10-K 1 v370597_10k.htm FORM 10-K
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
(Mark One)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended   December 31, 2013
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from_____________ to_______________
Commission File Number   000-49929
 
Access National Corporation
(Exact name of registrant as specified in its charter)
 
Virginia
82-0545425
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
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 x 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 x
 
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 x
Non-accelerated filer ¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨
 
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 $93,692,483.
 
As of March 11, there were 10,400,824 shares of Common Stock, par value $0.835 per share, of Access National Corporation issued and outstanding. Included in this figure are 24,017 shares of unregistered, restricted stock issued on January 31, 2014.
 
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for the Corporation’s Annual Meeting of Shareholders to be held on May 21, 2014, are incorporated by reference in Part III of this Form 10-K.
 
 
 
Access National Corporation
FORM 10-K
INDEX
 
 
 
 
 
Page
PART I
 
 
 
 
 
 
 
 
Item 1
Business
 
2
 
Item 1A
Risk Factors
 
14
 
Item 1B
Unresolved Staff Comments
 
21
 
Item 2
Properties
 
21
 
Item 3
Legal Proceedings
 
22
 
Item 4
Mine Safety Disclosures
 
22
 
 
 
 
 
PART II
 
 
 
 
 
 
 
 
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities
 
23
 
Item 6
Selected Financial Data
 
25
 
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
26
 
Item 7A
Quantitative and Qualitative Disclosures About Market Risk
 
43
 
Item 8
Financial Statements and Supplementary Data
 
44
 
Item 9
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
85
 
Item 9A
Controls and Procedures
 
85
 
Item 9B
Other Information
 
85
 
 
 
 
 
PART III
 
 
 
 
 
 
 
 
Item 10
Directors, Executive Officers and Corporate Governance
 
86
 
Item 11
Executive Compensation
 
86
 
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
86
 
Item 13
Certain Relationships and Related Transactions, and Director Independence
 
86
 
Item 14
Principal Accountant Fees and Services
 
86
 
 
 
 
 
PART IV
 
 
 
 
 
 
 
 
Item 15
Exhibits, Financial Statement Schedules
 
87
 
Signatures
 
 
89
 
 
1

 
PART I
 
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” herein.
 
ITEM 1 – BUSINESS
 
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, mortgage services and wealth management 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:
 
 
 
PARENT
 
 
ENTITY /
 
COMPANY /
 
YEAR
ACTIVITY
 
SOLE MEMBER
 
ORGANIZED
 
 
 
 
 
Access National Corporation
 
N/A
 
2002
  
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
 
ANC
 
1999
 
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
 
ANB
 
1985
(“ANMC” or the “Mortgage Corporation”)
 
 
 
 
 
During 2011 the Bank closed the Mortgage Corporation and all mortgage banking activities were transferred to the Bank under a separate business division of the Bank (the “Mortgage Division”).  The Mortgage Corporation ceased conducting new business on July 1, 2011 and was dissolved in the second quarter of 2012.
 
Access Real Estate L.L.C
 
ANB
 
2003
 
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 Division, Access Real Estate, Capital Fiduciary Advisors, and Access Investment Services.  Access Real Estate also owns vacant land in Fredericksburg that was purchased for future expansion of the Bank.
 
 
2

 
Access Capital Management Holding, L.L.C (“ACM”)
 
ANB
 
2011
 
ACM is a Virginia limited liability company whose sole member is ANB.  ACM is the holding company for Capital Fiduciary Advisors, L.L.C. (“CFA”), Access Investment Services, L.L.C. (“AIS”), and Access Insurance Group, L.L.C. (“AIG”).  ACM provides a full range of wealth management services to individuals.
 
Capital Fiduciary Advisors, L.L.C.
 
ACM
 
2011
 
CFA 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 Investment Services, L.L.C.
 
ACM
 
2011
 
AIS is a limited liability company whose sole member is ACM.  AIS provides financial planning services to clients along with access to a full range of investment products.  Activities are supervised by the Bank’s primary regulator, the Comptroller, as well as the SEC.
 
Access Insurance Group, L.L.C.
 
ACM
 
2011
 
AIG is a limited liability company whose sole member is ACM.  AIG is presently inactive and when activated will provide access to a wide variety of insurance products.
 
Access Capital Trust II
 
ANC
 
2003
 
A Delaware corporate trust established for the purpose of issuing trust preferred capital securities. Cancelled upon redemption of the preferred and common stock in July 2013.
 
ACME Real Estate, L.L.C (“ACME” or “ACME Real Estate”)
 
ANB
 
2007
 
ACME is 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:
 
BUSINESS BANKING SERVICES
 
BUSINESS BANKING SERVICES
 
PERSONAL BANKING
Lending
 
Cash Management
 
SERVICES
 
 
 
 
 
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. Major expenses of the Bank consist of personnel, interest paid on deposits and borrowings, and other operating expenses. Revenues from the Mortgage Division consist primarily of gains from the sale of loans and loan origination fees.  Major expenses of the Mortgage Division consist of personnel, advertising, and other operating expenses.  Revenue generated by the Bank (excluding the Mortgage Division) totaled $39.3 million in 2013. The Mortgage Division contributed $24.7 million; others contributed $2.6 million prior to inter-company eliminations. In 2013, the Bank’s pre-tax earnings amounted to 84.8% of the Corporation’s total income before taxes and the Mortgage Division and others contributed the remaining 15.2%.
 
 
3

 
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 Division, ACM, and the banking industry as a whole.  The economy shows signs of gradual improvement with the national unemployment rate dropping from 7.9% in January 2013 to 6.6% in January 2014. The January 2014 statement of the Federal Open Market Committee (“FOMC”) projected the federal funds rate to remain at zero percent to 0.25% even after the unemployment rate declines below 6.5% as inflation continues to run below the 2% longer-run goal set by the Committee.  The continued low rate environment will continue to stress net interest margins.
 
The Bank operates from five banking centers located in Virginia:  Chantilly, Tysons, Reston, Leesburg and Manassas, and online at www.accessnationalbank.com.  Additional offices may be added from time to time based upon management’s constant analysis of the market and opportunities.
 
The Mortgage Division 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 Division has established offices throughout Virginia; in Fairfax, Reston, Roanoke, and McLean. Offices outside the state of Virginia include Hagerstown, Maryland, New Smyrna Beach in Florida, Indianapolis in Indiana, and Atlanta in Georgia.  During 2013, the Mortgage Division closed its offices in Denver, Colorado, Nashville, Tennessee, and San Antonio, Texas.
 
The following table details the geographic distribution of the real estate collateral securing mortgage loans originated by the Mortgage Division in the periods indicated.  The individually named states are those in which the Mortgage Division had a physical presence during the periods described.  In addition to making loans for purchases within its markets, the Mortgage Division makes loans to borrowers for second homes located elsewhere, as well as utilizes direct mail to solicit loans outside its local markets, which accounts for the “Other States” category.  Percentages are of the total dollar value of originations, as opposed to the number of originations.
 
