UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission file number: 0-25923

Eagle Bancorp, Inc.
(Exact Name of Registrant as Specified in its Charter)

Registrant's Telephone Number, including area code:
(301) 986-1800

Securities registered pursuant to Section 12(b) of the Act:
Common Stock $.01 par value

Securities registered pursuant to Section 12(g) of the Act:
None

        Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Section 405 of the Securities Act. Yes o    No ý

        Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act Yes o    No ý

        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 ý    No o

        Indicate by check mark if disclosure of delinquent filers in pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act. Yes o    No ý

        The aggregate market value of the outstanding Common Stock held by nonaffiliates as of June 30, 20072008 was approximately $135$76 million.

        As of March 11, 2008,2009, the number of outstanding shares of the Common Stock, $.01 par value, of Eagle Bancorp, Inc. was 9,780,41812,745,118.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 22, 200821, 2009 are incorporated by reference in part III hereof.

Form 10-K Cross Reference Sheet

        The following shows the location in this Annual Report on Form 10-K or the Company's Proxy Statement for the Annual Meeting of Stockholders to be held on May 22, 2008,21, 2009, of the information required to be disclosed by the United States Securities and Exchange Commission Form 10-K. References to pages are only are to pages in this report.

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Six Year Summary of Selected Financial Data

        The following table shows selected historical consolidated financial data for Eagle Bancorp, Inc. (the "Company"). It should be read in conjunction with the Company's audited consolidated financial statements appearing elsewhere in this report.

(1)

Presented giving retroactive effect to the 10% stock dividend paid on the common stock on October 1, 2008 and the stock splits in the form of 30% dividends on the common stock dividends paid on July 5, 2006 and February 28, 2005. In July 2008, the Company discontinued the payment of its quarterly cash dividend.

(2)

Earnings per weighted average common share, basic and diluted, for the twelve months ended December 31, 2008 reflects the reduction to net income for the accrued dividends of $177 thousand on the preferred stock issued on December 5, 2008 pursuant to the Capital Purchase Program.

(3)

Computed by dividing dividends declared per common share by net income per share.income.

(3)(4)

Computed by dividing noninterest expense by the sum of net interest income and noninterest income.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
CONDITION AND RESULTS OF OPERATIONS

        The following discussion provides information about the results of operations, financial condition, liquidity, and capital resources of Eagle Bancorp, Inc. (the "Company") and its. The Company's primary subsidiaries are EagleBank (the "Bank") and Eagle Commercial Ventures ("ECV"). This discussion and analysis should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto, appearing elsewhere in this report.

        This report contains forward looking statements within the meaning of the Securities Exchange Act of 1934, as amended, including statements of goals, intentions, and expectations as to future trends, plans, events or results of Company operations and policies and regarding general economic conditions. In some cases, forward looking statements can be identified by use of such words as "may", "will", "anticipate", "believes", "expects", "plans", "estimates", "potential", "continue", "should", and similar words or phases. These statements are based upon current and anticipated economic conditions, nationally and in the Company's market, interest rates and interest rate policy, competitive factors and other conditions which, by their nature, are not susceptible to accurate forecast, and are subject to significant uncertainty. Because of these uncertainties and the assumptions on which this discussion and the forward looking statements are based, actual future operations and results in the future may differ materially from those indicated herein. Readers are cautioned against placing undue reliance on any such forward looking statements.

GENERAL

        The Company is a growth oriented, one-bank holding company headquartered in Bethesda, Maryland. We provideThe Company provides general commercial and consumer banking services through ourthe Bank, its wholly owned banking subsidiary, EagleBank, a Maryland chartered bank which is a member of the Federal Reserve System. We wereThe Company was organized in October 1997, to be the holding company for the Bank. The Bank was organized as an independent, community oriented, and full-servicefull service banking alternative to the super regional financial institutions, which dominate ourthe primary market area. OurThe Company's philosophy is to provide superior, personalized service to ourits customers. We focusThe Company focuses on relationship banking, providing each customer with a number of services, becoming familiar with and addressing customer needs in a proactive, personalized fashion. The Bank currently has seven offices serving Montgomery County, five offices in the District of Columbia and one office in Fairfax County, Virginia.

        The Company offers a broad range of commercial banking services to ourits business and professional clients as well as full service consumer banking services to individuals living and/or working primarily in ourthe service area. We emphasizeThe Company emphasizes providing commercial banking services to sole proprietors, small and medium-sized businesses, partnerships, corporations, non-profit organizations and associations, and investors living and working in and near ourthe primary service area. A full range of retail banking services are offered to accommodate the individual needs of both corporate customers as well as the community we serve.the Company serves. These services include the usual deposit functions of commercial banks, including business and personal checking accounts, "NOW" accounts and money market and savings accounts, business, construction, and commercial loans, equipment leasing, residential mortgages and consumer loans and cash management services. We haveThe Company has developed significant expertise and commitment as an SBA lender, haveand has been designated a Preferred Lender by the Small Business Administration (SBA),("SBA").

        During 2008, the financial industry encountered significant volatility and are a leading community bank SBA lenderstress as economic conditions worsened, unemployment increased and the effects of the "mortgage crisis" became more widespread. The Company did not make subprime residential mortgage loans to retail customers, and did not invest in private label mortgage backed securities or securities backed by subprime or Alt A mortgages or the Washington D.C. district.preferred stock of Freddie Mac and Fannie Mae.

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PENDING ACQUISITION

        In December 2007,The slowing economy, declines in housing construction and the related impact on contractors and other small and medium sized businesses, has impacted the Company's business. There can be no assurance that the steps taken to stimulate the economy and stabilize the financial system will prove successful, or that they will improve the financial condition of the Company's customers or the Company.

ACQUISITION COMPLETED

        The Company announcedcompleted as of August 31, 2008, the signingacquisition of a definitive agreement to acquire Fidelity & Trust Financial Corporation ("Fidelity & Trust"Fidelity"), parent of Fidelity & Trust Bank. At September 30, 2007, Fidelity & Trust had $452 million of assets. and its subsidiary Fidelity & Trust Bank operates("F&T Bank") which added approximately $360 million in loans, $100 million in investments, $385 million in deposits, $47 million in customer repurchase agreements and $13 million in equity capital. Fidelity operated six locations, with one in Northern Virginia, threebranches in Montgomery County, Maryland, Washington D.C. and two in the District of Columbia. The transaction is subject to regulatory and shareholder approvals and the satisfaction of other

conditions, as set forth in the merger agreement. The transaction is currently anticipated to be completed mid 2008.Fairfax County, Virginia. For further information about the proposed acquisition, please refer to "Business—Pending Acquisition" at page 61.

