Atlantic Union Bankshares Corp (AUB) 2016 Q2 法說會逐字稿

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

(Operator Instructions)

Thank you. Bill Cimino, you may begin your conference.

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

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

At the end of the call, we will take questions from the research analyst community. And now, I'll turn the call over to Billy Beale.

Thank you, Bill, and good morning, everyone.

Since our acquisition of StellarOne in February 2014, this is the quarter that the results that we had been looking for and expecting. The road to get here has been a little longer than we had anticipated.

But when you look at the results of double-digit loans and deposit growth or registered investment advisor acquisition, investments to make our organization more efficient, and significant improvement in our profitability metrics. And so while I have said in the past that we're making progress toward our strategic growth objectives, the second-quarter results demonstrate our team's hard work over the past two years is paying off.

We earned $19.3 million or $0.44 per share, an increase of almost 26% over the prior-year's second-quarter net income levels, and for the first half Union is up 17% over the prior year. We continue to capitalize on the organic growth opportunities we are seeing in our market, which reflects in part on the improving Virginia economy relative to prior years as well as Union's brand and market strength.

Loan growth improved again this quarter, as total loans came in at 11.1% annualized growth for the quarter. Our production levels have remained steady, and the growth was broad-based across our footprint as well as balanced between commercial and consumer loan categories.

Importantly, our loan pipelines look healthy coming into the third quarter. And given the strong first-half growth and strong pipeline, we are now expecting loan growth for the year to be in the upper-single-digit range. This represents an increase from the mid-single-digit expectation that we had given previously.

During the quarter, we expanded our commercial operations beyond Virginia for the first time by opening a commercial loan production office in Charlotte, North Carolina. Charlotte is a solid growth market that represents an opportunity to diversify the geography of our loan book and drive incremental loan growth.

I am pleased that we were able to bring over a team of experienced lenders to start up the Charlotte operation for us. And in addition, we also opened a building finance production office in Raleigh during the quarter which should also drive incremental loan growth.

Asset quality remains outstanding, as total past due and non-performing loans declined 25% from the prior quarter and 16% from the second quarter of 2015. In addition, we were able to reduce other real estate owned balances by around 6% during the quarter through the sale of 13 foreclosed properties, and we expect further reductions in OREO balances going forward. As we currently have approximately $1.3 million in properties under contract that should close over the second half of the year.

Our efforts to create a more efficient enterprise continue. In the second quarter, we closed five branches and opened a new stand-alone branch in Winchester. We also announced that we are closing five in-store branches in the Richmond market by September 30.

Upon completion of the branch consolidations in the third quarter, Union will have closed nine branches in 2016. And we will have 115 branches across our footprint, which is down 31 branches or 21% since June 2013.

During the quarter, we also made efforts to increase our non-interest income. Our acquisition of Old Dominion Capital Management registered investment advisor that is based in Charlottesville, Virginia with nearly $300 million in assets under management closed in May.

This acquisition reflects important progress in our strategy to expand the reach and the capabilities of our wealth management team by adding investment strategies and advisor talent. Old Dominion Capital Management enables us to add a strong registered investment advisory platform that will complement our ability to offer financial solutions to our wealth management clients.

In addition, during the quarter, Union hired a Treasury Services Director any digital strategist. These hires will help expand and enhance our treasury management and digital service product suites.

This will allow us to become more competitive with larger banks, and will also offer another differentiator between Union and other community banks. The results of these efforts are expected to generate incremental growth in non-interest income.

Our mortgage team delivered its most profitable quarter in more than two years. This improved financial performance was the result of a continued focus on operation efficiency, as well as additional growth in our sales force that increased mortgage loan production volumes by 42% from the first quarter.

Looking forward, the team is expecting to continue to opportunistically build out its salesforce over the second half of the year and take advantage of favorable market conditions to grow it's top line revenue. I am pleased that their hard work is starting to show positively on the Company's bottom line.

From a shareholder stewardship and capital management perspective, Union repurchased approximately 272,000 shares during the quarter totaling nearly $7 million. Approximately $15.5 million remains available under our Board stock repurchase authorization.

