Union Bankshares' (UBSH) CEO Billy Beale on Q2 2016 Results - Earnings Call Transcript

| About: Union Bankshares (UBSH)

Union Bankshares Corporation (NASDAQ:UBSH)

Q2 2016 Results Earnings Conference Call

July 22, 2016, 9:00 am ET

Executives

Bill Cimino - Director of Communications

Billy Beale - President, Chief Executive Officer, Director

Rob Gorman - Chief Financial Officer, Executive Vice President

Jeff Farrar - Executive Vice President of Wealth Management, Insurance and Mortgages

Analysts

William Wallace - Raymond James Financial Inc.

Catherine Mealor - Keefe Bruyette & Woods Inc.

Austin Nicholas - Stephens Inc.

Laurie Hunsicker - Compass Pt Rch & Trading LLC

Blair Brantley - BB&T Capital Markets

Presentation

Operator

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. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions].

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

Bill Cimino

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 for 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 calls which are subject to risks and uncertainties. A full discussion of the company's risk factors are included in our SEC filings. At the end of the call, we will take questions from the research analyst community.

And now I will turn the call over to Billy Beale.

Billy Beale

Thank you Bill and good morning everyone. Since our acquisition of StellarOne in February 2014, this is the quarter that showed up the results that we have been looking for and expecting. The road to get here has been a longer than we anticipated, but when you look at the results of double-digit loan and deposit growth, a 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 are 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 have 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 were able to bring over a team of experienced lenders to start at 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 nonperforming 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 continued. In the second quarter, we closed five branches and opened a new standalone 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 noninterest income. Our acquisition of Old Dominion Capital Management, a registered investment advisor 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 directive and a 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 noninterest income.

Our mortgage team delivered its most profitable quarter in more than two years. This improved financial performance was a result of the continued focus on operational 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 sales force over the second half of the year and take advantage of favorable market conditions to grow its 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 am more excited than ever 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.

Rob Gorman

Well, 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 was $19.3 million or $0.44 per share. That's 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. Return on tangible common equity was 11.6%. That's up 150 basis points from the 10.1% recorded 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's 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 tax equivalent net interest income of $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 two 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 eight basis points to the core net interest margin in the second quarter. That's up two basis points or $256,000 in 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 of 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 remain 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 rates in 2016 and that the current flat yield curve conditions persist over the medium-term calls for margin compression of three to four basis points in the third and fourth quarters of 2016 and into 2017 and that's primarily due to declining earning asset yields we expect. If the Fed were to increase the Fed fund's rate earlier than our forecast of late 2017, we would expect our baseline net interest margin forecast to improve by approximately three to five 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's 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 levels due to 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.

Noninterest income in the second quarter was $18 million, up nicely approximately $2 million from the $16 million in the first quarter and that's primarily driven by the higher mortgage banking income of $826,000, also higher customer related fee income of $477,000. Increases in loan related interest rate 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.

Second quarter noninterest expenses increased to $55.3 million. That's up from $54.3 million recorded in the first quarter. Expenses related to investments the company is making in our teammates, in 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 amounts 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 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 close 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 nonrecurring 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 investment 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's 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. Nonperforming 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 owned balances. Nonperforming assets as a percentage of total outstanding loans were lower by six basis points and now stands at 41 basis points and that's a decline of 17 basis point from the 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's down three basis points from March 31 levels as a result of continuing improvements in asset quality and lower historical loss rates. The allowance now covers five times annualized second quarter net charge-offs as compared with four 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's lower by 27 basis points from 8.86% at March 31, primarily a 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 quarter end. 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 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 will turn it back over to Bill Cimino, who will open it up for questions from our analysts.

Bill Cimino

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

Question-and-Answer Session

Operator

[Operator Instructions]. Your first question comes from the line of William Wallace. Please go ahead. Your line is open.

William Wallace

Thanks. Good morning guys.

Billy Beale

Good morning Wally. How are you?

William Wallace

I am good. Thank you. My first question, maybe just jump straight to the expense line. Last quarter, in my notes, we were talking about $53 million run rate on expense. So maybe I got the timing wrong, maybe can we talk a little bit about that commentary from last quarter and if that's changed moving forward? Is it just a timing situation or what?

Rob Gorman

Well, this is Rob. Yes, there is a couple of issues going on there. Part of it is the timing issue. I think we said we would eventually like to see our run rate get to that level, but we might have some lumpiness in the quarters as we have been making some investments as we noted in risk management, technology and operations areas, as well as the things like DFAS 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, out thought is, it would probably be in the $54.5 million to $55 million level over the next couple of quarters, probably higher in the third quarter, coming down with some of the savings we expect from the branches and run from $54.5 million level after that.

