Atlantic Union Bankshares Corporation
Q4 2014 Earnings Call Transcript

Published: 28 Jan 2015

[Operator:]

Good morning. My name is Laurel and I will be your conference operator today. At this time, I would like to welcome everyone to the Union Bankshares fourth quarter and 2014 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. I will now turn the call over to Bill Cimino, Vice President of Corporate Communications. Please go ahead, sir.

[Bill Cimino:]

Thank you, Laurel and good morning, everyone. I have Union President and CEO, Billy Beale and Executive Vice President and CFO, Rob Gorman with me today. Also joining us for the question-and-answer period are Elizabeth Bentley, EVP and Chief Retail Officer, Dave Bilko, EVP and Chief Risk Officer, Jeff Farrar, EVP of Wealth Management, Insurance and Mortgage. Please note that today's earnings release is available to download on our investor website, investors.bankatunion.com. Before I turn the call over to Billy, I would like to remind everyone that we will make forward-looking statements 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.

[Billy Beale:]

Thank you, Bill. Good morning, everyone. Thank you for joining us on this call this morning. As I reflect on 2014, let me start this by saying that I am proud of the work done by our teammates, the StellarOne integration, which was a massive undertaking for our team has been a success. Union is now the largest community bank headquartered in Virginia, but that is an outcome of the merger, not the goal. Even though we are larger, we are remaining true to our core community banking values and remained focused on prudent commercial and consumer loan and deposit growth through customer retention and developing new client relationships. The goal of the merger is to deliver improved financial performance resulting in better returns for our shareholders over the long term. In our last quarterly call, we noted several areas on which we were focused, including loan growth and aggressively disposing of our OREO properties. Regarding loans, in our last call, we indicated that we believed that September would represent the low point in loan balances. You will recall, we were down about $100 million from year-end at that point. And this belief was driven by the fact that we had hired several new loan officers and portfolio managers during 2Q 2014 and 3Q 2014 to replace the former StellarOne lenders and that our lending team was starting to assert itself in the market. That prediction certainly proved to be the case as loan balances grew by $175 million for the quarter or 13.5% on an annualized basis. Also of notice, we are now achieving one of the benefits from the StellarOne acquisition. More doors are opening for larger size lending opportunities across the Commonwealth. We are now able to compete for business from customers who would have been too large for Union prior to the acquisition. Our new lending power is a differentiator between Union and the other community banks in our market and represents a unique opportunity for us compared to others Virginia banks. Total loans for the year grew 1.3% with the fourth quarter loan growth more than making up for the negative loan growth in the second and third quarters. Non-contractual paydowns and payoffs were lower than in the third quarter, but still above second quarter levels. So the growth came primarily from increased production rather than lower paydowns. One additional note on the loan book. If you can see from the averages, a number of the loans came on later in the quarter. So while we incurred to full loan loss provision for these loans, we did not get a full quarters worth of interest income benefit. Regarding OREO. As we noted in the last call, we projected progress would be made in the fourth quarter to reduce OREO balances, including our former bank branches. For the quarter, we sold $11.4 million worth of OREO and recorded a net gain on those sales of $1.2 million. We feel confident that we will see continued reductions in the OREO book in 2015 as a result of additional sales of foreclosed properties in merger-related bank premises. Let me update you on a couple of other items. Net charge-offs increased from prior quarter, but for the full year were $5.6 million which is a six year low and charge-offs for the year were 10 basis points. So it's hard to be disappointed in those results of the year, even though we had a higher net in the fourth quarter. In the third quarter, we mentioned some frauds that caused us to put some [indiscernible] on nonperforming assets. Those frauds which were either against the bank or investors and the resulting personal bankruptcies rose from the larger charge-offs in the fourth quarter. Overall asset quality has improved significantly, particularly with the reduction of nonperforming assets and lower past-due loans. We believe that there is nothing systemic about the net charge-off increase in the fourth quarter and I would encourage those on the call to look at the trendlines over time rather than the lumpiness of the quarter as we expect net charge-offs and provision levels to remain relatively stable going forward with potential quarterly volatility driven by changes in individual credits. The same would apply to loans 90-days past-due and non-accruing, which grew some attention during the third quarter 2014 call. You will see that those are down from $16 million to $10 million. That actually represented $13 million worth of loans moving off and another $6 million of the new loans moving on in three stay. I also would suggest to you that the new consumer financial protection mortgage foreclosure rules will result in 90-days and still accruing numbers increasing for all banks, the whole portfolio of mortgages. One thing I would point out about that particular line item. That represents a little over 200 loans. So as you can see, it's a lot of small credits. We continued to repurchase stock during the quarter. When we announced the $65 million share buyback program in early 2014, we expected about $40 million in 2014 and $25 million in 2015. We have now purchased $55 million to-date and have $10 million remaining for 2015. Management and the Board of Directors will continue to evaluate all capital management options as the current repurchase program winds down, as the deployment of our capital for the enhancement of long-term shareholder value remains one of our highest priorities. We are now eight months past the systems integration of StellarOne and our value proposition is resonating with consumers, as we saw strong net new household growth of more than 5% in our legacy markets for 2014 and merger related attrition from retail customers slowed as the year progressed. Overall customer attrition was well below our projections. And we have recently seen net household growth in former StellarOne markets. We are continuing to build the Union brand in the western part of Virginia and expect those efforts to differentiate Union from our competitors in these markets. In December, we named Rick Webster as our Regional president for Southwest Virginia. His deep roots in the community, strong leadership, strategic and mentoring skills will be an asset as we seek to grow our market share in those areas. To summarize, we have solid core earnings in the fourth quarter driven by the community bank segment. Loan production has increased as our lending team began to assert itself in our markets. And 2014 was a transformative and successful year for Union. And we will continue to build upon that to deliver top tier financial performance for our shareholders. I thank you for your attention and with this, I am going to kick it over to Rob Gorman.

