Atlantic Union Bankshares Corp (AUB) 2015 Q1 法說會逐字稿

Good morning. My name is LeAnn, and I will be your conference operator today. At this time, I would like to welcome everyone to the Union Bankshares first-quarter earnings call.

(Operator Instructions)

Thank you. Bill Cimino, you may begin your conference.

Thanks, LeAnn, and good morning, everyone. I have Union President and CEO Billy Beale; and Executive Vice President and CFO Rob Gorman with me today. Also joining us for the question and answer period are Tony Peay, EVP and Chief Banking Officer; Elizabeth Bentley, EVP and Chief Retail Officer; Dave Bilko, EVP and Chief Risk Officer; and Jeff Farrar, EVP of Wealth Management, Insurance and Mortgage.

Please note that today's earnings release is available to download on our investors website, investors.bankatunion.com. Before I turn the call over to Billy, I would like to remind everyone that we will make forward-looking statements on today's call, which are subject to risks and uncertainties. A full discussion of the Company's risk factors are included in our SEC filings. At the end of the call, we will take questions from the research analyst community. And now, I'll turn the call over to Billy Beale.

Good morning, everyone, and thank you, Bill. Welcome to what is now our -- I think this is the fifth quarterly call that we've done. And I think we've learned something from each one of them, and I'm sure we'll learn something from this one.

Our first quarter marked a solid steady progress for the Company on our path to delivering top-tier financial performance for our shareholders. Our total loans for the quarter grew 3.1%, annualized. And our average loans increased 10.8% from the fourth quarter. Our commercial lending team continued to build on the momentum from the fourth quarter, as the commercial loan portfolio grew 7.5% on an annualized basis.

While we are seeing that our higher lending limit is a differentiator between Union and other community banks, and represents a unique market opportunity for us compared to other Virginia banks, our focus is to be dominant in our sweet spot of companies with $5 million to $75 million in revenue. We saw a net loan runoff in our consumer loan book during the quarter, primarily as a result of refinancing related to declines in mortgage portfolio balances. Seasonality in weather also contributed to the consumer loan decline during the quarter.

Union Mortgage Company made strides towards returning to profitability during the quarter. They nearly broke even during the seasonally low origination period, and remain on pace to break even and return to profitability over the next several quarters. In April, Sandy Peele, formerly with SunTrust, joined us as a Senior Vice President and Retail Mortgage Loan Production Manager. Sandy has a strong track record of building and developing sales teams, and will be a key player in building out our originator teams. We believe we're now in a position to move more aggressively to add loan officers and to drive revenue growth.

Asset quality continues to improve. We saw further reductions in OREO balances through additional sales of foreclosed properties and merger-related bank premises. And we made progress in moving several properties from the OREO portfolio, and expect further improvement, as we currently have approximately $5 million of OREO under contract that should close over the next two quarters.

As part of our efforts to streamline the Company and make it more efficient, we have completed an in-depth analysis of the profitability and market opportunity of each branch across our footprint, and have decided to close seven branches, or 5% of our network, by the end of August. And Rob will have more details on the financial impact during his piece of this presentation.

You may have noted that outside of the previously disclosed purchases in January, we did not repurchase stock during the quarter. To date, we have purchased $55 million. We actually have repurchased $55 million, and have $10 million remaining under current Board repurchase authorization. Management and the Board of Directors continue to evaluate all capital management options, including dividend payout levels, share repurchases and acquisitions, as deployment of our capital for the enhancement of long-term shareholder value remains one of our highest priorities.

So to summarize, we had solid performance in the quarter. The commercial lending momentum continued from the fourth quarter. Our mortgage business unit is on track to profitability. And in our efforts to become more efficient, we'll be closing seven branches by the end of August. The quarter was a good start to the year, and we're looking forward to build upon those results over the next three quarters of 2015. And with that, I'm going to turn it over to Rob Gorman.

Well, thank you, Billy, and good morning, everyone. Thanks for joining us today. I'm going to walk you through our financial results for the quarter. Please note, though, that all comparisons to prior periods are to operating earnings or operating ratios, which exclude after-tax expenses associated with the StellarOne acquisition that was incurred in 2014.