 
 
Loan Origination By State
 
 
 
Year Ended December 31,
 
 
 
2013
 
 
2012
 
 
2011
 
 
 
 
 
 
 
 
 
 
 
COLORADO
 
4.81
%
 
6.11
%
 
4.56
%
FLORIDA
 
6.36
%
 
2.92
%
 
2.40
%
GEORGIA
 
8.24
%
 
4.37
%
 
4.90
%
INDIANA
 
16.57
%
 
12.75
%
 
9.15
%
MASSACHUSETTS
 
0.00
%
 
0.00
%
 
2.30
%
MARYLAND
 
8.20
%
 
7.54
%
 
9.15
%
TENNESSEE
 
1.37
%
 
5.02
%
 
5.23
%
TEXAS
 
3.11
%
 
5.18
%
 
4.86
%
VIRGINIA
 
21.93
%
 
21.36
%
 
20.12
%
 
 
70.59
%
 
65.25
%
 
62.67
%
Other States
 
29.41
%
 
34.75
%
 
37.33
%
 
 
100.00
%
 
100.00
%
 
100.00
%
 
The Mortgage Division’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.
 
The Corporation and its subsidiaries are headquartered in Fairfax County, Virginia and primarily focus on serving the greater Washington, D.C. Metropolitan Area.
 
 
4

 
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 underserved and should 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 and 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; 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 our 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, skills and strategy and know how to provide private banking services that assist our individual clients to acquire assets, build wealth, and manage their resources.  Mortgage banking and the related activities in our model go hand-in-hand with supplying effective private banking services.  Unlike most banking companies, the heart of our Mortgage Division 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 goal was and is to generate at least 80% of the Corporation’s net income from the core business of the Bank, with the rest of our consolidated net income to be generated from related fee income activities.  During 2013, the Bank accounted for 84.8% of pretax earnings.  We will consider entering other related fee income businesses that serve our target market as opportunities, market conditions, and our capacity dictate.  See Note 17 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. We 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.  We will consider growth by careful acquisition; however, that is not our primary focus.
 
Lending Activities
 
The Bank’s lending activities involve commercial real estate loans both owner occupied and non-owner occupied, residential real estate loans, commercial loans, commercial and real estate construction loans, home equity loans, and consumer loans.  These lending activities provide access to credit to small and 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 Division originates residential mortgages and home equity loans that are held on average fifteen to forty-five days pending their sale primarily to mortgage banking subsidiaries of large financial institutions. The Bank 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 the past, when the Mortgage Division was a separate subsidiary of the Bank, the Bank would, in certain circumstances, 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.   The Bank did not retain any loans originated by the Mortgage Division for said purpose in 2013 but may retain loans in the future if management believes doing so would assist in achieving the Corporation’s strategic goals. Loans held in the Bank’s portfolio at December 31, 2013 resulting from the Mortgage Division’s inability to sell the loan to a third party totaled $1.4 million. Each of our principal loan types are described below.
 
At December 31, 2013 loans held for investment totaled $687.1 million compared to $617.0 million at year end 2012.  The Bank continued to experience growth in Commercial Real Estate  – Owner Occupied, Residential Real Estate, and Commercial loans reflecting continued improvement in the local economic conditions.
 
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, 2013 unsecured loans were comprised of $2.1 million in commercial loans and approximately $119 thousand in consumer loans and collectively equal approximately 0.3% of the loans held for investment portfolio.
 
 
5

 
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 does not currently 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, and did not during 2013, 2012, or 2011. The Mortgage Division does not currently originate any subprime loans or Alt A loans, did not originate such loans in 2013, 2012, or 2011, and does not expect to offer these programs in the future.
 
Loan Portfolio – Loans Held for Investment.  The following outlines the composition of loans held for investment.
 
Commercial Real Estate Loans-Owner Occupied:  Loans in this category represent 28.65% of our loan portfolio held for investment, as of December 31, 2013.   This category represents loans supporting an owner occupied commercial property.  Repayment is dependent upon the cash flows generated by operation of the commercial property. 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.
 
Commercial Real Estate Loans-Non-Owner Occupied:  Also known as Commercial Real Estate Loans-Income Producing.  Loans in this category represent 13.20% of our loan portfolio held for investment, as of December 31, 2013.  This category includes loans secured by commercial property that is leased to third parties and loans to non-profit organizations such as churches and schools. Also included in this category are loans secured by farmland and multifamily properties.  Repayment is dependent upon the cash flows generated from rents or by the non-profit organization. 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 existing consumers of other Bank products, and represents 25.27% of the loan portfolio, as of December 31, 2013.  Of this amount, the following sub-categories exist as a percentage of the whole Residential Real Estate Loan portfolio:  Home Equity Lines of Credit 18.25%; First Trust Mortgage Loans 72.64%; Loans Secured by a Junior Trust 9.11%.
 
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 and includes analysis of: repayment source and capacity, value of the underlying property, credit history, savings pattern, and stability.
 
Commercial Loans:  Commercial Loans represent 26.52% of our loan portfolio held for investment as of December 31, 2013.  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(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.
 
 
6

 
Real Estate Construction Loans:  Real Estate Construction Loans, also known as construction and land development loans, comprise 5.65% of our held for investment loan portfolio as of December 31, 2013.  These loans generally fall into one of four circumstances:  loans to construct owner occupied commercial buildings, loans to individuals that are ultimately used to acquire property and construct an owner occupied residence, loans to builders for the purpose of acquiring property and constructing homes for sale to consumers, and 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 0.71% of our loan portfolio as of December 31, 2013.  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 Division 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 and servicing are sold concurrently.  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 forty-five days.  In 2013, we originated $575 million of loans processed in this manner, down from $1.1 billion in 2012.  At December 31, 2013 loans held for sale totaled $24.4 million compared to $111.5 million at year end 2012.  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 2013, we originated a total volume of $1.4 million in residential mortgage loans under this type of delivery method compared to $1.8 million in 2012.  Brokered loans accounted for 0.2% of the total loan volume of the Mortgage Division at December 31, 2013 and 2012.  The risks associated with this activity are limited to losses or claims arising from fraud.
 
Deposits
 
Deposits are the primary source of funding loan growth.  At December 31, 2013 deposits totaled $573.0 million compared to $671.5 million at December 31, 2012.
 
Market Area
 
The Corporation, the Bank, the Mortgage Division, and ACM 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.  Recent  population figures of the county were reported at 1,118,602 making it the most populous jurisdiction in the Commonwealth of Virginia, with about 13.7% 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.  Virginia receives a large amount of federal procurement dollars second only to California, and places approximately 27% of these dollars with small businesses.  Fairfax County ranks the highest among the counties in Virginia receiving federal procurement money.  Forbes Magazine has returned Virginia to its number 1 ranking among the best states for businesses due to a pro-business regulatory climate. 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 2013 was $1,375,000 compared to the 2012 median of $1,055,000.  The average price of all homes that sold in November 2013 increased 1.9% compared to the average sales price in November 2012.  Home resale values in the Washington DC area continued to rise during 2013 as reported by Standard & Poor’s Case-Shiller Home Price Indices.
 
According to the Federal Reserve Board’s Fifth District – Richmond January 2014 report, borrowings by consumers slowed except for new home construction and car loans while commercial lending strengthened.  Residential real estate grew moderately with average days-on-market and inventory numbers decreasing.  Multi-family housing remains active while commercial leasing continues to be depressed.  Demand for C&I loans grew in the 2nd and 4th quarters of 2013.
 
