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Eagle Bancorp 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-21
  3. Ex-31
  4. Ex-31
  5. Ex-32
  6. Ex-32
  7. Ex-32
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
( X )             QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2010

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

For the transition period from   to_________

Commission File Number 0-25923

Eagle Bancorp, Inc.
(Exact name of registrant as specified in its charter)
            
Maryland
52-2061461
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
7815 Woodmont Avenue, Bethesda, Maryland
20814
(Address of principal executive offices)
(Zip Code)

(301) 986-1800
(Registrant's telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)

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

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

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

Large accelerated filer   [ ]
Accelerated filer [x]
Non-accelerated filer  [ ]
Smaller Reporting Company  [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act
Yes  [ ]    No  [x]

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

As of August  2, 2010, the registrant had 19,653,974 shares of Common Stock outstanding.

 
1

 
EAGLE BANCORP, INC.
TABLE OF CONTENTS

   
       
   
     
     
     
     
       
     
       
   
     
     
     
       
   
       
   
       
   
       
   
       
   
       
   
       
   
       
   
       
   
       
   
       
     
 
 
2

 
Item 1 – Financial Statements
EAGLE BANCORP, INC.
June 30, 2010 and December 31, 2009
(dollars in thousands, except per share data)
 
   
June 30,
   
December 31,
 
   
2010
   
2009
 
Assets
 
(Unaudited)
   
(Audited)
 
Cash and due from banks
  $ 23,901     $ 21,955  
Federal funds sold
    89,755       88,248  
Interest bearing deposits with banks and other short-term investments
    8,062       7,484  
Investment securities available for sale, at fair value
    237,117       235,227  
Federal Reserve and Federal Home Loan Bank stock
    10,285       10,417  
Loans held for sale
    24,491       1,550  
Loans
    1,504,413       1,399,311  
Less allowance for credit losses
    (21,741 )     (20,619 )
Loans, net
    1,482,672       1,378,692  
Premises and equipment, net
    8,687       9,253  
Deferred income taxes
    12,279       12,455  
Bank owned life insurance
    13,130       12,912  
Intangible assets, net
    4,277       4,379  
Other real estate owned
    3,556       5,106  
Other assets
    19,053       17,826  
Total Assets
  $ 1,937,265     $ 1,805,504  
                 
Liabilities
               
Deposits:
               
Noninterest bearing demand
  $ 313,812     $ 307,959  
Interest bearing transaction
    54,489       59,720  
Savings and money market
    709,987       582,854  
Time, $100,000 or more
    314,081       296,199  
Other time
    185,622       213,542  
Total deposits
    1,577,991       1,460,274  
Customer repurchase agreements
               
and federal funds purchased
    106,104       90,790  
Other short-term borrowings
    -       10,000  
Long-term borrowings
    49,300       49,300  
Other liabilities
    7,127       6,819  
Total liabilities
    1,740,522       1,617,183  
                 
Stockholders' Equity
               
Preferred stock, par value $.01 per share, shares authorized
               
1,000,000, Series A, $1,000 per share liquidation preference,
               
shares issued and outstanding 23,235 and 23,235, respectively,
         
discount of $690 and $570, respectively, net
    22,493       22,612  
Common stock, par value $.01 per share; shares authorized 50,000,000 shares
         
issued and outstanding 19,652,918 and 19,534,226, respectively
    197       195  
Warrants
    946       946  
Additional paid in capital
    129,701       129,211  
Retained earnings
    39,400       33,024  
Accumulated other comprehensive income
    4,006       2,333  
Total stockholders' equity
    196,743       188,321  
Total Liabilities and Stockholders' Equity
  $ 1,937,265     $ 1,805,504  
 
See notes to consolidated financial statements.

 
3

 
EAGLE BANCORP, INC.
For the Six and Three Month Periods Ended June 30, 2010 and 2009 (Unaudited)
 (dollars in thousands, except per share data)

   
Six Months Ended
   
Three Months Ended
 
   
June 30,
   
June 30,
 
Interest Income
 
2010
   
2009
   
2010
   
2009
 
Interest and fees on loans
  $ 42,340     $ 36,683     $ 21,878     $ 18,570  
Interest and dividends on investment securities
    3,715       3,768       1,738       1,839  
Interest on balances with other banks and short-term investments
    59       37       26       18  
Interest on federal funds sold
    83       11       47       5  
Total interest income
    46,197       40,499       23,689       20,432  
Interest Expense
                               
