UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission File Number: 000-49929

ACCESS NATIONAL CORPORATION

1800 Robert Fulton Drive, Suite 310, Reston, VA 20191
(Address of principal executive offices)

(703) 871-2100
(Registrant’s telephone number)

Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [  ]

Check whether the registrant is an accelerated filer ( as defined in Rule 12b-2 of the Exchange Act).

Yes [  ]  No [X]

The number of shares outstanding of the Access National Corporation’s common stock, par value,$1.67, as of May 7, 2004 was 3,477,360 shares.

ACCESS NATIONAL CORPORATION
FORM 10-Q

INDEX

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ACCESS NATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except for Share Data)

See Notes to Consolidated Financial Statements

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ACCESS NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except For Share Data)
(unaudited)

See Notes to Consolidated Financial Statements

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ACCESS NATIONAL CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Three Months Ended March 31,2004
(unaudited)

ACCESS NATIONAL CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Three Months Ended March 31, 2003
(unaudited)

See Notes to Consolidated Financial Statements

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ACCESS NATIONAL CORPORATION
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2004 and 2003
(unaudited)

See Notes to Consolidated Financial Statements.

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ACCESS NATIONAL CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)

NOTE 1 – COMMENCEMENT OF OPERATIONS

     Access National Corporation (the “Corporation”) is a bank holding company incorporated under the laws of the Commonwealth of Virginia. The Corporation has three wholly owned subsidiaries, Access National Bank (the “Bank”), which is an independent commercial bank chartered under federal laws as a national banking association, Access Capital Trust I, and Access Capital Trust II. The Corporation does not have any significant operations and serves primarily as the parent company for the Bank. The Corporation has a strong capital base that can be used to engage in bank related businesses as provided under the Bank Holding Company Act of 1956, as amended or down streamed to the Bank to support continued growth.

     The Corporation acquired all of the outstanding stock of the Bank in a statutory exchange transaction on June 15, 2002, pursuant to an Agreement and Plan of Reorganization between the Corporation and the Bank.

     The Corporation formed Access Capital Trust I and Access Capital Trust II in 2002 and 2003 respectively for the purpose of issuing redeemable capital securities. On July 30, 2002 Access Capital Trust I, issued $4 million of trust preferred securities and on September 30, 2003, Access Capital Trust II issued $6 million of trust preferred securities. Trust preferred securities may be included in Tier 1 capital in an amount equal to 25% of Tier 1 capital and amounts in excess of 25% are includable as Tier 2 capital. As guarantor, the Corporation unconditionally guarantees payment of all distributions required to be paid on the Trust Preferred Securities.

     Access National Bank opened for business on December 1, 1999 and has three wholly-owned subsidiaries: Access National Mortgage Corporation, a Virginia corporation engaged in mortgage banking activities, Access National Leasing Corporation, a Virginia corporation engaged in commercial and industrial leasing services, and Access Real Estate LLC. Access National Leasing was acquired in exchange for 7,500 shares of Access National Bank stock in the second quarter of 2002. The 7,500 shares were subsequently repurchased in 2003. The leasing subsidiary presently has no employees and its affairs are managed as a part of the bank’s commercial lending department. Access Real Estate LLC is a limited liability corporation established in July, 2003 for the purpose of holding title to the Corporation’s headquarters building, located at 1800 Robert Fulton Drive, Reston, Virginia.

     A 3 for 1 stock split was declared in June 2003. The par value per share decreased from $5.00 to $1.67. All per share information has been restated to reflect the change.

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NOTE 2 – BASIS OF PRESENTATION

     The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with rules and regulations of the Securities and Exchange Commission. The statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. All adjustments have been made, which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. Such adjustments are all of a normal and recurring nature. All significant inter-company accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2004. These consolidated financial statements should be read in conjunction with the Corporation’s audited financial statements and the notes thereto as of December 31, 2003, included in the Corporation’s Annual Report for the fiscal year ended December 31, 2003.

NOTE 3 – STOCK BASED COMPENSATION PLANS

Stock-Based Compensation Plans - The Corporation has a stock-based compensation plan. The Corporation accounts for the plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based compensation cost is reflected in net income, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Corporation had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation.

