Atlantic Union Bankshares Corp (AUB) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to be StellarOne Corporation earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions to follow at that time. (Operator Instructions). As a reminder this conference is being recorded.

I would now like to turn the call over to your host for today, Ms. Jennifer Knighting, Senior Brand Manager. Ma'am, you may begin.

Today we have with us O.R. Ed Bahram 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 fourth 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. And once again, I want to express my thanks to those that have dialed in to listen to the fourth-quarter earnings webcast of the StellarOne Corporation.

My opening comments about the quarter and for the year will be brief, but hopefully insightful. Jeff will provide more color and granularity around the financial results. And as usual, we will welcome your questions at the end of our presentation.

I am pleased to report that StellarOne ended the fourth quarter of 2012 with solid financial results. In general, we have been building earnings momentum over the last half of 2012 and enter 2013 well-positioned, though 2013 will be another challenging year, especially from margin compression.

While Jeff will highlight some of the primary drivers of our revenue and earnings for the quarter and for fiscal year-end 2012, I would summarize the key to our success for both the quarter and for 2012 was a result of a lot of things going right, made possible by the combination of consistent focus and hard work throughout the year by our dedicated employees.

As you are aware from the press release, StellarOne earned $6.2 million or $0.27 per diluted share, for the fourth quarter of 2012 versus $0.17 per diluted share for the same period a year ago, 2011, and sequentially, $0.03 more than the $0.24 per diluted share earned for the third quarter of 2012.

Annually, we earned $22.2 million for fiscal year-end 2012 compared to $13.4 million for fiscal year-end 2011. For fiscal year-end 2012, this converted to $0.96 per diluted share compared to fiscal year-end 2011's annual results of $0.59 per diluted share, a 65% increase.

These improved results are particularly gratifying given the headwinds of a still weak economy and low interest rate environment. I would also comment that 2012's results were accomplished with a balance of cost savings and measured initiatives to further expand our franchise.

While a more effective and efficient banking model is necessary to be a long-term survivor, we also know that the economy will rebound, and we need to be prepared to react in a positive manner to the coming opportunities. We opened three new universal branch offices during 2012, and have continued to add new, talented employees across the organization to prepare for our future and for the opportunities that will come. You have often heard me refer to this strategy as resource reallocation. That is, redeploying a portion of our cost saves into higher-return products, services, markets and human capital. And we will continue to take this balanced approach in the coming year to find new and better ways to increase our earnings and shareholder value, while investing in the future of our Company.

To this last point, over the last couple of weeks, you have read our public announcements of two additional branch offices to be opened in Richmond during the first six months of 2013, one a de novo foot facility on Gayton Road; and the most recent announcement, a purchase of the existing Robious Road branch office of Village Bank and Trust. The Robious office has roughly $21 million in deposits and approximately $12 million in loans outstanding.

Both these offices will be designed, as all of our new facilities, with our new universal branch concept, which uses more technology, staffed with fewer and better cross-trained employees, smaller square footage, which allows us to build a new facility for roughly half to one third of the cost of a larger, traditional branch. Most importantly, these combined benefits provide for a lower threshold for profitability, meaning fewer loans and deposits required.

For 2013, the newly-announced Richmond branch offices will likely be our last de novo offices for the immediate future as we take a breather to digest our efforts over the last year and we redirect more of our focus on our legacy markets to determine where we need to lift performance through further enhancements or efficiency.

From a lending perspective, total loans outstanding period-end 12-31-2012 versus period-end 12-31-2011 showed positive growth, and sequentially, third-quarter 2012 to fourth-quarter 2012 in particular. In particular, fourth-quarter 2012 period-end loans boosted the most -- showed the most robust growth of any point in the whole year of 2012, with new outstandings increasing by roughly $25 million from 9-30-2012 period-end to December 31, 2012.

We are still challenged in obtaining meaningful loan growth for two primary reasons, weak loan demand across our footprint and a continued deleveraging of our heavily-weighted real estate portfolio. We continue to strive for a more balanced portfolio mix. I remain optimistic that loan growth in the coming year will, on whole, improve from 2012 period-end levels as deleveraging slows and we focus on specific lending niches, some new, to grow our loan outstandings.

All of 2013's lending efforts will greatly benefit from the additional sales training that occurred in 2012 and continues, along with new talent and enhanced approval structure. My special thanks to our relationship officers and credit administration partners for the good collaborative work during 2012 and especially in the second half of the year. This partnership will pay dividends in the coming year.

