Atlantic Union Bankshares Corp (AUB) 2016 Q1 法說會逐字稿

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

(Operator Instructions)

Mr. Cimino, you may begin your conference.

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 for 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 on today's call, which are subject to risks and certainties. A full discussion of the Company's risk factors are included in our SEC filings. At the end of the call, we will take question from the research analyst community. I now will turn the call over to Billy Beale.

Thank you, Bill. Good morning, everyone. Thank you for taking time out of your day on probably is what a very busy earnings season to join us for this call. As I've mentioned on previous calls, we have been making steady progress toward delivering on our strategic growth objectives that will enable Union to deliver top tier financial performance to our shareholders. First-quarter results reflect that effort, as our team delivered earnings of $17 million, or $0.38 a share, which represents an 8% increase over the prior year's first quarter net income level.

During the first three months of the year, we continued to capitalize on the organic growth opportunities that we see in our markets, which is reflective of the improving Virginia economy and particularly strong job growth in Richmond, which has seen year-over-year growth in loans of more than 12%. We remain focused on building deeper relationships with our existing retail, commercial, wealth management and mortgage clients, better teamwork within and across our business -- our lines of business, as well as by enhancing our digital services and product offerings for our customers.

During the quarter, we saw 2% annualized growth in core deposit households, to more than 170,000 customers, which shows the continued strength of our value proposition. Loan growth improved this quarter, as total loans for the first three months of the year grew more than our mid-single-digit expectations, coming in at 7.7% annualized growth for the quarter. Production levels remain steady and broad based across our footprint, and our loan pipelines look healthy coming into the second quarter.

Asset quality is outstanding, as past due and non-performing loans declined 12% from the prior quarter and 20% from the first quarter of 2015. In addition, we were able to reduce our OREO balances by around 7% this quarter through the sales of foreclosed properties, and we expect further reductions in OREO balances going forward, as we currently have approximately $2.1 million in properties under contract that should close over the next two quarters.

We also remain motivated on building a more efficient enterprise. To that end, in the past week, we consolidated three branches in our Winchester market into a single stand-alone branch. We closed another branch in Middleburg, Virginia and in addition, we are on track to close an additional branch in May. Upon completion of these branch consolidations and closures, we will have 120 branches across our footprint, which is down 26 branches or 18% since June of 2013.

While we are growing organically and becoming a more efficient Company, we are also continuing to evaluate opportunities to improve our financial performance in noninterest income, through acquisitions such as our recently announced acquisition of Old Dominion Capital Management, a registered investment advisor headquartered in Charlottesville with nearly $300 million in assets under management. I am delighted their leadership team is staying in place, as it will help Union expand its wealth management capabilities, and partnering with the team at Old Dominion is a great step toward achieving our wealth management strategic growth objectives and we will continue to look for additional opportunities to expand our noninterest income.

From a shareholder stewardship and capital management perspective, in mid-February, the Company completed the $25 million stock repurchase authorization that was approved by our Board in October 2015. Subsequently, the Board authorized a new share repurchase program, again for up to $25 million in buybacks, and that buyback expires at year end 2016. So in total, during the first quarter, Union repurchased approximately 1 million shares, totaling more than $23 million, and we have approximately $22.5 million remaining available under our current authorization.

So let me summarize. I think we are off to a great start to 2016, as our strategy continues to take hold both organically and through opportunistic acquisitions, and as we take actions necessary to make us a more efficient Company in the future. Our recent operating performance demonstrates that we are well positioned to realize the long-term potential value of our franchise, and to generate the earnings growth and top tier financial performance that our shareholders expect.

With that, I'll turn it over to Rob, and I'll look forward to responding to your questions at the end.

Thank you, Billy, and good morning, everyone. Thanks for joining us today.

I would now like to take a few minutes to walk you through some of the details of our financial results for the quarter. As Billy noted, earnings for the first quarter were $17 million or $0.38 per share, that's down slightly from the fourth quarter's $17.8 million or $0.40 per share, but up nicely of 8% from last year's first quarter's result. Community bank segment's results were $16.9 million in the first quarter, while the mortgage segment reported a modest profit of $54,000, despite lower origination levels versus the prior quarter.