 
7

 
At December 31, 2013 and 2012, the Bank had approximately $90.7 million and $107.2 million, respectively in non-owner occupied 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 3.6% in December 2013 compared to 5.2% for the state of Virginia and 6.7% for the nation.  Fairfax County continues to rank in the top for median household income levels during 2013.
 
Competition
 
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.
 
Employees
 
At December 31, 2013 the Corporation had 215 employees, 106 of whom were employed by the Bank (excluding the Mortgage Division), 100 of whom were employed by the Mortgage Division, and 9 of whom were employed by the wealth management subsidiaries.  None of the employees of the Corporation are 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 financial crisis of 2008, the threat of collapse of numerous financial institutions, and other recent events have led to the adoption of numerous new laws and regulations that apply to and focus on financial institutions.  As a result of these regulatory reforms, the Corporation is experiencing a period of rapidly changing regulations.  These regulatory changes could have a significant impact on how the Corporation conducts its business.  The specific implications of these new laws and regulations cannot yet be predicted and will depend to a large extent on the specific regulations that are adopted in the coming months and years.  As a public company, 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 SEC. The Corporation is also required to comply with other laws and regulations of the SEC applicable to public companies.
 
As a national bank, the Bank is subject to regulation, supervision, and regular examination by the Comptroller.  The prior approval of the Comptroller or other appropriate bank regulatory authority is required for a national bank to merge with another bank or purchase the assets or assume the deposits of another bank.  In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the risks to the stability of the U.S. banking or financial system, the applicant’s performance record under the Community Reinvestment Act (“CRA”) and fair housing initiatives, and the effectiveness of the subject organizations in combating money laundering activities.  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.
 
 
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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 Sarbanes-Oxley Act. When enacted in 2002, the Sarbanes-Oxley Act (SOX) provided for major reforms of the federal securities laws intended to protect investors by improving the accuracy and reliability of corporate disclosures. It impacts all companies with securities registered under the Exchange Act, including the Corporation.  Section 404(a) of the SOX required public companies to include in their annual reports on Form 10-K an assessment from management of the effectiveness of the company’s internal control over financial reporting, and Section 404(b) of the SOX required the company’s auditor to attest to and report on management’s assessment.  SOX sets out enhanced requirements for audit committees including independence and expertise, includes stronger requirements for auditor independence by limiting the types of non-audit services that auditors can provide, and contains additional and increased civil and criminal penalties for violations of securities laws.  The Corporation is required to file as an accelerated filer as its public float has exceeded the $75 million threshold.
 
The Bank Holding Company Act. 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 (”FRB”).  A bank holding company is required to obtain the approval of the FRB before making certain acquisitions or engaging in certain activities.  Bank holding companies and their subsidiaries are also subject to restrictions on transactions with insiders and affiliates.
 
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. The FRB has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the FRB has reasonable grounds to believe that continuation of such activity or ownership constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.
 
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 percent of the capital stock and surplus of the bank on a per affiliate basis or 20 percent 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.
 
 
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The Dodd-Frank Act. The Dodd-Frank Act implements far-reaching changes across the financial regulatory landscape, and among other things includes the following:
 
· Creates a new consumer financial protection bureau that has 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 allows depository institutions to pay interest on business checking accounts.
 
· 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.
 
· Prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (the “Volker Rule”).
 
Many aspects of the Dodd-Frank Act remain subject to future rulemaking, 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 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 net income 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 $11.5 million in 2013, which includes a special, non-routine cash dividend of $0.70 per share discussed in more detail under “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 pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) and the Basel III Capital Accords. 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% 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, 2013, the Corporation and Bank both met all applicable capital requirements imposed by regulation.
 
 
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Under the 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, 2013, both the Corporation and the Bank were considered “well capitalized.”
 
Basel III Capital Framework.  In July 2013, the federal bank regulatory agencies adopted final rules (i) to implement the Basel III capital framework as outlined by the Basel Committee on Banking Supervision and (ii) for calculating risk-weighted assets (collectively, the “Base1 III Final Rules”). These final rules establish a new comprehensive capital framework for U.S. banking organizations, require bank holding companies and their bank subsidiaries to maintain substantially more capital with a greater emphasis on common equity, and make selected changes to the calculation of risk-weighted assets.
 
The Basel III Final Rules, among other things, (i) introduce as a new capital measure “Common Equity Tier 1” (“CET1”), (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) define 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) expand the scope of the adjustments as compared to existing regulations. The Basel III Final Rules implement the new minimum capital ratios and risk-weighting calculations on January 1, 2015, and the capital conservation buffer and regulatory capital adjustments and deductions will be phased in from 2015 to 2019.
 
 
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When fully phased in the Basel III Final Rules will require banks to maintain (i) 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) 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).
 
The Basel III Final Rules also implement a "countercyclical capital buffer," generally designed to absorb losses during periods of economic stress and to be imposed when national regulators determine that excess aggregate credit growth becomes associated with a buildup of systemic risk. The buffer is 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 Basel III Final Rules provide 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.
 
The Basel III Final Rules also revise the general rules for calculating a banking organization’s total risk-weighted assets and the risk weightings that are applied to many classes of assets held by community banks, including by applying higher risk weightings to certain commercial real estate loans.
 
Deposit Insurance. The Bank's deposits are insured up to applicable limits by the DIF of the FDIC.  The FDIC has set a designated reserve ratio of 1.35% ($1.35 for each $100 of insured deposits) for the DIF to be reached by September 30, 2020 as required by the Dodd-Frank Act. 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%. The DIF reserve ratio calculated by the FDIC at June 30, 2013 was 0.63%, up from the 0.44% calculated at December 31, 2012.  The FDIC staff project the DIF reserve ratio will reach 1.15% by the end of 2018.
 
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 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.
 
Financial Holding Company Status. As provided by the Gramm-Leach-Bliley Act of 1999 (the “GLBA”) , a bank holding company may become eligible to engage in activities that are financial in nature or incidental or complimentary to financial activities by qualifying 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 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.
 
 
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Confidentiality and Required Disclosures of Financial Information.  The Corporation is subject to various laws and regulations that address the privacy of nonpublic personal financial information of consumers.  The GLBA and certain other regulations issued thereunder protect 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.
The Corporation is subject to various laws and regulations that attempt to combat money laundering and terrorist financing.  The Bank Secrecy Act requires all financial institutions to, among other things, create a system of controls designed to prevent money laundering, the financing of terrorism, and imposes recordkeeping and reporting requirements. The USA Patriot Act provides for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering. Certain provisions of the USA PATRIOT Act impose the obligation to establish anti-money laundering programs.  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, and publicly releases information on designations of persons and organizations suspected of engaging in these activities. 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.
 
Although these laws and programs impose compliance costs and create privacy and reporting obligations, these laws and programs do not materially affect the Bank’s products, services or other business activities.
 
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 0.12% of the Bank’s total assets.
 
Mortgage Banking Regulation. The Mortgage Division 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.
 
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.
 
