AUB Q1 2017 Earnings Call
Operator: Good morning. My name is Heidi and I will be your conference operator today. At this time, I would like to welcome everyone to the Union Bankshares Corporation First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Bill Cimino, you may begin your conference.
Bill Cimino: Thank you, Heidi and good morning everyone. I have Union Bankshares President and CEO, John Asbury; and Executive Vice President and CFO Rob Gorman with me today. We also have other members of our senior management team with us and are available for the question-and-answer period. 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 John, 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 John.
John Asbury: Thank you, Bill and thanks everyone for joining us today. Union delivered a fourth consecutive quarter of double-digit loan growth on an annualized basis, nearly matched that with our deposit growth rate and saw a significant year-over-year improvements to our profitability metrics. For the first quarter, Union delivered a 13% year-over-year improvement in net income, a 16% growth in earnings per share, 3.9% linked quarter growth and loans which annualizes to 16%, and a 3.7% linked quarter growth in deposits which annualizes the 15%. Union saw strong year-over-year gains in our return on assets, which was up 4 basis points from the prior year, return on tangible common equity, which was up 107 basis points from 2016, and a year-over-year improvement of 82 basis points in the company's efficiency ratio. I'll comment on two things before I talk about the bigger picture, our loan growth guidance and the increase in non-accruals. First, loan growth for the quarter came in well ahead of our annual projections and reviewing the data behind this we saw a broad-based growth and our loan pipelines remain strong going into the second quarter. Nevertheless, I still do not currently expect the first quarter annualized growth rate to sustain through the rest of the year. Given the first quarter results will increase our current annualized loan growth guidance to the low double digit range and re-evaluate that at the end of Q2. We did have a $12 million increase in non-accruals, with about half of the increase coming from one long term commercial relationship and about a quarter coming from one non-owner occupied commercial real estate client, both have some unique characteristics surrounding their change in status, they had specific reserves acquired against them over the quarter non-indicative with any portfolio trends. The Virginia economy is steady, we are not seeing any weakening in the macroeconomic environment here. Other leading indicators of credit quality within Union remain benign and we are on an improving trend over the course of the quarter. But non-accruals being so low any individual issues among commercial borrowers were certainly be noticeable, while I do believe that [technical difficulty] levels at Union and across the industry are below the long-term trend line, we have no early indications of a downturn in portfolio level credit quality at this time. Turning to the bigger picture, as I stated in the last call, there are four areas sharply in focus for 2017 at Union. One is diversification; two, core deposit funding; three, efficiency; and four, preparing to cross the 10 billion asset threshold. Now let me speak to each. One diversification, Union has a great opportunity to further diversify our loan portfolio and our income streams. This will build a stronger bank over the long run since we are in a unique market position where we can deliver many products and services better than a big bank. Assets under management grew by 490 million or approximately 25% from the prior year to 2.4 billion as of March 31. The growth was driven by our strategic acquisition of Old Dominion Capital Management in 2016, which added 314 million in assets under management, as well as by solid organic growth of 176 million or 11% by the legacy Union Wealth Team. I believe this strong year-over-year growth shows that the wealth team is gaining traction in the market. Of our loan growth, we saw broad based growth across virtually all markets and categories and feel comfortable with our loan growth momentum. We are very pleased to see our linked quarter growth rates of C&I loans of 4.5% actually edge out the growth rate of non-owner occupied commercial real estate over the course of the quarter. I think this shows that we are making in-roads and building our C&I banking practice. Core deposit funding, we want to broaden our deposit base to manager our loan-to-deposit ratio to our targeted 95% level over time. We are intensely focused on improving our retail banking depository offerings, increasing our deposit intensive small and medium sized business relationships and enhancing our treasury management capabilities where we believe we can offer a superior treasury solution with better and personal support. We are pleased to nearly match our deposit growth rate to our loan growth rate during the quarter with a 15% annualized increase in deposits. Deposit growth was broad based led by increases in personal account balances, the highest percentage growth rate by deposit product type came from non-interest bearing deposits which is our most important product type. We grew core households by 2% annualized rate of