Atlantic Union Bankshares Corp (AUB) 2015 Q2 法說會逐字稿

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

(Operator Instructions)

Thank you. Mr. Bill Cimino, Vice President, Corporate Communications, you may begin your conference.

Thank you Melissa, and good morning everyone. I have Union President and CEO, Billy Beale, Executive Vice President and CFO, Rob Gorman, with me today. Also joining us for the question-and-answer period are Tony Peay, EVP and Chief Bank Officer; Dave Bilko, EVP and Chief Risk Officer; and Jeff Farrar, EVP of Wealth Management, Insurance and Markets. Please note that today's earnings release is available to download on our investor website, investors.bankatunion.com.

Before I turn the call over to Billy, I would like to remind everyone that we will make forward-looking statements on today's call which are subject to risks and uncertainties. A full discussion of the Company's risk factors are included in our SEC filings. At the end of the call we'll take questions from the research analyst community. I'll now turn the call over to Billy Beale.

Thank you, Bill. Good morning, everyone. Thank you for joining us on the call today. During the second quarter, some 18 months down range from our StellarOne acquisition, our results report, I think, display steady progress toward delivering the strategic growth objectives that will enable Union to deliver top-tier financial performance.

Total loans for the quarter grew 9.1% annualized and average loans increased 6.5% from the fourth quarter. Our loan growth was broad-based, as we saw growth in all of our major categories. Our commercial lending team continued to build on momentum from the prior two quarters, as the commercial loan portfolio grew 10.6% on an annualized basis. In addition, our consumer loan portfolio increased 5.2% on an annualized basis during the quarter, with increases coming in our mortgage, indirect auto and credit card loan portfolios.

This broad-based diversified growth shows the potential lending power of the Union franchise, and our commercial and retail teams are coming together to assert themselves in our marketplace. Keeping pace with loan growth, deposits grew by 8.1% annualized for the quarter as we continue to grow core households and work to deepen relationships with our existing customers.

We're pleased to report that the mortgage company return to profitability in the quarter, demonstrating the progress the team has made in restructuring its business model and rebuilding the operating platform. We believe we're now positioned to add mortgage loan officers, which should improve our operating leverage and profitability for the mortgage company going forward.

Also contributing to a solid quarter for non-interest income growth was our wealth management group which generated $2.3 million in fee income for the quarter, representing a 4.2% increase over first quarter. Assets under management now total $1.8 billion at the end -- at quarter's end reflecting an increase of $72 million, or 4% growth since year end.

Asset quality continued to improve, as nonaccruing loans are now below $10 million. And we saw further reductions in our OREO balances through additional sales of foreclosed properties. During the quarter we sold $3.6 million in OREO and have approximately $1.8 million currently under contract to be sold as we continue to aggressively work the OREO portfolio down. Since our last call the Board increased the quarterly dividend to $0.17 a share, up $0.02, or 13.3% from the prior dividend, and in line with our 45% to 50% targeted payout ratio.

To summarize, I believe we turned in a solid performance in the second quarter as our growth strategy took hold as evidenced by the broad-based loan and deposit balance growth during the quarter. The mortgage company return to profitability and is now ready to start growing again. And we believe we are now well-positioned to realize the long-term potential value of our franchise and to generate the earnings growth and top-tier financial performance that our shareholders expect.

I look forward to answering your questions after the call. But with that, I'll turn it over to Rob who's got lots of numbers to talk to with you about.

Thank you Billy, and good morning everyone. Thanks for joining us this morning. I'd now like to take a few minutes to walk you through the details of our financial results for the quarter. Before I do that, please note that all comparisons to prior-year periods are to operating earnings or operating ratios which exclude after-tax expenses associated with the StellarOne acquisition that were incurred in 2014.

For the quarter, earnings for the second quarter were $15.3 million, or $0.34 per share. That's down from $15.7 million, or $0.35 per share in the prior quarter. The current quarter results include $832,000, or $0.02 per share in after-tax nonrecurring costs related to the closure of seven branches we previously announced in our first-quarter earnings conference call.

The community bank segments results were $15.3 million, or $0.34 per share in the second quarter, inclusive of the branch closure costs. While the mortgage segment recorded net income of $95,000 in the current quarter.

Return on tangible common equity declined to 9.2% from 9.67% in the prior quarter. However excluding the impact of the branch closure costs incurred during the current quarter, the return on tangible common equity was up to 9.7%.

