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 September 30, 2009

OR

(   )              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 November 5, 2009, the registrant had 19,514,154 shares of Common Stock outstanding.

 
1

 
EAGLE BANCORP, INC.
TABLE OF CONTENTS

PART I.
FINANCIAL INFORMATION
   
       
   
     
     
     
     
     
       
   
     
     
     
       
   
       
   
       
PART II.
OTHER INFORMATION
   
       
   
       
   
       
   
       
   
       
   
       
   
       
   
       
     

 
 
2

 
Item 1 – Financial Statements

EAGLE BANCORP, INC.
Consolidated Balance Sheets
September 30, 2009 and December 31, 2008
(dollars in thousands, except per share data)
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
Assets
 
(Unaudited)
   
(Audited)
 
Cash and due from banks
  $ 21,253     $ 27,157  
Federal funds sold
    83,002       191  
Interest bearing deposits with banks and other short-term investments
    7,433       2,489  
Investment securities available for sale, at fair value
    219,652       169,079  
Loans held for sale
    1,068       2,718  
Loans
    1,317,089       1,265,640  
Less allowance for credit losses
    (19,929 )     (18,403 )
Loans, net
    1,297,160       1,247,237  
Premises and equipment, net
    9,246       9,666  
Deferred income taxes
    11,011       11,106  
Bank owned life insurance
    12,797       12,450  
Intangible assets, net
    4,447       2,533  
Other real estate owned
    4,581       909  
Other assets
    11,123       11,292  
           Total Assets
  $ 1,682,773     $ 1,496,827  
                 
Liabilities
               
Deposits:
               
Noninterest bearing demand
  $ 233,994     $ 223,580  
Interest bearing transaction
    55,513       54,801  
Savings and money market
    475,138       271,791  
Time, $100,000 or more
    299,171       249,516  
Other time
    268,186       329,692  
Total deposits
    1,332,002       1,129,380  
Customer repurchase agreements
               
and federal funds purchased
    79,301       98,802  
Other short-term borrowings
    30,000       55,000  
Long-term borrowings
    29,300       62,150  
Other liabilities
    10,654       9,124  
Total Liabilities
    1,481,257       1,354,456  
                 
Stockholders' Equity
               
Preferred stock, par value $.01 per share, shares authorized
         
1,000,000, Series A, $1,000 per share liquidation preference,
         
shares issued and outstanding 38,235 and 38,235 respectively,
         
discount of $696 and $1,892, respectively, net
    37,487       36,312  
Common stock, $.01 par value; shares authorized 50,000,000, shares
         
issued and outstanding  19,505,339 (2009) and 12,714,355 (2008)
    195       127  
Warrants
    946       1,892  
Additional paid in capital
    128,977       76,822  
Retained earnings
    30,756       24,866  
Accumulated other comprehensive income
    3,155       2,352  
Total Stockholders' Equity
    201,516       142,371  
Total Liabilities and Stockholders' Equity
  $ 1,682,773     $ 1,496,827  
 
See notes to consolidated financial statements.

 
3

 
EAGLE BANCORP, INC.
Consolidated Statements of Operations
For the Nine and Three Month Periods Ended September 30, 2009 and 2008 (Unaudited)
 (dollars in thousands, except per share data)
 
   
Nine Months Ended
   
Three Months Ended
 
   
September 30,
   
September 30,
 
Interest Income
 
2009
   
2008
   
2009
   
2008
 
Interest and fees on loans
  $ 56,427     $ 41,098     $ 19,744     $ 15,274  
Interest and dividends on investment securities
    5,391       3,492       1,623       1,365  
Interest on balances with other banks and short-term investments
    56       -       19       -  
Interest on federal funds sold
    51       163       40       105  
Total interest income
    61,925       44,753       21,426       16,744  
Interest Expense
                               
Interest on deposits
    16,090       13,130       5,481       4,794  
Interest on customer repurchase agreements and
                               
federal funds purchased
    774       1,019       200       324  
Interest on other short-term borrowings
    428       381       270       83  
Interest on long-term borrowings
    1,832       1,466       457       628  
Total interest expense
    19,124       15,996       6,408       5,829  
Net Interest Income
    42,801       28,757       15,018       10,915  
Provision for Credit Losses
    5,141       2,529       1,857       995  
Net Interest Income After Provision For Credit Losses
    37,660       26,228       13,161       9,920  
                                 
