Good Morning. My name is Sean and I'll be your conference operator today. At this time, I’d like to welcome everyone to the Union Bankshares fourth quarter earnings conference. 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]. I’ll now turn the conference over to Mr. Bill Cimino, Director of Communications. Please go ahead, sir.

Thanks Sean 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 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’ll make forward looking statement on today’s call which are subject to risks and uncertainties. A full discussion of our company's risk factors are included in our SEC filings. At the end of the call, we'll take questions from the research analyst community. Now I’ll turn the call over to Billy Deale.

Thank you Bill. Good morning everyone. I hope you’re doing well. Down here in Richmond we’re all excited about the couple of feet of snow we’re going to get this Thursday night and Friday morning. I want to thank you all for joining us. During the fourth quarter and throughout 2015, Union made steady progress for delivering on our strategic growth objectives that will enable Union to deliver top tier financial performance to our shareholders. We continue to work on several fronts and capitalize on organic growth opportunities that we see in our markets, are building deeper relationships with our existing retail, commercial and wealth management businesses through better team work within and across our lines of business as well as enhancing our digital service offering to our customers. In 2014 we rolled out global business banking, global check deposits, online account opening and online loan applications. In addition to making banking more convenient, these services help build our brand and customer loyalty. In addition to these investments in the digital space, we’re continuing to upgrade our technology infrastructure and re-engineering several of our internal processes to support an increased rate of organic growth while also improving operating efficiency across the company. All this work is being built on a foundation of high performing culture that remains focused on delivering an outstanding customer service experience to our clients. The fourth quarter operating results illustrates that our value proposition is resonating with our customers. Union earned $17.8 million or $0.40 a share during the fourth quarter, while net income was $67.1 million and earnings per share at $1.49 for the full year. Fourth quarter results included an after-tax evaluation adjustment from other real estate owned totaling $2.7 million per $0.06 per share related to updated appraisals on 2 large OREO properties.…

Thanks Billy and good morning everyone. Thank you for joining us today. I'd 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 prior year periods are to operating earnings or operating ratios, which exclude after-tax expenses associated with the StellarOne acquisition that we incurred in 2014. For the fourth quarter, earnings were $17.8 million or $0.40 per share, in line with third quarter results and up 15% from the prior year’s fourth quarter results of $ 15.5 million or $0.34 per share. For the full year 2015, net income was $67.1 million or $1.49 per share and that's up from $65.9 million or $1.43 earnings per share in the prior year. As Billy mentioned, included in the quarterly results are some material after tax, non-operating items, including the OREO valuation adjustment of $2.7 million. The net benefit from the sale of our credit card portfolio of $805,000, security gains of approximately $538,000 in the quarter, as well as a payroll tax adjustment recorded in the current quarter of approximately $800,000, which was due to the higher level of tax exempt income as a percentage of taxable income, which impacted the full year effective tax rates. Turning to the segments, the Community Bank segment earned $17.9 million or $0.40 per share in the fourth quarter and $67.3 million or $1.49 per share for the full year, while the mortgage segment reported a net loss of $90,000 in the fourth quarter and recorded a full year net loss of $202,000 for the full year. Our return on tangible common equity was 10.4%, down slightly from 10.7% in the third quarter, but up from 9.5% in the same period last year. For the full year, the return…

Thanks Rob. And Sean, we're now ready to take some questions from our research analyst community.

[Operator Instructions] Your first question comes from the line of Catherine Mealor from KBW. Your line is open.

Good morning, everyone. First I wanted to dig into your expenses a little bit. So first on the OREO costs, I'm assuming after these write-downs, OREO costs should meaningfully decline in 2016. Can you give us any idea of what you view as an appropriate level for OREO costs going into this year? Then if we think about all the branch savings we've got, the seven branches that closed in 2015. We've got another five coming on this year. So, I guess taking that in combination with the lower OREO expenses, where do you think the quarterly expense run rate should be by mid-2016 once we've kind of got all of that factored in?

