Atlantic Union Bankshares Corp (AUB) 2009 Q2 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. Please go ahead.

Thank you, Laurie. 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. Mr. Barham and Mr. Farrar will review results for the second 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. Ed?

Thank you, Linda, and good morning to everyone. Our format for this morning's call is going to be similar to our past presentations, and I will open with some general comments regarding StellarOne's second-quarter and year-to-date results, and also share with you some observations and a sense of where we see our asset quality trending. I would assume most of you listening today want to know about asset quality, so my remarks will be largely focused on asset quality and related issues.

As you are aware, we showed a modest loss for the second quarter of $326,000 and a net loss to common shareholders of $785,000 for the second-quarter 2009. This represents a $0.03 loss per common diluted share. For the first six months of this year, our cumulative loss was $1.1 million, which equates to a $0.05 per share loss.

Loan loss provisioning continues to be the primary driver of our weakened earnings as we absorbed $6.5 million in reserves during the second quarter, which was netted against charge-offs for the same period of $6.9 million. This resulted in an ending allowance of 1.56%.

Additionally, second-quarter's earnings were negatively impacted by the special FDIC assessment of $1.3 million. Obviously, both these negative factors are a sign of the times but obstacles we feel we are navigating well and at some future point will lessen their impact on our profitability.

Some positive trends should be noted. I would caution these positive observations are too early to declare a trend, but they give us encouragement that our management efforts are having an impact and our level of overall past dues declined both during May and June, ending the quarter at 1.38%. In fact, our past dues peaked in February and, since February, have continued to trend downward. The past due decline was most notable in commercial real estate, real estate construction, real estate mortgage, and even the consumer portfolio, though I anticipate real estate mortgages and consumer loans in particular would continue to be under some future pressure, especially in light of historically high levels of unemployment for the foreseeable future.

While nonperforming loans were up by 11% from first-quarter levels, the 11% increase was considerably less than what we have experienced in the previous three quarters, and we experienced little to no increase in problem assets associated with our residential real estate exposure at Smith Mountain Lake, which, as you will recall, has been a trouble spot for us. Past due levels, including nonperforming loans, were down 15% overall and down 49% in the 30 to 89 day range from the previous quarter.

Globally, the $73 million in nonperforming loans at 6/30/2009 are still largely made up of A&D credits, roughly 57%. One to four real estate make up 20%, commercial and industrial 13, which is primarily associated with one large shared credit tied to the construction industry, and commercial real estate at 7.5% and consumer loans at 1.8%.

The 57% of NPAs which are A&D are $41.6 million; $25 million are at Smith Mountain Lake. In fact, Smith Mountain Lake from a geographic footprint at this point houses 33.9% of all of our NPAs. We feel confident though we have seen the worst of that market, though the workout of the existing Smith Mountain Lake problem credits will take some extended period of time to resolve.

I am hopeful as we look to the remaining part of the year that some stabilization of asset quality has begun. This will not be truly possible until ongoing real estate values stabilize. If this were to occur, this would result in the single biggest and most immediate improvement to a turnaround in our earnings since the vast majority of our loan loss provisioning is a result of the continuing decline in real estate collateral.

It would also bring buyers back into the market. When this stabilization does occur, coupled with our active workout efforts, some positive and sustainable long-term earnings momentum will be possible.

Shifting focus, you will see as you analyze our numbers that we continue to maintain a decent EPT earnings level, which is certainly allowing us to absorb unprecedented monthly provisioning. Our net interest margin through the first six months stood at 3.43%, but more telling is second quarter's margin of number 3.24%. This does exclude the effects of purchase accounting amortization, and Jeff will have more to say about this in a moment.

Our PPT for the second quarter was number $5.7 million, and again, this was after the $1.3 million special assessment. Overall, we are pleased with our continued underlying level of earnings given all the obstacles we face in this economy.

I will conclude my general comments with one other bit of information relative to an area of focus for us during the remaining part of this year. As many of you know, last year, we successfully eliminated roughly $9.5 million in costs associated with our February '08 merger. A large part of those savings were compensation-related.

As of last month, we have embarked on a new initiative to reduce operating overhead, non-compensation, by another $3 million to $4.5 million to bring our average operating costs to average assets under our current 3.2% level. Our goal is to bring StellarOne more in line with peers to a level of 2.8% to 2.9% of average assets. The potential for achievement of these savings will not be known until fourth quarter of this year and the majority not realizable until 2010. We continue to view the time since our merger as a time not just to deal with problems, but to look for further ways to enhance our Company's effectiveness. We intend to emerge from the recession not only well-positioned from a balance sheet perspective, but from an operational perspective as well. We want to be positioned to realize stronger future growth for our Company.

I will now stop at this point, and I will ask Jeff Farrar, CFO for StellarOne Corporation, to provide further financial detail on our second-quarter results.