[Rob Gorman:]

Thank you, Billy and good morning, everyone. Thanks for joining us today. I am going to update you on the balance sheet and our results of operations for the quarter. First, turning to the income statement. Operating earnings for the fourth quarter were $15.6 million or $0.34 per share, down slightly from $16 million were $0.35 per share in the third quarter. As you recall, operating earnings exclude the impact of merger related costs, which were $563,000 on an after-tax basis in the quarter. For the full-year operating earnings were $66.3 million or $1.44 per share, up from $36.5 million in 2013 as a result of the StellarOne transaction. On a GAAP basis, which includes the impact of merger related costs, net income was $15.1 million for the quarter or $0.33 per share versus $14.9 million or $0.33 per share in the third quarter. For the full-year, GAAP net income was $52.6 million or $1.14 per share. The community bank segment's operating results were $16.5 million or $0.36 per share in the fourth quarter and $69.8 million or $1.52 per share for the full year, while the mortgage segment reported a net loss of $889,000 or $0.02 per share in the current quarter and recorded a net loss of $3.5 million or $0.08 per share for the year. Regarding profitability ratios. The operating return on tangible common equity increased to 9.51%, from 9.82% in the prior quarter and was 10.19% for the year. The operating return on assets was 86 basis points in the fourth quarter, down two basis points from the prior quarter. For the year, the operating return on assets was 91 basis points, up slightly from the prior year. The company's operating efficiency ratio declined to 64.8% from 69.8% in the third quarter and for the year was 67.3% down from 69.1% in 2013. The community bank segment's operating efficiency ratio was 62.1% down from 67.5% in the prior quarter and for the full year, the community bank segment's operating efficiency ratio was 64.4%. I will let you know here that we continue to target an operating ROA above 1.1%, return on tangible common equity of above 13% and an efficiency ratio below 60% and remain confident that if we generate more consistent loan growth and return the mortgage segment to profitability that we will meet these targets. Tax-equivalent to net interest income was $65.9 million for the quarter, down $1.5 million from the third quarter. The fourth quarter reported net interest margin declined by 10 basis points to 4.1%, compared to 4.11% in the previous quarter. Accretion of purchase accounting adjustments for loans, CDs and borrowings related to the StellarOne acquisition added 13 basis points to the core net interest margin during the fourth quarter and that was about six basis points from the 19 basis point impact in the third quarter or lower by approximately $1 million quarter-to-quarter. This decline was a result of the lower levels of loans and CD accretion during the quarter. For your reference, actual and remaining estimated net accretion impacts are reflected in the table included in our earnings release. As you can see, we estimate that net accretion will decline by approximately $6 million or about eight basis points in 2015 from 2014 net accretion levels of $10 million. The core net interest margin which does not include the impact of acquisition accounting accretion was 3.88% in the fourth quarter, which was decline of four basis points from the prior quarter and in line with our expectations. The core margin decline was driven by lower earning asset yields of five basis points in the fourth quarter, which was partially offset by one basis point decline in the cost of funds. The core loan portfolio yields fell 5 bips to 4.62% in the quarter while the average investment portfolio yields declined five basis points as well to 3.08%. As noted in our earnings release, we continue to expect that the core net interest margin will decline modestly over the next several quarters as declines in earning asset yields are projected to outpace decreases in interest bearing liability rates over the next four quarters. The provision for loan losses were $4.5 million dollars in the fourth quarter, an increase of $2.7 million from $1.8 million in the third quarter and up from $1.2 million in the same period a year ago. For the quarter, net charge-offs were $4.2 million or 31 basis points, up approximately $3.1 million from the prior quarter, but down $1 million from the prior year. The quarterly increase in provision was driven by loan growth and the increase in net charge-offs. For the full-year, net charge-offs were at a modest $5.6 million or 10 basis points, which was down from $10.8 million in the prior year. Turning to non-interest income. Non-interest income in the fourth quarter was $14.9 million, which was down $1.4 million from prior quarter, driven by lower security gains of approximately $750,000 and lower mortgage gains of $815,000 which was related to lower origination levels, which at $155 