Edgar Filing: EAGLE BANCORP INC

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2009

( ) 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 0-25923

Eagle Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Maryland	52-2061461
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
7815 Woodmont Avenue, Bethesda, Maryland	20814
(Address of principal executive offices)	(Zip Code)

(301) 986-1800

(Registrant's telephone number, including area code)

N/A

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ]

Accelerated filer [x]

Non-accelerated filer [ ]

Smaller Reporting Company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act

Yes [ ] No [x]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

As of August 7, 2009, the registrant had 12,763,940 shares of Common Stock outstanding.

EAGLE BANCORP, INC.

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008
	Consolidated Statements of Operations for the Six and Three Month Periods Ended June 30, 2009 and 2008
	Consolidated Statements of Cash Flows for the Six Month Periods Ended June 30, 2009 and 2008
	Consolidated Statements of Changes in Stockholders’ Equity for the Six Month Periods Ended June 30, 2009 and 2008
	Notes to Consolidated Financial Statements

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Item 4.	Controls and Procedures

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings

Item 1A.	Risk Factors

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

Item 3.	Defaults Upon Senior Securities

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

Item 5.	Other Information

Item 6.	Exhibits

Signatures

Item 1 – Financial Statements

EAGLE BANCORP, INC.

Consolidated Balance Sheets

June 30, 2009 and December 31, 2008

(dollars in thousands, except per share data)

	June 30,			December 31,
	2009			2008
Assets	(Unaudited)			(Audited)
Cash and due from banks	$	28,187		$	27,157
Federal funds sold		27,044			191
Interest bearing deposits with banks and other short-term investments		2,426			2,489
Investment securities available for sale, at fair value		177,710			169,079
Loans held for sale		10,502			2,718
Loans		1,313,394			1,265,640
Less allowance for credit losses		(19,650	)		(18,403	)
Loans, net		1,293,744			1,247,237
Premises and equipment, net		9,245			9,666
Deferred income taxes		12,404			11,106
Bank owned life insurance		12,680			12,450
Intangible assets, net		4,392			2,533
Other real estate owned		3,081			909
Other assets		8,791			11,292
Total Assets	$	1,590,206		$	1,496,827

Liabilities
Deposits:
Noninterest bearing demand	$	231,171		$	223,580
Interest bearing transaction		55,624			54,801
Savings and money market		375,007			271,791
Time, $100,000 or more		284,595			249,516
Other time		301,833			329,692
Total deposits		1,248,230			1,129,380
Customer repurchase agreements
and federal funds purchased		112,163			98,802
Other short-term borrowings		30,000			55,000
Long-term borrowings		32,150			62,150
Other liabilities		22,415			9,124
Total liabilities		1,444,958			1,354,456

Stockholders' Equity
Preferred stock, par value $.01 per share, shares authorized
1,000,000, Series A, $1,000 per share liquidation preference,
shares issued and outstanding 38,235 and 38,235 respectively,
discount of $1,725 and $1,892, respectively, net		36,458			36,312
Common stock, $.01 par value; shares authorized 50,000,000, shares
issued and outstanding 12,763,940 (2009) and 12,714,355 (2008)		127			127
Warrants		1,892			1,892
Additional paid in capital		77,099			76,822
Retained earnings		28,575			24,866
Accumulated other comprehensive income		1,097			2,352
Total stockholders' equity		145,248			142,371
Total Liabilities and Stockholders' Equity	$	1,590,206		$	1,496,827

See notes to consolidated financial statements.

EAGLE BANCORP, INC.

Consolidated Statements of Operations

For the Six and Three Month Periods Ended June 30, 2009 and 2008 (Unaudited)

(dollars in thousands, except per share data)

	Six Months Ended				Three Months Ended
	June 30,				June 30,
Interest Income	2009		2008		2009		2008
Interest and fees on loans	$	36,683	$	25,824	$	18,570	$	12,944
Interest and dividends on investment securities		3,768		2,070		1,839		1,018
Interest on balances with other banks and short-term investments		37		57		18		14
Interest on federal funds sold		11		58		5		19
Total interest income		40,499		28,009		20,432		13,995
Interest Expense
Interest on deposits		10,609		8,336		5,052		3,908
Interest on customer repurchase agreements and
federal funds purchased		574		695		293		301
Interest on other short-term borrowings		158		298		118		108
Interest on long-term borrowings		1,375		838		649		436
Total interest expense		12,716		10,167		6,112		4,753
Net Interest Income		27,783		17,842		14,320		9,242
Provision for Credit Losses		3,284		1,534		1,718		814
Net Interest Income After Provision For Credit Losses		24,499		16,308		12,602		8,428

Noninterest Income
Service charges on deposits		1,455		761		717		402
Gain on sale of loans		658		279		527		152
Gain on sale of investment securities		1,537		10		1,405		-
Increase in the cash surrender value of bank owned life insurance		230		233		116		117
Other income		655		627		338		299
Total noninterest income		4,535		1,910		3,103		970
Noninterest Expense
Salaries and employee benefits		10,349		7,286		5,044		3,646
Premises and equipment expenses		3,702		2,183		1,827		1,103
Marketing and advertising		557		195		242		114
Data processing		1,122		743		575		403
Legal, accounting and professional fees		1,377		408		787		238
FDIC insurance premiums		1,915		247		1,474		137
Other expenses		2,844		1,678		1,624		891
Total noninterest expense		21,866		12,740		11,573		6,532
Income Before Income Tax Expense		7,168		5,478		4,132		2,866
Income Tax Expense		2,442		1,972		1,481		1,011
Net Income		4,726		3,506		2,651		1,855
Preferred Stock Dividends and Discount Accretion		1,172		-		589		-
Net Income Available to Common Shareholders	$	3,554	$	3,506	$	2,062	$	1,855

Earnings Per Common Share
Basic	$	0.28	$	0.33	$	0.16	$	0.17
Diluted	$	0.28	$	0.32	$	0.16	$	0.17
Dividends Declared Per Common Share	$	-	$	0.1091	$	-	$	0.0545

See notes to consolidated financial statements.

EAGLE BANCORP, INC.

Consolidated Statements of Cash Flows

For the Six Month Periods Ended June 30, 2009 and 2008 (Unaudited)

(dollars in thousands, except per share data)

	2009			2008
Cash Flows From Operating Activities
Net income	$	4,726		$	3,506
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for credit losses		3,284			1,534
Depreciation and amortization		1,130			663
Gains on sale of loans		(658	)		(279	)
Origination of loans held for sale		(72,270	)		(18,204	)
Proceeds from sale of loans held for sale		65,144			19,176
Increase in cash surrender value of BOLI		(230	)		(233	)
Gain on sale of investment securities		(1,537	)		(10	)
Stock-based compensation expense		277			126
Excess tax benefit from exercise of non-qualified stock options		-			(192	)
Increase in other assets		(4,196	)		(93	)
Increase (decrease) in other liabilities		13,291			(262	)
Net cash provided by operating activities		8,961			5,732

Cash Flows From Investing Activities
Decrease in interest bearing deposits with other banks
and short term investments		63			3,099
Purchases of available for sale investment securities		(94,285	)		(5,879	)
Proceeds from maturities and principal payments
of available for sale securities		37,871			4,764
Proceeds from sale/call of available for sale securities		49,320			8,010
Net increase in loans		(49,791	)		(78,842	)
Bank premises and equipment acquired		(617	)		(523	)
Net cash used in investing activities		(57,439	)		(69,371	)