So to summarize, I am very pleased with our financial results for the first half of 2016, as our strategic plan continues to take hold and as we take the actions necessary to make us a more profitable company in the future. Our recent operating performance demonstrates that we are well positioned to realize the long-term potential value of our franchise, and I'm more excited about the earnings potential and the growth opportunities for Union.

With that, I am going to turn it over to Rob and I will look forward to answering your questions after he finishes.

Thank you, Billy, and good morning, everyone. Thanks for joining our call today. I would now like to take a few minutes to walk through some of the details of our financial results for the current quarter.

As Billy noted, earnings for the second quarter were $19.3 million or $0.44 per share. That is up 14% from the first quarter's $17 million or $0.38 per share, and up 26% from last year's second quarter's $15.3 million or $0.34 per share.

The community bank segment's results were $18.8 million or $0.43 per share in the second quarter, While the mortgage segment contributed a profit of $539,000 or $0.01 per share, compared to $54,000 in the first quarter on increased mortgage loan origination levels.

We made solid progress on our path to top-tier financial performance, with significant improvements in our profitability metrics this quarter. We return on tangible common equity was 11.6%, that's up 150 basis points from the 10.1% reported in the first quarter and up 240 basis points from the 9.2% from the same period in the prior year.

Our return on assets was 98 basis points, up 10 basis points from the first quarter and an increase of 15 basis points from the second quarter of 2015. In addition, the Company's efficiency ratio improved to 64.1% in the current quarter. That is down 200 basis points from the 66.1% in the first quarter, and down 300 basis points from 67.1% in the prior-year's second quarter.

Now turning to the major components of the income statement. Our cash equivalent net interest income or $68.2 million was up $2 million from the first quarter, driven by higher earning asset balances. Of note, the current quarter's reported net interest margin rose 2 basis points from the previous quarter to 3.84% driven by higher purchase accounting accretion levels as our acquired loan portfolio continued to perform better than expected.

Accretion of purchase accounting adjustments for loans and borrowings added 8 basis points to the core net interest margin in the second quarter, that's up 2 basis points or $256,000 from the first quarter. For your reference, actual and 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 acquisition accounting accretion, was 3.76% in the second quarter which is flat to the first quarter level and in line with our previous guidance. Core earning asset yields remained steady at 4.16%, as did the cost of funds at 40 basis points. The cost of deposits for the quarter was 28 basis points.

Going forward, our baseline core net interest margin projection, which assumes that the fed does not raise the rates in 2016 and that the current flat yield curve conditions persist over the medium term, calls for margin compression of 3 basis points to 4 basis points in the third and fourth quarter of 2016 and into 2017. And that is primarily due to declining earning asset yields which we expect.

If the fed were to increase the fed funds rate earlier than our forecast of late 2017, we would expect our baseline net interest margin forecast to improve by approximately 3 basis points to 5 basis points in the quarters following the increase given the asset sensitive positioning of the balance sheet.

The provision for credit losses in the second quarter was $2.3 million or 16 basis points. That is down from $2.6 million or 18 basis points in the first quarter, and down approximately $1.4 million from the second quarter 2015 provision level due to the lower net charge-off levels recorded during the second quarter.

For the second quarter, net charge-offs were $1.6 million or 11 basis points on an annualized basis compared to $2.2 million or 16 basis points for the same quarter last year and $2.2 million or 15 basis points for the first quarter. Non-interest income in the second quarter was $18 million, up nicely approximately $2 million from the $16 million in the first quarter. And that is primarily driven by the higher mortgage banking income of $826,000, also a higher customer related fee income of $477,000.

Increases in loan related interest rates swaps increased approximately $400,000, and we have also recorded seasonally higher insurance related income of $226,000 for the quarter. The increases in customer related fee income was primarily driven by higher wealth management fees resulting from the acquisition of Old Dominion Capital Management as well as by increased debit card interchange fees.

