Attached files

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EX-21 - ACCESS NATIONAL CORPv216142_ex21.htm
EX-32 - ACCESS NATIONAL CORPv216142_ex32.htm
EX-23 - ACCESS NATIONAL CORPv216142_ex23.htm
EX-10.5 - ACCESS NATIONAL CORPv216142_ex10-5.htm
EX-31.1 - ACCESS NATIONAL CORPv216142_ex31-1.htm
EX-10.6 - ACCESS NATIONAL CORPv216142_ex10-6.htm
EX-31.2 - ACCESS NATIONAL CORPv216142_ex31-2.htm

Washington, D.C. 20549 

 Form 10-K
(Mark One)
For the fiscal year ended   December 31, 2010
For the transition period from_____________ to_______________
Commission File Number   000-49929
Access National Corporation
(Exact name of registrant as specified in its charter)

(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)

1800 Robert Fulton Drive, Suite 300, Reston, Virginia  20191
  (Address of principal executive offices) (Zip Code)

(703) 871-2100
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock $0.835 par value
The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:
                              (Title of each class)  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ¨
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”  “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ¨ No x
The aggregate market value of the registrant’s common voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the price at which the stock was last sold on the NASDAQ Global Market as of the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $46,159,558.
As of March 18, 2011, there were 10,334,430 shares of Common Stock, par value $0.835 per share, of Access National Corporation issued and outstanding.
Portions of the Registrant’s Proxy Statement for the Corporation’s Annual Meeting of Shareholders to be held on May 24, 2011, are incorporated by reference in Part III of this Form 10-K.

Access National Corporation

Item 1
Item 1A
Risk Factors
Item 1B
Unresolved Staff Comments
Item 2
Item 3
Legal Proceedings
Item 4
(Removed and Reserved)
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities
Item 6
Selected Financial Data
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
Item 8
Financial Statements and Supplementary Data
Item 9
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A
Controls and Procedures
Item 9B
Other Information
Item 10
Directors, Executive Officers and Corporate Governance
Item 11
Executive Compensation
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13
Certain Relationships and Related Transactions, and Director Independence
Item 14
Principal Accountant Fees and Services
Item 15
Exhibits, Financial Statement Schedules


In addition to historical information, the following report contains forward-looking statements that are subject to risks and uncertainties that could cause Access National Corporation’s actual results to differ materially from those anticipated.  Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of the report. For discussion of factors that may cause our actual future results to differ materially from those anticipated, please see “Item 1A – Risk Factors” and “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Forward-Looking Statements” herein.


Access National Corporation (the “Corporation” or “ANC”) was organized June 15, 2002 under the laws of Virginia to operate as a bank holding company.  The Corporation has two active wholly owned subsidiaries:  Access National Bank (the “Bank” or “ANB”), and Access National Capital Trust II.  Effective June 15, 2002, pursuant to an Agreement and Plan of Reorganization dated April 18, 2002 between the Corporation and the Bank, the Corporation acquired all of the outstanding stock of the Bank in a statutory share exchange transaction.

The Bank is the primary operating business of the Corporation.  The Bank provides credit, deposit and mortgage services to middle market commercial businesses and associated professionals, primarily in the greater Washington, D.C. Metropolitan Area. The Bank was organized under federal law in 1999 as a national banking association to engage in a general banking business to serve the communities in and around Northern Virginia.  Deposits with the Bank are insured to the maximum amount provided by the Federal Deposit Insurance Corporation (“FDIC”). The Bank offers a comprehensive range of financial services and products and specializes in providing customized financial services to small and medium sized businesses, professionals, and associated individuals.  The Bank provides its customers with personal customized service utilizing the latest technology and delivery channels.  The various operating and non-operating entities that support the Corporation’s business directly and indirectly are listed below:

Access National Corporation

A Virginia corporation with common stock listed on the NASDAQ Global Market, and serves as the Bank’s holding company.  The bank holding company is subject to regulatory oversight by the Federal Reserve System.  Its primary purpose is to hold the common stock of the commercial bank subsidiary and support related capital activities.

Access National Bank

Primary operating entity holding a national bank charter issued under the laws of the United States.  Its principal activities are subject to regulation by the Office of the Comptroller of the Currency (“the Comptroller”).  The Bank’s primary business is serving the credit, depository and cash management needs of businesses and associated professionals.  Deposits of the Bank are insured by the FDIC.

Access National Mortgage Corporation (“ANMC” or the “Mortgage Corporation”)
A Virginia corporation engaged in residential mortgage lending.  The entity was formerly known as Mortgage Investment Corporation (MIC), which was organized in 1985.  MIC was acquired by ANB in 1999 pursuant to a merger agreement between MIC and ANB, and the name changed to ANMC in 2000.  Activities are supervised by the Bank’s primary regulator, the Comptroller.

Access Capital Management, LLC (“ACM”)

A Virginia limited liability company whose sole member is ANB.  ACM is a Registered Investment Advisor with the Securities and Exchange Commission (“SEC”) and provides wealth management services to high net worth individuals, businesses and institutions.  Activities are supervised by the Bank’s primary regulator, the Comptroller, as well as the SEC.

Access Capital Trust II

A Delaware corporate trust established for the purpose of issuing trust preferred capital securities.

ACME Real Estate, LLC (“ACME” or “ACME Real Estate”)
A Virginia limited liability company whose sole member is ANB.   ACME is a real estate holding company whose purpose is to hold title to the properties acquired by the Bank either through foreclosure or property deeded in lieu of
foreclosure.  Activities are supervised by the Bank’s primary regulator, the Comptroller.
The principal products and services offered by the Bank are listed below:

Cash Management
Accounts Receivable Lines of Credit
Accounts Receivable Collection Accounts
Growth Capital Term Loans
Business Acquisition Financing
Partner Buyout Funding
Debt Re-financing
Franchise Financing
Equipment Financing
Commercial Mortgages
Commercial Construction Loans
SBA Preferred Lender Loans
Online Banking
Checking Accounts
Money Market Accounts
Sweep Accounts
Zero Balance Accounts
Overnight Investments
Certificates of Deposit
Business Debit Cards
Lockbox Payment Processing
Payroll Services
Employer Sponsored Retirement Plans
Personal Checking Accounts
Savings / Money Market     Accounts
Certificates of Deposit
Residential Mortgage Loans
Asset Secured Loans
Loans for Business Investment
Construction Loans
Lot & Land Loans
Investment Management
Financial Planning
Retirement Account Services
Qualified Plans

Bank revenues are derived from interest and fees received in connection with loans, deposits, and investments. Interest paid on deposits and borrowings are the major expenses followed by administrative and operating expenses.  Revenues from the Mortgage Corporation consist primarily of gains from the sale of loans and loan origination fees.  Major expenses of the Mortgage Corporation consist of personnel, interest, advertising, and other operating expenses.  Revenue generated by the Bank totaled $37.9 million in 2010 and the Mortgage Corporation contributed $34.2 million and others contributed $1.2 million prior to inter-company eliminations. In 2010, the Bank’s pre-tax earnings amounted to 72.4% of the Corporation’s total income before taxes and the Mortgage Corporation and others contributed the remaining 27.6%.  Historically over the past five years the Bank has contributed over 73% of the Corporation’s consolidated income before taxes.

The economy, interest rates, monetary, and fiscal policies of the federal government and regulatory policies have a significant influence on the Corporation, the Bank, the Mortgage Corporation, and the banking industry as a whole.  During the recession depositors have become more sensitive to the financial standing of banks and more focused on the benefits of FDIC insurance coverage.  These changes have led to a substantial increase in depositor use of the Certificate of Deposit Account Registry Service (“CDARS”) program to obtain deposit insurance above FDIC prescribed coverage limits.  During 2010 this category of time deposits increased from $41.6 million at December 31, 2009 to $234.2 million at December 31, 2010.

The recession is the major contributing factor in the recent increases in loan default rates and foreclosure rates, which has led the Bank to adopt stricter credit standards with respect to loan to value ratios for real estate loans, conservative debt to income ratios and borrower credit scores.  In applying these credit standards, we employ standard and customary methods for the verification of stated information from borrowers.  Prior to 2007 the Bank did not have any significant charge offs or non-performing assets.  For the year ended December 31, 2007, net charge-offs totaled $578 thousand and increased to $5.4 million in 2008 and totaled $4.4 million in 2009.  Net charge-offs in 2010 totaled $1.4 million.  The combination of these factors contributed to the nominal growth in loans of $635 thousand for the year ended December 31, 2009 and approximately $5.0 million for the year ended December 31, 2010.  In 2010 the Bank foreclosed on two residential properties and four commercial properties.  In 2009 the Bank foreclosed on two residential properties and one commercial property.  In 2008 the Bank foreclosed on two residential properties and two commercial properties.  Prior to 2008 the Bank did not have any foreclosures.  In addition to applying more stringent underwriting guidelines to new lending decisions, the Bank has implemented programs to resolve credit issues with existing loans, with foreclosure being the last alternative. For example, senior lenders meet bi-weekly to review problem credits and the status of marketing efforts related to other real estate owned (“OREO”) properties.  In addition, our lending officers are required, when able, to meet and communicate frequently with borrowers experiencing financial difficulties to work on loan restructuring opportunities, obtaining credit enhancements and liquidating collateral.

The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Dodd-Frank Act”) permanently increases the deposit insurance coverage to $250 thousand, provides unlimited federal deposit insurance for noninterest-bearing transaction accounts at all insured depository institutions until December 31, 2012 and lifts the prohibition of the payment of interest on commercial checking accounts.
The Bank operates from five banking centers located in Chantilly, Tysons Corner, Reston, Leesburg and Manassas, Virginia and online at  Additional offices may be added from time to time based upon management’s constant analysis of the market and opportunities.


The Mortgage Corporation specializes in the origination of conforming and government insured residential mortgages to individuals in the greater Washington, D.C. Metropolitan Area, the surrounding areas of its branch locations, outside of its local markets via direct mail solicitation, and otherwise.  The Mortgage Corporation has established offices throughout Virginia, in Fairfax, Reston, Roanoke, and McLean. Offices outside the state of Virginia include Crofton in Maryland, Nashville in Tennessee, Denver in Colorado, Indianapolis in Indiana, Atlanta in Georgia, Winchester in Massachusetts, and San Antonio in Texas.

The following table details the geographic distribution of the real estate collateral securing mortgage loans originated by the Mortgage Corporation in the periods indicated.  The individually named states are those in which the Mortgage Corporation had a physical presence during the periods described.  In addition to making loans for purchases within its markets, the Mortgage Corporation makes loans to borrowers for second homes located elsewhere, as well as utilizes direct mail to solicit loans outside its local markets, which practices account for the “Other States” category.  Percentages are of the total dollar value of originations, as opposed to the number of originations.

Loan Originations by State

Year Ended December 31,
    3.92 %     4.84 %     3.28 %
    4.06 %     3.81 %     4.36 %
    0.00 %     1.82 %     1.86 %
    8.22 %     0.78 %     0.70 %
    2.69 %     2.87 %     2.98 %
    8.85 %     7.50 %     12.11 %
    5.60 %     3.72 %     4.47 %
    4.45 %     4.00 %     4.26 %
    27.92 %     22.23 %     21.15 %
      65.71 %     51.57 %     55.17 %
Other States
    34.29 %     48.43 %     44.83 %
      100.00 %     100.00 %     100.00 %

The Mortgage Corporation’s activities rely on insurance provided by the Department of Housing and Urban Development (“HUD”) and the Veterans Administration. In addition we underwrite mortgage loans in accordance with guidelines for programs under Fannie Mae and Freddie Mac that make these loans marketable in the secondary market.

Access Real Estate was formed to acquire and hold title to real estate for the Corporation. Access Real Estate owns a 45,000 square foot, three story office building located at 1800 Robert Fulton Drive in Reston, Virginia that serves as the corporate headquarters for the Corporation, Bank, Mortgage Corporation, and Access Real Estate.  Access Real Estate also owns vacant land in Fredericksburg that was purchased for future expansion of the Bank and Mortgage Corporation.

ACM became active in the second quarter of 2010 and provides a full range of wealth management services to individuals.

The Corporation and its subsidiaries are headquartered in Fairfax County, Virginia and primarily focus on serving the greater Washington, D.C. Metropolitan Area.

