Atlantic Union Bankshares Corp (AUB) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the StellarOne Corporation Earnings Call. At this time, all participants are on a listen-only mode. Later we'll conduct a question and instructions will follow at that time. (Operator Instructions).

I'll now introduce today's host, today's conference, Ms. Linda Caldwell. You may begin, ma'am.

Thanks, Sherise. Today we have with us O. R. Ed Barham, Jr., President and Chief Executive Officer of StellarOne Corporation and Jeff Farrar, Executive Vice President and Chief Financial Officer. Mr. Barham and Mr. Farrar will review results for the first quarter of 2010. 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 intention, 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 to everyone. Let me jump right into my comments regarding our first quarter results. I will provide you a brief overview of our financial results, some detail on asset quality and future outlook. And I will then be followed by Jeff Farrar, Executive Vice President and CFO for StellarOne Corporation. He will give us some further financial results in detail. Once we have concluded our remarks, we will take your questions.

First quarter 2010 results provided our second consecutive quarter of growing profitability for the company. StellarOne for the first quarter 2010 earned $1,854,000 on a per share basis to our common shareholders. Excluding dividends and the discount accretion on preferred stock, we earned $.06 per share.

While certainly not a return to historical level of profitability, this result does compare favorably to our prior fourth quarter earnings of $546,000. It also compares favorably to the net loss of $290,000, a one penny loss per share per diluted common share for the same quarter a year ago.

We are obviously pleased to see our first quarter improvement. First quarter was helped by some one-time gains associated with the sale of our Farmville branch and some cleaning up of our investment portfolio. Jeff will provide more detail on these items in his later comments.

Despite these one-time gains, StellarOne's core earnings were still in excess of $1.5 million. The results of first quarter were bolstered by an expanded net interest margin ending the quarter at 3.52%. Positive bottom line results from our retail and wholesale mortgage operations and a growing profitability in our wealth management area helped this. Loan growth overall still remains a challenge. And I will have more to say about that in a moment.

Our provisioning level for the first quarter of 2010 was $6.7 million while net charge-offs were $6.2 million. Our allowance coverage for the first quarter ended at 1.89% versus year-end 2009 at 1.84%. For further comparison, first quarter 2009 provisioning amounted to $7.8 million. And fourth quarter 2009's provision was $3.5 million.

Our coverage for non-performing loans increased to 69% from the 66% coverage at the end of the last quarter. The total dollar of non-performing loans declined slightly, $3.2 million for first quarter 2010 to $62.9 million resulted in a ratio of 2.1% of total assets. The biggest contributors to this improvement was a $2.2 million reduction in OREO.

Other asset quality indicators, TDRs, increased less than $3 million with the bulk of that increase related to $2.2 million CNI credit we moved out of non-performing to accruing TDR status. The bulk of these TDRs continue to be modified residential mortgages, roughly 20 million, which are performing well. It is our hope that at some point in the future, we will begin to reduce these by moving them back to a performing status.

It is worth commenting that StellarOne did have a $6.7 million A&D credit added to our non-performing loans at the end of February. This is a development loan that is in a well-established premier property that went to non-performing status, not because of the failure of the development, but primarily due to a divorce and resulting settlement. The borrower has essentially decided to turn the development over to the bank, though it is very likely you will see a significant pick up in our OREO by next quarter with a corresponding drop in the NPLs.

I might add this loan was not located in the Smith Mountain Lake area. And we feel it has great marketability due to the location, proven demand for the development, and the available amenities that are already in place. We have already reserved what we feel is an appropriate provision.

Overall, our [fast fuse] edged up slightly from last quarter, moving from 2.46% fourth quarter 2009 to 2.8% first quarter 2010. This is in line with what we've experienced most of last year. Some of this quarter's slight increase was a function of a smaller loan portfolio balance as StellarOne saw roughly a 1.9% decrease in our loan outstanding. Our continuing decrease in loan outstanding can be directly traced to our ongoing decline in acquisition and development loans. Since the first of 2009, we have now seen our A&D portfolios shrink by roughly $100 million, $33.6 million since January 1st of this year alone.

