Atlantic Union Bankshares Corp (AUB) 2014 Q2 法說會逐字稿

Good morning. My name is Caitlin and I will be your conference operator today. At this time, I would like to welcome everyone to the Union Bankshares second-quarter conference call. (Operator Instructions).

Bill Cimino, you may begin your conference.

Thank you, Caitlin, 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; Tony Peay, EVP and Chief Banking Office; and Jeff Farrar, EVP of Wealth Management, Insurance, and Mortgage.

I want to 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.

Thank you, Bill. Good morning, everyone, and thank you for dialing into our call, especially Jeff Farrar, who has called in off vacation to be able to answer your questions that you may have regarding mortgages.

Before I turn the call over to Rob, I want to comment on our second-quarter results and address some of the challenges that we are facing as an organization, and also provide you an update on the integration of StellarOne.

First, my read on the second-quarter results. I think we delivered another solid quarter of financial performance, despite some headwinds. If we back out the $3 million in after-tax merger-related expenses for the quarter, the Company had operating earnings of $17.8 million, or $0.38 a share. The corporate result was derived from the community bank segment operating earnings of $18.4 million, or $0.40 a share, and then we've got -- we had a mortgage segment loss of $602,000, or $0.01 a share.

Let me talk about two of the challenges that we are working through. First, loan growth was less than expected, and first, I want to look at the macroeconomic environment. We believe that there are some headwinds in the Virginia economy. Two of the higher-level indicators are we have seen unemployment increase in each of the last two reporting periods, or months, and the state is also seeing declining tax revenue, which caused it to adjust its budget.

And we believe that a significant portion of this is the result of the sequester that went in place in March of last year. It has finally, I guess, worked its way through the system and taken hold.

Turning you to Union specifically, our loan production was steady and met expectations during the quarter. However, we are continuing to see noncontractual paydowns and payoffs at elevated levels, and particularly in the second quarter, they outpaced overall loan production. Some of the paydowns are commercial customers deleveraging by taking the excess cash on their balance sheet to pay down their debt. We're also continuing to see credits moving to other banks or lenders where loan covenants are less restrictive.

As you know, we have not traditionally lowered yields, sacrificed credit terms, or taken on excessive interest rate risk to manufacture loan volume as we don't believe that's in the best interest of our shareholders. We will continue to emphasize prudent commercial loan growth through customer retention and development of commercial client relationships. Based on our existing pipeline, we do expect to see modest loan growth for the balance of the year.

Related to loan growth, we have hired four new loan officers during the quarter, and coupled with those hired in the first quarter and those who have accepted opportunities to come to work for us who will start in late July and early August, we have more than offset the departures that we experienced post merger. We plan to aggressively recruit additional commercial lenders to supplement our existing talent.

And I would encourage those investors and analysts on the call not to overreact to the negative loan growth results. We are only six months into this merger, and while I was maybe a little overoptimistic in how well we would come together, I am reminded that every merger I have experienced has had a lull post closing, a period of digestion, if you will, before the combined team starts to assert itself.

It appears as if we are regaining our momentum as we move into the last half of the year, and as we mentioned earlier, the Company is prepared to provide more specifics about the first six months and the next six, as well.

I want to give you a little bit of an overview of the challenge to return the segment to profitability. We made progress in our effort to adjust the mortgage segment's cost structure to the lower mortgage origination levels they are experiencing at Union Mortgage Group. As a result, the operating loss from the prior quarter (technical difficulty)

[It seemed] it was announced last evening was the hiring of J.G. Carter as President and CEO of our mortgage, both as a producer and an executive. He was Executive Vice President in charge of correspondent division at SunTrust before joining (technical difficulty) as their president, and we're looking forward to his leadership as the mortgage team continues to adjust.

I want to mention a little bit about wealth management. I continue to believe there is an opportunity for Union to offer a suite of products and services that smaller competitors will be hard pressed to duplicate and to build out our wealth team and offer a compelling wealth management (technical difficulty) value proposition to Virginians. To that end, Union has brought on new wealth and trust talent, including [Jesse] Ellington and his teams.