Our Strategy – Historical and Prospective

Our view of the financial services marketplace is that community banks must be effective in select market niches that are under-served and stay clear of competing with large national competitors on a head-to-head basis for broad based consumer business.  We started by organizing a de novo national bank in 1999.  The focus of the Bank was and is serving the small to medium sized businesses and their associated professionals in the greater Washington, D.C. Metropolitan Area. We find that large national competitors are ineffective at addressing this market as it is difficult to distinguish where a business’s financial needs stop and the personal financial needs of that business’s professionals start. We believe that emerging businesses and the finances of their owners are best served hand-in-hand.

Our core competency is judgmental discipline of commercial lending based upon personnel and practices that help our clients strategize and grow their businesses from a financial perspective.  As financial success takes hold in the business, personal goals and wealth objectives of the business owners become increasingly important.  Our second competency is a derivative of the first.  We have the personnel and know how to provide private banking services and the skills and strategy that assist our individual clients to acquire assets, build wealth, and manage their resources.  Mortgage banking and the related activities in our model goes hand-in-hand with supplying effective private banking services.  Unlike most banking companies, the heart of our Mortgage Corporation is ingrained into our commercial bank, serving the same clients side-by-side in a coordinated and seamless fashion.  We believe that lending is not enough in today’s environment to attract and retain commercial and professional clients.  The credit services must be backed up by competitive deposit and cash management products and operational excellence. We have made significant investments in skilled personnel and the latest technology to ensure we can deliver these services.


We generally expect to have fewer branch locations compared to similar size banking companies. We do not view our branch network as a significant determinant of our growth.  Our marketing strategies focus on benefits other than branch location convenience.

The acquisition of the Mortgage Corporation in 1999 provided two key benefits to our strategy:  1) it solidified our second competency from a personnel and operational perspective that would have taken years to replicate with organic growth alone; and 2) it provided fee income from which to launch a new banking business.  Strong profits and cash flow from the Mortgage Corporation in the early years subsidized the growth and development of the Bank and allowed for the acceleration of its growth plans and, in time, its profitability.

The goal was and is to generate 70-80% of the Corporation’s earnings from the core business of the Bank, with the rest of our consolidated earnings to be generated from related fee income activities.  We will consider entering other related fee income businesses that serve our target market as opportunities, market conditions and our capacity dictate.  See Note 19 to the consolidated financial statements for additional information on segment performance.

We expect to grow our Bank by continuing to hire and train our own skilled personnel, and provide a sound infrastructure that facilitates the success of businesses, their owners and key personnel, not only today but tomorrow and on into the ensuing decades.

Lending Activities

The Bank’s lending activities involve commercial real estate loans, residential mortgage loans, commercial loans, commercial and residential real estate construction loans, home equity loans, and consumer loans.  These lending activities provide access to credit to small to medium sized businesses, professionals, and consumers in the greater Washington, D.C. Metropolitan Area. Loans originated by the Bank are classified as loans held for investment.  The Mortgage Corporation originates residential mortgages and home equity loans that are held on average fifteen to thirty days pending their sale primarily to mortgage banking subsidiaries of large financial institutions. The Mortgage Corporation is also approved to sell loans directly to Fannie Mae and Freddie Mac and is able to securitize loans that are insured by the Federal Housing Administration.  In certain circumstances, the Bank will purchase adjustable rate mortgage loans in the Bank’s market area directly from the Mortgage Corporation to supplement loan growth in the Bank’s portfolio.  These circumstances are infrequent and such purchases totaled $959 thousand in 2009 and $490 thousand in 2010.  Loans held in the Bank’s portfolio at December 31, 2010 resulting from the Mortgage Corporation’s inability to sell the loan to a third party total approximately $2.2 million. The Mortgage Corporation also brokers loans that do not conform to their existing products.  Each of our principal loan types are described below.
At December 31, 2010 loans held for investment totaled $491.5 million compared to $486.6 million at year end 2009.  During 2010 loan demand continued to be weak as a result of economic conditions and stricter underwriting standards, which we strengthened during 2009, requiring more conservative target thresholds of debt to income ratios, loan to value ratios for real estate loans, and higher credit scores.
The Bank’s lending activities are subject to a variety of lending limits imposed by federal law. While differing limits apply in certain circumstances based on the type of loan, in general, the Bank’s lending limit to any one borrower on loans that are not fully secured by readily marketable or other permissible collateral is equal to 15% of the Bank’s capital and surplus.  Permissible collateral consists of:  inventory, accounts receivable, general intangibles, equipment, real estate, marketable securities, cash, and vehicles. The Bank has established relationships with correspondent banks to participate in loans when loan amounts exceed the Bank’s legal lending limits or internal lending policies. At December 31, 2010 unsecured loans were comprised of $3.0 million in commercial loans and approximately $170 thousand in consumer loans and collectively equal approximately 0.6% of the loans held for investment portfolio.
We have an established credit policy that includes procedures for underwriting each type of loan and lending personnel have been assigned specific authorities based upon their experience.  Loans in excess of an individual loan officer’s authority are presented to our Loan Committee for approval.  The Loan Committee meets weekly to facilitate a timely approval process for our clients.  Loans are approved based on the borrower’s capacity for credit, collateral and sources of repayment. Loans are actively monitored to detect any potential performance issues.  We manage our loans within the context of a risk grading system developed by management based upon extensive experience in administering loan portfolios in our market.  Payment performance is carefully monitored for all loans.  When loan repayment is dependent upon an operating business or investment real estate, periodic financial reports, site visits, and select asset verification procedures are used to ensure that we accurately rate the relative risk of our assets.  Based upon criteria that are established by management and the Board of Directors, the degree of monitoring is escalated or relaxed for any given borrower based upon our assessment of the future repayment risk.

The Bank did not hold any pay option adjustable rate mortgages, loans with teaser rates, subprime loans, Alt A loans or any other loans considered to be “high-risk loans” in its loans held for investment portfolio during 2010, 2009 or 2008.  The Mortgage Corporation did not originate any subprime loans during 2010, 2009 and 2008, and the Mortgage Corporation originated no Alt A loans in 2010 or 2009 and only two Alt A loans in 2008.  The Mortgage Corporation did not offer Alt A or subprime lending programs in 2010 or 2009, and the Corporation does not expect to offer these programs through the Mortgage Corporation in the future.
Loan Portfolio – Loans Held for Investment.  The following outlines the composition of loans held for investment.

Commercial Real Estate Loans:  Also known as Commercial Mortgages, loans in this category represent 44.4% of our loan portfolio held for investment, as of December 31, 2010.   These loans generally fall into one of three situations: 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, generally extended to Bank clients, and represents 28.0% of the portfolio, as of December 31, 2010.  Of this amount, the following sub-categories exist as a percentage of the whole Residential Real Estate Loan portfolio:  Home Equity Lines of Credit 15.8%; First Trust Mortgage Loans 67.3%; Loans Secured by a Junior Trust 13.6%; Multi-Family Loans and Loans Secured by Farmland 3.3%.

Home Equity Loans are extended to borrowers in our target market.  Real estate equity is the largest component of consumer wealth in our marketplace.  Once approved, this consumer finance tool allows the borrowers 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. One to Four Family Residential First Trust Loan, or First Trust Mortgage Loan, proceeds are used to acquire or refinance the primary financing on owner occupied and residential investment properties. Junior Trust Loans, or Loans Secured by 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 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 updated by our management and Board of Directors: repayment source and capacity, value of the underlying property, credit history, savings pattern, and stability.

Commercial Loans: Commercial Loans represent 19.3% of our loan portfolio held for investment as of December 31, 2010.  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 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 7.8% of our held for investment loan portfolio, as of December 31, 2010.  These loans generally fall into one of four circumstances:  first, loans to construct owner occupied commercial buildings; second, loans to individuals that are ultimately used to acquire property and construct an owner occupied residence; third, loans to builders for the purpose of acquiring property and constructing homes for sale to consumers; and fourth, 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 borrowers.  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 administrative procedures designed to verify and ensure progress of the project in accordance with allocated funding, project specifications, and time frames.

Consumer Loans:  Consumer Loans make up approximately 0.6% 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 updated by our management and Board of Directors: repayment source and capacity, collateral value, credit history, savings pattern, and stability.

Loans Held for Sale (“LHFS”). Loans in this category are originated by the Mortgage Corporation and comprised of residential mortgage loans extended to consumers and underwritten in accordance with standards set forth by an institutional investor to whom we expect to sell the loan. 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 until the loan is delivered to and purchased by an investor, generally within fifteen to thirty days.  In 2010, we originated $824.7 million of loans processed in this manner, down from $1.5 billion in 2009.  At December 31, 2010 loans held for sale totaled $82.2 million compared to $76.2 million at year end 2009.  The amount of loans held for sale outstanding at the end of any given month fluctuates with the volume of loans closed during the month and the timing of loans purchased by investors.


Brokered Loans

Brokered loans are underwritten and closed by a third party lender.  We are paid a fee for procuring and packaging brokered loans.   In 2010, we originated a total volume of $84.2 million in residential mortgage loans under this type of delivery method.  Brokered loans accounted for 9.3% of the total loan volume of the Mortgage Corporation.  The risks associated with this activity are limited to losses or claims arising from fraud.

Deposits are the primary source of funding loan growth.  At December 31, 2010 deposits totaled $627.8 million compared to $466.6 million on December 31, 2009.

Market Area

The Corporation, the Bank, and the Mortgage Corporation are headquartered in Fairfax County and primarily serve the Northern Virginia region and the Greater Washington, D.C. Metropolitan Area.  We believe that the economic conditions in Fairfax County provide a reasonable proxy for economic conditions across our primary market, the greater Washington, D.C. Metropolitan Area.  Fairfax County is a diverse and thriving urban county.  As per the 2010 Census, the population of the county was 1,081,726, making it the most populous jurisdiction in the Commonwealth of Virginia, with about 13.5% of Virginia's population.  The proximity to Washington, D.C. and the influence of the federal government and its spending provides somewhat of a recession shelter for the area.  The U.S. Census Bureau and the Fairfax County government provide the following information about current economic conditions and trends in Fairfax County.
The median sales price of new single-family homes in Fairfax County that sold in January through November, 2010 was $818,727, up 3.4% from $791,984 in 2009 and compared to $926,498 in 2008.  In 2010 building permits for single family homes in Fairfax County totaled 806 units, compared to 769 units in 2009, and 892 units in 2008.

The commercial office vacancy rate in Fairfax County at mid year 2010 was 13.3% down from 15.35% for the same period in 2009.  In 2010 there was 113.0 million square feet of office space available compared to 111.5 million square feet available in 2009.  While vacancy rates and building permits are common measures of the general health of the real estate industry, we have not discerned any material correlation between such measures and the performance of our loan portfolio.

At December 31, 2010 and 2009, the Bank had approximately $81 million and $95 million, respectively in income producing commercial real estate loans.  The properties securing these loans are generally small office buildings and industrial properties located in our trade area with less than ten tenants.  Income producing property loans are underwritten with personal and business guarantees that provide secondary sources of repayment and mitigate market risk factors.

The unemployment rate for Fairfax County was 4.4% in December, 2010 compared to 6.4% for the state of Virginia and 9.1% for the nation.  At December 31, 2009 the unemployment rate for Fairfax County was 4.7%, 6.7% for the state of Virginia and 9.7% for the nation.

The median household income in Fairfax County was $102,499 in 2009 down from $107,400 in 2008 and $105,200 in 2007.

The Bank competes with virtually all banks and financial institutions which offer services in its market area.  Much of this competition comes from large financial institutions headquartered outside the state of Virginia, each of which has greater financial and other resources to conduct large advertising campaigns and offer incentives.  To attract business in this competitive environment, the Bank relies on personal contact by its officers and directors, local promotional activities, and the ability to provide personalized custom services to small and medium sized businesses and professionals. In addition to providing full service banking, the Bank offers and promotes alternative and modern conveniences such as internet banking, automated clearinghouse transactions, remote deposit capture, and courier services for commercial clients. Because federal regulation of financial institutions changes regularly and is the subject of constant legislative debate, we cannot foresee how federal regulation of financial institutions may change in the future.  However, it is possible that current and future governmental regulatory and economic initiatives could impact the competitive landscape in the Bank’s markets. 


At December 31, 2010 the Corporation had 277 employees, 100 of whom were employed by the Bank and 177 of whom were employed by the Mortgage Corporation.  None of the employees of the Corporation is subject to a collective bargaining agreement.  Management considers employee relations to be good.

