UNB - NASDAQ

Bill Beale – CEO Rob Gorman – CFO Tony Peay - Chief Banking Officer Dave Bilko - Chief Risk Officer Jeff Farrar – EVP, Wealth Management, Insurance and Mortgage Bill Cimino - Director of Communications

Catherine Mealor - KBW Laurie Hunsicker - Compass Point William Wallace - Raymond James Austin Nicholas - Stephens Inc. Bryce Rowe - Robert W. Baird David West - Davenport & Company

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. In addition, as previously announced, since the company sold its credit card portfolio in the fourth quarter resulting in an after-tax benefit of $805,000. I'd like to offer you a little color on the OREO valuation. We've had these properties as those who have been on these calls and that we've met with face to face, since 2009. We have had a long history at this organization of trying to maximize shareholder value when we taking a piece of OREO and in this case, we felt that the best strategy was to wait and let the market come back to us on these two residential developments. We also had shared at the time that we felt like these were long term plays and I know that I specifically used that we would probably still own pieces of this 10 years from now. We are now give or take five to six years down range from that. In the fourth quarter we had a pretty sobering conversation internally about how we wanted to address these properties because the market -- it was clear to us that the market forces had not come back the way we anticipated that they would in 2010, 2011, 2012 and 2013. We felt like we needed to basically value these properties to get in line with where we think the market is today, which would allow us more options in selling either at a faster pace on individual lots or potentially bulk sales to builders, that this was the best course for us to deal with this property. That’s probably the color and I'm sure you'll have some questions about this as we go through, but we just really felt like this was the right course to take considering the circumstances. I do think it shows some of the flexibilities that the management team has and it’s willing to have a conversation about its long held beliefs and bias that the market would return and we would be able to sell these because clearly the market forces has just not recovered sufficiently enough. That said, we do have some lots under contract and we'll talk a little bit about that later. Let me move on from the OREO to loan growth, were strong during the quarter after we adjusted for the sale of the credit card portfolio. Total loans for the year grew slightly more than our expectations, mid-single digit loan growth coming in at 6.6% for the year and 9.2% annualized for this quarter. Our production levels remain steady and broad based and bode well for a strong start to 2016 lending levels. Deposits kept pace, with loan growth increasing by 10% annualized during the quarter and 5.8% for the year, continuing to be driven by steady growth in core deposit households. Asset quality continued to approve, adjusted for the valuation adjustments that we've already mentioned. We saw further reductions in OREO balances through additional sale of foreclosed properties. We sold 17 parcels in the fourth quarter at a slight gain. We currently have $3.3 million in OREO properties under contract that we believe will close in the next two quarters. $2.3 million of that is foreclosed OREO properties. $1 million is in our former branch location properties. We remain focused on building a more efficient enterprise. After reviewing our footprint, we plan to close two branches during the second quarter of 2016 and consolidate three branches in Winchester into a single standalone branch location. Upon closing these branches Unions, we’ll be operating 120 branches across the franchise. Rob will provide you more details on the financial impacts of these branch closings in his section. I'm pleased to note that the board increased quarterly dividend by $0.02 or 12% during the quarter. It's now $0.19 a quarter or 27% above the prior year’s dividend. That was a real watershed of debt for us because prior to the economic downturn, we were paying $0.18 a share in dividend. As many of you recall, we cut it to $0.12 and then to $0.06. We’ve now built it back to where we were prior to the great recession. The board also authorized a new repurchase program. We’re up to $25 million in purchases during 2016. The prior authorization ended on 12/31 and Union had exceed its execution of the $65 million authorization during the fourth quarter and began repurchasing under the current $25 million authorization. During the fourth quarter, we repurchased 321,500 shares totaling more than $8 million. As of year-end, approximately $21.1 million remained under our authorization. Let me summarize. We turned in I think solid operating results in the fourth quarter. We've not made the decision to adjust those two large pieces of OREO. I'd probably be telling you we had an outstanding quarter because I think we really did operationally. In fourth quarter end, I think in 2015 we had good results as well as our strategies continue to take hold. We see evidence of broad based loan production and deposit balance growth during the year and the quarter. Credit quality continues to improve. We talk about taking a hard look at our OREO inventory and take appropriate actions to make our foreclosed properties more marketable. We continue to take actions that will help us become a more efficient company. We’ve talked about using technology to eliminate some of the manual hand [indiscernible. Our operating performance demonstrates that we're well positioned to realize the long term potential value of our franchise and to generate the earnings growth and top financial performance that our shareholders expect. With that, I'm going to turn it over to Rob Gorman. He’s got lots of numbers to talk to you about. Rob.