Jesse and Jack bring us more than 60 years of combined experience in the industry, and I think it is indicative of the type of talent that we feel we can attract as Virginia's largest community bank.

During the second quarter, the integration and data conversion of StellarOne was completed over the May 9 weekend. More than 260,000 accounts were converted; 13 branches were consolidated. A lot of effort went into the conversion and I am proud of the hard work that our teammates did to ensure its success.

Now that the integration and its distraction is behind us, I am confident about the potential of Union and our new franchise. We recently embarked on a broad-based advertising campaign that seeks to introduce the Union brand to markets formerly served by StellarOne and to further build our brand recognition within Union's legacy markets. This is a research campaign that focuses on Union's world-class customer satisfaction rating and uses our customer experience to differentiate ourselves from our competitors, both large and small.

The campaign kicked off in earnest in late May and will continue to run through the rest of the year. We feel it is important to continue to build our brand early and repeat it often in both existing and new markets. We are aware that our competition isn't sitting still, so we continue to want to distinguish ourselves from them as much as possible as we build our brand.

I feel like our value proposition continues to resonate with customers as we have continued to see strong net new household growth in our legacy Union markets -- in fact, at a faster pace than we have experienced over the last couple of years. And merger-related attrition from retail and commercial customers within the Stellar footprint remains well below our projections.

Our merger costs to date are in line with our expectations, and the remaining one-time expenses will wind down over the next two quarters. To date, we've delivered on each of the metrics we laid out for you when we announced the StellarOne acquisition last June, and we look forward to delivering on the improved financial performance to our shareholders for the balance of this year.

So let me summarize. We had a solid second quarter, driven by the community bank segment, although net loan growth remains a challenge. The mortgage company is heading in the right direction and adjusting to the new regulatory environment and lower origination macro environment, and I think the hiring of J.G. Carter is a really positive step forward. And then, the StellarOne integration went well and we are ready to start leveraging the franchise.

And with that, I'm going to turn it over to Rob and he is going to talk about some numbers.

Thank you, Billy, and good morning, everyone. Thanks for joining us today. As Billy mentioned, I am going to walk through some of the financials, including the balance sheet and results of operations for the quarter.

On the balance-sheet side, our total assets stood at $7.3 billion at June 30, a slight increase from March 31 balances and an increase of $3.1 billion from our December 31, 2013, balances, reflecting the impact of the StellarOne acquisition.

Loans net of unearned income were $5.2 billion at quarter-end, down $41 million, while second-quarter average loans decreased by $33 million from the first quarter. On a pro forma basis, including StellarOne, period-end loans grew $94 million, or 1.8% annualized from the prior year. This is well below our mid-single digit growth estimates and we project that loan growth for the second half will be in the low single-digit range. As Billy noted, second-quarter loan production levels remained in line with our expectations; however, paydowns and payoffs continue to be a headwind to net loan growth.

At June 30, total deposits were $5.7 billion, an increase of $48 million from March 31 balances, and our average balances for the second quarter increased $47 million, or 3.3% annualized, over the prior quarter. This is reflective of the continued household growth in Union's legacy markets, as well as the modest deposit attrition to date associated with the StellarOne customer conversion to Union accounts.

Turning to asset quality, nonperforming assets totaled $62 million, comprised of $23 million in non-accruing loans and $38.5 million in OREO balances at June 30. Nonperforming assets as a percentage of total outstanding loans declined 89 basis points from the prior year, but increased 23 basis points to 1.18% from the prior quarter.

Nonaccrual loan balances increased by $8.4 million in the current quarter, driven primarily by three credit relationships previously identified as impaired and evaluated for specific reserves in prior quarters. At this time, the bank feels that we have secured sufficient collateral in loss reserves to mitigate any potential losses related to these loans.

Turning to OREO, OREO balances increased by $3 million to $38.5 million due to additions related to merger-related branch closures and vacated operations space, which we expect to dispose of by the end of 2014. This was offset by a $700,000 valuation adjustment resulting from a letter of intent to purchase the King Carter Golf Course OREO property during the quarter.