Return on tangible common equity was [10.1%], down slightly from 10.4% in the fourth quarter, but up from 9.7% from the same period of last year. Return on assets of 88 basis points were down 5 basis points on a link quarter basis, but again up 2 basis points from the first quarter of 2015. The Company's efficiency ratio includes the [66.1%] in the current quarter, down from 66.5% in the fourth quarter, and it's down 200 basis points from 68% in the prior-year first quarter.

Now turning to the major components of the income statement. Tax equivalent net interest income was $66.2 million, that's up $1.3 million from the fourth quarter, driven by higher earning asset balances and yields. Of note, the current quarter's reported net interest margin increased by 6 basis points, to 3.82%, compared to 3.76% in the previous quarter.

Accretion of purchase accounting adjustments for loans and borrowings added 6 basis points to net interest margin in the first quarter, that's down 1 basis point, or about $216,000, from the fourth quarter. For your reference, actual and remaining updated net accretion impact are reflected in the table included in our earnings release.

The core net interest margin front, which does not include the impact of acquisition accounting accretion, came in at 3.76% in the first quarter, which is an increase of 7 basis points from 3.69% in the fourth quarter. The core margin increase was driven by higher earning asset yields of 8 basis points in the quarter, offset by a 1 basis point increase in the cost of funds. The core loan portfolio yield increased by 8 basis points to 4.38% in the quarter, while the average investment portfolio yield increased 6 basis points to 3.25%.

The increase in the loan portfolio yield during the quarter was primarily driven by increased favorable rate loan yields rates, as rates were reset higher during the quarter, resulting from the increases in short-term market rates. A higher cost of funds from the prior quarter was due to higher short-term borrowing rates, also driven by the increase in short-term market rates during the quarter.

Going forward, our baseline net interest margin production, which assumes one Fed fund rate increase in late 2016, a continuation of the current flat yield curve conditions, calls for a relatively stable margin in Q2, followed by a compression of 2 to 4 basis points in the third and fourth quarters in 2016. If, however, the Fed were to increase the Fed funds rate earlier in the year, we would expect an improvement in our baseline NIM, our net interest margin outlook, by approximately 3 to 5 basis points in the quarters following the increase, given the asset sensitivity of our balance sheet. The provision for credit losses during the quarter was $2.6 million or 18 basis points, up from $2 million or 14 basis points in the fourth quarter, and up approximately $850,000 or 5 basis points from the first quarter of 2015.

During the first quarter, net charge-offs were $2.2 million or 15 basis points on an annualized basis, that compares to $3.2 million or 24 basis points for the same quarter last year, and $1.2 million or 9 basis points for the fourth quarter of 2015. Noninterest income of $15.9 million in the first quarter was down $1.1 million from $17 million in the prior quarter, primarily driven by lower security fees of $670,000 and a $937,000 benefit from the sale of the credit card portfolio that we recorded in the fourth quarter. Excluding these items, noninterest income increased a little over $500,000 or 3.3% from the prior quarter.

Loan-related interest rate swaps, swap fees $662,000 higher, and bank owned life insurance was $209,000 higher than the prior quarter. These increases were partially offset by lower customer-related fee income of $339,000, primarily driven by seasonally lower overdraft fees of $320,000 and lower wealth management income of $168,000, which was partially offset by higher seasonal safe deposit box rental income of $160,000.

First-quarter noninterest expenses were $54.3 million, down modestly from $54.5 million in the fourth quarter. OREO and credit-related costs decreased $3.9 million, related to lower valuation adjustments, as the Company recorded $4.2 million in valuation adjustments in the prior quarter related to updated appraisals on two large OREO properties we hold. This decrease was offset by increased salary and benefit expenses of $2.8 million and that's primarily related to seasonal increases in payroll taxes, the increase related to annual merit adjustments, as well as increased group insurance and incentive compensation expense.

Professional fees also increased $687,000, due to higher audit and project related consulting fees. Our marketing expenses increased $563,000, primarily related to the timing of advertising campaigns and higher public relations expenses versus the prior quarter.

As a reminder, the annual run rate savings from the 2016 branch consolidations and closings will be approximately $945,000, which [we expect to] begin in May. And during the quarter, [I should note] we incurred approximately $300,000 in associated non-recurring advanced closing expenses in the first quarter.