        Refer to "Note 1618 of Notes to Consolidated Financial Statements" and to "Business—Acquisition" at page 84.

CAPITAL PURCHASE PROGRAM

        On December 5, 2008, the Company entered into and consummated a Letter Agreement (the "Purchase Agreement") with the United States Department of the Treasury (the "Treasury"), pursuant to which the Company issued 38,235 shares of the Company's Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the "Series A Preferred Stock"), having a liquidation amount per share equal to $1,000, for a total purchase price of $38,235,000. The Series A Preferred Stock pays cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. For additional information see "Capital Resources and Adequacy" on page 54 for further information on this transaction.37.

CRITICAL ACCOUNTING POLICIES

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

        The fair values and the information used to record valuation adjustments for investment securities available for sale are based either on quoted market prices or are provided by other third-party sources, when available. AsThe Company's investment portfolio is categorized as available for sale with unrealized gains and losses net of December 31, 2007,tax being a component of stockholders' equity and comprehensive income. Refer to the Company had not adoptedfair value disclosures on page 18 and Note 19 of Notes to Consolidated Financial Statements for further discussion of the provisionscarrying value of Statement on Financial Accounting Standards ("SFAS") 157, which establishes a common definition of fair value.the investment portfolio.

        The allowance for credit losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two principles of accounting: (a) Statement onof Financial Accounting Standards ("SFAS") No. 5, "Accounting"Accounting for Contingencies", which requires that losses be accrued when they are probable of occurring and are estimable and (b) SFAS No. 114, "Accounting"Accounting by Creditors for Impairment of

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a Loan" ("SFAS 114"), which requires that losses be accrued when it is probable that the Company will not collect all principal and interest payments according to the contractual terms of the loan. The loss, if any, can be determined by the difference between the loan balance and the value of collateral, the present value of expected future cash flows, or values observable in the secondary markets.

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

        The specific allowance is usedallocates a reserve to identified impaired loans. Loans identified in the risk rating evaluation as substandard, doubtful and loss, (classified loans) are segregated from non-classified loans. Classified loans are assigned specific reserves based on an impairment analysis. Under SFAS 114, a loan for which reserves are individually allocate an allowance for loans identified as impaired. Impairment testing includes consideration ofallocated may show deficiencies in the borrower's overall financial condition, resources and payment history,record, support available from financial guarantors and for the fair market value of collateral. These factors are combined to estimate the probability and severity of inherent losses. When an impairmenta loan is identified as impaired, a specific reserve is established based uponon the Company's assessment of the estimated loss embedded inthat may be associated with the individual loan. Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, the Company does not individually evaluate consumer and residential loans for impairment.

        The formula allowance is used to estimate the loss on internally risk rated loans, exclusive of those identified as impaired. Loans identified in the risk rating evaluation as meeting the criteria for substandard, doubtful, and loss classification, (classified loans), are segregated from non-classifiedrequiring specific reserves. The portfolio of unimpaired loans within the portfolio. Unimpaired internally classified loans areis stratified by loan type; with eachtype and risk assessment. Allowance factors relate to the type of loan type

assigned an allowance factor based upon management's estimateand level of the associated risk. Allowance factors increase with the worsening of internal risk ratings.rating, with loans exhibiting higher risk and loss experience receiving a higher allowance factor.

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

        The factors assigned differ by loan type and internal risk rating. The unallocated allowance captures losses inherent in the portfolio which have not yet been recognized. Allowance factors and the overall size of the allowance may change from period to period based upon management's assessment of the above described factors, and the relative weights given to each factor.factor, and portfolio composition.

        Management has significant discretion in making the judgments inherent in the determination of the provision and allowance for credit losses, including, in connection with the valuation of collateral, a borrower's prospects of repayment, and in establishing allowance factors on the formula allowance and nonspecific or environmental allowance components of the allowance. The establishment of allowance factors isinvolves a continuing evaluation, based on management's ongoing assessment of the global factors discussed above and their impact on the portfolio. The allowance factors may change from period to period, resulting in an increase or decrease in the amount of the provision or allowance, based upon the same volume and classification of loans. Changes in allowance factors can have a direct impact on the amount of the provision, and a related after tax effect on net income. Errors in management's perception and assessment of the global factors and their impact on the portfolio could result in the allowance not being adequate to cover losses in the portfolio, and may result in additional provisions or charge-offs. Alternatively, errors in management's perception and assessment of the global factors and their impact on the portfolio could result in the allowance being in excess of amounts necessary to cover losses in the portfolio, and may result in lower provisionprovisions in the future. For additional information regarding the allowance for credit losses, refer to the discussion under the caption "Allowance for Credit Losses" below.on page 21.

        Beginning in January 2006, the        The Company adoptedfollows the provisions of SFAS No. 123R,"Share-Based Payment", which requires the expense recognition for the fair value of stock-basedshare based compensation awards, such as stock options, restricted stock units, and performance based shares and the like.shares. This standard allows management to establish modeling assumptions as to expected stock price volatility, option terms, forfeiture rates and dividend rates

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which directly impact estimated fair value. The accounting standard also allows for the use of alternative option pricing models which may impact fair value as determined. The Company's practice is to utilize reasonable and supportable assumptions which are reviewed with the appropriate Board Committee.

        In accounting for the acquisition of Fidelity, the Company followed the provisions of SFAS No. 141 "Business Combinations", which mandates the use of the purchase method of accounting and AICPA Statement of Position 03-3 ("SOP 03-3"), "Accounting for Certain Loans or Debt Securities Acquired in a Transfer". Accordingly, the tangible assets and liabilities and identifiable intangibles acquired were recorded at their respective fair values on the date of acquisition, with any impaired loans acquired being recorded at fair value outside the allowance for loan losses. The valuation of the loan and time deposit portfolios acquired were made by independent analysis for the difference between the instruments stated interest rates and the instruments current origination interest rate, with premiums and discounts being amortized to interest income and interest expense to achieve an effective market interest rate. An identified intangible asset related to core deposits was recorded based on independent valuation. Deferred tax assets were recorded for the future value of a net operating loss and for the tax effect of timing differences between the accounting and tax basis of assets and liabilities. The Company recorded an unidentified intangible (goodwill) for the excess of the purchase price of the acquisition (including direct acquisition costs) over the fair value of net tangible and identifiable intangible assets acquired. See discussion of "Allowance for Credit Losses" on page 21, discussion of "Nonperforming Asserts" on page 24, discussion of "Intangible Assets" on page 26, and Note 4 "Loans and Allowance for Credit Losses"; Note 18 "Acquisition" of Notes to Consolidated Financial Statements, and "Business-Acquisition" on page 84, for further information on the acquisition of Fidelity.

