Atlantic Union Bankshares Corp (AUB) 2016 Q4 法說會逐字稿

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

(Operator Instructions)

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

Thank you, Natalie, and good morning, everyone. I have Union Bankshares' President and CEO, John Asbury; Executive Vice Chairman, Billy Beale; and Executive Vice President and CFO, Rob Gorman, with me today. We also have other members of our Executive Management Team with us for the question-and-answer period.

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 on today's call which are subject to risks and uncertainties. A full discussion of the Company's risk factors are included in our SEC filings.

At the end of the call we will take questions from the research analyst community. And now I'll turn the call over to Billy Beale.

Thank you, Bill, and good morning, everyone. Union delivered a third consecutive quarter of double-digit loan growth and saw significant year-over-year improvements to our profitability metrics. For 2016, Union delivered a 16% year-over-year improvement in net income and a 19% growth in earnings per share to go with our loan growth of 11.2%.

It is interesting to note here, on my last earnings call, that Union had more loan growth in the fourth quarter than Union Bank and Trust had assets when I started with the Company in [1999]. I'd like to think that 2016 represented an inflection point in the history of Union as our results show we are on the right path to achieve the profitability goals established by our strategic plan. We've made significant progress on our work to get ready to cross the $10 billion threshold when investments in the Company's enterprise risk-management practices, IT infrastructure and Dodd-Frank stress testing capabilities.

And while more work needs to be done, we have continued to make our organization more efficient. The leadership transition has gone remarkably well. John Asbury hit the ground running, meeting with teammates, customers and shareholders.

As we are about halfway through the strategic plan work, his fresh set of eyes will help with any course corrections that might be needed to achieve our strategic and top-tier financial performance objectives. Finally, I want to thank all of you for your interest and investment in Union over the years. Since our public listing in 1993, until my last day as CEO, Union delivered a total shareholder return of 1,160%, which is nearly double the return of the S&P 500 over that same period.

I'm proud of what the Company has accomplished and the value it has returned to you, our shareholders. I continue to feel that Union's best days are ahead of it. The Company is well positioned to deliver sustainable, long-term shareholder value and we picked the right person to lead Union into the future.

With that, I'm going to turn it over to John Asbury.

Thank you, Billy, and good morning, everyone. As Billy noted, we had a very successful fourth quarter and FY16. Union saw strong year-over-year gains and our return on assets, which was up six basis points from the prior year, return on tangible common equity, which was up 145 points from 2015 and a year-over-year improvement of 223 basis points in the Company's efficiency ratio.

On net income, we earned $20.8 million, or $0.48 per share, an increase of approximately 17% over the prior-year's fourth-quarter net income level. And for the year, Union earned $77.5 million, which is approximately $10.4 million or 16% more than the prior year. Loan growth improved again this quarter as total loans were up 10.3% annualized from the prior quarter.

Our loan pipelines remain robust going into the first quarter of 2017 and at this point, we are projecting upper single-digit loan growth for 2017. Deposits increased by $121 million from the prior quarter or 7.7% annualized. We remain focused on matching loan and deposit growth and we target our loan-to-deposit ratio around 95% of the time.

From a shareholder stewardship and capital management perspective, Union increased the quarterly dividend by a penny, or 5%, to $0.20 during the quarter and our payout ratio is targeted in the 35% to 40% range. Also during the quarter we raised $150 million in subordinated debt. The offering was more than two times oversubscribed and was priced at the narrowest spread of any similarly rated deal in the last 18 months, and that is a testament to the soundness of the bank and our go-forward strategy.

When I started in October, I had the benefit of a well, thought out transition plan that was mutually agreed upon by the Board, Billy and me. I was able to visit every region of the bank meeting our teammates, customers and shareholders. The energy and enthusiasm that our teammates and customers have towards Union and our traditional, relationship-oriented value proposition has made quite the impression on me.

I do feel confident in saying that Union has a defensible market position and a unique spot in the competitive landscape. We have the scale and we have the products to compete with the big banks but we remain a community-focused bank with responsive local decision making. I've heard for many customers that for any number of reasons, they don't want to deal with the big banks when they don't have to and they value the customer experience they receive from Union.

