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 March 31, 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	(I.R.S. Employer
incorporation or organization)	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 o

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

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

Large accelerated filer o

Accelerated filer x

Non-accelerated filer x

Smaller Reporting Company o

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

Yes o 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 May 5, 2010, the registrant had 19,634,397 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 March 31, 2010 and December 31, 2009
	Consolidated Statements of Operations for the Three Month Periods Ended March 31, 2010 and 2009
	Consolidated Statements of Changes in Stockholders’ Equity for the Three Month Periods Ended March 31, 2010 and 2009
	Consolidated Statements of Cash Flows for the Three Month Periods Ended March 31, 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

March 31, 2010 and December 31, 2009

(dollars in thousands, except per share data)

	March 31,			December 31,
	2010			2009
Assets	(Unaudited)			(Audited)
Cash and due from banks	$	25,987		$	21,955
Federal funds sold		66,839			88,248
Interest bearing deposits with banks and other short-term investments		7,541			7,484
Investment securities available for sale, at fair value		253,740			235,227
Federal Reserve and Federal Home Loan Bank stock		10,417			10,417
Loans held for sale		1,089			1,550
Loans		1,427,223			1,399,311
Less allowance for credit losses		(21,045	)		(20,619	)
Loans, net		1,406,178			1,378,692
Premises and equipment, net		8,711			9,253
Deferred income taxes		11,909			12,455
Bank owned life insurance		13,022			12,912
Intangible assets, net		4,347			4,379
Other real estate owned		3,906			5,106
Other assets		19,305			17,826
Total Assets	$	1,832,991		$	1,805,504

Liabilities
Deposits:
Noninterest bearing demand	$	291,714		$	307,959
Interest bearing transaction		48,865			59,720
Savings and money market		624,197			582,854
Time, $100,000 or more		321,003			296,199
Other time		191,160			213,542
Total deposits		1,476,939			1,460,274
Customer repurchase agreements
and federal funds purchased		97,837			90,790
Other short-term borrowings		10,000			10,000
Long-term borrowings		49,300			49,300
Other liabilities		6,450			6,819
Total liabilities		1,640,526			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 $734 and $570, respectively, net		22,449			22,612
Common stock, $.01 par value; shares authorized 50,000,000, shares
issued and outstanding 19,633,763 and 19,534,226		196			195
Warrants		946			946
Additional paid in capital		129,434			129,211
Retained earnings		36,288			33,024
Accumulated other comprehensive income		3,152			2,333
Total stockholders' equity		192,465			188,321
Total Liabilities and Stockholders' Equity	$	1,832,991		$	1,805,504

See notes to consolidated financial statements.

EAGLE BANCORP, INC.

Consolidated Statements of Operations

For the Three Month Periods Ended March 31, 2010 and 2009 (Unaudited)

(dollars in thousands, except per share data)

Interest Income	2010		2009
Interest and fees on loans	$	20,462	$	18,113
Interest and dividends on investment securities		1,977		1,929
Interest on balances with other banks and short-term investments		33		19
Interest on federal funds sold		36		6
Total interest income		22,508		20,067
Interest Expense
Interest on deposits		4,538		5,557
Interest on customer repurchase agreements and
federal funds purchased		183		281
Interest on short-term borrowings		18		45
Interest on long-term borrowings		546		721
Total interest expense		5,285		6,604
Net Interest Income		17,223		13,463
Provision for Credit Losses		1,689		1,566
Net Interest Income After Provision For Credit Losses		15,534		11,897

Noninterest Income
Service charges on deposits		730		738
Gain on sale of loans		54		131
Gain on sale of investment securities		-		132
Increase in the cash surrender value of bank owned life insurance		110		114
Other income		328		317
Total noninterest income		1,222		1,432
Noninterest Expense
Salaries and employee benefits		5,675		5,305
Premises and equipment expenses		2,092		1,875
Marketing and advertising		247		315
Data processing		615		547
Legal, accounting and professional fees		574		590
FDIC insurance		634		441
Other expenses		1,626		1,220
Total noninterest expense		11,463		10,293
Income Before Income Tax Expense		5,293		3,036
Income Tax Expense		1,902		961
Net Income		3,391		2,075
Preferred Stock Dividends and Discount Accretion		320		583
Net Income Available to Common Stockholders	$	3,071	$	1,492

Earnings Per Common Share
Basic	$	0.16	$	0.12
Diluted	$	0.15	$	0.12

See notes to consolidated financial statements.