Return on assets was 83 basis points in the second quarter, down 3 basis points from the prior quarter. Excluding the impact of the branch closure costs, return on assets would've been 87 basis points. The Company's efficiency ratio declined to 67.1% from 68% in the first quarter. Again excluding the impact of the branch closure costs incurred during the current quarter, our efficiency ratio would've been 65.6%.

Now turning to the major components of the income statement. Our tax-equivalent net interest income was $66.1 million for the quarter. That's up $2 million from the prior quarter, driven by the impact of the additional day in the second quarter and higher earning asset balances in yields. The current quarter's reported net interest margin increased by 2 basis points to 3.97% compared to 3.95% in the previous quarter.

Accretion of purchase accounting adjustments for loans, CDs and borrowings related to the StellarOne acquisition added 11 basis points to the net interest margin in the second quarter, and that's in line with the first quarter's accretion impact. For your reference, actual remaining estimated net accretion impacts are reflected in the table included in our earnings release.

The core net interest margin, which does not include the impact of acquisition accounting accretion, was 3.86% in the second quarter, also an increase of 2 basis points on a linked-quarterly basis. The core margin increase was driven by higher earning asset yields of 1 basis point in the second quarter and a 1 basis point decline in the cost of funds.

The net increase in earning asset yields was primarily driven by higher loan fees and changes in earning asset mix partially offset by lower yields on new and renewed loans. The lower cost of funds from the prior quarter was driven by a more favorable deposit mix as growth in low-cost deposits out-paced the net runoff in higher cost CD balances. As noted in our earnings release, we expect that the core net interest margin will continue to decline modestly over the next several quarters as decreases in earning asset yields are projected to outpace the declines in interest-bearing liability rates.

The provision for loan losses was $3.5 million in the second quarter. That's an increase of $1.8 million from the first quarter provision level. For the quarter net charge-offs were $2.2 million, or 16 basis points. That's down approximately $1 million, or 8 basis points from the prior quarter. The increase in provision for loan losses in the current quarter compared to the prior quarter was driven by the $123 million increase in period-end loan balances as well as higher specific reserves required on impaired loans.

Noninterest income in the second quarter was $16.2 million, which was up $1.1 million, or 7.3% (sic -- see press release "7.7%"), from $15.1 million in the prior quarter. This was primarily driven by seasonally higher overdraft, debit and credit card interchange fees and letter of credit fees as well as the increase mortgage revenues -- mortgage loan revenues resulting from improved net gain on sale margins from the mortgage originations this quarter.

Our second quarter noninterest expenses came in at $55.2 million. That's a $1.4 million increase from the first quarter. The increase in noninterest expense is almost entirely driven by the previously mentioned $1.3 million in nonrecurring branch closure costs. Excluding these costs, noninterest expense levels increased slightly from the prior quarter, as lower compensation expenses were offset by higher marketing, professional fees, and OREO-related costs.

Salaries and benefits expenses declined by $1.9 million from the prior quarter due to lower incentive compensation, group insurance and payroll. Marketing expenses increased $685,000 related to the timing of advertising campaigns, while OREO and credit-related costs increased about $780,000 due to seasonal real estate taxes, higher legal fees, losses incurred on the sale of properties, and higher valuation adjustments.

As discussed in our first-quarter earnings call, we are on track to close seven branches in the third quarter and to realize annual expense savings of $1.9 million on a run rate basis beginning in the fourth quarter. One of the in-store branches has recently been closed, and the other six branches are scheduled to close on August 3.

Now I'd like to take a minute to provide some additional color on the mortgage segment's financial results for the current quarter. As noted, the Company's mortgage operations continue to make progress towards sustainable profitability with growth in revenues and achievement of profitability for the quarter, as management continues to implement its restructure and rebuild of this business line.

As stated earlier, the Company earned $95,000 compared to losses of $267,000 in the first quarter and $602,000 in the second quarter of the prior year. Total revenue for the mortgage company grew to $3.2 million. That's an improvement of 21% compared to the first quarter in 2015.

Total production in the second quarter amounted to $140 million, with improvements in volume and a more favorable purchase versus refinance production mix as compared to the $138 million in the first quarter of 2015. Gain on sale margins net of commissions amounted to 1.83% in the current quarter. That's up 12 basis points on a linked-quarter basis and an increase of 28 basis points from the same quarter last year. Mortgage-related operating expenses were essentially flat for the second quarter compared to the first quarter, while management's actions have resulted in quarterly operating expense reductions of $1.2 million, or 29% on a year-over-year basis.

