Yadkin Valley Financial Corporation. Q2 2008 Earnings Call Transcript

Aug.12.08 | About: Yadkin Financial (YDKN)

Yadkin Valley Financial Corporation (YAVY) Q2 2008 Earnings Call August 11, 2008 2:00 PM ET

Executives

William A. Long - President and Chief Executive Officer

Edwin Laws - Chief Financial Officer

Steve Robinson - Chief Operating Officer

Analysts

Carter Bundy - Stifel Nicolaus

Operator

Good day and welcome to the Yadkin Valley Financial Corporation Second Quarter Earnings Results Conference Call. Today’s conference is being recorded.

At this time I would like to turn the conference over to your President and CEO, Mr. William Long. Please go ahead sir.

William A. Long - President and Chief Executive Officer

Good afternoon everyone, my name is Bill Long, President and CEO of Yadkin Valley Bank and welcome you and thank you for joining us today. We appreciate your participation and your continued interest in the Yadkin Valley Financial.

With me on this call today is Edwin Laws, Yadkin Valley’s Chief Financial Officer and Steve Robinson is with us, our Chief Operating Officer who will participate during the question and answer session.

I will begin with the brief commentary on our business and our near term prospects and then Edwin will take you briefly through the financial results of the second quarter and then we will close with the question and answer session.

Please note that we are maybe making forward-looking statements of Yadkin Valley Financial and its subsidiaries and as always the company is subject to the risk and uncertainties described in its filings with Securities and Exchange Commission including it’s annual report on Form 10-K for the year ended December 2007 and quarterly reports on Form 10-Q for 2008 first quarter. You should read these factors as being applicable to all related forward-looking statements.

I’m pleased to say that our economic structure remains challenging for our industry, loan growth continues and asset quality remains healthy across our franchise. And Yadkin better remains well positioned to emerge from this downturn stronger than ever. As indicated in our press release, loans increased 31% year-over-year largely due to the Cardinal merger excluding Cardinal however, loans increased 15% year-over-year and 3% sequentially as demand for most types of warrants remained healthy, yet lower than in the past few years.

Cardinal’s loans increased 5% compared to the first quarter of 2008, its commercial loan demand more than offset the weaknesses in construction and residential loans in the Durham area. As we said, last quarter loan growth across our footprint has slowed since the end of 2007 and we expect growth for the remainder of the year to be similar to that of first half of 2008.

Well, economies across our markets have softened since the end of 2007 and certainly now declined nearly to the extent such areas as Florida and California and Michigan. Unemployment in the Durham markets has increased noticeably and housing activity has slowed but economies across these regions appear low. For example the most recent S&P case data reported that existing single family home prices and the metro solid data increased 1% between April and May of this year and they are just two-tenths of 1% on a year-over-year basis.

The June employment data shows that unemployment rate in Iredell County stands at about 5.8%, 5.1% in Durham County, 6.1% in Mecklenburg County, which of course includes a city of [Show], this compares to statewide on employment rate of 6% and national wide of 5.7%. Non-performing loans decreased slightly compared to the prior quarter representing 43 basis points of the loan sale for investment compared 48 points at the end of the last quarter and continue to be concentrated in residential construction and land development.

We continue to monitor our loan portfolio very closely and our loan committee introduced potential personal loans regularly. We strengthened our past due and risk rate affording process is allowing has to have better management control of other loan portfolio and we are in the process of adding infrastructure to our credit administration and review processes. This new infrastructure will not only allow us to better manage credit approval and processes that will also support our growth to the 2B in an appropriate level and assets

We continue to see a significant opportunity in Sidus, as customers have returned to the community buying further mortgages, in April Sidus entered six new England state and we believe this expansion represents a significant long term growth opportunity for us, we should continue to serve as the strong source of non interest income. Even during the current difficult mortgage environment Sidus reported record volume in profitability even accounting for the 234,000 start up costs during the first six months of 2008 for our New England project. While many mortgage lenders have experienced disruption in the product offerings following turmoil in the credit markets, this has not been the case with Sidus, majority of its product offers continued to be FHA Fannie Freddy eligible mortgages allowing us to continue to sell these mortgages in the secondary market.