Cash Flows From Financing Activities
Increase in deposits		118,850			67,505
Increase (decrease) in customer repurchase agreements and
federal funds purchased		13,361			(13,698	)
Decrease in other short-term borrowings		(25,000	)		(7,000	)
(Decrease) increase in long-term borrowings		(30,000	)		20,000
Payment of dividends on preferred stock		(850	)		-
Issuance of common stock		-			794
Excess tax benefit from exercise of non-qualified stock options		-			192
Payment of dividends and payment in lieu of fractional shares		-			(1,178	)
Net cash provided by financing activities		76,361			66,615

Net Increase In Cash And Due From Banks		27,883			2,976

Cash And Due From Banks At Beginning Of Period		27,348			15,652

Cash and Due from Banks At End Of Period	$	55,231		$	18,628

Supplemental Cash Flows Information
Interest paid	$	10,562		$	9,894
Income taxes paid	$	3,096		$	3,052
Non-Cash Investing Activities
Transfers from loans to other real estate owned	$	2,300		$	-

See notes to consolidated financial statements.

EAGLE BANCORP, INC.

Consolidated Statements of Changes in Stockholders’ Equity

For the Six Month Periods Ended June 30, 2009 and 2008 (Unaudited)

(dollars in thousands, except per share data)

													Accumulated
													Other			Total
	Preferred			Common				Additional Paid		Retained			Comprehensive			Stockholders'
	Stock			Stock		Warrants		in Capital		Earnings			Income (Loss)			Equity
Balance, January 1, 2009	$	36,312		$	127	$	1,892	$	76,822	$	24,866		$	2,352		$	142,371
Comprehensive Income
Net Income											4,726						4,726
Other comprehensive income:
Unrealized gain on securities available for sale (net of taxes)														(271	)		(271	)
Less: reclassification adjustment for gains net of taxes of $553 included in net income														(984	)		(984	)
Total Comprehensive Income								`									3,471
Preferred stock dividends ($22.22 per share)											(850	)					(850	)
Stock-based compensation									277								277
Preferred stock:
Issuance costs		(21	)														(21	)
Discount accretion		167									(167	)					-
Balance, June 30, 2009	$	36,458		$	127	$	1,892	$	77,099	$	28,575		$	1,097		$	145,248

Balance, January 1, 2008	$	-		$	97	$	-	$	52,290	$	28,195		$	584		$	81,166
Comprehensive Income
Net Income											3,506						3,506
Other comprehensive income:
Unrealized gain on securities available for sale (net of taxes)														(387	)		(387	)
Less: reclassification adjustment for gains net of taxes of $4 included in net income														(6	)		(6	)
Total Comprehensive Income								`									3,113
Cash Dividend ($0.1091 per share)											(1,178	)					(1,178	)
Shares issued under dividend reinvestment plan -											.
47,567 shares									523								523
Stock-based compensation									126								126
Exercise of options for 85,814 shares of common stock		-			1		-		270								271
Tax benefit on non-qualified options exercise									192								192
Balance, June 30, 2008	$	-		$	98	$	-	$	53,401	$	30,523		$	191		$	84,213

See notes to consolidated financial statements.

EAGLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Six Months Ended June 30, 2009 and 2008 (Unaudited)

1. BASIS OF PRESENTATION

The consolidated financial statements of Eagle Bancorp, Inc. (the “Company”) included herein are unaudited. The consolidated financial statements reflect all adjustments, consisting only of normal recurring accruals that in the opinion of Management, are necessary to present fairly the results for the periods presented. The amounts as of and for the year ended December 31, 2008 were derived from audited consolidated financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. There have been no significant changes to the Company’s Accounting Policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. The Company believes that the disclosures are adequate to make the information presented not misleading. The results of operations for the three and six months ended June 30, 2009 are not necessarily indicative of the results of operations to be expected for the remainder of the year, or for any other period. Certain reclassifications have been made to amounts previously reported to conform to the classifications made in 2009.

Management has evaluated subsequent events for potential recognition and/or disclosure through August 10, 2009, which is the date that the Company’s financial statements included in this Quarterly Report on Form 10Q were issued. No material subsequent events have occurred since June 30, 2009 that required recognition or disclosure in these financial statements.

2. NATURE OF OPERATIONS

The Company, through EagleBank, its bank subsidiary (the “Bank”), conducts a full service community banking business, primarily in Montgomery County, Maryland, Washington, D.C. and Fairfax County in Northern Virginia. On August 31, 2008, the Company completed the acquisition of Fidelity & Trust Financial Corporation (“Fidelity”) and Fidelity & Trust Bank (“F&T Bank”). The primary financial services offered by the Bank include real estate, commercial and consumer lending, as well as traditional deposit and repurchase agreement products. The Bank is also active in the origination and sale of residential mortgage loans and the origination of small business loans. The guaranteed portion of small business loans is typically sold through the Small Business Administration, in a transaction apart from the loan’s origination. The Bank currently offers its products and services through thirteen banking offices and various electronic capabilities, including remote deposit services. Eagle Commercial Ventures, LLC (“ECV”), a direct subsidiary of the Company provides subordinated financing for the acquisition, development and construction of real estate projects, where the primary financing is provided by the Bank. Refer to Note 4 - Higher Risk Lending – Revenue Recognition below.

3. CASH FLOWS

For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, and federal funds sold (items with an original maturity of three months or less).

4. HIGHER RISK LENDING – REVENUE RECOGNITION

The Company has occasionally made higher risk acquisition, development, and construction (“ADC”) loans that entail higher risks than ADC loans made following normal underwriting practices (“higher risk loan transactions”). These higher risk loan transactions are made through the Company’s subsidiary, ECV. This activity is limited as to individual transaction amount and total exposure amounts based on capital levels and is carefully monitored. The loans are carried on the balance sheet at amounts outstanding and meet the loan classification

requirements of the Accounting Standards Executive Committee (“AcSEC”) guidance reprinted from the CPA Letter, Special Supplement, dated February 10, 1986 (also referred to as Exhibit 1 to AcSEC Practice Bulletin No. 1). Additional interest earned on these higher risk loan transactions (as defined in the individual loan agreements) is recognized as realized under the provisions contained in Exhibit 1 to AcSEC Practice Bulletin No.1 and Staff Accounting Bulletin (“SAB”) No. 101 (Revenue Recognition in Financial Statements). The additional interest is included as a component of noninterest income. The Bank had one higher risk lending transaction, amounting to $1.7 million and $1.8 million, outstanding as of June 30, 2009 and December 31, 2008, respectively.

5. OTHER REAL ESTATE OWNED (OREO)

Assets acquired through loan foreclosure are held for sale and are initially recorded at the lower of cost or fair value less estimated selling costs when acquired, establishing a new cost basis. The new basis is supported by recent appraisals. Costs after acquisition are generally expensed. If the fair value of the asset declines, a write-down is recorded through expense. The valuation of foreclosed assets is subjective in nature and may be adjusted in the future because of changes in economic conditions or review by regulatory examiners.