William Wallace

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

Rob Gorman

Yes. Well, again some of that relates to some projects that we will mitigate over time, but yes, probably more. In addition of the Old Dominion and the LPO, it's a bit higher, about $1 million, less than $1 million.

Billy Beale

Both of that are strategic initiatives that weren't in our commentary [indiscernible].

Rob Gorman

So that's kind of bulk of the increase.

William Wallace

I thought we knew about the asset management business.

Rob Gorman

Yes. But that wasn't in the $53 million trajectory, or the $53 million to $53.5 million projection at that time.

William Wallace

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

Rob Gorman

Yes. A lot of that relates to our project, the readiness for $10 billion across our enterprise risk management group as we increase of diligence around that and build our structure around that. DFAS 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 really, it's related to the readiness for $10 billion that we are making investments there.

William Wallace

Okay. And then, last one. On the expense line. you had mentioned that you thought the OREO and related costs will be in the $500,000 to $750,000 range and this quarter it was $900,000. Are we really behind --

Rob Gorman

We are not coming off with that. It's kind of lumpy. We had some seasonal increases in payroll. So on average, we are looking at $500,000 to $750,000 and I think our average to-date for the first two quarters was $750,000.

Billy Beale

And we had taxes in the second.

Rob Gorman

So we expect that to come down in the third and out quarters.

William Wallace

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

Rob Gorman

Yes.

William Wallace

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

Rob Gorman

Well, it hasn't 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's really going to depend on what the customer preference is going forward and how they view the interest rate cycle. But I would not expect that we would continue to see the levels that we are seeing. It's kind of volatile and really depending on a deal-by-deal basis.

William Wallace

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 balances, you continue to release reserves as far as reserves to loans are concerned. At what point should we expect that that reserve ratio will flatline?

Rob Gorman

Yes. The way, of course, 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-too-distant future, you will be seeing that stabilizing in the 90 basis points or so range, depending on our loan growth.

William Wallace

And have you changed any of your qualitative factors?

Rob Gorman

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

William Wallace

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

Rob Gorman

Thanks Wally.

Billy Beale

Thanks Wally.

Bill Cimino

And Heidi, we are ready for our next caller please.

Operator

Certainly. Your next question comes from the line of Catherine Mealor. Please go ahead.

Catherine Mealor

Thanks. Good morning everyone.

Billy Beale

Good morning Catherine.

Catherine Mealor

So this is more of a big picture question. The Charlotte LPO, how does that, in terms of entrance into North Carolina, does that change your M&A appetite? Historically, I have viewed your M&A strategy as more of a Virginia and maybe D.C., kind of Hampton Roads, focused strategy. And now you are coming down to Charlotte. Does that put some franchises in North Carolina on the table for you? Or is this more just an opportunistic transactions to get loan growth in that market?

Billy Beale

Well, let me reiterate what I thought we had 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. An opportunity in North Caroline is a possibility, let me put it that way.

Catherine Mealor

Got it. That makes sense. And 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? I guess I am changing my question.

Billy Beale

I would say that would be more of an intermediate to longer term, however you want to figure that.

Catherine Mealor

Okay.

Billy Beale

I would say something in the 2.5 to three or four or five year range.

Catherine Mealor

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 around what's changed over the past couple of quarters that's really driven the growth? How much of it is, you just kind of got the team back together and now they are working on four cylinders and you are getting that? Or is it that the market is bringing you more products? Is it that there has 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?

Billy Beale

Years?

Catherine Mealor

I will give you one year. I will say 2017.

Billy Beale

Well, 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, net job growth was 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 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 have been a lot of commentary over the last few years about our loss of loan officers and how we replace 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 third one 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 dollars, but we are seeing diversified growth from Fredericksburg, our Hampton Roads area, a 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 pure C&I lending. So that part is all good. So I am pretty happy with both the geography and the credit concentration diversity.

Catherine Mealor

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

Billy Beale

And you asked about for the next two years.

Catherine Mealor

I am just trying get at the sustainability of it.

Billy Beale

Well, based on our pipeline reports. I think it's 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.

Catherine Mealor

Thanks again. Now 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 price as an opportunity to maybe pull back on the buyback and then 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?

