Atlantic Union Bankshares Corp (AUB) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the StellarOne Corporation earnings call. At this time, all participants are in a listen-only mode. (operator instructions). As a reminder, this conference is being recorded. I would like to introduce our host for today, Ms. Jennifer Knighting, Senior Branch Manager. Ma'am, please go ahead.

Thank you, Karyn. Today we have with us O.R. Ed Barham, Junior, 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 first quarter of 2013. 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 the 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 my thanks, everyone, that has dialed in this morning for StellarOne's first-quarter earnings report. We will again follow our established format, and I will begin today's call with an overview of our Company's first-quarter results and related commentary, followed by Jeff Farrar, Executive Vice President and CFO for the Corporation, who will provide detailed financial comments to the quarter just ended.

I am pleased to say once again that StellarOne completed our first quarter 2013 with continuing improvement in earnings, revenue growth, loan production, and asset quality. The one notable shortfall for the first quarter was the lack of improvement on the efficiency ratio when compared to fourth quarter of 2012. Jeff will provide some commentary around this metric to provide a better sense of the core run rate. Specifically, StellarOne earned $5.9 million or $0.26 per diluted share for the first quarter of 2013, versus $5.5 million or $0.24 per diluted share for the same period a year ago 2012. Sequentially, we were one penny below fourth-quarter 2012.

The end of first quarter, which is usually a tough quarter for most banks -- I'm still very encouraged by our start to the year. The primary differences to the earnings contributors for the first quarter 2013 versus the prior quarter 2012 are to be found in the pullback in mortgage revenues and retail banking fees. Net interest income remained flat. Also, heavier than normal one-time expenses were experienced in the first quarter. More detail will be provided in a moment. Despite a slight earnings drop on a sequential comparison, my outlook for the future earnings momentum at this time remains bullish. When compared to the first quarter of 2012, we posted positive revenue growth with first-quarter 2013 posting net revenue tax equivalent unadjusted of $31.6 million, which was 2.5% higher than first-quarter 2012.

While an improving economy has certainly helped our revenue, I see also momentum and growth being directly tied to our decisions over the last two to three years to reallocate resources, a phrase you have heard me use often before. We've reallocated resources away from less efficient and less productive markets, processes, and human resources. Some of the contributors from our reallocation efforts have been muted -- have muted our efficiency gains due to the related cost of -- to implement them. But I am certain we will continue to see further revenue lift and overall efficiency gains as cost savings become more firmly embedded and revenue continues to move upwards. Most encouraging in our first-quarter results is the fact for four straight months now, loan growth has turned solidly positive from fourth-quarter in 2012 to March 31, 2013. Ending loan balances were up $61 million, a 3% rate of growth.

Looking forward, if current pipelines continue to stay strong, certainly an unpredictable thing, we could see, though, some accelerating loan growth later in the year. Loan pipelines are currently at the highest levels seen in recent years. I attribute that to better sales training efforts, new markets with new opportunities, and the addition of new lending talent. On a sequential basis, specifically, commercial loans posted a 2.5% increase over year-end 2012. This is, point-to-point, not an average. Ending the first quarter at $1.3 billion.

Retail lending was not posting -- retail lending, while not posting as large a percentage increase in the actual dollars as commercial or as a percentage, still posted positive loan growth, which reverses a trend that had been negative to weak for some time. A big part of the retail loan success is the fact that greater emphasis being placed on creating more loan activity in the branches, and we clearly are seeing results. As an aside, just to add a bit more color to these retail efforts, retail lending is giving a loan lift even from our client contact center as outbound sales efforts, including loan efforts, continue to grow and our earnings improved with these efforts. As such, the contact center added $1.7 million in loans during the first quarter to the retail loan volume. I fully expect as we gain more experience from these efforts, the contact center's contributions will become more and more meaningful. In total, retail ended the quarter with an outstanding portfolio of $601.8 million quarter in balance for a 1.5% increase over fourth-quarter 2012.

Let me take just a moment and give you an update on a couple of growth initiatives we have mentioned on earlier calls. I would classify these efforts under the heading of my early description of resource reallocation. First, our newest market, Virginia Beach, where we opened a single full-service office, one of our four branches of the future, otherwise referred to as universal branch. We opened that in October 2012 and a loan production office several months later. Excuse me, several months earlier. Virginia Beach is now solidly profitable on a pre-tax, pre-allocation basis for first-quarter 2013. Total loans outstanding for the Virginia Beach office now stand at approximately $54 million. We continue to see additional upside potential for our Company in this market, and we will be making additional plans to take advantage of those opportunities.

