Edgar Filing: ACCESS NATIONAL CORP

e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended June 30, 2009


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

For the transition period from to

Commission File Number: 000-49929

ACCESS NATIONAL CORPORATION

(Exact name of registrant as specified in its charter)


Virginia		82-0545425

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

1800 Robert Fulton Drive, Suite 300, Reston, Virginia 20191

(Address of principal executive offices) (Zip Code)

(703) 871-2100

(Registrant’s telephone number, including area code)

(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 þ No o

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 o No o

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 o

Accelerated filer o

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The number of shares outstanding of Access National Corporation’s common stock, par value $0.835, as of August 3, 2009 was 10,438,619 shares.

Table of Contents

ACCESS NATIONAL CORPORATION
FORM 10-Q

INDEX


PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)
	Consolidated Balance Sheets, June 30, 2009 and December 31, 2008 (audited)	Page 2
	Consolidated Statements of Income, three months ended June 30, 2009 and 2008	Page 3
	Consolidated Statements of Income, six months ended June 30, 2009 and 2008	Page 4
	Consolidated Statements of Changes in Shareholders’ Equity, six months ended June 30, 2009 and 2008	Page 5
	Consolidated Statements of Cash Flows, six months ended June 30, 2009 and 2008	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 23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	Page 37
Item 4T.	Controls and Procedures	Page 38

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	Page 39
Item 1A.	Risk Factors	Page 39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	Page 39
Item 3.	Defaults Upon Senior Securities	Page 39
Item 4.	Submission of Matters to a Vote of Security Holders	Page 40
Item 5.	Other Information	Page 40
Item 6.	Exhibits	Page 40
	Signatures	Page 41
EX-31.1
EX-31.2
EX-32

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

ACCESS NATIONAL CORPORATION
Consolidated Balance Sheets
(In Thousands, Except for Share Data)


	June 30,			December 31,
	2009			2008
	(Unaudited)

ASSETS
Cash and due from banks	$	12,942		$	8,785
Interest-bearing deposits in other banks		26,820			13,697
Securities available for sale, at fair value		68,699			91,015
Loans held for sale, at fair value		107,778			84,312

Loans		505,661			485,929
Allowance for loan losses		(8,077	)		(7,462	)

Net loans		497,584			478,467

Premises and equipment, net		8,983			9,211
Accrued interest		2,928			3,193
Other real estate owned		3,925			4,455
Other assets		10,905			9,189

Total assets	$	740,564		$	702,324


LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest-bearing deposits	$	97,291		$	75,000
Savings and interest-bearing deposits		143,730			95,730
Time deposits		303,885			314,671

Total deposits		544,906			485,401
Other liabilities
Short-term borrowings		60,606			103,575
Long-term borrowings		53,270			41,107
Subordinated debentures		6,186			6,186
Other liabilities and accrued expenses		11,977			8,110

Total liabilities		676,945			644,379

SHAREHOLDERS’ EQUITY
Common stock, par value, $0.835; authorized, 60,000,000 shares; issued and outstanding,10,438,619 shares at June 30, 2009 and 10,240,747 shares at December 31, 2008		8,716			8,551
Surplus		18,080			17,410
Retained earnings		36,386			31,157
Accumulated other comprehensive income, net		437			827

Total shareholders’ equity		63,619			57,945

Total liabilities and shareholders’ equity	$	740,564		$	702,324

See accompanying notes to consolidated financial statements (Unaudited).

ACCESS NATIONAL CORPORATION
Consolidated Statements of Income
(In Thousands, Except for Share Data)
(Unaudited)


	Three Months Ended June 30,
	2009		2008

Interest and Dividend Income
Interest and fees on loans	$	8,781	$	8,626
Interest on deposits in other banks		46		96
Interest and dividends on securities		861		789

Total interest and dividend income		9,688		9,511


Interest Expense
Interest on deposits		2,737		3,301
Interest on short-term borrowings		332		233
Interest on long-term borrowings		515		639
Interest on subordinated debentures		65		89

Total interest expense		3,649		4,262


Net interest income		6,039		5,249
Provision for loan losses		2,060		1,399

Net interest income after provision for loan losses		3,979		3,850


Non-interest Income
Service fees on deposit accounts		130		113
Gain on sale of loans		14,550		6,239
Mortgage broker fee income		189		524
Other income		3,183		1,146

Total non-interest income		18,052		8,022


Non-interest Expense
Salaries and employee benefits		7,929		5,508
Occupancy and equipment		648		568
Other operating expenses		8,972		4,139

Total non-interest expense		17,549		10,215


Income before income taxes		4,482		1,657

Income tax expense		1,712		595

NET INCOME	$	2,770	$	1,062


Earnings per common share:
Basic	$	0.27	$	0.10

Diluted	$	0.27	$	0.10


Average outstanding shares:
Basic		10,345,890		10,170,174
Diluted		10,403,850		10,315,127

See accompanying notes to consolidated financial statements (Unaudited).

ACCESS NATIONAL CORPORATION
Consolidated Statements of Income
(In Thousands, Except for Share Data)
(Unaudited)


	Six Months Ended June 30,
	2009		2008

Interest and Dividend Income
Interest and fees on loans	$	17,448	$	17,529
Interest on deposits in other banks		78		361
Interest and dividends on securities		1,841		1,640

Total interest and dividend income		19,367		19,530


Interest Expense
Interest on deposits		5,818		7,569
Interest on short-term borrowings		648		539
Interest on long-term borrowings		991		1,189
Interest on subordinated debentures		128		202

Total interest expense		7,585		9,499


Net interest income		11,782		10,031
Provision for loan losses		3,429		1,807

Net interest income after provision for loan losses		8,353		8,224


Noninterest Income
Service fees on deposit accounts		264		216
Gain on sale of loans		28,339		13,093
Mortgage broker fee income		329		1,086
Other income		4,280		2,069

Total noninterest income		33,212		16,464


Noninterest Expense
Salaries and employee benefits		15,434		11,438
Occupancy and equipment		1,280		1,204
Other operating expenses		15,715		7,754

Total noninterest expense		32,429		20,396


Income before income taxes		9,136		4,292

Income tax expense		3,702		1,539

NET INCOME	$	5,434	$	2,753


Earnings per common share:
Basic	$	0.53	$	0.26

Diluted	$	0.52	$	0.26


Average outstanding shares:
Basic		10,306,638		10,395,002
Diluted		10,357,752		10,555,463

See accompanying notes to consolidated financial statements (Unaudited).

ACCESS NATIONAL CORPORATION
Consolidated Statements of Changes in Shareholders’ Equity
For the Six Months Ended June 30, 2009 and 2008
(In Thousands, Except for Share Data)
(Unaudited)


										Accumulated
										Other
	Common						Retained			Comprehensive
	Stock			Surplus			Earnings			Income (Loss)			Total
Balance, December 31, 2008	$	8,551		$	17,410		$	31,157		$	827		$	57,945

Comprehensive income:
Net income		—			—			5,434			—			5,434
Other comprehensive income, unrealized holdings gains (losses) arising during the period (net of tax, $201)		—			—			—			(390	)		(390	)

Total comprehensive income														5,044
Stock option exercises (148,452 shares)		124			377			—			—			501
Dividend reinvestment plan (74,550 shares)		62			290			—			—			352
Repurchased under share repurchase program (25,130 shares)		(21	)		(95	)		—			—			(116	)
Cash dividend		—			—			(205	)		—			(205	)
Stock-based compensation expense recognized in earnings		—			98			—			—			98


Balance, June 30, 2009	$	8,716		$	18,080		$	36,386		$	437		$	63,619


										Accumulated
										Other
	Common						Retained			Comprehensive
	Stock			Surplus			Earnings			Income (Loss)			Total
Balance, December 31, 2007	$	9,052		$	21,833		$	26,846		$	230		$	57,961

Comprehensive income:
Net income		—			—			2,753			—			2,753
Other comprehensive income, unrealized holdings gains (losses) arising during the period (net of tax, $78)		—			—			—			(152	)		(152	)

Total comprehensive income														2,601
Stock option exercises (85,398 shares)		71			151			—			—			222
Repurchased under share repurchase program (808,411 shares)		(675	)		(5,169	)		—			—			(5,844	)
Cash dividend		—			—			(230	)		—			(230	)
Stock-based compensation expense recognized in earnings		—			64			—			—			64


Balance, June 30, 2008	$	8,448		$	16,879		$	29,369		$	78		$	54,774

See accompanying notes to consolidated financial statements (Unaudited).

