Atlantic Union Bankshares Corp (AUB) 2014 Q3 法說會逐字稿

Good morning, my name is Michelle and I will be a conference operator today. At this time, I would like to welcome everyone to the Union Bankshares third-quarter earnings conference call.

(Operator Instructions)

I would now like to turn the call over to Mr. Bill Cimino, VP, Corporate Communications. Please go ahead.

Think you, Michelle, 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 Elizabeth Bentley, EVP and Chief Retail Officer; Tony Peay, EVP and Chief Banking Officer; and Jeff Farrar, EVP of Wealth Management, Insurance and Mortgage. Please note that today's earnings release is available to download on our investor 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 are 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. I'll now turn the call over to Billy Beale.

Thank you, Bill. Good morning, everybody. Thank you for dialing in. Rob's going to go into a lot of detail on the financial performance little bit later. But I want to comment on our third-quarter results, provide some additional details on the quarter, as well as give you an update of our StellarOne integration.

I will say that this quarter has a lot of noise in it. I think you will see noise in noninterest income, noninterest expense and even a little bit of net interest income. We have tried to identify each of those sort of one time expenses or non-operating expenses in our call report. And I'm sure Rob's going to go into a lot of detail on that but I just wanted to talk a little bit about that. I think you're also going to hear comments that sound a lot like comments I made in the second quarter call. Union has shown post integration progress with our teams working together well. And we have experienced lower than expected customer attrition. But the overall story really hasn't dramatically changed in the last 90 days.

As many of you know, we delivered positive earnings throughout this economic downturn. And we did that by focusing on the long-term, about building shareholder value over the long term and not getting too caught up in short-term trends. And you can see that and I hope through our explanations today we're continuing that prudent management philosophy today. And we remain focused on building long-term shareholder value through what we believe to be sustainable business practices.

Third quarter. Union delivered, I think, another quarter of solid financial performance despite some economic headwinds and the noise I've mentioned previously. If we back out $1.1 million in after-tax earnings, the Company had operating earnings of $16 million or $0.35 a share. The corporate result is derived from the community bank segment's operating earnings of $16.7 million or $0.36 a share. The mortgage Company experienced a loss of $628,000 or about $0.01 a share and included in our results is an after-tax OREO valuation adjustment of $4 million or $0.09 a share. That is part of the noise. Without this adjustment, the Company's operating earnings would've been $20 million or $0.44 per share.

Since it had the biggest impact on earnings, let me address the OREO evaluation upfront. During the quarter we took a hard look at some of our long-standing OREO properties. Just as a reminder, Union has maintained a philosophy of moving vertical OREO quickly, while holding onto raw land, partially developed land and in some cases developed land. In the belief that it was in the best interest of our shareholders to wait for the market to recover.

Given the lack of movement on some of the properties really for over five years, we elected to reappraise our OREO properties. As a result, the valuation adjustment of several long-held properties, resulting in a valuation adjustment, several long-help properties. I would point out that about half of that adjustment comes from the King Carter property, which we have disclosed separately. That is the golf course community accompanied by some undeveloped commercial land and some undeveloped potentially future residential land in the northern neck of Virginia.

It was last quarter that we reported to you that we were under contract to sell the golf course and we took a $700,000 write-down on that golf course last quarter. And about half of this valuation adjustment was an adjustment on the developed lots, the undeveloped commercial property and as I mentioned earlier the underdeveloped raw land for future development. That valuation adjustment masked what -- which would have been a strong noninterest expense result for the quarter. And I think Rob will go into that in his comments. Let me update you on a couple of other things first.

Net loans declined during the quarter. In looking at the macroeconomic environment first we continue to believe that there are some economic headwinds as tax revenues in Virginia came in well below projections. And the Commonwealth has had to solve for $2.4 billion bi-annual budget shortfall. Employment in Virginia rose by only 4/10% from the prior year which is lagging the national average of 1.8%. We saw some numbers yesterday I think in a Wall Street Journal article that indicated that total private sector employment in Virginia declined by 7,400. Not a big number, but certainly not the kind of thin line we'd want to see. We believe much of this is a result of the sequester taking hold.

