Edgar Filing: EAGLE BANCORP INC

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, 2010

( ) 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 2, 2010, the registrant had 19,653,974 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, 2010 and December 31, 2009
	Consolidated Statements of Operations for the Six and Three Month Periods Ended June 30, 2010 and 2009
	Consolidated Statements of Changes in Stockholders’ Equity for the Six Month Periods Ended June 30, 2010 and 2009
	Consolidated Statements of Cash Flows for the Six Month Periods Ended June 30, 2010 and 2009

	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.	Removed and Reserved

Item 5.	Other Information

Item 6.	Exhibits

Signatures

Item 1 – Financial Statements

EAGLE BANCORP, INC.

Consolidated Balance Sheets

June 30, 2010 and December 31, 2009

(dollars in thousands, except per share data)

	June 30,			December 31,
	2010			2009
Assets	(Unaudited)			(Audited)
Cash and due from banks	$	23,901		$	21,955
Federal funds sold		89,755			88,248
Interest bearing deposits with banks and other short-term investments		8,062			7,484
Investment securities available for sale, at fair value		237,117			235,227
Federal Reserve and Federal Home Loan Bank stock		10,285			10,417
Loans held for sale		24,491			1,550
Loans		1,504,413			1,399,311
Less allowance for credit losses		(21,741	)		(20,619	)
Loans, net		1,482,672			1,378,692
Premises and equipment, net		8,687			9,253
Deferred income taxes		12,279			12,455
Bank owned life insurance		13,130			12,912
Intangible assets, net		4,277			4,379
Other real estate owned		3,556			5,106
Other assets		19,053			17,826
Total Assets	$	1,937,265		$	1,805,504

Liabilities
Deposits:
Noninterest bearing demand	$	313,812		$	307,959
Interest bearing transaction		54,489			59,720
Savings and money market		709,987			582,854
Time, $100,000 or more		314,081			296,199
Other time		185,622			213,542
Total deposits		1,577,991			1,460,274
Customer repurchase agreements
and federal funds purchased		106,104			90,790
Other short-term borrowings		-			10,000
Long-term borrowings		49,300			49,300
Other liabilities		7,127			6,819
Total liabilities		1,740,522			1,617,183

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 23,235 and 23,235, respectively,
discount of $690 and $570, respectively, net		22,493			22,612
Common stock, par value $.01 per share; shares authorized 50,000,000 shares
issued and outstanding 19,652,918 and 19,534,226, respectively		197			195
Warrants		946			946
Additional paid in capital		129,701			129,211
Retained earnings		39,400			33,024
Accumulated other comprehensive income		4,006			2,333
Total stockholders' equity		196,743			188,321
Total Liabilities and Stockholders' Equity	$	1,937,265		$	1,805,504

See notes to consolidated financial statements.

EAGLE BANCORP, INC.

Consolidated Statements of Operations

For the Six and Three Month Periods Ended June 30, 2010 and 2009 (Unaudited)

(dollars in thousands, except per share data)

	Six Months Ended				Three Months Ended
	June 30,				June 30,
Interest Income	2010		2009		2010		2009
Interest and fees on loans	$	42,340	$	36,683	$	21,878	$	18,570
Interest and dividends on investment securities		3,715		3,768		1,738		1,839
Interest on balances with other banks and short-term investments		59		37		26		18
Interest on federal funds sold		83		11		47		5
Total interest income		46,197		40,499		23,689		20,432
Interest Expense
Interest on deposits		8,855		10,609		4,317		5,052
Interest on customer repurchase agreements
and federal funds purchased		378		574		195		293
Interest on short-term borrowings		27		168		9		123
Interest on long-term borrowings		1,097		1,365		551		644
Total interest expense		10,357		12,716		5,072		6,112
Net Interest Income		35,840		27,783		18,617		14,320
Provision for Credit Losses		3,790		3,284		2,101		1,718
Net Interest Income After Provision For Credit Losses		32,050		24,499		16,516		12,602

Noninterest Income
Service charges on deposits		1,486		1,455		756		717
Gain on sale of loans		251		658		197		527
Gain on sale of investment securities		573		1,537		573		1,405
Increase in the cash surrender value of bank owned life insurance		217		230		107		116
Other income		705		655		377		338
Total noninterest income		3,232		4,535		2,010		3,103
Noninterest Expense
Salaries and employee benefits		11,644		10,349		5,969		5,044
Premises and equipment expenses		4,704		3,702		2,612		1,827
Marketing and advertising		528		557		281		242
Data processing		1,258		1,122		643		575
Legal, accounting and professional fees		1,526		1,377		952		787
FDIC insurance		1,335		1,915		701		1,474
Other expenses		3,605		2,844		1,979		1,624
Total noninterest expense		24,600		21,866		13,137		11,573
Income Before Income Tax Expense		10,682		7,168		5,389		4,132
Income Tax Expense		3,844		2,442		1,942		1,481
Net Income		6,838		4,726		3,447		2,651
Preferred Stock Dividends and Discount Accretion		644		1,172		324		589
Net Income Available to Common Shareholders	$	6,194	$	3,554	$	3,123	$	2,062

Earnings Per Common Share
Basic	$	0.32	$	0.28	$	0.16	$	0.16
Diluted	$	0.31	$	0.28	$	0.16	$	0.16

See notes to consolidated financial statements.

EAGLE BANCORP, INC.