Now turning to the balance sheet. Total assets stood at $7.8 billion at March 31, up from the $7.7 billion on December 31, and an increase of $444 million from March 31, 2015 levels. The increase in assets was mainly driven by net loan growth during those periods.

Loans held for investment was $5.8 billion at quarter end, that is up 7.7% on an annualized basis, while average loans increased 7% annualized from the fourth quarter of 2015. Adjusted for the sale of the credit card portfolio in the fourth quarter of 2015, [loan] balances were up $417 million, or 7.8% from March of the previous year.

Going forward, we continue to project mid-single-digit loan growth for 2016, as we anticipate that we will see higher levels of pay-downs in the second quarter and beyond of -- versus what we saw in the first quarter. At March 31, deposits were $5.9 billion, a decrease of $18 million annualized -- or 1.2% annualized from December 31. Our net decrease in deposits from the prior quarter was primarily related to [reasonable] declines in noninterest-bearing deposits (inaudible) accounts, and some runoff in our (inaudible) accounts, which was partially offset by some increase in money markets and savings accounts. Importantly, deposit balances were up $276 million, or just under 5% from our previous-year levels.

As noted earlier, credit quality continued to improve during the first quarter. Non-performing assets were relatively unchanged at $27 million at quarter end, comprised of $13 million in non-accruing loans and about $14 million in OREO balances. Non-performing asset as a percentage of total outstanding loans is lower -- was lower by 1 basis point, now stands at 47 basis points, that's a decline of 32 basis points from the prior-year level.

On accrual loans, balances increased $1.2 million in the quarter, while OREO balances declined by $1.1 million, as Billy mentioned, driven by property sales closed during the quarter. Our allowance for loan losses increased $352,000, to $34.4 million at the end of March. The allowance as a percentage of the total loan portfolio, adjusted for purchase accounting, was 95 basis points at quarter end, that's down 3 basis points from our year-end levels and down 8 basis points from the prior-year levels. And that's a result of continuing improvements in our asset quality and the impact of lower historical loss rates on our calculation of the allowance.

Non-accrual loan coverage ratio was 263%, up [cheerly] from the 178% in the first quarter of the prior year. Our tangible common equity to tangible assets ratio at quarter end is 8.86%, that's down 34 basis points from the 9.2% level at December 31 and that's a result of the share repurchases and loan growth during the quarter. Our excess capital position at quarter end amounts to about $65 million, again with excess being defined as balances above an 8% tangible fund equity ratio.

We repurchased approximately 1 million shares during the quarter, at an average cost of $22.75 per share. As Billy noted, we have approximately $22 million remaining under the current Board repurchase authorization as of quarter end. Management and the Board of Directors continue to evaluate all capital management options, including dividend payout levels, share repurchases and acquisitions as a deployment of our capital for the enhancement of long-term shareholder value remains one of our highest priorities.

So in summary, Union's first quarter results demonstrate solid progress toward our strategic growth objectives. We remain steadfastly focused on leveraging the Union franchise to generate sustainable, profitable growth, and remain committed to delivering top tier financial performance in building long-term value for our shareholders.

With that, I would like to turn it back over to Bill Cimino, who will open it up for some questions.

Thanks, Bob. And Kyle, we are ready for our first question.

(Operator Instructions)

Your first question comes from the line of Casey Orr from Sandler O'Neill.

Good morning. Good quarter.

Thank you.

Thank you. Good morning.

Thanks. Can you tell us where you are now, on the expense side, in preparing for crossing $10 billion mark? How much have you spent, in terms of dollars or people or -- and have you invested there? And how much more spending do you think you have to go?

Yes. That's a good question. [As] we've talked before, we are investing in various areas to get ready for the -- crossing the $10 billion level. A lot of that spending is in building our enterprise risk management area out. And for the most part, we have made the investments in the people side of that. Just probably added about $2 million or so -- $1.5 million to $2 million on the people side. We still have some investments to go, in terms of some of the systems and software investments that need to be made that will take place over the remainder of this year.

