Good morning. My name is Jonathan and I will be your conference operator today. At this time, I would like to welcome everyone to the Union Bankshares' Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Bill Cimino, you may begin your conference.

Thank you, Jonathan, 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 Tony Peay, EVP and Chief Banking 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 Web-site, 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. Now I'll turn the call over to Billy Beale.

Thank you, Bill, and good morning everyone. Thank you for joining us today. During the third quarter, we continued our solid progress toward delivering on the strategic objectives that will enable Union to deliver top tier financial performance for our shareholders. We are working diligently on several fronts to capitalize on the organic growth opportunities we see in our markets and one area where we are keenly focused is on building deeper relationships with our existing retail, commercial and wealth customers, and mortgage customers to better cross-sell within our lines of business but also across our lines of business. In addition, we are making significant investments in our technology platform and re-engineering several of our internal processes to support our growth goals and to help us become a more efficient company. All of this work is being built on a foundation of a high performing culture that remains focused on delivering an outstanding customer experience. With that as a backdrop, I want to take a few minutes to comment on the rationale behind the decision to sell our credit card portfolio of $26 million in loans and enter into an outsourced partnership solution with Elan Financial Services. As I noted earlier, one of our strategic goals is to deepen our relationship with our customers and increase our share of wallet. In order to accomplish this, Union must offer competitive financial services, products and solutions to our clientele. A little history. In the 1980s, Union made the decision to enter into a partnership agent relationship with the Independent Community Bankers Association credit card program which partnered with what is now today [FIS] [ph] or [indiscernible] Information System. In the 1980s, the ICBA plan offered us differentiation from our community bank competitors. Over the last two decades, as cards have evolved, our…

Thank you, Billy, and good morning everyone for joining us this morning. I would now like to take a few minutes to walk you through the details of our financial results for the quarter. Please note that all comparisons to five-year periods are to operating earnings or operating ratios, which exclude after-tax expenses associated with our StellarOne acquisition that we incurred in 2014. Earnings for the third quarter were $18.2 million or $0.40 per share, up approximately 18% from $14.3 million or $0.34 per share in the second quarter. The community bank segment earned $18.2 million in the third quarter while the mortgage segment reported net income of $59,000. Return on tangible common equity increased to 10.7%, up from 9.2% in the second quarter and also up from 9.8% from the same period last year. Return on assets came in at 96 basis points this quarter, up 13 basis points from the prior quarter and an increase of 9 basis points from the third quarter in 2014. Our efficiency ratio declined to 64.7%, which is down from 67.1% in the second quarter and down from 69.7% in the prior year's third quarter. Excluding the impact of branch closure cost incurred during this year's second quarter, our efficiency ratio declined approximately 9 basis points. Turning to the major components of our income statement, tax equivalent net interest income was $65.7 million. That's down $400,000 from the second quarter driven by lower earning assets yields. The current quarter reported net interest margin decreased by 11 basis points to 3.86% as compared to 3.9% in the previous quarter. Accretion of purchase accounting adjustment to loans, TDs and borrowings related to the StellarOne acquisition added 9 basis points to the net interest margin during the third quarter. And for your reference, actual and remaining…

Thanks Rob. Jonathan, we're ready for some questions now.

[Operator Instructions] Your first question comes from Catherine Mealor with KBW. Please go ahead.

Wondering if we could dig into the margin and outside of the credit card portfolio coming out, help us think about the direction of the loan yields moving forward. Can you talk a little bit about where new loan yields are coming on and where they are coming off and is that gap narrowing or do you see that gap widening as it remains really competitive in the [indiscernible] market?

This is Rob. We are projecting – we've been suggesting 2 to 4 basis points on a core basis. Obviously this quarter was more than that. Going forward [where we can see the compression] [ph], we think that's on the higher end of the 4 basis point level going forward on a quarterly basis. We're seeing loans coming in – new loans, renewed loans coming in at above the 4.50 range. Obviously portfolio yield is 4.50, 4 before this quarter, 4.41 in the current quarter, so our projection is to be on the high end of margin compression going forward unless we see some rate movement, higher rates going forward, which we don't project at this point.

So all else equal, next quarter we should probably see another 4 bps decline in the margin and then another 3 to take into account the credit card portfolio, so 7 in total?