Noninterest Income
                               
Service charges on deposits
    2,182       1,293       727       530  
Gain on sale of loans
    950       406       292       127  
Gain on sale of investment securities
    1,537       55       -       45  
Increase in the cash surrender value of bank owned life insurance
    348       350       118       117  
Other income
    1,004       1,001       349       376  
Total noninterest income
    6,021       3,105       1,486       1,195  
Noninterest Expense
                               
Salaries and employee benefits
    15,477       11,458       5,128       4,172  
Premises and equipment expenses
    5,500       3,563       1,798       1,380  
Marketing and advertising
    785       320       228       125  
Data processing
    1,780       1,153       658       411  
Legal, accounting and professional fees
    2,041       656       664       248  
FDIC insurance premiums
    2,465       399       550       152  
Other expenses
    4,098       2,761       1,254       1,082  
Total noninterest expense
    32,146       20,310       10,280       7,570  
Income Before Income Tax Expense
    11,535       9,023       4,367       3,545  
Income Tax Expense
    4,067       3,256       1,625       1,284  
Net Income
    7,468       5,767       2,742       2,261  
Preferred Stock Dividends and Discount Accretion
    1,767       -       595       -  
Net Income Available to Common Stockholders
  $ 5,701     $ 5,767     $ 2,147     $ 2,261  
                                 
Earnings Per Common Share
                               
Basic
  $ 0.44     $ 0.53     $ 0.16     $ 0.20  
Diluted
  $ 0.43     $ 0.52     $ 0.15     $ 0.19  
Dividends Declared Per Common Share
  $ -     $ 0.1091     $ -     $ -  
 
See notes to consolidated financial statements.

 
4

 
EAGLE BANCORP, INC.
Consolidated Statements of Cash Flows
For the Nine Month Periods Ended September 30, 2009 and 2008 (Unaudited)
 (dollars in thousands, except per share data)
 
   
2009
   
2008
 
Cash Flows From Operating Activities
           
Net income
  $ 7,468     $ 5,767  
Adjustments to reconcile net income to net cash
         
provided by operating activities
               
Provision for credit losses
    5,141       2,529  
Depreciation and amortization
    1,706       1,101  
Gains on sale of loans
    (950 )     (406 )
Origination of loans held for sale
    (78,827 )     (27,449 )
Proceeds from sale of loans held for sale
    81,427       27,188  
Increase in cash surrender value of BOLI
    (348 )     (350 )
Gain on sale of investment securities
    (1,537 )     (55 )
Gain on sale of other real estate owned
    (64 )     -  
Stock-based compensation expense
    427       232  
Excess tax benefit from exercise of non-qualified stock options
    (24 )     (195 )
Increase in other assets
    (5,521 )     (13,381 )
Increase in other liabilities
    1,554       17,230  
Net cash provided by operating activities
    10,452       12,211  
                 
Cash Flows From Investing Activities
               
Increase in interest bearing deposits with other banks
         
and short term investments
    (4,944 )     (2,468 )
Purchases of available for sale investment securities
    (143,525 )     (62,378 )
Proceeds from maturities and principal payments
         
of available for sale securities
    45,169       12,193  
Proceeds from sale/call of available for sale securities
    49,320       19,925  
Net increase in loans
    (55,064 )     (96,354 )
Net cash received in acquisition
    -       10,885  
Proceeds from the sale of other real estate owned
    907          
Bank premises and equipment acquired
    (1,147 )     (968 )
Net cash used in investing activities
    (109,284 )     (119,165 )
                 
Cash Flows From Financing Activities
               
Increase in deposits
    202,622       119,696  
Decrease in customer repurchase agreements and
         
federal funds purchased
    (19,501 )     (19,490 )
Decrease in other short-term borrowings
    (25,000 )     (16,100 )
(Decrease) increase in long-term borrowings
    (32,850 )     46,150  
Payment of dividends on preferred stock
    (1,328 )     -  
Issuance of common stock
    51,772       1,149  
Excess tax benefit from exercise of non-qualified stock options
    24       195  
Payment of dividends and payment in lieu of fractional shares
    -       (1,178 )
Net cash provided by financing activities
    175,739       130,422  
                 
Net Increase In Cash And Due From Banks
    76,907       23,468  
                 
Cash And Due From Banks At Beginning Of Period
    27,348       15,652  
                 
Cash and Due from Banks At End Of Period
  $ 104,255     $ 39,120  
                 
Supplemental Cash Flows Information
               
Interest paid
  $ 20,037     $ 15,802  
Income taxes paid
  $ 5,515     $ 4,761  
Stock issued for acquisition of Fidelity
  $ -     $ 13,330  
Non-Cash Investing Activities
               
Transfers from loans to other real estate owned
  $ 6,122     $ 65  
 
See notes to consolidated financial statements.
 