We have also been investing in our technology infrastructure, and that is probably a quarter of the way done. We plan on investing in that technology and infrastructure areas during the balance of this year and probably some into next year. And we had estimated that would be about $2.5 million or so, but we have a ways to go, in that we have not finished that component. And then we have also got areas of investment that we are making in our DFAST capabilities, which we have just started undertaking that project and expect that another $500,000 to $600,000 would be spent this year to help us get in position for that.

But that wouldn't be all that we would be doing, with probably some additional investments in 2017 related to some people skill sets that we'll need to add, as well. So on the enterprise risk management side, I would say we're pretty -- a long ways towards that investment. Technology is probably about a ways to go, probably a quarter in. And DFAST is probably less than 10% in at this point.

Casey, let me add that I think Rob has summarized the expense portion of it. But I think there are some initiatives that we have alluded to, relative to gaining efficiencies and back office operations in other places that, once we have implemented them, we'll be glad to share what the cost is. But we think there will be some offsets to that spend.

Yes, that --

Great.

That's right. Sorry, Casey. Go ahead.

No, that's very helpful. And sticking with expenses, probably a question for Jeff, but it looks like mortgage expenses came down this quarter. But are you still expecting to add staff there? Or do you think you're all set with the people you have in place in that group?

From an spend expense control management perspective, I think we've done a lot of heavy lifting, and I don't really foresee significant improvement from that standpoint. I think the strategy for us is a revenue play. I think that the current leadership of the mortgage group would acknowledge that we're behind there.

Hiring has been difficult. We need to do better. I think to the extent we can do better, we should see incremental profitability immediately within the mortgage operation. I feel good about what we have today, in terms of the quality, in terms of the back office structure. So it's all about getting some leverage to improve the overall profitability.

Casey, just to add on that, [recall] what Jeff's talking about is adding mortgage loan originators where the conditions and the expenses go through the noninterest payoff set, the revenue line. So you won't see that come through in the expense line.

That's a fair statement. Yes.

Great. Thanks for taking my questions. I will let somebody else jump on.

Thanks, Casey. Kyle, we are ready for the next question, please.

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

Good morning, everyone.

Good morning, Catherine.

Good morning, Catherine.

Rob, you mentioned that the higher -- the margin was largely due to higher variable rate loan yields. Was there any impacts from higher loan fees this quarter, as well?

On a quarter to quarter basis, the loan fees were flat. They are about 12 basis points in that loan yield. But it's basically flat, quarter to quarter. So we didn't get a pickup from that.

Okay. And any commentary on the security bucket? It grew a little bit this quarter, a little bit more than we saw in terms of growth last year, and the yields also increased there. Any commentary on what you are putting on the books now?

Yes. We are pretty much sticking to our -- the way we have been investing, primarily in mortgage-backed securities and municipalities. We have added some corporate debt, a little bit of corporate debt. We've got -- I think we added about $20 million or so, in terms of subordinated notes and senior notes in the portfolio, which carry a higher yield than both the munis and mortgage backed.

So we haven't really changed anything on a wholesale basis, just around the edges. We did do some restructuring of the portfolio in the fourth quarter, in terms of trading out some lower-yielding investments, and reinvested those at higher levels. But -- and that helped a bit, in terms of our overall yields on the investment portfolio.

All right. Great. Thank you. Great quarter.

Thank you.

Thank you.

Kyle, we're ready for next caller, please.

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

Morning, guys.

Good morning, Wally.

Hey, Wally.

Most of my questions have been answered, but maybe a little bit more color on the expense line. Rob, you mentioned the -- I think you said $945,000 in annual cost saves that will come as a result of some of the branch closures, beginning in May, and then you mentioned something else right after that. And I apologize, I missed it. My connection is a little bit bad. But what was the next part of that commentary?

We had -- in the first quarter, we recorded $300,000 of non recurring costs to close the branches and consolidate the branches.

Okay, got you.

That's a one time behind us now.

Okay.

And going forward, we will get the run rate improvement.

So you get improvement in the run rates there. You talked about some continuing investment that you anticipate over the coming couple of years, really. So if we're looking at, say, a $54 million expense in the first quarter, net of that $300,000 in branch closure costs, would we anticipate that that level stays flattish to there, as any saves are offset by investments? Or do you -- or are the additional opportunities that you highlighted, Billy, as potential down the road, could that actually drive a reduction in the expense line, net of the investments?