ACCESS NATIONAL CORPORATION
Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)


	Six Months Ended June 30,
	2009			2008

Cash Flows from Operating Activities
Net income	$	5,434		$	2,753
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan losses- net of recoveries		3,429			1,807
Deferred tax benefit		(1,028	)		(428	)
Stock based compensation		98			64
Provision for hedging		27			(179	)
Net premium amortization/discount accretion on securities		3			—
Depreciation and amortization		306			385
Loss on Disposal of assets		—			5
Changes in assets and liabilities:
Valuation of loans held for sale carried at fair value		1,386			1,271
Increase in loans held for sale		(24,852	)		(5,440	)
Decrease in other assets		237			83
Increase in other liabilities		3,867			1,341

Net cash (used in) provided by operating activities		(11,093	)		1,662

Cash Flows from Investing Activities
Proceeds from maturities and calls of securities available for sale		42,489			37,340
Purchases of securities available for sale		(20,766	)		(27,311	)
Net increase in loans		(22,546	)		(19,854	)
Proceeds from sale of equipment		—			35
Proceeds from sales of other real estate owned		—			187
Purchases of premises and equipment		(34	)		(129	)

Net cash used in investing activities		(857	)		(9,732	)

Cash Flows from Financing Activities
Net increase in demand, interest-bearing demand and savings deposits		70,190			17,321
Net decrease in time deposits		(10,685	)		(41,357	)
Net decrease in securities sold under agreement to repurchase		(7,888	)		(2,101	)
Net (decrease) increase in short-term borrowings		(35,081	)		33,180
Net increase in long-term borrowings		12,163			21,381
Proceeds from issuance of common stock		852			222
Purchase of common stock		(116	)		(5,844	)
Dividends Paid		(205	)		(230	)

Net cash provided by financing activities		29,230			22,572


Increase in cash and cash equivalents		17,280			14,502
Cash and Cash Equivalents
Beginning		22,482			19,504

Ending	$	39,762		$	34,006

Supplemental Disclosures of Cash Flow Information
Cash payments for interest	$	7,629		$	9,521

Cash payments for income taxes	$	3,550		$	2,150

Supplemental Disclosures of Noncash Investing Activities
Unrealized (loss) gain on securities available for sale	$	(590	)	$	(230	)

See accompanying notes to consolidated financial statements (Unaudited).

Notes to Consolidated Financial Statements (Unaudited)

NOTE 1 — COMMENCEMENT OF OPERATIONS

Access National Corporation (the “Corporation”) is a bank holding company incorporated under the laws of the Commonwealth of Virginia. The Corporation has three wholly-owned subsidiaries, Access National Bank (the “Bank”), which is an independent commercial bank chartered under federal laws as a national banking association, Access Capital Trust I, and Access Capital Trust II. The Corporation does not have any significant operations and serves primarily as the parent company for the Bank. The Corporation’s income is primarily derived from dividends received from the Bank. The amount of these dividends is determined by the Bank’s earnings and capital position.

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

The Bank opened for business on December 1, 1999 and has two active wholly-owned subsidiaries: Access National Mortgage Corporation (the “Mortgage Corporation”), a Virginia corporation engaged in mortgage banking activities, and Access Real Estate LLC. Access Real Estate LLC is a limited liability company established in July, 2003 for the purpose of holding title to the Corporation’s headquarters building, located at 1800 Robert Fulton Drive, Reston, Virginia.

NOTE 2 — BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“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 six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2009. These consolidated financial statements should be read in conjunction with the Corporation’s audited financial statements and the notes thereto as of December 31, 2008, included in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

NOTE 3 — STOCK-BASED COMPENSATION PLANS

During the first six months of 2009, the Corporation granted 104,250 stock options to officers, directors, and employees under the 1999 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 have a vesting period of two and one half years and expire three and one half years after the issue date. Stock—based compensation expense recognized in other operating expense during the first six months of 2009 was approximately $98 thousand and $64 thousand for the same period in 2008. The fair value of options is estimated on the date of grant using a Black-Scholes option-pricing model with the assumptions noted below.

A summary of stock option activity under the Plan for the six months ended June 30, 2009 is presented as follows:


	Six Months Ended
	June 30, 2009
Expected life of options granted		3.50
Risk-free interest rate		1.08	%
Expected volatility of stock		47	%
Annual expected dividend yield		1	%

Fair Value of Granted Options	$	179,771
Non-Vested Options		248,275


					Weighted Avg.
	Number of		Weighted Avg.		Remaining		Aggregate Intrinsic
	Options		Exercise Price		Contractual Term		Value
Outstanding at beginning of year		589,617	$	5.96		1.57	$	284,885
Granted		104,250	$	4.03		3.09	$	—
Exercised		148,452	$	3.36		0.01	$	—
Lapsed or Canceled		42,586	$	7.03		0.92	$	—


Outstanding at June 30, 2009		502,829	$	6.23		1.85	$	339,050


Exercisable June 30, 2009		254,554	$	6.20		1.49	$	139,590

NOTE 4 — SECURITIES

Amortized costs and fair values of securities available for sale as of June 30, 2009 and December 31, 2008 are as follows:


	June 30, 2009
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In Thousands)
U.S. Government Agencies	$	60,091	$	754	$	(36	)	$	60,809
Mortgage Backed Securities		1,204		4		(46	)		1,162
Municipals — taxable		690		2		—			692
CRA Mutual Fund		1,500		—		(17	)		1,483
Restricted Securities:
Federal Reserve Bank Stock		894		—		—			894
FHLB Stock		3,659		—		—			3,659

Total Securities	$	68,038	$	760	$	(99	)	$	68,699


	December 31, 2008
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(In Thousands)
U.S. Treasury Notes	$	999	$	7	$	—		$	1,006
U.S. Governmental Agencies		74,934		1,420		—			76,354
Mortgage Backed Securities		1,428		2		(39	)		1,391
Municipals — taxable		5,006		3		(89	)		4,920
CRA Mutual Fund		1,500		—		(52	)		1,448
Restricted Securities:
Federal Reserve Bank Stock		894		—		—			894
FHLB Stock		5,002		—		—			5,002

Total Securities	$	89,763	$	1,432	$	(180	)	$	91,015

NOTE 4 — SECURITIES (continued)

The amortized cost and fair value of securities available for sale as of June 30, 2009 and December 31, 2008 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because the securities may be called or prepaid without any penalties.


	June 30, 2009				December 31, 2008
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
	(In Thousands)				(In Thousands)
U.S. Treasury and Agencies
Due in one year or less	$	—	$	—	$	999	$	1,006
Due after one through five years		10,190		10,198		25,000		25,121
Due after five through ten years		49,901		50,611		49,934		51,233
Municipals-taxable
Due after one through five years		690		692		905		907
Due after five through ten years		—		—		4,101		4,013
Mortgage Backed Securities
Due in one year or less		358		362		381		382
Due after one through five years		—		—		127		128
Due after fifteen years		846		800		920		881
CRA Mutual Fund		1,500		1,483		1,500		1,448
Restricted Securities:
Federal Reserve		894		894		894		894
Bank stock FHLB stock		3,659		3,659		5,002		5,002

Total	$	68,038	$	68,699	$	89,763	$	91,015

NOTE 4 — SECURITIES (continued)

Investment securities available for sale that have an unrealized loss position at June 30, 2009 and December 31, 2008 are as follows:

June 30, 2009


	Securities in a Loss					Securities in a Loss
	Position for Less than					Position for 12 Months
	12 Months					or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Investment securities available for sale:	(In Thousands)
U.S. Government Agencies	$	9,939	$	(36	)	$	—	$	—		$	9,939	$	(36	)
Mortgage Backed Securities		—		—			800		(46	)		800		(46	)
CRA Mutual Fund		—		—			1,483		(17	)		1,483		(17	)

Total	$	9,939	$	(36	)	$	2,283	$	(63	)	$	12,222	$	(99	)

December 31, 2008


	Securities in a Loss					Securities in a Loss
	Position for Less than					Position for 12 Months
	12 Months					or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Investment securities available for sale:	(In Thousands)
Mortgage Backed Securities	$	881	$	(39	)	$	—	$	—		$	881	$	(39	)
Municipals-taxable		4,012		(89	)		—		—			4,012		(89	)
CRA Mutual Fund		—		—			1,448		(52	)		1,448		(52	)

Total	$	4,893	$	(128	)	$	1,448	$	(52	)	$	6,341	$	(180	)

Management does not believe that any individual unrealized loss as of June 30, 2009 and December 31, 2008 is other than a temporary impairment. These unrealized losses are primarily attributable to changes in interest rates. The Corporation has the ability to hold these securities for a time necessary to recover the amortized cost or until maturity when full repayment would be received.