Catherine, thanks for that question. This is Rob. In terms of the OREO costs, we are expecting that to come down materially. Obviously valuation adjustments this year hopefully will not recur at that level in 2016. We had previously given some guidance running at about $750,000 a quarter in OREO expenses. I think that may come in a bit better than that based on some of the movement we've made in reducing our or selling some of our properties. It's probably in the $500,000 to $700,000 range. Maybe a little lumpy because with the property tax payments in second quarter, it will be a little higher than the other quarters. In terms of the ongoing run rate, you're right. We will see these reductions from the branch closings and the OREO reductions. Offsetting that will of course be incremental salary adjustments, merit adjustments, those sorts of things in the quarter. So I think the rate that we're looking at, including some of the infrastructure investments we’re making, is probably in the $53 million or so range on an ongoing basis, which will fluctuate a bit, especially in the first quarter as we reset expenses both from a payroll tax perspective, incentives perspective and things. You'll see the first quarter will be higher than that.

Okay. All right, cool. That's helpful. Thank you. And then on mortgage, can you talk a little bit about the mortgage trends and did trend have any impact to the mortgage volumes or profitability this quarter? Can you give us a little bit of an outlook on what you’re thinking in terms of the mortgage outlook this year and when we should see a return to profitability for that segment? Thanks.

Hey Catherine, it's Jeff. Good morning. So we, and as I'm sure you're aware, most of the national mortgage associations are predicting a fairly significant decrease in mortgage production for 2016. So obviously the industry overall is anticipating contraction and refinance and obviously that has some impact on that estimate. For us, it's a case of rebuilding, particularly on the top line as we've discussed before around LO hires. We feel like we've got a pretty solid infrastructure put in place now. We've got some good momentum relative to just how we do business. We've got some good hires that have come on board here in the last six months that are kind of getting their legs under them. So we are projecting growth, if you will, in mortgage production for 2016 and that is going to be a direct correlation to how successful we can be in ramping up our LO hiring, ramping up our production in terms of new originations, new originators. And from an infrastructure cost standpoint, continuing to figure out ways to drive efficiency and improvement will also help us build profitability. We are anticipating a return to profitability in 2016 and that is, again, primarily a function of revenue growth, but also continuing to drive some efficiencies on the operating side.

Do you want to talk about TRID?

No.

No, you don't want to talk about TRID.

No. A – Bill Beale: Okay.

My recollection on TRID is that we saw an increase over normal of applications in September and then we saw a decline after that I’ll say. It's kind of normalized at this point. That’s really officially not a relevant news item at this point. I think we feel pretty good about how all that has filled out and I think the team has done a good job of implementing it and our investors are accepting the pay first. I think the dust has settled from that. A – Bill Beale: It’s still taking 45 days or so, so the closing time has elongated or have we pulled that back in?

No, it's still 45 days, which I think is consistent with the industry.

All right. That's helpful. Thank you very much. A – Bill Cimino: Thanks Catherine. And Sean, we are ready for the next question please.

Your next question comes from a line of Laurie Hunsicker from Compass Point. Your line is now open.

Good morning. 3 questions here. Staring with the credit card gain which I guess is in the other, other, the 1.2 million pretax. The other, it shows up in other other income. Did you have some offsetting onetime expense then that --?

Lori, within the geography of the net benefit is primarily in the other income line gain, but we have about $300,000 related in the expense line that's termination related expenses for some contracts that we had. And then we’ve also, with the sale of the credit card portfolio, the provision line was a bit lighter and would have been because we were able to reduce, release the reserves related to the credit card portfolio.

How much was that reserve?

We had about $600,000 pertaining to the credit card system reserve.

Got it. Okay. When we think about what actually showed up then within the non-interest income, we get 300. We take out the 600, so we only had about 300,000 that showed up in that other other income line. Is that about right?

Yeah. It would be more like a $1 million, a little over $900,000 in net lines.

$900,000 showed up in the other other.

Think about it this way.900, plus the 6 on 1.5 is a benefit and 300,000 goes against that. That’s where you get the 1.2 net benefit.

Got it. Okay. That’s helpful. Thanks. Then if we can just jump over and talk about credit and obviously your credit metrics looks just great here. Can you maybe start by giving us a little bit more color on the 2 large OREO properties and then maybe also give us an update on King Carter and where that stands?