Consolidated Statements of Changes in Stockholders’ Equity

For the Six Month Periods Ended June 30, 2010 and 2009 (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			Equity
Balance, January 1, 2010	$	22,612		$	195	$	946	$	129,211		$	33,024		$	2,333		$	188,321
Comprehensive Income
Net Income												6,838						6,838
Other comprehensive income:
Unrealized gain on securities available for sale (net of taxes)															2,040			2,040
Less: reclassification adjustment for gains net of taxes of $206 included in net income															(367	)		(367	)
Total Comprehensive Income																		8,511
Stock-based compensation									302									302
Exercise of options for 53,039 shares of common stock					2				130									132
Tax benefit on non-qualified options exercise									74									74
Capital raise issuance cost									(16	)								(16	)
Preferred stock:
Preferred stock dividends												(581	)					(581	)
Discount accretion		(119	)									119						-
Balance, June 30, 2010	$	22,493		$	197	$	946	$	129,701		$	39,400		$	4,006		$	196,743

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
Stock-based compensation									277									277
Preferred stock dividends												(850	)					(850	)
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

See notes to consolidated financial statements.

EAGLE BANCORP, INC.

Consolidated Statements of Cash Flows

For the Six Month Periods Ended June 30, 2010 and 2009 (Unaudited)

(dollars in thousands, except per share data)

	2010			2009
Cash Flows From Operating Activities:
Net income	$	6,838		$	4,726
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for credit losses		3,790			3,284
Depreciation and amortization		1,327			1,130
Gains on sale of loans		(251	)		(658	)
Origination of loans held for sale		(41,222	)		(72,270	)
Proceeds from sale of loans held for sale		18,532			65,144
Net increase in cash surrender value of BOLI		(218	)		(230	)
Decrease (increase) deferred income taxes		176			(1,298	)
Net loss on sale of other real estate owned		245			158
Net gain on sale of investment securities		(573	)		(1,537	)
Stock-based compensation expense		302			277
Excess tax benefit from stock-based compensation		(74	)		-
Increase in other assets		516			(3,723	)
Increase in other liabilities		308			13,291
Net cash (used in) provided by operating activities		(10,304	)		8,294
Cash Flows From Investing Activities:
Increase (decrease) in interest bearing deposits with other banks
and short term investments		(578	)		63
Purchases of available for sale investment securities		(46,218	)		(98,915	)
Proceeds from maturities of available for sale securities		28,725			37,871
Proceeds from sale/call of available for sale securities		16,176			53,505
Purchases of federal reserve and federal home loan bank stock		-			(4,185	)
Proceeds from repurchase of federal reserve and federal home loan bank stock		132			4,630
Net increase in loans		(108,220	)		(49,791	)
Proceeds from sale of other real estate owned		1,755			667
Bank premises and equipment acquired		(669	)		(617	)
Net cash used in investing activities		(108,897	)		(56,772	)
Cash Flows From Financing Activities:
Increase in deposits		117,717			118,850
Increase in customer repurchase agreements and
federal funds purchased		15,314			13,361
Decrease in other short-term borrowings		(10,000	)		(25,000	)
Increase in long-term borrowings		-			(30,000	)
Payment of dividends on preferred stock		(581	)		(850	)
Proceeds from exercise of stock options		130			-
Excess tax benefit from stock-based compensation		74			-
Net cash provided by financing activities		122,654			76,361
Net Increase In Cash and Cash Equivalents		3,453			27,883
Cash and Cash Equivalents at Beginning of Period		110,203			27,348
Cash and Cash Equivalents at End of Period	$	113,656		$	55,231
Supplemental Cash Flows Information:
Interest paid	$	10,623		$	10,562
Income taxes paid	$	4,517		$	3,096
Non-Cash Investing Activities
Transfers from loans to other real estate owned	$	450		$	2,300

See notes to consolidated financial statements.

EAGLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Six Months Ended June 30, 2010 and 2009 (Unaudited)

1. BASIS OF PRESENTATION

The Consolidated Financial Statements include the accounts of Eagle Bancorp, Inc. and its subsidiaries (the “Company”), EagleBank (the “Bank”), Eagle Commercial Ventures LLC (“ECV”) and Bethesda Leasing, LLC with all significant intercompany transactions eliminated.

The consolidated financial statements of 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, 2009 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 (“GAAP”) 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, 2009. The Company believes that the disclosures are adequate to make the information presented not misleading. Certain reclassifications have been made to amounts previously reported to conform to the current period presentation.

These statements should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. Operating results for the three and six months ended June 30, 2010 are not necessarily indicative of the results of operations to be expected for the remainder of the year, or for any other period. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results may differ from those estimates and such differences could be material to the financial statements.

2. NATURE OF OPERATIONS

The Company, through the Bank, conducts a full service community banking business, primarily in Montgomery County, Maryland, Washington, D.C. and Fairfax County in Northern Virginia. 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 offers its products and services through thirteen banking offices and various electronic capabilities, including remote deposit services. Bethesda Leasing, LLC, direct subsidiary of the Company holds title to and manages Other Real Estate Owned (“OREO”) assets. 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. Prior to the formation of ECV, the Company engaged directly in occasional subordinated financing transactions, which involve higher levels of risk, together with commensurate returns. 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 currently 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 AcSEC’s guidance reprinted from the CPA Letter, Special Supplement, dated February 10, 1986 (also referred to as Exhibit 1 to AcSEC Practice Bulletin No.1) and Staff Accounting Bulletin No. 101 (Revenue Recognition in Financial Statements). The additional interest is included as a component of noninterest income. ECV recorded no additional interest on higher risk transactions during 2010 and 2009 (although normal interest income was recorded) and had one higher risk lending transaction outstanding as of June 30, 2010 and December 31, 2009, amounting to $1.5 million and $1.6 million, 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 noninterest 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. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets are subject to impairment testing at least annually, or when events or changes in circumstances indicate the assets might be impaired. Intangible assets (other than goodwill) are amortized to expense using accelerated or straight-line methods over their respective estimated useful lives. The Company’s testing of potential impairment of intangible assets at December 31, 2009, resulted in no impairment being recorded.