Going forward, continuing mortgage profitability improvement is dependent on increasing loan production levels and maintaining relatively stable net gain on sales mortgages. As Billy noted, we are now positioned to add mortgage loan officers to improve our operating leverage and increase the profitability at the mortgage company going forward.

Now turning to the balance sheet. Total assets stood at $7.5 billion at June 30, an increase of just over $100 million from March 31. The quarterly increase in assets was primarily driven by loan growth.

Loans net of deferred fees were $5.5 billion at quarter end, up $123 million, or 9.1 % annualized, while average loans increased by $87.5 million, or 6.5% annualized from the first quarter. Loan balances are now up 6.2% on a year-to-date basis and have increased 5.3% since June 30, 2014. We continue to project mid-single-digit loan growth for the balance of 2015 and for the full year of 2015. Also at June 30 total deposits were $5.8 billion. That's an increase of $114 million, or 8.1% from the prior quarter, as growth in low-cost deposits out-paced the net runoff in higher cost CDs.

Also as Billy noted, asset quality continued to improve during the second quarter. Nonperforming assets totaled $31.7 million at quarter end comprised of $9.5 million in nonaccruing loans and $22 million in OREO balances. This represents a decline of $11 million, or 26% from the prior quarter, and $30 million, or just under 50% from the prior year.

Non-performing assets as a percentage of total outstanding loans was 58 basis points at June 30, a decline of 21 basis points from the prior quarter and 60 basis points from the prior year. Our nonaccrual loan balances declined by $7.9 million, or 45% in the quarter, which was driven by payments received in settlements, sales of collateral, and liquidation of customer assets, while OREO balances declined by $3.2 million, or [13]% as a result of property sales closed in the quarter.

Our allowance for loan losses increased by $1.4 million from March 31 to now stand at $32.3 million at June 30, primarily driven by loan growth during the quarter. The allowance as a percentage of the total loan portfolio adjusted for purchase accounting was 1.02% at June 30, down 1 basis point from the level at March 31.

Nonaccrual loan coverage ratio improved substantially to 340%. That's up from 178% at March 31 and up from 135% in the second quarter 2014. Our tangible common equity to tangible assets ratio at quarter end was 9.3%. That's down 10 basis points from March 31 levels. Excess capital at quarter end amounts to approximately $90 million, with excess being defined as balances above an 8% tangible common equity ratio.

We repurchased approximately 78,000 shares for $1.7 million in the quarter. And to date, we have repurchased approximately $57 million and have about $8 million remaining under our current Board repurchase authorization. Management and the Board of Directors continue to evaluate all capital management options, including dividend payout ratios levels, share repurchases and acquisitions as the deployment of our capital for the enhancement of long-term shareholder value remains one of our highest priorities.

So in summary, Union's second-quarter results demonstrate a steady progress toward our strategic growth objectives. Of note, loans grew at 9.1% annualized for the quarter and are tracking to mid-single-digit growth for the year. Deposits grew at 8.1% annualized for the quarter. The mortgage company returned to profitability. And we will close 5% of our current branches by August 30 as part of our continuing efforts to become more efficient.

And finally, we remain steadfastly focused on leveraging the Union franchise to generate sustainable profitable growth, and remain committed to delivering top-tier financial performance and building long-term value for our shareholders.

With that, I'll turn it back over to Bill Cimino to open it up for questions from our analysts.

Thanks, Rob. We're now ready for questions.

(Operator Instructions)

Catherine Mealor, KBW.

Good morning, everyone. Rob, you mentioned loan fees which would help keep the loan yields stable this quarter. Can you give us a little bit more color (inaudible) what the impact of loan fees were this quarter versus last quarter?

Loan fees were up about $600,000 for the quarter. Some of that related to fees related to the loan growth. We had some late fee increases. And additionally we had a bit of noise in there related to our interest rate swaps related to derivative accounting. It added about 4 basis points to the margin for the quarter.

Got it. And then how are you thinking about loan yields moving forward? Can you give us a little bit of color on pricing on new production, and do you feel like loan yields are starting -- ex ask all the loan noise, just loan yields. Do you feel like that's starting to stabilize, or do you still feel like we'll have a couple quarters of compression on the yields?