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STOCK BASED COMPENSATION PLANS

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NOTE 4 - SECURITIES

The amortized cost and fair values of securities (in thousands) available for sale as of March 31, 2004 are as follows:

The amortized cost and fair values of securities (in thousands) available for sale as of December 31, 2003 are as follows:

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NOTE 5 - LOANS

The Corporation’s loan portfolio (in thousands) is composed of the following:

NOTE 6 – SEGMENT REPORTING

Access National Corporation has two reportable segments: traditional commercial banking and a mortgage banking business. Revenues from commercial banking operations consist primarily of interest earned on loans and investment securities and fees from deposit services. Mortgage banking operating revenues consist principally of interest earned on mortgage loans held for sale, gains on sales of loans in the secondary mortgage market and loan origination fee income.

The commercial bank segment provides the mortgage segment with the short term funds needed to originate mortgage loans through a warehouse line of credit and charges the mortgage banking segment interest based on a premium over their cost to borrow funds. These transactions are eliminated in the consolidation process.

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The following table presents segment information for the periods ended March 31, 2004 and 2003:

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NOTE 7 – EARNINGS PER SHARE (EPS):

The following table shows the calculation of both Basic and Diluted earnings per share for the three months ended March 31, 2004 and 2003.The numerator of both the Basic and Diluted EPS is equivalent to net income. The weighted average number of shares outstanding used in the denominator for Diluted EPS is increased over the denominator used for Basic EPS by the effect of potentially dilutive common stock options and warrants utilizing the treasury stock method.

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NOTE 8. – OTHER EXPENSES

The Corporation had the following other expenses as of March 31, 2004 and 2003.

NOTE 9 – DERIVATIVES

     The Mortgage Corporation enters into rate lock commitments to extend credit to borrowers for generally a 60 to 120 day period for the origination of loans. Unfunded loans for which commitments have been entered into are called “pipeline loans”. Some of these rate lock commitments will ultimately expire without being completed. To the extent that a loan is ultimately granted and the borrower ultimately accepts the terms of the loan, these rate lock commitments expose the Mortgage Corporation to variability in their fair value due to changes in interest rates. If interest rates increase, the value of these rate lock commitments decreases. Conversely, if interest rates decrease, the value of these rate lock commitments increases.

     The Mortgage Corporation is exposed to credit-related losses in the event of nonperformance by the counterparties to those agreements. The Mortgage Corporation controls the credit risk of its financial contracts through credit approvals, limits and monitoring procedures, and does not expect any counterparty to fail to meet its obligations.

     To mitigate the effect of this interest rate risk, the Mortgage Corporation enters into forward loan sale commitments for the portion of its pipeline that is not pre-sold to an investor. The contracts allow for cash settlement. The forward loan sale commitments lock in an interest rate and price for the sale of loans similar to the specific rate lock loan commitments classified as derivatives. Both the rate lock commitments and the forward loan sale commitments are undesignated derivatives, and accordingly are marked to market through earnings.

     The notional amount of undesignated forward loan sale commitments was $37.5 million on March 31, 2004 and $9.5 million at December 31, 2003. The notional amount of undesignated interest rate lock commitments was$36.9 million on March 31,2004 and $9.7 million at December 31, 2003. The commitments expire in 2004.

     Risk management results related to the undesignated hedging of interest rate lock commitments with undesignated forward loan sale commitments are summarized below and are included in other income (in thousands):

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NOTE 10 – RECENT ACCOUNTING PRONOUNCEMENTS

     There have been no new accounting pronouncements issued during the first quarter of 2004.

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     The following discussion and analysis is intended to provide an overview of the significant factors affecting the financial condition and the results of operations of Access National Corporation and subsidiary (the “Corporation”) for the three months ended March 31, 2004. The consolidated financial statements and accompanying notes should be read in conjunction with this discussion and analysis.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

     In addition to historical information, this Quarterly Report on Form 10-Q may contain forward-looking statements. For this purpose, any statements contained herein, including documents incorporated by reference, that are not statements of historical fact may be deemed to be forward-looking statements. Examples of forward-looking statements include discussions as to our expectations, beliefs, plans, goals, objectives and future financial or other performance or assumptions concerning matters discussed in this document. Forward-looking statements often use words such as “believes,” “expects,” “plans,” “may,” “will,” “should,” “projects,” “contemplates,” “ anticipates,” “forecasts,” “intends” or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements. Factors that could have a material adverse effect on the operations and future prospects of the Corporation include, but are not limited to, changes in: interest rates, general economic conditions, monetary and fiscal policies of the U.S. Government, including policies of the Office of the Comptroller of Currency, U.S. Treasury and the Federal Reserve Board, the economy of Northern Virginia, including governmental spending and real estate markets, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on

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such statements. Any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made.