7. CUSTOMER REPURCHASE AGREEMENTS

The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same securities. Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, securities sold under agreements to repurchase are accounted for as collateralized financing arrangements and not as a sale and subsequent repurchase of securities. The agreements are entered into primarily as accommodations for large commercial deposit customers. The obligation to repurchase the securities is reflected as a liability in the Company’s Consolidated Balance Sheets, while the securities underlying the securities sold under agreements to repurchase remain in the respective assets accounts and are delivered to and held as collateral in segregated accounts by third parties.

8. 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, 2010	Cost		Gains		Losses		Value
(dollars in thousands)
U. S. Government agency securities	$	91,239	$	1,264	$	3	$	92,500
Mortgage backed securities		100,138		4,318		23		104,433
Municipal bonds		38,627		1,273		98		39,802
Other equity investments		437		-		55		382
	$	230,441	$	6,855	$	179	$	237,117

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
December 31, 2009	Cost		Gains		Losses		Value
(dollars in thousands)
U. S. Government agency securities	$	75,980	$	412	$	285	$	76,107
Mortgage backed securities		122,076		3,501		181		125,396
Municipal bonds		32,845		717		237		33,325
Other equity investments		436		-		37		399
	$	231,337	$	4,630	$	740	$	235,227

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, 2010	Value		Losses		Value		Losses		Value		Losses
(dollars in thousands)
U. S. Government agency securities	$	3,004	$	3	$	-	$	-	$	3,004	$	3
Mortgage backed securities		3,107		23		-		-		3,107		23
Municipal bonds		2,436		66		2,297		32		4,733		98
Other equity investments		-		-		123		55		123		55
	$	8,547	$	92	$	2,420	$	87	$	10,967	$	179

	Less than				12 Months
	12 Months				or Greater				Total
	Estimated				Estimated				Estimated
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
December 31, 2009	Value		Losses		Value		Losses		Value		Losses
(dollars in thousands)
U. S. Government agency securities	$	37,357	$	285	$	-	$	-	$	37,357	$	285
Mortgage backed securities		11,681		181		-		-		11,681		181
Municipal bonds		13,850		237		-		-		13,850		237
Other equity investments		140		37		-		-		140		37
	$	63,028	$	740	$	-	$	-	$	63,028	$	740

The unrealized losses that exist are generally the result of changes in market interest rates and spread relationships since original purchases. The weighted average duration of debt securities, which comprise 99.8% of total investment securities, is relatively short at 2.8 years. The gross unrealized loss on other equity investments represents common stock of five local banking companies owned by the Company, and traded on a broker “bulletin board” exchange. The estimated fair value is determined by broker quoted prices. 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. The Company does not believe that the investment securities that were in an unrealized loss position as of June 30, 2010 represent an other-than-temporary impairment. The unrealized gross losses that exist on the debt and equity securities are the result of market changes in interest rates since the original purchase and widening interest rate spreads on debt and common stock issues. The Company does not intend to sell the investments and it is more likely than not that the Company will not have to sell the securities before recovery of its amortized cost basis, which may be maturity. In addition, at June 30, 2010, the Company held $10.3 million in equity securities in a combination of Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”) stocks which are held for regulatory purposes and are not marketable.

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

	June 30, 2010				December 31, 2009
	Amortized		Estimated		Amortized		Estimated
(dollars in thousands)	Cost		Fair Value		Cost		Fair Value
U. S. Government agency securities maturing:
One year or less	$	15,392	$	15,461	$	8,095	$	8,186
After one year through five years		75,847		77,039		67,885		67,921
Mortgage backed securities		100,138		104,433		122,076		125,396
Municipal bonds maturing:
Five years through ten years		5,252		5,417		3,023		3,072
After ten years		33,375		34,385		29,822		30,253
Other equity investments		437		382		436		399
	$	230,441	$	237,117	$	231,337	$	235,227

The carrying value of securities pledged as collateral for certain government deposits, securities sold under agreements to repurchase, and certain lines of credit with correspondent banks at June 30, 2010 was $175 million. As of June 30, 2010 and December 31, 2009, 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 stockholders’ equity.

9. ACCOUNTING STANDARDS UPDATE

Accounting Standards Update (ASU) No. 2010-20, “Receivables” (Topic 830) - Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” ASU 2010-20 requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment. The required disclosures include, among other things, a rollforward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past due loans and credit quality indicators. ASU 2010-20 will be effective for the Company’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period will be required for the Company’s financial statements that include periods beginning on or after January 1, 2011.

