Tableof Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,DC  20549**

** **

### **FORM 10-Q**

 

**(MARKONE)**

 

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

###### ** **

**For the Quarterly Period Ended March 31,2010**

 

**OR**

 

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

 

**For the transition period from               to                **

 

**Commission File Number:  000-50407**

 

#### **FREDERICKCOUNTY BANCORP, INC.**

(Exactname of registrant as specified in its charter)

 

| **Maryland**                     | ** ** | **20-0049496**       |
|----------------------------------|------------|----------------------|
| (State of other  jurisdiction of |       | (I.R.S. Employer     |
| incorporation or  organization)  |       | Identification  No.) |

 

#### **7North Market Street**

**Frederick, Maryland 21701**

(Address of registrant’s principal executive offices)

 

**301.620.1400**

(Registrant’stelephone number, including area code)

 

**N/A**

(Formername, former address and former fiscal year, if changed since last report)

 

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

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted 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 registrantwas required to submit and post such files).  xYes  oNo

 

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

 

| Large accelerated  filer o |   | Accelerated  filer o         |
|----------------------------|--------|------------------------------|
|                       |   |                         |
| Non-accelerated  filer o   |   | Smaller  reporting company x |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).   o Yes  x No

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practical date.  There were1,474,322 shares of Common Stock outstanding as of April 30, 2010.

 

 

 

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#### **FREDERICK COUNTY BANCORP, INC.AND SUBSIDIARY**

**TABLEOF CONTENTS**

 
| **PART I**  | **FINANCIAL INFORMATION**                                                                                         |   |
|------------------|-------------------------------------------------------------------------------------------------------------------|--------|
|             |                                                                                                              |
| Item 1.          | Financial Statements  (Unaudited)                                                                                 |   |
|             |                                                                                                              |
|             | Consolidated****Balance Sheets, March 31, 2010 and  December 31, 2009                                   |   |
|             |                                                                                                              |   |
|             | Consolidated Statements of Income, Three Months Ended  March 31, 2010 and 2009                               |   |
|             |                                                                                                              |   |
|             | Consolidated Statements of Changes in Shareholders’  Equity, Three Months Ended March 31, 2010 and 2009 |   |
|             |                                                                                                              |   |
|             | Consolidated Statements of Cash Flows, Three Months  Ended March 31, 2010 and 2009                           |   |
|             |                                                                                                              |   |
|             | Notes to Unaudited 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 4T.         | Controls and  Procedures                                                                                          |   |
|             |                                                                                                              |
| **PART II** | **OTHER  INFORMATION**                                                                                            |   |
|             |                                                                                                              |
| Item 1.          | Legal Proceedings                                                                                                 |   |
|             |                                                                                                              |   |
| Item 1A.         | Risk Factors                                                                                                      |   |
|             |                                                                                                              |   |
| Item 2.          | Unregistered  Sales of Equity Securities and Use of Proceeds                                                      |   |
|             |                                                                                                              |   |
| Item 3.          | Defaults upon  Senior Securities                                                                                  |   |
|             |                                                                                                              |   |
| Item 4.          | Removed and Reserved                                                                                              |   |
|             |                                                                                                              |   |
| Item 5.          | Other Information                                                                                                 |   |
|             |                                                                                                              |   |
| Item 6.          | Exhibits                                                                                                          |   |
|             |                                                                                                              |   |
|             | Signatures                                                                                                        |   |
|                  |                                                                                                                   |        |  |

 

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**FrederickCounty Bancorp, Inc. and Subsidiaries**

**Consolidated Balance Sheets**

 
| ** **                                                                                                      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(dollars in thousands)**                                                                                      | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| ** **                                                                                                      | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| * *                                                                                                        | * *   | * *           | * *   | * *              | * *   |
| ASSETS                                                                                                          |       |               |       |                  |       |
| Cash  and due from banks                                                                                        |       | $                  | 1,412      |                  | $          | 1,447 |   |
| Federal  funds sold                                                                                             |       | 1,172              |       | 938                   |       |
| Interest-bearing  deposits in other banks                                                                       |       | 28,919             |       | 9,729                 |       |
| Cash  and cash equivalents                                                                                      |       | 31,503             |       | 12,114                |       |
| Investment  securities available-for-sale at fair value                                                         |       | 28,052             |       | 24,077                |       |
| Restricted  stock                                                                                               |       | 1,566              |       | 1,566                 |       |
| Loans                                                                                                           |       | 214,586            |       | 214,943               |       |
| Less:  Allowance for loan losses                                                                                |       | (3,027             | )          | (3,127                | )          |
| Net  loans                                                                                                      |       | 211,559            |       | 211,816               |       |
| Bank  premises and equipment                                                                                    |       | 4,994              |       | 4,997                 |       |
| Other  assets                                                                                                   |       | 3,890              |       | 3,989                 |       |
| Total  assets                                                                                                   |       | $                  | 281,564    |                  | $          | 258,559 |   |
|                                                                                                            |       |               |       |                  |       |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                                      |       |               |       |                  |       |
|                                                                                                            |       |               |       |                  |       |
| **Liabilities**                                                                                                 |       |               |       |                  |       |
| Deposits:                                                                                                       |       |               |       |                  |       |
| Noninterest-bearing  deposits                                                                                   |       | $                  | 38,994     |                  | $          | 38,199 |   |
| Interest-bearing  deposits                                                                                      |       | 203,137            |       | 181,113               |       |
| Total  deposits                                                                                                 |       | 242,131            |       | 219,312               |       |
| Short-term  borrowings                                                                                          |       | 500                |       | 500                   |       |
| Long-term  borrowings                                                                                           |       | 10,000             |       | 10,000                |       |
| Junior  subordinated debentures                                                                                 |       | 6,186              |       | 6,186                 |       |
| Accrued  interest and other liabilities                                                                         |       | 671                |       | 811                   |       |
| Total  liabilities                                                                                              |       | 259,488            |       | 236,809               |       |
|                                                                                                            |       |               |       |                  |       |
| **Shareholders’ Equity**                                                                                   |       |               |       |                  |       |
| ** **                                                                                                      |       |               |       |                  |       |
| Common  stock, per share par value $.01; 10,000,000 shares authorized; 1,461,802  shares issued and outstanding |       | 15                 |       | 15                    |       |
| Additional  paid-in capital                                                                                     |       | 14,704             |       | 14,702                |       |
| Retained  earnings                                                                                              |       | 7,295              |       | 6,987                 |       |
| Accumulated  other comprehensive income                                                                         |       | 62                 |       | 46                    |       |
| Total  shareholders’ equity                                                                                |       | 22,076             |       | 21,750                |       |
| Total  liabilities and shareholders’ equity                                                                |       | $                  | 281,564    |                  | $          | 258,559 |   |

 

The accompanying notesare an integral part of these unaudited consolidated financial statements.

 

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**FrederickCounty Bancorp, Inc. and Subsidiaries**

**Consolidated Statements of Income (Unaudited)**

 
| ** **                                             | ** ** | **For the Three****Months Ended March 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(dollars in thousands, except per share amounts)**   | ** ** | **2010**                                         | ** ** | **2009** | ** ** |
| Interest  income:                                      |       |                                             |       |   |   |
| Interest  and fees on loans                            |       | $                                                | 3,289      |   | $ | 3,213 |   |
| Interest  and dividends on investment securities:      |       |                                             |       |   |   |
| Interest  – taxable                               |       | 115                                              |       | 172 |   |
| Interest  – tax exempt                            |       | 80                                               |       | 58 |   |
| Dividends                                              |       | 12                                               |       | 11 |   |
| Interest  on federal funds sold                        |       | —                                           |       | 1 |   |
| Other  interest income                                 |       | 8                                                |       | 9 |   |
| Total  interest income                                 |       | 3,504                                            |       | 3,464 |   |
| Interest  expense:                                     |       |                                             |       |   |   |
| Interest  on deposits                                  |       | 746                                              |       | 1,249 |   |
| Interest  on short-term borrowings                     |       | 5                                                |       | — |   |
| Interest  on long-term borrowings                      |       | 114                                              |       | 114 |   |
| Interest  on junior subordinated debentures            |       | 101                                              |       | 101 |   |
| Total  interest expense                                |       | 966                                              |       | 1,464 |   |
| Net  interest income                                   |       | 2,538                                            |       | 2,000 |   |
| Provision  for loan losses                             |       | 400                                              |       | 400 |   |
| Net  interest income after provision for loan losses   |       | 2,138                                            |       | 1,600 |   |
| Noninterest  income:                                   |       |                                             |       |   |   |
| Loss  on sale of foreclosed properties                 |       | —                                           |       | (32 | ) |
| Service  fees                                          |       | 91                                               |       | 84 |   |
| Other  operating income                                |       | 46                                               |       | 56 |   |
| Total  noninterest income                              |       | 137                                              |       | 108 |   |
| Noninterest  expense:                                  |       |                                             |       |   |   |
| Salaries  and employee benefits                        |       | 1,060                                            |       | 979 |   |
| Occupancy  and equipment expenses                      |       | 324                                              |       | 331 |   |
| Other  operating expenses                              |       | 451                                              |       | 373 |   |
| Total  noninterest expense                             |       | 1,835                                            |       | 1,683 |   |
| Income  before provision for income taxes              |       | 440                                              |       | 25 |   |
| Provision  for income tax expense (benefit)            |       | 132                                              |       | (20 | ) |
| Net  income                                            |       | $                                                | 308        |   | $ | 45 |   |
| Basic  earnings per share                              |       | $                                                | 0.21       |   | $ | 0.03 |   |
| Diluted  earnings per share                            |       | $                                                | 0.21       |   | $ | 0.03 |   |
| Basic  weighted average number of shares outstanding   |       | 1,461,802                                        |       | 1,460,802 |   |
| Diluted  weighted average number of shares outstanding |       | 1,468,896                                        |       | 1,481,419 |   |

 

The accompanying notesare an integral part of these unaudited consolidated financial statements.

