United Community Banks, Inc.
Q4 2015 Earnings Call Transcript

Published: 20 Jan 2016

[Operator:]

Good morning, and welcome to United Community Banks' Fourth Quarter Earnings Call. Hosting the call today are Chairman and Chief Executive Officer, Jimmy Tallent; President and Chief Operating Officer, Lynn Harton; Chief Financial Officer, Rex Schuette; and Chief Credit Officer, Rob Edwards. United's presentation today includes references to operating earnings, core pre-tax, pre-credit earnings, and other non-GAAP financial information. For these non-GAAP financial measures, United has provided a reconciliation to the corresponding GAAP financial measures in the financial highlights section of the earnings release, as well as at the end of the investor presentation. Both are included on the website at ucbi.com. Copies of the fourth quarter's earnings release and investor presentation were filed this morning on Form 8-K with the SEC, and a replay of this call will be available in the Company's Investor Relations section of United's at ucbi.com. Please be aware that during this call, forward-looking statements may be made by representatives of United. Any forward-looking statement should be considered in light of risks and uncertainties described on Page 4 of the Company's 2014 Form 10-K as well as other information provided by the Company in its filings with the SEC, and included on its website. At this time, I will turn the call over to Jimmy Tallent.

[Jimmy Tallent:]

Good morning, and thank you for joining us for our fourth quarter earnings call. Our fourth quarter performance caps a year of significant accomplishments and I am very pleased with our results and momentum as we enter 2016. Let me mention some of the fourth quarter highlights. Reported net income, including merger-related and other charges was $18.2 million or $0.25 per diluted share. The rest of this call will focus on operating performance that excludes the impact of merger-related and other charges. Net operating income was $23.8 million or $0.33 per share that is up 10% from the fourth quarter of 2014, on a per share basis. Our operating return on assets was 99 basis points, up from 96 basis points, a year ago. Our operating return on tangible common equity was 10.9% compared to 10.3% in the third quarter and 9.7% a year ago. Our margin was 3.34%, up 8 basis points from the third quarter and 3-basis point from the fourth quarter of 2014. Net loan growth, excluding the sale of our $190 million healthcare lending business was $162 million from the third quarter and 11% annualized. Solid fourth quarter loan production of $590 million brought our full-year production to just under $2 billion. We entered the Charleston, South Carolina market through a new loan production office that is already producing impressive results. Our provision for credit losses was $300,000, down from $700,000 in the third quarter and $1.8 million, a year ago. Among other factors, the declining trend in the provision for credit losses continues to be favorably impacted by the high recovery levels of loans that had previously been charged off. Net long charge-offs for the quarter were $1.3 million. That compares to $1.4 million for the third quarter and $2.5 million for the fourth quarter of 2014. Our allowance to loans ratio, excluding acquired loans was 1.35%. That is down from 1.37% in the third quarter. The addition of the First National and Palmetto loans, which have a purchase discount rather than an allowance for loan losses lowered this ratio by 21 basis points to our reported allowance ratio of 1.14%. Our non-performing assets to total assets ratio was 29 basis points. The revenue was up $3 million from the third quarter, reflecting the full quarter contribution of Palmetto's fee revenue and results of our growing SBA lending and all of our capital ratios remained very strong. Now I will share some details from the quarter. As you can see on Page 5 of the investor presentation, core pre-tax, pre-credit earnings were $38.3 million, up $2.9 million for the third quarter and up $7.5 million from a year ago. Our net interest margin was up 8 basis points from the third quarter and up 3 basis points from a year ago. Compared with the third quarter, we saw increases in our loans and securities yields as well as a 2-basis point decrease in the average rate on interest-bearing liabilities. You could say that rates on both side of the balance sheet moved favorably. A number of factors contributed to the margin increased. Let me take just a moment to talk about some of those. I will begin with the loan yield. The 6-basis point increase in loan yield is mostly due to the sale of our lower yielding healthcare loans and the full quarter impact of the discount accretion on the acquired loan portfolio. Although the Fed's mid-December rate hike also contributed to the higher loan yield, delayed timing minimized the impact. The impact was greater on the securities yield. Most of our $700 million [ph] in floating-rate securities are indexed to LIBOR, which began to increase earlier in the quarter in anticipation of the Fed move. That had a modest positive impact on our overall securities yield. We also saw last premium amortization as a benefit of the slowing prepayments in our mortgage-backed securities and we had the restructuring of the corporate bonds just veiled. Both of these added to the higher securities yield. Moving to funding cost, Palmetto's low-cost deposits were the primary driver of the 2-basis point decrease in the average rate on interest-bearing liabilities. To summarize the 