NOTE 5-LOANS

The following table presents the composition of the loan portfolio at June 30, 2009 and December 31, 2008:


	June 30, 2009		December 31, 2008
	(In Thousands)
Loans secured by real estate:
Construction and land development	$	51,616	$	42,600
Secured by residential real estate		148,872		151,993
Secured by multi-family residential		1,735		1,747
Secured by commercial real estate		223,691		218,539
Commercial and industrial loans		78,261		69,537
Consumer loans		1,486		1,513

Total loans		505,661		485,929
Less allowance for loan losses		8,077		7,462

Net loans	$	497,584	$	478,467

NOTE 6 — SEGMENT REPORTING

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

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

Other includes the operations of the Corporation and Access Real Estate LLC. The primary source of income for the Corporation is derived from dividends from the Bank and its primary expense relates to interest on subordinated debentures. The primary source of income for Access Real Estate LLC is derived from rents received from the Bank and Mortgage Corporation.

NOTE 6 — SEGMENT REPORTING (continued)

The following table presents segment information for the three months ended June 30, 2009 and 2008:


2009	Commercial										Consolidated
(In Thousands)	Banking		Mortgage		Other			Elimination			Totals

Revenues:
Interest income	$	9,231	$	1,015	$	9		$	(567	)	$	9,688
Gain on sale of loans		—		14,550		—			—			14,550
Other revenues		1,240		2,228		288			(254	)		3,502

Total revenues		10,471		17,793		297			(821	)		27,740


Expenses:
Interest expense		3,547		492		177			(567	)		3,649
Salaries and employee benefits		1,966		5,963		—			—			7,929
Other		4,388		7,045		501			(254	)		11,680

Total operating expenses		9,901		13,500		678			(821	)		23,258


Income (loss) before income taxes	$	570	$	4,293	$	(381	)	$	—		$	4,482


Total assets	$	707,227	$	112,126	$	45,568		$	(124,357	)	$	740,564


2008	Commercial										Consolidated
(In Thousands)	Banking		Mortgage		Other			Elimination			Totals

Revenues:
Interest income	$	9,246	$	526	$	9		$	(270	)	$	9,511
Gain on sale of loans		—		6,239		—			—			6,239
Other revenues		364		1,713		270			(564	)		1,783

Total revenues		9,610		8,478		279			(834	)		17,533


Expenses:
Interest expense		4,068		262		202			(270	)		4,262
Salaries and employee benefits		1,975		3,533		—			—			5,508
Other		2,531		3,647		492			(564	)		6,106

Total operating expenses		8,574		7,442		694			(834	)		15,876


Income (loss) before income taxes	$	1,036	$	1,036	$	(415	)	$	—		$	1,657


Total assets	$	613,954	$	45,711	$	43,268		$	(53,979	)	$	648,954

NOTE 6 — SEGMENT REPORTING (continued)

The following table presents segment information for the six months ended June 30, 2009 and 2008:


2009	Commercial										Consolidated
(In Thousands)	Banking		Mortgage		Other			Elimination			Totals

Revenues:
Interest income	$	18,428	$	1,930	$	19		$	(1,010	)	$	19,367
Gain on sale of loans		—		28,339		—			—			28,339
Other revenues		1,616		3,486		596			(825	)		4,873

Total revenues		20,044		33,755		615			(1,835	)		52,579


Expenses:
Interest expense		7,363		882		350			(1,010	)		7,585
Salaries and employee benefits		3,814		11,620		—			—			15,434
Other		7,285		13,008		956			(825	)		20,424

Total operating expenses		18,462		25,510		1,306			(1,835	)		43,443


Income (loss) before income taxes	$	1,582	$	8,245	$	(691	)	$	—		$	9,136


Total assets	$	707,227	$	112,126	$	45,568		$	(124,357	)	$	740,564


2008	Commercial										Consolidated
(In Thousands)	Banking		Mortgage		Other			Elimination			Totals

Revenues:
Interest income	$	19,083	$	1,040	$	46		$	(639	)	$	19,530
Gain on sale of loans		—		13,097		—			(4	)		13,093
Other revenues		916		3,042		536			(1,123	)		3,371

Total revenues		19,999		17,179		582			(1,766	)		35,994


Expenses:
Interest expense		9,097		613		429			(640	)		9,499
Salaries and employee benefits		3,938		7,500		—			—			11,438
Other		4,290		6,725		876			(1,126	)		10,765

Total operating expenses		17,325		14,838		1,305			(1,766	)		31,702


Income (loss) before income taxes	$	2,674	$	2,341	$	(723	)	$	—		$	4,292


Total assets	$	613,954	$	45,711	$	43,268		$	(53,979	)	$	648,954

NOTE 7 — EARNINGS PER SHARE (EPS)

The following tables show the calculation of both basic and diluted earnings per share (“EPS”) for the three and six months ended June 30, 2009 and 2008, 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
	June 30, 2009		June 30, 2008
	(In thousands except for share data)

BASIC EARNINGS PER SHARE:
Net income	$	2,770	$	1,062

Weighted average shares outstanding		10,345,890		10,170,174


Basic earnings per share	$	0.27	$	0.10


DILUTED EARNINGS PER SHARE:
Net income	$	2,770	$	1,062

Weighted average shares outstanding		10,345,890		10,170,174
Stock options and warrants		57,960		144,953

Weighted average diluted shares outstanding		10,403,850		10,315,127


Diluted earnings per share	$	0.27	$	0.10


	Six Months		Six Months
	Ended		Ended
	June 30, 2009		June 30, 2008
	(In thousands except for share data)

BASIC EARNINGS PER SHARE:
Net Income	$	5,434	$	2,753

Weighted average shares outstanding		10,306,638		10,395,002


Basic earnings per share	$	0.53	$	0.26


DILUTED EARNINGS PER SHARE:
Net Income	$	5,434	$	2,753

Weighted average shares outstanding		10,306,638		10,395,002
Stock options and warrants		51,114		160,461

Weighted average diluted shares outstanding		10,357,752		10,555,463


Diluted earnings per share	$	0.52	$	0.26

NOTE 8 — DERIVATIVES

As part of its mortgage banking activities, the Mortgage Corporation enters into interest rate lock commitments, which are commitments to originate loans whereby the interest rate on the loan is determined prior to funding and the customers have locked into that interest rate. The Mortgage Corporation then either locks the loan and rate in 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 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 non-interest 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 Mortgage Corporation determines the fair value of rate lock commitments and delivery contracts by measuring the fair value of the underlying asset, which is impacted by current interest rates and takes into consideration the probability that the 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 Mortgage Corporation does not expect any counterparty to fail to meet its obligation. Additional risks inherent in Mandatory delivery programs include the risk that if the Mortgage Corporation 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 Mortgage Corporation could incur significant costs in acquiring replacement loans or MBS and such costs could have an adverse effect on mortgage banking operations.

Since the Mortgage Corporation’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 Mortgage Corporation has not elected to apply hedge accounting to its derivative instruments as provided in Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities.”

At June 30, 2009 and December 31, 2008, the Mortgage Corporation had derivative financial instruments with a notional value of $122.3 million and $131.8 million respectively. The fair value of these derivative instruments at June 30, 2009 and December 31, 2008 was $64 thousand and $91 thousand respectively and was included in other assets.

Included in other non-interest income for the six months ended June 30, 2009 and June 30, 2008 was a net gain of $213 thousand and $309 thousand, respectively, relating to derivative instruments.

NOTE 9 — RECENT ACCOUNTING PRONOUNCEMENTS

In March 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB statement No. 133”. SFAS 161 requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related items are accounted for under SFAS 133, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The new standard became effective for the Corporation on January 1, 2009. The adoption of SFAS 161 did not have an impact on the Corporation’s consolidated financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments” (“FSP FAS 107-1”) which amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends Accounting Principles Board Opinion No. 28, “Interim Financial Reporting”, to require those disclosures in summarized financial information at interim reporting periods. FSP FAS 107-1 is effective for interim reporting periods ending after June 15, 2009, and was effective for the Corporation on June 30, 2009 and did not have any effect on the Corporation’s consolidated financial condition or results of operation.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary-Impairment” (“FSP FAS 115-2”) which amends the other-than-temporary impairment guidance under GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary

NOTE 9 — RECENT ACCOUNTING PRONOUNCEMENTS (continued)

impairments on debt and equity securities in the financial statements. This FSP requires that the annual disclosures in FAS 115 and FSP FAS 115-1 and FAS 124-1 “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” be made for interim periods. This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. FSP FAS 115-2 is effective for interim and annual reporting periods ending after June 15, 2009 and was effective June 30, 2009, for the Corporation. The adoption did not have a material impact on the Corporation’s consolidated financial condition or results of operations.