Retail sales, housing permits, auto registrations also declined during the first half of 2014. Turning to Union specifically. While new loan production continued to [be above] our budgeted expectations, we are continuing to see noncontractual commercial paydowns and payoffs. They remained at elevated levels and continued to outpace overall loan production. We also saw our consumers deleverage during the quarter with our consumer book declining by approximately $20 million or about one-third of our decline in loans.

As in the second quarter, some of the paydowns were commercial customers deleveraging by using excess cash on their balance sheets to pay down their debt. We had one very large just south of $20 million revolver paydown. We are also continuing to see credits moving to other banks and lenders where loan covenants are less restrictive. And just to provide some additional color, during the third quarter there were two large credits that moved to the nonrecourse market that accounted for about $25 million of the payoffs.

As I had said earlier, we take a financially responsible position on loan growth and we have not traded lower yields, sacrificed credit terms or taken on excessive interest risk to manufacture loan volume. Because we don't believe that is in the best long-term interest of our shareholders. We continued to emphasize core community banking values. They're driven by prudent commercial and consumer loan growth through customer retention and development of new client relationships.

Related to loan growth as we've noted in prior earnings calls we have hired several new loan officers and portfolio managers over the last few quarters. These new hires continue to get up to speed and we've seen some large loans close in the first few weeks of October. Some of these are construction loans that will take some time to be fully funded, but I believe we are emerging from the post closing merger lull. And our team is starting to assert itself in our markets.

Turning to StellarOne, we're now five months past the systems integrations. And our value proposition is resonating with consumers as we continued to see strong net new household growth in our legacy markets. And the merger related attrition from retail and commercial customers in the Stellar footprint remains well below our projections. For the year our core net household growth across our footprint is about 2%. I think one of the other important things to share with you is that we have delivered on each of the financial metrics that we laid out to you about 15 months ago when we announced the StellarOne acquisition. And we look forward to delivering on the improved financial performance that our shareholders expect. We are still very much focused on achieving top tier financial performance.

So let me summarize a little bit before I kick it over to Rob. We had a good core earnings in the third quarter driven by the community bank segment. Although net loan growth remains a challenge. We took a hard look at our aged OREO inventory and took what we believe it's appropriate action that will make our foreclosed properties more marketable. And the StellarOne integration has gone well and I believe this is now behind us. And Union is, I think we're well positioned for future earnings growth going into the fourth quarter and into 2015.

And with that, I'm going to pass the conversation over to Rob Gorman.

Well thank you, Billy and good morning, everyone. Think you for joining us today. I'm going to take some time to walk through the balance sheet and results of operations through the quarter.

Starting with the balance sheet total assets stood at $7.2 billion at September 30, 2014 a decrease of $113 million from June 30 levels. But an increase of $3 billion from December 31, 2013 levels reflecting the impact of the StellarOne acquisition which closed January 1, 2014. The decline in assets for the quarter was driven by net loan runoff as Billy mentioned and lower mortgage loans held for sale balances at the end of the quarter. Loans net of unearned income were $5.2 billion at quarter end down $62 million. While third quarter average loans declined $51 million in the second quarter, due to large paydowns again what Billy mentioned earlier.

This is well below our lows single digit growth estimates. And we are now projecting that loan balances for the full year 2014 will be modestly down the year-over-year. As Billy noted, Q3 loan production levels remained in line with our expectations. However both commercial and consumer loan paydowns and payoffs continue to be a headwind to net loan growth during the quarter.

As of September 30, 2014 total deposits were $5.6 billion, down $100 million from June 30 driven by CD runoff and a seasonal decline in public funds. The average deposit levels for the quarter increased $9 million or just under 1% annualized over the prior quarter. And that's reflective of the continued core household growth in Union's legacy markets. As well as the modest deposit attrition to date associated with the StellarOne customer conversion to Union during the second quarter.