CRITICAL ACCOUNTING POLICIES

General

     The Corporation’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. Actual losses could differ significantly from the historical factors that we monitor. Additionally, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

Allowance for Loan Losses

     The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) SFAS 5 Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimatable and (ii) SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

     An allowance for loan losses is established through a provision for loan losses based upon industry standards, known risk characteristics, management’s evaluation of the risk inherent in the loan portfolio and changes in the nature and volume of loan activity. Such evaluation considers among other factors, the estimated market value of the underlying collateral, and current economic conditions. For further information about our practices with respect to allowance for loan losses, please see the subsection “Loans” below.

Derivative Financial Instruments – The Mortgage Corporation enters into commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 60 to 120 days.

     The Mortgage Corporation protects itself from changes in interest rates for a portion of its pipeline loans through the use of best efforts forward delivery commitments, whereby the Mortgage Corporation commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan. These pipeline loans are considered pre-sold to

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an investor. As a result, the Mortgage Corporation is not exposed to losses nor will it realize significant gains related to its rate lock commitments due to changes in interest rates. The correlation between the rate lock commitments and the best efforts contracts is very high due to their similarity.

          The market value of rate lock commitments and best efforts contracts is not readily ascertainable with precision because rate lock commitments and best efforts contracts are not actively traded in stand-alone markets. The Mortgage Corporation determines the fair value of rate lock commitments and best efforts contracts by measuring the change in the value of the underlying asset while taking into consideration the probability that the rate lock commitments will close. Because of the high correlation between rate lock commitments and best efforts contracts, no gain or loss occurs on these rate lock commitments.

          For pipeline loans which are not pre-sold to an investor, the Mortgage Corporation manages the interest rate risk on rate lock commitments by entering into forward loan sale contracts, whereby the Mortgage Corporation obtains the right to deliver residential loans to investors in the future at a specified yield. Such contracts are accounted for as derivatives and are recorded at fair value in derivative assets or liabilities, with changes in fair value recorded in other income.

          These derivative financial instruments do not meet the hedging criteria required by FASB 133 and are classified as trading activities with changes in fair value recorded in income.

FINANCIAL CONDITION (March 31, 2004 compared to December 31, 2003)

     The Corporation experienced continued strong growth in assets during the first quarter of 2004 as loan demand remained strong and we expanded our deposit base. Total assets at March 31, 2004 were $334.3 million, up from $257.1 million at December 31, 2003, an increase of $77.2 million. Total loans held for investment increased $36.2 million, from $189.3 million to $225.5 million. Residential Real Estate loans increased $20.4 million as part of our strategy to develop a portfolio of adjustable rate mortgages. This portfolio is comprised of conforming loans that are readily marketable. Total loans held for sale increased $12.8 million from $29.8 million at December 31, 2003 to $42.5 million at March 31, 2004. The mortgage market was down during the fourth quarter of 2003 due to rising interest rates and a seasonal decline in activity. Mortgage volumes moderately improved during the first quarter of 2004, however they are still substantially below the levels of the first quarter of 2003. Management expects to continue its strategy of increasing the Loan Officer staff to support future growth in the Loans Held For Investment. The future balances in the Loans Held for Sale category will continue to experience volatility due to fluctuations of interest rates. The balances of this short term investment fluctuate daily as necessary to support loan origination and secondary market sales activities. Management does not view the Loan Held for Sale balance as a meaningful indicator of performance.