Yes. Yes. We would expect -- remember, Wally, the first quarter is the high water mark for expenses, with the resets on payroll taxes and things of that nature. So you should see some relief downward from -- in the second quarter, from FICA and unemployment taxes that won't recur. We also had a couple of other items, [we just had a] branch closure [causing] things. So we'd like to see that number come down closer to the $53 million range, which I think we had talked about in our last quarter, on an average basis. Maybe slightly higher than that, given some of the investments that we need to make.

Okay. And then Billy, you mentioned in your prepared remarks that there is some additional REO under contract. What was the amount that you said?

$2.3 million.

Okay. And do you anticipate that goes in the second quarter? Or is that something that could be over the next couple quarters?

Being that some of what we still haven't closed we were projecting might close in the first quarter, I would count it as the -- into the second, because things have a tendency to slip sometimes.

Sure.

We are in the second.

We're in the second. We could -- (multiple speakers). Sorry, second and third. My apologies.

Okay. Okay.

[This is Bill]. I would say the majority of those properties under contract will close in 2Q. And there is maybe a couple that might slip, would be my comment on that.

Yes.

Okay. And then also on the credit line, I noticed that the addition to non-accruals jumped up some this quarter. Is there any specific color to that? Were there any larger credits, or is it just deterioration of a handful of credits that you had anticipated?

It's a lot of small --

It's a lot of -- yes. It's -- a lot of it is in the consumer mortgage book.

Yes. That's the lion's share of it. Yes. I would say the consumer book was more than half of the (inaudible) there.

Was that across all markets?

(multiple speakers) Let me -- we'll have to -- yes, I may. Hold on. I'll see if I can decipher that. I don't have residential real estate broken out by market, Wally. But if I just look at the non-performing increase in non-performing assets, you're into that -- I would be better off not answering this question, since I don't have that level of detail.

Okay.

So we can take you offline on that, Wally.

Is there -- is that something that you guys have marked to something to pay attention to, just as a monitor of any deterioration of credit quality?

Sure.

From a secular (multiple speakers) -- I mean, is there anything that you are worried about?

No, it's not anything we are worried about. We are not an aggressive foreclosure on (technical difficulty) houses. And as you know, now with the new CFPB rules, we can't start the foreclosure until they are 120 days past due. And we have got a very detailed loan mitigation -- or loss mitigation, but a mitigation process to try to salvage that credit.

So you have a tendency for things to build up in the first quarter, if you will, because we do have a heart, and we're not going to drop a foreclosure notice on somebody's doorstep the first part of December. And those kinds of things. So we --

Okay.

You tend to see some of this. Now, we've had these in here before, and you just haven't noticed them because there have been some other things. But --

Right. Okay.

That was the biggest category.

Okay. Thanks for that color. My last question, just for clarity. In the press release, you mentioned unrealized gains on mortgage banking derivatives. Is that hedging activity? Or is that different?

Yes. That relates to reporting the fair value of our interest rate lock commitments, and we had an increase in our lock pipeline that suggested fair value would go up -- (multiple speakers).

It's not hedging.

it's the pipeline mark?

Yes.

Yes.

Yes. Okay. Thank you very much, guys. I appreciate it.

Kyle, we are ready for the next question please.

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

Good morning.

Good morning, Laurie.

Just wondered, can we go back to the REO for a minute? I know it came in at $14.2 million. But do you have the split between what is the shuttered branches piece and what is REO? And then just remind us --

Yes.

Of this $2.3 million under contract, which bucket is that going to be?

(multiple speakers) No change in the former branch sites, year end to 1Q.

Okay so --

It's about $3.3 million.

That's $3.3 million.

$3.3 million. Perfect.

Foreclosed is $10.9 million.

And there are no former branch sites under contract.

Okay. Any thought, in terms of movement there? Or --

We are working on those as we speak. We did have one piece of property that was under contract in the quarter that (technical difficulty) that terminated the contract. So we continue to work that, but it's a relatively slow process on the branch side.

We are down to the more -- shall we say rural branches, where there would be less interest. So we're still getting some nibbles, but nothing under contract yet.

Okay. Great. And then the $2.2 million in net charge-offs, was any of that related to King Carter?

No.

No.

