EAGLE BANCORP INC - Quarter Report: 2011 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2011

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 o		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 November 2, 2011, the registrant had 19,912,147 shares of Common Stock outstanding.

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EAGLE BANCORP, INC.

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PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements
	Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010
	Consolidated Statements of Operations for the Nine and Three Month Periods Ended September 30, 2011 and 2010
	Consolidated Statements of Changes in Shareholders’ Equity for the Nine Month Periods Ended September 30, 2011 and 2010
	Consolidated Statements of Cash Flows for the Nine Month Periods Ended September 30, 2011 and 2010

	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

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Item 1 — Financial Statements

EAGLE BANCORP, INC.

Consolidated Balance Sheets

September 30, 2011 and December 31, 2010

(dollars in thousands, except per share data)

	September 30,			December 31,
	2011			2010
	(Unaudited)			(Audited)
Assets
Cash and due from banks	$	5,914		$	12,414
Federal funds sold	22,088			34,048
Interest bearing deposits with banks and other short-term investments	718,848			11,652
Investment securities available for sale, at fair value	292,257			228,048
Federal Reserve and Federal Home Loan Bank stock	9,430			9,528
Loans held for sale	107,907			80,571
Loans	2,029,645			1,675,500
Less allowance for credit losses	(28,599		)	(24,754		)
Loans, net	2,001,046			1,650,746
Premises and equipment, net	11,162			9,367
Deferred income taxes	14,091			14,471
Bank owned life insurance	13,643			13,342
Intangible assets, net	4,154			4,188
Other real estate owned	2,941			6,701
Other assets	16,265			14,294
Total Assets	$	3,219,746		$	2,089,370

Liabilities and Shareholders’ Equity
Liabilities
Deposits:
Noninterest bearing demand	$	1,106,689		$	400,291
Interest bearing transaction	69,762			61,771
Savings and money market	986,585			737,071
Time, $100,000 or more	351,128			344,747
Other time	233,185			182,918
Total deposits	2,747,349			1,726,798
Customer repurchase agreements	147,671			97,584
Long-term borrowings	49,300			49,300
Other liabilities	16,964			10,972
Total liabilities	2,961,284			1,884,654

Shareholders’ 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 0 at September 30, 2011 and 23,235 at December 31, 2010, discount of $0 and $653 respectively, net	—			22,582
Preferred stock, par value $.01 per share, shares authorized 1,000,000, Series B, $1,000 per share liquidation preference, shares issued and outstanding 56,600 at September 30, 2011 and 0 at December 31, 2010	56,600
Common stock, par value $.01 per share; shares authorized 50,000,000, shares issued and outstanding 19,890,957, and 19,700,387, respectively	197			197
Warrant	946			946
Additional paid in capital	131,946			130,382
Retained earnings	64,389			48,551
Accumulated other comprehensive income	4,384			2,058
Total shareholders’ equity	258,462			204,716
Total Liabilities and Shareholders’ Equity	$	3,219,746		$	2,089,370

See notes to consolidated financial statements.

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EAGLE BANCORP, INC.

Consolidated Statements of Operations

For the Nine and Three Month Periods Ended September 30, 2011 and 2010 (Unaudited)

(dollars in thousands, except per share data)

	Nine Months Ended				Three Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
Interest Income
Interest and fees on loans	$	81,013	$	64,995	$	29,119	$	22,655
Interest and dividends on investment securities	4,754		5,412		1,469		1,697
Interest on balances with other banks and short-term investments	172		83		136		24
Interest on federal funds sold	94		128		17		45
Total interest income	86,033		70,618		30,741		24,421
Interest Expense
Interest on deposits	13,121		12,860		4,613		4,005
Interest on customer repurchase agreements	533		545		212		167
Interest on short-term borrowings	—		27		—		—
Interest on long-term borrowings	1,603		1,647		540		550
Total interest expense	15,257		15,079		5,365		4,722
Net Interest Income	70,776		55,539		25,376		19,699
Provision for Credit Losses	8,218		5,752		2,887		1,962
Net Interest Income After Provision For Credit Losses	62,558		49,787		22,489		17,737

Noninterest Income
Service charges on deposits	2,301		2,300		880		814
Gain on sale of loans	3,872		990		1,065		739
Gain on sale of investment securities	1,445		833		854		260
Increase in the cash surrender value of bank owned life insurance	301		325		100		108
Other income	1,718		1,117		612		412
Total noninterest income	9,637		5,565		3,511		2,333
Noninterest Expense
Salaries and employee benefits	24,335		18,193		9,263		6,549
Premises and equipment expenses	5,982		6,725		1,939		2,021
Marketing and advertising	1,215		919		234		391
Data processing	2,477		1,955		876		697
Legal, accounting and professional fees	2,870		2,181		731		655
FDIC insurance	1,628		2,027		285		692
Other expenses	6,462		5,529		2,395		1,924
Total noninterest expense	44,969		37,529		15,723		12,929
Income Before Income Tax Expense	27,226		17,823		10,277		7,141
Income Tax Expense	9,842		6,219		3,783		2,375
Net Income	17,384		11,604		6,494		4,766
Preferred Stock Dividends and Discount Accretion	1,369		971		166		327
Net Income Available to Common Shareholders	$	16,015	$	10,633	$	6,328	$	4,439

Earnings Per Common Share
Basic	$	0.81	$	0.54	$	0.32	$	0.22
Diluted	$	0.79	$	0.53	$	0.31	$	0.22

See notes to consolidated financial statements.

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EAGLE BANCORP, INC.

Consolidated Statements of Changes in Shareholders’ Equity

For the Nine Month Periods Ended September 30, 2011 and 2010 (Unaudited)

(dollars in thousands, except per share data)

														Accumulated
														Other			Total
	Preferred			Common				Additional Paid			Retained			Comprehensive			Shareholders’
	Stock			Stock		Warrants		in Capital			Earnings			Income			Equity
Balance, January 1, 2011	$	22,582		$	197	$	946	$	130,382		$	48,551		$	2,058		$	204,716
Comprehensive Income
Net Income											17,384						17,384
Other comprehensive income:
Unrealized gain on securities available for sale (net of taxes)														3,193			3,193
Less: reclassification adjustment for gains net of taxes of $578 included in net income														(867		)	(867		)
Total Comprehensive Income																	19,710
Stock-based compensation								818									818
Exercise of options for 114,624 shares of common stock								678									678
Tax benefit on non-qualified options exercised								68									68
Preferred stock:
Issuance of Series B Preferred Stock	56,600																56,600
Redemption of Series A Preferred Stock (23,235 shares)	(23,235		)														(23,235		)
Preferred stock dividends											(893		)				(893		)
Discount accretion	653										(653		)				—
Balance, September 30, 2011	$	56,600		$	197	$	946	$	131,946		$	64,389		$	4,384		$	258,462

Balance, January 1, 2010	$	22,612		$	195	$	946	$	129,211		$	33,024		$	2,333		$	188,321
Comprehensive Income
Net Income											11,604						11,604
Other comprehensive income:
Unrealized gain on securities available for sale (net of taxes)														2,997			2,997
Less: reclassification adjustment for gains net of taxes of $333 included in net income														(500		)	(500		)
Total Comprehensive Income																	14,101
Stock-based compensation								447									447
Exercise of options for 53,039 shares of common stock				2				229									231
Tax benefit on non-qualified options exercised								124									124
Capital raise issuance cost								(53		)							(53		)
Preferred stock:
Preferred stock dividends											(870		)				(870		)
Discount accretion	(75		)								75						—
Balance, September 30, 2010	$	22,537		$	197	$	946	$	129,958		$	43,833		$	4,830		$	202,301

See notes to consolidated financial statements.

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EAGLE BANCORP, INC.

Consolidated Statements of Cash Flows

For the Nine Month Periods Ended September 30, 2011 and 2010 (Unaudited)

(dollars in thousands, except per share data)

	2011			2010
Cash Flows From Operating Activities:
Net income	$	17,384		$	11,604
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for credit losses	8,218			5,752
Depreciation and amortization	1,855			2,105
Gains on sale of loans	(3,872		)	(990		)
Origination of loans held for sale	(432,485		)	(212,790		)
Proceeds from sale of loans held for sale	409,021			144,441
Net increase in cash surrender value of BOLI	(301		)	(325		)
Decrease in deferred income taxes	380			105
Net loss on sale of other real estate owned	299			256
Net gain on sale of investment securities	(1,445		)	(833		)
Stock-based compensation expense	818			447
Excess tax benefit from stock-based compensation	(68		)	(124		)
(Increase) decrease in other assets	(1,971		)	4,999
Increase in other liabilities	5,992			2,488
Net cash provided by (used in) operating activities	3,825			(42,865		)
Cash Flows From Investing Activities:
Increase in interest bearing deposits with other banks and short term investments	(87,196		)	(93		)
Purchases of available for sale investment securities	(233,491		)	(106,219		)
Proceeds from maturities of available for sale securities	87,130			46,339
Proceeds from sale/call of available for sale securities	85,923			37,038
Purchases of federal reserve and federal home loan bank stock	(891		)	(4		)
Proceeds from repurchase of federal reserve and federal home loan bank stock	989			647
Net increase in loans	(361,479		)	(137,356		)
Proceeds from sale of other real estate owned	5,660			1,859
Bank premises and equipment acquired	(3,439		)	(1,371		)
Net cash used in investing activities	(506,794		)	(159,160		)
Cash Flows From Financing Activities:
Increase in deposits	1,020,551			185,817
Increase in customer repurchase agreements	50,087			8,357
Decrease in other short-term borrowings	—			(10,000		)
Issuance of Series B Preferred Stock	56,600			—
Redemption of Series A Preferred Stock	(22,582		)	—
Payment of dividends on preferred stock	(893		)	(870		)
Proceeds from exercise of stock options	678			229
Excess tax benefit from stock-based compensation	68			124
Net cash provided by financing activities	1,104,509			183,657
Net Increase (Decrease) In Cash and Cash Equivalents	601,540			(18,368		)
Cash and Cash Equivalents at Beginning of Period	46,462			110,203
Cash and Cash Equivalents at End of Period	$	648,002		$	91,835
Supplemental Cash Flows Information:
Interest paid	$	15,548		$	15,754
Income taxes paid	$	10,330		$	6,469
Non-Cash Investing Activities
Transfers from loans to other real estate owned	$	2,060		$	1,590
Transfers from other real estate owned to loans	$	3,124		$	—

See notes to consolidated financial statements.

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EAGLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Months Ended September 30, 2011 and 2010 (Unaudited)

1. Summary of Significant Accounting Policies

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”), Eagle Insurance Services, LLC, and Bethesda Leasing, LLC, with all significant intercompany transactions eliminated.

The consolidated financial statements of the Company included herein are unaudited. The consolidated financial statements reflect all adjustments, consisting 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, 2010 were derived from audited consolidated financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“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, 2010. 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, 2010. Operating results for the nine and three months ended September 30, 2011 are not necessarily indicative of the results of operations to be expected for the remainder of the year, or for any other period.

Nature of Operations

The Company, through the Bank, conducts a full service community banking business, primarily in Montgomery County, Maryland; Washington, D.C.; and Arlington and Fairfax Counties in Virginia. The primary financial services offered by the Bank include real estate, commercial and consumer lending, as well as traditional deposit and repurchase agreement products. The Bank is also active in the origination and sale of residential mortgage loans and the origination of small business loans. The guaranteed portion of small business loans, guaranteed by the Small Business Administration (“SBA”), is typically sold to third party investors in a transaction apart from the loan’s origination. The Bank offers its products and services through fifteen banking offices and various electronic capabilities, including remote deposit services. Eagle Commercial Ventures, LLC, 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 or others. These transactions involve higher levels of risk, together with commensurate higher returns. Refer to Higher Risk Lending — Revenue Recognition below.

Use of Estimates

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.

Cash Flows

For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, federal funds sold, and interest bearing deposits with other banks which have an original maturity of three months or less.

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Loans Held for Sale

The Company engages in sales of residential mortgage loans and the guaranteed portion of Small Business Administration loans originated by the Bank. Loans held for sale are carried at the lower of aggregate cost or fair value. Fair value is derived from secondary market quotations for similar instruments. Gains and losses on sales of these loans are recorded as a component of noninterest income in the Consolidated Statements of Operations.

The Company’s current practice is to sell residential mortgage loans on a servicing released basis, and, therefore, it has no intangible asset recorded for the value of such servicing as of September 30, 2011 and December 31, 2010. The sale of the guaranteed portion of SBA loans on a servicing retained basis gives rise to an Excess Servicing Asset, which is computed on a loan by loan basis with the unamortized amount being included in Other assets in the Statement of Financial Condition. This Excess Servicing Asset is being amortized on a straight-line basis (with adjustment for prepayments) as an offset to servicing fees collected and is included in other noninterest income in the Consolidated Statement of Operations.

The Company enters into commitments to originate residential mortgage loans whereby the interest rate on the loan is determined prior to funding (i.e. rate lock commitments). Such rate lock commitments on mortgage loans to be sold in the secondary market are considered to be derivatives. The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 15 to 60 days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the Company commits to sell a loan at a premium at the time the borrower commits to an interest rate with the intent that the buyer has assumed the interest rate risk on the loan. As a result, the Company is not exposed to losses on loans sold nor will it realize gains, related to rate lock commitments due to changes in interest rates.

The market values of rate lock commitments and best efforts contracts are not readily ascertainable with precision because rate lock commitments and best efforts contracts are not actively traded. Because of the high correlation between rate lock commitments and best efforts contracts, no gain or loss should occur on the rate lock commitments.

Investment Securities

The Company has no securities classified as trading, nor are any investment securities classified as held to maturity. Marketable equity securities and debt securities not classified as held to maturity or trading are classified as available-for-sale. Securities available-for-sale are acquired as part of the Company’s asset/liability management strategy and may be sold in response to changes in interest rates, current market conditions, loan demand, changes in prepayment risk and other factors. Securities available-for-sale are carried at fair value, with unrealized gains or losses being reported as accumulated other comprehensive income, a separate component of shareholders’ equity, net of deferred income tax. Realized gains and losses, using the specific identification method, are included as a separate component of noninterest income in the Consolidated Statements of Operations.

Premiums and discounts on investment securities are amortized/accreted to the earlier of call or maturity based on expected lives, which lives are adjusted based on prepayment assumptions and call optionality. Declines in the fair value of individual available-for-sale securities below their cost that are other-than-temporary in nature result in write-downs of the individual securities to their fair value. Factors affecting the determination of whether other-than-temporary impairment has occurred include a downgrading of the security by a rating agency, a significant deterioration in the financial condition of the issuer, or a change in management’s intent and ability to hold a security for a period of time sufficient to allow for any anticipated recovery in fair value. Management systematically evaluates investment securities for, other-than-temporary, declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include (1) duration and magnitude of the decline in value, (2) the financial condition of the issuer or issuers and (3) structure of the security.

The entire amount of an impairment loss is recognized in earnings only when (1) the Company intends to sell the debt security, or (2) it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis, or (3) the Company does not expect to recover the entire amortized cost basis of the security. In all other situations, only the portion of the impairment loss representing the credit loss must be

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recognized in earnings, with the remaining portion being recognized in shareholders’ equity as comprehensive income, net of deferred taxes.

Loans

Loans are stated at the principal amount outstanding, net of unamortized deferred costs and fees. Interest income on loans is accrued at the contractual rate on the principal amount outstanding. It is the Company’s policy to discontinue the accrual of interest when circumstances indicate that collection is doubtful. Deferred fees and costs on loans originated through October 2005 are being amortized on straight-line method over the term of the loan. Deferred fees and costs on loans originated subsequent to October 2005 are being amortized on the interest method over the term of the loan. The difference between the straight-line method and the interest method is considered immaterial.

Management considers loans impaired when, based on current information, it is probable that the Company will not collect all principal and interest payments according to contractual terms. Loans are evaluated for impairment in accordance with the Company’s portfolio monitoring and ongoing risk assessment procedures. Management considers the financial condition of the borrower, cash flow of the borrower, payment status of the loan, and the value of the collateral, if any, securing the loan. Generally, impaired loans do not include large groups of smaller balance homogeneous loans such as residential real estate and consumer type loans which are evaluated collectively for impairment and are generally placed on nonaccrual when the loan becomes 90 days past due as to principal or interest. Loans specifically reviewed for impairment are not considered impaired during periods of “minimal delay” in payment (ninety days or less) provided eventual collection of all amounts due is expected. The impairment of a loan is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if repayment is expected to be provided solely by the collateral. In appropriate circumstances, interest income on impaired loans may be recognized on the cash basis.

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 2011 and 2010 (although normal interest income was recorded). ECV had three funding commitments at September 30, 2011, as compared to one commitment at December 31, 2010. At September 30, 2011 two of the commitments had outstanding transactions amounting to $2.4 million as compared to one outstanding transaction at December 31, 2010 amounting to $1.3 million.

Allowance for Credit Losses

The allowance for credit losses represents an amount which, in management’s judgment, is adequate to absorb probable losses on existing loans and other extensions of credit that may become uncollectible. The adequacy of the allowance for credit losses is determined through careful and continuous review and evaluation of the loan portfolio and involves the balancing of a number of factors to establish a prudent level of allowance. Among the factors considered in evaluating the adequacy of the allowance for credit losses are lending risks associated with growth and entry into new markets, loss allocations for specific credits, the level of the allowance to nonperforming loans, historical loss experience, economic conditions, portfolio trends and credit concentrations, changes in the size and character of the loan portfolio, and management’s judgment with respect to current and expected economic conditions and their impact on the existing loan portfolio. Allowances for impaired loans are

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generally determined based on collateral values. Loans or any portion thereof deemed uncollectible are charged against the allowance, while recoveries are credited to the allowance. Management adjusts the level of the allowance through the provision for credit losses, which is recorded as a current period operating expense. The allowance for credit losses consists of allocated and unallocated components.

The components of the allowance for credit losses represent an estimation done pursuant to Accounting Standards Codification (“ASC”) Topic 450, “Contingencies,” or ASC Topic 310, “Receivables.” Specific allowances are established in cases where management has identified significant conditions or circumstances related to a specific credit that management believes indicate the probability that a loss may be incurred. For potential problem credits for which specific allowance amounts have not been determined, the Company establishes allowances according to the application of credit risk factors. These factors are set by management and approved by the appropriate Board Committee to reflect its assessment of the relative level of risk inherent in each risk grade. A third component of the allowance computation, termed a nonspecific or environmental factors allowance, is based upon management’s evaluation of various environmental conditions that are not directly measured in the determination of either the specific allowance or formula allowance. Such conditions include general economic and business conditions affecting key lending areas, credit quality trends (including trends in delinquencies and nonperforming loans expected to result from existing conditions), loan volumes and concentrations, specific industry conditions within portfolio categories, recent loss experience in particular loan categories, duration of the current business cycle, bank regulatory examination results, findings of outside review consultants, and management’s judgment with respect to various other conditions including credit administration and management and the quality of risk identification systems. Executive management reviews these environmental conditions quarterly, and documents the rationale for all changes.