Earnings for the first quarter were $15.7 million or $0.35 per share, up from $15.5 million or $0.34 per share in the prior quarter. The community bank segments results were $16 million or $0.36 per share in the first quarter, while the mortgage segment reported a net loss of $267,000 or $0.01 per share in the quarter.

Return on tangible common equity increased to 9.67% from 9.46% in the prior quarter. ROA, or return on assets, was 86 basis points, up 1 basis point from the prior quarter. The Company's efficiency ratio increased to 68% from 64.7% in the fourth quarter, driven by seasonally high expense levels in the first quarter, as well as by OREO property sales related gains and expense impacts quarter over quarter.

Turning to the major components of the income statement, tax equivalent net income interest was $64.1 million for the quarter, down $1 million from the fourth quarter, driven by the impact of the lower day count of two days in the first quarter, and lower net accretion income. As expected, the current quarter's reported net interest margin declined by 6 basis points to 3.95%, compared to 4.01% in the prior quarter.

Accretion of purchase accounting adjustments for loans, CDs, and borrowings related to the StellarOne acquisition added 11 basis points to the net interest margin during the current quarter, down from 13 basis points impact in the fourth quarter, or lower by approximately $326,000 quarter to quarter. This decline was a result of lower levels of CD accretion during the quarter. For your reference, actual and remaining estimated net accretion impacts are reflected in the table included in our earnings release.

The coordinate interest margin, which does not include the impact of acquisition accounting accretion, was 3.84%, a decline of 4 basis points, and in line with our expectations for the quarter. The core margin decline was driven by lower earning asset yields of 6 basis points, partially offset by a 2-basis point decline in the cost of funds.

The core loan portfolio yield dropped 9 basis points to 4.53% in the quarter, while the average investment portfolio yield actually increased 8 basis points to 3.16%. As noted in our earnings release, we expect that the core net interest margin will continue to decline modestly over the next several quarters, as decreases in earning asset yields are projected to outpace the declines in earning interest-bearing liability rates.

The provision for loan losses was $1.8 million in the first quarter, a decline of $2.7 million from $4.5 million in the prior quarter. For the current quarter, net charge-offs were $3.2 million, or 24 basis points annualized, down approximately $1 million from the prior quarter. Of the $3.2 million in loans charged off this quarter, $2.9 million or 90% related to impaired loans we had specifically reserved for in prior periods. The decrease in provision for loan losses in the current quarter compared to the prior quarter was driven by the reduced levels of net charge-offs, the lower specific reserves required on impaired loans, and improving asset-quality metrics.

Non-interest income in the first quarter was $15.1 million, which is up slightly from the $14.9 million recorded in the prior quarter, primarily driven by increased mortgage loan revenues resulting from improved gain on sales margins for mortgage originations and unrealized gains on interest rate lock commitments. First-quarter non-interest expenses were $53.8 million, an increase of $2.1 million from the fourth quarter. The increase was driven by a $2.2 million increase in salaries and benefits expenses related to seasonal increases in payroll taxes, increased group insurance and higher incentive compensation costs.

In addition, OREO and credit related expenses increased $1.3 million, predominantly related to lower gains on sales of OREO in the current quarter and adjustments to OREO-carrying values related to properties currently under contract to be sold.

Non-interest expenses for the mortgage segment declined by 17% or $641,000 in the quarter to $3 million on a run rate basis for the quarter, and we're down $1.7 million or 35% over the same period in the prior year. These significant reductions were primarily related to management's continued efforts to streamline the mortgage segment's processes and cost structure, and to align with mortgage origination levels it has been experiencing over the last several quarters.

Regarding the seven branch closings in August that Billy mentioned, we expect to realize annual expense savings of $1.9 million on a run rate basis beginning in the fourth quarter. In addition, it should be noted, we expect to incur approximately $900,000 in non-recurring one-time costs that would be recorded in the second quarter related to the closings.

