Atlantic Union Bankshares Corp (AUB) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to your StellarOne Corporation earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference call, Ms. Jennifer Knighting. You may begin, ma'am.

Thank you, Kevin. 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 will review results for the first quarter of 2012. 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. Today's call will be conducted a bit differently from our past earnings calls. I would like to begin the presentation today more with an overall strategic view of the Company's first-quarter performance. Once I have concluded my remarks, Jeff Farrar, CFO and Executive Vice President for the Corporation, will provide more insight on the financial results for the quarter.

We are certainly pleased with our results for the quarter and continue to have success in improving our asset quality, albeit at a grudgingly slow pace. As you have seen from the press release, we, again, saw a decline in our NPAs to total assets in our net charge-offs, past-dues and TDR levels.

The consumer debt area is where we now see our biggest challenges, not the home equity area, which has remained flat in outstandings and stable on performance metrics, but more in consumer debt issues that are in single-family homes, both owner-occupied and rental. These are first deeds we have retained on our books for a number of years when it was done as a strategy to promote this type lending, which we do not do any more and have not seen this as a viable future lending strategy.

We do, from time to time though, do one-offs and retain those mortgages on our books to very credit-worthy borrowers, but then only on a balloon basis as opposed to long-term fixed rates.

With the increase in troubled residential properties, it should be noted that the issue is more in the number of troubled credits as opposed to aggregate dollars due to the smaller size of the debt per borrower. This is entirely different from the past years when we had the major write-offs from construction and development lending.

Before I leave asset quality, I will note we are cautiously optimistic that we will have the potential during second and third quarter to see some large remaining real estate construction credits come to a possible resolution. We have a significant auction scheduled at Smith Mountain Lake next month, which should significantly reduce the size -- the last sizable exposure we have there on a large failed development of $6.7 million, which I might add we have a significant specific reserve already assigned to this credit.

Also, we have mentioned in previous calls a $5 million apartment complex project, which we have retained a management firm to help lease this facility before going to market. This complex is 144 units and we currently have 122 of those units leased and are continuing the lease-up process. We feel confident about the outcome of this once we either auction or sell the note to a potential investor, most likely in the third quarter.

While on the topic of loans, allow me to make some comments relative to loan growth. Due to our continued strategy to reduce our exposure to real estate construction, we continue to see a decline in outstandings in this loan category from a year ago, down roughly another $26 million in the last 12 months. I might note, in the last three years, we have reduced this construction portfolio by over $380 million.

StellarOne, like many community banks pre-recession, relied heavily on all types of construction lending to grow its loan portfolio. Being more selective in our current construction lending, along with our shift in our focus to better diversify the portfolio, has made overall loan growth a challenge, especially in many legacy markets that provide a lack of loan diversity and opportunity.

Despite these facts, we did see slight overall loan growth for the quarter and noted 5% growth in C&I outstandings for the quarter. As the rate of deleveraging slows in our construction portfolio and we continue to gain momentum on the loan growth front, a strong loan growth trend should be evident as the year progresses.

While we are seeing loan growth in most of our larger legacy markets, our new markets of Richmond and Virginia Beach are continuing to give us the most opportunities to bid upon and we are having success doing that. We see loan growth going to pick up -- we see loan growth continuing to pick up as we continue to hire proven end-market producers in many markets and for the first time in three years with the recent repayment of TARP, we have been able to develop some attractive incentive plans to help drive all lines of business to grow revenue.

Specifically in the Virginia Beach market, again, our newest market and which we only hired our first lender last October, we have now added a third lender, a business banker. Despite this recent entry into the Virginia Beach market being still a few weeks away from opening our full-service facility there, which I might add will include Wealth Management and mortgage, we have approximately a $25 million pipeline with now $7 million already funded and outstanding. We anticipate outstandings to more than double in the next 30 to 45 days.

If you look at the loan categories within our total loan portfolio, the one area that has seen consistent growth over the last six to eight months is commercial and industrial, which moved from a low in August 2011 of $183 million to $204 million March 31, 2012. This is a direct correlation to the growth in our C&I and growth due to increased opportunities we have been afforded in our new markets. C&I lending now accounts for 10% of our loan portfolio and ironically, it is the same percentage as our real estate construction portfolio now. We would like to see our C&I percentage grow from 10% to at least twice that, 20%, in the next two to three years.