Okay. Was any of that related to -- because that's a little bit larger than you have been running. Was any of that -- was a chunk of that related to any one loan?

King Carter wouldn't have been a charge-off, because that's OREO. It would have just been a -- that would have been (inaudible).

Right, right. (multiple speakers) Okay. Okay. And then --

But it wasn't any -- it was about 50/50 on commercial versus consumer lending. Some of it had to do with -- [it would take] some recourse, some credit card loans back that we had. A couple hundred thousand was in that. Auto was --

We had some higher losses, yes, in direct auto, which is again not atypical for the second quarter. First quarter, things tend to get backed up on selling autos. (inaudible)

That was really -- okay. And the auto -- yes, you changed your loan breakouts lately. So the last data point I had on auto was around $225 million. Is that about --

Yes. Yes. It's up -- I think it's up over $230 million now. Don't have that in front of me right now.

[Past dues are] --

Yes.

Still running at [assort] levels or low levels.

Okay, and do you have an approximate FICO on your auto book?

This is Tony. Our credits are going on at about a 790 FICO score. So -- which is about -- a year ago, it was about 70 -- sorry, it was 700. It was 709 a year ago. So it's down slightly, but not materially. Pretty high credit quality.

I'm sorry, you know what? You are breaking up a little. I am having trouble with the connection. You said your average FICO is going on at what level?

700.

700. Okay. And then just can we go back to King Carter for a minute? Was there any adjustment in the quarter? Or does that still sit at about [$2.7 million]?

Yes, there was -- I won't call it an adjustment. There was a sale of almost $200,000 that we closed in second quarter at basically breakeven.

Okay, so that's down to about $2.5 million?

Yes, that sounds right.

That's right.

Okay. Okay. I mean, you have got that written down. It's such an immaterial amount, almost, at the moment. Okay, and then just if we could go back to loan loss provisioning. You mentioned you had a strong pipeline. How should we be thinking about -- with respect to your credit costs, obviously, the REO expense came way down. That looked great. And I know that you have got the tax payments that roll into 2Q and 4Q. But as we think about your overall credit costs going forward, can you give us any guidance with respect to loan loss provisioning and REO combined? Or however you break those out?

Yes, just sticking with the OREO balances -- or OREO costs, we are still sticking with between 500 and 750 a quarter.

Okay.

It can be up or down. Some of it has to do with some of the property taxes being a little lumpy in Q2 and Q4. In terms of the loan loss provisioning, we had about [15] basis point [slip] -- the way to think about it is cover our charge-offs and any loan growth on top of that, from a provisioning point of view.

So charge offs have been fluctuating between 8 -- this quarter was 15 basis points. And then putting on 90 to 95 basis points on any additional loan growth beyond that. So the provisioning will be 3 to 5 basis points higher than the charge-off ratio in any particular quarter, assuming loan growth comes in at levels we have been seeing.

Perfect. Okay. And then tax rate. Can you help us there? You were a little bit lower this quarter. How should we be thinking about that?

Yes. Yes. I think last quarter, I had mentioned running -- we would be running around a 26% tax rate. We came in at 25.5% this quarter. Basically, it's -- it probably should bring -- my viewpoint is that we should bring that down, going forward. We should probably see it closer to 25.5% [this week] by 7 or 8 versus the 26.% So we have taken our view of that down.

Okay. And then just going back to branch closures here. Do you expect any one-time hits in the second quarter, from the branch you're closing in May?

No. We have already taken the hits for the second quarter closures and consolidation, and that's part of the $300,000.

The $300,000? Okay. Okay. And then the annual savings you mentioned of the $945,000, how much of that was in this quarter?

There was zero in this quarter. We just closed the branches Friday, this past Friday. So none of the savings came through yet. The three that we closed -- or the net three we closed in April, you'll start to see that in May, that run rate come through. And then the one in May, you will start to see that in June. So nothing in the first quarter.

Just as a reminder on that, it's a little different than in the past, because we opened up a new one due to consolidation in Winchester. So it's a little bit different than what you have seen in the past, since you have that new branch open, which opened on Monday.

Got it.

Yes.

(multiple speakers) And then obviously this quarter -- because last quarter reflected some of your branch closure savings. So this quarter was the full reflect on the ones you closed at the end of last year? Is that right?

