Good morning. My name is Leann, and I will be your conference operator today. At this time, I would like to welcome everyone to the Union Bankshares’ First Quarter 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. Bill Cimino, you may begin your conference.

Thanks, Leann, and good morning, everyone. I’ve 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 Tony Peay, EVP and Chief Banking Officer; 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 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. And now, I’ll turn the call over to Billy Beale.

Good morning, everyone. Thank you, Bill. Welcome to what is now our – I think this is the fifth quarterly call that we’ve done and I think we’ve learned something from each one of them and I’m sure we’ll learn something from this one. Our first quarter marked a solid steady progress with the company on our path to delivering top tier financial performance for our shareholders. Our total loans for the quarter grew 3.1% annualized and our average loans increased 10.8% from the fourth quarter. Our commercial lending team continued to build on the momentum from the fourth quarter as the commercial loan portfolio grew 7.5% on an annualized basis. While we are seeing that our higher lending limit is a differentiator between Union and other community banks and represents a unique market opportunity for us compared to other Virginia banks, our focus is to be dominant in our sweet spot of companies with 5 million to 75 million in revenue. We saw net loan runoff in our consumer loan book during the quarter, primarily as a result of refinancing related to declines in mortgage portfolio balances. Seasonality in weather also contributed to the consumer loan decline during the quarter. Union Mortgage Company made strides toward returning to profitability during the quarter. They nearly broke even during the seasonally low origination period and remain on pace to break even and return to profitability over the next several quarters. In April, Sandy Peele, formerly with SunTrust, joined us as a Senior Vice President in Retail Mortgage Loan Production Management. Sandy has a strong track record of building and developing sales teams and will be a key player in building out our originator teams. We believe we’re now in a position to move more aggressively to add loan officers and to…

Thank you, Billy, and good morning, everyone. Thanks for joining us today. I’m going to walk you through our financial results for the quarter. Please note though that all comparisons of prior periods are to operating earnings or operating ratios, which exclude after-tax expenses associated with the StellarOne acquisition that was incurred in 2014. Earnings for the first quarter were $15.7 million or $0.35 per share, up from $50.5 million or $0.34 per share in the prior quarter. The community bank segment’s results were $16 million or $0.36 per share in the first quarter, while the mortgage segment reported a net loss of $267,000 or $0.01 per share in the quarter. Return on tangible common equity increased to 9.67% from 9.46% in the prior quarter. ROA or return on assets was 86 basis points, up one basis point from the prior quarter. The company’s efficiency ratio increased to 68% from 64.7% in the fourth quarter, driven by seasonally higher expense levels in the first quarter as well as by OREO property sales, related gains and expense impacts quarter-over-quarter. Turning to the major components of the income statement, tax equivalent net interest income was 64.1 million for the quarter, down $1 million from the fourth quarter driven by the impact of the lower day count of two days in the first quarter and lower net accretion income. As expected, the current quarter’s reported net interest margin declined by 6 basis points to 3.95% compared to 4.01% in the prior quarter. Accretion of purchase accounting adjustments for loans, CDs and borrowings related to the StellarOne acquisition added 11 basis points to the net interest margin during the current quarter, down from 13 basis points impact in the fourth quarter or lower by approximately $326,000 quarter-to-quarter. This decline was the result of lower…

Thanks, Rob. Leann, we’re ready for our first question please.

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

Good morning, guys.

Good morning, Catherine.

Rob, I just want to make sure I heard you right. So you said that the branch closings should add or should give you that 1.8 million in annual savings, is that right?

It’s about 1.9 million starting in the fourth.

So we should see that full run rate in the fourth quarter this year?

Well, it may not be quite the full quarter’s run rate in the fourth quarter, it’s probably about two-thirds of that for the quarter rate.

Okay, great. And then how should we think about – subtracting [ph] by the efficiency ratio and you increased that to 68 this quarter. Now you got this saving from the branch closing that will help and I know some of the increase this quarter was seasonal. But can you help us think about your path to this 60 efficiency ratio and the timing on when you think you can get there? Is it more of a next year event and maybe what’s your – do you have a near-term goal on the efficiency ratio maybe after you have these cost savings coming through?

