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Union Bankshares Corp (UBSH) Q4 2018 Earnings Conference Call Transcript

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Union Bankshares Corp  (NASDAQ: UBSH)
Q4 2018 Earnings Conference Call
Jan. 22, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Laura 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 a question-and-answer session. (Operator Instructions)

Mr. Cimino, you may begin your conference.

Bill Cimino -- Vice President and Director of Investor Relations

Thank you, Laura, and good morning, everyone. I have Union Bankshares' President and CEO, John Asbury; and Executive Vice President and CFO, Rob Gorman, with me today. We also have other members of our executive management team with us for the question-and-answer period. Please note that today's earnings release is available to download on our investor website, investors.bankatunion.com.

During the call today, we will comment on our financial performance using both GAAP metrics and non-GAAP financial measures. Important information about these non-GAAP financial measures, including reconciliations to comparable GAAP measures, is included in our earnings release for the fourth quarter and full year 2018.

Before I turn the call over to John, I would like to remind everyone that, on today's call, we will make forward-looking statements, which are not statements of historical fact and are subject to risks and uncertainties. There can be no assurance that actual performance will not differ materially from any future results expressed or implied by these forward-looking statements. We undertake no obligation to publicly revise any forward-looking statement. Please refer to our earnings release for the fourth quarter and full year of 2018 and our other SEC filings for further discussion of the company's risk factors and important information regarding our forward-looking statements, including factors that could cause actual results to differ. All comments made during today's call are subject to that Safe Harbor statement. And at the end of the call, we will take questions from the research analyst community.

And now I'll turn the call over to John.

John C. Asbury -- President & Chief Executive Officer

Thank you, Bill, and thanks to all for joining us today. Union closed out our transformative 2018 year with a strong fourth quarter. To start, we did what we said we would do. We hit every one of our top-tier financial targets that we've laid out at the beginning of the year. Operating return on tangible common equity was 17.18% for the quarter. Operating ROA was 1.36% for the quarter and the operating efficiency ratio was 53.5% for the quarter.

As we've been saying, the fourth quarter's results provide a better view of the underlying strength and earnings potential of this uniquely valuable franchise. We continue to expect further improvements to these top-tier financial metrics this year and next. As communicated in our Investor Day presentation, with the addition of Access, we have further stepped up our financial targets as follows: ROA between 1.4% and 1.6%; ROTCE between 16% and 18%; and an efficiency ratio at 50% or better.

As was the case in 2018 with Xenith, we expect the first three quarters of 2019 to be noisy, as we get through integration and systems conversion in May. We will start to demonstrate the improved results of the company post Access acquisition in Q4 '19. Since we have a slightly different timeline for our wealth integration, which will not have its systems conversion complete until early 2020, we'll not fully realize the higher levels of financial performance for that business unit until early 2020.

We are pleased to have achieved higher than expected loan growth at 13% annualized for the quarter, which lifts our full year loan growth back up to our original upper single digit (inaudible). Our loan growth was a result of both increased production and lower pay downs during the quarter. Pipelines remain strong and we expect the full year 2019 loan growth to be in the high single digit range of 7% to 9%, consistent with our 2018 full year growth. This includes growth from Access National Bank's baseline beginning when the merger closes on February 1.

For the year, if you review our 2018 priorities, you'll see that we either accomplished or made significant progress on every one of them. I mentioned already that we hit the top tier financial metrics on a quarterly basis, a significant achievement. We diversified our loan portfolio and revenue streams. We're especially encouraged by the results we're seeing with our commercial banking emphasis and we continue to enhance our treasury management products and delivery. We added two registered investment advisors in 2018, which is helping to diversify and grow fee income. The pieces of the diversification strategy are coming together and we expect to make further progress there in 2019.

Our average loan-to-deposit ratio was 96%, which is relatively in line with our long-term loan-to-deposit ratio goal of 95%. While deposit growth did not match loan growth during the quarter due to seasonally high loan growth, we believe pacing deposits to loans is achievable for the full year 2019, but not necessarily in every quarter. We improved the efficiency of the company, a task that never ends. Efficiency is more than just the efficiency ratio or simplifying tasks and improving processes too. We continued to build our brand and defined our value proposition to make banking easier, and finally, we successfully integrated Xenith.

If you look at all that we accomplished, including the successful integration and conversion of Xenith, the second quarter strategic actions to rationalize our business lines and our announced acquisition of Access National Bank, substantially completing the Virginia franchise, these are great proof points of our team's ability to execute a tightly focused acceleration strategy. If we demonstrated one thing and one thing only, it would be our ability to make change happen within this company. We want to use this ability to strengthen the Union moat around our franchise and keep the company nimble, adaptable, and responsive to our environment.

I'm very proud of the Union team, how well it has embraced the changes we have undertaken and how rapidly our company is evolving. And, as we've demonstrated all year long, we were able to do all of this while improving our quarterly financial results, culminating and hitting our top-tier financial metrics during Q4. Changing a company to build sustainable long-term shareholder value while improving near-term operating results is not a common occurrence and it's one that we're proud of achieving this past year. This is a journey without end and we'll continue to demonstrate discipline, focus, and intensity in executing against our 2019 strategic priorities and building out our franchise.