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 on tangible common equity ratio was 10%, in line with the prior year. Return on assets was 93 basis points. That’s down three basis points from third quarter results, but an increase of 8 basis points from the prior year’s fourth quarter. For the full year, ROE was 90 basis points, a basis point lower than 2014. Turning to the efficiency ratio, it increased 6.5% in the quarter. That’s up from 64.7% in the third quarter and 64.7% in the prior year’s fourth quarter. For the full year, the efficiency ratio was down slightly to 66.5% from 67.2% in 2014. Now, let's turn to the major components of the income statement. Tax equivalent net interest income was $64.9 million for the quarter, down $788,000 from the third quarter, driven by lower interest income from the sale of the credit card portfolio, as well as well as lower acquisition accounting net accretion income. The current quarter’s reported net interest margin declined by 10 basis points to 3.76%. That’s compared to 3.86% in the previous quarter. Accretion of purchase accounting adjustments for loans, TDs and borrowings related to the StellarOne acquisition added seven basis points to the net interest margin in the fourth quarter. That's down two basis points or $243,000 from the third quarter. As usual, for your reference, actual and remaining estimated net accretion impacts are reflected in the table provided in our earnings release. As you will see, we estimate that net accretion will decline by approximately $2.6 million or 4 basis points in 2016 and 2015 net accretion levels. The core net interest margin, which does not include the impact of acquisition accounting accretion, was 3.69% in the fourth quarter, a decline of 8 basis points on a linked quarter basis, of which 4 basis points related to the sale of the credit card portfolio. The quarterly core margin decline was in line with our estimates and guidance that we provided you last quarter. The core margin decline was driven by lower earning asset yields of 9 basis points offset by a one basis point decline in our cost of funds. Of the 9 basis points, earning assets yields declined 4 basis points related to the sale of the credit card portfolios. The core loan portfolio yield decreased by 11 basis points to 4.3% in the quarter, while the average invested portfolio yield remained steady at 3.19%. The decline in loan portfolio yield during the quarter was primarily driven by the credit card sale impact, lower yields on new and renewed loans and slightly lower loan fees for the quarter. The lower cost of funds from the prior quarter was driven by more favorable deposit mix as [broken] low cost deposits offset the net run off in higher cost CD balances. As we noted in our earnings release, we continue to expect that the core net interest margin will decline modestly over the next several quarters as decreases in earning asset yields are projected to outpace the declines in interest-bearing liability rates. Turning to the provision, the provision for loan loss was $2 million in the quarter, or 14 basis points, which is consistent with the third quarter, down $2.5 million or 19 basis points from the fourth quarter 2014 loan loss provision levels. For the quarter, net charge-offs were $1.2 million or 9 basis points. That’s up $200,000 or 2 basis points from the prior quarter, but down materially $4.2 million or 31 basis points from the fourth quarter 2014. For the year, net charge-offs came in at $7.6 million or 13 basis points. That compares to $5.6 million or 10 basis points in the prior year. The non-interest income levels in the fourth quarter were $17 million, which was up approximately $300,000 or 1.7% from the third quarter, driven by seasonally higher overdraft fees and increased gains on sales of securities, but offset by declines in our mortgage banking income, which resulted from seasonally lower levels of mortgage loan originations in the fourth quarter. As we expected, mortgage loan originations declined by $35 million or $0.26 in the current quarter to $113 million, down from $148 million in the third quarter. Fourth quarter non-interest expenses came in at $54.5 million, a $1.2 million increase from the prior quarter. Excluding the $4.2 million in OREO valuation that Billy discussed, non-interest expenses declined by $3.1 million or 5.8% compared to the third quarter level. The net decrease is attributable to lower legal related fees, lower group insurance costs and lower credit related expenses, as well as slightly higher gains on the sale of our OREO properties that Billy mentioned. Marketing expenses also declined $400,000 related to the timing of advertising campaigns from the prior quarter. As a reminder, we closed 7 branches in the third quarter and began to realize the annual expense savings of $1.9 million on a run rate basis during the fourth quarter. The annual run rate savings from the 2015 branch consolidations that Billy noted will be approximately $925,000, which we expect to begin materializing in May. We’ll also be incurring approximately $450,000 in non-recurring expenses in the first quarter related to closing the 5 branches and to open the new stand-alone branch. Now let me just take a quick minute