increase in the quarter building upon our already strong retail deposit base. I still think we have a great deal of room to run in building out our deposit base with small and midsized businesses. Deposit and household growth was aided by our new head of marketing and his team as we launched a new branding campaign designed to highlight the better customer experience that Union can provide relative to some of our larger competitors. We are hard at work on refining our brand proposition which we believe can be appointed differentiation between Union in our competition and give consumers a compelling reason to bank with us. Efficiency, while ROA and return on tangible common equity improved meaningfully over the past year improvement in our efficiency ratio is taking more time. In the first quarter the efficiency ratio declined 82 basis points from the prior year on a consolidated FTE basis, but is not directly comparable on a linked quarter basis due to the shorter day count in Q1, and a number of seasonally higher expenses. Efficiency improvement remains a significant opportunity for Union and I am keenly focused on moving the needle here. With this in mind, during the quarter I did eliminate a layer of management between the wealth and mortgage businesses, and now those teams report directly to me. This gives me greater visibility into those organizations and better positions their leaders with the seat at the same table as the other members of the executive team. We’re also nearing the end of a peer group benchmarking in end-to-end process and procedure review that we launched late last year, add to that evaluation is complete, and we’ll see what opportunities exists to improve and streamline procedures while better leveraging technology to improve the scalability of our operating platform as well as the overall efficiency of the organization. And last preparing to cross 10 billion, we made steady progress on this important objective and remain on track to be operationally ready to cross by the end of the year. We ran our first DeFas [ph] test run in the first quarter and the process went very smoothly. We expect to refine the model and process over the summer. We have also finished building out the information technology infrastructure and are nearly complete with the enterprise risk management build out. The work undertaken to cross $10 billion has been a multiyear process at Union and the team feels good about the position we’re in as we get into the final phase of the work. So, to summarize Union had a great first quarter with double-digit growth and loans, deposits, EPS and net income, and we made progress on our four focus areas seeing meaningful improvement in each one. I'll now turn the call over to Rob to cover the financial results for the quarter.
Rob Gorman: Thank you, John. And good morning everyone. Thanks for joining us this morning. I’d now like to take a few minutes to walk you through some of the details of our financial results for the quarter. As John noted, consolidated earnings for the first quarter were $19.1 million or $0.44 per share which is 16% higher than last year's first quarter earnings per share of $0.38. The Community Bank segments earnings were $19.1 million which was up 2.2 million from the first quarter of last year, while the mortgage segment recorded breakeven results for the quarter. We continue to make progress on our path to top tier financial performance with sustained improvements in our profitability metrics this quarter over the prior year. The return on tangible common equity ratio was 11.2%, which as John mentioned was up a 107 basis points from 10.13% in the same period of last year, while the return on assets for the quarter was 92 basis points, up 88 basis points in the first quarter of 2016. Now, turning to the measure components of the income statement, tax equivalent net interest income was $69.1 million that’s down $2.4 million from the fourth quarter primarily resulting from the day count in the first quarter, but up 2.9 million from the prior year's first quarter which was driven by higher earnings asset balances. The current quarters reported net interest margin was 3.66%, which is a decline of 12 basis points from the previous quarter and down 16 basis points from the prior year. Accretion and purchase accounting adjustment for loans and borrowings added eight basis points to the net interest margin in the first quarter and that's consistent with the prior quarter. The core net interest margin which excludes the impact of acquisition accounting accretion was 3.58% in the first quarter also down 12 basis points from the fourth quarter due to lower earning asset yields of two basis points and a 10 basis points increase in our cost of funds. The decline in earning asset yield was primarily driven by lower quarter loan portfolio yields which decreased by eight basis points to 4.26% in the quarter. The decline in the loan portfolio yield from the prior quarter was primarily driven by the four basis points yield impact for commercial loan level swap related interest income reported in the prior quarter as a result of the spike in market interest rates during the prior quarter. In addition, loan fees came in lower in the first quarter versus the prior quarter which impacted the quarter-to-quarter loan yield comparison. The quarterly 10 basis points