Atlantic Union Bankshares Corporation (AUB) Q3 2016 Earnings Report, Transcript and Summary

Good morning. My name is James and I will be your conference operator today. At this time, I would like to welcome everyone to the Union Bankshares Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be question-and-answer session. [Operator Instructions] Thank you. Bill Cimino, Vice President of Corporate Communications, you may begin your conference.

Thank you, James and good morning everyone. I have Union Bankshares CEO, Billy Beale; Union Bankshares President and Union Bank & Trust President and CEO, John Asbury; 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; 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 to download on our Investor Web site 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 will turn the call over to Billy Beale.

Good morning, Bill or thank you, Bill and good morning everyone. I appreciate you taking time out of your day to be on the call and certainly I feel like we have exciting news this morning. Union has produced another quarter of double-digit loan growth; double-digit deposit growth. We showed significant improvements in our profitability metrics clearing a return on assets of 1% and a return on tangible common equity of 12. The organization during the quarter continues to work to become more efficient. And we're also reflecting solid growth in non-interest income. I believe that the third quarter results showed that we are clearly on the path to achieve the top-tier financial performance that we have been sharing with the investment community for the last 18 months. We earned $20.4 million or $0.47 a share an increase of approximately 12% over the prior year's third quarter net income level and year-to-date our net income is up 15% over last year. We continue to capitalize on organic growth in our markets and I think this is a reflection of improving Virginia economy as well as the brand strength that Union has as we continue to grow market share in each of our markets. As I mentioned loan growth improved, again, this quarter's total loans came in at 14% annualized, growth for the quarter. Our production levels remained steady. Our pipeline remains study and the growth was broad-based across our footprint in both the consumer and the commercial loan categories. Our loan pipelines remain robust going into the fourth quarter and given the strong growth year-to-date of 11.2% annualized in the strong pipeline we are now expecting loan growth for the year to be in the low double digits. This is up from the upper single-digit guidance that we had previously provided. Our efforts to create a more efficient enterprise continued. We are renegotiating contracts to better manage for vendor relationships. We are in the process of reengineering our back-office operations to gain efficiencies and to make it scalable for future growth. We are continuing to review our facilities to move unused office space and optimizing our branch network to make sure we have the right branches in the right trade areas. After closing five branches in September, we are down a net of nine branches year-to-date and currently operate 115 branches across our footprint and we expect to close an additional in-store branch in December and one more in January. I want to complement our mortgage loan team. They followed up on a solid second quarter performance with an even stronger third quarter. This improved financial performance was a result of a continued focus on operation efficiency as a 12% increase in mortgage loan production volumes from the second quarter. From a shareholder stewardship and capital management perspective Union repurchased approximately 100,000 shares during the quarter totaling nearly $2.5 million. And approximately 13 million remains available under our authorization. So to summarize, I think we are on the right track with strong financial results for 2016 as our growth strategy continues to take hold and as we take the actions necessary to make us a more efficient company in the future. I know I have said this before, but our recent operating performance demonstrates that we are well-positioned to realize the long-term potential value of our franchise and to achieve our goals that we have stated. It is likely that this will be the last conference call that I participate in. I want to thank you for all of your interest and your investment in Union over the years. Since 1993, the year I became CEO, Union has delivered a total shareholder return of 840%. And while I am proud of what the company has accomplished over the last 25 years and the value that it has returned to you our shareholders. I continue to feel that Union's best days are ahead of it and that we have picked the right person to lead Union into the future. As a reminder, we announced our CEO transition plan in August and John Asbury started with Union as President of the Holding Company and President and CEO of the Bank on October 1. After the first of the year, I will transition to the role of Executive Vice Chairman and John will take over the CEO title of the Holding Company. I will let John speak to his initial thoughts in a moment but I will say that he has hit the ground running. The feedback that I have gotten from teammates and customers has been uniformly positive. Our teams are meeting the challenge that I put forward to them of not letting a CEO transition distract them from the progress we're making and they are energized to move Union forward. I am confident that our leadership succession plan solidly positions the company to generate top-tier financial performance and attractive long-term shareholder returns. I am looking forward to your questions at the end of this call. But with that I will turn this over to John.