8-basis point increase in margin this quarter, the 6-basis point increase in the average loan yields added about 3 basis points. The 16-basis point increase in the securities yield added 4 basis points and the 2-basis point decrease in average rate on interest-bearing liabilities added about 1-basis point. Now turning to loan growth and production, we grew loans by $162 million during the fourth quarter, excluding the sale of the $190 million in healthcare loans. We mentioned this sale during our third quarter and executed it during the fourth quarter. This fourth quarter loan growth represents an annualized growth rate of 11%. For the year, loan growth was $444 million or 10%, excluding loans resulting from the two mergers and the sale of the healthcare loans. That puts us slightly above our targeted growth range of mid-to-high single digits. Loan production remained strong at $590 million as shown on Page 7 of the investor presentation. Approximately $360 million was produced by our Community Banks, and $157 million by specialized lending. Looking at fourth-quarter loan production by categories, more than half was in our C&I and CRE portfolios. That proportion is similar to prior quarters. Commercial loans accounted for $361 million of total production and increased outstanding loan balances by approximately $130 million. This excludes the effect of the sale of healthcare loans. I mentioned earlier that we opened a new loan production office in Charleston, South Carolina, that is already showing strong results. Dixon Woodward, who has a long and distinguished career as President of the entire coastal South Carolina region for a much larger bank, joined United towards the end of the third quarter. He currently have the team of five to lead our expansion in the coastal South Carolina market. We expect this team to grow in 2016. I am thrilled to have Dixon and his team will board and I am especially pleased with the $28 million in new loans they produced in the fourth quarter. Our opportunity to grow in the coastal South Carolina market is tremendous, and we have recruited a great and experienced team to lead that growth. Moving on to interest sensitivity, with half of rate loans and a quarter of our securities at floating rates. Our balance sheet at the year-end remains well-positioned for rising interest rate. Before discussing fee revenue, they do not speak briefly about our probation for credit losses. We had a year of declining provision for credit losses as a result of abnormally low charge-offs and higher recoveries previously charge-off loans. Given our favorable credit quality outlook we expect provisioning to remain low in 2016 so far than in the past two quarters. You will find the trends on core fee revenue on Page 5 of the presentation. Fourth quarter quarterly revenue was $20.8 million, up $2.3 million from the third quarter. There were increases in all categories except our mortgage and advisory services business through service charges and fees on deposit accounts were up $2.2 million from the third quarter with increases in each of the three subcategories. The increase mostly reflects the full quarter impact of Palmettos fee revenue. Mortgage fees were down 550,000 from the third quarter primarily seasonal but up $1.2 million from a year ago due to our volume. We closed $138 million in mortgage loans in the fourth quarter, down slightly from the $141 million in the third quarter but up from the $77.4 million a year ago, 58% of the fourth quarter production represented in home purchases and 42% with refinancing. Turning to our SBA business, in the fourth quarter we closed $34 million of SBA loan commitments funded $24.1 million and so $25.1million of guarantees loans. The sales produced $2 million in fee revenue up 21% from the third quarter. By comparison during the third quarter we closed 41 million of SBA loan commitments funded 26.5 million and so 17.8 million which produced $1.6 million in fee revenue. Growing fee revenue generating businesses continues to be a strategic focus as we brought our business mix and I am very pleased with the progress that we continue to make in this area. Core operating expenses are on Page 5 of the investor presentation. As a reminder our presentations of core operating expenses excludes non-core items for market value adjustments to our deferred compensation plan liability. Severance charges and foreclosed property costs and also excludes an after-tax merger-related charge of $2 million during the fourth quarter and an after-tax $3.8 million charge in the third quarter. These merger-related acquisition costs are primarily for severance advisory fee systems and conversion cost and professional fees. In the fourth quarter we also incurred an after-tax charge of $3.6 million to write down certain properties to appraise values. The properties will purchase years ago as future branch sides. We are currently reevaluating all of our different delivery channels including future branch sides. Some of these properties will be retained for future branches, while others will be sold. These decisions will be made over the next 12 to 24 months as we continue to execute on our growth strategies. However, the cost we have held these properties for a long period of time, we evaluated them for impairment and wrote down the properties accordingly. We have included a reconciliation of both core operating expenses and core fee revenue on Page 17 of the investor presentation. To continue core operating expenses were $56.5 million, up $7.7 million from the third quarter. Palmetto metals operating