increased in the core cost of funds to 54 basis points was primarily driven by the full quarter impact of the $150 million subordinated debt issued in December and higher short-term borrowing rates driven by the increase in short-term market rates during the quarter. The cost of deposits was 32 basis points for the quarter, up two basis points from the fourth quarter primarily due to changes in deposit mix and increases in money market and time deposit rates. Looking forward our base line net interest margin projection caused for a core margin stabilization in the second quarter, followed by core margin expansion in the second half of 2017. Our outlook assumes that the Fed raises the Fed funds rate by 25 basis points one more time in 2017 in the third quarter. The provision for loan losses in the first quarter was $2 million or 13 basis points, an increase of $536,000 from the prior quarter. The increase in the current quarter was driven by higher loan balances and the increases in specific reserves related to non-accrual loans. Additionally, we recorded a $112,000 provision during the quarter for off balance sheet credit exposures resulting in a total $2.1 million in provision for credit losses for the quarter. For first quarter net charge-offs were $788,000 or 5 basis points on an annualized basis this compares to $2.2 million or 15 basis points for the same quarter last year and $824,000 or 5 basis points for fourth quarter of 2016. Non-interest income increased $2.9 million or 18% to 18.8 million in the first quarter, up from 15.9 million for the first quarter of 2016. The year-over-year increases were across all non-interest income line items, with the exception of mortgage banking revenues which declined modestly. Of note, wealth management fees were up $656,000 or 30% year-over-year primarily as a result of the acquisition of Old Dominion Capital Management in the second quarter of 2016. Non-interest expense increased $1.1 million of 2% to $57.4 million in the first quarter from $56.3 million in the fourth quarter of 2016. Salaries and benefit expenses increased 2.1 million and that was primarily driven by seasonal increases in payroll taxes, one month of the annual merit adjustments in the quarter, increased medical insurance claims that came in during the quarter and non-recurring cost which includes severance, expense, some succession planning expenses and branch related retention expenses of approximately $650,000 in total from a non-recurring perspective. These increases were partially offset by declines in our FDIC insurance expense of $697,000 and marketing expenses came in lower at -- in the amount of $206,000. Turning to the balance sheet, total assets now stand at $8.7 billion at March 31, an increase of $837 million from the prior year balances. The increase in assets was driven primarily by the loan growth both during the quarter and the year-over-year quarters. At quarter end, loans held for investment were $6.6 billion, that's an increase of $247 million or 15.7% on an annualized basis from the prior quarter. Loans held for investment increased $774 million, were 13% from the March 31, 2016, while quarterly average loans increased $674 million or approximately 12% from the prior year. Quarterly loan growth was strong across all commercial and consumer loan categories. As John noted given our first quarter performance we expect low double digit loan growth for the full year and we'll provide updated full year guidance during our second quarter conference call. At March 31, total deposits were $6.6 billion, that's an increase of $235 million or 14.7% annualized from December 31. Deposit balances were up $670 million or 11% from March 31, 2016 levels. All deposit categories experienced good balance growth during the quarter and year-over-year. Now turning to credit quality, non-performing assets increased $12 million to $31.9 million during the quarter and that's comprised of $22 million in non-accruing loans and $9.6 million in OREO balances which includes approximately $2.7 of former bank locations. As John mentioned the increase in non-accruals was primarily driven by two large credit relationships with unique circumstances and is not indicative of credit quality issues in our markets. The allowance for loan losses increased by $1.2 million to $38.4 million at March 31, primarily due to loan growth during the quarter and increases in specific reserve related to non-accruals loans mentioned. The allowance as a percentage of the total loan portfolio adjusted for purchase accounting was 84 basis points at quarter-end, down slightly from December 31 levels as a result of the benign asset quality environment and lower historical lost rates. So in summary, Union's first quarter financial results demonstrated continued solid progress towards strategic growth objectives. We continued to be steadily focused on leveraging the Union franchise to generate sustainable profitable growth and remain committed to achieving top tier financial performance and building long-term value for our shareholders. And with that let me turn back over to Bill Cimino to open it for questions from our analyst community.
Bill Cimino: Thanks, Rob. And Heidi we’re ready for our first question please.
Operator: [Operator Instructions] And your first question comes from the line of Catherine Mealor. Your line is open.
