Atlantic Union Bankshares Corporation (AUB) Q4 2016 Earnings Report, Transcript and Summary

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. 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, 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 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.

Thank you, Bill and good morning everyone. 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's interesting to note here on my last earnings call, the 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 the 2016 representative 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 plans. We've made significant progress on our work to get ready to cross the $10 billion threshold when investments in the company saw progress [ph], management's 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're 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 at total shareholder return of 1160% which is nearly double the return of the S&P500 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 fiscal 2016. Union saw strong year-over-year gains on a return on assets which was up 6 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 $20.4 million [ph] 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 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 remained focused on matching loan and deposit growth and we target our loan-to-deposit ratio around 95% from this time [ph]. From a shareholder stewardship and capital management perspective, Union increased the quarterly dividend by a $0.01 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 raise $150 million in subordinated debt, the offering was more than two times oversubscribed and was priced at the narrow spread and similar rate of deal in the last 18 months and that's a testament to 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 or the 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 that they don't want to deal with the big banks when they don't have to and they value the customer experience they received 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 a strategic planning work that Union is undertaking. 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 we need focus going forward; and 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 in a big way [ph]. I think 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 a wealth management business just to name a few. Core deposit funding; similarly, we can use a unique market 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 the positive intent of small and medium-sized businesses and to 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 positioning 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 under other top-tier financial metrics. While return on assets and return on tangible common equity improve meaningfully in 2016, the efficiency ratio while improved still lags behind. We've lowered our brand 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've 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've been pleasantly surprised by how far along we already are and the work that Union has undertaken to prepared across the $10 billion threshold. At our current growth rate, we expect to [indiscernible] organically in early 2019 so we can make sure that we stay focused on completing this important work. We expect to run our first DFAS [ph] test whether this year and we'll finish building out the enterprise risk and IT infrastructure. As you know, crossing the $10 billion mark will cost -- will cause lost revenue in increased expense, so that's another reason we're keenly focused on becoming as efficient as possible before we move over it. So to summarize, Union had a great fourth quarter 2016 with double-digit growth in loans, earnings per share and net income. We had a direct capital base with the sub-debt offering that was on great terms and then as shareholders best interest and the CEO transition has been remarkably smooth, thanks to Billy, exceeding my own high expectations on the matter. As good as 2016 was, I think Union will perform even better in 2017. I'll now turn the call over to our Chief Financial Officer, Rob Gorman, to cover the financial results for the quarter. Rob?

Thank you, John and good morning, everyone, thanks for joining us this morning. I'd now like to take a few moments to walk you through some of the details of 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 than 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 represented $0.28 or 19% increase over the prior year's $1.49 earnings per share level. Looking at the segments, the community bank segments [indiscernible] to $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 continue 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 6 basis points from the fourth quarter in 2015 and for the year, the return on assets came in at 96 basis points, up again 6 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 earnings asset levels partially offset by the impact of net interest margin compression of 9 basis points. The current quarter's reported net interest margin increased 2 basis points from the previous quarter to 3.78%. For the full year the reported net interest margin was 3.8% which was a decline of 9 basis points from the prior year. Accretion of purchased accounting adjustments for loans and borrowings added 8 basis points for 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 quarter's net interest margin which does not include the impact of acquisition accounting accretion, it came in at 3.7% and 3.70% in the fourth quarter which is up three basis points from the third quarter level due to higher earning asset yields of 5 basis points which was offset by 2 basis points increase in the cost of funds. Core earning asset yields increased 5 basis points to 4.14%, primarily driven by 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 2 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 with 30 basis points for the quarter which was up a basis point from the prior -- 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 persist over the medium-term, costs for net interest margin compression of four to 6 basis points in the first quarter driven primarily by the full quarter impact of the recent subordinated debt issue followed by margin 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 9 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 were 824 or 5 basis points on an annualized basis that compares to $1.2 million or 9 basis points for the same quarter last year and $929,000 or 6 basis points for the prior quarter. The full year net charge-off ratio was 9 basis points in 2016 which was down four basis points from 13 basis points in 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, non-interest 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 locked derivative. The fair value of the interest rate lock derivative decline $500,000 in the quarter compared to an absolute 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 the third quarter. Non-interest 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 non-interest expense were driven by $400,000 and branch closure cost 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, an increased franchise tax expenses which was driven by one-time tax credit recognized in the prior quarter related to the company's investment in a historic habilitation project related to the 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 effective tax rate was primarily driven by a one-time tax credit recognized in the prior quarter related to the company's investment and historic project noted in the proportionally higher levels of taxable income versus the 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 taxes formed that might become effective during the year. Turning to the balance sheet, total assets stood at $8.4 billion as of December 31, an increase of $700 million from the prior year, the increase in assets was driven primarily by the loan growth that we saw during 2016. At year end, loan tale [ph] from investment was $6.3 billion, that's an increase of 10.3% from the prior quarter. Loans increased $635 million or 11.2% from the last -- 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 of 7.7% annualized from September 30 levels. Deposit balances were up $460 million or 7% from the prior year-end levels. Credit quality continues to improve during the quarter, non-performing assets were down $3.2 million to $20.1 million at quarter end, and that will comprise 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. Non-performing assets as a percentage of total outstanding loans were lowered by 6 basis points in the 32 basis points and declined 16 basis points from the prior year. For the year, non-performing assets declined by $7.2 million. The allowance for loan losses increased by $650,000 to $37.2 million at December 31 and that was primarily driven by loan growth during the quarter. The allowance 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 covers -- 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 the regulatory capital ratio perspective. As mentioned previously, we cost-effectively raised a $150 million in subordinated debt during the fourth quarter which strengthened the [indiscernible] regulatory capital levels, reduced the company's risk commercial real estate concentration ratio to below 300% and provided additional capital capacity to continue to grow loans and an upper single digit level. So in summary, Union's fourth quarter and full year 2016 financial results demonstrated solid progress towards our strategic growth objectives. As we move look forward in 2017, we remain focused on leveraging that 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 analyst?

