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Executives

Bill Long - CEO

Edwin Laws- CFO

Steve Robinson - COO

Joe Towell - CCO

Julie Mason - Controller

Analysts

Carter Bundy - Stifel Nicolaus

Yadkin Valley Financial Corp. (YAVY) Q4 2008 Earnings Call February 13, 2009 11:00 AM ET

Operator

Good day and welcome to the Yadkin Valley Financial Corporation's fourth quarter earnings result conference call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to President and Chief Executive Officer, Mr. William A. Long. Please go ahead, sir.

Bill Long

Thank you very much, Nancy. This is Bill Long. I have got with me today who will be speaking Edwin Laws, our Chief Financial Officer and then to the question-and-answer session, Joe Towell will join us our Chief Credit Officer, Steve Robinson, our Chief Operating Officer, and Julie Mason, our Controller is also with us.

I do want to welcome and thank all of you for joining us today. We certainly appreciate your continued interest in Yadkin Valley Financial. During the first quarter of 2008 and 2009, we have certainly seen an economic environment becoming more and more difficult. Nonetheless, we believe that Yadkin Valley will be able to meet these challenges.

While our fourth quarter non-performing assets increased slightly over the third quarter of last year from 0.83% to 1.09%, we are still performing significantly better than the peers in the industry as a whole, which recorded non-performing assets as a percentage of total assets above the 2% range on average at the end of fourth quarter 2008.

Based on the fourth quarter 2008 (inaudible), our average non-performing total assets ratio at our peer group increased just over 150 basis points between year-end ’07 and year-end ’08.

By comparison, our average non-performing assets increased just 88 basis points. We believe this speaks to our conservative underwriting standards as well as our ability to recognize and manage global credits.

Our reserves as a percentage of total loans remain in line with our peers which were above 1.75%. Moreover, approximately one-third of our company’s non-accrual loans continue to pay as agree. Loans started 30 to 89 days past due totaled 18.6 million at the end of the fourth quarter, and we’re closely monitoring these loans.

We feel confident that we can manage our problem assets as we move forward in 2009, having significantly improved our credit administration and review process during all of ’09.

We remain well capitalized from a regulatory standpoint with $36 million in new capital we added under the TARP program will allow us to selectively take advantage of the unique opportunities have risen during this unprecedented economic environment, deeply as we move into demographically attractive markets of Mecklenburg County and Union County. We believe that we have excess capital to grow our franchise as well as absorb any potential future losses.

Speaking of merger, we made substantial progress toward closing the integrated American Community during the fourth quarter. In addition to extensive training for the American Community employees, we have been well extensively continued to review their loan portfolio for potential losses. I believe the risk inherent with their loan portfolio is still manageable. We expect the merger to close soon after the special shareholders meeting.

I must say here we are very pleased with the attitudes of the employees at American Community Bank that will go a long way towards making this merger successful. We feel confident that this merger will go smoothly given our prudent track record of successfully integrating three financial institutions with total assets of $587 million since 2002 as well as Sidus Financial, our mortgage subsidiary.

We're still focused on profitable growth, even though credit quality remains our top priority at the current time. Sidus rose to the record year in 2008 originations closing just over $1 billion in new mortgage loans and is entering 2009 with a loan pipeline at record levels. This is significant considering the weak position to current weak housing market and is expected to help improve our non-interest income even more.

The expansion into New England during the first quarter of '08 proved to be an important strategic move for us, it's almost [approval] of Sidus' 2008 originations were derived from this region. I think this is significant move for Sidus to start up that operation and become profitable in the first five months.

Looking forward to the future, we are cautiously optimistic about growth prospects in our markets. We believe we will successfully weather the difficult 2009. Excluding the American Community merger, we expect our loan growth to be modest compared to prior years. We anticipate that our net interest margin will remain relatively stable during the first quarter of '09.

Deposit pricing has become more rational in our markets and we anticipate that we will continue to add to our loan loss reserves as we anticipate the continued economic weakness. Our asset quality metrics are expected to deteriorate slightly. During the first half of '09, we believe that they will continue to perform above our peer and industry averages and remain at manageable levels.

And now, I'll turn it over to Edwin, who will discuss the financial results.

Edwin Laws

Thank you, Bill, and good morning, everyone. I do want to refer you to the press release that we distributed this morning shortly before the market opened at 9.20 and our comments will be derived from that.