Management believes that the allowance for credit losses is adequate; however, determination of the allowance is inherently subjective and requires significant estimates. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. Evaluation of the potential effects of these factors on estimated losses involves a high degree of uncertainty, including the strength and timing of economic cycles and concerns over the effects of a prolonged economic downturn in the current cycle. In addition, various regulatory agencies, as an integral part of their examination process, and independent consultants engaged by the Bank periodically review the Bank’s loan portfolio and allowance for credit losses. Such review may result in recognition of additions to the allowance based on their judgments of information available to them at the time of their examination.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation and amortization computed using the straight-line method for financial reporting purposes. Premises and equipment are depreciated over the useful lives of the assets, which generally range from five to seven years for furniture, fixtures and equipment, to three to five years for computer software and hardware, and to ten to forty years for buildings and building improvements. Leasehold improvements are amortized over the terms of the respective leases, which may include renewal options where management has the positive intent to exercise such options, or the estimated useful lives of the improvements, whichever is shorter. The costs of major renewals and betterments are capitalized, while the costs of ordinary maintenance and repairs are expensed as incurred. These costs are included as a component of premises and equipment expenses on the Consolidated Statements of Operations.

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.

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Goodwill and Other Intangible Assets

Goodwill and other intangible assets are subject to impairment testing at least annually, or when events or changes in circumstances indicate the assets might be impaired. Intangible assets (other than goodwill) are amortized to expense using accelerated or straight-line methods over their respective estimated useful lives. The Company’s testing of potential goodwill impairment (which is required annually) at December 31, 2010, resulted in no impairment being recorded.

Customer Repurchase Agreements

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

Marketing and Advertising

Marketing and advertising costs are generally expensed as incurred.

Income Taxes

The Company employs the liability method of accounting for income taxes as required by ASC Topic 740, “Income Taxes.” Under the liability method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities (i.e., temporary timing differences) and are measured at the enacted rates that will be in effect when these differences reverse. The Company utilizes statutory requirements for its income tax accounting, and avoids risks associated with potentially problematic tax positions that may incur challenge upon audit, where an adverse outcome is more likely than not. Therefore, no provisions are made for either uncertain tax positions nor accompanying potential tax penalties and interest for underpayments of income taxes in the Company’s tax reserves. In accordance with ASC Topic 740, the Company may establish a reserve against deferred tax assets in those cases where realization is less than certain, although no such reserves exist at either December 31, 2010 or September 30, 2011.

Transfer of Financial Assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. In certain cases, the recourse to the Bank to repurchase assets may exist but is deemed immaterial based on the specific facts and circumstances.

Earnings per Common Share

Basic net income per common share is derived by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period measured. Diluted earnings per common share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding during the period measured including the potential dilutive effects of common stock equivalents.

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Stock-Based Compensation

In accordance with ASC Topic 718, “Compensation,” the Company records as compensation expense an amount equal to the amortization (over the remaining service period) of the fair value (computed at the date of option grant) of any outstanding fixed stock option grants and restricted stock awards which vest subsequent to December 31, 2005. Compensation expense on variable stock option grants (i.e. performance based grants) is recorded based on the probability of achievement of the goals underlying the performance grant. Refer to Note 6 for a description of stock-based compensation awards, activity and expense.

New Authoritative Accounting Guidance

In April 2011, the FASB issued ASU No. 2011-02, “A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring.” The provisions of ASU No. 2011-02 provide additional guidance related to determining whether a creditor has granted a concession, include factors and examples for creditors to consider in evaluating whether a restructuring results in a delay in payment that is insignificant, prohibit creditors from using the borrower’s effective rate test to evaluate whether a concession has been granted to the borrower, and adds factors for creditors to use in determining whether a borrower is experiencing financial difficulties. The provisions of ASU No. 2011-02 were effective for the Company’s reporting period ending September 30, 2011. The adoption of ASU No. 2011-02 did not expected to have a material impact on the Company’s balance sheet and statement of operations.

In April 2011, the FASB issued ASU No. 2011-03, “Reconsideration of Effective Control for Repurchase Agreements.” ASU No. 2011-03 modifies the criteria for determining when repurchase agreements would be accounted for as a secured borrowing rather than as a sale. Currently, an entity that maintains effective control over transferred financial assets must account for the transfer as a secured borrowing rather than as a sale. The provisions of ASU No. 2011-03 removes from the assessment of effective control the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee. The FASB believes that contractual rights and obligations determine effective control and that there does not need to be a requirement to assess the ability to exercise those rights. ASU No. 2011-03 does not change the other existing criteria used in the assessment of effective control. The provisions of ASU No. 2011-03 are effective prospectively for transactions, or modifications of existing transactions, that occur on or after January 1, 2012. As the Company accounts for all of its repurchase agreements as collateralized financing arrangements, the adoption of this ASU is not expected to have a material impact on the Company’s balance sheet and statement of operations.

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU No. 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and International Financial Reporting Standards (“IFRS”). The changes to U.S. GAAP as a result of ASU No. 2011-04 are as follows: (1) The concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets (that is, it does not apply to financial assets or any liabilities); (2) U.S. GAAP currently prohibits application of a blockage factor in valuing financial instruments with quoted prices in active markets. ASU No. 2011-04 extends that prohibition to all fair value measurements; (3) An exception is provided to the basic fair value measurement principles for an entity that holds a group of financial assets and financial liabilities with offsetting positions in market risks or counterparty credit risk that are managed on the basis of the entity’s net exposure to either of those risks. This exception allows the entity, if certain criteria are met, to measure the fair value of the net asset or liability position in a manner consistent with how market participants would price the net risk position; (4) Aligns the fair value measurement of instruments classified within an entity’s shareholders’ equity with the guidance for liabilities; and (5) Disclosure requirements have been enhanced for recurring Level 3 fair value measurements to disclose quantitative information about unobservable inputs and assumptions used, to describe the valuation processes used by the entity, and to describe the sensitivity of fair value measurements to changes in unobservable inputs and interrelationships between those inputs. In addition, entities must report the level in the fair value hierarchy of items that are not measured at fair value in the statement of condition but whose fair value must be disclosed. The provisions of ASU No. 2011-04 are effective for the

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Company’s interim reporting period beginning on or after December 15, 2011. The adoption of ASU No. 2011-04 is not expected to have a material impact on the Company’s balance sheet and statement of operations.

In September 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” The provisions of ASU No. 2011-05 allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The statement(s) are required to be presented with equal prominence as the other primary financial statements. ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity but does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The provisions of ASU No. 2011-05 are effective for the Company’s interim reporting period beginning on or after December 15, 2011, with retrospective application required. The adoption of ASU No. 2011-05 is expected to result in presentation changes to the Company’s statements of income and the addition of a statement of comprehensive income. The adoption of ASU No. 2011-05 will have no impact on the Company’s balance sheet.

In September 2011, the FASB issued ASU No. 2011-08, “Testing Goodwill for Impairment.” The provisions of ASU No. 2011-08 permits an entity an option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity believes, as a result of its qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. Otherwise, no further impairment testing is required. ASU No. 2011-08 includes examples of events and circumstances that may indicate that a reporting unit’s fair value is less than its carrying amount. The provisions of ASU No. 2011-08 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted provided that the entity has not yet performed its annual impairment test for goodwill. The Company performs its annual impairment test for goodwill in the fourth quarter of each year. The adoption of ASU No. 2011-08 is not expected to have a material impact on the Company’s balance sheet and statement of operations.

2. Cash and Due from Banks

Regulation D of the Federal Reserve Act requires that banks maintain noninterest reserve balances with the Federal Reserve Bank based principally on the type and amount of their deposits. During 2011, the Bank maintained balances at the Federal Reserve (in addition to vault cash) to meet the reserve requirements as well as balances to partially compensate for services. Late in 2008, the Federal Reserve in connection with the Emergency Economic Stabilization Act of 2008 began paying a nominal amount of interest on balances held, which interest on excess reserves was increased under provisions of the Dodd Frank Wall Street Reform and Consumer Protection Act passed in July 2010.

In September 2011, the Bank received a substantial noninterest bearing escrow deposit, which was deemed to be short term in nature. Those funds, amounting to $620 million at September 30, 2011 are held at the Federal Reserve Bank in excess reserves earning 0.25%. These invested funds are classified as “Interest bearing deposits with banks and other short-term investments” on the balance sheet.

Additionally, the Bank maintains interest bearing balances with the Federal Home Loan Bank of Atlanta and noninterest bearing balances with six domestic correspondent banks as compensation for services they provide to the Bank.

3. Investment Securities Available for Sale

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

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			Gross		Gross		Estimated
September 30, 2011	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value

U. S. Government agency securities	$	102,563	$	1,511	$	305	$	103,769
Residential mortgage backed securities	133,467		3,231		159		136,539
Municipal bonds	48,516		3,127		11		51,632
Other equity investments	404		—		87		317
	$	284,950	$	7,869	$	562	$	292,257

			Gross		Gross		Estimated
December 31, 2010	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value

U. S. Government agency securities	$	67,288	$	1,253	$	143	$	68,398
Residential mortgage backed securities	107,425		2,903		419		109,909
Municipal bonds	49,459		658		749		49,368
Other equity investments	445		—		72		373
	$	224,617	$	4,814	$	1,383	$	228,048

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
September 30, 2011	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	Value		Losses		Value		Losses		Value		Losses

U. S. Government agency securities	$	45,522	$	305	$	—	$	—	$	45,522	$	305
Residential mortgage backed securities	31,268		159		—		—		31,268		159
Municipal bonds	1,156		11		—		—		1,156		11
Other equity investments	—		—		91		87		91		87
	$	77,946	$	475	$	91	$	87	$	78,037	$	562

	Less than				12 Months
	12 Months				or Greater				Total
	Estimated				Estimated				Estimated
December 31, 2010	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
(dollars in thousands)	Value		Losses		Value		Losses		Value		Losses

U. S. Government agency securities	$	7,122	$	143	$	—	$	—	$	7,122	$	143
Residential mortgage backed securities	31,605		419		—		—		31,605		419
Municipal bonds	21,874		749		—		—		21,874		749
Other equity investments	—		—		106		72		106		72
	$	60,601	$	1,311	$	106	$	72	$	60,707	$	1,383

The unrealized losses that exist are generally the result of changes in market interest rates and interest spread relationships since original purchases. The weighted average duration of debt securities, which comprise 99.9% of total investment securities, is relatively short at 3.4 years. The gross unrealized loss on other equity investments represents common stock of one local banking company owned by the Company, and traded on a broker “bulletin board” exchange. The estimated fair value is determined by broker quoted prices. The unrealized loss is deemed a result of generally weak valuations for many smaller community bank stocks. The individual

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banking company is profitable and has a satisfactory capital position. 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 September 30, 2011 represent an other-than-temporary impairment for the reasons noted. 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 September 30, 2011, the Company held $9.4 million in equity securities in a combination of Federal Reserve Bank (“FRB”) and Federal Home Loan Bank (“FHLB”) stocks which are required to be held for regulatory purposes and are not marketable.

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

	September 30, 2011				December 31, 2010
	Amortized		Estimated		Amortized		Estimated
(dollars in thousands)	Cost		Fair Value		Cost		Fair Value
U. S. Government agency securities maturing:
One year or less	$	11,840	$	11,949	$	—	$	—
After one year through five years	87,867		88,744		60,175		61,398
After five years through ten years	2,856		3,076		7,113		7,000
Residential mortgage backed securities	133,467		136,539		107,425		109,909
Municipal bonds maturing:
Five years through ten years	13,026		13,811		7,250		7,356
After ten years	35,490		37,821		42,209		42,012
Other equity investments	404		317		445		373
	$	284,950	$	292,257	$	224,617	$	228,048

The carrying value of securities pledged as collateral for certain government deposits, securities sold under agreements to repurchase, and certain lines of credit with correspondent banks at September 30, 2011 was $240.3 million. As of September 30, 2011 and December 31, 2010, there were no holdings of securities of any one issuer, other than the U.S. Government and U.S. Government agency securities that exceeded ten percent of shareholders’ equity.

4. Loans and Allowance for Credit Losses

The Bank makes loans to customers primarily in the Washington, D.C. metropolitan statistical area and surrounding communities. A substantial portion of the Bank’s loan portfolio consists of loans to businesses secured by real estate and other business assets.

Loans, net of unamortized net deferred fees, at September 30, 2011 and December 31, 2010 are summarized by type as follows:

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	September 30, 2011					December 31, 2010
(dollars in thousands)	Amount			%		Amount			%
Commercial	$	470,103		23	%	$	411,744		26	%
Investment - commercial real estate (1)	772,728			38	%	619,714			37	%
Owner occupied - commercial real estate	245,497			12	%	223,986			13	%
Real estate mortgage - residential	37,662			2	%	15,926			1	%
Construction - commercial and residential (1)	405,429			20	%	308,081			18	%
Home equity	94,008			5	%	89,936			5	%
Other consumer	4,218			—		6,113			—
Total loans	2,029,645			100	%	1,675,500			100	%
Less: Allowance for Credit Losses	(28,599		)			(24,754		)
Net loans	$	2,001,046				$	1,650,746

(1) Includes loans for land acquisition and development.

Unamortized net deferred fees amounted to $5.4 million and $4.1 million at September 30, 2011 and December 31, 2010.

As of September 30, 2011 and December 31, 2010, the Bank serviced $28.2 million and $28.1 million, respectively, of SBA loans participations which are not reflected as loan balances on the Consolidated Balance Sheets.

Loan Origination / Risk Management

The Bank’s goal is to mitigate risks in the event of unforeseen threats to the loan portfolio as a result of economic downturn or other negative influences. Plans for mitigating inherent risks in managing loan assets include: carefully enforcing loan policies and procedures, evaluating each borrower’s business plan during the underwriting process and throughout the loan term, identifying and monitoring primary and alternative sources for loan repayment, and obtaining collateral to mitigate economic loss in the event of liquidation. Specific loan reserves are established based upon credit and/or collateral risks on an individual loan basis. A risk rating system is employed to proactively estimate loss exposure and provide a measuring system for setting general and specific reserve allocations.

The composition of the Bank’s loan portfolio is heavily weighted toward commercial real estate, both owner occupied and investment real estate. At September 30, 2011, real estate commercial, real estate residential and real estate construction combined represented approximately 72% of the loan portfolio. These loans are underwritten to mitigate lending risks typical of this type of loan such as declines in real estate values, changes in borrower cash flow and general economic conditions. The Bank typically requires a maximum loan to value of 80% or less and minimum cash flow debt service coverage of 1.15 to 1.0. Personal guarantees are generally required, but may be limited. In making real estate commercial mortgage loans, the Bank generally requires that interest rates adjust not less frequently than five years.

The Bank is also an active traditional commercial lender providing loans for a variety of purposes, including cash flow, equipment and account receivable financing. This loan category represents approximately 23% of the loan portfolio at September 30, 2011 and is generally variable or adjustable rate. Commercial loans meet reasonable underwriting standards, including appropriate collateral, and cash flow necessary to support debt service. Personal guarantees are generally required, but may be limited. SBA loans represent 2% of the commercial loan category of loans. In originating SBA loans, the Company assumes the risk of non-payment on the uninsured portion of the credit. The Company generally sells the insured portion of the loan generating noninterest income from the gains on sale, as well as servicing income on the portion participated. SBA loans are subject to the same cash flow analyses as other commercial loans. SBA loans and the Section 7A lending program in particular, are subject to a maximum loan size established by the SBA.

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Approximately 5% of the loan portfolio at September 30, 2011 consists of home equity loans and lines of credit and other consumer loans. These credits, while making up a smaller portion of the loan portfolio, demand the same emphasis on underwriting and credit evaluation as other types of loans advanced by the Bank.

From time to time the Company may make loans for its own portfolio or through its higher risk loan affiliate, ECV, which under its operating agreement conducts lending only to real estate projects, where the Company’s directors or lending officers have significant expertise. Such loans may have higher risk characteristics than loans made by the Bank, such as lower priority interests and/or higher loan to value ratios. If the Bank provides the first lien financing on the project, the Company may, on a consolidated basis, be providing 100% financing of the project. The Company seeks an overall financial return on these transactions commensurate with the risks and structure of each individual loan. Certain transactions bear current interest at a rate with a significant premium to normal market rates. Other loan transactions carry a standard rate of current interest, and may also earn additional interest based on a percentage of the profits of the underlying project or a fixed rate.

Loans are secured primarily by duly recorded first deeds of trust. In some cases, the Bank may accept a recorded junior trust position. In general, borrowers will have a proven ability to build, lease, manage and/or sell a commercial or residential project and demonstrate satisfactory financial condition. Additionally, an equity contribution toward the project is customarily required.

Construction loans require that the financial condition and experience of the general contractor and major subcontractors be satisfactory to the Bank. Guaranteed, fixed price contracts are required whenever appropriate, along with payment and performance bonds or completion bonds for larger scale projects.

Loans intended for residential land acquisition, lot development and construction are made on the premise that the land: 1) is or will be developed for building sites for residential structures, and 2) will ultimately be utilized for construction or improvement of residential zoned real properties, including the creation of housing. Residential development and construction loans will finance projects such as single family subdivisions, planned unit developments, townhouses, and condominiums. Residential land acquisition, development and construction loans generally are underwritten with a maximum term of 36 months, including extensions approved at origination.

Commercial land acquisition and construction loans are secured by real property where loan funds will be used to acquire land and to construct or improve appropriately zoned real property for the creation of income producing or owner user commercial properties. Borrowers are generally required to put equity into each project at levels determined by the appropriate Loan Committee. Commercial land acquisition and construction loans generally are underwritten with a maximum term of 24 months.

All construction draw requests must be presented in writing on American Institute of Architects documents and certified by the contractor, the borrower and the borrower’s architect. Each draw request shall also include the borrower’s soft cost breakdown certified by the borrower or its Chief Financial Officer. Prior to an advance, the Bank or its contractor inspects the project to determine that the work has been completed, to justify the draw requisition.

Commercial permanent loans are secured by improved real property which is generating income in the normal course of operation. Debt service coverage, assuming stabilized occupancy, must be satisfactory to support a permanent loan. The debt service coverage ratio is ordinarily at least 1.15:1. As part of the underwriting process, debt service coverage ratios are stress tested assuming a 200 basis point increase in interest rates from their current levels.

Commercial permanent loans generally are underwritten with a term not greater than 10 years or the remaining useful life of the property, whichever is lower. The preferred term is between 5 to 7 years, with amortization to a maximum of 25 years.

Personal guarantees are generally received from the principals, and only in instances where the loan-to-value is sufficiently low and the debt service is sufficiently high is consideration given to either limiting or not requiring personal recourse.