I've heard the message and I'm committed to keeping and improving our customer experience as we move forward as a key competitive differentiator. I spent a great deal of time familiarizing myself with the strategic planning work that Union has undertaken. I think the Company is on the right track and has the right plan.

I'd also like to share my early view of four areas that I do think need focus going forward. They are diversification, core deposit funding, efficiency and preparing to cross the $10-billion asset threshold. And I will give you some context to each of these.

Diversification. Union has a great opportunity to further diversify our loan portfolio, deposit base and income streams. We are in a unique market position and can deliver many products and services better than a big bank. We need to leverage that opportunity and diversify our loan book and deposit base. Specific areas of focus include expanding our commercial and industrial banking effort, small business banking and our wealth management business, just to name a few.

Core deposit funding. Similarly, we can use our unique market position to broaden our deposit base to manage our loan-to-deposit ratio to our targeted 95% level. We will focus on improving our retail banking depository offerings, increase focus on deposit intents of small and medium size businesses and enhance our treasury management capabilities, where we believe we can offer a superior treasury solution with better and in-person support. We are also reviewing our overall brand position in conjunction with our newly hired Head of Marketing, Duane Smith, and I'm excited about the opportunity we have to better tell our story as we build the Bank one customer at a time.

Third point is efficiency. We have not made as much progress on our efficiency ratio as we have on our other top-tier financial metrics. While return on assets and return on tangible common equity improved meaningfully in 2016, the efficiency ratio, while improved, still lags behind. We've lowered our branch count by net of 10 in 2016 and we will close another branch later this month. At that point, Union will operate 113 branches across the Commonwealth of Virginia.

We will continue to evaluate our branch footprint and positioning to make sure we have the right branch footprint. Efficiency is not just about branch rationalization, though. We are reviewing our end-to-end processes and procedures with the intention of improving them, streamlining them and leveraging technology as we have never done before. We're also doing some peer group benchmarking that we expect will also point out areas for improvement.

And last, preparing to cross the $10-billion threshold. I have been pleasantly surprised by how far along we already are in the work that Union has undertaken to prepare to cross the $10-billion threshold. At our current growth rate, we expect to cross organically in early 2019 so we need to make sure that we stay focused on completing this important work. We expect to run our first DFAST test later this year and will finish building out the enterprise risk and IT infrastructure. As you know, crossing the $10-billion mark will cause lost revenue and increased expense so that's another reason we are keenly focused on becoming as efficient as possible before we move over it.

So to summarize, Union had a great fourth quarter in 2016 with double-digit growth in loans, earnings per share and net income. We added to our capital base with the sub-debt offering that was on great terms and in our shareholders best interest and the CEO transition has been remarkably smooth, thank you, Billy, exceeding my own high expectations on the matter.

As good as 2016 was, I think Union will perform even better in 2017. I will now turn the call over to our Chief Financial Officer, Rob Gorman, to cover the financial results for the quarter. Rob?

Well, thank you, John, and good morning, everyone. Thanks for joining us this morning. I would now like to take a few minutes to walk you through some of the details our financial results for the quarter.

As John noted, earnings for the fourth quarter were $20.8 million, or $0.48 per share, which is up from third-quarter's $0.47 per share, and 20% higher than last year's fourth-quarter earnings per share of $0.40. For 2016, Union earned a $1.77 per share, which represents a $0.28 or 19% increase over the prior-year's $1.49 earnings-per-share level.

Looking at the segments, the Community Bank segment's results were $20.4 million, or $0.47 per share, for the quarter, which is up $800,000 from the third quarter. While the mortgage segment reported a profit of just under $400,000 or $0.01 per share, compared to $785,000 in the third quarter, basically due to lower mortgage loan origination levels.

For the year, the Community Bank segment had $75.7 million in net income. That's up $8.4 million, or 12.5% from 2015 levels. And the Mortgage Company earned $1.8 million, which is up $2 million from the prior year's net loss position of $200,000.