RESULTS OF OPERATIONS

Overview

        The results of operation of the Company include the results of operation of Fidelity, acquired on August 31, 2008, for the period September 1, 2008 through December 31, 2008 only.

        The Company reported net income of $7.4 million for the year ended December 31, 2008, a 4% decrease from net income of $7.7 million for the year ended December 31, 2007, a 4% decrease from net income ofas compared to $8.0 million for the year ended December 31, 2006, as compared to $7.5 million for the year ended December 31, 2005.2006.

        The decrease in net income for the twelve months ended December 31, 20072008 can be attributed substantially to an increase in interestthe provision for credit losses of 142% and a 24% increase in noninterest expense of 33% while interest income increased by 13%only 15% as compared to the same period in 2006.2007. Net interest income showed an increase of 3%26% on growth in average earning assets of 13%36%. For the twelve months ended December 31, 2007,2008, the Company has experienced a 4432 basis point decline in its net interest margin from 4.81% in 2006 to 4.37% in 2007.2007 to 4.05% in 2008. This change was primarily due to reliance on more expensive sources of funds (i.e. funding mix) which has increased interest expense at a faster rate than increases in interest income. Also contributing to the lower net interest margin was a lesser value of noninterest funding sources as interest rates declined significantly during 2008. Additionally, a small portion of the decline was due to lower margins on the assets and liabilities acquired in the Fidelity acquisition.

        Earnings per basic common share were $0.80$0.63 for the year ended December 31, 2007,2008, as compared to $0.85$0.73 for 20062007 and $0.82$0.77 for 2005.2006. Earnings per diluted common share were $0.78$0.62 for the year ended December 31, 2007,2008, as compared to $0.81$0.71 for 20062007 and $0.77$0.74 for 2005.2006. Per common share amounts and the number of shares have been adjusted to give effect to the 10% stock dividend paid on October 1, 2008.

        For the three months ended December 31, 2007,2008, the Company reported net income of $2.3$1.7 million as compared to $2.2$2.3 million for the same period in 2006.2007. Earnings per basic share was $0.24 and $0.23 per diluted sharecommon shares were $0.12 for the three months ended December 31, 2007,2008, as compared to $0.23$0.22 per basic common share and $0.22$0.21 per diluted common share for the same period in 2006.2007.

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        The Company had a return on average assets of .96%0.69% and a return on average common equity of 10.03%8.05% for the year of 2007,2008, as compared to returns on average assets and average equity of 0.96% and 10.03%, respectively, for the year of 2007 and 1.13% and 11.63%, respectively, for the year of 2006 and 1.24% and 12.25% respectively, for the year of 2005.2006.

        For the twelve months ended December 31, 2007,2008, average interest bearing liabilities funding average earning assets increased to 77%78% as compared to 73%77% for the first twelve monthsyear of 2006.2007. Additionally, while the average rate on earning assets for the twelve month period ended December 31, 2007,2008, as compared to 2006 has increased2007 decreased by 2115 basis points from 7.46%7.48% to 7.48%6.33%, the cost of interest bearing liabilities has increasedalso decreased by 44115 basis points from 3.62%4.06% to 4.06%2.91%, resulting in a decline in the net interest spread of 42 basis points from 3.84%3.42% for both the twelve months ended December 31, 2006 to 3.42% for the twelve months ended December 31,2008 and 2007. The 4432 basis point decline in the net interest margin (from 4.81% for the twelve months ended December 31, 2006 tofrom 4.37% for the twelve months ended December 31, 2007) has been slightly greater than2007 to 4.05% for the twelve months ended December 31, 2008, despite the stable interest spread, reflects the effects of a steep decline in market interest rates that reduced the net interest spread as the Company's benefit from averageof noninterest bearing funding sources from 95 basis points in 2007 declined modestly as compared to 2006.63 basis points for 2008. For the twelve months ended December 31, 2007,2008, average noninterest sources funding earning assets were $178$225 million as compared to $181$179 million for the same period in 2006. The slight decline in noninterest funding sources has resulted in a slight decrease2007.

        Market interest rates (as evidenced by the U.S. Treasury yield curve), declined sharply in the valuefourth quarter of noninterest sources funding earning assets2008 due to a deepening financial crisis emanating from 97defaults in the residential mortgage markets and spreading quickly to all leveraged investments. During the fourth quarter of 2008, the Company's net interest spread was 3.18% as compared to 3.52% for the third quarter of 2008 and 3.69% for the second quarter of 2008. The Company believes that the change in the net interest spread has been consistent with its risk analysis. Furthermore, as market interest rates are currently very low, the lower rates tend to create floors (given a shock of -100 and -200 basis points in 2006points) on various deposit interest rate products, as interest rates cannot be reduced below zero. This effect further serves to 95 basis points in 2007.compress net interest income and net interest spreads and margins.

        Due to the need to meet loan funding objectives in excess of deposit growth, the Bank (during 2008) has relied to a larger extent on alternative funding sources, such as FHLB AdvancesFederal Home Loan Bank of Atlanta ("FHLB") advances and brokered time deposits, the higher costs of which have contributed to a narrowing of the net interest margin.sources provided favorable funding costs. If significant reliance on alternative funding sources continues, the Company's earnings could be adversely impacted.impacted, although use of such funds during 2008 had a favorable earnings impact.

        Loans, which generally have higher yields than securities and other earning assets, increased to 88% of average earning assets in 2008 from 86% of average earning assets in 2007 from 85% of average earning assets for 2006.2007. Investment securities accounted for 11% of average earning assets for both 20072008 and 2006.2007. Federal funds sold averaged 2%1% and 3%2% of average earning assets for 2008 and 2007, and 2006, respectively. This decline was directly related to average loan growth over the past twelve month period exceeding the growth of average deposits and other funding sources.