As I introduced during our first-ever Investor Day in November, we've established a new set of priorities for 2019. The first three are unchanged from last year. They are; one, diversify the loan portfolio and revenue streams; two, grow core funding; and three, manage the higher levels of performance. New to 2019 are; four, strengthen our digital capabilities; five, make banking easier; and six, integrate Access National Corporation. The webcast for the Investor Day is still available. If you want to catch our presentations and hear the details, you can find that on our Investor website.

I would like to comment on a topic that we covered in the Investor Day and that's our branding issue. There are a number of inefficiencies with operating multiple brands across multiple states and we intend to work toward one distinctive and unified brand across the banking franchise. We have previously announced we will adopt Access's wealth management brand of Middleburg for our combined wealth management group post merger. The Union Bank & Trust brand is more challenging. It's not usable in all of our markets, yet it goes back a 100 years. It's who we are. We want to honor its heritage, retain its brand equity, but ensure it's distinctive enough to work on all of our markets. We do have a plan in place to accomplish this and we intend to share that plan with you in the near term, but not today.

I will now detail some key topics from the quarter and year, while trying not to duplicate too much of Rob's upcoming commentary. Loan growth was broad-based, with commercial and industrial loans having the largest linked quarter percentage gain at 56% annualized. That C&I would become our largest loan growth category is something we've been predicting for some time and it's a good proof point that we are executing the strategy we've been talking about since my arrival. C&I line utilization during the quarter was stable, while commitments grew. Point-to-point deposits grew 5.5% annualized for the quarter, while average deposit growth was 6.1%.

As with the third quarter, point-to-point growth in deposits is lower than the average due to late quarter declines and demand deposits resulting from normal fluctuations among commercial customers. This quarterly deposit growth rate is close to our expected loan growth rate for 2019, so the delta is not that large and we have numerous deposit growth initiatives under way that we believe are capable of pacing deposit growth to loan growth. As a reminder, as we build out our commercial banking book, expect some unevenness when comparing period ending balances, given the normal fluctuations that occur among business clients.

Our loan pipelines have reloaded and while weighted to the earlier stages of the lending process, the pipelines are as full now as they were going into the fourth quarter. Keep in mind, this is only for the Union side and we remain very optimistic about the potential we have with the Access National Bank franchise and their very attractive markets. We will continue to opportunistically build out the commercial banking effort. After hiring 25 C&I bankers in 2018 and as our growth in the C&I and owner-occupied real estate loan types evidence, we are building momentum. However, we still do not expect the new bankers' full loan production impact to be felt before mid 2019.

For those not familiar with the Virginia banking history, I'll say again. Most small to mid sized businesses in the Commonwealth once banked with Virginia-based banks, just like Union, until they were all lost to interstate banking consolidation over the course of the '90s, we believe no one is as well positioned as Union to recreate that market dynamic and we are now able to go toe-to-toe with the largest of our competitors in the space.

Credit quality remains strong, the economy in our footprint is steady, and we're not seeing any systemic changes to our credit environment. While we did have a modest uptick in charge-offs for the quarter from a low base in Q3, they involved a variety of different credits and skewed toward consumer. For the full year 2018, charge-offs totaled a very benign 12 basis points, down from 15 basis points in 2017. Charge-offs will be lumpy quarter-to-quarter and we currently expect full year 2019 to look about like 2017 and '18 from a credit quality perspective with charge-offs incrementally increasing from the 2018 low base, barring some change in the macroeconomic environment.

I'll also point out that quarter-over-quarter rise and 30 day past dues at year end were part of a seasonal trend that we sometimes see around the year end. While higher than prior periods, we track these credits individually and as at last week, the level has normalized with more than half of those 30 to 59 day past dues at year end now current. We do not see past dues as a factor at this time. Later stage past dues in non-performing assets were stable quarter-over-quarter. As you've heard me say each quarter since my arrival, I believe problem asset levels at Union and across the industry remain below the long term trend line. But, at this time, we still do not see any early indications of a downturn in Union's portfolio-level credit quality. Eventually it will come, we just can't yet tell you exactly when, except that from this vantage point, we don't see it happening in 2019.

Turning to Access, we announced last Tuesday that all necessary approvals have been received and we expect to close on February 1. Our integration teams are working well together and are finalizing preparations for a smooth Legal Day One and systems conversion is slated for mid-May. Having just completed the Xenith integration, this is a process we know well. We remain enthusiastic about the potential of our expanded presence in this tremendous growth market.

In summary, Union achieved a great deal in 2018, hitting our financial targets and making significant progress against our six strategic priorities. We have now raised the bar with higher financial goals and refreshed priorities for 2019. We're excited to have the Access teams join Union in another week or so and look forward to coming together to form what is irrefutably Virginia's regional bank. I remain highly confident in what the future holds for Union and the potential we have to deliver long term sustainable performance for our customers, communities, teammates, and shareholders.

I'll close with a familiar message. Union is a uniquely valuable franchise, dense and compact in great markets with a story unlike any other in our region. We have assembled the right scale, the right markets, and the right team to deliver high performance and a franchise that can no longer be replicated in Virginia. With the Access National Bank partnership, the strong hand we're holding grows stronger still and we intend to play it.

I'll now turn the call over to Rob to cover the financial results for the quarter.