During the quarter we continued to make progress on our path to top-tier financial performance with noted improvements in our profitability metrics. Return on tangible common equity was 12.1%, up 167 basis points from 10.4% in the same period last year. For the year, return on tangible common equity came in at 11.5%, which is up significantly, [145] basis points from 2015 levels. Return on assets was 99 basis points, which is up six basis points from the fourth quarter in 2015. And for the year, the return on assets came in at 96 basis points, up again six basis points from the 90 basis points recorded in 2015.

The Company's efficiency ratio declined 154 basis points to 62.8% in the current quarter and declined 363 basis points from last year's fourth quarter. For the full year, the efficiency ratio declined 223 basis points to 64.3%.

Now turning to the major components of the income statement. Tax-equivalent net interest income was $71.5 million. That's up $6.6 million, or 10%, from the prior-year's fourth quarter, driven by higher earning asset balances. For the year, net interest income was $275.4 million, up $14.5 million or 6% from 2015 levels, driven by higher earning asset levels, partially offset by the impact of net interest margin compression of nine basis points.

The current-quarter's reported net interest margin increased two basis points from the previous to 3.78%. For the full year the reported net interest margin was 3.8%, which was a decline of nine basis points for the prior year. Accretion of purchase accounting adjusted for loans and borrowing added eight basis points to the net interest margin in the fourth quarter, which is down one basis point from the prior quarter. For your reference, actual remaining estimated net accretion impacts are included in the table in our earnings release.

Turning to the core net interest margin, which does not include the impact of acquisition accounting accretion, it came in at 3.7% in the fourth quarter, which is up three basis points from the third quarter level due to higher learning asset yields of five basis points, which was offset by a two basis point increase in the cost of funds.

Core earning asset yields increased five basis points to 4.14% primarily driven by a 1% increase in higher yielding loans as a percentage of earning assets and increased commercial loan levels swap-related interest income that are accounted for as fair-value hedges. The quarterly hedge-related increase was due to the significant increase in market interest rates during the quarter. The two basis point increase in the cost of funds to 44 basis points was primarily driven by the impact of the subordinated debt issued in December. The cost of deposits was 30 basis points for the quarter, which was up a basis point from the third quarter, primarily due to changes in the positive mix during that timeframe.

Going forward, our baseline net interest margin projection, which assumes that the Fed will raise the fed funds rate by 25 basis points twice in 2017 and that the current steepness of the yield curve persists over the medium term, calls for a net interest margin compression of four to six basis points in the first quarter, driven primarily by the full-quarter impact of the recent subordinated debt issue, followed by margins stabilization and some increase in the second quarter and margin expansion continuing in the second half of 2017.

The provision for loan losses in the fourth quarter was $1.5 million, or nine basis points of loans, down from $2.4 million, or 16 basis points, in the third quarter and down approximately $500,000 from the fourth-quarter 2015 provision level. During the quarter, the Company also recorded a $250,000 provision related to unfunded loan commitments which resulted in a total $1.7 million provision for credit losses in the fourth quarter. For the year, the provision for credit losses was $9.1 million, which was down slightly from $9.6 million in 2015.

During the fourth quarter, net charge-offs was $824,000, or five basis points, on an annualized basis which compares to $1.2 million, or nine basis points, for the same quarter last year and $929,000, or six basis points, for the prior quarter. The full-year net charge-off ratio was nine basis points in 2016, which was down four basis points from 13 basis points 2015.

Non-interest income in the fourth quarter was $18.1 million, which is down $900,000, or 4.7%, from $19 million in the prior quarter, primarily driven by lower mortgage banking revenue. For the year, noninterest income was $70.9 million, which was an increase of nearly $6 million, or 9%, from 2015 levels.