        For the quarter ended December 31, 2007,2008, average interest bearing liabilities funding average earning assets increased to 73%79% as compared to 72%77% for the same period in 2006.2007. Additionally, while the average rate on earning assets for the quarter ended December 31, 2007,2008, as compared to the same period in 2006,2007, has declined by 33132 basis points from 7.56%7.23% to 7.23%5.91%, the cost of interest bearing liabilities has decreased by 15110 basis points from 3.98%3.83% to 3.83%2.73%, resulting in a decline in the net interest spread of 1722 basis points from 3.58%3.40% for the quarter ended December 31, 20062007 to 3.41%3.18% for the quarter ended December 31, 2007.2008. The net interest margin decreased 2556 basis points from 4.55% for the quarter ended December 31, 2006 to 4.30% for the quarter ended December 31, 2007 to 3.74% for the quarter ended December 31, 2008, a higher decline than the net interest spread as the benefit of average noninterest sources funding earning assets declined from 9790 basis points for the quarter ended December 31, 20062007 to 8956 basis points for the quarter ended December 31, 2008. This decline was due to the lower value of noninterest funding sources in a much lower market interest rate environment during 2008 as compared to 2007.

        For the quarter ended December 31, 20072008 average loans increased 13%77% over the same period in 2006, maintaining a constant level2007, due substantially to the acquisition of approximatelyFidelity, and increased to 87% of average earning assets as compared to 84% of average earning assets. Investment securitiesassets for 2007. For the quarter ended December 31, 20072008, investment securities amounted to 12% of average earning assets, a decrease of 1% from 13% of average earning assets an increase of 2% from anfor the

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average of 11% for the same period in 2006.2007. Federal funds sold averaged 3%1% and 4%3% of average earning assets for the quarters ended December 31, 2008 and 2007, and 2006, respectively. This mix change toward a higher level of average loans as a percentage of assets reflects the Company's efforts to meet the demand for credit.

        The provision for credit losses was $1.6$4.0 million for the year ended December 31, 20072008 as compared to $1.7$1.6 million in 2006.2007. The higher provision for the year ended December 31, 2008 as compared to 2007 is attributable to substantially higher levels of loan growth, migration of loans to higher risk assessments within the portfolio and increases in reserve allocations on classified loans. For the full year 2007,2008, the Company recorded net charge-offs of $979 thousand,$1.1 million, as compared to $357$979 thousand for the same period in 2006.2007. The ratio of net-charge offs to average loans was .15%0.12% for 20072008 and .06%0.15% for 2006.2007. The increase in the amount of net charge-offs in 2008 over 2007 is associated with one largewas attributable to charge-offs in commercial loan relationship identified in prior periods.construction and land development loans ($446 thousand versus $0), the un-guaranteed portion of SBA loans ($337 thousand versus $0), non-real estate commercial business loans ($100 thousand versus $968 thousand), consumer loans ($210 thousand versus $11 thousand), and commercial real estate investment property loans ($29 thousand versus $0).

        At December 31, 2007,2008, the allowance for credit losses was $18.4 million (including the assumed balance of the Fidelity allowance for credit losses of $7.5 million) or 1.45% of total loans, as compared to $8.0 million or 1.12% of total loans at December 31, 2007. The primary factor in the increase of the balance of the allowance was the acquisition of Fidelity and the assumption of its allowance related to unimpaired loans. The increase in the allowance as compared to $7.4 million or 1.18%a percentage of total loans at December 31, 2006.reflects a higher risk profile of the loans acquired from Fidelity, as well as a change in the mix of loans as a result of the acquisition of Fidelity.

        The provision for credit losses was $883 thousand$1.4 million for the three months ended December 31, 20072008 as compared to $327$883 thousand for the same period in 2006,2007, the increase being primarily attributable to increaseschanges in environmental reserve factors associated with current economic conditionsthe composition of the loan portfolio among loan classes and not to any specific problem loan.risk grades. For the fourth quarter of 2007,2008, the Company recorded net charge-offs of $250$166 thousand, as compared to no$252 thousand net charge-offs for the fourth quarter of 2006.2007. The charge-offs in the fourth quarter of 20072008 related principally to onetwo problem loan relationshiprelationships identified several quarters ago and for which specific reserves had been established.

        Total noninterest income was $5.2$4.4 million for the year 20072008 as compared to $3.8$5.2 million for 2006, an increase2007, a decrease of 35%16%. These amounts include net investment gains of $6$2 thousand for the year of 20072008 and $124$6 thousand in 2006.2007. The decrease was attributable primarily to $1.3 million of income in 2007 from the settlement of a subordinated financing transaction. Excluding securities gains, totalthis transaction, noninterest income increased 10%, which includes the impact of the Fidelity acquisition. Other factors were higher service charges on deposit accounts of $919 thousand ($2.4 million in 2008 versus $1.5 million in 2007), partially offset by 39%. The increase was attributed primarily to higher amountslower volume of gains on the sale ofSBA and residential mortgage loansloan sales activity ($416426 thousand in 2008 versus $301 thousand); higher deposit account activity fees ($1.5$1.0 million versus $1.4 million) and income from subordinated financing of a real estate project ($1.2 million versus $0)in 2007). Income from subordinated financing activities can fluctuate greatly between periods, as it is based on the progress of a limited number of development projects. Refer to "Loan Portfolio" section below for further discussion of subordinated financing activity.activities.

        ForTotal noninterest income for the fourth quarter of 2008 was $1.3 million as compared to $2.0 million for the three months ended December 31, 2007, total noninterest income increased 107%a 36% decrease. This decrease was due primarily to $2.0$1.0 million as compared to $945 thousand for the same periodrecorded in 2006. Excluding securities losses of $1 thousand during the fourth quarter of 2007 and gainsfrom settlement of $39 thousand fora subordinated financing transaction. Excluding this transaction, noninterest income increased 30% over the same period in 2006, total noninterest income increased2007, in part due to the Fidelity acquisition. Other major contributors were higher service charges on deposit accounts and loan fees, partially offset by 116%. The increase was attributed substantiallya lower volume of SBA and residential mortgage loan sales activity which is subject to income ($1.0 million) from the subordinated financing transaction noted above.significant quarterly variances.

