Atlantic Union Bankshares Corp (AUB) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the StellarOne Corporation Earnings Conference Call. (Operator Instructions.) I would now like to turn the call over to your host, Linda Caldwell. Please go ahead.

Thank you, Milena. 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 are going to review results for the fourth 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 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, and good morning to everyone. As in the past earnings calls, I will begin today's comments with a brief introductory overview of our Company's fourth quarter results, followed by some discussion of asset quality trends and general outlook. Jeff Farrar, Executive Vice President and CFO for the corporation, will follow with further financial details and insight.

StellarOne for the fourth quarter 2010 earned $2.8 million. Net of dividends and discount accretion on preferred stock, net income available to common shareholders was 2.4 million, or $0.10 net income per diluted common share. These results compare to net income to common shareholders of $80,000, or essentially zero income per diluted common shareholder for the same period a year ago. For the year 2010, StellarOne earned 9.8 million, or $0.35 per common share, compared to a loss of 8.5 million, or $0.46 per common share in 2009.

Pre-tax pre-provision earnings amounted to 8.6 million for the fourth quarter, an increase of 515,000, or 6.4%, compared to third quarter 2010, and an increase of 5.1 million, or greater than 100%, when compared to the same period in the prior year. Without getting into the finer financial details of the Company's performance, which will be covered by Jeff, I will add that the net interest margin for the quarter was 3.87%, compared to 3.63% for the third quarter 2010, and 3.45% for the fourth quarter 2009. This improvement in the margin for the fourth quarter was helped both by the earning asset yield side and the continued lowering of the cost of our interest bearing liabilities.

Of particular note, total loans outstanding bottomed this past October for the year at roughly 2.72 billion, and then made positive gains for both November and December, ending the year at 2.99 billion. This positive loan growth is the first for StellarOne in 15 months. You will recall that some of the loan decline we have experienced was due to a conscious decision by Management to reduce our portfolio exposure to real estate construction and real estate mortgages. Loan outstandings in these two categories alone dropped by almost $80 million from the start of the year to December 2010. The loan growth we have experienced in 2010 has come in the categories of commercial and industrial, consumer, and commercial real estate. And by commercial real estate, I mean being predominantly owner occupied properties, not real estate dependent. That is to say we are not reliant on the future sale, lease, or refinance to gain repayment.

Let me shift your focus now to asset quality. StellarOne's nonperforming assets totaled 54.4 million at December 31, 2010, down 7.7 million, or 12.4%, from 62.1 million at September 30, 2010, and down 10.3 million, or 15.9%, compared to 64.7 million at December 31, 2009. The ratio of nonperforming assets as a percentage of total assets decreased sequentially to 1.85% as of December 31, 2010, compared to 2.13% at both September 30, 2010 and December 31, 2009.

Nonperforming loans totaled 43 million at December 2010, down 8.1 million, or 15.9%, when compared to the 51.1 million at September 30, 2010, and again, down 16.3 million, or 27.5%, compared to the 59.3 million at December 31, 2009. The mix of nonperforming loans continues to be related to the residential development and construction segment of our portfolio. Of the total non-accrual loans of 43 million on December 31, 2010, approximately 15.4 million are residential development and construction loans. Roughly half of the 15.4 million in non-accruals are located in the single market of Smith Mountain Lake. In an attempt to more effectively resolve the largest remaining Smith Mountain loan nonaccrual credit, we have retained the services of an outside third party real estate advisory firm to help develop a cohesive workout strategy. This particular credit is a mixed use development project with good value prospects, if managed effectively. We are hopefully--we are hopeful this may yield some positive resolution given time, but due to the saturation of real estate inventory in this market it will be a longer term workout.

While we are encouraged with the continuing progress on the asset quality metrics, we continue to see additional loans go to nonaccrual, albeit at a declining pace. Until unemployment levels improve, we will no doubt continue to experience historically higher levels of NPAs, charge-offs, and the need to maintain elevated loan loss reserves for the near term. Jeff will provide some more detail to fourth quarter charge-off levels in a moment.