10. 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)	2010		2009		2010		2009
Basic:
Net income available to common shareholders	$	6,194	$	3,554	$	3,123	$	2,062
Average common shares outstanding		19,625		12,747		19,641		12,750
Basic net income per common share	$	0.32	$	0.28	$	0.16	$	0.16

Diluted:
Net income available to common shareholders	$	6,194	$	3,554	$	3,123	$	2,062
Average common shares outstanding		19,625		12,747		19,641		12,750
Adjustment for common share equivalents		381		70		431		137
Average common shares outstanding-diluted		20,006		12,817		20,072		12,887
Diluted net income per common share	$	0.31	$	0.28	$	0.16	$	0.16

Anti-dilutive shares		337,324		1,607,261		336,224		804,597

11. STOCK-BASED COMPENSATION

The Company maintains the 1998 Stock Option Plan (“1998 Plan”) and the 2006 Stock Plan (“2006 Plan”), and, in connection with the acquisition of Fidelity & Trust Financial Corporation (“Fidelity”) and its subsidiary Fidelity & Trust Bank (F&T Bank”), assumed the Fidelity 2004 Long Term Incentive Plan and 2005 Long Term Incentive Plan (the “Fidelity Plans”). No additional options may be granted under the 1998 Plan or the Fidelity Plans.

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. As amended, 1,215,000 shares of common stock are subject to issuance pursuant to awards under the 2006 Plan. Option awards are made with an exercise price equal to the average of the high and low price of the Company’s shares at the date of grant.

For awards that are service based, compensation expense is being recognized over the service (vesting) period based on fair value, which for stock option grants is computed using the Black Scholes model, and for restricted stock awards is based on the average of the high and low stock price of the Company’s shares at the date of grant. For awards that are performance based, compensation expense is recorded based on the probability of achievement of the goals underlying the grant.

In January 2010, the Company awarded 81,600 shares of restricted stock to employees, senior officers and to a Director. Of the total restricted stock awarded, 17,464 shares vest in five substantially equal installments beginning on the date of grant. The Company awarded 31,247 shares that vest 100% upon the later of the date of repayment in full of all financial assistance received by the Company under the Troubled Asset Relief Program Capital Purchase Program (the “Capital Purchase Program”) or on January 21, 2012. The remaining 32,889 shares vest 60% upon the second anniversary of the date of grant and 20% on the third and fourth anniversaries of the date of grant or upon the later date of repayment in full of all financial assistance received by the Company under Capital Purchase Program.

In April 2010, the Company awarded two employees options to purchase 5,000 shares under the 2006 Plan which have five-year terms and vest in five substantially equal installments on the first through fifth anniversaries of the date of grant.

Below is a summary of changes in shares under option plans for the six months ended June 30, 2010 and 2009. The information excludes restricted stock units and awards.

	Six Months Ended June 30,
	2010					2009
	Shares			Weighted-Average Grant Date Fair Value		Shares			Weighted-Average Grant Date Fair Value

Beginning Balance		1,234,181		$	2.56		1,036,994		$	2.58
Issued		5,000			5.52		316,937			2.00
Exercised		(33,265	)		1.50		-			-
Forfeited		(1,966	)		2.05		(3,980	)		2.24
Expired		(26,488	)		2.65		(10,936	)		3.17
Ending Balance		1,177,462			2.60		1,339,015			2.44

The following summarizes information about stock options outstanding at June 30, 2010. The information excludes restricted stock units and awards.

Outstanding:						Weighted-Average
Range of		Stock Options		Weighted-Average		Remaining
Exercise Prices		Outstanding		Exercise Price		Contractual Life
$	2.98 - $8.10		450,387	$	6.22		6.02
$	8.11 - $11.07		262,711		10.18		3.93
$	11.08 - $15.43		222,906		12.76		3.50
$	15.44 - $26.86		241,458		22.05		4.25
			1,177,462		11.59		4.71

Exercisable:
Range of		Stock Options		Weighted-Average
Exercise Prices		Exercisable		Exercise Price
$	2.98 - $8.10		203,787	$	6.01
$	8.11 - $11.07		253,209		10.21
$	11.08 - $15.43		190,406		12.90
$	15.44 - $26.86		227,023		22.37
			874,425		12.97

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model with the assumptions as shown in the table below used for grants during the six months ended June 30, 2010 and the years ended December 31, 2009, and 2008.

	Six Months Ended			Year Ended			Year Ended
	June 30, 2010			2009			2008
Expected Volatility		51.2% - 51.2	%		25.9% - 58.0	%		23.7% - 43.6	%
Weighted-Average Volatility		51.19	%		26.74	%		30.28	%
Expected Dividends		0.0	%		0.0	%		0.9	%
Expected Term (In years)		5.0 - 5.0			3.5 - 8.5			3.0 - 9.0
Risk-Free Rate		1.01	%		0.84	%		2.55	%
Weighted-Average Fair Value (Grant date)	$	5.52		$	2.06		$	1.30

The expected lives are based on the “simplified” method allowed by ASC Topic 718“Compensation”, whereby the expected term is equal to the midpoint between the vesting date and the end of the contractual term of the award.

The total intrinsic value of outstanding stock options was $2.9 million at June 30, 2010. The total intrinsic value of stock options exercised during the six months ended June 30, 2010 was $269 thousand. No options were exercised during the six months ended June 30, 2009. The total fair value of stock options vested was $348 thousand and $203 thousand for the six months ended June 30, 2010 and 2009, respectively.

The Company recognized $302 thousand and $277 thousand in stock-based compensation expense for the six months ended June 30, 2010 and 2009, respectively which is included in salaries and employee benefits. Stock-based compensation expense is recognized ratably over the requisite service period for all awards. Unrecognized stock based compensation expense related to all stock-based awards totaled $1.6 million at June 30, 2010. At such date, the weighted-average period over which this unrecognized expense is expected to be recognized was 2.93 years.

