for the quarter with the consummation of our merger between FNB Corporation and Virginia Financial Group. I want to start by just speaking to the basis of presentation a moment. With the merger occurring when it did, we have a case where we have a partial period of operations for the combined Company under the purchase method of accounting. Historical statements have not been restated and so comparisons, obviously, will be somewhat difficult, but we will do our best job to explain to you what we are seeing in terms of core operations for the combined entity, both for the first quarter as well as some trends moving to the second quarter.

So again we only have about 33 days of operations for the combined entity from an earnings standpoint and, of course, the balance sheet has been combined as of the quarter -- quarter end.

Let's start with just the revenue. We continue to have some margin compression. There's several components to that in this first quarter. First of all, the FNB Corporation margin has historically run 20 to 25 basis points less than that of the VFG margin so you are going to have, naturally, with a combination of the two companies some contraction in the combined margin.

The other thing that impacted margin for the first quarter was an increase in nonaccruals. That -- we will talk more about that later but certainly the $6.5 million of net increase in nonaccrual loans had some impact for the first quarter as well.

I do see the margins stabilizing in the second quarter. We -- in relation to the liability side of the balance sheet we are seeing an acceleration of repricing. We have a lot of CD maturities in the second quarter. I guess somewhat dependent on what the Federal Reserve Board does today, and through the course of the second quarter, we do anticipate some leveling off if you will of our margin.

If I could then speak to non-interest income for a moment. Retail banking fee income continues to show some nice growth, predominantly due to our [Happerfield] direct-mail initiative. We are seeing a roughly 10% growth rate and a lot of that is attended to that initiative.

Mortgage revenue has been surprisingly strong. We are up slightly from this time last year. Given the market conditions compared to last year, we feel pretty good about that and are still seeing some earnings from that unit. Our trust revenues are up 12%, somewhat a result of the impact of having FNB for part of the quarter. We did see a significant contraction in assets roughly $50 million in market value-driven contraction and assets associated with that unit. But we are pleased with the overall level of profitability for the first quarter.

We wrote down a piece of [REO] that is embedded in noninterest income of $0.5 million. This is an acquisition and development credit we had back in late 2007 that we foreclosed on. We are pleased to say that we have got a contract for that property. We have a basis of $2.4 million at this point and will likely see that move off the books in the second quarter.

Other income, the catchall category within noninterest income includes a couple of items of notes. We have a fairly significant amount of Boley at both FNB as well as VFG so a part of that increase is associated with the FNB portion of that Boley income for the quarter. We also had about a $300,000 gain on the VISA stock redemption so that is embedded in that number as well.

Turning to overhead for the quarter, we had $3.7 million in merger-related expenses, that obviously had impact on our net earnings for the quarter. As you've noted in the press release, I'm sure, the net of tax impact of that as we reported which was $2.4 million certainly created some distortion, relative to levels of return on average assets, return on average equity. But we are pleased overall, I think, with the notion that we have got most of that behind us now in terms of non-recurring expenses and feel that we ought to start seeing some normalization here in the second quarter.

Now the cost saves component, which we had estimated at $9.5 million, we still feel good about. We are managing that pretty well as we go through integration. We believe we will start seeing benefit of that as we move into the third quarter and certainly in the fourth quarter.

Of the $3.7 million in merger expenses the way that breaks down for overhead is $2.8 million in comp and benefits; about a little over $0.5 million in data processing and then about $300,000 just the other category.

I really did not have or see any significant variances in our other line items. The normalized efficiency ratio came in at 66.41 which is just slightly over our run rate for this time last year.

I would like to now switch to asset quality and talk about that a little bit. The level of nonperforming assets, as I alluded to earlier, we actually had a $6.8 million increased for the first quarter on a net basis and that is the combined Company. The level of nonperformings obviously is up for us significantly over last quarter which reflects the fact that we had a higher level of nonperformings on the FNB Corporation; but the good news I think for us as we look at it is a lot of those relationships were relationships that we have been working with now for six to nine months and feel pretty good that we're making some pretty good headway in managing those credits off the books if you will. And we were probably have some more discussion on that later.

I thought charge-offs looked pretty good at 13 bips. We might see a little uptick in that through the remainder of the year because we did not have a full quarter, if you will, for charge-offs, again reflecting the fact that FNB was on the books for only a part quarter.

Provision of $[952,000] on net charge-offs of $537,000 for the quarter. The allowance is a percentage of loans at 117. That is down a little bit from last quarter, but that is a function of the purchase accounting adjustments, whereby allowances that related to impaired loans were FNB, which was the deemed acquiree for accounting purposes or brought over on a net basis. So specific reserves related to those impaired loans actually come out of the allowance and net against the loans as a contract account.

So I think the message there is that those reserves are still in place; they are just not embedded in the allowance of the loan losses.

Lastly, I wanted to just speak to the purchase accounting adjustments for a moment. We felt pretty good about the level of goodwill that ended up getting recorded in connection with this transaction. As we indicated in the press release, we had what we thought was a pretty reasonable amount of goodwill at $62 million. Core deposit intangible came in quite a bit less than what we had modeled when we first started looking at the transaction. That came in at $8.6 million.

If you look at intangibles overall in terms of percentage of total assets, percentage of equity, we think they are very manageable. 20% is the percentage of equity that we have four intangibles at this point and we feel pretty good about that. One of the many benefits of the MOE, frankly, is being able to put these companies together with not a significant drag from intangibles.

With that I think I will stop and turn it back over to Ed.