EAGLE BANCORP, INC.

Consolidated Statements of Changes in Stockholders’ Equity

For the Three Month Periods Ended March 31, 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												3,391						3,391
Other comprehensive income:
Unrealized gain on securities available for sale (net of taxes)															819			819
Total Comprehensive Income																		4,210
Stock-based compensation									154									154
Exercise of options for 24,090 shares of common stock					1				43									44
Tax benefit on non-qualified options exercise									42									42
Capital raise issuance cost									(16	)								(16	)
Preferred stock :
Preferred stock dividends												(290	)					(290	)
Discount accretion		(163	)									163						-
Balance, March 31, 2010	$	22,449		$	196	$	946	$	129,434		$	36,288		$	3,152		$	192,465

Balance, January 1, 2009	$	36,312		$	127	$	1,892	$	76,822		$	24,866		$	2,352		$	142,371
Comprehensive Income
Net Income												2,075						2,075
Other comprehensive income:
Unrealized gain on securities available for sale (net of taxes)															424			424
Less: reclassification adjustment for gains net of taxes of $48 included in net income															(84	)		(84	)
Total Comprehensive Income																		2,415
Stock-based compensation									136									136
Preferred stock dividends												(372	)					(372	)
Preferred stock issued pursuant to:
Issuance costs		(21	)															(21	)
Discount accretion		83										(83	)					-
Balance, March 31, 2009	$	36,374		$	127	$	1,892	$	76,958		$	26,486		$	2,692		$	144,529

See notes to consolidated financial statements.

EAGLE BANCORP, INC.

Consolidated Statements of Cash Flows

For the Three Month Periods Ended March 31, 2010 and 2009 (Unaudited)

(dollars in thousands, except per share data)


	2010			2009
Cash Flows From Operating Activities:
Net income	$	3,391		$	2,075
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for credit losses		1,689			1,566
Depreciation and amortization		712			580
Gains on sale of loans		(54	)		(131	)
Origination of loans held for sale		(8,315	)		(10,405	)
Proceeds from sale of loans held for sale		8,830			10,422
Net increase in cash surrender value of BOLI		(110	)		(114	)
Deferred income taxes		546			228
Net loss on sale of other real estate owned		85			-
Net gain on sale of investment securities		-			(132	)
Stock-based compensation expense		154			136
Excess tax benefit from stock-based compensation		(42	)		-
Increase in other assets		(1,479	)		(69	)
Increase in other liabilities		377			335
Net cash provided by operating activities		5,784			4,491
Cash Flows From Investing Activities:
Increase in interest bearing deposits with other banks
and short term investments		(57	)		(1,049	)
Purchases of available for sale investment securities		(27,535	)		(7,496	)
Proceeds from maturities of available for sale securities		9,022			1,000
Proceeds from sale/call of available for sale securities		-			15,601
Purchases of federal reserve and federal home loan bank stock		-			4,185
Proceeds of federal reserve and federal home loan bank stock		-			(3,055	)
Net increase in loans		(29,175	)		(3,236	)
Proceeds from sale of other real estate owned		1,200			-
Bank premises and equipment acquired		(124	)		(402	)
Net cash (used in) provided by investing activities		(46,669	)		5,548
Cash Flows From Financing Activities:
Increase in deposits		16,665			19,338
Increase in customer repurchase agreements and
federal funds purchased		7,047			22,116
Decrease in other short-term borrowings		-			(45,000	)
Payment of dividends on preferred stock		(290	)		(372	)
Proceeds from exercise of stock options		44			-
Excess tax benefit from stock-based compensation		42			-
Net cash provided by (used in) financing activities		23,508			(3,918	)
Net (Decrease) Increase In Cash and Cash Equivalents		(17,377	)		6,121
Cash and Cash Equivalents at Beginning of Period		110,203			27,348
Cash and Cash Equivalents at End of Period	$	92,826		$	33,469
Supplemental Cash Flows Information:
Interest paid	$	6,154		$	6,244
Income taxes paid	$	72		$	306
Non-Cash Investing Activities
Transfers from loans to other real estate owned	$	-		$	2,380