Robert Michael Gorman -- Executive Vice President & Chief Financial Officer

Well, thank you, John, and good morning, everyone. Thanks for joining us today. I'd now like to take a few minutes to provide you with some details of Union's financial results for the fourth quarter, which illustrates the earnings potential of this franchise. Please note that, for the most part, my commentary will focus on Union's fourth quarter financial results on a non-GAAP operating basis, which excludes $2.2 million in after-tax merger-related costs, but does include losses from discontinued operations of $192,000 related to Union's exit from the mortgage origination business. For clarity, I will specify which metrics are on a reported versus operating basis.

In the fourth quarter, reported net income was $44.1 million and earnings per share was $0.67. Reported return on assets improved 1.29%. Reported return on tangible common equity increased to 16.4% and reported efficiency ratio declined to 56.2%. On a non-GAAP operating basis, which, as noted, excludes $2.2 million in after-tax merger-related costs, consolidated net earnings for the fourth quarter were $46.2 million or $0.70 per share. We achieved our targeted top-tier financial metrics for the quarter, as the company's non-GAAP operating return on assets was 1.36% versus the fourth quarter goal of 1.3%; non-GAAP operating return on tangible common equity was 17.2%, exceeding the top end of our targeted range of 15% to 17%; and the non-GAAP operating efficiency ratio came in at 53.5%, in line with the lower than 55% target we set.

As John noted in his comments, we expect further improvements to these top-tier financial metrics this year and next with the addition of Access and as a result, we have raised our financial targets. The new targets are; return on assets between 1.4% and 1.6%, that's up from 1.3% to 1.5%; return on tangible common equity between 16% and 18%, again up from 15% to 17%; and an efficiency ratio at 50% or below, which is down from the 55% or lower previous target. We expect to achieve these new targets in 2020 once we have fully integrated Access and realized the strategic financial benefits of the combination.

Now, turning to the major components of the income statement, tax equivalent net interest income was $111.4 million, which was up $3.4 million from the third quarter due to loan growth during the quarter. The third quarter's tax equivalent net interest margin was 3.7%, a decline of 6 basis points from the prior quarter. Net accretion of purchase accounting adjustments for loans, time deposits, and long-term debt added 13 basis points to the net interest margin in the fourth quarter, which was in line with the third quarter's 13 basis point impact. The decline in the tax equivalent net interest margin was principally due to a 15 basis point increase in the cost of funds, partially offset by a 9 basis point increase in the yield on earning assets.

The quarterly net increase in earning asset yields to 4.74% was primarily driven by higher loan portfolio yields, which improved by 12 basis points to 5.8% during the quarter, due to the impact of increased short-term interest rates on variable rate loan yields. The higher loan yields translated to an increase of approximately 10 basis points on the net interest margin for the quarter.

The quarterly 15 basis point increase in the cost of funds to 104 basis points was driven by higher deposit costs which increased 11 basis points from the third quarter to 76 basis points during the current quarter as well as the impact of a higher cost funding mix, as average wholesale borrowing balances increased more than average deposits during the fourth quarter, which increased the cost to fund the strong loan growth realized during the quarter. The increase to the higher deposit cost lowered the net interest margin or impacted net interest margin by a negative 10 basis points and the average -- the mix of higher cost funding mix cost 6 basis points on the margin. So basically, loan yields increasing and deposit costs increasing offset each other on the margin and the entire decline in the margin for the quarter was due to the increase to the higher cost funding mix during the quarter to fund strong loan growth during the quarter.

The provision for loan losses for the fourth quarter was $4.8 million or 20 basis points on an annualized basis, an increase of $1.7 million compared to the previous quarter. The increase in the provision from the third quarter of 2018 was primarily driven by loan growth and higher levels of net charge-offs in the current quarter. For the fourth quarter of 2018, net charge-offs were $5 million or 21 basis points on an annualized basis, compared to $3.2 million or 30 basis points for the prior quarter and $2.7 million or 15 basis points for the same quarter last year.

For the year ended December 31, 2018, net charge-offs were $11.1 million or 12 basis points compared to $10.1 million or 15 basis points for the year ended 2017. Non-interest income increased $3.6 million to $23.5 million for the quarter from $19.9 million in the prior quarter. Excluding the $933,000 adjustment to reduce the Shore Premier gain recorded in third quarter of 2018, non-interest income increased $2.7 million or 12.8% for the fourth quarter when compared to the prior quarter. The increase in non-interest income was primarily driven by life insurance proceeds of approximately $976,000 related to a Xenith acquired loan that had been fully charged off prior to Union's acquisition of Xenith. In addition, an increase in customer-related fee income of $222,000 due to higher overdraft fees and fiduciary and asset management fees increased during the quarter and an increase in interest rate swap fees of $814,000 during the quarter due to an increase in transaction volumes.

Operating non-interest expenses decreased $2.7 million or 3.6% to $72.2 million when compared to the third quarter of 2018. The decrease in operating non-interest expense included a decline in marketing and advertising expenses due to timing and digital marketing expenses. Salaries and benefits of $698,000 primarily due to decreases in incentive plan and benefit costs.

Professional services declined $692,000 primarily due to a decrease in consulting fees. Additionally operating non-interest expense declined due to lower amortization of intangibles of $536,000 and a decline in branch closure cost of approximately $475,000 compared to the third quarter. Partially offsetting these declines was an increase in OREO and credit related expenses of $574,000 due to losses on sales of property as compared to gains recorded in the prior quarter.