 
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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 was an annualized 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.  The Bank repaid the debt at maturity on February 15, 2012.
 
Incentive Compensation.  The FRB, the Comptroller and the FDIC issued regulatory guidance 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 FRB will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Corporation, that are not “large, complex banking organizations.” The findings will be included in reports of examination and deficiencies will be incorporated into the organization's supervisory ratings. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization's safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
 
The Dodd-Frank Act requires the SEC and the federal bank regulatory agencies to establish joint regulations or guidelines that require financial institutions with assets of at least $1 billion to disclose the structure of their incentive compensation practices and prohibit such institutions from maintaining compensation arrangements that encourage inappropriate risk-taking by providing excessive compensation or that could lead to material financial loss to the financial institution. The SEC and the federal bank regulatory agencies proposed such regulations in March 2011. If the regulations are adopted in the form initially proposed, they will impose limitations on the manner in which the Corporation may structure compensation for its executives only if the Corporation’s total consolidated assets exceed $1 billion. These proposed regulations incorporate the principles discussed in the Incentive Compensation Guidance.
 
Stress Testing.  As required by the Dodd-Frank Act, the federal banking agencies have implemented stress testing requirements for certain financial institutions, including bank holding companies and state chartered banks, with more than $10 billion in total consolidated assets.  Although these requirements do not apply to institutions with $10 billion or less in total consolidated assets, the federal banking agencies, including the Comptroller, emphasize that all banking organizations, regardless of size, should have the capacity to analyze the potential impact of adverse market conditions or outcomes on the organization’s financial condition.  Based on existing regulatory guidance, the Corporation and the Bank will be expected to consider the institution’s interest rate risk management, commercial real estate concentrations and other credit-related information, and funding and liquidity management during this analysis of adverse outcomes. 
 
Volcker Rule. The Dodd-Frank Act prohibits bank holding companies and their subsidiary banks from engaging in proprietary trading except in limited circumstances, and places limits on ownership of equity investments in private equity and hedge funds (the “Volcker Rule”). On December 10, 2013, the U.S. financial regulatory agencies (including the FRB, the FDIC, the Comptroller and the SEC) adopted final rules to implement the Volcker Rule. In relevant part, these final rules would have prohibited banking entities from owning collateralized debt obligations (CDOs) backed by trust preferred securities (TruPS), effective July 21, 2015. However, subsequent to these final rules the U.S. financial regulatory agencies  issued an interim rule effective April 1, 2014 to exempt CDOs backed by TruPS from the Volker Rule and the final rule, provided that (a) the CDO was established prior to May 19, 2010, (b) the banking entity reasonably believes that the CDO’s offering proceeds were used to invest primarily in TruPS issued by banks with less than $15 billion in assets, and (iii) the banking entity acquired the CDO investment on or before December 10, 2013. The Corporation currently does not have any CDO investments, and the Corporation believes that its financial conditions will not be significantly impacted by the Volcker Rule, the final rule or the interim rule.
 
ITEM 1A – RISK FACTORS
 
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.
 
 
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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.  In addition, the FRB’s Federal Open Market Committee has stated that it expects to keep the federal funds target rate at 0% - 0.25%  until economic and labor conditions (as indicated by the unemployment rate) improve.  Even though such a continuance of accommodative monetary policy could allow the Corporation to continue to reprice fixed-rate deposits to lower rates, sustained low interest rates could put further pressure on the yields generated by the Corporation’s loan portfolio and on the Corporation’s net interest margin.
 
At December 31, 2013 approximately 66% 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 net income and capital than on the net income 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, 2013, approximately 73% 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 net income 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.
 
 
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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, a wealth management company, 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 net income 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, 2013 was $13.1 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 net income and capital.
 
 
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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 net income.
 
We operate in a highly regulated industry, and both the Corporation 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 has increased the Corporation’s regulatory compliance burden and associated costs, placed restrictions on certain products and services, increases the risk and liability of consumer litigation, and limited its future capital raising strategies.
 
A wide range of regulatory initiatives directed at the financial services industry has been proposed in recent years. One of those initiatives, the Dodd-Frank Act, was enacted in 2010 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 has increased 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 has the authority to impose new regulations and include its examiners in routine regulatory examinations conducted by the Comptroller. This agency, named the Consumer Financial Protection Bureau (“CFPB”), 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 CFPB has jurisdiction over banks with $10 billion or greater in assets, rules, regulations and policies issued by the CFPB may also apply to the Corporation, the Bank and/or the Mortgage Division 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 may 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.
 
 
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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 may cause the Corporation to reevaluate elements of its business focus and shape future capital strategies.
 
In January 2014, the Qualified Mortgage (QM) and Qualified Residential Mortgage (QRM) rules became effective under the Dodd Frank Act and may impact the willingness and ability of community banks and secondary market participants to make mortgage loans.  Among other requirements, these rules require lenders to show that borrowers met an “ability to repay” test – which can be challenged in court for the entire life of the loan, raising the risk of litigation.  Failure to prove the ability to repay can result in the lender’s obligation to reimburse the borrower for all payments made.  Together with newly imposed timeline restrictions covering the liquidation of problem consumer mortgage loans, litigation over “ability to repay” may delay the time to collect on soured consumer mortgages and result in elevated problem assets and increased loss rates.
 
The Basel III Final Rules will require higher levels of capital and liquid assets, which could adversely affect the Corporation’s net income and return on equity.
 
The Basel III Final Rules, when fully phased-in, will represent the most comprehensive overhaul of the U.S. banking capital framework in over two decades.  The Basel III Final Rules and related changes to the standardized calculations of risk-weighted assets are complex and may create enormous compliance burdens, especially for community banks.  The Basel III Final Rules require bank holding companies and their subsidiaries, such as the Corporation and the Bank, to maintain substantially more capital as a result of higher required capital levels and more demanding regulatory capital risk-weightings and calculations,  require all banks to substantially change the manner in which they collect and report information to calculate risk-weighted assets, and will likely increase risk-weighted assets at many banking organizations as a result of applying higher risk-weightings to many types of loans and securities.  As a result, banks may be forced to limit originations of certain types of commercial and mortgage loans, thereby reducing the amount of credit available to borrowers and limiting opportunities to earn interest income from the loan portfolio.
 
As a result of the Basel III Final Rules, many banks could be required to access the capital markets on short notice and in relatively weak economic conditions, which could result in banks raising capital that significantly dilutes existing shareholders. Additionally, many community banks could be forced to limit banking operations and activities, and growth of loan portfolios and interest income, in order to focus on retention of earnings to improve capital levels. The Base1 III Final Rules may have a detrimental effect on the Corporation’s net income and return on equity and limit the products and services it provides to its customers.
 
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 8 of the financial statements.
 
The primary risks related to our hedging activities relate to incorrect assumptions regarding 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 Division will be significantly reduced if we are not able to sell mortgages.
 
Currently, we generally sell all of the mortgage loans originated by the Mortgage Division. We only underwrite mortgages that we reasonably expect will have more than one potential purchaser.  The profitability of our Mortgage Division 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.
 