expenses accounted for approximately $5.6 million of this increase leaving about $2.1 million increase on a linked quarter basis. I will talk more about that in just a moment. Core salaries and employee benefits expense of $36.6 million was up $3 million from the third. Palmetto salaries and benefits accounted for approximately $2.3 million or more than three quarters of the increase. The other 700,000 primarily reflects end of the year through ups for production and performance incentives. At quarter end we had 1,932 employees up five from the third quarter. We continue to invest in our future by bringing on new revenue producers in attractive markets. Our charges and loan production office is an example of our execution of the strategy. Fourth quarter expenses were also elevated by decisions we made in the court to review critical components within the compliance area of our company. We all know the regulatory scrutiny and expectations that compliance received today. Specifically, we have taken a deep dive in our BSA fair lending and model risk management processes. We engaged a number of firms to assist us with independent reviews and enhancements to our compliance areas. Some of these projects and the related cost could have been delayed until 2016. However, we make a decision to accelerate the process in the fourth quarter, which leads us to better prepare for growth and expansion in 2016. These costs were high, which were primarily one-time items that total approximately $1 million but were necessary investments as we continue to grow, most of the costs went to the professional fees category. As a result of the special projects and year-end incentives our operating efficiency ratio client to 59.4% in the fourth quarter. We expect this ratio to decline to the prior quarter's levels by the second quarter of 2016 after the conversion of Palmetto. Now I want to take a moment to talk about our acquisition of Palmetto. We close the merger late in the third quarter and we are making good progress in combining our two companies. Our conversion teams meet regularly to make sure we stay on task and avoid any disruption forecaster. We only get one shot at getting this wrapped into that end, our teams are fully engaged. After systems conversion which we are scheduled for late February, Palmetto branches will begin operating under the United branch. Most of the expected $2 million a quarter in additional expense savings will be realized by the second quarter after the conversions or complete and recapping 2015. I am proud of the achievements our bankers maybe in a busy and very productive year. For the year operating earnings per share were up 14% to $1.27 per share return on assets was 98 basis points and hit our target of 1% during two of the fourth quarter. Operating return on tangible common equity was 10.9% in the fourth quarter up 113 basis points from a year ago. We produced $2 billion a new loans. Loan growth slightly exceeded our goal of mid to high single-digit and we further diversify our portfolio. We reentered the M&A business with two of the largest acquisitions in our history and I could not be more pleased with the banks we have chosen as our partners and once again our bankers our national recognition for high customer satisfaction scores. Now for a brief update on our outlook for 2016. Overall we continue to be optimistic about our earnings growth. We expect growth in loans and deposits to continue in the mid to high single-digit range. We also look for continued growth in fee revenue from our mortgage and our SBA lending businesses. Margin outlook is more difficult. Given what we know today and assuming no further rate increases by the Fed, we anticipate that our margin will hold steady at fourth quarter-level going into 2016. There are many uncertainties around the next Fed increase and its impact on the deposit pricing, margin and the level of core transaction deposits. Like most of the banks, we are benefiting in the near-term from the Fed increase, while not having to raise deposit rates, but we are unsure how long that will last, even without another rate increase. That is why we evaluate multiple scenarios and why [ph] we conservatively see our margin holding steady in 2016. As I noted earlier, expense saving from the Palmetto acquisition will be fully realized starting in the second quarter. Excluding Palmetto, we expect core operating expenses to increase as we add revenue producers, but at a slower pace than revenue growth. Importantly as I noted earlier, we expect our efficiency ratio to return to the sub-58% range in the second quarter of 2016. Also, we expect to obtain our ROA goal of 1.10% in the fourth quarter of 2016, so we enter the New Year with momentum built on a strong foundation. Our core deposit base is among the best with core transaction deposits making a 70% of customer deposits. Keep in mind that we exclude time deposits under $100,000 from our core transaction deposits. If they were included, our core deposits would be 81% of customer deposits. Also, 70% of our footprint is in high-growth metropolitan markets, where they can contribute to and benefit from ongoing economic growth and development and our bankers continue to do what they always do, provide the highest level of customer service while at the same time integrate new banks and delivering outstanding financial performance. Our results are a testimony to their perseverance, their dedication and their character and I am extremely proud to be a member of their team. Now, we will be glad to answer any questions that you may have.

