United Community Banks Inc (UCBIO) 2015 Q2 法說會逐字稿

Good morning, and welcome to United Community Banks' second-quarter conference call. Hosting our call today are Chairman and Chief Executive Officer, Jimmy Tallent; President and Chief Operating Officer, Lynn Harton; Chief Financial Officer, Rex Schuette; and Chief Credit Officer, Rob Edwards.

United's presentation today includes references to operating earnings, core pretax pre-credit earnings, and other non-GAAP financial information. For each of these non-GAAP financial measures, United has provided reconciliation to GAAP in the Financial Highlights section of the news release and at the end of the investor presentation. Both are included on the website at ucbi.com.

Copies of today's earnings release and the investor presentation for the second quarter were filed this morning on Form 8-K with the SEC. And a replay of this call will be available on the Company's Investor Relations page at ucbi.com.

Please be aware that during this call, forward-looking statements may be made by United Community Banks. Any forward-looking statements should be considered in light of risks and uncertainties described on page 4 of the Company's Form 10-K, and other information provided by the Company in its filings with the SEC, and included on its website.

At this time, we will begin the conference call with Jimmy Tallent.

Good morning. And thank you for joining us for our second-quarter earnings call. We had another strong quarter, both financially and strategically. Our financial results were solid by every measure, and I'll talk more about that in a moment.

On the strategic side, we completed our merger with MoneyTree Corporation and its subsidiary, First National Bank, and we announced the planned merger with Palmetto Bancshares. Both of these banks enhance and extend our footprint in very desirable markets, and it will be hard to find partners that more closely fit our community and service-oriented culture or provide better opportunities for growth. I'll talk more about where we are with both mergers and then I'll wrap up with our outlook.

First, let me start with some highlights. Our call today will focus on performance measures presented on an operating basis, which excludes the impact of merger-related charges. Net operating income was $20 million or $0.32 per share, up 19% from a year ago. Reported net income was $17.8 million or $0.28 per share.

Return on assets on an operating basis was 1%, up from 94 basis points last quarter, and from 88 basis points a year ago. Our operating return on common equity was 9.9% compared to 9% a year ago. Total revenue, excluding the provision, was $78.6 million, up $9.5 million or 14% from a year ago. At 3.30%, our margin was about the same as first quarter, and was up 9 basis points from the second quarter of 2014.

We had solid loan production of $518 million, with net loan growth of $142 million or 12% annualized. Our provision for credit losses was $900,000 -- half the amount from the first quarter. Unusually high recoveries drove net charge-offs down to $978,000, resulting in a lower provision.

Our reported allowance ratio was 1.36%, down from 1.46% last quarter. The addition of the acquired First National Bank loans, which have a purchase discount rather than an allowance, lowered this ratio by 6 basis points. The nonperforming assets to total assets ratio was 26 basis points, unchanged from the first quarter. Fee revenue was up $1.6 million from the first quarter or 40% annualized. The increase was driven mostly by strong mortgage production and SBA lending growth. Finally, all of our capital ratios remain very strong.

Now I'll share some details of the quarter and also cover the mergers and our outlook for the remainder of 2015.

As you can see on page 5 of the investor presentation, core pretax pre-credit earnings were $33.4 million, up $2.9 million from the first quarter and up $4.6 million from a year ago. Although First National Bank's earnings account for approximately $700,000 of the increase, most of the increase was from growth in our core businesses. We held our net interest margin steady for the past two quarters, lower by only 1 basis point at 3.30%. This allowed our strong loan growth to drive the increase in net interest revenue.

We grew loans by $142 million or 12% annualized during the quarter. This excludes the $244 million in loans acquired in the First National merger. The growth was driven by new loan production of $526 million in the second quarter, as shown on page 7 of the investor presentation. With the exception of the commercial construction category, production exceeded the first quarter in every market and every category.

Consistent with the first quarter, about 60% of the loan production, or $296 million, was driven by our Community Banks. Specialized lending added $130 million. Also similar to the first quarter, more than half of the production was in our C&I and CRE portfolios, reflecting our investment in key leaders and talent in this area. This investment continues to be both a strategic and a financial win.