As stated in earlier calls, we are working to reduce our exposure to A&D and increase our lending on the consumer side and commercial and industrial. On the topic of C&I lending, we have hired since the last quarter three new C&I lenders with significant end market share portfolios. Two of these lenders joined our loan production office in Richmond, and the other our Roanoke market. These recent hires represent the continuation of our efforts to improve our capability to grow commercial lending in our most promising markets.

We will continue to look to add resources in this area. Since January 1, 2010, a new head for retail was also hired from Wells Fargo. He has brought a new level of activity on consumer loan originations from our branches. And we are beginning to see results from this effort. Hopefully, by second quarter, we can share some positive news on that front. I will add we are seeing across the board a slight improvement in loan demand and especially in the mortgage line of business and retail lending. Jeff will shed more light on this in his comments.

Since February, we have moved our call center, which has roughly 30 employees, under the retail line of business and are emphasizing more outbound calling efforts. This call center was established in February, 2008, with our last merger as a way to primarily handle customer questions and problems. The emphasis going forward will be more on our outbound sales calls, and I believe this area will be a meaningful contributor to our future growth, especially in products like internet banking.

One last comment on retail -- we are now actively using our line of business and branch profitability measurement system company-wide. This is a first for our company and, I believe, will be a great game changer over time. We use this system to constantly evaluate the profitability of each business unit, even down to the branch level. We use this measurement system to determine how to better staff, manage, monitor, and reward our employees. It is helping our employees be better managers themselves because they now have the tools to manage. It is the same system that has helped us make the decisions on the closure, combination of eight branches, five in the last year, resulting in an annualized operating savings of roughly $1.8 million.

We will continue to refine our delivery challenge with the system, and the resulting profitability and efficiency should follow. I will not delve into operating, overhead, or efficiency at this point, but, again, leave that to Jeff to discuss.

A few concluding comments -- while the economy continues its recovery, albeit slowly, I am happy to report that our troubled assets in the real estate distressed market of Smith Mountain Lake continued to decline. And I might add the market itself is showing some small signs of recovery. We still have had no new additions to our MPLs from this geographic area since early last yr. Approximately 49% of our non-performing loans are still A&D with roughly 60% of that A&D exposure still in the Smith Mountain Lake area. But, the absolute dollars are significantly down.

I do anticipate an ongoing reduction in the Smith Mountain Lake exposure over the next two to three quarters as we finally obtain ownership of some of these properties and are able to act on removing them. We have written these properties down to solid carrying values, and recent appraisals have validated this. We feel as the market begins to rebound, our carrying values should be realized when we auction these properties. The remainder of our non-performing assets are uniformly spread throughout our footprint. And good progress is being made on these problems as well.

Let's conclude with some comments on TARP. Last week, we began discussion with the Fed about possible scenarios for our exiting TARP. The board and management will be examining our options in the coming months and developing a plan to exit TARP as soon as prudent. No date or timeline has been set. With that, I will now ask Jeff for his comments.

Thank you, Ed, and good morning, everyone. Thank you for joining us. I have several topics that I would like to cover today. And we'll start with adding some additional color to our net interest margin performance for the quarter. We continue to see some nice improvement in funding costs that drove some margin improvement for the quarter in spite of a five basis point contraction in asset yields. As discussed in previous calls, we continue to get some lift from our CD re-pricing with about 16.5% or roughly $161 million of the total portfolio re-pricing during the quarter. This is in addition to the 29% that re-priced in the fourth quarter of 2009. We have another $231 million of CDs re-pricing in the second quarter, or roughly 25.2% of the portfolio with a blended rate of 2.09%. So, we would expect to see some continued lift here.

In addition, we had two rate cuts representing 55 basis points on our higher tier money market accounts during the quarter on balances representing roughly $320 million. This was to align us better with market rates at the time, and so we are optimistic that we'll get some additional lift here as well.