That is one of the large OREO properties. King Carter, et al, which is also referred to in some of our releases as Merry Point is a -- we have there, just to refresh everybody’s memory, we have a golf course which is separately valued we had written down further in the second quarter of 2015 to $700,000. Surrounding that we have 92 lots that are curved gutter, public water, public sewer. And then we have some 200 acres that is again another internally separately valued. The valuation write down on King Carter/Merry Point this time took place on the 92 lots and that reduces the value of those lots round numbers from $30,000 down to $11,000. Intellectually, one would think that you would be able to sell aggressively curve and gutter, public water, public sewer lots around the golf course pretty easily at $11,000, if not more. That’s the write down there. The other piece of property was a multi-parcel piece of property located in King William County, which would be one county northeast of Richmond. This is a large -- it’s an acreage lot, large lot subdivision that has public water, paved roads but also septic. There are parcels that were undeveloped that we sold in or have -- I guess we sold some of them in 4Q. We have others that are for sale in first part of this year that are under contract. Specifically, one of the parcels, actually two of them are plotted. There are loads in them. There are builders in there building. This again is one that as we matched up what the absorption rate was, it wasn't happening as fast as we thought so we again wrote those lots down from the low 30s down to about $11,000. That’s the two parcels.

Lori, just to recap that, the King Carter write down was about $2.3 million of that total for the quarter and the remainder was this other large property that we had on the books.

Basically then your King Carter exposure is now down to about $3.3 million? Is that right? Your total. In other words if we include golf course, if we include the 92 lots --

Yeah. I think it's about $2.7 million at this point.

$2.7 million?

Yeah.

Okay, great. Then, I’m sorry just before get off King Carter, have you had any luck, any additional thoughts in terms of marketing that since you’ve written it down? Is that likely something that we see move this year?

Let me back up. We have -- in the time that we have owned this, we have had three different realtor agencies attempt to market these lots and that has been everything from mailings to -- because this is primarily a second home, retirement home. We have marketed it to Washington DC suburbs, Philadelphia, Wilmington, Baltimore. Those population centers is the place to attract. We do not have a firm strategy right now on how we're going to market it, but certainly with these values, it gives us an opportunity to be more creative. We think that these values are maybe an opportunity to interest someone in buying the remaining lots, say a homebuilder or homebuilders. We think there may be an opportunity to find a developer who'd be willing to take on the lot, these values and the golf course. We’ve got it down to various practice valuations. We’re going to -- I think this write down gives us more flexibility, but I wouldn't want to make -- based on the experience we've had to date, I would not make any promises on how quickly we’ll be able to get that done.

Okay, that's fair. And then just one --

[Indiscernible].

Okay and then just on your tax rate, if we add back this, the 800,000 benefit, it adjusts your tax rate to about 26.5%. Is that a good number to use for this next year or do you have another tax planning strategies that you’re putting in place? How should we think about that?

Lori, I think going forward -- you’re right. It’s about 26%. Going forward, you should assume that the steps will be -- that’s a good modelling tax rate going forward, 26%.

Okay, great. Thank you.

Thanks Lorie. Sean, we’re ready for our next caller please.

Your next question comes from the line of William Wallace from Raymond James. Your line is open.

Good morning gentlemen.

Good morning Wally and how are you?

I'm good, thank you. Just maybe real quick on the OREO. This stuff is appraised annually I assume right, maybe even more since it's OREO.

Yes, at least annually.

At least annually.

For King Carter and this other property, did the appraisals come in dramatically lower or had you guys not marked into appraisals or did you guys decide to take a significant discount to the appraisals?

You always have to market for the appraisals, unless the appraisals are higher than the value in your book value. We had been marking them to appraisal out. We took a different approach and methodology rather than just valuing the real estate because of how long it's taken us. I'll put it in another way. Because of the length of time that we have held this property and the lack of sales, we decided to ask the appraiser to project out absorptions and then discount back to give us basically the discounted value of this. There was a methodology change in our instructions to the appraiser rather than just valuing lots based on comps.

Okay. And then you just took your standard discount to take into account selling costs or upkeep costs or whatever?

Right.

You didn't increase? Okay.

That’s correct, Wally.

And that was for not just the King Carter lots, but the other property as well?

Correct. Yes.

Okay. I appreciate that color. Thank you. My other questions are focused around margin. I'm wondering, Rob, if you wouldn't mind updating your expectation for the margin in 2016? And then as a follow-up to that, I'm curious if you saw any impact, or if you've been seeing any impact since the Fed hike in December on deposit costs from your competitors?