 
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The Mortgage Division’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 with substantial market influence whose activities are governed by federal law. 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 reported past 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 severely contracted during the recent economic downturn and has failed to recover fully due to the weak economic recovery.  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 Division’s ability to sell mortgage loans readily could be hampered, and the profitability of the Bank 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. Proponents of the housing market reform had looked to enact legislation prior to year-end 2013; however, legislation has yet to be introduced.  Any such proposals, if enacted, may have broad adverse implications for the residential mortgage market, the mortgage-backed securities market and the Mortgage Division’s business, operations and financial condition. Such proposals have been, and we expect them to continue 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 Division’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 net income may be adversely affected if representations and warranties related to loans sold by the Mortgage Division are breached and we must pay related claims.
 
The Mortgage Division makes representations and warranties that loans sold to investors meet their program’s guidelines and 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 investor 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 2012, the Mortgage Division reached a settlement arrangement with one of its investors wherein a payment of $750 thousand was made to release the Bank from known and unknown repurchase obligations associated with approximately $252 million of mortgage loans.  The Mortgage Division maintains a reserve in other liabilities for potential losses on mortgage loans sold.  Net income may be impacted if this reserve is insufficient to cover claims from the investors.
 
Our net income and capital may be adversely affected if our efforts to protect or authenticate customers’ information or customers’ transactions fails.
 
Identity theft and data breaches are on the rise. To date, our losses have been immaterial due in part to our client awareness program, systems and controls.  While we regularly review activity and adopt new practices when warranted to control exposure, we have no way of predicting when a compromise may occur and the magnitude or liability arising from such a compromise. In particular, the occurrence of identity theft or data breaches could expose the Corporatin to risks of data loss or data misuse, could damage the Corporation’s reputation and result in the loss of customers and business, could subject the Corporation to additional regulatory scrutiny or could expose the Corporation to civil litigation, possible financial liability and costly remedial measures. Any of these occurrences could have a material adverse effect on the Corporation’s financial condition and results of operations.
 
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.
 
 
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Negative public opinion could damage our reputation and the strength of our Access National brand and adversely impact our business, client relationships and net income.
 
Reputation risk, or the risk to our businesses’ (including our primary commercial banking business and secondary mortgage lending business) net income 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 the U.S. financial system were to destabilize again, the financial condition of our target markets may suffer, which could adversely affect our business.
 
In response to the financial crises that affected 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 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 long-term 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 led to an economic downturn and current stagnant recovery which, in turn, has harmed the financial condition and performance of our small to medium sized business target market.  If despite such laws, regulations, and programs the financial markets again destabilize, or recent financial market conditions deteriorate rather than continuing to improve or remain steady, the financial condition of our small to medium sized business target market would suffer and could materially and adversely affect our business, financial condition, results of operations, and the trading price of our common stock.
 
Significant reductions in U.S. government spending may have an adverse effect on our local economy and customer base.
 
Fairfax County, Virginia receives more federal procurement dollars than any other country in Virginia.  More broadly, the State of Virginia ranks second among states that benefit from federal procurement.  We cannot predict any adverse implications of direct and indirect impact of government spending reductions on our financial performance.
 
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.
 
 
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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 have paid quarterly cash dividends since our first cash dividend 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, 2013, our chairman of the board, executive officers and directors and one other principal shareholder collectively beneficially owned approximately 35% of the outstanding shares of our common stock.  Our executive officers and directors collectively beneficially owned approximately 30% of our common stock and one other individual shareholder has declared beneficial ownership of an additional 5.4% 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.
 
ITEM 1B - UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2 - PROPERTIES
 
The Bank leases offices that are used in the normal course of business. The principal executive office of the Corporation, Bank, Access Real Estate, ACM and Mortgage Division 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 , Leesburg, and Manassas, Virginia. The Mortgage Division leases offices in Fairfax, McLean, and Reston in Virginia as well as Hagerstown, Maryland. The Mortgage Division also leases offices in Indiana, Georgia, and Florida. All of the Mortgage Division’s leases are month to month leases and can be terminated with thirty days notice. Access Real Estate owns an undeveloped commercial lot in Fredericksburg that was purchased for future expansion of the Bank.
 
All of the owned and leased properties are in good operating condition and are adequate for the Corporation’s present and anticipated future needs.
 
 
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ITEM 3 – LEGAL PROCEEDINGS
 
The Corporation, and the Bank are from time to time parties 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 and the Corporation may initiate legal actions against borrowers in connection with collecting defaulted loans.  Such actions are not considered material by management unless otherwise disclosed.
 
Prior to discontinuing the operations of the Mortgage Corporation, a subpoena dated May 3, 2011 was received from the United States Attorney's Office (the "U.S. Attorney's Office") for the Southern District of New York. Correspondence accompanying the subpoena indicated that the U.S. Attorney's Office is investigating potential violations by the Mortgage Corporation of the statutes, regulations, and rules governing the Federal Housing Administration's direct endorsement lender program and potential violations of sections 215, 656, 657, 1005, 1006, 1007, 1014, or 1344 of Title 18 or section 287, 1001, 1032, 1341, or 1343 of Title 18 affecting a federally insured financial institution in contemplation of a possible civil proceeding under 12 U.S.C. Section 1833a.
 
The subpoena required the Mortgage Corporation, through the Bank since the activities of the Mortgage Corporation have been transitioned into an operating division of the Bank, to produce certain documents and designate a knowledgeable witness to testify with respect to the matters set forth above. The Corporation and its subsidiaries have cooperated fully with this investigation. 
 
The Corporation cannot determine the outcome of this investigation or any related civil proceeding. In addition, the Corporation cannot predict how long the investigation will take or whether it or any of its subsidiaries will be required to take any additional actions.
 
ITEM 4 – MINE SAFETY DISCLOSURES
 
None.
 
 
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PART II
 
ITEM 5 – MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
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.
 
 
 
2013
 
 
 
 
2012
 
 
 
 
 
 
High
 
Low
 
Dividends
 
High
 
Low
 
Dividends
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First Quarter
 
$
18.07
 
$
13.22
 
$
0.09
 
$
10.71
 
$
8.66
 
$
0.05
 
Second Quarter
 
 
16.36
 
 
10.90
 
 
0.10
 
 
13.56
 
 
10.42
 
 
0.06
 
Third Quarter
 
 
16.16
 
 
12.95
 
 
0.11
 
 
14.39
 
 
12.71
 
 
0.06
 
Fourth Quarter
 
$
16.57
 
$
13.80
 
$
0.81
 
$
14.40
 
$
11.03
 
$
0.78
 
 
As of March 11, 2014, the Corporation had 10,400,824 outstanding shares of Common Stock, par value $0.835 per share, held by approximately 445 shareholders of record and the closing price for the Corporation’s common stock on the NASDAQ Global Market was $16.97. Included in the above share numbers are 24,017 shares of unregistered, restricted stock issued on January 31, 2014.
 
The Corporation paid its thirty-third consecutive quarterly cash dividend on February 25, 2014 to shareholders of record as of February 6, 2014. 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.
 