On the positive, we are gaining ground on working through the remaining larger problem credits that we experienced in the early part of this recession. It does appear that we are seeing a declining rate of new large additions to our troubled credit list. Given the declining levels of NPAs, especially the larger problem ones, we are now able to devote more attention to working through our smaller problem credits and existing OREO. Our OREO outstanding for December 31, 2010 stood at 10.9 million, up 359,000 from third quarter 2010, and 6.4 million greater than December 31, 2009. Our historical loss level for OREO principal write-offs at foreclosure to eventual liquidation is in the 32 to 32--30 to 32% range. This loss range is for small business and mostly single family properties, not larger [A and D] credits.

TDRs increased by 1.5 million from third quarter 2010 to 38.7 million December 31, 2010. The majority of TDRs still consists of residential modifications, roughly 30 million. The performance of the modifications have continued to be good with a re-default rate of roughly at 20%. This overall positive performance is further evidenced by the fact that of the total TDRs, only 5.4 million were nonaccrual at December 31, 2010. The preponderance of TDR mortgage modifications were written as three-year ARMs. Some of these TDRs will later this year begin to hit the first rate adjustment date. With the positive three-year payment history we have experienced, we anticipate some of these residential notes to be taken off the TDR status as the concession rates go back to market rate levels.

Let me conclude my remarks at this time by addressing TARP repayment and the recent resignation of our Bank President, Greg Feldmann. To be brief, our plans for repayment of TARP remain unchanged. Our primary desire is to attempt to repay as much as possible from retained earnings and to do it as soon as possible, so that we can improve our ability to increase the dividend to our shareholders. This is not to rule out any future possibility of some partial or full repayment from an equity raise, if we needed additional capital for offensive purposes. We continue to have dialogue on this topic with our regulators.

As to the recent announcement of the resignation of Greg Feldmann as President and CEO of StellarOne Bank, we all wish him the very best. Greg has played a pivotal role in helping to steer StellarOne through some of the most turbulent times in the financial industry many of us have ever seen. Greg's decision to leave the Company was Greg's decision and his alone. I would ask that each of you respect the privacy of his decision, which I know was a difficult one for him. You can expect shortly a press release outlining the management transition plan. This will, of course, first need to be shared with our employees of the Company.

This concludes my remarks and I'll now turn the call over to Jeff Farrar.

Thank you, Ed, and good morning, everyone. Thank you for joining us. I have several topics I'd like to cover today and I'll start with a breakdown of our earnings for the quarter. It was certainly encouraging to see some core revenue growth for the quarter, which really drove profitability and helped absorb some higher asset quality related charges. Ed has covered asset quality, but I did want to note that our special assets group was successful in resolving a large number of problem credits during the quarter.

We had about 30 loans that were resolved or liquidated that had related charge-offs during the quarter. Most of these credits had existing specific reserves that migrated to charge-off status as part of the liquidation of the credit and resulted in a higher charge-off ratio for the period. Of the 7.6 million in charge-offs this quarter, 1.9 million related to real estate construction with the largest single charge-off being 1 million associated with a Smith Mountain Lake construction project. Another 2.8 million was commercial non-real estate related.

As Ed noted, most of our other asset quality metrics showed improved results, including our allowance coverage to non-performing loans, which increased to 87.6%. The allowance to total loans came in at 1.79%, which compares to 1.84% this time last year.

Arguably, the most significant highlight for the quarter was the return of some core revenue growth. From a revenue perspective, operating revenues amounted to 31.2 million for the quarter. And while this was only modestly higher than last quarter, we were pleased with the growth in net interest income, which increased 1.2 million from last quarter, or just under 5%.

This increase was attributable to a 24 basis point improvement in net interest margin linked quarter. We continue to see some cost of funds improvement driven not only from the CD repricing, but from a continuing redistribution of core deposits into lower cost non-maturity deposits. We also had paid down some higher cost FHLB advances late in third quarter, which gave us some additional benefit on the cost of funds side. We also benefited from a nine basis point increase in asset yields driven by higher loan yields, improved asset mix, and lower non-performing assets.

We also experienced a period end increase in loan outstandings for the quarter, our first increase in some time, with substantially all the growth occurring in the last two months. We still anticipate pressure on the net interest margin this year, whereas the improvement in cost of funds is expected to moderate. And we are more aggressively attempting to lock in some favorable pricing on our CDs. We are modeling some loan growth for 2011 and the achievement of such will have some bearing on our margin performance.