6. INVESTMENT SECURITIES AVAILABLE FOR SALE

Amortized cost and estimated fair value of securities available for sale are summarized as follows:

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
June 30, 2009	Cost		Gains		Losses		Value
(dollars in thousands)
U. S. Government agency securities	$	15,722	$	322	$	19	$	16,025
Mortgage backed securities - GSEs		128,813		2,388		334		130,867
Municipal bonds		20,895		-		474		20,421
Federal Reserve and Federal Home Loan Bank stock		10,045		-		-		10,045
Other equity investments		396		-		44		352
	$	175,871	$	2,710	$	871	$	177,710



			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
December 31, 2008	Cost		Gains		Losses		Value
(dollars in thousands)
U. S. Government agency securities	$	71,837	$	2,197	$	5	$	74,029
Mortgage backed securities - GSEs		77,242		2,559		31		79,770
Municipal bonds		5,061		-		353		4,708
Federal Reserve and Federal Home Loan Bank stock		9,599		-		-		9,599
Other equity investments		1,396		-		423		973
	$	165,135	$	4,756	$	812	$	169,079

Gross unrealized losses and fair value by length of time that the individual available for sale securities have been in a continuous unrealized loss position are as follows:

	Less than				12 Months
	12 Months				or Greater				Total
	Estimated				Estimated				Estimated
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
June 30, 2009	Value		Losses		Value		Losses		Value		Losses
(dollars in thousands)
U. S. Government agency securities	$	2,965	$	19	$	-	$	-	$	2,965	$	19
Mortgage backed securities - GSEs		53,176		334		-		-		53,176		334
Municipal bonds		6,982		474		-		-		6,982		474
Other equity investments		134		44		-		-		134		44
	$	63,257	$	871	$	-	$	-	$	63,257	$	871


	Less than				12 Months
	12 Months				or Greater				Total
	Estimated				Estimated				Estimated
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2008	Value		Losses		Value		Losses		Value		Losses
(dollars in thousands)
U. S. Government agency securities	$	4,480	$	5	$	-	$	-	$	4,480	$	5
Mortgage backed securities - GSEs		7,715		31		-		-		7,715		31
Municipal bonds		4,707		353		-		-		4,707		353
Other equity investments		576		423		-		-		576		423
	$	17,478	$	812	$	-	$	-	$	17,478	$	812

The unrealized losses that exist are the result of changes in market interest rates since original purchases. The weighted average duration of debt securities, which comprise 94% of total investment securities, is relatively short at 3.1 years. The Company does not believe that the investment securities that were in an unrealized loss position as of June 30, 2009 represent an other-than-temporary impairment. Total gross unrealized losses were primarily attributed to changes in market interest rates since the original purchases, and not due to the credit quality of the investment securities. The Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity.

The amortized cost and estimated fair value of investments available for sale at June 30, 2009, by contractual maturity, are shown in the table below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available-for-Sale
	Amortized		Estimated
(dollars in thousands)	Cost		Fair Value
Amounts maturing
U. S. Government agency securities maturing:
One year or less	$	1,999	$	2,089
After one year through five years		13,723		13,936
Mortgage backed securities - GSEs		128,813		130,867
Municipal bonds maturing:
Five years through ten years		3,034		3,028
After ten years		17,861		17,393
FRB, FHLB and other equity securities		10,441		10,397
	$	175,871	$	177,710

The carrying value of securities pledged as collateral for certain government deposits, securities sold under agreement to repurchase, and certain lines of credit with correspondent banks at June 30, 2009 was $155 million. As of June 30, 2009 and December 31, 2008, there were no holdings of securities of any one issuer, other than the U.S. Government and U.S. Government agency securities that exceeded ten percent of shareholders’ equity.

7. INCOME TAXES

The Company employs the liability method of accounting for income taxes as required by Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” Under the liability method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities (i.e., temporary differences) and are measured at the enacted rates that will be in effect when these differences reverse. The Company utilizes statutory requirements for its income tax accounting, and avoids risks associated with potentially problematic tax positions that may incur challenge upon audit, where an adverse outcome is more likely than not. Therefore, no provisions are made for either uncertain tax positions or accompanying potential tax penalties and interest for underpayments of income taxes in the Company’s tax reserves. In accordance with SFAS No.109, the Company may establish a reserve against deferred tax assets in those cases where realization is less than certain.

8. EARNINGS PER SHARE

The calculation of net income per common share for the six and three months ended June 30 was as follows:

	Six Months Ended				Three Months Ended
	June 30,				June 30,
(dollars and shares in thousands)	2009		2008		2009		2008
Basic
Net income available to common stockholders	$	3,554	$	3,506	$	2,062	$	1,855
Average common shares outstanding		12,747		10,788		12,750		10,759
Basic net income per common share	$	0.28	$	0.33	$	0.16	$	0.17

Diluted
Net income available to common stockholders	$	3,554	$	3,506	$	2,062	$	1,855
Average common shares outstanding		12,747		10,788		12,750		10,759
Adjustment for common share equivalents		70		131		137		160
Average common shares outstanding-diluted		12,817		10,919		12,887		10,919
Diluted net income per common share	$	0.28	$	0.32	$	0.16	$	0.17

Per share amounts and the number of outstanding shares have been adjusted to give effect to the 10% common stock dividend paid on October 1, 2008

9. STOCK-BASED COMPENSATION

The Company maintains the 1998 Stock Option Plan (“1998 Plan”) and the 2006 Stock Plan (“2006 Plan”). No additional options may be granted under the 1998 Plan.

The 2006 Plan provides for the issuance of awards of incentive options, nonqualifying options, restricted stock and stock appreciation rights to selected key employees and members of the Board. The 2006 Plan shares were increased from 715,000 to 1,215,000 on May 21, 2009 by approval of an amendment by the shareholders. Option awards were made with an exercise price equal to the market price of the Company’s shares at the date of grant.

In January 2009, the Company awarded options to purchase 315,437 shares of common stock and 30,763 shares of restricted stock to employees, senior officers and to a Director. Of the total options awarded, 263,700 have a ten-year term and vest in five substantially equal installments beginning on the first year anniversary of the date of grant. The remaining options have a ten-year term and vest over a four-year period beginning on the seventh year anniversary of the date of grant. The restricted stock is service based, which vest in five substantially equal installments beginning on the first year anniversary of the date of grant. The restricted stock is being recognized as compensation expense over a five-year period based on the market value of shares at the date of grant.

In April 2009, the Company awarded options to purchase 1,500 shares to an employee under the 2006 Plan which have a ten-year term and vest in five substantially equal installments on the first through fifth anniversaries of the date of grant.

In June 2009, the Company awarded 18,822 shares of restricted stock to eighteen nonemployee Directors of the Company and Bank. The restricted stock vests in three substantially equal installments beginning on the first year anniversary of the date of grant. The restricted stock is being recognized as compensation expense over a three-year period based on the market value of shares at the date of grant.

The fair value of each option grant and other equity based award is estimated on the date of grant using the Black-Scholes option pricing model with the assumptions shown in the table below used for grants during the six months ended June 30, 2009 and the twelve months ended December 31, 2008 and 2007.

Below is a summary of changes in shares under option plans (split adjusted) for the six months ended June 30, 2009. The information excludes restricted stock awards.

