Edgar Filing: ACCESS NATIONAL CORP

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2014

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

(State or other jurisdiction of

incorporation or organization)

82-0545425

(I.R.S. Employer

Identification No.)

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)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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 Exchange 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 check mark 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 Exchange Act). Yes ¨ No x

The number of shares outstanding of Access National Corporation’s common stock, par value $0.835, as of May 8, 2014 was 10,413,324 shares.

ACCESS NATIONAL CORPORATION

FORM 10-Q

INDEX

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets, March 31, 2014 and December 31, 2013	Page 2
	Consolidated Statements of Income, three months ended March 31, 2014 and 2013	Page 3
	Consolidated Statements of Comprehensive Income, three months ended March 31, 2014 and 2013	Page 4
	Consolidated Statements of Changes in Shareholders' Equity, three months ended March 31, 2014 and 2013	Page 5
	Consolidated Statements of Cash Flows, three months ended March 31, 2014 and 2013	Page 6
	Notes to Consolidated Financial Statements (Unaudited)	Page 7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	Page 30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	Page 42
Item 4.	Controls and Procedures	Page 43

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	Page 43
Item1A.	Risk Factors	Page 44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	Page 44
Item 3.	Defaults Upon Senior Securities	Page 44
Item 4.	Mine Safety Disclosures	Page 44
Item 5.	Other Information	Page 44
Item 6.	Exhibits	Page 45

	Signatures	Page 46

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ACCESS NATIONAL CORPORATION

Consolidated Balance Sheets

(In Thousands, Except for Share and Per Share Data)

	March 31,			December 31,
ASSETS	2014			2013
	(Unaudited)
Cash and due from banks	$	10,816		$	8,117
Interest-bearing deposits in other banks and federal funds sold		51,354			15,302
Securities:
Securities available-for-sale, at fair value		90,595			76,552
Securities held-to-maturity, at amortized cost (fair value of $10,938 and $15,659)		11,273			16,277
Total investment securities		101,868			92,829

Restricted stock		1,761			8,559
Loans held for sale, at fair value		27,217			24,353
Loans		716,857			687,055
Allowance for loan losses		(13,171	)		(13,136	)
Net loans		703,686			673,919
Premises and equipment, net		8,368			8,389
Accrued interest receivable		2,457			2,491
Other assets		19,273			13,223
Total assets	$	926,800		$	847,182

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing deposits	$	229,059		$	189,908
Savings and interest-bearing deposits		239,795			200,196
Time deposits		336,570			182,868
Total deposits		805,424			572,972
Other liabilities
Short-term borrowings		17,646			172,855
Other liabilities and accrued expenses		10,153			10,221
Total liabilities	$	833,223		$	756,048

SHAREHOLDERS' EQUITY
Common stock, par value, $0.835; authorized, 60,000,000 shares; issued and
outstanding, 10,402,324 shares at March 31, 2014 and 10,369,420 shares at
December 31, 2013	$	8,686		$	8,659
Additional paid in capital		17,814			17,320
Retained earnings		68,392			67,121
Accumulated other comprehensive income (loss), net		(1,315	)		(1,966	)
Total shareholders' equity		93,577			91,134
Total liabilities and shareholders' equity	$	926,800		$	847,182

See accompanying notes to consolidated financial statements (Unaudited).

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ACCESS NATIONAL CORPORATION

Consolidated Statements of Income

(In Thousands, Except for Share and Per Share Data)

(Unaudited)

	Three Months Ended March 31,
	2014		2013
Interest and Dividend Income
Interest and fees on loans	$	8,459	$	8,596
Interest on deposits in other banks		18		25
Interest and dividends on securities		468		535
Total interest and dividend income		8,945		9,156

Interest Expense
Interest on deposits		728		1,001
Interest on short-term borrowings		76		13
Interest on subordinated debentures		-		53
Total interest expense		804		1,067

Net interest income		8,141		8,089
Provision for loan losses		-		225
Net interest income after provision for loan losses		8,141		7,864

Noninterest Income
Service fees on deposit accounts		177		169
Gain on sale of loans		1,728		7,881
Mortgage broker fee income		8		18
Other income		1,343		2,776
Total noninterest income		3,256		10,844

Noninterest Expense
Salaries and employee benefits		4,887		8,069
Occupancy and equipment		707		704
Other operating expenses		2,063		3,882
Total noninterest expense		7,657		12,655

Income before income taxes		3,740		6,053

Income tax expense		1,326		2,369
NET INCOME	$	2,414	$	3,684

Earnings per common share:
Basic	$	0.23	$	0.36
Diluted	$	0.23	$	0.35

Average outstanding shares:
Basic		10,391,080		10,322,623
Diluted		10,447,085		10,437,600

See accompanying notes to consolidated financial statements (Unaudited).

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ACCESS NATIONAL CORPORATION

Consolidated Statements of Comprehensive Income

(In Thousands)

(Unaudited)

	Three Months Ended March 31,
	2014			2013
Net income	$	2,414		$	3,684

Other comprehensive income:
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising during period		1,002			(268	)
Tax effect		(351	)		94
Net of tax amount		651			(174	)

Comprehensive income	$	3,065		$	3,510

See accompanying notes to consolidated financial statements (unaudited).

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ACCESS NATIONAL CORPORATION

Consolidated Statements of Changes in Shareholders' Equity

(In Thousands, Except for Share Data)

(Unaudited)

								Accumulated
								Other
			Additional					Compre-
	Common		Paid in		Retained			hensive
	Stock		Capital		Earnings			Income (Loss)			Total
Balance, December 31, 2013	$	8,659	$	17,320	$	67,121		$	(1,966	)	$	91,134
Net income		-		-		2,414			-			2,414
Other comprehensive loss		-		-		-			651			651
Stock option exercises (8,887 shares)		7		70		-			-			77
Issuance of common stock (24,017 shares)		20		365		-			-			385
Cash dividend		-		-		(1,143	)		-			(1,143	)
Stock-based compensation
expense recognized in earnings		-		59		-			-			59

Balance, March 31, 2014	$	8,686	$	17,814	$	68,392		$	(1,315	)	$	93,577

Balance, December 31, 2012	$	8,615	$	17,155	$	65,404		$	93		$	91,267
Net income		-		-		3,684			-			3,684
Other comprehensive income		-		-		-			(174	)		(174	)
Stock option exercises (11,337 shares)		10		70		-			-			80
Excess tax benefits from stock based arrangements		-		6		-			-			6
Cash dividend		-		-		(929	)		-			(929	)
Stock-based compensation
expense recognized in earnings		-		39		-			-			39

Balance, March 31, 2013	$	8,625	$	17,270	$	68,159		$	(81	)	$	93,973

See accompanying notes to consolidated financial statements (Unaudited).

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ACCESS NATIONAL CORPORATION

Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)

	Three Months Ended March 31,
	2014			2013
Cash Flows from Operating Activities
Net income	$	2,414		$	3,684
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Provision for loan losses		-			225
Provision for losses on mortgage loans sold		-			218
Provision for off-balance sheet losses		-			25
Excess tax benefits		-			6
Deferred tax benefit		(3	)		(4	)
Stock-based compensation		59			39
Valuation allowance on derivatives		10			228
Amortization of premiums and discount accretion on securities, net		(203	)		76
Depreciation and amortization		118			120
Changes in assets and liabilities:
Decrease (increase) in valuation of loans held for sale carried at fair value		(246	)		1,757
Decrease in loans held for sale		(2,618	)		40,199
Decrease (increase) in other assets		(1,380	)		(829	)
(Decrease) increase in other liabilities		(53	)		(2,094	)
Net cash provided (used) by operating activities		(1,902	)		43,650
Cash Flows from Investing Activities
Proceeds from maturities and calls of securities available-for-sale		10,053			8,384
Proceeds from maturities and calls of securities held-to-maturity		5,000			15,000
Proceeds from sale of securities available-for-sale		9,379			-
Purchases of securities available-for-sale		(25,467	)		(39,317	)
Purchases of securities held-to-maturity		-			(889	)
Net increase in loans		(29,767	)		(22,583	)
Purchase of bank owned life insurance		(5,000	)		-
Purchases of premises and equipment		(107	)		(154	)
Net cash used by investing activities		(35,909	)		(39,559	)
Cash Flows from Financing Activities
Increase in demand, interest-bearing demand and savings deposits		78,750			19,851
Increase in time deposits		153,702			41,821
Decrease in securities sold under agreement to repurchase		(10,209	)		(5,833	)
Decrease in other short-term borrowings		(145,000	)		(45,000	)
Proceeds from issuance of common stock		462			80
Dividends paid		(1,143	)		(929	)
Net cash provided by financing activities		76,562			9,990

Increase in cash and cash equivalents		38,751			14,081
Cash and Cash Equivalents
Beginning		23,419			37,941
Ending	$	62,170		$	52,022
Supplemental Disclosures of Cash Flow Information
Cash payments for interest	$	785		$	967
Cash payments for income taxes	$	16		$	3,723
Supplemental Disclosures of Noncash Investing Activities
Unrealized (loss) gain on securities available-for-sale	$	(1,315	)	$	(268	)

See accompanying notes to consolidated financial statements (Unaudited).

-6-

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1 – BASIS OF PRESENTATION

Access National Corporation (the “Corporation”) is a bank holding company incorporated under the laws of the Commonwealth of Virginia. The Corporation has two wholly-owned subsidiaries, Access National Bank (the “Bank”), which is an independent commercial bank chartered under federal laws as a national banking association, and Access National Capital Trust II, which was formed for the purpose of issuing redeemable capital securities. The Bank has two active subsidiaries, Access Real Estate LLC (“Access Real Estate”) and Access Capital Management Holding LLC (“ACM”).

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with rules and regulations of the Securities and Exchange Commission (“SEC”). The statements do not include all of the information and footnotes required by GAAP for complete financial statements. All adjustments have been made which, in the opinion of management, are necessary for a fair presentation of the results for the interim periods presented. Such adjustments are all of a normal and recurring nature. All significant inter-company accounts and transactions have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the current period presentation. The results of operations for the three months ended March 31, 2014 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2014. These consolidated financial statements should be read in conjunction with the Corporation’s audited financial statements and the notes thereto as of December 31, 2013, included in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

The Corporation has evaluated subsequent events for potential recognition and/or disclosure in this Quarterly Report on Form 10-Q through the date these consolidated financial statements were issued.

NOTE 2 – STOCK-BASED COMPENSATION PLANS

During the first three months of 2014, the Corporation granted 120,500 stock options to officers, directors, and employees under the 2009 Stock Option Plan (the “Plan”). Options granted under the Plan have an exercise price equal to the fair market value as of the grant date. Options granted vest over various periods ranging from two and one-half years to four years and expire one year after the full vesting date. Stock–based compensation expense recognized in other operating expense during the first three months of 2014 and 2013 was $59 thousand and $39 thousand, respectively. The fair value of options is estimated on the date of grant using a Black Scholes option-pricing model with the assumptions noted below.

The total unrecognized compensation cost related to non-vested share based compensation arrangements granted under the Plan as of March 31, 2014 was $640,503. The cost is expected to be recognized over a weighted average period of 1.52 years.

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NOTE 2 – STOCK-BASED COMPENSATION PLANS (continued)

A summary of stock option activity under the Plan for the three months ended March 31, 2014 and 2013 is presented as follows:

	Three Months Ended
	March 31, 2014

Expected life of options granted, in years		4.82
Risk-free interest rate		0.13	%
Expected volatility of stock		9	%
Annual expected dividend yield		3	%

Fair Value of Granted Options	$	300,152
Non-Vested Options		287,965

						Weighted Avg.
	Number of			Weighted Avg.		Remaining Contractual		Aggregate Intrinsic
	Options			Exercise Price		Term, in years		Value

Outstanding at beginning of year, in years		281,380		$	11.77		3.20	$	951,526
Granted		120,500			15.96		4.82		-
Exercised		(8,887	)		8.72		1.97		65,010
Lapsed or Canceled		(250	)	$	6.68		0.32	$	-

Outstanding at March 31, 2014		392,743		$	13.13		3.55	$	1,210,095

Exercisable at March 31, 2014		104,778		$	10.23		2.25	$	627,082

	Three Months Ended
	March 31, 2013

Expected life of options granted, in years		4.85
Risk-free interest rate		0.36	%
Expected volatility of stock		42	%
Annual expected dividend yield		2	%

Fair value of granted options	$	426,005
Non-vested options		330,139

						Weighted Avg.
	Number of			Weighted Avg.		Remaining Contractual		Aggregate Intrinsic
	Options			Exercise Price		Term, in years		Value

Outstanding at beginning of year, in years		274,800		$	7.72		2.59	$	1,450,016
Granted		137,584			15.38		4.85		-
Exercised		(11,337	)		7.03		1.66		98,557
Lapsed or canceled		(3,500	)	$	7.78		2.40	$	-

Outstanding at March 31, 2013		397,547		$	10.39		3.23	$	2,388,869

Exercisable at March 31, 2013		67,408		$	7.21		1.75	$	619,527

NOTE 3 – SECURITIES

The following table provides the amortized cost and fair value for the categories of available-for-sale securities and held-to-maturity securities at March 31, 2014 and December 31, 2013. Held-to-maturity securities are carried at amortized cost, which reflects historical cost, adjusted for amortization of premiums and accretion of discounts. Available-for-sale securities are carried at estimated fair value with net unrealized gains or losses reported on an after tax basis as a component of accumulated other comprehensive income in shareholders’ equity. The estimated fair value of available-for-sale securities is impacted by interest rates, credit spreads, market volatility, and liquidity.