In addition to the ordinary quarterly dividends paid in 2013, on December 4, 2013, the Corporation declared a special non-routine cash dividend of $0.70 per share to shareholders of record as of December 16, 2013, which was paid on December 30, 2013.  The Corporation’s dividend strategy is to pay routine quarterly dividends equal to 40% to 50% of core earnings, provided a minimum tangible common equity ratio of 8.00% is maintained.  Special dividends are excluded from this target. Special dividends may be considered when the tangible common equity to asset ratio exceeds 10.50%.
 
Issuer Purchases of Equity Securities for the Quarter Ended December 31, 2013
 
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 June 22, 2010 the number of shares authorized for repurchase under the Share Repurchase Program was increased from 2,500,000 to 3,500,000 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
 
Period
 
Shares Purchased
 
Paid Per Share
 
Announced Plan
 
Under the Plan
 
 
 
 
 
 
 
 
 
 
 
 
October 1 - October 31, 2013
 
-
 
$
-
 
-
 
768,781
 
November 1 - November 30, 2013
 
-
 
 
-
 
-
 
768,781
 
December 1 - December 31, 2013
 
-
 
 
-
 
-
 
768,781
 
 
 
-
 
$
-
 
-
 
768,781
 
 
 
23

 
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, 2013 with the cumulative return of a broad equity market index and the Standard & Poor’s 500 Index (“S&P 500 Index”).   This presentation assumes $100 was invested in shares of the Corporation and each of the indices on December 31, 2008, 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, 2008 through December 31, 2013.
 
 
 
 
 
Period Ending
 
Index
 
12/31/08
 
12/31/09
 
12/31/10
 
12/31/11
 
12/31/12
 
12/31/13
 
Access National Corporation
 
100.00
 
124.03
 
136.69
 
189.29
 
299.53
 
370.59
 
S&P 500
 
100.00
 
126.46
 
145.51
 
148.59
 
172.37
 
228.19
 
SNl Bank Index
 
100.00
 
98.97
 
110.90
 
85.88
 
115.90
 
159.12
 
 
 
24

 
ITEM 6 – SELECTED FINANCIAL DATA
 
The following consolidated selected financial data is derived from the Corporation’s audited financial statements for the five years ended December 31, 2013.  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,
 
 
 
2013
 
 
2012
 
 
2011
 
 
2010
 
 
2009
 
 
 
(In Thousands, Except for Share and Per Share Data)
 
Income Statement Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
$
32,164
 
 
$
31,551
 
 
$
28,117
 
 
$
25,029
 
 
$
23,558
 
Provision for loan losses
 
 
675
 
 
 
1,515
 
 
 
1,149
 
 
 
2,816
 
 
 
6,064
 
Noninterest income
 
 
28,150
 
 
 
54,794
 
 
 
36,429
 
 
 
34,660
 
 
 
56,966
 
Noninterest expense
 
 
39,198
 
 
 
56,399
 
 
 
45,722
 
 
 
44,771
 
 
 
58,971
 
Income taxes
 
 
7,234
 
 
 
10,708
 
 
 
6,287
 
 
 
4,526
 
 
 
5,854
 
Net Income
 
$
13,207
 
 
$
17,723
 
 
$
11,388
 
 
$
7,576
 
 
$
9,635
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Per Share Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
1.28
 
 
 
1.73
 
 
 
1.11
 
 
 
0.72
 
 
 
0.93
 
Diluted
 
 
1.27
 
 
 
1.71
 
 
 
1.10
 
 
 
0.72
 
 
 
0.92
 
Cash dividends paid
 
 
1.11
 
 
 
0.95
 
 
 
0.13
 
 
 
0.04
 
 
 
0.04
 
Book value at period end
 
 
8.79
 
 
 
8.85
 
 
 
8.13
 
 
 
6.96
 
 
 
6.43
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
847,182
 
 
$
863,914
 
 
$
809,758
 
 
$
831,824
 
 
$
666,879
 
Loans held for sale
 
 
24,353
 
 
 
111,542
 
 
 
95,126
 
 
 
82,244
 
 
 
76,232
 
Loans held for investment
 
 
687,055
 
 
 
616,978
 
 
 
569,400
 
 
 
491,529
 
 
 
486,564
 
Total investment securities (2)
 
 
92,829
 
 
 
80,711
 
 
 
85,824
 
 
 
124,307
 
 
 
43,095
 
Total deposits
 
 
572,972
 
 
 
671,496
 
 
 
645,013
 
 
 
627,848
 
 
 
466,645
 
Shareholders' equity
 
$
91,134
 
 
$
91,267
 
 
$
82,815
 
 
$
72,193
 
 
$
67,778
 
Average shares outstanding, basic
 
 
10,319,802
 
 
 
10,253,656
 
 
 
10,277,801
 
 
 
10,503,383
 
 
 
10,391,348
 
Average shares outstanding, diluted
 
 
10,403,155
 
 
 
10,363,267
 
 
 
10,344,325
 
 
 
10,525,258
 
 
 
10,432,857
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Performance Ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Return on average assets
 
 
1.55
%
 
 
2.15
%
 
 
1.50
%
 
 
0.98
%
 
 
1.35
%
Return on average equity
 
 
14.00
%
 
 
19.68
%
 
 
14.80
%
 
 
10.85
%
 
 
15.04
%
Net interest margin (1)
 
 
3.85
%
 
 
3.94
%
 
 
3.82
%
 
 
3.41
%
 
 
3.42
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Efficiency Ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Access National Bank
 
 
49.50
%
 
 
51.71
%
 
 
52.92
%
 
 
59.02
%
 
 
60.41
%
Access National Mortgage Division
 
 
79.79
%
 
 
70.19
%
 
 
80.78
%
 
 
84.72
%
 
 
77.40
%
Access National Corporation
 
 
64.99
%
 
 
65.32
%
 
 
70.84
%
 
 
75.01
%
 
 
73.23
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset Quality Ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance to period end loans
 
 
1.91
%
 
 
2.03
%
 
 
2.06
%
 
 
2.14
%
 
 
1.88
%
Allowance to non-performing loans
 
 
518.19
%
 
 
455.71
%
 
 
175.12
%
 
 
122.96
%
 
 
129.79
%
Net charge-offs to average loans
 
 
0.01
%
 
 
0.13
%
 
 
0.01
%
 
 
0.30
%
 
 
0.90
%
 
(1) Net interest income divided by total average earning assets.
(2) Excludes restricted stock.
 