As noted previously, mortgage banking income increased $826,000 or 38.5% to $3 million in the second quarter, as compared to $2.1 million in the first quarter. As mortgage loan originations increased by $42 million or a bit over 42% in the current quarter to $140 million. Our second-quarter non-interest expenses increased to $55.3 million, that's up from $54.3 million we recorded in the first quarter.

Expenses related to investments the Company is making in our teammates and enhancing our technology, operational and risk management capabilities as we grow towards the $10 billion asset level. As well as investments in revenue growth and efficiency initiatives, including the acquisition of Old Dominion Capital Management and the new loan production offices we opened in the second quarter, amounted to approximately $1.4 million of increase during the quarter.

In addition, loan volume driven expenses increased approximately $300,000 during the quarter as did OREO and credit related costs, due to increases in valuation adjustments, OREO workout expenses and seasonal real estate tax expenses. These increases were partially offset by reduced levels of seasonal payroll taxes of approximately $750,000, and other expense category declines of $400,000.

As a reminder, the $925,000 in annual expense savings from the four net branch closings completed during the second quarter will start being reflected in the third quarter. In addition, as Billy noted, five additional in-store branches are scheduled to be closed by the end of September which will reduce annual run rate expenses by approximately $1.5 million beginning in the fourth quarter. We also expect to incur approximately $400,000 in associated non-recurring branch closing expenses during the third quarter.

Now turning to the balance sheet. Total assets are now above $8 billion at $8.1 billion as of June 30, and that's up from $7.8 billion on March 31 and an increase of over $600 million from June 30, 2015 levels. The increase in assets are primarily driven by net loan growth during these periods.

Loans held for investments were $5.9 billion at quarter end, up $161 million or 11% annualized, while average loans increased by $153 million or 10.7% annualized from the first quarter. Adjusted for the sale of the credit card portfolio in 2015, loan balances were up $457 million or 8.3% from June 2015 levels. As Billy noted, we are now projecting that loan growth will be in the upper single digits for the full year of 2016, and that is up from the mid-single-digit guidance previously noted.

As of June 30, deposits were $6.1 billion, an increase of $150 million or 10.1% annualized from our March 31 levels. The net increase in deposits from the prior quarter was across all deposit categories. Deposit balances were up $311 million or 5.4% from our June 2015 levels.

As noted earlier, credit quality continued to improve during the first quarter. Non-performing assets were down $3.1 million to $24.2 million at quarter end, and that's comprised of $10.9 million in non-accruing loans and $13.4 million in OREO balances or other real estate [honed] balances. Non-performing assets as a percentage of total outstanding loans were lower by 6 basis points and now stand at 41 basis points, and that is a decline of 17 basis points from our prior-year levels.

Non-accrual loan balances declined by $2.2 million in the quarter, while OREO balances declined by $900,000 driven by property sales closed during the quarter. The allowance for loan losses increased by $675,000, and now stands at $35.1 million at June 30 due to loan growth during the quarter.

The allowance as a percentage of the total loan portfolio adjusted for purchase accounting was 92 basis points at quarter end, and that is down 3 basis points from March 31 levels as the result of continuing improvements in asset quality and lower historical loss rates. The allowance now covers 5 times annualized second-quarter net charge-offs as compared with 4 times coverage in the prior quarter. In addition, the non-accrual loan coverage ratio is now at 323%, up meaningfully from the 263% level in the first quarter.

Our tangible common equity to tangible assets ratio at quarter end is 8.59%. That is lower by 27 basis points from 8.68% at March 31, primarily as the result of share repurchases and the loan growth during the quarter.

As Billy has noted, we repurchased 272,000 shares during the quarter and have $15.5 million remaining under the current Board repurchase authorization as of the quarter and. We remain well capitalized from a regulatory capital perspective, with a tier 1 capital ratio of 11.25% and a total capital ratio of 11.77%.

Management and the Board of Directors continue to monitor capital management options given increased expectations for loan growth, including dividend payout 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 have demonstrated continued solid progress toward our strategic growth objectives. We remain steadfastly 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.

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

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

(Operator Instructions)

William Wallace.

Morning, guys.

Good morning, Wally. How are you?