     Asset growth during the period was supported primarily through deposit growth. Interest bearing deposits in other banks increased $24.5 million as a result of the increase in deposits. Total Deposits increased $27.7 million from $198.2 million at December 31, 2003 to $225.8 million on March 31, 2004. Of this increase, Non-Interest Bearing accounts increased $34.7 million, Savings and Money

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Market accounts increased $7.5 million and Time Deposits decreased $14.5 million. The increase in deposits is comprised of approximately $13.8 million in new accounts and $13.9 million in increased balances of existing accounts. The increase in deposits is attributable to the new relationships generated by our growing commercial lending staff and the expansion into our second banking center located in Reston, Virginia. The $14.5 million decrease in Time Deposits is attributable to a decrease in wholesale Certificate of Deposits purchased in connection with our Mortgage Corporation’s funding requirements. Short term borrowings increased $49.1 million and were used to meet short term funding needs. Management expects the expanding commercial lending staff and new banking centers to support future deposit growth necessary to fund loan growth. Management expects continued utilization of wholesale Certificates of Deposits and other borrowings as necessary to fund the Loans Held For Sale activity and growth in investments.

SECURITIES

     The Corporation’s securities portfolio is comprised of U.S.Treasury securities, U.S Government Agency securities, and mortgage backed securities. At March 31,2004 the securities portfolio totaled $22.4 million and was classified as available for sale. The Financial Accounting Standards Board requires that securities classified as available for sale be accounted for at fair market value. Unrealized gains and losses are recorded directly to a separate component of shareholders’ equity. The Corporation’s securities classified as available for sale had an unrealized gain net of deferred taxes of $137 thousand on March 31, 2004.

LOANS

     The loans held for investment portfolio constitutes the largest component of earning assets and is comprised of commercial loans, real estate loans, construction loans, and consumer loans. These lending activities provide access to credit to small businesses, professionals and consumers in the greater Washington, D.C. metropolitan area. All lending activities of the Access National Bank, the Bank, Access National Mortgage Corporation, the Mortgage Corporation and the Access National Leasing Corporation, the Leasing Corporation are subject to the regulations and supervision of the Office of the Comptroller of Currency.

     At March 31, 2004 loans held for investment increased $36.2 million from December 31, 2003 and totaled $225.5 million. The increase is a result of strong loan demand, expansion of the Bank’s loan officer staffing, increased name recognition and acceptance of the Bank’s products and services within the marketplace. Management intends to continue to increase Loan Officer staffing and support in order to facilitate continued growth in the portfolio. The following is a summary of the Loan Portfolio Held for Investment.

Commercial Loans. Commercial Loans represent 15.5% of our held for investment portfolio. These loans are to businesses or individuals within our target market for business purposes. Typically the loan proceeds are used to support working capital and the acquisition of fixed assets of an operating business. These loans are underwritten based upon our assessment of the obligor(s)’ ability to generate operating cash flow in the future necessary to repay the loan. To address the risks associated with the

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uncertainties of future cash flow, these loans are generally well secured by assets owned by the business or its principal shareholders and the principal shareholders are typically required to guarantee the loan.

Real Estate Construction Loans. Real Estate Construction Loans, also known as construction and land development loans, comprise 6.9% of our held for investment loan portfolio. These loans generally fall into one of three circumstances: first, loans to individuals that are ultimately used to acquire property and construct an owner occupied residence; second, loans to builders for the purpose of acquiring property and constructing homes for sale to consumers; and third, loans to developers for the purpose of acquiring land that is developed into finished lots for the ultimate construction of residential or commercial buildings. Loans of these types are generally secured by the subject property within limits established by the Board of Directors based upon an assessment of market conditions and up-dated from time to time. The loans typically carry recourse to principal owners. In addition to the repayment risk associated with loans to individuals and businesses, loans in this category carry construction completion risk. To address this additional risk, loans of this type are subject to additional administration procedures designed to verify and ensure progress of the project in accordance with allocated funding, project specifications and time frames.

Commercial Real Estate Loans. Also known as “Commercial Mortgages”, loans in this category represent 33.1% of our loan portfolio held for investment. These loans generally fall into one of three situations in order of magnitude: first, loans supporting an owner occupied commercial property; second, properties used by non-profit organizations such as churches or schools where repayment is dependent upon the cash flow of the non-profit organizations; and third, loans supporting a commercial property leased to third parties for investment. Commercial Real Estate Loans are secured by the subject property and underwritten to policy standards. Policy standards approved by the Board of Directors from time to time set forth, among other considerations, loan to value limits, cash flow coverage ratios, and the general creditworthiness of the obligors.