Allow me to share some other highlights from the quarter. Our retail bank added a net new 2962 checking accounts during the first quarter. Wealth Management, as I have alluded to earlier, is posting some very respectable asset growth, which will result in some revenue growth. For the first quarter 2012, Wealth Management booked over $19 million in new assets under management and the pipeline is strong. Wealth Management is on pace to potentially have its best year ever.

A recent change in leadership over this line of business and the addition of several new hires are beginning to make a difference from a production standpoint. You have already heard me mention the opening of our new full-service office in Virginia Beach. We will also officially open our Preston Avenue office in downtown Charlottesville on April 30 and are on schedule to also have our first full-service office in Richmond by June 2012.

Each of these new offices represent our new universal banking concept, our branch of the future, if you would. Developed in concert with an outside consultant, it has also helped us identify pockets of underbanked markets both in our current footprint and in new markets. These new branches will be staffed with much fewer employees given the use of technology and run by employees that will not come out of our traditional banking background. They will be sales people. We are excited to see how these offices will be perceived by the public and how they will perform and we will have more to share on that in the future.

We look forward to sharing more on all of this with you at the next quarter, but let me make one last comment before I turn it over to Jeff. Obviously, we feel good about our Company's momentum and to that end, you can anticipate in the coming quarters more positive news on the dividend front.

As you realize, we are still somewhat hampered by the $22.5 million dividend we upstreamed last quarter to repay our remaining TARP in full. As you may know, all banks are restricted to upstreaming any dividend to their holding companies by the aggregate retained earnings of the current year plus the two preceding years.

With this current quarter of 2012, we dropped 2009 off the calculation, which was a year of loss of for us. I can assure you our Board is focused on getting back to a normalized payout ratio of 30% to 40% for the Company as soon as practical. At this point, I will turn the remarks over to Jeff.

Thank you, Ed and good morning, everyone. From a financial perspective, StellarOne had a much improved first quarter to begin the year. First-quarter earnings were $5.5 million, an increase of 92% over the same period a year ago. This equated to $0.24 per common diluted share for the quarter compared to $0.11 per common diluted share in the same quarter last year. This also equated to a 0.76% return on average assets and a 5.3% return on average equity. Pre-tax pre-provision earnings amounted to $8.5 million for the quarter, a solid 5.8% improvement over the same quarter in 2011.

There are a few highlights that positively impacted the first-quarter results that I would like to speak to. First, loan loss provisioning expense for the first quarter of 2012 was significantly reduced to $850,000 for the quarter, which compared to net charge-offs of $1.8 million. The resulting decrease in the allowance of $1 million was the result of improving metrics around reduced historical loss experience, past dues, classified assets and improving market indicators. The coverage ratio of the allowance to non-performing loans still increased to 83.9% at quarter-end. NPAs to total assets reduced to 1.52% and NPAs to gross loans and foreclosed assets reduced to 2.18%.

Also noteworthy is the continued decline in accruing TDRs, down from $41 million this time last year to approximately $29 million at quarter-end.

On the revenue front, we saw a continuation of growth from the non-interest income side, which experienced an increase of $408,000, or 5.3% growth over first quarter 2011 with increases coming in in almost all fee categories, but especially from retail banking, mortgage, commercial banking-related fees and insurance income included in other income. At this point in the economic cycle, we are confident that our non-interest revenue improvement will continue.

Our net interest income -- we experienced net interest margin expansion, but a reduced earning asset base muted any real lift in revenue here. We continue to get a positive lift from our reduced interest expense, which moved from an overall funding cost of 1% in the fourth quarter of 2011 to 0.94% in the first quarter of 2012.

Looking forward, we continue to anticipate some modest contraction in the margin for the remainder of the year given the rate environment and increasingly limited options to reduce our funding costs. We do anticipate we can mitigate the revenue impact by getting some improved earning asset growth.

The last highlight I want to touch on centers around our focus on cost management. Activities for the quarter included a consolidation of a couple branches and the completion of our wholesale mortgage divestiture. We are down 35 FTE from last quarter and down 57 FTE from this quarter last year. These activities generated $1 million in annualized cost savings during the quarter. Although it should be noted that there was little to no benefit realized in the first quarter due to costs around severance, some non-recurring operating expenses associated with the wholesale divestiture and branch combinations and about $250,000 of benefit-related costs associated with our 2011 incentive payouts.