My first question -- maybe just jump straight to the expense line. Last quarter, in my notes we were talking about a $53 million run rate on expense so maybe I got the timing wrong.

Maybe could we talk a little bit about that commentary from last quarter and if that has changed moving forward? Is it just a timing situation or what?

Yes. Wally, this is Rob. Yes, there's a couple of issues going on here. Part of it is a timing issue.

I think we would eventually like to see our run rate get to that level, but we would have lumpiness in the quarters. As we've been making some investments as we noted in our risk management, technology and operations areas, as well as things like DFAST the projects that are underway we have been incurring some elevated costs related to that.

In addition, during the quarter, we also incurred some one-time expenses related to the acquisition of Old Dominion and the opening of the LPO office. So those have elevated the expense levels as well.

In terms of going forward, the LPO and the Old Dominion acquisitions from a run rate point of view is going to add about $750,000 to the run rate that we had previously suggested. And we also expect that we would be having, over the next couple of quarters anyways, we will continue to see some elevated expenses related to the $10 billion readiness projects that are going on.

So, to shorten this up a little bit, our thought is it would probably be the $54.5 million to $55 million level over the next couple or quarters. Probably higher in the third quarter coming down with some of the savings we expect from the branches, and run from a $54.5 million level after that.

So there is basically $4 million more expense now than you expected last quarter annually?

Yes. Well again, some of that is going to -- it relates to some projects that will mitigate over time. But yes, probably more in the -- the addition of the Old Dominion and the LPO it is a bit higher, a little less than $1 million. Which were not relative to the strategic initiatives that weren't in our commentary (inaudible). So that is bulk of the increase.

I thought we -- maybe I'm wrong, I thought we knew about the asset management business.

Yes, but we an -- that was not in the $53 million projection or $53 million to $55 million or $53.5 million projection at that time.

Okay. And what are these -- I think -- I can't remember exactly what the word was how you worded it in the press release, for the special projects or something that are driving up the professional services costs?

Yes. A lot of that relates to our project -- the readiness for $10 billion across our enterprise risk management groups as we increase our diligence around that and build our structure around that. DFAST is also a big part of that, where we have engaged some outside parties to assist us in those, and those costs will persist for probably a couple more quarters. But it really it's related to the readiness for $10 billion that we are making investments there.

Okay. And then last one, on the expense side, you had mentioned that you thought the REO and related costs would be in the $500,000 to $750,000 range and this quarter was $900,000. Are we around $900,000 or --?

Yes, we're not coming off of that. It's kind of lumpy. We had some seasonal increases in payroll.

So on average, we were looking at $500,000 to $750,000, and I think our average to date for the first two quarters was $750,000. So we would expect that to come down in the third and out quarters.

Okay. Back to that the $500,000 to $750,000.

Yes.

Okay, good. And then you mentioned the other revenue coming from customer hedges on interest rates, it contributed to about a $0.5 million increase in the other income line. Is that something that in the current -- if the curve space stays how it is, will you see that every quarter, or is that just a one time because the curve changed?

Well it has not been one time. We have been seeing some nice revenue generated out of that. It really, of course, depends on customer preference in terms of fixed rate paper where we write a floating rate or variable rate note and swap it out for fixed.

So it is really going to depend on what the customer preference is going forward and how they [do] the interest rate cycle. But I would not expect that we would continue to see the levels that we're seeing. It is kind of volatile and really dependent on a deal-by-deal basis.

Okay. And then my last question and I will step out. You guys -- if you adjust your reserves for the remaining mark and then look at the adjusted reserves as a percentage of your loan balance. As you continue to release reserves, so as far as reserves to loans are concerned, at what point should we expect that that ratio will flat line?

Yes. Of course the way the allowance is calculated is dependent on historical loss factors, and we do a four-year look back on historical loss factors. So as those numbers stabilize, you will start to see that happen. So I would expect in the not to distant future, you will be seeing that that stabilizing in the 90 basis points or so range depending on our loan growth.

And have you changed any of your qualitative factors?

