Atlantic Union Bankshares Corp (AUB) 2008 Q4 法說會逐字稿

Good day, everyone, and welcome to the StellarOne Corporation earnings conference call. Today's conference is being recorded. At this time, I would like to turn the call over to Ms. Linda Caldwell. Please go ahead, ma'am.

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

Please note StellarOne Corporation 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 those forward-looking statements.

Now, may I introduce our President and Chief Executive Officer, Ed Barham, for comments. Ed?

Thank you, Linda, and good morning to everybody. My thanks to all of the call-ins this morning.

I will begin our call today by first making some general comments on StellarOne's fourth-quarter results, market conditions, portfolio performance and outlook as we begin 2009. Upon the conclusion of my remarks, Jeff Farrar, CFO of StellarOne, will then provide some further financial details. Afterwards, as Linda has indicated, we will be happy to take any of your questions.

As you are already aware, StellarOne did post an $898,000 loss for the fourth quarter. For the year, StellarOne will earn roughly $9.4 million. Despite these disappointing results, our Company's core operations have remained strong, as evidenced by a stable deposit and loan level and an acceptable net interest margin, albeit declining in recent quarters. Given these facts, StellarOne was able to absorb rather heavy charge-offs and provisioning charges for the quarter. Jeff will give more details on this in a moment.

As we have mentioned for several months now, our most serious credits for StellarOne have been in and around the Smith Mountain Lake area. This market is largely a resort and second-home market. The market decline was early to this market and will likely be protracted due to its discretionary nature. We have, through our focused efforts, seen some reduction in our NPAs related to this market, but overall, our NPAs still remain elevated and flat from quarter to quarter, ending the quarter at 1.66% versus 1.65% at September 30.

Our progress on reducing NPAs during the quarter was offset by the addition of one significant business relationship of $7.1 million. I might add this was not a real estate credit, but a commercial loan involved in the construction industry.

While I have not examined the concentration of write-downs of loans taken throughout the year, they would be almost exclusively real estate-related, with A&D providing the biggest drag. Very little, if any, of our quarterly charge-offs were surprises to us as we continue to monitor our portfolio closely. Overall, delinquencies remain below 2%, with residential real estate mortgages carrying the highest past-due level at 3.7%. Loans over 90 days past due plus non-accruals stood at 2.1%.

More specifically, the commercial portion of our portfolio is performing well at this point, with C&I at 0.5%, real estate commercial at 0.8% and real estate construction at 2.3%. While I'm pleased with these past-due levels and especially at this time and in light of the current environment, there will be continued deterioration and historically higher credit costs during 2009.

While the future level of our credit problems will be largely dependent upon the unfolding economy, there are other areas that we continue to address for improvement on our earnings outlook. As we prepared for 2009, we took further steps during the fourth quarter to cut costs and find efficiencies. Most notable, as a continuation of the implementation of a common set of branch metrics, we closed three additional branches during fourth quarter and a third during this month. One additional facility we scheduled to be closed early in the spring.

Through our widely-reviewed management position report, we have now been able to reduce companywide positions from well over 1000 positions at merger date, February 2008, to currently 848 positions. Health and welfare benefit programs are now consistent across the new company, with management and board eliminating legacy VFG's pension plan, freezing legacy FNB's ESOP and termination of an existing retirement credit program. We are beginning to see a continued benefit from these cost-cutting efforts as net non-interest expense for the fourth quarter further decreased by $1.1 million, or 4.8%, from third quarter '08.

A few notes on the business development side. We will be moving all of our retail and wholesale mortgage lending to a separate line of business for improved service and revenue generation in the coming weeks. A yet-to-be-named executive will oversee this business activity and report directly to Greg Feldmann, President and CEO of StellarOne Bank.