Catherine Mealor: Let’s take on the loan yield, and you mentioned earlier that part of the decline in the core loan yields this quarter came from lower swap income and lower loan fees, but just kind of taking a step back to big picture, Rob, can you just give us any insight into where you're seeing new and renewed loans trending. Are you feeling that that is stabilizing or is there still some downward pressure there, especially given the big growth that we’ve seen. Is that coming at any kind of cost. And then also separately, what's the impact on the loan portfolio that you’ve seen so far from the two recent rate hikes?
Rob Gorman: Yeah. Sure, Catherine. Yeah, we put on loans on average in the portfolio at above 4% this quarter. We have seen that come down a little bit in the quarter, primarily because we’ve seen a kind of mix shift in fixed and variable rate loans and also we see some pretty good increase in loan swaps that we put on this quarter as well. So, you're seeing a bit of portfolio yield, a down draft, just from the variable rate perspective on those loans that are coming on in the loan swaps. But, obviously that puts us in good position as the rates start to rise and we expect to see that expand going forward. So, I would say we’re probably stabilizing at this level right now around the 4% average fixed and variable rates loan production. In terms of the rate increases we recently saw that’s, well we did see some pick up on that, maybe a one to two basis points during the quarter from the December move, we do expect to see additional pickup in the current quarter and the out quarters due to the most recent Fed funds move. So, that’s why we’re guiding towards stabilization of the margin and expansion going in the second half.
Catherine Mealor: Okay. Got it. And then that’s helpful. Thank you so much Rob. And then on mortgage, any update on your outlook for mortgage just getting this -- obviously this quarter with seasonally slower. Are you seeing a pick up in the pipeline as you're getting into the second quarter or you still seeing that pull back?
Rob Gorman: Yeah. As you know, we expect that it would be a seasonally down quarter for production and breakeven was pretty much what we had expected for the quarter. We are seeing that the pipelines have built up, we look forward to seasonally increased production in the second quarter and expect that return to profitability in meaningful way will take place in the second quarter and third quarters, based on what we seeing today.
Operator: Your next question comes from the line of William Wallace from Raymond James. Please go ahead.
William Wallace: Hey, Rob I’d like to maybe just dig a little bit deeper on the margin. Last quarter, I believe your guidance was for maybe four to six basis points of pressure in the first quarter. So, I'm wondering maybe if you could just talk a little bit about where margin came in different than your expectations. What drove the additional compression that you were not anticipate?
Rob Gorman: Yeah. I think we saw a bip or so just related to the mix in loan portfolio that I just talked about, but the other driver was the cost of our short-term borrowings or better home loan bank borrowings which moved very quickly as market rates move. And we saw about 22 basis points or 23 basis points move in one month LIBOR which drove that up more quickly than we had expected during the quarter. So that was about 2 basis points up the difference as well. And then you saw that our cost of deposits increases about 2 basis points that’s a little hard than we have expected. We did -- as you know with the long growth in double digits we're driving to increase our deposit base. We did see growth in money markets and CDs, and those are a bit higher cost than that added cost to the quarter that was a bit harder than we had originally projected.
William Wallace: And I guess maybe we will see when you file the Q, but have you adjusted your betas on the deposit side? Are you going to screen now a little bit less asset sensitive than you have in the prior models?
Rob Gorman: I don’t think we are going to screen less I think we'll be in the same ball park or actually a little better just due to the loan swaps that we put on and the variable rate loan product that we have been putting on.
William Wallace: And then I am curious you mentioned that the loan fees were down, but you didn’t mention that as to where you missed your expectations. So were they down to a level that was more what you would expect?
Rob Gorman: Actually they were a bit down, I shouldn’t mentioned that. That was -- they were down about a bip, a little lower than we had expected. Because the way we project the loan fee is we project that they will be flat quarter-to-quarter and they came in a bit lower than we have -- than the prior quarter.
William Wallace: So you got a move in December and you got a move in March, but you don’t think that those moves are going to drive margin expansion in the second quarter, on a core basis?