We have. We have adjusted our qualitative factors to take into consideration some of the potential best-in-cycle period we are in. So yes, we have adjusted for that.

Okay. I will step out. Good to see the mortgage profitability come back so strong. Thanks, guys.

Thanks, Wally.

Heidi, we are ready for our next caller please.

Catherine Mealor.

Thanks. Good morning, everyone.

Good morning, Catherine.

So this is more of a big picture question. The Charlotte LPO, how does that in terms of into North Carolina, did that change your M&A appetite?

Historically, your M&A strategy is more of a Virginia maybe DC, Hampton Roads focused strategy, and now that you are coming down to Charlotte, did that put some franchises in North Carolina on the table for you? Or is this more than just a opportunistic to transaction to get loan growth in that market?

Well, let me reiterate what I thought we have said before regarding M&A. I think our immediate -- I will say short-term to intermediate-term focus is market infill in Virginia where we can maximize earnings-per-share growth and efficiencies. But as we contemplate crossing $10 billion, we may -- at least we contemplate looking outside the state of Virginia in order to accomplish that.

So I don't think the Charlotte market LPO really changes anything regarding our M&A strategy. I think we, at least in our documents, Catherine, we have always contemplated a potential opportunity in North Carolina or an opportunity in North Carolina is a possibility. Maybe let me put it that way.

Got it, that makes sense. I was more thinking outside of a larger strategic deal, but would you view North Carolina even as a -- would you consider a smaller deal in North Carolina as you fill out that --? The change in my question.

I would say that would be more of an intermediate to longer term, however you want to figure that. I would say something in the 2.5- to 3- or 4- or 5-year range.

Okay, that makes sense. And then on the growth, really great growth this quarter. Can you talk a little bit about or give us some color on what has changed over the past couple of quarters that has really driven the growth? How much of it is you just got the team back together and now they are working on full cylinders and you're getting that, or is the market is bringing you more products?

Is it that there's been a change in the competitive landscape? If you could help us get some color around the driving factors behind the better growth, and your view for that to continue over the next couple of years.

Years?

Year, we will give you one year. Let's say 2017.

I would say this. I do not want to discount the impact that the improving Virginia economy has had. In 2014, the state GDP was zero and I think we had something like a -- the net job growth was like 1,000 jobs.

2015 was slightly better, 2016 we are starting to see Virginia's job growth and state GDP return to levels that we saw earlier in -- prior to the downturn. Maybe not quite as high, but we are starting to see those kinds of improvements. So certainly the economy has something to do with it.

There has been a lot of commentary over the last few years about our loss of loan officers and how we replaced those. But even once we replaced the 14 lost loan officers in 2014, we have continued to add lending.

Outside of the two in the loan production office in Charlotte and the one third on in Raleigh, we have added six other loan officers this year in our footprint. And so the combination of the economy and our existing lending team and new additions is resulting in this loan growth.

Geography wise, Catherine, Richmond continues to be the leader in both dollars -- or in dollars. But we are seeing diversified growth from Fredericksburg, our Hampton Roads area, our small outpost in northern Virginia is producing well for us. So we are getting geographic diversity.

And while we obviously still have some commercial real estate leanings in this, we are also seeing diversity in other parts of the portfolio as well. Both on the consumer side and commercial, pure C&I lending, so that part is all good. Pretty happy with both the geography and the credit concentration diversity.

That's helpful. Thank you, Billy. And one last one --

And you asked about for the next two years?

I'm just trying to think about the sustainability of it.

Based on our pipeline reports, I think it is clearly sustainable through year end and I think it will be sustainable as long as the Virginia economy continues to perform well. If the country goes into a recession and Virginia follows that, then I don't think we can sustain these growth levels.

Thanks for that. One last one just on the buyback. Now that your stock is higher over the past couple of weeks, and so do you view the higher stock prices as an opportunity to maybe pull back on the buyback and maybe get more aggressive on M&A? Or should we continue to see you use the rest of that $15 million authorization through the rest of the year even at these levels?

Yes. I think -- Catherine, this is Rob. I think you could expect to see a pullback in your repurchases going forward based on the level of the stock price.