        Total noninterest expense increased from $21.8expenses were $30.8 million for 2006the full year of 2008, as compared to $24.9 million for 2007, ana 24% increase, of 14%.which reflects the larger organization subsequent to the Fidelity acquisition. The other primary reasons for this increase were merit increases, in staff levels overhigher personnel costs, increased broker fees,

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higher internet and license agreement fees, increased legal, accounting and professional fees, including loan collection costs, and acquisition related expenses. In addition, higher costs were incurred for marketing, sponsorship, and professional services associated with the past twelve months and related personnel cost, occupancy cost (due in part toEagleBank Bowl, a new banking office and an expanded lending center facility), higher software licensing costs and expense associated with a reinstated FDIC deposit insurance assessment.NCAA Bowl in 2008 played in Washington, D.C. on December 20, 2008. The efficiency ratio, which measures the level of noninterest expense to total revenue, was 64.67%66.49% for 2007the year of 2008 as compared to 60.15%64.67% for 2006. The higher efficiency ratio relates in part to a lower net interest margin in 2007 as compared to 2006.2007.

        The efficiency ratio improved to 59.87%was 72.54% for the fourth quarter of 2007, as compared to 61.57% for the fourth quarter of 2006, owing to substantial noninterest income in the final three months of 2007. For the three months ended December 31, 2007, total noninterest expense was $6.5 million,2008, as compared to $5.759.87% for the three months ended December 31, 2007. Noninterest expenses were $10.5 million for the same period in 2006, anfourth quarter of 2008, as compared to $6.5 million for 2007, a 62% increase, of 13%. This increase was due substantially to the same factors mentioned above which affectedFidelity acquisition. Other reasons for this increase were merit increases and related personnel costs, increased broker fees, higher internet and license agreement fees, increased legal, accounting and professional fees, including loan collection costs, and acquisition related expenses. In addition, higher costs were incurred in the increasefourth quarter for marketing, sponsorship, and professional services associated with the full year 2007 over 2006.EagleBank Bowl.

Net Interest Income and Net Interest Margin

        Net interest income is the difference between interest income on earning assets and the cost of funds supporting those assets. Earning assets are composed primarily of loans and investment securities. The cost of funds represents interest expense on deposits, customer repurchase agreements and other borrowings,

which comprise federal funds purchased and advances from the Federal Home Loan Bank of Atlanta ("FHLBA").other borrowings. Noninterest bearing deposits and capital are other components representing funding sources. Changes in the volume and mix of assets and funding sources, along with the changes in yields earned and rates paid, determine changes in net interest income. Net interest income in 20072008 was $33.3$42.0 million compared to $33.3 million in 2007 and $32.4 million in 2006 and $28.7 million in 2005.2006. For the three months ended December 31, 2007,2008, net interest income was $8.8$13.2 million as compared to $8.4$8.8 million for the same period in 2006,2007, a 5% increase.50% increase, due in part to the Fidelity acquisition.

        The following tabletables below labeled "Average Balances, Interest Yields and Rates and Net Interest Margin" presentspresent the average balances and rates of the various categories of the Company's assets and liabilities.liabilities for the years ended 2008, 2007 and 2006 and the three months ended December 31, 2008 and 2007. Included in the table is a measurementtables are measurements of interest rate spread and margin. Interest spread is the difference (expressed as a percentage) between the interest rate earned on earning assets less the interest rate paidexpense on interest bearing liabilities. While net interest spread provides a quick comparison of earnings rates versus cost of funds, management believes that the net interest margin provides a better measurement of performance, since the net interest marginperformance. Margin includes the effect of noninterest bearing sources in its calculation which are significant factors in the Company's financial performance. The net interest marginand is net interest income (annualized) expressed as a percentage of average earning assets.

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

(1)

Includes loans held for sale.

(2)

Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $1.6 million, $1 million and $2 million for 2008, 2007 and $1.2 million respectively for 2007, 2006 2005 respectively.

(3)

Interest and fees on loans and investment securities available for sale exclude tax equivalent adjustments.

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

(1)

Includes loans held for sale.

(2)

Loans placed on nonaccrual status are included in average balances. Net loan fees and late charges included in interest income on loans totaled $514 thousand and $263 thousand for the three months ended December 31, 2008 and 2007 respectively.

(3)

Interest and fees on investments exclude tax equivalent adjustments.

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        The rate/volume table below presents the composition of the change in net interest income for the periods indicated, as allocated between the change in net interest income due to changes in the volume of average earning assets and interest bearing liabilities, and the changes in net interest income due to changes in interest rates. As the table shows, the increase in net interest income in 20072008 as compared to

2007 was a function of significant increase in the volume of earning assets partially offset by a decrease in the net interest margin on earning assets, due to the lower value of noninterest funding sources in 2008 as compared to 2007. For 2007 over 2006, the change is due to growth in the volume of earning assets offset substantially by a decrease in the net interest margin on earning assets. For 2006 over 2005, the increase in net interest income was a function of increased volume of earning assets and a decrease in the net interest margin.

Rate/Volume Analysis of Net Interest Income

Provision for Credit Losses

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

        Management has developed a comprehensive analytical process to monitor the adequacy of the allowance for credit losses. This process and guidelines were developed utilizing among other factors, the guidance from federal banking regulatory agencies. The results of this process, in combination with conclusions of the Bank's outside loan review consultant, support management's assessment as to the adequacy of the allowance at the balance sheet date. Please refer to the discussion under the caption "Critical Accounting Policies" for an overview of the methodology management employs on a quarterly basis to assess the adequacy of the allowance and the provisions charged to expense. Also, refer to the table in the section titled "Allowance for Credit Losses" which reflects the comparative charge-offs and recoveries on page 23.

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        During the year of 2008, the provision for credit losses was $4.0 million and the allowance for credit losses increased $10.4 million, including the impact of net charge-offs of $1.1 million during the period and the assumption of Fidelity's $7.5 million allowance in respect of unimpaired loans. During the year of 2007, athe provision for credit losses was made in the amount of $1.6 million and the allowance for credit losses increased $664 thousand, including the impact of net charge-offs of $979 thousand during the period. DuringThe higher provisioning for the year ended December 31, 2008 as compared to 2007 is attributable to substantially higher levels of 2006, a provision for credit losses was madeloan growth, migration of loans within the portfolio to higher risk assessments and increases in the amount of $1.7 million and the allowance for credit losses increased $1.4 million, including the impact of net charge-offs of $357 thousand during the period.reserve allocations on classified loans. The provision for credit losses of $1.6 million for the year 2007 was similar to the provision for credit losses of $1.7 million for the year 2006, as the overall portfolio mix of loans at year-endyear end 2007 and 2006 was similar and the amount of loan growth was also similar. The provision for credit losses was $1.8 million for the year 2005.