Looking at loan growth by categories, in the second quarter, we generated $300 million in commercial loan production, and increased outstanding balances by $116 million. Our funding costs were lower in the second quarter due to our actions taken in the first quarter. You may recall that we repaid the remaining $6 million balance of our structured repurchase agreement for which we paid interest at a rate of 4%. And we redeemed $15.5 million in trust preferred securities that had an average interest rate of 11%.

In addition, during the third quarter, we plan to redeem $32.3 million of trust preferred securities that have an average interest rate of 8.5%. At quarter-end, our balance sheet remains asset-sensitive. If there were a 200 basis point ramp-up in interest rates over the next year, we would expect to improve net interest revenue by 1.6%.

We still hold a large balance of floating rate securities to assist us in managing our exposure to rising interest rates. At the end of the second quarter, 30% of our investment portfolio was in floating rate securities. Loan pricing pressures will continue, and we expect that to compress our margins slightly through the remainder of 2015. With only a modest decline, we also expect loan growth to drive increases in net interest revenue going forward.

Before we move on to fee revenue, I want to speak briefly about our provision for credit losses. We saw a decline in the provision in the second quarter as a result of higher recoveries of previously charged-off loans. Our expectation is that net charge-offs will return to a level more consistent with the previous two quarters. You'll find the trends on core fee revenue on page 5 of our investor presentation.

Second-quarter core fee revenue was $17.2 million, up $2.1 million from the first quarter. The increase was spread among several categories, with our mortgage business leading the growth. Mortgage fees were up $952,000 from the first quarter and $1.8 million from a year ago. The increases from both quarters reflect an increase in refinancing activity and our strategic focus on growing the mortgage business by adding lenders in Metro markets.

We closed $128 million in mortgage loans in the second quarter, up from $88 million in the first quarter and $69 million a year ago. 54% of the second quarter mortgage production was purchases and 46% was refinancing activity. We also saw strong growth in our interchange fee revenue following a slight dip in the first quarter. Interchange fees were up $582,000 from the first quarter and $244,000 from a year ago.

During the second quarter, we funded $31 million in SBA USDA guaranteed loans and sold [$15 million]. Our SBA lending business produced $1.5 million in fee revenue from loan sales. That is up 30% from the first quarter. Sales of a portion of our SBA loan production and the resulting gains in fee revenue will remain a core part of our SBA business strategy. We expect continued growth in this area.

Other fee revenue is up $354,000 from the first quarter. Increased customer derivative activity was the largest contributor, as commercial customers sought to lock in low fixed rates on their loans. As I've mentioned before, growing our fee revenue-generating businesses has been a key strategic focus as we work to broaden our business mix. I'm very pleased with the progress we are making in this area.

Core operating expenses are on page 5 of the investor presentation. As a reminder, our presentation of core operating expenses excludes market value adjustments to our deferred compensation plan liability, severance charges, foreclosed property costs, and this quarter, $3,170,000 in merger-related charges. The merger-related charges are mostly severance systems conversion and professional costs specifically related to merger activity.

In the first quarter, we also excluded the charge of $690,000 to close out our loss sharing agreements with the FDIC. We have included a reconciliation of core operating expense on page 5 of our second-quarter investor presentation. Core operating expenses of $45.1 million reflected a $2.9 million increase from the first quarter. Accounting for $1.7 million of this increase was First National Bank's operating expenses for the two months following the merger.

The remaining $1.2 million increase was mostly in salaries and benefits, although professional fees and advertising and public relations expense were also up. All other expense categories were flat or down from first quarter, excluding First National Bank's expenses. The increase in salaries and benefits, excluding the expenses of First National Bank, was approximately $660,000, mostly due to higher incentives related to the increase in loan production and growth in fee revenues.

At quarter-end, we had 1,644 employees, up 92 from the first quarter. 77 of the 92 were added through our acquisition of First National Bank. The increase in advertising and public relations expense reflects the cost of our Annual Customer Appreciation Day as well as other advertising and marketing campaigns. The increase in professional fees reflects the cost of corporate initiatives. Our operating efficiency ratio for the second quarter was 57.6%, which improved from the first quarter of 59.2%.