See notes to consolidated financial statements.

EAGLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 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 (which holds title to and manages Other Real Estate Owned (“OREO”) assets) with all significant intercompany transactions eliminated. The investment in subsidiaries is recorded on the Company’s books (Parent Only) on the basis of its equity in the net assets of the subsidiary.

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, 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 months ended March 31, 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 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 offers its products and services through fourteen banking offices and various electronic capabilities, including remote deposit services. Management is currently negotiating the lease termination with the landlord of its Sligo Avenue office located in Silver Spring, Maryland. The Sligo Avenue branch was closed April 30, 2010. 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. 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 March 31, 2010 and December 31, 2009, amounting to $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 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
March 31, 2010	Cost		Gains		Losses		Value
(dollars in thousands)
U. S. Government agency securities	$	95,521	$	702	$	96	$	96,127
Mortgage backed securities		114,797		4,136		41		118,892
Municipal bonds		37,732		805		203		38,334
Other equity investments		437		-		50		387
	$	248,487	$	5,643	$	390	$	253,740


			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
March 31, 2010	Value		Losses		Value		Losses		Value		Losses
(dollars in thousands)
U. S. Government agency securities	$	29,776	$	96	$	-	$	-	$	29,776	$	96
Mortgage backed securities		8,802		41		-		-		8,802		41
Municipal bonds		14,228		180		1,076		23		15,304		203
Other equity investments		127		50		-		-		127		50
	$	52,933	$	367	$	1,076	$	23	$	54,009	$	390


	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% of total investment securities, is relatively short at 3.2 years. The gross unrealized loss on other equity investments represents common stock of the three local banking companies owned by the Company (parent only), 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 March 31, 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 March 31, 2010, the Company held $10.4 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 at March 31, 2010 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.

	2010				2009
	Amortized		Estimated		Amortized		Estimated
(dollars in thousands)	Cost		Fair Value		Cost		Fair Value
U. S. Government agency securities maturing:
One year or less	$	13,483	$	13,543	$	8,095	$	8,186
After one year through five years		82,038		82,584		67,885		67,921
After five years through ten years		-		-		-		-
Mortgage backed securities		114,797		118,892		122,076		125,396
Municipal bonds maturing:
Five years through ten years		3,631		3,728		3,023		3,072
After ten years		34,101		34,606		29,822		30,253
Other equity investments		437		387		436		399
	$	248,487	$	253,740	$	231,337	$	235,227

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 March 31, 2010 was $193 million. As of March 31, 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.

7. EARNINGS PER SHARE

The calculation of net income per common share for the three months ended March 31 was as follows:

(dollars and shares in thousands)	2010		2009
Basic:
Net income available to common shareholders	$	3,071	$	1,492
Average common shares outstanding		19,609		12,743
Basic net income per common share	$	0.16	$	0.12

Diluted:
Net income available to common shareholders	$	3,071	$	1,492
Average common shares outstanding		19,609		12,743
Adjustment for common share equivalents		342		51
Average common shares outstanding-diluted		19,951		12,794
Diluted net income per common share	$	0.15	$	0.12

There were 469,961 and 1,616,466 common share equivalents at March 31, 2010 and 2009, respectively that were excluded from the diluted net income per common share computation because their effects were anti-dilutive.