In terms of the margin compression, we’re projecting it will be in the 3 to 4 basis points per quarter. Really depends on whether we continue to see these rate increases. The jury is out on that as we speak, but we’re anticipating 3 to 4 basis points a quarter probably through the balance of 2016. It starts to stabilize towards the end of the year into 2017.

Does that assume any help from the Fed in 2016?

Our projection in terms of the assumptions from an ALCO point of view is we’ve got two rate increases baked into that projection. Obviously that could change and we’ll adjust accordingly going forward when we provide you a little more guidance at the next earnings call. In terms of the deposit cost, we haven’t really seen any movement on that front. The competition seems to be staying pat on interest rates on deposits going higher. So we really haven’t seen any impact at this point, but we’re closely monitoring that, but we weren’t really expecting to see that with the 25 basis point change. That could change as we get these base points or 75 basis points. But we closely monitor that and at this point we’re not seeing any impact.

Okay, good. Switching gears a little bit, your reserve to loans dropped below 100 basis points. I know you've got some of the marked loans from StellarOne in there that are going to optically impact that. But I'm just trying to think about how we might think about your reserves to loans moving forward into 2016. Obviously your credit has gotten better, but is there some thought from management that you don't want to take it down too low, given how long in the tooth this recovery has been? Maybe do you think about building it or at least maintaining it on a ratio basis in anticipation of any potential pressures down the road?

Obviously we continue to monitor that and follow our methodology regarding calculation of the allowance and make sure that it’s adequate. I think that you’ll see that it should be stabilizing this area, give or take 98 to 100 basis points. I wouldn’t expect to see it materially decline further from here. Like you said, credit is very good so it only perhaps can flat line or get worse. So we continue to monitor that, but I wouldn’t see that go too much lower than you see now.

Okay. Then my last question, if you don't mind, a great bounce back in loan growth. I can't remember what the loan growth in the third quarter was, if you backed out the impact from moving those credit cards to held for sale, but pretty good annualized run rate in the fourth quarter. You've been talking about anticipation in the mid-single digits. Does that hold? Have you seen any change in the competitive environment, either positive or negative in Richmond given the recent acquisition that you had in market? And I'll step out of the queue after that. Thanks.

Hey Wal, it’s Tony. I would tell you that the competition is still pretty intense across the state. I think the Richmond noise is still out there. I think we had some lenders leave as you know with the Stellar acquisition and we’ve had some other competitors come into the marketplace. We’ve been looking hard at deals we’re not getting and it’s typically the banks coming to the market that are trying to buy market share and I would tell you that they’re getting a few deals here and there, but we’re getting our fair share. Richmond actually led our loan growth last year in a meaningful way. We had pretty strong loan growth in Hampton as well. So we’re not getting stupid. We’re still trying to charge the appropriate rate for the risk we’re taking and structure our deals as well with that. So as far as next year, I would say that the mid single digit range is still in sight. I’m not telling you I’ll get 9 or 10 next quarter, but I think we’ve got a healthy pipeline. We’ve got strong lending teams throughout the state. We’re looking to expand those teams as we see people in play and disruption in the marketplace which there is today in several of our markets, disruption going on that we fully intend to take advantage of.

Great. Thanks Tony. And Sean, we're ready for our next caller please.

Your next question comes from the line of Austin Nicholas from Stephens. Your line is open.

Hey, guys, good morning. Nice job on the loan growth. Most of my questions have been answered, but I was hoping you could just speak a little bit about your asset sensitivity. Has that changed much quarter over quarter from that 1.7% on a 100-basis point move?

No, it really hasn’t, Austin. I think you’ll see that it’s pretty much in line with what the third quarter 10Q reported.

Got you. And then I guess my second question would relate to your wealth management business. I was just wondering if you guys had seen any kind of additional hires there, were planning anything more there, just thinking about that, the growth in that business going forward?