As I mentioned earlier, one of the areas that has benefited from this low rate environment has been our mortgage lending division. We realize that a heavy reliance on mortgage lending for sustainable revenue growth can become a problem at the point that rates again begin to rise, and especially if you have built a business model around refinances.

Our closings for 2012 in mortgage totaled 1704 loans for a total dollar value of over $357 million. Most impressive to me is the fact our closing mix was 45% purchase versus 55% refinances. We are constantly focused on the goal of creating a sustainable mortgage model in good or bad times. We do minimal advertising for mortgage business and never for refinancing activity, which provides -- which these refinancing opportunities provide little opportunity to obtain a customer relationship.

To further substantiate our approach, roughly 14% of all closings in our mortgage area in 2012 were held on our books. These primarily are for high-income professional borrowers, as well as for lower-income nonbank borrowers for which we offer a special mortgage program. In all cases, we stress banking relationships, but especially on these in-house portfolio products.

A few brief comments about retail banking. During the year, retail banking opened over 15,000 new checking accounts, which increased our checking account portfolio by 5%. Non-interest-bearing deposits grew from $301 million December 31, 2011 to $335 million at year-end 2012. Retail continues to play a key role in helping to provide a stable low-cost funding base for us through their efforts.

Our core funding balances are now at a healthy 70%, which has been a key for our stable NIM during 2012. Retail fee income has continued to see increases over the last three quarters of 2012 as renewed efforts have focused on better penetration levels on ancillary products as well, like 18% increase in credit cards for the year and a 10% increase in check card penetration.

I would like to give special recognition to our client contact center, our call center, if you would, which is part of our retail team, who have sold over 1800 credit cards and were responsible for over $3 million in consumer loan bookage for the year, a recent and new product offering for them. As these numbers reflect, our client contact center, staffed with roughly 30 associates, is evolving more and more to an outbound sales call center from merely a customer service and help center.

We see the client contact center as a huge delivery channel with huge potential. I feel it is safe to say that few banks our side can boast of such a facility, and especially one with these types of results. At its origination in 2008, the call center or client contact center functioned merely as a support function. It is now becoming an earnings contributor, another positive for our efficiency efforts.

In summary, as I have said at the start of my comments, we have had a good 2012 and a lot of areas of the Company growing and contributing to solid earnings, more improved results than I can possibly mention in this webcast. So for now, let me thank all of our people and for all of their good work.

Allow me to conclude my remarks by speaking to asset quality issues. Asset quality for the fourth quarter 2000 (sic -- 2012) finished the year on further improved metrics. Nonaccrual loans ended 2012 at just slightly over $41 million, representing 1.38% of total assets and 2.02% of total loans. Of particular note, OREO levels ended the year at $6.1 million, the lowest level since mid-2010. OREO activity is still brisk, but it has clearly shifted to smaller, consumer-oriented credits versus the large A&D activity that marked the early stages of the economic downturn and our charge-off activity.

We anticipate that both nonaccrual and OREO activity will remain robust, but a continual improvement over the year. Significant improvements in asset quality metrics during 2013 will be more muted, as the few remaining large credits are more long-term workouts, and in the case of OREO, the remaining properties for sale are now predominantly raw land, lots and less attractive finished properties. In fact, of the $6.1 million in OREO, roughly 40% are single-family homes, and the remaining 60% are residential or commercial lots. These, of course, are harder to move.

Gross charge-offs taken for all of 2012 were approximately $11.1 million as compared to $20 million for all of 2011. We've budgeted a significant improvement in this charge-off level for 2013, and while loan balance coverage dropped from December 31, 2011 of 1.6% to 1.4% coverage, NPL coverage remained stable at 83% for the year, and NPA coverage actually increased to 71%, December 31, 2012 from December 31, 2011's 68.6%.

This concludes my comment at this time, and I will now ask Jeff Farrar, Executive Vice President and CFO with StellarOne, to provide some additional detail to our financial results.

Thank you, Ed, and good morning, everyone. Thank you for joining us. I have several topics I'd like to cover today, including revenue trends, expense management and our line of business results. Let's start with a look at revenue for the quarter.

Net revenues came in at $33.6 million, an improvement of $1.1 million, or 3.3%, over fourth quarter of last year. While net interest income decreased slightly, we had over 10% annualized growth in noninterest income for the quarter as compared to last year, representing 26.5% of gross revenues for the period. Of particular note is such increase was broad-based, meaning that mortgage, wealth management and insurance revenues, as well as fee income associated with retail banking and commercial banking, all contributing.