The effective tax rate for the fourth quarter was 16.5% compared to 15.9% in the third quarter. The increase in the effective tax rate was primarily due to an increase in non-deductible merger expenses related to the pending Access merger.

Now turning to the balance sheet, period-end total assets stood at $13.8 billion at December 31, an increase of $394 million from September 30, primarily result of loan growth and increases in the investment securities portfolio during the quarter. At quarter end, loans held for investment were $9.7 billion, an increase of $304.6 million or 12.9% on an annualized basis from September 30. On a pro forma basis, as if the Xenith acquisition occurred on December 31 of 2017, and also adjusted for the mid-year sale of Shore Premier in the GreenSky portfolio, loans held for investment increased $670 million or 7.3% in 2018, in line with our full year guidance.

Looking forward, as John noted, we expect our 2019 loan growth to be relatively in line with the full year 2018 loan growth rate. At December 31, total deposits stood at $10 billion, an increase of $136.3 million or 5.5% on an annualized basis from September 30 while average deposits increased to $148.5 million or 6.1% annualized from the prior quarter. On a pro forma basis, as if the Xenith acquisition occurred on December 31, 2017, deposits increased $431 million or 4.5% in 2018.

Turning to credit quality, non-performing assets declined by $1.2 million to $33.7 million during the quarter or 35 basis points as a percentage of total loans. And that's comprised of $27 million in non-accruing loans and $6.7 million in foreclosed property balances. The allowance for loan losses were relatively unchanged from September 30 at $41 million. The allowance as a percentage of the total loan portfolio declined 2 basis points to 42 basis points at quarter end.

So, to summarize, our fourth quarter results demonstrate the significant earnings capacity we envisioned as a result of the Union and Xenith combination. Now that we have hit our top-tier financial performance target ranges, we will look to improve our performance in 2019 and hit the higher target levels we set, once the strategic and financial benefits of the Access combination are fully realized in 2020. As always, we remain focused on leveraging the Union franchise to generate sustainable, profitable growth, and remain committed to achieving top-tier financial performance and building long-term value for our shareholders.

With that, let me turn it back over to Bill Cimino to open it up for questions.

Bill Cimino -- Vice President and Director of Investor Relations

Thanks, Rob. And, Laura, we are ready for our first caller, please.

Questions and Answers:

Operator

(Operator Instructions) Our first question is from Catherine Mealor of KBW.

Robert Michael Gorman -- Executive Vice President & Chief Financial Officer

Good morning, Catherine.

Catherine Mealor -- KBW -- Analyst

Thanks. Good morning. I wanted to start with the margin and see, Rob, if you could give us your updated thoughts on your outlook for the margin. And if anything has -- and how that looks with or without Fed increases this year? Thanks.

Robert Michael Gorman -- Executive Vice President & Chief Financial Officer

Yes. Going forward, Catherine, we're modeling that we won't have any Fed increases during the year and the curve will remain very flat similar to where we sit today. So, we don't expect much improvement in the interest rate curve going forward. That said, as we look at core net interest margin from where we are at the end of this quarter, we expect that we'll be flat to maybe down 2 basis points to 3 basis points for the year of 2019. That's on a Union-only basis.

When you bring in Access, it's pretty much the same story, basically flat to where Union ended up the year with some potential compression in the 2 basis points to 3 basis points range. Now on a headline NIM basis, Union-only would be down about 7 basis points because of lower accretion, but with the acquisition of Xenith and the impact of their accretion, we're basically back to where we reported ourselves at this quarter. So, fairly flat on a headline line basis due to the accretion impact of Access with some potential small compression bias going forward.

John C. Asbury -- President & Chief Executive Officer

And, Catherine, I want to reiterate something Rob said earlier. The increase in yield on the loan portfolio matched the increase in deposit rate paid over the quarter. 13% annualized loan growth is a very strong number for us. That's a seasonal high. We will not be seeing that -- we do not expect to see that next year. So, we think that we have more of an opportunity to better match loan growth and deposit growth. So, we're not as reliant on wholesale funding, which is obviously less expensive.

Catherine Mealor -- KBW -- Analyst

Got it. That make sense. And then, do you have the dollar amount of fair value accretion you're expecting for Access National yet?

Robert Michael Gorman -- Executive Vice President & Chief Financial Officer

Well, of course, we're going to close the deal in another week or two, February 1, so we'll have a final number once we get there. But our current modeling and what we filed with the proxy prospectus was about $8 million to $9 million of accretion income for 2019. Now, remember that's nine months of accretion income as well. So when you're looking at Access and the impact for 2019, we won't get any income related to that until starting of February.

Catherine Mealor -- KBW -- Analyst

Got it. Okay, that's really helpful. And then, maybe one last one for me. You noted in the press release you have had higher past due loans this quarter. Can you give us any color on that? I know you also mentioned that some of those became current after year end, but just any kind of commentary about what trends you're seeing there. Thanks.

John C. Asbury -- President & Chief Executive Officer

Yes. Well, we were referencing 30 to 59-day past dues. If you look at greater than 59 day past dues, it was stable, even -- actually down slightly. We do sometimes see this phenomena. We dig into this pretty hard. We look at it credit-by-credit. It's not uncommon for us to see a rise in 30 to 59-day past dues, particularly at year end due to holidays and whatever. I used to see the same phenomena at Regions Bank. They were just talking about it on their quarterly earnings release. The most important thing is that, over half of those were cleared as of last week. So you can see that that was a fairly short term phenomena.