Turning attention to asset quality, nonperforming assets totaled $58 million comprised of $20 million in non-accruing loans and $38 million in OREO balances at September 30, 2014. Nonperforming assets as a percentage of total outstanding loans declined to 73 basis points from the prior year and declined 6 basis points from the prior quarter to 1.12%. Nonaccrual loans balance has decreased $2.8 million in the quarter.

The OREO balance has declined by about $700,000 to $37.8 million due to the full [convention] of OREO valuation adjustment of $6.2 million. Which was offset by additions related to merger related branch closures and vacated operations space, much of which we expect to dispose of by the end of this year and into early 2015.

Also during the quarter the Company reevaluated it's OREO sales strategies in light of limited progress in selling properties in inactive rural real estate markets that had been held for extended periods of time. These valuation adjustments will allow the Company to be more aggressive in disposing of long-held OREO properties and reducing the ongoing expenses associated with managing these properties. Several OREO properties are currently under contract to sell in the current quarter, so we expect to see those balances decline moving forward in the fourth quarter into 2015.

The allowance for loan losses increased approximately $700,000 from June 30 to $32.1 million at September 30. The allowance as a percentage of the total loan portfolio, adjusted for purchase accounting, was 1.12% at the end of the quarter up 1 basis point from June 30 levels and down from 1.25% from the same quarter last year.

The allowance for loan losses as a percentage of total loan portfolio was 62 basis points for September 30 up 2 basis points from June 30 and down from 1.13% from the prior year period. The decline from the prior year is primarily attributable to the acquisition of StellarOne. As you know in acquisition accounting the previously established StellarOne loan loss allowance was eliminated and replaced by the loan credit mark which is carried as a deduction to the required loan balances. At the end of the quarter the nonaccrual loan coverage ratio was 158%, compared to 170% from the same quarter last year and 136% at the end of the second quarter.

The Company's capital ratios continued to be considered well capitalized for regulatory purposes. The Company's estimated ratio of total capital to risk-weighted assets was 13.71% and the Tier 1 capital ratio was 13.07% at September 30, 2014. Our tangible common equity to tangible assets ratio at quarter end is 9.42% up 19 basis points from June 30, 2014 levels and up 33 basis points from 9.09% from the same period last year. Excess capital at the end of the third quarter amounts to approximately $98 million with the excess being defined as any balances above an 8% tangible common equity ratio.

As a reminder, Union's Board of Directors authorized a share repurchase program in the first quarter to purchase up to $65 million worth of the Company's common stock through December 31, 2015. As of October 17, 2014, approximately 1.8 million common shares have been repurchased at an average price of $25.01 per share leaving approximately $20 million remaining under the 2-year repurchase program authorization.

Now turning to the income statement. As Billy noted, operating earnings for the third quarter were $16 million, or $0.35 per share, down from $17.8 million or $0.38 per share in the prior quarter. As you recall, operating earnings exclude the impact of merger related costs which were $1.1 million on an after tax basis in the quarter. If you exclude the impact of the OREO valuation adjustment, operating earnings would have been $20 million or $0.44 per share. On GAAP reported basis, net income was $14.9 million for the quarter or $0.33 per share versus $14.8 million or $0.32 per share in second quarter. Again, as Billy mentioned, the community bank segment turned in solid operating results of $16.7 million or $0.36 per share in the third order. And $20.7 million without the OREO adjustment, while the mortgage segment reported a net loss of $628,000 or $0.01 per share.

Operating profitability ratios for the Company and the community bank segment also improved during the quarter, excluding the OREO evaluation adjustments. The operating return on tangible common equity ratio return decreased to 9.82% from 11.1% in the prior quarter. Without the OREO adjustment it would have increased to 12.2%. Operating return on tangible common equity in the community bank segment was 10.3% and adjusted for the OREO write-down was 12.7%. Operating return on assets was 88 basis points down from an operating ROA of 98 basis points in the prior quarter. Again excluding the OREO adjustment, ROA would have been 1.1%. The operating ROA of the community bank segment was 91 basis points and 1.13% on an OREO adjusted basis.