 

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**FrederickCounty Bancorp, Inc. and Subsidiaries**

**Consolidated Statement of Changes in Shareholders’Equity (Unaudited)**

 
| **Three Months Ended March 31,  (dollars in thousands)**                  | ** ** | **Shares****Outstanding** | ** ** | **Common****Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained****Earnings** | ** ** | **Accumulated****Other Comprehensive Income (Loss)** | ** ** | **Total****Shareholders’ Equity** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------|------------|----------------------------------|------------|--------------------------|------------|------------------------------------------------------|------------|----------------------------------------|------------|
|                                                                                                    |       |                      |       |                |       |                             |       |                     |       |                                                 |       |                                   |       |
| Balance,  January 1, 2009                                                                          |       | 1,460,802                 |       | $                   | 15         |                             | $          | 14,690                   |       | $                                                    | 5,939      |                                   | $          | (32 | ) | $ | 20,612 |   |
| Comprehensive  income:                                                                                  |       |                      |       |                |       |                             |       |                     |       |                                                 |       |                                   |       |
| Net  income                                                                                             |       | —                    |       | —              |       | —                           |       | 45                       |       | —                                               |       | 45                                     |       |
| Changes  in net unrealized gains (losses) on securities available for sale, net of  income taxes of $89 |       | —                    |       | —              |       | —                           |       | —                   |       | 136                                                  |       | 136                                    |       |
| Comprehensive  income                                                                                   |       | —                    |       | —              |       | —                           |       | —                   |       | —                                               |       | 181                                    |       |
| Balance,  March 31, 2009                                                                           |       | 1,460,802                 |       | $                   | 15         |                             | $          | 14,690                   |       | $                                                    | 5,984      |                                   | $          | 104 |   | $ | 20,793 |   |
| Balance,  January 1, 2010                                                                          |       | 1,461,802                 |       | $                   | 15         |                             | $          | 14,702                   |       | $                                                    | 6,987      |                                   | $          | 46 |   | $ | 21,750 |   |
| Comprehensive  income:                                                                                  |       |                      |       |                |       |                             |       |                     |       |                                                 |       |                                   |       |
| Net  income                                                                                             |       | —                    |       | —              |       | —                           |       | 308                      |       | —                                               |       | 308                                    |       |
| Changes  in net unrealized gains (losses) on securities available for sale, net of  income taxes of $10 |       | —                    |       | —              |       | —                           |       | —                   |       | 16                                                   |       | 16                                     |       |
| Comprehensive  income                                                                                   |       |                      |       |                |       |                             |       |                     |       |                                                 |       | 324                                    |       |
| Compensation  expense from stock option transactions                                                    |       | —                    |       | —              |       | 2                                |       | —                   |       | —                                               |       | 2                                      |       |
| Balance,  March 31, 2010                                                                           |       | 1,461,802                 |       | $                   | 15         |                             | $          | 14,704                   |       | $                                                    | 7,295      |                                   | $          | 62 |   | $ | 22,076 |   |

 

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**Frederick County Bancorp, Inc. and Subsidiaries**

**ConsolidatedStatements of Cash Flows (Unaudited)**

 
| ** **                                                                                      | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| **(dollars in thousands)**                                                                      | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| Cash flows from operating  activities:                                                          |       |                                  |       |   |   |
| Net income                                                                                      |       | $                                     | 308        |   | $ | 45 |   |
| Adjustments to reconcile net income to net cash  provided by  operating activities:             |       |                                  |       |   |   |
| Depreciation and amortization                                                                   |       | 77                                    |       | 83 |   |
| Deferred income taxes                                                                           |       | 82                                    |       | 157 |   |
| Provision for loan losses                                                                       |       | 400                                   |       | 400 |   |
| Net premium amortization on investment securities                                               |       | 60                                    |       | — |   |
| Loss on sale of foreclosed properties                                                           |       | —                                |       | 32 |   |
| Decrease in accrued interest and other assets                                                   |       | 19                                    |       | 387 |   |
| (Decrease) increase in accrued interest and other  liabilities                                  |       | (150                                  | )          | 141 |   |
| Net cash provided by operating activities                                                       |       | 796                                   |       | 1,245 |   |
| Cash flows from investing activities:                                                           |       |                                  |       |   |   |
| Purchases of investment securities available for sale                                           |       | (6,139                                | )          | — |   |
| Proceeds from maturities, prepayments and calls  investment  securities available for sale      |       | 2,130                                 |       | 609 |   |
| Net purchases of restricted stock                                                               |       | —                                |       | (12 | ) |
| Net (increase) decrease in loans                                                                |       | (143                                  | )          | 2,564 |   |
| Purchases of bank premises and equipment                                                        |       | (74                                   | )          | (33 | ) |
| Proceeds from sale of foreclosed properties                                                     |       | —                                |       | 331 |   |
| Net cash (used in) provided by investing activities                                             |       | (4,226                                | )          | 3,459 |   |
| Cash flows from financing activities:                                                           |       |                                  |       |   |   |
| Net increase in NOW, money market accounts, savings  accounts  and noninterest-bearing deposits |       | 6,968                                 |       | 6,593 |   |
| Net increase (decrease) in time deposits                                                        |       | 15,851                                |       | (1,847 | ) |
| Net cash provided by financing activities                                                       |       | 22,819                                |       | 4,746 |   |
| Net increase in cash and cash equivalents                                                       |       | 19,389                                |       | 9,450 |   |
| Cash and cash equivalents – beginning of period                                            |       | 12,114                                |       | 16,055 |   |
| Cash and cash equivalents – end of period                                                  |       | $                                     | 31,503     |   | $ | 25,505 |   |
| Supplemental cash flow disclosures:                                                             |       |                                  |       |   |   |
| Interest paid                                                                                   |       | $                                     | 971        |   | $ | 1,482 |   |
| Income taxes paid                                                                               |       | $                                     | 121        |   | $ | 71 |   |

 

The accompanying notesare an integral part of these unaudited consolidated financial statements.

 

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#### **FREDERICK COUNTY BANCORP,INC.**

#### ** **

Notes to UnauditedConsolidated Financial Statements

 

**Note1.  General:**

 

Frederick County Bancorp, Inc. (the “Bancorp”), theparent company for its wholly-owned subsidiary Frederick County Bank (the “Bank”and together with Bancorp, the “Company”), was organized in September 2003.The Bank was incorporated under the laws of the state of Maryland in August 2000and commenced banking operations in October 2001.  The Bank provides its customers with variousbanking services.  The Bank offersvarious loan and deposit products to its customers.  The Bank’s customers include individuals andcommercial enterprises within its principal market area consisting of FrederickCounty, Maryland.  Additionally, the Bankmaintains correspondent banking relationships and transacts daily federal fundssales on an unsecured basis with regional correspondent banks.  Note 4 discusses the types of securities theBank purchases.  Note 5 discusses thetypes of lending in which the Bank engages. The Bank does not have any significant concentrations to any oneindustry or customer.  Bancorp also has asubsidiary trust, established to issue trust preferred securities, and twosubsidiaries established to hold foreclosed properties.  The two subsidiaries established to holdforeclosed properties are known as FCB Holdings, Inc. (a direct subsidiaryof Bancorp) and FCB Hagerstown, LLC (an indirect subsidiary of Bancorp).  See Note 7 for additional disclosures relatedto the subsidiary trust.

 

The accompanying unaudited consolidated financialstatements of the Company have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information, the instructions for Form 10-Q, Regulation S-X, andgeneral practices within the banking industry. Accordingly, they do not include all of the information and disclosuresrequired by generally accepted accounting principles for complete financialstatements.  These statements should beread in conjunction with the consolidated financial statements and accompanyingfootnotes included in the Company’s 2009 Annual Report on Form 10-K.  In the opinion of management, alladjustments, consisting of normal recurring adjustments, considered necessaryfor a fair presentation have been included. The results shown in this interim report are not necessarily indicativeof results to be expected for any other period or for the full year ending December 31,2010.

 

Thepreparation of financial statements requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  These estimates andassumptions are based on information available as of the date of theconsolidated financial statements and could differ from actual results.

 

**Recent Accounting Pronouncements**

 

In June 2009, the Financial Accounting StandardsBoard (“FASB”) issued new guidance under ASC Topic 860 *Transfersand Servicing*for guidance on the transfer and servicing offinancial assets.  This guidance eliminatesthe concept of a “qualifying special-purpose entity” from the originalaccounting guidance and removes the exception from applying FASB guidance onconsolidation of variable interest entities*,*to qualifyingspecial-purpose entities.  This guidance iseffective at the beginning of a reporting entity’s first fiscal year thatbegins after November 15, 2009.  TheCompany adopted this guidance on January 1, 2010 and it did not have amaterial impact on the Company’s consolidated financial condition or results ofoperations.