Also contributing to a meaningful percentage of the total, you'll see a rise in owner-occupied real estate 30 to 59-day past dues and that was mostly about one credit that was in the process of being restructured and was in fact technically past due as of year end. But that's not due to a payment-related issue, it's really more due to handling. It was a busy quarter for the commercial bankers and we didn't get done what we should have gotten done on time. We don't see past dues as an issue at this point.

Catherine Mealor -- KBW -- Analyst

Got it. Okay. Very helpful. Thank you. Great quarter.

Bill Cimino -- Vice President and Director of Investor Relations

Thank you, Catherine. And, Laura, we're ready for our next caller, please.

Operator

Our next question is from Austin Nicholas of Stephens.

Robert Michael Gorman -- Executive Vice President & Chief Financial Officer

Hi, Austin.

John C. Asbury -- President & Chief Executive Officer

Hey, Austin.

Austin Nicholas -- Stephens -- Analyst

Hey, guys, good morning. Let me just hit back on the margin one more time. I think the previous guidance at the Investor Day was maybe for a flat-to-modestly up kind of margin off the 3Q levels. I guess is the delta versus kind of the message today that -- is it really just a flatter yield curve and kind of lower expectation for rate hikes that you're not seeing the benefit of on the asset side or is there more to it than just kind of those two components?

John C. Asbury -- President & Chief Executive Officer

Yeah, Austin, in terms of what we talked in the third quarter, we were thinking that we have a steeper yield curve going into '19 as well as we had two Fed fund moves modeled in our outlook for 2019. Obviously, we've shifted our view of that based on what's occurred during the fourth quarter. And that's pretty much what's causing just to be flat and a little more negative on the margin, although marginal downward bias.

Austin Nicholas -- Stephens -- Analyst

Got it. Okay. That's what I figured. I appreciate that. Maybe on the fee income, that was pretty strong in this quarter. You noted the swap fees and kind of insurance revenue there. Any outlook on kind of those specific line items that saw strength, maybe specifically the swap fees and how you're thinking about those going into '19?

John C. Asbury -- President & Chief Executive Officer

Well, I'll start. David Ring, our Head of Commercial Banking is here as well, so I'll ask him for some perspective. To me, part of this is demonstrating the maturation of the commercial banking effort. Particularly, an example would be, those who have been out or have joined us from larger institutions have probably dealt with industry hedging for a good bit of their career. I've dealt with it personally for 20 years. So it's still a relatively new product. It's an efficient form of hedging clearly for the borrower. So, as you see us doing more transactions, larger transactions, more of the build out and C&I, that's building our base of opportunity for interest rate hedging products, which are generally plain vanilla swaps. And I think also the expectation that this yield curve is going to remain flat for a while suggests it's a good opportunity to go ahead and lock in rates before something unexpected happens. Dave Ring, what is your outlook for interest rate swap income?

David V. Ring -- Executive Vice President & Commercial Banking Group Executive

Yeah. We're confident that our sales teams now have a full grasp of where the opportunities are. We're continuing to lend into the same asset classes that we went into in the past. So our swap opportunities are not only in real estate like they have mostly been, but now in revolving lines of credit. So when you see that rates are flat, that is the perfect time for a client to enter into a swap if it comes (ph) cheaper. And so some may see interest rates rising and they have to enter into a swap now, but our philosophy is control your costs today and that's when we're seeing our...

John C. Asbury -- President & Chief Executive Officer

Yeah, correct. We used to call that -- you don't have to pay-up the yield curve. So we think that the market is supporting increased interest and benefit and interest rate hedgings. And the fact that we continue to build our book of commercial and that we're growing our portfolio means more opportunities and for the more sophisticated client, it's a much more efficient way to hedge than frankly take on a traditional fixed rate line.

David V. Ring -- Executive Vice President & Commercial Banking Group Executive

We're actually seeing as many requests for quotes as we saw last quarter. And we have several in the queue already for this quarter.

John C. Asbury -- President & Chief Executive Officer

Okay, Austin, so bottom line, it has legs and we're feeling pretty good about that opportunity.

Robert Michael Gorman -- Executive Vice President & Chief Financial Officer

Yeah. Just note, Austin, that it was very high in the fourth quarter. We did have significant loan growth. So it's going to be -- it's going to fluctuate with loan growth quarter-to-quarter as well.

Austin Nicholas -- Stephens -- Analyst

Got it. Perfect. Thanks, guys. Appreciate all the help.

Robert Michael Gorman -- Executive Vice President & Chief Financial Officer

Thank you.

Bill Cimino -- Vice President and Director of Investor Relations

Thanks, Austin. And, Laura, we're ready for our next caller, please.

Operator

Our next question is from Laurie Hunsicker of Compass Point.

John C. Asbury -- President & Chief Executive Officer

Hi, Laurie.

Laurie Hunsicker -- Compass Point -- Analyst

Yeah. Hi, good morning. I just wanted to go back to margin from M&A, just want to make sure that I'm understanding it and I really appreciate the color. And the schedule that you guys have laid out on page two of your press release of accretion income does not include Access National. And so, again, I guess, as we're thinking about this and the accretion income is going to be very heavily phased-in in the June, September quarter and then obviously winding down. Theoretically, we could see your reported margin expanding while your core margin may -- expanding off of current levels, current 370 levels, while your core margin continues to contract. Am I thinking about that right?