As you know, we've got different criteria in terms of level of buyback depending where the stock price is based on a return we expect on the buybacks. So you could see that we -- in the first quarter, we bought back 1 million shares. In the second quarter we bought back about 270,000 shares. So if the stock price continues to move up, you can expect to see that coming down considerably.

Okay, great. Thank you. Great quarter, guys.

Thank you.

Heidi, we are ready for our next caller.

Austin Nicholas.

Hey, guys, good morning.

Good morning, Austin.

Just on the mortgage business, it was good to see the profitability in that business line. How are gain on sale margins trending in 2Q, and then maybe how are they looking so far this quarter? How should we think about that business through the second half of the year in terms of additional lending officers or mortgage officers driving some growth there?

Austin, this is Jeff Farrar. Good morning.

I would tell you that margins are very strong right now. I think that is somewhat a by-product of the market that we're in, but it is also a by-product of just stronger management around pricing and I think our team has done a nice job of continuing to build that. So we're seeing some of the best margins we have seen in years.

We would expect that to, at least to continue for the short term. I think that to some degree we will see that come in as the market cools off, but we are in somewhat of a nirvana right now in terms of market conditions and obviously taking advantage of that to the extent we can.

We have not seen the refi [pocket of sellthrough] would continue going down as it has, of course it is rebounding now. But the good news is that we are seeing really good growth in purchased money. We're seeing good growth in construction. Our pipeline is as strong as it has been in some time, so I think that bodes well for the second half of the year.

From and LO perspective, we are still behind that goal relative to hiring. The average production per LO is up nicely, I think we were over $1 million for the second quarter in average LO production. So that's strong and that's in line with our goal.

But I would temper expectations around production from a standpoint that we have not had the success in hiring that we had hoped. Some of that is predicated based on market conditions and the fact that LOs are just running so hard right now with production, even if they are not happy where they are at. But all in all, I think we feel very good about the second half of the year from a sustainability standpoint, and we will continue to work hard to try to leverage the business and provide some incremental profitability.

Thanks, that was very helpful. And just on deposits, when I look at your deposit costs, it looks like they were pretty stable quarter over quarter. Are you seeing any signs of pressure from competitors or any maybe larger municipalities is trying to get some higher rates? Or has that been subdued given the decline in rates?

Yes, Austin. This is Rob again. We have not really seen a whole lot of pressure on the competitive perspective on rates and expectations from our customer base. So I would not expect that you will see that cost of funds or cost of deposits move much at all over the next few quarters, especially in the continued low rate environment that we are in.

Okay, yes, that is helpful. And then maybe just looking at the Richmond market. Are you seeing any I guess loosening or I should say are you seeing any reduction in pricing pressure and given some disruption in there? And maybe some changes there being made at some of the larger banks that are in the market there in Richmond?

No. We have talked in I would guess during 2015 about some of the pricing pressure we had seen or competitiveness from other banks. But, Austin, that really seems to have abated, and I would say that while we continue to see -- let me put it this way, we are not seeing the pricing pressure from community banks that we had saw in 2015, that has abated and pretty much been that way most of this year.

As concerns -- the big banks -- and this is really no different than it has been. When a SunTrust or a Wells or a BB&T or even a First Citizens wants to win a deal, they will win the deal and it has always been that way.

But we are not even seeing that kind of pressure from them right now. I think everybody is -- nobody is really willing it seems to be willing to sacrifice their margins in this environment for growth, and I think some of this has to do with my response to Catherine.

The economy has picked up. We are seeing more organic growth. We are having to do less take away, and when we are competing for deals, there is not the pressure to win the deal with a rate that there was a year ago.

Got it. Thanks, Billy. That makes a lot of sense.

That's all my questions for now. I appreciate it, guys.

Thanks, Austin.

Heidi, we're ready for the next call.

Laurie Hunsicker.

Good morning, gentlemen.

Good morning, Laurie.