Interest on deposits
    8,855       10,609       4,317       5,052  
Interest on customer repurchase agreements
                               
and federal funds purchased
    378       574       195       293  
Interest on short-term borrowings
    27       168       9       123  
Interest on long-term borrowings
    1,097       1,365       551       644  
Total interest expense
    10,357       12,716       5,072       6,112  
Net Interest Income
    35,840       27,783       18,617       14,320  
Provision for Credit Losses
    3,790       3,284       2,101       1,718  
Net Interest Income After Provision For Credit Losses
    32,050       24,499       16,516       12,602  
                                 
Noninterest Income
                               
Service charges on deposits
    1,486       1,455       756       717  
Gain on sale of loans
    251       658       197       527  
Gain on sale of investment securities
    573       1,537       573       1,405  
Increase in the cash surrender value of  bank owned life insurance
    217       230       107       116  
Other income
    705       655       377       338  
Total noninterest income
    3,232       4,535       2,010       3,103  
Noninterest Expense
                               
Salaries and employee benefits
    11,644       10,349       5,969       5,044  
Premises and equipment expenses
    4,704       3,702       2,612       1,827  
Marketing and advertising
    528       557       281       242  
Data processing
    1,258       1,122       643       575  
Legal, accounting and professional fees
    1,526       1,377       952       787  
FDIC insurance
    1,335       1,915       701       1,474  
Other expenses
    3,605       2,844       1,979       1,624  
Total noninterest expense
    24,600       21,866       13,137       11,573  
Income Before Income Tax Expense
    10,682       7,168       5,389       4,132  
Income Tax Expense
    3,844       2,442       1,942       1,481  
Net Income
    6,838       4,726       3,447       2,651  
Preferred Stock Dividends and Discount Accretion
    644       1,172       324       589  
Net Income Available to Common Shareholders
  $ 6,194     $ 3,554     $ 3,123     $ 2,062  
                                 
Earnings Per Common Share
                               
Basic
  $ 0.32     $ 0.28     $ 0.16     $ 0.16  
Diluted
  $ 0.31     $ 0.28     $ 0.16     $ 0.16  
 
See notes to consolidated financial statements.
 
4

 
Consolidated Statements of Changes in Stockholders’ Equity
For the Six Month Periods Ended June 30, 2010 and 2009 (Unaudited)
 (dollars in thousands, except per share data)

                                 
Accumulated
       
                                 
Other
   
Total
 
   
Preferred
 
Common
         
Additional Paid
   
Retained
   
Comprehensive
   
Stockholders'
 
   
Stock
   
Stock
   
Warrants
 
in Capital
   
Earnings
   
Income
   
Equity
 
Balance, January 1, 2010
  $ 22,612     $ 195     $ 946     $ 129,211     $ 33,024     $ 2,333     $ 188,321  
Comprehensive Income
                                                       
Net Income
                                    6,838               6,838  
Other comprehensive income:
                                                       
Unrealized gain on securities
   available for sale (net of taxes)
                              2,040       2,040  
Less: reclassification adjustment for
  gains net of taxes of $206 included
  in net income
              (367 )     (367 )
Total Comprehensive Income
                                                    8,511  
Stock-based compensation
                            302                       302  
Exercise of options for 53,039 shares of
  common stock
      2               130                       132  
Tax benefit on non-qualified options exercise
                            74                       74  
Capital raise issuance cost
                            (16 )                     (16 )
Preferred stock:
                                                       
Preferred stock dividends
                                    (581 )             (581 )
Discount accretion
    (119 )                             119               -  
Balance, June  30, 2010
  $ 22,493     $ 197     $ 946     $ 129,701     $ 39,400     $ 4,006     $ 196,743  
                                                         
Balance, January 1, 2009
  $ 36,312     $ 127     $ 1,892     $ 76,822     $ 24,866     $ 2,352     $ 142,371  
Comprehensive Income
                                                       
Net Income
                                    4,726               4,726  
Other comprehensive income:
                                                       
Unrealized gain on securities
  available for sale (net of taxes)
                              (271 )     (271 )
Less: reclassification adjustment for
  gains net of taxes of $553 included
  in net income
              (984 )     (984 )
Total Comprehensive Income
                                                    3,471  
Stock-based compensation
                            277                       277  
Preferred stock dividends
                                    (850 )             (850 )
Preferred stock:
                                                       
Issuance costs
    (21 )                                             (21 )
Discount accretion
    167                               (167 )             -  
Balance, June  30, 2009
  $ 36,458     $ 127     $ 1,892     $ 77,099     $ 28,575     $ 1,097     $ 145,248  
 
See notes to consolidated financial statements.

 
5

 
EAGLE BANCORP, INC.
For the Six Month Periods Ended June 30, 2010 and 2009 (Unaudited)
 (dollars in thousands, except per share data)

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

 
 EAGLE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Months Ended June 30, 2010 and 2009 (Unaudited)


1. BASIS OF PRESENTATION

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

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

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

2. NATURE OF OPERATIONS

The Company, through the Bank, conducts a full service community banking business, primarily in Montgomery County, Maryland, Washington, D.C. and Fairfax County in Northern Virginia.  The primary financial services offered by the Bank include real estate, commercial and consumer lending, as well as traditional deposit and repurchase agreement products. The Bank is also active in the origination and sale of residential mortgage loans and the origination of small business loans. The guaranteed portion of small business loans is typically sold through the Small Business Administration, in a transaction apart from the loan’s origination. The Bank offers its products and services through thirteen banking offices and various electronic capabilities, including remote deposit services. Bethesda Leasing, LLC, direct subsidiary of the Company holds title to and manages Other Real Estate Owned (“OREO”) assets.  ECV, a direct subsidiary of the Company provides subordinated financing for the acquisition, development and construction of real estate projects, where the primary financing is provided by the Bank. Prior to the formation of ECV, the Company engaged directly in occasional subordinated financing transactions, which involve higher levels of risk, together with commensurate returns. Refer to Note 4 – Higher Risk Lending – Revenue Recognition below.

3. CASH FLOWS

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

 
7

 
4. HIGHER RISK LENDING – REVENUE RECOGNITION

The Company has occasionally made higher risk acquisition, development, and construction (“ADC”) loans that entail higher risks than ADC loans made following normal underwriting practices (“higher risk loan transactions”). These higher risk loan transactions are currently made through the Company’s subsidiary, ECV. This activity is limited as to individual transaction amount and total exposure amounts based on capital levels and is carefully monitored. The loans are carried on the balance sheet at amounts outstanding and meet the loan classification requirements of the Accounting Standards Executive Committee (“AcSEC”) guidance reprinted from the CPA Letter, Special Supplement, dated February 10, 1986 (also referred to as Exhibit 1 to AcSEC Practice Bulletin No. 1). Additional interest earned on these higher risk loan transactions (as defined in the individual loan agreements) is recognized as realized under the provisions contained in  AcSEC’s guidance reprinted from the CPA Letter, Special Supplement, dated February 10, 1986 (also referred to as Exhibit 1 to AcSEC Practice Bulletin No.1) and Staff Accounting Bulletin No. 101 (Revenue Recognition in Financial Statements). The additional interest is included as a component of noninterest income. ECV recorded no additional interest on higher risk transactions during 2010 and 2009 (although normal interest income was recorded) and had one higher risk lending transaction outstanding as of June 30, 2010 and December 31, 2009, amounting to $1.5 million and $1.6 million, respectively.

5. OTHER REAL ESTATE OWNED (OREO)

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

6. GOODWILL AND OTHER INTANGIBLE ASSETS

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

7. CUSTOMER REPURCHASE AGREEMENTS

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

 
8

 
8. INVESTMENT SECURITIES AVAILABLE FOR SALE

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

         
Gross
   
Gross
   
Estimated
 
 
 
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
June 30, 2010
 
Cost
   
Gains
   
Losses
   
Value
 
(dollars in thousands)
                       
U. S. Government agency securities
  $ 91,239     $ 1,264     $ 3     $ 92,500  
Mortgage backed securities
    100,138       4,318       23       104,433  
Municipal bonds
    38,627       1,273       98       39,802  
Other equity investments
    437       -       55       382  
    $ 230,441     $ 6,855     $ 179     $ 237,117  
 
         
Gross
   
Gross
   
Estimated
 
 
 
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
December 31, 2009
 
Cost
   
Gains
   
Losses
   
Value
 
(dollars in thousands)
                       
U. S. Government agency securities
  $ 75,980     $ 412     $ 285     $ 76,107  
Mortgage backed securities
    122,076       3,501       181       125,396  
Municipal bonds
    32,845       717       237       33,325  
Other equity investments
    436       -       37       399  
    $ 231,337     $ 4,630     $ 740     $ 235,227  
 
Gross unrealized losses and fair value by length of time that the individual available for sale securities have been in a continuous unrealized loss position are as follows:
 
   
Less than
   
12 Months
             
   
12 Months
   
or Greater
   
Total
 
   
Estimated
         
Estimated
         
Estimated
       
 
 
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
June 30, 2010
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
(dollars in thousands)
                                   
U. S. Government agency securities
  $ 3,004     $ 3     $ -     $ -     $ 3,004     $ 3  
Mortgage backed securities
    3,107       23       -       -       3,107       23  
Municipal bonds
    2,436       66       2,297       32       4,733       98  
Other equity investments
    -       -       123       55       123       55  
    $ 8,547     $ 92     $ 2,420     $ 87     $ 10,967     $ 179  
 
   
Less than
   
12 Months
             
   
12 Months
   
or Greater
   
Total
 
   
Estimated
         
Estimated
         
Estimated
       
 
 
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
December 31, 2009
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
(dollars in thousands)
                                   
U. S. Government agency securities
  $ 37,357     $ 285     $ -     $ -     $ 37,357     $ 285  
Mortgage backed securities
    11,681       181       -       -       11,681       181  
Municipal bonds
    13,850       237       -       -       13,850       237  
Other equity investments
    140       37       -       -       140       37  
    $ 63,028     $ 740     $ -     $ -     $ 63,028     $ 740  

 
9

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

The amortized cost and estimated fair value of investments available for sale by contractual maturity are shown in the table below.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
   
June 30, 2010
   
December 31, 2009
 
   
Amortized
   
Estimated
   
Amortized
   
Estimated
 
(dollars in thousands)
 
Cost
   
Fair Value
   
Cost
   
Fair Value
 
U. S. Government agency securities maturing:
             
   One year or less
  $ 15,392     $ 15,461     $ 8,095     $ 8,186  
   After one year through five years
    75,847       77,039       67,885       67,921  
Mortgage backed securities
    100,138       104,433       122,076       125,396  
Municipal bonds maturing:
                         
   Five years through ten years
    5,252       5,417       3,023       3,072  
   After ten years
    33,375       34,385       29,822       30,253  
Other equity investments
    437       382       436       399  
    $ 230,441     $ 237,117     $ 231,337     $ 235,227  

The carrying value of securities pledged as collateral for certain government deposits, securities sold under agreements to repurchase, and certain lines of credit with correspondent banks at June 30, 2010 was $175 million. As of June 30, 2010 and December 31, 2009, there were no holdings of securities of any one issuer, other than the U.S. Government and U.S. Government agency securities, that exceeded ten percent of stockholders’ equity.

9. ACCOUNTING STANDARDS UPDATE

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

 
10

 
10. EARNINGS PER SHARE

The calculation of net income per common share for the six and three months ended June 30 was as follows:
 
   
Six Months Ended
   
Three Months Ended
 
   
June 30,
   
June 30,
 
(dollars and shares in thousands)
 
2010
   
2009
   
2010
   
2009
 
Basic:
                       
Net income available to common shareholders
  $ 6,194     $ 3,554     $ 3,123     $ 2,062  
Average common shares outstanding
    19,625       12,747       19,641       12,750  
Basic net income per common  share
  $ 0.32     $ 0.28     $ 0.16     $ 0.16  
                                 
Diluted:
                               
Net income available to common shareholders
  $ 6,194     $ 3,554     $ 3,123     $ 2,062  
Average common shares outstanding
    19,625       12,747       19,641       12,750  
Adjustment for common share equivalents
    381       70       431       137  
Average common shares outstanding-diluted
    20,006       12,817       20,072       12,887  
Diluted net income per common share
  $ 0.31     $ 0.28     $ 0.16     $ 0.16  
                                 
Anti-dilutive shares
    337,324       1,607,261       336,224       804,597  

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

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

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

In January 2010, the Company awarded 81,600 shares of restricted stock to employees, senior officers and to a Director.  Of the total restricted stock awarded, 17,464 shares vest in five substantially equal installments beginning on the date of grant. The Company awarded 31,247 shares that vest 100% upon the later of the date of repayment in full of all financial assistance received by the Company under the Troubled Asset Relief Program Capital Purchase Program (the “Capital Purchase Program”) or on January 21, 2012. The remaining 32,889 shares vest 60% upon the second anniversary of the date of grant and 20% on the third and fourth anniversaries of the date of grant or upon the later date of repayment in full of all financial assistance received by the Company under Capital Purchase Program.
 
In April 2010, the Company awarded two employees options to purchase 5,000 shares under the 2006 Plan which have five-year terms and vest in five substantially equal installments on the first through fifth anniversaries of the date of grant.

 
11

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

   
Six Months Ended June 30,
 
   
2010
   
2009
 
   
Shares
   
Weighted-Average
Grant Date Fair Value
   
Shares
   
Weighted-Average
Grant Date Fair Value
 
                         
Beginning Balance
    1,234,181     $ 2.56       1,036,994     $ 2.58  
Issued
    5,000       5.52       316,937       2.00  
Exercised
    (33,265 )     1.50       -       -  
Forfeited
    (1,966 )     2.05       (3,980 )     2.24  
Expired
    (26,488 )     2.65       (10,936 )     3.17  
Ending Balance
    1,177,462       2.60       1,339,015       2.44  

The following summarizes information about stock options outstanding at June 30, 2010. The information excludes restricted stock units and awards.
 
Outstanding:
             
Weighted-Average
 
Range of
   
Stock Options
   
Weighted-Average
   
Remaining
 
Exercise Prices
 
Outstanding
   
Exercise Price
   
Contractual Life
 
$ 2.98 - $8.10       450,387     $ 6.22       6.02  
$ 8.11 - $11.07       262,711       10.18       3.93  
$ 11.08 - $15.43       222,906       12.76       3.50  
$ 15.44 - $26.86       241,458       22.05       4.25  
          1,177,462       11.59       4.71  
 
 
Exercisable:
             
Range of
   
Stock Options
   
Weighted-Average
 
Exercise Prices
   
Exercisable
   
Exercise Price
 
$ 2.98 -  $8.10       203,787     $ 6.01  
$ 8.11 -  $11.07       253,209       10.21  
$ 11.08 -  $15.43       190,406       12.90  
$ 15.44 -  $26.86       227,023       22.37  
          874,425       12.97  
 
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model with the assumptions as shown in the table below used for grants during the six months ended June 30, 2010 and the years ended December 31, 2009, and 2008.

 
12

 
   
Six Months Ended
   
Year Ended
   
Year Ended
 
   
June 30, 2010
   
2009
   
2008
 
Expected Volatility
    51.2% - 51.2 %     25.9% - 58.0 %     23.7% - 43.6 %
Weighted-Average Volatility
    51.19 %     26.74 %     30.28 %
Expected Dividends
    0.0 %     0.0 %     0.9 %
Expected Term (In years)
    5.0 - 5.0       3.5 - 8.5       3.0 - 9.0  
Risk-Free Rate
    1.01 %     0.84 %     2.55 %
Weighted-Average Fair Value (Grant date)
  $ 5.52     $ 2.06     $ 1.30  
 
 The expected lives are based on the “simplified” method allowed by ASC Topic 718“Compensation”, whereby the expected term is equal to the midpoint between the vesting date and the end of the contractual term of the award.

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

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

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


 
13

 
   
June 30, 2010
 
   
Restricted Stock Units
   
Restricted Stock Awards
 
   
Shares
   
Weighted-Average
Grant Date Fair
Value
   
Shares
   
Weighted-Average
Grant Date Fair
Value
 
                         
Unvested at Beginning
    7,642     $ 15.21       49,585     $ 6.88  
Issued
    -       -       81,600       10.35  
Forfeited
    (3,817 )     15.21       (116 )     10.35  
Vested
    (3,825 )     15.21       (15,897 )     7.77  
Unvested at End
    -     $ -       115,172     $ 9.21  

   
June 30, 2009
 
   
Restricted Stock Units
   
Restricted Stock Awards
 
   
Shares
   
Weighted-Average
Grant Date Fair
Value
   
Shares
   
Weighted-Average
Grant Date Fair
Value
 
                         
Unvested at Beginning
    7,642     $ 15.21       -     $ -  
Issued
    -       -       49,585       6.88  
Forfeited
    -       -       -       -  
Vested
    -       -       -       -  
Unvested at End
    7,642     $ 15.21       49,585     $ 6.88  
 
12. FAIR VALUE MEASUREMENTS

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

Level 1:
Quoted prices in active exchange markets for identical assets or liabilities; also includes certain U.S. Treasury and other U.S. government and agency securities actively traded in over-the-counter markets.
 
Level 2:
Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data.  This category generally includes certain U.S. government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans held for sale.
 
Level 3:
Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category generally includes certain private equity investments, retained interests from securitizations, and certain collateralized debt obligations.

 
14

 
Assets and Liabilities Recorded at Fair Value on a Recurring Basis

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

(dollars in thousands)
 
Quoted Prices (Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant Other
Unobservable Inputs
(Level 3)
   
Total
(Fair Value)
 
                         
Investment securities available for sale:
                       
U. S. Government agency securities
  $ -     $ 92,500     $ -     $ 92,500  
Mortgage backed securities
    -       104,433       -       104,433  
Municipal bonds
    -       39,802       -       39,802  
Other equity investments
    123       -       259       382  
Residential mortgage loans held for sale
    -       24,491       -       24,491  

Investment Securities Available for Sale

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

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

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

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

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

 
15

 
 
(dollars in thousands)
 
Quoted Prices
(Level 1)
   
Significant Other