Supervision and Regulation
Set forth below is a brief description of the material laws and regulations that affect the Corporation. The description of these statutes and regulations is only a summary and does not purport to be complete. This discussion is qualified in its entirety by reference to the statutes and regulations summarized below. No assurance can be given that these statutes or regulations will not change in the future.
General. The Corporation is subject to the periodic reporting requirements of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), which include, but are not limited to, the filing of annual, quarterly, and other reports with the Securities and Exchange Commission (the “SEC”). As an Exchange Act reporting company, the Corporation is directly affected by the Sarbanes-Oxley Act of 2002 (the “SOX”), which aimed at improving corporate governance and reporting procedures and requires expanded disclosure of the Corporation’s corporate operations and internal controls.
The Corporation is a bank holding company within the meaning of the Bank Holding Company Act of 1956, and is registered as such with, and subject to the supervision of, the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of Richmond (the “FRB”). Generally, a bank holding company is required to obtain the approval of the FRB before it may acquire all or substantially all of the assets of any bank, and before it may acquire ownership or control of the voting shares of any bank if, after giving effect to the acquisition, the bank holding company would own or control more than 5% of the voting shares of such bank. The FRB’s approval is also required for the merger or consolidation of bank holding companies.
The Corporation is required to file periodic reports with the FRB and provide any additional information as the FRB may require. The FRB also has the authority to examine the Corporation and the Bank, as well as any arrangements between the Corporation and the Bank, with the cost of any such examinations to be borne by the Corporation.
Banking subsidiaries of bank holding companies are also subject to certain restrictions imposed by federal law in dealings with their holding companies and other affiliates. Subject to certain restrictions set forth in the Federal Reserve Act, a bank can loan or extend credit to an affiliate, purchase or invest in the securities of an affiliate, purchase assets from an affiliate or issue a guarantee, acceptance or letter of credit on behalf of an affiliate, as long as the aggregate amount of such transactions of a bank and its subsidiaries with its affiliates does not exceed 10% of the capital stock and surplus of the bank on a per affiliate basis or 20% of the capital stock and surplus of the bank on an aggregate affiliate basis. In addition, such transactions must be on terms and conditions that are consistent with safe and sound banking practices. In particular, a bank and its subsidiaries generally may not purchase from an affiliate a low-quality asset, as defined in the Federal Reserve Act. These restrictions also prevent a bank holding company and its other affiliates from borrowing from a banking subsidiary of the bank holding company unless the loans are secured by marketable collateral of designated amounts. Additionally, the Corporation and its subsidiary are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services.
A bank holding company is prohibited from engaging in or acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company engaged in non-banking activities. A bank holding company may, however, engage in or acquire an interest in a company that engages in activities which the FRB has determined by regulation or order are so closely related to banking as to be a proper incident to banking. In making these determinations, the FRB considers whether the performance of such activities by a bank holding company would offer advantages to the public that outweigh possible adverse effects.
As a national bank, the Bank is subject to regulation, supervision, and regular examination by the Comptroller.  Each depositor’s account with the Bank is insured by the FDIC to the maximum amount permitted by law. The Bank is also subject to certain regulations promulgated by the FRB and applicable provisions of Virginia law, insofar as they do not conflict with or are not preempted by federal banking law.
The regulations of the FDIC, the Comptroller, and FRB govern most aspects of the Corporation’s business, including deposit reserve requirements, investments, loans, certain check clearing activities, issuance of securities, payment of dividends, branching, deposit interest rate ceilings, and numerous other matters.
As a consequence of the extensive regulation of commercial banking activities in the United States, the Corporation’s business is particularly susceptible to changes in state and federal legislation and regulations, which may have the effect of increasing the cost of doing business, limiting permissible activities or increasing competition.
The Dodd-Frank Act.   On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act, among other things includes the following:


Creates a new consumer financial protection bureau that will have rulemaking authority for a wide range of consumer protection laws that would apply to all banks and have broad powers to supervise and enforce consumer protection laws.

Changes standards for Federal preemption of state laws related to federally chartered institutions and their subsidiaries.

Permanently increases the deposit insurance coverage to $250 thousand and provides unlimited federal deposit insurance for noninterest-bearing demand transaction accounts at all insured depository institutions until December 31, 2012, and allows depository institutions to pay interest on business checking accounts starting July 2011.

Changes the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminates the ceiling on the size of the Deposit Insurance Fund (“DIF’), and increases the floor of the size of the DIF.

Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, making it difficult to anticipate the overall financial impact on the Corporation, its subsidiaries, its customers or the financial industry more generally. Provisions in the legislation that affect the payment of interest on demand deposits and interchange fees are likely to increase the costs associated with deposits as well as place limitations on certain revenues those deposits may generate. Provisions in the legislation that revoke the Tier 1 capital treatment of trust preferred securities and otherwise require revisions to the capital requirements of the Corporation and the Bank could require the Corporation and the Bank to seek other sources of capital in the future. Some of the rules that have been proposed and, in some cases, adopted to comply with the Dodd-Frank Act’s mandates are discussed further below.
Dividends. There are both federal and state regulatory restrictions on dividend payments by both the Bank and the Corporation that may affect the Corporation’s ability to pay dividends on its common stock. As a bank holding company, the Corporation is a separate legal entity from the Bank.  Virtually all of the Corporation’s income results from dividends paid to the Corporation by the Bank.  The amount of dividends that may be paid by the Bank depends upon the Bank’s earnings and capital position and is limited by federal and state law, regulations, and policies.  In addition to specific regulations governing the permissibility of dividends, both the FRB and the Virginia Bureau of Financial Institutions are generally authorized to prohibit payment of dividends if they determine that the payment of dividends by the Bank would be an unsafe and unsound banking practice.  The Corporation meets all regulatory requirements and began paying dividends in February 2006.  The Corporation paid dividends totaling $423 thousand in 2010. See “Item 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities”.
Capital Requirements. The FRB, the Comptroller, and the FDIC have adopted risk-based capital adequacy guidelines for bank holding companies and banks. These capital adequacy regulations are based upon a risk-based capital determination, whereby a bank holding company’s capital adequacy is determined in light of the risk, both on-and off-balance sheet, contained in the company’s assets. Different categories of assets are assigned risk weightings and are counted at a percentage of their book value.
The regulations divide capital between Tier 1 capital (core capital) and Tier 2 capital. For a bank holding company, Tier 1 capital consists primarily of common stock, related surplus, non-cumulative perpetual preferred stock, minority interests in consolidated subsidiaries, and a limited amount of qualifying cumulative preferred securities. Goodwill and certain other intangibles are excluded from Tier 1 capital. Tier 2 capital consists of an amount equal to the allowance for loan and lease losses up to a maximum of 1.25% of risk-weighted assets, limited other types of preferred stock not included in Tier 1 capital, hybrid capital instruments, and term subordinated debt. Investments in and loans to unconsolidated banking and finance subsidiaries that constitute capital of those subsidiaries are excluded from capital. The sum of Tier 1 and Tier 2 capital constitutes qualifying total capital. The guidelines generally require banks to maintain a total qualifying capital to weighted risk assets level of 8% (the “Risk-based Capital Ratio”). Of the total 8%, at least 4% of the total qualifying capital to risk weighted assets (the “Tier 1 Risk-based Capital Ratio”) must be Tier 1 capital.
The FRB, the Comptroller, and the FDIC have adopted leverage requirements that apply in addition to the risk-based capital requirements. Banks and bank holding companies are required to maintain a minimum leverage ratio of Tier 1 capital to average total consolidated assets (the “Leverage Ratio”) of at least 3.0% for the most highly-rated, financially sound banks and bank holding companies and a minimum Leverage Ratio of at least 4% for all other banks. The FDIC and the FRB define Tier 1 capital for banks in the same manner for both the Leverage Ratio and the Risk-based Capital Ratio. However, the FRB defines Tier 1 capital for bank holding companies in a slightly different manner. An institution may be required to maintain Tier 1 capital of at least 4% or 5%, or possibly higher, depending upon the activities, risks, rate of growth, and other factors deemed material by regulatory authorities. As of December 31, 2010, the Corporation and Bank both met all applicable capital requirements imposed by regulation.
Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”).   There are five capital categories applicable to insured institutions, each with specific regulatory consequences. If the appropriate federal banking agency determines, after notice and an opportunity for hearing, that an insured institution is in an unsafe or unsound condition, it may reclassify the institution to the next lower capital category (other than critically undercapitalized) and require the submission of a plan to correct the unsafe or unsound condition. The Comptroller has issued regulations to implement these provisions. Under these regulations, the categories are:

     a.     Well Capitalized — The institution exceeds the required minimum level for each relevant capital measure. A well capitalized institution is one (i) having a Risk-based Capital Ratio of 10% or greater, (ii) having a Tier 1 Risk-based Capital Ratio of 6% or greater, (iii) having a Leverage Ratio of 5% or greater and (iv) that is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure.
     b.     Adequately Capitalized — The institution meets the required minimum level for each relevant capital measure. No capital distribution may be made that would result in the institution becoming undercapitalized. An adequately capitalized institution is one (i) having a Risk-based Capital Ratio of 8% or greater, (ii) having a Tier 1 Risk-based Capital Ratio of 4% or greater and (iii) having a Leverage Ratio of 4% or greater or a Leverage Ratio of 3% or greater if the institution is rated composite 1 under the CAMELS (Capital, Assets, Management, Earnings, Liquidity, and Sensitivity to market risk) rating system.
     c.     Undercapitalized — The institution fails to meet the required minimum level for any relevant capital measure. An undercapitalized institution is one (i) having a Risk-based Capital Ratio of less than 8% or (ii) having a Tier 1 Risk-based Capital Ratio of less than 4% or (iii) having a Leverage Ratio of less than 4%, or if the institution is rated a composite 1 under the CAMEL rating system, a Leverage Ratio of less than 3%.
     d.     Significantly Undercapitalized — The institution is significantly below the required minimum level for any relevant capital measure. A significantly undercapitalized institution is one (i) having a Risk-based Capital Ratio of less than 6% or (ii) having a Tier 1 Risk-based Capital Ratio of less than 3% or (iii) having a Leverage Ratio of less than 3%.
     e.     Critically Undercapitalized — The institution fails to meet a critical capital level set by the appropriate federal banking agency. A critically undercapitalized institution is one having a ratio of tangible equity to total assets that is equal to or less than 2%.
An institution which is less than adequately capitalized must adopt an acceptable capital restoration plan, is subject to increased regulatory oversight, and is increasingly restricted in the scope of its permissible activities. Each company having control over an undercapitalized institution must provide a limited guarantee that the institution will comply with its capital restoration plan. Except under limited circumstances consistent with an accepted capital restoration plan, an undercapitalized institution may not grow. An undercapitalized institution may not acquire another institution, establish additional branch offices or engage in any new line of business unless determined by the appropriate federal banking agency to be consistent with an accepted capital restoration plan, or unless the FDIC determines that the proposed action will further the purpose of prompt corrective action. The appropriate Federal banking agency may take any action authorized for a significantly undercapitalized institution if an undercapitalized institution fails to submit an acceptable capital restoration plan or fails in any material respect to implement a plan accepted by the agency. A critically undercapitalized institution is subject to having a receiver or conservator appointed to manage its affairs and for loss of its charter to conduct banking activities.
An insured depository institution may not pay a management fee to a bank holding company controlling that institution or any other person having control of the institution if, after making the payment, the institution, would be undercapitalized. In addition, an institution cannot make a capital distribution, such as a dividend or other distribution that is in substance a distribution of capital to the owners of the institution if following such a distribution the institution would be undercapitalized. Thus, if payment of such a management fee or the making of such would cause the Bank to become undercapitalized, it could not pay a management fee or dividend to the Corporation.
As of December 31, 2010, both the Corporation and the Bank were considered “well capitalized”.
Basel III Capital Framework.  In December 2010, the Basel Committee on Banking Supervision (the “Basel Committee”) released its final framework for strengthening international capital and liquidity regulation, now officially identified by the Basel Committee as "Basel III". Basel III, when implemented by the U.S. banking agencies and fully phased-in, will require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity.  Implementation is presently scheduled to be phased in between 2014 and 2019, although it is possible that implementation may be delayed as a result of multiple factors including the current condition of the banking industry within the U.S. and abroad.

The Basel III final capital framework, among other things, (i) introduces as a new capital measure "Common Equity Tier 1" (“CET1”), (ii) specifies that Tier 1 capital consists of CET1 and "Additional Tier 1 capital" instruments meeting specified requirements, (iii) defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expands the scope of the adjustments as compared to existing regulations.