The allowance for loan losses increased approximately $500,000 from March 31 to $31.4 million at June 30. The allowance as a percentage of the total loan portfolio, adjusted for purchase accounting, was 1.11% at June 30, up 2 basis points from March 31 and down from 1.29% from the same quarter last year.

The allowance for loan losses as a percentage of total loan portfolio was 60 basis points at June 30, up 1 basis point from March 31 and down from 1.14% from the prior-year period. Of course, the decline from the prior year is primarily attributable to the acquisition of StellarOne. As you know, in acquisition accounting, the previously established StellarOne loan-loss allowance was eliminated and replaced by the loan credit mark, which is carried as a reduction to the acquired loan balances.

The nonaccrual loan coverage ratio was 136% at June 30, compared to 127% from the same quarter last year and 210% at March 31, driven lower by the increase in nonperforming loans.

The 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 13.57% and the Tier 1 capital ratio was 12.94% at June 30.

Our tangible common equity to tangible assets ratio at quarter-end was 9.23%, down 6 basis points from March 31 and up 31 basis points from 8.92% from the same period last year. Excess capital at June 30 amounts to approximately $85 million, with excess being defined as balance (technical difficulty) tangible common equity ratio.

As a reminder, Union's Board of Directors authorized a share repurchase program in the first quarter to purchase up to $65 million worth of the Company's common stock through December 31, 2015. As of July 18, approximately 1.5 million common shares have been repurchased at an average price of $25.26 per share, leaving approximately $27 million remaining under the two-year repurchase program.

Turning to the income (technical difficulty) operating earnings for the second quarter were $17.8 million, or $0.38 per share, up from $16.8 million, or $0.36 per share, in the first quarter. As you recall, operating earnings exclude the impact of merger-related costs, which were $3 million, or $0.06 per share, on an after-tax basis in the quarter. On a GAAP basis, net income was $14.8 million for the quarter, or $0.32 per share, versus $7.8 million, or $0.17 per share, in the first quarter.

As Billy mentioned, the community bank segment again turned in strong operating results of $18.4 million, or $0.40 per share, in the second quarter, while the mortgage segment reported a net loss of $602,000, or $0.01 per share.

Our profitability ratios for both the Company and community bank segment improved during the quarter. Operating return on tangible common equity increased to [11]% from 10.3% in the prior quarter. The operating return on tangible common equity of the community bank segment was 11.6%.

Operating return on assets was 98 basis points, up from an operating ROA of 94 basis points in the prior quarter. The operating ROA of the community bank segment remained above 1% at 1.02%. The operating efficiency ratio declined nicely to 66.4% from 68.4% in the prior quarter. The operating efficiency ratio for the community bank segment was 63.9% versus 64.6% in the first quarter.

As we have mentioned before, we remain committed to achieving top-tier financial performance relative to our peers. We continue to target an operating ROA at or above 1.2%, return on tangible common equity of above 13%, and an efficiency ratio below 60%. We are confident that once the cost savings from the StellarOne acquisition are fully realized, we generate more robust loan growth, and return the mortgage segment to profitability, that we will meet these targets.

Tax-equivalent net interest income was $65.8 million for the quarter, in line with the first quarter. The second-quarter net interest margin decreased by 5 basis points to 4.09%, compared to 4.14% in the previous quarter. Core net interest margin, which does not include the 15 basis-point impact of acquisition accounting accretion, was 3.94%, a decline of 5 basis points.

The core margin decline was driven by lower earning asset yields in the second quarter, as the investment portfolio yields dropped 7 basis points, primarily due to increased calls on municipal bonds, lower reinvestment rates, and the impact of portfolio mark-to-market adjustments in the quarter. The core loan portfolio yield dropped 4 basis points, from 4.7% to 4.69% in the quarter.