 
5

 
EAGLE BANCORP, INC.
Consolidated Statements of Changes in Stockholders’ Equity
For the Nine Month Periods Ended September 30, 2009 and 2008 (Unaudited)
 (dollars in thousands, except per share data)

                                 
Accumulated
       
                      Additional          
Other
   
Total
 
   
Preferred
 
Common
         
Paid
   
Retained
   
Comprehensive
   
Stockholders'
 
   
Stock
   
Stock
   
Warrants
   
in Capital
   
Earnings
   
Income (Loss)
   
Equity
 
Balance, January 1, 2009
  $ 36,312     $ 127     $ 1,892     $ 76,822     $ 24,866     $ 2,352     $ 142,371  
Comprehensive Income
                                                       
Net Income
                                    7,468               7,468  
Other comprehensive income:
                                                       
Unrealized gain on securities available
for sale (net of taxes)
                                    1,787       1,787  
Less: reclassification adjustment for gains
net of taxes of $553 included in net income
                      (984 )     (984 )
Total Comprehensive Income
                         
 
                      8,271  
Preferred stock dividends  ($34.73 per share)
                                    (1,328 )             (1,328 )
Stock-based compensation
                            427                       427  
Shares issued under the capital offering -
                                                       
6,731,640 shares, net of issuance costs of $3,457
            68               51,674                       51,742  
Exercise of options for 9,759 shares of common stock
                      30                       30  
Tax benefit on non-qualified options exercise
                            24                       24  
Preferred stock:
                                                       
Warrants reduced by 385,434 warrants
    946               (946 )                             -  
Issuance costs
    (21 )                                             (21 )
Discount accretion
    250                               (250 )             -  
Balance, September 30, 2009
  $ 37,487     $ 195     $ 946     $ 128,977     $ 30,756     $ 3,155     $ 201,516  
                                                         
Balance, January 1, 2008
  $ -     $ 97     $ -     $ 52,290     $ 28,195     $ 584     $ 81,166  
Comprehensive Income
                                                       
Net Income
                                    5,767               5,767  
Other comprehensive income:
                                                       
Unrealized gain on securities available
for sale (net of taxes)
                                    61       61  
Less: reclassification adjustment for gains
net of taxes of $22 included in net income
                      (33 )     (33 )
Total Comprehensive Income
                         
 
                      5,795  
Shares issued to effect merger with Fidelity -
                                                       
1,638,031 shares, net of issuance costs of $96
            16               13,218                       13,234  
Cash Dividend ($0.1091 per share)
                                    (1,178 )             (1,178 )
Shares issued under dividend reinvestment plan -
                                                       
76,246 shares
            1               806                       807  
10% Stock dividend declaration
                            9,561       (9,561 )             -  
Stock-based compensation
                            232                       232  
Exercise of options for 97,252 shares of common stock
    -       1       -       341                       342  
Tax benefit on non-qualified options exercise
                            195                       195  
Balance, September 30, 2008
  $ -     $ 115     $ -     $ 76,643     $ 23,223     $ 612     $ 100,593  

See notes to consolidated financial statements.

 
6

 
EAGLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Nine Months Ended September 30, 2009 and 2008 (Unaudited)


1. BASIS OF PRESENTATION

The consolidated financial statements of Eagle Bancorp, Inc. (the “Company”) included herein are unaudited.  The consolidated financial statements reflect all adjustments, consisting only of normal recurring accruals that in the opinion of Management, are necessary to present fairly the results for the periods presented. The amounts as of and for the year ended December 31, 2008 were derived from audited consolidated financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“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, 2008.  The Company believes that the disclosures are adequate to make the information presented not misleading. The results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of the results of operations to be expected for the remainder of the year, or for any other period. Certain reclassifications have been made to amounts previously reported to conform to the classifications made in 2009.

Management has evaluated subsequent events for potential recognition and/or disclosure through November 6, 2009, which is the date that the Company’s financial statements included in this Quarterly Report on Form 10-Q were issued.  No material subsequent events have occurred since September 30, 2009 that required recognition or disclosure in these financial statements.