Thank you, Billy, and good morning everyone. As Billy noted I joined Union on October 1. So, I won't comment directly on the third quarter financial results and instead I will deal with my initial observations about the company and our path through the transition. As many of you know I was born and raised and educated in Virginia. I began my banking career nearly 3 decades ago at the Old Wachovia Bank in Winston-Salem, North Carolina, before moving to Roanoke to work at NationsBank. NationsBank later sent me to Richmond and I have spent nearly a decade as a banker in Virginia. So, while I have been away since then I have been aware of Union for some time and I've long admired with Billy and the Union team have been able to accomplish with this great franchise. Now, hitting my third week I have been quite busy meeting our teammates across multiple departments and regions and our customers. I have been impressed by the energy, the enthusiasm that both our teammates and our customers have toward Union and our traditional relationship branded value proposition. And those common themes that I'm hearing from customers are that our bankers take the time to understand their needs and objectives. That we do -- we say we are going to do and if they trust us. I think that's a defensible competitive position in my opinion and long that last. During the interview process, I had the chance to review the strategic plan in addition to the publicly available information for the company. So I have been getting up to speed on the detailed progress the team has made on the strategic plan and I feel quite confident that the financial targets that have been laid out our achievable in the established timeframe. I will continue to dig deeper into the organization and planned to visit all of our banking regions by the end of the year to continue to listen to our teammates and customers and learn what Union can do even better. I will also hit the road to meet the institutional shareholders and analysts to keep our lines of communication open. So to summarize, now, three weeks in, I firmly believe the company is on the right track. I am deeply honored to have been selected to succeed the Billy. I am having a lot of fun and today I am even more excited about the opportunity to lead Union forward than I was when I accepted the position. With that, I will turn the call over to Rob to cover the financial results for the quarter. Rob?