We have also beefed up our number of originators. Despite the slowdown or the downturn of the real estate market, our combined mortgage areas remained profitable for the year. With the mortgage rates now at historical lows, we are seeing a tremendous inflow of refis and first home buyers over the last few weeks. In fact, the economic reports this week showed a 6.5% increase in home sales for the month. January looks as if this trend is continuing. This mortgage repositioning will help us to take better advantage of this developing opportunity.

In our wealth management line of business, despite a decline in the value of assets held for management and a decline in brokerage activity, wealth management still achieved a record-breaking year of profitability, earning roughly $1 million after tax for the year. Wealth management is also looking to add new business development candidates to take advantage of potential future increases in this line of business. While we see an improving future for the wealth management line of business, 2009 will be a challenging year until the market begins to recover.

If these two areas were to continue to perform well throughout the year, they may prove to be potential early indicators of a recovering economy. We will certainly hope so.

Both our retail and corporate banking lines have also been successful in developing new business, with a special emphasis on attracting customers with some of the larger institutions that are going through significant change. In particular, we are obtaining opportunities to look at more and more of the quality credits not real-estate-related. These new credit opportunities will hopefully allow us over time to build more solid banking relationships and reduce our heavy reliance on real estate and to add granularity to the portfolio. Again, this will not happen overnight, but we must begin to do this in earnest now if we are going to have a stronger, more durable Company in the future.

In general, 2009 will be a difficult year for the banking industry, and this will be the case for StellarOne. We will suffer the macro pressures of shrinking interest margin, the additional FDIC premium cost and added credit costs as stress on our loan portfolio continues for the foreseeable future.

Our counter to all of this will be to continue to develop as much new business as possible, reduce costs, remain very active in managing our troubled assets. We have already begun to deploy our TARP funding by way of a continuation of lending to business and consumers, a reduction of foreclosures through a special mortgage refinance program, and fixed-income investments providing assistance to municipalities.

We are fortunate that Virginia's business climate is doing much better than most other parts of the country. With the planned federal stimulus program, it is our belief Virginia should show a rebound when it comes, but sooner, as well. With StellarOne's strong, tangible equity-to-assets ratio of 10.79% and a Tier-1-based capital ratio of 14.07%, we feel well-positioned to deal with the challenges of 2009.

We plan to use our capital at this time to manage our way through the challenges of 2009 and put our Company on solid footing for the future growth that will come. I will now ask Jeff to provide further detail on what I've just discussed.

Thank you, Ed, and good morning, everyone. I would like to start first by reminding everybody that prior-year comparisons are difficult with the merger, as we treated it prospectively and thus, most of the comparisons that I will make are to sequential third quarter.

As Ed indicated, we did have a loss for the quarter of $898,000 to common shareholders. That did include $53,000 in accrued dividends on preferred stock related to our TARP investment. That annual cost for us on a $30 million investment is $1.5 million, and that is what we will anticipate for 2009.

Biggest impacts for the quarter, obviously, the loan-loss provisioning at $11 million compared to $6 million for the third quarter was a significant impact. We also saw some revenue contraction of roughly $2.6 million, primarily related to margin compression. We will talk more about that momentarily.

Looking at net interest income, we had for the quarter $25.3 million in gross net interest income. Netting out purchase accounting amortization, that number was $23.7 million. So on a gross basis, we were down $2.1 million or 7.7%. On a net basis, net of, again, purchase accounting adjustments, we were down $1.5 million or 6%.

Margin compression, we were down 26 basis points sequentially to 3.80%. And if you look at it on a net basis, down 17 basis points to a core margin of 3.55% for the quarter. The margin compression was predominately yield-driven, meaning that we had some fairly stout contraction in our yield on assets. We went from 6.30% in the third quarter to 6.03% in the fourth quarter, and the biggest component of that was in the loan portfolio.

We had roughly $771 million in loans that are directly tied to prime and LIBOR, and we also have roughly $575 million in loans that are directly tied to Treasury curve. And so those components really saw some fairly significant decrease in yield, consistent with Fed easing and what we've seen from the standpoint of the Fed policy.

