Atlantic Union Bankshares Corp (AUB) 2010 Q3 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 in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to turn the conference over to our host, Ms. Jennifer Knighting. Ma'am, you may begin.

Thank you Shannon. Today we have with O.R. Ed Barham, Jr., President and Chief Executive Officer of StellarOne and Jeffrey W. Farrar, Executive Vice President and Chief Financial Officer. Mr. Barham and Mr. Farrar will review results for the third quarter of 2010. 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 Jennifer, and good morning to everybody. I will begin today's earnings call with a brief overview of our Company's third-quarter results, asset quality trends and general overall performance. Jeff Farrar, Executive Vice President and CFO for StellarOne Corporation, will follow my opening remarks with further financial details and insight.

StellarOne for the third quarter 2010 earned $3.5 million. Net of dividends and discount accretion on preferred stock, net income available to common shareholders was $3.1 million, or $0.13 per share. This compares very favorably to a net loss to common shareholders of $9.4 million, or a $0.41 loss per diluted common share a year ago. It also compares favorably to second-quarter 2010 results of $1.1 million, or $0.05 per diluted common share.

Third quarter 2010's results were helped by strong non-interest income from mortgage banking, [lower] loan-loss provisioning and reduced credit costs associated with foreclosed assets. Third quarter's net earnings were the highest of any quarter over the last 18 months which continues a positive earnings trend for the Company.

Despite these improved results, we did face higher indemnification losses related to mortgage lending, reduced banking fees largely related to reduced overdraft charges.

Let me skip to some comments regarding asset quality. Clearly bottom-line earnings for the third quarter 2010 were bolstered by a smaller provision of $3.5 million for the quarter. This compares to $7.4 million provisioning for second quarter of this year and a $20.1 million provision a year ago.

While the reduced level of provision is obviously important to the current quarter results, what is equally important but perhaps not as obvious to the outside viewer is the positive impact being made by an effective internal credit monitoring process and experienced workout group. Our efforts to aggressively take write-downs on troubled credits and set appropriate reserve levels are beginning to yield positive results.

As I have stated before, if the economy can remain stable to improving, our asset quality outlook should continue to improve though our level of provisioning will remain elevated for the near term.

Currently our allowance for loan losses as a percentage of nonperforming loans increased to 78.2% or an increase of 13.4% from second quarter. The coverage at the end of June 30, 2010, was 64.8%. The allowance as a percentage of total loans stands at 1.92%, down only 3 basis points from the preceding quarter.

Nonperforming assets declined by $8.4 million to $62.1 million on a sequential basis resulting in a ratio of nonperforming assets to total assets of 2.13%. This compares favorably to June 30, 2010's ratio of 2.36% or $70.6 million in nonperforming assets.

Nonperforming loans totaled $51.1 million for the quarter, down by $13 million. Of the nonperforming loans, roughly $23.3 million were residential development and construction loans. Of the $23.3 million, $13.3 million are located in Smith Mountain Lake, Virginia. Essentially, this level is unchanged from last quarter.

I will note we are having active discussions with outside third-party professionals to develop plans to move the majority of the remaining nonperforming loans at Smith Mountain Lake. Of the $13.3 million nonperforming loan exposure at Smith Mountain Lake, roughly $10 million is to one developer consisting of two large projects which have some market appeal but need a more comprehensive approach for successful resolution.

The engagement of an outside consultant project manager would likely be structured on a revenue-sharing basis to minimize our out-of-pocket expenses going forward.

While most asset quality metrics show marked improvement, OREO levels did increase as anticipated as we took control of several troubled real estate projects, one development in particular accounted for over $4 million of the increase in OREO which at quarter end amounted to $10.5 million versus $6 million at the end of second quarter 2010.

This one large addition to OREO we also believe has an above-average market appeal mainly because it consists of some attractive income-producing residential properties in a well-established development. This credit is also being discussed with the same resolution consulting group that I just mentioned.

Also showing a slight negative trend were the past due levels which had loans between 30 and 89 days past due up by $7.9 million moving from second quarter's level of $14.1 million to $49.3 million. Some of this increase is a function of mature notes and administrative in nature which often is caused by extended negotiations with troubled borrowers.

Overall, total past dues for the quarter end were 2.49% which is favorable to our rolling 12-month average of 2.73%.

Our TDRs currently stand at $38.1 million. Of this amount, $26.2 million are a result of our residential mortgage modification program and the remaining $11.9 million are commercial credits. The re-default rate on the residential mods have been very good with only a 10% to 12% re-default rate.