Thank you, John and good morning everyone. Thanks for joining us today on the call. I would now like to take a few minutes to walk you through some of the details of our financial results for the third quarter. As Billy noted earnings for the third quarter were $20.4 million or $0.47 per share. That's up 6.8% from the second quarter's $0.44 earnings per share and 17.5% higher than last year's third quarter's earnings up $0.40 per share. On a year-to-date basis Union has earned $1.29 per share which represents an 18.3% increase over the prior year's $1.09 earnings per share level. The Community Bank segment results were $19.6 million or $0.45 per share in third quarter, while the mortgage segment contributed a profit of $785,000 or $0.02 per share as compared to $539,000 in the second quarter and that was due to increased mortgage loan origination levels. Mortgage has now earned $1.4 million on a year-to-date basis versus a net loss in the prior year's nine-month period of $100,000. So very good strong progress in the mortgage bottom line year-over-year. During the quarter, we continued to make progress on our path to top-tier financial performance with noted improvements in our profitability metrics this quarter. As Billy mentioned return on tangible common equity was 12% that's up 40 basis points from the second quarter and up 130 basis points from 10.7% in the same period last year. Return on assets was 1% up 2 basis points from 98 basis points in the second quarter and an increase of 4 basis points from the third quarter in 2015. Year-to-date return on assets is now at 95 basis points and that's up from 88 basis points in the same time period last year. The company's efficiency ratio increased 30 basis points to 64.4% in the current quarter, but improved approximately 30 basis points from the prior year's third quarter and is down 175 basis points on a year-to-date comparison basis. The increase from the prior quarter was primarily due to elevated expense levels not expected to recur in future quarters, which I will discuss in a moment. Now turning to the major components of the income statement. Tax equivalent net interest income was $69.5 million that's up $1.2 million from the second quarter primarily driven by higher earning asset balances. The current quarter's reported net interest margin, however, declined 8 basis points from the previous quarter to 3.76%, which is more than projected primarily due to the margin impact of lower levels of loan fees recorded during the quarter, which can fluctuate on a quarterly basis. Accretion of purchase accounting adjustments for loans and borrowings added 9 basis points to the net interest margin in the third quarter and that was up 1 basis points where little over $100,000 from the second quarter. As usual for your reference [actuals] [ph] on remaining estimated net accretion impacts are reflected in the table included in our earnings release this morning. The quarterly net interest margin which does not include the impact of the acquisition accounting accretion which was 3.67% in the third quarter which is down 9 basis points from the second quarter level due to lower earning asset yields and a 2 basis point increase and across the funds to 42 basis points. Core earning asset yields declined 7 basis points to 4.09% and that was driven by lower loan yields on new and renewed loans accounting for 4 basis points of the decline as we had expected. And then, it was also lower levels of loan fees during the quarter which represented a 3 basis point decline. As noted the earning asset yield impact of loan fees can fluctuate on a quarterly basis, but have averaged approximately 12 basis points on a full year basis. This is versus the 9 basis points that we recorded in the third quarter. The cost to deposits was 29 basis points for the quarter that's up 1 basis point from the second quarter and that's primarily due to changes in our deposit mix on a quarter-to-quarter basis. Going forward, our baseline net interest margin projection which now assumes that the Fed will raise the fed funds rate by 25 basis points in December and won't raise it again until the first quarter of 2018, now, also that current flat yield condition persist over the medium-term cost for net interest margin compression of 3 to 4 basis points in the fourth quarter and into 2017 with margins stabilization beginning in the second half of 2017. The provision for loan loss in the third quarter was $2.4 million or 16 basis points that's up $97,000 from $2.3 million in the second quarter and down approximately $435,000 from the third quarter 2015 provision level. For the third quarter net charge-offs were $929,000 or 6 basis points on an annualized basis as compared to $1.6 million or 11 basis points for the second quarter and $1 million or 7 basis points for the same quarter in the prior year. Non-interest income in the third quarter was $19 million that was up $1 million or 5.3%, from the $18 million recorded in the second quarter primarily driven by higher wealth management fees up $511,000 due to the Old Dominion Capital Management acquisition in June higher mortgage banking income $235,000 and higher customer related fee income of $190,000. The increase as in customer related fee income was primarily driven by higher overdraft and letter of credit fees during the quarter. The mortgage banking income increased $235,000 as noted or approximately 8% to $3.2 million in the third quarter a result of increased mortgage loan origination volume. Mortgage loan originations increased by $16.6 million or 11.8% in the current quarter to by $156.7 million from $140.1 million in the second quarter. Of the loan mortgage origination in the current quarter 34% were refinances volume, which was consistent with the prior quarter. Turning to non-interest expense; expenses increased $1.7 million or 3% to $56.9 million for the quarter ended September 30, 2016 and that's up from $55.3 million in the prior quarter. Salaries and benefits increased $2 million primarily due to incremental incentive compensation and profit sharing expenses that are tied directly to the company's financial performance as well as cost incurred related to the CEO succession plan that we announced during the quarter. Other increases in non-interest expenses included the pre-closure cost of approximately $400,000 related to the 5 branches we recently closed. Higher loan volume driven expenses of $302,000 as well as higher transaction driven data processing fees of $309,000. These increases were partially offset by declines in professional fees up $653,000 due to lower project related consulting expenses incurred and lower OREO and credit related expenses of $391,000 primarily due to gains on the sale of OREO property compared to losses in the prior quarter as well as recorded lower real estate tax expenses during the third quarter versus the second quarter. In addition the company realized franchise tax credits related to the company's investment in a historic rehabilitation community development project. Those recently completed which reduced expenses by approximately $900,000 during the quarter. The company also earned tangible historic tax credits of approximately $780,000 associated with this investment which reduced our effective tax rate to 23.3% during the quarter. As we look forward, we estimate that the fourth quarter's effective tax rate will increase to 25.1% and that we will also see an increase from that level in 2017 to approximately 26% effective tax rate. As a reminder, we expect annual run rate savings of $1.5 million from the 5 branches closed in the quarter and that should have started in October and will be effective in the fourth quarter. Looking forward, we are projecting that the company will return to a quarterly expense run rate in the $55.5 million to $56 million range in the fourth quarter as the maturity of the net expense increases we saw in the third quarter will not recur going forward. Now, let me turn to the balance sheet. Total assets now stand at $8.3 billion up from $8.1 billion on June 30 and an increase of $664 million from our September 30, 2015 levels. The increase in assets was driven by our net loan growth during the quarter. Loan sales for investment were $6.1 billion at quarter end. That's up $208 million or 14% on an annualized basis, while average loans increased by $171 million or 12% annualized from the second quarter. Loan balances are now up $636 million or 11.2% annualized since December 2015. And as Billy noted we are not projecting that loan growth for the full year will be in the low double-digit levels versus the high single-digit levels we had originally projected in the prior quarter. At September 30, deposits were $6.3 billion an increase of $163 million or double-digit increase of 11% annualized from June 30. The net increase and deposits from that prior quarter came in across all of our deposit categories and deposit balances are now up $440 million or just under 8% from last year September 2015 levels. Credit quality continue to improve during the third quarter down performing assets were down $1 million to $23.3 million at quarter end comprised of $12.7 in non-accruing loans and $10.6 million of OREO balances which includes $2.7 million of former bank locations. Non-performing assets as a percentage of total outstanding loans were lowered by 3 basis points now at 38 basis points at quarter end and declined 25 basis points from our prior-year level. The non-accrual loan balances increased $1.8 million in the quarter while OREO balance declined by $2.8 million driven by property sales closed during the quarter including a former bank location that sold during the quarter. The allowance for loan losses increased by $1.5 million to $36.5 million at September 30 as a result of the strong loan growth during the quarter. The allowance percentage of the total loan portfolio adjusted for purchase accounting was 90 basis points at quarter-end down slightly from June 30 as a result of continuing improvements in asset quality as a result of continuing improvements in asset quality and lower historical loss rates were seen. The allowance now covers 6x annualized year-to-date net charge-offs and a non-accrual loan coverage ratio is at 288%. Our tangible common equity ratio is now at a 8.57% at quarter end down slightly from the second quarter primarily as a result of our share repurchases and the asset growth we saw during the quarter. As Billy noted, we repurchased approximately 100,000 shares during the quarter at an average price of $25.22 per share. Also as Billy noted, we have $13 million remaining under the current Board repurchase authorization as of the quarter end. We remained well capitalized from a regulatory capital perspective. Management and the Board of Directors continue to assess capital management options given increased expectations for loan growth including dividend payout ratios or 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 let me summarize. Union's third quarter financial results demonstrated solid progress toward our strategic growth objectives. We remain steadfastly focused on leveraging the Union franchise to generate sustainable profitable growth to remain committed to achieving top-tier financial performance and building long-term value for our shareholders. And with that, let me turn it back over to Bill Cimino to open it up for questions. Thanks. Here you go Bill?