Purchase accounting, amortization amounts, I wanted to I guess point out that we continue to see some impact, but also, it is coming on down to a pretty manageable level now. If you look at the impact for the quarter, it was $1.7 million, or 25 basis points. But looking to 2009, amortization for the first quarter of 2009 is expected to be $1.1 million amortization; for the second quarter, $739,000; amortization for the third quarter, $537,000. So as we get into the second half of the year, we should see a lot less impact from amortization on the margin calc.

I guess lastly on the margin, we do expect to see some continuing compression. One of the things that I think we are seeing in terms of cost of funds is hitting some floors relative to how low we can go on our core deposit base. I mean, we still predominately fund our balance sheet through core deposits and have reached levels that we just can't push any further. So I think as we look at asset yields continuing to contract and a leveling off of our cost of funds, we are going to continue to see some margin compression for 2009.

Switching gears to non-interest income, we were down $502,000 or roughly -- or down to -- excuse me -- $502,000 down to $6.6 million, sequentially. We had some nice growth in retail fee income in spite of the pressures from the economy, and also the deposit balance contraction. We had $127,000 of growth sequentially, or 3.1%.

Mortgage revenue was fairly flat quarter-to-quarter, but the good news here is we are seeing a real spike in pipelines, applications taken. We also had a nice increase in loans held for sale on the balance sheet, representing loans that have closed that will sell in the first quarter. That number was a little over $15 million at the end of the year.

Trust revenues continue to have some contraction. We were down $259,000 or 19.9%, for the quarter. The biggest component of that is our fiduciary on revenues directly related to the market valuation of the assets under management. Obviously, a pretty tough quarter for the market, and correspondingly a tough quarter for us on the revenue stream. At the end, it was profitable, continues to be profitable, albeit at a reduced level.

I would like to talk about overhead now for a moment. Non-interest expense, as Ed alluded to, we were down $1.1 million for the quarter sequentially. Of that $1.1 million, $686,000 of that was related to comp and benefits expense. The other large component of that was a decrease in professional fees of $458,000.

The efficiency ratio for the quarter ended up at 69.23%. It continues to be elevated somewhat by the revenue contraction that we are experiencing.

I think Ed touched on most of our cost-saving initiatives currently. A couple things that I will also mention that we've done. We've effectively created a hiring freeze, so we did not budget any new FTE for 2009. We are managing that very tightly. To the extent that we need to add personnel, we are moving it all the way to the top of the management group to evaluate and require some metrics be provided to, if you will, justify the addition of the position.

We did suspend merit increases for 2009 in light of the economic conditions, and that was obviously a tough decision for us, but one we felt we needed to do for the time being.

We spoke to the branch closings. We've got a couple others that we are evaluating as we move down the road. I went back and looked at -- for the sake of just getting a sense of how we did for 2008 over 2007 -- went back and looked at the overhead for the legacy VFG and FNB as of 12-31-2007, adjusted out merger expenses, and we ended up having a reduction of gross overhead, 2008 over 2007, of $7.7 million or 8%. So that is a number I think we feel pretty good about.

There is a lot of expenses in 2008 that we were not direct merger expenses, but I know were directly associated with the merger. So I think that number is actually much higher. And it speaks well to our ability to drive some efficiencies, really, in just six months, when you consider that we didn't put our banks together until midyear. So I think that bodes well for our ability to continue to drive efficiency throughout the organization, and mitigate, if you will, the impacts of potential high loan-loss provisioning and continuing revenue contraction in 2009.

If I could speak to asset quality for a couple minutes, Ed covered that well, but I do want to point a couple things out. Level of nonperforming assets, $49.1 million. That is 1.65% of assets. That is an increase of $758,000 over third-quarter NPA levels of $48.4 million, or 1.62% of total assets.

Level of NPAs, we are certainly helped by the charge-off activity. We had two credits that we were moving to active liquidation on, and thus decided to take charge-offs for the period. And as you've heard, that gross charge-off number was over $12 million. So that certainly helped our level of charge-offs to some extent.

