Atlantic Union Bankshares Corp (AUB) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the StellarOne earnings call. (Operator Instructions). As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Ms. Jennifer Knighting, Advertising and Communications Manager. Please go ahead.

Thank you, Ally. Today we have with us O.R. Ed Barham, Jr., President and Chief Executive Officer of StellarOne Corp., and Jeffrey W. Farrar, Executive Vice President and Chief Financial Officer.

Mr. Barham and Mr. Farrar will review results for the first quarter of 2011. After we hear comments from Ed and Jeff, we will take questions from those listening.

Please note StellarOne Corp. 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 and welcome to our first-quarter 2011 StellarOne earnings call. We will today follow typical format, and I will begin my remarks with a brief overview of the Company's first-quarter earnings, followed by general outlook for revenue growth and concluding with some asset quality metrics.

Jeff Farrar, Executive Vice President and CFO for the Corporation, will follow me with detailed commentary on balance sheet and income statement matters. We will at the conclusion of our remarks invite your questions.

StellarOne earned $2.9 million for the first quarter of 2011. Net of dividends and discount accretion on preferred stock, net income available to common shareholders was $2.4 million or $0.11 per diluted common share. This was an improvement when compared to first-quarter 2010 at $1.4 million or $0.06 per diluted share and slightly better than the $0.10 in net income per diluted share for fourth-quarter 2010.

The most significant contributors to first-quarter 2011 improvement were lowering loan loss provisions cost $4.5 million for first-quarter 2011, a decrease of $800,000 compared to fourth-quarter 2010, coupled with decreasing OREO losses, down sequentially by $560,000, and a decline in mortgage indemnification losses, which were also down on a sequential basis by $589,000.

Pretax pre-provision earnings amounted to $8 million for the first quarter of 2011, a decrease of $634,000 or 7.3% compared to the fourth quarter of 2010 and a decrease of $769,000 or 8.8% when compared to the same period in the prior year. This decrease relates to nonrecurring revenue items being realized in both prior-year periods compared to minimal nonrecurring items in the current period. Jeff will provide more insight on these and other operating details in his remarks.

While period loans decreased $34.2 million as compared to fourth-quarter 2010, average loans for the first quarter of 2011 were $2.1 billion or down 1.4% when compared to $2.13 billion for the fourth quarter of 2010. A large part of the reduction was due to some large customer payoffs.

One point of optimism -- recent pipeline reports have begun to show some increased loan activity. We will be anxious to see how much of this turns into funded loans in the coming months. If we get a high pull-through rate, then loan level should show some growth again in the second quarter, much like we saw in the fourth quarter of 2010.

Clearly overall unemployment continues to decline in Virginia, reaching a statewide level of 6.3% in March, one full percentage point below where we stood a year ago. The biggest challenge facing StellarOne is that the majority of our franchise sits in smaller towns or rural markets that are rebounding more slowly than many larger metropolitan markets.

In these smaller markets, the consumer largely drives loan demand. With new job creation weak, loan demand is weak. Our efforts to grow our commercial and industrial loan book has proven to be challenging, and when we find opportunities, pricing is aggressive.

In our present footprint, our larger communities like Roanoke, Fredericksburg and our loan production office in Richmond are providing the preponderance of our new loan growth. Tactically we are focusing on targeting current customers of some of our larger super regionals and smaller weakened Community Banks for new loan opportunities. None of this can replace a strengthening economy though, which would help alleviate the anemic new loan growth.

Despite the challenge, we feel our substantial lending limit given our very strong capital levels, our product offering an additional new lending talent, we will begin to move loan growth in a positive direction.

The other critical component to help address our longer return revenue growth is to accelerate our future acquisition efforts. In general, future acquisitions for StellarOne will consist of multiple smaller transactions and select higher growth markets.

We believe this type of transaction will be easier to digest, allowing quicker cost saves and earnings accretion while also preserving the StellarOne culture we have spent the last three years creating.