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

Thank you. [Operator Instructions] Your first question comes from the line of Catherine Mealor.

Thanks, good morning, everyone. First, a great quarter; and also I wanted to start on expenses and Rob, I might have missed as if you gave guidance but I wanted to see if you could give us an update on your outlook for expense growth this year? I'm assuming its fair we can take out that $19 million [ph] of the franchise tax expenses quarter. And then outside of that how should we think about the core expense and then maybe some opportunities for potential expense reductions moving to next year and you become more and more focused on improving 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 is between 56.5 to 57 -- that will be of course the first quarter you will see a bit higher level than the average for the year due to seasonality regarding resetting FICA and things of that nature, payroll taxes. So we are suggesting that expense growth will not growth considerably, we've made investments in our $10 million 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 we'll assist in keeping that growth rate at that level which will offset some of the impacts of the merit increases etcetera that you would no longer will see during the year. So that's 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 the tax reform -- have you thought about what your tax rate could look like under let's say 10% and lower tax rate and maybe any DTA impact that we could see as well?

Yes, so in terms of the impact there, we've got some modeling around that. You know,, 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 $0.18 to $0.25 per share improvement at the bottom-line if those 15% or 20% or to come about in 2017. Of course, we will -- as you know, we have to take an impairment charge on the tax asset, we've got about $18 million of deferred tax asset as of year-end. You know, 15% or 20% would be $8 million to $11 million impairment based depending on what the rate ended up at. And obviously we've earned that back very quickly within a year or less based on the effective tax rate reduction.

Okay, got it, very helpful, thanks. Great quarter.

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

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

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

Trigger points where expenses missed my expectations; Rob, I guess the way I'm inclined to respond to that would be what -- how expense has fared vis-à-vis the '16 plan. And you know, while some of the differences -- so we were a bit about what we had planned for going into New Year; some of that had to do with some of the cost associated with the -- which came at a bit hard, 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 Charlotte [ph] and those are driven up expense as will. Of course offsetting that is benefits on the non-interest income and net interest income side. So I think while it was more driven by investments we were making in the company and benefits for the impact of the benefits of the profitability.

And this is John, if you look at the expense structure of the bank and stake rank from high to low, it looks like most banks would -- you know, it's going to one people, two facilities through 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 [ph] 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 [ph] that moves through the system. And as we continue on our growth trajectory, we can put ourselves at a position to where we do not need to add this sort of headcount that we would had if we were sort of business as usual. There is a lot of work underway this year to look at that and I'd rather be somewhat conservative in terms of our commentary as to exactly what to expect. I would reaffirm what we've said before, Rob, that we need to get the efficiency ratio below 60% and not just writing off the environment.

Okay. Great, I 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 especially in the net interest margin, loan yield was a bit higher than that.

Okay. So then if we were to kind of normalized that out 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, that’s how you would get to that 4 to 6. And then we would speak there.

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

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

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

Yes, this is John and I would ask Jeff to provide commentary, who's responsible for that unit. There was an element of a bit of a rush with the expectation of rising rate environment where people were sort of cute up to get refinancing while they could. Jeff, can you…

Sure, Wally, we had a bit of a double refinance activity walk 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 walk through the pipeline. That represented about $10 million and about a 10% increase in the relative contribution of refined to repurchase money. So we kind of see that as a little bit of an anomaly, we have historically been very strong on purchase money. I think historically been more like 35%. We're going to model that down somewhat in 2017 and anticipation of refinance activity obviously being under pressure on current mortgage rates, but that's really the reason for the uptick in the fourth quarter.

Okay. The gain on sales margin, as the mix should impact towards purchase would you anticipate some recovery gain in the margin side of that?

Well, yes, you would typically expect them to come in with much refinance activity, we had modeled I think about [indiscernible], that's a reduced margin on a go forward.

Yes, reduced margin primarily because the industry is contracting in terms of production levels and see a lot more competition.

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

Okay. Thanks, guys, I appreciate the color.