Turning to the efficiency ratio. The operating efficiency ratio increased to 69.92% from 66.43% in the in the prior quarter. The operating efficiency ratio without the OREO adjustment would've been 62.6%, a decrease of 380 basis points reflective of a StellarOne merger savings impact. For the community bank segment, the operating efficiency ratio was 67.7% and 60.1% on an OREO adjusted basis.

It should be said that we remain committed to achieving top tier financial performance relative to our peers. We continue to target an operating ROA above 1.1%, return on tangible common equity of above 13% and an efficiency ratio below 60%. As noted we have made significant strides towards these targets after stripping out the OREO adjustment this quarter. We remain confident that now that the cost savings from the StellarOne acquisition are fully realized, we generate more robust loan growth and return the mortgage segment to profitability that we will consistently exceed these targets.

Our tax equivalent net interest income was $66.5 million for the quarter up $700,000 for the second quarter. The third quarter reported net interest margin increased 2 basis points to 4.1% compared to 4.09% in the previous quarter. The core net interest margin which does not include the 19 basis point impact of acquisition accounting accretion was 3.92% a decline of 2 basis points from the prior quarter and in line with our expectations. The core margin decline was driven by lower earning asset yields in the second quarter as the investment portfolio yield dropped 7 basis points, primarily due to increased calls on higher yield in municipal bonds and lower reinvestment rates through the quarter.

The core loan portfolio yield dropped only 1 basis point to [4.68%] in the quarter as we continue to be disciplined in our loan pricing. Accretion of purchase accounting adjustments for loans, CDs and borrowings related to the StellarOne acquisition added 19 basis points to the net interest margin in the quarter. And for your reference actual and remaining estimated net accretion impact is reflected in the table included in our earnings release.

As noted in our earnings release we expect that the core net interest margin will decline modestly over the next several quarters as declines in earning asset yields are projected to outpace declines in the interest-bearing liability rates going forward. The provision for loan losses was $1.8 million in the third quarter an increase of $300,000 from the previous quarter and unchanged from the same period a year ago. For the quarter ended September 30, 2014, net charge-offs were $1.1 million up approximately $100,000 from the prior quarter, but down $1.2 million from the prior year.

Turning to noninterest income. Noninterest income was relatively flat from the prior quarter at $16.7 million. Customer related noninterest income declined $667,000 primarily due to declines in service charges on deposit accounts, debit card interchange income, better credit fees and income from trust businesses. Gains on sales of securities of $995,000 were recorded in the quarter. This related to the sale of Freddie Mac preferred shares and is an increase of $569,000 from the prior quarter. Other income increased $577,000 from the prior quarter primarily related to interest received on previously charged-off loans and previously deferred incentives from contracts that we renegotiated in the current quarter.

Gains on sales of mortgage loans net of conditions declined $433,000 from prior quarter. Primarily related to lower mortgage loan originations this quarter versus last. Third quarter operating noninterest expenses, excluding merger costs, were $58.2 million, an increase from $54.8 million in the second quarter. If exclude the unusual OREO evaluation costs in the third quarter, nonoperating interest expense would've decreased by $2.8 million to $52 million in the quarter.

We have hit our $28 million merger cost savings target on a run rate basis during the third quarter. As a reminder the majority of the run rate expense savings related to the [MIG] systems conversion and branch consolidations were captured during the quarter. Our merger cost totaled $1.7 million during the quarter and we have now incurred approximately $25 million of the merger expense budget and we do not expect to have any material expense associated with the merger going into the fourth quarter and beyond.

Finally, I'd like to add some color around the mortgage unit's results for the quarter. The mortgage segment reported a net loss of $628,000 for the third quarter which is consistent with the net loss in the second quarter. Originations declined during the quarter and that impacted our ability to show any bottom-line improvement. As you know we have been undergoing a fairly significant transformation of our mortgage company leadership and business model over the past several quarters.

We believe that we now have the right Management team in place and are able to focus on getting back to high service traditional secondary mortgage business model. JG Carter, President and CEO for the mortgage group has been on the job for a little more than a month and is working diligently to return the mortgage line of business to profitability. By reestablishing our production pipelines, improving back-office productivity and reducing loan closing times. As noted, the net loss stabilized in the third quarter despite the origination drop as expense levels declined by 9%. However since we're heading into seasonally low production quarters, we do not expect that the mortgage business will return to profitability during the next two quarters.

