Atlantic Union Bankshares Corp (AUB) 2009 Q1 法說會逐字稿

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

Thank you so much Melissa. 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 2009 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 these forward-looking statements. Now, may I introduce our President and Chief Executive Officer, Ed Barham.

Thank you Linda. Good morning and thanks for everyone calling in to StellarOne's first quarter 2009 earnings call. I am going to open this morning's call with some general comments which will be followed by Jeff Farrar, Executive Vice President and CFO for StellarOne Corporation.

Jeff will give a more detailed analysis of our first-quarter operating results. As you are now aware, StellarOne did post a modest profit of $146,000 and a net loss to shareholders of $298,000, the difference being the dividend paid on our TARP borrowings.

Let me begin my comments this morning with the Board's recent decision to reduce our annual dividend by 75%. This action was taken as a direct result of StellarOne's attempt to deal with current asset quality challenges and the unpredictability of the current recession.

It was management's belief that near-term earnings would make it difficult to continue to pay at the historical dividend rate without eroding our capital. This action will help preserve our strong tangible capital as we continue to work through our troubled credits, in particular those already identified in our AMD portfolio.

The related question to the dividend reduction is do we see a continuing rise in the NPAs, OREO and the like. As we've mentioned before, the Smith Mountain Lake area has been and continues to be our softest spot in our loan portfolio.

This area is very much a second home resort area that relies predominantly on discretionary buyers as opposed to primary homebuyers. As such, sales declined early in this market and the valuations have been steep.

With our remaining AMD portfolio, we have no exposure to any other similar developments such as Smith Mountain Lake. In fact, 70% of the first-quarter increase in our NPAs was a result of one large additional Smith Mountain Lake relationship going to non-performing.

With the addition of this single large credit, 38% of our total NPAs are now connected to this one market area. Overall, 62% of total NPAs are made up of construction and development loans and only 6.7% is commercial real estate and roughly 13% C&I, just for comparison.

As we look ahead, we believe credit costs will still remain elevated but hopefully deterioration will be at a diminished rate. The economy of course will determine that.

A few possible bright spots regarding this last large Smith Mountain Lake credit, with the borrowers cooperation, we have a planned series of auctions planned throughout the year that will begin in May/June and will be advertised on a national basis due to the quality of the product. If these auctions prove successful and properties are being offered at attractive prices, that will still allow significant repayment of our loans. Then we may begin to see some slight rebound in this market. Of course that is our hope.

To this point, as of today, we are sitting on top of approximately $7 million in cash contracts for possible sales of some of our NPAs. These are not guaranteed to happen but it does point to the fact that buyers appear to be surfacing now.

If these purchases occur and our first auction in May/June at Smith Mountain Lake yields some positive results, we could begin to reduce some of our exposure to Smith Mountain Lake and further reduce AMD exposure in general. I will not speak to the specific provisioning for the first quarter since Jeff will touch on this.

While no one posting a loss for the quarter, it was modest and modest because of our continued underlying earnings strength. Jeff again will speak to this.

A few remaining remarks. Overall our past dues at quarter end stood at 2.48%, a good level for this economic environment. The highest past due category was our real estate mortgage category which stood at 3.9% or a little over $570,000.

The real estate mortgage decline on our portfolio reflects the continued unemployment situation in general which now stands at 6.8% in Virginia as of last month. Virginia's unemployment has been rising over the last few months but more slowly than the national figures.

The hardest hit area for mortgage delinquencies and credit cards in the Virginia markets in general are in and around the Northern Virginia counties. We touched the fringes of these markets in two areas with our Fredericksburg and Culpepper locations.

Both of these markets appear to be running a little north of 2% for 90 days past due per the New York Federal Reserve statistics, though these are fourth-quarter figures, I would remind you. I will conclude with some positive facts.

First quarter displayed solid non-interest income at just under $7 million, a 9.1% over fourth quarter. Clearly we are benefiting from a strong residential mortgage market where refi versus purchases are running roughly 80% refi's, 20% of first-time home buyers. But I believe purchases will increase as home values decrease, mortgage rates stay low and the $8000 government incentive becomes more known to the buying public.