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NOTE 3 – SECURITIES (continued)

	March 31, 2014
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value
			(In Thousands)
Available-for-sale:
U.S. Government agencies	$	31,382	$	37	$	(1,219	)	$	30,200
Mortgage backed securities		39,952		55		(904	)		39,103
Corporate bonds		8,896		126		(62	)		8,960
Asset backed securities		8,402		51		-			8,453
Municipals - nontaxable		2,486		-		(24	)		2,462
CRA mutual fund		1,500		-		(83	)		1,417
Total	$	92,618	$	269	$	(2,292	)	$	90,595

Held-to-maturity:
U.S. Government agencies	$	9,985	$	-	$	(310	)	$	9,675
Municipals		426		5		-			431
Municipals - non taxable		862		-		(30	)		832
Total	$	11,273	$	5	$	(340	)	$	10,938

	December 31, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)			Estimated Fair Value
			(In Thousands)
Available-for-sale:
U.S. Government agencies	$	35,928	$	-	$	(1,796	)	$	34,132
Mortgage backed securities		28,770		53		(1,171	)		27,652
Corporate bonds		6,018		113		(112	)		6,019
Asset backed securities		6,657		-		(14	)		6,643
Municipals - nontaxable		705		-		(10.00	)		695
CRA mutual fund		1,500		-		(89	)		1,411
Total	$	79,578	$	166	$	(3,192	)	$	76,552

Held-to-maturity:
U.S. Government agencies	$	14,983	$	9	$	(568	)	$	14,424
Municipals		426		-		(48	)		378
Municipals - non taxable		868		-		(11	)		857
Total	$	16,277	$	9	$	(627	)	$	15,659

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NOTE 3 – SECURITIES (continued)

The amortized cost and estimated fair value of securities available-for-sale and held-to-maturity as of March 31, 2014 and December 31, 2013 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because some of the securities may be called or prepaid without any penalties.

	March 31, 2014				December 31, 2013
			Estimated				Estimated
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(In Thousands)
Available-for-sale:
U.S. Government agencies:
Due after one through five years	$	-	$	-	$	4,379	$	4,329
Due after five through ten years		21,013		20,079		23,998		22,532
Due after ten through fifteen years		3,753		3,727		4,121		4,085
Due after fifteen years		6,616		6,394		3,430		3,186
Mortgage backed securities:
Due after five through ten years		8,096		7,975		8,440		8,219
Due after ten through fifteen years		21,020		20,414		17,022		16,212
Due after fifteen years		10,836		10,714		3,308		3,221
Corporate bonds:
Due after one through five years		4,010		4,136		4,010		4,123
Due after five through ten years		4,886		4,824		2,008		1,896
Asset backed securities:
Due after five through ten years		1,000		1,000		1,000		1,000
Due after fifteen years		7,402		7,453		5,657		5,643
Municipals - nontaxable:
Due after five through ten years		1,110		1,103		705		695
Due after ten through fifteen years		1,376		1,359		-		-

CRA Mutual Fund		1,500		1,417		1,500		1,411
Total	$	92,618	$	90,595	$	79,578	$	76,552

Held-to-maturity:
U.S. Government agencies:
Due after one through five years	$	5,000	$	4,997	$	9,999	$	9,974
Due after ten through fifteen years		4,985		4,678		4,984		4,450
Municipals:
Due after five through ten years		426		431		426		415
Municipals non-taxable:
Due after ten through fifteen years		862		832		868		820
Total	$	11,273	$	10,938	$	16,277	$	15,659

The estimated fair value of securities pledged to secure public funds, securities sold under agreements to repurchase, and for other purposes amounted to $85.4 million at March 31, 2014 and $72.3 million at December 31, 2013.

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NOTE 3 – SECURITIES (continued)

Securities available-for-sale and held-to-maturity that have an unrealized loss position at March 31, 2014 and December 31, 2013 are as follows:

	Securities in a loss					Securities in a loss
	Position for less than					Position for 12 Months
	12 Months					or Longer					Total
March 31, 2014	Estimated					Estimated					Estimated
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Investment securities available-for-sale:	(In Thousands)

Mortgage backed securities	$	24,337	$	(490	)	$	11,886	$	(414	)	$	36,223	$	(904	)
U.S. Government agencies		25,043		(1,021	)		3,104		(198	)		28,147		(1,219	)
Municipals - nontaxable		2,462		(24	)		-		-			2,462		(24	)
Corporate bonds		4,824		(62	)		-		-			4,824		(62	)
CRA Mutual fund		-		-			1,417		(83	)		1,417		(83	)
Total	$	56,666	$	(1,597	)	$	16,407	$	(695	)	$	73,073	$	(2,292	)

Investment securities held-to-maturity:

U.S. Government agencies	$	9,675	$	(310	)	$	-	$	-		$	9,675	$	(310	)
Municipals - nontaxable		-		-			832		(30	)		832		(30	)
Total	$	9,675	$	(310	)	$	832	$	(30	)	$	10,507	$	(340	)

	Securities in a loss					Securities in a loss
	Position for less than					Position for 12 Months
	12 Months					or Longer					Total
	Estimated					Estimated					Estimated
December 31, 2013	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Investment securities available-for-sale:	(In Thousands)

Mortgage backed securities	$	19,641	$	(987	)	$	4,945	$	(184	)	$	24,586	$	(1,171	)
U.S. Government agencies		34,132		(1,796	)		-		-			34,132		(1,796	)
Municipals - nontaxable		695		(10	)		-		-			695		(10	)
Corporate bonds		1,895		(112	)		-		-			1,895		(112	)
Asset backed securities		5,643		(14	)		-		-			5,643		(14	)
CRA Mutual fund		-		-			1,411		(89	)		1,411		(89	)
Total	$	62,006	$	(2,919	)	$	6,356	$	(273	)	$	68,362	$	(3,192	)

Investment securities held-to-maturity:

U.S. Government agencies	$	9,416	$	(568	)	$	-	$	-	$	9,416	$	(568	)
Municipals - nontaxable		820		(48	)		-		-		820		(48	)
Municipals		415		(11	)		-		-		415		(11	)
Total	$	10,651	$	(627	)	$	-	$	-	$	10,651	$	(627	)

The Corporation evaluates securities for other than temporary impairment (“OTTI”) on a quarterly basis and more frequently when economic or market conditions warrant such evaluation. Consideration is given to various factors in determining whether the Corporation anticipates a recovery in fair value such as: the length of time and extent to which the fair value has been less than cost, and the financial condition and underlying credit quality of the issuer. When analyzing an issuer’s financial condition, the Corporation may consider whether the securities are issued by the federal government or its agencies, the sector or industry trends affecting the issuer, and whether any recent downgrades by bond rating agencies have occurred.

-11-

NOTE 3 – SECURITIES (continued)

U.S. Government agencies

The Corporation’s unrealized losses on U.S. Government Agency obligations were caused by interest rate fluctuations. On March 31, 2014, two held-to-maturity securities had unrealized losses of $310 thousand while eight available-for-sale securities had unrealized losses of $1.2 million. The severity and duration of these unrealized losses will fluctuate with interest rates in the economy. As the securities are obligations of government agencies, it is the Corporation’s intent to hold these securities until a market price recovery or maturity, and it is more-likely-than not that the Corporation will not be required to sell the securities before their anticipated recovery, the Corporation does not consider these investments other than temporarily impaired.

Corporate bonds

The Corporation’s unrealized losses on corporate obligations were caused by interest rate fluctuations. At March 31, 2014, two securities had unrealized losses of $62 thousand. Based on the credit quality of the issuers, the Corporation’s intent to hold these securities until a market price recovery or maturity, and the determination that it is more-likely-than not that the Corporation will not be required to sell the securities before their anticipated recoveries, the Corporation does not consider these investments other than temporarily impaired.

Mortgage-backed

The Corporation’s unrealized losses on mortgage backed securities were caused by interest rate fluctuations. At March 31, 2014, twelve securities had unrealized losses of $904 thousand. As these securities are Ginnie Mae and government sponsored entity securities backed by the United States Government, the Corporation’s intent to hold these securities until a market price recovery or maturity, and the determination that it is more-likely-than not that the Corporation will not be required to sell these securities before their anticipated recoveries, the Corporation does not consider these investments other than temporarily impaired.

Mutual fund

The Corporation’s unrealized loss on its mutual fund investment was caused by interest rate fluctuations. At March 31, 2014, this one security had an unrealized loss of $83 thousand. Based on the credit quality of the issuer, the Corporation’s intent to hold this security until a market price recovery, and the determination that it is more-likely-than not that the Corporation will not be required to sell this security before its anticipated recovery, the Corporation does not consider this investment other than temporarily impaired.

Municipals

The Corporation’s unrealized losses on its municipal investments were caused by interest rate fluctuations. At March 31, 2014, four available-for-sale municipals had unrealized losses of $24 thousand while one held-to-maturity municipal had an unrealized loss of $30 thousand. Based on the credit quality of the issuers, the Corporation’s intent to hold these securities until a market price recovery, and the determination that it is more-likely-than not that the Corporation will not be required to sell these securities before their anticipated recovery, the Corporation does not consider these investments other than temporarily impaired.

Restricted Stock

The Corporation’s restricted stock consists of Federal Home Loan Bank of Atlanta (“FHLB”) stock and Federal Reserve Bank (“FRB”) stock. The amortized costs of the restricted stock as of March 31, 2014 and December 31, 2013 are as follows:

	March 31, 2014		December 31, 2013
Restricted Stock:	(In Thousands)

Federal Reserve Bank stock	$	999	$	999

FHLB stock		762		7,560
	$	1,761	$	8,559

Securities Sold Under Agreements to Repurchase (Repurchase Agreements)

The Corporation enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. Under these arrangements, the Corporation may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Corporation to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized financing agreements (i.e., secured borrowings) and not as a sale and subsequent repurchase of securities. The obligation to repurchase the securities is reflected as a liability in the Corporation’s consolidated statements of condition, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts. In other words, there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. In addition, as the Corporation does not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements.

The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral would be used to settle the fair value of the repurchase agreement should the Corporation be in default (e.g., fails to make an interest payment to the counterparty). The collateral is held by a third-party financial institution in the Corporation’s custodial account. The Corporation has the right to sell or repledge the investment securities. As of March 31, 2014 and December 31, 2013, the obligations outstanding under these repurchase agreements totaled $17.6 million and $27.9 million, respectively, while the fair value of the securities pledged in connection with these repurchase agreements was $25.5 million and $32.7 million at March 31, 2014 and December 31, 2013, respectively.

-12-

NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES

The following table presents the composition of the loans held for investment portfolio at March 31, 2014 and December 31, 2013:

	March 31, 2014					December 31, 2013
(Dollars In Thousands)	Amount		Percentage of Total			Amount		Percentage of Total

Commercial real estate-owner occupied	$	204,725		28.56	%	$	196,804		28.65	%
Commercial real estate-non owner occupied		93,366		13.02			90,676		13.20
Residential real estate		176,914		24.68			173,639		25.27
Commercial		192,890		26.91			182,220		26.52
Real estate construction		42,766		5.97			38,842		5.65
Consumer		6,196		0.86			4,874		0.71
Total loans	$	716,857		100.00	%	$	687,055		100.00	%
Less allowance for loan losses		13,171					13,136
Net loans	$	703,686				$	673,919

Unearned income and net deferred loan fees and costs totaled $1.5 million at March 31, 2014 and December 31, 2013. Loans pledged to secure borrowings at the FHLB totaled $204.4 million and $226.4 million at March 31, 2014 and December 31, 2013, respectively.