Rob Gorman

Catherine, this is Rob. I think you would to see a pullback in the repurchases going forward based on the level of the stock price. As you know, we have got different criteria in terms of level of buyback depending on where the stock price is based on the return we expect on the buybacks. So you can see that in the first quarter we bought back a 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.

Catherine Mealor

Okay. Great. Thank you. Great quarter guys.

Rob Gorman

Thank you.

Bill Cimino

Thanks Catherine. Heidi, we are ready for our next caller please.

Operator

Certainly. Your next question comes from the line of Austin Nicholas. Please go ahead.

Austin Nicholas

Hi guys. Good morning.

Billy Beale

Good morning Austin.

Austin Nicholas

Just on the mortgage business. It was good to see the profitability in the net business line. How are gain on sale margins trending in 2Q and then maybe other looking so far this quarter? And 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?

Jeff Farrar

Austin, this is Jeff Farrar. Good morning. I would say that margins are very strong right now. I think that is somewhat of a byproduct of the market that we are in, but it's also about product, just stronger management around pricing and I think our team has done a nice job of continuing to build that. So we are seeing some of the best margins we have seen in years. We would expect that to at least 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 haven't seen the refi top itself with the tenure going down as it has. Of course it's rebounding now, but the good news is that we are seeing really good growth and purchase money. We are seeing some good growth in construction. Our pipeline is as strong as its been in some time. So I think that bodes well for the second half of the year. From an LO perspective, we are still behind that goal relative to hiring. The average production per LO is up nicely. I think we are over $1 million for the second quarter in average LO production. So that's strong. That's in line with our goal. But I would that I would temper expectations around production from the 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 we are not happy where they are at. But all in all, I think we fell very good about the second half of the year from a sustainability standpoint and we will continue to look hard to try to leverage the business and provide some incremental profitability.

Austin Nicholas

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

Rob Gorman

Yes. Austin, this is Rob again. Yes, we have not really seen a whole lot of pressure on the competitive perspective on rates and expectations from customer base. So I wouldn't expect 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.

Austin Nicholas

Okay. Yes, that's helpful. And then maybe just looking at the Richmond market. Are you seeing any, I guess loosening or I shouldn't say -- are you seeing any reduction in pricing pressure given some of the disruption there and maybe some changes that are being made at some of the larger banks that are there in the market there in Richmond?

Billy Beale

No. We have talked in, I would guess in 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 seen in 2015. That has abated and pretty much has been that way most of this year. As it concerns the big banks and this is really no different than it's 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 to, it seems to be, willing to sacrifice their margins in this environment for growth. 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 rate that there was a year ago.

Austin Nicholas

Got it. Thanks Billy. That makes a lot of sense. That's all my questions for now. I appreciate it guys.

Billy Beale

All right. Thanks Austin.

Bill Cimino

And Heidi, we are ready for the next caller please.

Operator

Certainly. Your next question comes from the line of Laurie Hunsicker. Please go ahead. Your line is open.

Laurie Hunsicker

Yes. Hi. Good morning gentlemen.

Billy Beale

Good morning Laurie.

Laurie Hunsicker

I wanted to go back to expenses for a minute here and I guess where Wally was starting as far as the $53 million. Obviously, I get that 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 sort of $2 million gap in $55 million or so quarterly run rate. Is that primarily the $10 billion asset threshold spend? Is that the difference?

Billy Beale

Yes. So the way I would look at it is, as you know we were at $55.3 million this quarter and we had several reasons for being above that. As we back out, there are things like potential cost savings or the savings that we are going to get from branches for next quarter we are adding closing costs for the branches. The LPO, Old Dominion adds about $750,000 to the run rate and then the rest of it is project related investments that we are making. In addition, some of that run rate is not all project related, we also are adding some new positions across our IT ops risk management areas in addition to some investments we are making to both management area and the commercial area in the LPO's opening. So it's basically a combination of those things, Laurie.

Laurie Hunsicker

Okay. Or maybe let me ask it in 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 DFAS, that you spend?

Billy Beale

Yes.

Laurie Hunsicker

Any framework around that that you could share with us?

Billy Beale

Well, as we have mentioned, we were talking about investing in IT and ops last quarter, investment in enterprise risk management and investing in risk management related to the DFAS 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 the projects are done. It's probably $2 million or so, to a little over $2 million is already in. The technology investment is probably about, call it third to half way there, which was another $2.5 million on a full run rate basis. And then DFAS is just starting. So $600,000 or $700,000 related to that and that has not been fully baked in yet.

Laurie Hunsicker

Okay. Great. Super.

