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Edited Transcript of ANCX earnings conference call or presentation 26-Oct-18 1:00pm GMT

Q3 2018 Access National Corp Earnings Call

Reston Nov 1, 2018 (Thomson StreetEvents) -- Edited Transcript of Access National Corp earnings conference call or presentation Friday, October 26, 2018 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Margaret M. Taylor

Access National Corporation - Executive VP & CFO

* Michael W. Clarke

Access National Corporation - President, CEO & Director

* Robert C. Shoemaker

Access National Bank - Chief Banking Officer

* Sheila M. Linton

Access National Corporation - VP & Corporate Secretary

* Steven A. Reeder

Access National Bank - Executive VP & Chief Deposit Officer

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Conference Call Participants

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* Catherine Fitzhugh Summerson Mealor

Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP

* Joseph Gladue

Merion Capital Group LLC, Research Division - Director of Research

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Access National Corporation Third Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would like to turn -- I would like now to turn the conference over to your host, Sheila Linton. Ma'am, you may begin.

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Sheila M. Linton, Access National Corporation - VP & Corporate Secretary [2]

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Thank you, Tom, and good morning, everyone. My associates who will be participating in this call today are Mike Clarke, CEO; Bob Shoemaker, Executive Vice President and Chief Banking Officer; Steve Reeder, Executive Vice President and Chief Deposit Officer; and Meg Taylor, Executive Vice President and Chief Financial Officer. Please note that our earnings release was issued late yesterday, October 24, 2018, and is available to download on our website at ir.accessnationalbank.com.

During today's call, we will comment on our financial performance using both GAAP and non-GAAP measures. Important information about these non-GAAP measures, including reconciliations to comparable GAAP measures, is included in our earnings release for the third quarter of 2018. I'd remind everyone that on today's call, we may make forward-looking statements, which are not statements of historical fact and are subject to various assumptions, risks and uncertainties, which change over time. There can be no assurance that actual performance will not differ materially from any future results expressed or implied by these forward-looking statements. Please refer to our earnings release for the third quarter of 2018 and our other SEC filings for further discussion of the company's risk factors, as well as important information regarding our forward-looking statements, including factors that could cause actual results to differ materially. We will take any questions from the research analyst community at the end of the call.

I will now turn it over to Mike Clarke, CEO.

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Michael W. Clarke, Access National Corporation - President, CEO & Director [3]

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Thank you, Sheila. Good morning to our listeners. We are pleased to have reported a record level of earnings of $9.6 million or $0.46 per diluted share. Concurrent with the earnings release, we announced a $0.01 increase in the quarterly dividend to $0.17 per share. This dividend represents an earnings payout ratio of 37% and it's consistent with our objective of targeting a 40% payout ratio of dividends against level and sustainable earnings. Before I go much further, I'd like to advise and remind listeners that on October 5, we announced in an agreement to combine Access National Corporation with Union Bankshares Corporation. The combination will be an all-stock transaction in which the holders of ANCX will receive 0.75 shares of UBSH for each share of Access.

Based on June 30, 2018 data, the merger creates Virginia's leading regional bank with assets in excess of $16 billion. The directors and executive officers of Access, all of whom are shareholders of Access, including myself, view this transaction as a compelling investment in Union. The resulting company enables the Access shareholders, clients and associates to realize the benefits of accelerated growth that is greater than what we would expect to achieve independently.

Our leadership is excited to become partners and shareholders of Union so we can contribute to the shared vision of being Virginia's regional bank. The investor slide deck published in connection with the merger announcement, reveals favorable strategic alignment and the strategic fit of Access and Union against Union's established strategic priorities.

Now back to the financial results. For the third quarter and year-to-date, we exceeded our strategic profitability targets by realizing a return on tangible common equity of 15.2% and 14.52%, respectively, compared with our target of 13.25%. With the Middleburg integration further in the rearview mirror, we experienced continued improvement in the efficiency ratio bringing it down to 60.19% for the third quarter and 62.99% year-to-date compared with our target of 65% or better. We expect further improvement as the balance sheet experiences continuing growth and leverage in future periods.

Importantly, loan and deposit growth during the quarter exceeded our strategic growth rates by a good margin. Our marketing focus on middle-market operating businesses continues to result in a well-balanced and diversified loan portfolio, with growth led by C&I loans and owner-occupied commercial mortgages. Bob Shoemaker will elaborate with color on the recent growth later. Our focus on operating companies has also been critical to the growth and maintenance of a strong core deposit base. And Steve Reeder is with us, and he will offer some insights on that aspect of our business a bit later.