        For the three months ended December 31, 2007,2008, a provision for credit losses was made in the amount of $883 thousand,$1.4 million, as compared to $327$883 thousand for the same period in 2006.2007. The higher provision for the fourth quarter of 2008 is primarily attributable to higher levels of loan growth in the fourth quarter of 2008 versus 2007, relates primarilymigration within the portfolio to higher risk assessments, and increases in environmental reserve factors associated with current economic conditions and not to any specific reserves for problem loan.loans. For the fourth quarter of 2007,2008, net charge-offs amounted to $250$166 thousand as compared to no$252 thousand of net charge-offs for the same period in 2006.2007. The charge-offs in the fourth quarter of 2007 related to one problem loan relationship identified several quarters ago for which specific reserves had been established.

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

Noninterest Income

        Total noninterest income includes service charges on deposits, gain on sale of loans, gain on sale of investments, income from bank owned life insurance ("BOLI"), income from subordinated financing and other income and gain (loss) on investment securities.income.

        Total noninterest income for the full year ended December 31, 2007of 2008 was $5.2$4.4 million compared to $3.8$5.2 million for the year ended December 31, 2006, an increase of 35%. Excluding securities gains of $6 thousand for year ended 2007 and $124 thousand during the same period in 2006, noninterest income increased by 39%2007, a decrease of 16%. The increasedecrease was attributed primarily to $1.3 million of income in 2007 from the settlement of a subordinated financing transaction. Excluding this transaction, noninterest income increased 10%, which includes the impact of the Fidelity acquisition. Other factors were higher amountsservice charges on deposit accounts of gains on the sale$919 thousand ($2.4 million in 2008 versus $1.5 million in 2007), partially offset by a lower volume of SBA and residential mortgage loansloan gain on sale activity ($416426 thousand in 2008 versus $301 thousand), higher deposit account activity fees ($1.5$1.0 million versus $1.4 million) and income from subordinated financing of real estate projects ($1.2 million versus $0)in 2007). Income from subordinated financing activities can fluctuate greatly between periods, as it is based on the progress of a limited number of development projects. Refer to "Loan Portfolio" section belowthe discussion under Loan Portfolio for further discussion of subordinated financing activity.information on the Company's higher risk lending activities.

        NoninterestTotal noninterest income for the fourth quarter of 2007 increased 107%2008 was $1.3 million as compared to $2.0 million from $945 thousand for the fourth quarter of 2006. Excluding securities losses of $1 thousand duringthree months ended December 31, 2007, a 36% decrease. This decrease was due primarily to $1.0 million recorded in the fourth quarter of 2007 and gainsfrom settlement of $39 thousand fora subordinated financing transaction. Excluding this non-recurring transaction, noninterest income increased 30% over the same period in 2006, noninterest income increased2007, in part due to the Fidelity acquisition. Other major contributors were higher service charges on deposit accounts and loan fees, offset by 116%. The increase was attributed substantiallya lower volume of SBA and residential mortgage loan sales activity which is subject to income ($1.0 million) from a subordinated financing transaction related to a real estate development project.significant quarterly variances.

        For the year ended December 31, 20072008 service charges on deposit accounts increased to $1.5$2.4 million from $1.4$1.5 million, an increase of 8%61%. The increase in service charges for the year was primarily related to new relationships and a full yearthe Fidelity acquisition, to fee increases due in part to the impact of changes made in 2006lower interest rates on customer earnings credits and to earning credit computations.new relationships. For the three months ended December 31, 20072008 service charges on deposit accounts increased from $350$429 thousand to $429$876 thousand compared to the same period in 2006, 2007,

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an increase of 22%104%. This increase relates in part to the impact of lower interest rates in fourth quarter of 20072008 as compared to 20062007 on commercial deposit account fees.

        Gain on sale of loans consists of SBA and residential mortgage loans. For the year ended December 31, 20072008 gain on sale of loans decreased from $1.1$1.0 million to $1.0 million$426 thousand compared to the same period in 20062007 or 7.0%59%. For the three months ended December 31, 20072008 gain on loan sales decreased from $255$220 thousand to $220$20 thousand compared to the same period in 2006.2007. These declines were due to lower volumes of activity due to weaker economic conditions and to a lowering of the profit margin afforded on SBA guaranteed loan sales.

        The Company is an active originator of SBA loans and its current practice is to sell the insured portion of those loans at a premium. Income from this source was $212 thousand for the year ended December 31, 2008 compared to $620 thousand for the year ended December 31, 2007 compared to $813 thousand for the year ended December 31, 2006.2007. For the three months ended December 31, 2007,2008, gains on the sale of SBA loans amounted to $140 thousand$0 as compared to $124$140 thousand for the same period in 2006.2007. Activity in SBA loan sales to secondary markets can vary widely from quarter to quarter. The Bank has been recognized as the leading community bank SBA lender in its marketplaceAs noted above, weaker economic activity and continued emphasis is anticipated. A portion of the lower SBA gains is due to lower fee margins established by the SBA.SBA were the reasons for the decline in this source of revenue.

        The Company originates residential mortgage loans on a pre-sold basis, servicing released. Sales of these mortgage loans yielded gains of $416$214 thousand for the year of 20072008 compared to $301$416 thousand in the same period in 2006.2007. For the three months ended December 31, 2007,2008, gains on the sale of residential mortgage loans were $80$26 thousand as compared to $131$80 thousand for the same three months of 2006.2007. The Company continues its efforts to expandoriginate residential mortgage lendingmortgages and associated sale of these assets on a servicing released basis. Loans sold are subject to repurchase in circumstances where documentation is not accuratedeficient or the underlying loan becomes delinquent within a specified period following sale and loan funding. The Bank considers these potential recourse provisions to be a minimal risk and to date has not been required to repurchase any loans. The Bank does not originate so called "sub-prime" loans and has no exposure to this market segment.

A weaker general economy and a slowdown in housing activity in 2008 as compared to 2007 was the reason for the decline in this source of revenue.