 

In June 2009, the FASB issued new guidance underASC Topic 810 *Consolidation* for guidance on theconsolidation of variable interest entities. This amends the original guidance*,*to require anenterprise to perform an analysis to determine whether the enterprise’svariable interest or interests give it a controlling financial interest in avariable interest entity (VIE).  Thisanalysis identifies the primary beneficiary of a VIE as the enterprise that hasboth (a) the power to direct the activities of a VIE that mostsignificantly impact the entity’s economic performance, and (b) theobligation to absorb losses of the entity that could potentially be significantto the VIE.  Additionally, this newguidance requires an enterprise to assess whether it has an implicit financialresponsibility to ensure that a VIE operates as designed when determining ithas the power to direct the activities of the VIE that most significantlyimpact the entity’s economic performance. It is effective at the beginning of a company’s first fiscal year thatbegins after November 15, 2009.  TheCompany adopted this guidance on January 1, 2010 and it did not have amaterial impact on the Company’s consolidated financial condition or results ofoperations.

 

In January 2010, the FASB issued new guidanceunder ASC Topic 820 *Fair Value Measurementsand Disclosures*to improve disclosures about fair valuemeasurements.  The guidance requiresentities to disclose separately the amounts of significant transfers in and outof Level 1 and Level 2 fair value measurements and describe thereasons for the same.  It also requiresLevel 3 reconciliation to be presented on a gross basis disclosingpurchases, sales, issuances and settlements separately.  The guidance is effective for interim andannual financial periods beginning after December 15, 2009 except forgross basis presentation for Level 3 reconciliation, which is effectivefor interim and annual periods beginning after December 15,2010.  The disclosure requirements effective for interim and annualfinancial periods beginning after December 15, 2009 have been adopted forthe interim period ended March 31, 2010.

 

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**Note2. Earnings Per Share:**

 

Earnings per share (“EPS”)are disclosed as basic and diluted. Basic EPS is generally computed by dividing net income by theweighted-average number of common shares outstanding for the period, whereasdiluted EPS essentially reflects the potential dilution in basic EPS that couldoccur if other contracts to issue common stock were exercised.  As of March 31, 2010 there were 3,000common stock equivalents excluded from the diluted EPS calculation, but none asof March 31, 2009.

 
| ** **                                             | ** ** | **Three  Months Ended****March 31,** | ** ** |
|--------------------------------------------------------|------------|-------------------------------------------|------------|
| **(dollars in thousands, except per share  amounts)**  | ** ** | **2010**                                  | ** ** | **2009** | ** ** |
| Net income                                             |       | $                                         | 308        |   | $ | 45 |   |
| Basic earnings per share                               |       | $                                         | 0.21       |   | $ | 0.03 |   |
| Diluted earnings per share                             |       | $                                         | 0.21       |   | $ | 0.03 |   |
| Basic weighted average number of shares outstanding    |       | 1,461,802                                 |       | 1,460,802 |   |
| Effect of dilutive securities — stock options     |       | 7,094                                     |       | 20,617 |   |
| Diluted weighted average number of shares  outstanding |       | 1,468,896                                 |       | 1,481,419 |   |

 

**Note3.  Employee Stock Option Plan:**

 

The Company maintains an Employee Stock Option Plan that provides forgrants of incentive and non-incentive stock options.  This plan has been presented to and approvedby the Company’s shareholders.  TheCompany follows the guidance issued by FASB regarding stock compensation.   There were 3,000 stock options granted in December 2009and no options granted in 2010.  Allprior grants were fully vested and exercisable as of December 31,2008.  The Company recognizes the cost ofemployee services received in exchange for an award of equity investment basedon the grant-date fair value of the award. That cost will be recognized over the vesting period of the award.  Stock-based compensation expense related tostock options for the three-month period ended March 31, 2010 was $2,000,whereas, no stock-based compensation was recognized in the three-month periodended March 31, 2009.  As of March 31,2010, there was $4,000 of total unrecognized compensation cost related tonon-vested stock options that will be expensed over the period April 1,2010 through December 31, 2011.

 

The weighted-average fair value of options granted in the year ended December 31,2009 was $2.97 and was estimated at the date of grant using the Black-ScholesOption Pricing Model with the following weighted average assumptions.

** **
| ** **                         | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-----------------------|------------|
| ** **                         | ** ** | **2009**              | ** ** |
| Risk  free interest rate of return |       | 3.85                  | %          |
| Expected  option life (months)     |       | 120                   |       |
| Expected  volatility               |       | 25                    | %          |
| Expected  dividends                |       | 2.50                  | %          |

 

The risk-free interestrate is based on the U.S. Treasury yield curve in effect at the time of thegrant.  The expected life is based onhistorical experience.  The expectedvolatility is based on historic volatility. The dividend yield assumption is based on the Company’s expectation ofdividend payouts.

 

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**Note 4.  Investment Portfolio:**

 

Thefollowing tables set forth certain information regarding the Company’sinvestment portfolio at March 31, 2010 and December 31, 2009:

 

## **Available-for-saleportfolio**

 
| **March 31, 2010  (dollars in thousands)**                    | ** ** | **Amortized  Cost** | ** ** | **Gross********Unrealized********Gains** | ** ** | **Gross********Unrealized********Losses** | ** ** | **Estimated  Fair  Value** | ** ** | **Average  Yield** | ** ** |
|--------------------------------------------------------------------|------------|---------------------|------------|------------------------------------------|------------|-------------------------------------------|------------|----------------------------|------------|--------------------|------------|
| U.S. Treasury and other U.S. government agencies and corporations: | ** ** | ** **          | ** ** | ** **                               | ** ** | ** **                                | ** ** | ** **                 | ** ** | ** **         | ** ** |
| Due after one year through five years                              |       | $                   | 488        |                                     | $          | 28                                        |       | $                          | —     |               | 516        |   | 4.83 | % |
| Due after five years through ten years                             |       | 468                 |       | 30                                       |       | —                                    |       | 498                        |       | 5.00               | %          |
| State and political subdivisions:                                  |       |                |       |                                     |       |                                      |       |                       |       |               |       |
| Due after one year through five years                              |       | 155                 |       | —                                   |       | 2                                         |       | 153                        |       | 5.17               | %          |
| Due after five years through ten years                             |       | 755                 |       | 4                                        |       | —                                    |       | 759                        |       | 5.53               | %          |
| Due after ten years                                                |       | 6,934               |       | 56                                       |       | 7                                         |       | 6,983                      |       | 5.90               | %          |
| Mortgage-backed debt securities                                    |       | 18,850              |       | 124                                      |       | 131                                       |       | 18,843                     |       | 3.47               | %          |
| Equity securities                                                  |       | 300                 |       | —                                   |       | —                                    |       | 300                        |       | —             | %          |
|                                                               |       | $                   | 27,950     |                                     | $          | 242                                       |       | $                          | 140        |               | $          | 28,052 |   | 4.15 | % |
|                                                                    |            |                     |            |                                          |            |                                           |            |                            |            |                    |            |  |  |  |  |

 
| **December 31, 2009  (dollars in thousands)**                 | ** ** | **Amortized  Cost** | ** ** | **Gross********Unrealized********Gains** | ** ** | **Gross********Unrealized********Losses** | ** ** | **Estimated  Fair  Value** | ** ** | **Average  Yield** | ** ** |
|--------------------------------------------------------------------|------------|---------------------|------------|------------------------------------------|------------|-------------------------------------------|------------|----------------------------|------------|--------------------|------------|
| U.S. Treasury and other U.S. government agencies and corporations: | ** ** | ** **          | ** ** | ** **                               | ** ** | ** **                                | ** ** | ** **                 | ** ** | ** **         | ** ** |
| Due within one year                                                |       | $                   | 490        |                                     | $          | 3                                         |       | $                          | —     |               | $          | 493 |   | 4.46 | % |
| Due after one year through five years                              |       | 1,391               |       | 29                                       |       | 5                                         |       | 1,415                      |       | 4.03               | %          |
| Due after five years through ten years                             |       | 497                 |       | 29                                       |       | —                                    |       | 526                        |       | 5.00               | %          |
| State and political subdivisions:                                  |       |                |       |                                     |       |                                      |       |                       |       |               |       |
| Due after five years through ten years                             |       | 910                 |       | 2                                        |       | 3                                         |       | 909                        |       | 5.47               | %          |
| Due after ten years                                                |       | 6,935               |       | 35                                       |       | 28                                        |       | 6,942                      |       | 5.90               | %          |
| Mortgage-backed debt securities                                    |       | 13,478              |       | 83                                       |       | 69                                        |       | 13,492                     |       | 3.63               | %          |
| Equity securities                                                  |       | 300                 |       | —                                   |       | —                                    |       | 300                        |       | —             | %          |
|                                                               |       | $                   | 24,001     |                                     | $          | 181                                       |       | $                          | 105        |               | $          | 24,077 |   | 4.38 | % |

 
| ** **                                                     | ** ** | **Continuous unrealized  losses existing for less than  12 months** | ** ** | **Continuous unrealized  losses existing for 12  months and greater** | ** ** | **Total**                    | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| **March 31, 2010  (dollars in thousands)** | ** ** | **Estimated  Fair****Value**                                                                      | ** ** | **Unrealized  Losses**                                                                              | ** ** | **Estimated  Fair****Value** | ** ** | **Unrealized  Losses** | ** ** | **Estimated  Fair****Value** | ** ** | **Unrealized  Losses** | ** ** |
| Mortgage-backed  debt securities                               |       | $                                                                                                 | 11,257     |                                                                                                | $          | 131                          |       | $ | — |   | $ | — |   | $ | 11,257 |   | $ | 131 |   |
| State  and political subdivisions                              |       | 1,151                                                                                             |       | 7                                                                                                   |       | 153                          |       | 2 |   | 1,304 |   | 9 |   |
| Total  temporarily impaired securities                         |       | $                                                                                                 | 12,408     |                                                                                                | $          | 138                          |       | $ | 153 |   | $ | 2 |   | $ | 12,561 |   | $ | 140 |   |