Catherine, this is Rob. I would say the path to the 60% efficiency ratio is probably towards the middle to the end of next year. Key things that have to happen there are continued improvement in loan growth over that period of time. We need to return the mortgage company the profitability not just breakeven but be close to breakeven. And the other important aspect to that is we need to stabilize the net interest margin. We got to stop seeing that compression quarter-to-quarter. We’re still projecting about 4 basis points of compression on a quarterly basis into 2016, probably the latter half of that maybe toward the end of that. Of course that depends on what the interest rate environment looks like and that’s the current path we see today on where rates are going. In terms of the expenses, as we mentioned, we have a number of seasonal upticks in the first quarter from payroll taxes and unemployment taxes that we adjust in the first quarter. Incentives were up as well during the quarter. We also had increases in group insurance. And if you look at the fourth quarter, we also had material OREO gains about 1.2 million. But as we go forward, we also had what we consider about 1.5 million to 1.6 million of what we basically consider nonrecurring or one-time events, some of that related to the OREO sales expenses associated with the purchases that we’ll close in the next couple of quarters, the $5 million we mentioned on the current [indiscernible]. We had some cost associated with changing the bank’s name that we incurred during the quarter. We had some true-ups on incentives with the year for the prior year into first quarter, as well as unemployment taxes will abate as we go forward. So, when you add all that up it’s probably about 1.5 million, 1.6 million of one-time nonrecurring type expenses, which starts to get you down certainly well below the rate that we saw in the fourth quarter. Hopefully that helps to give a bit of a path towards it, but we’re really dependent on the revenue side to get below that 60%.

Okay. That’s helpful. Thank you.

Our next question comes from the line of Laurie Hunsicker from Compass Point. Your line is open.

Hi. Good morning, gentlemen. Just a couple of things. Going back to Catherine’s question on the seven branches, was the 1.9 million pre-tax annual savings or after-tax?

Yes, that’s pre-tax savings, Laurie.

Pre-tax, okay. And then your one-time cost of 900,000, is that pre-tax or after-tax?

That’s pre-tax as well.

Pre-tax, okay, great. And then just a couple of other things. OREO of $25.4 million that you ended March with, how much of that was real estate investment/shuttered branches?

About $4 million of bank premises in that 25 million.

Okay. And then how much of your 5 million that’s in your pipe with OREO under contract, how much of that is the real estate investment shutter branches versus your other OREO?

I think that’s all other OREO.

Yes, it’s all other OREO.

All other, okay. So your shutter branches, what’s the timing on cleaning that up? Is that still going to be this year or do you think that’s just a longer process?

Yes, we still expect this year, Laurie. By the end of the year, we should be able to move those properties.

Okay. And then the seven branches that you’re closing, will those also then come into OREO in the same accounting fashion that you’ve held these other branches and shutter branches or is this – that was related to the --

Six of the seven are in-store, Laurie. They are leased facilities, so they won’t come into OREO. And as Billy said – so we’ve got one of the seven that will likely come into OREO if we can’t sell it.

But it’s relatively low value OREO. It wouldn’t make a difference in that balance.

Perfect. Okay, got it, okay. And then just one last question. If you could just circle back on your capital management thought regarding the three-prong strategy, in other words dividends, acquisitions and buybacks and which you prefer in which order and then maybe just give us a little color on your thinking of acquisitions now? Thanks.

Well, in terms of the capital deployment strategy, obviously organic growth is where we want to use that capital. Then we look at to be opportunistic on the acquisition front. You can’t necessarily manage that, but we evaluate those as they come through. And depending on the opportunity in that position that may rise from the top in terms of the order that we look at, it really depends on what’s happening in the current time period. Then repurchases and dividends, we evaluate those based on what we think the returns will be in terms of where our stock price is going where we value that from an intrinsic value perspective and then evaluate our payout ratios depending on where those other deployment activities may bring us, we evaluate that. But right now we’ve increased our dividend payout ratio for the last couple of years from 30% to 35% to 35% to 40% and now we’re at 40% to 45%. So as we continue to build capital on a excess basis, we continue to reevaluate the payout ratios as well. Billy, I guess you might – I don’t know if you want to chat about or comment on the acquisition front.