While we were pleased to see the efficiency ratio improved to 69.7%, which compared to fourth quarter 2011 of 71.83% and our 2011 first-quarter mark of 71.2%, we recognize that it is not where it needs to be. To that end, the management team has developed and initiated a comprehensive three-stage program during the quarter to reduce our efficiency ratio to 60% or less in a three-year period.

I would add that while we certainly expect revenue trends to improve, we are attacking this with the assumption that we will not place reliance on such revenue lift to get there and will focus heavily on our cost structure as part of this initiative. We see this as a game-changer for us and one that will represent a cultural shift for our Company.

The first phase of this program represents a comprehensive internal review of operating expenses, which has identified some immediate opportunities to reduce costs. This will be implemented during the second quarter and while we are not quite to the point of refinement to disclose the financial impacts today, we will plan to disclose specifics as part of our second-quarter earnings release and call. Third and fourth-quarter 2012 efficiencies should see some improvement and we feel will be evident during this first phase.

The second phase of our efficiency effort is currently underway from a discovery standpoint. We are utilizing an outside third party to help us conduct a comprehensive metrics-driven evaluation of our organizational structure and companywide processes. These recommendations will be available to management around the August/September timeframe with implementation to follow soon thereafter. The majority of the benefits from the second-phase cost saves will not be evident until 2013.

The last and third phase of our efficiency initiative will deal with all aspects of our real estate holdings, both current offices and land held for future development. More to come on that.

That concludes my prepared remarks and I will turn it back over to Jennifer for the 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. Kevin?

(Operator Instructions). Catherine Mealor, KBW.

Thanks, guys. Congrats on a good quarter. I wanted to see if you could talk a little bit about the reserve to loan ratio and how you think that should trend down over the next couple of quarters. I know, Ed, you mentioned that you have some specific reserves associated with the Smith Mountain Lake project that you are going to auction next quarter. But where do you think the reserve to loan ratio should balance out as you continue to clean up the credit quality? Thanks so much.

I don't have a specific number in mind, but I mean we are looking for that to continue to work its way down as it should. I mean that is obvious as the credit continues to improve for us. Just off the cuff, I am not comfortable telling you a number that I think it should drop to, but feel confident where we are now. Toward the end of the year, it will be lower, obviously, than where we are sitting now to 155 overall to the portfolio.

I will note, even though we are at 155 to the overall loan portfolio, we are at an 84% coverage on all non-accruals. So that is really more of an important number to me relative to what I look at. As long as that is a healthy coverage, I don't worry so much about where the overall percentage is to the total portfolio.

I would add that, on the Smith Mountain Lake auction, I mean that you would anticipate seeing some charge-offs associated with that if we are successful with the auction, of which we would already have reserved obviously to the specific reserve if things work well for us. But that would increase the amount of charge-offs and so you could see some associated reduction in the allowance coverage, everything else equal.

Okay, great. Thanks so much. And my one follow-up is, Jeff, can you quantify the one-time cost you had this quarter with severance related to the employee reduction? I'm just trying to think of what a good run rate for the expense base is going forward ex kind of one-time severance costs.

Understood, understood. I would -- in addition to the $250,000 associated with the incentive payouts, I would tack on another $150,000 to that. So I would aggregate that at $400,000 that I would consider non-recurring.

Okay, great. Thank you very much.

David Peppard, Janney Capital Markets.

Could you maybe talk specifically about loan demand and the loan pipeline, including loan types and specific geographies for me?

Yes, we are seeing increasing loan demand; that is the good news. And as we have shifted, if you would, from having such an internal focus on past credit issues, we are able to focus more on activity. So it is -- I think it's a combination of overall loan growth improving to some extent, but also able to allocate more resources toward the effort.

We are seeing growth across all our footprint, but I would say to you that, again, the newer markets for us are really giving us the biggest lift. And that is, again, Richmond for us and recently Virginia Beach we still believe is going to be a really good market for us just because of a lot of issues there relative to community banks and the market there that are, for lack of a better word, out of the game, out of the market because of their problems that they are experiencing.