Catherine, this is Tony Peay. I would tell you that we've seen some improvement, I guess, in the negotiation of those by other banks. There's been a lot of aggressiveness, particularly in markets for us like Richmond where we've got a lot of other banks wanting a piece of the market. It does seem as though we're getting a little better yields this quarter. I wouldn't suggest for a second that that aggressiveness by our competitors is over. I think I would be cautious in assuming that at this point, but I do think we're seeing some improvement in that area.

Catherine, this is Rob again. Quarter to quarter we did see compression in our earning asset yields, primarily in the loan yields of about [4] basis points. As you recall, we had suggested the margin was going to compress somewhat quarter to quarter. That was the major driver of our original projection.

Got it. Okay. And then a question on mortgage. What level of origination of volume do you need to have to maintain profitability in that segment?

Hey, Catherine it's Jeff. How are you? I think $40 million to $45 million in core production is kind of a sweet spot in terms of break even profitability. So we've been obviously running pretty close to that level here the last couple of months. So sustainability at that level will be our challenge as we move forward.

Okay. Helpful. Thank you very much.

Hey Jeff, can you talk a little bit about margin? Because we've seen (inaudible) about volume, but margin is a big part of that, and we've seen really some pretty nice margins and there may be some compression (multiple speakers).

Yes. Sure, I'd be happy to do that. With the refinance wave that we had earlier this year, we certainly saw some strong margins coming through, which you would typically see with the refinance market. We are obviously, as you look at the mix that we saw in this last quarter, we saw a reversion back to more of a core purchase money origination volume. So we are anticipating that we could see some gain on sale compression associated with just the normalization of the market and away from refinance. So that certainly will be a headwind for us as we move forward. I think the other thing I would mention, we've talked about the need to add LOs. I think given where we are in the cycle right now, that is a little bit of a challenge just because a lot of the folks that we're talking to still have pretty strong pipelines. So when you look at it from a cyclical standpoint, not the perfect time to be trying to hire. Even those that are not happy are hesitant to move forward right now, given how strong their pipelines are and anticipation that they've got money coming to them. It's going to be a little bit of headwind here the next quarter or two as we try to ramp up our recruiting efforts. Having said all that, I'm real excited about the number of conversations we're having right now. We're talking to some pretty strong producers. The team's done a good job of working the market, working the street. So we are optimistic that we can add some strong producers and move forward with this from a leverage standpoint.

Very helpful. Thanks, guys.

Thanks Catherine. Melissa, we are ready for the next question.

William Wallace, Raymond James.

Thanks. Good morning, guys. Maybe to just follow up, to piggyback on Catherine's questions. Tony, to your comments on loans. Is there -- are you seeing anything, whether it's in the pipeline or just in the market in general, that would give you guys any confidence that maybe that high single-digit loan growth level could be achievable, or do you think that mid-single-digit is still the right target for the organization?

Anything's possible. I am, as Jeff is, very optimistic about what we've been doing the last few quarters. We've seen strong growth production across all of our lines, our lending lines. We're building teams of people who are doing a good job building their pipelines. I think we could do better than the mid-single-digits. We're still seeing economic activity pick up. We had a loan just last week of the core payoff that was, I believe, about $10 million. Somebody sold property. So we're still seeing, as the economy picks up and people are doing things they've held off doing for a while. We're still seeing some of that loan runoff, and we're still fighting to keep certain strong customers in their seats on our balance sheet and not somebody else's. I'm optimistic, but I think that mid-single-digit number is probably a safer bet.

Okay. And along those lines, what regions are you seeing driving the activity in your portfolio from a production standpoint?

I would say Richmond and Hampton have had strong growth through the quarter.

Are those all seven markets that are experiencing the most from a payoff perspective?

That's kind of scattered. It kind of depends upon -- we had, I think, the big (inaudible) that was up in Fredericksburg. We're looking to see -- we've had good growth in the Hampton market without a lot of paydowns. Charlottesville remain strong, Fredericksburg remains strong. (Inaudible) highly competitive. We'd like to see a little more out of the Southwest. We're working out on that [side of it]. We've got -- our team is in place now, and they are settling in with building their pipeline. I think the answer to your question, it's fairly well spread out and the payoffs kind of come as they come.