One final comment on revenue. Non-interest income on a sequential basis did increase by 7.9%. The increase resulted from a reduction in write-downs from foreclosed assets and a reduction in mortgage modifications. Wealth Management also recorded an increase in management fees. More detail on the noninterest income piece in a moment.

Moving to asset quality, StellarOne's nonperforming assets totaled $52.2 million at March 31, 2011, down $2.2 million or 4% from $54.4 million at December 31, 2010, and down $9.8 million or 15.8% compared to $62.2 million at the end of March 31, 2010.

As a point of reference, this current level of NPAs represents the lowest absolute dollar level of MPAs since January 31, 2009 when they stood just slightly north of $51 million. First-quarter 2011 MPAs as a percentage of total assets stood at 1.8% compared to 1.85% at December 31, 2010, and 2.07% as of March 31, 2010. We are very pleased with this continuing improvement in our MPAs and are optimistic this overall trend will continue for the remainder of the year. If we do maintain this trend, our earnings will obviously begin to benefit from the future reduction of our reserves.

At the current time, though, we have maintained our allowance as stated at 1.8% of total loans, which equates to a healthy 86.9% coverage of nonperforming loans.

Nonperforming loans totaled $43.2 million at March 31, 2011, essentially flat when compared to $43 million at December 31, 2010, and down $16.6 million or 27.8% compared to $59.8 million at March 31, 2010. Our mix of nonperforming loans continues to be weighted to the residential development and construction portion of our portfolio. We continue to monitor this proportion of our portfolio very closely. Of the total non-accrual loans of $43.2 million at March 31, 2011, approximately $16.4 million are residential development and construction credits.

Foreclosed assets totaled $9 million, down $1.9 million or 17.4% compared to 10.9% at December 31, 2010, and up $6.8 million or greater than 100% -- compared to December -- excuse me, March 31, 2010. The increase in OREO as compared to a year ago is understandable as the natural progression of many credits cycle from nonperforming loan status to a resolution liquidation status. Our average liquidation discount to OREO carrying values has historically been less than 10%.

As the economy improves, we would expect to see this discount shrink even further, providing an additional improvement to future earnings. Earlier this month as a case in point, we held a sizable auction of 25 undeveloped residential lots in one large subdivision in the Smith Mountain Lake area. As you have heard us to discuss before, this particular market has been seriously depressed. We were not only successful in selling all of the 25 lots, but for an amount in excess of what we needed to cover our carrying values and related expenses. This sale resulted in another $2.5 million in MPA elimination. It is likely given this positive outcome we will have another similar-sized auction of similar properties in mid to late summer.

Past dues and matured loans between 30 and 89 days totaled $41.8 million at March 31, 2011, which was down by $11 million or 20.8% compared to $52.8 million at December 31, 2010. Annualized charge-offs as a percent of average loans receivables amounted to 0.88% for the first-quarter 2011, down compared to 1.43% for the fourth-quarter 2010 results and down 1.13% for the first quarter of 2010. Net charge-offs for the first quarter of 2011 totaled $4.6 million or down $3 million compared to the $7.6 million realized during fourth-quarter 2010 and down $1.6 million when compared to the $6.2 million during the first quarter of 2010.

I have no new comment on the TDRs today, which have remained somewhat flat from the previous quarter. We do anticipate hopefully further reduction in this category in the coming months as notes mature and we have an opportunity to move some of these loans back to a market rate and market term.

I know there will be questions related to our recent partial repayment of TARP funds and other future prospects for repayment, so let me delay those questions or comments until question-and-answer period, which we will be happy to answer those further questions.

I will now turn the program over to Jeff for his remarks.

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

We feel we had a solid profitable first quarter. We continue to see incremental improvements on a number of fronts and have accomplished this in the face of continued elevated loan workouts, weak loan demand, ever-changing regulatory compliance and a fragile economy. Our team is energized, excited about our partial repayment of TARP from accumulated earnings, and stands ready to accelerate our growth in performance.

I would like to start my financial discussion today with some additional color on the net interest margin for the quarter.