million for the quarter were down approximately 13% from third quarter production levels. Fourth quarter operating non-interest expenses excluding merger cost were $51.8 million, a $6 million decrease from the third quarter, primarily due to the OREO valuation charge taken in the third quarter. Non-interest expenses for the mortgage segment declined 5.8% or $224,000 to $3.7 million, primarily related to declines in salaries and occupancy expense, partially offset by approximately $250,000 of nonrecurring costs incurred in the fourth quarter which was related to severance and lease terminations, as a result of management's continued efforts to streamline the mortgage segment's processes and cost structure to return it to profitability. On that note, although significant progress has been made in transforming the mortgage segment's operating model during 2014, we do not expect the mortgage business to return to profitability in the current quarter due to the seasonally low production levels expected in the first quarter. I also want to remind you that pre-tax merger cost totaled $821,000 during the quarter and we do not expect to have any material expense associated with the merger going forward. Now turning over to the balance sheet. Total assets stood at $7.4 billion at December 31, an increase of $165 million from third quarter levels. The quarterly increase in assets was driven by loan growth, as Billy noted. Loans net of unearned income were $5.3 billion at quarter-end, up $175 million or 13.5% annualized, while the fourth quarter average loans increased by $24.1 million or 1.9% annualized from the third quarter. Total loans for the year grew 1.3% with the fourth quarter loan growth more than making up for the negative loan growth experienced in the second and third quarters. As Billy noted, fourth quarter loan production increases as our new lenders get up to speed and we saw a slight reduction in non-contractual paydowns. Looking ahead, we are budgeting for mid single digit loan growth for 2015. At the end of the year, total deposits were $5.6 billion flat with the prior quarter. Quarter four average deposits increased about $40 million, or 2.8% annualized versus the prior quarter. CD and one-off partially offset by seasonal increases in public funds drove that change. Now turning over to the asset quality metrics. Nonperforming assets totaled $47 million comprised of $19 million in non-accrual loans and $28 Million in OREO balances at December 31. Non-performing assets as a percentage of total outstanding loans declined 73 basis points from the prior year and 23 basis points from the prior quarter to 89 basis points at year-end. Non-accrual loan balances declined by 5% in the fourth quarter, while OREO balances declined 26%, driven by the sale of foreclosed and merger related properties totaling $11.4 million. As Billy noted, these properties are sold with at a net gain of $1.2 million. The allowance for loan losses increased $275,000 from September 30, to $32.4 million at December 31 The allowance as a percentage of the total loan portfolio, adjusted for purchase accounting, was 1.08% at the end of the year, down four basis points from September 30 and down two basis points from the same quarter last year. The non-accrual loan coverage ratio improved to 168% at December 31, up from 158% at the end of the third quarter and up from 136% coverage at June 30. Company's capital ratios continued to be considered well-capitalized for regulatory purposes. The company's estimated ratio of total capital to risk-weighted assets was 13.39% and the Tier 1 capital ratio was 12.77% at December 31. Our tangible common equity to tangible assets ratio at quarter-end is 9.28%. That was down 14 basis points from September 30 levels and up 34 basis points from 8.94%, from the same period last year. Our excess capital at year-end amounts to approximately $90 million, with excess being defined as balances above an 8% tangible common equity ratio. As Billy noted, as of January 23, approximately 2.2 million common shares have been repurchased at an average price of $24.65 per share, leaving approximately $10 million remaining under the company's two-year $65 million repurchase program. We will continue to evaluate capital management options as the current repurchase program winds down as Billy has mentioned. So to summarize, 2014 was a year of significant progress and transformation for Union as a result of the StellarOne transaction. We successfully integrated StellarOne into Union, achieved the cost savings targets we set and are now well positioned to generate a sustainable growth we envisioned a combined banking franchise would produce as the largest community banking institution headquartered in Virginia. As a result, Union remains as committed as ever to delivering top tier financial performance and building long-term value for our shareholders. And with that, I will turn it back over to Bill Cimino to open it up for questions from our analysts.