Now I want to take a moment to talk about our acquisitions. As I mentioned earlier, we completed our acquisition of First National Bank on May 1, and their earnings are included in our results from that date forward. We continue to operate First National as a separate bank charter within banking offices through the systems conversion, which was successfully completed last weekend.

Following the conversion, all of First National Banking offices are operating under the United Community Banks brand. We have completed all the necessary training, and First National Bank is now fully a part of United. Because this was an in-market merger with significant branch overlap, we will be consolidating six bank offices -- three of First National Banks and three of United's -- during the third quarter.

When completed, we will have 13 banking offices and one commercial loan office in Eastern Tennessee, with a total of 108 banking offices throughout our footprint. At the time we announced the merger, our estimate of the annual cost savings was about $4 million. We are well on track to exceed that amount with anticipated savings to be fully realized in the fourth quarter.

I want to congratulate the United team and the First National team, which are now one and the same, for all the hard work that has gone into making this merger such a great success. They have worked together flawlessly, and we are now well-positioned and energized to move forward with the next transaction.

And that brings us to the Palmetto Bank merger. We have received all regulatory approvals, and our registration statement is now effective after having been reviewed and cleared by the SEC. Proxies were mailed to Palmetto shareholders last week. The shareholders' meeting date has been set for August the 12th, and closing is expected on September the 1st.

In last quarter's earnings call, we attached an investor presentation for the Palmetto merger. And this quarter, we added a summary page in the investor presentation. I want to highlight a few comments from last quarter to refresh the importance of this acquisition.

The Palmetto Bank is a high quality franchise in Greenville, South Carolina. It is a 109-year-old bank focused on community banking with $1.2 billion in assets. We will be adding 25 banking offices in upstate South Carolina, significantly expanding this fast-growing, highly attractive southeastern market. It greatly strengthens our existing base with bankers, including several executive officers and senior management.

Financially, it is meaningfully accretive. When fully phased-in for the cost saves by the end of the first quarter of 2016, it will enhance our return on assets and equity with high-single-digit EPS accretion for 2016, and double-digit EPS accretion for 2017. As noted last quarter, Sam Irwin will be appointed President and CEO of United South Carolina, and Lee Dixon will be named Executive Vice President.

Bottom line, this merger creates significant benefits for United, including meaningful EPS accretion, improved profitability, attractive internal rates of return, earn-back in less than five years, improved growth profile, and higher franchise value. I'm excited about both of these new partners and the tremendous opportunity they provide to expand and grow our footprint. We extend a warm welcome to both banking teams as they become important members of the United family.

Before we open the call for your questions, I want to provide an update on our outlook for the remainder of 2015. The earnings outlook remains optimistic. We look for loan and deposit growth to continue in the high-single-digit range. And we expect growth in our mortgage and SBA lending businesses as well.

We anticipate a slight decline in our margin due to ongoing competitive pressures on loan pricing. Loan growth should offset most of the impact of margin compression, leading to modest growth in net interest revenue. Expected savings from the First National Bank transaction should be fully phased-in by the end of the third quarter. Expense savings from the Palmetto acquisition will be realized in early 2016.

Excluding the effect of the mergers, we expect modest expense increases, but at a slower pace than revenue growth. Early in the third quarter, we paid a dividend of $40 million from our Bank to the holding company. And later this quarter, we plan to access the debt market to finance the cash portion of the Palmetto purchase price.

As you all know, the acquisition of Palmetto pushes us closer to the $10 billion mark. We believe we can keep under that limit through year-end 2015. If necessary, we can reduce our securities portfolio and wholesale borrowings. In fact, we believe we can even absorb another small acquisition before year-end and still remain below that level. Eventually, however, growth will push us over.

In summary, our second-quarter financial results are a reflection of the hard work and dedication of United bankers. They continue to execute our strategy, as they have done year after year. They make me proud every day to be part of this Company.