But as Ed mentioned, we had a number of NPAs that we were able to move out during the fourth quarter, as well. And I think we feel pretty good about that component. Had it not been for the $7.1 million addition, we would have seen some noticeable improvement in NPAs for the quarter.

As far as breakdown on NPAs, $42.9 million represents non-accruals. $4.6 million, other real estate owned. Past due, 90 days, $855,000. And then loans held for sale of $724,000.

Charge-offs for the period, fourth quarter, 2.22% on an annualized basis compared to 0.44% for the third quarter. Again, indicative of the $12.6 million in net charge-offs for the quarter. We do expect to see some continuing charge-off activity -- elevated charge-off activity as we move through the course of 2009.

Reserve at the end of this quarter was down slightly, 135 versus 140. But our allowance calculation tells us that is adequate. If you look at the breakdown on our allowance, our allowance currently is at about $30.5 million. We've got $5.5 million of that $30 million, or roughly 20%, that is specifically reserved now. So everything else is based on what I will call FAS 5 factors, which includes historical loss experience, factors associated with our anticipation of what our losses will be in a recessionary environment, and other factors such as past-due levels and what have you. So again, only 20% of it is truly specifically reserved to problem credits at this point.

From a capital perspective, obviously, we got a nice pop on our ratios from TARP. We did include for the first time a tangible common equity calculation to show with and without. And as you can see, the tangible common equity -- the tangible asset calculation of 9.75% still, in our minds, demonstrates a very strong capital position.

A couple quick comments on the balance sheet. Pretty stable. We are still seeing some contraction, but in our minds, it is nominal and it is not really hurting us right now. It is more a function of market conditions than anything.

Looking at deposits, it is really been in the CDs and non-interest DDA balances. And particularly with non-interest DDA, if you look at our concentration of commercial accounts, we've got certainly a concentration of accounts that are directly tied to the real estate market. And so what we have seen is a drawdown in average balances and not a runoff in accounts. And so we are hopeful that that will come back as things start to improve.

From a liquidity standpoint, cash and cash equivalents of almost $117 million. Securities portfolio increased to $327.3 million. Certainly indicative of a strong liquidity position, and helped obviously by our TARP investment.

We did get some short-term borrowings paid off during the quarter of $33 million. Related to TARP, we are investing in munis and mortgage-backed securities to some extent, and we are also tracking new production on consumer mortgage portfolios basically our long-term strategy for TARP investment. And then the fixed income investments will peel off as we are able to redeploy them, if you will, into the loan portfolio.

With that, I will stop and turn it back over to Linda.

Thank you, gentlemen. We will now move to the question-and-answer portion of this conference call. Please limit your questions to one primary and one follow-up. At this time, I will ask our operator, Dana, to open the call for your questions.

(Operator Instructions) Allan Bach, Davenport & Company.

Good morning. I was wondering if you wouldn't mind touching on the overall deposit-gathering environment that you are seeing right now.

Well, Allen, it is difficult. I would say from a pricing standpoint, there has certainly been some moderation. And Linda sits with me on a pricing committee that meets every other week to talk about this.

There has certainly been some moderation in pricing. We haven't seen the proverbial flight to quality that we would have hoped for, even with the increase in FDIC insurance coverage. I do think the increase in coverage has mitigated some of the concern and pressure we've had on runoff from concentration for particular customers.

But all in all, I would have to say fairly stable right now. The only real issue I guess we are having is just drawdown on balances, as folks are using up cash positions rather than borrowing money.

Very good. Thank you very much.

Michael Rose, Raymond James.

Good morning. I was wondering if you could talk a little bit about some of the differences in your geography in terms of economic trends, legacy versus acquired markets.

In terms of what we are seeing relative to credit quality, I assume that is what you are looking --.

Yes.