[Bill Cimino:]

Thank you, Rob and thank you, Billy. Laurel, we are ready for the first questioner.

[Operator:]

[Operator Instructions]. Your first question comes from the line of Kathryn Miller with KBW. Your line is open.

[Kathryn Miller:]

Good morning, everyone.

[Billy Beale:]

Good morning, Kathryn.

[Kathryn Miller:]

Billy, how should we think about provisioning moving forward? Now you are at a reserve-to-loan ratio of 1.08, excluding the acquired loans. It feels like we might be at a bottom when it comes to reserve release and provision will really just be provisioning for loan growth and matching that charge-off moving forward. Is that an appropriate way to think about it? Or do you think you still have a little bit more room for reserve release this year?

[Rob Gorman:]

Kathryn, this is Rob. I would suggest that your point is right on, because we have stabilized at this level and think about it as provisioning for net charge-offs and loan growth going forward at about this level.

[Kathryn Miller:]

Okay. That's helpful. And then also, Billy, you talked a little bit about how you are looking at larger credit now that you have StellarOne in the fold. And [indiscernible] was a really nice improvement in this quarter, so I don't know if some of that was what drove it. So can you talk just generally about the size of credit that you now consider versus your comfort level before the merger? And maybe how pricing is different on these types of credits?

[Billy Beale:]

Well, our in-house limit pre-merger was $25 million. Our in-house limit post-merger is $60 million. We have booked some credits and exposures this year that are above $40 million, including one in the fourth quarter. So we are looking at those. They are very competitive in the pricing of those. And the pricing all sort of gets merged into and we are running at about what? 4.3%, Rob, in the fourth quarter?

[Rob Gorman:]

Yes.

[Billy Beale:]

I think we had shared, Kathryn, to add some context that we had taken some steps in the third and fourth quarter to change our pricing model to allow us to be a little more competitive. Basically dropping the end result by about 25 basis points on commercial loans. That was attractive and I think has helped drive some of the loan volume. The other one, some of the larger credits, some of them have some bank qualified tax-exempt pieces to them. And so that also can be attractive to us as well.

[Kathryn Miller:]

Okay. That's helpful. Thank you.

[Bill Cimino:]

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

[Operator:]

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

[William Wallace:]

Thank you. Good morning, guys.