Allowance for Loan Losses

The allowance for loan losses totaled $13.2 million at March 31, 2014 compared to $13.1 million at year end December 31, 2013. The allowance for loan losses was equivalent to 1.84% and 1.91% of total loans held for investment at March 31, 2014 and December 31, 2013, respectively. Adequacy of the allowance is assessed and the allowance is increased by provisions for loan losses charged to expense no less than quarterly. Charge-offs are taken when a loan is identified as uncollectible.

The methodology by which we systematically determine the amount of our allowance is set forth by the Board of Directors in our Loan Policy and implemented by management. The results of the analysis are documented, reviewed, and approved by the Board of Directors no less than quarterly.

-13-

NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES (continued)

The level of the allowance for loan losses is determined by management through an ongoing, detailed analysis of historical loss rates and risk characteristics. During each quarter, management evaluates the collectability of all loans in the portfolio and ensures an accurate risk rating is assigned to each loan. The risk rating scale and definitions commonly adopted by the Federal Banking Agencies is contained within the framework prescribed by the Bank’s Loan Policy. Any loan that is deemed to have potential or well defined weaknesses that may jeopardize collection in full is then analyzed to ascertain its level of weakness. If appropriate, the loan may be charged-off or a specific reserve may be assigned if the loan is deemed to be impaired.

During the risk rating verification process, each loan identified as inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged is considered impaired and is placed on non-accrual status. On these loans, management analyzes the potential impairment of the individual loan and may set aside a specific reserve. Any amounts deemed uncollectible during that analysis are charged-off.

For the remaining loans in each segment, the Bank calculates the probability of loss as a group using the risk rating for each of the following loan types: Commercial Real Estate - Owner Occupied, Commercial Real Estate - Non-Owner Occupied, Residential Real Estate, Commercial, Real Estate Construction, and Consumer. Management calculates the historical loss rate in each group by risk rating using a period of at least five years. This historical loss rate may then be adjusted based on management’s assessment of internal and external environmental factors. While management may consider other factors, the analysis generally includes factors such as unemployment, office vacancy rates, and any concentrations that exist within the portfolio. This adjustment is meant to account for changes between the historical economic environment and current conditions and for changes in the ongoing management of the portfolio which affects the loans’ potential losses.

Once complete, management compares the condition of the portfolio using several different characteristics, as well as its experience, to the experience of other banks in its peer group in order to determine if it is directionally consistent with others’ experience in our area and line of business. Based on that analysis, management aggregates the probabilities of loss of the remaining portfolio based on the specific and general allowances and may provide additional amounts to the allowance for loan losses as needed. Since this process involves estimates, the allowance for loan losses may also contain an amount that is non-material which is not allocated to a specific loan or to a group of loans but is deemed necessary to absorb additional losses in the portfolio.

Management and the Board of Directors subject the reserve adequacy and methodology to a review on a regular basis by internal auditors, external auditors and bank regulators, and such reviews have not resulted in any material adjustment to the allowance.

The following tables provide detailed information about the allowance for loan losses as of and for the periods indicated.

Three months ended March 31, 2014	Commercial real estate - owner occupied			Commercial real estate - non-owner occupied			Residential real estate			Commercial			Real estate construction		Consumer		Total
Allowance for credit losses:	(In Thousands)
Beginning Balance	$	3,763		$	1,734		$	3,320		$	3,484		$	743	$	92	$	13,136
Charge-offs		-			-			-			(16	)		-		-		(16	)
Recoveries		-			-			40			11			-		-		51
Provisions		(2	)		(19	)		(109	)		66			43		21		-
Ending Balance	$	3,761		$	1,715		$	3,251		$	3,545		$	786	$	113	$	13,171

Three months ended March 31, 2013	Commercial real estate - owner occupied		Commercial real estate - non-owner occupied			Residential real estate		Commercial		Real estate construction		Consumer		Total
Allowance for credit losses:	(In Thousands)
Beginning Balance	$	3,701	$	2,173		$	2,924	$	3,028	$	610	$	64	$	12,500
Charge-offs		-		-			-		-		-		-		-
Recoveries		-		56			63		13		-		3		135
Provisions		24		(130	)		33		179		99		20		225
Ending Balance	$	3,725	$	2,099		$	3,020	$	3,220	$	709	$	87	$	12,860

-14-

NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES (continued)

March 31, 2014	Commercial real estate - owner occupied		Commercial real estate - non-owner occupied		Residential real estate		Commercial		Real estate construction		Consumer		Total
Allowance	(In Thousands)
Ending balance:	$	3,761	$	1,715	$	3,251	$	3,545	$	786	$	113	$	13,171
Ending balance: individually evaluated for impairment	$	49	$	-	$	73	$	-	$	-	$	-	$	122
Ending balance: collectively evaluated for impairment	$	3,712	$	1,715	$	3,178	$	3,545	$	786	$	113	$	13,049
Ending balance: loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Loans
Ending balance	$	204,725	$	93,366	$	176,914	$	192,890	$	42,766	$	6,196	$	716,857
Ending balance: individually evaluated for impairment	$	361	$	-	$	756	$	1,806	$	-	$	-	$	2,923
Ending balance: collectively evaluated for impairment	$	204,364	$	93,366	$	176,158	$	191,084	$	42,766	$	6,196	$	713,934
Ending balance: loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	-	$	-	$	-	$	-

December 31, 2013	Commercial real estate - owner occupied		Commercial real estate - non-owner occupied		Residential real estate		Commercial		Real estate construction		Consumer		Total
Allowance	(In Thousands)
Ending balance:	$	3,763	$	1,734	$	3,320	$	3,484	$	743	$	92	$	13,136
Ending balance: individually evaluated for impairment	$	51	$	-	$	88	$	-	$	-	$	-	$	139
Ending balance: collectively evaluated for impairment	$	3,712	$	1,734	$	3,232	$	3,484	$	743	$	92	$	12,997
Ending balance: loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Loans
Ending balance:	$	196,804	$	90,676	$	173,639	$	182,220	$	38,842	$	4,874	$	687,055
Ending balance: individually evaluated for impairment	$	363	$	-	$	871	$	1,724	$	-	$	-	$	2,958
Ending balance: collectively evaluated for impairment	$	196,441	$	90,676	$	172,768	$	180,496	$	38,842	$	4,874	$	684,097
Ending balance: loans acquired with deteriorated credit quality	$	-	$	-	$	-	$	-	$	-	$	-	$	-

Identifying and Classifying Portfolio Risks by Risk Rating

At origination, loans are categorized into risk categories based upon original underwriting. Subsequent to origination, management evaluates the collectability of all loans in the portfolio and assigns a proprietary risk rating. Ratings range from the highest to lowest quality based on factors including measurements of ability to pay, collateral type and value, borrower stability, management experience, and credit enhancements. These ratings are consistent with the bank regulatory rating system.

A loan may have portions of its balance in one rating and other portions in a different rating. The Bank may use these “split ratings” when factors cause loan loss risk to exist for part but not all of the principal balance. Split ratings may also be used where cash collateral or a government agency has provided a guaranty that partially covers a loan.

For clarity of presentation, the Corporation’s loan portfolio is profiled below in accordance with the risk rating framework that has been commonly adopted by the federal banking agencies. The definitions of the various risk rating categories are as follows:

Pass - The condition of the borrower and the performance of the loan is satisfactory or better.

Special mention - A special mention asset has one or more potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date.

-15-

NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES (continued)

Substandard - A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

Doubtful - An asset classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss - Assets classified loss are considered uncollectible and their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, and a partial recovery may be effected in the future.

The Bank did not have any loans classified as loss at March 31, 2014 or December 31, 2013. It is the Bank’s policy to charge-off any loan once the risk rating is classified as loss.

The profile of the loan portfolio, as indicated by risk rating, as of March 31, 2014 and December 31, 2013 is shown below.

	Commercial real estate - owner occupied						Commercial real estate - non-owner occupied						Residential real estate						Commercial						Real estate construction						Consumer				Totals
	3/31/14			12/31/13			3/31/14			12/31/13			3/31/14			12/31/13			3/31/14			12/31/13			3/31/14			12/31/13			3/31/14		12/31/13		3/31/14			12/31/13
	(In Thousands)
Pass	$	189,195		$	180,637		$	86,497		$	83,723		$	171,919		$	168,493		$	174,996		$	171,353		$	42,965		$	39,013		$	6,196	$	4,874	$	671,768		$	648,093
Special mention		3,573			5,125			1,905			1,919			3,509			3,530			11,343			4,034			-			-			-		-		20,330			14,608
Substandard		12,400			11,476			5,227			5,302			1,696			1,834			6,983			7,216			-			-			-		-		26,306			25,828
Doubtful		-			-			-			-			-			-			-			-			-			-			-		-		-			-
Loss		-			-			-			-			-			-			-			-			-			-			-		-		-			-
Unearned income		(443	)		(434	)		(263	)		(268	)		(210	)		(218	)		(432	)		(383	)		(199	)		(171	)		-		-		(1,547	)		(1,474	)
Total	$	204,725		$	196,804		$	93,366		$	90,676		$	176,914		$	173,639		$	192,890		$	182,220		$	42,766		$	38,842		$	6,196	$	4,874	$	716,857		$	687,055

-16-

NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES (continued)

Loans listed as non-performing are also placed on non-accrual status. The accrual of interest is discontinued at the time a loan is 90 days delinquent or when the credit deteriorates and there is doubt that the credit will be paid as agreed, unless the credit is well-secured and in process of collection. Once the loan is on non-accrual status, all accrued but unpaid interest is also charged-off, and all payments are used to reduce the principal balance. Once the principal balance is repaid in full, additional payments are taken into income. A loan may be returned to accrual status if the borrower shows renewed willingness and ability to repay under the term of the loan agreement. The risk profile based upon payment activity is shown below.

	Commercial real estate - owner occupied				Commercial real estate - non-owner occupied				Residential real estate				Commercial				Real estate construction				Consumer				Totals
	3/31/14		12/31/13		3/31/14		12/31/13		3/31/14		12/31/13		3/31/14		12/31/13		3/31/14		12/31/13		3/31/14		12/31/13		3/31/14		12/31/13
	(In Thousands)
Performing	$	204,725	$	196,804	$	93,366	$	90,676	$	176,158	$	172,768	$	191,136	$	180,556	$	42,766	$	38,842	$	6,196	$	4,874	$	714,347	$	684,520
Non-performing		-		-		-		-		756		871		1,754		1,664		-		-		-		-		2,510		2,535
Total	$	204,725	$	196,804	$	93,366	$	90,676	$	176,914	$	173,639	$	192,890	$	182,220	$	42,766	$	38,842	$	6,196	$	4,874	$	716,857	$	687,055

Loans are considered past due if a contractual payment is not made by the calendar day after the payment is due. However, for reporting purposes loans past due 1 to 29 days are excluded from loans past due and are included in the total for current loans in the table below. The delinquency status of the loans in the portfolio is shown below as of March 31, 2014 and December 31, 2013. Loans that were on non-accrual status are not included in any past due amounts.

	Age Analysis of Past Due Loans

	March 31, 2014
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Non-accrual Loans		Current Loans		Total Loans
	(In Thousands)
Commercial real estate - owner occupied	$	-	$	-	$	-	$	-	$	-	$	204,725	$	204,725
Commercial real estate - non-owner occupied		-		-		-		-		-		93,366		93,366
Residential real estate		-		-		-		-		756		176,158		176,914
Commercial		-		-		-		-		1,754		191,136		192,890
Real estate construction		-		-		-		-		-		42,766		42,766
Consumer		-		-		-		-		-		6,196		6,196
Total	$	-	$	-	$	-	$	-	$	2,510	$	714,347	$	716,857

	December 31, 2013
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Non-accrual Loans		Current Loans		Total Loans
	(In Thousands)
Commercial real estate - owner occupied	$	-	$	-	$	-	$	-	$	-	$	196,804	$	196,804
Commercial real estate - non-owner occupied		-		-		-		-		-		90,676		90,676
Residential real estate		-		-		-		-		871		172,768		173,639
Commercial		-		-		-		-		1,664		180,556		182,220
Real estate construction		-		-		-		-		-		38,842		38,842
Consumer		-		-		-		-		-		4,874		4,874
Total	$	-	$	-	$	-	$	-	$	2,535	$	684,520	$	687,055

-17-

NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES (continued)

Troubled Debt Restructurings

A troubled debt restructuring ("TDR") is a formal restructure of a loan when the Bank, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to a borrower. The Bank classifies these transactions as a TDR if the transaction meets the following conditions: an existing credit agreement must be formally renewed, extended and/or modified; the borrower must be experiencing financial difficulty; and the Bank has granted a concession that it would not otherwise consider.