When fully phased in on January 1, 2019, Basel III requires banks to maintain (i) as a newly adopted international standard, a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7%), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of Total (that is, Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) as a newly adopted international standard, a minimum leverage ratio of 3%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter).
Basel III also provides for a "countercyclical capital buffer," generally to be imposed when national regulators determine that excess aggregate credit growth becomes associated with a buildup of systemic risk, that would be a CET1 add-on to the capital conservation buffer in the range of 0% to 2.5% when fully implemented (potentially resulting in total buffers of between 2.5% and 5%).

The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

The implementation of the Basel III final framework will commence January 1, 2013. On that date, banking institutions will be required to meet the following minimum capital ratios:

3.5% CET1 to risk-weighted assets.
4.5% Tier 1 capital to risk-weighted assets.
8.0% Total capital to risk-weighted assets.

The Basel III final framework provides for a number of new deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.

Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2014 and will be phased-in over a five-year period (20% per year). The implementation of the capital conservation buffer will begin on January 1, 2016 at 0.625% and be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).

The U.S. banking agencies have indicated informally that they expect to propose regulations implementing Basel III in mid-2011 with final adoption of implementing regulations in mid-2012. Notwithstanding its release of the Basel III framework as a final framework, the Basel Committee is considering further amendments to Basel III, including the imposition of additional capital surcharges on globally systemically important financial institutions. In addition to Basel III, the Dodd-Frank Act (as defined and discussed above) requires or permits the federal banking agencies to adopt regulations affecting banking institutions' capital requirements in a number of respects, including potentially more stringent capital requirements for systemically important financial institutions. Accordingly, the regulations ultimately applicable to the Corporation may be substantially different from the Basel III final framework as published in December 2010. Requirements to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact the Corporation’s net income and return on equity.

Deposit Insurance. The Bank's deposits are insured up to applicable limits by the DIF of the FDIC.  In November 2010, the FDIC issued a Final Rule implementing section 343 of the Dodd-Frank Act that provides for unlimited insurance coverage of certain noninterest-bearing accounts. Beginning December 31, 2010, through December 31, 2012, all noninterest-bearing transaction accounts are fully insured, regardless of the balance of the account, at all FDIC-insured institutions. The unlimited insurance coverage is available to all depositors, including consumers, businesses, and government entities. This unlimited insurance coverage is separate from, and in addition to, the insurance coverage provided to a depositor’s other deposit accounts held at an FDIC-insured institution.

The FDIC has set a designated reserve ratio of 1.35% ($1.35 for each $100 of insured deposits) for the DIF. The Federal Deposit Insurance Act of 2005 (“FDIC Act”) provides the FDIC Board of Directors the authority to set the designated reserve ratio between 1.15% and 1.50%. The FDIC must adopt a restoration plan when the reserve ratio falls below 1.15% and begin paying dividends when the reserve ratio exceeds 1.35%. There is no requirement to achieve a specific ratio within a given timeframe. The DIF reserve ratio calculated by the FDIC at December 31, 2010 was a negative .12% and therefore, the FDIC needs to increase premiums charged to banks.

In 2010, the annual insurance premiums on bank deposits insured by the DIF varied between $.07 per $100 of deposits for banks classified in the highest capital and supervisory evaluation categories to $.78 per $100 of deposits for banks classified in the lowest capital and supervisory evaluation categories.


On November 12, 2009, the FDIC adopted a final rule requiring depository institutions to prepay their estimated quarterly insurance premium for fourth quarter 2009 and all of 2010, 2011 and 2012. The Bank prepaid $2.8 million of such premium on December 30, 2009 and $2.2 million remained as a prepaid balance at December 31, 2010.

In February 2011, the FDIC approved a final rule that changes the assessment base from domestic deposits to average consolidated total assets minus average tangible equity (defined as Tier 1 capital); adopts a new large-bank pricing assessment scheme; and sets a target size for the DIF. The changes will go into effect beginning with the second quarter of 2011 and will be payable at the end of September 2011. The rule, as mandated by the Dodd-Frank Act, finalizes a target size for the DIF at 2 percent of insured deposits. It also implements a lower assessment rate schedule when the fund reaches 1.15 percent and, in lieu of dividends, provides for a lower rate schedule when the reserve ratio reaches 2 percent and 2.5 percent. 

Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Act of 1999 (the “GLBA”) implemented major changes to the statutory framework for providing banking and other financial services in the United States. The GLBA, among other things, eliminated many of the restrictions on affiliations among banks, and securities firms, insurance firms, and other financial service providers. A bank holding company that qualifies as a financial holding company will be permitted to engage in activities that are financial in nature or incidental or complimentary to financial activities. The activities that the GLBA expressly lists as financial in nature include insurance underwriting, sales and brokerage activities, providing financial and investment advisory services, underwriting services, and limited merchant banking activities.
To become eligible for these expanded activities, a bank holding company must qualify as a financial holding company. To qualify as a financial holding company, each insured depository institution controlled by the bank holding company must be well-capitalized, well-managed and have at least a satisfactory rating under the Community Reinvestment Act (the “CRA”).  In addition, the bank holding company must file with the FRB a declaration of its intention to become a financial holding company. While the Corporation satisfies these requirements, the Corporation has not elected for various reasons to be treated as a financial holding company under the GLBA.
We do not believe that the GLBA has had a material adverse impact on the Corporation’s or the Bank’s operations. To the extent that it allows banks, securities firms and insurance firms to affiliate, the financial services industry may experience further consolidation. The GLBA may have the result of increasing competition that we face from larger institutions and other companies offering financial products and services, many of which may have substantially greater financial resources.
The GLBA and certain other regulations issued by federal banking agencies also provide new protections against the transfer and use by financial institutions of consumer nonpublic personal information. A financial institution must provide to its customers, at the beginning of the customer relationship and annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. These privacy provisions generally prohibit a financial institution from providing a customer’s personal financial information to unaffiliated third parties unless the institution discloses to the customer that the information may be so provided and the customer is given the opportunity to opt out of such disclosure.
Community Reinvestment Act.   The Bank is subject to the requirements of CRA. The CRA imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of their local communities, including low and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. A financial institution’s efforts in meeting community credit needs currently are evaluated as part of the examination process pursuant to three performance tests. These factors also are considered in evaluating mergers, acquisitions, and applications to open a branch or facility.
Federal Home Loan Bank (“FHLB”) of Atlanta. The Bank is a member of the FHLB of Atlanta, which is one of twelve regional FHLBs that provide funding to their members for making housing loans as well as for affordable housing and community development lending. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the Board of Directors of the FHLB. As a member the Bank is required to purchase and maintain stock in the FHLB in an amount equal to 4.5% of aggregate outstanding advances in addition to the membership stock requirement of 0.2% of the Bank’s total assets.
Mortgage Banking Regulation. The Bank’s mortgage banking subsidiary is subject to the rules and regulations of, and examination by, HUD, the Federal Housing Administration, the Department of Veterans Affairs, and state regulatory authorities with respect to originating, processing, and selling mortgage loans. Those rules and regulations, among other things, establish standards for loan origination, prohibit discrimination, provide for inspections and appraisals of property, require credit reports on prospective borrowers, and, in some cases, restrict certain loan features and fix maximum interest rates and fees. In addition to other federal laws, mortgage origination activities are subject to the Equal Credit Opportunity Act, Truth-in-Lending Act, Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act, and Home Ownership Equity Protection Act, and the regulations promulgated there under. These laws prohibit discrimination, require the disclosure of certain basic information to mortgagors concerning credit and settlement costs, limit payment for settlement services to the reasonable value of the services rendered, and require the maintenance and disclosure of information regarding the disposition of mortgage applications based on race, gender, geographical distribution, and income level.


USA PATRIOT Act.    The USA PATRIOT Act became effective on October 26, 2001 and provides for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering. Among other provisions, the USA PATRIOT Act permits financial institutions, upon providing notice to the U.S. Treasury, to share information with one another in order to better identify and report to the federal government concerning activities that may involve money laundering or terrorists’ activities. The USA PATRIOT Act is considered a significant banking law in terms of information disclosure regarding certain customer transactions. Certain provisions of the USA PATRIOT Act impose the obligation to establish anti-money laundering programs, including the development of a customer identification program, and the screening of all customers against any government lists of known or suspected terrorists. Although it does create a reporting obligation and a cost of compliance, the Bank does not expect the USA PATRIOT Act to materially affect its products, services or other business activities.
Reporting Terrorist Activities.   The Federal Bureau of Investigation (“FBI”) has sent, and will send, our banking regulatory agencies lists of the names of persons suspected of involvement in terrorist activities. The Bank has been requested, and will be requested, to search its records for any relationships or transactions with persons on those lists. If the Bank finds any relationships or transactions, it must file a suspicious activity report and contact the FBI.

The Office of Foreign Assets Control (“OFAC”), which is a division of the U.S.Treasury, is responsible for helping to insure that United States entities do not engage in transactions with “enemies” of the United States, as defined by various Executive Orders and Acts of Congress. OFAC has sent, and will send, our banking regulatory agencies lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts. If the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, it must freeze such account, file a suspicious activity report and notify the FBI. The Bank has appointed an OFAC compliance officer to oversee the inspection of its accounts and the filing of any notifications. The Bank actively checks high-risk OFAC areas such as new accounts, wire transfers, and customer files. The Bank performs these checks utilizing software, which is updated each time a modification is made to the lists provided by OFAC and other agencies of Specially Designated Nationals and Blocked Persons.

Consumer Laws and Regulations. The Bank is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks.  While the list set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, and the Fair Housing Act, among others.  These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions transact business with customers.  The Bank must comply with the applicable provisions of these consumer protection laws and regulations as part of its ongoing customer relations.

Temporary Liquidity Guarantee Program.  On November 21, 2008, the Board of Directors of the FDIC adopted a final rule relating to the Temporary Liquidity Guarantee Program (“TLG Program”). The TLG Program was announced by the FDIC on October 14, 2008, preceded by the determination of systemic risk by the Secretary of the Department of Treasury (after consultation with the President), as an initiative to counter the system-wide crisis in the nation’s financial sector. Under the TLG Program the FDIC will (i) guarantee, through the earlier of maturity or December 31, 2012, certain newly issued senior unsecured debt issued by participating institutions on or after October 14, 2008, and before October 31, 2009 and (ii) provide full FDIC deposit insurance coverage for noninterest-bearing transaction deposit accounts, Negotiable Order of Withdrawal (“NOW”) accounts paying less than 0.5% interest per annum and Interest on Lawyers Trust Accounts held at participating FDIC insured institutions through June 30, 2010, extended by subsequent amendment from December 31, 2009.  Coverage under the TLG Program was available for the first 30 days without charge. The fee assessment for coverage of senior unsecured debt ranges from 50 basis points to 125 basis points per annum, depending on the initial maturity of the debt and its date of issuance. The fee assessment for deposit insurance coverage on amounts in covered accounts exceeding $250,000 was an annualized 10 basis points through December 31, 2009 and is an annualizes 15 basis points for coverage in 2010 for institutions in risk category 1. The Bank elected to participate in both guarantee programs.  On February 11, 2009 the Bank issued $30.0 million in new senior unsecured debt at 2.74% maturing February 15, 2012 under the TLG Program.  The proceeds to the Bank from the issuance of senior unsecured debt under the TLGP were used to repay FHLB short term borrowings and to provide additional liquidity.  We believe that the discontinuance of the TLGP will not have a material impact on the Corporation because the Bank intends to repay the debt at maturity on February 15, 2012.

Incentive Compensation. In June 2010, the FRB, the Comptroller and the FDIC issued a comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.


Risks Related to the Corporation’s Business

Our future success will depend on our ability to compete effectively in the highly competitive financial services industry in Northern Virginia.

We face substantial competition in all phases of our operations from a variety of different competitors.  In particular, there is very strong competition for financial services in Northern Virginia and the greater Washington, D.C. Metropolitan Area in which we conduct a substantial portion of our business.  We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds and other mutual funds, as well as other local and community, super-regional, national and international financial institutions that operate offices in our primary market areas and elsewhere.  Our future growth and success will depend on our ability to compete effectively in this highly competitive financial services environment.  Many of our competitors are well-established, larger financial institutions and many offer products and services that we do not.  Many have substantially greater resources, name recognition and market presence that benefit them in attracting business.  Some of our competitors are not subject to the same regulation as is imposed on bank holding companies and federally-insured national banks, including credit unions which do not pay federal income tax, and, therefore, have regulatory advantages over us in accessing funding and in providing various services.  While we believe we compete effectively with these other financial institutions in our primary markets, we may face a competitive disadvantage as a result of our smaller size, smaller asset base, lack of geographic diversification and inability to spread our marketing costs across a broader market.  If we have to raise interest rates paid on deposits or lower interest rates charged on loans to compete effectively, our net interest margin and income could be negatively affected.  Failure to compete effectively to attract new or to retain existing clients may reduce or limit our net income and our market share and may adversely affect our results of operations, financial condition and growth.