Billy Beale

So I guess you would think about $4.5 million in run rate increase would probably close to half way there.

Laurie Hunsicker

Okay. That's very helpful. Thanks. Okay. And then just going back, circling back to Catherine's question on M&A and I am going to put on the spot a little bit and I don't mean to, but per your annual shareholder side deck in May, that you would be $13 billion to $15 billion by the end of 2018. Is that in terms of an unannounced deal? And then can you also to 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 FNB's purchase of Yadkin. What is the sort of 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 think you can help us understand?

Billy Beale

Are we also going to debate how we model it?

Laurie Hunsicker

You mean ---

Billy Beale

You have different opinions than we do on that.

Laurie Hunsicker

That's true. I will tell you what. If we just talk about how you guys think about it, that would be helpful.

Billy Beale

In terms of how we do it or the calculation?

Laurie Hunsicker

Well, maybe just starting so $13 billion to $15 billion by the end of 2018. That suggests that you are going to a pretty, like a $3 billion, $4 billion, $5 billion asset bank acquisition and obviously the stars -- there are certain things that have to happen right. I get that. But assuming that, it seems like it's very much on the plate. You are halfway there on your $10 billion asset spend. So is that a realistic goal? And how do you think about dilution?

Billy Beale

Well, I think it's a realistic goal, which you are correct, the stars have to align and I think there is plenty of examples of other banks in the marketplace that probably had that same strategy that we did or we do and had 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 for, EPS accretion. And then the other is, as we want to keep our tangible book value dilution less than three years, I think the only time during our acquisitions that we had exceeded that would have been the StellarOne acquisition where we were right on top of five years, but we felt that we had ROI above 20%, we had an EPS above 6% growth and we felt like the strategic nature of it allowed us to deviate from that. But typically, we are going to want to keep our tangible book value dilution less than three.

Rob Gorman

And I will just add --

Laurie Hunsicker

And that's using that crossover method, is that correct?

Rob Gorman

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

Laurie Hunsicker

Okay.

Rob Gorman

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's the magic number. So staying inside of that. So we would be looking at it both ways knowing that the marketplace maybe looking at it that way.

Billy Beale

Yes. And the other thing I would point out, if we were able to sustain upper single-digit asset growth, we will cross $10 billion organically sometime between, I will say, mid-year 2019 to mid-year 2020 at this stage, depending upon how that works out. So it's 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.

Laurie Hunsicker

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

Rob Gorman

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, it might be a bit excessive.

Laurie Hunsicker

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 is going to be upwards of $7 million and we are 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's fantastic, you are going to continue on your path? How do you think about that?

Billy Beale

Well, I will speak as best as 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, the management and the Board make the decision to, 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 to all this work and then look for a partner.

Laurie Hunsicker

Okay. Great.

Billy Beale

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

Laurie Hunsicker

Great. Thank you.

Bill Cimino

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

Operator

Certainly. Your next question comes from the line of Blair Brantley. Please go ahead. Your line is open.

Blair Brantley

Good morning guys.

Billy Beale

Good morning.

Blair Brantley

Most of my questions have been asked. I did want to go back to your thoughts on the margin in your investment security book and those yields. Obviously those yields went up a little bit this quarter and balances went up. I am just trying to get a sense of what you guys are buying these days and what your thoughts are around that, given the pull back in rates?

Rob Gorman

Yes. We really haven't changed our investment securities portfolio strategies. We are still continuing to investment in a barbell approach, municipalities on long end and mortgage backed securities on the front end. So we are still around the 60/40 level. We probably go on a bit above the 40% level and gone into municipalities a bit heavier than we had in the past, not materially but that helps stabilize the yield on the investment portfolio. And then we have also added a few select sub-debt or core debt kind of the investments, but not a lot of money, I think we are at about $40 million to $50 million worth, which has a bit higher yield than debt. We have invested in knowing the credits pretty well.

Blair Brantley

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?

Rob Gorman

Yes. That's more of a timing at the end of 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 core 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 kind of a timing and then loan growth outpacing deposit growth for a period of time.

Blair Brantley

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?

Billy Beale

No.

Blair Brantley

Okay.

Billy Beale

I would say, it took us almost a year or 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 first quarter 2015. So we haven't gone up. Think of it this way, I am not seeing anything come across the desk that's any larger than what we have looked at over the last 18 months.

Blair Brantley

Okay. That's very helpful. Thank you.

Billy Beale

Thanks Blair.

Rob Gorman

Thanks Blair.

Bill Cimino

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

Operator

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