We are also -- the other big piece of that is we are hiring -- we continue to hire -- in fact, we just made another offer to a really outstanding commercial lender yesterday to be added to the Richmond and also to work some into the Fredericksburg market. I would tell you the Fredericksburg market is one of our better markets, but to be quite honest with my comments, that market we are not getting the lift there we want. So we see there's a huge amount of potential there if we can get that hitting on all cylinders in the coming months.

Sure. Could you talk a little bit about the specific loan types in Richmond and Virginia Beach that you are targeting?

Yes, we have hired three lenders. One is a commercial real estate lender, one is a business banker and the other is a C&I lender. So we are going after all three types, but I think the biggest dollars that we are seeing still are probably commercial real estate in those markets, but we are seeing C&I, as I alluded to earlier, that is really the big growth area for us. And that is as we want it to be and have wanted it to be for some time. So that shift is a direct correlation to the new markets with more opportunity in C&I lending and also the type of lenders we are hiring. We are getting people who are capable to lend in that arena.

Right. That's good. What do you guys have budgeted for the rest of the year for loan growth?

I don't really have that number off the top of my head to be honest with you. I can tell you we are running above budget and I will leave it at that. So I would tell you that we are pleased -- relative to where we thought we would be, we are pleased. And so first quarter, we beat budget on a lot of fronts.

Okay, thank you very much for the time, guys.

William Wallace, Raymond James.

Good morning, guys. I apologize; I accidentally dropped the call, so I have only heard one question. So if I ask anything that has been asked, just let me know and I will check the transcript. But have you talked about the mortgage repurchase expense?

We have not, Wally. For the first time in quite a while, we got stung by the mortgage repurchase bug. We had more in the way of expense in the first quarter than we did for the last half of 2011. There were only just a handful of claims that we paid, but they were pretty egregious claims in terms of just the percentage lost on the mortgages. I believe there were roughly four that we paid out that made up that expense.

I would tell you that we are not seeing any meaningful inflow of these types of indemnification claims. We pick up one or two a quarter. We begin to work -- each of these had been on the books in terms of a claim for an extended period of time and it just took that long to hear back formally from the investor as to what the loss was going to be.

We feel we have got them pretty well reserved at this point in terms of any anticipated future losses. And the good news is that we had such a strong quarter and had enough carryover from our wholesale revenue stream that we were able to absorb it and still showed some decent profitability. It is frustrating for us because Mortgage could have contributed on a net basis $0.03 a share to earnings this quarter. It ended up being about $0.01.

So should I take from what you are saying that, for any additional claims that you currently are aware of, you don't feel there is going to be additional losses? These four, it was just the severity that surprised you that resulted in a higher expense than your reserves for those?

That is correct. That is correct. And it is -- I mean it is a difficult estimate to come up with because the facts and circumstances around each are very different. And then you have to assess the probability of whether you are going to have a claim at all based on the negotiation on whatever they are alleging in terms of documentation deficiency. But we have spent a lot of time on it and based on the severity of the losses that we have experienced, we have modified our allowance requirements accordingly.

So no increase in requests or anything like that?

No meaningful increase. I wouldn't say none, but looking back over the last couple of quarters, we have seen a couple come in each quarter and their probabilities vary from us feeling like we're not going to have any loss to that of having a probable loss.

Okay, okay. Onto the margin. Did you use some liquidity to repay some FHLB advances in the quarter or to pay off?

No, we had one maturity and it was a high cost advance. So we will get a little lift on that, but it wasn't a very large advance either, but just normal maturity.

Okay, all right. And then the last question I had is, to your comments, Ed, at the beginning of the call about some of the pressure on your -- it sounded like it was a particular portion or part of your first lien book, it was owner-occupied and rental properties. How big is the portfolio that you are speaking to there?

Overall, it is about $450 million and so, again, I want to emphasize it is more in terms of numbers that we are seeing all of a sudden as opposed to aggregate dollars at this point. And that is where we are spending a lot of the workout time now so that the bigger credits that we saw in the past, especially the real estate development type credits we were wrestling with that bit us pretty hard. What we have sort of gone into now is a phase where the consumer I think is, in many cases, just getting worn out and some of those are having problems keeping the mortgages current.