Our profitability depends on interest rates generally, and we may be adversely affected by changes in government monetary policy or by fluctuations in interest rates.

Our profitability depends in substantial part on our net interest margin, which is the difference between the rates we receive on loans and investments and the rates we pay for deposits and other sources of funds.  Our net interest margin depends on many factors that are partly or completely outside of our control, including competition, federal economic, monetary and fiscal policies, and economic conditions generally.  Our net interest income will be adversely affected if market interest rates change so that the interest we pay on deposits and borrowings increases faster than the interest we earn on loans and investments.

Changes in interest rates, particularly by the Board of Governors of the FRB, which implements national monetary policy in order to mitigate recessionary and inflationary pressures, also affect the value of our loans.  In setting its policy, the FRB may utilize techniques such as: (i) engaging in open market transactions in United States government securities; (ii) setting the discount rate on member bank borrowings; and (iii) determining reserve requirements.  These techniques may have an adverse effect on our deposit levels, net interest margin, loan demand or our business and operations.  In addition, an increase in interest rates could adversely affect borrowers’ ability to pay the principal or interest on existing loans or reduce their desire to borrow more money.  This may lead to an increase in our non-performing assets, a decrease in loan originations, or a reduction in the value of and income from our loans, any of which could have a material and negative effect on our results of operations.  We try to minimize our exposure to interest rate risk, but we are unable to completely eliminate this risk.  Fluctuations in market rates and other market disruptions are neither predictable nor controllable and may have a material and negative effect on our business, financial condition and results of operations

At December 31, 2010 approximately 74.9% of the loans held for investment were variable rate loans.  A majority of these loans are based on the prime rate and will adjust upwards as the prime rate increases.  While the variable rate structure on these loans reduces interest rate risk for the Bank, increases in rates may cause the borrower’s required payment to increase which, in turn, may increase the risk of payment default.
Because we make loans primarily to local small and medium sized businesses, our profitability depends significantly on local economic conditions, particularly real estate values, and the success of those businesses.

As a lender, we are exposed to the risk that our loan clients may not repay their loans according to their terms and any collateral securing payment may be insufficient to fully compensate us for the outstanding balance of the loan plus the costs we incur disposing of the collateral.  Although we have collateral for most of our loans, that collateral can fluctuate in value and may not always cover the outstanding balance on the loan.  With most of our loans concentrated in Northern Virginia, a decline in local economic conditions could adversely affect the values of our real estate collateral.  Consequently, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are more geographically diverse.


In addition to assessing the financial strength and cash flow characteristics of each of our borrowers, the Bank often secures loans with real estate collateral.  At December 31, 2010, approximately 80.1% of our Bank’s loans held for investment have real estate as a primary or secondary component of collateral.  The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended.  If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely affected.

Our business strategy includes the continuation of our growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.

We intend to continue to grow in our existing banking markets (internally and through additional offices) and to expand into new markets as appropriate opportunities arise.  Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies that are experiencing growth.  We cannot assure you we will be able to expand our market presence in our existing markets or successfully enter new markets, or that any expansion will not adversely affect our results of operations.  Failure to manage our growth effectively could have a material adverse effect on our business, future prospects, financial condition or results of operations, and could adversely affect our ability to successfully implement our business strategy.  Also, if our growth occurs more slowly than anticipated or declines, our operating results could be materially affected in an adverse way. Our ability to successfully grow will depend on a variety of factors, including the continued availability of desirable business opportunities, the competitive responses from other financial institutions in our market areas and our ability to manage our growth.  While we believe we have the management resources and internal systems in place to successfully manage our future growth, there can be no assurance growth opportunities will be available or growth will be successfully managed.

Although we have made a limited number of acquisitions, we may face a broad range of risks in connection with future acquisitions that could result in those acquisitions not increasing shareholder value.

As a strategy, we have sought to increase the size of our business by pursuing business development opportunities, and we have grown rapidly since our incorporation.  As part of that strategy, we have acquired three mortgage companies and a small equipment leasing company.  We may acquire other financial institutions and mortgage companies, or parts of those entities, in the future.  Acquisitions and mergers involve a number of risks, including:

the time and costs associated with identifying and evaluating potential acquisitions and merger partners;

the estimates and judgments used to evaluate credit, operations, management and market risks with respect to the target entity may not be accurate;

the time and costs of evaluating new markets, hiring experienced local management and opening new offices, and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion;

our ability to finance an acquisition and possible ownership or economic dilution to our current shareholders;

the diversion of our management’s attention to the negotiation of a transaction, and the integration of the operations and personnel of the combining businesses;

entry into new markets where we lack experience;

the introduction of new products and services into our business;

the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations; and

the potential loss of key employees and clients.

We may incur substantial costs to expand, and we can give no assurance such expansion will result in the levels of profits we seek.  There can be no assurance that integration efforts for any future mergers or acquisitions will be successful.  Also, we may issue equity securities, including common stock and securities convertible into shares of our common stock, in connection with future acquisitions, which could cause ownership and economic dilution to our current shareholders. There is no assurance that, following any future merger or acquisition, our integration efforts will be successful or our company, after giving effect to the acquisition, will achieve profits comparable to or better than our historical experience.


Our allowance for loan losses could become inadequate and reduce our earnings and capital.

We maintain an allowance for loan losses that we believe is adequate for absorbing any potential losses in our loan portfolio.  Management conducts a periodic review and consideration of the loan portfolio to determine the amount of the allowance for loan losses based upon general market conditions, credit quality of the loan portfolio and performance of our clients relative to their financial obligations with us.  The amount of future losses, however, is susceptible to changes in borrowers’ circumstances and economic and other market conditions, including changes in interest rates and collateral values that are beyond our control and these future losses may exceed our current estimates.  Our allowance for loan losses at December 31, 2010 was $10.5 million.  Although we believe the allowance for loan losses is adequate to absorb probable losses in our loan portfolio, we cannot predict such losses or guarantee that our allowance will be adequate in the future.  Excessive loan losses could have a material impact on our financial performance and reduce our earnings and capital.

Our future liquidity needs could exceed our available liquidity sources, which could limit our asset growth and adversely affect our results of operations and financial condition.

We rely on dividends from the Bank as our primary source of funds.  The primary sources of funds of the Bank are client deposits and loan repayments.  While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans.  The ability of borrowers to repay loans can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters and international instability.  Additionally, deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to clients on alternative investments and general economic conditions.  Accordingly, we may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations.  Such sources include FHLB advances, sales of securities and loans, and federal funds lines of credit from correspondent banks, as well as out-of-market time deposits.  While we believe that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands, particularly if we continue to grow and experience increasing loan demand.  We may be required to slow or discontinue loan growth, capital expenditures or other investments or liquidate assets should such sources not be adequate.

We are subject to extensive regulation that could limit or restrict our activities and adversely affect our earnings.

We operate in a highly regulated industry, and both we and the Bank are subject to extensive regulation and supervision by the FRB, the Comptroller, and the FDIC.  Our compliance with these regulations is costly and restricts certain of our activities, including payment of dividends, mergers and acquisitions, investments, loans and interest rates charged, interest rates paid on deposits and locations of offices.  We are also subject to capitalization guidelines established by our regulators, which require us to maintain adequate capital to support our growth.  Many of these regulations are intended to protect depositors and the FDIC’s DIF rather than our shareholders.

SOX, and the related rules and regulations promulgated by the SEC and NASDAQ that are applicable to us, have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices, including the cost of completing our audit and maintaining our internal controls.  As a result, we may experience greater compliance costs.

Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect the Corporation in substantial and unpredictable ways. Such changes could subject the Corporation to additional costs, limit the types of financial services and products the Corporation may offer and/or increase the ability of non-banks that are not subject to similar regulation to offer competing financial services and products, which could place these non-banks in stronger, more favorable competitive positions and which could adversely affect the Corporation’s growth and ability to operate profitably. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on the Corporation’s business, financial condition and results of operations.

The Dodd-Frank Act could increase the Corporation’s regulatory compliance burden and associated costs, place restrictions on certain products and services, and limit its future capital raising strategies.  

A wide range of regulatory initiatives directed at the financial services industry have been proposed in recent months. One of those initiatives, the Dodd-Frank Act, was signed into law on July 21, 2010. The Dodd-Frank Act represents a sweeping overhaul of the financial services industry within the United States and mandates significant changes in the financial regulatory landscape that will impact all financial institutions, including the Corporation and the Bank.  The Dodd-Frank Act will likely increase the Corporation’s regulatory compliance burden and may have a material adverse effect on the Corporation, by increasing the costs associated with regulatory examinations and compliance measures. However, it is too early to fully assess the impact of the Dodd-Frank Act and subsequent regulatory rulemaking processes on the Corporation’s and the Bank’s business, financial condition or results of operations.

Among the Dodd-Frank Act’s significant regulatory changes, the Act creates a new financial consumer protection agency that could impose new regulations and include its examiners in routine regulatory examinations conducted by the Comptroller. This agency, named the Consumer Financial Protection Bureau, may reshape the consumer financial laws through rulemaking and enforcement of the Dodd-Frank Act’s prohibitions against unfair, deceptive and abusive business practices, which may directly impact the business operations of financial institutions offering consumer financial products or services, including the Corporation and the Bank.  This agency’s broad rulemaking authority includes identifying practices or acts that are unfair, deceptive or abusive in connection with any consumer financial transaction or consumer financial product or service.  Although the Consumer Financial Protection Bureau has jurisdiction over banks with $10 billion or greater in assets, rules, regulations and policies issued by the Bureau may also apply to the Corporation, the Bank and/or the Mortgage Corporation by virtue of the adoption of such policies and best practices by the FRB, Comptroller and FDIC.  The costs and limitations related to this additional regulatory agency and the limitations and restrictions that will be placed upon the Corporation with respect to its consumer product and service offerings have yet to be determined.  However, these costs, limitations and restrictions may produce significant, material effects on the Corporation’s business, financial condition and results of operations.
The Dodd-Frank Act also increases regulatory supervision and examination of bank holding companies and their banking and non-banking subsidiaries. These and other regulations included in the Dodd-Frank Act could increase the Corporation’s regulatory compliance burden and costs, restrict the financial products and services the Corporation can offer to its customers and restrict the Corporation’s ability to generate revenues from non-banking operations. The Dodd-Frank Act imposes more stringent capital requirements on bank holding companies, which could limit the Corporation’s future capital strategies.
The recent repeal of federal prohibitions on payment of interest on demand deposits could increase interest expense.  

As part of the Dodd-Frank Act, the prohibition on the ability of financial institutions to pay interest on commercial demand deposit accounts was repealed.  As a result, beginning on July 21, 2011, financial institutions could commence offering interest on demand deposits.  The Corporation does not yet know what interest rates other institutions may offer.  If the Corporation begins to offer interest on demand deposit accounts the Corporation’s interest expense may increase and the net interest margin may decline, which could have a material adverse effect on the Corporation’s and the Bank’s business, financial condition and results of operations.

Our hedging strategies do not completely eliminate risks associated with interest rates and we may incur losses due to changes in interest rates that are not effectively hedged.

We use various derivative financial instruments to provide a level of protection against interest rate risks, but no hedging strategy can protect us completely and we cannot assure you that our hedging strategy and use of derivatives will offset the risks related to changes in interest rates.  When rates change, we expect to record a gain or loss on derivatives that would be offset by an inverse change in the value of loans held for sale and mortgage-related securities. We utilize a third party consulting firm to manage our hedging activities and we typically hedge 80% of our loan pipeline and 100% of our loans being warehoused.  The derivative financial instruments used to hedge the interest rate risk of our loan pipeline and warehoused loans are forward sales of 15 year and 30 year mortgage backed securities.  The notional amount and fair value of  these derivatives are disclosed in Note 10 of the financial statements on page 64.

