Good morning. My name is Laurel and I will be your conference operator today. At this time, I would like to welcome everyone to the Union Bankshares fourth quarter and 2014 earnings 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. I will now turn the call over to Bill Cimino, Vice President of Corporate Communications. Please go ahead, sir.

Thank you, Laurel 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, Jeff Farrar, EVP of Wealth Management, Insurance and Mortgage. Please note that today's earnings release is available to download on our investor website, investors.bankatunion.com. Before I turn the call over to Billy, I would like to remind everyone that we will make forward-looking statements on today's call which are subject to risks and uncertainties. A full discussion of the company's risk factors are included in our SEC filings. At the end of the call, we will take questions from the research analyst community. And now, I will turn the call over to Billy Beale.

Thank you, Bill. Good morning, everyone. Thank you for joining us on this call this morning. As I reflect on 2014, let me start this by saying that I am proud of the work done by our teammates, the StellarOne integration, which was a massive undertaking for our team has been a success. Union is now the largest community bank headquartered in Virginia, but that is an outcome of the merger, not the goal. Even though we are larger, we are remaining true to our core community banking values and remained focused on prudent commercial and consumer loan and deposit growth through customer retention and developing new client relationships. The goal of the merger is to deliver improved financial performance resulting in better returns for our shareholders over the long term. In our last quarterly call, we noted several areas on which we were focused, including loan growth and aggressively disposing of our OREO properties. Regarding loans, in our last call, we indicated that we believed that September would represent the low point in loan balances. You will recall, we were down about $100 million from year-end at that point. And this belief was driven by the fact that we had hired several new loan officers and portfolio managers during 2Q 2014 and 3Q 2014 to replace the former StellarOne lenders and that our lending team was starting to assert itself in the market. That prediction certainly proved to be the case as loan balances grew by $175 million for the quarter or 13.5% on an annualized basis. Also of notice, we are now achieving one of the benefits from the StellarOne acquisition. More doors are opening for larger size lending opportunities across the Commonwealth. We are now able to compete for business from customers who would have been too…

Thank you, Billy and good morning, everyone. Thanks for joining us today. I am going to update you on the balance sheet and our results of operations for the quarter. First, turning to the income statement. Operating earnings for the fourth quarter were $15.6 million or $0.34 per share, down slightly from $16 million were $0.35 per share in the third quarter. As you recall, operating earnings exclude the impact of merger related costs, which were $563,000 on an after-tax basis in the quarter. For the full-year operating earnings were $66.3 million or $1.44 per share, up from $36.5 million in 2013 as a result of the StellarOne transaction. On a GAAP basis, which includes the impact of merger related costs, net income was $15.1 million for the quarter or $0.33 per share versus $14.9 million or $0.33 per share in the third quarter. For the full-year, GAAP net income was $52.6 million or $1.14 per share. The community bank segment's operating results were $16.5 million or $0.36 per share in the fourth quarter and $69.8 million or $1.52 per share for the full year, while the mortgage segment reported a net loss of $889,000 or $0.02 per share in the current quarter and recorded a net loss of $3.5 million or $0.08 per share for the year. Regarding profitability ratios. The operating return on tangible common equity increased to 9.51%, from 9.82% in the prior quarter and was 10.19% for the year. The operating return on assets was 86 basis points in the fourth quarter, down two basis points from the prior quarter. For the year, the operating return on assets was 91 basis points, up slightly from the prior year. The company's operating efficiency ratio declined to 64.8% from 69.8% in the third quarter and for the year…

Thank you, Rob and thank you, Billy. Laurel, we are ready for the first questioner.

[Operator Instructions]. Your first question comes from the line of Kathryn Miller with KBW. Your line is open.

Good morning, everyone.

Good morning, Kathryn.

Billy, how should we think about provisioning moving forward? Now you are at a reserve-to-loan ratio of 1.08, excluding the acquired loans. It feels like we might be at a bottom when it comes to reserve release and provision will really just be provisioning for loan growth and matching that charge-off moving forward. Is that an appropriate way to think about it? Or do you think you still have a little bit more room for reserve release this year?