Now turning to the balance sheet, total assets stood at $7.4 billion at March 31, an increase of $30 million from December 31, driven by loan growth during the quarter. Loans net of unearned income were $5.4 billion at quarter-end, up $42 million or 3.1% annualized. While average loans increased by $141 million or 10.8% annualized from the fourth quarter. As Billy noted, first-quarter commercial loan balances increased by 7.5% on an annualized basis, while consumer loans, including mortgages, experienced runoff of approximately 8%. Looking ahead, we are projecting mid-single-digit loan growth for the full-year 2015.

At the end of the first quarter, total deposits were $5.7 billion, an increase of $31.5 million or 2.2% annualized from the prior quarter, as growth in low-cost deposit balances were partially offset by continued runoff in higher-cost CDs. Asset quality continued to improve during the quarter. Non-performing assets totaling $42.8 million were comprised of $17.4 million in non-accruing loans and $25.4 million in OREO balances as of the end of the quarter. Non-performing assets as a percentage of total outstanding loans declined 16 basis points from the prior year, and 10 basis points from the prior quarter, to 79 basis points.

Non-accrual loan balances declined by $2 million or 10% in the quarter. OREO balances declined by $2.7 million, also 10%, as a result of property sales closed during the quarter. As Billy mentioned, we also have $5 million in OREO properties currently under contract that are scheduled to close over the next two quarters.

The allowance for loan losses declined from $1.4 million from December 31 to $31 million at March 31, primarily driven by lower levels of specific reserves required on impaired loans. The allowance is a percentage of the total loan portfolio. Adjusted for purchase accounting was 1.03% at March 31. The non-accrual loan coverage ratio improved to 178% at March 31, up from 168% at the end of the fourth quarter.

Our tangible common equity to tangible assets ratio at quarter-end is 9.4%, up 13 basis points from December 31. Excess capital at year-end amounts to approximately $100 million, with excess being defined as balances above an 8% tangible common equity ratio.

As Billy noted, as part of our ongoing process, we continually evaluate capital deployment options, including dividend payout levels, share repurchases, and acquisitions. As noted, we have approximately $10 million remaining on our current share repurchase authorization as of the end of the quarter.

So in summary, Union's first quarter results demonstrated steady progress toward our growth objectives. Of note, commercial loans grew at a 7.5% annualized rate, as the strong loan production momentum generated in the prior quarter continued. The mortgage Company made great strides towards returning to profitability during the quarter. And we are closing 5% of our current branches by the end of August as part of our continuing efforts to become more efficient.

Going forward, we are steadfastly focused on leveraging the Union franchise to generate sustainable and profitable growth, and remain committed to delivering top-tier financial performance and building long-term value for our shareholders. With that, I'll turn it back over to Bill Cimino to open it up to questions from our analysts.

Thanks, Rob. And LeAnn, we're ready for our first question, please.

(Operator Instructions)

Our first question comes from the line of Catherine Mealor from KBW. Your line is open.

Good morning, guys.

Good morning, Catherine.

Rob, I just want to make sure I heard you right. You said that the branch closings should save you that $1.8 million in annual savings. Is that right?

It's about $1.9 million, starting in the fourth.

So we should see that full run rate in the fourth quarter this year?

No.

Well, there may be a -- it may not be quite the full year or full quarter's run rate in the fourth quarter. It's probably about two-thirds of that for the quarter rate.

Okay, great. And then how should we think about -- so a part of -- I'm thinking about the efficiency ratio, and you increased that to [68%] this quarter. Now you've got this savings from the branch closing that will help. And I know some of the increase this quarter was seasonal. But can you help us think about your path to this 60% efficiency ratio, and the timing on when you think you can get there? Is it more of a next-year event? And what's your -- do you have a near-term goal on the efficiency ratio after you have these cost savings coming through?