Mortgage banking income decreased approximately $600,000, or 18%, to $2.6 million in the fourth quarter, compared to $3.2 million recorded in the third quarter, related to seasonably lower mortgage loan originations as well as fair-value adjustments associated with the interest rate lock derivative. The fair value of the interest rate lock derivative declines $500,000 in the current quarter, compared to an actual increase of $64,000 in the prior quarter as a result of lower levels of locked mortgage balances at year end. As expected, mortgage loan originations declined by $11.3 million, or 7%, in the current quarter to $145 million from $157 million in third quarter.

Noninterest expenses declined $646,000, or 1.1%, to $56.3 million for the quarter ended December 31, 2016, down from $56.9 million in the prior quarter. Salaries and benefit expenses declined $451,000 primarily due to lower levels of incentive comp expenses. Other declines in noninterest expense were driven by $400,000 in branch closure costs incurred in the prior quarter, lower loan-related expenses of $379,000 due to lower appraisal expenses, reduced levels of professional fees of $242,000 and lower amortization of intangible assets of $101,000. These lower expenses were partially offset by approximately $900,000 in increased franchise tax expenses, which was driven by a one-time tax credit recognized in the prior quarter related to the Company's investment in a historic rehabilitation project in relation to a community development project that we finalized during the past quarter.

Our effective tax rate for the fourth quarter was 27.5%, that compares to 23.3% in the third quarter. The increase in the effective tax rate was primarily driven by a one-time tax credit recognized in the prior quarter related to the Company's investment in the historic project noted and the proportionally higher levels of taxable income versus tax exempt income. The effective tax rate for the year ended 2016 was 25.7% compared to 25.8% in the prior year. Going forward, we project the full-year 2017 effective tax rate to be in the 26.2% to 26.5% range, excluding any impact of tax reform that might become effective during the year.

Turning to the balance sheet, total assets stood at a $8.4 billion as of December 31, an increase of $700 million from prior year. The increase in assets was driven primarily by the loan growth that we saw during 2016.

At year end, loans held for investment were $6.3 billion, that's an increase of 10.3% from the prior quarter. Loans increased $635 million, or 11.2%, from December 31, 2015, levels while quarterly average loans increased $602 million, or 10.7%, from the prior year. And as John noted, we are projecting that loan growth in 2017 will be in the upper single digits.

At December 31, total deposits were $6.4 billion, that's an increase some 7.7% annualized from September 30 levels. Deposit balances were up $416 million, or 7%, from the prior year-end levels.

Credit quality continues to improve during the quarter. Nonperforming assets were down $3.2 million to $20.1 million at quarter end and that was comprised of $10 million in non-accruing loans and $10.1 million in OREO balances, which includes, as you recall, $2.7 million of former bank locations.

Nonperforming assets as a percentage of total outstanding loans were lower by six basis points and now stand at 32 basis points and declined 16 basis points from the prior year. For the year, nonperforming assets declined by $7.2 million. The allowance for loan losses increased by $650,000 to $37.2 million at of December 31, and that was primarily driven by loan growth during the quarter.

The balance as a percentage of the total loan portfolio adjusted for purchase accounting was 86 basis points at quarter end, down slightly from September 30 as a result of continuing improvements in our asset quality and lower historical loss rates. The allowance now covers approximately seven times the net charge-offs for 2016 while the non-accrual loan coverage ratio increased to 373% from 288% in the third quarter and 285% at year-end 2015.

We continue to be well capitalized from a regulatory capital ratio perspective. As mentioned previously, we cost effectively raised $150 million in subordinated debt during the fourth quarter, which strengthened the Bank's regulatory capital levels, reduced the Company's commercial real estate concentration ratio to below 300% and provided additional capital capacity to continue to grow loans at an upper single-digit level.

So in summary, Union's fourth-quarter and full-year 2016 financial results demonstrated solid progress toward our strategic growth objectives. As we move forward in 2017, we remain focused on leveraging the Union franchise to generate sustainable, profitable growth and remain committed to achieving top-tier financial performance and building long-term value for our shareholders. With that, let me turn it back over to Bill, who will entertain questions from our analysts.

Thanks, Rob. Natalie, we're ready to begin our question-and-answer period.

(Operator Instructions)

Catherine Mealor.