Our first branch of the future on Preston Avenue in Charlottesville opened April of last year. It has now turned a profit on a pre-tax, pre-allocation basis for the first three months of 2013 and is continuing to build on this momentum. Interestingly, loans stand at almost $12 million and deposits at roughly $5 million, half of which are non-deposit, non-interest-bearing.

Our universal branch office opened on Patterson Avenue in Richmond last September. Now it has roughly $5 million in loans and $10 million in total deposits. A little more than one third of these deposits are in non-interest-bearing accounts. Patterson is clearly on track to reach profitability in the very near term as well.

I've chosen to share these initiatives because these new innovative branch efforts, perhaps the most visible of all our initiatives, are performing as we had planned and will be solid contributors to our future earnings momentum. The old assumptions that most traditional new-branch facilities need, at best, three years to begin to turn a profit and roughly $30 million of deposits does not apply to our new branch concept. These successes are proof that the lower infrastructure costs to build these facilities -- roughly 1/3 to 1/2 the cost of a traditional branch, along with new technologies coupled with new cross training for the employees -- is yielding faster results and a better return on the investment.

Building on our belief in this universal banking model, we have brought online two additional new offices in the first three months of 2013. One, an acquired facility from a competitor that included $21 million in deposits and $11 million of loans; and it is currently profitable. And another renovated branch open for roughly three weeks now. Both of these offices are in Richmond. With these two latest additions, we now have three offices in Richmond plus our Westerre office, which houses our commercial team, wealth management, and several other departments in the Company. We will continue to look for other appropriate locations in the Richmond market as we desire to further grow our presence there.

We anticipate as the year unfolds to continue to gain earnings momentum, not only through continued loan growth but also from improvement in fee income, as we have recently taken steps to move some of our normal everyday banking charges more towards industry standards, which we had not adjusted in some time. Changes like coin and currency charges and implementation of some new charges that had not been charged before, like non-customer check cashing fees and other overdraft and transfer fees. The aggregate potential for these additional fees are meaningful and will help offset some of the fee income decline we have experienced in other areas due to recent regulatory changes.

Mortgage and lending continues to benefit from the low rate environment with mortgage volumes still strong, up 3% from first quarter of 2012 but down 12.5% sequentially. We are keeping a watchful eye on mortgage activity in case we do see a developing slowdown. A blessing and a curse for us is that we -- while we have a meaningful mortgage line of business that is typically only represented 24% to 26% of our total non-interest income over the last year, this of course is in a strong mortgage market. We do continue to strive for purchase-money volume as opposed to revise, as we feel this provides a more sustainable model over the long run. For the quarter just ended, purchase money amounted to 43% of total loan closings for us. Our legacy markets of Roanoke and Christiansburg are our biggest mortgage producers, with a steady mortgage volume also coming from Staten and Fredericksburg. In an attempt to increase long-term revenue and profitability in the mortgage line of business, we will continue to put more resources to work in Richmond and the Virginia Beach markets, our two newest markets, and this will be done through internal hiring as opposed to any acquisition plans. By this deliberate approach, we can better manage the inevitable ups and downs that occur in this line of business.

On the wealth management front, while still a modest contributor to our overall earnings, wealth management continues to grow steady -- steadily in overall level of assets, but more importantly providing a better level of service and product offerings such as new offering of our private banking service, which includes among other things some loan offerings via our in-house mortgage product and an investment line of credit secured by the client's managed account. Wealth management did post an 8.8% sequential increase of new sharing brokerage fees, but we believe the real potential for growth in this line of business needs to come from some acquisitive growth to leverage our current infrastructure. We are evaluating such opportunities on an ongoing basis.

I have only a few brief comments about asset quality, and I must admit I have long waited to say that. In the broadest measure of asset quality, our past dues across the board were the lowest in years. Nonperforming loans as a percentage of total assets stood at 1.26% and 1.76% of loans and foreclosed assets. While our allowance continued to contract 1.3% of total loans, the coverage ratio of nonperforming loans was strong at 92.3% and 76.7% of nonperforming assets. Further improvement is, of course, reflected in our actual first-quarter loan provisioning, dropping to $700,000, while charge-offs continue to remain elevated at an annualized charge-off rate of 0.28% of average loans outstanding.