 

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| ** **                                                         | ** ** | **Continuous unrealized  losses existing for less than  12 months** | ** ** | **Continuous unrealized  losses existing for 12  months and greater** | ** ** | **Total**                    | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------|------------|
| **December 31, 2009  (dollars in thousands)**                 | ** ** | **Estimated  Fair****Value**                                        | ** ** | **Unrealized  Losses**                                                | ** ** | **Estimated  Fair****Value** | ** ** | **Unrealized  Losses** | ** ** | **Estimated  Fair****Value** | ** ** | **Unrealized  Losses** | ** ** |
| U.S.  Treasury and other U.S. government agencies and corporations |       | $                                                                   | 870        |                                                                  | $          | 5                            |       | $ | — |   | $ | — |   | $ | 870 |   | $ | 5 |   |
| State  and political subdivisions                                  |       | 4,112                                                               |       | 28                                                                    |       | 152                          |       | 3 |   | 4,264 |   | 31 |   |
| Mortgage-backed  debt securities                                   |       | 7,233                                                               |       | 69                                                                    |       | —                       |       | — |   | 7,233 |   | 69 |   |
| Total  temporarily impaired securities                             |       | $                                                                   | 12,215     |                                                                  | $          | 102                          |       | $ | 152 |   | $ | 3 |   | $ | 12,367 |   | $ | 105 |   |

 

Management systematicallyevaluates investment securities for other-than-temporary declines in fair valueon a quarterly basis.  This analysisrequires management to consider various factors, which include (1) durationand magnitude of the decline in value, (2) the financial condition of theissuer or issuers and (3) the structure of the security. An impairmentloss is recognized in earnings only when: (1) we intend to sell the debtsecurity; (2) it is more likely than not that we will be required to sellthe security before recovery of its amortized cost basis; or (3) we do notexpect to recover the entire amortized cost basis of the security.  In situations where we intend to sell or whenit is more likely than not that we will be required to sell the security, theentire impairment loss must be recognized in earnings.  In all other situations, only the portion ofthe impairment loss representing the credit loss must be recognized inearnings, with the remaining portion being recognized in shareholders’ equityas a component of other comprehensive income, net of deferred taxes.  Credit loss is determined by calculating thepresent value of future cash flows of the security compared to the amortizedcost of the security.  Realized gains orlosses on the sale of investment and mortgage-backed securities are reported inearnings and determined using the amortized cost of the specific security sold.

 

**Restricted Stock**

 

Thefollowing table shows the amounts of restricted stock as of March 31, 2010and December 31, 2009:

 
| ** **                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(dollars in thousands)**         | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| Federal  Home Loan Bank of Atlanta |       | $                  | 952        |                  | $          | 952 |   |
| Federal  Reserve Bank              |       | 574                |       | 574                   |       |
| Atlantic  Central Bankers Bank     |       | 40                 |       | 40                    |       |
|                               |       | $                  | 1,566      |                  | $          | 1,566 |   |

 

**Note 5.  Loans and Allowance for Loan Losses:**

 

Loansconsist of the following:

 
| ** **                                                                  | ** ** | **March 31,** | ** ** | **% of**  | ** ** | **December 31,** | ** ** | **% of**  | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------|------------|-----------|------------|-----------------------|------------|-----------|------------|
| **(dollars  in thousands)**                                                 | ** ** | **2010**           | ** ** | **Loans** | ** ** | **2009**              | ** ** | **Loans** | ** ** |
| Real estate loans:                                                          |       |               |       |      |       |                  |       |      |       |
| Construction and land development                                           |       | $                  | 18,097     |      | 8          | %                     | $          | 15,726    |       | 7 | % |
| Mortgage loans:                                                             |       |               |       |      |       |                  |       |      |       |
| Secured by 1 to 4 family residential properties                             |       | 39,293             |       | 18        | %          | 36,369                |       | 17        | %          |
| Secured by multi-family (5 or more) residential  properties                 |       | 11,876             |       | 6         | %          | 12,348                |       | 6         | %          |
| Secured by commercial properties                                            |       | 108,051            |       | 50        | %          | 106,378               |       | 49        | %          |
| Secured by farm land                                                        |       | 7,811              |       | 4         | %          | 6,995                 |       | 3         | %          |
| Total mortgage loans                                                        |       | 167,031            |       | 78        | %          | 162,090               |       | 75        | %          |
| Loans to farmers                                                            |       | 467                |       | —    | %          | 46                    |       | —    | %          |
| Commercial and industrial loans                                             |       | 27,539             |       | 13        | %          | 35,351                |       | 17        | %          |
| Loans to individuals for household, family and  other personal expenditures |       | 1,873              |       | 1         | %          | 1,730                 |       | 1         | %          |
|                                                                        |       | 214,586            |       | 100       | %          | 214,943               |       | 100       | %          |
| Less allowance for loan losses                                              |       | (3,027             | )          |      |       | (3,127                | )          |      |       |
| Net loans                                                                   |       | $                  | 211,559    |      |       |                  | $          | 211,816   |       |   |   |

 

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Transactions in theallowance for loan losses are summarized as follows:

 
| ** **                                     | ** ** | **Three  Months Ended****March 31,** | ** ** |
|------------------------------------------------|------------|-------------------------------------------|------------|
| **(dollars in thousands)**                     | ** ** | **2010**                                  | ** ** | **2009** | ** ** |
| Average  total loans outstanding during period |       | $                                         | 214,714    |   | $ | 211,872 |   |
| Balance  at beginning of period                |       | $                                         | 3,127      |   | $ | 3,120 |   |
| Recoveries  of loans previously charged-off    |       | —                                    |       | 3 |   |
| Loans  charged-off (commercial and industrial) |       | —                                    |       | (226 | ) |
| Loans  charged-off (commercial real estate)    |       | (500                                      | )          | (448 | ) |
| Loans  charged-off (consumer)                  |       | —                                    |       | (11 | ) |
| Net  charge-offs                               |       | (500                                      | )          | (682 | ) |
| Provision  charged to operating expenses       |       | 400                                       |       | 400 |   |
| Balance  at end of period                      |       | $                                         | 3,027      |   | $ | 2,838 |   |
| Ratios  of net charge-offs to average loans    |       | 0.23                                      | %          | 0.32 | % |

 

**Note6.   Deposits**

 

The following table provides a summary of the Company’s deposit base atthe dates indicated.

 
| ** **                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(dollars  in thousands)**         | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| Noninterest-bearing demand deposits |       | $                  | 38,994     |                  | $          | 38,199 |   |
| Interest-bearing demand deposits:   |       |               |       |                  |       |
| NOW accounts                        |       | 13,463             |       | 12,366                |       |
| Money market accounts               |       | 59,943             |       | 54,886                |       |
| Savings accounts                    |       | 4,853              |       | 4,835                 |       |
| Certificates of deposit:            |       |               |       |                  |       |
| $100,000 or more                    |       | 51,099             |       | 42,752                |       |
| Less than $100,000                  |       | 73,779             |       | 66,274                |       |
| Total deposits                      |       | $                  | 242,131    |                  | $          | 219,312 |   |

 

**Note 7. Trust preferredsecurities/junior subordinated debentures and other long-term borrowings:**

 

InDecember 2006, Bancorp completed the private placement of an aggregate of$6,000,000 of trust preferred securities through FCBI Statutory Trust I (the “Trust”),a newly formed trust subsidiary organized under Connecticut law, of whichBancorp owns all of the common securities of $186,000. The principal asset ofthe Trust is a similar amount of Bancorp’s junior subordinated debentures. Thejunior subordinated debentures bear interest at a fixed rate of 6.5375% until December 15,2011, at which time the interest rate becomes a variable rate, adjustedquarterly, equal to 163 basis points over three-month LIBOR. The juniorsubordinated debentures mature on December 15, 2036, and may be redeemedat par, at Bancorp’s option, on any interest payment date commencing December 15,2011. The securities are redeemable prior to December 15, 2011, at apremium ranging up to 103.525% of the principal amount thereof, upon theoccurrence of certain regulatory or legal events. The obligations of Bancorpwith respect to the Trust’s preferred securities constitute a full andunconditional guarantee by Bancorp of Trust’s obligations with respect to thetrust preferred securities to the extent set forth in the related guarantee.Subject to certain exceptions and limitations, Bancorp may elect from time totime to defer interest payments on the junior subordinated debentures,resulting in a deferral of distribution payments on the related trust preferredsecurities.   If the Company defers interest payments on the juniorsubordinated debentures, or otherwise is in default of the obligations, theCompany would be prohibited from making dividend payments to its shareholders.

 

The trust preferredsecurities may be included in Tier 1 capital for regulatory capital adequacypurposes up to 25% of Tier 1 capital, net of goodwill after its inclusion. Theportion of the trust preferred securities not qualifying as Tier 1 capital maybe included as part of total qualifying capital in Tier 2 capital, subject tolimitation.

 

AtMarch 31, 2010 and December 31, 2009, the Company had $10,000,000 inborrowings under its credit facility from the Federal Home Loan Bank of Atlanta(“FHLB”).  Both are in the amount of$5,000,000 with the first being a 4.56% fixed rate advance that 

 

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matureson April 27, 2012 and the second being a 4.56% convertible advance with amaturity date of September 4, 2012, unless called on September 4,2010 by the FHLB.  Outstanding advancesare secured by collateral consisting of a blanket lien on qualifying loans inthe Bank’s residential mortgage loan portfolio and certain commercial realestate loans.