Referring back to the merger announcement slide deck. Investors should take note of the positive and accretive effect of the ANCX loan and deposit portfolios on that of Union. The growth of our loan and deposit portfolio during this most recent period should uphold and enhance the contribution rates of DDAs and commercial loans to the pro forma of the total company as illustrated in the slide deck.

Our fee-based services are an important element of the value proposition to clients, as well as an important contributor to shareholder value. For the wealth segment, assets under management grew 12.8% on an annual basis during the third quarter to more than $2 billion. On a linked quarter, the mortgage segment margins decreased while origination volume increased resulting in pretax earnings of nearly $1 million for the 3 months ended June 30, 2018. Together, our wealth and mortgage markets businesses contributed 17.3% of year-to-date pretax income, up from approximately 14.5% for the same period of 2017. Our aspirational target is a pretax contribution equal to 20%, indicating there is work to be done. We have experienced leadership in place in both these businesses to help us make further advances against the aspirational targets.

I will now turn it over to our CFO, Meg Taylor, who will elaborate on the financial performance.

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Margaret M. Taylor, Access National Corporation - Executive VP & CFO [4]

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Thank you, Mike. Net income for the third quarter was $9.6 million, an increase of $0.06 million (sic) [$0.6 million] compared to the previous quarter and more than $2.6 million over the same quarter last year. Included in this figure is a one-time after-tax gain of $882,000 or $0.04 per share on a fully diluted basis.

Year-over-year, net income as of September 30 was $26.7 million, an increase of $13.2 million or 98% over the prior year. Regarding noninterest expense, the bank recorded a one-time expense to the credit tax -- excuse me, one-time expense credit to the tax provision, both related to the accounting method change of how the bank accounts for its investments in low income housing tax credit funds. Otherwise, we believe that the third quarter noninterest expense is a good baseline indicator for coming quarters that will support organic growth. At this time, we do not have any material overhead commitments on the horizon.

Management expects to continue to realize operating leverage going forward with higher net interest income and fee income that will result in an improving efficiency ratio. Provision expense for the second quarter was $700,000 driven primarily by loan growth. Given that a significant portion of the corporation's loan portfolio consists of purchased credits, the reported loan loss reserve ratio is not readily comparable to peers. By combining purchase marks with the allowance, we did a pro forma loan loss reserve ratio of 1.25% as of September 30, 2018 compared to 1.43% as of December 31, 2017.

Credit quality remained strong as the level of nonperforming assets decreased modestly to $6.1 million as of September 30, 2018 or to 0.20% of total assets, up slightly from $5.3 million or 0.18% of total assets as of December 31, 2017. As of September 30, 2018, tangible common equity was 9.09% compared to 8.79% as of the prior year. Placing a strategic capital target ratio near the higher end of our desired range of 8.5% to 9.5%.

Now I will turn it over to our Chief Banking Officer, Bob Shoemaker, who will elaborate on loan portfolio and outlook. And then Steve Reeder will comment on the deposit portfolio.

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Robert C. Shoemaker, Access National Bank - Chief Banking Officer [5]

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Thanks, Meg. As noted on our previous earnings call, the hiring of new lenders and relationship managers during 2017 and into the first half of 2018 has positioned us to directionally generate the 9.5% -- 9% to 10.5% annualized loan growth. Linked quarter loan growth accelerated during the third quarter to $110 million. This was an annualized growth rate of 22.2%, up from $59.3 million during Q2 or 12.3%. Our newer teammates are getting comfortable and are performing in a way that should enable more consistent growth with advice for increasing and accelerating that growth. Our core strategic goal remains an annual growth rate of $200 million per year net after considering seasonal and one-off factors, they can cause a pause from time-to-time. Consistent with our strategy and marketing focus, owner-occupied commercial real estate led the growth followed by C&I loans. Generally, competition remains strong in our market. Our growing reputation of being a responsive and trusted adviser with industry-specific expertise has enabled us to grow our portfolio within our targeted industry verticals, with referrals from existing clients remaining our primary source of new business.

We're also pleased with the mix of loans closed during the past quarter. Of the roughly $260 million in new loans booked, 45% were adjustable rates, almost 20% were floating rate loans and only 35% of the loans were booked as fixed-rate loans. All of these had a shorter weighted average maturity of just over 6 years. And at this time, our -- fully half of the bank's portfolio is comprised of C&I loans and owner-occupied commercial real estate loans.