Thanks, good morning, everyone.

Good morning, Catherine.

First, great quarter. And also I wanted to start on expenses. And, Rob, I might have missed this if you gave guidance but wanted to see if you could give us an update on your outlook for expense growth this year? I'm assuming that it's fair we can take out that $900,000 of the franchise tax expense this quarter.

And then outside of that, how should we think about a core expense growth rate and then maybe some opportunities for potential expense reductions as we move into next year and you become more and more focused on improving that efficiency ratio? Thanks.

Yes, in terms of the outlook for expenses, we are going into 2017. We are looking at about a little over 2% growth in expenses so you can expect to see that the quarterly, on average, basis will be between $56.5 million to $57 million. That will be -- of course, the first quarter you will see a bit higher level than the average for the year due to the seasonality regarding resetting FICA and things of that nature, payroll taxes.

So we are suggesting that expense growth will not growth considerably. We have made investments in our $10 billion threshold, investments that we need to make and maybe there are a bit more to make but not material numbers. And we continue to look hard at the efficiency ratio, as John had mentioned.

We've got some projects that are underway that will assist in keeping that growth rate at that level, which will offset some of the impacts of the merit increases, et cetera, that you would normally see during the year. So that is pretty much what we're looking at from an outlook point of view and hopefully continue to drive down that efficiency ratio.

That's great, thank you. And then one thing on the taxes, Rob, you mentioned your outlook for the tax rate this next year excluding any tax reform. Have you thought about what your tax rate could look like under, let's say, 10% and lower corporate tax rates and maybe any DTA impact that we could see as well?

Yes, so in terms of the impact there, we've had some modeling around that. If we did see the 35% go to 50%, we would see our effective tax rate get into the 11%, 12% range, which is pretty significant. And if it went to 20%, we would be in the 13%, 14% level. Obviously, those would be significant from a bottom line perspective, basically an $0.18 to $0.25 per share improvement in the bottom line if those 15% or 20% were to come about in 2017.

Of course, we will, as you know, we have to take an impairment charge on our deferred tax asset. We've got about $18 million of deferred tax asset as of year end.

You know, 15% or 20% would be an $8 million to $11 million impairment based -- depending on what the rate ended up at. And obviously, we would earn that back very quickly, within a year or less based on the effective tax rate reduction.

Got it, very helpful. Thanks. Great quarter.

Thanks.

Natalie, we're ready for our next caller, please.

William Wallace, Raymond James.

Thank you and good morning, guys.

Good morning.

My first question, maybe just as a follow-up to Catherine's expense question. You know, it feels like, I think, John, in your prepared remarks you mentioned that, that's still an area of focus and it's kind of lagged expectations. If you were to maybe look back at 2016, where are the trigger points where expense has missed your expectations?

Trigger points where expenses have missed my expectations. Rob, I guess the way I'm inclined to respond to that would be what -- how expenses faired vis-a-vis the 2016 plan.

Yes.

And while some of the differences -- so we were a bit above the -- what we had planned for going into the year. Some of that had to do with some of the cost associated with DFAST, which came in a bit higher, not that much. We also had a good year, which drove up our incentive compensation expenses so that's just based on the profitability of the Company exceeding our expectations as well.

Remember, we also made investments in Old Dominion. We made investments in our LPO in Charlotte and those have driven up the expense base as well. Of course, offsetting that is benefits on the noninterest income and net interest income side.

We closed branches too.

Yes. So I think, while it was more driven by investments we were making in the Company and benefits of --or the impact of the benefits of beating profitability.

And, Wally, as you know -- this is John -- if you look at the expense structure of the bank and stack rank it from high to low, it looks like most banks would. It's going to be, one, people; two, facilities; three, technology; and then everything else. I think Union has done a good job in terms of addressing the branch infrastructure and beginning to bring that down.