 

**Note8.  Noninterest Expense:**

 

Noninterest expenseconsists of the following:

* *
| ** **                              | ** ** | **Three Months Ended****March 31,** | ** ** |
|-----------------------------------------|------------|------------------------------------------|------------|
| **(dollars in thousands)**              | ** ** | **2010**                                 | ** ** | **2009** | ** ** |
|                                    |       |                                     |       |   |   |
| Salaries                                |       | $                                        | 881        |   | $ | 814 |   |
| Deferred  Personnel Costs               |       | (14                                      | )          | (13 | ) |
| Payroll  Taxes                          |       | 76                                       |       | 67 |   |
| Employee  Insurance                     |       | 62                                       |       | 63 |   |
| Other Employee Benefits                 |       | 55                                       |       | 48 |   |
| Depreciation                            |       | 77                                       |       | 84 |   |
| Rent                                    |       | 104                                      |       | 97 |   |
| Utilities                               |       | 27                                       |       | 28 |   |
| Repairs  and Maintenance                |       | 57                                       |       | 61 |   |
| ATM  Expense                            |       | 24                                       |       | 27 |   |
| Other  Occupancy and Equipment Expenses |       | 35                                       |       | 34 |   |
| Postage  and Supplies                   |       | 15                                       |       | 19 |   |
| Data  Processing                        |       | 98                                       |       | 97 |   |
| Advertising  and Promotion              |       | 70                                       |       | 34 |   |
| FDIC  insurance                         |       | 81                                       |       | 47 |   |
| Legal                                   |       | 10                                       |       | 11 |   |
| Insurance                               |       | 14                                       |       | 12 |   |
| Consulting                              |       | 5                                        |       | 11 |   |
| Courier                                 |       | 4                                        |       | 4 |   |
| Audit  Fees                             |       | 48                                       |       | 45 |   |
| Other                                   |       | 106                                      |       | 93 |   |
|                                    |       | $                                        | 1,835      |   | $ | 1,683 |   |

 

**Note9.  401(k) Profit Sharing Plan:**

 

The Company has a Section 401(k) profit sharing plan coveringemployees meeting certain eligibility requirements as to minimum age and yearsof service.  Employees may make voluntarycontributions to the Plan through payroll deductions on a pre-tax basis.  The Company has the discretion to makematching contributions of 100% of the employee’s contributions up to 4% of theemployee’s salary.  A participant’saccount under the Plan, together with investment earnings thereon, is normallydistributable, following retirement, death, disability or other termination ofemployment, in a single lump-sum payment.

 

The Company made contributions to the Plan in the amounts of $42,000 and$33,000 for the three months ended March 31, 2010 and 2009, respectively.

 

**Note10.  Shareholders’ Equity:**

 

Capital:

 

The Company and the Bankare subject to various regulatory capital requirements administered by thefederal banking agencies.  Failure tomeet minimum capital requirements can initiate certain mandatory - and possiblyadditional discretionary - actions by regulators that, if undertaken, couldhave a direct material effect on the Company’s consolidated financialstatements.  Under capital adequacyguidelines and the regulatory framework for prompt corrective action, theCompany, once it exceeds $500 million in assets, and the Bank must meetspecific capital guidelines that involve quantitative measures of the Company’sand the Bank’s assets, liabilities, and certain off-balance-sheet items ascalculated under regulatory accounting practices.  The Company’s and the Bank’s capital amountsand classification are also subject to qualitative judgments by the regulatorsabout components, risk weightings, and other factors.

 

Quantitative measuresestablished by regulation to ensure capital adequacy require the Company andthe Bank to maintain minimum 

 

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amounts and ratios (setforth in the following table) of total and Tier 1 capital (as defined in theregulations) to risk-weighted assets (as defined), and Tier 1 capital (asdefined) to average assets (as defined). Management believes that the Company and the Bank met all capitaladequacy requirements to which they are subject as of March 31, 2010.

 

As of March 31,2010, the most recent notification from the regulatory agency categorized theBank as well capitalized under the regulatory framework for prompt correctiveaction.  To be categorized as wellcapitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,and Tier 1 leverage ratios as set forth in the table.  There are no conditions or events since thatnotification which management believes have changed the Bank’s category.

 

The Company’s and theBank’s actual capital amounts and ratios at March 31, 2010 and December 31,2009 are presented in the following tables.

 
| ** **                 | ** ** | ** ** | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** | **Minimum To Be Well** | ** ** |
|----------------------------|------------|------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|------------------------|------------|
| ** **                 | ** ** | ** ** | ** ** | ** **            | ** ** | ** **            | ** ** | ** **            | ** ** | **Capitalized Under**  | ** ** |
| ** **                 | ** ** | ** ** | ** ** | ** **            | ** ** | **For Capital**       | ** ** | **Prompt Corrective** | ** ** |
| **March 31, 2010**         | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| **(dollars in thousands)** | ** ** | **Amount** | ** ** | **Ratio**             | ** ** | **Amount**            | ** ** | **Ratio**             | ** ** | **Amount**             | ** ** | **Ratio** | ** ** |
| Tier 1 Capital             |       |       |       |                  |       |                  |       |                  |       |                   |       |   |   |
| To Risk-Weighted  Assets   |       |       |       |                  |       |                  |       |                  |       |                   |       |   |   |
| Company                    |       | $          | 28,014     |                  | 12.03      | %                     | $          | 9,315                 |       | 4.00                   | %          | N/A |   | N/A |   |
| Bank                       |       | $          | 27,363     |                  | 11.79      | %                     | $          | 9,280                 |       | 4.00                   | %          | $ | 13,920 |   | 6.00 | % |
|                       |       |       |       |                  |       |                  |       |                  |       |                   |       |   |   |
| Total Capital              |       |       |       |                  |       |                  |       |                  |       |                   |       |   |   |
| To Risk-Weighted  Assets   |       |       |       |                  |       |                  |       |                  |       |                   |       |   |   |
| Company                    |       | $          | 30,925     |                  | 13.28      | %                     | $          | 18,630                |       | 8.00                   | %          | N/A |   | N/A |   |
| Bank                       |       | $          | 30,263     |                  | 13.04      | %                     | $          | 18,560                |       | 8.00                   | %          | $ | 23,201 |   | 10.00 | % |
|                       |       |       |       |                  |       |                  |       |                  |       |                   |       |   |   |
| Tier 1 Capital             |       |       |       |                  |       |                  |       |                  |       |                   |       |   |   |
| To Average  Assets         |       |       |       |                  |       |                  |       |                  |       |                   |       |   |   |
| Company                    |       | $          | 28,014     |                  | 10.60      | %                     | $          | 10,568                |       | 4.00                   | %          | N/A |   | N/A |   |
| Bank                       |       | $          | 27,363     |                  | 10.39      | %                     | $          | 10,532                |       | 4.00                   | %          | $ | 13,164 |   | 5.00 | % |

 
| ** **                           | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | **Minimum To Be Well** | ** ** |
|--------------------------------------|------------|------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|---------------------------------------|------------|
| ** **                           | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | **Capitalized Under**            | ** ** |
| ** **                           | ** ** | ** ** | ** ** | ** **                 | ** ** | **For Capital**       | ** ** | **Prompt Corrective** | ** ** |
| **December 31, 2009**      | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| **(dollars in thousands)** | ** ** | **Amount** | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio**                  | ** ** | **Amount**                            | ** ** | **Ratio** | ** ** |
| Tier  1 Capital                      |       |       |       |                       |       |                       |       |                       |       |                                  |       |   |   |
| To  Risk-Weighted Assets             |       |       |       |                       |       |                       |       |                       |       |                                  |       |   |   |
| Company                              |       | $          | 27,704     |                       | 11.81      | %                          | $          | 9,384                      |       | 4.00                                  | %          | N/A |   | N/A |   |
| Bank                                 |       | $          | 26,987     |                       | 11.55      | %                          | $          | 9,344                      |       | 4.00                                  | %          | $ | 14,016 |   | 6.00 | % |
|                                 |       |       |       |                       |       |                       |       |                       |       |                                  |       |   |   |
| Total  Capital                       |       |       |       |                       |       |                       |       |                       |       |                                  |       |   |   |
| To  Risk-Weighted Assets             |       |       |       |                       |       |                       |       |                       |       |                                  |       |   |   |
| Company                              |       | $          | 30,636     |                       | 13.06      | %                          | $          | 18,767                     |       | 8.00                                  | %          | N/A |   | N/A |   |
| Bank                                 |       | $          | 29,907     |                       | 12.80      | %                          | $          | 18,688                     |       | 8.00                                  | %          | $ | 23,360 |   | 10.00 | % |
|                                 |       |       |       |                       |       |                       |       |                       |       |                                  |       |   |   |
| Tier  1 Capital                      |       |       |       |                       |       |                       |       |                       |       |                                  |       |   |   |
| To  Average Assets                   |       |       |       |                       |       |                       |       |                       |       |                                  |       |   |   |
| Company                              |       | $          | 27,704     |                       | 10.53      | %                          | $          | 10,522                     |       | 4.00                                  | %          | N/A |   | N/A |   |
| Bank                                 |       | $          | 26,987     |                       | 10.24      | %                          | $          | 10,545                     |       | 4.00                                  | %          | $ | 13,181 |   | 5.00 | % |

 

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On June 26, 2007,the Company authorized the repurchase of up to 146,000 shares of its commonstock, for an aggregate expenditure of not more than $4.5 million, through September 30,2012, or earlier termination of the program by the Board of Directors.  Repurchases, if any, by the Company pursuantto this authorization are expected to enable the Company to repurchase itsshares at an attractive price, and to provide a source of liquidity for theCompany’s shares.  As of March 31,2010, there have been no shares repurchased by the Company.