Kathryn, this is Rob. I would suggest that your point is right on, because we have stabilized at this level and think about it as provisioning for net charge-offs and loan growth going forward at about this level.

Okay. That's helpful. And then also, Billy, you talked a little bit about how you are looking at larger credit now that you have StellarOne in the fold. And [indiscernible] was a really nice improvement in this quarter, so I don't know if some of that was what drove it. So can you talk just generally about the size of credit that you now consider versus your comfort level before the merger? And maybe how pricing is different on these types of credits?

Well, our in-house limit pre-merger was $25 million. Our in-house limit post-merger is $60 million. We have booked some credits and exposures this year that are above $40 million, including one in the fourth quarter. So we are looking at those. They are very competitive in the pricing of those. And the pricing all sort of gets merged into and we are running at about what? 4.3%, Rob, in the fourth quarter?

Yes.

I think we had shared, Kathryn, to add some context that we had taken some steps in the third and fourth quarter to change our pricing model to allow us to be a little more competitive. Basically dropping the end result by about 25 basis points on commercial loans. That was attractive and I think has helped drive some of the loan volume. The other one, some of the larger credits, some of them have some bank qualified tax-exempt pieces to them. And so that also can be attractive to us as well.

Okay. That's helpful. Thank you.

Thanks, Kathryn. Operator, we are ready for the next caller, please.

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

Thank you. Good morning, guys.

Good morning, Wallace.

Just real quick on the follow-up to your last comment, Billy. You mentioned some favorable tax, et cetera. What's a tax rate to use for 2015?

Well, I would suggest about 27% is normalized rate going forward. As you can see, in the prior year or 2014, it was lower than that. But that was due to the impacts of merger-related costs lowering pre-tax income and having our tax-exempt levels as a higher percentage of pre-tax income. So going forward, I would say, about 27%.

Okay and then, so last quarter, you guys talked about getting more aggressive on the OREO. You sold $11.4 million in the fourth quarter with a nice gain. Was that $11.4 million a lot? Was that multiple credits? Was that a couple of larger credits? What was sort of the composition of the sales?

Well, there were a large number of credits involved in that. There were double-digit, close to double-digit on the bank branches were involved in that and then there were five single digit number of loans or former loans that we had foreclosed on.

Okay. So it was pretty granular.

Yes.

Right. My last question is on mortgage. I didn't ask about it last quarter. Rob, in your commentary you mentioned you would expect you wouldn't hit breakeven in the 1Q, just due to seasonality. Maybe just talk about 2015, what's your expectation for contribution to the bottomline out of that segment?

Yes. Well, let me turn it over to Jeff there, who runs that business. We would get it right from him. And then I will add comment if there is other questions.

Hi, Wally.

Hi, Jeff.

What I would say is that, as you are all aware, we have been going through a pretty major restructure this year with the mortgage company and I think we have got major building blocks in place to see a turn here on profitability in 2015. The resulting company, post-reconstruction, will have significantly less in the way of fixed costs. I think it will be more scalable, sustainable. We will have less volatility in earnings based on market conditions. Because of that, we have carved out a significant amount of fixed charges during the course of 2014. If you go back and look at operating expenses 1Q to 4Q, we are running over $1 million less. We have reduced a number of FTE in conjunction with that. We are just about done with centralizing the fulfillment process and getting that to a place where we can feel confident that we can go out and hire strong LOs that can feel good about getting the widgets through the door. So I am optimistic. I really am, because this is the year that we can turn this from a profitability standpoint. The other thing I will mention is, we are getting ready to rollout a portfolio of mortgage strategy that I think everybody is about is excited about and we are within 60 days of taking apps on that. So I think that's also going to help improve the upticks around profitability for the mortgage company, of a go forward. And then lastly, I am real happy and excited about the core team that's left. We have had a lot of folks leave. We did lose some large producers on the LO side. That was somewhat directly related to some long-term challenges on fulfillment and was exacerbated by the distant conversion, consolidation of StellarOne or integration of StellarOne. But when I look at what we have left, I like the platform. I just like the team. And I think we can build form this now and really start focusing on topline revenue growth going forward.