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability has Significantly Decreased and Identifying Transactions that are Not Orderly” (“FSP FAS 157-4”) which provides additional guidance for estimating fair value in accordance with SFAS No. 157 “Fair Value Measurement” when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP FAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009 and became effective for the Corporation for the period ended June 30, 2009. The adoption of FSP FAS 157-4 did not have a material impact on the Corporation’s consolidated financial condition or results of operations.

In June 2009, the FASB issued SFAS 166 “Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140.” SFAS 166 removes the concept of a qualifying special-purpose entity (“QSPE”) from Statement 140, and eliminates the exception for QSPEs from the consolidation guidance of FASB Interpretation No. 46 (R), Consolidation of Variable Interest Entities (“FIN 46 (R)”). Concurrent with the issuance of SFAS 166, the FASB issued SFAS 167, Amendment to FASB Interpretation No. 46(R). SFAS 167 addresses the effect of eliminating the QSPE concept from Statement 140 and enhances the transparency of an entity’s involvement in a variable interest entity (“VIE”). SFAS 166 is effective as of the beginning of the Corporation’s first annual reporting period beginning after November 15, 2009. Earlier adoption is prohibited. The Corporation does not expect the adoption of the provisions of SFAS 166 to have a material effect on the Corporation’s financial condition or results of operations.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” SFAS 168 establishes the FASB Accounting Standards Codification (the Codification) as the single source of authoritative, nongovernmental GAAP. The Codification does not change GAAP. All existing accounting standard documents will be superseded and all other accounting literature not included in the Codification will be considered non-authoritative. SFAS 168 is effective for interim and annual periods ending after September 15, 2009. Accordingly, the Corporation will adopt the provision of SFAS 168 in the third quarter 2009. The Corporation does not expect the adoption of the provisions of SFAS 168 to have any effect on the Corporation’s financial condition or results of operations.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).” SFAS 167 replaces the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with a qualitative approach focused on identifying which enterprise has both the power to direct the activities of the variable interest entity that most significantly impacts the entity’s economic performance and has the obligation to absorb losses or the right to receive benefits that could be significant to the entity. In addition, SFAS 167 requires reconsideration of whether an entity is a variable interest entity when any changes in facts and circumstances occur such that the holders of the equity investment at risk, as a group, lose the power from voting rights or similar rights of those investments to direct the activities of the entity that most significantly impact the entity’s economic performance. It also requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity and additional disclosures about an enterprise’s involvement in variable interest entities. SFAS 167 is effective for fiscal years beginning after November 15, 2009. Accordingly, the Corporation will adopt the provisions of SFAS 167 in the first quarter of 2010. The Corporation is currently evaluating the impact of the provisions of SFAS 167 on the Corporation’s consolidated financial condition and results of operations.

NOTE 10 — FAIR VALUE

Fair value pursuant to SFAS No. 157, “Fair Value Measurements,” 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

NOTE 10 — FAIR VALUE (continued)

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. SFAS 157 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, SFAS 157 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:

Investment securities: The fair values for investment securities are determined by quoted market prices from active markets (Level 1).

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

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. 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 rate lock commitments (Level 3).

Impaired loans: The fair values of impaired loans are measured for impairment using the fair value of the collateral for
collateral-dependent loans on a nonrecurring basis. 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 is included in other assets on the balance sheet, and 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 non-interest expense (Level 2).

NOTE 10 — FAIR VALUE (continued)

Assets and liabilities measured at fair value under SFAS 157 on a recurring and non-recurring basis, including financial assets and liabilities for which the Corporation has elected the fair value option, are summarized below:


			Fair Value Measurement
			at June 30, 2009 Using
			Quoted Prices in
			Active Markets for				Significant
			Identical Assets		Other Observable		Unobservable Inputs
Description	Carrying Value		(Level 1)		Inputs (Level 2)		(Level 3)

			(In Thousands)
Financial Assets-Recurring
Available for sale investment securities (1)	$	64,146	$	64,146	$	—	$	—
Residential loans held for sale		107,778		—		107,778		—
Derivative financial instruments		426		—		—		426
Financial Liabilities-Recurring
Derivative financial instruments		362		—		—		362

Financial Assets-Non-Recurring
Impaired loans (2)		6,885		—		—		6,885
Other real estate owned (3)		3,925		—		3,925		—


(1)		Excludes restricted stock.

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

(3)		Represents appraised value and realtor comparables less estimated selling expenses.

NOTE 10 — FAIR VALUE (continued)

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows for the three month period ended June 30, 2009.


	Net
	Derivatives
Balance March 31, 2009	$	265
Realized and unrealized losses included in earnings		(201	)
Unrealized gains (losses) included in other comprehensive income		—
Purchases, settlements, paydowns, and maturities		—
Transfer into Level 3		—

Balance June 30, 2009	$	64

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis are summarized as follows for the six month peroid ended June 30, 2009.


	Net Derivatives
	(In Thousands)
Balance December 31, 2008	$	91
Realized and unrealized gains (losses) included in earnings		(27	)
Unrealized gains (losses) included in other comprehensive income		—
Purchases, settlements, paydowns, and maturities		—
Transfer into Level 3		—

Balance June 30, 2009	$	64

Financial instruments recorded using SFAS 159

Under SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” 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 of SFAS 159, 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 June 30, 2009, measured at fair value under SFAS 159 and the aggregate unpaid principal amount the Corporation is contractually entitled to receive at maturity.


	Aggregate				Contractual
(In Thousands)	Fair Value		Difference		Principal
Residential mortgage loans held for sale	$	107,778	$	1,386	$	106,392

The Corporation elected to account for residential loans held for sale to eliminate the mismatch in 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 change to fair value accounting for loans held for sale resulted in a pre-tax increase in income of $612 thousand after considering loan origination fees and costs that were previously deferred in accordance with SFAS No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases-an amendment of FASB Statements No. 13, 60, and 65 and a rescission of FASB Statement No. 17.”

NOTE 10 — FAIR VALUE (continued)

SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The estimated fair value approximates carrying value for cash and cash equivalents, and accrued interest. The methodologies for other financial assets and financial liabilities are discussed below:

Cash and Short-Term Investments

For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

Securities

For securities, fair values are based on quoted market prices or dealer quotes.

Loans Held for Sale

Loans held for sale and are recorded at fair value, determined individually, as of the balance sheet date.

Loans

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. 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.

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. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value of all other deposits and borrowings is determined using the discounted cash flow method. The discount rate was equal to the rate currently offered on similar products.

Accrued Interest

The carrying amounts of accrued interest approximate fair value.

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 credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed 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 June 30, 2009 and December 31, 2008, the majority of off-balance-sheet items are variable rate instruments or converts to variable rate instruments if drawn upon. Therefore, the fair value of these items is largely based on fees, which are nominal and immaterial.


	June 30, 2009				December 31, 2008
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	Unaudited
	(In Thousands)
Financial assets:
Cash and due from banks	$	39,762	$	39,762	$	22,482	$	22,482
Securities available for sale		64,146		64,146		85,119		85,119
Restricted stock		4,553		4,553		5,896		5,896
Loans held for sale		107,778		107,778		84,312		84,312
Loans, net of allowance for loan losses		497,584		495,924		478,467		478,118
Derivatives		426		426		273		273

Total Financial Assets	$	714,249	$	712,589	$	676,549	$	676,200


Financial liabilities:
Deposits	$	544,906	$	544,846	$	485,401	$	486,989
Securities sold under agreement to repurchase		23,499		23,491		31,388		31,613
Borrowings		90,377		90,321		113,294		114,928
Subordinated debentures		6,186		6,251		6,186		6,321
Derivatives		362		362		182		182

Total Financial Liabilities	$	665,330	$	665,271	$	636,451	$	640,033

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

The following discussion should be read in conjunction with the Corporation’s consolidated financial statements, and notes thereto, included in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008. Operating results for the six months ended June 30, 2009 are not necessarily indicative of the results for the year ending December 31, 2009 or any future period.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q may contain forward-looking statements. For this purpose, any statements contained herein, including documents incorporated by reference, that are not statements of historical fact may be deemed to be forward-looking statements. Examples of forward-looking statements include discussions as to our expectations, beliefs, plans, goals, objectives and future financial or other performance or assumptions concerning matters discussed in this document. Forward-looking statements often use words such as “believes,” “expects,” “plans,” “may,” “will,” “should,” “projects,” “contemplates,” ” anticipates,” “forecasts,” “intends” or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements. Factors that could have a material adverse effect on the operations and future prospects of the Corporation include, but are not limited to, changes in: continued deterioration in general business and economic conditions and in the financial markets, the impact of any policies or programs implemented pursuant to the Emergency Economic Stabilization Act of 2008 (the “EESA”), as amended by the American Recovery and Reinvestment Act of 2009 (the “ARRA”), branch expansion plans, interest rates, general economic conditions, 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, 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.