Our pipeline feels solid. And the credit quality remains good. In spite of recent increases in the cost of financing, our clients and referral sources continued to convey optimism in the local economy. Client optimism is tempered only by the tight job market and the difficulty in finding qualified employees in the local market that enjoys an unemployment rate under 3%.

Our relationship managers remain embedded in their selected industries, and they are energized about what they will be able to accomplish in 2019 as part of Virginia's premier regional bank.

I'll now turn it over to Steve Reeder, who'll talk about our deposit activities.

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Steven A. Reeder, Access National Bank - Executive VP & Chief Deposit Officer [6]

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Thank you, Bob. DDAs account for approximately $1.2 billion over 53.9% of the $2.1 billion deposit portfolio. Of that, approximately $758 million or 33% of total deposits is in non-interest-bearing checking accounts, our most favored source of funds.

Non-interest-bearing checking account balances grew $38 million or 21.1% annualized on a linked-quarter basis. The continued growth of our strong core funding has enabled us to be more tactical in responding to the Fed's rate moves and tightening money supply posture.

We continue to allow rate-sensitive depositors with stand-alone products to rotate off our books, if unwilling to become more relationship-based. Our Middleburg private initiative was launched mid-2017, and designed to broaden the relationship of rate-sensitive high balance depositors and reward high-value target. That now carries total balances of more than $210 million, up $18 million or 37% annualized in the third quarter with nearly 80% of those balances in non-maturity deposits.

Total deposits grew $168 million on a linked-quarter basis. These positive results are due to 3 primary factors. Brokered CDs increased by approximately $37 million early in the third quarter. Seasonal balance fluctuations worked in our favor during the quarter, reversing the downward changes experienced on net over the first half of the year. This included an increase in public funds deposits which, along with the brokered CD increase, drove the deposit beta in the third quarter whereas pricing changes in the other core deposits were more muted.

The most important factor in our deposit increase was continued generation of new, high-value commercial and private client relationships. Among the many new relationships that we on-boarded in the quarter. A dozen have 7-figure balances in transaction accounts, non-maturity deposits. These new relationships had quarter-end balances of nearly $35 million. Year-to-date, transaction account balances and new relationships on-boarded in 2018 exceeds $140 million.

Our model is working with our trusted advisers pursuing targeted business segments, through deliberate marketing initiatives. As strong as the third quarter was, our pipeline remains healthy. Importantly, client and prospect reaction to the news of our pending merger with Union has been positive. They see the benefits of the increased scale, enhanced treasury capabilities, and continuity with the Access relationship managers who will continue to serve them so very well. To underscore the importance to our shareholders and teammates, I'll remind you that non-interest-bearing DDAs account for 1/3 of our deposit base and about 53% of total deposits, including interest-bearing checking accounts. As always, the priority focus and outreach of our front line is to identify when and maintain relationships anchored by primary DDA.

Now I'll turn the call back over to Mike.

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Michael W. Clarke, Access National Corporation - President, CEO & Director [7]

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Thank you, Steve. With regards to the operating environment, we feel the local economy is holding up better than the national economy, which has not been the case for most of the recovery. The current strength in our economy is attributable to the healthy new procurement activity coming from the federal government. The governments FY 2018 budget, which concluded on September 30, was the first period of operating under a fully authorized budget in 12 years. As a result, numerous new programs and initiatives are being implemented that should bode well for clients engaged with federally related customers for Q4, 2018 and 2019, and beyond.

During the last 30 days, we held 3 targeted client engagement events designed to deepen relationships and demonstrate our appreciation for their business. Personally, I have each of our government services, clients or prospects, that I spoke with about their growth prospects for 2019. The lowest growth number I heard was 10%, most reported anticipated growth rates of 15% to 35%. Their confidence anecdotally gives me confidence that we will be able to continue to deliver on our stated goals. 2 of these 3 events that I mentioned were post-merger announcement. Clients were excited to learn about the prospects of a larger lending capacity and Union's commitment to upholding and expanding the sophisticated treasury management services, to which many of our clients are accustomed.

The regional bank positioning resonates extremely well with our relationship managers and our coveted clients. In the event legacy Access investors are not familiar with UBSH, I suggest that you check them out by visiting their Investor Relations page at www.bank@union.com. while you checkout Union here at Access, we're focused on retaining and expanding our value client base. That concludes our remarks.

I would like to turn it over back to Tom and will take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Joe Gladue with Merion Capital Group.

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Joseph Gladue, Merion Capital Group LLC, Research Division - Director of Research [2]

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Just a follow-up on the last comment about the approved budget and government spending. Just in that regard, are you seeing increases in line utilization from a lot of your customers?