Yes, Catherine, this is Rob. I would say the path to that 60% efficiency ratio is probably towards the middle to the end of next year. Key things that have to happen there are continued improvement in loan growth over that period of time. We need to return the mortgage Company to profitability, not just breakeven or be close to breakeven. And the other important aspect of that is, we need to stabilize the net interest margin. We've got to stop seeing that compression quarter to quarter. We're still projecting about 4 basis points of compression on a quarterly basis into 2016, and probably the latter half of that maybe toward the end of that. Of course, that depends on what the interest rate environment looks like. But that's the current path we see today on where rates are going.

In terms of the expenses, as we mentioned, we have a number of seasonal upticks in the first quarter from payroll taxes and unemployment taxes that re-adjust in the first quarter. Incentives were up as well during the quarter. We also had increases in group insurance. And if you look at the fourth quarter, we also had material OREO gains of about $1.2 million. But as we go forward, we also had what we consider about $1.5 million to $1.6 million of what we consider non-recurring or one-time events. Some of that related to the OREO sales; expenses associated with the purchases that we'll close in the next couple of quarters; the $5 million, we mentioned, under contract. We had some costs associated with changing the bank's name that we incurred during the quarter. We had some true-ups on incentives for the prior year in the first quarter, as well as unemployment taxes will abate as we go forward.

So when you add all that up, it's probably about $1.5 million, $1.6 million of one-time, non-recurring-type expenses, which starts to get you down certainly well-below the rate that we saw in the fourth quarter. Hopefully, that helps give you a bit of a path towards it. But we're really dependent on the revenue side to get below that 60%.

Okay, that's helpful. Thank you.

We're ready for the next one.

Our next question comes from the line of Laurie Hunsicker from Compass Point. Your line is open.

Hi, good morning, gentlemen.

Good morning, Laurie.

Just a couple things going back to Catherine's question on the seven branches. Was the $1.9 million pre-tax annual savings or after-tax?

Yes, that's pre-tax savings, Laurie.

That's pre-tax, okay. And then your one-time cost of $900,000 -- is that pre-tax or after-tax?

That's pre-tax as well.

Pre-tax, okay, great. And then just a couple of other things. The OREO of $25.4 million that you ended March with -- how much of that was real estate investment/shuttered branches?

There's about $4 million of bank premises in that $25 million.

Okay. And then how much of your $5 million that's in your pipe, that's OREO under contract -- how much of that is the real estate investment/shutter branches versus your other OREO?

I think that's all other OREO.

Yes.

It's all other OREO.

Right.

It's all other, okay. And your shuttered branches -- what's the timing on cleaning that up? Is that still going to be this year, or do you think that's just a longer process?

Yes, we still expect this year, Laurie, by the end of the year, we should be able to move those properties.

Okay. And then the seven branches that you're closing -- will those also then come into OREO in the same accounting fashion that you've held these other branches and real estate/shutter branches? Or is this -- that was related to the (multiple speakers)

Six of the seven are in-store, Laurie.

They're leased facilities, so they wouldn't come into OREO. As Billy said, in six of the (multiple speakers)

So we've got one of the seven that will likely come into OREO if we can't sell it.

But it's relatively low-value OREO. It wouldn't make a difference in that balance.

Perfect. Okay, got it. And then just one last question. If you could just circle back on your capital management thought regarding the three-prong strategy. In other words, dividends, acquisitions and buybacks? And which you prefer, in which order? And then just give us a little color on your thinking of acquisitions now? Thanks.

Well, in terms of the capital deployment strategy, obviously organic growth is where we want to use that capital. And then we look to be opportunistic on the acquisitions front. You can't necessarily manage that, but we evaluate those as they come through. And depending on the opportunity with the acquisition, that may rise to the top, in terms of the order that we look at. It really depends on what's happening in the current time period.

And then repurchases and dividends -- we evaluate those based on what we think the returns will be, in terms of where our stock price is going, where we value that from an intrinsic value perspective. And then evaluate our payout ratios -- depending on where those other deployment activities may bring us, we evaluate that. But we're right now -- we've increased our dividend payout ratio for the last couple of years from 30% to 35%, to 35% to 40%, and now we're at 40% to 45%. So as we continue to build capital on an excess basis, we continue to re-evaluate the payout ratios as well. Billy, I don't know if you want to chat about or comment on the acquisition front?