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The Company’s loan portfolio includes loans made for real estate Acquisition, Development and Construction (“ADC”) purposes, including both investment and owner occupied projects. ADC loans amounted to $405.4 million at September 30, 2011. ADC loans containing loan funded interest reserves represent approximately 27% of the outstanding ADC loan portfolio at September 30, 2011. The decision to establish a loan-funded interest reserve is made upon origination of the ADC loan and is based upon a number of factors considered during underwriting of the credit including (i) the feasibility of the project; (ii) the experience of the sponsor; (iii) the creditworthiness of the borrower and guarantors; (iv) borrower’s equity contribution; and (v) the level of collateral protection. When appropriate, an interest reserve provides an effective means of addressing the cash flow characteristics of a properly underwritten ADC loan. The Company does not significantly utilize interest reserves in other loan products. The Company recognizes that one of the risks inherent in the use of interest reserves is the potential masking of underlying problems with the project and/or the borrower’s ability to repay the loan. In order to mitigate this inherent risk, the Company employs a series of reporting and monitoring mechanisms on all ADC loans, whether or not an interest reserve is provided, including (i) construction and development timelines which are monitored on an ongoing basis which track the progress of a given project to the timeline projected at origination; (ii) a construction loan administration department independent of lending function; (iii) third party independent construction loan inspection reports; (iv) monthly interest reserve monitoring reports detailing the balance of the interest reserves approved at origination and the days of interest carry represented by the reserve balances as compared to the then current anticipated time to completion and/or sale of speculative projects; and (v) quarterly commercial real estate construction meetings among senior Company management which includes monitoring of current and projected real estate market conditions. If a project has not performed as expected, it is not the customary practice of the Company to increase loan funded interest reserves.

The following table details activity in the allowance for credit losses by portfolio segment for the three and nine months ended September 30, 2011. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

				Investment			Owner occupied			Real Estate			Construction
				Commercial			Commercial			Mortgage			Commercial and			Home			Other
(dollars in thousands)	Commercial			Real Estate			Real Estate			Residential			Residential			Equity			Consumer			Total
Three Months Ended September 30, 2011
Allowance for credit losses:
Balance at beginning of period	$	9,050		$	7,303		$	2,046		$	365		$	7,131		$	1,508		$	72		$	27,475
Loans charged-off	(1,273		)	—			—			(1		)	(216		)	(209		)	(81		)	(1,780		)
Recoveries of loans previously charged-off	9			—			—			3			3			1			1			17
Net loan charged-off	(1,264		)	—			—			2			(213		)	(208		)	(80		)	(1,763		)
Provision for credit losses	1,057			357			(49		)	(367		)	1,510			301			78			2,887
Balance at end of period	$	8,843		$	7,660		$	1,997		$	—		$	8,428		$	1,601		$	70		$	28,599
Nine Months Ended September 30, 2011
Allowance for credit losses:
Balance at beginning of period	$	8,630		$	6,668		$	2,064		$	115		$	5,745		$	1,441		$	91		$	24,754
Loans charged-off	(3,073		)	(277		)	—			(95		)	(957		)	(209		)	(87		)	(4,698		)
Recoveries of loans previously charged-off	23			126			—			3			170			2			1			325
Net loan charged-off	(3,050		)	(151		)	—			(92		)	(787		)	(207		)	(86		)	(4,373		)
Provision for credit losses	3,263			1,143			(67		)	(23		)	3,470			367			65			8,218
Balance at end of period	$	8,843		$	7,660		$	1,997		$	—		$	8,428		$	1,601		$	70		$	28,599

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			Investment		Owner occupied		Real Estate		Construction
			Commercial		Commercial		Mortgage		Commercial and		Home		Other
(dollars in thousands)	Commercial		Real Estate		Real Estate		Residential		Residential		Equity		Consumer		Total
For the Period Ended September 30, 2011
Allowance for credit losses:
Individually evaluated for impairment	$	1,933	$	759	$	90	$	—	$	1,525	$	283	$	4	$	4,594
Collectively evaluated for impairment	6,910		6,901		1,907				6,903		1,318		66		24,005
Total	$	8,843	$	7,660	$	1,997	$	—	$	8,428	$	1,601	$	70	$	28,599
Recorded investment in loans:
Individually evaluated for impairment	$	12,360	$	8,923	$	4,507	$	—	$	28,709	$	424	$	8	$	54,931
Collectively evaluated for impairment	457,743		763,805		240,990		37,662		376,720		93,584		4,210		1,974,714
Total	$	470,103	$	772,728	$	245,497	$	37,662	$	405,429	$	94,008	$	4,218	$	2,029,645

At September 30, 2011, the nonperforming loans acquired from Fidelity & Trust Financial Corporation (“Fidelity”) have a carrying value of $3.8 million and an unpaid principal balance of $13.4 million and were evaluated separately in accordance with ASC Topic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality.” The various impaired loans were recorded at estimated fair value with any excess being charged-off or treated as a non-accretable discount. Subsequent downward adjustments to the valuation of impaired loans acquired will result in additional loan loss provisions and related allowance for credit losses. Subsequent upward adjustments to the valuation of impaired loans acquired will result in accretable discount. No adjustments have been made to the fair value amounts of impaired loans subsequent to the allowable period of adjustment from the date of acquisition.

Credit Quality Indicators

The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company’s primary credit quality indicators are to use an internal credit risk rating system that categorizes loans into pass, watch, special mention, or classified categories. Credit risk ratings are applied individually to those classes of loans that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans to businesses or individuals in the classes which comprise the commercial portfolio segment. Groups of loans that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk rated and monitored collectively. These are typically loans to individuals in the classes which comprise the consumer portfolio segment.

The following are the definitions of the Company’s credit quality indicators:

Pass:	Loans in all classes that comprise the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan agreement. Management believes that there is a low likelihood of loss related to those loans that are considered pass.

Watch:	Loan paying as agreed with generally acceptable asset quality; however Borrower’s performance has not met expectations. Balance sheet and/or income statement has shown deterioration to the point that the company could not sustain any further setbacks. Credit is expected to be strengthened through improved company performance and/or additional collateral within a reasonable period of time.

Special Mention:	Loans in the classes that comprise the commercial portfolio segment that have potential weaknesses that deserve management’s close attention. If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan. The special mention credit quality indicator is not used for classes of loans that comprise the consumer portfolio segment. Management believes that there is a moderate likelihood of some loss related to those loans that are considered special mention.

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Classified:	Classified (a) Substandard - Loans inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected. Loss potential, while existing in the aggregate amount of substandard loans, does not have to exist in individual loans classified substandard.

	Classified (b) Doubtful - Loans that have all the weaknesses inherent in a loan classified substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors, which may work to the advantage and strengthening of the assets, its classification as an estimated loss is deferred until its more exact status may be determined.

The Company’s credit quality indicators are periodically updated on a case-by-case basis. The following table presents by class and by credit quality indicator, the recorded investment in the Company’s loans and leases as of September 30, 2011.

			Watch and						Total
(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Loans
Commercial	$	426,834	$	30,909	$	12,127	$	233	$	470,103
Investment - commercial real estate	753,767		10,038		8,923		—		772,728
Owner occupied - commercial real estate	232,236		8,754		4,507		—		245,497
Real estate mortgage — residential	37,662		—		—		—		37,662
Construction - commercial and residential	368,926		7,793		28,710		—		405,429
Home equity	93,584		—		424		—		94,008
Other consumer	4,210		—		8		—		4,218
Total	$	1,917,219	$	57,494	$	54,699	$	233	$	2,029,645

Nonaccrual and Past Due Loans

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The following presents by class of loan, information related to nonaccrual loans as of the periods ended September 30, 2011 and December 31, 2010.

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(dollars in thousands)	September 30, 2011		December 31, 2010

Commercial	$	5,740	$	5,137
Investment - commercial real estate	4,412		5,038
Owner occupied - commercial real estate	1,080		—
Real estate mortgage - residential	1,049		760
Construction - commercial and residential	18,481		13,520
Home equity	664		297
Other consumer	8		535
Total nonperforming loans (1)(2)	$	31,434	$	25,287

(1)	Excludes TDRs returned to performing status totaling $3.1 million at September 30, 2011. These loans have demonstrated a period of a least six months of performance under the modified terms.
(2)	Gross interest income that would have been recorded in 2011 if nonaccrual loans shown above had been current and in accordance with their original terms was $961 thousand, while interest actually recorded on such loans was $191 thousand. See Note 1 to the Consolidated Financial Statements for a description of the Company’s policy for placing loans on nonaccrual status.

The following table presents by class, an aging analysis and the recorded investments in loans past due as of September 30, 2011 and December 31, 2010.

	Loans		Loans		Loans						Total Recorded
	30-59 Days		60-89 Days		90 Days or		Total Past		Current		Investment in
(dollars in thousands)	Past Due		Past Due		More Past Due		Due Loans		Loans		Loans
September 30, 2011
Commercial	$	1,229	$	4,937	$	5,740	$	11,906	$	458,197	$	470,103
Investment - commercial real estate	716		6,471		4,412		11,599		761,129		772,728
Owner occupied - commercial real estate	5,697		791		1,080		7,568		237,929		245,497
Real estate mortgage — residential	—		859		1,049		1,908		35,754		37,662
Construction - commercial and residential	9,395		1,112		18,481		28,988		376,441		405,429
Home equity	375		748		664		1,787		92,221		94,008
Other consumer	64		4		8		76		4,142		4,218
Total	$	17,476	$	14,922	$	31,434	$	63,832	$	1,965,813	$	2,029,645

	Loans		Loans		Loans						Total Recorded
	30-59 Days		60-89 Days		90 Days or		Total Past		Current		Investment in
(dollars in thousands)	Past Due		Past Due		More Past Due		Due Loans		Loans		Loans
December 31, 2010
Commercial	$	1,175	$	1,497	$	5,136	$	7,808	$	403,936	$	411,744
Investment - commercial real estate	3,758		2,096		5,039		10,893		608,821		619,714
Owner occupied - commercial real estate	368		3,177		—		3,545		220,441		223,986
Real estate mortgage — residential	107		—		760		867		15,059		15,926
Construction - commercial and residential	12,028		8,122		14,056		34,206		273,875		308,081
Home equity	1,199		—		297		1,496		88,440		89,936
Other consumer	64		—		—		64		6,049		6,113
Total	$	18,699	$	14,892	$	25,288	$	58,879	$	1,616,621	$	1,675,500

Impaired Loans

Loans are considered impaired when, based on current information and events, it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is

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allocated, if necessary, so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

The following table presents by class, information related to impaired loans for the periods ended September 30, 2011 and December 31, 2010.

	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total				Average		Interest
	Principal		With No		With		Recorded		Related		Recorded		Income
(dollars in thousands)	Balance		Allowance		Allowance		Investment		Allowance		Investment		Recognized
Commercial	$	10,742	$	6,390	$	4,352	$	10,742	$	1,350	$	5,426	$	255
Investment - commercial real estate	6,750		3,685		3,065		6,750		412		5,876		117
Owner occupied - commercial	1,080		791		289		1,080		90		385		4
Real estate mortgage — residential	1,049		1,049		—		1,049		—		1,042		16
Construction - commercial and residential	23,752		8,770		14,982		23,752		1,125		19,286		171
Home equity	664		240		424		664		283		366		12
Other consumer	8		—		8		8		4		3		—
Total impaired loans at September 30, 2011	$	44,045	$	20,925	$	23,120	$	44,045	$	3,264	$	32,384	$	575

	Unpaid		Recorded		Recorded
	Contractual		Investment		Investment		Total				Average		Interest
	Principal		With No		With		Recorded		Related		Recorded		Income
(dollars in thousands)	Balance		Allowance		Allowance		Investment		Allowance		Investment		Recognized
Commercial	$	5,136	$	1,527	$	1,995	$	3,522	$	1,615	$	4,480	$	131
Investment - commercial real estate	7,182		2,156		2,188		4,344		695		3,736		87
Owner occupied - commercial	—		—		—		—		—		263		—
Real estate mortgage — residential	760		760		—		760		—		510		23
Construction - commercial and residential	15,055		7,775		5,206		12,981		1,075		19,147		136
Home equity	297		112		100		212		85		170		13
Other consumer	—		—		—		—		—		4,253		—
Total impaired loans at December 31, 2010	$	28,430	$	12,330	$	9,489	$	21,819	$	3,470	$	32,559	$	390

Modifications

A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Company offers various types of concessions when modifying a loan, however, forgiveness of principal is rarely granted. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period.

Loans modified in a TDR are typically already on non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR for the Company may have the financial effect of increasing the specific allowance associated with the loan. An allowance for impaired consumer and commercial loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates.

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The following presents by class, information related to loans modified in a TDR during the three and nine months ended September 30, 2011.

	Loans Modified as a TDR for the			Loans Modified as a TDR for the
	Nine Months Ended September 30, 2011			Three Months Ended September 30, 2011
Troubled Debt Restructuring	Number of	Recorded		Number of	Recorded
(dollars in thousands)	Contracts	Investment		Contracts	Investment

Commercial	2	$	5,002	2	$	5,002
Investment - commercial real estate	2	2,338		1	217
Construction - commercial and residential	2	5,271		1	4,271
Total	6	$	12,611	4	$	9,490

Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. The allowance may be increased, adjustments may be made in the allocation of the allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan. There were no loans modified in a TDR during the nine and three months ended September 30, 2011, that subsequently defaulted (i.e., 90 days or more past due following a modification).

5. Net Income per Common Share

The calculation of net income per common share for the nine and three months ended September 30, 2011 and 2010 was as follows.

	Nine Months Ended				Three Months Ended
	September 30,				September 30,
(dollars and shares in thousands)	2011		2010		2011		2010
Basic:
Net income available to common shareholders	$	16,015	$	10,633	$	6,328	$	4,439
Average common shares outstanding	19,806		19,637		19,868		19,660
Basic net income per common share	$	0.81	$	0.54	$	0.32	$	0.22

Diluted:
Net income available to common shareholders	$	16,015	$	10,633	$	6,328	$	4,439
Average common shares outstanding	19,806		19,637		19,868		19,660
Adjustment for common share equivalents	452		373		413		355
Average common shares outstanding-diluted	20,258		20,010		20,281		20,015
Diluted net income per common share	$	0.79	$	0.53	$	0.31	$	0.22

Anti-dilutive shares	198,225		413,848		198,482		413,848

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6. Stock-Based Compensation

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

The 2006 Plan provides for the issuance of awards of incentive options, nonqualifying options, restricted stock and stock appreciation rights to selected key employees and members of the Board. As amended, 1,215,000 shares of common stock are subject to issuance pursuant to awards under the 2006 Plan. Option awards are made with an exercise price equal to the average of the high and low price of the Company’s shares at the date of grant.

For awards that are service based, compensation expense is being recognized over the service (vesting) period based on fair value, which for stock option grants is computed using the Black Scholes model, and for restricted stock awards is based on the average of the high and low stock price of the Company’s shares at the date of grant. For awards that are performance based, compensation expense is recorded based on the probability of achievement of the goals underlying the grant. No performance based awards are outstanding at September 30, 2011.

In February 2011, the Company awarded 17,302 shares of restricted stock to employees. The shares vest in five substantially equal installments beginning on the date of grant.

In February 2011, the Company awarded an employee options to purchase 1,500 shares which have a ten-year term and vest in five substantially equal installments on the first through fifth anniversary of the date of grant.

In March 2011, the Company awarded 78,860 shares of restricted stock to senior officers and to a Director. The Company awarded 63,075 shares that vest 100% on March 29, 2013. The remaining 15,785 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.

In August 2011, the Company awarded an employee options to purchase 3,000 shares which have a ten-year term and vest in three substantially equal installments on the first through third anniversary of the date of grant.

In August 2011, the Company awarded 6,000 shares of restricted stock to an employee. The shares vest in three substantially equal installments beginning on the sixth, eighteenth and thirtieth month after the date of grant.

At the Company’s Annual Shareholders meeting in May 2011, approval was received for an Employee Stock Purchase Plan (ESPP), with 500,000 shares being reserved for issuance. The ESPP was implemented in October 2011, with the initial quarterly payroll withholding period ending in December 2011 and the initial share purchase occurring as of December 30, 2011. Whole shares will be sold to participants in the plan at 85% of the lower of the stock price at the beginning or end of each quarterly offering period.

Below is a summary of changes in shares under option plans pursuant to our equity compensation plans for the nine months ended September 30, 2011 and 2010. The information excludes restricted stock units and awards.

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	Nine Months Ended September 30,
	2011				2010
	Shares		Weighted-Average Exercise Price		Shares		Weighted-Average Exercise Price

Beginning Balance	995,005		$	10.54	1,218,831		$	11.27
Issued	4,500		12.96		5,000		12.33
Exercised	(98,752	)	6.97		(52,144	)	4.41
Forfeited	(13,620	)	6.34		(53,523	)	24.79
Expired	(13,108	)	12.33		(33,366	)	14.74
Ending Balance	874,025		$	10.99	1,084,798		$	10.83

The following summarizes information about stock options outstanding at September 30, 2011. 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
$5.40 - $8.10	328,099	$	6.46	5.91
$8.11 - $11.07	226,017	10.13		2.67
$11.08 - $15.43	206,726	12.73		2.54
$15.44 - $26.86	113,183	22.66		4.17
	874,025	$	10.99	4.05

Exercisable:

Range of	Stock Options	Weighted-Average
Exercise Prices	Exercisable	Exercise Price
$5.40 - $8.10	151,172	$	6.61
$8.11 - $11.07	222,392	10.14
$11.08 - $15.43	171,726	12.87
$15.44 - $26.86	104,627	23.12
	649,917	$	12.13

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 nine months ended September 30, 2011 and the years ended December 31, 2010, and 2009.

	Nine Months Ended			Year Ended			Year Ended
	September 30, 2011			2010			2009
Expected Volatility	33.6% - 36.6		%	44.44		%	25.9% - 58.0		%
Weighted-Average Volatility	35.6		%	44.44		%	26.74		%
Expected Dividends	0.0		%	0.0		%	0.0		%
Expected Term (In years)	6.0 - 7.5			8.5			3.5 - 8.5
Risk-Free Rate	1.82		%	1.01		%	0.84		%
Weighted-Average Fair Value (Grant date)	$	1.50		$	6.23		$	2.06

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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 period and the contractual term of the award.

The total intrinsic value of outstanding stock options was $2.2 million at September 30, 2011. The total intrinsic value of stock options exercised during the nine months ended September 30, 2011 and 2010 was $583 thousand and $295 thousand, respectively. The total fair value of stock options vested was $145 thousand and $377 thousand for the nine months ended September 30, 2011 and 2010, respectively.

The Company recognized $818 thousand and $447 thousand in stock-based compensation expense for the nine months ended September 30, 2011 and 2010, respectively; and $344 thousand and $145 thousand for the three months ended September 30, 2011 and 2010 respectively, which is included in salaries and employee benefits. Stock-based compensation expense is recognized ratably over the requisite service period for all awards. Unrecognized stock-based compensation expense related to all stock-based awards totaled $1.9 million at September 30, 2011. At such date, the weighted-average period over which this unrecognized expense is expected to be recognized was 3.51 years.

The Company has unvested restricted stock award grants of 196,910 shares from the 2006 Plan at September 30, 2011. Unrecognized stock based compensation expense related to restricted stock awards totaled $1.5 million at September 30, 2011. At such date, the weighted-average period over which this unrecognized expense was expected to be recognized was 2.06 years. The following table summarizes the unvested restricted stock awards and units outstanding at September 30, 2011 and 2010.