OREO grew slightly, the most recent quarter -- during the most recent quarter to $6.4 million, but we feel good about the reduction activities in this area for the coming year.

In closing, let me express management's commitment also to continue to look for ways to increase shareholder value and to look for opportunities to better manage our current capital levels. One obvious example of that is the announced 25% dividend increase. We have also been active during the first quarter in repurchasing shares. To date, 372,000 shares have been repurchased. Having shared this repurchased number, one should not assume this is a predictable future repurchase rate, as circumstances will dictate how active we are in this repurchase effort as we move forward. I will now turn the presentation over to Jeff.

Thank you, Ed, and good morning, everyone. Thank you for joining us. I have the usual areas of focus today. Namely, some color around earnings, revenue, margin performance, and expense management. Overall, pretty pleased for the quarter from a financial perspective. The first quarter is always kind of a challenging one for us due to seasonal factors and less days in the period when compared to the previous quarter. But even so, we think we had a reasonably strong result which includes some revenue growth over last year and solid expense control when compared to the previous quarter and prior year.

Pre-tax, pre-provision earnings were $9.6 million, up $376,000 or 4.1% over the $9.2 million recognized for the first quarter of last year, representing a return on average assets of approximately 1.3%. Shifting to net revenues -- our net revenues came in at $31.6 million, an improvement of $774,000 or 2.5% over first quarter last year. You will note that this comparison reflects the reclassification adjustment made this quarter for each period presented. We made a change in presentation that moves certain previously disclosed operating expenses like mortgage and brokerage commissions, DDA charge-offs, debit card interchange expense, and insurance-related management fees to the associated revenue line to reflect the net revenue approach. We believe this better reflects relative contribution and is more consistent with industry practices. The reclassification amounted to $1.2 million for the first quarter. It also resulted in an improved efficiency ratio, representing about 100 basis points of improved efficiency for each of the periods presented. We will have more on this later.

Non-interest income was up $532,000 or 7.7% growth for the quarter as compared to same quarter last year, with improved results around losses associated with mortgage indemnifications and other real estate items. Net interest income increased only slightly, up $275,000 to $24.9 million on the strength of growth in average earning assets, which offset margin compression. Non-interest revenues were down only $127,000 or 1.7% compared to fourth quarter last year on seasonal contraction in retail banking fees, coupled with a decrease in mortgage revenues, while net interest income was stable at $24.9 million.

The net interest margin for the quarter came in at 3.78%, compared to 3.75% for the fourth quarter of last year and 3.85% for the first quarter of last year. The yield on assets was slightly stronger this quarter due to a higher loan fee amortization associated with certain loan payoffs and a three-basis-point improvement in funding costs contributed to the margin improvement. Loan yields still contracted by basis points and a three-basis-point improvement in the funding costs -- we are still projecting some modest margin compression in the remainder of the year, as benefits from deposit costs and funding mix continue to decline.

From a line of business perspective, mortgage banking fees totaled $1.8 million for the first quarter 2013, down $316,000 or 12.5% compared to the 21 -- or the $2.1 million for the fourth quarter of last year, and essentially flat when compared to prior year. The sequential decrease was primarily margin driven, whereas the larger percentage of secondary corresponding paper sold represented refinance activity. Volumes were actually fairly stable with total loans sold in the first quarter of $76.8 million, down $1.4 million or 1.8% from the fourth quarter of 2012. Close volume including construction and in-house production was strong for the quarter, with $98.4 million closed year-to-date representing the 32.6% increase from first-quarter 2012. Earnings contribution for this segment amounted to $482,000 for the quarter. Wealth management revenues from trust and brokerage fees for the first quarter of 2013 were $1.2 million or $99,000 or 8% on a sequential quarter basis, and flat when compared to the same quarter of 2012. A very solid quarter for asset growth with over $105 million in new assets under management. Wealth management earnings increased sequentially on improved margins and sales volumes in the production in the brokerage division.

Our commercial bank segment earned $5.4 million for the first quarter, a decrease of $306,000 or 5.4% compared to the $5.7 million for the fourth quarter of 2012, and essentially flat when compared to the same quarter last year. Earnings were impacted by increased compensation incentive costs paid out to our commercial lending group. In spite of some non-recurring and higher than normal expenses associated with our incentive plans, expenses were up only $370,000 or 1.6% compared to the same quarter last year. Excluding about $316,000 in non-recurring expenses and adjusting incentive costs $215,000 to normalize, operating expenses would've actually been down $161,000 compared to last year. Comparisons would be very similar on a sequential quarter basis. Year-over-year comparisons are even more compelling when you factor in the fact that operating costs associated with the four new branches amounted to $511,000 during the first quarter. Non-recurring expenses were primarily associated with elevated professional fee costs for the quarter. Such costs were centered around strategic initiatives, including succession management, evaluation and implementation of some strategic opportunities, and vendor contract negotiations. We do expect such costs to decrease in the second quarter.