Accretion of purchase accounting adjustments for loan CDs and borrowings related to the StellarOne acquisition added 15 basis points to the net interest margin in the second quarter. And for your reference, actual and remaining estimated net accretion impacts are reflected in the table included in our earnings release. Also as noted in our earnings release, we expect that the net interest margin will decline modestly over the next several quarters, as decreases in earning asset yields are projected to outpace declines in interest-bearing liability rates.

The provision for loan losses was $1.5 million in the second quarter, an increase of $1.5 million from the previous quarter and $500,000 higher than the same period a year ago. For the quarter ended June 30, net charge-offs were $1 million, or 8 basis points annualized, compared to a net recovery of $772,000 in the prior quarter.

Noninterest income was $16.7 million, an increase of $2.5 million from the prior quarter. The increase was across the board, driven by higher levels of deposit service charges, debit card interchange income, letters of credit fees, and trust revenues.

In addition, gain on sales of mortgage loans increased $733,000, driven by higher loan origination levels in the quarter, and gains on sales of securities increased approximately $400,000.

Operating noninterest expenses in the second quarter were $54.8 million, excluding merger costs, in line with the first quarter as declines in salary and benefit expenses of $1.6 million (technical difficulty) from OREO valuation expenses related to the King Carter Golf Course OREO property mentioned earlier and higher marketing expenses related to the post-integration advertising campaign that Billy mentioned earlier.

We remain on track to hit our $28 million merger cost-savings target. As a reminder, the majority of the run rate expense savings related to the May systems conversion and [breas] consolidations will be reflected in the third quarter.

Merger costs totaled $4.7 million during the quarter and we have now (technical difficulty) of the estimated $25 million merger expense budget.

Before closing my prepared remarks, I would like to add some color around the mortgage unit's results for the quarter. As noted earlier, the mortgage segment reported a net loss of $602,000, or $0.01 per share, for the second quarter, which narrowed from a $1.4 million loss in the first quarter. The improvement in operating results was driven by higher levels of mortgage loan originations during the quarter, as well as by a significant reduction in expense levels resulting from its successful efforts to recalibrate its cost structure to align with the overall lower mortgage origination levels.

Mortgage loan originations increased by $46 million, or 31%, in the current quarter to $195 million, driving a $733,000 increase in net mortgage revenue levels. Also, expenses were down nicely, down $400,000, or 9%, quarter over quarter. The mortgage management team made good progress during the quarter towards returning the mortgage segment back to profitability and we are committed to taking the necessary actions to do so in the near future.

So in summary, our second-quarter operating results demonstrate the significant earnings capacity we envisioned the Union and StellarOne combination would produce as the largest community banking institution headquartered in Virginia. The merger integration work went well and we are on track to hit our merger cost-savings targets of $28 million.

While overall loan growth in the quarter did not meet our objectives, we are projecting to see modest to low single-digit growth over the balance of the year. We expect to see continued improvement in the mortgage segment's operating results in the third quarter as production levels stabilize and the expense bases further rationalize.

Finally, please note that Union remains as committed as ever to delivering top-tier financial performance 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?

Thanks, Rob, and now we have time for a few questions from our research analysts. Caitlin, we are ready for the first question.

(Operator Instructions). Catherine Mealor, KBW.

You all laid out your long-term financial goals and actually made some nice progress towards those goals again this quarter. But given the slower growth and your commentary around that, does that change at all your outlook on your path to these targets, either the time to get there or your ability to reach the metrics? Maybe is it the lower end of the range or even below the range, or do you feel like you can still hit these targets, even with the slower growth prospects?

Thanks, Catherine. This is Rob. I will take a shot at that one.

Yes, we fully project that we can hit those targets that we've set. Obviously, loan growth has to increase to achieve that, as well as to return the mortgage company to profitability. So, failing mid single-digit loan growth, that will be a bit harder. We will probably be on the lower end of those targets, and, of course, mortgage returning to profitability will assist us in that.

So, I would say it is dependent on where we go with loan growth and how quickly we can turn the mortgage segment to -- return that to profitability, which we expect positive loan growth in the next -- going forward, next few quarters and returning mortgage profitability -- or mortgage loss into profitability over the next several quarters. So, we are looking toward the end of 2015 to hit those numbers.