The Company has outstanding restricted stock award grants from the 2006 Plan at June 30, 2010. Unrecognized stock based compensation expense related to restricted stock awards totaled $928 thousand at June 30, 2010. At such date, the weighted-average period over which this unrecognized expense was expected to be recognized was 1.88 years. The following table summarizes the unvested restricted stock awards outstanding at June 30, 2010 and 2009 and the restricted stock units at June 30, 2009, which were performance based, and which were not outstanding at June 30, 2010:

	June 30, 2010
	Restricted Stock Units					Restricted Stock Awards
	Shares			Weighted-Average Grant Date Fair Value		Shares			Weighted-Average Grant Date Fair Value

Unvested at Beginning		7,642		$	15.21		49,585		$	6.88
Issued		-			-		81,600			10.35
Forfeited		(3,817	)		15.21		(116	)		10.35
Vested		(3,825	)		15.21		(15,897	)		7.77
Unvested at End		-		$	-		115,172		$	9.21

	June 30, 2009
	Restricted Stock Units				Restricted Stock Awards
	Shares		Weighted-Average Grant Date Fair Value		Shares		Weighted-Average Grant Date Fair Value

Unvested at Beginning		7,642	$	15.21		-	$	-
Issued		-		-		49,585		6.88
Forfeited		-		-		-		-
Vested		-		-		-		-
Unvested at End		7,642	$	15.21		49,585	$	6.88

12. FAIR VALUE MEASUREMENTS

The measurement of fair value under GAAP uses a hierarchy intended to maximize the use of observable inputs and minimize the use of unobservable inputs. This hierarchy uses three levels of inputs to measure the fair value of assets and liabilities as follows:

Level 1:

Quoted prices in active exchange markets for identical assets or liabilities; also includes certain U.S. Treasury and other U.S. government and agency securities actively traded in over-the-counter markets.

Level 2:

Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans held for sale.

Level 3:

Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category generally includes certain private equity investments, retained interests from securitizations, and certain collateralized debt obligations.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Assets measured at fair value on a recurring basis comprised the following at June 30, 2010:

(dollars in thousands)	Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total (Fair Value)

Investment securities available for sale:
U. S. Government agency securities	$	-	$	92,500	$	-	$	92,500
Mortgage backed securities		-		104,433		-		104,433
Municipal bonds		-		39,802		-		39,802
Other equity investments		123		-		259		382
Residential mortgage loans held for sale		-		24,491		-		24,491

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.

The following is a reconciliation of activity for assets measured at fair value based on significant unobservable (non-market) information:

(dollars in thousands)	Available For Sale Securities
Balance, January 1, 2010	$	258
Total realized and unrealized gains and losses:
Included in net income		-
Included in other comprehensive income		1
Purchases, issuances and settlements		-
Transfers in and/or out of Level 3		-
Balance, June 30, 2010	$	259

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 GAAP. 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)	Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total (Fair Value)

Impaired loans:
Commercial	$	-	$	2,215	$	2,092	$	4,307
Investment - commercial real estate		-		3,574		560		4,134
Owner occupied - commercial real estate				6,944		440		7,384
Construction - commercial and residential		-		9,611		2,762		12,373
Home equity		-		-		16		16
Other consumer		-		-		251		251
Other real estate owned		-		3,556		-		3,556

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. The fair value of impaired loans is estimated using one of several methods, including the collateral value, the market value of similar debt, the enterprise value, the liquidation value and the discounted cash flow value. 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. 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.

The fair value of the Company’s other real estate owned when determined using current appraisals, within the last twelve months, and which includes estimated costs to sell is recorded as nonrecurring Level 2. When the appraisal is older than twelve months or management determines the fair value of the real estate owned is further impaired below the appraised value and there is no observable market price, the Company records the real estate owned as nonrecurring Level 3.

The following table presents the estimated fair values of financial assets and liabilities on the Company’s consolidated balance sheet, including those financial assets and liabilities that are not measured and reported at fair value on a recurring or non-recurring basis:

	June 30, 2010				December 31, 2009
(dollars in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Cash and due from banks	$	23,901	$	23,901	$	21,955	$	21,955
Interest bearing deposits with other banks		8,062		8,062		7,484		7,484
Federal funds sold		89,755		89,755		88,248		88,248
Investment securities		237,117		237,117		235,227		235,227
Federal Reserve and Federal Home Loan Bank stock		10,285		10,285		10,417		10,417
Loans held for sale		24,491		24,491		1,550		1,550
Loans		1,504,413		1,504,645		1,399,311		1,398,043
Other earning assets		13,130		13,130		12,912		12,912

Liabilities:
Noninterest bearing deposits		313,812		313,812		307,959		307,959
Interest bearing deposits		1,264,179		1,265,524		1,152,315		1,155,583
Customer repurchase agreements and federal funds purchased		106,104		106,104		90,790		90,790
Borrowings		49,300		51,354		59,300		63,690

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

Interest bearing deposits with other 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 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.

Federal Reserve and Federal Home Loan Bank stock: The carrying amount approximate the fair values at the reporting date.

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: 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 do 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 do 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 federal funds purchased: The carrying amount approximate the fair values at the reporting date.

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 and the subordinated debentures are 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.