That's correct, yes.

Okay. And then just going back to your total expenses, you were -- again, if we start with $54.3 million, we are backing out the $300,000 of one time. The higher payroll taxes. That's another $200,000 that comes out. Your marketing run rate was elevated. Is that unusually elevated? Or is that --

No. That -- I would not take marketing down. That's -- we had a --

We don't typically advertise a lot in the fourth quarter, because you get lost in the Thanksgiving and Christmas clutter.

Yes, so the fourth quarter was a low point, and I wouldn't expect that that's going -- that the first quarter run rate will hold for the next few quarters.

Okay. And then what -- technology also elevated, but that will continue to stay elevated?

Yes. That will continue at the levels that you see, as well.

Okay. I guess it's worth thinking about, and certainly you mentioned the $53 million range. Could we potentially see it below that for this next one for two quarters? I am just adjusting some of that, or --

We're not projecting that, because we are doing -- seeing more hiring and building our technology infrastructure. We have also -- you'll get the -- we only had one month of annual merit increases during the first quarter. We will see another -- two more months in the second quarter. And that's $200,000 or $300,000 a month now. So I wouldn't want to go below $53 million.

Okay. Okay. And then just two more questions. Your assets under management, where did you finish the quarter?

$1.9 billion.

Okay. So then plus the $300 million, you will be up at $2.2 billion? The $300 million with Old Dominion? Is that --

That's correct, yes.

Okay. And then just Billy, one last more macro question, just circling back to where Casey started with the $10 billion mark. Can you talk a little bit about your thoughts on going that? Obviously, you went through the expense portion. But just how you are approaching that? How you approach breakeven? How you think about going over that? And what would be the timing, in terms of when we could see you make that leap?

We are thinking about it methodically. We are preparing ourselves for it. Organic growth-wise, we would like likely pierce $10 billion, just based on organic growth, in calendar year 2019. We then have 18 months or so after that before it would actually financially impact us. And so I would think that the leap piece to reach the financial breakeven would be an acquisition somewhere in the $3 billion to $4 billion to $5 billion range, where you would -- would get you to breakeven, though something larger than that would hopefully be accretive to offset the expense. And I would think it would be something that we would announce in 2018.

Okay. So likely this year or next year, we don't see you do any meaningful acquisition?

I didn't say that. You asked me when I was going to leap across $10 billion.

Okay. Okay. In terms of acquisitions?

I think we have been very consistent that if there is an opportunistic acquisition that would allow us to maximize earnings per share, maximize cost saves, give us a superior return on investments and a pretty quick payback of any tangible book value dilution, and it was somewhere in that $800 million to $1.2 billion range, we would look at it.

Okay. So right, so a small one. But in terms of a meaningful acquisition, is to fair to assume that you would back burner that for the moment?

Yes.

Okay. Perfect. Thank you very much.

Although those of us sitting around this table would call a $1.2 billion meaningful.

(laughter) Yes, absolutely. Thank you.

Yes, but reaching the $10 billion is --

Laurie, this is Tony. One clarification. The credit scores you asked about, the Beacon scores, are averaging about 720, not 700. So if it matters to you.

Yes. Perfect. Thank you.

All right. Kyle, we're ready for the next question, please.

Your next question comes from the line of Austin Nicholas from Stephens, Inc. Your line is open.

Hey, guys. Good morning. Great quarter.

Good morning.

Thank you, Austin.

A quick question, just on your wealth management business. How should we think about the profitability of the business that you recently acquired? And how does that fit into your acquisition, I guess, trajectory there? And maybe should we see those sort of acquisitions, be it a full firm or a team, over the next year or so?

Hey, Austin. This is Jeff. So I guess about a year ago now, we started down a path of trying to identify registered investment advisory firms that would complement what we're doing, and this is the culmination of that process. The idea is that having a registered investment advisory firm would help us, in terms of focus on the high net worth space, [and asset influence] space, provide some additional investment sleeves, some additional talent that would complement the talent that we have embedded in our wealth management group.

The private banking services, trust services, a brokerage, would complement their client base and conversely, what they have would complement our client base. So we are excited to get one on board. It is -- the firm itself, from a profitability standpoint, was attractive to us because it had operating margins in the mid 40% range. So that's pretty strong, and that will certainly complement the profitability of our group. We would anticipate that this is the platform from which we will grow from.