Catherine, why don't we let Tony talk a little bit about what he sees as regards loan growth, since that's obviously one of the key factors, and then Jeff may want to weigh in on the mortgage profitability?

Okay (multiple speakers)

I would say that since the acquisition, we have probably seen -- we have seen a lot of large deals and we are getting looks at a lot of deals.

One of the things driving our lack of loan growth, I guess, is that we are maintaining our underwriting standards, as we always have. There's been a lot of -- increased competition has led to increased irrational behavior, and we pretty much stick to our knitting in that regard. We have made some concessions on price to keep customers or to get new customers, and we have, I guess, managed some risk on the underwriting side, but we are seeing some pretty aggressive activity.

Rob and Billy referred to the early pre-pays, and some of that is driven by the competition in our markets by out-of-state banks and out-of-area banks that are coming into places like Richmond and Roanoke and Charlottesville and being very aggressive in going after clientele.

Billy also mentioned the addition of lenders. We have had some attrition in commercial lenders who have been offered fairly aggressive comp packages. We have worked with those lenders and we have been aggressive in recruiting new lenders. We have replaced virtually all of those lenders with other lenders. A couple are not yet announced, but we have got some -- I think we are reloading our team in a very positive way and I am optimistic about where we are going.

William Wallace, Raymond James.

Maybe just a quick follow-up on the loan growth commentary, Tony. I get the competitive environment. There is not much that you can do about that if you want to maintain your underwriting standards, but if you look at the payoffs, have you looked at it from the perspective of the legacy Stellar markets and the legacy Union markets, and are you seeing any difference in the payoffs in those different markets?

We have seen some limited loss of credits to lenders who have left. I would tell you that number is not a significant number at this point.

A lot of these have been -- as an example, we had about a $9.2 million paydown that was a middle-market loan, a corporate credit, and that is not unusual in that type of lending for those credits to pay down. We expect, in that case, that customer will probably ramp back up in the next six months and we will have those outstandings back on our books again. So, that is some of what you are seeing in the paydowns.

Others are going to the nonrecourse market, as they always have. Lots of folks are taking advantage of the low rate environment to go to the secondary market and go nonrecourse. We have got some smaller banks who are doing some low or nonrecourse lending. We had a competitor in Richmond take an $8 million deal that was a nonrecourse deal, and that just hasn't typically happened in the past.

So we are seeing a little bit of that, but that can't happen but so long and we're optimistic about the -- and we're looking at those to see what could we have done different on any of the ones that left us? Could we have tweaked something? Did we give it the best pricing we could? And typically, we find that we have done what we should have done.

Okay, so there is no reason to be concerned that any difference in the way you service your customers versus how StellarOne serviced their customers is creating more paydowns on your legacy StellarOne side, outside of the lenders who have left, which is to be expected?

Not outside of the lenders who have left. We have lost some credits to lenders who have left, Wally.

Okay, all right, good.

And then, I'm sure you're not surprised I have a couple questions on the mortgage bank. So last quarter, we were talking about a breakeven in the $50 million to $60 million monthly production level. You exceeded that on the high end this quarter, yet still lost money. I know there were some duplicative costs during the quarter, so I was hoping we could dig in, one, to find out how much of the duplicative costs are now gone, and two, it sounds like you are now going to do some further rationalization in the business, which would suggest that the production in what I assume is your seasonally strongest quarter was below expectations.

Wally, Jeff, good morning. A few thoughts on that. First of all, I think that we need to differentiate on production -- core production and construction, and I am not sure we really did that effectively for you last quarter.

But when we spoke to $50 million to $60 million of breakeven profitability, we were speaking to core profitability and not inclusive of construction volume. So for us in our model, we do a fair amount of construction volume, and from a revenue standpoint, that's pretty muted for us in the mortgage world on the front end.