Thanks Jeff. I would just sort of summarize a couple of things from a broader perspective and that is our integration proceeds as we planned it to be. We are making good strides. Things are falling in place as we hoped they would; and we are looking forward to an integration on Memorial Day weekends with new signs going up; all our systems being converted to one system; and all again is going as planned.

Obviously the asset quality issue is out there for all banks, but again it is just alluded to. Our net gain on nonperforming, really, it was only about $6.8 million. That's a pretty good number I think and we feel good about where we are, relative to managing our way through this process. Having been through the '80s, been through the '90s and other asset quality downturns, there is a lesson here that you get involved early with these credits as we have. We work them aggressively and we work them down; and we feel good that throughout the remaining part of the year we will make some good strides to drop these numbers from the current levels.

In fact, I would anticipate hopefully in the next 30 to 60 days we will see a $3 million to $4 million drop in that number easily.

So all in all I think this Company has a great future in front of it. We are looking for 2009, barring some unforeseen circumstance of the economy further deteriorating, but we see 2009 as a year for us to really come out the box extremely strong, with a good franchise and good products, good people and good systems in place to make us continue to grow this organization.

With that I will stop and see if there's any questions I guess that we would take at this point in time.

Thank you both, gentlemen. Now we will move to the question-and-answer portion of this conference call. If you will please limit your question to one primary and one follow-up. At this time I'm going to ask Terry our operator to open the call for those questions.

(OPERATOR INSTRUCTIONS). [Bret Morris]. FTN.

I just had one quick question for you. Can you tell me the net interest margin for the month of March?

360.

All right and did you see a lot of additional compression then or was it -- did it hold up pretty well?

It held up pretty well on a core basis, but I will tell you that it was impacted by $180,000 of interest associated with non-accrual that was recorded in the month of March. Of that $6.8 million, one relationship to $4.2 million got reclassified to non-accrual in that period.

Great. That's all I had. Thank you.

[Michael Sharmer], Raymond James.

I was wondering if you could quantify the impact on the margin from the higher nonperforming assets and also the Fed rate cuts on a basis point basis?

I don't really -- I'm not really prepared to give you that. I really haven't attempted to quantify it in that framework.

And then do you have any further updates on the cost save projections are is that the match in line with what you had previously specified?

In line with what we had previously specified both in terms of total as well as line item.

As Jeff said we are managing that pretty diligently and will for the rest of the year to make sure we hit those numbers.

Cary Morris with Scott and Stringfellow.

Couple of questions. One, Ed, did you say $3 million to $4 million you thought coming down on MPAs in the second quarter? Is that correct?

Yes. That's correct.

So from the current levels you don't see anything adding back to it or can you talk a little bit about the, I guess it's almost $32 million that you have in there now?

I think there could be some more deterioration but I can't put my finger on any dollar amount right now but hopefully the worst of that is behind us.

And the follow-up just would be, can you talked a little bit about your pipeline today and to what it looks like for you all as we look out for the next next couple of quarters?

As far as loan volume?

Yes.

The pipeline looks pretty good for us, actually. We have been real pleased and in particular pleased that the majority of what we are seeing is the commercial and industrial type credits which, again, we put an emphasis to look for that type of credit because of the associated deposits that usually come with a C&I type credit versus real estate. And obviously real estate is not where we want to be these days, but we are not continuing to completely cut the spigot out. We will look at real estate transactions that really make a lot of sense but they have to be pristine, very good. But the growth we are seeing right now really seeing high activity.

(OPERATOR INSTRUCTIONS) [William Hartman].

One of the things that I've noticed is as the merger was taking place, and it is understandable, is that communication with shareholders had to be somewhat restricted. You know what I really would like to suggest as you go forward now, with that merger behind us and the first quarter of earnings reported, is that you -- to your investor relations department or person, would you please try to let us know what the integration is progressing like, what your general feelings are about how the merger is going along in between earnings reports I guess is what I'm saying.

We appreciate that input and that is something that we will -- I'm sitting here watching Linda take notes and we will certainly look at what we can do to speak to that on an ongoing basis. And thank you for the suggestion.

Allan Bach with Davenport & Company.

I was wondering if you wouldn't mind walking through some of your various market areas and the strengths and weaknesses you might be seeing in some of those areas?

I would say, again, I can take you kind of from the West over to the middle part of the state if you would. Primarily the FNB footprint which is Christiansburg, Blacksburg, Roanoke area, I think I would call it at best a moderate market. It is not particularly overwhelming at this point in time. We do have a fair amount of real estate in that area that is, at this point, the largest part of some of the non-accruals we've got. But again we feel good about where we are relative to our management with those assets.

We do have good presence in those markets. We continue to look for good work and good loans and good credits. The area that I would say, if you look at growth for us and the areas that we are seeing most of the growth in this point in time would be the Fredericksburg market and actually out of our LPO in Richmond.

And, again, those markets are offering up a little more variety of credit just because the economy is being somewhat more diversified, perhaps, than a lot of the other footprints we are located in. And there are larger urban areas for us. We're predominantly as you well know in the communities we serve, we serve mostly small- and medium-size communities and rural markets. Those markets of Fredericksburg, Richmond, Roanoke and others have continued to prove to be a good market for us with our increased legal lending authority. And so opportunity's there not only to enhance relationships that we already have, but to look at relationships that we heretofore have not been able to approach because of our limitations in legal lending authority.

Very good. Thank you very much.

(OPERATOR INSTRUCTIONS) It appears there are no further questions at this time. Ms. Caldwell, I will turn the conference back to you for any closing remarks.

Thank you very much. And, everyone, thank you for joining us and for your questions today. We appreciate your participation. No further comments from the two gentlemen here. This concludes our teleconference.

Thank you.

Thank you, everyone.