Thanks Rob. James, we are ready for some questions now.

[Operator Instructions] And your first question comes from the line of William Wallace from Raymond James. Your line is open.

Good morning, guys.

Good morning, Wallace. How are you?

Good. Thank you. A few questions here. Maybe I'll start with the expenses. So, I saw an article yesterday about that you guys aren't going to be operating five in-store branches when Martin sells to Publix. Is that the five you're talking about closing or those five more that are coming?

Wallace, this is Rob. We closed five in September. Those aren't connected to the Publix sale. We recently announced what you saw publicized we are going to -- we've got six branches that where Martin stores that Publix purchased that we will not remain in those stores. Two of the six will be closed. One in the fourth quarter and another one in the first quarter…

That was the December and January ones that I mentioned.

Yes. The other four, we will be relocating those branches in the area where they are to today. And that two more will be closing beyond the five that we talked about.

But, then you're going to be moving four from in-store to regular branches?

Most likely we will be in retail space because those were in shopping centers now. We have signed leases for two of them already that will be in the same shopping center in a storefront type location. And these are branches that had significant deposits in them. I'll say north of $30 million. So we want to retain those opportunities and that relationship with those customers, but there won't be brick and mortar.

Okay. So the cost -- this is what it really boils down to the cost will be net of the two closures those four will cost about the same as the four that are in the stores?

Probably a little higher because we are going to be occupying more square feet.

Okay. So, do we still think that the guidance that has been discussed in the past about an expense run rate settling in, in the $54 million to $54.5 million once all the regulatory projects are completed is that still the right level to think about?