Our fourth quarter results were impacted by $2.7 million increase in loan loss provision, in addition to 6% increase in our net interest income over the fourth quarter of 2007. Net income for the fourth quarter amounted to $217,000 or $0.02 per diluted share while net income for the full year 2008 amounted to $6.7 million or $0.59 per diluted share.

Net interest income decreased by 6% to $9.9 million over the fourth quarter of 2007, primarily due to 400 basis points decrease in the prime rate during the year 2008, which has more immediate effect on variable rate loans and deposit costs.

The net interest margin decreased by 101 basis points to 3.02% compared to the same period last year. Non-interest income increased 22% to $4.5 million over the fourth quarter of 2007, primarily driven by an increase in service charges in mortgage sale gains. We also recorded a write-down, $215,000 in real estate owned during the fourth quarter of 2007.

Compared to the third quarter of 2008, non-interest income increased 48%. This increase was primarily due to $972,000 pre-tax loss on investments in Freddie Mac preferred stock that occurred during the third quarter of 2008.

Excluding this third quarter charge non-interest income for the fourth quarter would have increased 12% over the third quarter. Service charges increased 2% sequentially, while gains in mortgage sales rose 20%.

Non-interest expense increased 26% to $10.1 million over the fourth quarter of 2007. This year-over-year increase was largely due to expenses associated with the Cardinal State Bank acquisition in March '08.

We saw some significant growth in our total assets, loans and deposits. This increase on a year-over-year basis was mostly due to acquisition of Cardinal State Bank. Nevertheless, we did see some organic growth with our assets increasing by 8%, loans by 14% and deposits by 2% excluding the Cardinal acquisition.

As Bill mentioned, we believe we can weather current economic conditions that will continue in 2009 with the net interest margin that should become stable in the first quarter of the year and improve after that. We do expect to increase our loan loss reserves, which will slightly impact our asset quality, but we expect to continue to outperform our peers.

I’ll now turn it back over to Bill.

Bill Long

Thank you very much, Edwin. This concludes our prepared remarks. Before we begin the questions, let me remind you that Joe Towell is with us by phone, Steve Robinson is with us in the room and Julie Mason is also in the room along with Edwin and I.

So if you know how I would like to talk and brag about this bank, so if you want to ask somebody specifically, ask him, or I’ll be answering. So we’ll open it up for questions, Nancy.

Question-and-Answer Session

Operator

Thank you, Mr. Long. (Operator Instructions) Our first question will come from [Scott Middleman] from AM Investment Partners.

Unidentified Analyst

Hi, good afternoon. Thanks for taking my question. I just had one question about the merger. There is a condition in the merger agreement about the index and the ratio regarding your stock price. I was just wondering when the 10-day average period compare your stock price to the index would begin? And if there has been any talk about that condition to the confirmation of the deal with American Community?

Bill Long

I’ll answer that, that's a case, [Scott]. This is Bill. There is a condition and there is a 20-day average [compare] and it's kind of a double trigger during the financial stock index to any drop or increase in our price as well as ceiling also. We've had no discussions about from them, it's their call. They've indicated no resistance to what our stock has done lately.

So I guess that'll answer your question in that way. It would be their call and we're going through the process now we've in our meeting in conversations with [Randy] a bit down, I think they want the merger to proceed.

Unidentified Analyst

All right, super. Thank you very much.

Bill Long

Thank you.

Operator

(Operator Instructions). We'll take our next question from Carter Bundy from Stifel Nicolaus.

Carter Bundy - Stifel Nicolaus

Good morning.

Bill Long

Hey, Carter, how are you doing?

Carter Bundy - Stifel Nicolaus

Doing all, right. How are you?

Bill Long

Good, thanks.

Carter Bundy - Stifel Nicolaus

Bill, did you say that these 30 to 89 balances were $18.6 million?

Bill Long

I can get back again, I'm little bit lost. Where are you?

Carter Bundy - Stifel Nicolaus

The past due data?

Bill Long

Yes, $18.6 million in total.

Carter Bundy - Stifel Nicolaus

Okay. And that’s just 30 to 89?

Bill Long

Yes.

Carter Bundy - Stifel Nicolaus

Okay. Secondly, do you believe that looking at the mortgage results in the quarter, do you believe that those kind of results are sustainable here going in to early 09?