Once identified as a TDR, a loan is considered to be impaired, and an impairment analysis is performed for the loan individually, rather than under a general loss allowance based on the loan type and risk rating. Any resulting shortfall is charged-off. This method is used consistently for all segments of the portfolio.

Normally, loans identified as TDRs would be placed on non-accrual status and considered non-performing until sufficient history of timely collection or payment has occurred that allows them to return to performing status, generally 6 months.

No loans were modified in connection with a troubled debt restructuring during the three month period ended March 31, 2014.

One residential real estate loan totaling $216 thousand at the time of modification was modified in connection with a troubled debt restructuring during the three month period ended March 31, 2013. The modification granted the borrower reduced payments for a period of one year. There were no material financial effects as a direct result of this modification.

Impaired Loans

A loan is classified as impaired when it is deemed probable by management’s analysis that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement, or the recorded investment in the impaired loan is greater than the present value of expected future cash flows, discounted at the loan's effective interest rate. In the case of an impaired loan, management conducts an analysis which identifies if a quantifiable potential loss exists, and takes the necessary steps to record that loss when it has been identified as uncollectible.

As the ultimate collectability of the total principal of an impaired loan is in doubt, the loan is placed on nonaccrual status with all payment applied to principal under the cost-recovery method. As such, the Bank did not recognize any interest income on its impaired loans for the three month periods ended March 31, 2014 and 2013.

-18-

NOTE 4 – LOANS AND THE ALLOWANCE FOR LOAN LOSSES (continued)

The table below shows the results of management’s analysis of impaired loans as of March 31, 2014 and December 31, 2013.

	Impaired Loans

	March 31, 2014						December 31, 2013
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
With no specific related allowance recorded:	(In Thousands)
Commercial real estate - owner occupied	$	-	$	-	$	-	$	-	$	-	$	-
Commercial real estate - non-owner occupied		-		-		-		-		-		-
Residential real estate		327		379		-		332		382		-
Commercial		1,806		2,296		-		1,724		2,175		-
Real estate construction		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
With a specific related allowance recorded:
Commercial real estate - owner occupied		361		361		49		363		363		51
Commercial real estate - non-owner occupied		-		-		-		-		-		-
Residential real estate		429		513		73		539		662		88
Commercial		-		-		-		-		-		-
Real estate construction		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Total:
Commercial real estate - owner occupied		361		361		49		363		363		51
Commercial real estate - non-owner occupied		-		-		-		-		-		-
Residential real estate		756		892		73		871		1,044		88
Commercial		1,806		2,296		-		1,724		2,175		-
Real estate construction		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
	$	2,923	$	3,549	$	122	$	2,958	$	3,582	$	139

The table below shows the average recorded investment in impaired loans for the periods presented.

	Three Months Ended
	March 31, 2014		March 31, 2013
	Average Recorded Investment		Average Recorded Investment

Commercial real estate - owner occupied	$	362	$	-
Commercial real estate - non-owner occupied		-		-
Residential real estate		850		709
Commercial		2,036		1,053
Real estate construction		-		-
Consumer		-		-
Total	$	3,248	$	1,762

NOTE 5 – SEGMENT REPORTING

The Corporation has three reportable segments: traditional commercial banking, mortgage banking, and wealth management. Revenues from commercial banking operations consist primarily of interest earned on loans and securities and fees from deposit services. Mortgage banking operating revenues consist principally of interest earned on mortgage loans held for sale, gains on sales of loans in the secondary mortgage market, and loan origination fee income. Wealth management operating revenues consist principally of advisory fees related to its wealth management services.

-19-

NOTE 5 – SEGMENT REPORTING (continued)

The commercial banking segment provides the mortgage banking segment with the short-term funds needed to originate mortgage loans through a warehouse line of credit and charges the mortgage banking segment interest based on the prime rate. These transactions are eliminated in the consolidation process.

The “Other” column in the following table includes the operations of the Corporation and Access Real Estate. The primary source of income for the Corporation is derived from dividends from the Bank and its primary expenses relate to costs incurred by the Corporation in connection with its annual audits and directors fees. The primary source of income for Access Real Estate is derived from rents received from the Bank.

The following table presents segment information for the three months ended March 31, 2014 and 2013:

	Commercial		Mortgage		Wealth									Consolidated
March 31, 2014	Banking		Banking		Management			Other			Eliminations			Totals
	(In Thousands)
Revenues:
Interest income	$	8,848	$	202	$	-		$	3		$	(108	)	$	8,945
Gain on sale of loans		-		1,728		-			-			-			1,728
Other revenues		483		549		509			287			(300	)		1,528
Total revenues		9,331		2,479		509			290			(408	)		12,201

Expenses:
Interest expense		802		10		5			95			(108	)		804
Salaries and employee benefits		2,800		1,800		287			-			-			4,887
Other expenses		1,548		666		225			631			(300	)		2,770
Total operating expenses		5,150		2,476		517			726			(408	)		8,461

Income (loss) before income taxes	$	4,181	$	3	$	(8	)	$	(436	)	$	-		$	3,740

Total assets	$	893,580	$	33,461	$	1,895		$	14,354		$	(16,490	)	$	926,800

	Commercial		Mortgage		Wealth									Consolidated
March 31, 2013	Banking		Banking		Management			Other			Eliminations			Totals
	(In Thousands)
Revenues:
Interest income	$	8,983	$	614	$	-		$	3		$	(444	)	$	9,156
Gain on sale of loans		-		7,881		-			-			-			7,881
Other revenues		634		2,191		220			323			(405	)		2,963
Total revenues		9,617		10,686		220			326			(849	)		20,000

Expenses:
Interest expense		1,017		343		-			151			(444	)		1,067
Salaries and employee benefits		2,890		4,944		235			-			-			8,069
Other expenses		1,912		2,591		171			542			(405	)		4,811
Total operating expenses		5,819		7,878		406			693			(849	)		13,947

Income (loss) before income taxes	$	3,798	$	2,808	$	(186	)	$	(367	)	$	-		$	6,053

Total assets	$	802,411	$	74,974	$	1,333		$	19,103		$	(21,460	)	$	876,361

-20-

NOTE 6 – EARNINGS PER SHARE

The following table shows the calculation of both basic and diluted earnings per share (“EPS”) for the three months ended March 31, 2014 and 2013, respectively. The numerator of both the basic and diluted EPS is equivalent to net income. The weighted average number of shares outstanding used as the denominator for diluted EPS is increased over the denominator used for basic EPS by the effect of potentially dilutive common stock options utilizing the treasury stock method.

	Three Months		Three Months
	Ended		Ended
	March 31, 2014		March 31, 2013
	(In Thousands, Except for Share and Per Share Data)

BASIC EARNINGS PER SHARE:
Net income	$	2,414	$	3,684
Weighted average shares outstanding		10,391,080		10,322,623

Basic earnings per share	$	0.23	$	0.36

DILUTED EARNINGS PER SHARE:
Net income	$	2,414	$	3,684
Weighted average shares outstanding		10,391,080		10,322,623
Dilutive stock options		56,005		114,977
Weighted average diluted shares outstanding		10,447,085		10,437,600

Diluted earnings per share	$	0.23	$	0.35

NOTE 7 - DERIVATIVES

As part of its mortgage banking activities, the Bank enters into interest rate lock commitments, which are commitments to originate loans where the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Bank then locks in the loan and interest rate with an investor and commits to deliver the loan if settlement occurs (“best efforts”) or commits to deliver the locked loan in a binding (“mandatory”) delivery program with an investor. Certain loans under interest rate lock commitments are covered under forward sales contracts of mortgage backed securities (“MBS”). Forward sales contracts of MBS are recorded at fair value with changes in fair value recorded in noninterest income. Interest rate lock commitments and commitments to deliver loans to investors are considered derivatives. The market value of interest rate lock commitments and best efforts contracts are not readily ascertainable with precision because they are not actively traded in stand-alone markets. The Bank determines the fair value of interest rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates, taking into consideration the probability that the interest rate lock commitments will close or will be funded.

Certain additional risks arise from these forward delivery contracts in that the counterparties to the contracts may not be able to meet the terms of the contracts. The Bank does not expect any counterparty to any MBS to fail to meet its obligation. Additional risks inherent in mandatory delivery programs include the risk that, if the Bank does not close the loans subject to interest rate risk lock commitments, it will still be obligated to deliver MBS to the counterparty under the forward sales agreement. Should this be required, the Bank could incur significant costs in acquiring replacement loans or MBS and such costs could have an adverse effect on mortgage banking operations.

Since the Bank’s derivative instruments are not designated as hedging instruments, the fair value of the derivatives are recorded as a freestanding asset or liability with the change in value being recognized in current earnings during the period of change. The Bank has not elected to apply hedge accounting to its derivative instruments as provided in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 815, Derivatives and Hedging.

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NOTE 7 – DERIVATIVES (continued)

At March 31, 2014 and December 31, 2013, the Bank had derivative financial instruments with a notional value of $16.3 million and $16.0 million, respectively, related to its forward contracts. Derivative financial instruments related to over the counter written options totaled $20.5 million and $22.4 million at March 31, 2014 and December 31, 2013, respectively. The net fair value of these derivative instruments at March 31, 2014 and December 31, 2013 was $85 thousand and $95 thousand, respectively, and was included in other assets and other liabilities.

Included in other noninterest income for the three months ended March 31, 2014 and March 31, 2013 was a net loss of $25 thousand and a net loss of $315 thousand, respectively, relating to derivative instruments. The amount included in other noninterest income for the three months ended March 31, 2014 and March 31, 2013 pertaining to its hedging activities was a net realized loss of $343 thousand and a net realized gain of $1.2 million, respectively.

NOTE 8 – RECENT ACCOUNTING PRONOUNCEMENTS

In January 2014, the FASB issued ASU 2014-01, “Investments – Equity Method and Joint Ventures: Accounting for Investments in Qualified Affordable Housing Projects”. This ASU applies to all reporting entities that invest in qualified affordable housing projects through limited liability entities that are flow through entities for tax purposes. The amendments in the ASU eliminate the effective yield election and permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Those not electing the proportional amortization method would account for the investment using the equity method or cost method. The amendments in this ASU are effective for public business entities for annual periods beginning after December 15, 2014. The adoption of this guidance should not have a material effect on the Corporation’s financial condition or results of operations.

In January 2014, the FASB issued ASU 2014-04, “Receivables – Troubled Debt Restructurings by Creditors”. ASU 2014-04 clarifies when a creditor should be considered to have received physical possession of residential real estate property during a foreclosure. ASU 2014-04 establishes a loan receivable should be derecognized and the real estate property recognized upon the creditor obtaining legal title to the residential real estate property upon completion of foreclosure or the borrower conveying all interest in the residential real estate property to the creditor to satisfy the loan. The provisions of ASU 2014-04 are effective for annual periods beginning after December 15, 2014. The adoption of this guidance should not have a material effect on the Corporation’s financial condition or results of operations.

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NOTE 9 - FAIR VALUE

Fair value pursuant to FASB ASC 820-10, Fair Value Measurements and Disclosures, is the exchange price, in an orderly transaction that is not a forced liquidation or distressed sale, between market participants to sell an asset or transfer a liability in the market in which the reporting entity would transact for the asset or liability, that is, the principal or most advantageous market for the asset or liability. The transaction to sell the asset or transfer the liability is a hypothetical transaction at the measurement date, considered from the perspective of a market participant that holds the asset or liability. FASB ASC 820-10 provides a consistent definition of fair value which focuses on exit price and prioritizes, within a measurement of fair value, the use of market-based inputs over entity specific inputs. In addition, FASB ASC 820-10 provides a framework for measuring fair value and establishes a three-level hierarchy for fair value measurements based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The standard describes three levels of inputs that may be used to measure fair values:

Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 - Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3 - Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Corporation used the following methods to determine the fair value of each type of financial instrument:

Securities: Fair values for securities available-for-sale are obtained from an independent pricing service. The prices are not adjusted. The independent pricing service uses industry-standard models to price U.S. Government agency obligations and mortgage backed securities that consider various assumptions, including time value, yield curves, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Securities of obligations of state and political subdivisions are valued using a type of matrix, or grid, pricing in which securities are benchmarked against the treasury rate based on credit rating. Substantially all assumptions used by the independent pricing service are observable in the marketplace, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace (Level 2).