The efficiency ratio came in at 69.19% for the first quarter, compared to 66.95% for the fourth quarter of 2012 and 68.78% for the first quarter of 2012. These results reflect the reclassification adjustment discussed in my earlier remarks, sequential quarter increase in the efficiency ratio reflects lower non-interest income revenues associated with seasonality, and a shorter quarter coupled with higher operating costs associated with the incentives and non-recurring costs. Adjusting to normalize for these items, we estimate a core run rate of approximately 67% for the first quarter, which does not attempt to account for the normal seasonal decrease in revenue associated with that quarter. The added incentive of cost also drove the year-over-year increase, which was partially offset by slightly higher noninterest revenues for the period.

We continue to focus on a number of initiatives that we are confident will drive some efficiency improvement in 2013. Recall, we initiated a three-phase efficiency improvement plan in 2012. Phase 1 was completed in 2012 and we are actively working on Phase 2 and 3 of this initiative. We have implemented strategies that will realize approximately 70% of the $6.9 million of revenue and expense opportunity identified in Phase 2 over the next 12 to 18 months. Phase 3, representing an assessment of our real estate holdings and space utilization, has approximately 6 active strategies in works around a space optimization, lease renegotiations, and consolidation, with more significant projects in the planning stages.

We expect some modest revenue pickup and cost reduction to work into our results during the second half of this year, with the most significant financial benefits to be realized beginning in 2014. Lastly, while this isn't an efficiency initiative, our focus is equally allocated between driving revenue growth and expense control. Our long-term goal here is to transform the business model to become more efficient and effective at how we do business and how we serve the customer.

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 the operator to open the call for your questions. Karyn?

(operator instructions). Stephen Scouten, KBW.

A question on the loan growth. I know, first, very impressive this quarter. I'm getting about almost 10% ex the acquired loans from Richmond. I know Ed, in your comments you mentioned that looking forward from the pipeline loan growth for the rest of the year looked strong and maybe even higher, if I heard you correctly. So can you give me any color as to what's driving that increase over kind of recent historical trends? And also, is a lot of that coming specifically from the Virginia Beach and Richmond markets?

What's driving that -- I kind of alluded to it -- I would repeat the same comments again. It's really -- our lenders went to a good sales training effort last year for the majority of the year. We're in better markets than we were if you would more established now a year later than we were last year, and just see more opportunity as we become more established, especially in the Richmond market. I think we were getting a lot of looks at a lot of things. People know we're there now, and the same is beginning to be true in Hampton Roads, Virginia Beach area. So that's what I really would attribute it to. We are digging hard. We've put some nice incentives in place and those that are incented by such things are reacting appropriately.

Now, the type of loans, I will tell you -- as I said, really pleased about retail because that's been something that we've been a little bit lackluster on. But I would say if you looked at dollars, just aggregate dollars, of what's driving things, it's still commercial real estate, by and large, but certainly better properties than we've looked at before. A lot better under writings being practiced. We feel good about what's on the books.

Yes, we did have the purchase of about $11 million in the branch that we acquired, so that helped us out a bit for the first quarter.

Right. And appreciate that color. And then looking at the net interest margin, I know you gave some good details in the press release -- and specifically on the loan yields and the loan fee amortization costs, you guys mentioned it kind of gave that a little bit of a bump. Can you tell me what the effect, if you know it, in basis points was of those fees, and kind of what degree of compression you would expect to move forward from here?

It represented about four basis points to the loan yields. So we had four basis points more of compression if you normalize the loan fee amortization. So, I think that's pretty consistent with what the expectation would be as we move through the next couple of quarters.

Okay, super. Well, I appreciate it, guys.

Casey Orr, Sandler O'Neill.

First, on capital -- with the buyback activity we saw this quarter, going forward could we see that ramp-up? And then, what are your just general thoughts on capital deployment at this point?