Deposits increased by roughly $68 million from the last quarter and our gross loans came in at $2.263 billion. While exhibiting flat loan growth, I consider this a good result as we have attempted to reduce our exposure to real estate and are looking for solid commercial and industrial type credits and solid consumer relationships.

For the first quarter, we booked roughly $102 million in new loans but the aggregate loan growth was muted by similar reduction in general lending. Pricing on new borrowers is good as we are using the profitability model to give credit for relationships as opposed to merely running money.

And I'm most pleased to see us collecting an average of around $200,000 a month in retail and commercial loan fees through the first three months of this year. Our total number of retail households is now approaching $100,000 and corporate banking households have now grown over 8% since the merger. Total corporate and retail households now stand at roughly $112,000.

In summary, I would judge our business development efforts as good but the market is challenging as consumer confidence still needs to improve. Let me now stop and I will turn the discussion over to Jeff and afterwards we will be open for questions.

Thank you Ed and good morning everyone. Thank you for joining us. I have several topics I would like to cover today, including a look at our earnings results, revenue and its components, overhead and cost reduction initiatives, capital and liquidity.

I will start with earnings. As Ed has mentioned, we did have a loss of $298,000 or $0.01 per common share compared to a loss of $898,000 or $0.04 a share for fourth quarter 2008.

I will remind everyone that the comparisons that I will speak to today are sequential or linked quarter to fourth quarter, whereas first quarter 2008 is not comparable due to our merger. I'm also pleased to say this is the last time I will have to say that since we have now eclipsed a 12 month period since the close of our merger.

Certainly the dividend on the TARP was the reason for moving from $146,000 in earnings to a $298,000 loss with $444,000 in accrued dividends and discount accretion on a $30 million investment. Pretax pre-provisioned earnings for the quarter were $7.3 million, indicative of solid core earnings strength with the largest impacts obviously being that of loan-loss provisioning of $7.75 million which actually was down from $11 million in fourth quarter and a $1.6 million decrease in revenues primarily associated with our margin compression.

Speaking of the net interest income, we had $22 million in net interest income for the first quarter versus $23.7 million on a linked quarter basis, down $1.7 million or 6.9%, a net of purchase accounting amortization of $1.1 million and $1.69 respectively. Our core margin, which also includes those amortization amounts, experienced compression of 19 basis points sequentially, moving to 3.36 versus 3.55% for fourth quarter.

I will point out that the result for the first quarter was also impacted by the non-performing asset increase that Ed mentioned to the tune of roughly 3 basis points for the quarter. The compression has been predominately yield driven.

We were down 44 basis points on a linked-quarter basis. 36% of our portfolio is tied to prime and LIBOR. As most of you are aware, we saw a fairly rapid decrease in those two indices Q4 to Q1.

Funding costs improved 16 basis points for the quarter but obviously not near as sensitive as the declining rates were on the asset side. We are asset sensitive and certainly we saw the result of that in the first quarter.

The other thing I think that's impacting our margin is the fact that on our funding side, we are still predominantly reliant on core deposits and we are seeing certain types of core deposit instruments hitting floors if you will do to how low rates are in the current environment. For those who care, the purchase amortization amount continued to come down for second quarter we estimate $739,000 in pick up in net interest income associated with that amortization and that number moves to $537,000 for third quarter.

We do expect to see some compression in the remainder of the year, albeit we do think it will be less than what we experienced in the first quarter. We always seem to have a tougher first quarter relative to the remainder of the year anyway.

But we are continuing to see some improvement in CD pricing as CD rates reprice down and we also have a fair amount of excess liquidity now that we are working hard to redeploy to improve our operating leverage. And I do think we will have as much as $50 million redeployed during the second quarter.

Shifting to non-interest income, certainly a good quarter for us. Excluding the effects of gain and loss on sale of assets, we were up $523,000 or 8% to just under $7 million. The increase was primarily attributable to mortgage revenue which saw an increase of $814,000 or over 100% on a linked-quarter basis.