Thank you, Ed, and good morning, everyone. Thank you for joining us today.

I have several topics I would like to cover today, including a look at our operating results at revenue and its components, overhead for the quarter, cost reduction initiatives as Ed has alluded to, capital and liquidity.

I will start with the loss for the quarter. The modest loss is $785,000 or $0.03 per common share compares to a loss of $298,000 or $0.01 per share for 1Q 2009. This loss includes $457,000 in accrued dividends and discount accretion on preferred stock associated with the Capital Purchase Program.

Pretax pre-provision earnings, as Ed mentioned, was $5.17, down from $7.3 million in the first quarter with the largest impacts including a $1.3 million special assessment from the FDIC accrued in the second quarter and to be paid in the third quarter; $644,000 in OREO and asset-related write-downs for the quarter, and approximately $550,000 in net interest income contraction associated with our margin compression.

On a positive note, core noninterest revenues helped offset some of this with revenues of $8.3 million representing an increase of $1.3 million or 17.8% over first quarter.

Let's talk about the net interest margin in some more detail. We saw less contraction in the core margin, excluding the purchase accounting adjustment this quarter, experiencing compression of 12 basis points sequentially from 336 in the first quarter to 324 in second quarter. But that was noticeably better than the 19 basis point contraction when you compared first quarter to fourth quarter of 2008.

For those of you that care, the purchase accounting amortization continues to whittle down a 10 basis point impact this quarter. We have $537,000 of amortization for 3Q coming in, and we have $336,000 for 4Q.

As noted last quarter, our compression continues to be yield driven. We were down 30 basis points on a linked quarter basis on an average -- on earning assets. The fixed-rate portion of our loan portfolio, representing almost 63% of the portfolio, has experienced accelerated repricing as this low, short-term rate environment has become protracted. With an average yield of 644, 6.44% on this portfolio currently, this trend is likely to continue until rates begin to move up and loan growth improves.

Other impacts include the $77 million in non-accrual loans, which are essentially non-earning assets currently and an excess to short-term liquidity that we have consciously maintained until conditions improved. We do anticipate given where we are today some improvement in whittling down our excess short-term liquidity over the course of the remainder of 2009.

Funding costs improved 14 basis points on a linked quarter comparison. But we are obviously not as sensitive to declining rates as the asset base. We should get some relief though from additional funding cost improvement in the third quarter, whereas we have over $221 million in CDs repricing for the quarter with an average rate of ever 3%. And we have already paid down $25 million in advances in the third quarter with a rate of approximately 3.5%.

Other margin drivers for the next couple of quarters include the amount of carry associated with the nonperforming assets, improving our credit spreads on our loans, and growing our earning asset base.

A few additional comments, if I could, on non-interest income. Mortgage revenue was our primary growth driver for the quarter with revenues of $2.1 million representing an increase of $660,000 or over 46.4% compared to first quarter. Loans held for sale on the balance sheet were over $50 million, and profitability was notably better in second quarter compared to first quarter.

On the retail banking side, retail fee income was also stronger. Revenues of $4.1 million representing an increase of $402,000 or 11.9% sequentially.

Now let's talk about non-interest expense. While we did experience some increase in overhead for the quarter, if we adjust out the FDIC assessment and commission increases associated with the ramp-up in mortgage production, we have maintained a run rate of just over $22 million for the last three quarters and roughly $2.5 million less than the run rate for second quarter of 2008. That also does not take into consideration that our recurring quarterly FDIC insurance costs this quarter is approximately $800,000, greater than we were in 2Q of 2008. So we had over $2.1 million in FDIC insurance expense for the quarter, including the special assessment.

Excluding the ramp in commissions expense, comp and benefits were flat for the third straight quarter. FTE numbers came in at 831, and that compares to 834 on a linked quarter basis.

Ed has referenced our continuing focus on efficiency. In addition to the project big-band controllable cost save initiative, we have consolidated another financial center this quarter and now have consolidated a total of five since mid-2008. We recently announced the sale of another center to close in the fourth quarter. These consolidations continue to go well with excellent customer and deposit retention.

A few concluding remarks related to the balance sheet. Despite the economic challenges, capital levels remained very strong with Tier 1 capital at 13.47%, and that's 12.28% without the TARP investment; total capital of 14.72%; tangible common equity of 9.27%; and a tangible book value per common share of $12.16.

Another good story for us for the quarter was deposit growth. Deposit growth accelerated for the second quarter in a row with average deposits growing $78.9 million to $2.41 billion or a 3.4% increase when compared to first quarter. Growth was noted in most categories, and we now have seen deposit growth year-to-date of over $126 million.