							Weighted-Average			Weighted-Average		Aggregate
				Weighted-Average			Remaining			Grant Date		Intrinsic
As of 1/1/2009	Stock Options			Exercise Price			Contractual Life			Fair Value		Value
Outstanding		1,028,754		$	13.01			-		$	2.57		-
Vested		800,058			13.05			-			2.43		-
Nonvested		228,696			12.86			-			3.07		-

Period Activity
Issued		316,937		$	6.34			-		$	2.00		-
Exercised		-			-			-			-		-
Forfeited		3,980			9.38			-			2.24		-
Expired		10,936			12.89			-			3.17		-

As of 6/30/2009
Outstanding		1,330,775		$	11.43			5.30		$	2.43	$	1,610,323
Vested		854,925			13.04			3.85			2.43		826,895
Nonvested		475,850			8.53			7.90			2.44		783,428



Outstanding:							Weighted-Average
Range of	Stock Options			Weighted-Average			Remaining
Exercise Prices	Outstanding			Exercise Price			Contractual Life
$2.98 - $8.10		559,722		$	5.90			6.33
$8.11 - $11.07		246,215			10.24			4.94
$11.08 - $15.43		247,673			13.01			4.08
$15.44 - $26.86		277,165			22.27			4.62
		1,330,775			11.43			5.30

Exercisable:
Range of	Stock Options			Weighted-Average
Exercise Prices	Outstanding			Exercise Price
$2.98 - $8.10		222,023		$	5.05
$8.11 - $11.07		244,214			10.24
$11.08 - $15.43		131,835			12.92
$15.44 - $26.86		256,853			22.68
		854,925			13.04

Assumptions:
	Six Months Ended			Year Ended			Year Ended
	June 30, 2009				2008			2007
Expected Volatility		25.9% - 41.2	%		23.7% - 78.5	%		18.5% - 24.4	%
Weighted-Average Volatility		25.97	%		35.47	%		20.12	%
Expected Dividends		0.0	%		0.8	%		1.4	%
Expected Term (In years)		7.0 - 8.5			0.1 - 9.0			3.1 - 4.0
Risk-Free Rate		0.83	%		2.54	%		4.73	%
Weighted-Average Fair Value (Grant date)	$	2.00		$	1.30		$	4.40

Total intrinsic value of options exercised	$	-
Total fair value of shares vested	$	203,059
Weighted-average period over which nonvested awards are expected to be recognized		2.77 years

The expected lives are based on the “simplified” method allowed by SAB No. 107, whereby the expected term is equal to the midpoint between the vesting date and the end of the contractual term of the award.

Included in salaries and employee benefits, the Company recognized $141 thousand ($0.01 per share) and $277 thousand ($0.02 per share) in share based compensation expense for the three and six months ended June 30, 2009 as compared to $92 thousand ($0.01 per share) and $126 thousand ($0.01 per share) for the same periods in 2008. As of June 30, 2009 there was $1.2 million of total unrecognized compensation cost related to non-vested equity awards under the Company’s share based compensation plans. The $1.2 million of unrecognized compensation expense is being amortized over the remaining requisite service (vesting) periods through 2018.

10. NEW ACCOUNTING PRONOUNCEMENTS

Recent Accounting Pronouncements Adopted

In September 2006, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Effective January 2008, the Company adopted the provisions of SFAS 157 related to financial assets and liabilities, as well as other assets and liabilities carried at fair value on a recurring basis. These provisions were applied prospectively and did not have a material effect on the consolidated financial position, results of operations or cash flows of the Company. Effective January 2009, the Company adopted the provisions of SFAS 157 related to other nonfinancial assets and liabilities. The adoption of these provisions did not have a material effect on the consolidated financial position, results of operations or cash flows of the Company.

In April 2009, the Company adopted the provisions of FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” This FSP provides additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and level of activity for the asset or liability have decreased significantly and in identifying circumstances that indicate a transaction is not orderly. In such instances, management may determine that further analysis of the transactions or quoted prices is required, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value in accordance with SFAS No. 157. The provisions of FSP FAS 157-4 were applied prospectively and did not result in significant changes to the Company’s valuation techniques. Furthermore, the adoption of FSP FAS 157-4 is not expected to have a material impact on our consolidated financial positions, results of operations or cash flows.

In April 2009, the Company adopted the provisions of FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” This FSP requires disclosures about fair value of financial instruments in interim reporting periods of publicly traded companies that were previously only required to be disclosed in annual financial statements. As FSP FAS 107-1 and APB 28-1 amended only the disclosure requirements about fair value of financial instruments in interim periods, the adoption had no impact on our consolidated financial positions, results of operations or cash flows. See Note 11 for the disclosures required under the provisions of FSP FAS 107-1 and APB 28-1.

In April 2009, the Company adopted the provisions of FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” This FSP amends current other-than-temporary impairment (“OTTI”) guidance in GAAP for debt securities by requiring a write-down when fair value is below amortized cost in circumstances where: (1) an entity has the intent to sell a security; (2) it is more likely than not that an entity will be required to sell the security before recovery of its amortized cost basis; or (3) an entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not the entity will be required to sell the security before recovery, an OTTI write-down is recognized in earnings equal to

the entire difference between the security’s amortized cost basis and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income. This FSP does not amend existing recognition and measurement guidance related to OTTI write-downs of equity securities. This FSP also extends disclosure requirements about debt and equity securities to interim reporting periods. See Note 6 for the disclosures required under the provisions of FSP FAS 115-2 and FAS 124-2. The adoption of FSP FAS 115-2 and FAS 124-2 had no impact on retained earnings and is not expected to have a material impact on our consolidated financial positions, results of operations or cash flows.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosures of subsequent events that occurred after the balance sheet date but prior to the issuance of financial statements. SFAS 165 is effective for financial statements issued for interim or fiscal years ending after June 15, 2009. The adoption of SFAS 165, effective June 2009, did not affect our consolidated financial positions, results of operations or cash flows.

Accounting Pronouncements Issued But Not Yet Effective

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140.” SFAS No. 166 makes several significant amendments to SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” including the removal of the concept of a qualifying special-purpose entity from SFAS No. 140. SFAS No. 166 also clarifies that a transferor must evaluate whether it has maintained effective control of a financial asset by considering its continuing direct or indirect involvement with the transferred financial asset. The provisions of SFAS No. 166 are effective for financial asset transfers occurring after December 31, 2009. The adoption of the provisions of SFAS No. 166 will have no impact on our consolidated financial positions, results of operations or cash flows.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R).” SFAS No. 167 requires a qualitative rather than a quantitative analysis to determine the primary beneficiary of a variable interest entity (“VIE”) for consolidation purposes. The primary beneficiary of a VIE is the enterprise that has: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits of the VIE that could potentially be significant to the VIE. The provisions of SFAS No. 167 are effective for the Company on January 1, 2010. The adoption of the provisions of SFAS No. 167 will have on our consolidated financial positions, results of operations or cash flows.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162.” SFAS No. 168 established the FASB Accounting Standards Codification (the “Codification”) to become the single source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities, with the exception of guidance issued by the U.S. Securities and Exchange Commission (the “SEC”) and its staff. All guidance contained in the Codification carries an equal level of authority. The provisions of SFAS No. 168 are effective for interim and annual periods ending after September 15, 2009. As the Codification is not intended to change GAAP, the adoption of the provisions of SFAS No. 168 will have no impact on our consolidated financial positions, results of operations or cash flows.