The net interest margin for the quarter came in at 3.75% compared to 3.77% for the third quarter and 3.79% for the same quarter last year. An 11 basis point decrease in loan yields associated with lower rates on new production drove the modest compression, with an eight basis point improvement in deposit costs mitigating much of the impact. We are still projecting some modest margin compression this coming year as benefits from deposit costs and funding mix continue to decline.

From a line of business perspective, mortgage banking related fees totaled $2.6 million for the fourth quarter of 2012, up $303,000 or 13% compared to $2.3 million for the third quarter of 2012, and essentially flat when compared to the same quarter in 2011. The sequential increase is primarily volume-driven, as loans sold in the fourth quarter of 2012 totaled $78.2 million, or up $5.2 million or 7.4% from the $70.8 million sold during the third quarter of 2012.

We have essentially replaced the lost revenue associated with the sale of our wholesale division last year. Losses associated with mortgage indemnifications continue to mitigate nicely, and were virtually nonexistent in the fourth quarter. These factors contributed to strong earnings contribution of $722,000 for the quarter and $1.7 million for the year.

Wealth management revenues from trust and brokerage fees for the fourth quarter of 2012 were $1.2 million, or down $43,000 or 3.3% sequential quarter, and up $188,000 or 17.8% when compared to the fourth quarter of 2011. The year-over-year increase is primarily due to higher brokerage fee realizations, while the sequential reduction is associated with a net contraction in underlying assets that was market valuation driven. Earnings contributions for the unit for the year amounted to $532,000, a 17.7% improvement over the prior year.

Our commercial bank segment earned $5.7 million for the fourth quarter, an increase of $1 million or 21.6% compared to the $4.7 million for the fourth quarter of 2011. The commercial lending team had a most successful quarter, with period-end commercial and industrial outstandings up $18.8 million or 10.2%, with much of this improvement emanating from our Virginia Beach office. For the year, this group had over 5% loan growth, which is a vast improvement over the past three years.

From a fee perspective, the commercial team had a most productive year with loan swaps, generating $326,000 in fees for the fourth quarter and $1.1 million in fees for the year. Such swaps had the additional benefit of converting approximately $73 million in loans outstanding from longer-term fixed-rate loans to floating-rate structures.

Let's now look at noninterest expense. We had some nice improvement in our efficiency ratio for the quarter, coming in at 68.25% as compared to fourth quarter last year on the strength of reduced overhead and some revenue growth. The majority of the noninterest expense decrease in fourth quarter of 2012 as compared to the same quarter the prior year relates to $368,000 in decreases associated with compensation and benefits. This decrease was caused by a lower salary and benefit expense of approximately $489,000, which was offset somewhat by a $104,000 increase in mortgage commissions and production incentives.

During 2012, FTEs were reduced by 52 to end the year at 759 FTE. This includes both FTEs eliminated during phase one of our cost initiative and purposeful reductions managed through attrition and branch closings.

We do have a number of initiatives either in process or planned that we expect to yield some efficiency improvement in 2013 that are related to our phase two and phase three cost initiatives. As a reminder, phase three was an assessment of our real estate holdings and space utilization. We now have received the report from our real estate advisor group and are beginning to build strategies around these recommendations. While this is a longer-term process, we see some significant opportunity to reduce costs and improve efficiency from this space of our efficiency initiative.

Some immediate improvements that are both internally generated and as a result of phase two are expected in areas such as telecommunication costs, operating costs associated with some of our support areas and professional fees. We do not see a singular FTE reduction event as we experienced this past year, but we will see isolated FTE reductions over time as we implement process improvement strategies.

On the revenue side, we would expect to see some improvement in interchange and NSF fees, financial advisory fees and fees from treasury management services. We do anticipate there will be some nonrecurring expenses on the horizon associated with our CEO succession efforts, branch acquisitions and openings that will limit the benefit in the short term. Overall, we anticipate FTE levels could trend up a little bit in 2013 based strictly on revenue initiatives.

I will now 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. Ben?

(Operator Instructions) Catherine Mealor, KBW.

Good morning, everyone. In December, you all recently announced a share buyback, which was great to see, given your capital position. Can you walk us through your capital deployment priorities between dividends, buybacks and M&A, and just how you see these playing out throughout 2013? Thanks.

Catherine, what I would say is that certainly we see all three as being components of our strategy for 2013. We obviously, from an evaluation standpoint, still see some attractiveness in a share repurchase plan. We are ramping up for that and anticipate having some activity here in the first quarter associated with that.