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Michael W. Clarke, Access National Corporation - President, CEO & Director [3]

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Yes, Bob will talk about that.

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Robert C. Shoemaker, Access National Bank - Chief Banking Officer [4]

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Not yet, Joe. I mean, we're still seeing pretty modest utilization of the lines. Our current exposure is about -- to the government contractors is about $350 million, and they have about $135 million outstanding. So it's little over -- a little bit better than 30%. And again, most of the new initiatives are going to be under new contracts that were let and are not even scheduled to start until this quarter or somewhere in 2019.

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Michael W. Clarke, Access National Corporation - President, CEO & Director [5]

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We do have a lot of active discussions about increasing line limits, again, looking towards next calendar year.

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Joseph Gladue, Merion Capital Group LLC, Research Division - Director of Research [6]

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Okay. And I'm sorry if you've mentioned this and I missed it, but where does the pipeline stand relative to 3 months ago?

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Michael W. Clarke, Access National Corporation - President, CEO & Director [7]

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It's -- that's a hard question to answer. I'll tell you we had -- the pipeline remains full, in terms of loans that have been approved. I think we're a little shy on that. We have a lot more that are in the discussion phases, right now. I'd like to tell you that this is a linear business, but it's lumpy. So we -- like I said, we feel really strong about the pipeline, we've got a lot of work to do to get these loans approved and booked.

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Joseph Gladue, Merion Capital Group LLC, Research Division - Director of Research [8]

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Okay. And on the funding side, you talked a little bit about that, but does the reduction in the FHLB borrowings -- did that occur early or late in the quarter? Just wondering if that's fully reflected in the margin going forward?

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Michael W. Clarke, Access National Corporation - President, CEO & Director [9]

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Meg, do you want to take a round at that?

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Margaret M. Taylor, Access National Corporation - Executive VP & CFO [10]

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Yes. And I'm sorry, Joe, what was -- I couldn't quite hear you. You were kind of breaking up, you were asking if FHLB borrowings were included in the margins?

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Michael W. Clarke, Access National Corporation - President, CEO & Director [11]

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Well, did it occur early -- hey, Meg, did it occur early or late in the quarter is his question. So how much impact does that have?

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Margaret M. Taylor, Access National Corporation - Executive VP & CFO [12]

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Got it. The actual impact, the actual percentage points impact I don't have it right in front of me. But the borrowings were spread out evenly throughout the quarter. So it is something that you shouldn't see a spike or a decline next quarter based on the borrowings.

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Joseph Gladue, Merion Capital Group LLC, Research Division - Director of Research [13]

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Okay. And just a housekeeping item while I have you, Meg. The onetime changes, I just wanted to make sure I'm including that in the right line item on the income statement, where did that appear?

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Margaret M. Taylor, Access National Corporation - Executive VP & CFO [14]

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Yes. The onetime, there was a portion of it that went to the income tax line item and that was $163,000. Whereas the other $911,000 that was pretax ended up to the -- I believe that was the -- and, Matt, are you on?

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Michael W. Clarke, Access National Corporation - President, CEO & Director [15]

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He is not. He is not.

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Margaret M. Taylor, Access National Corporation - Executive VP & CFO [16]

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Okay. Okay, so that ended up into the -- for the $911,000 was in the noninterest expense line item.

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Operator [17]

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(Operator Instructions) Your next question comes from the line of Catherine Miller from KBW.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [18]

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Congrats on the quarter and the deal with Union. I think I wanted to start on just talking about the growth, really strong growth this quarter. And I still -- if I think about your growth versus some of your peers, we're seeing everyone has -- I feel like it's had really strong origination volume like you've -- but I think your peers have been more impacted this quarter by larger pay downs. Are you seeing that as well? And is it just that your volume was so much higher that it has offset that? So any commentary on payoffs would be helpful? And then over the next coming quarters, are there any kind of larger, chunkier payoffs that you expect to see, that would impact growth in the coming quarters before you close with Union?

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Robert C. Shoemaker, Access National Bank - Chief Banking Officer [19]

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Hey, Cath, and this is Bob. Yes, I don't know that -- well, I don't know that we have any large payoffs expected. And honestly in the first quarter of this year, we did a little bit, I'll call it portfolio repositioning. But in the past quarter, I think we've seen pretty typical payoff activity. And I think that's going to continue for the next couple of quarters anyway.