Non-interest revenues on an operating basis came in at 7.1 million, down 863,000, or 10.8% from third quarter, but up over a million, or 16.9%, for the same quarter prior year. Results were impacted this quarter by 854,000 of losses associated with mortgage indemnifications and 688,000 of losses associated with other real estate earned. As noted in our earlier announcement, we were able to settle over 80% of our pending make whole or repurchased claims associated with some older wholesale mortgage production, and eliminated a substantial off balance sheet risk associated with those potential future claims. Our pipeline of unresolved claims currently stands at about 12 loans with principal of just over 2 million, and these claims have been reserved for.

Mortgage banking revenue totaled 2.8 million for the quarter. That was up 6.4% on a linked quarter basis, and up over 38% for the same quarter in 2009. We have seen a marked decrease in applications associated with the recent rise in mortgage rates, but still have a strong pipeline, which should support a continuation of strong revenue stream in the short term.

Let's shift gears and look at non-interest expense. We saw a slight up tick in overhead for the quarter with non-interest expenses amounting to 24 million, a 291,000 or 1.2% increase over third quarter, and an 822,000 or 3.3% improvement over the same quarter in 2009. Primary drivers for this increased linked quarter include comp and benefits costs and professional fees. Comp and benefits costs predominantly from commissions on the mortgage, which had a rather large quarter. With the revenue growth for the quarter, we actually experienced some improvement in our efficiency ratio coming in at just over 71%. On professional fees, it was a continuation of exceedingly high legal costs associated with loan workouts, but we do believe this should begin to mitigate in first quarter 2011.

Our FTE number came in at 838 versus 827 one year ago. It should be noted that total comp and benefits for 2010--comp and benefits expense was only 3% higher than that of 2009 and only 2.6% higher than 2008.

Lastly, a couple comments on the balance sheet. Capital levels remain strong. Tier one capital came in at 14.19%. Tier one common equity ratio, which excludes the capital benefit of TARP and TruPS, or trust preferred, came in at 11.52%. Tangible common equity ratio is 9.79 at quarter end with tangible book value per common share of $12.14.

We had some expected CD contraction compared to third quarter and related to the higher CD repricing during the period. Average deposits were essentially flat at 2.38 billion compared to third quarter, whereas expected contraction in CDs was offset by growth in non-interest bearing deposits. For the year, average non-maturity deposits were up over 106 million, or 7.25% over 2009. Again, that's average non-maturity deposits, non-CD deposits, reflecting the mix improvement that we spoke of earlier. Average securities were 367.1 million for the quarter, representing a decrease of just over 30 million or roughly 7.7%, while cash and cash equivalents at quarter end amounted to just under 140 million.

Ed touched on the improved loan activity. I will add one additional point. We saw 20 million in net commercial loan growth in December alone with an aggregate portfolio now currently at 1.2 billion.

In conclusion, while we will continue to have challenges on the asset quality front, we are optimistic for profitability improvement in 2011. We are pleased to be in the position we are relative to strong liquidity and capital, but understand the valuation driver will ultimately be earnings. I will now turn it back over to Linda for the Q&A discussion.

Thank you, gentlemen. Now we will move to that Q&A portion of the conference call. And at this time, I will ask our operator, Melina, to open the call for your questions. Melina?

Thank you. (Operator Instructions.) Our first question comes from Brett Scheiner with FBR Capital Markets.

Hey, gentlemen. Congrats on the quarter.

Thank you.

Thank you.

Just real quick, can you talk about with the cash you're now generating and the significant excess capital, I understand that M&A could be on the horizon. But can you talk about the potential timing of TARP repayment, and also if you'd consider partial repayment?

Again, yes, partial repayment is certainly on our radar. And I anticipate quite honestly, all things being equal, that the partial repayment is the way we would approach repayment. Now as to the other part of your question about M&A activity, don't really have a set time on that. We really are looking for the right opportunity, but as it relates to TARP, if we were to find the right opportunity, clearly we would look at eliminating the TARP. At the same time, we would move forward on an acquisition most likely. And so, whenever that occurs, it's hard to say, can't say, but it would be our intent to speed the process up with an acquisition and eliminate the TARP altogether.