Rob Gorman: No, I think it's going to kind of even out, again, depending on where market rates move. We saw those increases a bit more at the end of March and going into April due to the Fed move in March. So our short-term borrowings are increasing as well, so it kind of offsets that in the second quarter. But then we should start to see that stabilization in the second quarter and some margin expansion. You know, call it 2 to 3 basis points in the out quarters after the second quarter.
William Wallace: And that assumes 2 to 3 basis points if we get another move from the Fed. Is that you are saying? You would expect --.
Rob Gorman: Yes we are assuming another Fed and that’s correct.
John Asbury: But only one.
Rob Gorman: Yes, one.
William Wallace: So John, you have mentioned just a kind of bigger picture, strategically a focus on treasury management and driving stronger DDA deposit growth and we saw that to a degree in the quarter. Is that something that -- this quarter is that reflective of a change in strategy or is it too early yet to see any benefits from just treasury management and other strategic things that you are doing to drive more core deposits to the bank?
John Asbury: I would say in terms of structural change in the overall mix, it's too early. I can say this; the team is very focused. So I think that we have complete clarity within the company about the need to pace our loan growth with deposit growth and I think it is eminently clear that the bankers have never been more focused on that. We have made some changes in the incentive plans on the commercial side to better drive and reward deposit growth performance. So some of this is just a focus effort, there are a lot of things, a lot of moving pieces in the retail bank right now, is they've sharpened their focus, relooked at the overall product offering, we got a new branding effort underway, advertising. So it’s a little bit of everything, Wally, but I would not say that we are at a point where we've had some sort of fundamental change and are now getting significantly better results in commercial side. Tony, would you agree with that?
Tony Peay: I agree with that, a little bit longer sales cycle.
John Asbury: Yes, another thing. But that’s good news, in the sense that, we are getting improvement just by better focus and so there are things that will follow behind. For example, we are upgrading later this year to the state of the art version of bottom line our treasury management platform from an older version. That will make us extremely competitive and frankly we should be able to compete with the best of them like Wells Fargo head-to-head on treasury management platform in terms of a focus on small to midsized businesses and so with that it's going to come better results overtime, I'm quite convinced.
William Wallace: Okay. I actually have two more questions. So on the loan growth side, you are -- you're -- I'm curious that if the commentary that you provided would suggest that the closings are -- will have remained strong, so far three weeks in April, but you don’t want to jump to guidance and you just want to see how May and June play out before you take your guidance higher?
John Asbury: That’s right. We try to be pretty conservative whenever we provide guidance. It just makes me nervous. I mean I do not think that it's reasonable to expect that we’re going to have the 15% annualized growth rate for the full year. Clearly our results from the funding standpoint were skewed towards the end of the first quarter, we had a bang out March. Pipelines look really good compared to where we were this time last year for example. So I see nothing that is reducing the optimism, but at the same time I just don’t feel comfortable saying anything other than what we’ve said. And we’ll revisit one guidance quarterly.
William Wallace: Okay. But maybe just reading the tea leaves it sounds like this quarter is off to a good start and you're maintaining that same rate of growth that you saw in the first quarter?
John Asbury: I would say [Multiple Speakers], I will tell you that -- nice try, based on what we see right now I'm feeling comfortable with annual guidance and the very low double-digit rate Wally. And then lastly, you know how it works, but we’ll continue to recalibrate it at the end of each quarter.
William Wallace: Sure. Okay. All right, thank you. And then my last question is just real quick Rob. The [indiscernible] was up about 700,000, did you guys invested more or is there a debt benefit?
Rob Gorman: No, it was a pay out on a policy, so that came to about 700,000 or so.
William Wallace: So, you highlighted the --.
Rob Gorman: [Multiple Speakers] would have been barely flat.
William Wallace: Okay. And then you highlighted about a similar amount in non-referring expenses around severance and some other stuff that kind of -- that would be almost one time. So net those out, there is no reason --?
Rob Gorman: Yeah.
William Wallace: Okay. Thank, you guys. I'll let someone, I have asked too much, I'm taking too much.
Operator: Your next question comes from the line of Austin Nicholas with Stephens. Your line is open.