11. FAIR VALUE MEASUREMENTS

SFAS No. 157, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follow:

Level 1

Quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2

Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable;

Level 3

Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.

Investment Securities Available for Sale

Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include securities in less liquid markets.

Loans

The Company does not record loans at fair value on a recurring basis, however, from time to time, a loan is considered impaired and an allowance for loan loss is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with SFAS 114, “Accounting by Creditors for Impairment of a Loan,” (SFAS 114). The fair value of impaired loans is estimated using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At June 30, 2009, substantially all of the impaired loans were evaluated based upon the fair value of the collateral. In accordance with SFAS 157, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis as of June 30, 2009.

(dollars in thousands)	Carrying Value (Fair Value)		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Trading Gains and (Losses)		Total Changes in Fair Values Included in Period Earnings

Investment securities available for sale	$	177,710	$	134	$	177,358	$	218	$	-	$	-

The following is a reconciliation of the beginning and ending balances for the six months ended June 30, 2009 for Level 3 assets.

	Available-for-sale Securities
	Three Months Ended		Six Months Ended
(dollars in thousands)	June 30, 2009		June 30, 2009
Balance at beginning of period	$	218	$	218
Total realized and unrealized gains and losses:
Included in net income		-		-
Included in other comprehensive income		-		-
Purchases, issuances and settlements		-		-
Transfers in and/or out of Level 3		-		-
Balance at end of period	$	218	$	218

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. There are no liabilities which the Company measures at fair value on a nonrecurring basis. Assets measured at fair value on a nonrecurring basis are included in the table below:

(dollars in thousands)	Carrying Value (Fair Value)		Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Trading Gains and (Losses)		Total Changes in Fair Values Included in Period Earnings

Impaired loans	$	30,993	$	-	$	21,587	$	9,406	$	-	$	-
Other real estate owned	$	3,081	$	-	$	-	$	3,081	$	-	$	-

Fair value measurements for impaired loans are performed pursuant to SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," (SFAS 114), and are measured on a non-recurring basis. These impaired loans were carried at fair value as estimated using current and prior appraisals, discounting factors, the borrows’ financial results, estimated cash flows generated from the property and other factors. Certain assumptions and unobservable inputs are used many times by the appraiser, therefore, qualifying the assets as Level 3 in the fair value hierarchy.

The fair value of the Company’s other real estate owned is determined using Level 3 inputs which include current and prior appraisals and estimated costs to sell. There was no change in fair value of other real estate owned during the six months ended June 30, 2009.

The Company discloses fair value information about financial instruments for which it is practicable to estimate the value, whether or not such financial instruments are recognized on the balance sheet. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by quoted market price, if one exists.

Quoted market prices, if available, are shown as estimates of fair value. Because no quoted market prices exist for a portion of the Company’s financial instruments, the fair value of such instruments has been derived based on management’s assumptions with respect to future economic conditions, the amount and timing of future cash

flows and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the net realizable value could be materially different from the estimates presented below. In addition, the estimates are only indicative of individual financial instrument values and should not be considered an indication of the fair value of the Company taken as a whole.

The following methods and assumptions were used to estimate the fair value of each category of financial instrument for which it is practicable to estimate value:

Cash and federal funds sold: For cash and due from banks, and federal funds sold the carrying amount approximates fair value.

Interest bearing deposits with banks: Values are estimated by discounting the future cash flows using the current rates at which similar deposits would be earning.

Investment securities: For these instruments, fair values are based on published market or dealer quotes.

Loans held for sale: Fair values are at the carrying value (lower of cost or market) since such loans are typically committed to be sold (servicing released) at a profit.

Loans net of unearned interest: For variable rate loans that re-price on a scheduled basis, fair values are based on carrying values. The fair value of the remaining loans are estimated by discounting the estimated future cash flows using the current interest rate at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term.

Other earning assets: The fair value of bank owned life insurance is the current cash surrender value which is the carrying value.

Noninterest bearing deposits: The fair value of these deposits is the amount payable on demand at the reporting date, since generally accepted accounting standards does not permit an assumption of core deposit value.

Interest bearing deposits: The fair value of interest bearing transaction, savings, and money market deposits with no defined maturity is the amount payable on demand at the reporting date, since generally accepted accounting standards does not permit an assumption of core deposit value.

The fair value of certificates of deposit is estimated by discounting the future cash flows using the current rates at which similar deposits would be accepted.

Customer repurchase agreements and other borrowings: The carrying amount for variable rate borrowings approximate the fair values at the reporting date. The fair value of fixed rate Federal Home Loan Bank advances is estimated by computing the discounted value of contractual cash flows payable at current interest rates for obligations with similar remaining terms. The fair value of variable rate Federal Home Loan Bank advances is estimated to be carrying value since these liabilities are based on a spread to a current pricing index.

Off-balance sheet items: Management has reviewed the unfunded portion of commitments to extend credit, as well as standby and other letters of credit, and has determined that the fair value of such instruments is equal to the fee, if any, collected and unamortized for the commitment made.

The estimated fair values of the Company’s financial instruments at June 30, 2009 and December 31, 2008 are as follows:

	June 30,				December 31,
	2009				2008
	Carrying		Fair		Carrying		Fair
(dollars in thousands)	Value		Value		Value		Value
Assets
Cash and due from banks	$	28,187	$	28,187	$	27,157	$	27,157
Interest bearing deposits with other banks		2,426		2,426		2,489		2,489
Federal funds sold		27,044		27,044		191		191
Investment securities		177,710		177,710		169,079		169,079
Loans held for sale		10,502		10,502		2,718		2,718
Loans		1,313,394		1,313,549		1,265,640		1,261,301
Other earning assets		12,680		12,680		12,450		12,450

Liabilities
Noninterest bearing deposits		231,171		231,171		223,580		223,580
Interest bearing deposits		1,017,059		1,020,851		905,800		911,257
Borrowings		174,313		177,377		215,952		218,758

12. PREFERRED STOCK AND WARRANTS

On December 5, 2008, the Company entered into and consummated a Letter Agreement (the “Purchase Agreement”) with the United States Department of the Treasury (the “Treasury”), pursuant to which the Company issued 38,235 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Series A Preferred Stock”), having a liquidation amount per share equal to $1,000, for a total purchase price of $38,235,000. The Series A Preferred Stock pays cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. The Company accrued dividends on the preferred stock and recognized the discount accretion of $589 thousand for the three months ended June 30, 2009 reducing net income available to common stockholders to $2.1 million ($0.16 per basic and diluted common share). On May 15, 2009, the Company paid the quarterly dividend payment of $478 thousand on the $38.2 million of preferred stock Series A due for the three months ended March 31, 2009.

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

The following discussion provides information about the results of operations, and financial condition, liquidity, and capital resources of the Company and its subsidiaries as of the dates and periods indicated. This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this report and the Management Discussion and Analysis in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

This report contains forward looking statements within the meaning of the Securities Exchange Act of 1934, as amended, including statements of goals, intentions, and expectations as to future trends, plans, events or results of Company operations and policies and regarding general economic conditions. In some cases, forward looking statements can be identified by use of such words as “may”, “will”, “anticipate”, “believes”, “expects”, “plans”, “estimates”, “potential”, “continue”, “should”, and similar words or phases. These statements are based upon current and anticipated economic conditions, nationally and in the Company’s market, interest rates and interest rate policy, competitive factors and other conditions which, by their nature, are not susceptible to accurate forecast, and are subject to significant uncertainty. Because of these uncertainties and the assumptions on which this discussion and the forward looking statements are based, actual future operations and results in the future may differ materially from those indicated herein. Readers are cautioned against placing undue reliance on any such forward looking statements.