And one final note. We have scheduled an Investor Day conference for Thursday, October the 8th, which will be held in Atlanta. The conference will include presentations from our management team to provide a broader view of our businesses and growth opportunities. In the next couple of weeks, we will have additional information about the conference and registration process on our website under Events in the Investor Relations tab.

Now, we will be glad to answer any questions.

(Operator Instructions) Michael Rose, Raymond James.

I missed some of your prepared remarks, but I wanted to talk -- now that you guys have a kind of a 1% return on assets and have the other deal closing here soon, how should we think about kind of profitability as we get into next year and beyond?

Well, from the 1% ROA, Michael, which has been a goal of our Company and our team now for a while, and I'm very proud that our bankers have achieved that -- you know, I would say a 10% improvement, a 110% ROA would be our next milestone. And I think that's certainly achievable as long as we continue to execute at the current pace. And I think also added to that will be the closing of the Palmetto, once that is integrated and all the efficiencies realized. So, I think that's where we will be.

Okay, that's helpful. And then can you -- maybe this is one for Rex, but can you just talk about how you expect the margin with the deals to trend this year over the next couple of quarters, maybe on a core basis, and then with the accretion from the deals? Thanks.

Sure, Michael. I think a couple of things with it. When you look at their cost base with Palmetto coming in, as Jimmy indicated, the close September 1st, their deposit costs are averaging about 5 basis points; we are averaging around 17 basis points. So, there is a benefit there. But keep in mind their cost per quarter is about $130,000.

And even if that were to come up to our rates, you know, that's $260,000 a quarter. So, it shouldn't have too much of a negative impact, but it could have, as we look at adjusting rates with Palmetto back to ours, or bringing ours down a little bit in comparison.

When we blended it in and looked at their loans and deposits in our forecast, we see our margin holding in pretty close or coming down 1 or 2 basis points, Michael. I don't see it dropping down much more than that on a run rate on a linked quarter basis. And then going out to 2016, we see it holding.

And again, part of this is on loan growth assumptions we have built-in, as Jimmy indicated before, in the high-single-digits. So, we could see the margin expanding a little in a flat rate environment slightly into 2016.

And that would have to do on the loan side from some of your -- maybe some of your specialty businesses with higher yields?

Yes. And again, we are seeing more of a mix come in -- and Lynn could have this -- but seeing more of a mix come in with respect to floating rates in the specialized lending area. So, again, if rates do move up -- and, as Jimmy indicated, we are asset-sensitive. If you look at a 200 basis point ramp, just under 2%.

But again, our expectations, I think, like The Street, is that you probably have one increase and it holds for a while. And then maybe another increase in 2016. But it's not a ramp every quarter. The ramps are built on consecutive quarter increases of 25 when you look at it.

Okay, great. Thanks for taking my questions.

Kevin Fitzsimmons, Hovde Group.

If -- you guys touched on this when you talked about the outlook on the margin about the yield pressure. Can you dig into that just a little more? We've heard from a couple of banks over the past couple of days about how it's gotten noticeably more competitive, the pricing pressure, just over the past few months. And so if you can give us a sense on where you are seeing the most pressure, either by market or by loan type, that would be helpful. Thanks.

Yes. Let me make a -- Kevin, a couple of comments, and have Lynn comment on the business side of it. As we indicated last quarter, we did redeem some TruPS and repurchase agreements. That helped us offset some of the lower yields that we had on the loan portfolio dropping down 4 basis points. So, we've held steady at 330 compared to 331, benefited from some of the lower debt costs that we had.

We anticipate redeeming another $32 million late this quarter in TruPS. That will have a benefit of 2 or 3 basis points on a run rate, but that will be next quarter, because it would be late before we do that. But again, we still have the pressure, as Lynn can talk about in a second, just on competitive loan pricing. Or this might offset some of that on a linked quarter basis as we go forward.

But, Lynn?

Sure. Sure, thanks. And Kevin, clearly it's highly competitive. And in variable rate loans, we continuing to see probably another 5 basis points in compression this quarter over last.