	September 30, 2011
	Restricted Stock Units			Restricted Stock Awards
	Shares	Weighted-Average Grant Date Fair Value		Shares		Weighted-Average Grant Date Fair Value

Unvested at Beginning	—	$	—	114,275		$	9.20
Issued	—	—		102,162		13.83
Forfeited	—	—		(423	)	11.99
Vested	—	—		(19,104	)	8.83
Unvested at End	—	$	—	196,910		$	11.63

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

Unvested at Beginning	7,642		$	15.21	49,585		$	6.88
Issued	—		—		81,600		10.35
Forfeited	(3,817	)	15.21		(301	)	10.35
Vested	(3,825	)	15.21		(15,897	)	7.77
Unvested at End	—		$	—	114,987		$	9.21

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7. Fair Value Measurements

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is 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 as Fair Value on a Recurring Basis

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010.

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(dollars in thousands)	Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total (Fair Value)
September 30, 2011
Investment securities available for sale:
U. S. Government agency securities	$	—	$	103,769	$	—	$	103,769
Residential mortgage backed securities	—		136,539		—		136,539
Municipal bonds	—		51,632		—		51,632
Other equity investments	91		—		226		317
Residential mortgage loans held for sale	—		107,907		—		107,907
Total assets measured at fair value on a recurring basis as of September 30, 2011	$	91	$	399,847	$	226	$	400,164

(dollars in thousands)	Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total (Fair Value)
December 31, 2010
Investment securities available for sale:
U. S. Government agency securities	$	—	$	68,398	$	—	$	68,398
Residential mortgage backed securities	—		109,909		—		109,909
Municipal bonds	—		49,368		—		49,368
Other equity investments	106		—		267		373
Residential mortgage loans held for sale	—		80,571		—		80,571
Total assets measured at fair value on a recurring basis as of December 31, 2010	$	106	$	308,246	$	267	$	308,619

Investment Securities Available-for-sale

Investment securities available-for-sale is 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 investment 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 US government agency debt securities, mortgage backed securities issued by government sponsored entities and municipal bonds. Securities classified as Level 3 include securities in less liquid markets.

The Company’s residential loans held for sale are reported on an aggregate basis at the lower of cost or fair value.

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

	Other Equity Investments
(dollars in thousands)	September 30, 2011			December 31, 2010
Balance, beginning of period	$	267		$	258
Total realized and unrealized gains and losses:
Included in other comprehensive income	—			1
Purchases, issuances and settlements	—			8
Principal redemption	(41		)	—
Balance, end of period	$	226		$	267

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Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

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

(dollars in thousands)	Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total (Fair Value)
September 30, 2011
Impaired loans:
Commercial	$	—	$	930	$	9,812	$	10,742
Investment - commercial real estate	—		218		3,591		3,809
Owner occupied - commercial real estate	—		—		1,080		1,080
Real estate mortgage - residential	—		—		1,049		1,049
Construction - commercial and residential	—		20,746		3,006		23,752
Home equity	—		273		391		664
Other consumer	—		—		8		8
Other real estate owned	—		1,547		1,394		2,941
Total assets measured at fair value on a nonrecurring basis as of September 30, 2011	$	—	$	23,714	$	20,331	$	44,045

(dollars in thousands)	Quoted Prices (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)		Total (Fair Value)
December 31, 2010
Impaired loans:
Commercial	$	—	$	1,715	$	3,422	$	5,137
Investment - commercial real estate	—		1,713		2,200		3,913
Owner occupied - commercial real estate	—		—		—		—
Real estate mortgage - residential	—		260		500		760
Construction - commercial and residential	—		8,661		5,984		14,645
Home equity	—		185		112		297
Other consumer	—		535		—		535
Other real estate owned	—		6,051		650		6,701
Total assets measured at fair value on a nonrecurring basis as of December 31, 2010	$	—	$	19,120	$	12,868	$	31,988

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan loss is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC Topic 310, “Receivables,” the fair value of impaired loans may be 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. At September 30, 2011, substantially all of the impaired loans were evaluated based upon the fair value of the collateral. In accordance with ASC Topic 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or

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

Quoted market prices, if available, are shown as estimates of fair value. Because no quoted market prices exist for a portion of the Company’s financial instruments, the fair value of such instruments has been derived based on management’s assumptions with respect to future economic conditions, the amount and timing of future cash flows and estimated discount rates. Different assumptions could significantly affect these estimates. Accordingly, the net realizable value could be materially different from the estimates presented below. In addition, the estimates are only indicative of individual financial instrument values and should not be considered an indication of the fair value of the Company taken as a whole.

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

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

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

Investment securities: For these instruments, fair values are based upon quoted prices, if available. If quoted prices are not available, fair value is measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.

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

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

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

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

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

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

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

Customer repurchase agreements and federal funds purchased: The carrying amount approximates the fair values at the reporting date.

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

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

The estimated fair values of the Company’s financial instruments at September 30, 2011 and December 31, 2010 are as follows:

	September 30, 2011				December 31, 2010
(dollars in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets
Cash and due from banks	$	5,914	$	5,914	$	12,414	$	12,414
Federal funds sold	22,088		22,088		34,048		34,048
Interest bearing deposits with other banks	718,848		718,848		11,652		11,652
Investment securities	292,257		292,257		228,048		228,048
Federal Reserve and Federal Home Loan Bank stock	9,430		9,430		9,528		9,528
Loans held for sale	107,907		107,907		80,571		80,571
Loans	2,029,645		2,031,302		1,675,500		1,680,569
Other earning assets	13,643		13,643		13,342		13,342

Liabilities
Noninterest bearing deposits	1,106,689		1,106,689		400,291		400,291
Interest bearing deposits	1,640,660		1,645,519		1,326,507		1,331,070
Borrowings	196,971		209,225		146,884		149,331

8. Shareholders’ 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 paid cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. On December 23, 2009, the Company redeemed 15,000 shares of Series A Preferred Stock for an aggregate redemption price of $15,079,166, including accrued but unpaid dividends on the shares. On July 14, 2011, the Company repurchased all of the remaining 23,325 shares of Series A Preferred Stock. The Company accrued dividends on the preferred stock and recognized accelerated discount accretion totaling $1.2 million for the nine months ended September 30, 2011, reducing net income available to common shareholders by $0.06 per share through September 30, 2011.

On July 14, 2011, the Company entered into and consummated a Securities Purchase Agreement (the “Purchase Agreement”) with the Secretary of the Treasury of the United States (the “Secretary”), pursuant to which the Company issued 56,600 shares of the Company’s Senior Non-Cumulative Perpetual Preferred Stock, Series B (the “Series B Preferred Stock”), having a liquidation amount per share equal to $1,000, for a total purchase price of $56,600,000. The Series B Preferred Stock has a current dividend rate of 1.00%. The rate is subject to quarterly adjustment based on growth of certain qualified small business loans. For the three months ended September 30, 2011, the Company accrued dividends of $121 thousand or $0.01 per share on the Series B Preferred Stock.

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9. Pending Acquisition

On July 27, 2011, the Company entered into a definitive merger agreement (the “Agreement”), pursuant to which Alliance Bankshares Corporation (“Alliance”) will be merged into the Company.

The merger is structured as a stock-for-stock transaction, under which Alliance shareholders will receive 0.4317 shares (the “Conversion Ratio”) of the Company’s common stock for each share of Alliance common stock, subject to adjustment based upon certain factors set forth in the Agreement.

The merger is subject to the approval of Alliance shareholders, regulatory approvals, and the satisfaction or waiver of the conditions to closing and covenants of each of the parties contained in the Agreement.

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, 2010.

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, 2010 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 the Bank, its wholly owned banking subsidiary, a Maryland chartered bank which is a member of the Federal Reserve System. 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 a total of fifteen offices, including seven offices serving Montgomery County, Maryland, five offices in the District of Columbia and three offices in Arlington and Fairfax Counties in Virginia. The Company has announced plans to open two additional offices in Northern Virginia, which are expected to open in 2012.

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

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and near the primary service area. A full range of retail banking services are offered to accommodate the individual needs of both corporate customers as well as the community the Company serves. These services include the usual deposit functions of commercial banks, including business and personal checking accounts, “NOW” accounts and money market and savings accounts, business, construction, and commercial loans, residential mortgages and consumer loans, and cash management services. The Bank is also active in the origination and sale of residential mortgage loans and the origination of small business loans. The residential mortgage loans are originated for sale to third-party investors, generally large mortgage and banking companies, under firm commitments by the investors to purchase the loans subject to compliance with pre-established investor criteria. The guaranteed portion of small business loans is typically sold through the Small Business Administration, in a transaction apart from the loan’s origination. Bethesda Leasing, LLC holds title to and manages Other Real Estate Owned (“OREO”) assets. Eagle Insurance Services, LLC, a subsidiary of the Bank, markets insurance products and services through an arrangement with a third party insurance broker. ECV, a subsidiary of the Company, provides subordinated financing for the acquisition, development and construction of real estate projects. This lending involves higher levels of risk, together with commensurate expected returns.

CRITICAL ACCOUNTING POLICIES

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

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

The allowance for credit losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two principles of accounting: (a) ASC Topic 450, “Contingencies,” which requires that losses be accrued when they are probable of occurring and are estimable and (b) ASC Topic 310, “Receivables,” which requires that losses be accrued when it is probable that the Company will not collect all principal and interest payments according to the contractual terms of the loan. The loss, if any, can be determined by the difference between the loan balance and the value of collateral, the present value of expected future cash flows, or values observable in the secondary markets.

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

The specific allowance allocates a reserve to identified impaired loans. Impaired loans are assigned specific reserves based on an impairment analysis. Under ASC Topic 310, “Receivables,” a loan for which reserves are individually allocated may show deficiencies in the borrower’s overall financial condition, payment record, support available from financial guarantors and for the fair market value of collateral. When a loan is identified as impaired, a specific reserve is established based on the Company’s assessment of the loss that may be associated with the individual loan.

The formula allowance is used to estimate the loss on internally risk rated loans, exclusive of those identified as requiring specific reserves. The portfolio of unimpaired loans is stratified by loan type and risk

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assessment. Allowance factors relate to the type of loan and level of the internal risk rating, with loans exhibiting higher risk and loss experience receiving a higher allowance factor.

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

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

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

The Company follows the provisions of ASC Topic 718, “Compensation,” which requires the expense recognition for the fair value of share based compensation awards, such as stock options, restricted stock, and performance based shares. This standard allows management to establish modeling assumptions as to expected stock price volatility, option terms, forfeiture rates and dividend rates which directly impact estimated fair value. The accounting standard also allows for the use of alternative option pricing models which may impact fair value as determined. The Company’s practice is to utilize reasonable and supportable assumptions.

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

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RESULTS OF OPERATIONS

Earnings Summary

In mid September 2011, the Bank became the escrow depository for approximately $620 million of noninterest bearing deposits resulting from a very large class action lawsuit settlement (the “settlement deposit”). Due to the expected short-term nature of these funds, they are being invested in excess reserves at the Federal Reserve Bank. The Company estimates that these funds contributed approximately $30 thousand to earnings in the third quarter of 2011. The funds are expected to be substantially disbursed to other financial institutions by year end 2011. These funds positively impacted earnings but have a negative impact on net interest margin, return on assets, and the capital leverage position. The discussion below also reflects our results of operation excluding the settlement deposit, on a non-GAAP basis, which management feels is more comparable to prior period results. The reconciliation of the various non-GAAP measures is included elsewhere in this quarterly report.

For the nine months ended September 30, 2011, the Company reported net income of $17.4 million, a 50% increase over the $11.6 million for the nine months ended September 30, 2010. Net income available to common shareholders was $16.0 million ($0.81 per basic common share and $0.79 per diluted common share), as compared to $10.6 million ($0.54 per basic common share and $0.53 per diluted common share) for the same nine month period in 2010, a 51% increase.

For the three months ended September 30, 2011 the Company’s net income was $6.5 million, a 36% increase over the $4.8 million for the same three months in 2010. Net income available to common shareholders increased 43% to $6.3 million ($0.32 per basic common share and $0.31 per diluted common share) for the three months ended September 30, 2011, compared to $4.4 million ($0.22 per basic and diluted common share) for the three months ended September 30, 2010.

The increase in net income for the nine and three months ended September 30, 2011 can be attributed primarily to an increase in net interest income of 27% and 29%, respectively, as compared to the same period in 2010. Net interest income growth was due to both growth in average earning assets of 23% and 31% for the nine and three months ended September 30, 2011 as compared to 2010 and to expansion of the nine and three month net interest margin, as adjusted for the settlement deposit.

The Company had an annualized return on average assets of 1.00% (1.01% excluding the effect of the settlement deposit) and an annualized return on average common equity of 11.10% for the first nine months of 2011, as compared to annualized returns on average assets and average common equity of 0.82% and 8.21%, respectively, for the same nine month period in 2010.

For the three months ended September 30, 2011, the Company had an annualized return on average assets of 1.00% (1.04% excluding the effect of the settlement deposit) and an annualized return on average common equity of 12.55%, as compared to annualized returns on average assets and average common equity of 0.96% and 9.93%, respectively, for the same three month period in 2010.

The Company’s earnings are largely dependent on net interest income, which represented 88% of total revenue (i.e. net interest income plus noninterest income) for the nine months ended September 30, 2011 compared to 91% for the same period in 2010, as the Company has been successful in diversifying its revenue through noninterest sources.

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 4.06% for the nine months ended September 30, 2010 to 4.15% (4.21% excluding the effect of the settlement deposit) for the nine months ended September 30, 2011. The net interest margin was 9 basis points higher on a GAAP basis for the first nine months in 2011 as compared to 2010, and 15 basis points higher on a non-GAAP basis.

The higher margin in the first nine months of 2011 as compared to the same period of 2010 was due primarily to lower funding costs for both deposits and borrowings more than offsetting a decline in earning asset yields. Average loan yields declined by 7 basis points (from 5.87% to 5.80%), and average investment yields

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declined by 29 basis points (from 2.78% to 2.49%), as compared to a decline of 21 basis points (from 1.47% to 1.26%) in the cost of interest bearing liabilities. Also, a higher mix of average loans as a percentage of total earning assets (from 80% to 81%) during the nine months ended September 30, 2011, as compared to the same period in 2010, mitigated the decline in average earning asset yield. The net interest spread was 3.78% for the nine months ended September 30, 2011, as compared to 3.69% for the same period in 2010, an increase of 9 basis points. The benefit of noninterest sources funding earning assets remained the same at 37 basis points for the nine months ended September 30, 2011 and 2010. The combination of a 9 basis point increase in the net interest spread and no change in the value of noninterest sources resulted in the 9 basis point increase in the net interest margin.

For the three months ended September 30, 2011 and 2010, average interest bearing liabilities were 68% and 74%, respectively, of average earning assets, as more earning assets were funded by noninterest bearing sources in the most recent three month period as compared to the same three month period in 2010. Additionally, due to a lower mix of average loans (due to the effect of the settlement deposit) in the three months ended September 30, 2011, as compared to the same period in 2010, the average rate on earning assets for the three months ended September 30, 2011 decreased by 26 basis points (5 basis points excluding the effect of the settlement deposit) from 5.08% to 4.82%. The cost of interest bearing liabilities for the three months ended September 30, 2011 as compared to 2010 decreased by 9 basis points from 1.33% to 1.24%, resulting in a decrease in the net interest spread of 17 basis points from 3.75% for the three months ended September 30, 2010 to 3.58% for the three months ended September 30, 2011. Excluding the effect of the settlement deposit, the net interest spread for the three months ended September 30, 2011 would have been 3.79% as compared to 3.75% for the same period in 2010, a 4 basis point increase. The net interest margin decreased 12 basis points from 4.10% for the three months ended September 30, 2010 to 3.98% for the three months ended September 30, 2011. Excluding the effect of the settlement deposit, the net interest margin for the three months ended September 30, 2011 would have been 4.15% as compared to 4.10% for the same period in 2010, a 5 basis point increase. A higher mix of noninterest deposits in the three months ended September 30, 2011 as compared to the same quarter in 2010 was the reason for the net interest margin gain being in excess of the net interest spread gain.

The Company believes it has effectively managed its net interest margin and net interest income over the past twelve months as average market interest rates have declined. This factor has been significant to overall earnings performance over the past twelve months as net interest income (at 88%) represents the most significant component of the Company’s revenues.

In order to fund significant growth in the average balance of loans of 26% over the nine months ended September 30, 2011 as compared to 2010, the Company has relied primarily upon core deposit growth, together with use of increased levels of brokered and wholesale deposits. The major component of the growth in core deposits has been growth in money market accounts being promoted primarily through direct sales efforts by the business development staff and to growth in noninterest deposits primarily as a result of effectively building new and enhanced client relationships.

In terms of the average balance sheet composition or mix, loans, which generally have higher yields than securities and other earning assets, increased from 80% of average earning assets in the first nine months of 2010 to 81% of average earning assets for the same period of 2011. The increase in average loans as a percentage of average earning assets is due to the significant growth in the loan portfolio and very significant average deposit growth for the nine month period ended September 30, 2011 as compared to 2010, including the settlement deposit which added $38 million to average deposits. In the first nine months of 2011, average loans, excluding loans held for sale, increased $384 million, a 26% increase, and average deposits increased by $394 million, a 26% increase ($356 million and 23% excluding the effect of the settlement deposit) as compared to the same period in 2010. Average time deposit growth in the period of $81 million consisted primarily of brokered deposits, which were acquired from national firms at attractive term rates. The increase in average loans in 2011 as compared to 2010 is primarily attributable to growth in loans for both income producing - commercial real estate and construction loans. Average investment securities for the first nine months of 2011 amounted to 11% of average earning assets, a decrease of 3% from an average of 14% for the same period in 2010, as average liquidity was enhanced. The combination of federal funds sold and interest bearing deposits with other banks, averaged 7% of average earning assets in the first nine months of 2011 as compared to 5% for the same period in 2010.

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For the three months ended September 30, 2011, average loans were 78% of average earning assets (81% excluding the effect of the settlement deposit) as compared to 79% for the same period in 2010. Average loans increased $460 million (31%) and average deposits increased $513 million (31%) ($399 million and 25% excluding the effect of the settlement deposit), during the three months ended September 30, 2011 as compared to the third quarter of 2010. The increase in average loans in the third quarter of 2011 as compared to the third quarter of 2010 is primarily attributable to growth in income producing commercial real estate and construction loans. Increases in average deposits in the third quarter of 2011, as compared to the third quarter of 2010, is attributable to growth in noninterest bearing demand deposits, and money market accounts. Average investment securities for the three months ended September 30, 2011 amounted to 11% of average earning assets, a decrease of 3% from an average of 14% for the same period in 2010. The combination of federal funds sold and interest bearing deposits with other banks, averaged 10% of average earning assets for the three months ended September 30, 2011 as compared to 5% for the same period in 2010, as average balance sheet liquidity was enhanced during the latest three month period.