In addition, loans held for sale increased to $38 million. So we have approximately $38 million on the balance sheet ready to sell and to record revenue off of.

Division was profitable for the quarter. We would expect to see some increase in earnings contribution from the mortgage unit as we continue through the course of the year.

Retail fee income from banking services was weaker, down $499,000 or 11.9% on a linked-quarter basis. We attributed most of this to just seasonability fourth quarter versus first quarter.

Trust revenues were essentially flat at $1 million. Continuing contraction on fiduciary assets due to market valuation contraction continues to hamper if you will our ability to grow revenues but we continue to see some profitability from that unit; have also, I will add, picked up some nice relationships over the course of the quarter.

Let me now shift to overhead. Continue to see some improvement in core efficiency from our overhead perspective with total operating expenses equaling $22.2 million, essentially flat with that of fourth quarter of 2008; and having absorbed, if you will, an increase in FDIC insurance of $462,000 and increases of roughly $300,000 associated with mortgage commissions.

I will also note that if you look at the run rate for overhead for the two companies prior to announcement of our merger back in 2007, we're running about $2 million less than the second quarter 2007 run rate for the two respective companies which is indicative of our efforts to control costs and create additional efficiency.

Other variances for the quarter included a decrease in DDA-related charge-offs of $442,000. This helped offset an increase in professional fees which are in large part related to our credit issues of $340,000 for the quarter.

Comp and benefits were flat on a linked-quarter basis and will likely begin to increase modestly as commissions on mortgage production and related hirings begin to have some impact. Having said that, our FTE numbers came in at 834 versus 846 in the fourth quarter of 2008. So we continue to see some contraction, if you will, in our FTEs and I do think that we will see some leveling on that as we go forward.

We continue to work very hard on cost save initiatives, having now consolidated two more retail financial centers and a total of four since mid-2008. We have one more consolidation scheduled for next month and we will likely have a couple more branches that we're looking at in terms of some sort of combination or consolidation as we assess the metrics and customer impacts for those branches. These consolidations have gone well for us with excellent customer and deposit retention and obviously have created some efficiencies for us from an overhead perspective.

We will continue to work on some other cost save initiatives, with more information to come shortly. Several other things that occurred during the first quarter from a cost efficiency of reduction intent, if you will; we have accomplished the mission of looking at some restructuring on comp and benefits.

We have put together some benefit plans that will yield some cost savings. We have held the line on merit increases and incentive plans for 2009 which I believe we have previously announced.

We have also restructured our corporate Boards. Beginning this month, we will have a reduction in our corporate Board to 14 outside directors and we will have a significant reduction in the number of bank board members.

Both Boards will also see a reduction in cash retainers and our Chairman and CEO have elected to take a 5% reduction in their base compensation. Let me move now to asset quality.

I think Ed's covered this pretty well. But a couple of points I would like to make. Level of non-performing assets dud increase to $70.8 million or 2.3% of assets, an increase of $21.7 million or -- excuse me -- an increase of $21.7 million over the level of $49.1 million at the end of the fourth quarter.

Ed has noted the large increase of $14.7 million. Of our total Smith Mountain Lake exposure of $58.6 million currently, we have now $25.3 million or 43% of that total now in non-performing and we have allowances or specific reserves on that $25.3 million of roughly $10 million, which represents approximately 17% of total outstanding.

To date, we have reserved and written down approximately 24.7 of our total exposure at Smith Mountain Lake. Again, that is both specific and general reserves allocated to Smith Mountain Lake as well as its charge-offs incurred over roughly the last nine month period.

NPAs consist of non-accrual loans of $66.4 million, OREO of $4.2 million, past due loans greater than 90 days of $293,000, loans held for sale of $279,000 and TDRs of $195,000. Annualized charge-offs amounted to 0.51% versus 2.22% for the fourth quarter, indicative of $2.9 million in net charge-offs for the quarter.