Residential loans held for sale: The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2).

-23-

NOTE 9 - FAIR VALUE (continued)

Derivative financial instruments: Derivative instruments are used to hedge residential mortgage loans held for sale and the related interest-rate lock commitments and include forward commitments to sell mortgage loans and mortgage-backed securities as further described in Note 7. The fair values of derivative financial instruments are based on derivative market data inputs as of the valuation date and the underlying value of mortgage loans for interest rate lock commitments (Level 3).

Impaired loans: The fair values of impaired loans are measured on a nonrecurring basis as the fair value of the loan’s collateral for collateral-dependent loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The use of discounted cash flow models and management’s best judgment are significant inputs in arriving at the fair value measure of the underlying collateral (Level 3).

Other real estate owned: The fair value of other real estate owned, which consists of real estate that has been foreclosed, is recorded at the lower of fair value less selling expenses or the book balance prior to foreclosure. Write downs are provided for subsequent declines in value and are recorded in other operating expenses (Level 2).

Assets and liabilities measured at fair value under FASB ASC 820-10 on a recurring and non-recurring basis, including financial assets and liabilities for which the Corporation has elected the fair value option as of March 31, 2014 and December 31, 2013, are summarized below:

	Fair Value Measurement
	at March 31, 2014 Using
Description	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets-Recurring	(In Thousands)
Available-for-sale investment securities
US Government agency	$	30,200	$	-	$	30,200	$	-
Mortgage backed		39,103		-		39,103		-
Corporate bonds		8,960		-		8,960		-
Asset backed securities		8,453		-		8,453		-
Municipals - nontaxable		2,462		-		2,462		-
CRA Mutual fund		1,417		-		1,417		-
Total available-for-sale investment securities		90,595		-		90,595		-

Residential loans held for sale		27,217		-		27,217		-
Derivative assets		192		-		-		192
Total Financial Assets-Recurring	$	118,004	$	-	$	117,812	$	192

Financial Liabilities-Recurring
Derivative liabilities	$	107	$	-	$	-	$	107
Total Financial Liabilities-Recurring	$	107	$	-	$	-	$	107

Financial Assets-Non-Recurring
Impaired loans ⁽¹⁾	$	2,923	$	-	$	-	$	2,923
Total Financial Assets-Non-Recurring	$	2,923	$	-	$	-	$	2,923

⁽¹⁾ Represents the carrying value of loans for which adjustments are based on the appraised value of the collateral.

-24-

NOTE 9 - FAIR VALUE (continued)

	Fair Value Measurement
	at December 31, 2013 Using
Description	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial Assets-Recurring	(In Thousands)
Available-for-sale investment securities
US Government agency	$	34,132	$	-	$	34,132	$	-
Mortgage backed		27,652		-		27,652		-
Corporate bonds		6,019		-		6,019		-
Asset backed securities		6,643		-		6,643		-
Taxable municipals		695		-		695		-
CRA Mutual fund		1,411		-		1,411		-
Total available-for-sale investment securities		76,552		-		76,552		-

Residential loans held for sale		24,353		-		24,353		-
Derivative assets		219		-		-		219
Total Financial Assets-Recurring	$	101,124	$	-	$	100,905	$	219

Financial Liabilities-Recurring
Derivative liabilities	$	124	$	-	$	-	$	124
Total Financial Liabilities-Recurring	$	124	$	-	$	-	$	124

Financial Assets-Non-Recurring
Impaired loans ⁽¹⁾	$	2,958	$	-	$	-	$	2,958
Total Financial Assets-Non-Recurring	$	2,958	$	-	$	-	$	2,958

⁽¹⁾ Represents the carrying value of loans for which adjustments are based on the appraised value of the collateral.

It is the Corporation’s policy to recognize transfers between levels as of the actual date of the event or change in circumstances that caused the transfer. There were no transfers between Level 1 and Level 2 during the three month periods ended March 31, 2014 and 2013.

The changes in Level 3 net derivatives measured at fair value on a recurring basis are summarized as follows:

	Three Months Ended March 31,
	2014			2013
	(In Thousands)
Balance, beginning of period	$	95		$	465
Realized and unrealized losses included in earnings		(10	)		(228	)
Unrealized gains (losses) included in other comprehensive income		-			-
Purchases, settlements, paydowns, and maturities		-			-
Transfer into Level 3		-			-
Balance, end of period	$	85		$	237

-25-

NOTE 9 - FAIR VALUE (Continued)

The following table presents qualitative information about level 3 fair value measurements for financial instruments measured at fair value at March 31, 2014:

Description

Fair Value Estimate

Valuation Techniques

Unobservable Input

Range (Weighted Average)

(In Thousands)

Financial Assets - Recurring

Derivative assets

192

Market pricing (3)

Estimated pullthrough

75% - 90%

Derivative liabilities

107

Market pricing (3)

Estimated pullthrough

75% - 90%

Financial Assets - Non-recurring

Impaired loans - Real estate secured

1,117

Appraisal of collateral (1)

Liquidation expenses (2)

20% - 30%

Impaired loans - Non-real estate secured

1,806

Cash flow basis

Liquidation expenses (2)

10% - 20%

(1)	Fair value is generally determined through independent appraisals of the underlying collateral on real estate secured loans, which generally include various level 3 inputs which are not identifiable.

(2)	Valuations of impaired loans may be adjusted by management for qualitative factors such as liquidation expenses. The range and weighted average of liquidation expense adjustments are presented as a percent of the appraisal.

(3)	Market pricing on derivative assets and liabilities is adjusted by management for the anticipated percent of derivative assets and liabilities that will create a realized gain or loss. The range and weighted average of estimated pull-through is presented as a percent of the volume.

Financial instruments recorded using FASB ASC 825-10

Under FASB ASC 825-10, Financial Instruments, the Corporation may elect to report most financial instruments and certain other items at fair value on an instrument-by-instrument basis with changes in fair value reported in net income. After the initial adoption the election is made at the acquisition of an eligible financial asset, financial liability or firm commitment or when certain specified reconsideration events occur. The fair value election, with respect to an item, may not be revoked once an election is made.

The following table reflects the differences between the fair value carrying amount of residential mortgage loans held for sale at March 31, 2014, measured at fair value under FASB ASC 825-10, and the aggregate unpaid principal amount the Corporation is contractually entitled to receive at maturity.

(In Thousands)		Aggregate Fair Value				Difference				Contractual Principal
Residential mortgage loans held for sale		$	27,217			$	950			$	26,267

The Corporation has elected to account for residential loans held for sale at fair value to eliminate the mismatch that would occur by recording changes in market value on derivative instruments used to hedge loans held for sale while carrying the loans at the lower of cost or market.

The following methods and assumptions not previously presented were used in estimating the fair value of financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis:

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NOTE 9 - FAIR VALUE (Continued)

Cash and Short-Term Investments

For those short-term instruments, the carrying amount is a reasonable estimate of fair value. As such they are classified as Level 1 for noninterest-bearing deposits and Level 2 for interest-bearing deposits due from banks or federal funds sold.

Restricted Stock

It is not practical to determine the fair value of restricted stock due to the restrictions placed on its transferability.

Loans, Net of Allowance

For certain homogeneous categories of loans, such as some residential mortgages, and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics resulting in a Level 3 classification. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities resulting in a Level 3 classification.

Bank-Owned Life Insurance

The carrying amount of bank-owned life insurance ("BOLI") purchased on a group of officers is a reasonable estimate of fair value resulting in a Level 2 classification.

Accrued Interest

The carrying amounts of accrued interest approximate fair value resulting in a Level 2 or Level 3 classification depending upon the level of the asset or liability, with which, the accrual is associated.

Deposits and Borrowings

The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date resulting in a Level 1 classification. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities also resulting in a Level 1 classification. The fair value of all other deposits and borrowings is determined using the discounted cash flow method thereby resulting in a Level 2 classification. The discount rate was equal to the rate currently offered on similar products.

Subordinated debentures

Due to the pooled nature of these instruments, which are not actively traded, estimated fair value is based on broker prices from recent similar sales resulting in a Level 2 classification.

Off-Balance-Sheet Financial Instruments

The fair value of commitments to extend credit is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed interest rates. The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.

At March 31, 2014 and December 31, 2013, the majority of off-balance-sheet items are variable rate instruments or convert to variable rate instruments if drawn upon. Therefore, the fair value of these items is largely based on fees, which are nominal and immaterial.

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NOTE 9 - FAIR VALUE (Continued)

The carrying amounts and estimated fair values of financial instruments at March 31, 2014 and December 31, 2013 were as follows:

	March 31, 2014				December 31, 2013
			Estimated				Estimated
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:	(In Thousands)
Cash and short-term investments	$	62,170	$	62,170	$	23,419	$	23,419
Securities available-for-sale		90,595		90,595		76,552		76,552
Securities held-to-maturity		11,273		10,938		16,277		15,659
Restricted stock		1,761		1,761		8,559		8,559
Loans, net of allowance		730,903		746,120		698,272		696,298
Derivatives		192		192		219		219
Total financial assets	$	896,894	$	911,776	$	823,298	$	820,706

Financial liabilities:
Deposits	$	805,424	$	799,757	$	572,972	$	552,735
Short-term borrowings		17,646		17,648		172,855		172,787
Derivatives		107		107		124		124
Total financial liabilities	$	823,177	$	817,512	$	745,951	$	725,646

NOTE 10 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK

The Corporation is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral, if any, deemed necessary by the Corporation upon extension of credit is based on management’s credit evaluation of the counterparty. Collateral normally consists of real property, liquid assets or business assets. The Corporation had $17.0 million and $5.1 million in outstanding commitments at March 31, 2014 and December 31, 2013, respectively.

The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. The Corporation had $224.5 million and $227.3 million in unfunded lines of credit whose contract amounts represent credit risk at March 31, 2014 and December 31, 2013, respectively.

-28-

NOTE 10 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK (continued)

Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation generally holds collateral supporting those commitments if deemed necessary. The Corporation had standby letters of credit outstanding in the amount $4.1 million at March 31, 2014 and December 31, 2013.

The Bank maintains a reserve for potential off-balance sheet credit losses that is included in other liabilities on the balance sheet. At March 31, 2014 and December 31, 2013 the balance in this account totaled $636 thousand.

The mortgage division of the Bank makes representations and warranties that loans sold to investors meet its program’s guidelines and that the information provided by the borrowers is accurate and complete. 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. The mortgage division maintains a reserve in other liabilities for potential losses on mortgage loans sold. At March 31, 2014 and December 31, 2013, the balance in this reserve totaled $4.6 million.

The following table shows the changes to the allowance for losses on mortgage loans sold.

	Three Months ended March 31,					Year ended
	2014		2013			December 31, 2013
	(In Thousands)
Allowance for losses on mortgage loans sold -beginning of period	$	4,645	$	4,376		$	4,376

Provision charged to operating expense		-		218			388
Recoveries		-		-			-
Charge-offs		-		(119	)		(119	)
Allowance for losses on mortgage loans sold - end of period	$	4,645	$	4,475		$	4,645

NOTE 11 – BANK-OWNED LIFE INSURANCE POLICIES

The Bank entered into contracts to purchase $5 million in bank-owned life insurance policies (“BOLI”) during the first quarter of 2014. After March 31, 2014 but prior to the issuance of these financial statements, the Bank purchased an additional $10 million in BOLI. There are no post-retirement benefits associated with the BOLI policies owned by the Bank.