In addition, a continuation of the recent turbulence in significant portions of the global financial markets, particularly if it worsens, could impact our performance, both directly by affecting our revenues and the value of our assets and liabilities, and indirectly by affecting our counterparties and the economy generally. Dramatic declines in the commercial and residential real estate markets have resulted in significant write-downs of asset values by financial institutions in the United States. Concerns about the stability of the U.S. financial markets generally have reduced the availability of funding to certain financial institutions, leading to a tightening of credit, reduction of business activity, and increased market volatility. There can be no assurance that the EESA, the ARRA or other actions taken by the federal government will stabilize the U.S. financial system or alleviate the industry or economic factors that may adversely affect our business. In addition, our business and financial performance could be impacted as the financial industry restructures in the current environment, both by changes in the creditworthiness and performance of our counterparties and by changes in the competitive and regulatory landscape. 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, 2008.

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:

Allowance for Loan Losses

The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) SFAS No. 5 “Accounting for Contingencies”, which requires that losses be accrued when they are probable of occurring and estimatable, and (ii) SFAS No. 114, “Accounting by Creditors for Impairment of a Loan”, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. An allowance for loan losses is established through a provision for loan losses based upon industry standards, known risk characteristics, and management’s evaluation of the risk inherent in the loan portfolio and changes in the nature and volume of loan activity. Such evaluation considers, among other factors, the estimated market value of the underlying collateral and current economic conditions. For further information about our practices with respect to allowance for loan losses, please see the subsection “Allowance for Loan Losses” below.

Other-Than-Temporary Impairment of Investment Securities

The Bank’s investment portfolio is classified as available-for-sale. The estimated fair value of the portfolio fluctuates due to changes in market interest rates and other factors. Changes in estimated fair value are recorded in stockholders’ equity as a component of comprehensive income. Securities are monitored to determine whether a decline in their value is other-than-temporary. Management evaluates the investment portfolio on a quarterly basis to determine the collectability of amounts due per the contractual terms of the investment security. Once a decline in value is determined to be other than temporary, the value of the security is reduced and a corresponding charge to earnings is recognized. At June 30, 2009, 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.

Fair Value

Fair values of financial instruments are estimated using relevant market information and other assumptions. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on and off-balance sheet financial instruments do not include the value of anticipated future business or the values of assets and liabilities not considered financial instruments. For additional information about our financial assets carried at fair value, refer to Note 10 of the accompanying notes to the consolidated financial statements.

Off-Balance Sheet Items

In the ordinary course of business, the Bank issues commitments to extend credit and, at June 30, 2009, these commitments amounted to $28.7 million. These commitments do not necessarily represent cash requirements, since many commitments are expected to expire without being drawn on.

At June 30, 2009, the Bank had approximately $73.0 million in unfunded lines of credit and letters of credit. These lines of credit, if drawn upon, would be funded from routine cash flows and short-term borrowings. As the Corporation continues

Off-Balance Sheet Items (continued)

the planned expansion of the loans held for investment portfolio, the volume of commitments and unfunded lines of credit are expected to increase accordingly. The Bank maintains a reserve for potential off-balance sheet credit losses that is included in other liabilities on the balance sheet. At June 30, 2009 and December 31, 2008 the balance in this account totaled $297 thousand. The Mortgage Corporation maintains a similar reserve for standard representations and warranties issued in connection with loans sold that totaled $3.5 million at June 30, 2009 and $1.4 million at December 31, 2008.

Subsequent Events

On June 30, 2009, the Corporation adopted FASB Statement No. 165, “Subsequent Events”. SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, SFAS 165 defines: (1) the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (3) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. Management has reviewed events occurring through August 13, 2009, the date the second quarter financial statements were filed on Form 10Q and no subsequent events have occurred requiring accrual or disclosure.

FINANCIAL CONDITION (June 30, 2009 compared to December 31, 2008)

At June 30, 2009, the Corporation’s assets totaled $740.6 million compared to $702.3 million at December 31, 2008, an increase of $38.3 million. Loans held for investment totaled $505.7 million up from $485.9 million at year end 2008 primarily due to increases in construction, commercial and industrial and commercial real estate loans. Loans held for sale totaled $107.8 million, up from $84.3 million at December 31, 2008, an increase of $23.5 million, primarily due to lower interest rates. Total deposits increased $59.5 million to $544.9 million, compared to $485.4 million at December 31, 2008.

Securities

The Corporation’s securities portfolio is comprised of U.S. government agency securities, mortgage backed securities, taxable municipal securities, a CRA mutual fund and Federal Reserve Bank and Federal Home Loan Bank stock. At June 30, 2009 the securities portfolio totaled $68.7 million, down from $91.0 million on December 31, 2008. The decrease is due in part to the sale of $5 million in taxable municipal securities during the second quarter with a pre-tax gain of approximately $649 thousand. The remaining decrease is due to maturities and called securities that were not reinvested. All securities were classified as available for sale. 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. Investment securities are used to provide liquidity, to generate income, and to temporarily supplement loan growth as needed.

Loans

The loans held for investment portfolio constitutes the largest component of earning assets and is comprised of commercial and industrial loans, real estate loans, construction and land development loans, and consumer loans. All lending activities of the Bank and its subsidiaries are subject to the regulations and supervision of the Comptroller. During the six months ended June 30, 2009, we were able to increase loans held for investment while applying stricter credit standards and conservative loan-to-value requirements. Loans held for investment totaled $505.7 million, an increase of $19.8 million from $485.9 million at December 31, 2008. The increase in loans demonstrates the Bank’s commitment to providing credit to small businesses, professionals and consumers in the greater Washington, D.C. metropolitan area. Commercial loans increased $8.7 million and residential real estate loans decreased $3.1 million. Commercial real estate loans increased $5.2 million and construction and land development loans increased $9.0 million. See Note 5 of the accompanying notes 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 loans held for investment portfolio at June 30, 2009.

Commercial Loans: Commercial Loans represent 15.5% of the loans held for investment portfolio as of June 30, 2009. 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 and the principal shareholders are typically required to guarantee the loan.

Commercial Real Estate Loans: Also known as commercial mortgages, loans in this category represent 44.2% of the loans held for investment portfolio as of June 30, 2009. These loans generally fall into one of three situations in order of magnitude: first, loans supporting an owner occupied commercial property; second, properties used by non-profit organizations such as churches or schools where repayment is dependent upon the cash flow of the non-profit organizations; and third, loans supporting a commercial property leased to third parties for investment. Commercial real estate loans are secured by the subject property and underwritten to policy standards. Policy standards approved by the Board of Directors from time to time set forth, among other considerations, loan-to-value limits, cash flow coverage ratios, and the general creditworthiness of the obligors.

Real Estate Construction Loans: Real estate construction loans, also known as construction and land development loans, comprise 10.2% of the loans held for investment portfolio as of June 30, 2009. 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.

Residential Real Estate Loans: This category includes loans secured by first or second mortgages on one to four family residential properties and represents 29.8% of the loans held for investment portfolio as of June 30, 2009. Of this amount, the following sub-categories exist as a percentage of the whole residential real estate loan portfolio: home equity lines of credit, 15.3%; first trust mortgage loans, 70.1%; junior trust loans, 12.0%; and multi-family loans and loans secured by farmland 2.6%.

Home equity lines of credit are extended to borrowers in our target market. Real estate equity is the largest component of consumer wealth in our marketplace. Once approved, this consumer finance tool allows the borrowers to access the equity in their home or investment property and use the proceeds for virtually any purpose. Home equity 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 Board of Directors and takes into consideration repayment source and capacity, value of the underlying property, credit history, savings pattern and stability.

Consumer Loans: Consumer Loans make up approximately 0.3% of the loans held for investment portfolio as of June 30, 2009. Most loans 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.

Loans Held for Sale (“LHFS”)

LHFS are residential mortgage loans originated by the Mortgage Corporation 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. The LHFS loans are closed by the Mortgage Corporation and carried on its books until the loan is delivered to and purchased by an investor. In the six months ended June 30, 2009 we originated $953.4 million of loans processed in this manner. Loans are sold without recourse and subject to industry standard representations and warranties that may require the repurchase, by the Mortgage Corporation, of loans previously sold. The repurchase risks associated with this activity center around early payment defaults and borrower fraud. There is also a risk that loans originated may not be purchased by our investors. The Mortgage Corporation attempts to manage these risks by the on-going maintenance of an extensive quality control program, an internal audit and verification program, and a selective approval process for investors and programs offered. At June 30, 2009, LHFS at fair value totaled $107.8 million compared to $84.3 million at December 31, 2008.