I think what we're looking at right now is, we have increased our guidance on that to be more in that $55.5 million to $56 million level primarily due to some additional regulatory cost that are coming in. Also factoring in the full run rate's of the recent acquisition that we made in the wealth management front and the new [IPOs] [ph] that we opened recently.

Okay. I don't know why. I thought there were some prices; there were some cost that were coming off related to the Old Dominion acquisition?

Basically, it's incremental cost. Remember there's plenty of revenue to offset -- it's pretty high profit margin on that.

Okay.

Go ahead. Sorry.

That's helpful. So $55.5 million to $56 million is where we are going to settle in. It sounds like -- from what I understood in your prepared remarks that starts next quarter.

Yes. You should be seeing a decline quarter-to-quarter as we're talking some non-recurring expenses during the quarter that will not continue in the fourth quarter some elevated incentive and profit sharing cost as well as some succession planning cost and of course the $400,000 branch closure cost that were incurred this quarter.

And those closure cost, were those in the occupancy line?

No. They were in the other expense line our press release.

Okay. Good. And then on to margin. You mentioned three to four basis points of pressure moving forward. Is that off of this 367 core rate which included the lower margin because your loan fees were down? Or would that be off of a higher base if you kind of come back to a normal…

Yes. It's on a lower end. It really depends. As we said, the loan fees two to three basis points and they will come back. That would somewhat mitigate that impression. We are assuming that as we look forward we assume that the current level of loan fee for the quarter continue but that would be fluctuating higher or lower, but probably higher.

Okay. And in the past you had suggested that a fed hike of 25 basis points would benefit NIM by three to five basis points, but then you said you are modeling one in December but you are still expecting three to four basis points of pressure in the first half of 2017 quarter?

Yes. It could be a little lower than that in the first quarter, but we've got pressure from a LIBOR funding perspective that could offset that benefit in the fed funds area -- sorry, fed funds really impact.

Okay. Okay. All right. That's helpful. Then my last question just housekeeping for the tax rate , if I back out the credits that you highlighted in the release, I get a tax rate of 29% give or take, which is significantly higher than the 25% that you are expecting for the fourth quarter. Am I doing something wrong or is 29% what it would have been, had you not had these credits or these credit something that you have some amount of every quarter. I'm just trying to because that's normally been around 26% or 25%?

Yes. Looking at the effective tax rate looking, you can't just look at it on a one quarter basis and look at kind of over time. So, it's really an effective tax rate for the full year which getting back to the 25% level. So, looking at it from a year-to-date perspective about a one quarter basis.

Okay. So if I wanted to look at what your earnings were this quarter if tax had been sort of normalized it would be 25-ish tax rate not 29, okay. Thank you.

Yes.

Okay. All right. That's helpful.

If we didn't have the tax credit it would be more in the 26% range on the full-year basis. So the 25 does include the impact of that credit in the third quarter.

Okay. I see it. Okay. Thank you very much. I appreciate your time guys. I'll let somebody else ask some questions.

Thank Wallace.

Thanks Wallace. James, we are ready for our next caller please.

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

Thanks. Good morning everyone.

Good morning, Cathy.

Wallace hit most of mine but I may ask some more on mortgage. Mortgage obviously was better this quarter. How should we think about I would imagine that origination will slow as you move to the fourth and first quarters with seasonality. And so how should we think about the profitability of the mortgage segment as we move into seasonally slower quarters. Do you feel like you've got some of the cost to back up of these costs now realign so you can still keep that segment profitable even as originations normalize a little bit or do you really need a certain level of origination volume to keep the segment profitable. Thanks.

Good morning, Catherine. How are you?

Hey, Jeff.