 

**Note11.  Fair Value Measurements**

 

The Company followsthe new guidance issued by the FASB under ASC Topic 825 *FinancialInstruments*regarding fair value measurements and disclosurestopic.  This guidance permits entities tomeasure many financial instruments and certain other items at fair value.  The objective is to improve financialreporting by providing entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions.  The election to use the fair value option isavailable when an entity first recognizes a financial asset or financialliability or upon entering into a Company commitment.  Subsequent changes must be recorded inearnings.  The Company has yet to applythe fair value option to any assets or liabilities.  This guidance clarifies that fair value is anexit price, representing the amount that would be received to sell an asset orpaid to transfer a liability in an orderly transaction between marketparticipants.  Under this guidance, fairvalue measurements are not adjusted for transaction costs.  This guidance establishes a fair valuehierarchy that prioritizes the inputs to valuation techniques used to measurefair value.  The hierarchy gives thehighest priority to unadjusted quoted prices in active markets for identicalassets or liabilities (Level 1 measurements) and the lowest priority tounobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under this guidance aredescribed below.

 
| Level 1 |   | Valuations for assets  and liabilities traded in active exchange markets.  Valuations are  obtained from readily available pricing sources for market transactions  involving identical assets or liabilities.                                                                                                                                                                                                                                                                                                                    |
|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| Level 2 |   | Valuations for assets and  liabilities traded in less active dealer or broker  markets.  Valuations are obtained from third party pricing services  for identical or comparable assets or liabilities which use observable inputs  other than Level 1 prices, such as quoted prices for similar assets or  liabilities; quoted prices in active markets that are not active; or other  inputs that are observable or can be corroborated by observable market data  for substantially the full term of the assets or liabilities. |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| Level 3 |   | Unobservable inputs  that are supported by little or no market activity and that are significant  to the fair value of the assets or liabilities.                                                                                                                                                                                                                                                                                                                                                                                           |

 

A financialinstrument’s level within the fair value hierarchy is based on the lowest levelof input that is significant to the fair value measurement.

 

The types ofinstruments valued based on quoted market prices in active markets include mostU.S. government and agency securities, liquid mortgage products, active listedequities and most money market securities. Such instruments are generally classified within Level 1 or Level 2 ofthe fair value hierarchy.  As required byfair value measurement and disclosures guidance, the Company does not adjustthe quoted price for such instruments.

 

The types ofinstruments valued based on quoted prices in markets that are not active,broker or dealer quotations, or alternative pricing sources with reasonablelevels of price transparency include most investment-grade and high-yieldcorporate bonds, less liquid mortgage products, less liquid equities, state,municipal and provincial obligations. Such instruments are generally classified within Level 2 of the fairvalue hierarchy.

 

Level 3 is forpositions that are not traded in active markets or are subject to transferrestrictions, valuations are adjusted to reflect illiquidity and/ornon-transferability, and such adjustments are generally based on availablemarket evidence.  In the absence of suchevidence, management’s best estimate is used.

 

Impaired loans areevaluated and valued at the time the loan is identified as impaired, at thelower of cost or market value.  Marketvalue is measured based on the value of the collateral securing these loans andis classified at a Level 3 in the fair value hierarchy.  Collateral may be real estate and/or businessassets including equipment, inventory and/or accounts receivable.  The value of real estate collateral isdetermined based on appraisal by qualified licensed appraisers hired by theCompany.  The value of businessequipment, inventory and accounts receivable collateral is based on the netbook value on the business’ financial statements and, if necessary, discountedbased on management’s review and analysis. Appraised and reported values may be discounted based on management’shistorical knowledge, changes in market conditions from the time of valuation,and/or management’s expertise and knowledge of the client and client’sbusiness.  Impaired loans are reviewedand evaluated on at least a quarterly basis for additional impairment and adjustedaccordingly, based on the same factors identified above.

 

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The following table setsforth the Company’s financial assets and liabilities that were accounted for ordisclosed at fair value on a recurring basis as of March 31, 2010.

 
| ** **                           | ** ** | ** **   | ** ** | ** **         | ** ** | **Significant**    | ** ** | ** **       | ** ** |
|--------------------------------------|------------|--------------|------------|--------------------|------------|--------------------|------------|------------------|------------|
| ** **                           | ** ** | **Carrying** | ** ** | ** **         | ** ** | **Other**          | ** ** | **Significant**  | ** ** |
| ** **                           | ** ** | **Value**    | ** ** | **Quoted**         | ** ** | **Observable**     | ** ** | **Unobservable** | ** ** |
| ** **                           | ** ** | **(Fair**    | ** ** | **Prices**         | ** ** | **Inputs**         | ** ** | **Inputs**       | ** ** |
| **(dollars in thousands)** | ** ** | **Value)**   | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **(Level  3)**   | ** ** |
| Securities  available for sale       |       | $            | 28,052     |               | $          | —             |       | $                | 28,052     |   | $ | — |   |
|                                      |            |              |            |                    |            |                    |            |                  |            |  |  |  |  |

 

The following table setsforth the Company’s financial assets and liabilities that were accounted for ordisclosed at fair value on a nonrecurring basis as of March 31, 2010.

*** ***
| ** **                           | ** ** | ** **   | ** ** | ** **         | ** ** | **Significant**    | ** ** | ** **       | ** ** |
|--------------------------------------|------------|--------------|------------|--------------------|------------|--------------------|------------|------------------|------------|
| ** **                           | ** ** | **Carrying** | ** ** | ** **         | ** ** | **Other**          | ** ** | **Significant**  | ** ** |
| ** **                           | ** ** | **Value**    | ** ** | **Quoted**         | ** ** | **Observable**     | ** ** | **Unobservable** | ** ** |
| ** **                           | ** ** | **(Fair**    | ** ** | **Prices**         | ** ** | **Inputs**         | ** ** | **Inputs**       | ** ** |
| **(dollars in thousands)** | ** ** | **Value)**   | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **(Level  3)**   | ** ** |
| Impaired  loans:                     |       |         |       |               |       |               |       |             |       |
| Construction                         |       | $            | 2,428      |               | $          | —             |       | $                | —     |   | $ | 2,428 |   |
| Commercial  real estate              |       | 5,738        |       | —             |       | —             |       | 5,738            |       |
| Commercial  and industrial           |       | 3,532        |       | —             |       | —             |       | 3,532            |       |
| Residential  real estate             |       | 515          |       | —             |       | —             |       | 515              |       |
| Total  impaired loans                |       | $            | 12,213     |               | $          | —             |       | $                | —     |   | $ | 12,213 |   |
| Foreclosed  properties               |       | $            | 495        |               | $          | —             |       | $                | —     |   | $ | 495 |   |

 

The following tableprovides a reconciliation of all assets measured at fair value on anonrecurring basis using significant unobservable inputs (Level 3) for thethree months ended March 31, 2010.

 
| ** **                                            | ** ** | **Foreclosed** | ** ** | **Impaired** | ** ** |
|-------------------------------------------------------|------------|----------------|------------|--------------|------------|
| **(dollars  in thousands)**                           | ** ** | **Properties** | ** ** | **Loans**    | ** ** |
| Balance at December 31,  2009                         |       | $              | 495        |         | $          | 12,350 |   |
| Total  net gains (losses) for the period included in: |       |           |       |         |       |
| Gain  on sale of foreclosed properties                |       | —         |       | —       |       |
| Other  comprehensive gain (loss)                      |       | —         |       | —       |       |
| Purchases                                             |       | —         |       | —       |       |
| Sales                                                 |       | —         |       | —       |       |
| Transfers  in                                         |       | —         |       | 242          |       |
| Transfers  out                                        |       | —         |       | (379         | )          |
| Balance  at March 31, 2010                            |       | $              | 495        |         | $          | 12,213 |   |

 

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**Note 12.  Fair Value of Financial Instruments**

 

The estimated fair valuesof the Company’s financial instruments are as follows:

 
| ** **                                | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|----------------------------|------------|
| **(dollars  in thousands)**               | ** ** | **Carrying  Amount**    | ** ** | **Fair Value**             | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** |
| FINANCIAL  ASSETS                         |       |                    |       |                       |       |   |   |   |   |
| Cash  and cash equivalents                |       | $                       | 31,503     |                       | $          | 31,503 |   | $ | 12,114 |   | $ | 12,114 |   |
| Investment  securities available for sale |       | 28,052                  |       | 28,052                     |       | 24,077 |   | 24,077 |   |
| Restricted  stock                         |       | 1,566                   |       | 1,566                      |       | 1,566 |   | 1,566 |   |
| Net  loans                                |       | 211,559                 |       | 212,450                    |       | 211,816 |   | 212,777 |   |
| Accrued  interest receivable              |       | 858                     |       | 858                        |       | 871 |   | 871 |   |
|                                      |       |                    |       |                       |       |   |   |   |   |
| FINANCIAL  LIABILITIES                    |       |                    |       |                       |       |   |   |   |   |
| Deposits                                  |       | $                       | 242,131    |                       | $          | 248,054 |   | $ | 219,312 |   | $ | 224,694 |   |
| Short-term  borrowings                    |       | 500                     |       | 500                        |       | 500 |   | 500 |   |
| Long-term  borrowings                     |       | 10,000                  |       | 10,720                     |       | 10,000 |   | 10,695 |   |
| Junior  subordinated debentures           |       | 6,186                   |       | 5,984                      |       | 6,186 |   | 5,960 |   |
| Accrued  interest payable                 |       | 189                     |       | 189                        |       | 194 |   | 194 |   |

 

The followingmethods and assumptions were used to estimate the fair value disclosures forfinancial instruments as of March 31, 2010 and December 31, 2009:

 

Cash and cashequivalents:

 

The fair value ofcash and cash equivalents is estimated to approximate the carrying amounts.