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Michael W. Clarke, Access National Corporation - President, CEO & Director [20]

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Yes, nothing real lumpy or unexpected.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [21]

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Okay. Great. And then on the mortgage side, your -- if you look at this, your originations came down but it feels like your on sale margin increased a little bit this quarter. Can you just talk about some of the dynamics in your mortgage business and your outlook for that moving forward?

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Robert C. Shoemaker, Access National Bank - Chief Banking Officer [22]

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Sure. The margins in the mortgage business is heavily influenced by -- for us anyway, by the product mix, as well as the geography of it. And so it will ebb and flow. And so relative to product mix, the more we do some government loans, as well as the standard size Fannie and Freddie conforming loans, we seem to do better as opposed to jumbos within our market that are highly, highly competitive, as well as about 50% of our activity is outside of our, the DCMSA and the activity outside of the MSA is also a higher margin. So generally speaking the commodity business of the margin pressure is pretty strong, because a lot of mortgage companies are struggling to get enough volume to cover overhead. And there is a lot of red ink in the mortgage business right now. Dean is not with us here today, but you know he's very adept at pulling the levers and keeping things moving in the right direction. We do believe that we have some excellent hiring opportunities of originators. Importantly, relative to volume, the volume prospects are very important in today's environment and the pending merger with Union is a positive factor in those discussions.

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Catherine Fitzhugh Summerson Mealor, Keefe, Bruyette, & Woods, Inc., Research Division - MD and SVP [23]

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Okay. That's helpful. And then one last question, just back to the growth. You've talked about this and Union has talked about this with -- once post-merger you'll have a lot larger scale, and so will be able to larger loans and different loans than maybe you would have been able to do on standalones. So can you talk a little bit about that, maybe give an example of a type of credit or a size of credit, that you haven't been able to do as Access today, but that you'll be able to be more competitive with under the Union platform?

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Michael W. Clarke, Access National Corporation - President, CEO & Director [24]

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Well. Yes. I mean actually, I just spoke to a long time client this week. It's a government services, professional services business who we kind of helped them get started, he started very strongly, probably, almost 10 years ago. And he is currently running at a $180 million revenue rate. He's got probably a $20 million revolving line of credit with us. Generally organic growth, although he's done a couple of small acquisitions. He is in the midst of -- he has a letter of intent for a very significant acquisition that will nearly double his revenue base. And he's lining up some private equity and mezz debt to fund the acquisition. But in order to provide for working capital he needs a $40 million revolving line of credit. So our current legal lending limit is $30 million. So we would have to say goodbye and let him "graduate" to one of the large bank competitors in the market. He is very profitable, he is highly sought after by the banks that are knocking on doors. Although extreme amount of loyalty to us. So we're excited about the opportunity to step up and maintain that relationship and grow it. And we have a handful of those kinds of discussions underway.

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Operator [25]

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(Operator Instructions) We have a follow-up question from the line of Joe Gladue from Merion Capital.

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Joseph Gladue, Merion Capital Group LLC, Research Division - Director of Research [26]

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Just 2 quick follow-ups. One, I guess, given the impact of the onetime gain on taxes, just wondering what you expect to be a good run rate going forward on tax rate?

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Margaret M. Taylor, Access National Corporation - Executive VP & CFO [27]

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What expected -- I'm sorry, Joe, I am having a hard time hearing you, especially the run rate.

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Michael W. Clarke, Access National Corporation - President, CEO & Director [28]

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Hey, Meg, tax rate, stabilized tax rate.

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Margaret M. Taylor, Access National Corporation - Executive VP & CFO [29]

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Stabilized tax rate, we appear to be running at about an 18.9%. So that's what I anticipate, so just shy of 19%.

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Joseph Gladue, Merion Capital Group LLC, Research Division - Director of Research [30]

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Okay. And just one last one. I'm just wondering if my calculations are correct. I'm coming up with, I guess, net recovering, rather than charge offs down to 100k or so, is that accurate?

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Michael W. Clarke, Access National Corporation - President, CEO & Director [31]

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Bob?

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Robert C. Shoemaker, Access National Bank - Chief Banking Officer [32]

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Yes, for the -- let's see, for the quarter, yes, it was a net recovery. We'd like to see more of those.

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Operator [33]

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(Operator Instructions) And there are no further questions at this time. Presenters, you may continue.

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Michael W. Clarke, Access National Corporation - President, CEO & Director [34]

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Okay. Well, we appreciate everyone's interest and again, we ask you to check out UBSH. If you like what we're doing. There'll be more of it wrapped inside of that business. Thanks so much.

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Operator [35]

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And this concludes today's conference call. Thank you for your participation. You may now disconnect.