Hey Austin, this is Jeff Farrar. Yes, we’ve been very active in hiring on the wealth management side, particularly in some of our newer markets like the Hampton Roads market. We’ve had some success there. Some of our legacy markets, including Richmond, Staunton, Fredericksburg. We've had some success picking up client advisors, private banking client advisors from some of the regional banks. We’ve also picked up a couple of nice trust advisors in that regard, again from regional banks. So we feel pretty good about what we accomplished in 2015 relative to hiring, particularly on the producer side. Assets held up well, continue to run a little over $1 billion in assets under management, had an earnings contribution of about $2.5 million in 2015. We are very focused on growing the wealth management division within our company. We will at some point during this point, start reporting that as a segment. So you’ll get better optics of the performance of that group. But we’ve got a lot of good things going on and look forward to continuing to grow it and increasing that earnings contribution.

Okay. Great. Thanks for the color, guys. Appreciate it.

Great. Thanks Austin. Sean, we're ready for our next call please.

Your next question comes from the line of Bryce Rowe from W. Baird. Your line is open.

Good morning. I just wanted to follow up on Catherine's questions about the run rate operating expense, and just wanted to be clear. So $53 million on a run rate basis, that excludes any OREO costs? And does it also incorporate the savings you mentioned that you'll get when you close the five branches?

Yes. So the three that I mentioned, we consider all that and also consider some of the investments we’re making in our technology group, risk management group and additional salary adjustments related to merit increases and that sort of thing.

Go ahead. I’m sorry.

If I could, I know we said we’re closing five, but it’s a net four because we’re building a brick and mortar branch in Winchester. We’re going to be consolidating three branches in Winchester into that one so it’s going to be a net four.

Yes, net four. But the number that we cited was considering that so it was $900,000 or so of run rate savings on the expense side.

Okay. That's helpful. Then a couple of questions around the margin. The compression or the expected margin changes that you mentioned, do those changes include the effect of the expected two rate increases, or the rate increases by the Fed in 2016?

Yes, they do. Yes, so we expect over the year to have two rate increases on the short end. We don't expect that the long end or the intermediate end is going to be changing that much. So we’re seeing a bit of a flattening curve is our projection. So we continue to see some earning assets, especially on the loan yield side some compression there.

Okay. That's helpful, Rob. One follow up to that, do you have where commercial loans on an average, weighted average basis priced, new commercial loans priced in the fourth quarter? At what yield?

Yes. I think when you consider fixed and floating, we’re probably in about the 390 range with new and renewed coming on, fixed being in maybe the 440 range and variable down below 4.

So that’s ballpark?

Yes.

Great. Thank you.

Thanks Bryce. Sean, we have time for one more caller please.

Your final question comes from the line of David West from Davenport & Company. Your line is open.

Good morning. First I just want to get a clarification on the branch closings. You're closing five total, but four net. And of those you're closing -- you're consolidating three offices in Winchester into one new office?

Correct.

Okay. I got that. Thank you. Billy, just wondered about your current thoughts on the M&A environment. Has it changed much from the last call?

No, not really. I think it appears in obviously some of the announcements that have been made would indicate that. A lot of the M&A activity is at levels higher than our asset sizes, higher than we’re really comfortable in I guess approaching at this point in time because it would put us above $10 billion and that’s not a threshold we believe that we are yet prepared to cross, either on an operational infrastructure and efficiency level nor on a risk management level. Acquiring a $4 billion bank would get us to roughly $11 billion and some change. Right now it also isn't enough to cross that. So and we’ve not seen as much activity or conversation in those I’ll say the smaller range that we would find acceptable, but we tend to be a very methodical acquirer. If you look back over our history, we tend to do it in three to four year increments. And so we’re trying to be very patient and diligent in looking for those opportunities as they present themselves.

Very good. That's helpful. And lastly, I remember from some past discussions, one of your major OREO properties I did not hear mentioned today was the one in Fluvanna County. Have you taken any particular write downs against that OREO?

No. That one has -- we have not and the appraisals have not indicated a need for that. It's not a developed property. It's a sizable piece of raw land. We have gotten some increased interest in the property, but we’ve had increased interest before that hasn’t materialized. So we’ll continue to work that. The property is, I would say a reasonable proximity to Charlottesville and the Charlottesville market is I think continuing to look at the ring sort of around Albemarle County would be the place where affordable housing could be obtained in that market. So I think as Charlottesville continues to grow and expand and recover, the opportunities in Fluvanna will present themselves. It will be attractive too.

Okay. All right. Thanks so much. End of Q&A

Thanks everyone for calling and we look forward to talking with you next quarter. Goodbye.

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