So to summarize, our third quarter operating results continue to illustrate the earnings capacity we envisioned the Union and StellarOne combination would produce as the largest community banking institution headquartered in Virginia. We achieved each of the financial metrics we projected with the StellarOne acquisition. And finally, please note that Union remains as committed as ever to delivering top tier financial performance and delivering long-term value for our shareholders.

And with that I will turn it back over to Bill Cimino to open it up for questions from our analysts. Bill?

Thanks, Rob. And that now we will have the time for a few questions. Michelle, we're ready for our first caller.

(Operator Instructions) Catherine Mealor, KBW.

Good morning, everyone.

Good morning, Catherine.

Let me first talk about the loan growth. And Bill, if you can think about your markets and would you say that the loan decline is coming primarily from the softening in your markets that you spoke about earlier in your comments? Or from increased competition and your desire to stay conservative in your loan pricing and the maturities of your other loans?

Catherine, why don't I let Tony take a shot at that and I may or may not add a postscript.

Alright great. Thank you.

Hi, Catherine. How are you?

I'm great, Tony, how are you?

I'm well thank you. I would tell you that both of those things are contributing to the loan decline. We are getting a lot of loan looks, larger deals we've not necessarily gotten in the past. So the market is there to a degree. It is highly competitive. We have some peers who are a little more aggressive than they probably should be and you may read about them down the road a few quarters.

But we have stuck to our discipline. We are addressing the opportunities we have. We're building strong teams of lenders and I feel really good about where we're going in the next quarter.

Billy mentioned sticking to our discipline, we have done that but at the same time we have looked at -- when we have a loan payoff unexpectedly we study the reasons why it paid off, where did it go, why did it go? And we're also tracking all of our lost opportunities on loans where we're bidding on if you will or pursuing. And we're trying to understand what is happening in the marketplace and adjust accordingly.

And we have done some limited recourse lending, which has typically we've been a full recourse lender. We've studied the marketplace We've studied a particular credit worthiness of certain of our customers and we are adjusting some of our underwriting in that marketplace to get better LTVs, better debt covered ratios and lowering recourse provisions there.

We've looked at the pricing metrics and adjusted our ROA target and our pricing models downward some because we think this lull we're in is a longer-term lull. So 15 ROE in our pricing model is probably aggressive and we've lowered that down to 13. So we're adjusting to the marketplace but it is probably the biggest thing is it is highly competitive. We've got some much smaller community banks doing nonrecourse lending, which is not the norm. And we're trying to stick to what we do well.

Great. That's really helpful to me. Thank you.

Catherine -- The only thing that I would add is maybe the same thing Tony said a little different way, is there still remains probably more banks and non-banks seeking loans then there is supply. Which makes it competitive and we think some people losing their discipline on this as well.

Catherine, one last thing. It's no secret we've had some posts merger -- we've had banks coming after our lenders. We've lost no less than 14 commercial lenders in the last nine months. We've replaced all of them. I like to think we've traded up in most every case. So I'm optimistic about -- we didn't rebuild, we reloaded and we're ready to begin producing.

It takes time. When a producer leaves, it's probably 30 days or more trying to find somebody to replace them. And they've got to come in and absorb that portfolio get up to speed and keep those customers happy and maintain them, while still building a book of business. It's probably a six to nine month speed bump if you will when we lose a producer.

Great. That's really helpful color, Tony. Thank you so much.

And then maybe just on the OREO cost, this is for Rob. Can you talk about how the valuation write-down or the valuation adjustments that you took this quarter, how that should translate into lower OREO cost moving forward? Do you think it's possible to move that OREO line below the $1 million quarter mark as we move into 2015?

Yes, Catherine. We are going through that analysis as we speak. We did to it during the third quarter as well and we expect that we will see declines in those call it $1 million a quarter levels going into 2015. As mentioned in my comments, we've got several properties that are ready -- are under contract and will be moving out hopefully in the fourth quarter.