        Other income totaled $2.7$1.1 million for the year ended 2007 up from $1.22008 as compared to $2.2 million for the same period in 2006, an increase2007, a decrease of 117%52%. The primary reason fordecrease is attributable primarily to the increase is due to$1.3 million of income from the settlement of a subordinated financing transactions.transaction in 2007. The Company provides subordinated financing for the acquisition, development and construction of real estate projects. These subordinated financings which are held by its wholly owned subsidiary ECV, generally entail a higher risk profile (including lower priority and higher loan to value ratios) than other loans made by the Bank. A portion of the amount which the Company expects to receive for such loans will be payments based on the success, sale or completion of the underlying project, and as such the income from these loans may be volatile from period to period, based on the status of such projects. For the year ended December 31, 20072008 the Company recognized $1.2 million asno income from the settlement of its remaining interest in a subordinated financing transaction compared to $0$1.3 million for the same period in 2006.2007. Income from subordinated financing activities is subject to wide variances, as it is based on the sales progress of a limited number of development projects. Refer to "Loan Portfolio" below for additional information on outstanding subordinatesubordinated financing transactions. OtherThe decline in other income also increased due to income from increases in the cash surrender value of bank owned life insurance and tofor 2008 was partially offset by increases in loan commitment fees on terminated transactions, and loan prepayment fees.

        Other income totaled $1.3$303 thousand for the fourth quarter of 2008 down from $1.2 million for the fourth quarter of 2007, up from $300 thousand fora decrease of approximately $900 thousand. This decrease was due primarily to the $1.0 million recorded in the fourth quarter of 2006, an increase2007 from settlement of $1.0 million. The primary reason for the increase was due to the realization of income from thea subordinated financing transaction discussed above.

        Net investment gains amounted to $2 thousand and a loss of $53 thousand for the year and quarter ended December 31, 2008, respectively, as compared to net investment gains of $6 thousand and a loss of $1 thousand for the year and quarter ended December 31, 2007, respectively, as compared to net investment gains of $124 thousand and $39 thousand for the year and quarter ended December 31, 2006, respectively. Investment gains and losses

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are typically recognized as part of the Company's asset and liability management to meet loan demand or to better manage the Bank's interest rate risk position.

Noninterest Expense

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

        Total noninterest expense wasexpenses were $30.8 million for the full year of 2008, as compared to $24.9 million for 2007, a 24% increase, which reflects the year ended December 31, 2007 comparedlarger organization subsequent to $21.8 million for the year ended December 31, 2006, an increase of 14%.Fidelity acquisition. For the three months ended December 31, 2007,2008, total noninterest expense was $6.5 million versus $5.7expenses were $10.5 million for the same periodfourth quarter of 2008, as compared to $6.5 million for 2007, a 62% increase, due substantially to the Fidelity acquisition and in 2006, a 13% increase.part due to higher costs for marketing, sponsorship, and professional services associated with the EagleBank Bowl.

        Salaries and employee benefits were $14.2$16.7 million for the year ended 2007,2008, as compared to $12.2$14.2 million for 2006, a 16%2007, an 18% increase. For the three months ended December 31, 2007,2008, salaries and employee benefits amounted to $3.8$5.3 million versus $3.2$3.8 million for the same period in 2006,2007, a 19%39% increase. This increase for both periods was due primarily to the Fidelity acquisition and to staff additions and related personnel costs, merit increases and increased benefit costs, offset by a decline inand to higher levels of incentive based compensation. At December 31, 2007,2008, the Company's staff numbered 175,235, as compared to 171175 and 145171 at December 31, 20062007 and 2005,2006, respectively.

        Premises and equipment expenses amounted to $4.8$5.4 million for the year ended December 31, 20072008 versus $3.8$4.8 million for the same period in 2006.2007. This increase of 26%12% was due primarily to a new banking office opened in mid May 2006 and an expanded lending center facility opened inoffices acquired from the first quarter of 2007.Fidelity acquisition. Additionally, ongoing operating expense increases associated with the Company's facilities, all of which are leased, and increased equipment costs contributed to the overall increase in expense. For the three months ended December 31, 2007,2008, premises and equipment expenses amounted to $1.2$1.9 million versus $1.0$1.2 million for the same period in 2006.2007. The reason for the increase in expense for the three month period is the same as mentioned above for the year ended.full year.

        Advertising costs decreasedincreased from $587$465 thousand in the year ended December 31, 20062007 to $465 thousand$1.1 million in the same period in 2007, a decrease2008, an increase of 21%127%. For the three months ended December 31, 2007,2008, advertising expenses amounted to $109$734 thousand versus $221$109 thousand for the same period in 2006, a decrease2007, an increase of 51%573%. TheseThe primary reasons for the significant increase were higher costs incurred in the fourth quarter for marketing, sponsorship, and professional services associated with the EagleBank Bowl. This increase was partially offset by declines were due primarily to shifting certain design work in-house, and lower levels of product advertising, includingin time deposit rate advertising.advertising in 2008 as compared to 2007.

        Outside dataData processing costs were $793 thousand$1.6 million for the year ended 2007,2008, as compared to $881 thousand$1.2 million in 2006, a decrease2007, an increase of 10%32%. For the three months ended December 31, 2007, outside2008, data processing costs amounted to $146$469 thousand versus $225$269 thousand for the same period in 2006, a decrease2007, an increase of 35%74%. This declineincrease in the three months and year ended December 31, 20072008 as compared to 20062007 was due initially to savings achieved from the renegotiationaddition of six new bank offices and an increase in the Bank's primaryvolume of data processing vendor agreement.activity following the Fidelity acquisition.

        Legal, accounting and professional fees were $611 thousand$1.1 million for the year ended 2007,2008, as compared to $801$611 thousand for 2006,2007, a 24% decrease.73% increase. This decreaseincrease was due in part to higher legal and consulting engagement work in 20062008 related to an IT audit,the larger organization subsequent to the Fidelity acquisition and costs in 2006 related to a companywide initiative on relationship management.higher loan collection fees. For the three months ended December 31, 2007,2008, legal, accounting and professional fees amounted to $153$398 thousand versus $167$151 thousand for the same period in 2006, an 8% decrease.2007, a 164% increase. The increase in the fourth quarter costs related to legal and professional services for a larger organization and to costs associated with loan collection and the pending acquisitionEagleBank Bowl.

Table of Fidelity & Trust, which will be capitalized as of the consummation of the transaction, are not included in these expense totals.Contents

        Other expenses, increased to $4.1 million in the year ended 2007 from $3.5 millionFDIC insurance and regulatory assessments were $718 thousand for the year ended December 31, 2006, or2008, as compared to $508 thousand in 2007, an increase of 16%41%. For the three months ended December 31, 2007, other expenses2008, FDIC insurance and regulatory assessments amounted to $1.1 million$268 thousand versus $913$154 thousand for the same period in 2006,2007, an increase of 20%75%. The primary reasons for the increase in the three months and year ended December 31, 2008 as compared to 2007 were an increase in the FDIC premium rates charged on deposits and increased deposits following the Fidelity acquisition.