Residential Real Estate Loans. This category includes loans secured by first or second mortgages on one to four family residential properties and represent 32.7% of the portfolio. This portfolio increased over $20 million during the first quarter of 2004 and is comprised of predominately adjustable rate mortgages. Within the Residential Real Estate Loan portfolio, the following is a summary of the sub-components.

Home Equity Loans are extended to borrowers in our target market and comprised 9.7% of the total loans held for investment portfolio. Real estate equity is the largest component of consumer wealth in our marketplace. Once approved, this consumer finance tool allows the borrower to access the equity in their home or investment property and use the proceeds for virtually any purpose. Home Equity Loans are most frequently secured by a second lien on residential property.

1-4 Family Residential First Trust Loan, or “First Mortgage Loan,” proceeds are used to acquire or refinance the primary financing on owner occupied and residential investment properties. Junior Trust, or “Loans Secured by a Second Trust Loans,” are to consumers wherein the proceeds have been used for a stated consumer purpose. Examples of consumer purposes are education, refinancing debt, or purchasing consumer goods. The loans are generally extended in a single disbursement and repaid over

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a specified period of time.

Loans in the Residential Real Estate portfolio are underwritten to standards within a traditional consumer framework that is periodically reviewed and up-dated by our management and Board of Directors: repayment source and capacity, value of the underlying property, credit history, savings pattern and stability.

Consumer Loans. Consumer Loans make up less than 1% of our loan portfolio. Most loans are well secured with assets other than real estate, such as marketable securities or automobiles. Very few loans are unsecured. As a matter of operation, management discourages unsecured lending. Loans in this category are underwritten to standards within a traditional consumer framework that is periodically reviewed and up-dated by our management and Board of Directors: repayment capacity, collateral value, savings pattern, credit history and stability. Loans in this portfolio are generally underwritten to secondary market guidelines are considered sale-able in the event the Corporation needed liquidity. Management expects to continue to grow the adjustable rate mortgage balances in this portfolio through new loans to bank customers and the purchase of loans from the Mortgage Corporation.

Loans Held for Sale (LHFS) Loans Held For Sale are originated by the Mortgage Corporation, a wholly owned subsidiary of the Bank. Loans of these types are residential mortgage loans extended to consumers underwritten in accordance with standards set forth by an institutional investor to whom we expect to sell the loan for a profit. Loan proceeds are used for the purchase or refinance of the property securing the loan. Loans are sold with the servicing released to the investor.

The LHFS loans are closed in our name and carried on our books as an investment until the loan is delivered to and purchased by an investor. Repayment risk of this activity is minimal since the loans are on the books for a short time period. Loans are sold without recourse and subject to industry standard representations and warranties. The risks associated with this activity center around borrower fraud and failure of our investors to purchase the loans. These risks are addressed by the on-going maintenance of an extensive quality control program, an internal audit and verification program, and a selective approval process for investors. To date we have been able to absorb the financial impact of these risks without material impact on our operating performance. LHFS loans are generally carried on our books for less than 30 days. At March 31, 2004 loans held for sale totaled $42.5 million compared to $29.7 million at year end 2003. The increase in loans held for sale at March 31, 2004 over year end 2003 was due to in part to a temporary downward movement in interest rates during the first quarter which increased demand and focusing marketing efforts on purchase transactions.

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The following table summarizes the Corporation’s loan portfolio (in thousands) as of March 31, 2004.

ALLOWANCE FOR LOAN LOSSES

At March 31, 2004, the allowance for loan loss totaled $2.7 million. Actual loan losses have been insignificant since inception, our senior credit management, with 60 years in collective experience in managing similar portfolios in our marketplace, concluded the amount of our reserve and the methodology applied to arrive at the amount of the reserve is justified and appropriate due to the lack of seasoning of the portfolio, the relatively large dollar amount of a relatively small number of loans, portfolio growth, staffing changes and trend analysis. Outside of our own analysis, our reserve adequacy and methodology are reviewed on a regular basis by our external auditors, internal audit program, and bank regulators and such reviews have not resulted in any material adjustment to the reserve amount or methodology.