Well, Laurie, I think we have shared that we looked at five opportunities last year. Three of those withdrew from the process because of price. Two of them ended up being announced, and we were not the winner. And I would say -- to use Rob's word -- we would be opportunistic if those opportunities presented themselves. But we do not want to be distracted from our internal goals of focusing on organic growth, and continue to look for places where we can be operationally efficient. We don't want to take our eye off that ball, and totally turn away and focus solely on acquisitions.

Got it. And then can you just remind us how you think about that $10 billion threshold, what would be the timing in theory, how ready you are to cross (multiple speakers) or not?

Yes. I would say we are not ready today to cross that. Organically, if we grow at mid-single-digit loan growth, we would be in the low [$9 billions] by year-end 2018. If we were to grow at a -- let's say, a higher rate, but not quite double-digits -- we could be right on the precipice of $10 billion by year-end 2018. We will ready by the time we get there. We're continuing to build out our enterprise risk management process and structure. We expect to have that completed by the end of this year. And we're continuing to work with the regulators who are being very proactive in guiding us toward their expectations of what life is like post $10 billion, and that. So we feel like we're being very methodical on our path there.

Okay. And so near-term, even with an acquisition, you would be inclined to stay below $10 billion. Is that correct?

I don't think we would be -- let's see. That would imply we'd have to do something north of $3 billion in an acquisition. And having just completed one of those a little over a year ago, I don't think we're yet ready to take on something of that size again.

Perfect, okay. And then one last question. Can you all help us in terms of guidance, with respect to loan-loss provision and OREO costs? Just those two line items, how you think about that for this next year? And I realize they're lumpy, but any guidance you could give there.

In terms of the loan-loss allowance, we're at 1.03%. I would expect that to be stable in that area, based on what we're seeing today from a credit-quality perspective. Charge-offs we expect to be in the 15 to 20 basis points for the full year. And depending on loan growth, the provision could be 20 basis points or so, maybe a little higher depending on the level of growth.

Okay. And then what the OREO line item, the OREO charges?

Yes, OREO costs should be coming down from what you're seeing in the first quarter -- and the last quarter, adjust for the gain that we recorded in the fourth quarter. So you can expect to see those coming down over the next several quarters.

Okay. So maybe like a $500,000 normalized run rate, give or take? I realize that's lumpy, but without the --

Yes, it could be lumpy. But as we normalize those numbers, that doesn't sound like it's too out of whack with what we're thinking.

Perfect. Thank you so much.

Thanks Laurie. LeAnn, we're ready for the next question, please.

Our next question comes from the line of William Wallace from Raymond James. Your line is open.

Good morning, gentleman.

Good morning Wally.

Just as a quick follow-up to the last question, on the reserves. So you expect to continue releasing reserves. Is there a level -- if we look at it on your reserves to your loan -- where you flatten out and start building? You know, if I look at it on a reserves to loans basis.

I wouldn't say that we're going to be continuing to release reserves. We're probably going to be stabilized in this one, where we are today, [1%] to [1.05%] allowance ratio to loans. And as new loans come on and asset quality remains good, I would expect it to remain in those levels. So provision will be driven by charge-offs and loan growth over that time.

Thanks for the clarity, Rob. I'm sorry, I thought I heard you say 25 basis points charge-offs, and 20 basis point provision. So [1%] to [1.05%].

No, it was more 15 to 20 basis points on the charge-off side.

Got you, sorry, okay. And then a little bit more on the expense. First question -- for that sub 60%, you mentioned obviously you need loan growth in mid-single-digits. Is that what you need?

Yes, mid-single-digits. Obviously higher is better. But the other part of that is, we also need to see the margin stabilize as well. We can get there with mid-single-digits, with a stable margin.

And then you said that you're still anticipating about 4 basis points of pressure a quarter into 2016. What type of interest rate environment does that assume?

It assumes a fairly flat curve. If you look at the forward curve, it basically implies that, where it's relatively low increases on the long-end and moderate increases on the short-end.