We've also recently reduced the rate on our high performance checking account by 75 basis points cumulative, which reduces the funding costs on another roughly $300 million on deposits. So, while we would expect to continue to see some contraction in asset yields, we would expect some margin expansion in the short term. We know this will be very short term if we don't get some lift in loan growth and work off some of the liquidity in our balance sheet currently. So, we're very focused on making that happen and would certainly anticipate driving some additional earning assets and revenue growth.

From a non-interest income perspective, we had gross non-interest income revenues of $8.8 million and on an operating basis, $8.1 million, which was essentially flat through the fourth quarter. From an operating perspective, we had some contraction and retail banking fees associated with reduced NSF activity, which was mitigated by some nice growth in wealth management fees and insurance-related revenues.

We began to see some noticeable lift from our debit card activity in the quarter, the result of focused effort on the part of retail to improve our penetration levels. Mortgage banking revenues, while flat sequentially, continue to be strong in both wholesale and retail and generated an improved earnings contribution for the quarter. This unit closed 688 units, or roughly $124 million in total originations for the quarter and generated a net earnings contribution of over $300,000 for the quarter.

Ed mentioned some non-recurring items. We did have some gains associated with asset sales, including the sale of our Farmville financial center for $748,000 in gains and the sale of some small MBS or mortgage-backed security positions for another $302,000 in gains.

OREO losses improved to $364,000 compared to $1.8 million on a linked-quarter basis, which is impressive given the number of properties that we were able to move during the quarter.

Let's switch gears and talk about overhead. We experienced some noticeable improvement in the level of overhead on a linked-quarter basis and saw very little core overhead growth as compared to first quarter as well, first quarter of 2009, that being. Primary drivers for the decrease on a linked-quarter basis included a $579,000 reduction in professional fees and an $865,000 decrease in compensation expenses associated with commissions, incentives, and some severance pay during the period.

We also noted improvement in other expenses of $600,000 on a linked-quarter basis, associated primarily with improved level of DDA charge-offs and a reduction in appraisal expenses associated with both the secondary market activity as well as the commercial bank. Full time equivalent numbers came in at 818 for the quarter versus 823 for the previous quarter. And we would expect this to continue to level out some and even increase slightly in the short term.

Efficiency ratio came in at 72.23%, which is 147 Basis points better than first quarter of last year and almost 700 basis points improved over first quarter of 2009.

While the level is still higher than we would like, we think that the greater opportunity right now for improvement is on the revenue side. Overhead as a percentage of average assets came in at roughly 3%. Excluding non-recurring expenses for the quarter of about $425,000 and normalizing for another $350,000 in excess professional fees associated with loan workouts and one-time consulting engagements, this percentage, uh, on a normalized basis looks more like 2.9%, which is good improvement for us over the levels of 2009.

A few additional comments on the balance sheet, if I could. Despite the economic challenges, capital levels remain strong. Tier one capital came in at 13.67% or 12.40% without the TARP investment. Tangible common equity ratio was 9.40 for the quarter with tangible book value coming in at $11.94.

We had a flat average deposit base on a linked-quarter basis. But, considering the level of CD re-pricing and the fact that we sold $15 million in deposits during the quarter, we consider that a success.

Average deposits amounted to $2.14 billion for the quarter. Average securities grew to $366 million for the quarter, representing an increase of roughly $15 million or a little over 4%, while cash and cash equivalents at quarter-end amounted to $165 million.

We continue to have some contraction in the loan portfolio, as Ed touched on with much of that contraction involving real estate and in particular A&D. We saw shrinkage in that component of our portfolio, that being the A&D of $33.6 million, as Ed mentioned. We are hearing some early success stories from our new seasoned lenders from both Richmond and Roanoke. And we'll continue to add capable lenders, which may include the Tidewater market.

In conclusion, we made some progress in the first quarter on a number of fronts. But, understand we have a ways to go to return the company to an acceptable level of profitability. We will continue to work hard to make that happen. I will now turn it back over to Linda for the Q&A.