[Billy Beale:]

Good morning, Wallace.

[William Wallace:]

Just real quick on the follow-up to your last comment, Billy. You mentioned some favorable tax, et cetera. What's a tax rate to use for 2015?

[Billy Beale:]

Well, I would suggest about 27% is normalized rate going forward. As you can see, in the prior year or 2014, it was lower than that. But that was due to the impacts of merger-related costs lowering pre-tax income and having our tax-exempt levels as a higher percentage of pre-tax income. So going forward, I would say, about 27%.

[William Wallace:]

Okay and then, so last quarter, you guys talked about getting more aggressive on the OREO. You sold $11.4 million in the fourth quarter with a nice gain. Was that $11.4 million a lot? Was that multiple credits? Was that a couple of larger credits? What was sort of the composition of the sales?

[Billy Beale:]

Well, there were a large number of credits involved in that. There were double-digit, close to double-digit on the bank branches were involved in that and then there were five single digit number of loans or former loans that we had foreclosed on.

[William Wallace:]

Okay. So it was pretty granular.

[Billy Beale:]

Yes.

[William Wallace:]

Right. My last question is on mortgage. I didn't ask about it last quarter. Rob, in your commentary you mentioned you would expect you wouldn't hit breakeven in the 1Q, just due to seasonality. Maybe just talk about 2015, what's your expectation for contribution to the bottomline out of that segment?

[Rob Gorman:]

Yes. Well, let me turn it over to Jeff there, who runs that business. We would get it right from him. And then I will add comment if there is other questions.

[Jeff Farrar:]

Hi, Wally.

[William Wallace:]

Hi, Jeff.

[Jeff Farrar:]

What I would say is that, as you are all aware, we have been going through a pretty major restructure this year with the mortgage company and I think we have got major building blocks in place to see a turn here on profitability in 2015. The resulting company, post-reconstruction, will have significantly less in the way of fixed costs. I think it will be more scalable, sustainable. We will have less volatility in earnings based on market conditions. Because of that, we have carved out a significant amount of fixed charges during the course of 2014. If you go back and look at operating expenses 1Q to 4Q, we are running over $1 million less. We have reduced a number of FTE in conjunction with that. We are just about done with centralizing the fulfillment process and getting that to a place where we can feel confident that we can go out and hire strong LOs that can feel good about getting the widgets through the door. So I am optimistic. I really am, because this is the year that we can turn this from a profitability standpoint. The other thing I will mention is, we are getting ready to rollout a portfolio of mortgage strategy that I think everybody is about is excited about and we are within 60 days of taking apps on that. So I think that's also going to help improve the upticks around profitability for the mortgage company, of a go forward. And then lastly, I am real happy and excited about the core team that's left. We have had a lot of folks leave. We did lose some large producers on the LO side. That was somewhat directly related to some long-term challenges on fulfillment and was exacerbated by the distant conversion, consolidation of StellarOne or integration of StellarOne. But when I look at what we have left, I like the platform. I just like the team. And I think we can build form this now and really start focusing on topline revenue growth going forward.

[William Wallace:]

Okay. So, Jeff, is your expectation, the way the business stands now, that the first and fourth quarters would be loss quarters, but the second and third quarters would be profitable? Or do you think that you could turn 1Q and 4Q into breakeven quarters as a sales?

[Jeff Farrar:]

I am not sure that I am following you but I think that what we are hopeful of, is that once we get past 1Q and we start seeing some pickup in volumes that we will begin to see a sustainable breakeven to profitability picture on a go forward basis.

[William Wallace:]

Okay.

[Jeff Farrar:]

So we are looking at, particularly in the second half of the year, we are looking quarter-to-quarter profitability. Second quarter, I think, some things need to work for us. We still have a little bit of noise with some of the transitional decisions that have been made. But feeling pretty confident about second half profitability.

[William Wallace:]

Okay. Thanks, Jeff. That's perfect. I appreciate it.

[Billy Beale:]

Thanks, Wally.

[Operator:]

Your next question comes from the line of Laurie Hunsicker with Compass Point. Please go ahead.