2. NATURE OF OPERATIONS

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

3. CASH FLOWS

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

 
7

 
4. HIGHER RISK LENDING – REVENUE RECOGNITION

The Company has occasionally made higher risk acquisition, development, and construction (“ADC”) loans that entail higher risks than ADC loans made following normal underwriting practices (“higher risk loan transactions”). These higher risk loan transactions are made through the Company’s subsidiary, ECV. This activity is limited as to individual transaction amount and total exposure amounts based on capital levels and is carefully monitored. The loans are carried on the balance sheet at amounts outstanding and meet the loan classification requirements of the Accounting Standards Executive Committee (“AcSEC”) guidance reprinted from the CPA Letter, Special Supplement, dated February 10, 1986 (also referred to as Exhibit 1 to AcSEC Practice Bulletin No. 1). Additional interest earned on these higher risk loan transactions (as defined in the individual loan agreements) is recognized as realized under the provisions contained in  Exhibit 1 to AcSEC Practice Bulletin No.1 and Staff Accounting Bulletin (“SAB”) No. 101 (Revenue Recognition in Financial Statements). The additional interest is included as a component of noninterest income. The Bank had one higher risk lending transaction, amounting to $1.6 million and $1.8 million, outstanding as of September 30, 2009 and December 31, 2008, respectively.  There were no higher risk lending transactions in 2009

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. 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
 
September 30, 2009
 
Cost
   
Gains
   
Losses
   
Value
 
(dollars in thousands)
                       
U. S. Government agency securities
  $ 61,580     $ 550     $ 23     $ 62,107  
Mortgage backed securities - GSEs
    119,918       3,829       2       123,745  
Municipal bonds
    22,414       999       33       23,380  
Federal Reserve and Federal Home Loan Bank stock
    10,053       -       -       10,053  
Other equity investments
    396       -       29       367  
    $ 214,361     $ 5,378     $ 87     $ 219,652  
 
         
Gross
   
Gross
   
Estimated
 
 
 
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
December 31, 2008
 
Cost
   
Gains
   
Losses
   
Value
 
(dollars in thousands)
                       
U. S. Government agency securities
  $ 71,837     $ 2,197     $ 5     $ 74,029  
Mortgage backed securities - GSEs
    77,242       2,559       31       79,770  
Municipal bonds
    5,061       -       353       4,708  
Federal Reserve and Federal Home Loan Bank stock
    9,599       -       -       9,599  
Other equity investments
    1,396       -       423       973  
    $ 165,135     $ 4,756     $ 812     $ 169,079  

 
8

 
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
 
September 30, 2009
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
(dollars in thousands)
                                   
U. S. Government agency securities
  $ 16,799     $ 23     $ -     $ -     $ 16,799     $ 23  
Mortgage backed securities - GSEs
    946       2       -       -       946       2  
Municipal bonds
    2,294       33       -       -       2,294       33  
Other equity investments
    149       29       -       -       149       29  
    $ 20,188     $ 87     $ -     $ -     $ 20,188     $ 87  
 
   
Less than
   
12 Months
             
   
12 Months
   
or Greater
   
Total
 
   
Estimated
         
Estimated
         
Estimated
       
 
 
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
December 31, 2008
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
(dollars in thousands)
                                   
U. S. Government agency securities
  $ 4,480     $ 5     $ -     $ -     $ 4,480     $ 5  
Mortgage backed securities - GSEs
    7,715       31       -       -       7,715       31  
Municipal bonds
    4,707       353       -       -       4,707       353  
Other equity investments
    576       423       -       -       576       423  
    $ 17,478     $ 812     $ -     $ -     $ 17,478     $ 812  
 
The unrealized losses that exist are generally the result of changes in market interest rates and spread relationships since original purchases. The weighted average duration of debt securities, which comprise 95% of total investment securities, is relatively short at 3.2 years. The Company does not believe that the investment securities that were in an unrealized loss position as of September 30, 2009 represent an other-than-temporary impairment.  Total gross unrealized losses were primarily attributed to changes in market interest rates since the original purchases, and not due to the credit quality of the investment securities.  The Company does not intend to sell the investments and it is more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity.

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

 
9

 
   
Available-for-Sale
 
   
Amortized
   
Estimated
 
(dollars in thousands)
 
Cost
   
Fair Value
 
Amounts maturing
           
U. S. Government agency securities maturing:
           
   One year or less
  $ 5,000     $ 5,064  
   After one year through five years
    56,580       57,043  
Mortgage backed securities - GSEs
    119,918       123,745  
Municipal bonds maturing:
               
   Five years through ten years
    3,030       3,112  
   After ten years
    19,384       20,268  
FRB, FHLB and  other equity securities
    10,449       10,420  
    $ 214,361     $ 219,652  
 
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 September 30, 2009 was $181 million. As of September 30, 2009 and December 31, 2008, there were no holdings of securities of any one issuer, other than the U.S. Government and U.S. Government agency securities that exceeded ten percent of stockholders’ equity.