Brokered Loans

Brokered loans are underwritten and closed by a third party lender. The Mortgage Corporation is paid a fee for procuring and packaging brokered loans. For the first six months of 2009, $16.9 million in residential mortgage loans were originated under this type of delivery method, as compared to $51.6 million for the same period of 2008. Brokered loans accounted for 1.8% of the total loan volume for the first six months of 2009 compared to 11.4% for the same period of 2008. We typically broker loans that do not conform to the products offered by the Mortgage Corporation and for this reason the level of brokered loans is subject to wide fluctuations.

Allowance for Loan Losses

The allowance for loan losses totaled approximately $8.1 million at June 30, 2009 compared to $7.5 million at year end 2008. The allowance for loan losses is equivalent to approximately 1.6% of total consolidated loans held for investment at June 30, 2009. The level of the allowance for loan losses is determined by management through an ongoing detailed analysis of risk and loss potential within the portfolio as a whole and management has concluded the amount of our reserve and the methodology applied to arrive at the amount of the reserve is justified and appropriate. Outside of our own analysis, our reserve adequacy and methodology are reviewed on a regular basis by an internal audit program and bank regulators, and such reviews have not resulted in any material adjustment to the reserve. The table below, Allocation of the Allowance for Loan Losses, reflects the allocation by the different loan types. The methodology as to how the allowance was derived is a combination of specific allocations and percentage allocations of the allowance for loan losses, as discussed below.

The Bank has developed a comprehensive risk weighting system based on individual loan characteristics that enables the Bank to allocate the composition of the allowance for loan losses by types of loans. The methodology as to how the allowance was derived is detailed below. Adequacy of the allowance is assessed monthly and increased by provisions for loan losses charged to expense. Charge-offs are taken, no less frequently than at the close of each fiscal quarter. The methodology by which we systematically determine the amount of our allowance is set forth by the Board of Directors in our Credit Policy, pursuant to which our Chief Credit Officer is charged with ensuring that each loan is individually evaluated and the portfolio characteristics are evaluated to arrive at an appropriate aggregate reserve. The results of the analysis are documented, reviewed and approved by the Board of Directors no less than quarterly. The following elements are considered in this analysis: loss estimates on specific problem credits, individual loan risk ratings, lending staff changes, loan review and board oversight, loan policies and procedures, portfolio trends with respect to volume, delinquency, composition/concentrations of credit, risk rating migration, levels of classified credit, off-balance sheet credit exposure, any other factors considered relevant from time to time. All loans are graded or “Risk Rated” individually for loss potential at the time of origination and as warranted thereafter, but no less frequently than quarterly. Loss potential factors are applied based upon a blend of the following criteria: our own direct experience at this Bank; our collective management experience in administering similar loan portfolios in the market; and peer data contained in statistical releases issued by both the Comptroller and the Federal Deposit Insurance Corporation (“FDIC”). Management’s collective experience at this Bank and other banks is the most heavily weighted criterion, and the weighting is subjective and varies by loan type, amount, collateral,

Allowance for Loan Losses (continued)

structure, and repayment terms. Prevailing economic conditions generally and within each individual borrower’s business sector are considered, as well as any changes in the borrower’s own financial position and, in the case of commercial loans, management structure and business operations. When deterioration develops in an individual credit, the loan is placed on a “watch list” and is monitored more closely. All loans on the watch list are evaluated for specific loss potential based upon either an evaluation of the liquidated value of the collateral or cash flow deficiencies. If management believes that, with respect to a specific loan, an impaired source of repayment, collateral impairment or a change in a debtor’s financial condition presents a heightened risk of loss, the loan is classified as impaired and the book balance of the loan is reduced to the expected liquidation value by charging the allowance for loan losses.

An analysis of the Bank’s allowance for loan losses as of the dates and for the periods indicated is set forth in the following tables:


	Six months ended
Allowance for Loan Losses	June 30,
(In Thousands)	2009			2008
Balance at beginning of period	$	7,462		$	7,462
Charge offs		(3,062	)		(87	)
Recoveries		248			128
Provision		3,429			1,807

Balance at the end of period	$	8,077		$	9,310


	Allocation of the Allowance for Loan Losses
	(Dollars In Thousands)
	June 30, 2009										December 31, 2008
						Allowance
						for Loan										Allowance for
	Amount		Percentage			Loss		Percentage			Amount		Percentage			Loan Loss		Percentage

Commercial and industrial	$	78,261		15.48	%	$	1,806		22.36	%	$	69,537		14.31	%	$	1,816		24.34	%
Commercial real estate		223,691		44.24			3,277		40.57			218,539		44.97			2,948		39.51
Real estate construction		51,616		10.21			936		11.59			42,600		8.77			805		10.79
Residential real estate		150,607		29.78			2,045		25.32			153,740		31.64			1,880		25.19
Consumer		1,486		0.29			13		0.16			1,513		0.31			13		0.17

	$	505,661		100.00	%	$	8,077		100.00	%	$	485,929		100.00	%	$	7,462		100.00	%

Non-performing Assets

At June 30, 2009, the Bank had non-performing assets totaling $10.8 million consisting of non-accrual loans and other real estate owned. Non-accrual loans totaled approximately $6.9 million at June 30, 2009 and are composed of commercial loans in the amount of $652 thousand, commercial real estate loans in the amount of $3.4 million, one residential construction loans totaling $1.8 million, and residential real estate first trust loans in the amount of $1.0 million. Other real estate owned consists of two commercial properties totaling $3.9 million.

Deposits

Deposits are one of the primary sources of funding loan growth. At June 30, 2009, deposits totaled $544.9 million compared to $485.4 million on December 31, 2008, an increase of $59.5 million. Savings and interest-bearing deposits increased $48.0 million from December 31, 2008 as a result of increased core deposits. Time deposits decreased $10.8 million from $314.7 million at December 31, 2008 to $303.9 million at June 30, 2009 as maturing wholesale and rate sensitive deposits were not renewed. Non-interest-bearing deposits increased $22.3 million from $75.0 million at December 31, 2008 to $97.3 million at June 30, 2009. The increase in non-interest-bearing deposits is largely due to fluctuations in balances of commercial accounts and an increase in core deposit relationships.

Shareholders’ Equity

Shareholders’ equity was $63.6 million at June 30, 2009 compared to approximately $57.9 million at December 31, 2008. Shareholders’ equity increased by $5.7 million during the six month period ended June 30, 2009. The increase in shareholders’ equity is primarily due to retained earnings for the six months ended June 30, 2009.

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 capital and risk based capital ratios.

Risk Based Capital Analysis


	June 30,				December 31,
	2009			2008
	(In Thousands)
Tier 1 Capital:
Common stock	$	8,716		$	8,551
Capital surplus		18,080			17,411
Retained earnings		36,386			31,157
Less: Net unrealized loss on equity securities		(11	)		(34	)
Subordinated debentures		6,000			6,000

Total Tier 1 capital		69,171			63,085

Subordinated debentures not included in Tier 1		—			—
Allowance for loan losses		6,942			6,662


Total risk based capital	$	76,113		$	69,747


Risk weighted assets	$	553,892		$	532,195


Quarterly average assets	$	737,206		$	649,817

							Regulatory Minimum
Capital Ratios:
Tier 1 risk based capital ratio		12.49	%		11.85	%		4.00	%
Total risk based capital ratio		13.74	%		13.11	%		8.00	%
Leverage ratio		9.38	%		9.71	%		4.00	%

RESULTS OF OPERATIONS

Summary

Net income for the three months ended June 30, 2009 increased 160.8% and totaled $2.8 million compared to $1.1 million at June 30, 2008. Diluted earnings per share were $0.27 and $0.10 for the quarter ended June 30, 2009 and June 30, 2008 respectively. Contributing to the record earnings was an $8.3 million increase in gains on the sale of loans. Earnings were impacted during the second quarter of 2009 by a provision for loan losses of $2.1 million, up from $1.4 million for the same period in 2008 as a result of continuously conducting risk assessments of the loan portfolio. Also during the quarter we expensed $524 thousand and reduced the carrying value of OREO properties. FDIC insurance expense increased $540 thousand as a result of a special assessment. These expenses were partially offset by securities gains of $649 thousand.

Net income for six months ended June 30, 2009 totaled $5.4 million compared to $2.8 million for the same period in 2008. Diluted earnings per share were $0.52 and $0.26 for the six months ended June 30, 2009 and 2008 respectively. Annualized return on average assets and average common equity for the six months ended June 30, 2009 were 1.48% and 16.94% respectively. Net income for the six months ended June 30, 2009 was enhanced due in part to a $15.2 million increase in gains on sale of loans, as lower interest rates contributed to a $498.4 million increase in mortgage loans originations of compared to the same period in 2008.