So your question, relative to would we add groups, would we add other firms? I think we would look at both. We would use this as the base platform to [get a fairly] robust compliance program in place, which was appealing to us, as well. So we certainly anticipate growing this RIA space, as we expect to grow our wealth management space within the bank. So excited about it, and think it makes a lot of sense from a strategy standpoint.

Okay. Great. That's really helpful. I think that's all my questions for now. Thanks, guys.

Thanks, Austin.

Kyle, we are ready for next caller, please.

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

Good morning, guys.

Good morning, Blair.

Just had a question on your loan growth drivers for the quarter. If you can just give us some more detail there, by category and by geographic location?

Geography. As you might expect, Richmond was our biggest growth market. They are tracking through the first quarter at the same pace they were tracking last year, at about a 12% growth rate. We also saw significant growth in our other two larger markets, Fredericksburg and Charlottesville, which was nice because Fredericksburg was actually down, net last year, as a result of some pretty significant pay-downs. So Richmond, Fredericksburg, Charlottesville, were the three drivers.

And as far as loan growth goes in the different categories, it's -- we are continuing to see -- hold on. I flipped to the wrong page. The whole construction loan, land development and other land piece was a big driver for loan growth. The bulk of that was coming out of builder lines of credit. We've got some -- we're seeing our builders start to have better opportunities, and we are also seeing some commercial construction. As you know, we are very active in historic rehab and other sorts of things, and so that piece is continuing to [provide] for us.

The other large area of growth is C&I lending, commercial real estate. We had some stuff move out of construction, commercial construction, move into commercial real estate. And then we had growth in the personal lines, as we are continuing to work with and partner with some of the alternative lenders out in that (inaudible) personal loan space, which is something we have been doing for years.

Okay. That's very helpful. Can you give us a sense of pricing today versus last quarter? And what you are seeing there, in terms of pricing competition, and who is giving you the biggest headaches right now?

I would say this quarter has not been as bad as it was in the fourth quarter, in terms of -- this is Tony, by the way -- in terms of the competitive environment. There is still a lot of fishing rods in the pond, and a lot of folks trying to go after the same game. So it is still competitive. I think the pricing has probably gotten a little more rational, and our loans are getting booked in the high threes, up to mid fours, so it's getting a little bit better there.

Okay.

That's pretty consistent across all markets.

Okay. Great. And then just one follow-up on the margin, Rob. How much of the rate increase impacted margins for the quarter? How much was the benefit there?

The rate increase in terms of the short-term rates moving?

Yes.

About 5 basis points.

Okay. All right. Great. Thank you very much.

Thank you, Blair.

Kyle, we have time for one more call, please.

Your last question comes from the line of David West from Davenport & Company. Line is open.

Good morning.

Good morning, David.

Good morning.

Just one question left. I wondered if you could give a little color on your new credit card relationship? How that's working for you, and the customer acceptance of that?

David, this is Elizabeth Bentley. How are you this morning?

Great, thank you.

We are still somewhat early in the process of the transition, so we've got teams working on reissuing cards to existing customers. They are going out in waves. We've had good feedback around that. We have pulled in the old portfolios from StellarOne and First Market Bank that had gone to Elan and all of those customers have been reissued our branded cards.

And so now we are turning our attention to selling to the rest of our base and improving penetration. That's in the very early stages. So feeling good about the relationships. Still operationalizing some things. But excited about the ability to bring a broader product suite to the rest of our clients.

Very good. Thank you.

Hey, David, one of the things Elizabeth didn't mention is -- she mentioned it, but I guess to quantify it -- the former First Market, former StellarOne customers, both those banks sold credit cards to Elan. And post-acquisition, Elan kept the cards and just branded them Elan. Getting those back, we should see a boost in the -- of transaction fee income of we are guessing about $300,000 that we don't have really good visibility into those customers, because they have been away for a while. But we are thinking that's going to be a nice little addition to noninterest income, as well.

Very good. Thanks for that color.

Thanks, Dave. And thanks for everyone who took time out to call in today, and we will talk to you in the next quarter.

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