[Operator:]

[Operator Instructions] Our first question is from Jennifer Demba with SunTrust. Your line is open.

[Jennifer Demba:]

Hi. Good morning. Two questions, first, Jimmy could you talk about your M&A interest at this point during 2016? Secondly, the independent reviews of the various areas that are compliance-related. Was that just a proactive choice or was this encouraged by the regulators? Can you just kind of give some color behind the decision to do that?

[Jimmy Tallent:]

Sure. Let me answer second question first, Jennifer, yes. Proactive was the basis of that. We just felt that with the heightened scrutiny, the compliance gives today, we just want to make sure we have it right. We look at it as an investment, obviously, as our company continues to grow, but we just felt that it was a smart thing to do. In regards to M&A, certainly, there is ongoing conversation with a number of banks, which is not unusual. Certainly, where banks stock prices are today, certainly will make that probably more challenging. Our view of the geography that we have said we would like to be in or expand within has not changed. We have purposely over the last few years been able to grow and direct the overall footprint of the company into some of higher growth MSA areas, the Atlanta the Greenville, Savanna, Knoxville so forth, so yes. We do have interest. Yes. There are ongoing conversations, but more importantly, assuming something does come about the financial pricing of those are very, very critical and the future of growth within those markets are equally as important.

[Jennifer Demba:]

Thanks a lot.

[Operator:]

Thank you. Our next question is from Michael Rose with Raymond James. Your line is open.

[Michael Rose:]

Hey, good morning, guys. How are you?

[Jimmy Tallent:]

Hey, Michael. Good morning.

[Michael Rose:]

Hey. Just wanted to get a little color on the asset growth this quarter, it looks like you had added some securities. The balance sheet was bigger. Bottom-line than what I forecasted. Do you think you will get to $10 billion this year on an organic basis or you are going to try to stay under by the end of the year? If you do, can you just remind us what the costs are in doing so both, on the revenue hit side and then the incremental expenses? Thanks.

[Jimmy Tallent:]

Michael, let me answer part of that and then I will have Rex, of course, to answer the other piece. In regards to the $10 billion, certainly, organic growth that we have planned for 2016 will push us close to the $10 billion. We do have flexibility within our securities portfolio to manage that. If the opportunities in M&A to come about, certainly, those would be taken advantage of, but also to keep in mind the cost of that assuming we do go over at the end of 2016, the cost of that begins Q3 of '17, so you have basically half of that cost, so we are continuing to look at the cost how to either reduce internal cost, how to increase revenue and legacy UCBI to absorb that. The cost that we have put out has been somewhere in that $8 million $10 million a year range. Once Palmetto became part of United, because certainly the debit card fees seem to have a greater impact on banks - got large core retail customers and that is one of the components that we have. We are very proud of that, but the other side of that obviously is the cost associated with that, so we do believe we have ability to manage that. It is hard to predict what opportunities may surface over the next 12 months, but we are totally cognizant of the cost as well as how to absorb that. Rex, you want to talk about the securities?

[Rex Schuette:]

Yes. I will talk about the securities. We mentioned on the last call, Michael, with respect to the sale of the healthcare business $190 million, that in the interim, we would replacement them in the interim with adding securities. We added about $170 million of securities related to that transaction with that running off by the end of the fourth quarter, so on a linked-quarter basis, you will see us up about $200 million, which is primarily the replacements for the healthcare in that interim period. Again if you look at the prior quarter, the increase there was about $120 million, primarily related to the Palmetto acquisition on a linked-quarter basis. Did you have another question on other cost too, Michael, just to clarify?