GENERAL

The Company is a growth oriented, one-bank holding company headquartered in Bethesda, Maryland. The Company provides general commercial and consumer banking services through EagleBank, its wholly owned banking subsidiary, a Maryland chartered bank which is a member of the Federal Reserve System (the “Bank”). The Company was organized in October 1997, to be the holding company for the Bank. The Bank was organized as an independent, community oriented, full service banking alternative to the super regional financial institutions, which dominate the primary market area. The Company’s philosophy is to provide superior, personalized service to its customers. The Company focuses on relationship banking, providing each customer with a number of services, becoming familiar with and addressing customer needs in a proactive, personalized fashion. The Bank currently has seven offices serving Montgomery County, five offices in the District of Columbia and one office in Fairfax County, Virginia.

The Company offers a broad range of commercial banking services to its business and professional clients as well as full service consumer banking services to individuals living and/or working primarily in the service area. The Company emphasizes providing commercial banking services to sole proprietors, small and medium-sized businesses, partnerships, corporations, non-profit organizations and associations, and investors living and working in and near the primary service area. A full range of retail banking services are offered to accommodate the individual needs of both corporate customers as well as the community the Company serves. These services include the usual deposit functions of commercial banks, including business and personal checking accounts, “NOW” accounts and money market and savings accounts, business, construction, and commercial loans, residential mortgages and consumer loans and cash management services. The Company has developed significant expertise and commitment as an SBA lender, and has been designated a Preferred Lender by the Small Business Administration (“SBA”).

CRITICAL ACCOUNTING POLICIES

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and follow general practices within the banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the consolidated financial statements; accordingly, as this information changes, the consolidated financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or a valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility.

The fair values and the information used to record valuation adjustments for investment securities available for sale are based either on quoted market prices or are provided by other third-party sources, when available. The Company’s investment portfolio is categorized as available for sale with unrealized gains and losses net of tax being a component of stockholders’ equity and comprehensive income.

The allowance for credit losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two principles of accounting: (a) Statement of Financial Accounting Standards (“SFAS”) No. 5, “Accounting for Contingencies”, which requires that losses be accrued when they are probable of occurring and are estimable and (b) SFAS No. 114, “Accounting by Creditors for Impairment of a Loan”, which requires that losses be accrued when it is probable that the Company will not collect all principal and interest payments according to the contractual terms of the loan. The loss, if any, can be determined by the difference between the loan balance and the value of collateral, the present value of expected future cash flows, or values observable in the secondary markets.

Three components comprise our allowance for credit losses: a specific allowance, a formula allowance and a nonspecific or environmental factors allowance. Each component is determined based on estimates that can and do change when actual events occur.

The specific allowance allocates a reserve to identified impaired loans. Loans identified in the risk rating evaluation as substandard, doubtful or loss, (classified loans) are segregated from non-classified loans. Classified loans are assigned specific reserves based on an impairment analysis. Under SFAS 114, a loan for which reserves are individually allocated may show deficiencies in the borrower’s overall financial condition, payment record, support available from financial guarantors and for the fair market value of collateral. When a loan is identified as impaired, a specific reserve is established based on the Company’s assessment of the loss that may be associated with the individual loan.

The formula allowance is used to estimate the loss on internally risk rated loans, exclusive of those identified as requiring specific reserves. The portfolio of unimpaired loans is stratified by loan type and risk assessment. Allowance factors relate to the type of loan and level of the internal risk rating, with loans exhibiting higher risk and loss experience receiving a higher allowance factor.

The environmental allowance is also used to estimate the loss associated with pools of non-classified loans. These non-classified loans are also stratified by loan type, and environmental allowance factors are assigned by management based upon a number of conditions, including delinquencies, loss history, changes in lending policy and procedures, changes in business and economic conditions, changes in the nature and volume of the portfolio, management expertise, concentrations within the portfolio, quality of internal and external loan review systems, competition, and legal and regulatory requirements.

The allowance captures losses inherent in the portfolio which have not yet been recognized. Allowance factors and the overall size of the allowance may change from period to period based upon management’s assessment of the above described factors, the relative weights given to each factor, and portfolio composition.

Management has significant discretion in making the judgments inherent in the determination of the provision and allowance for credit losses, including, in connection with the valuation of collateral, a borrower’s prospects of repayment, and in establishing allowance factors on the formula and environmental components of the allowance. The establishment of allowance factors involves a continuing evaluation, based on management’s ongoing assessment of the global factors discussed above and their impact on the portfolio. The allowance factors may change from period to period, resulting in an increase or decrease in the amount of the provision or allowance, based upon the same volume and classification of loans. Changes in allowance factors can have a direct impact on the amount of the provision, and a related after tax effect on net income. Errors in management’s perception and assessment of the global factors and their impact on the portfolio could result in the allowance not being adequate to cover losses in the portfolio, and may result in additional provisions or charge-offs. Alternatively, errors in management’s perception and assessment of the global factors and their impact on the portfolio could result in the allowance being in excess of amounts necessary to cover losses in the portfolio, and may result in lower provisions in the future. For additional information regarding the provision for credit losses, refer to the discussion under the caption “Provision for Credit Losses” below.

The Company follows the provisions of SFAS No. 123R, “Share-Based Payment”, which requires the expense recognition for the fair value of share based compensation awards, such as stock options, restricted stock, and performance based shares. This standard allows management to establish modeling assumptions as to expected stock price volatility, option terms, forfeiture rates and dividend rates which directly impact estimated fair value. The accounting standard also allows for the use of alternative option pricing models which may impact fair value as determined. The Company’s practice is to utilize reasonable and supportable assumptions which are reviewed with the appropriate Board Committee.

In accounting for the acquisition of Fidelity, the Company followed the provisions of SFAS No. 141 “Business Combinations”, which mandates the use of the purchase method of accounting and AICPA Statement of Position 03-3 (“SOP 03-3”), “Accounting for Certain Loans or Debt Securities Acquired in a Transfer”. Accordingly, the tangible assets and liabilities and identifiable intangibles acquired were recorded at their respective

fair values on the date of acquisition, with any impaired loans acquired being recorded at fair value outside the allowance for credit losses. The valuation of the loan and time deposit portfolios acquired were made by independent analysis for the difference between the instruments stated interest rates and the instruments current origination interest rate, with premiums and discounts being amortized to interest income and interest expense to achieve an effective market interest rate. An identified intangible asset related to core deposits was recorded based on independent valuation. Deferred tax assets were recorded for the future value of a net operating loss and for the tax effect of timing differences between the accounting and tax basis of assets and liabilities. The Company recorded an unidentified intangible (goodwill) for the excess of the purchase price of the acquisition (including direct acquisition costs) over the fair value of net tangible and identifiable intangible assets acquired. In the second quarter of 2009, an adjustment to impaired loans acquired was made in the amount of $2.4 million, based on facts recently determined which also adjusted the amount of goodwill recorded (which was permitted within the 12 month period subsequent to consummation of the acquisition)

RESULTS OF OPERATIONS

Regulator Developments

Deposits in the Bank are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to a maximum amount, which is generally $250,000 (in effect until December 31, 2013) per depositor subject to aggregation rules. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. In addition, the Bank participates in the FDIC’s Transaction Account Guarantee (“TAG”) program. Under the TAG program, deposits in excess of $250,000 in all noninterest bearing transaction accounts and certain NOW accounts are insured by the FDIC. The TAG program is under consideration by the FDIC for extension to June 30, 2010.