That's right, yes. So my comments primarily excluded the impact of the credit cards, but yes, that's 3 basis points or so [from a margin] [ph], but on the credit card portfolio ought to be, because of noninterest expense [indiscernible]. If you look at it from a net income perspective on credit card, it will be accretive or positive, yes, but on the margin itself it will be below that margin.

Got it, okay. And then one thing on the mortgage side, the mortgage expenses declined, I think it was about 7% linked quarter. Are you done with the expense initiative that you had in place in the mortgage company, and so from here it's improving profitability in the mortgage company more about hiring more originators and really getting more operating leverage or do you have additional cost savings left to take in that segment?

It's Jeff. I would tell you that for the most part it's the latter. It's a case of leveraging back up a low base on an infrastructure that we have worked hard to get our arms around. There are still some opportunities from cost standpoint. I think the biggest one is on the lease cost. We still have some facilities that aren't significant in terms of cost to us that we are trying to sub-lease, one in particular which is the old operation center in Annandale. So there are still some opportunities there that are more one-off. I think that in terms of just the operations, we are still fine-tuning if you will metrics around fulfillment. We added a number of underwriters who are still kind of developing if you will their ability to be efficient in terms of how we underwrite credit. It's a little bit of a culture shift given where we hired some of these underwriters, and so we have still seen some inefficiency with respect to underwriter group. And there are still some pockets for opportunity around cost savings and efficiency, but by and large it's a top line strategy to add LOs and add leverage to what we have.

Great, thank you for the color.

Let me ask Jeff [indiscernible] about mortgage, do you want to go into any of the impacts of [indiscernible] in what we have seen so far both from sort of an acceleration of [indiscernible] prior to October and then sort of some of the processes of moving things through [indiscernible]?

Yes, sure. I would tell you this, I think what we have experienced is not unlike what the industry has experienced. It's still a ramp-up and application activity prior to the implementation. We have also experienced a dampened or distorted activity around application post [indiscernible] be like a lot of folks who moved a lot of [periods] [ph] out, so we are at 45 days [on a lock minimum] [ph], and again I think the industry has kind of travelled that trail as well. So far so good on trade, I think we had a good initial implementation. We are doing a lot of back testing right now to make sure we feel good about the conversion. I think there are still have to get learned [indiscernible] to the secondary market that are under the trade disclosure requirement, so I think we are still in a wait-and-see mode [indiscernible] to the implementation and won't really know how well we did until we [indiscernible] investors. We have certainly seen some impact on application. We are down, if you look at average apps end of last quarter versus this quarter, some of it is seasonality but we think some of it is [indiscernible] related. We are down probably 20% on average [indiscernible]. That will have some impact if you will for production in the fourth quarter if that holds. So all in all, that's kind of what we have experienced with trade.

Thank you, Jeff. Jonathan, we're ready for our next question please.

Your next question comes from William Wallace with Raymond James. Please go ahead.

While we are on the subject of mortgage, Jeff, maybe I could ask a couple of follow-up questions. In the press release, there is mentioned some losses relate to mortgage banking derivatives. Is that related to hedges?

No, it's simply the interest rate locked directives. So as we measured the fair value of that locked portfolio, as volumes come down, I think you will see a lot of – you have to pull back on the fair value function or fair value class relation of the share with interest rate locked derivative. Margins are also a component of that. So to the extent that we start moving from a refi market to purchase funding market, we would expect some pressure on margins and that also is a major function as we put that interest-rate lock derivative. So it's a non-cash item. Obviously it's a fair value adjustment but certainly has earnings impact and when you are operating, in essence a breakeven like we have the last couple of quarters, any move obviously has to impact to absorb what we did this quarter, feel pretty good about where we are. It could be more impact in the fourth quarter from the interest rate locked derivatives since what we have seen [indiscernible] right now, but I don't think it will be material to the overall performance. It could put us in a loss for the fourth quarter if the interest rate locked derivative pulls back, but I don't again think it will be material in the sense [indiscernible] would be much improved than what we were this time last year.

Okay thanks. And then a follow-up, if I was reading the text correctly, it sounds like there was some increase to the reserves for the reps and warrants. Did I read that correctly?

Could you repeat that?