13. STOCKHOLDERS’ EQUITY

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. On December 23, 2009, the Company redeemed 15,000 shares of Series A Preferred Stock for an aggregate redemption price of $15,079,166, including accrued but unpaid dividends on the shares. Following the repurchase, 23,235 shares of Series A Preferred Stock remain outstanding, held by the Treasury. The Company accrued dividends on the preferred stock and recognized the discount accretion of $324 thousand and $644 thousand for the three and six months ended June 30, 2010 reducing net income available to common stockholders to $3.1 million ($0.16 per basic and diluted common share) and $6.2 million ($0.32 per basic common share and $0.31 diluted common share) for the three and six months ended June 30, 2010, respectively.

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, 2009.

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. For details on factors that could affect these expectations, see the risk factors and other cautionary language included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 and in other periodic and current reports filed by the Company with the Securities and Exchange Commission. 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, Maryland, 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, savings, and time deposit 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 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 income tax being a component of stockholders’ equity and accumulated other 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) ASC Topic 450, “Contingencies”, which requires that losses be accrued when they are probable of occurring and are estimable and (b) ASC Topic 310, “Receivables”, 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. Impaired loans are assigned specific reserves based on an impairment analysis. Under ASC Topic 310, “Receivables”, 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 ASC Topic 718,“Compensation”, 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.

In accounting for the acquisition of Fidelity & Trust Financial Corporation (“Fidelity”) and Fidelity & Trust Bank (“F&T Bank”), the Company followed the provisions of ASC Topic 805 “Business Combinations”, which mandates the use of the purchase method of accounting and AICPA Statement of Position Topic ASC - 310, “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.

RESULTS OF OPERATIONS

Earnings Summary

For the six months ended June 30, 2010, the Company reported net income of $6.8 million, a 45% increase over the $4.7 million for the six months ended June 30, 2009. Net income available to common shareholders (which is after accrual of preferred stock dividends) was $6.2 million ($0.32 per basic common share and $0.31 per diluted common share), as compared to $3.6 million ($0.28 per basic and diluted common share) for the same six month period in 2009, a 74% increase.

For the three months ended June 30, 2010 the Company’s net income was $3.4 million, a 30% increase over the $2.7 million for the same three months in 2009. Net income available to common shareholders was $3.1 million ($0.16 per basic and diluted common share) for the quarter ended June 30, 2010, compared to $2.1 million ($0.16 per basic and diluted common share) for the quarter ended June 30, 2009, a 52% increase.

The increase in net income for the six and three months ended June 30, 2010 can be attributed primarily to an increase in net interest income of 29% and 30%, respectively, as compared to the same period in 2009. Net interest income growth was due to both growth in average earning assets of 22% and 24% for the six and three months ended June 30, 2010, respectively, as compared to 2009, and to expansion of the net interest margin.

The Company had an annualized return on average assets of 0.75% and an annualized return on average common equity of 7.35% for the first six months of 2010, as compared to annualized returns on average assets and average common equity of 0.63% and 6.81%, respectively, for the same six month period in 2009.

For the three months ended June 30, 2010, the Company had an annualized return on average assets of 0.73% and an annualized return on average common equity of 7.30%, as compared to annualized returns on average assets and average common equity of 0.70% and 7.71%, respectively, for the same period in 2009.

The Company’s earnings are largely dependent on net interest income, which represented 92% of total revenue (i.e. net interest income plus non-interest income) for the six months ended June 30, 2010 compared to 86% for the same period in 2009.

The net interest margin, which measures the difference between interest income and interest expense (i.e. net interest income) as a percentage of earning assets increased from 3.83% for the six months ended June 30, 2009 to 4.04% for the six months ended June 30, 2010. The higher margin in the first six months of 2010 as compared to the same period of 2009 was due to lower funding costs for both deposits and borrowings more than offsetting

declines in earning asset yields. Substantially higher average federal funds sold during the six months ended June 30, 2010, as compared to the same period ended in 2009, contributed to the lower earning asset yields, as did lower yields on investment securities, due to lower market interest rates. The benefit of noninterest sources funding earning assets declined by 13 basis points to 37 basis points for the six months ended June 30, 2010 as compared to 50 basis points for the same period in 2009, which effect was due to lower market interest rates in the current period as compared to 2009. Additionally, while the average rate on earning assets for the six months ended June 30, 2010, as compared to the same period in 2009 decreased by 38 basis points from 5.59% to 5.21%, the cost of interest bearing liabilities decreased by 72 basis points from 2.26% to 1.54%, resulting in a net interest spread of 3.67% for the six months ended June 30, 2010, as compared to 3.33% for the same period in 2009, an increase of 34 basis points. The combination of a 34 basis point increase in the net interest spread and a 13 basis point decline in the value of noninterest sources resulted in the 21 basis point increase in the net interest margin.

For the three months ended June 30, 2010 and 2009, average interest bearing liabilities were 75% and 78%, respectively, of average earning assets. Additionally, while the average rate on earning assets for the three months ended June 30, 2010 declined by 36 basis points from 5.58% to 5.22%, as compared to 2009, the cost of interest bearing liabilities decreased by 67 basis points from 2.15% to 1.48%, resulting in a increase in the net interest spread of 31 basis points from 3.43% for the quarter ended June 30, 2009 to 3.74% for the three months ended June 30, 2009. The net interest margin increased 19 basis points from 3.91% for the three months ended June 30, 2009 to 4.10% for the three months ended June 30, 2010. The 12 basis point difference between the net interest spread improvement of 31 basis points and the net interest margin improvement of 19 basis points was due to lower market interest rates in the current period reducing the benefit of noninterest funding sources from 48 basis points to 36 basis points.