7. EARNINGS PER SHARE

The calculation of net income per common share for the nine and three months ended September 30 was as follows:
 
   
Nine Months Ended
   
Three Months Ended
 
   
September 30,
   
September 30,
 
(dollars and shares in thousands)
 
2009
   
2008
   
2009
   
2008
 
Basic
                       
Net income available to common stockholders
  $ 5,701     $ 5,767     $ 2,147     $ 2,261  
Average common shares outstanding
    12,999       11,021       13,505       11,482  
Basic net income per common  share
  $ 0.44     $ 0.53     $ 0.16     $ 0.20  
                                 
Diluted
                               
Net income available to common stockholders
  $ 5,701     $ 5,767     $ 2,147     $ 2,261  
Average common shares outstanding
    12,999       11,021       13,505       11,482  
Adjustment for common share equivalents
    113       139       290       94  
Average common shares outstanding-diluted
    13,112       11,160       13,795       11,576  
Diluted net income per common share
  $ 0.43     $ 0.52     $ 0.15     $ 0.19  
 
Per share amounts and the number of outstanding shares have been adjusted to give effect to the 10% common stock dividend paid on October 1, 2008.
 
10

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

The 2006 Plan provides for the issuance of awards of incentive options, nonqualifying options, restricted stock and stock appreciation rights to selected key employees and members of the Board. The 2006 Plan authorized shares were increased from 715,000 to 1,215,000 on May 21, 2009 by approval of an amendment to the plan by the stockholders. Option awards were 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.

In January 2009, the Company awarded options to purchase 315,437 shares of common stock and 30,763 shares of restricted stock to employees, senior officers and to a Director. Of the total options awarded, 263,700 have a ten-year term and vest in five substantially equal installments beginning on the first year anniversary of the date of grant. The remaining options have a ten-year term and vest over a four-year period beginning on the seventh year anniversary of the date of grant. The restricted stock is service based, which vest in five substantially equal installments beginning on the first year anniversary of the date of grant. The restricted stock is being recognized as compensation expense over a five-year period based on the market value of shares at the date of grant.
 
In April 2009, the Company awarded options to purchase 1,500 shares to an employee under the 2006 Plan which have a ten-year term and vest in five substantially equal installments on the first through fifth anniversaries of the date of grant.

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

In August 2009, the Company awarded options to purchase 5,000 shares to an employee under the 2006 Plan which have a five-year term and vest in four substantially equal installments on the first through fourth anniversaries of the date of grant.

In September 2009, the Company awarded options to purchase 3,000 shares to an employee under the 2006 Plan which have a five-year term and vest in three substantially equal installments on the date of grant, and the first and second anniversaries of the date of grant.

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

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

 
11

 
                     
Weighted-Average
 
Weighted-Average
 
Aggregate
 
               
Weighted-Average
 
Remaining
 
Grant Date
 
Intrinsic
 
As of 1/1/2009
   
Stock Options
   
Exercise Price
 
Contractual Life
 
Fair Value
   
Value
 
Outstanding
          1,028,580     $ 13.01       -     $ 2.57       -  
Vested
          799,884       13.05       -       2.43       -  
Nonvested
          228,696       12.86       -       3.07       -  
                                               
Period Activity
                                         
Issued
          324,937     $ 6.41       -     $ 2.04       -  
Exercised
          9,759       3.07       -       1.36       -  
Forfeited
          7,792       8.40       -       2.22       -  
Expired
          36,937       20.70       -       0.96       -  
                                               
As of 9/30/2009
                                         
Outstanding
      1,299,029     $ 11.24       5.18     $ 2.50     $ 2,001,988  
Vested
          832,746       12.75       3.76       2.51       967,093  
Nonvested
          466,283       8.55       7.72       2.46       1,034,896  
                                               
                                               
                                               
Outstanding:
                   
Weighted-Average
               
Range of
       
Stock Options
   
Weighted-Average
 
Remaining
               
Exercise Prices
   
Outstanding
   
Exercise Price
 
Contractual Life
               
$2.98      -
  $ 8.10       546,175     $ 5.94       6.18                  
$8.11      -
  $ 11.07       254,190       10.21       4.70                  
$11.08    -
  $ 15.43       247,209       13.01       3.83                  
$15.44    -
  $ 26.86       251,455       22.08       4.82                  
              1,299,029       11.24       5.18                  
                                                 