Okay. So, Jeff, is your expectation, the way the business stands now, that the first and fourth quarters would be loss quarters, but the second and third quarters would be profitable? Or do you think that you could turn 1Q and 4Q into breakeven quarters as a sales?

I am not sure that I am following you but I think that what we are hopeful of, is that once we get past 1Q and we start seeing some pickup in volumes that we will begin to see a sustainable breakeven to profitability picture on a go forward basis.

Okay.

So we are looking at, particularly in the second half of the year, we are looking quarter-to-quarter profitability. Second quarter, I think, some things need to work for us. We still have a little bit of noise with some of the transitional decisions that have been made. But feeling pretty confident about second half profitability.

Okay. Thanks, Jeff. That's perfect. I appreciate it.

Thanks, Wally.

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

Yes. Hi. Good morning, gentlemen. So a couple of questions. Just to go back to where Kathryn was asking regarding loan loss provision. Can you just take us through a little bit, I guess, how the breakdown related this quarter to fraud, those in terms of provisions and terms of charge-offs? And just even how you charge-off category actually broke? If you have any detail on that, i.e. what's commercial, what's real estate, what's consumer?

I think in the third quarter, we mentioned that we had a fraud that was disclosed that we are going to credit. Union had an exposure, StellarOne had an exposure. And this was a real estate developer investor that got money, if you will, from individual investors around Virginia to provide the equity in his projects and then it came to light that he basically had over subscribed those investments. There was some unsecured exposure that we wrote-off in the third quarter. We put the loan on non-accrual and as we worked and put a reserve for it and as we worked through this fourth quarter and started foreclosure, these properties were allowed to be taken in the bankruptcy which further complicated things. And so fourth quarter, we took some charge-offs, part of which was previously reserved. And Rob's looking for the detail but I don't think we have got the whole granular piece of the $3 million or so that was, yes, I think, it was just done in December. But it would be over half that. And then there were some other.

You mean, so of the $4.5 million? So just to clarify, so of the $4.2 million and roughly half of it was fraud related? Or higher?

No, I think it was probably a little less than $2 million, maybe $1.5 million or so. Then we had some other charge-offs that would collateral depending where collateral declined and we took partial charge-offs on those, as we do every quarter. We look at a collateral of the pending loans just to make sure that we have enough collateral there. Now to the extent we don't, we take partial charge-offs and those, then I would say the remaining is HELA, credit card, some mortgage related charge-offs as well, which have been fairly constant quarter-to-quarter.

Right. I mean certainly your overall credit picture looks great. Certainly it really continued to improve this quarter too. But I guess the swing in provisions, just to your comment earlier that expect net charge-offs to remain stable, are you talking stable relative to December? And let's strip out the fraud. So it wasn't $4.2 million of charge-offs. That was $2 million of charge-offs. So that's still a substantially higher rate than where we were. And so when we think about charge-offs plus growth, are we starting with the round numbers, $2 million per quarter? Give or take? I never realized the [indiscernible].

Yes. We think about it, call it about 15 basis points or so and then any additional provision related to loan growth on top of that. So it will be a little higher on provision as a base point for the quarter. And if you looked at our -- we had a lumpy, as Billy said, we call it lumpy quarters. In the first quarter, we had net recoveries. In the fourth quarter, we had, obviously, net charge-offs. But if you take it across quarters, we probably had a low level in 2014, but I would suggest that the base point going forward is probably good for us.

Okay. Good. That's really helpful. Okay and then just to go back to the OREO book here for one second. So if we are looking at how your OREO breaks out your $28 million. You have got $5 million of this real estate investment. This is all shuttered branches?

Shuttered branches and there's some operational premises that we are in the process of disposing them. So it's not [indiscernible].

And the goal is most of that comes off this year?

That's correct. Yes.

That's the goal. Some of them will be difficult properties to move. Yes.