The provision for credit losses was $8.2 million for the nine months of 2011 as compared to $5.8 million in 2010. The higher provisioning in 2011 is attributable to substantially higher loan growth in the nine months of 2011 compared to 2010 ($354 million as compared to $132 million), while net charge-offs were only slightly higher in the first nine months of 2011 as compared to 2010. For the nine months ended September 30, 2011, net charge-offs totaled $4.4 million (0.32% of average loans) compared to $4.1 million (0.38% of average loans) for the nine months ended September 30, 2010. Net charge-offs in the nine months ended September 30, 2011 were primarily attributable to charge-offs of commercial real estate loans ($151 thousand), commercial and industrial loans ($2.6 million), construction loans ($787 thousand), the unguaranteed portion of SBA loans ($425 thousand), and consumer loans ($385 thousand).

The provision for credit losses was $2.9 million for the three months ended September 30, 2011 as compared to $2.0 million for the three months ended September 30, 2010. At September 30, 2011, the allowance for credit losses represented 1.41% of loans outstanding, as compared to 1.45% at September 30, 2010 and 1.41% at June 30, 2011. The higher provisioning in the third quarter of 2011, as compared to the third quarter of 2010, is attributable to substantially higher loan growth ($81 million in 2011 as compared to $26 million in 2010). Net charge-offs totaled $1.8 million (0.36% of average loans), in the third quarter of 2011, as compared to $1.5 million (0.39% of average loans), in the third quarter of 2010. Net charge-offs in the third quarter of 2011 were primarily attributable to charge-offs of construction loans ($213 thousand), commercial and industrial loans ($1.2 million), the unguaranteed portion of SBA loans ($85 thousand) and consumer loans ($286 thousand).

At September 30, 2011, the allowance for credit losses represented 1.41% of loans outstanding, as compared to 1.45% at September 30, 2010, and 1.48% at December 31, 2010. The allowance for credit losses was 91% of nonperforming loans at September 30, 2011, as compared to 90% at September 30, 2010, and 98% at December 31, 2010. The level of nonperforming loans at September 30, 2011 as compared to December 31, 2010 was impacted significantly by the addition of one commercial construction real estate loan in the amount of $12 million placed on nonaccrual in the first quarter of 2011.

Total noninterest income for the nine months of 2011 was $9.6 million compared to $5.6 million in 2010, an increase of 73%. This increase was due primarily to a $2.7 million increase in gains realized on the sale of residential mortgage loans, $612 thousand increase in gains realized on the sale of investments and $139 thousand increase in gains realized on the sale of SBA loans. Also contributing to the increase in noninterest income in 2011 compared to 2010 was an increase of $601 thousand in other income. Excluding investment securities gains, total noninterest income was $8.2 million for the nine months of 2011 as compared to $4.7 million for 2010, a 73% increase.

Total noninterest income for the three months ended September 30, 2011 increased to $3.5 million from $2.3 million for the three months ended September 30, 2010, a 51% increase. This increase was due primarily to a $594 thousand increase in investment gains realized in the third quarter of 2011, as compared to the third quarter of 2010, increases of $409 thousand in gains realized on the increased sales of residential mortgage loans and to increases of $317 thousand from other income. Excluding investment securities gains, total noninterest income was $2.7 million for the third quarter of 2011 as compared to $2.1 million for the third quarter of 2010, a 28% increase.

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The efficiency ratio, which measures the ratio of noninterest expense to total revenue improved to 55.92% for the first nine months of 2011 as compared to 61.42% for the same period in 2010, as the Company has enhanced its productivity. Total noninterest expenses were $45.0 million for the nine months of 2011, as compared to $37.5 million for 2010, a 20% increase. This increase includes $1.21 million of nonrecurring merger related expenses, system enhancement costs from a bank wide conversion in April 2011, and special events marketing. Cost increases for salaries and benefits were $6.1 million primarily due to merit increases, incentive compensation, benefits increases and staffing increases, primarily as a result of expansion of commercial lending and residential mortgage divisions. Legal, accounting, and professional fees increases of $689 thousand were due substantially to higher problem loan collection costs. Premises and equipment expenses were $743 thousand lower due primarily to the consolidation of two branches during 2010. Marketing and advertising costs increased by $296 thousand due primarily to special event marketing noted above. Data processing costs increased by $522 thousand due to system enhancements noted above and to an expanded customer base. FDIC insurance premiums on the higher levels of deposits were $399 thousand lower for the nine months in 2011 as compared to 2010 due to a lower FDIC premium rate which took effect on April 1, 2011. Other expenses increases for the nine months of 2011 versus 2010 amounted to $933 thousand associated primarily with merger expenses of $333 thousand and $496 thousand of bank wide conversion expenses.

Total noninterest expenses were $15.7 million for the three months ended September 30, 2011, as compared to $12.9 million for the three months ended September 30, 2010, a 22% increase. This increase includes $326 thousand of nonrecurring expenses consisting of $267 thousand of merger related expenses and $59 thousand of system conversion related expenses from a bank wide conversion in April 2011. Cost increases were incurred for salaries and benefits of $2.7 million due substantially to additional commercial lending and support and residential mortgage staff, and to increases in incentive compensation. Premises and equipment expenses were $82 thousand lower due primarily to the benefits from consolidation of two branches during 2010. Marketing and advertising costs decreased by $157 thousand due primarily to nonrecurring special event marketing incurred during 2010. Data processing costs increased by $179 thousand due to system enhancements, growth in client accounts, and nonrecurring conversion related costs of $20 thousand. FDIC insurance premiums were $407 thousand less due to lower FDIC premiums rates which took effect on April 1, 2011. Other expenses increased by $471 thousand for the period ended September 30, 2011 compared to the same period in 2010, primarily due to $267 thousand of merger related expenses and $172 thousand increase for the operations, disposition and valuation adjustments of OREO properties. The efficiency ratio was 54.43% for the third quarter of 2011, as compared to 58.68% for the third quarter of 2010. As compared to the second quarter of 2011, the third quarter efficiency ratio was lower (from 55.13% to 54.43%) due to increases in revenue (net interest income and noninterest income) more than offsetting increases in noninterest expenses.

The ratio of common equity to total assets decreased from 8.96% at September 30, 2010 to 6.27% (7.76% excluding the effect of the settlement deposit) at September 30, 2011 due to an increase in balance sheet leverage. As discussed later in “Capital Resources and Adequacy,” the regulatory 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.

For the first nine months of 2011, net interest income increased 27% over the same period for 2010. Average loans increased $384 million and average deposits increased by $394 million ($355 million excluding the effect of the settlement deposit). The net interest margin was 4.15% (4.21% excluding the effect of the settlement deposit) for the nine months of 2011, as compared to 4.06% for the nine months of 2010. The Company has been able to maintain its loan yields in 2011 close to 2010 levels due to loan pricing practices, and has been able to reduce its funding costs while maintaining a favorable deposit mix; much of which has occurred from sales efforts to

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increase and deepen client relationships. The Company believes its net interest margin remains favorable to peer banking companies.

Net interest income increased 29% for the three months ended September 30, 2011 over the same period in 2010, resulting from a 12 basis point decrease in the net interest margin (5 basis point increase excluding the effect of the settlement deposit) and strong balance sheet growth. For the three months ended September 30, 2011, the net interest margin was 3.98% (4.15% excluding the effect of the settlement deposit) as compared to 4.10% for the three months ended September 30, 2010.

The tables below presents the average balances and rates of the various categories of the Company’s assets and liabilities for the three and nine months ended September 30, 2011 and 2010. Included in the tables is a measurement of interest rate spread and margin. Interest rate spread is the difference (expressed as a percentage) between the interest rate earned on earning assets less the interest rate paid on interest bearing liabilities. While the interest rate spread provides a quick comparison of earnings rates versus cost of funds, management believes that margin provides a better measurement of performance. Margin includes the effect of noninterest bearing sources in its calculation and is net interest income expressed as a percentage of average earning assets.

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Eagle Bancorp, Inc.

Average Balances, Interest Yields And Rates, And Net Interest Margin

(dollars in thousands)

	Three Months Ended September 30,
	2011						2010
	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	$	229,242	$	136	0.24	%	$	7,926	$	24	1.20	%
Loans held for sale (1)	35,320		360		4.06	%	46,360		519		4.44	%
Loans (1) (2)	1,967,214		28,759		5.80	%	1,506,894		22,136		5.83	%
Investment securities available for sale (2)	275,213		1,469		2.12	%	266,498		1,697		2.53	%
Federal funds sold	24,779		17		0.27	%	80,222		45		0.22	%
Total interest earning assets	2,531,768		30,741		4.82	%	1,907,900		24,421		5.08	%

Total noninterest earning assets	66,042						78,627
Less: allowance for credit losses	27,840						21,700
Total noninterest earning assets	38,202						56,927
TOTAL ASSETS	$	2,569,970					$	1,964,827

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing liabilities:
Interest bearing transaction	$	62,610	$	51	0.32	%	$	55,839	$	54	0.38	%
Savings and money market	874,433		2,429		1.10	%	705,751		1,828		1.03	%
Time deposits	596,201		2,133		1.42	%	501,679		2,123		1.68	%
Total interest bearing deposits	1,533,244		4,613		1.19	%	1,263,269		4,005		1.26	%
Customer repurchase agreements	135,574		212		0.62	%	97,411		167		0.68	%
Long-term borrowings	49,300		540		4.29	%	49,300		550		4.43	%
Total interest bearing liabilities	1,718,118		5,365		1.24	%	1,409,980		4,722		1.33	%

Noninterest bearing liabilities:
Noninterest bearing demand	591,030						347,544
Other liabilities	8,906						6,747
Total noninterest bearing liabilities	599,936						354,291

Shareholders’ equity	251,916						200,556
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,569,970					$	1,964,827

Net interest income			$	25,376					$	19,699
Net interest spread					3.58	%					3.75	%
Net interest margin					3.98	%					4.10	%

(1) Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $1.1 million and $601 thousand for the three months ended September 30, 2011 and 2010, respectively.

(2) Interest and fees on loans and investments exclude tax equivalent adjustments.

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Eagle Bancorp, Inc.

Average Balances, Interest Yields And Rates, And Net Interest Margin

(dollars in thousands)

	Nine Months Ended September 30,
	2011						2010
	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	$	94,665	$	172	0.24	%	$	7,724	$	83	1.44	%
Loans held for sale (1)	24,809		734		4.14	%	18,259		615		4.50	%
Loans (1) (2)	1,849,531		80,279		5.80	%	1,465,438		64,380		5.87	%
Investment securities available for sale (2)	255,044		4,754		2.49	%	260,605		5,412		2.78	%
Federal funds sold	59,992		94		0.21	%	76,482		128		0.22	%
Total interest earning assets	2,284,041		86,033		5.04	%	1,828,508		70,618		5.16	%

Total noninterest earning assets	67,591						80,724
Less: allowance for credit losses	26,315						21,300
Total noninterest earning assets	41,276						59,424
TOTAL ASSETS	$	2,325,317					$	1,887,932

LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest bearing liabilities:
Interest bearing transaction	$	61,908	$	163	0.35	%	$	53,296	$	140	0.35	%
Savings and money market	815,678		6,404		1.05	%	668,688		5,959		1.19	%
Time deposits	582,286		6,554		1.50	%	501,478		6,761		1.80	%
Total interest bearing deposits	1,459,872		13,121		1.20	%	1,223,462		12,860		1.41	%
Customer repurchase agreements	110,313		533		0.65	%	93,901		545		0.78	%
Other short-term borrowings	29		—		—		4,996		27		0.72	%
Long-term borrowings	49,300		1,603		4.29	%	49,300		1,647		4.47	%
Total interest bearing liabilities	1,619,514		15,257		1.26	%	1,371,659		15,079		1.47	%

Noninterest bearing liabilities:
Noninterest bearing demand	471,941						314,498
Other liabilities	8,459						6,137
Total noninterest bearing liabilities	480,400						320,635

Shareholders’ equity	225,403						195,638
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	2,325,317					$	1,887,932

Net interest income			$	70,776					$	55,539
Net interest spread					3.78	%					3.69	%
Net interest margin					4.15	%					4.06	%

(1) Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $3.1 million and $1.8 million for the nine months ended September 30, 2011 and 2010, respectively.

(2) Interest and fees on loans and investments exclude tax equivalent adjustments.

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Provision for Credit Losses

The provision for credit losses represents the amount of expense charged to current earnings to fund the allowance for credit losses. The amount of the allowance for credit losses is based on many factors which reflect management’s assessment of the risk in the loan portfolio. Those factors include historical losses, economic conditions and trends, the value and adequacy of collateral, volume and mix of the portfolio, performance of the portfolio, and internal loan processes of the Company and Bank.

Management has developed a comprehensive analytical process to monitor the adequacy of the allowance for credit losses. This process and guidelines were developed utilizing, among other factors, the guidance from federal banking regulatory agencies. The results of this process, in combination with conclusions of the Bank’s outside loan review consultant, support management’s assessment as to the adequacy of the allowance at the balance sheet date. Please refer to the discussion under the caption “Critical Accounting Policies” for an overview of the methodology management employs on a quarterly basis to assess the adequacy of the allowance and the provisions charged to expense.

During the first nine months of 2011, the allowance for credit losses increased $3.8 million, reflecting $8.2 million in provision for credit losses and $4.4 million in net charge-offs during the period. The provision for credit losses was $8.2 million for the nine months of 2011 as compared to $5.8 million in 2010. The higher provisioning in 2011 as compared to 2010 is attributable to substantially higher loan growth in the nine months of 2011 compared to 2010, $354 million as compared to $132 million in 2010, while net charge-offs were only slightly higher in 2011 as compared to 2010. For the nine months ended September 30, 2011, net charge-offs totaled $4.4 million (0.32% of average loans) compared to $4.1 million (0.38% of average loans) for the nine months ended September 30, 2010.

During the three months ended September 30, 2011, the allowance for credit losses increased $1.1 million, reflecting $2.9 million in provision for credit losses and $1.8 million in net charge-offs during the period. The provision for credit losses was $2.9 million for the three months ended September 30, 2011 as compared to $2.0 million for the three months ended September 30, 2010. At September 30, 2011, the allowance for credit losses represented 1.41% of loans outstanding, as compared to 1.45% at September 30, 2010 and 1.41% at June 30, 2011. The higher provisioning in the third quarter of 2011, as compared to the third quarter of 2010, is attributable to substantially higher loan growth, $81 million in 2011 as compared to $26 million in 2010. Net charge-offs of $1.8 million represented 0.36% of average loans, excluding loans held for sale, in the third quarter of 2011, as compared to $1.5 million or 0.39% of average loans, excluding loans held for sale, in the third quarter of 2010.

As part of its comprehensive loan review process, the Bank’s Board of Directors and Loan Committee or Credit Review Committee carefully evaluate loans which are past-due 30 days or more. The Committees make a thorough assessment of the conditions and circumstances surrounding each delinquent loan. The Bank’s loan policy requires that loans be placed on nonaccrual if they are ninety days past-due, unless they are well secured and in the process of collection. Additionally, Credit Administration specifically analyzes the status of development and construction projects, sales activities and utilization of interest reserves in order to carefully and prudently assess potential increased levels of risk requiring additional reserves.

The maintenance of a high quality loan portfolio, with an adequate allowance for possible credit losses, will continue to be a primary management objective for the Company.

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The following table sets forth activity in the allowance for credit losses for the periods indicated.

	Nine Months Ended
	September 30,
(dollars in thousands)	2011			2010
Balance at beginning of year	$	24,754		$	20,619
Charge-offs:
Commercial (1)	3,073			2,077
Investment - commercial real estate	277			369
Owner occupied - commercial real estate	—			—
Real estate mortgage - residential	95			—
Construction - commercial and residential	957			1,698
Home equity	209			—
Other consumer	87			21
Total charge-offs	4,698			4,165

Recoveries:
Commercial (1)	23			27
Investment - commercial real estate	126			3
Owner occupied - commercial real estate	—			—
Real estate mortgage - residential	3			—
Construction - commercial and residential	170			3
Home equity	2			1
Other consumer	1			—
Total recoveries	325			34
Net charge-offs	4,373			4,131

Additions charged to operations	8,218			5,752
Balance at end of period	$	28,599		$	22,240

Annualized ratio of net charge-offs during the period to average loans outstanding during the period	0.32		%	0.38		%

(1) Includes SBA loans.

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The following table reflects the allocation of the allowance for credit losses at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses or charge-offs and does not restrict the use of the allowance to absorb losses in any category.

	September 30, 2011				December 31, 2010
(dollars in thousands)	Amount		% (1)		Amount		% (1)
Commercial	$	8,843	23	%	$	8,630	26	%
Investment - commercial real estate	7,660		38	%	6,668		37	%
Owner occupied - commercial real estate	1,997		12	%	2,064		13	%
Real estate mortgage - residential	—		2	%	115		1	%
Construction - commercial and residential	8,428		20	%	5,745		18	%
Home equity	1,601		5	%	1,441		5	%
Other consumer	70		—		91		—
Unallocated	—		—		—		—
Total loans	$	28,599	100	%	$	24,754	100	%

(1) Represents the percent of loans in each category to total loans.

Nonperforming Assets

As shown in the table below, the Company’s level of nonperforming assets, which are comprised of loans delinquent 90 days or more, nonaccrual loans, the nonperforming portion of troubled debt restructurings and other real estate owned, totaled $34.4 million at September 30, 2011, representing 1.07% of total assets (1.32% excluding the effect of the settlement deposit), as compared to $32.0 million of nonperforming assets, or 1.53% of total assets, at December 31, 2010 and $29.2 million of nonperforming assets, or 1.46% of total assets, at September 30, 2010. The Company had $804 thousand of accruing loans 90 days or more past due at September 30, 2011 and no accruing loans 90 days or more past due at September 30, 2010 or December 31, 2010. The primary cause of the increases from prior periods is due to one large commercial real estate loan amounting to $12.0 million that was placed on nonaccrual in the first quarter of 2011. Management believes the loan is well secured and anticipates no loss of principal. Excluding the $12 million loan, other nonperforming assets declined due to a net OREO decline of $3.8 million from December 31, 2010 and $1.6 million from September 30, 2010, payments received on nonperforming loans, and the charge off of uncollectible balances. Management remains attentive to early signs of deterioration in borrowers’ financial conditions and to taking the appropriate action to mitigate risk. Furthermore, the Company is diligent in placing loans on nonaccrual status and believes, based on its loan portfolio risk analysis, that its allowance for credit losses, at 1.41% of total loans at September 30, 2011 is adequate to absorb potential credit losses within the loan portfolio at that date.

Included in nonperforming assets at September 30, 2011 were $2.9 million of OREO, consisting of nine foreclosed properties. The Company had eleven foreclosed properties with a net carrying value of $6.7 million at December 31, 2010 and eleven foreclosed properties with a net carrying value of $4.6 million at September 30, 2010. OREO properties are carried at the lower of cost or appraised value less estimated costs to sell. It is the Company’s policy to obtain third party appraisals prior to foreclosure, and to obtain updated third party appraisals on OREO properties not less frequently than annually. Generally, the Company would obtain updated appraisals or evaluations where it has reason to believe, based upon market indications (such as comparable sales, legitimate offers below carrying value, broker indications and similar factors), that the current appraisal does not accurately reflect current value. During the first nine months of 2011, seven foreclosed properties with a net carrying value of $5.6 million were sold for a net loss of $299 thousand.