We had to deal with the Martin's situation, which was not of our choosing. And so there has been some expense associated with preparing to get out of that and move the majority of those branches. But I remain convinced that we have opportunity to continue to run the Company in a more efficient manner, not just addressing the branch infrastructure but also looking at technology. We have a lot of manual processes, we have a lot of paper that moves through the system, and as we continue on our growth trajectory, we can put ourself in a position too, to where we do not need to add the sort of headcount that we would have if we were sort of business as usual.

There's a lot of work underway this year to look at that and I would rather be somewhat conservative in terms of our commentary as to exactly what to expect. I would reaffirm we have said before, Rob, that we need to get the efficiency ratio below 60% and not just by writing [off as a low rate] environment

Okay. Great. Appreciate that color. On the margin, Rob, you mentioned there was some increased swap-related income, interest income that was a benefit fourth quarter. Can you quantify that benefit?

Yes, it was about $600,000 for the quarter. So it was about 3 basis points, or so, in the loan yield. Actually in the net interest margin. Loan yield was a bit higher than that.

Okay. So then if we were to kind of normalize that out and think about the sub debt impact in the first quarter, you are expecting about a 3 basis point benefit from the December hike? Is that true?

That's right. You would get that 4 basis points to 6 basis points and then we'd [peak] there.

And then, so if we got two more hikes this year, as your modeling, each hike do you anticipate you would get 3 basis points to margin? Or do you anticipate that, that benefit declines maybe deposit prices increase?

Yes, the three basis point is probably a pretty good number and that would be netting out some of the impacts of any additional cost of funds we got -- we would get from a wholesale funding perspective increase as well as potential -- not in the next -- I wouldn't expect it in another rate that we'd have to move deposit levels that much. But the second one, I think you're going to start seeing market pressure on deposit. So on average it will be about 3 basis points of benefit in the quarter after.

Great, thank you. My last question is, moving to the mortgage segment, I couldn't help but notice that the refinance volume was up about 35% sequentially. It's the highest level that I see going back about 3-1/2 years and it is the first quarter in almost, I think, 2 years that it was above the purchase volume in the quarter. Is there any -- do you have any feeling as to why the refinance pipe so high in the seasonably weak, typically, quarter?

Yes, Wally, this is John and I'm going to ask Jeff Farrar to provide color commentary. He's responsible for that unit. There was an element of a bit of a rush with the expectation of rising rate environments where people were sort of queued up to get refinancing in while they could. Jeff, can you?

Sure.

They were sort of happy to --

Wally, we had a little bit of a bubble of refinance activity work through the pipeline that goes back to mid-third quarter when we saw a reduction in mortgage rates from a market standpoint. So it just -- it more or less took that period of time to work through the pipeline. That represented about $10 million and about a 10% increase in the relative contribution of refi to purchase money.

So we kind of see that as just a little bit of an anomaly. We, historically, have been very strong on purchase money. I think historically we've been more like 35%.

We're going to model that down somewhat in 2017 in anticipation of refinance activity obviously being under pressure from current mortgage rates. But that's really the reason for the uptick in the fourth quarter.

Okay. The gain on sale margins, as the mix shifts back towards purchase, would you anticipate some recovery on the gain of sale margin side of that?

Well, you would typically -- yes, you would typically expect your gain on sale margins to come in with less refinance activity. And we have modeled, I think, about 15 bps of reduced margin on a go forward.

Yes, reduced margin primarily because the industry is contracting in terms of production levels and you'll see a lot more competition, right?

No, it's related to typically stronger gains on the refinance loans than you would have on your purchase money, so we have modeled it from that perspective.

Okay. Thanks, guys, I appreciate the color.

Thanks, Wally.

Natalie, we're ready for our next caller, please.

Austin Nicholas, Stephens.

Hello, Austin.

Hey, guys, good morning. Great quarter. So as you make your way up to the path to the 13%-plus return on tangible common equity, you know, given some more clarity and rate hikes and a change in the economic outlook, does that path become shorter?

I guess is it -- do you achieve that 13% or greater more sooner rather than later in your mind? And when, just ballpark, do you think that, that could happen?

Yes, Austin, you are right. The rate rise does help us accelerate that path to the 13%. We are suggesting that, that will probably come in a couple of quarters than we had projected before, but we are looking towards the end of this year, going into the first quarter to be in that range on a quarterly basis.