Laurie, I think we have shared that we looked to five opportunities last year and three of those were true from the process because of price. Two of them ended up being announced and we were not the winner. And I would say we would – use Rob’s words. We would be opportunistic if those opportunities presented themselves but we do not want to be distracted from our internal goals of focusing on organic growth and continuing to look for prices where we can be operationally efficient, and we don’t want to take our eye off that ball and totally turn away and focus solely on acquisitions.

Got it. And then can you just remind us how you think about that $10 billion threshold, what would be the timing in theory? How ready you are to cross that or not?

Yes. I would say we are not ready today to cross that. Organically, if we grow at mid-single digit loan growth, we would be in the low 9s by year end 2018. If we were to grow at a, let’s say a higher rate but not quite double digits, we could be right on the precipice of 10 by year end 2018. We would be ready by the time we get – we’re continuing to build out our enterprise with management process and structure and we expect to have that completed by the end of this year, and we’re continuing to work with the regulators who have been very proactive in sort of guiding us toward their expectations of what life is like post 10 billion, and that’s – we feel like we’re being very methodical on our path.

Okay. And so near term, even with an acquisition, you would be inclined to stay below 10 million, is that correct?

I don’t think we would be – that would imply we’d have to be something north of $3 billion in an acquisition and having just completed one of those a little over a year ago, I don’t think we’re yet ready to take on something of that size again.

Perfect. Okay. And then one last question. Can you all help us in terms of guidance with respect to loan loss provision and OREO costs, on just those two line items, how you think about that for this next year? And I realize they are lumpy, but any guidance you could give there. Thanks.

Yes, in terms of the loan loss balance, we’re at 1.03%. I would expect that to be stable in that area based on what we’re seeing today from the credit quality perspective. Charge-offs we expect to be in the 15 to 20 basis points for the full year and depending on loan growth, provision could be 20 basis points or so, maybe a little higher depending on the level of growth.

Okay. And then what about the OREO line item or any charges?

OREO cost should be coming down from what you’re seeing in the first quarter and the last quarter if you adjust for the gain that we recorded in the fourth quarter. So expect to see those coming down over the next several quarters.

Okay. So maybe like a $500,000 normalized run rate give or take. I realize that’s lumpy but without the --?

Yes, it could be lumpy but as we normalize those numbers that doesn’t sound too out of whack from what we’re thinking.

Perfect. Thank you so much.

Thanks, Laurie. Leann, we’re ready for the next question please.

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

Good morning, gentlemen.

Good morning, Wallace.

Just as a quick follow up to the last question on the reserves, so you expect to continue releasing reserves. Is there a level maybe if we look at it on your reserves to your loan where maybe you flatten out and start building if I looked at on reserves to loans basis?

Yes, I wouldn’t say that we’re going to be continuing to lease reserves. We’re probably going to be stabilizing this where we are today, 105 allowance ratio to loans. And as we always come on [ph], the asset quality remains good. I would expect it to remain in those levels. So provision will be driven by charge-offs and loan growth over that time.

That’s for the clarity, Rob. I’m sorry, I thought I heard you say 25 basis points charge-offs and 20 basis point provision, so 1 to --

It’s more 15 to 20 on the charge-off side.

Got it, sorry, okay. And then a little bit more maybe on the expense. First question, for that sub-60 you mentioned obviously you need loan growth in mid-single digits. Is that what you need?

Yes, mid-single digits, obviously higher is better, but the other part of that is we also need to see the margin stabilize as well. So we can get there with mid single digits with a stable margin.

And then you said that you’re still anticipating about 4 basis points of pressure a quarter into 2016. What type of interest rate environment does that assume?