8. 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 Fidelity acquisition 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 TARP 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 TARP.

Below is a summary of changes in shares under option plans for the three months ended March 31, 2010 and 2009. The information excludes restricted stock units and awards.

	Three Months Ended March 31,
	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		-			-		315,437			1.99
Exercised		(14,112	)		3.17		-			-
Forfeited		(566	)		6.84		(3,797	)		2.24
Expired		(22,428	)		15.21		(873	)		2.36
Ending Balance		1,197,075			2.57		1,347,761			2.45

The following summarizes information about stock options outstanding at March 31, 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	469,510	$ 6.13	6.08
$8.11 - $11.07	264,104	10.19	4.19
$11.08 - $15.43	220,931	12.77	3.70
$15.44 - $26.86	242,530	22.03	4.48
	1,197,075	11.47	4.90

Exercisable:
Range of	Stock Options	Weighted-Average
Exercise Prices	Exercisable	Exercise Price
$2.98 - $8.10	221,208	$ 5.84
$8.11 - $11.07	254,602	10.21
$11.08 - $15.43	193,431	12.90
$15.44 - $26.86	228,095	22.34
	897,336	12.80

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 three months ended March 31, 2010 and the years ended December 31, 2009, and 2008.

	Three Months Ended			Year Ended			Year Ended
	March 31, 2010			2009			2008
Expected Volatility		0.0% - 0.0	%		25.9% - 58.0	%		23.7% - 43.6	%
Weighted-Average Volatility		-			26.74	%		30.28	%
Expected Dividends		0.0	%		0.0	%		0.9	%
Expected Term (In years)		0.0 - 0.0			3.5 - 8.5			3.0 - 9.0
Risk-Free Rate		-			0.84	%		2.55	%
Weighted-Average Fair Value (Grant date)	$	0.00		$	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 and outstanding exercisable stock options was $3.1 million at March 31, 2010. The total intrinsic value of stock options exercised during the three months ended March 31, 2010 was $109 thousand. No options were exercised during the three months ended March 31, 2009. The total

fair value of stock options vested was $347 thousand and $203 thousand for the three months ended March 31, 2010 and 2009, respectively.

Included in salaries and employee benefits the Company recognized $154 thousand and $136 thousand in stock-based compensation expense for the three months ended March 31, 2010 and 2009, respectively. 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 $1.7 million at March 31, 2010. At such date, the weighted-average period over which this unrecognized expense was expected to be recognized was 3.18 years.

The Company has outstanding restricted stock awards and units granted from the 2006 Plan at March 31, 2010. Restricted stock units are performance based where shares are not issued until performance conditions are satisfied. Unrecognized stock based compensation expense related to restricted stock awards and units totaled $1.0 million at March 31, 2010. At such date, the weighted-average period over which this unrecognized expense was expected to be recognized was 2.03 years. The following table summarizes the unvested restricted stock awards and units outstanding at March 31, 2010 and 2009:

	March 31, 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		9,623		7.79
Unvested at End		-	$	-		121,446	$	9.13


	March 31, 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		-		-		30,763		6.34
Forfeited		-		-		-		-
Vested		-		-		-		-
Unvested at End		7,642	$	15.21		30,763	$	6.34

9. ACCOUNTING STANDARDS UPDATE

Accounting Standards Update (ASU) No. 2009-16, “Transfers and Servicing (Topic 860) - Accounting for Transfers of Financial Assets.” ASU 2009-16 amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. ASU 2009-16 eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. ASU 2009-16 also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. The provisions of ASU 2009-16 became effective on January 1, 2010 and did not have a significant impact on the Company’s financial statements.

ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures About Fair Value Measurements.” ASU 2010-06 requires expanded disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements. ASU 2010-06 further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (ii) companies’ should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy will be required for the Company beginning January 1, 2011. The remaining disclosure requirements and clarifications made by ASU 2010-06 became effective for the Company on January 1, 2010. See Note 10 – Fair Value Measurements.

10. FAIR VALUE MEASUREMENTS

The measurement of fair value under US 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 March 31, 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	$	-	$	96,127	$	-	$	96,127
Mortgage backed securities		-		118,892		-		118,892
Municipal bonds		-		38,334		-		38,334
Other equity investments		129		-		258		387

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, 2009	$	258
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, December 31, 2009	$	258

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

Impaired loans:
Commercial	$	-	$	2,069	$	2,584	$	4,653
Real estate - commercial		-		1,860		-	$	1,860
Construction - commercial and residential		-		12,206		2,564	$	14,770
Home equity		-		-		41	$	41
Other consumer		-		398		255	$	653
Other real estate owned		-		3,906		-		3,906

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, market value of similar debt, enterprise value, and 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. 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 is determined using current appraisals, within the last twelve months, and estimated costs to sell 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:

	March 31,				December 31,
	2010				2009
(dollars in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Cash and due from banks	$	25,987	$	25,987	$	21,955	$	21,955
Interest bearing deposits with other banks		7,541		7,541		7,484		7,484
Federal funds sold		66,839		66,839		88,248		88,248
Investment securities		253,740		253,740		235,227		235,227
Federal Reserve and Federal Home Loan Bank stock		10,417		10,417		10,417		10,417
Loans held for sale		1,089		1,089		1,550		1,550
Loans		1,406,178		1,400,089		1,399,311		1,398,043
Other earning assets		13,022		13,022		12,912		12,912

Liabilities:
Noninterest bearing deposits		291,714		291,714		307,959		307,959
Interest bearing deposits		1,185,225		1,184,970		1,152,315		1,155,583
Borrowings		157,137		158,349		150,090		154,480

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 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 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 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.

11. 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 its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, $1,000 liquidation amount per share (the “Series A Preferred Stock”) issued to the Treasury on December 5, 2008 pursuant to the Troubled Asset Relief Program Capital Purchase Program. The aggregate redemption price for the shares was $15,079,166, including accrued but unpaid dividends on the shares. Following the repurchase, 23,235 shares of Series A Preferred Stock ($23,235,000) remain outstanding, held by the Treasury. The Company accrued dividends on the preferred stock and recognized the discount accretion of $320 thousand for the three months ended March 31, 2010 reducing net income available to common stockholders to $3.1 million ($0.16 per basic and $0.15 per diluted common share). On February 16, 2010, the Company paid the quarterly dividend payment of $290 thousand on the $23.2 million of preferred stock Series A.

On September 21, 2009, the Company completed an underwritten public offering of 6,731,640 shares of its common stock at an offering price of $8.20 per share, including 878,040 shares subject to the underwriter's over-allotment option. The offering, which constituted a “qualified equity offering” for purposes of the Series A Preferred Stock, generated gross cash proceeds of $55,199,448. As a result of the offering, the Company, in November 2009, received Treasury approval of the reduction of the number of shares of common stock subject to the Warrant. Accordingly, the discount on the preferred stock and the warrants were reduced by $946 thousand in November 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, 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 eight offices serving Montgomery County, Maryland, including an office in Potomac, Maryland, which opened in November 2009; five offices in the District of Columbia; and one office in Fairfax County, Virginia. Management is currently negotiating the lease termination with the landlord of its Sligo Avenue office located in Silver Spring, Maryland. The Sligo Avenue branch was closed April 30, 2010. The relationships from the Sligo Avenue office were moved to the Company’s other Silver Springs location.

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 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 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. 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 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 which are reviewed with the appropriate Board Committee.