Thank you, gentlemen. Now, we'll move to the question and answer portion of this conference call. And at this time, I'll ask our operator, Sherise to open the call for your questions. Sherise?

Thank you, ladies and gentlemen. (Operator Instructions). Our first question comes from Michael Rose from Raymond James. Your line is open.

Hi, good morning, guys.

Good morning.

Hey, Michael.

Hey, Jeff, can you address the tax rate-- it looks a little bit low this quarter-- and kind of how it's going to shake out going forward?

Sure, Michael. The tax rate is showing a lot of volatility right now because of, I guess, the absolute value of earnings in relation to permanent differences. So, as we continue to run around or break even to slightly profitable level, you're going to see more of a benefit because of the level of permanent differences embedded in our balance sheet and in our tax position. So, as we see more normalization of earnings, that rate will continue to increase to what historically for us has been high 20s to around 30% effective rate.

Okay, that's helpful. And secondarily, can you maybe address-- I think you mentioned that you hired three lenders, C&I lenders. Where were they, and in what markets are they in? And do you have plans to hire additional lenders? And what markets would they be planned for?

Two of the lenders are in the Richmond market. They were in the Richmond market. And they came out of M&T. The other is in the Roanoke market, was in the Roanoke market and is now in the Roanoke market. And I don't recall exactly where he came from.

I don't, either.

I'm sorry. I don't recall where he originally came from.

Okay, that's helpful. And, finally if I may, can you address how the new regulations will impact service charges for you all going forward?

Well, obviously not well. But, we're dealing with that. And, in fact, are out in front of that with quite a bit of solicitation planned. We have analyzed who our customers are that use the overdraft. And we know them well and are making a special effort to contact them to make sure they opt in as we go forward. So, it's a little early for us to tell how that'll fall out. But, on another front-- Jeff just touched on it in his comment-- we're pushing some other areas in the bank, such as debit card income, which we've raised penetration and number of cards outstanding to where we're seeing significant lift on that. And we'll be doing that in other areas and are already doing it in other areas, again, to offset some of that.

Okay, great. Thanks, guys.

Our next question comes from Alan Bach from Davenport & Co. Your line is open.

Hey, good morning.

Good morning.

I was wondering-- you had mentioned chatting with the regulators about potentially repurchasing the TARP preferred. Do you think that it would make sense to get that behind you before pursuing any strategic acquisitions? Or does that matter to you?

I haven't thought that far ahead, to be honest with you, Alan. As you well know, it could come at the same time if we found something. But, really haven't thought it through that way. Really, I'm more focused, as I have said before, on just continuing to drive our earnings right now, to clean up our balance sheet. And maybe by this summer, then I'll shift my thinking. But, I'm limited in my ability to hold two thoughts at one time. So, I'm just staying focused on that.

I would add, I guess, a couple of comments, Alan. One thing we're definitely sensing is that there is a lot of scrutiny relative to the capital position of the company, both with and without the TARP investment. So, thinking about in terms of modeling, if you will, what you're going to look like in a post retainment position, it certainly would be a cleaner analysis if there wasn't an acquisition. And so from that standpoint, I think you're probably in a better place if you deal with one before the other, meaning TARP before an acquisition.

Okay. Thank you very much.

Welcome.

Our next question is coming from Catherine Mealor from KBW. Your line is open.

Good morning, guys.

Good morning.

Hey, Catherine.

Is your watch list seeing a similar trend as your NPLs? Or are you still continuing to see an increase in your watch list loans?

I don't know that I'd know that right off the top of my head. But, I will tell you the sense is-- because we sit down in special asset meetings fairly frequently-- I would say somewhat slowing would be the best way I'd describe it without, I think, the rapid deterioration that we saw last year, all through last year. So, I would call it leveling out. Let's just leave it at that. I don't really have a number I can give you. But, we don't see it particularly worsening. We've got what we've got. Obviously, the economy is still somewhat fragile. But, it's not alarming to us.