Table continued on next page
 
 
25

 
ITEM 6 – SELECTED FINANCIAL DATA continued
 
 
 
Year Ended December 31,
 
 
 
2013
 
 
2012
 
 
2011
 
 
2010
 
 
2009
 
 
 
(In Thousands, Except for Share and Per Share Data)
 
Average Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
854,572
 
 
$
826,233
 
 
$
758,994
 
 
$
772,600
 
 
$
714,970
 
Investment securities
 
 
97,260
 
 
 
105,520
 
 
 
105,042
 
 
 
107,940
 
 
 
69,758
 
Loans held for sale
 
 
42,667
 
 
 
78,543
 
 
 
51,774
 
 
 
63,868
 
 
 
65,780
 
Loans held for investment
 
 
648,744
 
 
 
583,724
 
 
 
520,062
 
 
 
475,726
 
 
 
490,393
 
Allowance for loan losses
 
 
12,924
 
 
 
11,994
 
 
 
11,123
 
 
 
9,485
 
 
 
8,065
 
Total deposits
 
 
678,531
 
 
 
672,693
 
 
 
565,450
 
 
 
572,139
 
 
 
519,477
 
Junior subordinated debentures
 
 
3,135
 
 
 
6,186
 
 
 
6,186
 
 
 
6,186
 
 
 
6,186
 
Total shareholders' equity
 
 
94,352
 
 
 
90,047
 
 
 
76,969
 
 
 
69,827
 
 
 
64,054
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Capital Ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 risk-based capital
 
 
12.05
%
 
 
14.10
%
 
 
14.33
%
 
 
14.25
%
 
 
13.47
%
Total risk-based capital
 
 
13.30
%
 
 
15.35
%
 
 
15.59
%
 
 
15.51
%
 
 
14.73
%
Leverage capital ratio
 
 
10.93
%
 
 
11.50
%
 
 
10.78
%
 
 
9.56
%
 
 
10.73
%
Tangible common equity ratio
 
 
10.76
%
 
 
10.56
%
 
 
10.23
%
 
 
8.68
%
 
 
10.16
%
 
ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis is intended to provide an overview of the significant factors affecting the Corporation and its subsidiaries financial condition at December 31, 2013 and 2012 and the results of operations for the years ended December 31, 2013, 2012 and 2011. 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: collateral values, especially in the real estate market; stagnation or continued deterioration in general business and economic conditions and in the financial markets; the impact of any policies or programs implemented pursuant to the Dodd-Frank Act or other legislation or regulation; unemployment levels; 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.
 
 
26

 
CRITICAL ACCOUNTING POLICIES
 
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 principles 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
 
Securities in the Bank’s investment portfolio are classified as either held-to-maturity or available-for-sale.  Securities classified as held-to-maturity are recorded at cost or amortized cost.  Available-for-sale securities are carried at fair value.  The estimated fair value of the available-for-sale portfolio fluctuates due to changes in market interest rates and other factors. Changes in estimated fair value are recorded in shareholders’ equity as a component of other 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 will cause the security to be 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, 2013 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 16 to the consolidated financial statements.
 
 
27

 
Executive Summary
 
The Corporation completed its fourteenth year of operation and recorded net income of $13.2 million or $1.27 per diluted common share in 2013 compared to $17.7 million or $1.71 per diluted common share and $11.4 million or $1.10 per diluted common share in 2012 and 2011, respectively. The decrease in net income over last year was due mainly to reduced loan origination volumes in the Mortgage Division, from $1.1 billion in 2012 to $575 million in 2013, a volume decrease of 49%.  To counteract the decrease in loan origination volumes, the Mortgage Division was able to reduce its overheard by 49%, from total operating expenses of $38.6 million in 2012 to $19.8 million in 2013.  In 2013, the Corporation was able to reduce interest expense by $1.5 million or 28% as the target federal funds rate remained at 0.25% throughout 2013 which contributed to the lower interest expense.  The increase in net income from 2011of $11.4 million to 2012 of $17.7 million was due mainly to record performance during 2012 by the Mortgage Division.  In 2012, gains realized from the sale of mortgage loans increased by $20.4 million or 58% from 2011, while noninterest expense increased by $10.7 million or 23%.   
 
At December 31, 2013, assets totaled $847.2 million compared to $863.9 million at December 31, 2012, down $16.7 million or 2.0% from the prior year.  The decrease was due to the decrease in loans held for sale which were $24.4 million at December 31, 2013 compared to $111.5 million at December 31, 2012.  Offsetting the loans held for sale decrease was an increase in loans held for investment of $70.1 million, from $617.0 million at December 31, 2012 to $687.1 million at December 31, 2013.  The growth in loans held for investment was across all categories with the exception of commercial real estate – non-owner occupied.  The largest dollar growth occurred in the commercial loan portfolio 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 continues to be one of the dominant SBA lenders in 7A loans in the greater Washington D.C. Metropolitan Area, as measured by dollar value of originations. The SBA lending activity is an important component of our focus on small businesses and expanding our core business relationships. 
 
Investment securities totaled $92.8 million at December 31, 2013 compared to $80.7 million at December 31, 2012 as the Corporation continues to build its portfolio judiciously in a manner that is consistent with the Corporation’s planned liquidity and asset management goals. 
 
Deposits totaled $573.0 million at December 31, 2013 compared to $671.5 million at December 31, 2012.  The $98.5 million decrease was due mainly to a $138.5 million reduction in Certificate of Deposit Account Registry Service (“CDARS”) reciprocal balances and brokered deposits and was offset by a $40.5 million increase in demand deposit accounts.  Management has utilized CDARS reciprocal balances and brokered deposits as a cost effective way to fund certain asset portfolio classes, namely the loans held for sale and the investment portfolio.  With the overall reduction in mortgage banking activity during 2013, management’s utilization of CDARS reciprocal balances and brokered deposits was reduced as noted by the decrease in those balances.    
 
Non-performing assets (“NPA”) totaled approximately $2.5 million or 0.30% of total assets at December 31, 2013, down from $2.7 million or 0.32% of total assets at December 31, 2012.  NPAs are comprised of non-accrual loans solely at December 31, 2013, and 2012, as the Corporation did not have any other real estate owned. Included in non-accrual loans at December 31, 2013 is a restructured loan to one borrower which consisted of a commercial loan totaling $729 thousand.  The allowance for loan losses totaled $13.1 million or 1.9% of total loans held for investment as of December 31, 2013, compared to $12.5 million or 2.0% at December 31, 2012.
 
The economy continues to show signs of improvement with unemployment rates declining, and we are beginning to see price appreciation in the local residential real estate market. Notwithstanding the foregoing, there is no guarantee that these positive trends will continue.  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 2014 with a strong capital base and being positioned for continued growth.
 
RESULTS OF OPERATIONS
 
Net income for 2013 totaled $13.2 million, or $1.27 per diluted common share compared to $17.7 million or $1.71 per diluted common share in 2012.  Net income in 2013 was favorably impacted by a decrease in interest expense, a decrease in the provision for loan losses, an increase in other noninterest income due to positive marks on our loans held for sale pipeline and hedging activity,  a decrease in total noninterest expense, and a decrease in the provision for income taxes; however, dramatic decreases in the gain on the sale of loans resulted in an overall $4.5 million decrease in net income when comparing 2013 to 2012.    During 2013 average loans held for investment increased $65.0 million and average loans held for sale decreased $35.9 million when comparing to 2012.  Average interest-bearing balances and federal funds sold increased $12.9 million from 2012 to 2013.
 
 
28

 
Net income for 2012 totaled $17.7 million, or $1.71 per diluted common share compared to $11.4 million or $1.10 per diluted common share in 2011.  Net income in 2012 was favorably impacted by a decrease in interest expense and increased gains from the sale of mortgage loans, partially offset by increases in noninterest expense, provision for loan losses and provision for income taxes.  During 2012 average loans held for investment increased $63.7 million and average loans held for sale increased $26.8 million. 
 