But we are actively marketing all those properties and the goal is to move those off by the end of the year.

Okay and then a last question. Actually, this is a question just to follow up on Wally's question. Jeff, this is for you. Can you give us an update and I am sorry if I somehow missed this, but just a breakdown of originations? What was construction and what was core? And then just given your cost-cutting initiatives, where we are with respect to what constitutes a core breakeven? And I think it had been running at about $160 million or $170 million. You projected core, is that still a good number? Or has that number now come down?

So let me run through the numbers first. For the core, we had core volume of $129 million, construction volume of $26 million. We were down $11.9 million quarter-to-quarter on core. We are down $10.9 million on construction. So we think about the 2015 and what it is going to take, core, the mix of core is changed a little bit now, because we have got a portfolio of component embedded in that. So that will change the profitability dynamic a little bit from a breakeven perspective. So it's a little harder to say because of that. What I would say is that if you look at the volumes this year, we are not anticipating a significant change in volume for 2015. It means that we think we can kind of backfill what was lost in terms of LOs in the second half of the year. So the profitability, we are anticipating to be more in a breakeven type price result. So as I think about it, if you look at volumes for 2014and say, okay, we think we can pretty much do the same thing in 2015 and breakeven, that would be a sense of what we think that monthly run rate is.

Okay. Great. Very helpful. Thanks.

Thanks, Laurie.

Your next question comes from the line of David West with Davenport & Co. Please go ahead.

Hi. Good morning.

Good morning, David.

You characterized your expectations for this year's loan growth as mid-single digit. Do you expect that, I guess, to be from mostly your growth, I guess in C&I, commercial real estate, construction? Are those areas you still expect to drive loan growth in the coming year?

Yes. I don't think the mix is going to change. We have seen a nice increase as well on the consumer side, relatively speaking, which for us, would be primarily indirect lending, auto lien and individual home improvement loans. We also bought some of those indirect. But the mix is going to continue to be on C&I and commercial real estate.

Yes. I will add, David, that as Jeff mentioned, we now have a mortgage portfolio product that will flow throughout the year. We have been running of mortgages. StellarOne had fairly robust mortgage portfolio that's been running off. And as Jeff mentioned, we are introducing a portfolio of products that going to help. You will see some growth coming out of that, that you didn't see this year.

Is that a fixed product? A fixed --

It's a combination of both fixed and non-product.

Okay. Very good. And then, I guess the only other one left. You gave us a little flavor around your actions in the third quarter regarding some of the larger foreclosed properties. And you mentioned you had a commercial lot here in Richmond and then some larger rural properties in Fluvanna, Orange and King William County. Were there any movements in those properties in the quarter?

No.

Okay.

I am looking back. No.

All right.

We have got -- there's some under contract. But we have nothing on those larger ones that we had mentioned earlier.

Yes. We will note that we do have a contract on the King Carter Golf Course property. But that's not expected to close until later in the first half of the year.

On the golf course portion. Not the residential development piece. The one we had in King William, the good news there is that now that we have finally worked through our processes with the County and are able to put an entry road into that subdivision that we own, we do have a builder that has taken down building permits and will start construction. We think that will lead to more lot sales and eventually can get us out of that property. So there should be some forward movement on that one probably in the second half of 2015.

Great. All right. Thanks so much.

Thanks, Dave.

And Laurel, we have time for one more caller, please.

Great. Thank you. Your next question comes from the line of Bryce Rowe with Robert W. Baird. Your line is open.

Great. Thank you. Hi, Rob. Just real quickly, trying to get a feel for a good run rate from an operating expense perspective. I am calculating just under $52 million of operating expenses for the fourth quarter. Any feel for a good operating expense run rate going forward here?

Yes. We are projecting $51.5 million to $52 million, is probably a good run rate going forward.

All right. That's very helpful. Thank you.

There are no further questions. I would turn the call back to the presenters.

Thank you, Laurel and thank you everybody for calling today and as a reminder, a replay of this call will be available on our investor website later this afternoon. Thank you.

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