[Laurie Hunsicker:]

Yes. Hi. Good morning, gentlemen. So a couple of questions. Just to go back to where Kathryn was asking regarding loan loss provision. Can you just take us through a little bit, I guess, how the breakdown related this quarter to fraud, those in terms of provisions and terms of charge-offs? And just even how you charge-off category actually broke? If you have any detail on that, i.e. what's commercial, what's real estate, what's consumer?

[Billy Beale:]

I think in the third quarter, we mentioned that we had a fraud that was disclosed that we are going to credit. Union had an exposure, StellarOne had an exposure. And this was a real estate developer investor that got money, if you will, from individual investors around Virginia to provide the equity in his projects and then it came to light that he basically had over subscribed those investments. There was some unsecured exposure that we wrote-off in the third quarter. We put the loan on non-accrual and as we worked and put a reserve for it and as we worked through this fourth quarter and started foreclosure, these properties were allowed to be taken in the bankruptcy which further complicated things. And so fourth quarter, we took some charge-offs, part of which was previously reserved. And Rob's looking for the detail but I don't think we have got the whole granular piece of the $3 million or so that was, yes, I think, it was just done in December. But it would be over half that. And then there were some other.

[Laurie Hunsicker:]

You mean, so of the $4.5 million? So just to clarify, so of the $4.2 million and roughly half of it was fraud related? Or higher?

[Rob Gorman:]

No, I think it was probably a little less than $2 million, maybe $1.5 million or so. Then we had some other charge-offs that would collateral depending where collateral declined and we took partial charge-offs on those, as we do every quarter. We look at a collateral of the pending loans just to make sure that we have enough collateral there. Now to the extent we don't, we take partial charge-offs and those, then I would say the remaining is HELA, credit card, some mortgage related charge-offs as well, which have been fairly constant quarter-to-quarter.

[Laurie Hunsicker:]

Right. I mean certainly your overall credit picture looks great. Certainly it really continued to improve this quarter too. But I guess the swing in provisions, just to your comment earlier that expect net charge-offs to remain stable, are you talking stable relative to December? And let's strip out the fraud. So it wasn't $4.2 million of charge-offs. That was $2 million of charge-offs. So that's still a substantially higher rate than where we were. And so when we think about charge-offs plus growth, are we starting with the round numbers, $2 million per quarter? Give or take? I never realized the [indiscernible].

[Rob Gorman:]

Yes. We think about it, call it about 15 basis points or so and then any additional provision related to loan growth on top of that. So it will be a little higher on provision as a base point for the quarter. And if you looked at our -- we had a lumpy, as Billy said, we call it lumpy quarters. In the first quarter, we had net recoveries. In the fourth quarter, we had, obviously, net charge-offs. But if you take it across quarters, we probably had a low level in 2014, but I would suggest that the base point going forward is probably good for us.

[Laurie Hunsicker:]

Okay. Good. That's really helpful. Okay and then just to go back to the OREO book here for one second. So if we are looking at how your OREO breaks out your $28 million. You have got $5 million of this real estate investment. This is all shuttered branches?

[Billy Beale:]

Shuttered branches and there's some operational premises that we are in the process of disposing them. So it's not [indiscernible].

[Laurie Hunsicker:]

And the goal is most of that comes off this year?

[Billy Beale:]

That's correct. Yes.

[Rob Gorman:]

That's the goal. Some of them will be difficult properties to move. Yes.

[Billy Beale:]

But we are actively marketing all those properties and the goal is to move those off by the end of the year.

[Laurie Hunsicker:]

Okay and then a last question. Actually, this is a question just to follow up on Wally's question. Jeff, this is for you. Can you give us an update and I am sorry if I somehow missed this, but just a breakdown of originations? What was construction and what was core? And then just given your cost-cutting initiatives, where we are with respect to what constitutes a core breakeven? And I think it had been running at about $160 million or $170 million. You projected core, is that still a good number? Or has that number now come down?