Our net interest margin came in at 3.85%, expanding 33 basis points from 3.52% this time last year, representing a 9% growth rate. We feel pretty good about this level given the low rate environment, our excess liquidity position and drag associated with current nonperforming assets. We did experience some slight compression in the margin as compared to sequential fourth-quarter 2010 down 2 basis points. This contraction was a function of the average yield on earning assets for the current quarter, decreasing 8 basis points to 485 or 4.85% as compared to 4.93% for the fourth quarter of 2010. This was largely offset by a 6 basis point improvement in the cost of interest-bearing liabilities, moving from 1.26% during the fourth quarter of 2010 to 1.20% during the first quarter of 2011.

It should be noted that we had some unusually high fee income from the commercial loan portfolio during the fourth quarter of 2010 that contributed to asset yield results for that quarter. Without that contribution, the margin would have essentially been flat quarter to quarter.

So, as we look at net interest income revenues on a tax equivalent basis, they came in for the first quarter at $24.6 million, which compares to $25.4 million for the fourth quarter of 2010 and $23.1 million for the same period in the prior year. While we had decent year-over-year growth of 6.5%, the decrease as compared to fourth-quarter 2010 is more a function of decreased earning asset base or roughly $13 million and less earning days in the period.

Looking forward, we expect to see a continuing moderation of improvement in funding costs, and while we plan to reduce the excess liquidity in our balance sheet, which should provide some lift, there is continuing risk of margin compression to the extent we don't obtain some meaningful long and earning asset growth to support asset yields.

Let's look at noninterest revenues. On an operating basis, which excludes gains and losses from sales and impairments of securities and other assets, total non-interest income amounted to $7.7 million for the first quarter of 2011 or up $560,000 or 7.9% on a sequential basis compared to the $7.1 million for the fourth quarter of 2010 and essentially flat compared to the same period prior year. First-quarter 2010 included some nonrecurring gains associated with a branch sale and some securities sales amounting in aggregate to $1.1 million. Fourth-quarter 2010 included $726,000 in net gains associated with security and asset sales.

We did enjoy some noticeable improvements in costs associated with foreclosed assets and indemnification losses, as mentioned by Ed, and had some revenue growth in areas such as wealth management fees, interchange fees and insurance-related revenues. We experienced some market value contraction within our total assets under management within the Wealth Management division for the quarter, but also added over $18 million in new assets under management for the quarter and continue to see some improvement in profitability for the unit.

We experienced some contraction in retail banking fees associated with reduced overdraft activity, and mortgage revenues contracted $577,000 or 20.7% on reduced volume associated with refinance activity.

On the mortgage front, we are certainly encouraged by the significantly reduced number of indemnification claims and resulting costs, which allows the unit to remain profitable on sharply reduced revenues and should result in greater profitability for the line of business over the course of the year as volumes improve.

On the operating expense front, non-interest expense for the first quarter amounted to $23.5 million, down $420,000 or 1.8% when compared to $24 million for the fourth quarter of 2010 and up $980,000 or 4.4% when compared to the first quarter of 2010. Actually I think that is -- yes, fourth-quarter 2010. Pardon me.

The sequential quarter decreased was driven by decreases of $593,000 in FDIC insurance expense, which were offset by $552,000 of increase in compensation and employee benefits. The decrease in FDIC insurance is a function of an improved risk category for StellarOne under insurance assessment guidelines and for the most part will be a recurring savings for us going forward. The increase in compensation costs associated with incentive-related payments and accruals based on improved profitability results. These incentives are not currently at normal historical levels, but compared to the non-recorded in the comparative periods, you can see the variance. This cost will be variable based on attainment of profitability and production goals.

StellarOne's efficiency ratio came in at 71.4% for the first quarter of 2011, a fairly tight range compared to 71.5% for the fourth quarter of 2010 and 71.2% for the same quarter in 2010. We expect this ratio to improve over the course of the year as we experience less credit quality related costs, the FDIC insurance costs, continue to consolidate and realign our branch network, and get some anticipated revenue growth.