It assumes a fairly flat curve if you look at the foreign curve, it basically implies that where it’s relatively low increases on the long end and moderate increases on the short end.

Okay. And then as we look at the cost saves that you’re going to have from closing the branches, do you think that all of that will be realized or do you think that we might see some reinvestment in the franchise that could offset some of those savings?

At this point – I mean there’s always potential for reinvestment but at this point we have not earmarked any of that for reinvestment, so you should see a different bottom line or the expense line and the after-tax bottom line.

Okay. That’s all I have. Everything else was answered. Thanks, guys.

Thanks, Wallace.

Our next question comes from the line of Blair Brantley from BB&T Capital Markets. Your line is open.

Good morning, everyone.

Good morning, Blair.

A question on the branch closings, you mentioned six I believe were in-store branches, is that – from a geographic perspective, is that spread across or is that more central Virginia?

Let’s see, we have told our teammates that we have not yet notified our customers, so let me say it, it is across the footprint.

Okay, thanks. And then regarding M&A, obviously hearing that you’re not quite ready to maybe go over that 10 billion asset threshold. Has your parameters changed at all of what you guys are looking at in terms of size and if you could tell us what those or remind us what those are, that would be very helpful?

I’d be glad to. I think for us to consider an acquisition today, the sweet spot would probably be somewhere between 750 million and 1.2 billion with the preference being that it would be somewhere, first, within our footprint where we can maximize the cost saves. Second would be a place where we could achieve some sort of strategic expansion, if you will, to a market where we’re underrepresented today in our franchise, so that would probably be the size that would be enough to create significant earnings per share accretion for our shareholders and to help the franchise, so that’s the sweet spot right now.

Okay. Would you be looking to go out-of-state or it was still focused in-state overall?

I think that for the next couple of years as we look for that size acquisition then something in state would probably be preferable.

Okay. Thank you very much.

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

Good morning.

Good morning, David.

Just curious, you were in this kind of unique size in legal lending limit that you alluded to earlier. Where do you think you’re seeing the tougher competition? Is it from smaller banks, small community banks or the larger regional banks?

Dave, this is Tony Peay. I would tell you it’s across the board. I think some of the smaller banks where they can compete on deal size are doing so aggressively. Rate, structure, term, every component of the lending decision they are competitive. The larger banks are doing some of the same, probably a little more rationale, but a lot of competition for every deal we look at and quite frankly for every one of our commercial bankers who’s out there making loans, so it’s a great competitive environment.

That’s very helpful. Would you say on the regional side that maybe the terms and conditions you say are maybe a little bit more rationale, is that fair?

Probably in general, yes, but I think on any individual deal, we’ve seen some things that were something less than smart.

Yes, okay. And then in the press release, you detailed the changes within nonaccruals and it’s great to see the move down, but you did have 4.4 million come into nonaccrual. Was that multiple relationships or primarily centered in one or two credits?

The pause you’re hearing is all of us looking at each other. Wait a minute, I may have that. Let me say my recollection is, is that it was multiple relationships.

Yes, very good. And then lastly given the preponderance of the branches you’re closing are the in-store format, any implications we should read into that? Of course you acquired a fair number of in-store locations with the first market deal. Are you finding that format a bit of challenge in terms of the economies and returns?

No. I would say that we did a very thorough analysis of this and if you will actually ranked our branches and we were focused on the underperforming branches and it just happened that some of them were in-store. We got some in-stores that are performing very well. And so I don’t think it speaks ill of the in-store model, it just happened that we had a few of them that we needed to close.

David, this is Elizabeth. The other thing I would add is that as we’ve acquired over the time, over the last few years, we’ve ended up picking up traditional branches where we had in-stores and so that’s another factor here where we have that overlap. But no, I would not read anything into our commitment to the in-store model. We have many very successful in-store branches.

All right, good. Thank you so much.

Thanks, David.

This concludes our Q&A session. I will now turn the call back over for closing remarks.

Thanks, Leann. Just as a reminder, this call will be available on replay at investors.bankatunion.com. Thank you.