I'm sure one positive thing is we are seeing less in long-term fixed rates. We were seeing a lot of that, even from larger banks. That has moderated. And, in fact, if I look at our funds transfer pricing yield quarter-over-quarter, which would take into effect fixed and term, we are actually slightly better this quarter than last. So, it's clearly very competitive. I wouldn't want to say anything else, but I don't see it dramatically accelerating from here.

Okay. And Jimmy, just a follow-up for you. You mentioned how you guys would still be able to be open to a small deal while going through Palmetto and going through the integrating of it. Can you talk about if -- I would assume that it would have to be the real -- the right market, the right situation. What kind of markets would really be high on your priority list if something did come up? Thanks.

Sure. Really, Kevin, it's the same markets that we have talked about for some time. Certainly, our bias is in the Metro markets today.

You know, when I did mention that the last earnings call that we had put a self-imposed time-out, that was due to the fact that the FNB and Palmetto had just come onboard. What we really wanted to do is to first close FNB and obviously that's complete. Second, and very important, was to get that integrated into the United system. And as of last weekend, that is complete and has been successful.

Now, of course our attention will focus over on the integration of Palmetto and certainly the close. You know, it would need to be a very compelling transaction. It needs to be the right bank in the right market, financially compelling, low risk; one that would not take our eye off the ball with Palmetto, with the bias toward the Metro markets.

Okay. And when would Palmetto be -- I know it's going to close 9/1 -- when would the conversion take place?

The integration should have occurred at least early in Q1. Could it come earlier than that? That's a possibility. That will be firmed up over the next 60 days.

Got it. All right, thanks, Jimmy.

Jennifer Demba, SunTrust.

Just curious, can you give us a little more detail on the kind of growth trajectory you are expecting in some of these fee income line items, like mortgage and SBA? And also, Rex, just wondering what you are thinking about in terms of the tax rate going forward? Thank you.

Yes. Lynn?

So, Jennifer, on mortgage, we've continued to invest in producers, as we've talked about. So, obviously, that paid off big this past quarter. It's very hard to get visibility in the mortgage business beyond about one quarter. And so I would say we feel very good about the third quarter. And again, we have new producers that are just coming online, so we would expect to continue to see some growth beyond that.

In the fourth quarter, we would expect to be in a not-as-hot, just because it's the normal seasonal slowdown. But again, so we feel very good about that.

On the SBA side, as you noticed, as Jimmy mentioned, we did not sell as much of our production this quarter as we did in the prior quarter, which has been part of our strategy. Fundings were up pretty significantly, right on line with our plan and budget. And so we would expect to see the same kind of growth in the third quarter that we showed this past quarter. So again, feel very good about that.

Brokerage, it looks like it's down, which I mean, it was down quarter-over-quarter, but we had a large campaign in the first quarter. And so we had a really outsized performance in the first quarter. And we've just started adding some additional producers in brokerage, and so we would expect that to start paying off probably in the fourth quarter. So again, just -- we would expect continuing same kind of growth we are showing because of the investments we've made.

And probably just the other comment, Lynn, on fee revenue within the tax rate. And fee revenue and other fee revenue, you'll see that up on a linked quarter basis. And that is primarily driven by our customer swap program that we have with our commercial loan customers out there. It's about $0.5 million in the quarter, so it's up about $300,000 on a linked quarter. So very solid performance for that.

On the effective tax rate for the quarter, it's slightly over 38% -- 38.2%. That's really driven again by the mix of some of the merger charges coming in, some not deductible. But on a prospective basis, we've been averaging around 37.8%, 38%, 37.8% or 38%. We should be in that same range prospectively. And we might have some other, again, adjustments in Q3 because of merger charges coming in on that. But that's kind of the run rate, Jennifer.

Thank you very much.

Jefferson Harralson, KBW.

I'm going to follow-up on Jimmy's question on the SBA specifically. You got to $34 million you said on the SBA loans originated. And do you think that -- are we -- I guess when do we get to a full ramp here? Is it at $40 million? At $45 million? At $50 million? With the investments you've made, what can you say about what kind of run rate originations that you expect to get to?