        Other expenses increased to $4.2 million in the year ended 2008 from $3.1 million for the year ended December 31, 2007, or an increase of 36%. For the three months ended December 31, 2008, other expenses amounted to $1.5 million versus $820 thousand for the same period in 2007, an increase of 84%. The major components of costs in this category include ATM expenses, broker fees, telephone, courier, printing, business development, office supplies, charitable contributions, director fees, dues, and FDIC insurance premiums.director fees. For the year ended of 2007,2008, as compared to 2006,2007, the significant increases in this category were primarily broker fees, internetcorrespondent bank fees, and license agreements and the reinstituted requirement that the Bank pay deposit insurance premiums.merger expense. The same factors which contributed to an increase in other expenses for 20072008 over 20062007 mentioned above also contributed substantially to the increase in other expenses for the three months ended December 31, 2007,2008, as compared to the same period in 2006.2007. These increases were also impacted by the Fidelity acquisition consummated as of August 31, 2008.

Income Tax Expense

        The Company recorded income tax expense of $4.1 million in 2008 compared to $4.3 million in 2007, compared to $4.7 million in 2006 and $4.4 million in 2005, resulting in an effective tax rate of 35.7%, 36.9% and 36.7%35.7%, respectively. The lower effective tax rate for 2008 and 2007 relates in part to a higher level of state tax exempt income.

BALANCE SHEET ANALYSIS

Overview

        At December 31, 2007,2008, the Company's total assets were $846.4 million,$1.5 billion, loans were $716.7 million,$1.3 billion, deposits were $630.9 million,$1.1 billion, other borrowings, including customer repurchase agreements were $128.4$216.0 million and stockholders' equity was $81.2$142.4 million. As compared to December 31, 2006,2007, assets grew in 20072008 by $72.9$651.2 million (9%(77%), loans by $90.9$549.0 million (15%(77%), deposits by $2.4$498.4 million (.4%(79%), borrowings by $60.3$87.5 million (89%(68%) and stockholders' equity by $8.3$61.2 million (11%(75%).

        A substantial portion of the growth in all categories in 2008 was due to the Fidelity acquisition. A significant portion of the growth in stockholders' equity was due to participation in the Capital Purchase Program established under the Emergency Economic Stimulation Act of 2008 ("EESA") pursuant to which $38.235 million of preferred stock was sold to the United States Department of the Treasury (the "Treasury") in December 2008. In connection with the purchase, the Treasury also received warrants to purchase 770,236 shares of common stock, which are exercisable for a term of ten years. For additional information regarding the Company's participation in the Capital Purchase Program please refer to page 37 and Note 9 of Notes to Consolidated Financial Statements.

        The Company declaredpaid a cash dividend of $0.24$0.0545 per common share for each of the year 2007first and $0.23second quarters of 2008 and $0.0545 per common share for each quarter of 2007. In July 2008, the year 2006.Company, in an action to conserve capital, discontinued the payment of its quarterly cash dividend. On October 1, 2008, the Company paid a 10% stock dividend on the common stock.

Investment Securities Available-for-Sale (AFS)("AFS") and Short-Term Investments

        The AFS portfolio is comprised largely of U.S. Government agency securities (59%(44% of AFS) with an average duration of 1.61.0 years. The remaining AFS securities consists of seasoned mortgage backed securities that are 100% agency issued (34%(47% of AFS) which have an average expected lives of 2.92.1 years

with contractual maturities of the underlying mortgages of up to thirty years, a municipal bond issuebonds ($357 thousand)4.7 million or 3% of AFS) and equity investments (7%(6% of AFS), a portionmost of which are required by regulatory mandates (Federal Reserve and Federal Home Loan Bank stocks amounting to 6% of AFS)stocks). The remaining portion of equity investments are either preferred or common stocks of three community basedcommunity-based banking companies.companies which amount to

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$1.0 million fair value. Ninety seven percent (97%) of the bonds (the debt instruments) are rated AAA. The remaining three percent (3%) of the bonds represent municipal bonds which have a rating of AA. Both ratings represent high investment grade issues.

        At December 31, 2007,2008, the investment portfolio amounted to $87.1$169.1 million as compared to a balance of $91.1$87.1 million at December 31, 2006, a decrease2007, an increase of 4%.94%, most of the growth being associated with the Fidelity acquisition consummated as of August 31, 2008. The investment portfolio is managed to achieve goals related to income, liquidity, interest rate risk management and providing collateral for customer repurchase agreements and other borrowing relationships.

        The Company also has a portfolio of short-term investments utilized for asset liability management needs which consists from time-to-time of discount notes, money market investments, and other bank certificates of deposit This portfolio amounted to $2.5 million at December 31, 2008 as compared to $4.5 million at December 31, 2007 as compared to $4.9 million at December 31, 2006.2007.

        Federal funds sold amounted to $191 thousand at December 31, 2008 as compared to $244 thousand at December 31, 2007 as compared to $9.7 million at December 31, 2006.2007. These funds represent excess daily liquidity which is invested on an unsecured basis with well capitalized banks, in amounts generally limited both in the aggregate and to any one bank.

        The tables below and Note 3 of Notes to the Consolidated Financial Statements provide additional information regarding the Company's investment securities available for sale. The Company classifies all its investment securities as AFS. This classification requires that investment securities be recorded at their fair value with any difference between the fair value and amortized cost (the purchase price adjusted by any accretion or amortization) reported as a component of stockholders' equity (accumulated other comprehensive income), net of deferred income taxes. At December 31, 2007,2008, the Company had a net unrealized gain in AFS securities of $966 thousand$3.9 million as compared to a net unrealized lossgain in AFS securities of $420$966 thousand at December 31, 2006.2007. The deferred income tax liability/benefit at December 31, 2008 and 2007 of these unrealized gains and losses was $382 thousand$1.5 million and $167$382 thousand, respectively.

        The following table provides information regarding the composition of the Company's investment securities portfolio at the dates indicated. Amounts are reported at estimated fair value. The change in composition of the portfolio at December 31, 2008 as compared to 2007 was due principally to the acquisition of Fidelity which had a larger portion of its portfolio invested in mortgaged backed securities. The Company also expanded its investment in municipal bonds during 2008 as they represented high quality issues and attractive yields.