We certainly expect we'll see similar levels of charge-offs in the short-term. We did have reserve building for the quarter, moving the reserve as a percentage of total loans to 1.56% versus 1.35% at the end of the year. This represents approximately 53% of non-performing loans and represents approximately 50% of total non-performing assets.

We now have specific reserves within the allowance of $13 million, representing approximately 37% of our total allowance of $35.3 million. From a capital perspective, we continue to have strong levels of Tier 1 risk-based capital at 13.65%; excluding TARP, a very healthy 12.44%.

Our tangible common equity ratio is a very strong 9.53% and our book value per common share is at $16.01. We do continue to be one of the stronger capitalized banks in our peer group.

From a liquidity standpoint, we have cash and cash equivalents at the end of the quarter of $145 million, a securities portfolio of $323 million; certainly indicative of a strong liquidity position. In conclusion, while we continue to have challenges on the asset quality front, our bank continues to perform well on many fronts.

Liquidity and capital are certainly strong. Mortgage activity should result in greater earnings contributions. Recent deposit growth is encouraging and we continue to find meaningful ways to improve our core operating efficiency which will serve us well as conditions improve. I will now turn it back over to Linda for the Q&A discussion.

Thank you gentlemen. Now we will 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 to open the call for your questions. Melissa?

(Operator Instructions) Allan Bach, Davenport & Co.

Thanks for all the good detail on the call. I was wondering if you wouldn't mind talking a little bit about the commercial real estate portfolio and any updates as far as what you are seeing there, opportunities as well as maybe some areas of weakness you might be seeing. Any thoughts there?

In general, it continues to hold up. We're not seeing any issues there that concern us and we are obviously getting an opportunity to look at some better credits from larger banks and where we feel there are opportunities, we're looking at them.

That's great. As a follow-up, I think it's about $812 million is the balance there. How much of that is approximately income related investment properties?

About 29%.

Michael Rose, Raymond James.

Just a question on the mortgage activity. You mentioned it's been pretty strong. We have seen that from most of the industry. What markets is that coming from primarily?

Across the board, Michael. It's strong everywhere. The low rates really are making a difference in the marketplace and so we are seeing good activity across the whole footprint.

Okay and secondarily, what was the OREO balance at the end of the quarter?

$4.2 million.

So roughly unchanged. In regards to the auction that you guys are going to do, are other bank selling properties in that area, in the Smith Mountain Lake area and do you have any sense for kind of what they are selling at as a discount to I guess the loan value?

Michael, really not many auctions have been held to date and so the May/June auction will be an eye-opener for us as to what we think the market really will yield. So it's an important event for us.

So really would hesitate to project what I think. I think that May/June auction is going to tell us what the transactions will bring. The good news for that particular property is it's very quality in nature and is going to be advertised on almost a national basis because of the quality of what we've got to offer.

You're talking waterfront properties and dock slips with it and that sort of thing. We feel hopeful. Let me put it that way.

Catherine Mealor, KBW.

Your residential mortgage past dues were up pretty substantially last quarter. How much of that moved into NPAs this past quarter and did you see another increase in past dues in that portfolio again this quarter?

I can't tell you how many (inaudible) moved into NPA. Let me see if I can find that number real quick. I may not have it. If not, we can get back to you.

Okay. A follow-up to that was also if you could break down I guess the NPAs. You gave the breakdown of the Smith Mountain Lake one. That was about $14.7 million. Do you have the breakdown of the other $7 million increase in NPLs, what loan categories that came from?

Not with us, Catherine. I would be happy to circle back with you on it.

Okay, thanks so much.

Bryce Rowe, Robert W. Baird.

Thanks for the information so far on the call. Jeff or Ed, if you guys could speak to -- you mentioned the demand deposit charge-offs as part of expenses being down. I assume that's tied to some kind of overdraft product?

Yes, certainly it is. And quite honestly, we're just I think doing a better job of managing it. A lot of it is fees that we were not realizing. It's not true and civil charge-off. At least good portion of it is not.