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 $32.2 million in 2013, up from $31.6 million in 2012.  Average noninterest-bearing deposits increased $46.3 million in 2013.  Net interest margin was 3.85% in 2013 and 3.94% in 2012, with the decrease primarily due to the weighted average rate earned on interest-earning assets decreasing 29 basis points to 4.29% in 2013 from 4.58% in 2012.
 
During 2013, total average earning assets increased by $35.2 million.  Average loans held for investment increased by $65.0 million, or 11.1%, while interest-bearing balances and federal funds sold increased $12.9 million, or 39.0%.  These increases were offset by a decrease in the average loans held for sale balance of $35.9 million, or 45.7%, and a decrease of $6.9 million, or 6.5%, in average securities balances.  On the funding side total average interest-bearing deposits and borrowings decreased by $19.4 million or 3.4%.  The volume decrease as well as a rate decrease in most categories of interest-bearing deposits and borrowings was enough to offset the rate decreases in all categories of interest-earning assets when combined with the volume increase in loans. 
 
Net interest income totaled $31.6 million in 2012, up from $28.1 million in 2011.  Average noninterest-bearing deposits increased $46.2 million in 2012.  Net interest margin was 3.94% in 2012 and 3.82% in 2011, with the increase primarily due to the weighted average rate paid on interest-bearing liabilities decreasing 33 basis points to 0.90% in 2012 from 1.23% in 2011.  
 
 
29

 
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, 2013
 
December 31, 2012
 
December 31, 2011
 
 
 
Average
 
Income /
 
Yield /
 
Average
 
Income /
 
Yield /
 
Average
 
Income /
 
Yield /
 
 
 
Balance
 
Expense
 
Rate
 
Balance
 
Expense
 
Rate
 
Balance
 
Expense
 
Rate
 
 
 
(Dollars In Thousands)
 
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities
 
$
98,501
 
$
1,928
 
1.96
%
$
105,378
 
$
2,266
 
2.15
%
$
105,964
 
$
2,216
 
2.09
%
Loans held for sale
 
 
42,667
 
 
1,505
 
3.53
%
 
78,543
 
 
2,953
 
3.76
%
 
51,774
 
 
2,176
 
4.20
%
Loans(1)
 
 
648,744
 
 
32,336
 
4.98
%
 
583,724
 
 
31,418
 
5.38
%
 
520,062
 
 
30,632
 
5.89
%
Interest-bearing balances and federal funds sold
 
 
46,217
 
 
107
 
0.23
%
 
33,272
 
 
79
 
0.24
%
 
58,128
 
 
143
 
0.25
%
Total interest-earning assets
 
 
836,129
 
 
35,876
 
4.29
%
 
800,917
 
 
36,716
 
4.58
%
 
735,928
 
 
35,167
 
4.78
%
Noninterest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
 
 
9,852
 
 
 
 
 
 
 
11,848
 
 
 
 
 
 
 
12,066
 
 
 
 
 
 
Premises, land and equipment
 
 
8,480
 
 
 
 
 
 
 
8,548
 
 
 
 
 
 
 
8,819
 
 
 
 
 
 
Other assets
 
 
13,035
 
 
 
 
 
 
 
16,914
 
 
 
 
 
 
 
13,304
 
 
 
 
 
 
Less: allowance for loan losses
 
 
(12,924)
 
 
 
 
 
 
 
(11,994)
 
 
 
 
 
 
 
(11,123)
 
 
 
 
 
 
Total noninterest-earning assets
 
 
18,443
 
 
 
 
 
 
 
25,316
 
 
 
 
 
 
 
23,066
 
 
 
 
 
 
Total Assets
 
$
854,572
 
 
 
 
 
 
$
826,233
 
 
 
 
 
 
$
758,994
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Shareholders' Equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposits:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
 
$
75,706
 
$
148
 
0.20
%
$
63,203
 
$
171
 
0.27
%
$
48,349
 
$
227
 
0.47
%
Money market deposit accounts
 
 
120,307
 
 
282
 
0.23
%
 
119,621
 
 
484
 
0.40
%
 
111,090
 
 
628
 
0.57
%
Savings accounts
 
 
2,483
 
 
5
 
0.20
%
 
2,587
 
 
4
 
0.15
%
 
2,853
 
 
6
 
0.21
%
Time deposits
 
 
287,364
 
 
3,051
 
1.06
%
 
340,935
 
 
3,870
 
1.14
%
 
303,009
 
 
4,343
 
1.43
%
Total interest-bearing deposits
 
 
485,860
 
 
3,486
 
0.72
%
 
526,346
 
 
4,529
 
0.86
%
 
465,301
 
 
5,204
 
1.12
%
Borrowings:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FHLB Advances
 
 
43,077
 
 
97
 
0.23
%
 
11,141
 
 
65
 
0.58
%
 
8,458
 
 
42
 
0.50
%
Securities sold under agreements to repurchase and federal funds purchased
 
 
25,524
 
 
26
 
0.10
%
 
26,744
 
 
38
 
0.14
%
 
36,612
 
 
67
 
0.18
%
Other short-term borrowings
 
 
-
 
 
-
 
0.00
%
 
-
 
 
-
 
0.00
%
 
20,681
 
 
114
 
0.55
%
FHLB Long-term borrowings
 
 
-
 
 
-
 
0.00
%
 
3,015
 
 
212
 
7.03
%
 
6,196
 
 
219
 
3.53
%
FDIC Term Note
 
 
-
 
 
-
 
0.00
%
 
3,607
 
 
98
 
2.72
%
 
30,081
 
 
1,191
 
3.96
%
Subordinated Debentures
 
 
3,135
 
 
103
 
3.29
%
 
6,186
 
 
223
 
3.60
%
 
6,186
 
 
213
 
3.44
%
Total borrowings
 
 
71,736
 
 
226
 
0.32
%
 
50,693
 
 
636
 
1.25
%
 
108,214
 
 
1,846
 
1.71
%
Total interest-bearing deposits and borrowings
 
 
557,596
 
 
3,712
 
0.67
%
 
577,039
 
 
5,165
 
0.90
%
 
573,515
 
 
7,050
 
1.23
%
Noninterest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Demand deposits
 
 
192,671
 
 
 
 
 
 
 
146,347
 
 
 
 
 
 
 
100,149
 
 
 
 
 
 
Other liabilities
 
 
9,953
 
 
 
 
 
 
 
12,800
 
 
 
 
 
 
 
8,361
 
 
 
 
 
 
Total liabilities
 
 
760,220
 
 
 
 
 
 
 
736,186
 
 
 
 
 
 
 
682,025
 
 
 
 
 
 
Shareholders' Equity
 
 
94,352
 
 
 
 
 
 
 
90,047
 
 
 
 
 
 
 
76,969
 
 
 
 
 
 
Total Liabilities and Shareholders' Equity:
 
$
854,572
 
 
 
 
 
 
$
826,233
 
 
 
 
 
 
$
758,994
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest Spread(2)
 
 
 
 
 
 
 
3.63
%
 
 
 
 
 
 
3.69
%
 
 
 
 
 
 
3.55
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Interest Margin(3)
 
 
 
 
$
32,164
 
3.85
%
 
 
 
$
31,551
 
3.94
%
 
 
 
$
28,117