Of the $11.9 million in commercial TDRs, roughly $8 million consists of two credits, $2.8 million to an excavated company with significant corporate and personal assets available for liquidation and the remaining commercial exposure to a nationally branded fast food franchise that is under consideration for restructure which once completed should allow for resumption of amortization under conforming terms.

I will conclude my opening comments by providing an update on our position regarding the redemption of TARP. Since our last earnings call, a series of discussions have been held with our regulators, our State Fed and Safety and Soundness exam has been concluded in early September and we had our Board strategic retreat during the same month. This topic has been vetted quite a bit.

Bottom line, we believe for the current time that our best approach to the repayment of TARP is to improve earnings metrics and asset quality which would result in capital retention that would replace the TARP capital. No TARP recipient bank can just give TARP back. It must be replaced by earned new capital or a capital raise.

Given the fact that our capital levels have always been strong and have even increased further this year, we do not see a capital raise merely for the repayment of TARP as a practical approach. If that were to be other developments relative to TARP or relative to attractive growth opportunities, then a modification of our current position to a capital raise may occur.

But for now, we are focused on improved earnings through asset quality enhancement, further cost reduction initiatives and revenue growth. As an aside, one constricting factor to the immediate repayment of TARP that the Treasury does require repayment in increments of 25% of the outstanding amount which for us would be payments of not less than $7.5 million.

I will conclude my remarks now and thank you for your attention and I'll turn the call over to Jeff.

Thank you, Ed, and good morning everyone. Thank you for joining us. I have several topics I would like to cover today and would start with some additional color on the revenue results for the quarter.

Revenues were essentially flat for us for the quarter. We experienced some contraction in operating noninterest revenues, with such revenues coming in at $8 million down $397,000, or 4.8% compared to linked second quarter and up $217,000 compared to the same quarter prior year.

Expected decreases in retail banking fees associated with Regulation E changes coupled with an increase in mortgage loss indemnifications contributed to this decrease.

Our retail and wholesale divisions closed over $150 million in mortgages during the third quarter, a huge volume for us. The resultant mortgage revenues and profitability were however impacted by approximately 809,000 in accrued indemnification losses in the third quarter. In spite of these charges, the segment still reported after-tax earnings of $146,000 for the quarter and $594,000 for the nine-month period.

Losses continue to be primarily related to 2000 and 2007 -- excuse me -- 2006 and 2007 production from our wholesale division with minimal losses realized from subsequent production periods. In fact, score carding from our investors has been very positive for production that has occurred in the last 24 months.

We currently have approximately 27 pending indemnification claims in the pipeline with an aggregate balance of $4.5 million and an allowance on the books of $1.1 million for such claims.

As noted in the earnings release, the impact of Reg E compliance began to show up in the third quarter. The revenue impact based on initial results would indicate an implied impact of $1.5 million to $1.8 million annually. We continue to have success with opt-ins for our higher users with approximately 50% of such users now opting in.

A couple of other mitigators include some solid achievements in debit card penetration and DDA account acquisition. Debit card revenues have essentially doubled since the first of the year on a month-to-month basis and we have averaged over 1000 new DDA accounts per month for the last three months. These successes should begin to mitigate the fee impact from the regulation change over time.

Wealth management also experienced some revenue contraction associated with reduced fee realization but did contribute after-tax earnings of almost $100,000 for the quarter and $360,000 for the nine-month period. We have seen a rise in new business acquisition during the quarter which should become more apparent in the coming quarters.

Our growth in net interest income amounted to just over $300,000 sequentially and $1.4 million compared to the same quarter prior year. We continue to see some reduced funding costs that drove some margin improvement up four basis points to 3.63 for the quarter and that is our fourth consecutive quarter of expansion albeit at a slower pace.

As discussed in last quarter's call, we continue to get some improvement in the cost of liabilities associated with CD repricing with about 22.5% of the total portfolio repricing during the quarter. In addition, we experienced some continued improvement in costs of funds associated with our non-maturity deposits and wholesale funding. This improvement coupled with the CD repricing resulted in a 16 basis point reduction in funding costs for the period.

With another $192 million of CDs repricing in the fourth quarter at a blended rate of 2.07 and repricing on average about 100 basis points downward, we would expect our margin to continue to be relatively stable as these funding costs continue to mitigate the impact of loans repricing in the current rate environment.