As I'm sure you are aware with these overdraft programs, those NSF charges can ramp up pretty quickly. We are just doing a better job of managing that whole process.

I think the other thing I would mention is as we move away from [Haberfield] we're not as aggressively taking on the DDA accounts that maybe don't have the profile that we have had historically. So you inherently would see a little less in the way of charge-offs as we move forward because we are doing a little more in the way of selective account opening as opposed to just having a mass entry, if you will, through a mail advertisement.

And two I guess follow-ups. Any thought -- (inaudible) any thoughts related to TARP and kind of the increased stigma that has come with having excess TARP for the whole banking sector, that would be my one follow-up.

I would tell you that we certainly would like to pay it back sooner than later. I think we would like to see how the next quarter or two plays out and we kind of want to get a little more comfort as to where we are going with this economy and asset quality in general before we make that decision.

But we certainly are in a position I think from the capital perspective to do it sooner than later. But we don't want to jump the gun here. We want to make sure we know kind of where things are headed before we do that.

(Operator Instructions) Steve Moss, Janney Montgomery.

Just with regards -- most of my questions have been answered. But just following up on the Smith Mountain Lake property that went NPL. Are they condos or houses and what is the price range?

Most of it is lots, finished product and many of them have nice curbside guttering, water sewers all in. It's not anything that we're having to fund or complete. So it's ready-to-go property and so that makes it easy for us. That is the majority of what we have. There are a few homes but not much of that sort of thing. Overall it's finished product.

As I recall, originally we were in a kind of a band of 400,000 to 700,000 per lot.

Bryce Rowe, Robert W. Baird.

I forgot one of my two follow-up questions and re-remembered it. Could you guys speak to the M&A activity in Richmond -- in the Richmond market over the last month with the two banks being announced?

Well, I would have to say it wasn't totally a surprise to us. I won't say which, but we were a player in looking at some of that.

Our decision has been to stay focused on the current bank and the things we feel we need to do here. So we haven't been really aggressively looking to do anything though.

Certainly Richmond is a market that we desire to be in. There are other opportunities we feel that will present itself at a better time and at a time will be able to take advantage of it better. And I wish everybody good luck.

Carter Bundy, Stifel Nicolaus.

Jeff, when you were talking about the margin near term contracting, were you talking about out on a core basis or on a reported basis?

Core basis. Yes, I have tried to focus more on core relative to what is going on within the margins and the continuation of benefit we are getting from the purchase accounting adjustments. So I would -- again, I would expect to see some modest compression as we go through the remainder of the year although I think it's going to be less than what we experienced in first quarter.

Could you talk a little bit about the deposit pricing environment right now?

I would tell you that it's pretty disciplined. We don't see too many outliers right now.

I think everybody is feeling kind of what we are feeling right now from a margin compression perspective Except for some that are not relying on core deposits and are seeing a nice pickup in reduction on non-core.

But having said that, I would tell you that it's again pretty rational. We look at it every week and I think folks are pretty well behaved right now in terms of how they are pricing their deposits.

In terms of an opportunity to reprice lower, it looks that you obviously ran a pretty attractive interest-bearing checking campaign. it looked like it went pretty materially in the quarter. Do you see opportunities to reprice lower pretty much across the board in the CD -- or excuse me -- in the deposit portfolio?

I wouldn't say across the board. I do think the interest checking account is one that we probably have some room on.

Certainly on the CDs, we are getting some repricing. I think where we feel the pinch is in traditional savings, money market accounts where we are just so low right now that it's hard to push the needle anymore.

Okay, are you getting -- in terms of loan yields right now, are you all getting to the point where you feel like they would stabilized exclusive of NPLs additions?

I would say so, yes.

It appears we have no further questions at this time. I would like to turn the call back to our speakers for any additional or closing remarks.

Everyone, thank you so much for joining for your questions today. We appreciate your participation and this does conclude today's teleconference.

Once again, that does conclude today's call. We do appreciate your participation. You may now disconnect.