to provide some comments on the financial impact of selling our credit card loan portfolio to Elan in the fourth quarter and the ongoing outsource partnerships we entered with them. As we discussed in the third quarter, the transaction closed in October and resulted in approximately $26 million in credit card loans being sold. During the quarter, we recorded a pre-tax net benefit from the sale of approximately $1.2 million. Starting in the fourth quarter, we are now sharing in the ongoing revenue stream from the sold credit card accounts as well as on any new accounts we generate going forward. As previously noted, the impact of the loan sale lowered our net interest margin by approximately 4 basis points due to lost interest income. The combination of shared non-interest revenue, cost savings and income from reinvested proceeds will be accretive to earnings. Now turning to the balance sheet. Total assets stood at $7.7 billion at the end of the year, an increase of $99 million from the third quarter and $335 million from the prior year 2014 year end level. The increase in assets was driven by net loan growth. Loans net of deferred fees were $5.7 billion at quarter end, up $128 million or 9.2% annualized, while average loans increased by $87 million or 6.3% annualized from the third quarter. Adjusted for the sale of the credit card portfolio, loan balances for the year ended up 6.6%. At December 31, total deposits were $6 billion, an increase of $145 million or 10% annualized from the prior quarter, as growth in low-cost deposit balances outpaced the net runoff in higher cost CDs. Average deposits increased $91 million or 6.3% annualized basis from the prior quarter. And for the full year, total deposits were 5.8% or a little over $300 million for the year. As a result, our loan to deposit ratio remained constant at 95%. Asset quality continued to improve during the fourth quarter. Non-performing assets totaled $27.2 million at quarter-end. That was comprised of $12 million in non-accruing loans and $15.3 million in OREO balances. This represents a decrease of $7.8 million from the third quarter and a decline of $20 million or 43% from the prior year end levels. Non-performing assets as a percentage of total outstanding loans were 48 basis points at quarter end, a decline of 41 basis points from the prior year and a decline of 15 basis points from the prior quarter. During the quarter, the company revaluated its OREO sale strategies in light of limited progress in selling properties in inactive rural real-estate markets and held for an extended period of time. As Billy mentioned, the evaluation adjusted to allow the company to be more aggressive in disposing of these long held OREO properties and ultimately reduce the ongoing expenses associated with managing these properties. OREO properties totaling $3.3 million are currently under contract to sell and we expect those to close within the next few quarters. Non-accrual loan balances declined by $1 million in the quarter. While again excluding the valuation adjusted for OREO balances, declined by $2.6 million driven by property sales closed during the quarter. Our allowance for loan losses increased by approximately $780,000 from September 30 to $34 million at the end of the year. The net result of loan loss reserve addition is driven by loan growth for the quarter, partially offset by reductions related to the sale of the credit card portfolio in the fourth quarter. The allowance as a percentage of total loan portfolio, adjusted for purchase accounting, was 98 basis points at quarter end. That was down three fifths or 3 basis points from September 30 level and down 10 basis points from December 31, 2014 level as a result of continuing improvement in our asset quality level. The non-accrual loan coverage ratio however increased to 285% from 257% in the third quarter and that was up significantly from 168% in the fourth quarter of last year. Tangible common equity to the tangible asset ratio at quarter end is 9.2%, which is down 9 basis point from third quarter levels. Excess capital at quarter end amounts to approximately $90 million, with excess being defined as balances above an 8% tangible common equity ratio. We repurchased 321,500 shares during the quarter and as Billy noted, we had $21 million remaining under the current board repurchase authorization at year end. Management and the board of directors continue to evaluate all capital management options, including dividend payout levels, share repurchases and acquisitions as the deployment of our capital for the enhancement of long-term shareholder value remains one of our highest priorities. So in summary, in this fourth quarter 2015 results demonstrated steady progress for our strategic growth objectives and we remain steadfastly focused on leveraging the Union franchise to generate sustainable and profitable growth and remain committed to delivering top-tier financial performance and building long-term value for our shareholders. With that, let me turn it back over to Bill to open it up for some questions.

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, it's still 45 days, which I think is consistent with the industry.

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.