-29-

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with Access National Corporation’s (“Corporation”, “we”, “us”) consolidated financial statements, and notes thereto, included in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013. Operating results for the three months ended March 31, 2014 are not necessarily indicative of the results for the year ending December 31, 2014 or any future period.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q contains 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. Forward-looking statements in this Quarterly Report on Form 10-Q include, without limitation, statements regarding the Corporation’s beliefs regarding the future strength of the economy and labor markets and anticipated interest rates and the effect of such rates on the Corporation’s performance and net interest margin and the volume of future mortgage refinancing, as well as the Corporation’s expectations concerning operating losses and the profitability of its mortgage segment after the closure of the Mortgage Production Branch. 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; continued challenging economic conditions or deterioration in general business and economic conditions and in the financial markets; the impact of any laws, regulations, policies or programs implemented pursuant to the Dodd-Frank Act, the Emergency Economic Stabilization Act of 2008, as amended by the American Recovery and Reinvestment Act of 2009; branch expansion plans; interest rates; monetary and fiscal policies of the U.S. Government, including policies of the Office of the Comptroller of the Currency (“Comptroller”), the U.S. Department of the Treasury and the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of Richmond; the economy of Northern Virginia, including governmental spending and commercial and residential real estate markets; the quality or composition of the loan or investment portfolios; demand for loan products; deposit flows; competition; the liquidity of the Corporation; 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” of the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

CRITICAL ACCOUNTING POLICIES

The Corporation’s consolidated financial statements have been prepared in accordance with GAAP. In preparing the Corporation’s financial statements management makes estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses. Management believes that the most significant subjective judgments that it makes include the following:

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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) FASB ASC 450-10, which requires that losses be accrued when they are probable of occurring and can be estimated, and (ii) FASB ASC 310-10, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. An allowance for loan losses is established through a provision for loan losses based upon industry standards, known risk characteristics, management’s evaluation of the risk inherent in the loan portfolio, and changes in the nature and volume of loan activity. Such evaluation considers, among other factors, the estimated market value of the underlying collateral and current economic conditions. For further information about our practices with respect to allowance for loan losses, please see Note 4 to the consolidated financial statements.

Other Than Temporary Impairment of Securities

Securities in the Corporation’s securities portfolio are classified as either available-for-sale or held-to-maturity. At March 31, 2014, there were no non-agency mortgage backed securities or trust preferred securities in the portfolio. The estimated fair value of the portfolio fluctuates due to changes in market interest rates and other factors. Changes in estimated fair value are recorded in 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 securities portfolio on a quarterly basis to determine the collectability of amounts due per the contractual terms of each security. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to net income is recognized. At March 31, 2014, there were no securities 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. The Corporation’s 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, please see Note 9 to the consolidated financial statements.

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FINANCIAL CONDITION

Executive Summary

At March 31, 2014, the Corporation’s assets totaled $926.8 million, compared to $847.2 million at December 31, 2013, an increase of $79.6 million. The increase in assets was primarily due to a growth in loans held for investment of $29.8 million, an increase in interest-bearing balances of $36.1 million, an increase in investment securities of $9.0 million, and an increase in other assets of $6.1 million due in part to a $5.0 million purchase of bank-owned life insurance (BOLI). The increase in loans held for investment is primarily attributable to a $10.7 million increase in commercial loans, a $3.3 million increase in residential real estate loans, a $7.9 million increase in commercial real estate – owner occupied, and a $3.9 million increase in real estate construction loans. At March 31, 2014, loans secured by real estate collateral comprised 72.3% of our total loan portfolio, with loans secured by commercial real estate contributing 41.6% of our total loan portfolio, loans secured by residential real estate contributing 24.7% and real estate construction loans contributing 6.0%. Loans held for sale totaled $27.2 million at March 31, 2014, compared to $24.4 million at December 31, 2013. Loans held for sale fluctuates with the volume of loans originated during any given month and the length of time the loans are held prior to selling them in the secondary market. Deposits totaled $805.4 million at March 31, 2014, compared to $573.0 million at December 31, 2013, an increase of $232.4 million. Noninterest-bearing deposits increased $39.2 million from $189.9 million at December 31, 2013 to $229.1 million at March 31, 2014. Savings and interest-bearing deposits increased to $239.8 million at March 31, 2014 from $200.2 million at December 31, 2013, an increase of $39.6 million. The largest increase in our deposits came in the time deposits, growing from $182.9 million at December 31, 2013 to $336.6 million at March 31, 2014. This $153.7 million increase was due in part to management’s decision to utilize the Certificate of Deposit Account Registry Service (CDARS) to fund a planned increase in our investment portfolio as well as pay down the Federal Home Loan Bank (FHLB) borrowings of $145.0 million at December 31, 2013.

Net income for the first quarter of 2014 totaled $2.4 million compared to $3.7 million for the same period in 2013. Earnings per diluted share were $0.23 for the first quarter of 2014, compared to $0.35 per diluted share in the same period of 2013. While the banking segment continued to show positive growth in net interest income when comparing the periods ended March 31, 2014 to March 31, 2013, the mortgage segment reflected declines in the mortgage loan origination volume for the same comparison period of $147.1 million. This decreased volume, prompted in part by a rise in interest rates in the second quarter of 2013, led to the $6.2 million decrease in the mortgage segment’s gain on sale of loans when comparing the three month period ending March 2014 to the same period ending March 2013 and lead to the mortgage segment reporting near break-even performance for the first quarter 2014.

Non-performing assets (“NPA”) totaled $2.5 million, or 0.27%, of total assets at March 31, 2014, down from 0.30%, of total assets at December 31, 2013. NPAs are comprised solely of non-accrual loans at March 31, 2014.

While the U.S. Bureau of Labor Statistics reported a decrease in labor productivity of 1.7% in the nonfarm business sector for the first quarter of 2014, productivity in this same sector increased when compared to the first quarter of 2013 by 1.4%. The unemployment rate for Fairfax County, Virginia rose from its December 2013 low to 4.1% in March 2014 still remaining below the 5.0% for the state of Virginia at the end of March 2014 and 6.7% for the nation at the end of March 2014. Information reviewed at the Federal Open Market Committee’s (FOMC) April 2014 meeting suggested growth in economic activity picked up recently after a sharp slowing during the winter months due in part to adverse weather conditions. Labor market indicators showed further improvement; however, concern over the still elevated unemployment rate for the nation was noted by the FOMC as well as a slow recovery in the housing sector. The historically low interest rate environment continues to negatively impact yields of variable loans and the securities portfolio. The Corporation’s net interest margin for the three months ended March 31, 2014 increased to 3.78% from the March 31, 2013 percentage of 3.73% as a result of the payoff of the subordinated debentures. While there is no certainty to the magnitude of any impact, the continued extended period of low short-term interest rates, as presently forecasted by the Federal Reserve, will continue to have an adverse effect on the net interest margin.

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While the economy continues to show signs of improvement with unemployment rates declining, and we are continuing to see price appreciation in the local residential real estate market, there is no guarantee that these positive trends will continue. As such, we remain cautious as to the macro-economic risks, many openly identified by the Federal Open Market Committee, including persistently high rates of unemployment and underemployment and inflation below the FOMC’s 2% objective. As a consequence, we have generally retained more cautious loan underwriting criteria established during the financial crisis period of 2007 – 2009. In spite of these challenges, we are proactive in seeking new client relationships driven by our target market profile: business-to-business and business-to-government companies with annual revenue of $1 million to $100 million and the various banking services needed by the business and the professionals associated with the businesses.

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 with a strong capital base and being positioned for continued growth.

Securities

The Corporation’s securities portfolio is comprised of U.S. government agency securities, mortgage backed securities, corporate bonds, a CRA mutual fund, and other available-for-sale securities as well as municipal bonds. The portfolio does not have any non-agency mortgage backed securities or trust preferred securities.

At March 31, 2014 the fair value of the securities portfolio totaled $101.5 million, compared to $92.2 million at December 31, 2013. Included in the fair value totals are held-to-maturity securities with an amortized cost of $11.3 million (fair value of $10.9 million) and $16.3 million (fair value of $15.7 million) at March 31, 2014 and December 31, 2013, respectively. Securities classified as available-for-sale are accounted for at fair market value with unrealized gains and losses recorded directly to a separate component of shareholders' equity, net of associated tax effect while held-to-maturity securities are carried at amortized cost. Investment securities are used to provide liquidity, to generate income, and to temporarily supplement loan growth as needed.

Restricted Stock

Restricted stock consists of FHLB stock and FRB stock. These stocks are classified as restricted stocks because their ownership is restricted to certain types of entities and they lack a market. Restricted stock is carried at cost on the Corporation’s financial statements. Dividends are paid semiannually on FRB stock and quarterly on FHLB stock.

Loans

The loan portfolio constitutes the largest component of earning assets and is comprised of commercial real estate – owner occupied, commercial real estate – non-owner occupied, residential real estate, commercial, real estate construction, and consumer loans. All lending activities of the Bank and its subsidiaries are subject to the regulations and supervision of the Comptroller. The loan portfolio does not have any pay option adjustable rate mortgages, loans with teaser rates or subprime loans or any other loans considered “high risk loans”. Loans totaled $716.9 million at March 31, 2014 compared to $687.1 million at December 31, 2013, an increase of $29.8 million or 4.3%. Comprising the majority of the growth, commercial loans increased $10.7 million, residential real estate loans increased $3.3 million, commercial real estate – owner occupied increased $7.9 million and real estate construction loans increased $3.9 million. The overall increase in loans reflects results from our marketing outreach as well as continued improvement in loan demand by local businesses. Please see Note 4 to the consolidated financial statements for a table that summarizes the composition of the Corporation’s loan portfolio. The following is a summary of the loan portfolio at March 31, 2014.

Commercial Real Estate Loans – Owner Occupied: This category of loans represented the largest segment of the loan portfolio and was comprised of owner occupied loans secured by the commercial property, totaling $204.7 million, representing 28.56% of the loan portfolio at March 31, 2014. Commercial real estate loans are secured by the subject property and underwritten to policy standards. Policy standards approved by the Board of Directors from time to time set forth, among other considerations, loan-to-value limits, cash flow coverage ratios, and the general creditworthiness of the obligors.

Commercial Real Estate Loans – Non-Owner Occupied: This category of loans represented the fourth largest segment of the loan portfolio and was comprised of loans secured by income producing commercial property, totaling $93.4 million and representing 13.02% of the loan portfolio at March 31, 2014. Commercial real estate loans are secured by the subject property and underwritten to policy standards as listed above.

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Residential Real Estate Loans: This category represented the third largest segment of the loan portfolio and included loans secured by first or second mortgages on one to four family residential properties. This segment totaled $176.9 million and comprised 24.68% of the loan portfolio at March 31, 2014. Of this amount, the following sub-categories existed as a percentage of the whole residential real estate loan portfolio as of March 31, 2014: home equity lines of credit, 18.4%; first trust mortgage loans, 73.0%; and junior trust loans, 8.6%.

Home equity lines of credit are extended to borrowers in our target market. Real estate equity is often the largest component of consumer wealth in our marketplace. Once approved, this consumer finance tool allows the borrowers to access the equity in their homes or investment properties and use the proceeds for virtually any purpose. Home equity lines of credit are most frequently secured by a second lien on residential property. The proceeds of first trust mortgage loans are used to acquire or refinance the primary financing on owner occupied and residential investment properties. Junior trust loans are loans 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 management and the Board of Directors and takes into consideration repayment source and capacity, value of the underlying property, credit history, savings pattern, and stability.

Commercial Loans: Commercial Loans represented the second largest segment of the loan portfolio, totaling $192.9 million and representing 26.91% of the loan portfolio at March 31, 2014. These loans are made 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. We underwrite these loans based upon our assessment of the obligor(s)’ ability to generate operating cash flows in the future necessary to repay the loan. To address the risks associated with the uncertainties of future cash flows, these loans are generally well secured by assets owned by the business or its principal shareholders/owners and the principal shareholders/owners are typically required to guarantee the loan.

Real Estate Construction Loans: Real estate construction loans, also known as construction and land development loans represented the fifth largest segment of the loan portfolio and totaled $42.8 million and represented 5.97% of the loan portfolio at March 31, 2014. These loans generally fall into one of three categories: first, loans to individuals that are ultimately used to acquire property and construct an owner occupied residence; second, loans to builders for the purpose of acquiring property and constructing homes for sale to consumers; and third, loans to developers for the purpose of acquiring land that is developed into finished lots for the ultimate construction of residential or commercial buildings. Loans of these types are generally secured by the subject property within limits established by the Board of Directors based upon an assessment of market conditions and updated from time to time. The loans typically carry recourse to principal owners. In addition to the repayment risk associated with loans to individuals and businesses, loans in this category carry construction completion risk. To address this additional risk, loans of this type are subject to additional administration procedures designed to verify and ensure progress of the project in accordance with allocated funding, project specifications and time frames.