The primary risks related to our hedging activities relates to incorrect assumptions relating to pull through and the amount of the pipeline being hedged.  A hedging policy and hedging management committee are in place to control, monitor and manage risks associated with our hedging activity.  The hedging policy quantifies risk tolerance thresholds that ensure the economic risk taken is not material to the Corporation’s financial condition or operating performance. See “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” and “Item 7A - Quantitative and Qualitative Disclosures About Market Risk.”

The profitability of the Mortgage Corporation will be significantly reduced if we are not able to sell mortgages.

Currently, we sell all of the mortgage loans originated by the Mortgage Corporation. We only underwrite mortgages that we reasonably expect will have more than one potential purchaser.  The profitability of our mortgage company depends in large part upon our ability to originate or purchase a high volume of loans and to quickly sell them in the secondary market.  Thus, we are dependent upon (i) the existence of an active secondary market and (ii) our ability to sell loans into that market.

The Mortgage Corporation’s ability to sell mortgage loans readily is dependent upon the availability of an active secondary market for single-family mortgage loans, which in turn depends in part upon the continuation of programs currently offered by Fannie Mae and Freddie Mac and other institutional and non-institutional investors.  These entities account for a substantial portion of the secondary market in residential mortgage loans.  Some of the largest participants in the secondary market, including Fannie Mae and Freddie Mac, are government-sponsored enterprises whose activities are governed by federal law, and while we do not actively participate in their programs, they do have substantial market influence. Any future changes in laws that significantly affect the activity of these government-sponsored enterprises and other institutional and non-institutional investors or any impairment of our ability to participate in such programs could, in turn, adversely affect our operations.


Fannie Mae and Freddie Mac have recently reported substantial losses and a need for substantial amounts of additional capital. Such losses are due to these entities’ business models being tied extensively to the U.S. housing market which is in a severe contraction.  In response to the deteriorating financial condition of Fannie Mae and Freddie Mac from the U.S. housing market contraction, Congress and the U.S. Treasury have undertaken a series of actions to stabilize these entities.  The Federal Housing Finance Agency, or FHFA, was established in July 2008 pursuant to the Regulatory Reform Act in an effort to enhance regulatory oversight over Fannie Mae and Freddie Mac.  FHFA placed Fannie Mae and Freddie Mac into federal conservatorship in September 2008.  Although the federal government has committed capital to Fannie Mae and Freddie Mac, there is no explicit guaranty of the obligations of these entities by the federal government and there can be no assurance that these government credit facilities and other capital infusions will be adequate for the needs of Fannie Mae and Freddie Mac. If the financial support is inadequate, these companies could continue to suffer losses and could fail to offer programs necessary to an active secondary market. If this were to occur, the Mortgage Corporation’s ability to sell mortgage loans readily could be hampered, and the profitability of the Mortgage Corporation could be significantly reduced.

On February 11, 2011, the U.S. Treasury issued a White Paper titled “Reforming America's Housing Finance Market” (or the “White Paper”) that lays out, among other things, proposals to limit or potentially wind down the role that Fannie Mae and Freddie Mac play in the mortgage market. Any such proposals, if enacted, may have broad adverse implications for the residential mortgage market, the mortgage-backed securities market and the Mortgage Corporation’s business, operations and financial condition. We expect such proposals to be the subject of significant discussion, and it is not yet possible to determine whether such proposals will be enacted and, if so, when, what form any final legislation or policies might take and how proposals, legislation or policies emanating from the White Paper may impact the residential mortgage market, the mortgage-backed securities market and the Mortgage Corporation’s business, operations and financial condition. We are evaluating, and will continue to evaluate, the potential impact of the proposals set forth in the White Paper on our business and our financial position and results of operations.
Our earnings may be adversely affected if representations and warranties related to loans sold by the Mortgage Corporation are breached and we must pay related claims.
The Mortage Corporation makes representations and warranties that loans sold to their investors meet their program's guidelines, that the information provided by the borrowers is accurate and complete and that the loan documents are complete and executed by the borrowers.  In the event of a default on a loan sold, the investors may make a claim for losses due to document deficiencies, program compliance, early payment default, and fraud or borrower misrepresentations. During the fourth quarter of 2010, Access National Mortgage reached settlement arrangements with it's two largest mortgage investors wherein payments of $3.8 million were made to release the company from known and unknown repurchase obligations associated with approximately $3 billion of mortgage loans. The Mortagage Corporation maintains a reserve in other liabilities for potential losses on mortage loans sold. Earnings may be impacted if this reserve is insufficient to cover claims from the investors.
An economic downturn may adversely affect our operating results and financial condition because our small to medium sized business target market may have fewer financial resources to weather an economic downturn.

We target our commercial development and marketing strategy primarily to serve the banking and financial services needs of small and medium sized businesses.  These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities.  If general economic conditions negatively impact this economic sector in the markets in which we operate, our results of operations and financial condition may be adversely affected.



Negative public opinion could damage our reputation and the strength our Access National brand and adversely impact our business, client relationships and earnings.
Reputation risk, or the risk to our businesses’ (including our primary commercial banking business and secondary mortgage lending business) earnings and capital from negative public opinion, is inherent in our business.  Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions, and from actions taken by government regulators and community organizations in response to those activities.  Negative public opinion can adversely affect our ability to keep and attract clients and employees and can expose us to litigation and regulatory action.

Virtually all of our businesses operate under the “Access National” brand.  Any actual or alleged conduct by one of our businesses could
result in negative public opinion about our other businesses under the Access National brand.  Because our businesses rely on and leverage the strength of the Access National brand any negative public opinion that tarnishes our Access National brand may negatively impact our business, client relationships and financial performance.  Although we take steps to minimize our reputation risk in dealing with our clients and communities, due to the nature of the commercial banking and mortgage lending businesses we will always face some measure of reputational risk.

If recent government actions do not help stabilize the U.S. financial system, the financial condition of our target markets may suffer, which could adversely affect our business.

In response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, various branches and agencies of the U.S. government have put in place laws, regulations, and programs to address capital and liquidity issues in the banking system. There can be no assurance, however, as to the actual impact that such laws, regulations, and programs will have on the financial markets.

Among many other contributing factors, the recent recession was triggered by instability of financial institutions and large measures of volatility and fear in the financial markets.  This financial instability has led to an economic downturn which, in turn, has harmed the financial condition and performance of our small to medium sized business target market.  If such laws, regulations, and programs fail to help stabilize the financial markets, or recent financial market conditions continue to deteriorate, the financial condition of our small to medium sized business target market would continue to suffer and could materially and adversely affect our business, financial condition, results of operations, and the trading price of our common stock.

We have substantial counterparty risk due to our transactions with financial institution counterparties and the soundness of such counterparties could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers, dealers, commercial banks, investment banks, and government sponsored enterprises. Many of these transactions expose us to credit risk in the event of default of our counterparty. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or other obligation due us. There is no assurance that any such losses would not materially and adversely affect our financial condition and results of operations.

Current market developments including declining real estate values and rising default rates may continue to adversely affect our industry, business, and results of operations.

Dramatic declines in the housing market during 2008 and 2009, with falling home prices and increasing foreclosures and unemployment, resulted in significant write-downs of asset values by financial institutions, including government-sponsored entities and major commercial and investment banks. These write-downs caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors reduced, and in some cases, ceased to provide funding to borrowers, including other financial institutions.  Subsequent to the events of 2008 and 2009, during 2010 real estate prices remained low, economic statistics indicated that the United States economy remained in a recession or recession-like condition, and demand for credit and lending activity were below historical levels.  The depressed real estate values and demand for credit and continuing economic recession could materially and adversely, directly or indirectly, affect our business, financial condition and results of operations.

The economic conditions in our market area have affected and could continue to adversely affect our revenues, earnings and financial condition.  Property values in our market area have declined over the past three years, reducing the value of collateral securing both commercial and residential loans. In addition, the economic conditions have led to an increased number of loan defaults and foreclosures and, as a result and indicative of a general decline in credit quality, the provision for loan losses and loan charge-offs have increased and has negatively impacted our financial results.  After totaling only $232 thousand in 2006, our provision for loan losses charged to expense amounted to $2.6 million in 2007, $5.4 million in 2008, $6.1 million in 2009 and $2.8 million in 2010.  Following zero loan charge-offs in 2005 or 2006, we recognized $580 thousand in charge-offs in 2007, $5.6 million in 2008, $5.3 million in 2009 and $2.0 million in 2010.


Risks Associated With The Corporation’s Common Stock

Our ability to pay dividends is subject to regulatory restrictions, and we may be unable to pay future dividends.

Our ability to pay dividends is subject to regulatory restrictions and the need to maintain sufficient consolidated capital.  Also, our only source of funds with which to pay dividends to our shareholders is dividends we receive from our Bank, and the Bank’s ability to pay dividends to us is limited by its own obligations to maintain sufficient capital and regulatory restrictions.  If these regulatory requirements are not satisfied, we will be unable to pay dividends on our common stock.  We paid our first cash dividends on February 24, 2006. We cannot guarantee that dividends will not be reduced or eliminated in future periods.

Certain provisions under our articles of incorporation and applicable law may make it difficult for others to obtain control of our Corporation even if such a change in control may be favored by some shareholders.

Certain provisions in our articles of incorporation and applicable Virginia corporate and banking law may have the effect of discouraging a change of control of our company even if such a transaction is favored by some of our shareholders and could result in shareholders receiving a substantial premium over the current market price of our shares.  The primary purpose of these provisions is to encourage negotiations with our management by persons interested in acquiring control of our Corporation.  These provisions may also tend to perpetuate present management and make it difficult for shareholders owning less than a majority of the shares to be able to elect even a single director.

The ownership position of certain shareholders, directors and officers may permit them to exert a major influence on the election of directors and other corporate actions that require a shareholder vote, including change in control transactions.

As of December 31, 2010, our chairman of the board, officers and directors and other principal shareholders collectively beneficially owned approximately 38.7% of the outstanding shares of our common stock.  Our officers and directors collectively beneficially owned approximately 26.5% of our common stock and two other individual shareholders have declared beneficial ownership of an additional 12.2% of our common stock.  This concentration of ownership may allow our directors, acting in their role as substantial shareholders, to exert a major influence over the election of their nominees as directors, especially if voting together with our officers and other significant shareholders.  Our directors, officers, and major shareholders could exercise similar influence over other corporate actions that require a shareholder vote, including change in control transactions.

The trading volume in the corporation’s common stock is less than that of other larger financial services companies.

Although the Corporation’s common stock is listed for trading on the NASDAQ Stock Exchange, the trading volume in its common stock is less than that of other, larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of the Corporation’s common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which the Corporation has no control. Given the lower trading volume of the Corporation’s common stock, significant sales of the Corporation’s common stock, or the expectation of these sales, could cause the Corporation’s stock price to fall.



The Bank and the Mortgage Corporation lease offices that are used in the normal course of business. The principal executive office of the Corporation, Bank, Access Real Estate and Mortgage Corporation is owned by Access Real Estate, a subsidiary of the Bank, and is located at 1800 Robert Fulton Drive, Reston, Virginia. The Bank leases offices in Chantilly, Tysons Corner, Leesburg, and Manassas, Virginia. The Mortgage Corporation leases offices in Annandale, Fairfax, McLean, Reston, Richmond, and Roanoke in Virginia. The Mortgage Corporation leases an office in Maryland located in Crofton, in addition to the offices in Tennessee, Texas, Indiana, Georgia, Massachusetts and Colorado.  All of the Mortgage Corporation’s leases with the exception of Roanoke are month to month leases and can be terminated with thirty days notice. Access Real Estate owns an undeveloped commercial lot in Fredericksburg that is being held for future expansion of the Bank and Mortgage Corporation.

All of the owned and leased properties are in good operating condition and are adequate for the Corporation’s present and anticipated future needs.



The Bank is a party to legal proceedings arising in the ordinary course of business. Management is of the opinion that these legal proceedings will not have a material adverse effect on the Corporation’s financial condition or results of operations. From time to time the Bank may initiate legal actions against borrowers in connection with collecting defaulted loans.  Such actions are not considered material by management unless otherwise disclosed.