Okay, thanks. And, Jeff, you mentioned that we're probably going to see slight net expense in the next couple of quarters. How about into next year, when we possibly get into a rising rate environment? How are you all positioned for that?

Positioned well, certainly modestly asset-sensitive, so we would expect to see some lift as rates begin to move up. And certainly that lift could be stronger. We could also see the lift on the loan portfolio.

Okay, great. Thank you.

Our next question comes from Avi Barak from Sandler O'Neill. Your line is open.

Good morning, guys.

Good morning.

Two quick questions for you, first the provision line item. That's obviously fluctuated rather dramatically over the past few quarters. I know you don't give official guidance, but could you maybe help us understand the provisioning more globally? When do you expect to see some reserve releases maybe? And how is the provision coming versus where you expected it would be, say a month or two months ago?

You always ask the easy questions, Avi.

Sorry.

You know, I would tell you that from a standpoint of just overall coverage on the portfolio, we've been pretty consistent now for several quarters. And I think that a large function of that allowance obviously would be looking at the historical nature of your charge-offs. And as the historical nature of those charge-offs begins to moderate, that's when I think you'll start seeing some release. So, I would tend to think about it in terms of evaluating StellarOne or any other bank on what they're actually experiencing in charge-offs and look at those charge-off levels as kind of being my indicator as to when you're going to start seeing some lift, if you will, of the allowance coverage.

Jeff, I might add to that. I think Jeff is absolutely on the money with that. I think the issue really is if we have done the job we should be doing, and that is drive the values down to realizable values. If we're in a recovering economy, which we appear to be in, then we shouldn't have any more of that hitting us. And we should be able to look and say we're covered, and we should realize what we're carrying these assets on our books for.

Okay, that's helpful. On a separate issue, and maybe a follow-up to Alan's earlier question on acquisitions, obviously historically Stellar has grown through an acquisition strategy. And as you've mentioned on past calls, you're refocused internally now with dealing with your own asset quality issues. But, of late, as we appear to be in a stabilizing environment, has acquisition, either FDIC-assisted or otherwise, become more of a focus or just moved off the back burner at all? Or are you still going to remain internally focused?

I'm still in the same spot, Avi. I think until I get through a couple more quarters, I'm really not going to get too excited about looking outside my four walls.

Okay, and if I could just throw in one last question, how should we think about the regulation change governing the overdraft fees? Obviously I think August 15th is when everyone has to be opted in. Have you reached out to your customers of that product and talked to them about opting in? And have you thought of any potential ways to recapture maybe what could be lost for guys that don't opt in?

Yeah, the answer to all of that is yes. In May we'll begin, really in earnest, to reach out to the customers. And as I mentioned earlier, we have segmented our customer base to really know who the users of overdraft are. And so those are really the ones that are most important to us. So, we're making special effort to contact those parties and make sure they understand the need to opt in. But, it's too early to tell what the final resolution of that would be. But, we're not sitting around to get caught off guard with that. We are driving other sources of revenue, of fee income at the retail side especially. And that's why I, at the beginning, mentioned the debit card program, which we just finished, which got tremendous lift on that. And we're moving more towards getting better penetration on our analysis charges on commercial accounts. We're getting some lift on that. We're picking up some good fee income in other areas, insurance, trusts, so we're not waiting for that to see where it falls out. We're working to try to make sure we're increasing areas as well as getting the opt-in as high up as we possibly can.

Okay, appreciate it. Thank you.

Yes.

Our next question comes from Steve Moss from Janney Montgomery. Your line is open.

Hey, good morning, guys.

Good morning.

Hey, Steve.

Most of my questions have been answered, but just want to touch on the mortgage banking side of things. You guys did mention a pickup in mortgage activity here and been running quite a few quarters now good mortgage banking like most others. Kind of what to expect going forward?

Well, I would tell you that we're encouraged with the level of purchase money originations. We ran-- almost two-thirds of our production in March was purchase money, which is pretty encouraging for us when considered that the volumes have held up, and we're seeing a migration, if you will, from refinance. So, we're obviously entering a stronger part of the season. We're continuing to see some favorable rates. We've got a full complement of originators right now. So, all in all, I think we're still pretty optimistic that we can drive some pretty decent earnings performance in volume over the short term.