Okay.

Part of that really depends on where -- how the Fed moves. As we said, we have got two rate moves in 2017.

If it was three that would be even better for us. If it is one that will hurt us a bit. And we also need the steeper curve that we've seen in the last month or so, two months, to maintain that level and maybe improve a little.

Got you, okay. That's helpful.

And then just maybe shifting towards the Company's M&A strategy, is there any change there? Should we still continue to see purchases of small asset managers like we've seen over the last year? And then maybe, what's the message on whole bank M&A as well?

Okay. I will start with the RIA strategy. We are keenly interested in continuing to develop and build out the wealth management business through the acquisition of RIAs and I would say that we are actively looking at opportunities there, so no change there.

In terms of the broader issue, the way I always prefer to answer this question is to start by saying that the single most important objective of the bank is to drive organic performance to build the bank one customer at a time to make the most of the franchise that we have right here, right now. That is our primary objective. Having said that, particularly given the reality of the $10 billion asset threshold, there's no question that an important but secondary strategy will be M&A and so that is something that is on our mind.

I do not think that the leadership transition which we are in the process of completing slows us down in any way, shape or form. And it is a part of the plan and any thing we would do there would make both financial and strategic sense for the Company.

Okay. I appreciate the color, guys, and have a great one.

Thank you. You as well.

Natalie, we are ready for our last caller, please.

Laurie Hunsicker, Compass Point.

Thanks. Hi, good morning, gentlemen.

Good morning.

Just a follow-up on Austin's question. Can you just remind us, what are the parameters in terms of asset size that you will consider? And has your thinking change at all?

We have seen obviously a really nice increase in your stock price in the last quarter. Has that impacted your thinking?

Well, I think that it certainly improves the currency that we have available to us. There's no question about it. What we have been -- Billy, I will ask you to chime in on this one too because we've talked about this extensively.

I think about it in the context of, first of all, what would be the smallest that we would entertain? We have said publicly that in general we think about a company which would have assets of say $700 million. Having said that, I would never say never to something that was a little lower if it made strategic sense.

And then I don't know that we've given an upper bound, but I certainly do think that we would have the capability to execute a transaction that would be substantially larger than that and we've done it before. If you think about the history of Union Bank, the acquisition of StellarOne, so we could absolutely look at something that would lift us nicely above the $10 billion asset threshold if it made strategic and financial sense. So that's probably about the most clarity I can provide unless Billy or Rob care to be more specific.

So a merger of equals wouldn't be off the table? You would consider almost a similar size bank to yourself? Is --

Well, I would say -- let me think about the right way to answer that one. The Board will always do what is in the best interest of our shareholders. In terms of what we are actively pursuing right now, it would not be of that magnitude.

Okay. But something of similar size. And then, yesterday -- or rather Sunday, we saw Pinnacle buy BNCN and simultaneously also a capital raise and so that deal was accretive to book and accretive to earnings. Would you consider, in conjunction with doing the deal, also doing a capital raise?

Rob?

How do you think about that?

Well, yes, I think we would have to evaluate the situation at the time based on the acquisition. Does it make sense? Certainly as John said, we are going to do what's right for the shareholder and if that makes sense we would do that. Yes.

And then --

So I can't comment on it unless we know what the transaction looks like. If it made financial sense and created value for us as a part of the overall transaction, I would say sure.

Okay. And then, John, just to put you on the spot a little bit here. Typically the 5%, the [5% in five years], as it's called, the dilution to tangible book and earn back, would you commit to being in that path? Or how do you think about that?

Well, I certainly think, Laurie, it's a fair question. That has been our declared objective. That is how we think about it.

Could there ever be a scenario where we would do something that would deviate from that? I would never say never. But I think we have been clear in terms of what are parameters are.

Rob, what would you say?