And over the first six months of the year we'll continue to evaluate and sell properties, which should impact those ongoing costs. So, yes, fully expect that we'll see those levels go down.

Catherine, let me add that the biggest portion of our OREO cost is legal. And over the last 12 months that has been centered on four properties. We think we have -- well one of them we resolved I guess this quarter because the numbers show that we resolved that issue.

And some of the resolution of that is reflected as a recovery of noninterest income in our release, we mentioned that. We've also think that we have are close to resolving some of the other pieces where we have expended OREO expense and it will not be a recurring or ongoing costs going into next year.

Alright thank you.

Operator we are ready for the next call.

William Wallace, Raymond James & Associates

Maybe a couple questions on credit as a follow-up. In the release you mentioned the sharp increase in 90 plus being driven by two commercial credits. Are those credits or do you expect they're going to move back to accrual or are these going to move through the process?

Tony?

Tony, do you want me to take that or you?

If you could take it, take it. I'm trying to find it.

Yes, Wallace. We had as mentioned two credits there. We continue to resolve those and I don't have a time frame in terms of what the resolution would be going through the process. But I'd expect that would take some time to do.

So the expectation that you can get these paying and moving back to accrual that's why they are in the 90 plus? Or was it you've got some other stuff going on that driving that decision to put them in 90 plus rather than nonaccrual?

No. We didn't move them to nonaccrual, but we think there's opportunity for continue to accrual there. So we continue to look at those credits and we'll decide going forward if that should move into the nonaccrual status or not.

And non-accrual by definition means that we would have a likelihood of not fully recovering principal and interest and that we were not in process of collection. And so if, Wally, and I can't remember -- I only remember one of these particular credits and it was just a commercial piece of property where we have a stubborn borrower who needs to renew this credit.

This is sort of an exercise we go through with him about every five years and that one should resolve itself. We have a very low LTV on it and we have what I want to say a Class A nationally recognized tenant as the primary tenant in the property. So that one we're not too worried about and I must admit I'm not recalling which the other one is.

Fair enough. Thank you. And then with this new OREO disposition strategy first maybe if could you comment a little bit on what led you guys to decide to take a significantly more aggressive approach?

And two, Billy it sounded like in your prepared remarks you had some that hadn't been appraised in five years and I'm wondering if part of the strategy you're also changing your reappraisal timeline where you'll get appraisals more often? Or maybe just a little commentary around that.

I think that's a fair question. And as I mentioned, these were rural real estate that some internally have referred to, Wally as the third ring around our metropolitan areas and maybe even the one in the Northern neck might be a fourth ring. And we had not appraised those properties since we took those in to OREO. We knew they were long-term holds.

We had referred in our calls that at least on a couple of them we would still be dealing with them in 10 years. We're halfway into that 10 years for some of these and we have just not just seen the demand for purchase that one would expect to see five years post recovery. And so we reappraise those, we have also changed our focus, our policy, procedure and process, if you will, is that we'll begin reappraising every two years of all of our OREO.

Great.

Thanks, Wally. Operator, we are ready for the next caller, please.

Bryce Rowe, Robert W. Baird.

Rob, question for you on the operating expenses. Saw an increase in marketing data processing and in the furniture and equipment. On the furniture equipment was there some accelerated amortization there with the StellarOne branch properties moving into the investment category?

And then wondering if the marketing expenses at $2 million will remain at these levels going forward? And then any commentary on the data processing would be helpful.

Yes. On the furniture equipment, those basically increased due to the -- some purchases we made. Some are related to the StellarOne merger as well. So those numbers will probably in line going forward as the numbers you should be thinking about.

Data processing, they're probably up, we've just renegotiated our core processing contract and we are expecting to see those levels come down a bit going forward. The new contract hadn't kicked in and we're kind of on an arrears basis related to paying those bills. You should see those numbers come down a bit based on the renegotiated terms that we have put in place in the third quarter.