Robert Michael Gorman -- Executive Vice President & Chief Financial Officer

Yes, Laurie. You're thinking about it exactly right. The accretion that we're running off on the Union will continue over the quarter, so decline over the quarterly basis. We'll get the pickup in accretion from Access starting in the first quarter or so. That's why you could see it potentially be -- on a headline NIM basis, be flat or bit up in the first quarter, but start to decline over the remaining quarters.

Laurie Hunsicker -- Compass Point -- Analyst

Got it. Okay. And then just to quantify that, obviously your accretion income just basis points (ph) on your 370 margin this quarter was 13 basis points. So if we look fully phased into the June quarter, that could theoretically be about 16 basis points, 17 basis points, maybe 18 basis points depending?

Robert Michael Gorman -- Executive Vice President & Chief Financial Officer

Which quarter you're talking about, Laurie?

Laurie Hunsicker -- Compass Point -- Analyst

So, in other word, June quarter, when it's fully phased, right, because you're only booking part way through March, so as we think about...

Robert Michael Gorman -- Executive Vice President & Chief Financial Officer

Yeah, you are talking more probably around 15 basis points, 16 basis points.

Laurie Hunsicker -- Compass Point -- Analyst

Okay, perfect. Okay, perfect. And then just a couple of things here on the income statement. The jump in BOLI linked quarter, was there anything non-recurring in that, in that $2.07 million number?

Robert Michael Gorman -- Executive Vice President & Chief Financial Officer

We did get some proceeds from -- life insurance proceeds from that. It's about a couple hundred thousand dollars in the BOLI line, so that would be considered non-recurring from that point of view.

Laurie Hunsicker -- Compass Point -- Analyst

Got it. Okay. I'm sorry, that was the $222,000 that you referenced or no?

Robert Michael Gorman -- Executive Vice President & Chief Financial Officer

No, it was...

Laurie Hunsicker -- Compass Point -- Analyst

No, that was something different. Okay, so...

Robert Michael Gorman -- Executive Vice President & Chief Financial Officer

No, it's about $200,000. Yeah, I wasn't referencing BOLI on that one, but it was about $200,000 in the BOLI, in the quarterly numbers.

Laurie Hunsicker -- Compass Point -- Analyst

In the BOLI line. Okay. And then, on the other operating income number, the $2.255 million, can you just take us through what was non-recurring in that, because I feel like I'm not getting all the adjustments.

Robert Michael Gorman -- Executive Vice President & Chief Financial Officer

Yeah. In that number is the $976,000 we received, again from life insurance proceeds, but related to Xenith acquired loans, so if you back up that, you'll be more in line with what we had in the third quarter.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. And then where does the $933,000 adjustment from Shore Premier show up?

Robert Michael Gorman -- Executive Vice President & Chief Financial Officer

Well, that was in the third quarter, so we were just...

Laurie Hunsicker -- Compass Point -- Analyst

That was the third -- OK, sorry, just was reading that.

Robert Michael Gorman -- Executive Vice President & Chief Financial Officer

It's a -- you should see it on a separate line in our press release.

Laurie Hunsicker -- Compass Point -- Analyst

Got it. Okay. I just wanted to make sure. And then, as we think about your tax rate next year, what should that look like?

Robert Michael Gorman -- Executive Vice President & Chief Financial Officer

Yeah. That's a complicated question, but we're modeling in the 17% range. It's going to fluctuate quarter-to-quarter depending on when we're paying merger-related costs, et cetera. And then the impact of Access, so I'd say on a combined basis, we're probably in the 17% range or so.

Laurie Hunsicker -- Compass Point -- Analyst

Okay, great.

Robert Michael Gorman -- Executive Vice President & Chief Financial Officer

It could be a little -- that could be a little heavy, but we'll adjust as we go forward and provide some guidance.

Laurie Hunsicker -- Compass Point -- Analyst

Okay, great. And then just two last quick questions. John, can you just comment, in light of your raised (ph) targets, how you all are thinking about your dividend policy here?

John C. Asbury -- President & Chief Executive Officer

I think that, from our standpoint, we have not changed really anything in terms of our philosophy.

Robert Michael Gorman -- Executive Vice President & Chief Financial Officer

No. Our payout ratio -- the target of payout ratio continues to be in the 35% to 40% target range.

Laurie Hunsicker -- Compass Point -- Analyst

Okay, great. And then just one last question. And I appreciate your focus on the Access integration as we look forward this year. But can you just refresh us, now that you're just about to close this, where you sit on M&A thoughts, especially given where your stock currency is, just how you're thinking about that? Thanks.

John C. Asbury -- President & Chief Executive Officer

Yes. Laurie, I think that we have always said that organic performance is our first and most important objective and that's what we're focused on. It's very difficult to think about M&A from this juncture, because we have so much work ahead of us. As it relates to Access, Access opens up a world of opportunity for us in the greater Washington area. So, we are incredibly enthusiastic and we are laser-focused on making sure that we have a successful integration and conversion and on-boarding of that team. And we really need to let things settle down, so to speak.