Reading the text on the segment and the release, it sounded like maybe that you were increasing the reserves for the reps and warrants.

This is Rob. We actually had pulled back a bit in the second quarter. So when you looked at it quarter to quarter, it was an increase in terms of that reserving. So I think that's how you should read it. It's nothing unusual going on there.

Okay, so it wasn't for any specific credits or anything, it was just production related?

Yes, exactly.

Okay thanks. And then can you tell us about the muni that you guys impaired?

Of course every quarter we look at our investment portfolio for other than temporary [indiscernible] analysis regarding that. We did have one municipal security identified and based on our analysis and the pricing of the market there was a general negative – [indiscernible] analysis but those are components that went into it and we needed to take [indiscernible] and it will be about 30% [indiscernible] on that and decided it was other than temporary as credit related and we took that loss.

This is Virginia municipality or is that outer state?

It's outer state, it's actually kind of Ohio based municipality.

It's been on our, if you would, watch-list for a while.

Yes, it was put on Moody's for negative watch and looked at the pricing of that and find that it wasn't going to come back and that we should get that [indiscernible].

Okay. And then one last question, maybe Billy, if you could just talk a little bit about what you are seeing in the loan portfolio? There are some moving parts going on, so if you just kind of maybe look at the production levels during the quarter, are you seeing any change in any of your markets or across all of your markets?

Tony, do you want to take that or would you prefer if I take it? I'll take it. I would say that we are fairly consistent across our footprint with that. Richmond is clearly the most competitive of our markets right now. We'll see other banks coming to town, but all of our markets are very competitive. We're seeing improvement in the Southwest. We're seeing a lot of activity in Hampton. I will also say that virtually every deal we look at despite the length of relationships is giving other banks looking at it as well, and I think we're seeing some of the discussions we had earlier about the margin being impacted by banks getting on rate and probably more importantly we're seeing a little more banks getting on structure. So I think rate we can live with a little bit easier but I think the structure side does cause me some pause, so we are trying to make sure we are mitigating our risks and making the decisions and virtually all of our marketplaces, [indiscernible] fairly slow market, but the others are showing improved activity I would say.

Would you say on structure that is going longer, is that what you mean?

I think things like reducing guarantees and limiting – we do limit some guarantees but only in certain cases and I think some of that give up and some of the structure, not so much the term but the deal structure itself.

Let me add a little postscript to that. We are seeing some pressure as well to extend maturities. Our preference is five and we are seeing a lot of push [indiscernible] and we are not that far behind where we thought we would be at this point in time as far as net loan volume and if you will where we are behind is spread pretty evenly across all of our markets. And the pipeline looks good. It looks as good as it did coming into June or coming in third quarter but we do not have [indiscernible] out there some of the expected elevated levels of non-contractual paydowns that we knew were coming in the third quarter. So we think we are going to get a single-digit loan growth for the year and that's where we expect to be.

Great. Thanks Billy, thanks Tony.

Your next question comes from Laurie Hunsicker with Compass Point. Please go ahead.

If we could jump over to credit for just a minute, the OREOs finished the quarter at $22.1 million and you mentioned $4 million under contract coming out likely in the fourth quarter. How does that split between your shutter branches and just your regular OREO?

The $4 million on the contract is primarily the foreclosed properly, not the…

It's not the shutter – the shutter branches are still right about 3 million or so?

Yes, a little over 3 million. It hasn't moved at all this quarter but we do have some progress being made on that but we just at this point don't have anything to mention in terms of the actual – it's not contracted to sell at this point.

Laurie, I think we've got one former branch under contract that I don't know because of the – what I [indiscernible] the due diligence period the buyer has, we will [indiscernible] in the fourth quarter.

This is Dave. I would say that what we have under contract primarily, none of the branch is really branch related but it's mostly residential including the LakeWatch OREO. The exception is one commercial property which was some condominium that's about $700,000 I think.

Okay, and then can you – I mean what is the LakeWatch OREO piece?

That was a residential [indiscernible] lake development that was part of the – that were OREO transferred in or migrated in from the StellarOne deal. There's also some non-accruals as well [indiscernible] small amount in nonaccrual.

And what's the size balance of what's in the – I guess it's the $19 million piece then, cutting out those branches? Okay, I can just follow-up with you offline. Yes, just as a LakeWatch OREO.