I would say as a whole, again, with the exception around the recreational market of Smith Mountain Lake, everything is fairly stable. I think the more northern markets we are in -- I was just looking at some statistics that the Fed puts out yesterday -- the past-due ratios are a little higher, if you look at a map of the whole state of Virginia, as you move more toward the northern part of the state, up toward DC and all that.

So to the extent we have exposure or a footprint in the Fredericksburg-Culpeper market, which is as far north as we go, I would tell you past dues on the mortgages, consumer loans are a little higher in that area. But you get back down into the Charlottesville market, Central Virginia and over in the valley, you don't really see much of that. It is a very stable, pretty moderate past-due market.

Okay. And as a follow-up, how much more exposure do you have in Smith Mountain Lake, and how much of your specific reserves are for credits in that market?

Well, as we mentioned earlier, we've had $50 million worth of exposure in that market. And obviously, we haven't been lending any more money into that market. We've been exiting that market as much as possible.

I can't tell you off the top of my head -- maybe Jeff, do you have a sense of what percentage of the reserve is --?

Michael, I want to qualify it by going back and looking, but I want to say roughly 30% of that is directly attributable to Smith Mountain Lake.

That would be probably about right, what I would guess, too, as well, Michael.

Okay, great. Thank you.

Steve Moss, Janney Montgomery Scott.

Good morning, guys. Just with regard to nonperforming loans, I was wondering what is the mix as of year-end.

Well, predominately, it is going to be real estate, without any question, predominantly. I couldn't give you a percentage off the top of my head. I'd be a little bit afraid to do that without having a little more opportunity to study that. But clearly, it is a real estate issue in A&D, in particular.

I would agree with that, Steve, outside of the $7.1 million C&I credit.

Yes. We haven't begun to see yet, though there is I guess that potential, but again, as I shared with you on the past-due ratios, we are not seeing it on the commercial portion of our portfolio yet, or consumer to any great extent. It is trending up somewhat, but still at very acceptable levels.

And just with regard to the loan-loss reserve going forward here, as you guys indicated, net charge-offs would be elevated for '09. What does that -- what should we expect for the loan-loss reserve ratio in terms of the methodology and historical charge-offs going forward?

Well, I would say that to the extent you see historical loss experience ratios going up, you would expect to see a larger reserve requirement. I can't tell you what that coverage factor is going to be, but I can tell you as we look at in our more recent charge-off activity and start modeling that in, invariably is going to require a larger allocation, if you will. And then the wild card, obviously, is soft factor adjustments that we make as conditions either deteriorate or improve. If you know the answer to that one, let me know.

As Jeff said, the FAS 5, which is what he is referring to, that portion of our reserve is really growing as the economy deteriorates, and we have to beef those up. And that now represents the majority of what our allowance happens to be now, as opposed to specific reserves.

Okay. Thank you very much.

Jennifer Demba, SunTrust Robinson Humphrey.

Good morning, guys. This is Dave, Jennifer's associate, just filling in for Jenny real quick this morning. I wanted a follow-up question on the C&I NPL that you had mentioned, just wanted to confirm that was a construction-related credit.

It is a construction-related industry, Dave.

They are a supplier of product to the construction industry.

Supplier to the construction industry, okay. And is it kind of early to tell what the resolution path on that looks like, or --?

It's a little early at this point.

Okay. All right. And then just --.

You know, we get a good stimulus plan, it would benefit it greatly.

Okay, all right. Then just to switch gears a little bit, looking at the non-interest expenses, do you have any info -- I'm sorry if it was in the release and I missed it -- but any info perhaps on the FDIC premium activity towards the end of the year and then your outlook on that for '09?

The FDIC insurance, obviously, is something that we anticipate a rather significant increase in for 2009. And I believe if you look at the earnings release, you will see for the fourth quarter we had roughly $643,000 in expense.

We are modeling $3 million in increase in FDIC insurance over our run rate for 2008. So I think -- in fact, I'd have to go back and look -- but I believe the gross is approximately $4.5 million of FDIC insurance coverage expense for 2009. Does that answer your question?