You know, predictably, it's hard to say what we may see in terms of activity, because we do have limits we've established internally on where we will stop buying, and we are limited in when we can come into the market -- next to the market. So it's really hard to say. It's our desire to continue to do as much as we possibly can. But it's hard to predict at this point. You know, capital deployment for us -- obviously we'd love to find an opportunity. That's the best deployment of capital we could have. We continue to look in that regard and have looked, and just haven't found what we favor at this time.

Great. And then, I guess other than the branch you just opened this month, do you have any other branches you are planning to open as of right now?

It's not very far down the planning stage, but we are having discussions about some other areas that we are looking at. But I wouldn't say it would be anything we would probably be able to talk about the next couple of quarters anyway.

Great. That's helpful. And my other questions were answered. Thanks for letting me come on.

(operator instructions). William Wallace, Raymond James.

One quick follow-up on the accelerated loan fee amortization. You said just that that was an increase loan yields by four basis points, or were you referring to NIM.

Well the NIM -- actually the NIM would've been down a basis point sequential.

Okay, so it was four basis points for both then?

Yes.

Okay. Okay, and then in your prepared remarks, you referenced the Phase 2 and Phase 3 -- the efficiency plan, and you said, I believe, that you've implemented initiatives targeting 70% of the $6.9 million.

And so, is -- and then you referred to some benefits in the second half of 2013 and then more in 2014, but I felt that was really in reference to Phase 3. So, for the 70% that you've already begun to target in Phase 2, how do you think you might be able to capture some of those efficiencies, timing wise?

Well, some of those initiatives are fee driven, and those fee changes -- I think Ed alluded to some of them -- began in the second quarter. And so, we'll have a pretty good run rate on those. And some of the cost-saving initiatives have also been in place for the better part of this quarter. We'll get pretty full lift from those through the course of the year. But then we have some that, frankly, just have a longer project line that will take us the better part of this year to get in place, and we really want to see meaningful lift from those initiatives until next year. So not really in a position to give you guidance on how much of that 70% hits this year versus next year, but certainly feel good that we've got a number of things working right now where you'll see some benefit starting to show itself here in the second quarter.

One point I might add a little color to -- we've got -- most of those initiatives are under way right now. As Jeff said, some of them just have a longer runways to them, and they are under way now, but you won't see the benefit out of them in some cases until probably even early part of next year in some cases, the longer-term ones. But they're all under way and we're all pressing on them right now to get there.

Okay great. And then I assume that it's your -- as far as Phase 3, you have begun some strategies but you haven't yet identified a potential number, as far as what the savings might be for that phase?

We have a pretty good sense of certain parts of what the number might be. I mean, when we look at, for instance, just our vacancy rate -- and we kind of build in what the cost of that vacancy is all in -- there's about $1.6 million of potential lift there for us. That's a quantifiable number. That is based on some historical data. So, it may actually be a little bit higher than that if we were to use the most recent 12-month period. But there are others that, frankly, are larger projects that are going to require more analysis that we have not quantified. We know there's a big number out there. But we haven't gotten to a point where we can actually tell you what that feels like in terms of financial benefit.

So, there's going to be some gains and losses associated with sale of the properties that will be here and there, just depending upon on what our success is relative to liquidation. The other thing I think I would mention is that we have executed a couple of leases that, in the second half of the year, we began to see the benefit of. There's about $120,000 in annual leasing comps on books that we haven't initiated yet that will come in the second half of the year. So I mean, those are -- I guess that's some color, Wally, but there are a lot of parts to this, and I think the bigger nuggets represent some consolidations of things that are -- frankly, are just kind of going to take some time to figure out and quantify.

Okay, fair enough. And then lastly, if you would care to give any update on the CEO?

Progress is still underway. Nothing to report. So efforts are still underway. Don't have anything else to really add at this point.

Okay. Fair enough. That's all I have, guys. I appreciate it.

David Peppard, Janney Montgomery Scott.

I was just wondering if you could take a moment to discuss the impact of the sequester in your markets. And at which point of your income statement balance sheet do you think will be affected in the later part of the year if there is no movement on it? Thank you.

You know, just in general, I would say I don't think we're going to fill feel much of it. You know, the biggest exposure we have would probably be in the Virginia Beach Hampton Roads markets. And we only have one office there which, you know, quite honestly you heard me allude to the fact that we are seeing good growth there and good opportunity. And so, I can't say it's having an impact on us all. We're obviously not in the Northern Virginia markets where I think it could exist. But, so far, I think it's a nonevent for us.

Okay thank you.

Thank you. And I have no further questions at this time.

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

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.