As disclosed in the Company’s 2008 Annual Report on Form 10-K, the FDIC adopted a Restoration Plan to restore the reserve ratio of the Deposit Insurance Fund (“DIF”) to 1.15%. Effective April 1, 2009, the Restoration Plan provides base assessment rate adjustments downward for unsecured debt, upward for secured liabilities, and, for certain institutions, upward for brokered deposits. For most institutions, assessments rates are based on weighted-average supervisory ratings and financial ratios. Under the regulations of the FDIC, currently in effect, insurance assessments range between 0.07% and 0.78%, depending on a bank’s risk classification, as well as its unsecured debt, secured liabilities and brokered deposits.

In addition, under an interim rule approved in May 2009, the FDIC imposed a five basis point emergency special assessment based on assets less Tier 1 capital on insured depository institutions as of June 30, 2009. The special assessment is payable on September 30, 2009. The interim rule also authorizes the FDIC to impose an additional emergency special assessment after June 30, 2009, of up to 10 basis points, if necessary to maintain public confidence in federal deposit insurance. The emergency special assessment resulted in an increase of $723,000 in FDIC insurance expense for the Bank during the second quarter of 2009 compared to the second quarter of 2008.

Based upon the Restoration Plan, the emergency assessment of five basis points as of June 30, 2009 and other higher deposit insurance assessments beginning in the second quarter of 2009, the Company’s FDIC insurance expense will increase significantly its operating expenses for the year ended December 31, 2009.

Summary

On August 31, 2008 the Company completed the acquisition of Fidelity & Trust Financial Corporation (“Fidelity”) and its subsidiary Fidelity & Trust Bank (“F&T Bank”), which added approximately $360 million in loans, $100 million in investments, $385 million in deposits, $47 million in customer repurchase agreements and $13 million in equity capital. The combined organization is reflected in the balance sheet at June 30, 2009 and results of operations for the six and three months ended June 30, 2009 but is not reflected in the balance sheet at June 30, 2008 and the results of operations for the six and three months ended June 30, 2008.

The Company reported net income of $4.7 million for the six months ended June 30, 2009 as compared to $3.5 million for the same six month period in 2008. Net income available to common shareholders (which is after accrual of preferred stock dividends) was $3.6 million for the six months ended June 30, 2009 ($0.28 per basic and diluted common share), compared to $3.5 million ($0.33 per basic and $0.32 per diluted common share) for the same period in 2008, an increase of 1%.

Net income available to common shareholders (which is after accrual of preferred stock dividends), was $2.1 million for the three months ended June 30, 2009 ($0.16 per basic and diluted common share), compared to $1.9 million ($0.17 per basic and diluted common share) for the same three months of 2008, an increase of 11%.

The Company had an annualized return on average assets of 0.63% and an annualized return on average common equity of 6.81% for the first six months of 2009, as compared to annualized returns on average assets and average common equity of 0.81% and 8.40%, respectively, for the same six months of 2008.

For the three months ended June 30, 2009, the Company had an annualized return on average assets of 0.70% and an annualized return on average common equity of 7.71% , as compared to annualized returns on average assets and average common equity of 0.84% and 8.81%, respectively, for the same period in 2008.

For the six months ended June 30, 2009, net interest income showed an increase of 56% as compared to the same period in 2008 on growth in average earning assets of 74%. For the six months ended June 30, 2009 as compared to the same period in 2008, the Company experienced a decline in its net interest margin from 4.26% to 3.83% or 43 basis points. This change was primarily due to margin compression, reflecting declines in market interest rates on earning assets resulting from Federal Reserve activities which have not been matched by comparable declines in rates on interest bearing liabilities and by a lesser benefit of noninterest funding sources in a much lower interest rate environment.

For the three months ended June 30, 2009, net interest income showed an increase of 55% as compared to the same period in 2008 on growth in average earning assets of 71%. For the three months ended June 30, 2009 as compared to the same period in 2008, the Company experienced a decline in its net interest margin from 4.34% to 3.91% or 43 basis points. The decrease for the three months ended June 30, 2009 is due to the same reason stated above for the decline in the margin for the six months ended June 30, 2009.

For the six months ended June 30, 2009 and 2008, average interest bearing liabilities funding average earning assets was 78% and 77%, respectively. Additionally, while the average rate on earning assets for the six month period ended June 30, 2009 has declined by 111 basis points from 6.70% to 5.59%, as compared to the same period in 2008, the cost of interest bearing liabilities has decreased by 89 basis points from 3.15% to 2.26%, resulting in a decrease in the net interest spread of 22 basis points from 3.55% for the six months ended June 30, 2008 to 3.33% for the six months ended June 30, 2009. The 43 basis point decline in the net interest margin compares to a smaller decrease in the net interest spread as the benefit of average noninterest sources funding earning assets declined from 71 basis points for the six months ended June 30, 2008 to 50 basis points for the six months ended June 30, 2009. This decline was due to the significantly lower level of interest rates during the six months ended June 30, 2009 as compared to 2008.

For the three months ended June 30, 2009 and 2008, average interest bearing liabilities funding average earning assets was 78% and 77%, respectively. Additionally, while the average rate on earning assets for the three months ended June 30, 2008has declined by 99 basis points from 6.57% to 5.58%, as compared to 2009, the cost of interest bearing liabilities has decreased by 73 basis points from 2.88% to 2.15%, resulting in a decrease in the net interest spread of 26 basis points from 3.69% for the quarter ended June 30, 2008 to 3.43% for the three months ended June 30, 2009. The net interest margin decreased 43 basis points from 4.34% for the three months ended June 30, 2008 to 3.91% for the three months ended June 30, 2008 and compares to a smaller decrease in the net interest spread as the benefit of average noninterest sources funding earning assets declined from 66 basis points for the three months ended June 30, 2008 to 48 basis points for the three months ended June 30, 2009, also due to the significantly lower level of interest rates in 2009 as compared to 2008.

The Company believes it has effectively managed its net interest margin and net interest income over the past 12 months as market interest rates have declined sharply. This factor has been significant to overall earnings performance over that period as net interest income represents the most significant component of the Company’s revenues.

Due to the need to meet loan funding objectives in excess of deposit growth, the bank has availed itself to a larger extent on alternative funding sources, such as Federal Home Loan Bank (“FHLB”) advances, correspondent bank lines of credit and brokered time deposits which costs have been judged reasonable as an alternative to more core funding. If significant reliance on alternative funding sources continues, the Company’s earnings could be adversely impacted, depending on the cost of those funds when needed.