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

The Company reported net income of $3.4 million for the three months ended March 31, 2010 as compared to $2.1 million for the same three month period in 2009. Net income available to common stockholders (which is after accrual of preferred stock dividends) was $3.1 million for the three months ended March 31, 2010 ($0.16 per basic and $0.15 per diluted common share), compared to $1.5 million ($0.12 per basic and diluted common share) for the same period in 2009, an increase of 106%.

The increase in net income for the three months ended March 31, 2010 can be attributed primarily to an increase in net interest income of 28% as compared to the same period in 2009. Net interest income growth was due substantially to both growth in average earning assets of 21% for the three months ended March 31, 2010, as compared to 2009 and to expansion of the net interest margin over the past twelve months.

For the three months ended March 31, 2010, the Company had an annualized return on average assets of 0.76% and an annualized return on average common equity of 7.40%, as compared to annualized returns on average assets and average common equity of 0.56% and 5.87%, respectively, for the same period in 2009.

The Company’s earnings are largely dependent on net interest income, which represented 93% of total revenue (i.e. net interest income plus non-interest income) for the three months ended March 31, 2010 compared to 90% for the same period in 2009. For the three months ended March 31, 2010, 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 3.76% for the three months ended March 31, 2009 to 3.98% for the three months ended March 31, 2010. The higher margin in the first quarter 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. Higher average levels of liquid assets during the quarter ended March 31, 2010, as compared to the quarter ended

March 31, 2009, contributed to the lower earning asset yields. Noninterest sources funding earning assets declined to 39 basis points for the three months ended March 31, 2010 as compared to 52 basis points for the same period in 2009. Average interest bearing liabilities funding average earning assets decreased to 76% as compared to 78% for the three months ended March 31, 2009. Additionally, while the average rate on earning assets for the three months ended March 31, 2010, as compared to the same period in 2009 decreased by 40 basis points from 5.60% to 5.20%, the cost of interest bearing liabilities decreased by 75 basis points from 2.36% to 1.61%, resulting in a net interest spread of 3.59% for the three months ended March 31, 2010, as compared to 3.24% for the same period in 2009, an increase of 37 basis points. For the three months ended March 31, 2010, average noninterest sources funding earning assets were $571 million as compared to $511 million for the same period in 2009.

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 three 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 December 31, 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 three months of 2009 to 80% 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 loan growth amounted to $54.8 million in the first quarter of 2010, as compared to $90.8 million of average deposit growth. Investment securities for the first three months of 2010 amounted to 15% of average earning assets, an increase of 4% from an average of 11% for the same period in 2009. Federal funds sold averaged 4.0% of average earning assets in the first three months of 2010 and 0.6% for the same period in 2009.

The provision for credit losses was $1.7 million for the first three months of 2010 as compared to $1.6 million for the same period in 2009. The slightly higher provisioning in the first quarter of 2010, as compared to the first quarter of 2009, is primarily attributable to higher amounts of loan growth in the first quarter of 2010 versus 2009 and to higher levels of net charge-offs. Net charge-offs of $1.3 million represented 0.36% of average loans in the first quarter of 2010, as compared to $918 thousand, or 0.29% of average loans in the first quarter of 2009. Net charge-offs in the first quarter of 2010 were attributable primarily to charge-offs in the unguaranteed portion of SBA loans ($107 thousand), commercial and industrial loans ($652 thousand), commercial real estate loans ($500 thousand) and consumer loans ($4 thousand).

At March 31, 2010, the allowance for credit losses represented 100% of nonperforming loans as compared to 41% at March 31, 2009 and 94% at December 31, 2009. The higher coverage ratio at March 31, 2010 is due primarily to increases in the allowance for credit losses over the past year and a substantial decline in the level of nonperforming loans, from $46.5 million at March 31, 2009 to $21.0 million at March 31, 2010. At March 31, 2010, approximately $13.2 million or 63% of nonperforming loans represent impaired loans acquired in the acquisition with F&T Bank which, in accordance with generally accepted accounting principles, were initially recorded at fair value without any allowance attributable to pre-acquisition deterioration.