[Jeff Farrar:]

So let me run through the numbers first. For the core, we had core volume of $129 million, construction volume of $26 million. We were down $11.9 million quarter-to-quarter on core. We are down $10.9 million on construction. So we think about the 2015 and what it is going to take, core, the mix of core is changed a little bit now, because we have got a portfolio of component embedded in that. So that will change the profitability dynamic a little bit from a breakeven perspective. So it's a little harder to say because of that. What I would say is that if you look at the volumes this year, we are not anticipating a significant change in volume for 2015. It means that we think we can kind of backfill what was lost in terms of LOs in the second half of the year. So the profitability, we are anticipating to be more in a breakeven type price result. So as I think about it, if you look at volumes for 2014and say, okay, we think we can pretty much do the same thing in 2015 and breakeven, that would be a sense of what we think that monthly run rate is.

[Laurie Hunsicker:]

Okay. Great. Very helpful. Thanks.

[Billy Beale:]

Thanks, Laurie.

[Operator:]

Your next question comes from the line of David West with Davenport & Co. Please go ahead.

[David West:]

Hi. Good morning.

[Billy Beale:]

Good morning, David.

[David West:]

You characterized your expectations for this year's loan growth as mid-single digit. Do you expect that, I guess, to be from mostly your growth, I guess in C&I, commercial real estate, construction? Are those areas you still expect to drive loan growth in the coming year?

[Jeff Farrar:]

Yes. I don't think the mix is going to change. We have seen a nice increase as well on the consumer side, relatively speaking, which for us, would be primarily indirect lending, auto lien and individual home improvement loans. We also bought some of those indirect. But the mix is going to continue to be on C&I and commercial real estate.

[Billy Beale:]

Yes. I will add, David, that as Jeff mentioned, we now have a mortgage portfolio product that will flow throughout the year. We have been running of mortgages. StellarOne had fairly robust mortgage portfolio that's been running off. And as Jeff mentioned, we are introducing a portfolio of products that going to help. You will see some growth coming out of that, that you didn't see this year.

[David West:]

Is that a fixed product? A fixed --

[Jeff Farrar:]

It's a combination of both fixed and non-product.

[David West:]

Okay. Very good. And then, I guess the only other one left. You gave us a little flavor around your actions in the third quarter regarding some of the larger foreclosed properties. And you mentioned you had a commercial lot here in Richmond and then some larger rural properties in Fluvanna, Orange and King William County. Were there any movements in those properties in the quarter?

[Jeff Farrar:]

No.

[David West:]

Okay.

[Jeff Farrar:]

I am looking back. No.

[David West:]

All right.

[Jeff Farrar:]

We have got -- there's some under contract. But we have nothing on those larger ones that we had mentioned earlier.

[Billy Beale:]

Yes. We will note that we do have a contract on the King Carter Golf Course property. But that's not expected to close until later in the first half of the year.

[Jeff Farrar:]

On the golf course portion. Not the residential development piece. The one we had in King William, the good news there is that now that we have finally worked through our processes with the County and are able to put an entry road into that subdivision that we own, we do have a builder that has taken down building permits and will start construction. We think that will lead to more lot sales and eventually can get us out of that property. So there should be some forward movement on that one probably in the second half of 2015.

[David West:]

Great. All right. Thanks so much.

[Billy Beale:]

Thanks, Dave.

[Bill Cimino:]

And Laurel, we have time for one more caller, please.

[Operator:]

Great. Thank you. Your next question comes from the line of Bryce Rowe with Robert W. Baird. Your line is open.

[Bryce Rowe:]

Great. Thank you. Hi, Rob. Just real quickly, trying to get a feel for a good run rate from an operating expense perspective. I am calculating just under $52 million of operating expenses for the fourth quarter. Any feel for a good operating expense run rate going forward here?

[Rob Gorman:]

Yes. We are projecting $51.5 million to $52 million, is probably a good run rate going forward.

[Bryce Rowe:]

All right. That's very helpful. Thank you.

[Operator:]

There are no further questions. I would turn the call back to the presenters.

[Bill Cimino:]

Thank you, Laurel and thank you everybody for calling today and as a reminder, a replay of this call will be available on our investor website later this afternoon. Thank you.

[Operator:]

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