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

Due to favorable core deposit growth over the past twelve months, the need to meet loan funding objectives has not required the use of alternative funding sources, such as Federal Home Loan Bank (“FHLB”) advances, correspondent bank lines of credit and brokered time deposits, the balances of which have declined since June 30, 2009. The major component of the growth in core deposits has been growth in a special money market account originally promoted through advertisements, but which is now promoted primarily through direct sales effort by the business development staff.

In terms of the average balance sheet composition or mix, loans, which generally have higher yields than securities and other earning assets, decreased from 88% of average earning assets in the first six months of 2009 to 81% of average earning assets for the same period of 2010. The decrease in average loans as a percentage of other earning assets is due to the growth in the securities portfolio and other earning assets resulting from higher levels of growth in deposits as compared to loans over the past twelve months. Average loans increased $159 million, a 12% increase, and average deposits increased by $340 million, a 29% increase in the first six months of 2010 as compared to the same period in 2009. The increase in average loans in 2010 as compared to 2009 is primarily attributable to growth in income-producing commercial real estate loans and commercial and industrial loans. The increase in average deposits in 2010 as compared to 2009 is primarily attributable to noninterest bearing and money market deposits. Investment securities for the first six months of 2010 amounted to 14% of average earning assets, an increase of 3% from an average of 11% for the same period in 2009. Federal funds sold averaged 4% of average earning assets in the first six months of 2010 as compared to 0.6% for the same period in 2009.

For the three months ended June 30, 2010, average loans were 82% of average earning assets as compared to 88% for the same period in 2009. Average loans increased $82 million (6%) and average deposits increased $57 million (4%) during the three months ended June 30, 2010 as compared to the first quarter of 2010. The increase in average loans in the second quarter of 2010 as compared to the second quarter of 2009 is primarily attributable to growth in income-producing commercial real estate loans and commercial and industrial loans. Increases in average deposits in the second quarter of 2010, as compared to the second quarter of 2009, is attributable to growth in both noninterest bearing demand deposits and money market accounts. Average investment securities for the three months ended June 30, 2010 amounted to 14% of average earning assets, an increase of 3% from an average of 11%

for the same period in 2009. Average federal funds sold averaged 4.1% of average earning assets for the three months ended June 30, 2010 as compared to 0.6% for the same period in 2009, due to higher average deposit growth.

The provision for credit losses was $3.8 million for the first six months of 2010 as compared to $3.3 million in 2009. The higher provisioning in 2010 as compared to 2009 is attributable to both higher amounts of loan growth in the first six months of 2010 compared to 2009, and to slightly higher net charge-offs in 2010 as compared to 2009. For the six months ended June 30, 2010, net charge-offs totaled $2.7 million (0.37% of average loans) compared to $2.1 million (0.32% of average loans) for the six months ended June 30, 2009. Net charge-offs in the six months ended June 30, 2010 were attributable to charge-offs in the unguaranteed portion of SBA loans ($652 thousand), commercial and industrial loans ($954 thousand), commercial real estate loans ($1.1 million), and consumer loans ($9 thousand).

The provision for credit losses was $2.1 million for the three months ended June 30, 2010 as compared to $1.7 million for the three months ended June 30, 2009. The higher provisioning in the second quarter of 2010, as compared to the second quarter of 2009, is primarily attributable to loan growth. Net charge-offs of $1.4 million represented 0.38% of average loans in the second quarter of 2010, as compared to $1.1 million or 0.35% of average loans in the second quarter of 2009. Net charge-offs in the second quarter of 2010 were attributable to charge-offs in the unguaranteed portion of SBA loans ($545 thousand), commercial and industrial loans ($303 thousand), commercial real estate loans ($552 thousand), and consumer loans ($5 thousand).

At June 30, 2010, the allowance for credit losses represented 1.45% of loans outstanding, as compared to 1.50% at June 30, 2009 and 1.47% at December 31, 2009. The allowance for credit losses was 86% of nonperforming loans at June 30, 2010, as compared to 63% at June 30, 2009 and 94% at December 31, 2009. The two basis point decline in the allowance for credit losses at June 30, 2010 as compared to March 31, 2010 is based upon the incorporation of consistently low levels of historical losses in the reserve methodology. The higher coverage ratio at June 30, 2010 as compared to the same period in 2009 is due primarily to increases in the allowance for credit losses over the past year and a decline in the level of nonperforming loans, from $31 million at June 30, 2009 to $25.3 million at June 30, 2010.

Total noninterest income for the six months of 2010 was $3.2 million compared to $4.5 million in 2009, a decrease of 29%. This decrease was due primarily to a $964 thousand decline in gains on the sale of investment securities. Investment gains realized in both the first six months of 2010 and 2009 were the result of asset/liability management decisions to reduce call risk in the portfolio of U.S. Agency securities, and to mitigate potential extension risk in longer-term mortgage backed securities. Also contributing to lower noninterest income in the first six months of 2010 compared to 2009 was a decline of $407 thousand in gains on the sale of loans; as gains on the sale of SBA loans increased $73 thousand while gains on the sale of residential mortgages decreased $480 thousand. The Company expanded its residential mortgage banking division in the second quarter of 2010 and anticipates higher amounts of noninterest income from the origination and sale of residential mortgage loans for the remainder of 2010.