Consumer Loans: Consumer loans, which was the smallest segment of the loan portfolio, totaled $6.2 million and represented 0.86% of the loan portfolio at March 31, 2014. Most loans in this category are well secured with assets other than real estate, such as marketable securities or automobiles. Very few consumer 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 management and the Board of Directors and takes into consideration repayment capacity, collateral value, savings pattern, credit history, and stability.

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Loans Held for Sale (“LHFS”)

LHFS are residential mortgage loans originated by the mortgage division of the Bank to consumers and underwritten in accordance with standards set forth by an institutional investor to whom we expect to sell the loans for a profit. Loan proceeds are used for the purchase or refinance of the property securing the loan. Loans are sold with the servicing released to the investor. At March 31, 2014, LHFS at fair value totaled $27.2 million compared to $24.4 million at December 31, 2013.

The LHFS loans are closed by the Bank and held on average fifteen to thirty days pending their sale to government sponsored entities as well as mortgage banking subsidiaries of large financial institutions. During the first quarter of 2014 we originated $70.6 million of loans processed in this manner, compared to $217.7 million for the first quarter of 2013. Loans are sold without recourse and subject to industry standard representations and warranties that may require the repurchase by the Bank of loans previously sold. The repurchase risks associated with this activity center around early payment defaults and borrower fraud.

Allowance for Loan Losses

The allowance for loan losses totaled $13.2 million at March 31, 2014 compared to $13.1 million at December 31, 2013. The allowance for loan losses was equivalent to 1.84% and 1.91% of total loans held for investment at March 31, 2014 and December 31, 2013, respectively. Adequacy of the allowance is assessed and increased by provisions for loan losses charged to expense no less than quarterly. Charge-offs are taken when a loan is identified as uncollectible. For additional information about the allowance for loan losses, please see Note 4 to the consolidated financial statements.

Non-performing Assets

At March 31, 2014 and December 31, 2013, the Bank had non-performing assets totaling $2.5 million. Non-performing assets consist of non-accrual and restructured loans. All non-performing loans are carried at the expected liquidation value of the underlying collateral.

The following table is a summary of our non-performing assets at March 31, 2014 and December 31, 2013.

	March 31, 2014			December 31, 2013
Non-accrual loans :	(Dollars In Thousands)
Commercial real estate - owner occupied	$	-		$	-
Commercial real estate - non-owner occupied		-			-
Residential real estate		756			871
Commercial		1,754			1,664
Real estate construction		-			-
Consumer		-			-
Total non-accrual loans	$	2,510		$	2,535

Other real estate owned ("OREO")		-			-

Total non-performing assets	$	2,510		$	2,535

Restructured loans included above in non-accrual loans	$	918		$	931

Ratio of non-performing assets to:
Total loans plus OREO		0.35	%		0.37	%

Total Assets		0.27	%		0.30	%

Accruing Past due loans:
90 or more days past due	$	-		$	-

At March 31, 2014 and December 31, 2013, the Bank had no loans past due 90 days or more and still accruing interest.

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Deposits

Deposits are the primary sources of funding loan growth. At March 31, 2014, deposits totaled $805.4 million compared to $573.0 million on December 31, 2013, an increase of $232.4 million. Noninterest-bearing deposits increased $39.2 million from $189.9 million at December 31, 2013 to $229.1 million at March 31, 2014. Savings and interest-bearing deposits increased to $239.8 million at March 31, 2014 from $200.2 million at December 31, 2013, an increase of $39.6 million. The largest increase in our deposits came in the time deposits, growing from $182.9 million at December 31, 2013 to $336.6 million at March 31, 2014. This $153.7 million increase was due in part to management’s decision to utilize the Certificate of Deposit Account Registry Service (CDARS) to fund a planned increase in our investment portfolio as well as pay down the Federal Home Loan Bank (FHLB) borrowings of $145 million at December 31, 2013.The growth in noninterest-bearing accounts is attributable to new accounts opened during the first three months of 2014 as a result of our outreach to operating businesses and positive balance fluctuations of existing commercial accounts.

Shareholders’ Equity

Shareholders’ equity totaled $93.6 million at March 31, 2014 compared to $91.1 million at December 31, 2013. The increase in shareholders’ equity is due mainly to retained earnings net of dividends paid. Banking regulators have defined minimum regulatory capital ratios that the Corporation and the Bank are required to maintain. These risk based capital guidelines take into consideration risk factors, as defined by the banking regulators, associated with various categories of assets, both on and off the balance sheet. Both the Corporation and Bank are classified as well capitalized, which is the highest rating.

The following table outlines the regulatory components of the Corporation’s capital and risk based capital ratios.

	March 31,			December 31,
	2014			2013
	(In Thousands)
Tier 1 Capital:
Common stock	$	8,686		$	8,659
Capital surplus		17,814			17,320
Retained earnings		68,392			67,121
Less: Net unrealized loss on equity securities		(54	)		-
Less: Dissallowed servicing assets		(241	)		(313	)
Total Tier 1 capital		94,597			92,787

Allowance for loan losses		10,204			9,680


Total risk based capital	$	104,801		$	102,467

Risk weighted assets	$	812,715		$	770,276

Quarterly average assets	$	881,676		$	848,886

			Regulatory
Capital Ratios:			Minimum
Tier 1 risk based capital ratio	11.64%	12.05%		4.00%
Total risk based capital ratio	12.90%	13.30%		8.00%
Leverage ratio	10.73%	10.93%		4.00%

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RESULTS OF OPERATIONS

Summary

Net income for the first quarter of 2014 totaled $2.4 million or $0.23 diluted earnings per share. This compares with $3.7 million or $0.35 diluted earnings per share for the same quarter in 2013. The decrease in net income for the three months ended March 31, 2014 as compared to the same period in 2013 is attributable to the decreased loan volume in the mortgage banking segment and was mitigated by reductions in salaries and employee benefits and advertising and promotional costs as well as fees related directly to the production of loans such as management fees, investor fees, provision for losses on mortgage loans sold, and credit report charges.

Net Interest Income

Net interest income, the principal source of earnings, is the amount of income generated by earning assets (primarily loans and investment securities) less the interest expense incurred on interest-bearing liabilities (primarily deposits) used to fund earning assets. Net interest income before the provision for loan losses totaled $8.1 million for the three months ended March 31, 2014 as well as for the same period in 2013. The annualized yield on earning assets was 4.15% for the quarter ended March 31, 2014 when compared to 4.22% for the quarter ended March 31, 2013. The decrease in the first quarter income on earning assets of $211 thousand is mainly attributable to decreased volumes in loans held for sale resulting in a reduction to interest income of $412 thousand. Mitigating this reduction was an increase in the volume of loans held for investment which offset the rate reduction in the category resulting in an overall increase to interest income of $275 thousand. The cost of interest-bearing deposits and borrowings decreased from 0.69% for the quarter ended March 31, 2013 to 0.55% for the quarter ended March 31, 2014 due mainly to the decrease in volume in time deposits. Net interest margin was 3.78% for the quarter ended March 31, 2014 compared to 3.73% for the same period in 2013.

Volume and Rate Analysis

The following tables present the dollar amount of changes in interest income and interest expense for each category of interest earning assets and interest-bearing liabilities.

	Three Months Ended March 31,
	2014 compared to 2013
	Change Due To:
	Increase /
	(Decrease)			Volume			Rate
	(In Thousands)
Interest Earning Assets:
Investments	$	(67	)	$	(10	)	$	(57	)
Loans held for sale		(412	)		(563	)		151
Loans		275			876			(601	)
Interest-bearing deposits		(7	)		(9	)		2
Total increase (decrease) in interest income		(211	)		294			(505	)

Interest-Bearing Liabilities:
Interest-bearing demand deposits		16			11			5
Money market deposit accounts		(32	)		(4	)		(28	)
Savings accounts		1			-			1
Time deposits		(258	)		(399	)		141
Total interest-bearing deposits		(273	)		(392	)		119
FHLB Advances		66			67			(1	)
Securities sold under agreements to repurchase		(3	)		(2	)		(1	)
Subordinated debentures		(53	)		(26	)		(27	)
Total increase (decrease) in interest expense		(263	)		(353	)		90

Increase (decrease) in net interest income	$	52		$	647		$	(595	)

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Average Balances, Net Interest Income, Yields Earned and Rates Paid

The following tables present for the periods indicated the total dollar amount of interest income from average interest earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities, expressed in dollars and rates.

	Yield on Average Earning Assets and Rates on Average Interest-Bearing Liabilities
	Three Months Ended

	March 31, 2014								March 31, 2013
	Average			Income /		Yield /			Average			Income /		Yield /
	Balance			Expense		Rate			Balance			Expense		Rate
	(Dollars In Thousands)
Assets:
Interest earning assets:
Securities	$	104,782		$	468		1.79	%	$	106,697		$	535		2.00	%
Loans held for sale		18,708			202		4.32	%		74,768			614		3.28	%
Loans⁽¹⁾		698,429			8,257		4.73	%		626,504			7,982		5.10	%
Interest-bearing balances and federal funds sold		39,251			18		0.18	%		58,937			25		17.00	%
Total interest earning assets		861,170			8,945		4.15	%		866,906			9,156		4.22	%
Noninterest earning assets:
Cash and due from banks		7,609								11,386
Premises, land and equipment		8,379								8,544
Other assets		16,007								14,361
Less: allowance for loan losses		(13,181	)							(12,608	)
Total noninterest earning assets		18,814								21,683
Total Assets	$	879,984							$	888,589

Liabilities and Shareholders' Equity:
Interest-bearing deposits:
Interest-bearing demand deposits	$	105,816		$	58		0.22	%	$	85,053		$	42		0.20	%
Money market deposit accounts		114,119			57		0.20	%		118,927			89		0.30	%
Savings accounts		2,868			2		0.28	%		2,444			1		0.14	%
Time deposits		218,954			611		1.12	%		369,362			869		0.94	%
Total interest-bearing deposits		441,757			728		0.66	%		575,786			1,001		0.70	%
Borrowings:
FHLB Advances		115,944			70		0.24	%		5,056			4		0.32	%
Securities sold under agreements to repurchase and federal funds purchased		23,374			6		0.10	%		30,389			9		0.11	%
Subordinated Debentures		-			-		0.00	%		6,186			53		3.43	%
Total borrowings		139,318			76		0.22	%		41,631			66		0.63	%
Total interest-bearing deposits and borrowings		581,075			804		0.55	%		617,417			1,067		0.69	%
Noninterest-bearing liabilities:
Demand deposits		196,454								169,056
Other liabilities		9,861								9,719
Total liabilities		787,390								796,192
Shareholders' Equity		92,594								92,397
Total Liabilities and Shareholders' Equity:	$	879,984							$	888,589

Interest Spread⁽²⁾							3.60	%							3.53	%

Net Interest Margin⁽³⁾				$	8,141		3.78	%				$	8,089		3.73	%

⁽¹⁾Loans placed on nonaccrual status are included in loan balances

⁽²⁾ Interest spread is the average yield earned on earning assets, less the average rate incurred on interest-bearing liabilities.

⁽³⁾Net interest margin is net interest income, expressed as a percentage of average earning assets.

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Noninterest Income

Noninterest income consists of revenue generated from financial services and activities other than lending and investing. The mortgage segment provides the most significant contributions to noninterest income. Total noninterest income was $3.3 million for the first quarter of 2014 compared to $10.8 million for the same period in 2013. Gains on the sale of loans originated by the Banks’s mortgage segment are the largest component of noninterest income. Gains on the sale of loans totaled $1.7 million for the three month period ended March 31, 2014, compared to $7.9 million for the same period of 2013. Gains on the sale of loans fluctuate with the volume of mortgage loans originated. During the three months ended March 31, 2014, the Bank’s mortgage segment originated $70.6 million in mortgage and brokered loans, down from $217.7 million for the same period in 2013. For the three months ended March 31, 2014, other income reflected an increase of $1.3 million, as compared to $2.8 million for the three months ended March 31, 2013, due mainly to a $343 thousand loss relating to hedging activities associated with loans held for sale as compared to a $1.2 million gain for the same period in 2013. Our hedging activities are designed to insulate the net gain on sale margins from movements of interest rates during the mortgage loan origination and delivery process. When gains are recognized on instruments used to hedge interest rate risk, the value of the loans being hedged decrease proportionately resulting in lower realized gains on sale income.