Obviously, we are playing for the perm. Our profitability, if you will, will come from closing the perm and selling it to the secondary market, so case in point, if you look at the volume for the quarter, we had $39 million in construction volume, $156 million in core volume, for a total volume of $195 million. So, as you can see, if we use $60 million, we were below a core breakeven model, if you will, from a profitability standpoint.

So, in terms of the overhead days, a lot of rationalization has already occurred. I wouldn't tell you that there is more significant rationalization to come, unless volumes work against us, but what I would tell you is that we haven't seen the benefit of much of the activities that took place in the first and second quarter sift through the operating results yet.

So I would expect another nice incremental improvement in the overhead base. I am pleased with what I am seeing in terms of the pipeline and volumes [live], so I think we'll show a nice quarter for volume. We should show a nice improvement in core profitability.

I would also say that I still expect the next couple quarters to be a little noisy around just some other activities around closing of offices, consolidation of headquarters buildings, and lease-related expenses that are nonrecurring in nature, but overall expect to see continuing improvement, if you will, in the next couple of quarters, and at least getting to a point where we are not pulling core profitability of the organization down.

And so, excited to have J.G. on board, excited to move into 2015 with a level set on the operating model and a redefined strategy, and I really think 2015, we will see a nice normalization, if you will, of profitability from the mortgage operation.

Okay, so can I read between the lines a little bit? Were some additional adjustments made in the second quarter that you had not planned on making when we had the conference call last quarter?

No, I would tell you that we had a plan to do several things.

We have gone through a commission reset, so we had a new commission plan go in place June 1. We had anticipated with that that we would have some LO loss. We did see some of that, so that's a positive impact on the operating cost side, but that's also an impact on the revenue side that we have modeled and think makes sense for us.

We knew we were top heavy. We knew we had a pretty high level of fixed costs associated with just the operating model, so in terms of the management team, there was some right-sizing, if you will, some of which was voluntary and that was good, because it was needed and we were going to head in that direction anyway.

So, I think that some of that activity just hasn't had a chance to sift through the numbers, if you will. We haven't gotten the full quarter benefit of really any of those activities in the second quarter. We did mention some operating headcount reductions back in the first quarter that were production related, but I would tell you that I feel pretty good about that aspect of our operating model right now. I don't think we have a lot of excess capacity from just a core production standpoint.

So, yes, that's how it has evolved. Some of it has been planned action. Some of it has been voluntary opting out, but it has gotten us to a point where we feel pretty good. I think we only have one or two key positions in terms of the management team that we need to fill right now. Certainly, J.G. was a big one, so excited about that, and we will continue to look at volumes as we go down the pike here.

I think the construction activity for the last two quarters will certainly support us for the second half of the year. We had $70 million in construction volume in the last two quarters, and so, we will -- if we [retain] most of that, as we have historically done, that will certainly carry us for the remainder of the year, to a large extent.

Lock volume looks really good in July, so, yes, I am feeling pretty optimistic about improving results as we move through the course of the year.

Thanks, Jeff, and thanks, Wally. Operator, we are ready for the next question, please.

David West, Davenport & Company.

First, I guess, a follow-up question for Tony. The competition you are signing pricewise in terms and conditions, is that more in traditional C&I, CRE, construction/development, or all of the above?

I would say, Dave, it is more prevalent in the C&I space. CRE has still got enough risk that nobody is giving that away, but it is increasingly competitive and I think things like limited guarantees are becoming more prevalent in the CRE space. So that's what I see.

Okay, very good. And wondered, you mentioned in the press release and your comments that three particular credits led to the increase in nonperforming loans. Could you provide a little more color on the background and nature of those credits?

Dave, Billy. One of them was a pretty well-publicized fraud in the Fredericksburg area that both StellarOne and Union had a piece of. Stellar's came over as purchased impaired. Union's was not, obviously, so that one was a bit of surprise to everybody.

So we have -- we think we are adequately secured. We are secured by real estate. There was an unsecured portion that was charged off in the second quarter and is in the numbers you saw in the report.

There is another one that is a -- that we picked up in the First Market acquisition that is real estate related, a homebuilder type credit that we had worked down from about $10.5 million or -- yes, I think $10.5 million, if not a little bit -- $13 million?