Total noninterest income for the three months ended June 30, 2010 decreased to $2.0 million from $3.1 million for the three months ended June 30, 2009, a 35% decrease. This decrease was due primarily to an $832 thousand decline in gains on the sale of investment securities. Gains recorded in both periods were the result of asset/liability management decisions to reduce call risk in the portfolio of U.S. Agency securities, and to mitigate potential extension risk in longer-term mortgage backed securities. Also contributing to lower noninterest income in 2010 compared to 2009 was a $330 thousand decline in gains on the sale of loans. Gains on the sale of SBA loans increased $57 thousand while gains on the sales of residential mortgages decreased $387 thousand.

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 62.96% for the first six months of 2010, as compared to 67.66% for the six months ended June 30, 2009, as the Company has enhanced its productivity. Cost control remains a key operating objective of the Company. Total noninterest expenses were $24.6 million for the first six months of 2010, as compared to $21.9 million for 2009, a 13% increase primarily comprised of salaries and benefits expense of $1.3 million, reflecting in part the expansion of the residential mortgage banking division, premises and equipment expenses of $1.0 million, other expenses of $761 thousand, legal, accounting and professional fees of $149 thousand, and data processing costs of $136 thousand.

Premises and equipment expenses include approximately $595 thousand due to the acceleration of the remaining lease term for the closure of the Sligo branch in Silver Spring, Maryland in April, 2010. The decrease in the FDIC insurance of $580 thousand resulted from a special assessment of approximately $723 thousand recorded in the second quarter of 2009.

Total noninterest expenses were $13.1 million for the three months ended June 30, 2010, as compared to $11.6 million for the three months ended June 30, 2009, a 14% increase. Higher costs were incurred for salaries and benefits of $925 thousand, premises and equipment expenses of $785 thousand, other expenses of $355 thousand, legal, accounting and professional fees of $165 thousand, data processing of $68 thousand, and marketing and advertising of $39 thousand. Premises and equipment expenses include approximately $595 thousand due to the acceleration of the remaining lease term for the closure of the Sligo branch in Silver Spring, Maryland in April, 2010. The decrease in the FDIC insurance of $773 thousand resulted from a special assessment of approximately $723 thousand recorded in the second quarter of 2009.Finally, a portion of the increase in other expenses is due to the operating and disposition costs of OREO. The efficiency ratio was 63.69% for the second quarter of 2010, as compared to 66.42% for the second quarter of 2009, as the Company has enhanced its productivity. As compared to the first quarter of 2010, the second quarter efficiency ratio was slightly elevated (from 62.15% to 63.69%) due largely to additional staffing in the residential mortgage banking division (see above discussion), and to additional other lending personnel.

For the six months ended June 30, 2010 as compared to 2009, the increase in net interest income from increased volumes and a higher net interest margin, offset by the combination of a higher provision for credit losses, lower levels of noninterest income, higher levels of noninterest expenses and the preferred stock dividend, resulted in an increase in net income available to common stockholders.

The ratio of common equity to total assets increased from 6.73% for the first six months of 2009 to 8.96% for the first six months of 2010, primarily as a result of the common stock offering completed in September 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 2010 was $35.8 million compared to $27.8 million for the first six months of 2009, an increase of 29%. For the six months ended June 30, 2010, the net interest margin was 4.04% as compared to 3.83% for the six months ended June 30, 2009, an increase of 21 basis points. The higher margin for the first six months of 2010 as compared to the same period of 2009 was due to lower funding costs for both deposits and borrowings more than offsetting modest declines in earning asset yields. The Company’s net interest margin remains favorable to peer banking companies.

For the three months ended June 30, 2010 and 2009, net interest income was $18.6 million and $14.3 million, respectively, an increase of 30%. For the three months ended June 30, 2010, the net interest margin was 4.10% as compared to 3.91% for the three months ended June 30, 2009, an increase of 19 basis points.

The Company’s net interest margin for quarter ended June 30, 2010 increased by 12 basis points from 3.98% for the first quarter of 2010 and increased by 14 basis points from 3.96% for the quarter ended December 31, 2009. The higher margin in the second quarter of 2010 as compared to the first quarter of 2010 and the fourth quarter of 2009 was due to both lower funding costs for both deposits and borrowings more than offsetting declines in earning asset yields.

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, 2010 and 2009. Included in the tables is a measurement of interest rate spread and margin. Interest rate spread is the difference (expressed as a percentage) between the

interest rate earned on earning assets less the interest rate paid on interest bearing liabilities. While the interest rate spread provides a quick comparison of earnings rates versus cost of funds, management believes that margin provides a better measurement of performance. Margin includes the effect of noninterest bearing sources in its calculation and is net interest income expressed as a percentage of average earning assets.

	Three Months Ended June 30,
(dollars in thousands)	2010							2009
	Average Balance		Interest		Average Yield/Rate			Average Balance		Interest		Average Yield/Rate
ASSETS
Interest earning assets:
Interest bearing deposits with other banks and other short-term investments	$	7,683	$	26		1.36	%	$	2,450	$	18		2.95	%
Loans (1) (2) (3)		1,489,325		21,878		5.89	%		1,297,634		18,570		5.74	%
Investment securities available for sale (3)		250,276		1,738		2.79	%		159,064		1,839		4.64	%
Federal funds sold		74,659		47		0.25	%		9,148		5		0.22	%
Total interest earning assets		1,821,943		23,689		5.22	%		1,468,296		20,432		5.58	%

Total noninterest earning assets		81,188							69,756
Less: allowance for credit losses		21,370							19,073
Total noninterest earning assets		59,818							50,683
TOTAL ASSETS	$	1,881,761						$	1,518,979