Exercisable:
                                         
Range of
   
Stock Options
   
Weighted-Average
                       
Exercise Prices
   
Outstanding
   
Exercise Price
                       
$2.98      -
  $ 8.10       222,061     $ 5.27                          
$8.11      -
  $ 11.07       246,188       10.24                          
$11.08    -
  $ 15.43       133,354       12.91                          
$15.44    -
  $ 26.86       231,143       22.52                          
              832,746       12.75                          
                                                 
Assumptions:
                                         
           
Nine Months Ended
 
Year Ended
 
Year Ended
               
           
September 30, 2009
    2008       2007                  
Expected Volatility
      25.9% - 58.0 %     23.7% - 78.5 %     18.5% - 24.4 %                
Weighted-Average Volatility
      26.61 %     35.47 %     20.12 %                
Expected Dividends
      0.0 %     0.8 %     1.4 %                
Expected Term (In years)
      3.5 - 8.5       0.1 - 9.0       3.1 - 4.0                  
Risk-Free Rate
      0.84 %     2.54 %     4.73 %                
Weighted-Average Fair Value (Grant date)
    $ 2.04     $ 1.30     $ 4.40                  
                                                 
                                                 
Total intrinsic value of options exercised
                    $ 58,466          
Total fair value of shares vested
                            $ 237,626          
Weighted-average period over which nonvested awards are expected to be recognized
      2.58    
years
 

 
12

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

Included in salaries and employee benefits, the Company recognized $150 thousand ($0.01 per share) and $428 thousand ($0.02 per share) in share based compensation expense for the three and nine months ended September 30, 2009 as compared to $106 thousand ($0.01 per share) and $232 thousand ($0.02 per share) for the same periods in 2008. As of September 30, 2009 there was $1.1 million of total unrecognized compensation cost related to non-vested equity awards under the Company’s share based compensation plans. The $1.1 million of unrecognized compensation expense is being amortized over the remaining requisite service (vesting) periods through 2018.

9. NEW ACCOUNTING PRONOUNCEMENTS
 
Recent Accounting Pronouncements Adopted
 
In April 2009, the Financial Accounting Standards Board (“FASB”) issued guidance on “Recognition and Presentation of Other-Than-Temporary Impairments.”  This guidance requires entities to separate an other-than-temporary impairment of a debt security into two components when there are credit related losses associated with the impaired debt security for which management asserts that it does not have the intent to sell the security and it is more likely than not that it will not be required to sell the security before recovery of its cost basis.  The amount of the other-than-temporary impairment related to a credit loss is recognized in earnings and the amount of the other-than-temporary impairment related to other factors is recorded in other comprehensive income (loss).  This guidance was effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  We elected to adopt this guidance in the first quarter 2009 and effective January 1, 2009.  There were no impairments previously recognized on debt securities we owned at December 31, 2008; therefore, there was no cumulative effect adjustment to retained earnings and other comprehensive loss as a result of adopting this guidance.

In April 2009, the FASB issued guidance on “Determining Fair Value When Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are Not Orderly.”  Under this guidance, if an entity determines that there has been a significant decrease in the volume and level of activity for the asset or the liability in relation to the normal market activity for the asset or liability (or similar assets or liabilities), then transactions or quoted prices may not accurately reflect fair value.  In addition, if there is evidence that the transaction for the asset or liability is not orderly, the entity shall place little, if any, weight on that transaction price as an indicator of fair value.  This guidance is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  We elected to adopt this guidance in the first quarter 2009. Its adoption did not have a material impact on our consolidated financial condition or results of operations.

In April 2009, the FASB issued guidance on “Interim Disclosures about Fair Value of Financial Instruments.”  This guidance requires disclosures about fair value of financial instruments in interim and annual financial statements which is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  We elected to adopt this guidance in the first quarter 2009 and included required disclosures in the notes to consolidated financial statements.

In May 2009, the FASB issued guidance on “Subsequent Events.”  This guidance sets forth general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  This guidance is effective for periods ending after June 15, 2009.  The adoption of this guidance did not have an impact on the consolidated financial condition or results of operations of the Company.