 

Investmentsecurities and restricted stock:

 

Fair values arebased on quoted market prices for Level 1 and 2, except for certain restricted stocks where fair value equals parvalue because of certain redemption restrictions.

 

Loans:

 

Fair values areestimated for portfolios of loans with similar financial characteristics.  Each portfolio is further segmented intofixed and adjustable rate interest terms by performing and non-performingcategories.

 

The fair value ofperforming loans is calculated by discounting estimated cash flows using currentrates at which similar loans would be made to borrowers with similar creditratings and for the same remaining maturities. The estimated cash flows do not anticipate prepayments.

 

Management hasmade estimates of fair value discount rates that it believes to bereasonable.  However, because there is nomarket for many of these financial instruments, management has no basis todetermine whether the fair value presented for loans would be indicative of thevalue negotiated in an actual sale.

 

Deposits:

 

The fair value ofdeposits with no stated maturity, such as noninterest-bearing demand deposits,savings, NOW accounts and money market accounts, is equal to the amount payableon demand at the reporting date (that is, their carrying amounts).  The fair value of certificates of deposit isbased on the discounted value of contractual cash flows.  The discount rate is estimated using therates currently offered for deposits of similar remaining maturities.  The fair value estimates do not include thebenefit that results from the low-cost funding provided by the depositliabilities compared to the cost of borrowing funds in the market.

 

Short-termborrowings:

 

The fair value ofshort-term borrowings is determined using rates currently available to theCompany for debt with similar terms and remaining maturities.

 

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Long-term borrowings:

 

The fair value ofthe long-term borrowings is determined using rates currently available to theCompany for debt with similar terms and remaining maturities.

 

Juniorsubordinated debentures:

 

The juniorsubordinated debentures are unsecured obligations of the Company and aresubordinate and junior in right of payment to all present and future seniorindebtedness of the Company.  The Companyhas entered into a guarantee, which together with its obligations under thejunior subordinated debentures and the declaration of trust governing the Trustprovides a full and unconditional guarantee of the Trust’s preferredsecurities.  The fair value of juniorsubordinated debentures is determined using rates currently available to theCompany for debt with similar terms and remaining maturities.  See Note 7 for additional disclosures.

 

Accrued Interest:

 

The carryingamounts of accrued interest approximate fair value.

 

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

 

**Forward-LookingStatements**

 

This management’s discussion and analysis contains forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995, including statements relating to Frederick County Bancorp, Inc.’s(“Bancorp”) and Frederick County Bank’s (the “Bank” and together with Bancorp,the “Company”) beliefs, expectations, anticipations and plans regarding, amongother things, general economic trends, interest rates, product expansions andother matters.  Such forward-lookingstatements are identified by terminology such as “may”, “will”, “believe”, “expect”,“estimate”, “anticipate”, “likely”, “unlikely”, “continue”, or similar termsand are subject to numerous uncertainties, such as federal monetary policy,inflation, employment, profitability and consumer confidence levels, bothnationally and in the Company’s market area, the health of the real estate andconstruction market in the Company’s market area, the Company’s ability todevelop and market new products and to enter new markets, competitive challengesin the Company’s market, legislative changes and other factors, and as such,there can be no assurance that future events will develop in accordance withthe forward-looking statements contained herein.  Readers are cautioned against placing unduereliance on any such forward-looking statement. In addition, the Company’s past results of operations do not necessarilyindicate its future results.

 

**General**

 

The following paragraphs provide an overview of the financial conditionand results of operations of the Company. This discussion is intended to assist the readers in their analysis ofthe accompanying financial statements and notes thereto.

 

Bancorp, the parent company for the Bank, its wholly-ownedsubsidiary, was organized in September 2003. The Bank was incorporatedunder the laws of the state of Maryland in August 2000 and commencedbanking operations in October 2001. The Bank provides its customers with various banking services, fromthree banking offices in the City of Frederick and one in Walkersville,Maryland.  The Bank is currently planningto establish a fifth banking office located in the City of Frederick, which issubject to regulatory approvals and construction, and is expected to open inthe first quarter of 2011.  The Bankoffers various loan and deposit products to its customers.  The Bank’s customers include individuals andcommercial enterprises within its principal market area consisting of FrederickCounty, Maryland.  Additionally, the Bankmaintains correspondent banking relationships and transacts daily federal fundssales on an unsecured basis with regional correspondent banks.  Note 4 discusses the types of securities theBank purchases.  Note 5 discusses thetypes of lending in which the Bank engages. The Bank does not have any significant concentrations to any oneindustry or customer.  Bancorp also has asubsidiary trust, established to issue trust preferred securities, and twosubsidiaries established to hold foreclosed properties.  The two subsidiaries established to holdforeclosed properties are known as FCB Holdings, Inc. (a direct subsidiaryof Bancorp) and FCB Hagerstown, LLC (an indirect subsidiary of Bancorp).  See Note 7 for additional disclosures relatedto the subsidiary trust.

 

## **Critical Accounting Policies**

## ** **

The Company’sconsolidated financial statements are prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”) andfollow general practices within the industry in which it operates.  Application of these principles requiresmanagement to make estimates, assumptions, and judgments that affect theamounts reported in the financial statements and accompanying notes.  These estimates, assumptions, and judgmentsare based on information available as of the date of the financial statements;accordingly, as this information changes, the financial statements couldreflect different estimates, assumptions, and judgments.  Certain policies inherently have a greaterreliance on the use of estimates, assumptions, and judgments and as such have agreater possibility of producing results that could be materially differentthan originally reported.  Estimates, 

 

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assumptions, andjudgments are necessary when assets and liabilities are required to be recordedat fair value, when a decline in the value of an asset not carried on thefinancial statements at fair value warrants an impairment write-down orvaluation reserve to be established, or when an asset or liability needs to berecorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in morefinancial statement volatility.  The fairvalues and the information used to record valuation adjustments for certainassets and liabilities are based either on quoted market prices or are providedby other third-party sources, when available. The estimates used in management’sassessment of the adequacy of the allowance for loan losses require thatmanagement make assumptions about matters that are uncertain at the time ofestimation.  Differences in theseassumptions and differences between the estimated and actual losses could havea material effect.  For discussionsrelated to the critical accounting policies of the Company, refer to thesections in this Management’s Discussion and Analysis entitled “Income Taxes”and “Allowance for Loan Losses.”

 

## **Loans**

## ** **

Loans decreased by$357,000, or (0.17)%, from December 31, 2009, to a balance of $214.59million as of March 31, 2010, but increased by $6.36 million, or 3.05%from March 31, 2009.  The Company’sloan growth was primarily in the last half of 2009 and has slowed since thebeginning of 2010.  Management continuesto be cautious about the economy and therefore has maintained the lower growthloan strategy.

 

## **Deposits**

## ** **

Deposits increased by$22.82 million, or 10.40%, from December 31, 2009 to a balance of $242.13million as of March 31, 2010, and by $20.50 million, or 9.25% from March 31,2009.  The balance of certificates ofdeposit increased to $124.88 million as of March 31, 2010 from $109.03million as of December 31, 2009; while noninterest-bearing demand depositsincreased by $795,000 from $38.20 million, NOW and savings accounts increasedto $18.32 million from $17.20 million, and money market accounts increased to$59.94 million from $54.89 million, all for the same periods.

 

**ThreeMonths Ended March 31, 2010 and 2009**

 

Net income was $308,000for the three months ended March 31, 2010, as compared to $45,000 of netincome for the same period in 2009.  Theincrease in earnings for this quarter in 2010 is primarily related to anincrease in net interest income to $2.54 million from $2.00 million for thesame period in 2009, which is offset by an increase in income taxes of$152,000.  Basic earnings per share for the three months ended March 31, 2010and 2009 were $0.21 and $0.03, respectively, and were based on weighted-averagenumber of shares outstanding of 1,461,802 and 1,460,802, respectively.  Diluted earnings per share for the threemonths ended March 31, 2010 and 2009 were $0.21 and $0.03, respectively,and were based on weighted-average number of shares outstanding of 1,468,896and 1,481,419, respectively.

 

TheCompany experienced an annualized return on average assets of 0.47% and 0.07%for the three-month periods ended March 31, 2010 and 2009,respectively.  Additionally, the Companyexperienced an annualized return on average shareholders’ equity of 5.55% and0.86% for the three-month periods ended March 31, 2010 and 2009,respectively.