All right. Thanks so much. Take care.

You're welcome.

Thank you. Our next question comes from Will Curtis with Sandler O'Neill.

Good morning.

Good morning.

Hi, Will.

You touched on it in your comments about the margin. I just wanted to see if you could provide any additional color for your expectation--on the expectations for the margin for this year?

Well, I would tell you that I think we still see some challenges. We still are looking at a fairly benign loan growth projection given market conditions. Certainly encouraged with what we're seeing of late. But that coupled with just the low rate environment we're in and the fact that we've--what we feel--we feel we've reached a pretty--pretty close to the floor in terms of the lift we're going to get on the cost to funds side looking at our CD maturities and so forth and where those CDs are repricing. We just don't see the ability to continue to enjoy the amount of margin expansion that we've experienced the last couple of quarters. So I'm thinking it's going to be more flattish than what we have experienced and the timing of that is a little bit hard to gauge quite honestly, but that's really all the additional color I feel at this point I could add.

Okay. And then, on fees here, it looks like the core fees are down, again, linked quarter. And you mentioned some contributing factors in the release. And just wanted to see how we should be thinking about the fee income going forward.

Well, we've got pockets that we feel real good about in terms of fee income growth. But as you know, they're going to be somewhat mitigated by the regulatory impacts of Reg E and the potential of the Durbin Amendment. So we see a fairly muted result because of that. Those are some significant revenue streams for us. And while we feel good about where we've landed thus far on Reg E, the Durbin Amendment obviously is concerning. It's a significant revenue stream for us. I think we ended the year at 4.7 million on debit card interchange income. So you can see that what's been proposed would have some significant impact there. Having said that, I feel good about mortgage, feel good about wealth management in terms of strategy and where we see those revenue streams for the coming year. And I'd like to think that we can at least mitigate the impact.

Yes.

I'd add one other bit of color to that in that we do have room to look at fee increases in the retail side. Whether or not we do or not we are sort of going to wait and see where the Durbin Amendment and all that falls out and where the competition lines up relative to that. Being a community bank, we're not necessarily wanting to be where the larger guys are, but we do have some ability there to perhaps generate some other fees that would hopefully be somewhat benign to the customer.

Okay, thank you.

Thank you. Our next question comes from Allan Bach with Davenport and Company.

Hey, good morning.

Hey, Allan. Good morning.

I was wondering if you couldn't--wouldn't mind commenting on the margin throughout the quarter maybe on a month-to-month basis. Do you have that information by chance?

I do, but Allan, I'd be hesitant to comment because of several things that occurred. It--there was a fair amount of range from month-to-month during the quarter. I will tell you that we had a rather strong loan fee income month that gave us some additional lift that I wouldn't expect to be recurring. That probably had a four basis point lift on the quarterly margin. And it was just a case where we had some large deferred loan fees that came in associated with some payoff activity. So that would be the additional color I would add relative to what occurred during the quarter on the margin.

Okay. And then, as far as loan demand during the quarter, you guys obviously saw an up tick there in the latter part of the quarter. Geographically, were there any areas that you saw the loan demand maybe more than others?

I would say in our larger markets, the Roanoke market, and I would say in the Richmond market, we're picking up some opportunities there, and the Fredericksburg. Again, the three markets that are perhaps the most populous for us are the ones that are driving it more than anything.

Okay. Thank you very much.

Thank you. Our next question comes from Steve Moss with Janney Montgomery.

Good morning, guys.

Good morning.

Good morning.

It was good to see the improvement in asset quality and loan growth. Most of my questions have been answered. Just one incremental one in terms of the commercial real estate growth during the quarter. What type of loans did you book?

Well, again, predominantly they're owner occupied type of credits we're seeing. I mean, we're not--we've had a bellyful of A and D for the most part and where we're doing A and D it's really, excuse the pun, stellar and has to be quite strong. So I--that's sort of it in a nutshell. Though again, as I alluded to earlier, if you look at January to December through the year 2000, the growth--we actually had growth occur in the consumer end as well. And some of that is a new emphasis in the retail area to see more loans and more volume and give credit to the business banking unit that we have, which focuses on small business and professional type of credits. SBA, we continue to really focus on the SBA. We're number one in SBA lending in the state in our peer group, any bank under 3 billion in assets. And we rank somewhere around--I believe have been as high as fourth or fifth, but I think we may be somewhere sixth most active SBA lender in the whole state. So, anyhow.