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 increased $787 thousand for the three months ended June 30, 2009 over the same period in 2008. Net interest margin was 3.41% for the second quarter of 2009 compared with 3.54% for the second quarter of 2008. The yield on interest earning assets decreased 94 basis points from 6.42% for the second quarter of 2008 to 5.48% for the same period in 2009. The cost of interest-bearing liabilities decreased 99 basis points from 3.51% for the second quarter of 2008 to 2.52% during the same period in 2009. Average earning assets for the three month period ending June 30, 2009 totaled $707.4 million compared to $593.1 million for the same period in 2008, an increase of $114.3 million. The increase in average earning assets is due to a $10.4 million increase in investment securities, a $64.9 million increase in loans, and a $39.1 million increase in interest-bearing balances.

Net interest income for the six months ended June 30, 2009 totaled $11.8 million, an increase of $1.8 million over $10.0 million recorded for the same period in 2008. The volume rate analysis table below details the change in net interest income. Net interest margin was 3.33% for the six month period ended June 30, 2009 compared to 3.36% for the same period in 2008. Net interest margin is impacted by $10.8 million in non-performing assets and the level of cash reserves. Average earning assets for the six month period ended June 30, 2009 totaled $707.9 million up from $598.4 million for the same period in 2008. Average loans outstanding increased approximately $60.0 million, largely due to an increase in the volume of loans held for sale. Average interest bearing balances increased approximately $40.6 million providing liquidity for increased loan production. Average investment securities increased $9.0 million over 2008 levels.

The following table presents volume and rate analysis for the six months ended June 30, 2009 and 2008:

Volume and Rate Analysis


	Six Months Ended June 30,
	2009 compared to 2008
	Change Due To:
	Increase /
	(Decrease)			Volume			Rate
	(In Thousands)
Interest Earning Assets:
Securities	$	189		$	222		$	(33	)
Loans		(81	)		1,963			(2,044	)
Interest bearing deposits		(283	)		233			(516	)

Total Increase (Decrease) in Interest Income		(175	)		2,418			(2,593	)

Interest-Bearing Liabilities:
Interest-bearing demand deposits		70			78			(8	)
Money market deposit accounts		(943	)		(419	)		(524	)
Savings accounts		(21	)		24			(45	)
Time deposits		(857	)		1,716			(2,573	)

Total interest- bearing deposits		(1,751	)		1,399			(3,150	)
FHLB Advances		298			287			11
Securities sold under agreements to repurchase		(75	)		73			(148	)
Other short-term borrowings		(114	)		(3	)		(111	)
Long-term borrowings		(198	)		(96	)		(102	)
Subordinated debentures		(74	)		—			(74	)

Total Increase (Decrease) in Interest Expense		(1,914	)		1,660			(3,574	)

Increase (Decrease) in Net Interest Income	$	1,739		$	758		$	981

The following tables present average balances, the yield on average earning assets and the rates on average interest-bearing liabilities for the three months and six months ended June 30, 2009 and 2008.

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


	Three Months
	Ended June 30,
	2009								2008
	Average			Income /		Yield /			Average			Income /		Yield /
	Balance			Expense		Rate			Balance			Expense		Rate
	(Dollars In Thousands)
Assets:
Interest earning assets:
Securities⁽¹⁾	$	71,915		$	861		4.79	%	$	61,541		$	792		5.15	%
Loans held for sale		83,011			1,015		4.89	%		31,246			526		6.73	%
Loans⁽²⁾		493,395			7,766		6.30	%		480,298			8,100		6.75	%
Interest bearing balances		59,112			46		0.31	%		20,025			96		1.92	%

Total interest earning assets		707,433			9,688		5.48	%		593,110			9,514		6.42	%
Non-interest earning assets:
Cash and due from banks		6,842								6,286
Premises, land and equipment		13,312								9,539
Other assets		17,426								6,007
Less: allowance for loan losses		(7,806	)							(8,061	)

Total non-interest earning assets		29,774								13,771

Total Assets	$	737,207							$	606,881


Liabilities and Shareholders’ Equity:
Interest bearing liabilities:
Interest-bearing demand deposits	$	34,348		$	96		1.12	%	$	8,396		$	20		0.95	%
Money market deposit accounts		90,225			393		1.74	%		120,019			667		2.22	%
Savings accounts		4,298			15		1.40	%		2,632			11		1.67	%
Time deposits		323,216			2,233		2.76	%		235,578			2,603		4.42	%

Total interest-bearing deposits		452,087			2,737		2.42	%		366,625			3,301		3.60	%
FHLB Advances		26,054			267		4.10	%		9,742			65		2.67	%
Securities sold under agreements to repurchase and federal fund purchased		24,252			28		0.46	%		14,103			60		1.70	%
Other short-term borrowings		15,923			37		0.93	%		24,227			108		1.78	%
FHLB Long-term borrowings		24,224			217		3.58	%		65,030			639		3.93	%
FDIC Term Note		29,996			297		3.96	%		—			—		—
Subordinated Debentures		6,186			66		4.27	%		6,186			89		5.75	%

Total interest-bearing liabilities		578,722			3,649		2.52	%		485,913			4,262		3.51	%

Non-interest bearing liabilities:
Demand deposits		83,854								63,244
Other liabilities		10,493								1,558

Total liabilities		673,069								550,715
Shareholders’ Equity		64,138								56,166

Total Liabilities and Shareholders’ Equity:	$	737,207							$	606,881


Interest Spread⁽³⁾							2.96	%							2.91	%


Net Interest Margin⁽⁴⁾				$	6,039		3.41	%				$	5,252		3.54	%


⁽¹⁾		Interest income and yields are presented on a fully taxable equivalent basis using 34% tax rate.

⁽²⁾		Loans placed on nonaccrual status are included in loan balances

⁽³⁾		Interest spread is the average yield earned on earning assets, less the average rate incurred on interest bearing liabilities.

⁽⁴⁾		Net interest margin is net interest income, expressed as a percentage of average earning assets.

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


	Six Months
	Ended June 30,
	2009								2008
	Average			Income /		Yield /			Average			Income /		Yield /
	Balance			Expense		Rate			Balance			Expense		Rate
	(Dollars In Thousands)
Assets:
Interest earning assets:
Securities⁽¹⁾	$	74,999		$	1,841		4.91	%	$	65,983		$	1,652		5.01	%
Loans held for sale		77,008			1,930		5.01	%		29,611			1,040		7.02	%
Loans⁽²⁾		488,024			15,518		6.36	%		475,436			16,489		6.94	%
Interest bearing balances		67,909			78		0.23	%		27,346			361		2.64	%

Total interest earning assets		707,940			19,367		5.47	%		598,376			19,542		6.53	%
Non-interest earning assets:
Cash and due from banks		6,159								6,568
Premises, land and equipment		13,465								9,603
Other assets		16,982								5,836
Less: allowance for loan losses		(7,751	)							(7,746	)

Total non-interest earning assets		28,855								14,261

Total Assets	$	736,795							$	612,637


Liabilities and Shareholders’ Equity:
Interest bearing liabilities:
Interest-bearing demand deposits	$	23,108		$	123		1.06	%	$	8,621		$	53		1.23	%
Money market deposit accounts		80,763			634		1.57	%		119,430			1,577		2.64	%
Savings accounts		4,480			32		1.43	%		2,693			53		3.94	%
Time deposits		344,529			5,029		2.92	%		254,034			5,886		4.63	%

Total interest-bearing deposits		452,880			5,818		2.57	%		384,778			7,569		3.93	%
FHLB Advances		24,963			488		3.91	%		10,246			190		3.71	%
Securities sold under agreements to repurchase and fed fund purchased		25,466			66		0.52	%		13,591			141		2.07	%
Other short-term borrowings		19,958			94		0.94	%		20,292			208		2.05	%
FHLB Long-term borrowings		29,395			522		3.55	%		57,431			1,189		4.14	%
FDIC Term Note		23,201			469		4.04	%		—			—		—
Subordinated Debentures		6,186			128		4.14	%		6,186			202		6.53	%

Total interest-bearing liabilities		582,049			7,585		2.61	%		492,524			9,499		3.86	%

Non-interest bearing liabilities:
Demand deposits		83,094								60,936
Other liabilities		9,269								1,626

Total liabilities		674,412								555,086
Shareholders’ Equity		62,383								57,551

Total Liabilities and Shareholders’ Equity:	$	736,795							$	612,637


Interest Spread⁽³⁾							2.86	%							2.67	%


Net Interest Margin⁽⁴⁾				$	11,782		3.33	%				$	10,043		3.36	%


⁽¹⁾		Interest income and yields are presented on a fully taxable equivalent basis using 34% tax rate.

⁽²⁾		Loans placed on nonaccrual status are included in loan balances

⁽³⁾		Interest spread is the average yield earned on earning assets, less the average rate incurred on interest bearing liabilities.