Austin Nicholas: On the non-accrual loans, where there any specific industries that those credits were attributed too?
John Asbury: Nothing that -- I would describe this as an unusual situation and an unusual industry, nothing that would be reflective of any sort of portfolio issue. So, it's just one-off, I'll leave it at that.
Austin Nicholas: Yeah. And then I guess outside of those two broader picture are there any areas where -- or industries that you are you are staying away from or more cautious on, a number of banks over the past couple of days of have seen some issues with healthcare related credits and maybe some hotels. Just wondering if you had any commentary on --?
John Asbury: It’s a good question. We just did our monthly sort of problem asset review and so we certainly are feeling pretty clear. I would say there is nothing I would specifically point to Austin, as we have been for a while, we’re generally cautious about multifamily, we don’t do the sort of high rise luxury, large urban market types of projects that would be most of the concern. We don’t see anything specific to healthcare, I would be worried about things like exposure to small rural hospitals for example, but we don’t have that. So, the areas that maybe of concern are not anything that’s particularly well represented in our portfolio. We are -- our hospitality portfolio is performing fine, and overall as we look around it feels pretty steady.
Austin Nicholas: Got you. That’s very helpful. Thank you. And then maybe could you just remind me what the kind of message is on M&A and if its changed at all over the six months?
John Asbury: Sure. Yeah, it really hasn’t changed. I would say that having now been here six months, I've certainly feel well informed and would reaffirm what we've said before publicly which is; one, the most important and first objective for the company is the organic performance of the Union, grow our bank one customer at a time, make the most what we have right here right now. That is job number one. But secondary strategy and it is secondary, is the use of M&A to create value, to create shareholder value, to expand strategically into markets where we would like to have more density. Clearly, we are mindful of the opportunity to use M&A and in an appropriate manner as a level to deal with a crossing the $10 billion asset threshold. So nothing is really changed there. And to anticipate the types of questions that usually followed those comments we would love to continue to increase density in Virginia, particularly in some of the larger markets where we have a presence, but are not as dense as we would like to be. A good example would be the greater Hampton roads, second most populous area of Virginia. So that would make a lot of sense. We could always do in-fill in existing markets where we are today. North of Virginia is the most populous area of the state, its the most wealthy area. We would like that as it relates to commercial business opportunities we are not interested in building or acquiring any sort of outsized commercial real estate exposure there. Because it does have a tendency to cycle and it has a history of that more so than the rest of Virginia. And then our future could carry us out of state. Would we look out of state? Yes we would. The most logical out of state extension of the franchise we believe is North Carolina. We continue to have a good experience with our LPO in Charlotte. It’s a market that I know well, having lived there many times and done business there for a great deal of my career. That would make sense. We would look into Maryland as well. And anything we would do, I can't imagine we would do something that’s not contagious. So that’s sort of our view. But I would go back to our most important objective which is organic performance of the bank.
Austin Nicholas: And then maybe just on the tax rate. It was a little bit low this quarter, was that just related to the [indiscernible] income and should that kind of pop back up to the, maybe 26.5% run rate?
Rob Gorman: Yes, that’s right Austin. And so it's going to fall within the 26% to 26.5%, probably on the higher end going forward.
Operator: Your next question comes from the line of Bryce Rowe with Baird. Your line is open.
Bryce Rowe: I was curious Rob, if maybe you could talk through kind of a run rate for operating expenses. John mentioned the enterprise risk management build out being nearly complete and some of the upgrades from a treasury management technology perspective that, you have this year. So just wanted to get a feel for the type of operating leverage we might be able to see as you progress through '17 and into 2018? Thanks.
Rob Gorman: Thanks Bryce. Yes, we haven’t come off our guidance on that. We've said, on quarterly basis we are talking about 56.5 million a quarter to 57 million a quarter fluctuating in that band, expecting a full year basis given the $228 million to $230 million range. That’s relatively low growth rates; I think its 2.5% over last year. And a big part of that is we are having our run rate, the cost of investing for the $10 billion threshold, as we've mentioned before we have about $5 million annual expenses baked into that number, and really don’t expect that’s going to change too much going forward. So I guess that’s kind of where we would be guiding you too.