Noninterest Expense

Noninterest expense totaled $7.7 million for the three months ended March 31, 2014, compared to $12.7 million for the same period in 2013, a decrease of $5.0 million. Salaries and employee benefits totaled $4.9 million for the three months ended March 31, 2014, compared to $8.1 million for the same period last year. The decrease in salary and employee benefits is attributable in part to the reduction in the mortgage loan production. Other operating expenses totaled $2.1 million for the three months ended March 31, 2014, compared to $3.9 million for the same period in 2013. The reduction in other operating expenses was primarily due to the decrease in mortgage loan volume as management fees decreased $588 thousand, investor fees decreased $227 thousand and the provision for losses on mortgage loans sold decreased $218 thousand between related periods.

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The table below provides the composition of other operating expenses.

	Three Months Ended March 31,
	2014		2013
	(In Thousands)

Business and franchise tax	$	210	$	203
Advertising and promotional		177		563
Data processing		168		199
Director fees		159		90
Accounting and auditing		153		153
Consulting fees		120		157
FDIC insurance		101		106
Office supplies-stationary print		81		64
Investor fees		79		306
Telephone		75		63
Publication and subscription		60		86
Stock option expense		59		39
Disaster recovery expense		56		47
Regulatory examinations		52		51
Credit report		47		107
Management fees		47		635
SBA guarantee fee		47		53
Legal fees		35		53
Courier		31		29
D&O liability insurance		30		26
FRB and Bank analysis charges		26		15
Verification fees		14		57
Early payoff expense		13		46
Freight and express		13		30
Appraisal fees		5		22
Provision for losses on mortgage loans sold		-		218
Other		205		464
	$	2,063	$	3,882

Liquidity Management

Liquidity is the ability of the Corporation to meet current and future cash flow requirements. The liquidity of a financial institution reflects its ability to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining the Corporation’s ability to meet the daily cash flow requirements of both depositors and borrowers. Management monitors liquidity through a regular review of asset and liability maturities, funding sources, and loan and deposit forecasts.

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

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The asset portion of the balance sheet provides liquidity primarily through loan principal repayments and maturities of investment securities. Other short-term investments such as federal funds sold and interest-bearing deposits with other banks provide an additional source of liquidity funding. At March 31, 2014, overnight interest-bearing balances totaled $51.4 million and unpledged available-for-sale investment securities totaled approximately $15.7 million.

The Bank proactively manages a portfolio of short-term time deposits issued to local municipalities and wholesale depositors in order to fund loans held for sale and short-term investments. As of March 31, 2014, the portfolio of CDARS and wholesale time deposits totaled $228.9 million compared to $76.6 million at December 31, 2013.

The liability portion of the balance sheet provides liquidity through various interest-bearing and noninterest-bearing deposit accounts, federal funds purchased, securities sold under agreement to repurchase and other short-term borrowings. At March 31, 2014, the Bank had a line of credit with the FHLB totaling $254.0 million. As there were no outstanding advances or short term loans with the FHLB at March 31, 2014, the entire $254.0 million was available on the line. In addition to the line of credit at the FHLB, the Bank issues repurchase agreements. As of March 31, 2014, outstanding repurchase agreements totaled $17.6 million. The interest rates on these instruments are variable and subject to change daily. The Bank also maintains federal funds lines of credit with its correspondent banks and, at March 31, 2014, these lines totaled $60.5 million and were available as an additional funding source.

The following table presents the composition of borrowings at March 31, 2014 and December 31, 2013 and for the periods indicated.

Borrowed Funds Distribution

	March 31, 2014		December 31, 2013

	(Dollars In Thousands)
Borrowings:
FHLB advances	$	-	$	145,000
Securities sold under agreements to repurchase and federal funds purchased		17,646		27,855
Total at period end	$	17,646	$	172,855

	Three Months Ended			Year Ended
	March 31, 2014			December 31, 2013

Borrowings:	(Dollars In Thousands)
Average Balances
FHLB advances	$	115,944		$	43,077
Securities sold under agreements to repurchase and federal funds purchased		23,374			25,524
Subordinated debentures		-			3,135
Total average balance	$	139,318		$	71,736

Average rate paid on all borrowed funds		0.22	%		0.32	%

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Management believes the Corporation is well positioned with liquid assets, the ability to generate liquidity through liability funding and the availability of borrowed funds, to meet the liquidity needs of depositors and customers’ borrowing needs. The Corporation’s ability to maintain sufficient liquidity may be affected by numerous factors, including economic conditions nationally and in our markets. Depending on the Corporation’s liquidity levels, its capital position, conditions in the capital markets and other factors, the Corporation may from time to time consider the issuance of debt, equity or other securities, or other possible capital markets transactions, the proceeds of which could provide additional liquidity for its operations.

Contractual Obligations

There have been no material changes outside the ordinary course of business to the contractual obligations disclosed in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Corporation’s market risk is composed primarily of interest rate risk. The Funds Management Committee is responsible for reviewing the interest rate sensitivity position and establishes policies to monitor and coordinate the Corporation’s sources, uses and pricing of funds.

Interest Rate Sensitivity Management

The Corporation uses a simulation model to analyze, manage and formulate operating strategies that address net interest income sensitivity to movements in interest rates. The simulation model projects net interest income based on various interest rate scenarios over a twelve month period. The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets and liabilities. The model incorporates certain assumptions which management believes to be reasonable regarding the impact of changing interest rates and the prepayment assumption of certain assets and liabilities. The table below reflects the outcome of these analyses at March 31, 2014 and December 31, 2013, assuming budgeted growth in the balance sheet. According to the model run for the three month period ended March 31, 2014, and projecting forward over a twelve month period, an immediate 100 basis point increase in interest rates would result in an increase in net interest income of 6.63%. Modeling for an immediate 100 basis point decrease in interest rates has been suspended due to the current rate environment. While management carefully monitors the exposure to changes in interest rates and takes actions as warranted to mitigate any adverse impact, there can be no assurance about the actual effect of interest rate changes on net interest income.

The following table reflects the Corporation’s earnings sensitivity profile.

Increase in Federal Funds Target Rate	Hypothetical Percentage Change in Earnings March 31, 2014	Hypothetical Percentage Change in Earnings December 31, 2013
3.00%	20.49%	8.20%
2.00%	13.70%	5.50%
1.00%	6.63%	2.41%

The Corporation’s net interest income and the fair value of its financial instruments are influenced by changes in the level of interest rates. The Corporation manages its exposure to fluctuations in interest rates through policies established by its Funds Management Committee. The Funds Management Committee meets periodically and has responsibility for formulating and implementing strategies to improve balance sheet positioning and earnings and reviewing interest rate sensitivity.

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The Mortgage Division is party to mortgage rate lock commitments to fund mortgage loans at interest rates previously agreed (locked) by both the Mortgage Division and the borrower for specified periods of time. When the borrower locks his or her interest rate, the Mortgage Division effectively extends a put option to the borrower, whereby the borrower is not obligated to enter into the loan agreement, but the Mortgage Division must honor the interest rate for the specified time period. The Mortgage Division is exposed to interest rate risk during the accumulation of interest rate lock commitments and loans prior to sale. The Mortgage Division utilizes either a best efforts sell forward or a mandatory sell forward commitment to economically hedge the changes in fair value of the loan due to changes in market interest rates. Failure to effectively monitor, manage, and hedge the interest rate risk associated with the mandatory commitments subjects the Mortgage Division to potentially significant market risk.

Throughout the lock period the changes in the market value of interest rate lock commitments, best efforts and mandatory sell forward commitments are recorded as unrealized gains and losses and are included in the consolidated statement of income under other noninterest income. The Mortgage Division utilizes a third party and its proprietary simulation model to assist in identifying and managing the risk associated with this activity.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Corporation’s management evaluated, with the participation of the Chief Executive Officer and Chief Financial Officer, the effectiveness of the Corporation’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures are effective as of the end of the period covered by this report to ensure that information required to be disclosed in the reports that the Corporation files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Corporation’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Corporation’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Corporation to disclose material information required to be set forth in the Corporation’s periodic and current reports.

Changes in Internal Control over Financial Reporting

The Corporation’s management is also responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). No changes in the Corporation’s internal control over financial reporting occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. 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.

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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 requires 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 1A. Risk Factors

There have been no material changes in the risk factors faced by the Corporation from those disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2013.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table details the Corporation’s purchases of its common stock during the first quarter of 2014 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. 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

January 1 - January 31, 2014		-	$	-		-		768,781
February 1 - February 28, 2014		-		-		-		768,781
March 1 - March 31, 2014		-		-		-		768,781
		-	$	-		-		768,781

On January 31, 2014, an indirect, wholly-owned subsidiary of the Corporation entered into an asset purchase agreement pursuant to which it acquired client accounts and certain other assets from a local wealth management practice for an aggregate purchase price of $1.54 million, subject to adjustment, payable in four installments: $770 thousand in connection with closing, $256.5 thousand on March 31, 2015, $256.5 thousand on March 31, 2016 and $257 thousand on March 31, 2017. Each installment of the purchase price is payable 50% in cash and 50% in common stock of the Corporation. For the initial installment in connection with closing, the Corporation issued 24,017 restricted shares of its common stock and the subsidiary agreed to pay up to $385 thousand in cash on three payment dates over 120 days, with the total amount of cash payable in connection with closing subject to adjustment pursuant to the asset purchase agreement to reflect the post-closing delivery of certain consents. For the payment installments in 2015, 2016 and 2017, the number of shares of common stock of the Corporation to be issued will be determined by dividing (i) one-half of the consideration to be paid on the relevant payment date by (ii) the average of the daily closing price per share of the common stock on the NASDAQ Global Market, as reported by The Wall Street Journal, for the ten consecutive trading days prior to and including the December 31 immediately preceding the applicable payment date (with any fraction of a share being rounded to the nearest whole number). All shares of common stock issued pursuant to the asset purchase agreement will be restricted for three years from their date of issuance.

The shares have been and will be issued to a natural person who was the sole shareholder of the seller of the assets in an unregistered transaction in reliance on Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended. Such natural person represented to the Corporation that he is an “accredited investor” as defined under Rule 501(a) of Regulation D. The transaction was privately negotiated and did not involve any public offering of securities.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

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Item 6. Exhibits

Exhibit No.	Description
3.1	Amended and Restated Articles of Incorporation of Access National Corporation (incorporated by reference to Exhibit 3.1 to Form 8-K filed July 18, 2006 (file number 000-49929))
3.1.1	Articles of Amendment to Amended and Restated Articles of Incorporation of Access National Corporation (incorporated by reference to Exhibit 3.1.1 to Form 10-Q filed August 15, 2011 (file number 000-49929))
3.2	Amended and Restated Bylaws of Access National Corporation (incorporated by reference to Exhibit 3.2 to Form 8-K filed October 24, 2007 (file number 000-49929))
	Certain instruments relating to long-term debt as to which the total amount of securities authorized there under does not exceed 10% of Access National Corporation’s total assets have been omitted in accordance with Item 601(b)(4)(iii) of Regulation S-K. The registrant will furnish a copy of any such instrument to the Securities and Exchange Commission upon its request.
10.5+	Annual compensation of Non-Employee Directors (incorporated by reference to Exhibit 10.5 to Form 10-K filed March 14, 2014 (file number 000-49929))
10.6+	Base Salaries for Named Executive Officers (incorporated by reference to Exhibit 10.6 to Form 10-K filed March 14, 2014 (file number 000-49929))
31.1*	CEO Certification Pursuant to Rule 13a-14(a)
31.2*	CFO Certification Pursuant to Rule 13a-14(a)
32*	CEO/CFO Certification Pursuant to § 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350)
101*	The following materials from Access National Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014 formatted in XBRL (Extensible Business Reporting Language), filed herewith: (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of Comprehensive Income (unaudited), (iv) Consolidated Statements of Changes in Shareholders’ Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited), and (vi) Notes to Consolidated Financial Statements (unaudited).

101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase
101.DEF*	XBRL Taxonomy Extension Definition Linkbase
101.LAB*	XBRL Taxonomy Extension Label Linkbase
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase

* filed herewith

+ indicates a management contract or compensatory plan or arrangement

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Access National Corporation
	(Registrant)

Date: May 12, 2014	By: /s/ Michael W. Clarke
	Michael W. Clarke
	President and Chief Executive Officer
	(Principal Executive Officer)

Date: May 12, 2014	By: /s/ Margaret M. Taylor
	Margaret M. Taylor
	Senior Vice President and Chief Financial Officer
	(Principal Financial & Accounting Officer)

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