So, what I would say is yes, we would expect seasonality to start kicking in here in the fourth quarter. But, I will tell you October has been very strong. We haven't seen any drop off yet. We are optimistic about that. We think fourth quarter should hold up pretty well even if we start to see some decline in volumes. So that's the good news in terms of the fourth quarter. From a longer-term perspective as we look at first quarter where you would expect even more seasonality what I would say is that we've gotten their breakeven down in terms of volume to a much lower level than we were experiencing this time last year. We think our profitability, it's somewhere in the $35 million to $40 million of production range. We think we can hold that with the current level of LOs that we had in the production levels that we are seeing from our group. The inclination is that we should not have a problem at least maintaining breakeven in this lower volume periods. And I guess the wildcard there is, if we can be successful on elevating the LO hiring process and the first quarter is really the recruiting season, we should maybe even do better than that. So, I think we are in a better place. Had we squeezed all the expenses out there we can. I think we have from a compensation -- from a personnel standpoint. I mean we do carry some excess capacity, but we want to do that because we're trying to grow the business. And so we are trying to maintain that capacity in the anticipation we are going to be successful in ramping up our recruiting efforts. That is continued to be a challenge. We did at a couple LOs in the quarter. But, things are so good right now; it's just very difficult to pull the LOs from other shops. But we do thank as things start slowing down that that opportunity will improve.

Thanks, Jeff. And then, if one follow-up on the margin. Your guidance for an additional three to four basis points next quarter, Rob, is that mostly coming from loan yields? I see both loan held for sale look like that came down each quarter, and then, the core loan yield exceed the accretion. From here should we expect some stabilization, let's just say outside of a higher rate by moving funds rate that we won't see another increase in cost of funds? Or do you still think that the cost of funds will continue to increase as well as you will see the loan yields falling down. I guess, I was surprised to see the increase in the cost of funds this quarter.

Yes. One of the things driving that is the mix that you saw this quarter. We saw some increases in our CD balances which obviously are a bit higher cost than the core deposit categories. So as we continue to see the level of growth that we have seen on the loan side we are looking at our deposit pricing strategy to make sure that we maintain loan and deposit ratio in the mid-90s range and if you look at today probably [indiscernible] so we continue to evaluate what strategies we entail from a pricing point of view to ensure that we draw in more deposits. But so we are making a bit more pressure on that front. There also could be -- continue to see pressure as you know LIBOR rates have moved up fairly significantly during the quarter. Not so much as three to 12 months levels in terms. We did see some pressure on that from a wholesale borrowing perspective with Federal Home Loan Bank. Not quite as much during this quarter based on what you saw in the increases in LIBOR, but Federal Home Loan Bank is typically based on a blend of treasuries and one month LIBOR. So you may see some pressure on that going forward as well. So I guess it's basically a combination of the 2. We will continue to see compression in the loan yields, we put on loans this quarter around that 405 to 410 range. And as you will see in the quarter loan yields were -- our portfolio was at 29. So, you'll continue to see some pressure on that point as well.

Okay, great. Super helpful. And congrats on your retirement Billy and welcome to Union John.

Thank you, Catherine. Look forward to meeting you.

Thanks Catherine.

Thanks Catherine. James, we are ready for our next caller please.

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

Great. Hi. Good morning. Billy, congratulations. It's been great. And John also welcome.

I still have one quarter to go Laurie but you may [indiscernible].

Hopefully, we will hear from you next quarter too. Last earnings call though it's exciting. Just to go back to what Wally and Catherine were talking about in terms of margin. Just if you can clarify this to me. When you are giving guidance next quarter about three to four basis point compression, are you talking about from the core margin of 367?

Yes. Yes, I'm talking primarily the core margin, right.

Okay. So, as I'm looking here at your accretion income schedule you've actually got accretion income model to drop from what was 1.5 to what was 1.1. So, all else being equal that would put your reported margin around 370 for the December quarter, so six basis points reported compression.

You are right. Based on the drop in the accretion that we expected, we had nine basis points of accretion this quarter that's going to drop as well based on the model.

Okay, good. I just wanted to make sure I was thinking about that the right way. Okay. And then, also just to circle back on expenses here. Can you just hit the highlights obviously we know the non-recurring piece of $400,000 related to the branch closures, but where the other non-recurring items in your $57 million. I mean obviously, we had CEO succession how much was that one time?

Well, CEO was approximately $300,000 during the quarter. The other components there were we adjusted our various incentive plans based on financial forms of the company year-to-date as well as now projecting going forward for the full-year. As you saw big component of that was our commercial incentive plans that you saw we had significant growth this quarter, which looks like it will continue on a full year basis in the double-digit levels as we talk earlier so there were adjustments related to that. There were adjustments related to profit sharing plan that the company has which is based on net income and growth and net income as well as management incentive plans again based on various metrics including net income loan growth, deposit growth those sort of things.