And marketing expenses, I think those have been kind of lumpy in the first nine months of the year. I think we are probably a bit heavy in the third quarter, probably should dial that back. Taking a look at the over the course of the year and kind of prorate this quarter based on the total spend for the year. That's probably annualized spend we'll be doing.

That's helpful, Rob and just one follow-up on the OREO. Do you guys have a property count within the OREO bucket or at least within the rural bucket that you just referred to?

Yes, I don't have the exact number of properties. I don't have a list.

Yes the total is the total, at least our loan category some of them may have multiple lots in them. It's like 22. 22 pieces of property but one of them is I returned to is King Carter which is still 90 some odd developed lots and commercially zoned property and then some for future residential development. And I don't know whether Bryce you'd want to include that as 90 some odd parcels or whether it's just one property. But at least as we look at it that's one and our count of OREO is 20 some odd.

Okay, that's a fair way to look at it, Billy. And I assume that the valuation adjustment this quarter was primarily tied to those 22 properties?

Well, 22 would be total. Five of them represented the more rural that we had sort of let sit in that long-term hold bucket that we had reappraised. That represented a substantial portion of the charge-off. Obviously with King Carter taking almost half of it from the charge-off, the write-down. With King Carter taking almost half of it.

Okay. That's helpful. Thank you.

Thanks, operator. We're ready for the next question, please

Blair Brantley, BB&T Capital Markets.

Just a follow-up on the OREO too. You said you had some properties under contract, were those -- any of those be a [rural stuff] or are these more of the other properties that you have?

In terms of the five properties that Billy mentioned in the rural they're not related to those properties.

Okay? Okay. And so --

And so the golf course is under contract but that's I think it's second quarter of 2015 is when that is to close.

Okay.

That is a portion of the King Carter totals.

Okay. And then on a different question with mortgage, and you mentioned that you're probably going to have some losses the next couple of quarters and I know you're still in transition somewhat.

But what kind of contribution do you think this Company could have to the bottom line? It's obviously been a $0.01 loss here and there and wasn't a big benefit to the bottom line during boom times, what kind of benefit do you think the mortgage company could have?

This is Jeff Farrar. I would tell you that I think that we would likely see mortgage longer-term having a fairly limited contribution in relation to the bank earnings, community bank segment earnings overall. I do think that our strategy will be one where we'll move more to a purchase portfolio type lending in conjunction with our secondary market strategy.

So I do anticipate that we'll begin to see some additional earnings contribution associated with that. But just given the industry and given some of the headwinds that I think are going to be around for a while, I don't anticipate the earnings contribution to be measurable.

I do think it'll be there. I do think it'll contribute to earnings per share, but I don't think it's going to be significant - excuse me a significant component, if you will, to the overall earnings of the Company. We're excited about the future. We've got some headwinds that we're continuing to work with, but I do think as we move to mid-2015 we'll start seeing some earnings contribution.

Okay then in terms of for the next couple quarters is that loss pretty similar to what we've seen the last couple quarters? Could the loss get much worse?

I think it'll be similar to what we've seen the last two quarters.

Yes. That's what we're projecting.

Okay. Thank you very much.

Thanks, Blair. Operator, we've got time for one more caller, please.

Your final question is from Laurie Hunsicker, Compass Point

Great. Thanks for taking my question. Just to follow up on the OREO, can you just take us back through King Carter? Because I know it started way back when at $9 million and you said half of the write down this quarter -- so heading into this it was down to $8.3 million? Is that correct?

Hold on a second.

And you said half of the write-down half of the $6.55 million was Carter?

I think King Carter we had a year ago was $9.4 million we wrote down $700,000 last quarter, second quarter 2014. When we went under contract on the golf course so that, you're right it took it down to $8.7 million. And then we're telling you about half of the gross of $6 million net of $4.2 million came out of King Carter.

Okay so that is down to $5.4 million?

Yes.

That's right, Laurie.

And was there any change to the golf course contract?

No.

Any further write-down on that? No. And you said -- you just mentioned that was still set to close in Q2 and that's going to the guy that previously managed Pinehurst?