Total noninterest income for the three months ended March 31, 2010 decreased to $1.2 million from $1.4 million for the three months ended March 31, 2009, a 15% decrease. This decrease was due primarily to lower gains realized on the sale of residential mortgage loans, resulting from accounting rule changes effective January 1, 2010. The new rule requires deferral of gain recognition until all recourse provisions are satisfied. Also contributing to the decline in noninterest income in the first quarter of 2010 was no investment securities gains as compared to gains of $132 thousand during the same period in 2009.

The efficiency ratio, which measures the ratio of noninterest expense to total revenue, was 62.15% for the first quarter of 2010, as compared to 69.10% for the first quarter of 2009, as the Company has enhanced its productivity and, margin. Total noninterest expenses were $11.5 million for the three months ended March 31, 2010, as compared to $10.3 million for the three months ended March 31, 2009, an 11% increase. Higher costs were incurred for salaries and benefits of $370 thousand, $217 thousand of premises and equipment expenses, data processing of $68 thousand and deposit insurance premiums of $193 thousand. Other expenses increased $406 thousand, primarily due to $181 thousand of OREO expenses and a net loss of $85 thousand on the sale of two OREO properties.

For the three months ended March 31, 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 7.11% for the first three months of 2009 to 9.24% for the first three months of 2010, primarily as a result of the common stock offering completed in September. 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 three months of 2010 was $17.2 million compared to $13.5 million for the first three months of 2009, an increase of 28%. For the three months ended March 31, 2010, the net interest margin was 3.98% as compared to 3.76% for the three months ended March 31, 2009, an increase of 22 basis points. The Company’s net interest margin for the first quarter of 2010 increased by 2 basis points from 3.96% for the fourth quarter of 2009 to 3.98%. The higher margin in the first quarter of 2010 as compared to the same period of 2009 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 and to higher average noninterest deposit balances. The Company’s net interest margin remains favorable to peer banking companies.

The table below presents the average balances and rates of the various categories of the Company’s assets and liabilities for the three months ended March 31, 2010 and 2009. Included in the table 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 March 31,
	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	$	7,558	$	33	1.77	%	$	2,763	$	19		2.72	%
Loans (1) (2) (3)		1,406,904		20,462	5.90	%		1,281,925		18,113		5.73	%
Investment securities available for sale (3)		269,437		1,977	2.98	%		159,649		1,929		4.90	%
Federal funds sold		70,090		36	0.21	%		9,166		6		0.25	%
Total interest earning assets		1,753,989		22,508	5.20	%		1,453,503		20,067		5.60	%

Total noninterest earning assets		82,214						62,191
Less: allowance for credit losses		20,820						18,658
Total noninterest earning assets		61,394						43,533
TOTAL ASSETS	$	1,815,383					$	1,497,036

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing transaction	$	50,557	$	33	0.26	%	$	47,690	$	32		0.27	%
Savings and money market		625,639		2,085	1.35	%		293,551		1,088		1.50	%
Time deposits		507,089		2,420	1.94	%		601,440		4,437		2.99	%
Total interest bearing deposits		1,183,285		4,538	1.56	%		942,681		5,557		2.39	%
Customer repurchase agreements and federal funds purchased		87,338		183	0.85	%		98,582		281		1.16	%
Other short-term borrowings		10,000		18	0.73	%		29,333		45		0.62	%
Long-term borrowings		49,300		546	4.49	%		62,150		721		4.70	%
Total interest bearing liabilities		1,329,923		5,285	1.61	%		1,132,746		6,604		2.36	%

Noninterest bearing liabilities:
Noninterest bearing demand		288,776						214,546
Other liabilities		5,291						8,404
Total noninterest bearing liabilities		294,067						222,950

Stockholders’ equity		191,393						141,341
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,815,383					$	1,497,036