What we did say in our Investor Day in November in response and anticipating the question of how do you think about M&A, yeah, I said there are really three options for the future. The most important option is do nothing. We have everything we need right here, right now. There's no compelling reason why we must do additional M&A. And to your point, given where the stock price is, that doesn't really necessarily suggest that we would be out there looking anytime soon. That does not mean that in the future we wouldn't have other thoughts or other considerations. But you can ask us again later in the year, but right now we are exceptionally focused on making sure that everything goes well with Access. And then, we need to let things settle down and just make sure that everything is working as expected.

Laurie Hunsicker -- Compass Point -- Analyst

Great. Thank you.

Bill Cimino -- Vice President and Director of Investor Relations

Thanks, Laurie. And, Laura, we're ready for our next caller, please.

Operator

Our next question is from Matthew Keating of Barclays.

Matthew Keating -- Barclays -- Analyst

Great. Thank you. Good morning.

John C. Asbury -- President & Chief Executive Officer

Good morning.

Matthew Keating -- Barclays -- Analyst

Hi, thanks. So, Rob, maybe for you around core expense growth. I understand the first three quarters of this year are going to be a bit noisy with the Access National closing and integration, but I guess at the Investor Day, the Bank talked about 4% to 4.5% core expense growth, which was inclusive of some of the additional digital expenses the Bank is contemplating for this year. What do you think from a core expense growth rate sort of ex-Access National we should be thinking about for this year? Thanks.

John C. Asbury -- President & Chief Executive Officer

Yeah. You're pretty much right on, we're finishing up our 2019 budget where we have, and we're talking about a 4% -- little over 4% growth in the expense run rate if you just look at on a Union stand-alone basis. Obviously that will be impacted by savings we'll get from Access, which will decrease that rate, perhaps the positive or negative growth, once we fully incorporate the cost savings on them, if you look at on a quarterly run rate basis. But above 4% -- little over 4% growth is what we're assuming.

Robert Michael Gorman -- Executive Vice President & Chief Financial Officer

There are always the potential that we could do some strategic investment organically in terms of adding commercial teams, expanding commercial teams. If we were to do that, that can add greater than planned expenses, but we wouldn't do it, unless we were confident of the return realization period. And I'm not saying there's anything specifically on the board right now either.

John C. Asbury -- President & Chief Executive Officer

Yeah we'll be looking for operating leverage coming out of that.

Matthew Keating -- Barclays -- Analyst

Great. And then just a quick follow up for John. You mentioned in the opening commentary around the potential brand initiatives and you're not ready not signing (ph) yet. Do you think that, there'll be at some point this year, can you kind of time-bound when we might expect additional information around that? Thanks.

John C. Asbury -- President & Chief Executive Officer

Coming very soon, probably sooner than you think. We'll be back very shortly and we're talking about months from now, not next year in terms of actually making it happen. The reason why we're being a bit cagey about it, quite candidly is simply two-fold; one, we're still working on our final estimates of the actual cost, and two; we don't want that to be a distraction as it relates to the good news which is coming with respect to Access. And so, we envision a bit more of a big bang.

Look for us to comment on this again, as we announce the closing of the Access merger and don't look for anything dramatic. I said this, I'll reiterate. We, Union Bank and Trust has been around over a 100 years. The name Union was intended to represent the unification of small community banks, which had come together in the 1920's, to better serve their clients.

So we're still a Union. That still resonates. The problem, as you know, is we can't use that across the franchise and there is some degree of market confusion up in Northern Virginia with the other bank whose name begins with a U. And that's about all I'll say. So we do think we have an appropriate logical way to deal with this and we look forward to sharing information with you on that very soon. And then when we do, we'll come back and we'll be real clear in terms of what it costs, et cetera.

Matthew Keating -- Barclays -- Analyst

Understood, thanks very much.

Bill Cimino -- Vice President and Director of Investor Relations

Thanks Matt. And Laura, we've got time for one more caller please.

Operator

Our next question comes from Blair Brantley of Brean Capital.

John C. Asbury -- President & Chief Executive Officer

Hi, Blair.

Blair Brantley -- Brean Capital -- Analyst

Hey, good morning, everyone.

John C. Asbury -- President & Chief Executive Officer

Good morning, Blair.

Blair Brantley -- Brean Capital -- Analyst

I just wanted to circle back on the loan growth side. Can you give us an idea from a geographic perspective, where the strength came from this quarter?

John C. Asbury -- President & Chief Executive Officer

Yes, David Ring, would you like to comment on that?

David V. Ring -- Executive Vice President & Commercial Banking Group Executive

Primarily three markets; our coastal region which is our newest growth region where we've added a full C&I team, which mean all we does well, and so there's Greater Richmond area, is number two and our North region which is primarily the area around Fredericksburg, has done very well. And then our Carolina's region, which is mostly a long production market, also had a very good year, and a strong quarter, but the big three were those I just named.

Robert Michael Gorman -- Executive Vice President & Chief Financial Officer

And I want to elaborate on something because Dave hit on a critically important point, when he says coastal, he's talking about the former Hampton Roads' bank franchise. The south side of Hampton Roads, Virginia Beach, Norfolk et cetera, where we only had a very small presence prior to the Xenith combination.

As a reminder, the Xenith represented the combination of Legacy Richmond-base Xenith, which was principally a branch-like business bank, not unlike Access. And so they always have had a really strong C&I team in Richmond and in Northern Virginia. Hampton Roads looked very much like a traditional community bank. So what has happened, as we've used that as a platform and we have built a very capable skilled commercial and industrial banking team post Xenith acquisition, and we are super excited about the potential of that market. This is exactly what we said we will do. This is exactly what we predicted would happen. And so we are very bullish on that Hampton Roads region.