Hey, Wally. I would add that I think one of the stories of this quarter is diversity. We saw growth in commercial and consumer lending. We saw, at least across the consumer continuum, we saw growth in really every products that are HELOCs. And the interesting story there is, is that we actually, the number of new HELOCs that we had booked this year, we're running at a much faster pace than we had ever done. But it is not yet translated itself into higher outstandings, but we're seeing things there. Across the commercial continuum we are seeing growth in literally every category. So we're getting good diversity across that. And as far as our regions go, we only had -- we only had one region that was down for the quarter. And Tony has spoken to that because of a sizable payoff they had. Everybody else was positive to flat. And it tends to be those rural regions that tend to find themselves flat or just marginal growth. We're seeing good diversity everywhere within our footprint, which I think is really part of the story of our franchise is the diversity we bring across our footprint. It doesn't necessarily tie us to growth associated with any one region. We're getting it across the state, and we're getting it across really all aspects of our lending.

Okay. Thanks Billy. That's helpful. And my last question is for Jeff. Jeff, you mentioned, and it was also in the press release, that you guys are looking to maybe bulk up on the production side in the mortgage segment. How many hires, production hires, can you make with your current, without having to increase any of your systems or fixed cost base on that segment? How many people would you like to hire and how many could you hire?

Wally, what I would say is that given what we've built in terms of an infrastructure, we have more scalability I think than we've had previously because we've been able to centralize the operation and we've put protocols in place relative to staffing that I think as we evolve will allow us to leverage better. Having said all that, we had modeled another 10 to 15 LOs in the short term, I don't think we would need any significant resource allocation. And it's somewhat dependent on sales assistants and who you're hiring, and there's a little bit of noise there. But feel pretty confident that we could add 10 to 15 LOs without a significant increase in operating overhead.

Great. Thanks, Jeff. I appreciate. I'll step out.

Melissa, we are ready for the next caller, please.

Laurie Hunsicker, Compass.

Good morning, gentlemen. Just to switch gears over to credit. Your credit really had such a nice improvement. Can you talk to us a little bit about the -- such the significant drop in commercial nonaccruals, and maybe give us an update too in terms of where we stand on King Carter? I know the golf course was supposed to close this quarter. Was that part of it?

The first part of the question was about the decline in commercial nonaccruals?

Yes, the (multiple speakers) you dropped from $14.5 million down to $8 million. I mean, just a really nice drop there. If you could maybe update us on -- were some of these the rural properties that you had gone back and remarked or --

I think much to my comments earlier about the economy improving, I think we've got credits that are getting better, getting well, so to speak. Certainly anything in the development and construction real estate-related businesses has improved. We did have some payoffs in that regard, nearly $5 million in payoffs of nonaccrual credits. That always helps. And then we charged off a couple million there. That $2.2 million in charge-offs helped to reduce that balance.

Was most of your charge-offs commercial this quarter?

Yes, about $1.8 million of that.

And then the other piece you asked about was King Carter. About a year ago we had the letter of intent from a purchaser to purchase the King Carter golf course for $1.2 million. The time came around for the borrower to exercise that. He chose not to exercise that letter of intent. That prompted us to go back and basically reassess the value of the property. We obtained a new appraisal, and that appraisal came in at, instead of at $1.2 million at -- something above $1.2 million, came in $700,000. So we wrote the asset down. The individual investors -- the individual and the investors that were looking to purchase the course are still operating it for us at this point in time. Our costs out of pocket this year has been negligible. So that is certainly an improvement over prior years. And we should have a strategy of whether to continue with that individual, whether to sell the course to them at a lower value or to bring in another operator probably by the end of this -- we will have it before the end of this quarter but we'll speak to it at next earnings call.

Okay, and then the King Carter exposure at March was $5.4 million, and that included the golf course, correct?

Yes. King Carter is a multi-use development. And what we hold there, it is developed lots, and there are hundreds. I won't say hundreds, there are over 100 houses around the golf course now. We still hold about 85 lots, and then there is 20 acres of commercial on the frontage and then another 200 acres of future development. So that package is the whole [$5.4] million.

Okay, and then if you just took a $0.5 million write-down on the golf course, you're now down to $4.9 million total exposure, or was anything else marked?

I can tell you exactly. Hold on one second. Let me flip the page here. No. We're showing we finished the quarter at $5.6 million. We were at $6 million at the end of the first quarter and we're now down to $5.6 million.