$13 million.

Tony tells me it was $13 million. We've worked it down from $13 million to a little over about $5 million, and then basically the builder ran out of steam, ran out of desire to continue to work through his problems, and so we have started the foreclosure process there.

The third one is a fairly small and one, but that gives you some color on the two we had. If the courts will allow us to get foreclosed and get out of these, we could be through with them in the third quarter. Unfortunately, there is a high probability that those borrowers will file bankruptcy and that will delay us into the fourth quarter, if not into the early part of next year, of getting these things resolved.

Very good. Thank you for that color. As well, you mentioned, I think, $700,000 was thrown [out] in relation to the King Carter transaction. I suspect that -- imagine just for the golf course only? Could you (multiple speakers)

Yes, you may recall we took that piece of property in, which was golf course, lots around the golf course, some commercial property, and some adjacent property that a developer would turn into more lots.

And in 2008, we put a value on the property. We marketed the golf course and we got an offer, and that was the first offer we've received. It is an offer we have accepted. It is a letter of intent, so the borrower still has until next -- or the buyer still has until next June to change their mind, but they are in, operating the golf course now. And so, we have taken the write-down based on that letter of intent.

Okay, very good. And lastly, on expenses, obviously the OREO perked up this quarter, for obvious reasons, and the marketing campaign you mentioned earlier. Would you expect those two line items to moderate at all in the second half or continue in your current levels?

We have sold some pieces of the branch network -- I think it was almost $11 million worth of branch real estate that we moved into OREO. We have worked some of that down.

There are more to be sold in the second half of the year, but I do not believe that we will rid ourselves, if you will, totally 100% of all those pieces of property between now and the end of the year. Some of them are -- the one in Christiansburg is a five-story office building, so that will take us a while to market it. But certainly by year-end, we will right-size that asset based on what we see the market to be.

And the other question was on marketing expense. We will slow down a little bit during the summer because that's not a very good television and newspaper viewing time, but we will pick back up in the fourth quarter of the year to continue to reinforce our brand.

Good, thanks so much.

Operator, we've got time for one more call -- question, please.

Bryce Rowe, Robert W. Baird.

Rob, can you maybe update us on the cost saves and the level of achievement so far relative to those cost saves, and maybe what we should expect now that you will have, going forward, four quarters of the integration having been completed?

Yes, Bryce, if you look at the $28 million that we projected, we are very close to 100% of that on a run rate basis today after closing the branches in May and also getting our conversion completed.

We do have some additional -- of course, the second quarter wasn't the full run rate, but you can start to see towards, call it, 90%, 95% of that run rate being achieved in the third quarter and fourth quarter. There are some costs that are also continuing to come out over the balance of the year. Some of those relate to the disposal of properties that we talked about, Billy mentioned, as well as we have negotiated some new contracts related to our core processor, which will start to kick in in the second half of the year as well.

So, we are very much on target and well close to 100% of those run rates going into the third and fourth quarters.

That's helpful. Then a follow-up for you, Billy. Obviously, we have seen some additional larger acquisitions announced here recently in Virginia. Just wondering if you could comment on what you have talked about in the past, that acquisitions is still a strategy for you, and maybe as we get into the back half of this year or early next year, what are the prospects for additional Union-related acquisitions? Thanks.

There continues to be active conversations among those who wish to sell and, at least on our part, those who wish to buy. I can't predict our success in achieving or closing any of those, but we are actively looking out there for banks whose balance sheet looks like ours, whose lenders have a compatible, if you will, approach to lending money.

And we have defined our markets. We would like to infill in Richmond. We would like to expand into the Norfolk/Virginia Beach area. We would like to continue to look at places where we can build our footprint in some of the other MSAs in Virginia, to include northern Virginia and Roanoke. So, it is no less robust than it was 90 days ago.

Okay, thanks.

Great. Thanks, Bryce, and thanks to everyone for joining us on the call today. A replay of the call will be posted on our investor website later this afternoon. Thank you. Goodbye.

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