From a liquidity standpoint, cash and cash equivalents grew to $184.4 million, up 27.6% from the first quarter. Average securities portfolio of $327 million, which is up 5% from the first quarter.

In conclusion, while we continue to have challenges on the asset quality front, we are cautiously optimistic for improvement in operations for the second half of the year and are pleased to be in a position of maintaining strong liquidity and capital. Mortgage activity is resulting in greater earnings contributions, recent deposit growth, and mix is certainly encouraging. And we continue to find meaningful ways to improve our core operating efficiency, which should serve us well when 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. And at this time, I'll ask our operator, Laurie, to open the call for your questions. Laurie?

(Operator Instructions). Jennifer Demba, SunTrust Robinson Humphrey.

Can you just give us some more color behind your thought process of not building the reserve this quarter? I know your delinquencies are obviously down, and it sounds like they been down for several months now. But can you kind of give us some more color behind your thought process there? Thanks.

I think we have identified those NPAs, Jennifer, that are actually needing to be reserved for specifically, and, what we see relative, as you said to the past dues coming down, we feel very comfortable where we are in the coverage factor.

Okay. Can you talk about more specifically what you are seeing in the C&I and commercial real estate part of your loan portfolio?

Sure can. Commercial income producing portfolio was probably what you are most focused on I would assume, and we have roughly $298 million in that portfolio. I will tell you that of that, 1.25% is nonaccrual, and we run past dues a little over -- a little under 1% actually. So we are still continuing to see that segment hold up well, and so we hope that trend will continue for as.

Jennifer, if I could add, commercial and industrial nonperforming loans for the quarter ended at $9.8 million, which is 13.5% of the nonperforming loans. Commercial real estate was at $5.5 million or 7.5% of our nonperforming.

Okay. Thank you.

Allan Bach, Davenport & Co.

I was wondering if you couldn't -- wouldn't mind refreshening us as to the total exposure at Smith Mountain Lake?

Let's see. Allan, I believe we were -- going on memory here now -- about $57 million, which is all in. That includes some components of the portfolio outside of the A&D. The A&D is less than that. But I believe the aggregate was right around $57 million.

That's helpful. And I was also wondering if you wouldn't mind, I guess, providing us an update as far as what you are seeing in the mortgage revenues and what kind of trends you are seeing so far in the third quarter.

In terms of secondary?

Yes.

It is holding up. We are continuing to see some slight drip down, but it is still very strong historically for us.

Very good. Thank you very much.

(Operator Instructions). Avi Barak, Sandler O'Neill.

Two quick questions. First, I was wondering when you move a credit from non-performer to the OREO, and I know no two credits are the same. Maybe you can give us an average or a range. What type of mark-to-market are you seeing from when you reappraise it in that OREO bucket? Is it down 20? Down 50? Could you give us an idea there?

It really does. There is a wide range. Some of them we see no reduction. We've had some move that has had no reduction almost. So it's really hard to give you a feel. It depends on the market.

I would really just be taking a shot in the dark if I even told you what the average was. I'm really not comfortable telling you that.

Okay. Fair enough.

Just philosophically, we are very conscious of moving these assets to a liquidation value before we go to OREO. So we're trying to take our haircut, if you will, best estimate of the loss prior to moving to OREO.

If you look at Smith Mountain Lake, there's definite haircuts going on there. We could see 30% or 40% sometimes, but sometimes we've moved some that were not.

Okay. Thank you. And then secondly, with a tangible common ratio north of 9%, which is one of the highest at least in my coverage universe, wondering why you are not more aggressively pursuing getting out of the TARP just so you don't have to have the government in your hair and kind of telling you -- whispering in your ear all the time.

Yes. Well, my response to that I think early in the cycle, back when we took the TARP last fall around December, it was a real unknown as to what the economy was going to be like, and we had just finished a merger, and we were still at that point trying to understand the sensitivity of the portfolio we had. I think as each passing month goes by, we are getting our arms around that, and I hope to make a definite decision by third quarter on where we're going to be with TARP.

Thank you.

Being a conservative kind of guy, I'm just sitting tight on it right now. But we certainly appreciate the notoriety of having some good levels of capital.

Thanks.

Dan Bandi, Integrity Asset Management.

Thanks. I was wondering if you guys could give us some more color on the charge-offs for the quarter in terms of what categories they came from -- were they on write-downs on new flows coming in, or were they price adjustments of things that were already on the books? Just some color there.

Happy to do that. We had really three significant charge-offs for the quarter, and they really covered much of our footprint. We had one charge-off of $1.2 million related to Swiss Mountain Lake. That was an A&D loan. We had one in our Northern Virginia market was again an A&D loan of $1.1 million charged down, and then we had another one in our Central Virginia market that was A&D related of $1.3 million. So those were our significant charge downs.