Okay. I must've had that wrong. Okay. Okay, good. In terms of your loan loss provision, again your still credit is so pristine at this point. Can you help us think about how the loan loss provision line should be looking, given your comments in terms of where we are with the mid-single-digit loan growth in some of the markets? Is it possible that we could see loan loss provisioning be running in the $2 million, $2.5 million per quarter range?

I think the way you want to look at it, Laurie, is taking a look at charge-offs we're running about 16 basis points this quarter and we were 24 in the first quarter. Between 10 and 15 basis points or so in charge-offs, and then you add on top of that the provisioning we have to do for any loan growth that we have. So we've been thinking of it in the 20 to 25 basis points range, depending on where charge-offs come in from a provisioning point of view.

Okay, okay. And then I guess along those same lines on the OREO line, that was obviously very elevated at $1.965 million. And I was thinking there was going to come a point when that more normalized to a $500,000, $600,000 or so run rate. Can you update us on your thinking with that?

Laurie, for this quarter, as Billy just mentioned, we took a valuation adjustment, primarily on the King Carter golf course, of about $0.5 million. That hopefully -- hopefully that won't recur, but it can be lumpy in terms of those valuation adjustments as we get new appraisals on properties going forward. In addition, we had about $300,000 of seasonal tax -- property tax payments that we had to make this quarter. So between them, we're talking about $750,000, $800,000 that we'd like to think aren't recurring but they may be lumpy going forward, though. (multiple speakers).

Taxes will be back in December. Twice a year.

We've been thinking about the $750,000 to $850,000 range on a quarterly basis kind of normalized.

Okay. And then your second quarter and fourth quarter are higher because of the tax?

Yes.

Okay. And then just if you can update us, too, on your bank properties, your branches? So those at June were $3.3 million. That was obviously down a little bit from March at $3.7 million. And now you've got potentially seven new branches coming in there, or are those branches going to be sold? How should we be thinking about that line?

We were at $3.3 million in former branch sites at quarter end. Six of the seven branches we're closing are in-store. So they are leased. So there's no real estate coming in there. There is one brick-and-mortar branch located in the Fredericksburg market that will close, and that one's going to add $900,000, give or take, to OREO.

It's actually going to be about $600,000.

$600,0000 to OREO.

Once we exit that.

Yes, once we exit it. So that will add $600,000 to OREO, assuming we are not able to sell it and get it under contract before we vacate it.

And again, we are actively marketing all of these properties. So we expect to make some progress in reducing those balances even further over the next two quarters.

Okay. And then in terms of obviously you took the $1.82 million in branch closures this quarter. Are we going to see any cost run into September quarter, or are you one and done there?

We are one and done there. Taking that $1.3 million charge which captures all the costs associated with those.

Okay. Great. And then just to switch gears. Billy, can you take us from a high-level perspective and remind us where you stand on the $10 billion threshold, and how you see that, how you are approaching that now?

Slowly.

That's good.

Well, organic growth rise if we stay at the mid-single-digit loan growth, Laurie. It would be year-end, 2018 or 2019. I guess 2019 before we would hit the $10,000 -- or $10 billion mark. If we were able to accelerate and end up in the high single-digit organic growth, than we would be there at year end 2018. We're building out our risk management area, and have already started that so that piece is ready and prepared to pass muster with the regulators as we cross $10 billion. We have provided to the Board and ourselves that we understand the cost related on Durban. We have estimates relative to the Volcker rule and other pieces. Rob and I are having conversations with our counterparts at banks that are already cross $10 billion, and getting a feel from them as what they see the costs are and kind of truing them against -- their cost against what we're expecting so that we have maybe a little bit better feel for it. But I think from where we stand now it is more a process and sort of partnership with the Richmond Fed that's in our quarterly meetings that we're talking about what to expect from an enterprise risk standpoint, what to expect from IP, what to expect from BSAA&L. We've had those meetings. Our leadership of our examination team this time is actually a group that has done banks over $10 billion. So we're getting -- we're going to get a little better view of what the expectations are in that kind of environment. So I would call it a well thought out methodical process.

Okay. And as you think about acquisition, then, if you were to execute on anything, you would most likely stay small at this point? Is that a good way to think about it? (Multiple speakers) pro forma below $10 billion?