Let's switch gears and talk about non-interest expense. We experienced some acceleration of overhead growth on a linked quarter basis but still compare favorably to same quarter 2009 with a modest 4% growth rate. Of the 875,000, or 3.8% of increased overhead on a linked quarter basis, approximately $247,000 relates to increased commission and overtime costs associated with a higher mortgage production and another $295,000 relates to increased FDIC insurance costs.

The efficiency ratio came in at 71.8% which is 276 basis points higher than the second quarter but 587 basis points lower than the same quarter prior year. The increase in the third quarter is a function of the aforementioned increase in overhead and relatively flat revenue results for the quarter. Overhead as a percentage of average assets came in at 3.16% again elevated by costs associated with record mortgage production and increased FDIC insurance cost.

Our effective tax rate came in at 23.6 for the third quarter and now stands at 14.8 for the nine-month period. The effective tax rate for the quarter is reflective of the earnings improvement experienced this quarter as compared to our levels of permanent tax differences which are predominantly tax exempt income and bank owned life insurance.

A few quick comments on the balance sheet. Our regulatory capital level showed the growth for the quarter as a result of earnings retention and reduced risk-weighted asset base. Tier 1 risk-based capital came in at 14.49%. Excluding the TARP investment, the ratio still is a healthy 13.19%. Tangible common equity was 9.96% at quarter end with tangible book value per share of 12.25 or $12.25.

We continued to see some slight balance sheet contraction with average assets decreasing $7.3 million or less than 0.3% sequentially. Average loans were down $24.3 million, or 1.1% sequentially while average deposits were down $16.2 million, or less than 1% linked quarter.

Average securities grew to $397.9 million for the quarter and finished the quarter at $403.4 million. Cash and cash equivalents at quarter end amounted to $108.9 million, down $17.4 million from the second quarter.

That concludes my prepared remarks and I will now turn it back to Jennifer for the Q&A discussion.

Thank you, gentlemen. Now we will move to the question-and-answer portion of this conference call. At this time, I will ask our operator to open the call for your questions. Shannon?

(Operator Instructions). [Will Curtis], Sandler O'Neill.

Good morning. You guys mentioned the impact of the Reg E. Can you talk a little bit about the methodology behind that 1.5 to 1.8? I guess how you come up with that?

We really just looked at the revenue stream reduction post-implementation and just kind of applied it if you well on an annualized basis. That number is going to move around obviously as our opt-in rates continue to build and we obviously feel that there is some other areas that we have got some lift that will reduce that impact as well.

I would just add to that I think that is a worst-case scenario as we analyzed it.

Okay, and then just in terms of the Smith Mountain Lake, can you provide any additional color? I think in the past you guys had done some auctions. Are you guys are continuing to do that?

Well, we are kind of out of the auction season right now and that is why we have taken a little bit of a different tack if you would, two large credits I referenced are of the size and magnitude that we felt we needed a little more comprehensive professional involvement beyond our staff, our employees to handle and develop a plan for eliminating that particular nonperforming loans or those particular nonperforming loans. So the jury is still out.

Several scenarios are being discussed and at this time really not at a point where I can share that with you. Hopefully by the next quarter, we will have some more color around that but again, you know the intent here is to try to move those loans as quickly as possible.

Okay, thank you.

Allan Bach, Davenport.

Good morning. Congratulations on the good quarter.

Thank you.

Thank you.

Well, I guess you had mentioned the earning out of the TARP preferred. Could you talk a little bit about the timeline that you expect there? Do you think you will wait to hopefully accrue a few more good quarters before starting that process or is that more of an immediate process start there?

Well, you know as I referred to, you are required by the Treasury to make a 25% payment minimum so that would require that at a minimum I would have to pay $7.5 million. And of course I have got shareholders to pay, trust preferreds and all the rest. So there is some need to continue to accumulate retained earnings to be able to make those sort of payments. That is why I referenced it in my comments, it is sort of not an immediate thing but hopefully not too far in the future.

Okay, thank you very much.

Jennifer Demba, Robinson Humphrey.

Thank you. Good morning. Ed, just kind of wanted to get your thoughts on acquisition opportunities or what you may be seeing out there in the market right now and your own ability and willingness to do a transaction right now?

Well, I would say the ability is there if we wanted to but the desire is somewhat muted, Jennifer, just because it is still a very uncertain environment out there and the markets that I most desire obviously as I've alluded to earlier in the Richmond market, have been giving some thoughts to perhaps maybe even some northern Virginia activity at some point again keeping on the theme of needing to go to higher growth markets.