It does. Thank you. Thank you very much. I appreciate it, guys. Thanks.

(Operator Instructions) Bryce Rowe, Robert W. Baird.

Thanks. Good morning, guys. A couple questions. One, on the salary and benefits for the fourth quarter there, is that a good run rate, Jeff, or was there some level of incentive accrual that was reversed in the fourth quarter?

It wasn't a reversal of incentive accrual, but we did have some things kind of jumping around. But I would say that, all in all, they pretty much netted out. So I would tell you it is not far off from a pretty good run rate.

We had a couple of adjustments. Ed mentioned the elimination of a medical premium supplement plan that legacy FNB had. And we recorded a gain associated with that. But then we also had some additional expense associated with some one-time payments we made that pretty much mitigated the impact of that.

So that is a rather long answer, but I would say that it was pretty close to a reasonable run rate.

Okay, next question on credit in some of these construction loans. What are you guys seeing as far as having these -- I guess the properties reappraised to a certain extent? What kind of deterioration in value are you seeing, maybe with the Smith Mountain Lake properties and any other properties that are at risk right now?

The more severe write-downs, obviously, are in the Smith Mountain Lake area, because they are A&D type credits, and the buyers for that are not going to be the consumers. They are going to be other investors. So we are seeing pretty significant discounts, I would say probably somewhere in the 40% to 50% range.

Outside of that, again, we really don't have a lot more to compare as far as A&D, maybe on the consumer side. And you are seeing anywhere there from up, again, in the northern part of the state maybe a 20%, 15% to 20%. You come back into Central Virginia, I think over into the valley, the downturn is a lot less. I really don't have a sense of that, but it is certainly less than the 15% to 20% in the northern part of the state.

Okay. And one cleanup question, Jeff. I missed the projected purchase accounting mark for the second quarter of '09.

Sure. $739,000.

Okay. Thanks, guys. Appreciate it.

(Operator Instructions) Carter Bundy, Stifel Nicolaus.

Good morning, Ed. Good morning, Jeff. You all suggested that deposit pricing it sounds like has largely reached floors right now. Did that include your projections also for CD costs going forward?

No. I think the focus of that comment was on the non-maturity deposits.

Okay. What kind of [slog] of CDs do you all have repricing this quarter, what kind of rates are they repricing into, and what is the current rate in there?

You know, I don't have that, Carter, handy. I would say that we are continuing to see some higher cost funds priced down to current levels, but I don't have specifics relative to rate or spread.

Okay. Secondly, could you all give me an idea of what the estimated warrant amortization cost is going to be for the year?

I can circle back with you. I don't have it in front of me.

Okay. Finally, I guess the next question would be, is the Board right now considering looking at the dividend and lowering the dividend right now, and where might it go?

Well, we obviously are having that discussion and do have that discussion. And the only thing I could tell you is that is a situation we evaluate from quarter to quarter. Because of the uncertainty of the market, we are just looking at where we are relative to now.

Okay. Finally, if you could just speak to some of the loan growth opportunities. Obviously, we've some contraction in the balance sheet. How are you all thinking about going into '09? Would we suspect that loan balances might continue to ease, or are we seeing some good opportunities out there?

I think it is going to be pretty flat overall. And let me go back on the dividend thing, though, because I think at the finish we did go ahead and declare and will -- for this quarter.

Okay.

But back on the loan question now, to tell you that, again, we see very slight increase over the whole year for us.

Okay. Thank you all very much.

Steve Moss, Janney Montgomery Scott.

Sorry, guys, my question was just answered there.

At this time, we have no further questions. Ms. Caldwell, I will turn the call back over to you for any additional or closing remarks.

Thank you, Dana. Everyone, thank you for joining us and for your questions today. We appreciate your participation, and this concludes today's teleconference.

Thank you. And that does conclude today's call. Thank you for your participation. You may disconnect at this time.