Bill Long

I think the mortgage results are sustainable going into 09, we cover so much pipeline right now. And it breaks -- mortgage rates could be anticipated to drop a little bit. I think there is a lot more people waiting that for move. So I think there is a very good chance of that.

Carter Bundy - Stifel Nicolaus

Okay. And on the third, moving on to capital, we haven’t heard anything from ACBA about TARP proceeds, do you all anticipate them receiving TARP?

Bill Long

We don’t have the idea whether they are going to receive. They have applied to TARP. They haven’t heard back from that. It would be nice if they got it, but in our calculations, we did not anticipate any TARP.

Carter Bundy - Stifel Nicolaus

Okay. Given where the share price is now, and given the amount of assets you are putting on the balance sheet as the deal goes through, how do you all feel about capital levels right now?

Bill Long

Edwin.

Edwin Laws

Well, we feel like additional TARP that we got back in January which we had announced last month provides sufficient capital for the net assets required from American Community as well as provides for some growth opportunities of [bill amount] deposit loan base from there.

Carter Bundy - Stifel Nicolaus

Okay. So you feel like that can carry you through the next few quarters?

Edwin Laws

Yes.

Carter Bundy - Stifel Nicolaus

Okay. Thank you all very much.

Bill Long

Thank you, Carter.

Operator

Our next question will come from [Hillary Shane] from [ODS Capital].

Unidentified Analyst

Hi, how are you?

Bill Long

Good morning, [Hillary].

Unidentified Analyst

Good morning. It’s a follow-up to the questions I think [Scott] asked. When is the 20-day period start exactly, do you know when that started?

Edwin Laws

Prior to the meeting.

Bill Long

Thank you. It's a 20 days prior to the shareholders meeting.

Unidentified Analyst

That’s great. 20 days prior and is it based on the closing price or the evaluated price, do you remember?

Bill Long

No. It is closing.

Unidentified Analyst

It is based on the closing price, okay. And how is it done, today, what is the trigger percentage-wise versus its index?

Bill Long

Well, we still got a few days to go, long time.

Unidentified Analyst

Has the trigger been set now, is it close to the trigger?

Bill Long

We are below the trigger right now, if the first half stay down,

Unidentified Analyst

You are below the trigger.

Bill Long

We are below the…

Unidentified Analyst

The threshold.

Bill Long

We are below the [forward] which is just one of the triggers.

Unidentified Analyst

Okay. So, I think then American Commodity would have to go the board and ask them what they would want to do then if you are below the trigger that they have reserved, correct?

Bill Long

They would have to make that call.

Unidentified Analyst

Okay. All right. Thank you so much. I appreciate it.

Bill Long

Thank you, [Hillary].

Operator

(Operator Instructions). It appears there are no further questions at this time. Mr. Long, I would like to turn the conference back over to you for any additional or closing remarks.

Bill Long

Well, just in closing I would say that this bank is well prepared to face the challenges for '09 and beyond that. We are excited about American Community merger. We think it is a good merger for us. It’s a good match for us and will bring great rewards to this bank in the future.

We are really excited about some of the people that branch fills. That’s the most important sign about our merger to me is, can we all get along, and get over that he said this and we said that and those kind so things. So we are excited about the attitude. The attitude of the American Community people has been remarkable. We are very pleased with it. And Steve, do you got any closing comments about American Community merger.

Steve Robinson

Bill, not to know them to echo your comments. Our integration process started sometime ago and has gone very smoothly. We had multiple integration meetings with the staff and our two staffs are working very well together and come together quite nicely. We appreciate American Community's leadership. They are doing a great job of helping brining the two organizations together.

Bill Long

Joe Towell, are you still there?

Joe Towell

Yes. I am here.

Bill Long

Any comments?

Joe Towell

No. I think you have covered it. We are working hard to understand everything and the American Community portfolio and to get focused on any stressed assets or large dollar exposures that they have.

Bill Long

Julie, are you good?

Julie Mason

I am good.

Bill Long

Okay. Everyone, we really appreciate your being here and thank you for joining us and I appreciate your participation and continued interest in the Yadkin Valley Bank and we will sign off. Nancy, thank you.

Operator

You are very welcome, sir. This now concludes today's presentation. We appreciate your participation and have a great day.

Bill Long

Thank you.

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