The Bank, does not have a history of charge offs with which to establish trends in loan losses by loan classifications. As of March 31, 2004 the total net charge offs since inception amounted to approximately $11 thousand. The overall allowance for loan losses is equivalent to 1.21% of total loans held for investment. The Bank has developed a comprehensive risk weighting system based on individual loan characteristics that enables the Bank to precisely allocate the composition of the allowance for loan losses by types of loans.

The allowance for loan losses increased $175 thousand during 2003 or approximately 6.8%. Total loans increased $36.2 million in during the quarter ended March 31, 2004, an increase of 19.1%. The allowance for loan losses at March 31, 2004 was 1.21 % of total loans compared to 1.35% at December 31, 2003. Net charge offs from inception through March 31, 2004 have totaled less than $11 thousand. Since the Bank does not have any historical charge off experience, changes in the composition of the allowance for loan losses are due to volume and changes in individual risk ratings on new and existing loans.

The loss risk of each loan within a particular classification, however, is not the same. The methodology for arriving at the allowance is not dictated by loan classification. The methodology as to how the

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allowance was derived is detailed below. Unallocated amounts included in the allowance for loan losses have been applied to the loan classifications on a percentage basis.

Adequacy of the reserve is assessed, and appropriate expense and charge offs are taken, no less frequently than at the close of each fiscal quarter end. The methodology by which we systematically determine the amount of our reserve is set forth by the Board of Directors in our credit policy. Under this policy, our Chief Credit Officer is charged with ensuring that each loan is individually evaluated and the portfolio characteristics are evaluated to arrive at an appropriate aggregate reserve. The results of the analysis are documented, reviewed and approved by the Board of Directors no less than quarterly. The following elements are considered in this analysis: loss estimates on specific problem credits the Specific Reserve , individual loan risk ratings, lending staff changes, loan review and board oversight, loan policies and procedures, portfolio trends with respect to volume, delinquency, composition/concentrations of credit, risk rating migration, levels of classified credit, off-balance sheet credit exposure, any other factors considered relevant from time to time, the General Reserve’ and, finally, an Unallocated Reserve to cover any unforeseen factors not considered above in the appropriate magnitude. Each of the reserve components, General, Specific and Unallocated are discussed in further detail below.

With respect to the General Reserve, all loans are graded or risk rated individually for loss potential at the time of origination and as warranted thereafter, but no less frequently than quarterly. Loss potential factors are applied based upon a blend of the following criteria: our own direct experience at the Bank; our collective management experience in administering similar loan portfolios at other banks in this market for over 60 years; and peer data contained in statistical releases issued by both the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. Although looking only at peer data and the Bank’s historically low write-offs would suggest a lower loan loss allowance, our management’s experience with similar portfolios in the same market combined with the fact that our portfolio is relatively unseasoned, justify a conservative approach in contemplating external statistical resources. Accordingly, management’s collective experience at the Bank and other banks is the most heavily weighted criterion, and the weighting is subjective and varies by loan type, amount, collateral, structure, and repayment terms. Prevailing economic condition generally and within each individual borrower’s business sector are considered, as well as any changes in the borrower’s own financial position and, in the case of commercial loans, management structure and business operations.

When deterioration develops in an individual credit, the loan is placed on a “Watch List” and the loan is monitored more closely. All loans on the watch list are evaluated for specific loss potential based upon either an evaluation of the liquidated value of the collateral or cash flow deficiencies. If management believes that, with respect to a specific loan, an impaired source of repayment, collateral impairment or a change in a debtor’s financial condition presents a heightened risk of non-performance of a particular loan, a portion of the reserve may be specifically allocated to that individual loan.

The Unallocated Reserve is maintained to absorb risk factors outside of the General and Specific Allocations. Maximum and minimum target limits are established by us on a quarterly basis for the Unallocated Reserve.