We continue to want to drive our dividend growth, still see a target 40% payout ratio that is being achievable and something that we would want to move toward. So I would anticipate you will continue to see some emphasis on that as we move through the course of the year.

And then from an M&A standpoint, we certainly understand the need to leverage our balance sheet, and know that M&A is probably going to be the biggest lever we can pull to make that happen. So we continue to have active discussions along that realm, and obviously, want to protect our tangible book value, but at the same time, understand that we've got some capital to leverage.

That's very helpful. Thanks, Jeff. And maybe as one follow-up, can you talk a little bit or maybe give us a little bit more color around the pipeline for loans going into the beginning of the year? You had a really nice pickup in growth in the back half of the year. How confident are you that we can continue to see that level of growth as we move into 2013?

In general, I can't give you a dollar on the pipeline, but we will go into the new year with a decent pipeline, and we feel pretty confident we will be able to build on where we ended the year, as I said.

So we've done a lot of things to make that possible, with renewed focus, especially in some new areas we are going to look at as far as niche lending areas, the talent we've brought on and I think some alignment through our credit administration partners and the relationship managers relative to the whole loan approval process and all that.

So I'm pretty optimistic, even though it will be a lot of headwinds to deal with; our people are out really working hard and making efforts to grow the portfolio. And we are beginning to see those benefits, as was evident, and as I stated, especially in the last half of the year.

That's great. Thanks. Congrats on the quarter.

William Wallace, Raymond James.

Jeff, maybe I will go to your comments on the efficiency initiative that you spoke to in your prepared remarks at the end there. You gave several different kinds of line items for phase two. And I'm wondering if you could maybe give some idea of timing as when he might start to see some of the benefits from telecom, call support and operations support costs, professional fees. And then also on the revenue side, you mentioned NSF, interchange -- I can't remember the third thing that you mentioned. But just maybe help us figure about how we might see these benefits flow into your financials.

What I would say to that, Wally, is that my comments were intended to imply that we feel there is some immediate lift to be incurred from each of these. So, for instance, on telecom, we've already executed contracts and kind of know what that lift is going to be, and that is most definitely immediate.

Relative to support areas, there are various components of that. We are seeing some FTE reduction just kind of through attrition and realignment of duties and responsibilities. Some of that occurred in the fourth quarter. We anticipate more in the first and second quarter. It will be -- and it will be lumpy in terms of how much we are getting. And it will also be directly tied to some of the process improvement initiatives, some of which are longer projects that will take three to five months to implement. And so in those cases, you would expect that lift to occur, if you will, in the second half of the year.

On the revenue side, we are already seeing some lift on interchange and NSF fees associated with some things we've put in place this past year. Just have implemented a new strategy around working with Visa that we think will provide us some nice lift on the interchange side going forward.

On the financial advisory side, we've introduced some minimum fee requirements that we anticipate some lift from. That is a little harder to quantify, because obviously anytime you have a minimum fee, you are going to have some smaller accounts drop off. But just based on our early assessments, we think there is some nice lift there that will certainly help the wealth management division from a profitability standpoint. And, let's see, that pretty much covers the gamut.

So obviously (multiple speakers) -- go ahead.

I was just going to say, Wally, the other thing I might just add here is that, in general, all of the lines of business heads and major managers, leaders in the Company, within their goals for the coming year, as it was last year, there is an efficiency component that we identify. So they are measured on trying to achieve some of the things that Jeff has talked about. It is not just a high-level effort here; it is driven down through the organization. So just wanted to add that bit of color.

Appreciate that. Go ahead.

I was going to say, there was one other item that I wanted to mention. On the treasury management side, we've asked someone to take a role of product enhancement specialist, and her sole mission in life is to kind of look at how we've got our products set up, both in terms of offerings, as well as structure, to maximize, if you will, what we think are some real fee opportunities in that particular realm. And so we're excited about that. We're excited about the focus and the opportunities we think it has from a fee generation standpoint.

So there is obviously a ton of moving parts. If you were to kind of look at it from 10,000 feet and bundle it all together, would you -- this is probably more anecdotal -- but do you think that -- would you expect that the benefits would be more kind of front half of the year loaded, or do you think it would -- really we'll just sort of see it gradually? It sounds like there is a lot of stuff we should see in the first quarter, but stuff in the second half as well.

I would say I think the more significant lift is going to be back-end, second half of the year. I think particularly around the fee side, it is just going to take us a while to get there. I think on some of the process improvement initiatives, as I mentioned earlier, they are three to five months in development. We are actively engaged, but it is just going to take us a while to get there.