I wanted to go back to expenses for a minute here, and just I guess where Wally was starting as far as the $53 million. Obviously, I get the add of the LPO Old Dominion, that takes us to $53.7 million then we have got the five branch closures which takes us down to $53.3 million and then you have got a $2 million gap in, call it, the $55 million or so quarterly run rate.

Is that primarily the $10 billion asset threshold spend? Is that the difference?

Well yes. So the way I would look at it is we are at $55.3 million this quarter, and we had several reasons for being above that. As we back out -- there's things like potential cost savings or the savings we're going to get from our branches then for next quarter we are adding in closing costs for the branches. The LPO, Old Dominion, adds about $750,000 for the run rate, and then the rest of it is project related investments that we are making.

In addition, some of that is -- the run rate, it's not all project related. We also are adding some new positions across our IT, ops, risk management areas in addition to some of the investments we are making in the wealth management area and the commercial area and LPO is opening. So it is basically a combination of those things, Laurie.

Okay. Or maybe let me ask it a different way. Can you update us on the different pieces within the $10 billion spend that you have done, and where you are completion wise and how much more to go?

In other words, within the enterprise risk management, within technology, within DFAST, you've spent X. Any framework around that that you could share with us?

As we'd mentioned, we were talking about investing in IT and ops last quarter, and investing in enterprise risk management and investing in risk management related to the DFAST. And we were talking about adding about $4.5 million or so in run rate over a period of time. Of that, the risk management area, other than some projects that are going on that will elevate expenses for a period of time until a project is done.

It is probably about $2 million, so a little over $2 million is already in. The technology investment is probably about, call it, a third to halfway there which was another $2.5 million on a full run rate basis and then DFAST is just starting. So $600,000 or $700,000 related to that, and that has not been fully baked in yet.

All right, great.

So I guess you'd think about it with of that $4.5 million in run rate increase, we're probably close to halfway there.

Okay, that's super helpful. Thanks. And then just going back -- circling back to Catherine's question on M&A and I'm going to put you on the spot little bit, and I don't mean to. But per your annual shareholders slide deck in May that you would be $13 billion to $15 billion by the end of 2018, in that in terms of an announced deal?

And then can you also take us through the framework of how you approach dilution? I think all of us are sensitive to it. We saw the reaction yesterday with F&B's purchase of [yakhen]. What does the max limit that you would go in terms of dilution to tangible book and years to earn back? So maybe just those two things if you can help us understand --

Are we going to also debate how we model it?

You mean -- (multiple speaker) versus (multiple speakers)?

I know you have different opinions than we do on that.

That's true, I do. No, I tell you what, if we just talk about how you guys think about it, that would be helpful.

In terms of how we do it or the calculations for it?

Well maybe just starting, so $13 billion to $15 billon by the end of 2018. That suggests that you all are going to do a pretty like a $3 billion, $4 billion, $5 billion asset bank acquisition, and obviously, there are certain things that have to happen and I get that.

But assuming that, it seems like it is very much on the plate. You are halfway there on your $10 billion asset spend. So how you -- is that a realistic goal and how do you think about dilution?

Well I think it is a realistic goal, but you are correct, the stars have to align. And I think there's plenty of examples of other banks in the marketplace that probably had that same strategy that we did or we do, and have deviated from that. Because the $3 billion to $4 billion to $5 billion acquisition was not there, and they have gone down to the $1 billion to $2 billion to $3 billion and we may well have to pivot.

But I think we have been pretty consistent in how we want to look at these. We are looking for an internal ROI of 15% plus. We are looking at EPS accretion, and then the other is we want to keep our tangible book value dilution less than three years.

I think the only time during our acquisitions that we have exceeded that would have been the StellarOne acquisition where we were right on top of five years. But we felt we had an ROI above 20% and we had an EPS above our 6% growth and we felt like the strategic nature of it allowed us to deviate from that. But typically, we're going to want to keep our tangible book value dilution less than [3%].

And that's just using that cross over method, is that correct?

Yes, I was just going to mention that, Laurie, that Billy is referring to is the cross over method.

Okay.