ITEM 4 – Removed and Reserved


In July 2004, the Corporation’s common stock became listed on the NASDAQ Global Market of the NASDAQ Stock Market LLC and is quoted under the symbol of “ANCX”. Set forth below is certain financial information relating to the Corporation’s common stock price history.  Prices reflect transactions executed on NASDAQ.
First Quarter
  $ 6.77     $ 5.54     $ 0.01     $ 5.17     $ 3.80     $ 0.01  
Second Quarter
    6.75       5.50       0.01       6.80       4.49       0.01  
Third Quarter
    6.37       5.61       0.01       6.92       5.10       0.01  
Fourth Quarter
  $ 6.82     $ 6.00     $ 0.01     $ 6.85     $ 5.86     $ 0.01  
As of March 18, 2011, the Corporation had 10,334,430 outstanding shares of Common Stock, par value $0.835 per share, held by approximately 431 shareholders of record and the closing price for the Corporation’s common stock on the NASDAQ Global Market was $7.05.
The Corporation paid its twenty first consecutive quarterly cash dividend on February 25, 2011 to shareholders of record as of February 10, 2011. Payment of dividends is at the discretion of the Corporation’s Board of Directors, and is also subject to various federal and state regulatory limitations.  Future dividends are dependent upon the overall performance and capital requirements of the Corporation.  See “Item 1 - Business - Supervision and Regulation - Dividends" for a discussion of regulatory requirements related to dividends.
Issuer Purchases of Equity Securities for the Quarter Ended December 31, 2010
The following table details the Corporation’s purchases of its common stock during the fourth quarter pursuant to a Share Repurchase Program announced on March 20, 2007. On April 22, 2008 the number of shares authorized for repurchase under the Share Repurchase Program was increased from 2,000,000 to 2,500,000 shares. The Share Repurchase Program does not have an expiration date.

Issuer Purchases of Equity Securities
(c) Total Number of
(d) Maximum Number
Shares Purchased as
of Shares that may
(a) Total Number of
(b) Average Price
Part of Publicly
yet be Purchased
Shares Purchased
Paid Per Share
Announced Plan
Under the Plan
October 1 - October 31, 2010
    65,800     $ 6.14       65,800       1,161,887  
November 1 - November 30, 2010
    16,400       6.40       16,400       1,145,487  
December 1 - December 31, 2010
    1,457       6.50       1,457       1,144,030  
      83,657     $ 6.19       83,657       1,144,030  



Stock Performance

The following graph compares the Corporation’s cumulative total shareholder return on its common stock for the five year period ended December 31, 2010 with the cumulative return of a broad equity market index, the Standard & Poor’s 500 Index (“S&P 500 Index”) and a peer group constructed by the Corporation (the “Peer Group”).   This presentation assumes $100 was invested in shares of the Corporation and each of the indices on December 31, 2005, and that dividends, if any, were immediately reinvested in additional shares.   The graph plots the value of the initial $100 investment at one-year intervals from December 31, 2005 through December 31, 2010.

The Peer Group consists of five companies that, in the opinion of management, are similar to the Corporation in ways relevant to a comparison of stock performance.  Specifically, each company in the Peer Group provides commercial banking services in the Mid-Atlantic Region, has existed for a reasonably similar time period as has the Corporation, and is considered by our management to be in an expansion mode.  In calculating the relative index, the stock values of the Peer Group are re-balanced at the beginning of each year by the weighted market capitalization.

The Peer Group consists of:
Total Assets
Company, Headquarters
Trading Symbol
Cardinal Financial Corporation
  $ 2,072,018  
Fairfax, Virginia
Eagle Bancorp, Inc.
  $ 2,089,370  
Bethesda, Maryland
  $ 3,871,018  
 Portsmouth, Virginia
Valley Financial Corporation
  $ 767,588  
Roanoke, Virginia
Virginia National Bank
  $ 458,297  
Charlottesville, Virginia

    Period Ending  
Access National Corporation
    100.00       67.22       42.69       34.07       42.25       46.57  
S&P 500
    100.00       115.79       122.16       76.96       97.33       111.99  
ANCX Peer Group Index*
    100.00       100.76       83.34       86.74       68.42       92.11  
*Access National Corporation's peer group consists of the following: Cardinal Financial Corporation (CFNL), Eagle Bancorp, Inc. (EGBN), Towne Bank (TOWN), Valley Financial Corporation (VYFC), Virginia National Bank (VABK)



The following consolidated selected financial data is derived from the Corporation’s audited financial statements for the five years ended December 31, 2010.  This information should be read in conjunction with the following Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes thereto.

Selected Financial Data
Year Ended December 31,
(In Thousands, Except for Share Data)
Income Statement Data:
Net interest income
  $ 25,029     $ 23,558     $ 21,052     $ 20,122     $ 18,256  
Provision for loan losses
    2,816       6,064       5,423       2,588       232  
Noninterest income
    34,660       56,966       30,813       27,707       27,633  
Noninterest expense
    44,771       58,971       38,998       39,949       34,212  
Income taxes
    4,526       5,854       2,700       1,590       3,853  
Net Income
  $ 7,576     $ 9,635     $ 4,744     $ 3,702     $ 7,592  
Per Share Data:
Earnings per share
  $ 0.72     $ 0.93     $ 0.46     $ 0.32     $ 0.81  
    0.72       0.92       0.46       0.31       0.72  
Cash dividends paid
    0.04       0.04       0.04       0.04       0.02  
Book value at period end
    6.96       6.43       5.66       5.35       5.27  
Balance Sheet Data:
Total assets
  $ 831,824     $ 666,879     $ 702,324     $ 622,376     $ 644,782  
Loans held for sale
    82,244       76,232       84,312       39,144       65,320  
Total loans
    491,529       486,564       485,929       477,598       433,594  
Total securities
    124,307       43,095       85,119       69,001       99,276  
Total deposits
    627,848       466,645       485,401       473,418       438,932  
Shareholders' equity
    72,193       67,778       57,945       57,961       62,295  
Average shares outstanding, basic
    10,503,383       10,391,348       10,298,631       11,620,130       9,429,074  
Average shares outstanding, diluted
    10,525,258       10,432,857       10,423,555       11,866,468       10,541,873  
Performance Ratios:
Return on average assets
    0.98 %     1.35 %     0.76 %     0.57 %     1.29 %
Return on average equity
    10.85 %     15.04 %     8.34 %     5.84 %     17.15 %
Net interest margin (1)
    3.41 %     3.42 %     3.48 %     3.18 %     3.21 %
Efficiency Ratios:
Access National Bank
    59.02 %     60.41 %     55.36 %     50.87 %     48.67 %
Access National Mortgage Corp.
    84.72 %     77.40 %     86.65 %     107.52 %     92.42 %
Access National Corporation
    75.01 %     73.23 %     75.19 %     83.52 %     75.06 %
Asset Quality Ratios:
Allowance to period end loans
    2.14 %     1.88 %     1.54 %     1.56 %     1.26 %
Allowance to non-performing loans
    122.96 %     129.79 %     259.55 %     449.25 %     1514.60 %
Net charge-offs to average loans
    0.43 %     1.08 %     1.06 %     0.12 %     -  

(1) Net interest income divided by total average earning assets.

Table continued on next page


Year Ended December 31,
(In Thousands, Except for Share Data)
Average Balance Sheet Data:
Total assets
  $ 772,600     $ 714,970     $ 624,450     $ 649,584     $ 589,834  
Securities, at fair value
    107,940       69,758       68,861       94,331       107,165  
Loans held for sale
    63,868       65,780       25,757       49,750       53,935  
    475,726       490,393       484,764       472,372       400,211  
Allowance for loan losses
    9,485       8,065       8,248       6,170       5,363  
Total deposits
    572,139       519,477       450,873       444,999       423,788  
Junior subordinated debentures
    6,186       6,186       6,186       9,237       10,311  
Total shareholders' equity
    69,827       64,054       56,882       63,343       44,270  
Capital Ratios:
Tier 1 risk-based capital
    14.25 %     13.47 %     11.86 %     12.41 %     15.01 %
Total risk-based capital
    15.51 %     14.73 %     13.11 %     13.66 %     16.18 %
Leverage capital ratio
    9.56 %     10.73 %     9.71 %     10.07 %     11.53 %


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 the Corporation and its subsidiaries for the years ended December 31, 2010 and 2009. The consolidated financial statements and accompanying notes should be read in conjunction with this discussion and analysis.
Forward-Looking Statements
In addition to historical information, this Annual Report on Form 10-K 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: continued deterioration in general business and economic conditions and in the financial markets and the impact of any policies or programs implemented pursuant to the Dodd-Frank Act, branch expansion plans, interest rates, general economic conditions, monetary and fiscal policies of the U.S. Government, including policies of the Comptroller, U.S. Treasury and the FRB, 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 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.  For additional discussion of risk factors that may cause our actual future results to differ materially from the results indicated within forward-looking statements, please see “Item 1A – Risk Factors” herein.


The Corporation’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. In preparing the Corporation’s financial statements management makes estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. Our significant accounting policies are presented in Note 1 to the consolidated financial statements.  Management believes that the most significant subjective judgments that it makes include the following:

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 principals of accounting: (i) Accounting Standards Codification (“ASC”) No. 450-10 Contingencies, which requires that losses be accrued when they are probable of occurring and estimable and (ii) ASC 310-10, Receivables, 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, and 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 “Allowance for Loan Losses” below.
Other Than Temporary Impairment of Investment Securities
The Bank’s investment portfolio is classified as available-for-sale.  The estimated fair value of the portfolio fluctuates due to changes in market interest rates and other factors. Changes in estimated fair value are recorded in stockholders’ equity as a component of comprehensive income. Securities are monitored to determine whether a decline in their value is other than temporary.  Management evaluates the investment portfolio on a quarterly basis to determine the collectability of amounts due per the contractual terms of the investment security.  A decline in the fair value of an investment below its amortized cost attributable to factors that indicate the decline will not be recovered over the anticipated holding period of the investment is considered other than temporarily impaired. Other than temporary impairments result in reducing the security’s carrying value by the amount of the estimated credit loss. The credit component of the other than temporary-impairment loss is realized through the statement of income and the remainder of the loss remains in other comprehensive income.  At December 31, 2010 there were no securities in the securities portfolio with other than temporary impairment.
Income Taxes
The Corporation uses the liability method of accounting for income taxes. This method results in the recognition of deferred tax assets and liabilities that are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. The deferred provision for income taxes is the result of the net change in the deferred tax asset and deferred tax liability balances during the year. This amount combined with the current taxes payable or refundable results in the income tax expense for the current year. Our evaluation of the deductibility or taxability of items included in the Corporation’s tax returns has not resulted in the identification of any material, uncertain tax positions.

Fair Value

Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items.  Changes in assumptions or in market conditions could significantly affect the estimates.  The fair value estimates of existing on and off-balance sheet financial instruments do not include the value of anticipated future business or the values of assets and liabilities not considered financial instruments. For additional information about our financial assets carried at fair value, refer to Note 18 to the consolidated financial statements.

Executive Summary

The Corporation completed its eleventh year of operation and recorded net income of $7.6 million or $0.72 per diluted common share in 2010 compared to $9.6 million or $0.92 per diluted common share in 2009. The decrease in net income over last year was due to record performance during 2009 by our mortgage subsidiary that was not repeated in 2010 due to a decline in refinancing activity. In 2010 the dollar volume of mortgage loan originations excluding brokered loans decreased 45.6% which contributed to a decrease in income before taxes of 60.4% for the mortgage segment.  Income before taxes from the banking segment increased 107.3% from 2009 to 2010, partially due to a $3.2 million decrease in the provision for loan losses as credit quality issues improved.
The target federal funds rate remained at 25 basis points during 2010. The impact of this historically low interest rate environment has negatively affected yields of variable loans and the securities portfolio however the lower cost of funds was favorable. Despite the low interest rate environment net interest margin in 2010 was consistent with 2009.