Let me discuss briefly our plans for Cardinal over the coming quarters. As said in our press release Cardinal merger was off to a great start and we replaced some underperforming -- we replaced some loan officers with three new experienced (inaudible) loan officers in Durham market since the beginning of the year. We have two new offices in the Cardinal regions since the beginning of the year and full cash like even within the next 18 months. Our new [Claymore] office opened in April is operating out of a temporary location and already have 8.4 million in deposits and the Hillsborough Office which opened in May has $9.2 million in deposits. We planned to move Claymore office to a permanent facility during the first quarter of 2009. We are currently in the process of locating a new site and research triangle area and expect to begin construction of our new branch there sometime in mid 2009.

Lastly I would like to discuss our expectations for the remainder of 2008. First, we believe that net interest margin has bottomed during the second quarter of 2008 and expect to see some improvement in the margin over the next two quarters. Secondly, we expect cost saving related to the Cardinal transaction of approximately $730,000 over the next two quarters, which should have a positive impact on operating expenses. We expect our asset quality to continue to rise from current levels, given the slow economic activity across our footprint. We anticipate however, our asset quality metrics will continue to outperform average throughout the remainder of 2008, which showed nonperforming loans as a percentage of total loans of 1.1% on the net charge-out ratio of 23 to 1% as of the second quarter of 2008.

And now I would like to turn this over to Edwin, who will discuss the financial results.

Edwin Laws - Chief Financial Officer

Thank you, Bill and good afternoon everyone. As mentioned in our press release that came over at 1 O’clock this afternoon. Net income for the quarter was 2.1 million and diluted EPS was $0.19 per share. The primary reasons for the 46% decrease in year-over-year earnings per share was 87 basis decrease in our net interest margin from two 334 in the second quarter of ‘08 versus 421 prior year. On balance we remained asset sensitive and accordingly our loan yields have decreased more rapidly than the deposits costs from 325 basis point rate change that began back in September of ‘07. Compared to first quarter of ‘08, our net interest margin decreased by 22 basis points due in part to that last rate cut in April, at the end of April 25 basis points.

The Cardinal acquisition was accounted for about 9 to 10 basis points in the decrease and their balance sheet was also asset sensitive. At the end of second quarter approximately 50% our loans available rate pricing in the next 30 months and approximately 48% of our CDs were re-priced during the second half of ‘08. In addition to the reduction in deposit costs we expect in the second half of the year, we have also taken steps to improve our net interest margin by increasing our loan cost demand deposits where we are focusing on our commercial -- focusing on bringing commercial deposits as they always have and with a high emphasis on that in addition to booking new loans and we hope to improve over the next few quarters in that area, although we have been higher than the peer group in those non interest bearing deposits, historically.

Our competitive environment for deposit pricing has intensified as we have had some large in regional banks and our market that are facing liquidity issues and have been offering markets rates or rates that are actually higher than the national market who has had some stiff CD competition and we have not chased those rates trying to maintain our margin and improve it over the second half of the year, we have had lower short terms volumes and other running sources. Given an example of one year CD rate in our current market as high as 4 in the quarter and we have been able borrow the light funds of about 230, so maintaining adequate liquidity in sufficient collateral the borrower gets has helped us through this time.

Looking over at the provisional loan losses we increased that to $1.1 million that was a $878,000 increase compared to a $200,000 during the second quarter of ‘07 that had a provision with result of loan growth associated with the Cardinal merger and increased level of non performing asset and softening economic conditions across our market areas. The additional provision of $878,000 on a year-over-year basis negatively impacted EPS by about $0.05 a share during the second quarter of ‘08.

Non interest income decreased 2% to $4 million from $4.1 million in the second quarter of ‘07, the decrease is primarily attributable to a 14% decrease in other service fees due to commissions on retail mortgages that we closed in our retail bank branches as volumes have slowed somewhat over the past year, in particularly loads of volumes has slowed within the mountains of our region in North Carolina on a sequential basis net interest income increased 3% due to the increase across most non interest income categories. As the second quarter of 2008 non interest income of approximately 30% operating revenue was up from 29% second quarter of ‘07 and down from 31% at the end of the first quarter.