How much were the one-time cost?

If you look at it incrementally over the prior quarter was about $1.4 million increase. That's going to drop off because we said our accruals for the year-to-date basis. That so-called addition will drop-off in the fourth quarter as we now are year-to-date fully accrued for the level that we expect for the full year. So those are the primary.

Okay. Good. That's helpful. And then, assets under management, where does that stand currently?

Laurie, we are at $2.290 billion and that compares to $1.865 billion this time -- not this time but December 31, 2015.

Okay. Great. And then, could you just give us an update to on King Carter, where does that currently stand?

There has been no activity -- let me put this way, there has been no sale.

So, you're still at about 2.5 there?

We are still at 2.5. We have been doing too aggressively market it, but there were no transactions.

I will say Billy on that point, we've got about $1.5 billion under contract for the fourth quarter. There's a component loss. I think there is a part of King Carter. So, not any 10% of that balance would be what's under contract currently that we would expect to close in the fourth quarter. No movement in the third quarter, Laurie.

Yes. The OREO is down to $10.6 million, which is less than half then what it was this time last year. But, we are continuing to make progress and it looks like a little bit in the King Carter.

As Billy mentioned that continue to be a whole deal.

Unless something comes in and buys the whole thing, it will be…

Okay. And then, your shutter branches, obviously, we saw as a little movement in that this quarter. Where does that number go as we look to next year, the $2.7 million?

She wants to know -- while, we have got -- you want to talk about those from branches with that include the stamp and office center?

We've got some good activity going on relative to both sales of buildings that we're not using as well as some opportunities to consolidate. So we've got one of op centers under contract. That was $1.3 million that [indiscernible] Salem's op center and we are looking at some other opportunities to combine if you will some spaces that we don't have good utilization and some more to come there, but I think the biggest negative is still an op center.

Is that going to close in the fourth quarter?

The hope could be that it would. Yes.

Okay. Because I initially had in my notes that you all expected $2.3 million to close, what was under contract expected to close in the third quarter, so that slid a little bit?

Yes. There were a couple things that were under contract that rolled into the fourth quarter not at a lot. But, there were a couple of contracts that's still out in the quarter that we will have.

Maybe we were down $2.8 million.

Yes.

I can think of three shutter branches that did close during the quarter. So we did have some good activity on some of the branch locations. One of which was…

That branch side we had about $650,000 of sales, so we have been down to the level that brought down from the previous quarter plus $700,000.

Okay, great. Fantastic. And then, just one last question. Can you update us, obviously, you have very strong loan growth this quarter annualized and you have indicated strong loan growth. Can you just update us in terms of your new Charlotte team and your new Riley team in terms of how they are doing production wise both this quarter and how you see it here in the next few quarters? Thanks.

We've had some -- we were better than original plan on that front. As of the end of September we had about $20 million to $23 million book to loans and there is a nice pipeline that is building. We expect that will continue to grow during the fourth quarter through year end. So we are ahead of what we had originally projected in terms of breakeven on that. I think we said about 1.5 years or so would be the breakeven. I think we were -- we may see that come a lot sooner maybe within a year or so if we keep on this pace. But it's been a real strong performer since opening that in June. Pretty good pipeline and we booked some nice loans.

Great. Thank you.

Great. Thanks, Laurie. James, we are ready for our next caller please.

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

Guys, good morning, and welcome to the call John. Just a couple questions here and what some more answers. But, maybe just looking at fees, wealth management saw some pretty good growth. As I think about that line over the next year or so should we continue to see acquisitions of kind of smaller wealth management firm layer into that and so what sort of business model and maybe assets under management size are you targeting?