Most of everything else that came through was one to four family. We did have one other additional large one, which was a national syndicated credit. That's our C&I component of our portfolio of $901,000. So actually four awards ones and then the remainder of it was pretty small stuff in the one to number four family arena.

And of those large ones, I guess, well, Smith Mountain, we know, but the other ones, were they on dispositions, or were they just additional write-downs upon revaluation?

Two of the three large -- excuse me, two of the four large charge-offs were dispositions. They had not settled at the end of the quarter. You will see that occur in the third quarter. So two of the four were dispositions. The shared credit was basically us following the lead bank in terms of write-down. I think the two that remain are probably longer-term markouts for us.

And of the dispositions, can you just give a flavor of how that charge-off was compared to the loan balance that you have?

That's going to be difficult for me. I would say on the shared national credit, it was a 12% haircut. On the Smith Mountain Lake relationship, we're down 60% on that particular project, and that's, by far, our largest haircut. And that was one that we had taken a large charge-off on in the fourth-quarter. We've gotten some purchase activity or interest in the project, and that is what we based the valuation on for second quarter.

So, those two I'm aware of. The other two, quite honestly, I don't recall the haircut amount.

I'm sorry. I don't mean of the original balance, but just of the immediately prior carrying balance.

Understood.

I just want to make sure that you got my other question. Okay. Great. Thanks a lot.

Bryce Rowe, Robert W. Baird.

Thanks. Good morning, guys. I'm good. Thanks. Just a couple of questions and maybe a third as a follow-up to the previous answers there. One, the deposit growth obviously has been very strong for this year. Is that a function of any kind of special campaign, or is it just basic blocking and tackling?

Basic blocking and tackling.

So we should -- is that something we should expect over the next six months? I mean do you see some of the early quarter trends here in the third quarter similar to the first six months of the year?

No. It is leveling out.

Okay.

I would also tell you that we've got some significant balances with municipalities that appear to be short-term in nature. So I do think that will haircut, if you will, any core growth we get in the second half.

Yes.

Okay. And then on the -- you guys mentioned the repricing of fixed-rate loans and that impacting the loan yields. When those loans, I guess, come up for renewal or come up for repricing, is there any opportunity to, I guess, change how those loans are priced or get a higher margin over the whatever it's tied to?

It is case-by-case, but yes, we're certainly trying to get better yields on everything since, quite honestly, there's less opportunities or alternatives for the borrowers these days. So we are trying to take advantage of that.

Okay. And then the third question, the shared national credit, was that in your markets?

Yes.

Okay. So any other shared national credits, I guess, outside of your markets?

No, none that I can think of. I think we had none.

Okay. Thanks, Ed.

You're welcome.

(Operator Instructions). Carter Bundy, Stiefel Nicholas.

If you could just talk a little bit about your recent auction experiences, I know that you all had planned some auction this quarter, as well as I think into the third quarter. And Jeff, if you could just talk a little bit about that. I know you had some Smith Mountain Lake parcels and how that process is going.

Sure, Carter. Happy to do that. We have had some auction activity. I would call the results mixed. I think we were impressed with the amount of interest in terms of the number of folks that came out and were able to move a fair amount of property out through the auction. Unfortunately, the structure of the auction I think we learned some lessons relative to setting some minimums, and this was one where we had allowed the borrower to kind of participate in some of that decisioning with us. And I think in hindsight, we probably would have structured a little bit differently.

But overall, I would say it is still a successful auction. It is still something we would continue to in that Smith Mountain Lake area. I think we will do selective small auctions as we've talked about before so as to not flood the market and hurt underlying values. But I would tell you that you can expect us to continue that approach as we move through the course of the year.

Obviously the auction season is coming to an end here pretty quickly. I don't know how many more we will be able to get before we kind of go into the non-buying season. So, if we can get one or two more done, I think we would be happy and consider that a success before we get back into the next spring buying season.

Could you talk a little bit about the valuations you have seen? And I guess the next question becomes, do you basically apply that sort of valuation to some of the remaining credits? And if that is the case, do you see additional haircuts in what you have that -- those Smith Mountain Lake credits written down to?

We do consider where the auction values come in relative to the liquidation values that we have used for our specific reserves, and we do do what we call market adjustments to those liquidation values. I will tell you the one that we had in the third quarter actually came in -- for the ones we sold came in above our carrying value. So we had no direct charge-off associated with that particular auction, which was nice. But, I guess philosophically, yes, if there is -- if we are doing auctions and those valuations come in at less than liquidation values, then we will market adjust, if you will, that liquidation value.

Okay. But at this point, you haven't taken any more haircuts at least with this quarter's auctions?

That's correct.

Great. Thank you all very much.

That being our final question, I would like to turn the conference back over to our presenters for any additional or closing comments.

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

Again, that does conclude today's conference call. Thank you for your participation.