Lastly, a look at capital. Capital levels remain strong with total shareholders equity of $428 million. Tier 1 capital came in at 14.88% compared to 14.19% at December 31, 2010. Excluding the TARP investment, Tier 1 would be 13.56%, and if we include TARP but net out the partial repayment that we did in April, Tier 1 would be 14.55%. Tangible common equity ratio is a healthy 10.08% for the quarter with tangible book value versus common share of $12.25.

That concludes my prepared remarks, and I will turn it back over to Jennifer for our Q&A.

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. Ally?

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

Ed, just to topics I would like to ask about. First of all, your plans in the future on the remaining TARP repayment, and I also wanted to ask you a little more color about your acquisition strategy. You said you would like some smaller deals in higher growth markets. I'm interested in a little more color there.

Okay, happy to do that, Jennifer. The TARP, our plans remain as we have stated before. Absent an acquisition opportunity, we would want to continue to look at repaying TARP from our retained earnings. If we do find an opportunity and we are out looking and examining opportunities, we would raise some offensive capital to do the acquisition and repay the TARP in full at that time.

As far as markets, we still look to the Richmond market as being a priority to us. I would tell you also I have some interest in the Northern Virginia market. That would be sort of the second option for me, and perhaps Tidewater would be in there somewhere in third place.

In the past, I think you have shied away from Northern Virginia citing the level of competition. So what has changed now?

You have got a good memory. What has changed is a couple of banks that I have some familiarity with and I guess more comfort with the management of those banks, and given the portfolio that they have, they are into lending, which we don't have, some government contract lending, which would be a nice addition to our portfolio, give it some diversity. So that sort is part of what is behind it. And they are also, again, as I say, smaller transactions, and they have C&I, which we need more C&I.

(Operator Instructions). Steve Moss, Janney Montgomery Scott.

I just want to follow up on the M&A question there since that was interesting on the Northern Virginia side. But what are your thoughts on a distressed deal versus a healthy deal?

I still don't really care for a distressed deal. The part that I think maybe we have more appreciation of than some is the fact that it may be from a financial standpoint an attractive situation, but socially and from a time constraint, the commitment of resources, it takes a lot of effort to turn things around. You still have a lot of bad assets you have got to work through. I would rather spend that time and our energies and our resources on positive energy and positive development and positive growth as opposed to trying to wrestle through portfolios that may be somewhat less attractive.

And then with regard to the loan pipeline improving here, is that C&I driven or commercial real estate?

It is a little bit of everything, but it is still some heavy real estate there. But we have a real estate finance area that we have created over the last two years and hired into that unit some very qualified, talented people and changed a lot of our underwriting policies there.

So we are willing to look at real estate. We are just doing it a lot better than it was done before.

Are you seeing pricing tighten with regard to loans?

It is tight everywhere. It is competitive. Anybody that is worth lending money to is having a real good pricing opportunity there. So --

A borrower's market? A borrower's market.

It is a borrower's market yes.

And then, I guess, the third thing, just kind of with regard to the real estate markets in Central Virginia, it struck me when I was driving through there last -- quite a bit of land was for sale, and just kind of wondering what you guys are seeing for property values in towards Fredericksburg, Culpeper and down toward Charlottesville, along with the land values?

Again, it always varies to us. The market always use -- I always use the comment, all real estate is local. Because really what drives real estate is job creation, and if you go to the markets like Fredericksburg, you go to markets like Charlottesville, you have got some colleges in both communities, you have got government influence in Fredericksburg. So you're seeing property values there actually sort of level to inch back up a bit. If you get into the more rural markets, the Shenandoah Valley, it is just not bouncing back. It did not drop as much as maybe Northern Virginia might have at the height of the recession, but it has not bounced back as it is in some of those markets.

So it just varies. Up in towards Culpeper where I live, the market is very depressed. Still a lot of foreclosure activity going on. So it just depends on where you look. New River Valley, I would say not deteriorating greatly, but not improving a heck of a lot.

I'm showing no further questions at this time. I would like to turn the call back over to management for any closing remarks.

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

Ladies and gentlemen, this does conclude today's conference. You may all disconnect, and have a wonderful day.