Austin, this is Jeff. We certainly are continuing to pursue a strategy around acquiring registered investment advisory firms that fit currently. We'd like to build on the platform that we have acquired. We think we have got a solid platform with Old Dominion. So that's probably the primary strategy would be to just add-in if you will or fold in acquisitions. Having said that though, we certainly would look at larger shops if they fit the strategy, and then, evaluate how we would structure that. So that's an active strategy. We are having ongoing conversations with various firms and are optimistic that that will happen for us. As I look to just the core wealth group, we've got a little bit of headwinds associated with the DOL legislation coming down the pike. So, we know that we are going to have a little bit of haircut of the income associated with that. And we are working closely with Raymond James to figure out a strategy around how we implement that in the spring. For instance, annuity sales will come under pressure. Annuity sales for us represent about 20% of what we generate in our brokerage division roughly $1 million annualized. It remains to be seen how much that's impacted, but certainly the way we sell annuities is going to change. So that's the one headwind that I would point to. In terms of just core business. I think that the team deals that we have got a lot of momentum right now we've got a solid pipeline so we are expecting good solid organic growth as well in 2017.

Okay. Thanks appreciate that color there. That's very helpful. And then, just maybe similarly on looking on the bigger picture on the companies M&A strategy for whole banks. Could you refresh my memory on what that is? I know that there was different scenarios on how the company crosses the $10 million mark, has there been any change in thinking on the strategy in order to make that kind of jump over?

No. But I'll go ahead and refresh your memory just to what our current thinking is. We are continuing to look and would be excited to have the opportunity to be able to infill, if you would, within our footprint with an organization somewhere in that $800 million to $1.3 billion in size where we could have cost saves above 60% certainly above 50% and we could maximize EPS for our shareholders and gain some efficiencies. After that, we would be looking for something larger to cross $10 billion that could be somewhere in that depending on where we are somewhere in the $2 billion, $3 billion range. Organically, Austin, we are tracking toward $10 billion probably fourth quarter 2018, first quarter 2019 now if we stay at this low double-digit loan growth.

Got you. Okay. Well, I appreciate it guys. That's all I've got. And I'll let somebody else hop on. Thanks, guys.

Thanks Austin. And James, we have time for one more caller please.

Your next question comes from the line of David West from Davenport. Your line is open.

Good morning. Billy, let me add my congratulations and best wishes for a happy retirement.

Well, thank you, David.

Thank you. Couple questions. Loan growth as you noted in your comments was very broad spread. Could you comment a little bit as to geography. I think in the past kind of Richmond, Fredericksburg, was perhaps the areas of highest growth.

Well, yes, I would say we were very -- let me -- hold on here. Let me get to my right-- proper page here. Richmond because it represents such a large part of our franchise if you look at it in a dollar basis is continuing to produce the most dollars of growth. But we are still running double-digit loan growth there. The others on a dollar basis that are producing well for us are Hampton roads market, Charlottesville, Fredericksburg actually is second behind Richmond. And we are also starting to see some really nice growth out of the Southwest area as we really had some opportunities to rejuvenate that team and take advantage of what's been some disruption in that market. So, we are really getting it across-the-board. And uniformly and we've got some of our smaller markets that I've said are punching above their weight class as far as gains and percentage of loans. But, we are still being driven by Richmond, Northern Virginia, Charlottesville is our three largest.

Very good. I know it's only been a little over a month since some of that disclosures at Wells, but have you seen any customer reaction either loan deposit wise yet, do you see that as a potential net benefit to Union?

This is Elizabeth. We've seen a smattering of customers coming to us out of concern. So, we have certainly welcomed them and helped them transition business. I wouldn't say there's been a groundswell of change yet.

Okay. All right. Very good. And I guess last question. The company was obviously very significant in-store branch came after you acquired First Market and it seems with the recent actions you are continuing to back further away from that, do you see a day when you don't have in-store branches?

Well, that's certainly possible. We're solidifying our plans for the six that we know. We are business as usual in the six that we will have after this particular phase of Martin sale is complete. It's important that these branches have been good locations for us. It's important for us that customers have continuity of service. So, I think what I would like to say is that it's business as usual, but you have seen our history. That we do a pretty good job of assessing our network consolidating where it makes sense, and then, looking to new markets where we can have growth potential. So, we will continue to do that.

Okay. All right. Great. Thanks very much.

Thanks David.

And thanks, James and for everybody who dialed in today. We look forward to talking with you in January. Have a good day.

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