Yes, I would agree with that, John. But yes, Laurie, we certainly evaluate in the 5% in five years based on the, not the crossover method but --

If and when the opportunity comes, we are well aware that we will have to stand here and defend -- have to make the financial case. We will have to make the strategic case. And if we don't think we can do that successfully, we wouldn't do it at all.

Looking at some things, we passed on things based on financial returns.

And then just one last question on M&A. Have you all had any increase in discussion levels since you've had an increase in your stock price?

I'd really rather not answer that, per se. What I would say, in general terms, is Billy has done an outstanding job of he and I making the rounds, principally in the context of introducing me in my new capacity. And I think that, in a big general term, there's no question in my mind that chatter has picked up across the industry. We are certainly seeing a lot of activity in the southeast and that's how I will answer your question.

Okay. Fair enough. I will leave M&A there. Okay. So just quickly a few other things. Assets under administration, do you have that number for December?

Yes, so we finished the year that $2.341 billion so we were up $360 million -- excuse me, $461 million for the year. $300 million of which was the acquisition of Old Dominion Capital Management. $141 million of which was both market and organic growth.

And, Laurie, that was Jeff there who answered that. Thank you, Jeff.

Great. Okay. Thanks, Jeff. And then credit. Obviously, your credit is pristine here but just if you can update us on two components of the REO? It looks like your real estate held for investment, which is primarily the shuttered branches, didn't change linked quarter, and I had thought in my notes we had $1.3 million under contract. Did something slide there? Or?

Well, we had $1.3 million that closed during the quarter but was not related to the bank specific properties that we had. That was in the overall OREO bucket, in that case the forecloses properties.

So we did have some -- the sales did come through way we had suggested. We are continuing to evaluate the bank owned properties or the former bank premises and continue to look for opportunities to divest that property.

Lori, this is Jeff. We did have one contract fall through, that you may be referring to, related to one of our old op center buildings. Continue to work to try to move that, but the contract that we alluded to last quarter fell through.

That fell through. Okay. And then same question as it pertains to King Carter. I think as of September, I had that at $2.5 million and they were supposed to be $1.5 million, potentially under contract to close in fourth quarter. Did we see that or do you have a new balance on King Carter? Or of any change there?

King Carter is now about $2.2 million. We did sell more property related to that, that closed during the quarter. Currently related to King Carter, we don't have anything under contract but continue evaluate this.

Okay. So only had $300,000 come down? The $1.5 million didn't materialize? Is that?

Yes.

Okay. That is helpful. Okay. And then just going back to branches for a moment. So you are at 113 when you closed your last branch, that takes you to 7 in-store, is that correct?

Yes, it brings us down to six remaining.

This will be in store with this latest closing. Okay. And then how do we think about branch closures for the rest of the year? Or do you feel like for right now you are done?

Well, Elizabeth Bentley, Head of Retail Banking to speak to that.

Hi, Laurie, it's Elizabeth. I think you have heard me say this before, we have a good history of looking at our markets and reacting where we feel it is appropriate to branch closures. We don't do, however, is broadcast that in advance.

So we always let our teammates and customers now before we go public with any definitive around closures. So I would tell you that we are continually looking at the market and as we make those decisions we will let you know.

Okay. Great. Rob, last question for you. Just going back to margin and your color around margin compression, the 4 basis points to 6 basis points, is that from the core margin or from the reported margin?

Yes, that is from the core margin, Laurie.

Okay. And so when I look at the core margin, you had exceptional accretion. Your accretion was $1.6 million. So core margin was right around -- (multiple speakers) And then your accretion is probably going to go down to round numbers of $1 million or $1.1 million for next quarter?

Well, it will go down about $1 million for the full year.

Right, so that theoretically reported -- (multiple speakers)

--In the release, so we had for the year, for 2016 we had about $5.7 million of accretion and that's going down to about $4.8 million. So the way I look at it is, we had 8 basis points of accretion this year and it's going to go down to about 6 basis points next year.

Great, that's helpful. Okay. Thanks.

Thanks, Laurie, and thanks for everybody for dialing in today. We will post a webcast -- we will post a replay of this on our website a little bit later today. Thank you.

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