In terms of the average balance sheet composition or mix, loans, which generally have higher yields than securities and other earning assets, decreased slightly from 89% of average earning assets in the first six months of 2008 to 88% of average earning assets for the same period of 2009. Investment securities for the first six months of 2009 amounted to 11% of average earning assets, an increase of 1% from an average of 10% for the same period in 2008. Federal funds sold averaged 0.6% of average earning assets in the first six months of 2009 and 2008.

For the three months ended June 30, 2009 average loans were 88% of average earning assets a decrease of 2%, as compared to 90% for the same period in 2008. Investment securities for the three months ended June 30, 2009 amounted to 11% of average earning assets, an increase of 1% from an average of 10% for the same period in 2008 Federal funds sold averaged 0.6% of average earning assets for the three months ended June 30, 2009 as compared to 0.4% for the same period in 2008.

The provision for credit losses was $3.3 million for the first six months of 2009 as compared to $1.5 million for the same period in 2008. The higher provisioning in the first six months of 2009 as compared to 2008 is attributable to higher net charge-offs in 2009, risk migration within the portfolio and increased reserves for problem loans.

The provision for credit losses was $1.7 million for the three months ended June 30, 2009 as compared to $814 thousand for the three months ended June 30, 2008. The higher provisioning in the second quarter of 2009 as compared to the second quarter of 2008 is primarily attributable to higher levels of loan growth in the second quarter of 2009 as compared to the same period in 2008 ($45.4 million as compared to $35.6 million), increases in specific reserves for problem and potential problem loans, and net charge-offs.

The ratio of net charge-offs to average loans was 0.32% for the first six months of 2009 as compared to 0.11% for the first six months of 2008. The continued management of a quality loan portfolio remains a key objective of the Company. For the six months ended June 30, 2009, net charge-offs totaled $2.0 million versus $417 thousand for the six months ended June 30, 2008.

In total, the ratio of net charge-offs to average loans was 0.35% for the three months ended June 30, 2009 as compared to 0.20% for the same three month period of 2008. For the three months ended June 30, 2009, the Company recorded net charge-offs of $1.1 million as compared to $393 thousand of net charge-offs for the three months ended June 30, 2008.

Total noninterest income was $4.5 million for the first six months of 2009 as compared to $1.9 million for the same period in 2008, a 137% increase. This increase was due primarily to higher service charges on deposit accounts of $694 thousand, gains realized on the sale of residential and SBA loans of $379 thousand, and gains realized on the investment securities portfolio of $1.5 million. Investment gains realized in 2009 are the result of asset/liability management decisions to reduce call risk in the portfolio of U.S. Agency securities, to reduce potential extension risk in longer term U.S. Agency mortgage backed securities and to better position the investment portfolio for potentially higher interest rates over future years. Increased gains from mortgage banking activities in 2009 reflect higher levels of mortgage refinancing given lower market interest rates.

Total noninterest income for the three months ended June 30, 2009 increased 220% from the same period in 2008 from $970 thousand to $3.1 million. This increase was due primarily to higher service charges on deposit accounts of $315 thousand, gains realized on the sale of residential and SBA loans of $375 thousand, and gains realized on the investment securities portfolio of $1.4 million for the reasons noted above.

Total noninterest expenses increased from $12.7 million in the first six months of 2008 to $21.9 million for the first six months of 2009, an increase of 72%. The primary reason for this increase was the Fidelity acquisition which increased the size of the organization resulting in higher staff levels and related personnel costs of $3.1

million, increased occupancy costs of $1.5 million, and data processing of $379 thousand. In addition, higher costs were incurred for marketing and advertising of $362 thousand, legal, accounting and professional fees of $969 thousand, and FDIC insurance premium of $1.7 million which includes the special FDIC assessment of approximately $723 thousand recorded in the second quarter of 2009 (refer to discussion above under Market Developments). Other expenses increased $1.2 million primarily due to $161 thousand in OREO expenses, a $224 thousand director fee agreement termination payment, and $795 thousand in general and administrative costs due to the growth of the organization subsequent to the Fidelity acquisition and to increases in loan collection expenses. The efficiency ratio, which measures the level of non-interest expense to total revenue (defined as the sum of net interest income and noninterest income) was 67.66% for the six months ended June 30, 2009, as compared to 64.50% for the six months ended June 30, 2008. The increase in the efficiency ratio is due to higher costs resulting from maintaining a larger organization following the Fidelity acquisition which was off-set by the gains realized on the investment securities portfolio of $1.4 million.

For the three months ended June 30, 2009, total noninterest expenses were $11.6 million, as compared to $6.5 million for the same period in 2008, an increase of 77%. The Fidelity acquisition increased the size of the organization resulting in higher staff levels and related personnel costs of $1.4 million, increased occupancy costs of $724 thousand, and higher data processing of $172 thousand. In addition, higher costs were incurred for marketing and advertising of $128 thousand, legal, accounting and professional fees of $549 thousand, and FDIC insurance premium increased $1.3 million (refer to discussion above under Market Developments). Other expenses increased $733 thousand primarily due to $155 thousand in OREO expenses, and the $224 thousand director fee agreement termination payment. The efficiency ratio for the three months ended June 30, 2009 was 66.42% as compared to 63.96% for the same period in 2008. While the Company continues to make strategic investments in infrastructure, more attention to overall cost management and post-merger integration is being emphasized.

For the six months ended June 30, 2009 as compared to 2008, the increase in net interest income from increased volumes, offset by the combination of a higher provision for credit losses, higher levels of noninterest income, a lower net interest margin, higher levels of noninterest expenses, and the preferred stock dividend resulted in slightly increased net income available to common shareholders during the six month period ended June 30, 2009 as compared to 2008.

The ratio of average common equity to average assets decreased slightly from 9.59% for the first six months of 2008 to 9.51% for the first six months of 2009. The ratio increased from 9.50% for the three months ended June 30, 2008 to 9.58% for the three months ended June 30, 2009. As discussed below, the capital ratios of the Bank and Company remain above well capitalized levels.

Net Interest Income and Net Interest Margin

Net interest income is the difference between interest income on earning assets and the cost of funds supporting those assets. Earning assets are composed primarily of loans and investment securities. The cost of funds represents interest expense on deposits, customer repurchase agreements and other borrowings. Noninterest bearing deposits and capital are other components representing funding sources (refer to discussion above under Results of Operations). Changes in the volume and mix of assets and funding sources, along with the changes in yields earned and rates paid, determine changes in net interest income. Net interest income for the first six months of 2009 was $27.8 million compared to $17.8 million for the first six months of 2008, an increase of 56%. This increase in net interest income for the six months ended June 30, 2009 was attributable in part to the Fidelity acquisition which contributed to an increased volume of average earning assets of 78%, offset somewhat by a 10% decline in the net interest margin from 4.26% to 3.83%. The decline in the net interest margin was due to a lower benefit of noninterest funding sources as market interest rates were substantially lower in the first six months of 2009 as compared to 2008. In an effort to combat a weaker economic climate, the Federal Reserve lowered its targeted federal funds rate from 2.00% at June 30, 2008 to between 0.0% and 0.25% in December 2008. The net interest margin was higher in the second quarter of 2009 (3.91%) as compared to the first quarter of 2009 (3.76%).

The tables below present the average balances and rates of the various categories of the Company’s assets and liabilities for the three and six months ended June 30, 2009 and 2008. Included in the table is a measurement of