Okay. And then as we look at the cost saves that you're going to have from closing the branches, do you think that all of that will be realized? Or do you think that we might see some re-investment in the franchise that could offset some of those savings?

At this point -- I mean, there's always potential for re-investment. But at this point, we have not earmarked any of that for re-investment. So you should see it hit the bottom line or the expense line, and after-tax bottom line.

Okay, that's all I have. Everything else was answered. Thanks, guys.

Thanks.

And our next question comes from the line of Blair Brantley from BB&T Capital Markets. Your line is open.

Good morning, everyone.

Good morning, Blair.

Question on the branch closings. You mentioned six, I believe, were in-store branches. From a geographic perspective, is that spread across? Or is that more central Virginia?

Let's see. We have told our teammates, but we have not yet notified our customers.

Okay.

So just let me say it is across the footprint.

Okay, thanks. And then regarding M&A, obviously hearing that you're not quite ready to go over that $10 billion as a threshold. Has your parameters changed at all in what you guys are looking at in terms of size? And if you could tell us what those -- or remind us what those are, that would be very helpful.

I'd be glad to. I think for us to consider an acquisition today, the sweet spot would probably be somewhere between $750 million and $1.2 billion. With the preference being that it would be somewhere first within our footprint where we can maximize the cost saves. Second would be a place where we could achieve some sort of strategic expansion, if you will, to a market where we're underrepresented today in our franchise. So that would probably be the size that would be enough to create significant earnings per share accretion for our shareholders, and to help the franchise. That's sort of the sweet spot right now.

Okay. Would you be looking to go out-of-state, or is it still focused in-state, overall?

I think that for the next couple of years, as we look for that size acquisition, then something in-state would probably be preferable.

Okay. Thank you very much.

Our next question comes from the line of David West from Davenport & Company. Your line is open.

Good morning.

Good morning, David.

Just curious. You're in this unique size in legal lending limit, that you alluded to early. Where do you think you're seeing the tougher competition? Is it from smaller banks -- smaller community banks or the larger regional banks?

Dave, this is Tony Peay. I would tell you it's across the board. I think some of the smaller banks where they can compete on deal size, are doing so aggressively. Rate, structure, term -- every component of the lending decision, they're competitive. The larger banks are doing some of the same, probably a little bit more rational. But a lot of competition for every deal we look at, and quite frankly, for every one of our commercial bankers who's out there making loans. So it's a very competitive environment.

That's very helpful. Would you say on the regional side, that the terms and conditions you say are a little bit more rational? Is that fair?

Probably in general, yes. But I think on any individual deal, we've seen some things that were something less than smart.

Yes, okay. And then on in the press release, you detailed the changes within non-accruals. And it's great to see them move down, but you did have $4.4 million come into non-accrual. Was that multiple relationships or primarily centered in one of two credits?

The pause you're hearing is all of us looking at each other. (laughter) Wait a minute. I may have that. My sense is -- let me say, my recollection is, is that it was multiple relationships.

Okay, very good. And then lastly, given the preponderance of the branches you're closing are the in-store format, any implications we should read into that? Of course, you acquired a fair number of in-store locations with the first market deal. Are you finding that format a bit of a challenge, in terms of the economies and returns?

No, I would say that we did a very thorough analysis of this and, if you will, actually ranked our branches. We were focused on underperforming branches, and it just happened that some of them were in-store. We've got some in-stores that are performing very well, and so I don't think it speaks ill of the in-store model. It's just that it just happened that we had a few of them that we needed to -- we need to close.

And David, this is Elizabeth. The other thing I would add is that, as we've acquired over the times, over the last few years, we've ended up picking up traditional branches where we had in-stores. So that's another factor here, where we had that overlap. But no, I would not read anything into our commitment to the in-store model. We have many very successful in-stores branches.

Very good. Thank you so much.

Thanks, Dave.

And this concludes our Q&A session. I will now turn the call back over for closing remarks.

Thanks, LeAnn. And just as a reminder, this call will be available on replay at investors.bankatunion.com. Thank you.

And this concludes today's conference. You may now disconnect.