I don't have that number.

Okay, I can follow up with you later. King Carter, was there any change in that or does that still sit at about 5.6 million?

No change in King Carter.

Okay. And then just one last question here on credit. As we look at your TDR, specifically your performing TDRs, they have vast improvement this quarter, and they are very low now but huge improvement going from 20 million down to 9.5 million. Was that a few properties or what were the types or any color you can give on that?

I don't think it was any specific type necessarily. I think it was more and better collection efforts around the TDRs but nothing more than that really.

This is Rob. I don't have the color on the details of that but basically we were moving on our TDRs if there was that market interest rate and we structure that and it's been performing for at least 12 months and that [indiscernible] obviously, so it will be moving [as we expected] [ph]. We have good positive collections on that.

Okay great. And then to that point, in terms of how we think about the OREO expense running through your income statement line obviously, it was 2 million in June, down to 1.3 million in September, I mean at what point are we going to see that particularly with this 4 million I guess coming off in fourth quarter, at what point do we see that number then drop below 1 million? Are we basically close?

I'd like to say that we are getting very close, Laurie, but I think if you look at the details of OREO, the real issue is the valuation adjustment. So we took about another $500,000 valuation adjustment. So to the extent we can get more stable there, as you know we get new appraisals every year, so there's some potential for that to continue. Hopefully we get [indiscernible] value appraisal process [indiscernible]. That's really the wildcard getting us below the $1 million mark. As we said previously, we are looking to get down to about $750,000 quarterly run rate and we did make some progress in valuations more or less this quarter, but as we get new appraisals, that could change [indiscernible] or potentially even higher.

And what was the $500,000 valuation adjustment on?

There were a number of – there's probably [indiscernible] exactly how many five or six – I think it was about seven properties where we got new appraisals and some additional write-downs if you will based on those properties.

Yes, I mean it was mostly appraisal update and there were some reduced listing amounts to encourage sales. So I think it was a mix.

Okay. So I mean ex that, you were at 760,000 run rate then?

That's right, that's right. That's kind of the [indiscernible] idea we're at.

Okay. And then just last question on the income statement, the other line, other operating income of $1.9 million, was there some nonrecurring items in that?

Yes, we did record a little over $1 million in that line that related to resolution of a problem credit, long held, previously charged off – long held restructured credit that we had exhausted the recoveries on that and booked that as a noninterest income, gain if you will on sale.

Okay, perfect, very helpful. Thanks, I'll let somebody else jump on.

[Operator Instructions] Your next question comes from David West with Davenport and Company. Please go ahead.

Just a couple of quick questions, I guess returning back to Jeff on mortgage, you're entering the seasonally slower time particularly in residential originations. Do you think you can maintain breakeven results or better in Q4, Q1?

I think we're going to see some pressure on results here for the next two [indiscernible]. To the extent that it's breakeven or modestly negative or positive, I don't really see it significantly up or down one way or the other. I think it will be down breakeven from next two quarters but probably up from where we are today in the next [indiscernible] quarters [indiscernible] ramp back up LO [indiscernible] back up. So a couple of more quarters I think. Obviously seasonality has a lot to do with that, and as I mentioned earlier, I think [indiscernible] are having some impact on that as well. We've got some good activity right now with LO hiring that's [indiscernible]. We really like the quality of the individuals that we're bringing on. That bodes well for a successful 2016 and early modelling for 2016, so significantly improve profits. So we can just get to the next quarter with a good [indiscernible].

All right, very good, thanks for that color. And lastly, your deposit numbers are holding up really well. I know the branches you closed were mostly in-store branches. Could you comment a little bit about client retention post those closings?

We have not noticed any significant drop-off yet. It's usually – our rule of thumb is late about a quarter to do that comparison, so probably better to comment on that in January than it is – we closed them in early August, so it's just in about 60 days now. It usually takes about 90 if there's going to be any significant runoff to show up. To date we have not seen any. We weren't expecting any because of the close proximity of [indiscernible] branches to all of the in-stores that we have.

Very good. Thanks so much.

Thanks everyone for dialing in today. As a reminder, today's investor call will be posted on our Web-site a little bit later. Thank you for your time.

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