Okay. Thank you very much.

(Operator Instructions.) Our next question comes from Catherine Mealor with KBW.

Jeff, you mentioned that a specific reserve fell about 2.2 million in the quarter. Can you give us the balance for that at year end?

We don't have it in front of us, Catherine. I'd be happy to circle back with you.

Okay. And also, there was about a $4.7 million swing in AOCI. Can you comment on that?

Would you clarify that for me?

It just looks--it looked like your AOCI had about a $4 million swing.

Other comprehensive?

Yes. Accumulative other comprehensive income.

Yes. We just had some I guess market related adjustment relative to our bond portfolio. As I recall, that was the single biggest reason for the change.

All my other questions have been answered. Thanks.

Thank you. Our next question comes from [Michael Charner] with Raymond James.

Good morning.

Good morning.

Wondering if you could talk a little bit about your watch list and delinquency trends.

What in particular on the watch list?

Well, has the watch list declined from quarter-to-quarter?

I'd have to look at that. Off the top of my head, I don't know the answer to that offhand.

Okay. And I noticed that the early stage delinquency ticked up in the quarter. Was that in any particular category or is that more widespread?

Mortgage was the category that drove that.

Okay. And then, your non-performing loan inflows, did they decline this quarter?

Yes, they have.

Can you give us those numbers or--?

--No, not off the top of my head, I can't.

Okay. All right. Thank you.

Thank you. Our next question comes from Carter Bundy with Stifel Nicolaus.

Good morning, everyone.

Good morning.

Good morning.

Ed, did you say that you would consider raising capital to repay TARP absent an acquisition opportunity?

No, I did not say that. Where I sit right now and the Board is sort of focused is that we look at doing it as much as possible out of retained earnings. So repayment strictly from a capital raise is not something at this point in time we're willing to look at.

Okay. That's good.

There may be a situation where a private placement could make sense to us at some part--some point in time. But just an outright capital raise at this point, that's not in the cards for us.

Could you expand on that given the kind of capital levels you're running right now?

Well, if we get into a discussion hypothetically with our regulators and it's their feeling that some--there needs to be some component of capital raise in addition to what we've accumulated in retained earnings through earnings, we might fill the hole, so to speak, to get a partial repay done on the TARP. Again, that's a hypothetical example.

Yes.

Okay. And then, secondly, do you all have some sort of color on how we should think about the personnel run rate? And more importantly, are you planning on extracting anymore expenses from the expense base right now?

Yes. We are continuing--one of our initiatives for the 2011 budget is to continue to still aggressively manage down costs. And so, we are looking at additional ways to gain some efficiency. And so, yes to the question. We are very much focused on that and there is an ability to get some of it.

Okay. And from a personnel perspective, if this run rate sort of--obviously it was a little bit elevated with mortgage. But do we not see this going down much from here?

I would say I can't see a great deal of that because the ebb and the flow is quite honestly some areas decline relative to headcount and other areas we increase depending upon as we evolve in different areas whether it's some alternative delivery areas that we might put more emphasis on as we try to grow mobile banking or internet banking more. And there may be other areas that we pull back that aren't as meaningful to us as they have been in the past. There could be essentially some retail functions that we'd look at maybe eliminating in the future.

Okay. And then, final question, Jeff. From an interest rate positioning perspective, how is the balance sheet right now?

You mean in terms of sensitivity?

Yes.

Still fairly asset sensitive.

Okay. And it sounds like you might be extending duration on the funding side.

Correct.

Okay.

Aggressive in the three to five-year area on the CD portfolio. I mean, the rates are just so attractive long term. So we've got several promotions to try to lock in some of this funding cost.

Okay. Thank you all very much.

Thank you. I'm showing no further questions at this time.

Well, thank you, Melina, and thanks, everyone, for your questions and for joining us today. We appreciate that participation. And this concludes today's teleconference.

Ladies and gentlemen, thank you for your participation in today's conference call. This concludes the conference and you may now disconnect.