Yes. So, the third quarter, we would expect to be up from where we were in the second quarter by an equivalent amount of where our growth in the first quarter. And as we look at fourth quarter, historically, fourth quarter is a strong quarter for SBA. And so, a little additional growth in the fourth quarter. We're pretty much in a full complement of staffing so, again we feel very good about the team and very good about their ability to put those numbers up.

All right. Thanks, guys.

Thanks, Jefferson.

Nancy Bush, NAB Research.

I have two questions for you. The first one, Synovus had some very positive comments about the Atlanta market yesterday, both the demand side there, but also we are very cautious about the competitive side. They said that competition has flocked back in. And I wanted to just get your view of the market, how you are competing there? Are there any segments where you think you are moving market share? And are there any segments where you've just decided that competition has become too crazy?

We also like the Atlanta market. As we mentioned, earlier in the year, we opened actually up a new region in that kind of mid -- middle Atlanta area. And we continue to add to the team there.

Yes, it is very competitive. Every market we are in is extremely competitive. We are very focused on the small end of the commercial side. Also, we have some specialized lenders there in Atlanta that work a team together with the branches, particularly -- specifically in SBA and commercial real estate.

So, you know in our mind, it is a very attractive market. We don't see the competition there any more drastic than in Savannah or Knoxville or Greenville. And we're just trying to compete with hiring the best -- I mean, it sounds trite, but the best bankers that we can, and letting them bring their relationships over. And that's kind of what we are focused on.

Are you big enough there yet to really be moving any market share that you can see? Or is that yet to come?

That's really hard to say in terms of -- we are growing there. In terms of picking up dramatic market share, I don't know that we are going to -- we are large enough to move dramatic market share, but we are clearly growing there. And we feel very good about continuing to grow.

Jimmy, I don't know if you've got anything additional there.

Sure. Well, you know the beauty of that is, certainly a little bit of market share growth there has a significant impact on our Company. I would say that the opportunities that we are seeing today are significantly more than just a few quarters ago.

I think Atlanta particularly was a little slower with getting traction in our economy, though I think that is making a nice progress. It's still a very dynamic market; some very large corporations. We continue to see expansions, new companies moving in. I've seen more cranes in Atlanta today than I have in years.

So we are very optimistic about the market. Our goal today is to slice off a little piece of that -- the dynamics there. And I think that will have a significant benefit to the growth. And we've been able to continue to add to a very capable team. So, that would be my comments, Nancy.

Okay. Secondly, you know, as you approach the $10 billion -- sort of the magic $10 billion mark, I mean, as you say, you probably will be under at year-end. But I mean, inevitably, you are going to cross it, so -- and maybe cross it significantly.

So how are you thinking about that change from under to over $10 billion, how you have to ramp up for that? Do your compliance costs, then, after $10 billion, sort of go up exponentially? And what do we expect as you guys grow, I guess, is the bigger question?

Sure, Nancy, let me give you a little bit of color and maybe some of our thinking in regards to that $10 billion. Once again, we will not cross the $10 billion in 2015. Today, I do believe there is a good probability that that would occur in 2016. But suffice that to say that we still have some flexibility with our securities portfolio in helping to manage our sales underneath that.

But here is what we do know specifically. After the Palmetto closes, the Durbin impact is going to be somewhere in the $8 million to $9 million range. The FDIC insurance assessment will be in the $1 million to $2 million range. So we know that absolute. Again, we will not exceed that in 2015.

Now, assuming that we do cross that landmark in 2016, our Durbin effect will not go into force until 7/1/2017. Of course, by the end of 2017, the DFAST also gets ramped up. We have been adding to the compliance arena for some time. We probably will add a few more but not a significant cost, because we've been investing in that now for almost two years.

Currently, we are working on plans to help offset this additional cost. It includes cost saves. It includes revenue enhancements, it includes acquisitions. Now, in regards to the acquisitions, would it take the shape of three or four banks in that 18 to 24-month period that would [fall in our will house] of say $500 million to $1 billion? That's a possibility. Or a bank of $2 billion or $3 billion in size that would help to cross that in a more meaningful way.