And certainly understand that the marketplace may look at other ways to calculate that and have certain metrics, five-year and 5% dilution, sounds like that is a magic number to stay inside of that. So we would be looking at it both ways knowing that the marketplace may be looking at it that way.

The other thing I will point out, if we were able to sustain upper-single-digit asset growth, we will cross $10 billion organically sometime between I will say midyear 2019 to midyear 2020 at this stage depending upon how all that works out. So it is going to be a reality for us anyway which is why we are doing this spend and trying to get ahead of it, and acquisitions of any size would just accelerate that process.

Okay. And then just going back to the 5% and 5% that you mentioned and more certainly in the framework. Are you also committing to not diluting your tangible book by more than 5%?

Well that's certainly one of the things that we will evaluate, and we will continue to evaluate that level and it could fluctuate a bit. But yes, 5% dilution would appear to be -- beyond that might be a bit excessive.

Okay, great. And then just one more question that I want to ask you, and again, I guess I am putting you on the spot a little bit. But we saw legacy in Texas, LTXB, they came out in the face of the $10 billion asset market and said, you know what, the spend for us it's going to be upwards of $7 million and we're looking for a partner.

Is that ever at any point in the game on the table, or do you feel now you are halfway in? You have got a standalone franchise that is fantastic, you are going to continue on your path. How do you think about that?

Well I will speak as best I can on behalf of the Board. Shareholder value is first and foremost in our discussions. But we want to have a game plan which we believe we can control and manage and deliver shareholder value.

If at any point in time management and the Board make the decision that we just don't feel like we can deliver the shareholder value on our path, then yes, we would have to look at other options. But I don't think you, at least in our case, it is not in our strategic plan to go through all this work and then look for a partner.

Okay, great.

Obviously if that were the case, we would not be spending the money. We would just grow and then sell and get close to $10 billion. It is our plan and it's our intention to continue this franchise and continue to grow and prosper, and we see ourselves as a player going forward.

Great. Thank you.

Thanks, Laurie, and, Heidi, we have time for one more caller please.

Blair Brantley.

Good morning, guys.

Blair, good morning.

Most of my questions have been asked. I did want to go back to your thoughts on the margin and your investment security book and those yields.

Obviously those yields went up a little bit this quarter and balances went up. I'm just trying to get a sense that's what you guys are buying these days and what your thoughts are around that given the pull back in rates.

Yes, we really have not changed our investment security portfolio strategies. We are still continuing to invest in a barbell approach municipalities on the long end and mortgage backed securities on the front end. So we are still around the 60/40 level. We've probably gone a bit above the 40% level in going into municipalities a bit heavier than we have had in the past, not materially, but that helps us stabilize the yield on the investment portfolio.

And then we have also added a few select sub debt or core debt investments, but not a lot of money. I think we're are about $40 million to $50 million worth, which has a bit higher yield than debt. We have invested in knowing the credits pretty well.

Okay. And then on the balance sheet, borrowings have been going up. And I know you guys -- it looked like your cash balances were higher at period end. Is that just a timing situation or what's --?

Yes. That is more of a timing at the end of the period. And also as you have seen year to date, our loan growth has been a bit higher than deposit growth primarily because we were pretty flat in the first quarter from a deposit.

(Inaudible) deposits gathering perspective, but we have accelerated that in the second quarter. So we expect that borrowings to decline in the out quarters here. So timing and then loan growth outpacing deposit growth for a period of time.

Okay. And then I just had one last question. In terms of the lending environment, are you guys going up in size? Has that changed at all over the last couple quarters given your bigger balance sheet and position within the market?

No.

Okay.

I would say it took us almost a year post merger from StellarOne to really start seeing larger credits come in. As you know, we have got a house limit exposure to any one borrower of $60 million. And so we have been looking at larger individual credits really since the first quarter 2015, so we have not gone up any. Let me put it this way, I'm not seeing anything come across the desk that is any larger than what we have looked at over the last 18 months.

Okay. That's very helpful. Thank you.

Thank you.

Thanks, Heidi, and for everyone for dialing in today. We will talk to you all next quarter. Goodbye.

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