[Michael Rose:]

Yes. I think you said that Durbin hit, which I said before is kind of $8 million to $10 million, but is there anything on the expense side?

[Rex Schuette:]

…$10 billion is kind of identifiable at this point.

[Michael Rose:]

All right, very good.

[Operator:]

Thank you. Next question is from Brad Milsaps with Sandler O'Neill. Your line is open.

[Brad Milsaps:]

Hey, good morning, guys.

[Jimmy Tallent:]

Good morning.

[Brad Milsaps:]

Jimmy, I appreciate all the guidance for 2016. I just kind of wanted to may be square a couple of things. You mentioned the efficiency ratio getting back to 57% or so in the second quarter. As you kind of look into the back half of the year in order to hit your 1.10% kind of ROA guidance would be your expectation that you have got to push that number even lower and do you think that comes from absolute expense reductions or more on the revenue side?

[Jimmy Tallent:]

Well, let me just kind of give you the high-level then I am going to ask Rex to give you the components of that, but basically if you take the 2016 outlook, given the loan growth and margin expectations and so forth, and also to the cost that we believe are for 2016, the cost that I am referring to is coming out of the Palmetto, we bake all that together. We believe that the 1.10% ROA is achievable by Q4 of '16.

[Rex Schuette:]

Yes. Let me maybe comment more specific. As I know we have had questions in the past on core expenses and Jimmy commented this quarter with our core expenses of $56.5 million, increasing about $2.1 million. If we backup first just on the Palmetto transaction to recap it, their run rate at Q2 of last year was approximately $9.6 million. In the third quarter, we have one month of Palmetto at $2.7 million, which would equate to $8.1 million run rate with respect to Palmetto, when it came on board, so that right there we had pre-closing cost savings of about $1.5 million before we closed Palmetto for our targeted expense savings. The other piece we mentioned previously too is that we expected to get about a $3.5 million or quarter [ph] $14 million run rate benefit out of Palmetto, so that means another $2 million of cost savings. If we become back to our core expenses of the $56.5 million for the quarter, as Jimmy noted, we had some true-ups or some run rate items with respect incentives in the quarter $700,000, another $1 million on special projects or $1.7 million in total. If you back that out of the $56.5 million, you come roughly to $54.8 million run rate. Then if you think the $54 million run rate, reduce that by another $2 million, that brings you down to roughly $52.8 million run rate or roughly about $53 million. That is what we have in our base case without the growth Jimmy is talking about, so our core for next year does reflect that $2 million of additional savings by the second quarter of next year. To get the benefit of ROA and with respect to efficiency with that expenses coming out, that gives you the benefit going into Q2 of a lower expense base coming in. Keep in mind, as Jimmy indicated, we have growth built into the budget, so this does not include merit increases, this would not include adding revenue producers what we are doing and continue to do, so that are expense numbers layer in additional growth numbers for revenue producers that we are doing, so our expense numbers in our budget and be higher than that base case, but that base case is the foundation of our budget, so we have the savings built-in into our numbers and we expect to have those by the second quarter. Of the $2 million that is left to come, we will see that come primarily two-thirds of it that come out of the staff line yet, notes of 59 people coming out in total by the second quarter and the other part of that two-thirds of the $2 million is related to software and equipment expense that is coming out and the balance is spread in other category, so we feel very confident in our target and we are looking at.

[Brad Milsaps:]

That is really helpful Rex, so bottom-line kind of starting in the second quarter, it is kind of just under $53 million-plus, whatever natural growth you have, we are going to have anyway is that fair?

[Rex Schuette:]

That's fair. Correct. That would give us again looking at the second quarter positive operating leverage, improve our efficiency ratio still be noted that are positive operating leverage, but also can put our efficiency ratio as Jimmy noted below 58%.

[Brad Milsaps:]

Perfect. Thank you, guys. I appreciate it

[Operator:]

Our next question is from Kevin Fitzsimmons with Hovde Group. Your line is open.

[Kevin Fitzsimmons:]

Good morning guys.

[Jimmy Tallent:]

Good morning, Kevin.