David V. Ring -- Executive Vice President & Commercial Banking Group Executive

Lets say that's in dollars, not percentage right, which we throw things, that's true dollar growth.

Robert Michael Gorman -- Executive Vice President & Chief Financial Officer

Yeah, so we think we have a lot of upside there off of a small base.

John C. Asbury -- President & Chief Executive Officer

In the context of C&I, Hampton Roads is essentially a new market entry for us and we are doing well down there.

Blair Brantley -- Brean Capital -- Analyst

Okay, great. Thanks. What's the growth this quarter? Can you speak to what you saw from the pay down perspective and how that maybe compares to last quarter? Kind of (multiple speakers)

John C. Asbury -- President & Chief Executive Officer

Well, it is certainly less, pay downs felt relatively normalized in Q4 neighboring. I'm looking at the data here now. We certainly saw elevated pay downs earlier in the year, all the reasons we've talked about before, that seemed to abate somewhat in Q4.

Yes, for sure. Well from April to August we saw a lot of pay downs and it started to slow down in September and -- in the fourth quarter, it's more normalized.

Blair Brantley -- Brean Capital -- Analyst

Okay, great. Thanks and then finally just on the pricing environment. Any update in terms of what the competition and how that feels relative to the first half of '18 maybe?

John C. Asbury -- President & Chief Executive Officer

We don't have to fairly react to the competition as much as we look at market data overall that we subscribe with the S&P, and we've seen our pricing be at least at market or above market. So, we're more relationship-oriented lenders, bankers and we take that into consideration, what's fortunate for us is, we have very loyal relationships. So it's not simply about price. It's about the relationship and the value we're bringing to them.

Robert Michael Gorman -- Executive Vice President & Chief Financial Officer

We actually have been using over the course of the year a third-party well-known loan pricing bench-marking service on the commercial side that Dave Ring and I have used for probably over a decade and it was interesting what it confirmed for us is what we sensed, which is that, we do a pretty good job. We are clearly not outrunning business on the back of having the most aggressive pricing. We're in pretty good shape there.

On a depository side, I'm going to ask our relatively new President Maria Tedesco to comment. She's been here less than four months, so this isn't entirely fair. We are beginning to see movement on the deposit pricing side, including to some extent from the larger banks. One of the things that we have always done at Union is, had a one size, fits all pricing strategy, all markets same rate on the retail side.

Maria, do you have any comments on that and frankly I have to point out, it's not exactly your question, but I'm going to answer it. We see a lot of untapped potential on the retail side of the bank. How do you think about what you're seeing in terms of pricing competition and opportunity in retail?

Maria P. Tedesco -- President

Well, we are looking -- as I mentioned, at our Investor Day, that we're looking at segmenting the branch and thinking of the markets, not one size fits all. And so we're implementing a regional pricing model and we go through this year. We're not there today, but we will be there soon enough. I think that will help us stay competitive, but also help on our margin size.

And if I could just comment about retail in general, my thinking hasn't changed since the Investor Day. I am very confident with the growth potential of retail, but retail needs to deliver its potential and it's not quite there yet. And essentially we've taken a multi-tier approach and already implemented a number of initiatives that I think will help continue to see them realize their potential. And just to name a few, we have implemented an incentive program, which I believe intends very good balanced performance. Secondly, we reintroduced a service and sales coaching model, which includes training, again, elevating the skillset of the retail bankers.

We've also introduced assessment through an exhaustive assessment around branch processes, because we want them -- and that includes lending by the way, our lending processes, streamlining them, not only for our teammates, but certainly that makes banking easy. And in addition to that obviously as you all know our digital agenda, we're going to continue to execute on a digital agenda, which will help, again make banking easy, which is our objective. All of this, I think, will help us be more competitive and grow the retail franchise to all know as a greater percent.

Robert Michael Gorman -- Executive Vice President & Chief Financial Officer

And then again as we bring greater resources to the table for Access, they have -- by necessity had a very focused intensive deposit gathering effort particularly for small business. And so that model not only will continue up there, we intend to import that into other markets where we think that would be useful. That was your reference to branch segmentation and we'll talk more about that later on.

Blair Brantley -- Brean Capital -- Analyst

Great. Thank you, appreciate the color.

Robert Michael Gorman -- Executive Vice President & Chief Financial Officer

Thank you.

Bill Cimino -- Vice President and Director of Investor Relations

Thanks Blair and thanks everyone for dialing in today. As a reminder, we'll have a replay of this call available on our Investor website, investors.bankatunion.com. Have a good day.

Operator

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

Duration: 51 minutes

Call participants:

Bill Cimino -- Vice President and Director of Investor Relations

John C. Asbury -- President & Chief Executive Officer

Robert Michael Gorman -- Executive Vice President & Chief Financial Officer

Catherine Mealor -- KBW -- Analyst

Austin Nicholas -- Stephens -- Analyst

David V. Ring -- Executive Vice President & Commercial Banking Group Executive

Laurie Hunsicker -- Compass Point -- Analyst

Matthew Keating -- Barclays -- Analyst

Blair Brantley -- Brean Capital -- Analyst

Maria P. Tedesco -- President

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