Included in nonperforming assets are loans that the Company considers impaired. Impaired loans are defined as those which we believe it is probable that we will not collect all amounts due according to the contractual terms of the loan agreement, as well as that portion of loans whose terms have been modified in a troubled debt

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restructuring (“TDR”) which have not shown a period of performance as required under applicable accounting standards. Valuation allowances for those loans determined to be impaired are evaluated in accordance with ASC Topic 310—“Receivables,” and updated quarterly. For collateral dependent impaired loans, the carrying amount of the loan is determined by current appraised value less estimated costs to sell the underlying collateral, which may be adjusted downward under certain circumstances for actual events and/or changes in market conditions. For example, current average actual selling prices less average actual closing costs on an impaired multi-unit real estate project may indicate the need for an adjustment in the appraised valuation of the project, which in turn could increase the associated ASC Topic 310 specific reserve for the loan. Generally, all appraisals associated with impaired loans are updated on a not less than annual basis.

Loans are considered to have been modified in a TDR when due to a borrower’s financial difficulties, the Company makes concessions to the borrower that it would not otherwise consider. Concessions could include interest rate, principal or interest forgiveness, forbearance, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Alternatively, management, from time-to-time and in the ordinary course of business, implements renewals, modifications, extensions, and/or changes in terms of loans to borrowers who have the ability to repay on reasonable market-based terms, as circumstances may warrant. Such modifications are not considered to be TDRs as the accommodation of a borrower’s request does not rise to the level of a concession and/or the borrower is not experiencing financial difficulty. For example: (1) adverse weather conditions may create a short term cash flow issue for an otherwise profitable retail business which suggests a temporary interest only period on an amortizing loan; (2) there may be delays in absorption on a real estate project which reasonably suggests extension of the loan maturity at market terms; or (3) there may be maturing loans to borrowers with demonstrated repayment ability who are not in a position at the time of maturity to obtain alternate long-term financing. The most common change in terms provided by the Company is an extension of an interest only term. The determination of whether a restructured loan is a TDR requires consideration of all of the facts and circumstances surrounding the change in terms, and the exercise of prudent business judgment. In an effort to clarify TDR related matters, the Financial Accounting Standards Board issued guidance in April 2011, which became effective for the Company in this third quarter 2011 reporting period. The new guidance resulted in $9.5 million of loans being classified as performing TDRs. The Company had six TDRs at September 30, 2011 totaling approximately $12.6 million, $9.5 million of which were performing under the modified terms at September 30, 2011. These loans have demonstrated a period of at least six months of performance under the modified terms.

Total nonperforming loans amounted to $31.4 million at September 30, 2011 (1.55% of total loans), compared to $25.3 million at December 31, 2010 (1.51% of total loans) and $24.7 million at September 30, 2010 (1.61% of total loans). The increase in the ratio of nonperforming loans to total loans at September 30, 2011 as compared to September 30, 2010, and the decline in the ratio of the allowance for loan losses to nonperforming loans between those periods, is due to one large commercial real estate loan amounting to $12.0 million (noted above), on which no principal loss is anticipated, that was placed on nonaccrual in the first quarter of 2011.

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The following table shows the amounts of nonperforming assets at the dates indicated.

	September 30,						December 31,
(dollars in thousands)	2011			2010			2010
Nonaccrual Loans:
Commercial	$	5,726		$	3,861		$	5,137
Investment - commercial real estate	4,330			3,381			3,831
Owner occupied - commercial real estate	289			5,753			—
Real estate mortgage - residential	1,049			247			760
Construction - commercial and residential	18,481			10,115			13,438
Home equity	664			15			297
Other consumer	8			—			535
Accrual loans-past due 90 days:
Commercial	14			—			—
Owner occupied - commercial real estate	791			—			—
Real estate - commercial	—			—			—
Restructured loans (1)	82			1,289			1,289
Total nonperforming loans	31,434			24,661			25,287
Other real estate owned	2,941			4,581			6,701
Total nonperforming assets	$	34,375		$	29,242		$	31,988

Coverage ratio, allowance for credit losses to total nonperforming loans	90.98		%	90.18		%	97.89		%
Ratio of nonperforming loans to total loans	1.55		%	1.61		%	1.51		%
Ratio of nonperforming assets to total assets	1.07		%	1.46		%	1.53		%

(1) Excludes TDRs returned to performing status totaling $3.1 million at September 30, 2011. These loans have demonstrated a period of at least six months of performance under the modified terms.

Significant variation in the amount of nonperforming loans may occur from period to period because the amount of nonperforming loans depends largely on the condition of a relatively small number of individual credits and borrowers relative to the total loan portfolio.

At September 30, 2011, there were $25.7 million of performing loans considered potential problem loans, defined as loans which are not included in the 90 day past due, nonaccrual or restructured categories, but for which known information about possible credit problems causes management to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms which may in the future result in disclosure in the past due, nonaccrual or restructured loan categories. The $25.7 million in potential problem loans at September 30, 2011, compared to $36.5 million at December 31, 2010, and $31.1 million at September 30, 2010. The Company has taken a conservative posture with respect to risk rating its loan portfolio. Based upon their status as potential problem loans, these loans receive heightened scrutiny and ongoing intensive risk management. Additionally, the Company’s loan loss allowance methodology incorporates increased reserve factors for certain loans considered potential problem loans as compared to the general portfolio. See Allowance for Loan Credit Losses for a description of the allowance methodology.

Noninterest Income

Total noninterest income includes service charges on deposits, gain on sale of loans, gain on sale of investment securities, income from bank owned life insurance (“BOLI”) and other income.

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compared to 2010 was an increase of $601 thousand in other income. Excluding investment securities gains, total noninterest income was $8.2 million for the nine months of 2011 as compared to $4.7 million for 2010, a 73% increase.

For the nine months ended September 30, 2011, service charges on deposit accounts increased $1 thousand compared to the same nine month period in 2010. For the three months ended September 30, 2011, service charges on deposit accounts increased to $880 thousand from $814 thousand in the same period in 2010, an increase of 11%. The increase for the nine month period was due to the impact of lower market rates on earnings credits, and to timing differences on revenue recognition due to system conversions in April 2011.

For the nine months ended September 30, 2011 gain on sale of loans increased from $990 thousand to $3.9 million, compared to the same period in 2010. For the three months ended September 30, 2011 gain on sale of loans increased 44%, from $739 thousand to $1.1 million, compared to the same period in 2010. For the nine months ended September 30, 2011 gains on the sale of SBA loans increased $139 thousand while gains on the sale of residential mortgages increased $2.7 million as compared to the same nine month period in 2010. For the three months ended September 30, 2011 gains on the sale of SBA loans decreased $83 thousand while gains on the sales of residential mortgages increased $409 thousand compared to the same three month period in 2010.

The Company originates residential mortgage loans on a pre-sold basis, servicing released. Sales of these mortgage loans yielded gains of $3.4 million for the nine months ended September 30, 2011 compared to $682 thousand in the same period in 2010, due to expansion of the residential mortgage origination and sales division in the second quarter of 2010 and to the impact of refinancing volume due to lower market interest rates. For the three months ended September 30, 2011and 2010, gains on the sale of residential mortgage loans were $993 thousand and $585 thousand, respectively. Loans sold are subject to repurchase in circumstances where documentation is deficient or the underlying loan becomes delinquent or pays off within a specified period following loan funding and sale. The Bank considers these potential recourse provisions to be a minimal risk, but has established a reserve under generally accepted accounting principles for possible repurchases. There was one repurchases due to fraud by the borrower. The reserve amounted to $136 thousand at September 30, 2011 and is included in other liabilities on the Consolidated Balance Sheets. The Bank does not originate “sub-prime” loans and has no exposure to this market segment.

The Company is an originator of SBA loans and its current practice is to sell the insured portion of those loans at a premium. Income from this source was $448 thousand and $72 thousand for the nine and three months ended September 30, 2011, respectively, compared to $309 thousand and $154 thousand for the same three and nine month periods in 2010. Activity in SBA loan sales to secondary markets can vary widely from quarter to quarter. Beginning in 2010, the Company’s earnings from the sale of the guaranteed portion of SBA loans originated were impacted by the new accounting standard, ASC Topic 860, “Transfers and Servicing,” which requires that the recognition of profit on the sale of loans be deferred until all repurchase recourse provisions are met, which is typically a period of 90-120 days. Effective in March 2011, the SBA relaxed its recourse provisions, which allowed for gain recognition upon sale and funding.

Other income totaled $1.7 million for the nine months ended September 30, 2011 as compared to $1.1 million for the same period in 2010, an increase of 54%. The major components of income in this category consist of ATM fees, SBA servicing fees, noninterest loan fees and other noninterest fee income. ATM fees increased from $412 thousand for the nine months ended September 30, 2010 to $541 thousand for the same period in 2011, a 31% increase. SBA servicing fees remained the same for the nine months ended September 30, 2011 and 2010 at $165 thousand. Noninterest loan fees increased from $438 thousand for the nine months ended September 30, 2010 to $725 thousand for the same period in 2011, a 65% increase. Other noninterest fee income was $276 thousand for the nine months ended September 30, 2011 compared to $102 thousand for the same period in 2010, a 171% increase.

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Other income totaled $612 thousand for the three months ended September 30, 2011 as compared to $412 thousand for the same period in 2010, an increase of 49%. ATM fees increased from $151 thousand for the three months ended September 30, 2010 to $193 thousand for the same period in 2011, a 28% increase. SBA servicing fees increased from $53 thousand for the three months ended September 30, 2010 to $62 thousand for the same period in 2011, an 18% increase. Noninterest loan fees increased from $178 thousand for the three months ended September 30, 2010 to $188 thousand for the same period in 2011, a 6% increase. Other noninterest fee income was $158 thousand for the three months ended September 30, 2011 compared to $31 thousand for the same period in 2010, a 411% increase.

Noninterest Expense

Total noninterest expense consists of salaries and employee benefits, premises and equipment expenses, marketing and advertising, data processing, legal, accounting and professional fees, FDIC insurance and other expenses.

Total noninterest expense was $45.0 million for the nine months of 2011, as compared to $37.5 million for 2010, a 20% increase. This increase includes $1.2 million of nonrecurring expenses consisting of merger related expenses ($333 thousand), system enhancements from a bank wide conversion in April 2011 ($504 thousand), and special events marketing ($368 thousand).

Total noninterest expense was $15.7 million for the three months ended September 30, 2011, as compared to $12.9 million for the three months ended September 30, 2010, a 22% increase. This increase includes $326 thousand of nonrecurring expenses consisting of $267 thousand of merger related expenses and $59 thousand of system conversion related expenses from a bank wide conversion in April 2011.

Salaries and employee benefits were $24.3 million for the nine months ended September 30, 2011, as compared to $18.2 million for 2010, a 34% increase. Salaries and employee benefits were $9.3 million for the three months ended September 30, 2011, as compared to $6.5 million for 2010, a 41% increase. These increases were primarily due to merit increases, higher incentive compensation and benefits, and staffing increases primarily as a result of expansion of commercial lending and residential mortgage divisions. At September 30, 2011, the Company’s staff numbered 325, as compared to 292 at December 31, 2010 and 280 at September 30, 2010.

Premises and equipment expenses amounted to $6.0 million for the nine months ended September 30, 2011 as compared to $6.7 million for the same period in 2010, an 11% decrease. Premises and equipment expenses amounted to $1.9 million for the three months ended September 30, 2011 as compared to $2.0 million for the same period in 2010. The decrease in expense for the nine and three month periods ended September 30, 2011 is due primarily to approximately $1.7 million of premises and equipment expenses related to benefits of consolidation of two offices closed in 2010. This decrease in expense was partially offset by the additional expenses of approximately $519 thousand related to the opening of two new offices in January and August of 2011 and additional space for the residential mortgage origination and sales division beginning in the first quarter of 2011. Additionally, for the nine and three months ended September 30, 2011, the Company recognized $253 thousand and $93 thousand of sublease revenue as compared to $317 thousand and $148 thousand for the same period in 2010. The sublease revenue is a direct offset of premises and equipment expenses.

Marketing and advertising expenses increased from $919 thousand for the nine months ended September 30, 2010 to $1.2 million for the same period in 2011, a 32% increase. Marketing and advertising expenses decreased from $391 thousand for the three months ended September 30, 2010 to $234 thousand for the same period in 2011, a 40% decrease. The primary reason for the increase in the nine month period was due to special event marketing expense.

Data processing expenses increased from $2.0 million for the nine months ended September 30, 2010 to $2.5 million for the same period in 2011, an increase of 27%. Data processing expenses increased from $697 thousand for the three months ended September 30, 2010 to $876 thousand in the same period in 2011, a 26% increase. The nine and three month increase in expense was due primarily to system enhancements and to expanded customer transaction costs.

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Legal, accounting and professional fees were $2.9 million for the nine months ended September 30, 2011, as compared to $2.2 million for same period in 2010, an increase of 32%. Legal, accounting and professional fees were $731 thousand for the three months ended September 30, 2011, as compared to $655 thousand for same period in 2010, a 12% increase. The increase in legal and professional fee expense for both the nine and three months periods were substantially due to higher problem loan collection costs.

FDIC insurance premiums were $1.6 million for the nine months ended September 30, 2011, as compared to $2.0 million for the same period in 2010, a 20% decrease. FDIC insurance premiums were $285 thousand for the three months ended September 30, 2011, as compared to $692 thousand in 2010, a 59% decrease. FDIC insurance premiums were less in 2011 as compared to 2010 due to lower FDIC premiums which took effect on April 1, 2011.

Other expenses, increased to $6.5 million in the first nine months of 2011 from $5.5 million for the same period in 2010, an increase of 17%. For the three months ended September 30, 2011, other expenses amounted to $2.4 million as compared to $1.9 million for the same period in 2010, an increase of 25%. The major components of cost in this category include insurance expenses, broker fees, telephone, director fees, OREO expenses and other losses. For the nine months ended September 30, 2011, the significant increases in this category as compared to the same period in 2010, were $333 thousand of merger related expenses and $496 thousand of bank wide conversion expenses. The increase for the three month period ended September 30, 2011 compared to the same period in 2010, was primarily due to $267 thousand of merger related expenses and $172 thousand increase for the operations, disposition and valuation adjustments of OREO properties.

Income Tax Expense

The Company’s ratio of income tax expense to pre-tax income (“effective tax rate”) increased to 36.1% for the nine months ended September 30, 2011 as compared to 34.9% for the same period in 2010. For the third quarter of 2011 as compared to 2010, the effective tax rate was 36.8% compared to 33.3%. The higher effective tax rate for both the nine and three month periods relates to lower relative levels of tax preferred investments and loans, including associated tax credits, as compared to higher levels of income.

FINANCIAL CONDITION

Summary

At September 30, 2011, the Company’s total assets were $3.2 billion ($2.6 billion excluding the effect of the settlement deposit), loans were $2.0 billion, excluding loans held for sale, deposits were $2.7 billion ($2.1 billion excluding the effect of the settlement deposit), other borrowings, including customer repurchase agreements, were $197 million and shareholders’ equity was $258.5 million. As compared to December 31, 2010, total assets increased by $1.1 billion (54%) ($512.4 million (25%) excluding the effect of the settlement deposit), loans increased by $354.1 million (21%), investment securities available for sale, federal funds sold and other short-term investments increased by $759.4 million (277%) ($141.4 million (52%) excluding the effect of the settlement deposit), deposits increased by $1.02 billion (59%) ($402.6 million (23%) excluding the effect of the settlement deposit), customer repurchase agreements and borrowings increased by $50.1 million (34%) and shareholders’ equity increased by $53.8 million (26%).

A substantial portion of the deposit growth in 2011, excluding the impact of the settlement deposit, is due to focused sales effort to attract more core deposit customers, and an emphasis on requiring loan customers to maintain deposits with the Bank. Due to the loan growth exceeding core deposit growth earlier in 2011, brokered funds from reliable national sources increased by $142.4 million.

In the quarter ended September 30, 2011, the Bank experienced core deposit growth in excess of loan growth in the quarter, which enhanced balance sheet liquidity at both September 30, 2011 and the third quarter of 2011 average.

Loans, net of amortized deferred fees and costs, at September 30, 2011, December 31, 2010 and September 30, 2010 by major category are summarized below.

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	September 30, 2011					December 31, 2010					September 30, 2010
(dollars in thousands)	Amount			%		Amount			%		Amount			%
Commercial	$	470,103		23	%	$	411,744		26	%	$	388,401		25	%
Investment - commercial real estate (1)	772,728			38	%	619,714			37	%	573,753			37	%
Owner occupied - commercial real estate	245,497			12	%	223,986			13	%	210,053			14	%
Real estate mortgage - residential	37,662			2	%	15,926			1	%	11,523			1	%
Construction - commercial and residential (1)	405,429			20	%	308,081			18	%	251,869			16	%
Home equity	94,008			5	%	89,936			5	%	88,251			6	%
Other consumer	4,218			—		6,113			—		7,096			—
Total loans	2,029,645			100	%	1,675,500			100	%	1,530,946			100	%
Less: Allowance for Credit Losses	(28,599		)			(24,754		)			(22,240		)
Net loans	$	2,001,046				$	1,650,746				$	1,508,706

(1) Includes loans for land acquisition and development.

In its lending activities, the Company seeks to develop sound relationships with clients whose businesses and individual banking needs will grow with the Bank. There has been a significant effort to grow the loan portfolio and to be responsive to the lending needs in the markets served, while maintaining sound asset quality.

Loan growth over the past nine months has been favorable, with loans outstanding reaching $2 billion at September 30, 2011, an increase of $354 million or 21% as compared to $1.7 billion at December 31, 2010, and increased $499 million or 33% as compared to $1.5 billion at September 30, 2010. The loan growth was predominantly in the commercial, investment - commercial real estate and construction — commercial and residential segments. Traditional sources of credit for commercial real estate transactions remain constrained and the Bank has been able to capitalize on this environment and acquire significant new customers because of the Bank’s ability and willingness to lend. Commercial real estate leasing in the Bank’s market area has held up far better than in other markets and values have generally seen only minor diminution. Meanwhile, multi-family properties in a number of sub-markets within the Bank’s market area are experiencing normalized vacancy rates, indicating a balance of supply and demand. Construction loans increased year over year as demand for new construction loans have begun to return and the Bank is selectively evaluating projects. Commercial loan growth has picked up as several new and sizeable relationships were captured from other banks in the market. Consumer loan balances, a relatively minor focus of the Company’s lending efforts, were essentially unchanged.

The Bank has a large proportion of its loan portfolio related to real estate with 72% consisting of commercial real estate, owner occupied, residential mortgage real estate and commercial and residential construction loans. Real estate also serves as collateral for loans made for other purposes, resulting in 78% of loans being secured by real estate.