[Kevin Fitzsimmons:]

Jimmy, thanks for all the detailed outlook. One thing I wanted to ask about was the loan growth range, how do you kind of view what could drive that toward the high-end or toward he low-end of that range? You mentioned how you came on a core basis came slightly above that in this most recent quarters. Given that performance, just wondering are you being conservative relative to what you see out there or you are being you know you are just seeing some slowdown or some underrating that from competitors that you are not comfortable with how are feeling about that.

[Jimmy Tallent:]

Let me ask Lynn to address that. Lynn.

[Lynn Harton:]

Sure. Thanks. Kevin, in terms of what could drive it to the high-end, so we feel very good about what is going on in Charleston. We mentioned hiring the same there, it is big solid team we have known for a long time, so certainly that is a positive. In terms of underwriting, the only thing that we have tightened our underwriting on significantly would be multifamily we just think that market is getting a little overheated, but we are seeing great opportunities in credit tenant office, credit tenant retail and credit tenant industrial, so in the real estate side, so we feel pretty good about that. We do not expect the same kind of growth in our indirect auto portfolio going forward that we have had to this point, because we are about where we would like to be, so that will moderate. Again, we feel like this quarter was higher than we would see going forward, but we feel very confident in that kind of upper single-digit range.

[Kevin Fitzsimmons:]

Great. Thanks, Lynn. Just one quick follow-up, Jimmy, can you update us where Corsair's position is today and what your understanding is about their intentions going forward. I know they killed back some of their position in the fourth quarter and the share seemed to hold up relatively well in the immediate term when that happened and just what you are thinking about their plan for the future is. Thanks.

[Jimmy Tallent:]

Sure, Kevin. They sold down a position of about, I believe it was 3 million shares. Currently they would own about 10% of shares outstanding. You know, this is something that I am sure they have looked that over the last couple years hitting certain thresholds on the of valuation growth. I think I have been very pleased with their investment and certainly, you know, going forward I just cannot speak for them, but certainly with the pullback - share price today I am sure they would probably - hesitate before they settle down later, but that is just part of the normal and natural process, but anyways their current ownership is approximately 10%.

[Kevin Fitzsimmons:]

Okay. All, right. Thank you. Thank you. Our next question is from Christopher Marinac with FIG Partners. Your line is open.

[Christopher Marinac:]

Thanks. Good morning. Jimmy, I was wondering if you or Lynn or Rex to talk about any signs of any slowdown throughout the footprint whether that is in Tennessee or North Georgia or elsewhere I was just curious and if you had any signs of change in the last one to two months.

[Jimmy Tallent:]

Lynn.

[Lynn Harton:]

We have not seen anything. Our credit approvals come through committee are up, our credit requests are up, not dramatically, but kind of good, good same kind of activity we saw in '15, visiting with clients, we are not hearing anything that concerns us. Obviously, you know, everybody is concerned about what is going on with the market, but we do not see any of that flowing into any of the numbers at this point. Yes. If you look at our production for example you know in the fourth quarter, it was strong across the board, every, two were up mostly quarter and over and every market but one was up over the previous year, so the momentum is good, the credit side still looks good, so are not seeing it yet, or see anything yet.

[Christopher Marinac:]

Okay. Great. Then the progress that you continue to see on the classified assets again this quarter, is there additional improvement that lies ahead or would you be kind of reaching a trough at those figures?

[Rob Edwards:]

This is Rob. Hey, Christopher, I think there is continued room for improvement. We seeing some of our larger classified assets accruing, particularly the accruing substandard on the commercial side continue to come down and find leg, so I think there is room for some continued moderate improvement.

[Christopher Marinac:]

Okay. Great. Thanks for the - I guess, just one last question for Rex. If you cross the $10 billion mark during '17, but still several quarters now does that typically push that at the higher fee change or that the fee change in the 2018, just curious if you have any room to defer that in other couple of quarters beyond Q3.

[Rex Schuette:]

That requirement is by Durbin, so that is a year-end-only calculation when you cross $10 billion for that, Chris, so if we do not cross at year-end '16 then it goes to year end 17, so if you crossed in '17 as Jimmy indicated that it would be in the third quarter of '18 the impact on it, so those give us another year of crossing over 12/31/16.

[Christopher Marinac:]

Okay. Great. Thank you, Rex. I appreciate it.