And then of course, the associated resource allocation, you're not going to make adjustments on that until you have a process in place. So I would tell you that while we feel like we are going to have lift in the first half of the year, I think it is going to be more pronounced in the second half.

Okay, great. I appreciate the color there, and will look forward to hearing more color as the year progresses.

And then just really quick, switching gears here, on the loan growth side, it looks like on C&I, that was one of your bigger categories from a growth perspective. And kind of looking back at last year, I'm assuming there is some seasonality that is driving that, in part. I'm wondering if you are able to sort of separate what you saw that could be seasonal, tax preparations or whatever, versus new lines or increased utilization across the board.

I would categorize it more as just more focus on it, as opposed to seasonality or anything of that nature. We are really just stressing that. And some of the parties that we brought into the Company skill set is built more around C&I lending as opposed to real estate. So I think it is just more emphasis.

And the other part of that is the markets we are in now. You heard Jeff talk about the real benefit and growth was in the Virginia Beach market. That market, as we've said, Richmond, provides us that C&I opportunities in much more abundance than we've got in our legacy markets. So I think those are the real drivers of that C&I growth.

Are you able to quantify how much of the dollar growth was driven from new customers versus utilization?

I can't, off the top of my head.

Okay. All right. I will let somebody else come in for a question. Thanks, guys. I appreciate it.

(Operator Instructions) David West, Davenport & Company.

First, a clarification on the buyback. I know the (inaudible) authorization was announced kind of second half of December. I did see in the release some cancelled shares, though, for the quarter. Did you do any buyback activity in Q4?

We did not, Dave.

Did not. But you said you have initiated some in the current quarter.

Have not yet. Obviously, we will wait for our trading window to open, and we are still, I guess, putting the final touches on our broker relationship structure in order to move forward.

Very good. Turning to the recent announcement on your purchase of the branch here in Richmond, given that size, will that allow that branch to come in pretty much immediately at a breakeven level, or could it be profitable to you in the first year of operation?

Yes to both. Certainly, when we looked at the structure of the transaction, the $12 million in loans was important to us. That is a solid commercial book of business with a solid yield on it, and so we are looking for profitability out of the gate.

And we actually looked very much at those loans that we wanted to have to make sure that they were quality assets, and we feel good about all of that.

-- that color. Any update you could provide us on the CEO search at this point?

Only to tell you it is progressing, that we are on track with where we thought we would be in it. We are active. The succession committee is active. And so nothing to report at this time. But don't anticipate any change in originally stated, which my retirement will be this year, and that as soon as that is determined who the party is coming in, that will be announced. But everything is moving along.

Last, I guess, Jeff or both of you, obviously you, like most everybody, has experienced a margin pressure. Just curious, what dollar level of maturities are you facing in 2013 in the investment portfolio this year?

Well, I don't have the dollar amount for you. I will tell you that one of the transactions that took place this past quarter -- and you may have noted some gains on the sale of securities of a little over $400,000 -- we did an extension trade of about $50 million that pushed about $50 million out from the sale, a little over a one-year duration to four, 4.5 years' duration. We saw a pretty heavy cash ladder. We saw an opportunity to kind of push that out and kind of hold yields constant and obviously harvest a little bit of gain out of it as well.

So I kind of like the fact that we've reduced the amount of cash flow coming in on that bond portfolio over the next year. Certainly feel that given what we think we could do on the loan portfolio, that bond portfolio will serve us well in terms of just having a good, solid reinvestment into the loan portfolio.

Do you have, by chance, like a rough duration of the investment portfolio?

In aggregate?

Yes.

Yes, I would say about three years.

About three years, great. Thanks so much.

William Wallace, Raymond James.

Just a quick maintenance question. In your CRE loan breakout, owner-occupied versus non-owner occupied, did you guys reclassify how you categorize loans in those two? It looks like there is a flip-flop in the balances.

I can only tell you that the breakout has pretty much been the same. I mean, it is running somewhere around 45% -- in approximate round numbers, 45% owner-occupied, 55% non-owner-occupied, the last I looked at. And I think that is pretty close.

What I would tell you is I think there was some scrubbing that took place during the quarter from our credit risk administration folks, and that there was some movement, based on just, again, scrubbing the portfolio and making sure that we had them in the right bucket. So there was, in fact, some cleanup that occurred during the quarter.

Okay, all right. Great. Thanks, guys.

I am showing no further questions in queue, and I'd like to turn the conference 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. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of the day.