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An analysis of the Corporation’s allowance for loan losses (in thousands) as of and for the period indicated is set forth in the following tables:

Allowance for Loan Losses

Allocation of the Allowance for Loan Losses

NONPERFORMING LOANS and PAST DUE LOANS

     At March 31, 2004 there were three loans in non accrual status totaling $1.5 million. These loans are well secured by first trusts on residential real estate and no loss of principal or interest is anticipated. As of this same date, no accruing loans were past due more than 90 days.

DEPOSITS

     Deposits represent the primary funding source of the Corporation. At March 31, 2004, deposits totaled $225.8 million compared to $198.2 million at December 31, 2003. Of this increase, Non-Interest Bearing accounts increased $34.7 million, Savings and Money Market accounts increased $7.5 million and Time Deposits decreased $14.5 million. The increase in deposits is attributed to approximately $13.8 million in new accounts and $13.9 million in increased balances of existing accounts (core deposits). The $14.5 million decrease in Time Deposits is attributable to a decrease in wholesale CDs purchased in connection with our Mortgage Corp. funding requirements (Loans Held for Sale). The

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increase in new accounts is largely a result of new relationships brought in by our commercial lending staff. Additionally the Bank markets its deposit products on our web page and various other internet web pages. The Bank opened its second banking office in March and it is expected that this office will contribute to additional growth in core deposits. The Bank also intends to open its third banking office in the Tyson’s Corner area of Fairfax County in late June. Management expects these actions to result in continued growth of non-wholesale deposits. Management expects wholesale deposits and other borrowings to fluctuate as necessary to fund Loans Held For Sale and other investments.

CAPITAL RESOURCES

     Total shareholders’ equity was $20.3 million, or 6.09% of total assets, at March 31, 2004. A strong capital position is vital to the continued profitability of the Corporation. It also promotes depositor and investor confidence and provides a solid foundation for the future growth of the organization.

     Banking regulators have defined minimum regulatory capital rations that the Corporation and the Bank are required to maintain. These risk based capital guidelines take into consideration risk factors, as defined by the banking regulators, associated with various categories of assets, both on and off the balance sheet. Both the Corporation and Bank are classified as Well Capitalized, which is the highest rating. The Table below Risk Based Capital Analysis, outlines the regulatory components of capital and risk based capital ratios.

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Risk Based Capital Analysis

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2004

     General. Pretax income for the three months ended March 31, 2004 was approximately $870 thousand down 46.2% from the $1.6 million for the corresponding period of 2003. Net income for the period totaled $542 thousand compared to $1.0 million for the first quarter of last year. The decline in income is partially due to the Mortgage segment which experienced a decline in mortgage loan

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production . Loan production during the first quarter of 2003 amounted to $302.6 million and totaled $180.3 million for the first quarter of 2004 a 40 % decline. The decline mortgage loan production is due to a combination of interest rate movements and a decline in the number of requests to refinance. To offset the impact of the decline in refinancing, the Mortgage Corporation is focusing on increasing its market share of purchase financing. The Banking segment also experienced a decline in income before tax for the first quarter of $136 thousand. The decline in income at the Banking segment was due increased personnel expense and other operating expense. The Bank increased the commercial lending staff and added its second Banking Center during the period. It is expected that income at the Banking segment will improve as new lenders and the new Banking Center expand the base of business. Basic earnings per common share for the first quarter decreased from $.29 in 2003 to $.16 in 2004. Diluted earnings per share decreased from $.23 in 2003 to $.12 in 2004. Earnings per share have been adjusted to reflect a 3 for 1 stock split in June 2003.

Net Interest Income

     Net interest income, the principal source of Bank earnings, is the amount of income generated by earning assets (primarily loans and investment securities) less the interest expense incurred on interest bearing liabilities (primarily deposits used to fund earning assets). Management of the Bank strives to maximize net interest income through prudent balance sheet administration and maintaining appropriate risk levels as determined by Management.

Net interest income increased in the first quarter of 2004 to $2.4 million compared to $2.1 million for the same period in 2003. Net interest income depends upon the volume of earning assets and interest bearing liabilities and the associated rates. Average interest earning assets increased $19.8 million to $258.4 million compared to $238.6 million in 2003. The increase is primarily due to the growth in the average loans which increased $16.2 million. The yield on earning assets decreased from 5.66% in 2003 to 5.57% in 2004 reflecting the current rate environment. Irrespective of the future interest rate environment, we expect net interest income to continue to increase as a result of our plans to grow the volumes of loans held for investment and core Bank deposits.