Looking back at first quarter of ‘08 and to lesser extent of second quarter of ‘08, non interest income was positively impacted by FASB 109 accounting change or SAB 109 which is not expected increase in future quarters. We expect additional non-interest income to be generated at Cardinal during the second half of ‘08, for instance Cardinal did not have a source of mortgage related fee income and we recently initiated retail mortgages at Cardinal. Also overdraft protections we offered to Cardinal customers beginning in September and we expect about $120,000 in Cardinal related overdraft fees by year end.

Expense was increased 17% to $10.2 million compared to $8.7 million in the second quarter of ‘07. The increase in the expenses reflects the first four quarters of operations that include Cardinal -- that includes one time merger expense of about $330,000 of salaries, benefits and data processing and other miscellaneous expenses. Excluding these one time charges, net income was about $2.4 million and EPS would be $0.21 if you excluded those expense. Start up expenses of $234,000 related to Sidus’s New England expansion represented approximately penny a share, these expenses are expected to moderate over next several quarters. And those 234 were actual expenses incurred during the first half of the year $97,000 second quarter, $137 in the first quarter.

As Bill has mentioned in his earlier statement, our asset quality continues to hold up well in this economy. However, credit costs did increase due to loan growth associated with the Cardinal transaction and a higher level non-performing asset as well as slowing economic conditions. We increased provision to $1.1 million from $200,000 last year second quarter and covered net charge-offs by 281%. We remain well reserved as the allowance account stood at 142 for the quarter up from 1.32% from the second quarter of ‘07 and 1.40% last quarter.

Shifting gears we will talk a little bit about the loan portfolio. Total loans grew $266 million or 31% year-over-year due to the impact of Cardinal merger excluding Cardinal organic growth was 15% on a year-over-year basis and 3% on a length quarter basis. Organic growth was fairly broad based loan category in market, we expect the loan growth during the remainder of 2008 to remain constant and with what we reported during the second quarter of 2008.

Lastly, I will discuss our capital position. The bank remains well capitalized with a total risk base capital ratio of 262 as of the end second quarter compared with 268 last year. Tangible equity as a percentage of tangible assets stood at 6.63% compared to 8.39% during the same period ‘07. The decrease in tangible equity reflects significant amount of goodwill created by Cardinal transaction which we did partially start and we trust that and its kind of a substitute for our equity capital. Unlike many banks across the US we currently do not plan to cut our dividend due to strong capital position and the dividend yield is about 3.25% based on (inaudible) 16.

This concludes my comments and I will turn it back to Bill.

William A. Long - President and Chief Executive Officer

As the second quarter results show we are holding our own in a difficult economy. Asset quality and loan growth remains bright spots and Cardinal is off to a strong start. Sidus continues to perform well and should continue to serve as the strong source of non-interest income for us further diversifying our revenue. We will continue to focus on strength in our own policies and procedures as well credit quality for the remainder of 2008 and certainly into 2009. While the rest of 2008 represents many challenges, I believe these challenges will in fact present significant opportunities for us.

And with that I’ll open it up for questions.

Questions-and-Answers Session

Operator

[Operator Instructions]. And our first question comes from Carter Bundy of Stifel Nicolaus.

Carter Bundy

Hello, Long.

William A. Long

Hi, Carter.

Carter Bundy

How are you doing?

William A. Long

Doing great. How are you doing?

Carter Bundy

Doing all right. I just got a few questions for you all.

William A. Long

Sure.

Carter Bundy

If you could help us quantify the amount of merger related charges in the Sally and Data processing on items?

William A. Long

That was, most of that expense probably 90% of that $330,000 was Sally and Data process. You want it broken down?

Carter Bundy

Right. So, 90% on that you were saying was in the Sally alone?

William A. Long

No, I’m sorry the combined line. We probably had about 20% in the data processing area about 70% in Sally. And then was this miscellaneous one.

Carter Bundy

What was your FTD count at quarter end?

William A. Long

It was, I’ll tell you that figure is on our color board. I’ll get that number for you but I don’t have it right here at my finger tip. I think it’s probably in the 420 through to lower 400.

Carter Bundy

Okay.

William A. Long

We added about 40 employees at Cardinal and that figure came back during the quarter.