[Operator:]

Our last question is from Nancy Bush with NAB Research, LLC. Your line is open.

[Nancy Bush:]

Good morning, Jimmy. How are you?

[Jimmy Tallent:]

Fine, Nancy, I hope you are.

[Nancy Bush:]

Thank you. Could you guys go back and just talk about that after-tax charge to write-down real estate. I just want to make sure I have gotten this written down correctly.

[Jimmy Tallent:]

Sure. The thesis behind that, Nancy, is if we go back into the 2004, 2005, 2006, 2007 era, we historically looked onward in our expansion during that time with future branches and of course branch sizes. We have always through that the strategy, once we identify the people and hire them, then we would be able to put the brick-and-mortar around them. Sometimes those stats cannot be used for a year or two or three, but all those stats are what I would define are just key locations then obviously 2008, 2010, 2011 came. Certainly, there were no branch expansions, matter of fact there were branch closures, so now we have reached the time where is we look at our distribution all throughout our company and the advancement of technology during that time, the recalibration of the brick-and-mortar they are fewer and they are smaller. Also a number of inbound calls that, we have receiving really over the last year because of - more key location of folks interested in buying. All that said was, as we step back revisit our delivery channels, we will not be building on all those locations. Therefore due to the probably bought them and the values of lastly on versus the appraised values today and the differential we basically -, we will decide over the next year or two those that we will be selling as well as that we possibly will retain for future [ph].

[Nancy Bush:]

…but this was $3.6 million after-tax. Is that correct?

[Jimmy Tallent:]

That is correct.

[Nancy Bush:]

That was in the fourth quarter?

[Jimmy Tallent:]

Yes.

[Nancy Bush:]

Where would that have been contained on that income statement?

[Rex Schuette:]

Nancy, this is Rex. It is in the merger and other charge line on income statement. It is roughly about $6 million of that total of just over $9 million.

[Nancy Bush:]

Can you give us any idea, Jimmy, how many sites you are talking about and is there any sort of geographic concentration of them?

[Jimmy Tallent:]

There is about, I believe, 18 sites, Nancy. They are really spread over the general markets with the exception of South Carolina. For example in Cleveland, Tennessee, when we expanded there a few years back, we actually acquired four locations, four sites. We built on two. We just are in the process of disposing on the other two, so there is not any one set location. It is pretty disbursed throughout our footprint with the exception of South Carolina.

[Nancy Bush:]

Okay. If I could ask one final question, the 1.10% ROA target that you foresee in the fourth quarter, do you think the progression toward that is going to be sort of a smooth upward progression, or are we going to sort of have a plateau up and to a new ROA territory.

[Jimmy Tallent:]

I think it will be a progression. You know, certainly after Q1, we have the integration of Palmetto. The remaining expense comes out at that point in time. With our revenue growth as we move throughout the year, it won't be perfect on a year one-fourth improvement each quarter.

[Nancy Bush:]

Right.

[Jimmy Tallent:]

The trajectory will be in such a fashion that that we believe that that goal is attainable.

[Nancy Bush:]

Okay.

[Rex Schuette:]

Nancy, this is Rex. I would add to Jimmy's comments. As I indicated with the $2 million of additional savings that are coming out of our based run rate by Q2, Q2 is where you can see the jump when you compare to Q4, so Q4 and Q1 are fairly consistent with your estimates of it. They would be fairly consistent. You run your model, but with the savings coming out by Q2, you will see us probably pick up four basis points, five basis points for the second quarter and run rate then as Jimmy indicated progress fairly steadily from there as our targets will get for the 1.10% for fourth quarter.

[Nancy Bush:]

All right, thank you very much.

[Operator:]

[Operator Instructions] Thank you. I am not showing any further questions at this time.

[Jimmy Tallent:]

Okay. Thank you, operator, and first of all, let me say thank you to all of you on the call today. I sincerely appreciate your interest and certainly encourage you to reach out to any of us if you have further questions. I do want to recognize our team of over 1,900 employees that make up this great company and once again thank them for their continued hard work, dedication, competitive nature and just a great group of human being. Thank you for being on the call and we look forward to talking with you again soon.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program and you may all disconnect. Everyone, have a great day.