I would think that you need to think $1.5 billion down.

Okay, perfect. Thank you so much.

Melissa, we are ready for the next caller, please.

David West, Davenport.

Good morning, gentlemen. First, just a couple detailed questions on expenses. The marketing expense you noted did sequentially go of this quarter. Could you talk a little bit about your outlook for the second half of the year on the marketing line?

Yes. The second quarter was up about $600,000, [above] $600,000 primarily related to production costs and media costs that we incurred. We're expecting that to come back down for the balance of the year to about $1.7 million or so a quarter.

Very good. That's [very helpful]. And then as probably relates to Laurie's earlier question on the regulatory front. Professional services, that's an unavoidable thing this day and age, but do you think you're going to bump along the current level or is that likely to trend higher or lower? Any comments there?

Yes I would say it's probably going to come down a bit, but not materially for the balance of this year the way we look at it.

Has that been somewhat inflated by the branch consolidation study and efforts?

Some of the cost relates to that, and there's other costs that were incurred related to some efficiency work that we're doing as well in there (technical difficulties).

Very good. And then a little bigger picture question. We're all waiting for the eventual Fed lift-off on rates. Could you talk a little bit about your rate sensitivity, and if we do get this gradual increase in rates in 2016 what your expectations would be on the margin in that scenario?

Yes. Yes, in terms of interest rate sensitivity, we're -- our outlook hasn't changed. We're still slightly asset sensitive, looking for positive impact as rates rise. And in terms of the margins stabilization, we do expect to see, because of earning asset yields coming down as we put new loans on books at lower rates, as Tony talked a bit about, we do expect earning asset yield compression. And we're thinking that over the next two to three quarters we're probably going to see about 3 to 4 basis points of compression on the margin. And then from there on, stabilize assuming rates, as you say, gradually increase, which at this point we're looking at September and December for the -- or December to get lift-off from the Fed.

And any -- (multiple speakers)

I'm sorry, David. I was going to ask, what does a 1% increase in that run rate translate to? Do you recall?

A 1% overall increase is about $2.5 million in terms of our net interest income.

So we are about 1.7% -- 100 basis points is about 1.7% positive to the margin.

And have you guys thought about much what the impact would be -- I guess a lot of people are wondering, when we finally start to move to higher rates, what the impact on depositors and the deposit rates and the deposit flows will be, given the unusually long period of negligible rates. You have any particular thoughts on that subject you'd like to share?

Yes. We've done a lot of work in modeling as rates rise what we think the impact will be in terms of deposit surge outflow, if you will. And we've got a number of contingency plans in place regarding pricing our deposits to make sure that we don't see a large outflow on the deposit levels. That's going to require obviously increasing rates, and we've been looking at different betas based on historical rate increase -- times of rate increases, as well as understanding that we're probably [at an] unusual time in the surge balances, maybe more prone to exiting the deposit base and going to other higher-yielding, if you will, assets. So we've done a lot of work on that, and we think we're in good position as rates rise. We've looked at it from both a gradual increase, as we talked about here, or a spike in rates as well and what our contingency plans would be in regarding deposit pricing. So we feel like we're in good shape from that point of view and we'll be able to react quickly.

Great. Thanks so much.

Thanks, Dave. And Melissa, we've got time for one more caller, please.

Blair Brantley, BB&T Capital.

Good morning, guys. Most of my questions have been answered. I did have one on the purchase accounting adjustments. It looks like those estimates increase from Q1. Can you speak to that, what drove that change for future accretion benefit?

Yes. We've done some work in terms of purchase accounting. We have to recast the outlook for the accretion, what would be coming in from the [crebone] yield point of view, and that work was done this quarter and we've adjusted the expectations for the crebone yield to the higher end, and that's basically driving the increase (Multiple speakers) those are estimates dependent on if we get payments on the loans, et cetera. That timing could change, of course.

Was there anything specific in there, or was it just a more broad-based, just overall improvement in the economy kind of driving that, or --

Yes, I don't think -- it's nothing specific that's driving it. It's more that just the expectations that we have when we did the deal and closed the transaction for StellarOne have gotten better in terms of the expectations. So nothing really, nothing I can really point to, just better expectations based on our detailed recasting.

Okay. Thank you very much.

Thanks everyone for dialing in today. Again, a replay of today's webcast will be on the investor website at investors.bankatunion.com. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.