Carter Bundy

So, you added about 40 and then you actually reduced additional FDA in the quarter?

William A. Long

Yes, about a handful.

Carter Bundy

Okay. And if you could just speak to some of the margin trends that will be wonderful, sounds like deposit pricing despite a lot of CD’s re-pricing in the second half of the year is pretty intense down there. Do you see that margin potentially read down in the role was that color in the first quarter of ‘08 levels or do you think that’s pretty outlook for that?

William A. Long

I would qualify this because we don’t know what our mix will end up being, but within our plans, we can see maybe three basis points based on what I’m seeing in the CD run off. And depending on whether we can continue on mix and replace it what we did in June, July, and looking out over the rest of the year assuming that loans remain pretty constant and we are steadily seeing some slope in the yield curve which is going to help the fixed rate loans, we are thinking about 50-50 variable fix. So, we’ll suffer a little bit on the variable side initially but when rates start moving up which we expect sometime early and middle part of the next year, we will pick up some benefit there on the fixed rate side you are seeing over 6%. We’re not expecting to get back to the first quarter in next year, really quickly. Getting back the 4%.

Edwin Laws

And if we get move back towards the kind of the 345 to 350 run range at the end of the third quarter, like that will be pretty good, I did some announces on margin and the bank we measure margin just for the bank that excludes Sidus and excludes the trust preferred, I guess, we consider that really capital item or replacement for equity.

Carter Bundy

Okay.

Edwin Laws

But, we ran about 336 in April in the bank an then we added 13 basis points (inaudible) and accretion from the fair market value adjustment on the Cardinal volumes, 349, the May was the lowest at 327 in June. We came in with about 343.

Carter Bundy

Are those purchase accounting adjustments are expected to quickly go away?

Edwin Laws

That one did on the, excuse me that was for the Cedars, we have got a product, which I guess we can talk about later but our CD product allows us to provide FDSC insured for our relationship customer that CD was actually placed for other banks. But, that those were short term deposit for the most parts of that, that ran out pretty quick, the borrowings and the regular CDs and the loans are continuing and there’s about of $1,500 charge every month netting notes, the loans return up more than the others, so its not a big item maybe a basis point or less.

Carter Bundy

Okay. Any fall with the borrowings and looks like you funded a lot big growth with the borrowed funds obviously being more attractive in this market. Are you thinking about potentially replacing those with some deposits and paying out form, thinking about maybe going longer on deposit side or is that just some thing you’ll continue to look at throughout the next few quarters?

William A. Long

I think, we will keep borrowing that, I don’t know whether we are going to have to, if we have to pay out, we’ll pay out, what we opened as the market drops back sounds sensible and, we don’t to pay out to the quarter-on-quarter range. So, we might pay up, but I don’t think its going to be quarter-on-quarter range.

Carter Bundy

Okay. Well thank you very much, I’ve been taken up too many questions.

William A. Long

Thanks, good to talk.

Carter Bundy

I’ll appreciate it.

Operator

[Operator Instruction]. And we have no further question on the phone at this time, like to turn the conference back over to the speakers for any additional or closing remarks.

William A. Long

I don’t really have anything to close, we got Steve Robinson here, and I want to thank him to come up, he has had a death in his family, his wife Anne has favored his past way and Steve we appreciate you coming. We did pretty much on the agenda cover and we weren’t sure whether he was going to make it or not. But, it’s good when they have questions to, if you got any question to, great job, (inaudible) our Chief Planning Officer is on vacation as we we’re on the great vacation. So, Steve is going to kind of fill in both places.

We continue to be exited about 2008, I know its challenging but to be honest that’s when we have our most strongest, when we get into the challenging economy, but our earnings are not what we want and certainly not what we used to. We think that this year and the time we get to hearing and when (inaudible) buying in our peer group we are going to look pretty good. That mean we’re going to be where we really want to be, so I think we want to better than our peer group. We thank you very much for attending today, Edwin and I will be around today if anybody wants to call in and feel free to do so and we appreciate our interest Yadkin Valley Bank. Thank you very much.

Operator

Again ladies and gentlemen this does conclude today’s conference. We thank you for your participation, you may disconnect at this time.

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