Again, I'll add to that. We've got a good network on the retail side, particularly. And, as Jeff said, to pick up and purchase money is what you want to see because refis are just interest rate-driven. Purchase money tells you the market has some recovery going on, and people are beginning to buy. As you know the tax credit runs off April 30th. And so we're looking at a pretty good pipeline. So, I think that impact's behind us, and we do see some markets coming back.

Great. Thank you very much.

Our next question comes from Bryce Rowe from Robert Baird. Your line is open.

All right, thank you. Good morning.

Good morning.

Just a follow-up to, I guess, Alan's question earlier about TARP, Jeff, you mentioned scrutiny on models with or without capital-- without the TARP capital, that is. Any indication from regulators that they're going to want some amount of capital raised to repay that TARP? Or are you just not at that point yet?

They haven't, Ed-- we're just having discussions now. And it's not so much what they're asking us to do. It's we're running some scenarios by them that we'd like to see done. And I just would say that we obviously want to take care of the shareholders best we can. So, we're looking at the most favorable structure for the shareholders.

Okay. And then a follow-up on the Reg E question, what piece of the fee income is tied to the point of sale overdrafts or the ATM overdrafts?

I think about 48%.

Okay. And then last question for Jeff -- Jeff, you talked about some of the deposit costs coming in. Can you tell us what to expect there? And maybe I just didn't catch it well enough, but you had interest checking 97 basis points, average costs for the quarter 134 basis points. Are you telling us those are going to come down materially here in the second quarter?

Well, define materially. I would tell you that I think we've got some additional lift on both. I'm not in a position to want to quantify it. But, certainly when you consider that we had some fairly significant cuts in rates on both that occurred over the course of the first quarter-- so, we obviously didn't see a full lift because of the way we staggered them in, I would anticipate that we ought to get some nice improvement. And I'll leave it up to you as to determine how much.

Okay. And then, last question, you mentioned one time costs were in the expense line item of $425,000. What was that tied to?

We had a quarter of a million in snow removal.

Okay.

We had a lot of snow here in Virginia, though. And then there were just some isolated items that really aren't worth mentioning in the $50 to $75,000 range. We had a fraud loss, for instance, so just an accumulation of several smaller items.

Okay, thank you. Appreciate it.

You're welcome.

Next question comes from Carter Bundy from Stiefel Nicolaus. Your line is open.

Morning, Ed and Jeff.

Morning.

Good morning.

I sort of got into queue here late, so all my questions have been answered, except if you could just provide a little color, and you might have talked about this earlier. I might've missed it, Jeff. From an expense standpoint, we're clipped along here, about 3% of assets annualized. Do you have much room here to sort of cut any more expenses out of this model from an operating perspective?

I would say that there are still opportunities. We are two years removed from closing the merger, and the heavy lifting, I think, is behind us. But, there's no doubt that there are still opportunities to pull our efficiency in. And a number of the initiatives that we've talked about today, even relative to things like branch consolidation, I think you'll see continuing efforts to refine and build on those initiatives. And so, yes, I do think there's opportunity to get some additional efficiency and some additional performance relative to the efficiency ratio as well as overhead to the average assets.

Okay. And you said FTE are likely to stabilize here?

Yeah, I think so. We're seeing some stabilization on that. We've obviously had to add some staff in certain areas, such as risk management, such as mortgage, given the volumes, compliance. So, we've had to build some infrastructure. Being a $3 billion bank, it just requires another level of infrastructure in certain areas. So, that's mitigating some of the lift from some of the initiatives that we were able to get done in 2009. But, there again, I think we're pretty pleased. We're down from over a thousand two years ago. So, we're feeling pretty good about where we are there.

Okay. Thank you all very much.

(Operator Instructors) I'm showing no further questions at this time. Please continue.

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

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Have a wonderful day.