Bryce Rowe: And then John maybe a follow up to the layer of management. You took out between wealth management and mortgage area. Have you identified any other lower hanging fruit, so to speak, now that you've been there for six months?
John Asbury: I think that what I was wanting to do in terms of the position that I was referencing, frankly, is just a streamline the organization and felt that wealth management and mortgage have good leadership, they are important businesses to the bank. And I felt that the span of control that we had with a leader dedicated to those two businesses we’re just not sufficient, had nothing whatsoever to do with the performance of that individual who is very well regarded. We are always looking at opportunities to improve efficiency, we do have an effort underway that I did mentioned briefly, to look at our overall processes, I should say to do some benchmarking looking for areas of opportunity. And so as I think about Union, clearly we have a big branch network which we'll continue to rationalize were possible that’s a significant issue for us. And I think that the issue is not so much that we’re overstaffed per say, but it's really more about as we continue to grow the bank and we are growing the bank, how do we do in a manner where we don’t need to keep putting more FTE up against it. There are still a lot of manual processes within our company. And there are ways we can use automation and technology to improve those processes and to just get more product through our system in a more efficient manner improve our quality. So, we’re just kind of going through department-by-department and we’re firming up our view. And I'll kind of leave at that, so I think it's not so much a, there is some big obvious thing here. I think what's going to happen is going to take a number of individual actions sort of across the board, but beyond making sure that the branch network is optimized, I think that the use of automation, the use of technology to increase productivity is very important.
Bryce Rowe: That’s helpful. And then maybe one last topic for me. I appreciate some of the discussion around loan pricing here this quarter and a bit of a mix shift to more variable rate pricing and how that could help in the future as rates go up. Any commentary around competitive situation and loan pricing from a competitive perspective. And periods, are there particular markets that you guys operate in that are more competitive now than others? Thanks.
Rob Gorman: I'm going to Tony Peay, Chief Banking Officer to render the opinion and then I follow behind him.
Tony Peay: Hi, Brice. I would say that the competition is probably more sane today than it has been in a while. It's still pretty irrational up in the northern part of the State with a couple of banks in particular who are very aggressive in their pricing. But on most deals we’re looking at Richmond's competitive, it always has been and always will be. But, we’re seeing a lot more rationale pricing, we’re not having the stretch to get deals, we’re not having to adjust our credit policy guideline. So, it’s a fairly sane market right now.
Rob Gorman: And that’s very consistent with what I hear from a team and what I see, it's always been competitive always will be, but I don’t feel -- it doesn’t feel any different as if it somehow getting worse. Well discretionary, it's a lot with how they do that, why they do that.
Bryce Rowe: Got it. Okay. Thanks guys.
Bill Cimino: Thank you. Next question. And Heidi, we’re ready for our last caller please.
Operator: Certainly. Your final question comes from the line of Blair Brantley from Brean Capital. Please go ahead.
Blair Brantley: Most of my questions have been answered. Just kind of bigger picture, so with the pull back in kind of the spreads in the 10 year was not and then some of the margin compression. How is your view about reaching this targeted operating goal? Is it still yearend '17 or early 2018, on the ROA, ROE kind of metrics?
Rob Gorman: Yeah. If you look at on a quarterly basis, we continue to look towards those stages probably early in called it 2018. As we’ve seen that the loan growth that you’ve been seeing that’s going to obviously improve revenue and revenue growth expenses being tightly managed we should be able to achieve those goals at the time table that we’ve mentioned.
Blair Brantley: Right. And then as a quick follow-up, with the layer management being gone, is that savings to the bottom line or is that just being reinvested into other areas?
Rob Gorman: Yeah, it’s a real savings.
John Asbury: We had severance expense related to it. [Multiple Speakers].
Blair Brantley: Okay. All right. Great. Thank you.
Rob Gorman: Thanks, Blair.
Bill Cimino: Thanks, Blair. And thank you everyone for calling in for today. As a reminder, we’ll post the reply of this conference call on our website investors.bankatunion.com. Thank you, we’ll talk to you next quarter.
Operator: This concludes today's conference call. You may now disconnect.