Deposits and Other Borrowings

The principal sources of funds for the Bank are core deposits, consisting of demand deposits, NOW accounts, money market accounts and savings accounts. Additionally, the Bank obtains certificates of deposits from the local market areas surrounding the Bank’s offices. The deposit base includes transaction accounts, time and savings accounts and accounts which customers use for cash management and which provide the Bank with a source of fee income and cross-marketing opportunities, as well as an attractive source of lower cost funds. To meet funding needs during periods of high loan demand and seasonal variations in core deposits, the Bank utilizes alternative funding sources such as secured borrowings from the FHLB; federal funds purchased lines of credit from correspondent banks and brokered deposits from regional and national brokerage firms and the Promontory Interfinancial Network, LLC network.

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For the nine months ended September 30, 2011, noninterest bearing deposits increased $706.4 million as compared to December 31, 2010, while interest bearing deposits increased by $314.2 million during the same period. Of the total increase of $1.02 billion of deposit growth in the nine months of 2011, $620 million of noninterest bearing deposits growth was due to the settlement deposit, and $142.4 million represented brokered deposits. Average total deposits for the nine months of 2011 were $1.93 billion ($1.89 billion excluding the effect of the settlement deposit), as compared to $1.54 billion for the same period in 2010, a 26% increase (23% excluding the effect of the settlement deposit). Average brokered deposits were $238.1 million for the nine months of 2011 as compared to $108.9 million for the nine months of 2010.

From time to time, when appropriate in order to fund strong loan demand, the Bank accepts brokered time deposits, generally in denominations of less than $100 thousand, from a regional brokerage firm, and other national brokerage networks, including the Promontory Interfinancial Network, LLC. Additionally, the Bank participates in the Certificates of Deposit Account Registry Service (“CDARS”), which provides for reciprocal (“two-way”) transactions among banks facilitated by the Promontory Interfinancial Network, LLC for the purpose of maximizing FDIC insurance. These reciprocal CDARS funds are currently classified as brokered deposits, although there is a recognition by bank regulators that these reciprocal deposits are closely related to core funding, At September 30, 2011, total time deposits included $301.2 million of brokered deposits, which represented 11% (14% excluding the settlement deposit) of total deposits. The CDARS reciprocal component represented $62.2 million or 2% of total deposits (3% excluding the settlement deposit). These sources are believed to represent a reliable and cost efficient alternative funding source for the Company. At December 31, 2010, total time deposits included $151.6 million of brokered deposits, which represented 9% of total deposits. The CDARS component represented $91.5 million, or 5% of total deposits.

At September 30, 2011, the Company had $1.1 billion ($488.0 million excluding the effect of the settlement deposit) in noninterest bearing demand deposits, representing 40% (23% excluding the effect of the settlement deposit) of total deposits. This compared to $400.3 million of these deposits at December 31, 2010 or 23% of total deposits. These deposits are primarily business checking accounts on which the payment of interest was prohibited by regulations of the Federal Reserve. Since July 2011, banks are no longer prohibited from paying interest on demand deposits account, including those from businesses. To date, the Bank has elected to not pay interest on business checking accounts, nor is the payment of such interest a prevalent practice in the Bank’s market area at present. It is not clear over the longer-term what affect the elimination of this prohibition will have on the Bank’s interest expense, allocation of deposits, deposit pricing, loan pricing, net interest margin, ability to compete, ability to establish and maintain customer relationships, or profitability. The Bank is currently evaluating options in this area should competition intensify for these deposits, which is not occurring at this time. Payment of interest on these deposits could have a significant negative impact on the Company’s net interest income and net interest margin, net income, and the return on assets and equity, although no such effect is currently anticipated, as the payment of interest on accounts will not permit those business checking accounts above $250,000 to receive deposit insurance, a factor deemed important.

As an enhancement to the basic noninterest bearing demand deposit account, the Bank offers a sweep account, or “customer repurchase agreement,” allowing qualifying businesses to earn interest on short-term excess funds which are not suited for either a certificate of deposit or a money market account. The balances in these accounts were $147.7 million at September 30, 2011 compared to $97.6 million at December 31, 2010. Customers repurchase agreements are not deposits and are not insured by the FDIC, but are collateralized by U.S. government agency securities and / or U.S. agency backed mortgage backed securities. These accounts are particularly suitable to businesses with significant fluctuation in the levels of cash flows. Attorney and title company escrow accounts are an example of accounts which can benefit from this product, as are customers who may require collateral for deposits in excess of FDIC insurance limits but do not qualify for other pledging arrangements. This program requires the Bank to maintain a sufficient investment securities level to accommodate the fluctuations in balances which may occur in these accounts.

The Bank had no outstanding balances under its federal funds purchase lines of credit provided by correspondent banks at September 30, 2011 and December 31, 2010. The Bank had $40.0 million of borrowings outstanding under its credit facility from the FHLB at September 30, 2011 and December 31, 2010. Outstanding FHLB advances are secured by collateral consisting of a blanket lien on qualifying loans in the Bank’s commercial mortgage and home equity loan portfolios.

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The Company has a credit facility with United Bank, secured by a portion of the stock of the Bank, pursuant to which the Company may borrow, on a revolving basis, up to $30 million for working capital purposes, to finance capital contributions to the Bank and ECV. There were no amounts outstanding under this credit at September 30, 2011 or December 31, 2010. For additional information on this credit facility please refer to “Capital Resources and Adequacy” below.

The Company has issued an aggregate of $9.3 million of subordinated notes, due 2016. For additional information on the subordinated notes, please refer to “Capital Resources and Adequacy” below.

Liquidity Management

Liquidity is a measure of the Company’s and Bank’s ability to meet loan demand and to satisfy depositor withdrawal requirements in an orderly manner. The Bank’s primary sources of liquidity consist of cash and cash balances due from correspondent banks, loan repayments, federal funds sold and other short-term investments, maturities and sales of investment securities, income from operations and new core deposits into the Bank. The Bank’s investment portfolio of debt securities is held in an available-for-sale status which allows for flexibility, subject to holdings held as collateral for customer repurchase agreements, to generate cash from sales as needed to meet ongoing loan demand. These sources of liquidity are considered primary and are supplemented by the ability of the Company and Bank to borrow funds, which are termed secondary sources and which are substantial. The Company’s secondary sources of liquidity include a $30 million line of credit with a regional bank, secured by a portion of the stock of the Bank, against which there were no amounts outstanding at September 30, 2011. Additionally, the Bank can purchase up to $82.5 million in federal funds on an unsecured basis from its correspondents, against which there were no amounts outstanding at September 30, 2011 and can borrow unsecured funds under one-way CDARS brokered deposits in the amount of $481.3 million, against which there was $82.9 million outstanding at September 30, 2011. The Bank also has a commitment at September 30, 2011 from the Promontory Interfinancial Network to place up to $100 million of brokered deposits from its Insured Network Deposit (“IND”) program with the Bank, as compared to an actual balance of $27.8 million at September 30, 2011. At September 30, 2011, the Bank was also eligible to make advances from the FHLB up to $272.8 million based on collateral at the FHLB, of which $40.0 million was outstanding at September 30, 2011. Also, the Bank may enter into repurchase agreements as well as obtaining additional borrowing capabilities from the FHLB provided adequate collateral exists to secure these lending relationships.

The loss of deposits, through disintermediation, is one of the greater risks to liquidity. Disintermediation occurs most commonly when rates rise and depositors withdraw deposits seeking higher rates in alternative savings and investment sources than the Bank may offer. The Bank was founded under a philosophy of relationship banking and, therefore, believes that it has less of an exposure to disintermediation and resultant liquidity concerns than do many banks. There is, however, a risk that some deposits would be lost if rates were to increase and the Bank elected not to remain competitive with its deposit rates. Under those conditions, the Bank believes that it is well positioned to use other sources of funds such as FHLB borrowings, brokered deposits, repurchase agreements and correspondent banks’ lines of credit to offset a decline in deposits in the short run. Over the long-term, an adjustment in assets and change in business emphasis could compensate for a potential loss of deposits. The Bank also maintains a marketable investment portfolio to provide flexibility in the event of significant liquidity needs. The Asset Liability Committee of the Bank’s Board of Directors (“ALCO”) has adopted policy guidelines which emphasize the importance of core deposits and adequate asset liquidity.

At September 30, 2011, under the Bank’s liquidity formula, it had $1.66 billion ($1.04 billion excluding the effect of the settlement deposit) of primary and secondary liquidity sources. The amount is deemed adequate to meet current and projected funding needs.

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Commitments and Contractual Obligations

Loan commitments outstanding and lines and letters of credit at September 30, 2011 are as follows:

(dollars in thousands)

Unfunded loan commitments	$	565,676
Unfunded home equity lines of credit	56,530
Letters of credit	43,707
Total	$	665,913

Unfunded loan commitments are agreements whereby the Bank has made a commitment and the borrower has accepted the commitment to lend to a customer as long as there is no violation of the terms or conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee before the commitment period is extended. In many instances, borrowers are required to meet performance milestones in order to draw on a commitment as is the case in construction loans, or to have a required level of collateral in order to draw on a commitment, as is the case in asset based lending credit facilities. Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements.

Unfunded home equity lines of credit are agreements to lend to a customer as long as there is no violation of the terms or conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements.

Letters of credit include standby and commercial letters of credit. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance by the Bank’s customer to a third party. Standby letters of credit generally become payable upon the failure of the customer to perform according to the terms of the underlying contract with the third party. Standby letters of credit are generally not drawn. Commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn when the underlying transaction is consummated between the customer and a third party. The contractual amount of these letters of credit represents the maximum potential future payments guaranteed by the Bank. The Bank has recourse against the customer for any amount it is required to pay to a third party under a letter of credit, and holds cash and or other collateral on those standby letters of credit for which collateral is deemed necessary.

Asset/Liability Management and Quantitative and Qualitative Disclosures about Market Risk

A fundamental risk in banking is exposure to market risk, or interest rate risk, since a bank’s net income is largely dependent on net interest income. The Asset Liability Committee (“ALCO”) of the Bank’s Board of Directors formulates and monitors the management of interest rate risk through policies and guidelines established by it and the full Board of Directors and through review of detailed reports discussed quarterly. In its consideration of risk limits, the ALCO considers the impact on earnings and capital, the level and direction of interest rates, liquidity, local economic conditions, outside threats and other factors. Banking is generally a business of managing the maturity and repricing mismatch inherent in its asset and liability cash flows and to provide net interest income growth consistent with the Company’s profit objectives. During the three months ended September 30, 2011, the Company was able to both increase its net interest income and manage its overall interest rate risk position.

The Company, through its ALCO, monitors the interest rate environment in which it operates and adjusts the rates and maturities of its assets and liabilities to remain competitive and to achieve its overall financial objectives subject to established risk limits. In the current and expected future interest rate environment, the Company has been maintaining its investment portfolio to manage the balance between yield and prepayment risk in its portfolio of mortgage backed securities should rates remain at current levels and has been managing the investment portfolio to mitigate extension risk in that same portfolio should rates increase. In the third quarter of 2011, the investment portfolio balance was increased due to both an increase in customer repurchase agreements requiring collateral and deployment of excess liquidity. Cash flows from maturing mortgaged backed securities

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were reinvested into a combination of US Agency issues, and pass-thru and structured mortgaged backed securities. The duration of the investment portfolio declined to 3.4 years at September 30, 2011 from 3.9 years at December 31, 2010. In the loan portfolio, the re-pricing duration of the portfolio was 14 months at September 30, 2011, as compared to 11 months at December 31, 2010, with fixed rate loans amounting to 38% of total loans at September 30, 2011 (37% at December 31, 2010) and variable and adjustable rate loans at 62% of total loans at September 30, 2011 (63% at December 31, 2010). Variable rate loans are indexed primarily to the Wall Street Journal prime interest rate, while adjustable rate loans are indexed primarily to the five year U.S. Treasury interest rate. In the deposit portfolio, since December 31, 2010, the Company has extended the duration of the portfolio to 33 months at September 30, 2011, as longer-term brokered deposits acquired in the first nine months of 2011 offset shorter durations from other term deposits. Through the first nine months of 2011 the Company sought to acquire more fixed rate longer-term funding at today’s lower interest rates, whether core or non-core funding. However, the growth of core deposits, which enhance franchise value and provide a stable funding source, has been a major objective which has been met by the Company over the past 18 months, adding liquidity and enhanced asset sensitivity to the balance sheet, which includes the level of loans held for sale.

The Company has continued its emphasis on funding loans in its marketplace, and has been able to achieve favorable loan pricing, including interest rate floors on many loan originations. These factors have resulted in less pressure on loan yields over the past twelve months, as average interest rates have declined, thereby contributing to enhancing the Company’s net interest margin (excluding the effect of the settlement deposit) in the third quarter of 2011 and the nine months of 2011 as compared to 2010. Subject to interest rate floor rates, variable and adjustable rate loans provide additional income opportunities should interest rates rise from current levels.

The net unrealized gain before tax on the investment portfolio increased to $7.3 million at September 30, 2011 from $3.4 million at December 31, 2010, with $854 thousand of realized gains recorded for the quarter ended September 30, 2011. Gains were realized during the third quarter of 2011 to both take advantage of a very strong fixed income market and to mitigate prepayment risk in the portfolio of mortgaged backed securities.

There can be no assurance that the Company will be able to successfully achieve its optimal asset liability mix, as a result of competitive pressures, customer preferences and the inability to perfectly forecast future interest rates and movements.

One of the tools used by the Company to manage its interest rate risk is a static GAP analysis presented below. The Company also employs an earnings simulation model on a quarterly basis to monitor its interest rate sensitivity and risk and to model its balance sheet cash flows and its income statement effects in different interest rate scenarios. The model utilizes current balance sheet data and attributes and is adjusted for assumptions as to investment maturities (calls), loan prepayments, interest rates, the level of noninterest income and noninterest expense. The data is then subjected to a “shock test” which assumes a simultaneous change in interest rates up 100, 200, 300 and 400 basis points or down 100, 200 and 300 basis points, along the entire yield curve, but not below zero. The results are analyzed as to the impact on net interest income, net income and the market equity over the next twelve and twenty-four month periods.

For the analysis presented below, at September 30, 2011, the simulation assumes a 50 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in a decreasing interest rate shock scenario with a floor of 10 basis points, and assumes a 70 basis point change in interest rates on money market and interest bearing transaction deposits for each 100 basis point change in market interest rates in an increasing interest rate shock scenario.

As quantified in the table below, the Company’s analysis at September 30, 2011 shows a moderate effect on net interest income (over the next 12 months) as well as to the economic value of equity when interest rates are shocked both down 100, 200 and 300 basis points and up 100, 200, 300 and 400 basis points due substantially to the significant level of variable rate and repriceable assets and liabilities. The repricing duration of the investment portfolio at September 30, 2011 is 3.4 years, the loan portfolio 1.2 years, the interest bearing deposit portfolio 2.3 years and the borrowed funds portfolio 1.1 years.

The following table reflects the result of simulation analysis on the September 30, 2011 asset and liabilities balances:

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Change in interest rates (basis points)	Percentage change in net interest income		Percentage change in net income		Percentage change in market value of portfolio equity
+400	+10.3	%	+28.5	%	+2.2	%
+300	+6.5	%	+17.9	%	+1.1	%
+200	+2.9	%	+8.0	%	+2.0	%
+100	+1.0	%	+2.6	%	+2.1	%
0	—		—		—
-100	+2.5	%	+6.8	%	-4.3	%
-200	+5.4	%	+14.9	%	-5.2	%
-300	+5.4	%	+14.9	%	-6.0	%

The results of simulation are within the policy limits adopted by the Company. For net interest income, the Company has adopted a policy limit of 10% for a 100 basis point change, 12% for a 200 basis point change, and 18% for a 300 basis point change. For the market value of equity, the Company has adopted a policy limit of 12% for a 100 basis point change, 15% for a 200 basis point change, and 20% for a 300 basis point change. No policy limit for a change of 400 basis points is currently in place. The changes in net interest income, net income and the economic value of equity in both a higher and lower interest rate shock scenario at September 30, 2011 are not considered to be material. The positive impact of 1.0% in net interest income and 2.6% in net income given a 100 basis point increase in market interest rates reflects in large measure the higher level of short-term investments added to the balance sheet in the quarter ended September 30, 2011, as deposit growth exceeded loan growth, and the funds were held short-term to meet expected future loan fundings.

In the third quarter of 2011, the Company continued to manage its interest rate sensitivity position to moderate levels of risk, as indicated in the simulation results above. Except for the higher level of asset liquidity at September 30, 2011, the risk position at the end of the third quarter was similar to the interest rate risk position at both December 31, 2010 and June 30, 2011.

Generally speaking, the loss of economic value of portfolio equity in a lower interest rate environment is due to lower values of core deposits more than offsetting the gains in loan and investment values; while the gain of economic value of portfolio equity in a higher interest rate environment is due to higher value of core deposits more than offsetting lower values of fixed rate loans and investments. The Company believes its balance sheet is well positioned in the current interest rate environment.

Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or repricing periods, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that limit changes in interest rates on a short-term basis and over the life of the loan. Further, in the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the tables. Finally, the ability of many borrowers to service their debt may decrease in the event of a significant interest rate increase.

For the third quarter of 2011, average market interest rates declined as compared to the third quarter of 2010 and the yield curve flattened. The average two year U.S. Treasury rate declined by 27 basis points and the average ten year U.S. Treasury rate declined by 34 basis points. In that environment, the Company was able to increase its net interest spread and margin for the three months ended September 30, 2011 (excluding the impact of the settlement deposit) as compared to the three months ended September 30, 2010. The Company believes that the change in the net interest spread for the three months ended September 30, 2011 as compared to September 30, 2010 has been consistent with its quarterly risk analysis at December 31, 2010, March 31, 2011, and June 30, 2011.

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GAP Position

Banks and other financial institutions earnings are significantly dependent upon net interest income, which is the difference between interest earned on earning assets and interest expense on interest bearing liabilities. This revenue represented 88% of the Company’s revenue for the third quarter of 2011, as compared to 91% of the Company’s revenue for the third quarter of 2010. The Company’s net interest margin was 3.98% (4.15% excluding the effect of the settlement deposit) as compared to 4.10% for the three months ended September 30, 2010. The decrease in the net interest margin in the third quarter of 2011 as compared to the third quarter of 2010 of 12 basis points (from 4.10% to 3.98%) was due to the settlement funds being invested in excess reserves at the Federal Reserve Bank. Excluding the impact of the settlement deposit, the net interest margin was 4.15%, or 5 basis points higher than the net interest margin of 4.10% for the third quarter of 2010.

In falling interest rate environments, net interest income is maximized with longer term, higher yielding assets being funded by lower yielding short-term funds, or what is referred to as a negative mismatch or GAP. Conversely, in a rising interest rate environment, net interest income is maximized with shorter term, higher yielding assets being funded by longer-term liabilities or what is referred to as a positive mismatch or GAP.

The GAP position, which is a measure of the difference in maturity and repricing volume between assets and liabilities, is a means of monitoring the sensitivity of a financial institution to changes in interest rates. The chart below provides an indication of the sensitivity of the Company to changes in interest rates. A negative GAP indicates the degree to which the volume of repriceable liabilities exceeds repriceable assets in given time periods.

At September 30, 2011, the Company had a positive GAP position of approximately $315 million or 9.8% of total assets out to three months and a positive cumulative GAP position of $227 million or 7.0% of total assets out to 12 months; as compared to a positive GAP position of approximately $399 million or 19.1% of total assets out to three months and a positive cumulative GAP position of approximately $265 million or 12.7% out to 12 months at December 31, 2010. The change in the positive GAP position at September 30, 2011, as compared to December 2010, was more significant in percentage terms than dollar change due to the impact of the settlement deposit of $620 million, which inflated the balance sheet at September 30, 2011. The change in the GAP position at September 30, 2011 as compared to December 31, 2010 is not judged material to the Company’s overall interest rate risk position, which relies more heavily on simulation analysis which captures the full optimality within the balance sheet. The current position is within guideline limits established by the ALCO.

While management believes that this overall position creates a reasonable balance in managing its interest rate risk and maximizing its net interest margin within plan objectives, there can be no assurance as to actual results. Management has carefully considered its strategy to maximize interest income by reviewing interest rate levels, economic indicators and call features within its investment portfolio (which aspects of risk have been reduced significantly), as well as interest rate floors within its loan portfolio. These factors have been discussed with the ALCO and management believes that current strategies are appropriate to current economic and interest rate trends.

If interest rates increase, the Company’s net interest income and net interest margin are expected to increase modestly due to an excess of rate sensitive assets over liabilities, adjusted for the impact of loan floors and the assumption of an increase in money market interest rates by 70% of the change in market interest rates.

If interest rates decline, the Company’s net interest income and margin are expected to increase as the floors on the loan portfolio provide added value and variable rate deposits are reduced.

Because competitive market behavior does not necessarily track the trend of interest rates but at times moves ahead of financial market influences, the change in the cost of liabilities may be different than anticipated by the GAP model. If this were to occur, the effects of a declining interest rate environment may not be in accordance with management’s expectations.

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GAP Analysis

September 30, 2011

(dollars in thousands)

Repriceable in:	0-3 months			4-12 months			13-36 months			37-60 months			Over 60 months			Total Rate Sensitive		Non- sensitive		Total Assets

RATE SENSITIVE ASSETS:
Investment securities	$	20,860		$	45,715		$	94,211		$	75,070		$	56,401		$	292,257
Loans (1)(2)	1,188,826			161,115			394,530			281,710			111,371			2,137,552
Fed funds and other short-term investments	740,936			—			—			—			—			740,936
Other earning assets	—			13,643			—			—			—			13,643
Total	$	1,950,622		$	220,473		$	488,741		$	356,780		$	167,772		$	3,184,388	$	35,358	$	3,219,746

RATE SENSITIVE LIABILITIES:
Noninterest bearing demand	$	633,174		$	39,522		$	105,392		$	105,392		$	223,220		$	1,106,700
Interest bearing transaction	48,826			—			10,462			10,463			—			69,751
Savings and money market	690,610			—			147,987			147,988			—			986,585
Time deposits	115,051			269,563			179,667			20,032			—			584,313
Customer repurchase agreements and fed funds purchased	147,671			—			—			—			—			147,671
Other borrowings	—			—			10,000			20,000			19,300			49,300
Total	$	1,635,332		$	309,085		$	453,508		$	303,875		$	242,520		$	2,944,320	$	16,964	$	2,961,284
GAP	$	315,290		$	(88,612	)	$	35,233		$	52,905		$	(74,748	)	$	240,068
Cumulative GAP	$	315,290		$	226,678		$	261,911		$	314,816		$	240,068

Cumulative gap as percent of total assets	9.79		%	7.04		%	8.13		%	9.78		%	7.46		%

(1) Includes loans held for sale.

(2) Non-accrual loans are included in the over 60 months category.

Over the next twelve months, as reflected in the GAP table above, the Company has an excess of rate sensitive assets over rate sensitive liabilities of 7.04% out to 12 months. During the first nine months of 2011, the Company has recognized the probability of higher interest rates and had repositioned both its investment portfolio and its borrowed funds to better position the Company for that probability, while not exposing the Company to negative effects should interest rates either stay fairly stable or decline. During the third quarter of 2011, the balance sheet experienced a substantial increase in liquidity, which added to asset sensitivity and to net interest margin compression for the three months ended September 30, 2011. Going forward, the additional liquidity on the balance sheet at September 30, 2011 is expected to fund a continuing favorable pipeline of new loans and loan advances.

Although NOW and MMA accounts are subject to immediate repricing, the Bank’s GAP model has incorporated a repricing schedule to account for a lag in rate changes based on our experience, as measured by the amount of those deposit rate changes relative to the amount of rate change in assets.

Capital Resources and Adequacy

The assessment of capital adequacy depends on a number of factors such as asset quality and mix, liquidity, earnings performance, changing competitive conditions and economic forces, regulatory measures and policy, as well as the overall level of growth and complexity of the balance sheet. The adequacy of the Company’s current and future capital needs is monitored by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses.

The federal banking regulators have issued guidance for those institutions which are deemed to have concentrations in commercial real estate lending. Pursuant to the supervisory criteria contained in the guidance for identifying institutions with a potential commercial real estate concentration risk, institutions which have (1) total

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reported loans for construction, land development, and other land acquisitions which represent 100% or more of an institution’s total risk-based capital; or (2) total commercial real estate loans representing 300% or more of the institution’s total risk-based capital and the institution’s commercial real estate loan portfolio has increased 50% or more during the prior 36 months are identified as having potential commercial real estate concentration risk. Institutions which are deemed to have concentrations in commercial real estate lending are expected to employ heightened levels of risk management with respect to their commercial real estate portfolios, and may be required to hold higher levels of capital. The Company, like many community banks, has a concentration in commercial real estate loans, and the Company has experienced significant growth in its commercial real estate portfolio in recent years. Commercial real estate loans and construction, land and land development loans represent 501% and 143%, respectively of total risk based capital. Management has extensive experience in commercial real estate lending, and has implemented and continues to maintain heightened risk management procedures, and strong underwriting criteria with respect to its commercial real estate portfolio. Nevertheless, we may be required to maintain higher levels of capital as a result of our commercial real estate concentration, which could require us to obtain additional capital, and may adversely affect shareholder returns.

The Company has a credit facility with United Bank, pursuant to which the Company may borrow, on a revolving basis, up to $30 million for working capital purposes, to finance capital contributions to the Bank and ECV. The credit facility is secured by a first lien on a portion of the stock of the Bank, and bears interest at a floating rate equal to the Wall Street Journal Prime Rate minus 0.25% with a floor interest rate of 4.25%. Interest is payable on a monthly basis. The term of the credit facility expires on August 31, 2012. There were no amounts outstanding under this credit at September 30, 2011 and December 31, 2010.

The Company has issued an aggregate of $9.3 million of subordinated notes, which bear interest at a fixed rate of 10.0% per year. The notes have a maturity of September 30, 2016 and are redeemable at the option of the Company, in whole or in part, on any interest payment date at the principal amount thereof, plus interest to the date of redemption. The notes are intended to qualify as Tier 2 capital for regulatory purposes to the fullest extent permitted. The payment of principal on the notes may only be accelerated upon the occurrence of certain bankruptcy or receivership related events relating to the Company or, to the extent permitted under capital rules to be adopted by the Federal Reserve Board pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, a major bank subsidiary of the Company.

Under current capital rules, the capital treatment of the notes must be phased out, at a rate of 20% of the original principal amount per year during the last five years of the term of the notes, commencing on October 1, 2011.

The actual capital amounts and ratios for the Company and Bank as of September 30, 2011, December 31, 2010 and September 30, 2010 are presented in the table below.

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									For Capital		To Be Well
	Company				Bank				Adequacy		Capitalized Under
	Actual				Actual				Purposes		Prompt Corrective Action
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Ratio		Provision Ratio *

As of September 30, 2011
Total capital (to risk weighted assets)	$	284,160	12.11	%	$	263,616	11.29	%	8.0	%	10.0	%
Tier 1 capital (to risk weighted assets)	246,125		10.49	%	234,911		10.06	%	4.0	%	6.0	%
Tier 1 capital (to average assets)	246,125		9.61	%	234,911		9.21	%	3.0	%	5.0	%

As of December 31, 2010
Total capital (to risk weighted assets)	$	226,131	11.64	%	$	204,250	10.60	%	8.0	%	10.0	%
Tier 1 capital (to risk weighted assets)	192,988		9.91	%	180,146		9.35	%	4.0	%	6.0	%
Tier 1 capital (to average assets)	192,988		9.32	%	180,146		8.82	%	3.0	%	5.0	%

As of September 30, 2010
Total capital (to risk weighted assets)	$	219,975	12.66	%	$	182,267	10.59	%	8.0	%	10.0	%
Tier 1 capital (to risk weighted assets)	188,952		10.88	%	160,759		9.34	%	4.0	%	6.0	%
Tier 1 capital (to average assets)	188,952		9.66	%	160,759		8.37	%	3.0	%	5.0	%

* Applies to Bank only

Bank and holding company regulations, as well as Maryland law, impose certain restrictions on dividend payments by the Bank, as well as restricting extensions of credit and transfers of assets between the Bank and the Company. At September 30, 2011 the Bank could pay dividends to the parent to the extent of its earnings so long as it maintained required capital ratios.

Use of Non-GAAP Financial Measures

The Company considers the following non-GAAP measurements useful for investors, regulators, management and others to evaluate capital adequacy and to compare against other financial institutions. The table provides a reconciliation of these non-GAAP financial measures with financial measures defined by GAAP.

Tangible common equity to tangible assets (the “tangible common equity ratio”) and tangible book value per common share are non-GAAP financial measures derived from GAAP-based amounts. The Company calculates the tangible common equity ratio by excluding the balance of intangible assets from common shareholders’ equity and dividing by tangible assets. The Company calculates tangible book value per common share by dividing tangible common equity by common shares outstanding, as compared to book value per common share, which the Company calculates by dividing common shareholders’ equity by common shares outstanding. The Company considers this information is important to shareholders’ as tangible equity is a measure that is consistent with the calculation of capital for bank regulatory purposes, which excludes intangible assets from the calculation of risk based ratios.

The reported GAAP figures below have been adjusted for the $620 million settlement deposit received in connection with a class action settlement September 13, 2011 and which is expected to be disbursed by year end. In the interim, the deposit is invested in excess reserves at the Federal Reserve. As the magnitude of the deposit distorts the operational results of the Company, the GAAP reconciliation below and in the accompanying management’s discussion and analysis provide certain performance ratios excluding the effect of this deposit. The settlement deposit resulted in approximately $72,000 of interest income and $30,000 of income, net of tax, during the three and nine months periods ended September 30, 2011. The Company considers this information important to enable shareholders and other interested parties to assess the core operational performance of the Company.

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GAAP to Non-GAAP Reconciliation

(dollars in thousands except per share data)

	Nine Months Ended
	September 30,
	2011			2010
	(Unaudited)			(Unaudited)
Nonperforming assets	$	34,375		$	29,242
Total assets	3,219,746			2,006,146
Nonperforming assets to total assets	1.07		%	1.46		%
Total assets	$	3,219,746		$	2,006,146
Less: settlement deposit	(620,000		)	—
Adjusted total assets	$	2,599,746		$	2,006,146
Nonperforming assets	$	34,375		$	29,242
Adjusted total assets	2,601,746			2,006,146
Nonperforming assets to total adjusted assets	1.32		%	1.46		%
Total deposits	$	2,747,349		$	1,646,091
Less: settlement deposit	(620,000		)	—
Adjusted total deposits	$	2,127,349		$	1,646,091

Common shareholders’ equity	$	201,863		$	179,764
Less: Intangible assets	(4,154		)	(4,242		)
Tangible common equity	$	197,709		$	175,522
Book value per common share	$	10.15		$	9.14
Less: Intangible book value per common share	(0.21		)	(0.22		)
Tangible book value per common share	$	9.94		$	8.92
Total assets	$	3,219,746		$	2,006,146
Less: Intangible assets	(4,154		)	(4,242		)
Tangible assets	$	3,215,592		$	2,001,904
Tangible common equity ratio	6.15		%	8.77		%

Common shareholders’ equity	$	201,863		$	179,764
Less: settlement deposit	(30		)	—
Less: Intangible assets	(4,154		)	(4,242		)
Tangible common equity	$	197,679		$	175,522
Total assets	$	3,219,746		$	2,006,146
Less: settlement deposit	(620,000		)	—
Less: Intangible assets	(4,154		)	(4,242		)
Adjusted tangible assets	$	2,595,592		$	2,001,904
Adjusted tangible common equity ratio	7.62		%	8.77		%

Common shareholders’ equity	$	201,863		$	179,764
Less: settlement deposit	(30		)	—
Adjusted common equity	$	201,833		$	179,764
Adjusted total assets	2,601,746			2,006,146
Adjusted common equity to adjusted total assets	7.76		%	8.96		%

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GAAP to Non-GAAP Reconciliation

(dollars in thousands except per share data)

	Three Months Ended September 30,
	2011								2010
	Average						Average		Average				Average
	Balance			Interest			Yield/Rate		Balance		Interest		Yield/Rate

Total interest earning assets	$	2,531,768		$	30,741		4.82	%	$	1,907,900	$	24,421	5.08	%
Less: settlement deposit	(114,000		)	(72		)	-0.25	%	—		—		—
Adjusted interest earning assets	$	2,417,768		$	30,669		5.03	%	$	1,907,900	$	24,421	5.08	%

Total interest bearing liabilities	$	1,718,118		$	5,365		1.24	%	$	1,409,980	$	4,722	1.33	%

Adjusted interest spread							3.79	%					3.75	%
Adjusted interest margin							4.15	%					4.10	%

	Nine Months Ended September 30,
	2011								2010
	Average						Average		Average				Average
	Balance			Interest			Yield/Rate		Balance		Interest		Yield/Rate

Total interest earning assets	$	2,284,041		$	86,033		5.04	%	$	1,828,508	$	70,618	5.16	%
Less: settlement deposit	(38,000		)	(72		)	-0.25	%	—		—		—
Adjusted interest earning assets	$	2,246,041		$	85,961		5.12	%	$	1,828,508	$	70,618	5.16	%

Total interest bearing liabilities	$	1,619,514		$	15,257		1.26	%	$	1,371,659	$	15,079	1.47	%

Adjusted interest spread							3.86	%					3.69	%
Adjusted interest margin							4.21	%					4.06	%

	Nine Months Ended						Three Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Net income	$	17,384		$	11,604		$	6,494		$	4,766
Less: settlement deposit	(30		)	—			(30		)	—
Adjusted net income	$	17,354		$	11,604		$	6,464		$	4,766

Average total assets	2,325,317			1,887,932			2,569,970			1,964,827
Less: settlement deposit	(38,000		)	—			(114,000		)	—
Adjusted average total assets	2,287,317			1,887,932			2,455,970			1,964,827

Adjusted return on average assets	1.01		%	0.82		%	1.04		%	0.96		%

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Please refer to Item 2 of this report, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the caption “Asset/Liability Management and Quantitative and Qualitative Disclosure about Market Risk.”

Item 4. Controls and Procedures

The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated as of the last day of the period covered by this report the effectiveness of the operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-14 under the Securities and Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

From time to time the Company may become involved in legal proceedings. At the present time there are no proceedings which the Company believes will have a material adverse impact on the financial condition or earnings of the Company.

Item 1A - Risk Factors

There have been no material changes as of September 30, 2011 in the risk factors from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

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

(a) Sales of Unregistered Securities.	None

(b) Use of Proceeds.	Not Applicable

(c) Issuer Purchases of Securities.	None

Item 3 - Defaults Upon Senior Securities	None

Item 4 - Removed and Reserved

Item 5 - Other Information

(a) Required 8-K Disclosures	None

(b) Changes in Procedures for Director Nominations	None

Item 6 - Exhibits

Exhibit No.		Description of Exhibit
3.1		Certificate of Incorporation of the Company, as amended (1)

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3.2	Articles Supplementary to the Articles of Incorporation for the Series B Preferred Stock (2)
3.3	Bylaws of the Company (3)
4.1	Warrant to Purchase Common Stock (4)
4.2	Form of Subordinated Note due 2016 (5)
10.1	1998 Stock Option Plan (6)
10.2	Amended and Restated Employment Agreement between James H. Langmead and the Bank (7)
10.3	Amended and Restated Employment Agreement between Thomas D. Murphy and the Bank (8)
10.4	Amended and Restated Employment Agreement between Ronald D. Paul and the Company (9)
10.5	Amended and Restated Employment Agreement between Susan G. Riel and the Bank (10)
10.6	Fee Agreement between Robert P. Pincus and the Company (11)
10.7	2006 Stock Plan (12)
10.8	Amended and Restated Employment Agreement among Michael T. Flynn the Company and the Bank (13)
10.9	Amendment to Amended and Restated Employment Agreement among Michael T. Flynn the Company and the Bank (14)
10.10	Amended and Restated Employment Agreement between the Bank and Janice Williams (15)
10.11	Form of Note Exchange Agreement (16)
10.12	Eagle Bancorp, Inc. 2011 Employee Stock Purchase Plan (17)
11	Statement Regarding Computation of Per Share Income
	See Note 5 of the Notes to Consolidated Financial Statements

21	Subsidiaries of the Registrant
31.1	Certification of Ronald D. Paul
31.2	Certification of James H. Langmead
32.1	Certification of Ronald D. Paul
32.2	Certification of James H. Langmead

101	Interactive data files pursuant to Rule 405 of Regulation S-T:

	(i)	the Consolidated Statement of Financial Position at September 30, 2011 and December 31, 2010
	(ii)	the Consolidated Statement of Earnings for the nine and three month periods ended September 30, 2011 and 2010,
	(iii)	the Consolidated Statement of Changes in Shareholders’ Equity for the nine month periods ended September 30, 2011 and 2010
	(iv)	the Consolidated Statement of Cash Flows for the nine months ended September 30, 2011 and 2010
	(v)	the Notes to the Consolidated Financial Statements

(1)	Incorporated by reference to the exhibit of the same number to the Company’s Current Report on Form 8-K filed on July 16, 2008.
(2)	Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on July 15, 2011.
(3)	Incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on October 30, 2007.
(4)	Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 8, 2008.
(5)	Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 1, 2010.
(6)	Incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 1998.
(7)	Incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on December 8, 2008.
(8)	Incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on December 8, 2008.
(9)	Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K/A filed on December 22, 2008.
(10)	Incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on December 8, 2008.
(11)	Incorporated by reference to Exhibit 10.3 to the Company’s Registration Statement on Form S-4 (Registration No. 333-150763)
(12)	Incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form S-8 (No. 333-135072)
(13)	Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on December 8, 2008
(14)	Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on January 8, 2010.
(15)	Incorporated by reference to Exhibit 10.9 to the Company’s Current Report on Form 8-K filed on December 8, 2008.
(16)	Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 1, 2010.
(17)	Incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form S-8 (Registration No. 333-175966).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	EAGLE BANCORP, INC.


Date: November 9, 2011	By:	/s/ Ronald D. Paul
		Ronald D. Paul, Chairman, President and Chief Executive Officer of the Company


Date: November 9, 2011	By:	/s/ James H. Langmead
		James H. Langmead, Executive Vice President and Chief Financial Officer of the Company