So I am still at a point where I am trying to practice patience here because I think the further that things move down the line in the coming quarters, I think the opportunities are going to be more evident and they are going to be possibility of having more attractive acquisitions.

I am very sensitive as is my Board and so I am that anything we do really is accretive and beneficial to us. There is less room in my opinion to make mistakes. The other thing I would say, you know I don't care how good a due diligence team you have got in this environment, it is next to impossible to be able to go into due diligence and feel like you have really covered yourself.

So that is another reason I tend to kind of want to wait and see where the economy is heading to give us a little bit of at least indication, a arrow point that things are getting better. And maybe if we have an opportunity them we will be looking at it a little more seriously.

Thank you for those thoughts. Are you seeing any acceleration in inquiries?

Absolutely, Jennifer. I am having a lot of ongoing conversations. I have been invited to a lot of dances and we've just sort of sat on the sideline right now because I think those situations don't go away. They are still there and they get more attractive from a buyer's perspective quite honestly. So I think that patience prevails.

Thanks a lot.

Brett Scheiner, FBR Capital Markets.

Hey guys, good quarter. Just real quick, the $12 million to the one developer on Smith Mountain Lake, have you released what's that carried at net of the allocated reserve?

It is $10 million and is your question are we adequately reserved that we could let it go for what we have got it reserved and written down to?

And not take a hit, yes.

Yes.

Okay, thank you.

Is that a brief enough answer?

All right. Thanks guys.

(Operator Instructions). Michael Rose, Raymond James.

Hey, good morning guys. If you were to contemplate an acquisition, would you consider a capital raise to repay TARP at that time?

Yes.

Okay. And secondly, (multiple speakers) on the expense base, is there any more incremental opportunities to reduce the cost structure here or do you kind of feel like you are at a good rate here?

I would tell you that there is some opportunity as it relates to just the asset quality area and some of the fires that we are fighting there. We continue to have a lot of elevated costs associated with just managing the problem assets. And so as that begins to normalize certainly I think there is some opportunities to see some reduced professional fees and that type of thing, foreclosure costs, holding costs, what have you.

So certainly that is an area that comes to mind. The FDIC insurance costs I do think we are going to get some lift there once the FDIC figures out how to calculate the premium.

And so I heard a speaker this week say that you know they are still noodling with the formula and the process and so we are still kind of patiently waiting to figure out what the timing on that is going to be. But I am still hearing 33% decrease in FDIC insurance premiums. So at some point, that certainly will be a major component.

And then the indemnifications on the mortgage obviously that is an area that we are spending a lot of time with right now. Again, it is older production. At some point you would like to think if it continues to see some improvement in the economy and what have you, at some point the frequency with which those are coming at us is going to wane and therefore we will get a little better profitability and gross revenue from that mortgage unit which will obviously help.

Okay, that's helpful. And one follow-up if I can, in terms of a competitive landscape. And I know loan growth is tough right now, are you seeing any green shoots so to speak in terms of maybe a pickup in C&I activity or anything like that?

No, I can't tell you that we really are, anything I can really brag about. You know I am reading a lot about the northern Virginia market beginning to -- the commercial real estate market actually beginning to come back and people putting money into that market. But that is a little bit north of us but it does have a trickle-down effect somewhat delayed that hits us a little later. So I'm hoping it is true. But so far we are not seeing a great deal of it.

Has your pipeline increased at all?

We tend to keep a pretty good pipeline and it is increasing and the only issue we have got really is that the runoff some of it planned is greater than the pipeline build. And the old -- the difference is really nothing more than real estate and we've made a conscious effort in many cases not to chase real estate to the extent that we did in the past.

If that were available to us, if it was a normal market, we would be doing much better on a pipeline basis if you could say that real estate was doing better and it was available to us. But the real problem is that is kind of in the doldrums.

But if you look at C&I, consumer lending is up over the last 12 months is up. So we are encouraged by what we are seeing. It is competitive but our guys and gals are working hard and having success.

We are doing a few more interest rate swaps. We have kind of gotten into that and having some success with that and obviously some nice fees that we can take in on an immediate front with that and that is getting us to a lot of tables for opportunities that we haven't heretofore been able to take advantage of.

So maybe the better way to think about it is loan production has improved maybe modestly over the past few quarters?

I would say that is a fair way of putting it, yes.

Okay, thanks guys.

I show no further questions in queue. I would now like to turn the conference back over to Jennifer Knighting.

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

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.