⁽⁴⁾		Net interest margin is net interest income, expressed as a percentage of average earning assets.

Non-interest Income

Non-interest income consists of revenue generated from financial services and activities other than lending and investing. The Mortgage Corporation provides the most significant contributions to non-interest income. Total non-interest income was $33.2 million for the six month period ended June 30, 2009 compared to $16.5 million for the same period in 2008; the increase is primarily due to an increase in gains on sale of loans. Gains on the sale of loans originated by the Mortgage Corporation totaled $28.3 million for the six month period ended June 30, 2009, up from $13.1 million for the same period of 2008 as a result of an increase of $498.4 million in loans originated during the six months ended June 30, 2009.

Non-interest Expense

Non-interest expense totaled $32.4 million for the six months ended June 30, 2009, compared to $20.4 million for the same period in 2008. Salaries and employee benefits totaled $15.4 million for the six month period ended June 30, 2009, compared to $11.4 million for the same period last year, primarily due to a $4.0 million increase in salaries and commissions as a result of the increase in mortgage loan originations. Other operating expenses totaled $15.7 million for the six months ended June 30, 2009, up from $7.8 million for the same period in 2008, an increase of $7.9 million. The increase is primarily attributable to an increase of $3.1 million in management fees associated with the operation of certain offices of the Mortgage Corporation and the increase in loan production. Advertising expenses relating to the Mortgage Corporation increased $920 thousand and the provision for losses on loans sold increased $1.7 million. OREO expense totaled $696 thousand in 2009 as a result of writing down property values. FDIC insurance expense increased $541 thousand for the six months ended June 30, 2009, primarily as a result of a special assessment imposed by FDIC to replenish the FDIC Deposit Insurance Fund.

The table below provides the composition of other operating expenses.


	Six Months Ended
	June 30,
	2009		2008
	(In Thousands)
Advertising	$	2,877	$	1,957
Investor fees		902		516
Management fees		4,371		1,296
Provision for losses on loans sold		2,724		1,064
Buy down expense		261		171
Business and franchise tax		224		188
Accounting and auditing service		307		317
Consulting fees		178		182
OREO Expense		696		—
Credit report expenses		265		142
Data processing		247		241
FDIC insurance		707		166
Other		1,956		1,514

	$	15,715	$	7,754

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.

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

The asset portion of the balance sheet provides liquidity primarily through loan principal repayments and maturities of investment securities. Other short-term investments such as federal funds sold and interest-bearing deposits with other banks provide an additional source of liquidity funding. At June 30, 2009, overnight interest-bearing balances totaled $26.8 million compared to $13.7 at December 31, 2008.

The liability portion of the balance sheet provides liquidity through various interest-bearing and non-interest-bearing deposit accounts, federal funds purchased, securities sold under agreement to repurchase and other short-term borrowings. At June 30, 2009, the Bank had $103.7 million available under a line of credit with the FHLB and had outstanding short-term loans of $24.7 million, and an additional $23.3 million in term loans at fixed rates ranging from 2.55% to 5.07% leaving $55.7 million available on the line. In addition to the line of credit at the FHLB, the Bank and the Mortgage Corporation also issue repurchase agreements and commercial paper. As of June 30, 2009, outstanding repurchase agreements totaled approximately $23.5 million and commercial paper issued and other short-term borrowings amounted to $12.4 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 June 30, 2009, these lines amounted to $21.5 million. The Corporation also has $6.2 million in subordinated debentures to support the growth of the organization.

On February 11, 2009 the Bank issued $30.0 million in long term debt that is backed by the full faith and credit of the United States under the FDIC’s Temporary Liquidity Guarantee Program. The note bears interest at 2.74% plus a 1% guarantee fee and matures February 15, 2012. The proceeds were used to supplement traditional sources of liquidity and to provide funding for loans.

The following table presents the composition of borrowings at June 30, 2009 and December 31, 2008.

Borrowed Funds Distribution


	June 30,		December 31,
	2009		2008
	(Dollars In Thousands)
At Period End
FHLB advances	$	24,702	$	44,333
FHLB long-term borrowings		23,274		41,107
Securities sold under agreements to repurchase and federal funds purchased		23,499		31,388
Other short-term borrowings		12,404		27,854
Subordinated debentures		6,186		6,186
FDIC term note		29,996		—

Total at period end	$	120,061	$	150,868


	Six Months			Year Ended
	Ended			December 31,
	June 30, 2009			2008
	(Dollars In Thousands)
Average Balances
FHLB advances	$	24,963		$	13,524
FHLB long-term borrowings		29,395			54,173
Securities sold under agreements to repurchase and fed fund purchased		25,466			16,433
Other short-term borrowings		19,958			20,697
Subordinated debentures		6,186			6,186
FDIC term note		23,201			—

Total average balance	$	129,169		$	111,013


Average rate paid on all borrowed funds		2.74	%		3.32	%

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, 2008.

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 as of June 30, 2009. The table below reflects the outcome of these analyses at June 30, 2009, assuming budgeted growth in the balance sheet. According to the model run for the six month period ended June 30, 2009, 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 2.2%. 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 as of June 30, 2009.


Increase in		Hypothetical Percentage
Federal Funds	Hypothetical Percentage	Change in Economic
Target Rate	Change in Earnings	Value of Equity
3.00%	8.54%	-2.70%
2.00%	5.10%	-2.40%
1.00%	2.20%	-1.71%

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.

The Mortgage Corporation is party to mortgage rate lock commitments to fund mortgage loans at interest rates previously agreed to, as locked by both the Corporation and the borrower for specified periods of time. When the borrower locks its interest rate, the Corporation effectively extends a put option to the borrower, whereby the borrower is not obligated to enter into the loan agreement, but the Corporation must honor the interest rate for the specified time period. The Corporation is exposed to interest rate risk during the accumulation of interest rate lock commitments and loans prior to sale. The Corporation utilizes either a Best Efforts sell forward commitment 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 Corporation 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 statement of operations in other income. The Corporation’s management has made complex judgments in the recognition of gains and losses in connection with this activity. The Corporation utilizes a third party and its proprietary simulation model to assist in identifying and managing the risk associated with this activity.

Item 4T. 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

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 our internal control over financial reporting occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

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

The following table provides information with respect to purchases by the Corporation of its common shares during the quarter ended June 30, 2009:


	Issuer Purchases of Equity Securities (1)
					(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

April 1- April 30, 2009		4,588		4.90		4,588		404,410
May 1- May 31, 2009		—		—		—		404,410
June 1- June 30, 2009		—		—		—		404,410

		4,588	$	4.90		4,588		404,410


⁽¹⁾		This table details the Corporation’s purchases of its common stock during the quarter ended June 30, 2009 pursuant to a Share Repurchase Program announced on March 20, 2007. On April 22, 2008 the number of shares authorized for repurchase under the Share Repurchase Program was increased from 2,000,000 to 2,500,000 shares. The Share Repurchase Program does not have an expiration date.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

The 2009 Annual Meeting of Shareholders of the Corporation was held on May 19, 2009. At the 2009 Annual Meeting, the following persons were elected to serve as Class I Directors of the Corporation, to serve until the 2012 Annual Meeting, having received the following votes:


Name	For		Withheld

Michael W. Clarke		9,455,034		27,992
James L. Jadlos		8,551,839		931,637

The following Class II and III Directors, whose terms expire in 2010 and 2011, respectively, continued in office: Class II — Thomas M. Kody and Robert C. Shoemaker; Class III — John W. Edgemond and J. Randolph Babbitt.

Shareholders also approved the Access National Corporation 2009 Stock Option Plan with the following votes:

Broker Non

Name

For

Against

Abstain

-Vote

Approval of the Access National Corporation 2009 Stock Option Plan

5,900,693

1,134,424

27,502

2,420,406

Item 5. Other Information

None.

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))

3.2		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))

4.0		Certain instruments relating to long-term debt as to which the total amount of securities authorized thereunder 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.

10.10		Access National Corporation 2009 Stock Option Plan, effective May 19, 2009 (incorporated by reference to Appendix A to Access National Corporation’s Proxy Statement filed April 15, 2009)

10.10.1		Form of Stock Option Agreement for Employee under 2009 Stock Option Plan (incorporated by reference to Exhibit 10.10.1 to Form 8-K filed July 6, 2009)

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)


*		filed herewith

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: August 13, 2009	By:	/s/ Michael W. Clarke
		Michael W. Clarke
		President and Chief Executive Officer (Principal Executive Officer)


Date: August 13, 2009	By:	/s/ Charles Wimer
		Charles Wimer
		Executive Vice President and Chief Financial Officer (Principal Financial & Accounting Officer)