Obviously, the debt on each of those is a lot less than it is on the commercial type credit. So our workout guys are a lot more active, but staying on top of it, but that is the challenge we have now. But from an aggregate dollar standpoint, at this stage in the game, we are not too concerned about it.

Okay. And it sounded like you said that you are actually not seeing much in the home equity line.

That is correct. Our outstandings have been flat in home equities. We are pretty keenly focused on that and even the performance metrics have been pretty stable on that. So so far, so good.

Okay. That is all I have, guys. I appreciate it.

David West, Davenport & Co.

Good morning. I wondered if you could comment a little bit about the outlook for the professional expense line in light of the outline, the expense initiative that you just outlined.

Happy to do that, Dave. We are working hard to reach out to each of our partners and if you will, build a little more structure around how we are being billed from a legal perspective. We have implemented, if you will, an engagement plan with each of them that speaks to very specific criteria around when more than one partner, for instance, can be engaged in the engagement, whatever that may be.

We have implemented some requirements around required discounting for certain levels of business and have put a little structure, if you will, to a little more structure to those relationships and our in-house counsel, Doug Calloway, has done a nice job of sitting down with each of our partners, if you will, building more structure around that relationship. So that is probably the single biggest thing that we have worked on.

We have also looked at some of our other third-party vendors that we use for consulting and have been able to negotiate some identified savings around, for instance, audit-related costs that we think will be meaningful going forward. Obviously, we mentioned the third-party consultant on the efficiency initiative. We will have some costs associated with that over the next few months. But it's not, in the overall scheme of things, real material to us and I don't think you will see a whole lot of impact there from a financial perspective.

Okay, so it sounds like there is some optimism that line item would not materially perk up even in light of using an outside consultant to help with your new expense initiative effort.

I think that is a fair assessment.

Okay, all right. One quick detail question. Your BOLI income picked up pretty nicely year-over-year. Is the current Q1 result probably a good run rate for that line item?

It is, it is. We bought another $10 million piece late in the fourth quarter of 2011 and this is the first full quarter associated with that return.

Okay, very good. And lastly, I know this is a volatile line item, but the Mortgage Banking segment in general, you noted that they would've made a pretty good contribution less the mortgage indemnification cost. Do you feel like that segment in general can generate a little more revenue from recent levels than it then has or just what is your general outlook for mortgage I guess is the question?

Well, I can tell you we have made some great hires on the mortgage front and are filling the wholesale revenue gap nicely. Keep in mind, we did sell off our revenue line with the wholesale operation. And so in terms of trying to compare it to last year, we are still going to be in catch-up mode for a while from just a top-line perspective.

I feel real good about the team that we are building, feel real good about what I am seeing in terms of pipeline right now. Our mortgage business as you have seen with some of our peer banks has been very strong in the first quarter and I think certainly as we look out to the next quarter looks strong. But on a relative basis comparing to last year, we are still going to be in catch-up mode and I would not anticipate that you would see any meaningful growth in our top line.

From a profitability perspective, I feel good that we will continue to show some profitability out of that unit and the wildcard for us, as we mentioned on the call, or a question from Wally, would be the indemnification costs. If we can hold that in line then I feel good about our earnings prospects.

Thanks so much.

Will Curtiss, Sandler O'Neill.

I was going to see if you guys -- you talked about the dividend a little bit, so I wanted to see if you could give us an update on the local M&A environment.

Relative to our activities in it or just an observation?

Well, both. I mean just kind of what you guys are seeing and hearing out there and just kind of how that relates to you all.

I would describe it as still a lot of discussion and no action. I still think there is still the issue of pricing from the seller's perspective versus the buyer's perspective. So I don't think, in my opinion, consolidation is around the corner yet. I'd still say it is another 18 months off from our activity. We are not really focused on that. We are internally focused. I think you can glean that from the comments we have shared with you today.

Our stock price is really not where it needs to be from a currency standpoint to really be doing a transaction. So we are sitting tight and doing what we can to start driving the earnings of the Company and hopefully the stock price will respond accordingly. So that is where we are focused right now.

Okay, thank you.

I am not showing any further questions at this time.

Okay, 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 presentation. You may now disconnect and have a wonderful day.