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

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

Hey, guys, good morning, great quarter. So as you make your way up the path to the 13% plus return on tangible common equity, you know, given some more clarity and great hikes and -- rate hikes and economic outlook, does that path become shorter? I guess 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 would 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 how it moves. As we said we have to 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 steeper curve than we see in the last month or so, two months to maintain that level and maybe improve a little.

Got you, okay. That's helpful. And just maybe shifting towards the companies M&A strategy, is there any change there? Should we still continue to see purchases of small asset managers like we see the last year? And then maybe -- what's the message on whole bank M&A as well?

Okay. I will start with the strategy. We are keenly interested in continuing to develop and build out the wealth management business through the acquisition of our AAs 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 single most important objective of the bank; is to drive organic performance to build the bank on -- 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 morality of the $10 million asset threshold, there's no question that 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 think 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, we are ready for our last caller, please.

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

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? Has your thinking change at all? We have seen obviously a really nice increase in your stock-based in the last quarter, has that impacted your thinking?

Well, I think that is certainly improves the currency that we have available to us, there's no question about it. What we and Billy, I will ask you to chime in on this too because we talked about this extensively, I think about it in the context of first of all, you know, what would be the false we would entertain, we have said publicly that in general we think about the 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 make 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 it would be substantially larger than that, and we've done it before. If you think about the history of Union Bank the acquisition of Star One, 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 it's probably about the most clarity I can provide. Unless Billy, or Rob can be more specific.

Equals will be off the table? You would consider most similar size bank?

Well, I would say when we 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 you know, yesterday, or rather Sunday we saw pinnacle by the NCN [ph] simultaneously also our capital raised and so that deal was accretive to bulk and accretive to earnings. Would you consider in conjunction with doing the deal also doing a capital raise? How 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 and certainly, as John said, we are going to do what's right for the shareholder and if that makes sense we would do that. So I can't comment on it was we know what the transaction looks like.

If it makes financial sense and created value for us as a part of the overall transaction I would say sure.

Okay. John, just to put you on the spot little bit here, typically the 5%, five and five as it's called the dilution to tangible book [ph]; would you commit to be in that path? How do you think about that?

While I certainly think, Laurie, it's a fair session. That has been our objective. That is how we think about it. Could there ever be a scenario where we 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?

Yes, I would agree with that, John. But yes, Laurie, we would certainly violated the five and five based on not the crossover method.

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

Right.

Looking at some things, we passed on things they start financial assurance.

And then, just one last question on M&A; if you will have an increase in discussion level since you had an increase in your stock price?

I'd really rather no answer that per say. But I would say in general terms, Billy has done an outstanding job. He and I making the round principally in the context of introducing me and my new capacity, and I think in a big general term, there's no question in my mind that chatter has picked up across the industry. We are certainly see a lot of activity in the southeast and that's how I will answer your question.

Okay, fair enough. I believe M&A there. So just quickly a few other things, assets under administration, do have that number for December?

Yes, we finished the year at 2.341 billion, so we were up 316 million -- excuse me, $461 million for the year; $300 million of which was the acquisition of capital management, 141 of which was both market and organic growth.

And Laurie, that was just there, we answered that.

Thank you, Bill.

Great, okay. Thanks, Jeff. Okay. And then credit -- obviously, your credit is pristine here but just if -- if you can update us on two components of the OREO, it looks like your real estate held for investment which is primarily the shutter branches didn't change in the quarter and I thought in my notes you had $1.2 million under contract, did something flood there or…

Well, we had $1.3 million that closed during the quarter but was not related to thank specific properties we had, that was in the overall OREO bucket; in that case the foreclosed properties. So we did have some sales that come through the 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.

Laurie, this is Jeff. We did have one contract fall -through that you may be referring to, early to one of our old off-center buildings. We continue to work to try to move that but the contract that we alluded to you last quarter.

That sounds great, okay. And then the same question is 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 closing the fourth quarter; did we see that or do you have a new balance on King Carter of any…

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

Okay. So you only had 300 come down the $1.5 million to materialize?

Yes.

Okay, that's helpful. And then just going back to branches for a moment; so you're 113 when you closed your last branch, that takes you to 7 in-store, is that correct?

Yes, it brings up down to 6 remaining.

So there will still be in store with this, okay. And then how do we think about branch closures for the relative year or do you feel like right now you're done?

I'll let Elizabeth Bentley, the Head of Retail Banking to speak to that.

Hi, I think you're trying to say this before, we have a good history of looking at our markets and reacting where we feel it is appropriate to branch closures. What 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 margins and your color around margin compression, the 46 basis points, is that from the core margin or from the reported margin?

Yes, that's from the core margin, Laurie.

Okay. So when I look at the core margin, I mean you exceptional accretion; your accretion was $1.6 million. So core margin was right around -- and then your accretion is probably going to go down to around 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 theoretically that report is…

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, it's going to go down to about $6 million next year.

Okay, great, that's helpful. Thanks.

Thank you, Laurie.

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

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