Correct.

Okay. And so can you just take us through the other clump of the $3.3 million what that related to? I guess it's the other four properties in that rural community -- is it sort of a macro?

Sure Mean we've got round numbers, 600 acres of raw land in Fluvanna County. We've got 35 acres in Orange County that had previously been approved for residential development. That approval has since expired so it's now agricultural land. Or I don't know exactly what the zoning is but it's raw land without any development plan.

We've got one commercial lot in Richmond that we actually acquired in the first market acquisition. It was part of this write-down and then we've got a multi-parcel residential development in King William County. There is a portion of that, that is currently, if you will, under development meaning that it had plotted lots, raw cut roads. We are paving the roads, there are homebuilders who have purchased lots from us previously.

They will begin building and we will market the rest of those lots in that subdivision. And then there are adjacent parcels that would have been, if you will, for that developer phases two, three, and four that we will market as -- to somebody else. We will not be able to develop them ourselves.

So and of those four, can you just give me the approximate balance of where they're carried now and what the corresponding write down was this quarter?

I don't -

Or can I just chat with you offline?

Well you can, I don't think we've given that kind of detail on each and every of our 20 some odd pieces of our OREO. And not every parcel that we own had a write-down. Some of them actually appraised above our carrying value but the accounting gods do not let us right up they only let us write down. And so if we were able to sell those properties then we get gains. But you're more than welcome to talk to us online but we have typically not disclosed piece by piece.

I know there is a lot of focus on the write-down. I know that one of you on this line has already published something regarding the write-down.

We've been carrying this real estate for a while. We made a decision after not seeing the kind of movement we thought we would see five plus years later that we needed to make what we thought was a prudent business decision and write it down to reflect the proper values of it.

But ongoing, I think the story is what our operating earnings are going to be not what the value of our OREO is. But, yes we can talk offline about it.

Okay so just one sort of follow-up then. As obviously you talked about loan growth being slower and so forth. So as you look at your stock price sitting here at $23 and you think about share buyback as a really a potentially good viable option and certainly two points below what you paid.

Can you sort of expand your thought on using capital for that purpose? And then sort of one follow-up just generally now that Stellar is completed, where you stand with M&A?

I was just going to say a lot of our investors and a lot of our analysts have very differing opinions about whether we ought to be buying back stock or whether we ought to be paying dividends or whether we ought to be retaining stock to do acquisitions.

We have internal models that we use and do valuations based on our internal models and that will drive our decision as to whether we will buyback additional stock or whether we'll continue to increase dividends or whether we'll retain it for M&A.

As far as M&A environment, it has not -- my comments regarding that would not have changed much since last quarter. It's very active. You have seen some deals announced in Virginia. I think there are lots of conversations going on. And we seek to participate in those conversations.

And have an opportunity to get ones that fit what we're looking for which would be a traditional Community Banks, people with core deposits. People who have a good franchise value and ones that can be both strategic and partners for us and ones that would produce good earnings per share accretion for our shareholders.

Rob, do you have anything you want to add?

No. I think you've summarized it very well, Billy. Our share repurchase, as you mentioned, we'll continue to evaluate that. We do have $20 million left in our authorization and will continue to evaluate that going forward in light of other capital management tools we have in place.

Great. In just one last question as you think about M&A, at one point you had mentioned to me the likelihood of staying below $10 billion. Can you comment on how you view that now?

Yes. We are focused on what life would be like after $10 billion. We understand, I believe, the financial impact on the non-interest income side of our balance sheet. We are building a risk management structure so that when we get close to or choose to go over that $10 billion threshold that we will be prepared, the regulators will feel that we are in the appropriate place from a risk management standpoint. And we're continuing to focus on that. But that's really probably a conversation and an announcement that would be three, four, or five years off. But we will be prepared and we'll work to be ready for when that time comes.

Perfect. Thank you gentleman.

Great. Thanks, Laurie. And thanks to everyone for participating in the call. A replay of the call will be posted on the event website fairly soon. Thank you.

Thank you. This concludes today's conference call. You may now disconnect.