     Total interest bearing deposits averaged $130.6 million in 2004 compared to $134.1 million in 2003. Borrowed funds averaged $70.3 million in 2004 compared to $36.7 million in 2003. The increase in deposits and borrowings funded the growth in earning assets. The average cost of interest bearing liabilities was 2.34% in 2004 compared to 2.99% in 2003.

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Yield on Average Earning Assets and Rates on Average Interest-Bearing Liabilities

⁽¹⁾ Interest spread is the average yield earned on earning assets, less the average rate incurred on interest bearing liabilities.

⁽²⁾ Net interest margin is net interest income, expressed as a percentage of average earning assets.

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Volume and Rate Analysis

     Non-Interest Income. Gains on loans held for sale decreased approximately 40.2% in the first quarter of 2004 from $7.3 million in March 2003 to $4.3 million in 2004, reflecting the decreased volume in mortgage loans. Mortgage loan originations during the quarter ended March 31, 2004 were $180 million, 40% less than the $302 million of originations during the same period of 2003. Service charges and fees totaled $60 thousand for the three month period ended March 31, 2004 compared with $50 thousand in the same period of 2003. Other Income, representing principally loan brokerage income, increased to $1.9 million in March, 2003 compared to $809 thousand in March 2003. Future levels of Non-Interest Income depend primarily on the mortgage loan origination volume.

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Non-Interest Expense For the three month period ended March 31, 2004, non-interest expense totaled $7.6 million, down 9.2% over the same period of 2003. The majority of the decrease in expenses is attributable to Mortgage Banking salaries, benefits and other operating expense because a substantial portion of the Mortgage Banking Business expenses are variable with loan origination volume. As the bank has expands overhead, management expects volatility of Non-Interest Expense with mortgage loan origination volume to become less pronounced.

Liquidity Management

Liquidity is the ability of the Corporation to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the Corporation’s ability to meet the daily cash flow requirements of both depositors and borrowers.

Asset and liability management functions not only serve to assure adequate liquidity in order to meet the needs of the Corporation’s customers, but also to maintain an appropriate balance between interest sensitive assets and interest sensitive liabilities so that the Corporation can earn an appropriate return for its shareholders.

The asset portion of the balance sheet provides liquidity primarily through loan principal repayments and maturities of investment securities. Other short-term investments such as Federal Funds sold and maturing interest bearing deposits with other banks are additional sources of liquidity funding. At March 31, 2004, overnight interest bearing balances totaled $24.7 million and securities available for sale totaled $22.4 million.

The liability portion of the balance sheet provides liquidity through various interest bearing and non interest bearing deposit accounts, Federal Funds purchased, securities sold under agreement to repurchase and other short-term borrowings. At March 31, 2004 the Corporation had lines of credit with the Federal Home Loan Bank of Atlanta totaling $125 million and outstanding loans of $67 million, leaving $58 million available on the lines. The interest rates on these lines of credit are variable rates that are subject to change daily. Included in the $67 million in borrowings at the Federal Home Loan Bank are term notes in the amount of $15 million at a fixed rates of interest ranging from 2.7% to 4.58%.

     In addition to the lines of credit at the Federal Home Loan Bank, the Bank and Mortgage Corporation also issue repurchase agreements and commercial paper. As of March 31, 2004, outstanding repurchase agreements totaled $1.7 million and commercial paper issued amounted to $7.7 million. The interest rate on these instruments are variable and subject to change daily. The Bank also maintains Federal Funds lines of credit with its correspondent banks and, at March 31, 2004 these lines amounted to $15 million.

The Corporation funded the growth in interest earning assets through a combination of non-interest bearing deposits, interest bearing deposits, retention of earnings and borrowed funds. The chart below. Borrowed Funds, shows the composition of borrowed funds. The Corporation expects its short and long

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term sources of liquidity and capital to remain adequate to support expected growth. The Bank relies on a variety of short and long term resources for liquidity from a variety of sources that substantially reduces reliance upon any single provider.

     Borrowed Funds Distribution