At December 31, 2010 assets totaled $831.8 million compared to $666.9 million at December 31, 2009. Total loans held for investment were $491.5 million at December 31, 2010 an increase of approximately $5.0 million over last year.  While the overall increase in total loans held for investment is nominal, our commercial loan portfolio increased $22.2 million or 30.5% in 2010.  This increase is due in part to our focus on small to medium sized businesses and providing credit facilities in conjunction with the U.S. Small Business Administration’s (“SBA”) guaranteed loan program.  The Bank was recognized by the SBA as the leading bank provider of SBA loans originated in the Washington Metropolitan Area for the fiscal year ended September 30, 2010.  The SBA lending activity is an important component of our focus on small businesses and expanding our core business relationships.
Investment securities totaled $124.3 million at December 31, 2010 compared to $43.1 million at December 31, 2009. The growth in the investment portfolio is attributable to excess liquidity provided by deposit growth and modest net loan growth during 2010.  All of the securities purchased in 2010 were government agencies.
Deposits totaled $627.8 million at December 31, 2010 compared to $466.6 million at December 31, 2009.  Noninterest-bearing deposit balances totaled approximately $84.0 million compared to $69.8 million at December 31, 2009, a 20.3% increase.
Non-performing assets (“NPA”) totaled approximately $10.4 million or 1.3% of assets at December 31, 2010, down from $12.1 million or 1.8% of assets at December 31, 2009.  NPA are comprised of non-accrual loans totaling $8.6 million and other real estate owned of $1.9 million. The allowance for loan losses totaled $10.5 million or 2.1% of total loans held for investment as of December 31, 2010, compared to $9.1 million or 1.9% at December 31, 2009.
During the fourth quarter, Access National Mortgage reached settlement arrangements with its two largest mortgage investors wherein payments of $3.75 million were made to these investors to release the Mortgage Corporation from known and unknown repurchase obligations associated with approximately $3 billion of mortgage loans. One agreement covers all loans originated prior to 2009 and the other agreement covers all loans originated through December 31, 2010.  Loans covered under the agreements included a disproportionate share of the non-prime and wholesale channel loans sold by the company during the applicable period that pose, in the company’s estimation and experience, the greatest repurchase potential.  The wholesale and non-prime loan programs were terminated by the company in 2007.  After removal of loans covered under the referenced settlement agreements and accounting for repayments, the company estimates there is approximately $2.9 billion of loans sold with remaining balances outstanding for which there may be potential liability, consisting of $1.9 billion in government insured loans, $826 million in prime loans and less than $200 million in non-prime loans.
With respect to ongoing repurchase liability, the Mortgage Corporation’s loss experience in order of magnitude has been greatest to lowest in non-prime loans, prime loans and government loans, respectively.  The Mortgage Corporation has undertaken an extensive analysis of historical run-off rates, claim rates and loss rates given validated claims, in order to formulate a methodology for evaluating loss potential of claims.
The $3.75 million settlement was paid from the existing allowance for loan losses on mortgage loans sold.  The Mortgage Corporation estimates that its remaining reserve of approximately $2.0 million is adequate for all current and future exposure on previous period loan sales that are not covered under the referenced agreements.  The Mortgage Corporation continues to apply a loss reserve methodology to current production that results in a provision expense in each period.   Since adoption of representation and warranty loss reserve accounting in 2006, the reserve has proven adequate in each period to absorb all validated claims.
While we continue to see signs of improvement in the economy, the health of the residential real estate market remains critical to any economic recovery.  The resale housing market is stabilizing across most of the greater Washington D.C. Metropolitan area although price gains have been largely confined to Northern Virginia with average sales prices up by approximately 8.9 percent from last year. Fairfax County’s unemployment rate at 4.4% is the third lowest of the 22 major jurisdictions making up the greater Washington Metropolitan D.C. area.  The unemployment rate for the surrounding counties of Arlington and Loudoun was 3.7% and 4.2% respectively.

Although we believe that the credit quality of our primary business and professional customers has stabilized and has begun to improve, we will continue to focus on improving the credit quality of our loan portfolio and reducing non-performing assets. The Corporation is optimistic going into 2011 with a strong capital base and positioned for continued growth.


Net income for 2010 totaled $7.6 million, or $0.72 per diluted common share compared to $9.6 million or $0.92 per diluted common share in 2009.  Earnings in 2010 were impacted by a decrease in income generated from the mortgage banking segment as a result of a 34.0% decrease in gains on sale of loans resulting from 45.6% decline in mortgage loan originations from 2009 to 2010.   Interest and dividend income for 2010 totaled $35.1 million, down from $37.5 million in 2009 primarily due to changes in the composition of earning assets. During 2010 average loans held for investment decreased $14.7 million and average investment securities increased $38.8 million.  Average interest-bearing balances and federal funds sold increased $22.4 million from 2009 to 2010.


Net income for 2009 totaled $9.6 million, or $.92 per diluted common share compared to $4.7 million or $.46 per diluted common share in 2008.  Earnings in 2009 were favorably impacted by gains on the sale of mortgage loans that contributed $49.3 million in pre-tax gains, up from $24.9 million in 2008.  During 2009 the economy continued to impact commercial clients and collateral values resulting in a provision for loan losses of $6.1 million, up from $5.4 million in 2008. Interest and dividend income totaled $37.5 million, down from $38.8 million in 2008 as increases in the volume of earning assets did not offset the decrease in yields.  Net interest income improved from $21.1 million in 2008 to $23.6 million in 2009 due to lower rates on deposits and borrowings.

Net Interest Income

Net interest income 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. Net interest income and margin are influenced by many factors, primarily the volume and mix of earning assets, funding sources, yields on earning assets and interest rate fluctuations. Net interest income totaled $25.0 million in 2010, up from $23.6 million in 2009.  Average earning assets increased $44.6 million from $689.2 million in 2009 to $733.8 million in 2010.  Average interest-bearing deposits and liabilities increased $47.9 million in 2010.  Net interest margin was 3.42% in 2009 and 3.41% in 2010.  The weighted average yield on earning assets decreased 66 basis points while the weighted average rate paid on interest-bearing liabilities decreased 82 basis points.

Average earning assets were impacted during 2010 by a $38.8 million increase in investment securities combined with a $22.4 million increase in interest-bearing balances and federal funds sold and a $14.7 decrease in loans held for investment.  The increase in lower yielding investment securities and interest-bearing deposits contributed to the 66 basis points decrease in yield on earning assets.

During 2010 the target federal funds rate remained in a range of 0.0% to 0.25% and the prime rate was unchanged at 3.25%.  This low rate environment contributed to the 82 basis points decrease in funding costs.

Net interest income totaled $23.6 million in 2009, up from $21.1 million in 2008.  Average earning assets increased $83.2 million from $606.0 million in 2008 to $689.2 million in 2009.  Average interest-bearing deposits and liabilities increased $64.1 million in 2009.  Net interest margin decreased 6 basis points from 3.48% in 2008 to 3.42% in 2009.  The weighted average yield on earning assets decreased 95 basis points while the weighted average rate paid on interest-bearing liabilities decreased 108 basis points.

The table below, Yield on Average Earning Assets and Rates on Average Interest-Bearing Liabilities, summarizes the major components of net interest income for the past three years and also provides yields, rates, and average balances.

Yield on Average Earning Assets and Rates on Average Interest-Bearing Liabilities
For the year ended

December 31, 2010
December 31, 2009
December 31, 2008
Income /
Yield /
Income /
Yield /
Income /
Yield /
(Dollars In Thousands)
Interest-earning assets:
Securities, at amortized cost(1)
  $ 107,685     $ 2,242       2.08 %   $ 68,852     $ 3,038       4.41 %   $ 68,522     $ 3,440       5.02 %
Loans held for sale
    63,868       2,982       4.67 %     65,780       3,361       5.11 %     25,757       1,778       6.90 %
    475,726       29,709       6.24 %     490,393       30,973       6.32 %     484,764       33,097       6.83 %
Interest-bearing balances and federal funds sold
    86,531       210       0.24 %     64,128       154       0.24 %     26,911       487       1.81 %
Total interest-earning assets
    733,810       35,143       4.79 %     689,153       37,526       5.45 %     605,954       38,802       6.40 %
Noninterest-earning assets:
Cash and due from banks
    10,927                       6,748                       5,257                  
Premises, land and equipment
    8,655                       8,991                       9,475                  
Other assets
    28,693                       18,143                       12,012                  
Less: allowance for loan losses
    (9,485 )                     (8,065 )                     (8,248 )                
Total noninterest-earning assets
    38,790                       25,817                       18,496                  
Total Assets
  $ 772,600                     $ 714,970                     $ 624,450                  
Liabilities and Shareholders' Equity:
Interest-bearing deposits:
Interest-bearing demand deposits
  $ 30,166     $ 183       0.61 %   $ 27,224     $ 278       1.02 %   $ 8,956     $ 100       1.12 %
Money market deposit accounts
    132,761       1,345       1.01 %     92,682       1,403       1.51 %     112,391       2,653       2.36 %
Savings accounts
    3,939       30       0.76 %     4,470       60       1.34 %     3,137       101       3.22 %
Time deposits
    331,162       6,075       1.83 %     316,823       8,827       2.79 %     263,175       11,197       4.25 %
Total interest-bearing deposits
    498,028       7,633       1.53 %     441,199       10,568       2.40 %     387,659       14,051       3.62 %
FHLB Advances
    11,413       429       3.76 %     23,676       979       4.13 %     13,524       454       3.36 %
Securities sold under agreements to repurchase and federal funds purchased
    29,202       105       0.36 %     23,460       115       0.49 %     16,433       260       1.58 %
Other short-term borrowings
    26,674       228       0.85 %     17,640       167       0.95 %     20,697       363       1.75 %
FHLB Long-term borrowings
    9,239       312       3.38 %     24,026       833       3.47 %     54,173       2,195       4.05 %
FDIC Term Note
    29,998       1,191       3.97 %     26,627       1,068       4.01 %     -       -       0.00 %
Subordinated Debentures
    6,186       216       3.49 %     6,186       238       3.85 %     6,186       417       6.74 %
Total borrowings
    112,712       2,481       2.20 %     121,615       3,400       2.80 %     111,013       3,689       3.32 %
Total interest-bearing deposits and borrowings
    610,740       10,114       1.66 %     562,814       13,968       2.48 %     498,672       17,740       3.56 %
Noninterest-bearing liabilities:
Demand deposits
    74,111                       78,278                       63,214                  
Other liabilities
    17,922                       9,824                       5,682                  
Total liabilities
    92,033                       650,916                       567,568                  
Shareholders' Equity
    69,827                       64,054                       56,882                  
Total Liabilities and Shareholders' Equity:
  $ 772,600                     $ 714,970                     $ 624,450                  
Interest Spread(3)
                    3.13 %                     2.97 %                     2.84 %
Net Interest Margin(4)
          $ 25,029       3.41 %           $ 23,558       3.42 %           $ 21,062       3.48 %

(1) Includes restricted stock
(2) Loans placed on nonaccrual status are included in loan balances
(3) Interest spread is the average yield earned on earning assets, less the average rate incurred on interest-bearing liabilities.
(4) Net interest margin is net interest income, expressed as a percentage of average earning assets.


The following table shows fluctuations in net interest income attributable to changes in the average balances of assets and liabilities and the yields earned or rates paid for the years ended December 31.

Volume and Rate Analysis
Years Ended December 31,
2010 compared to 2009
2009 compared to 2008
2008 compared to 2007
Change Due To:
Change Due To:
Change Due To:
Increase /
Increase /
Increase /
(In Thousands)
Interest Earning Assets:
  $ (796 )   $ 1,246     $ (2,042 )   $ (402 )   $ 16     $ (418 )   $ (884 )   $ (1,267 )   $ 383  
    (1,643 )     (1,012 )     (631 )     (541 )     2,974       (3,515 )     (5,428 )     (879 )     (4,549 )
Interest-bearing deposits
    56       54       2       (319 )     319       (638 )     (356 )     299       (655 )
Federal funds sold
    -       -       -       (14 )     (7 )     (7 )     (2 )     18       (20 )
Total (decrease) increase in interest income
    (2,383 )     288       (2,671 )     (1,276 )     3,302       (4,578 )     (6,670 )     (1,829 )     (4,841 )
Interest-Bearing Liabilities:
Interest-bearing demand deposits
    (95 )     27       (122 )     177       187       (10 )     (99 )     (11 )     (88 )
Money market deposit accounts
    (58 )     493       (551 )     (1,250 )     (410 )     (840 )     (2,235 )     46       (2,281 )
Savings accounts
    (30 )     (6 )     (24 )     (42 )     32       (74 )     (130 )     (71 )     (59 )
Time deposits
    (2,752 )     384       (3,136 )     (2,368 )     1,990       (4,358 )     (1,611 )     311       (1,922 )
Total interest-bearing deposits
    (2,935 )     898       (3,833 )     (3,483 )     1,799       (5,282 )     (4,075 )     275       (4,350 )
FHLB Advances
    (550 )     (468 )     (82 )     525       401       124       (2,743 )     (1,861 )     (882 )
Securities sold under agreements to repurchase
    (10 )     25       (35 )     (145 )     82       (227 )     (256 )     132       (388 )
Other short-term borrowings
    61       79       (18 )     (196 )     (48 )     (148 )     (278 )     155       (433 )
Long-term borrowings
    (398 )     (437 )     39