Today, I can't answer that specifically on the M&A, because we have very specific criteria that we will not deviate from. But clearly, we understand where we are, the cost associated with it, and where we need to go. Did that help?

Yes, there's a plan there. All right. Thank you very much.

Sure.

Matt Olney, Stephens.

Within operating expenses, I believe in your prepared remarks, you said what the contribution of the recent acquisition was. Can you repeat what that was in the second quarter?

The contribution, Rex, of the FNB transaction?

Are you asking on the revenue side? Is that --?

No, I'm sorry. Just on the expense side.

Oh, okay.

Yes, the expense side is roughly about $1.7 million of expenses with FNB in the quarter for two months. That's pretty much the run rate we anticipated. If you go back early, you have to go to our call reports, they've been running about $900,000 a month in Q1. So the run rate has come down a little. And again, as we've indicated, we expect to get 35% or 40% savings by Q4 in that run rate by going into Q4, with the conversion completed as well as going through the balance and everything and the consolidating six offices in August.

So, as we look to fully integrate that in the third quarter along with partial impact of Palmetto, any range you can give us in terms of what we should be expecting for operating expenses in 3Q?

If you look at they just released this morning, Palmetto did. And again, on a monthly basis, they're about $3.2 million or roughly $9.5 million a quarter. The $10 million is their run rate right now and they just released this morning. So you have about one-third of that hitting in the third quarter, Matt, because again, with conversion, we won't get the savings until we get closer to conversion. And that run rate will continue in the fourth quarter as far as the expense line is concerned.

And then just legacy, the legacy bank, any material change in expenses in third quarter?

Not any material changes on the run rate. It will be fairly consistent. There are some little ups and downs when you look at it on run rates, advertising aside, because of customer appreciation. Professional is a little high with some initiatives. Some of those will move around coming into Q3 but not a significant move.

Sure. Okay. Well, that's helpful, and that was my only question. Thanks, guys.

Thank you.

Thank you.

Christopher Marinac, FIG Partners.

Jimmy, just to go back to your -- that point about the 2017. So, if you cross over $10 billion, then there's no financial impact on 2016. It's all beginning in the second half of 2017. Just wanted to clarify that.

That's correct. Yes, Chris.

Okay, great. And my original question was on the refi business on the mortgage side. Should that percentage change much as the third and fourth quarter develop? And will the purchase number naturally grow as you continue to execute there?

Yes, we would expect -- we've got -- the purchase business has continued to grow as a percentage. And we expect to continue to see that happening.

Okay. And then back to the SBA business. Would you expect any changes from the program? And as you get deeper in this business, I mean, would there be any shifts in terms of where emphasis comes from Congress? Or would you imagine it's just status quo in the program in general?

So there is a possibility, just because it's tied to overall government funding, that there could be a time-out in September, potentially. All of our information dealing with contacts on the Hill, there is no doubt that it will be funded. But there may be a 30-day hiatus. We've gone through that many times before. We are executing a plan now to go ahead and get our approval numbers in before the August -- they're -- right now, it's fully funded through the end of August.

So we don't think it's going to have any impact on our business. And we don't see any significant changes in our program. It's got a lot of support on the Hill. And again, we feel very good about where it's going and the business itself.

Well, there's a fact that you didn't sell certain loans this quarter. Did that flexibility kind of give you an option if that scenario occurs?

It does.

Okay, great. Thanks for the color, guys.

Thank you.

Thanks.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Jimmy Tallent for any further remarks.

Thank you, operator. And let me say thank you all for being on the call today, as well as your interest in United Community Banks. As a reminder, the Investor Day that's scheduled for October the 8th there in Atlanta, we hope that you are able to take advantage of that. And hope to see there.

And also, to our team, our United team, once again, just a huge thank you for your continued support and execution in driving this Company to a level that we all desire. I'll just thank you for your continued support.

With that, I hope all of you have a great day, and look forward to talking to you at the end of the third quarter.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect.