Edgar Filing: EAGLE BANCORP INC

egbn_10q-093012.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

( X )

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

For the Quarterly Period Ended September 30, 2012

( )	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. Yesx Noo

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). Yesx Noo

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 filero

Accelerated filerx

Non-accelerated filer o

Smaller Reporting Companyo

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 October 31, 2012, the registrant had 22,894,721 shares of Common Stock outstanding.

EAGLE BANCORP, INC.

TABLE OF CONTENTS

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets
	Consolidated Statements of Operations
	Consolidated Statements of Comprehensive Income
	Consolidated Statements of Changes in Shareholders’ Equity
	Consolidated Statements of Cash Flows
	Notes to Consolidated Financial Statements

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.	Mine Safety Disclosures

Item 5.	Other Information

Item 6.	Exhibits

Signatures

Item 1 – Financial Statements (Unaudited)

EAGLE BANCORP, INC.

Consolidated Balance Sheets (Unaudited)

(dollars in thousands, except per share data)

	September 30, 2012			December 31, 2011			September 30, 2011
Assets
Cash and due from banks	$	6,780		$	5,374		$	5,914
Federal funds sold		4,173			21,785			22,088
Interest bearing deposits with banks and other short-term investments		46,752			205,252			718,848
Investment securities available for sale, at fair value		296,363			313,811			292,257
Federal Reserve and Federal Home Loan Bank stock		12,031			10,242			9,430
Loans held for sale		171,241			176,826			107,907
Loans		2,397,669			2,056,256			2,029,645
Less allowance for credit losses		(35,582	)		(29,653	)		(28,599	)
Loans, net		2,362,087			2,026,603			2,001,046
Premises and equipment, net		14,472			12,320			11,162
Deferred income taxes		16,413			14,673			14,091
Bank owned life insurance		14,036			13,743			13,643
Intangible assets, net		3,895			4,145			4,154
Other real estate owned		4,923			3,225			2,941
Other assets		23,022			23,256			16,265
Total Assets	$	2,976,188		$	2,831,255		$	3,219,746

Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest bearing demand	$	796,654		$	688,506		$	1,106,689
Interest bearing transaction		112,901			80,105			69,762
Savings and money market		1,180,894			1,068,370			986,585
Time, $100,000 or more		242,159			332,470			351,128
Other time		182,381			222,644			233,185
Total deposits		2,514,989			2,392,095			2,747,349
Customer repurchase agreements		75,368			103,362			147,671
Other short-term borrowings		10,000			-			-
Long-term borrowings		39,300			49,300			49,300
Other liabilities		12,132			19,787			16,964
Total Liabilities		2,651,789			2,564,544			2,961,284

Shareholders' Equity
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, 2012, December 31, 2011 and September 30, 2011		56,600			56,600			56,600
Common stock, par value $.01 per share; shares authorized 50,000,000, shares issued and outstanding 22,040,006, 19,952,844 and 19,890,957, respectively		217			197			197
Warrant		946			946			946
Additional paid in capital		164,522			132,670			131,946
Retained earnings		96,088			71,423			64,389
Accumulated other comprehensive income		6,026			4,875			4,384
Total Shareholders' Equity		324,399			266,711			258,462
Total Liabilities and Shareholders' Equity	$	2,976,188		$	2,831,255		$	3,219,746

See notes to consolidated financial statements.

EAGLE BANCORP, INC.

Consolidated Statements of Operations (Unaudited)

(dollars in thousands, except per share data)

	Nine Months Ended September 30,					Three Months Ended September 30,
	2012			2011		2012			2011
Interest Income
Interest and fees on loans	$	98,161		$	81,013	$	34,805		$	29,119
Interest and dividends on investment securities		5,279			4,754		1,735			1,469
Interest on balances with other banks and short-term investments		298			172		83			136
Interest on federal funds sold		41			94		13			17
Total interest income		103,779			86,033		36,636			30,741
Interest Expense
Interest on deposits		9,130			13,121		2,722			4,613
Interest on customer repurchase agreements		250			533		68			212
Interest on short-term borrowings		2			-		2			-
Interest on long-term borrowings		1,605			1,603		536			540
Total interest expense		10,987			15,257		3,328			5,365
Net Interest Income		92,792			70,776		33,308			25,376
Provision for Credit Losses		12,051			8,218		3,638			2,887
Net Interest Income After Provision For Credit Losses		80,741			62,558		29,670			22,489

Noninterest Income
Service charges on deposits		2,902			2,301		988			880
Gain on sale of loans		9,867			3,872		3,144			1,065
Gain on sale of investment securities		765			1,445		464			854
Loss on early extinguishment of debt		(529	)		-		(529	)		-
Increase in the cash surrender value of bank owned life insurance		294			301		100			100
Other income		2,005			1,718		684			612
Total noninterest income		15,304			9,637		4,851			3,511
Noninterest Expense
Salaries and employee benefits		31,520			24,335		10,807			9,263
Premises and equipment expenses		7,541			5,982		2,562			1,939
Marketing and advertising		1,340			1,215		497			234
Data processing		3,273			2,477		1,066			876
Legal, accounting and professional fees		3,315			2,870		1,073			731
FDIC insurance		1,553			1,628		485			285
Other expenses		7,664			6,462		2,617			2,395
Total noninterest expense		56,206			44,969		19,107			15,723
Income Before Income Tax Expense		39,839			27,226		15,414			10,277
Income Tax Expense		14,748			9,842		5,739			3,783
Net Income		25,091			17,384		9,675			6,494
Preferred Stock Dividends and Discount Accretion		425			1,369		142			166
Net Income Available to Common Shareholders	$	24,666		$	16,015	$	9,533		$	6,328

Earnings Per Common Share
Basic	$	1.20		$	0.81	$	0.45		$	0.32
Diluted	$	1.17		$	0.79	$	0.44		$	0.31

See notes to consolidated financial statements.

EAGLE BANCORP, INC.

Consolidated Statements of Comprehensive Income (Unaudited)

(dollars in thousands)

	Nine Months Ended September 30,						Three Months Ended September 30,
	2012			2011			2012			2011

Net Income	$	25,091		$	17,384		$	9,675		$	6,494

Other comprehensive income, net of tax:
Net unrealized gain on securities available for sale		1,610			3,193			911			1,681
Reclassification adjustment for net gains included in net income		(459	)		(867	)		(278	)		(512	)
Net change in unrealized gains on securities		1,151			2,326			633			1,169
Comprehensive Income	$	26,242		$	19,710		$	10,308		$	7,663

See notes to consolidated financial statements.

EAGLE BANCORP, INC.

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(dollars in thousands, except per share data)

	Preferred Stock			Common Stock		Warrant		Additional Paid in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)		Total Shareholders' Equity
Balance, January 1, 2012	$	56,600		$	197	$	946	$	132,670	$	71,423		$	4,875	$	266,711

Net Income		-			-		-		-		25,091			-		25,091
Net change in other comprehensive income		-			-		-		-		-			1,151		1,151
Stock-based compensation		-			-		-		2,060		-			-		2,060
Common stock issued 316,577 shares under purchase and equity compensation plans		-			2		-		1,223		-			-		1,225
Shares issued in public offering 1,770,585 shares, net of of issuance costs of $1,384		-			18		-		28,482		-			-		28,500
Tax benefits related to non-qualified stock compensation		-			-		-		87		-			-		87
Preferred stock:
Preferred stock dividends		-			-		-		-		(426	)		-		(426	)
Balance, September 30, 2012	$	56,600		$	217	$	946	$	164,522	$	96,088		$	6,026	$	324,399

Balance, January 1, 2011	$	22,582		$	197	$	946	$	130,382	$	48,551		$	2,058	$	204,716
Net Income		-			-		-		-		17,384			-		17,384
Net change in other comprehensive income		-			-		-		-		-			2,326		2,326
Stock-based compensation		-			-		-		818		-			-		818
Common stock issued 114,624 shares under purchase and equity compensation plans		-			-		-		678		-			-		678
Tax benefits related to non-qualified stock compensation		-			-		-		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

See notes to consolidated financial statements.

EAGLE BANCORP, INC.

Consolidated Statements of Cash Flows (Unaudited)

(dollars in thousands)

	Nine Months Ended September 30,
	2012			2011
Cash Flows From Operating Activities:
Net Income	$	25,091		$	17,384
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		12,051			8,218
Depreciation and amortization		2,392			1,855
Gains on sale of loans		(9,867	)		(3,872	)
Origination of loans held for sale		(981,733	)		(432,485	)
Proceeds from sale of loans held for sale		997,185			409,021
Net increase in cash surrender value of BOLI		(294	)		(301	)
(Increase) decrease in deferred income taxes		(1,740	)		380
Net (gain) loss on sale of other real estate owned		(26	)		299
Net gain on sale of investment securities		(765	)		(1,445	)
Loss on early extinguishment of debt		529			-
Stock-based compensation expense		2,060			818
Excess tax benefit from stock-based compensation		(87	)		(68	)
Decrease (increase) in other assets		234			(1,971	)
(Increase) decrease in other liabilities		(7,655	)		5,992
Net cash provided by operating activities		37,375			3,825
Cash Flows From Investing Activities:
Increase (decrease) in interest bearing deposits with other banks and short term investments		22			(87,196	)
Purchases of available for sale investment securities		(79,314	)		(233,491	)
Proceeds from maturities of available for sale securities		33,874			87,130
Proceeds from sale/call of available for sale securities		62,888			85,923
Purchases of federal reserve and federal home loan bank stock		(2,763	)		(891	)
Proceeds from redemption of federal reserve and federal home loan bank stock		974			989
Net increase in loans		(348,405	)		(361,479	)
Proceeds from sale of other real estate owned		901			5,660
Bank premises and equipment acquired		(4,321	)		(3,439	)
Net cash used in investing activities		(336,144	)		(506,794	)
Cash Flows From Financing Activities:
Increase in deposits		122,671			1,020,551
(Decrease) increase in customer repurchase agreements		(27,994	)		50,087
Issuance of Series B Preferred Stock		-			56,600
Redemption of Series A Preferred Stock		-			(22,582	)
Increase in other short-term borrowings		10,000			-
Decrease in long-term borrowings		(10,000	)		-
Payment of dividends on preferred stock		(426	)		(893	)
Issuance of common stock		28,500			-
Proceeds from exercise of stock options		1,225			678
Excess tax benefit from stock-based compensation		87			68
Net cash provided by financing activities		124,063			1,104,509
Net (Decrease) Increase In Cash and Cash Equivalents		(174,706	)		601,540
Cash and Cash Equivalents at Beginning of Period		232,411			46,462
Cash and Cash Equivalents at End of Period	$	57,705		$	648,002
Supplemental Cash Flows Information:
Interest paid	$	11,752		$	15,548
Income taxes paid	$	11,951		$	10,330
Non-Cash Investing Activities
Transfers from loans to other real estate owned	$	3,555		$	2,060
Transfers from other real estate owned to loans	$	-		$	3,124

See notes to consolidated financial statements.

EAGLE BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(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, 2011 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, 2011. 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, 2011. Operating results for the three and nine months ended September 30, 2012 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, DC; 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 seventeen branch offices and various electronic capabilities, including remote deposit services. Eagle Insurance Services, LLC, a subsidiary of the Bank, offers access to insurance products and services through a referral program with a third party insurance broker. Eagle Commercial Ventures, LLC, a direct subsidiary of the Company, provides subordinated financing for the acquisition, development and construction of real estate projects. 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.

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, 2012, December 31, 2011, and September 30, 2011. 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 30 to 90 days under current market conditions. 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 if any. 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 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 are being amortized on the interest method over the term of the loan.

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 certain of 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). Such additional interest is included as a component of noninterest income. ECV recorded no additional interest on higher risk transactions during 2012 and 2011 (although normal interest income was recorded). ECV had four higher risk lending transactions with balances outstanding at September 30, 2012 and December 31, 2011, amounting to $3.7 million and $2.3 million, respectively.

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 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 adjustments 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.

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 performed annually) at December 31, 2011, 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 September 30, 2012 or December 31, 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.

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 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 July 2012, the FASB issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment.” The provisions of ASU No. 2012-02 permit an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform a quantitative impairment test, as is currently required by GAAP. ASU No. 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. As the Company does not have any indefinite-lived intangible assets, other than goodwill, the adoption of ASU No. 2012-02 is expected to have no impact on the Company’s consolidated financial statements.

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 2012, 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. 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:

September 30, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
(dollars in thousands)
U. S. Government agency securities	$	44,718	$	1,545	$	-	$	46,263
Residential mortgage backed securities		168,439		3,240		305		171,374
Municipal bonds		72,755		5,646		30		78,371
Other equity investments		407		-		52		355
	$	286,319	$	10,431	$	387	$	296,363

December 31, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
(dollars in thousands)
U. S. Government agency securities	$	102,283	$	1,547	$	77	$	103,753
Residential mortgage backed securities		145,451		2,767		240		147,978
Municipal bonds		57,548		4,227		2		61,773
Other equity investments		404		-		97		307
	$	305,686	$	8,541	$	416	$	313,811

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
September 30, 2012	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
(dollars in thousands)
Residential mortgage backed securities	$	42,588	$	305	$	-	$	-	$	42,588	$	305
Municipal bonds		2,312		30		-		-		2,312		30
Other equity investments		-		-		126		52		126		52
	$	44,900	$	335	$	126	$	52	$	45,026	$	387

	Less than 12 Months				12 Months or Greater				Total
December 31, 2011	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
(dollars in thousands)
U. S. Government agency securities	$	25,313	$	77	$	-	$	-	$	25,313	$	77
Residential mortgage backed securities		35,017		240		-		-		35,017		240
Municipal bonds		510		2		-		-		510		2
Other equity investments		-		-		81		97		81		97
	$	60,840	$	319	$	81	$	97	$	60,921	$	416

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 3.6 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 banking company is profitable, has good financial trends 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, 2012 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, 2012, the Company held $12.0 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, 2012				December 31, 2011
(dollars in thousands)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
U. S. Government agency securities maturing:
One year or less	$	-	$	-	$	15,783	$	15,906
After one year through five years		41,840		43,071		83,638		84,740
After five years through ten years		2,878		3,192		2,862		3,107
Residential mortgage backed securities		168,439		171,374		145,451		147,978
Municipal bonds maturing:
After one year through five years		12,876		13,545		10,089		10,539
Five years through ten years		59,879		64,826		47,459		51,234
Other equity investments		407		355		404		307
	$	286,319	$	296,363	$	305,686	$	313,811

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, 2012 was $215.6 million. As of September 30, 2012 and December 31, 2011, 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, DC metropolitan 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, 2012, December 31, 2011, and September 30, 2011 are summarized by type as follows:

	September 30, 2012						December 31, 2011						September 30, 2011
(dollars in thousands)	Amount			%			Amount			%			Amount			%
Commercial	$	534,133			23	%	$	478,886			23	%	$	470,103			23	%
Investment - commercial real estate (1)		942,770			39	%		756,645			37	%		772,728			38	%
Owner occupied - commercial real estate		306,148			13	%		250,174			12	%		245,497			12	%
Real estate mortgage - residential		57,952			2	%		39,552			2	%		37,662			2	%
Construction - commercial and residential (1)		437,954			18	%		395,267			19	%		374,394			18	%
Construction - C&I (owner occupied) (1)		14,739			1	%		34,402			2	%		31,035			2	%
Home equity		98,930			4	%		97,103			5	%		94,008			5	%
Other consumer		5,043			-			4,227			-			4,218			-
Total loans		2,397,669			100	%		2,056,256			100	%		2,029,645			100	%
Less: Allowance for Credit Losses		(35,582	)					(29,653	)					(28,599	)
Net loans	$	2,362,087					$	2,026,603					$	2,001,046

(1) Includes loans for land acquisition and development.

Unamortized net deferred fees amounted to $8.1 million and $5.2 million at September 30, 2012 and December 31, 2011, respectively.

As of September 30, 2012 and December 31, 2011, the Bank serviced $28.3 million and $27.3 million, respectively, of SBA loans participations which are not reflected as loan balances on the Consolidated Balance Sheets.

Loan Origination / Risk Management

The Company’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 Company’s loan portfolio is heavily weighted toward commercial real estate, both owner occupied and investment real estate. At September 30, 2012, the combination of commercial real estate and real estate construction loans represent approximately 71% of the loan portfolio. The combination of owner occupied commercial real estate and owner occupied commercial real estate construction represent 14% of the loan portfolio. When owner occupied commercial real estate and owner occupied commercial construction loans are excluded, the percentage of commercial real estate and construction loans to total loans decrease to 57%. 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 1.00. 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 Company 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, 2012 and was 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 are subject to a maximum loan size established by the SBA.

Approximately 4% of the loan portfolio at September 30, 2012 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.

The remaining 2% of the loan portfolio consists of longer-term residential mortgage loans. These are typically loans underwritten to the same underwriting standards as residential loans held for sale but for shorter terms, generally less than 10 years.

Loans are secured primarily by duly recorded first deeds of trust. In some cases, the Bank may accept a recorded second 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 to 1.00. 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.

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 $452.6 million at September 30, 2012. The majority of the ADC portfolio, both speculative and non speculative, includes loan funded interest reserves at origination. ADC loans containing loan funded interest reserves represent approximately 34% of the outstanding ADC loan portfolio at September 30, 2012. 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 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 the 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.

From time to time the Company may make loans for its own portfolio or through its higher risk loan affiliate, ECV. Such loans, which are made to finance projects (which may also be financed at the Bank level), may have higher risk characteristics than loans made by the Bank, such as lower priority interests and/or higher loan to value ratios. 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, but also earn additional interest based on a percentage of the profits of the underlying project or a fixed accrued rate of interest.

The following table details activity in the allowance for credit losses by portfolio segment for the three and nine months ended September 30, 2012 and 2011. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

(dollars in thousands)	Commercial			Investment Commercial Real Estate			Owner occupied Commercial Real Estate			Real Estate Mortgage Residential			Construction Commercial and Residential			Home Equity			Other Consumer			Total

Three months ended September 30, 2012
Allowance for credit losses:
Balance at beginning of period	$	8,877		$	8,720		$	2,390		$	-		$	12,484		$	1,433		$	174		$	34,078
Loans charged-off		(69	)		-			(350	)		-			(1,554	)		(250	)		(28	)		(2,251	)
Recoveries of loans previously charged-off		41			-			-			-			6			70			-			117
Net loan charged-off		(28	)		-			(350	)		-			(1,548	)		(180	)		(28	)		(2,134	)
Provision for credit losses		519			3			451			-			2,067			449			149			3,638
Ending balance	$	9,368		$	8,723		$	2,491		$	-		$	13,003		$	1,702		$	295		$	35,582

Nine months ended September 30, 2012
Allowance for credit losses:
Balance at beginning of period	$	9,609		$	7,304		$	1,898		$	399		$	8,546		$	1,528		$	369		$	29,653
Loans charged-off		(1,831	)		(1,189	)		(350	)		(300	)		(2,544	)		(511	)		(37	)		(6,762	)
Recoveries of loans previously charged-off		69			18			-			-			480			71			2			640
Net loan charged-off		(1,762	)		(1,171	)		(350	)		(300	)		(2,064	)		(440	)		(35	)		(6,122	)
Provision for credit losses		1,521			2,590			943			(99	)		6,521			614			(39	)		12,051
Ending balance	$	9,368		$	8,723		$	2,491		$	-		$	13,003		$	1,702		$	295		$	35,582

For the Period Ended September 30, 2012
Allowance for credit losses:
Individually evaluated for impairment	$	2,256		$	863		$	413		$	-		$	3,381		$	380		$	4		$	7,297
Collectively evaluated for impairment		7,112			7,860			2,078			-			9,622			1,322			291			28,285
Ending balance	$	9,368		$	8,723		$	2,491		$	-		$	13,003		$	1,702		$	295		$	35,582

(dollars in thousands)	Commercial			Investment Commercial Real Estate			Owner occupied Commercial Real Estate			Real Estate Mortgage Residential			Construction Commercial and Residential			Home Equity			Other 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
Ending balance	$	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
Ending balance	$	8,843		$	7,660		$	1,997		$	-		$	8,428		$	1,601		$	70		$	28,599

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
Ending balance	$	8,843		$	7,660		$	1,997		$	-		$	8,428		$	1,601		$	70		$	28,599

The Company’s recorded investments in loans as of September 30, 2012, December 31, 2011 and September 30, 2011 related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the basis of the Company’s impairment methodology was as follows:

(dollars in thousands)	Commercial		Investment Commercial Real Estate		Owner occupied Commercial Real Estate		Real Estate Mortgage Residential		Construction Commercial and Residential		Home Equity		Other Consumer		Total

September 30, 2012
Recorded investment in loans:
Individually evaluated for impairment	$	14,054	$	11,624	$	6,455	$	-	$	36,110	$	670	$	8	$	68,921
Collectively evaluated for impairment		520,079		931,146		299,693		57,952		416,583		98,260		5,035		2,328,748
Ending balance	$	534,133	$	942,770	$	306,148	$	57,952	$	452,693	$	98,930	$	5,043	$	2,397,669

December 31, 2011
Recorded investment in loans:
Individually evaluated for impairment	$	11,741	$	9,304	$	5,280	$	751	$	26,855	$	363	$	1,345	$	55,639
Collectively evaluated for impairment		467,145		747,341		244,894		38,801		402,814		96,740		2,882		2,000,617
Ending balance	$	478,886	$	756,645	$	250,174	$	39,552	$	429,669	$	97,103	$	4,227	$	2,056,256

September 30, 2011
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
Ending balance	$	470,103	$	772,728	$	245,497	$	37,662	$	405,429	$	94,008	$	4,218	$	2,029,645

At September 30, 2012, the nonperforming loans acquired in 2008 from Fidelity & Trust Financial Corporation (“Fidelity”) have a carrying value of $2.1 million and an unpaid principal balance of $11.7 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.

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.

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, 2012, December 31, 2011 and September 30, 2011.

(dollars in thousands)	Pass		Watch and Special Mention		Substandard		Doubtful		Total Loans

September 30, 2012
Commercial	$	493,361	$	26,718	$	14,037	$	17	$	534,133
Investment - commercial real estate		920,553		10,593		11,624		-		942,770
Owner occupied - commercial real estate		285,292		14,401		6,455		-		306,148
Real estate mortgage – residential		57,952		-		-		-		57,952
Construction - commercial and residential		397,246		19,337		36,110		-		452,693
Home equity		96,674		1,586		670		-		98,930
Other consumer		4,990		45		8		-		5,043
Total	$	2,256,068	$	72,680	$	68,904	$	17	$	2,397,669

December 31, 2011
Commercial	$	438,943	$	28,202	$	11,704	$	37	$	478,886
Investment - commercial real estate		739,668		7,673		9,304		-		756,645
Owner occupied - commercial real estate		235,988		8,906		5,280		-		250,174
Real estate mortgage – residential		38,801		-		751		-		39,552
Construction - commercial and residential		394,135		8,679		26,855		-		429,669
Home equity		96,740		-		363		-		97,103
Other consumer		2,882		-		1,345		-		4,227
Total	$	1,947,157	$	53,460	$	55,602	$	37	$	2,056,256

September 30, 2011
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, 2012, December 31, 2011 and September 30, 2011.

(dollars in thousands)	September 30, 2012		December 31, 2011		September 30, 2011

Commercial	$	5,282	$	5,718	$	5,740
Investment - commercial real estate		3,647		7,662		4,412
Owner occupied - commercial real estate		2,374		282		1,080
Real estate mortgage - residential		713		1,041		1,049
Construction - commercial and residential		19,730		17,459		18,481
Home equity		670		624		664
Other consumer		7		8		8
Total nonperforming loans (1)(2)	$	32,423	$	32,794	$	31,434

(1) Excludes performing TDRs totaling $8.8 million at September 30, 2012, $13.9 million at December 31, 2011 and $3.1 million at September 30, 2011.

(2) Gross interest income that would have been recorded in 2012 if nonaccrual loans shown above had been current and in accordance with their original terms was $1.8 million, while interest actually recorded on such loans was $97 thousand for the nine months ended September 30, 2012. 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, 2012.

(dollars in thousands)	Loans 30-59 Days Past Due		Loans 60-89 Days Past Due		Loans 90 Days or More Past Due		Total Past Due Loans		Current Loans		Total Recorded Investment in Loans
September 30, 2012
Commercial	$	9,031	$	5,201	$	5,282	$	19,514	$	514,619	$	534,133
Investment - commercial real estate		1,082		2,626		3,647		7,355		935,415		942,770
Owner occupied - commercial real estate		2,593		4,081		2,374		9,048		297,100		306,148
Real estate mortgage – residential		743		107		713		1,563		56,389		57,952
Construction - commercial and residential		10,138		5,309		19,730		35,177		417,516		452,693
Home equity		148		726		670		1,544		97,386		98,930
Other consumer		7		15		7		29		5,014		5,043
Total	$	23,742	$	18,065	$	32,423	$	74,230	$	2,323,439	$	2,397,669

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 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, 2012, December 31, 2011 and September 30, 2011.

Unpaid

Recorded

Average Recorded

Interest Income

Contractual

Investment

Total