In June 2009, the FASB issued guidance on “The FASB Accounting Standards Codification (“ASC”) and the Hierarchy of Generally Accepted Accounting Principles” which established the FASB Accounting Standards Codification as the single source of authoritative accounting principles in the preparation of financial statements in

 
13

 
conformity with GAAP.  This guidance also explicitly recognized rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under federal securities laws as authoritative GAAP for SEC registrants.  This guidance was effective for financial statements issued for periods ending after September 15, 2009.  The adoption of this guidance did not have an impact on the consolidated financial condition or results of operations of the Company.
 
Accounting Pronouncements Issued But Not Yet Effective

In June 2009, the (“FASB”) issued guidance on “Accounting for Transfers of Financial Assets” that requires enhanced disclosures about transfers of financial assets and a company’s continuing involvement in transferred assets.  This guidance is effective for financial statements issued for fiscal years beginning after November 15, 2009.  We do not expect the adoption of this guidance to have any impact on the Company’s  disclosures, since we do not engage in transfers of financial assets.
 
In June 2009, the FASB issued guidance which 1) replaces the quantitative-based risks and rewards calculation for determining whether an enterprise is the primary beneficiary in a variable interest entity with an approach that is primarily qualitative, 2) requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity, and 3) requires additional disclosures about an enterprise’s involvement in variable interest entities.  This guidance is effective for financial statements issued for fiscal years beginning after November 15, 2009.  We do not expect the adoption of this guidance to have a material impact, if any, on the Company’s consolidated financial condition or results of operations.
 
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.
 
 
14

 
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
 
Assets measured at fair value on a recurring basis comprised the following at September 30, 2009:
 
(dollars in thousands)
 
Carrying
Value
(Fair Value)
   
Quoted
Prices
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Other
Unobservable
Inputs
(Level 3)
   
Trading
Gains
and
(Losses)
   
Total
Changes
in Fair
Values
Included in
Period
 Earnings
 
                                     
Investment securities available for sale
  $ 219,652     $ 149     $ 219,285     $ 218     $ -     $ -  
 
 
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
  $ 218  
    Total realized and unrealized gains and losses:
       
         Included in net income
    -  
         Included in other comprehensive income
    -  
    Purchases, issuances and settlements
    -  
    Transfers in and/or out of Level 3
    -  
Balance, September 30, 2009
  $ 218  
 
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

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

(dollars in thousands)
 
Carrying Value
(Fair Value)
   
Quoted Prices
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Other
Unobservable
Inputs
(Level 3)
   
Trading
Gains and
(Losses)
   
Total
Changesin Fair
Values Included in
Period Earnings
 
                                     
Impaired loans
  $ 22,775     $ -     $ 15,802     $ 6,973     $ -     $ -  
Other real estate owned
  $ 4,581     $ -     $ 2,881     $ 1,700     $ -     $ -  

 
15

 
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. There was no change in fair value of other real estate owned during the nine months ended September 30, 2009.

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:
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
Carrying
   
Fair
   
Carrying
   
Fair
 
(dollars in thousands)
 
Value
   
Value
   
Value
   
Value
 
Assets
                       
Cash and due from banks
  $ 21,253     $ 21,253     $ 27,157     $ 27,157  
Federal funds sold
    83,002       83,002       191       191  
Interest bearing deposits with other banks
    7,433       7,433       2,489       2,489  
Investment securities
    219,652       219,652       169,079       169,079  
Loans held for sale
    1,068       1,068       2,718       2,718  
Loans
    1,317,089       1,310,970       1,265,640       1,261,301  
Other earning assets
    12,797       12,797       12,450       12,450  
                                 
Liabilities
                               
Noninterest bearing deposits
    233,994       233,994       223,580       223,580  
Interest bearing deposits
    1,098,008       1,102,428       905,800       911,257  
Borrowings
    138,601       145,108       215,952       218,758  

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.

 
16

 
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.

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.   The Company accrued dividends on the preferred stock and recognized the discount accretion of $595 thousand for the three months ended September 30, 2009 reducing net income available to common stockholders to $2.1 million ($0.16 per basic and $0.15 per diluted common share).  On August 15, 2009, the Company paid the quarterly dividend payment of $478 thousand on the $38.2 million of preferred stock Series A.

On September 21, 2009, the Company closed on a publicly underwritten offering of  6,731,640 shares of its common stock at $8.20 per share, including 878,040 shares subject to the underwriter's over-allotment option. As a

 
17

 
result of the qualifying capital raise, the Company received approval from the U.S. Treasury to reduce by 50% the number of shares of common stock subject to warrants issued to the U.S. Treasury from 770,868 shares to 385,434 shares.  Accordingly, the discount on the preferred stock Series A and the warrants were reduced by $946 thousand.
 
ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion provides information about the results of operations, and financial condition, liquidity, and capital resources of the Company and its subsidiaries as of the dates and periods indicated. This discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this report and the Management Discussion and Analysis in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
 
This report contains forward looking statements within the meaning of the Securities Exchange Act of 1934, as amended, including statements of goals, intentions, and expectations as to future trends, plans, events or results of Company operations and policies and regarding general economic conditions. In some cases, forward- looking statements can be identified by use of such words as “may”, “will”, “anticipate”, “believes”, “expects”, “plans”, “estimates”, “potential”, “continue”, “should”, and similar words or phases.  These statements are based upon current and anticipated economic conditions, nationally and in the Company’s market, interest rates and interest rate policy, competitive factors and other conditions which, by their nature, are not susceptible to accurate forecast, and are subject to significant uncertainty. 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, 2008 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, our fourteenth which opened in November 2009; five offices in the District of Columbia; and one office in Fairfax County, Virginia. A fourteenth office opened in early November in Potomac, Maryland.

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”).

 
18

 
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) the Financial Accounting Standards Board (“FASB”)  issued guidance on “Accounting for Contingencies,” which requires that losses be accrued when they are probable of occurring and are estimable and (b) FASB issued guidance on “Accounting by Creditors for Impairment of a Loan,” which requires that losses be accrued when it is probable that the Company will not collect all principal and interest payments according to the contractual terms of the loan. The loss, if any, can be determined by the difference between the loan balance and the value of collateral, the present value of expected future cash flows, or values observable in the secondary markets.

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

The specific allowance allocates a reserve to identified impaired loans. Loans identified in the risk rating evaluation as substandard, doubtful or loss (classified loans), are segregated from non-classified loans.  Classified loans are assigned specific reserves based on an impairment analysis. Under FASB issued guidance on “Accounting by Creditors for Impairment of a Loan,” 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.

 
19

 
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  FASB issued guidance on “Share-Based Payment,” which requires the expense recognition for the fair value of share based compensation awards, such as stock options, restricted stock, and performance based shares.  This standard allows management to establish modeling assumptions as to expected stock price volatility, option terms, forfeiture rates and dividend rates which directly impact estimated fair value. The accounting standard also allows for the use of alternative option pricing models which may impact fair value as determined. The Company’s practice is to utilize reasonable and supportable assumptions which are reviewed with the appropriate Board Committee.

In accounting for the acquisition of Fidelity, the Company followed the provisions of FASB issued guidance on “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

 
On August 31, 2008 the Company completed the acquisition of Fidelity & Trust Financial Corporation (“Fidelity”) and its subsidiary Fidelity & Trust Bank (“F&T Bank”), which added approximately $360 million in loans, $100 million in investments, $385 million in deposits, $47 million in customer repurchase agreements and $13 million in equity capital.  The combined organization is reflected in the balance sheets at September 30, 2009 and December 31, 2008 and the results of operations for the nine and three months ended September 30, 2009 and reflects one month of combined results of operations for the nine and three months ended September 30, 2008.
 
 
20

 
On September 21, 2009, the Company completed a public offering of its common stock in a transaction which added 6,731,640 shares and approximately $51.8 million (which is net of underwriting discounts and expenses) to its stockholders equity. The additional common equity will be utilized for general corporate purposes, including to support future internal growth or potential acquisitions.
 
The Company reported net income of $7.5 million for the nine months ended September 30, 2009 as compared to $5.8 million for the same nine month period in 2008. Net income available to common stockholders (which is after accrual of preferred stock dividends) was $5.7 million for the nine months ended September 30, 2009 ($0.44 per basic and $0.43 per diluted common share), compared to $5.8 million ($0.53 per basic and $0.52 per diluted common share) for the same period in 2008, a decrease of 1%.
 
Net income available to common stockholders (which is after accrual of preferred stock dividends), was $2.1 million for the three months ended September 30, 2009 ($0.16 per basic and $0.15 per diluted common share), compared to $2.3 million ($0.20 per basic and $0.19 per diluted common share) for the same three months of 2008, a decrease of 5%.
 
The Company had an annualized return on average assets of 0.64% and an annualized return on average common equity of 7.02% for the first nine months of 2009, as compared to annualized returns on average assets and average common equity of 0.81% and 8.95%, respectively, for the same nine months of 200