 

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**Distribution of Assets,Liabilities and Shareholders’ Equity; Interest Rates and Interest Differential**

 

The followingtables show average balances of asset and liability categories, interest incomeand interest expense, and average yields and rates for the periods indicated.

 
| ** **                                                                             | ** ** | **2010**                     | ** ** | **2009**                         | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| **Three Months Ended March 31,  (dollars in thousands)** | ** ** | **Average****daily balance** | ** ** | **Interest****Income/  Expense** | ** ** | **Average****Yield/ rate** | ** ** | **Average****daily balance** | ** ** | **Interest****Income/ Expense** | ** ** | **Average****Yield/ rate** | ** ** |
| Assets                                                                                 |       |                         |       |                             |       |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                                               |       |                         |       |                             |       |   |   |   |   |   |   |   |   |
| Federal funds sold                                                                     |       | $                            | 1,086      |                             | $          | — |   | — | % | $ | 1,127 |   | $ | 1 |   | 0.36 | % |
| Interest bearing deposits in other banks                                               |       | 15,500                       |       | 8                                |       | 0.21 |   | 17,102 |   | 9 |   | 0.21 |   |
| Investment securities (1):                                                             |       |                         |       |                             |       |   |   |   |   |   |   |   |   |
| Taxable                                                                                |       | 17,777                       |       | 127                              |       | 2.90 |   | 15,814 |   | 183 |   | 4.69 |   |
| Tax-exempt (2)                                                                         |       | 7,845                        |       | 121                              |       | 6.26 |   | 5,686 |   | 88 |   | 6.28 |   |
| Loans (3)                                                                              |       | 214,714                      |       | 3,322                            |       | 6.27 |   | 211,872 |   | 3,229 |   | 6.18 |   |
| Total interest-earning assets                                                          |       | 256,922                      |       | 3,578                            |       | 5.65 |   | 251,601 |   | 3,510 |   | 5.66 |   |
| Noninterest-earning assets                                                             |       | 7,267                        |       |                             |       |   |   | 5,016 |   |   |   |   |   |
| Total assets                                                                           |       | $                            | 264,189    |                             |       |   |   |   | $ | 256,617 |   |   |   |   |   |
|                                                                                   |       |                         |       |                             |       |   |   |   |   |   |   |   |   |
| Liabilities and Shareholders’ Equity                                              |       |                         |       |                             |       |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                                          |       |                         |       |                             |       |   |   |   |   |   |   |   |   |
| NOW accounts                                                                           |       | $                            | 12,359     |                             | 5          |   | 0.16 | % | $ | 11,917 |   | 7 |   | 0.24 | % |
| Savings accounts                                                                       |       | 4,874                        |       | 1                                |       | 0.08 |   | 4,136 |   | 3 |   | 0.29 |   |
| Money market accounts                                                                  |       | 58,143                       |       | 166                              |       | 1.16 |   | 38,757 |   | 115 |   | 1.20 |   |
| Certificates of deposit $100,000 or more                                               |       | 43,195                       |       | 231                              |       | 2.17 |   | 55,838 |   | 489 |   | 3.55 |   |
| Certificates of deposit less than $100,000                                             |       | 67,689                       |       | 343                              |       | 2.06 |   | 74,184 |   | 635 |   | 3.47 |   |
| Short-term borrowings                                                                  |       | 500                          |       | 5                                |       | 4.06 |   | — |   | — |   | — |   |
| Long-term borrowings                                                                   |       | 10,000                       |       | 114                              |       | 4.62 |   | 10,000 |   | 114 |   | 4.62 |   |
| Junior subordinated debentures                                                         |       | 6,186                        |       | 101                              |       | 6.62 |   | 6,186 |   | 101 |   | 6.62 |   |
| Total interest-bearing liabilities                                                     |       | 202,946                      |       | 966                              |       | 1.93 |   | 201,018 |   | 1,464 |   | 2.95 |   |
| Noninterest-bearing deposits                                                           |       | 38,353                       |       |                             |       |   |   | 34,170 |   |   |   |   |   |
| Noninterest-bearing liabilities                                                        |       | 706                          |       |                             |       |   |   | 545 |   |   |   |   |   |
| Total liabilities                                                                      |       | 242,005                      |       |                             |       |   |   | 235,733 |   |   |   |   |   |
| Total shareholders’ equity                                                        |       | 22,184                       |       |                             |       |   |   | 20,884 |   |   |   |   |   |
| Total liabilities and shareholders’  equity                                       |       | $                            | 264,189    |                             |       |   |   |   | $ | 256,617 |   |   |   |   |   |
| Net interest income                                                                    |       |                         |       | $                                | 2,612      |   |   |   |   |   | $ | 2,046 |   |   |   |
| Net interest spread                                                                    |       |                         |       |                             |       | 3.72 | % |   |   |   |   | 2.71 | % |
| Net interest margin                                                                    |       |                         |       |                             |       | 4.12 | % |   |   |   |   | 3.30 | % |

 

----

(1)          Yields on securities available-for-sale have beencalculated on the basis of historical cost and do not give effect to changes inthe fair value of those securities, which is reflected as a component ofshareholders’ equity.

(2)          Presented on a taxable-equivalent basis using thestatutory federal income tax rate of 34%. Taxable-equivalent adjustments of $41,000 in 2010 and $30,000 in 2009are included in the calculation of the tax-exempt investment interest income.

(3)          Presented on a taxable-equivalent basis using thestatutory federal income tax rate of 34%. Taxable-equivalent adjustments of $33,000 in 2010 and $16,000 in 2009are included in the calculation of the loan interest income.  Net loan origination income (expense) ininterest income totaled $13,000 in 2010 and $(4,000) in 2009.

 

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**Rate/VolumeAnalysis**

 

The followingtables indicate the changes in interest income and interest expense that areattributable to changes in average volume and average rates, in comparison withthe same period in the preceding year on a fully taxable equivalent basis.  The change in interest due to the combinedrate-volume variance has been allocated entirely to the change in rate.

 
| ** **                                 | ** ** | **Three Months Ended March 31,****2010 compared to 2009** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Increase (decrease)  Due to**                                                    | ** ** | **Net  increase** | ** ** |
| **(dollars in thousands)**       | ** ** | **Volume**                                                                                   | ** ** | **Rate** | ** ** | **(decrease)** | ** ** |
| Interest income                            |       |                                                                                         |       |   |   |   |   |
| Interest-earning assets:                   |       |                                                                                         |       |   |   |   |   |
| Federal funds sold                         |       | $                                                                                            | —     |   | $ | (1 | ) | $ | (1 | ) |
| Interest-bearing deposits in other banks   |       | (1                                                                                           | )          | — |   | (1 | ) |
| Investment securities:                     |       |                                                                                         |       |   |   |   |   |
| Taxable                                    |       | 23                                                                                           |       | (79 | ) | (56 | ) |
| Tax-exempt                                 |       | 34                                                                                           |       | (1 | ) | 33 |   |
| Loans                                      |       | 44                                                                                           |       | 49 |   | 93 |   |
| Total interest income                      |       | 100                                                                                          |       | (32 | ) | 68 |   |
|                                       |       |                                                                                         |       |   |   |   |   |
| Interest expense                           |       |                                                                                         |       |   |   |   |   |
| Interest-bearing liabilities:              |       |                                                                                         |       |   |   |   |   |
| NOW accounts                               |       | —                                                                                       |       | (2 | ) | (2 | ) |
| Savings accounts                           |       | 1                                                                                            |       | (3 | ) | (2 | ) |
| Money market accounts                      |       | 58                                                                                           |       | (7 | ) | 51 |   |
| Certificates of deposit $100,000 or more   |       | (112                                                                                         | )          | (146 | ) | (258 | ) |
| Certificates of deposit less than $100,000 |       | (56                                                                                          | )          | (236 | ) | (292 | ) |
| Short-term borrowings                      |       | —                                                                                       |       | 5 |   | 5 |   |
| Total interest expense                     |       | (109                                                                                         | )          | (389 | ) | (498 | ) |
| Net interest income                        |       | $                                                                                            | 209        |   | $ | 357 |   | $ | 566 |   |

 

## **NetInterest Income**

## ** **

Netinterest income is generated from the Company’s lending and investmentactivities, and is the most significant component of the Company’searnings.  Net interest income is thedifference between interest and rate-related fee income on earning assets(primarily loans and investment securities) and the interest paid on the funds(primarily deposits) supporting them. The Company primarily utilizes deposits to fund loans and investments, witha small amount of additional funding from junior subordinated debentures andminimal short-term and long-term borrowings. In future periods, the Company may utilize a higher level of short-termand long-term borrowings, including borrowings from the Federal Home Loan Bank,federal funds lines with correspondent banks and repurchase agreements, to fundoperations, depending on economic conditions, deposit availability and pricing,interest rates and other factors.

 

**ThreeMonths Ended March 31, 2010 and 2009**

 

Net interest income (on a taxable-equivalent basis) was $2.61 million in2010 and $2.05 million in 2009.  Thechange in net interest income was primarily driven by lower rates paid on alldeposit categories, along with an improvement in the volume of loans and therelated yields.  Average earning assetsincreased by $5.32 million, or 2.11%, since March 31, 2009.  The yield on earning assets in 2010 onlydecreased by 1 basis point to 5.65% from 5.66% in 2009.  The decrease of 102 basis points in the ratepaid on interest-bearing liabilities primarily is the result of the lower ratespaid on money market accounts and certificates of deposit.  The Company’s net interest margin was 4.12%and 3.30%, and the net interest spread was 3.72% and 2.71%, for the three-monthperiods ended March 31, 2010 and 2009, respectively.

 

Interest expense decreased 34.02% from $1.46 million in 2009 to $966,000in 2010 due to the reduced rates paid on interest-bearing liabilities, whichdecreased to 1.93% in 2010 from 2.95% in 2009 primarily as a result in declinesin rates on and volumes of certificates of deposit.

 

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**NoninterestIncome**

 

Noninterest income was $137,000 in 2010 and $108,000 in 2009 for therespective quarters ended March 31. Included in the period in 2009 is a loss on the sale of foreclosedproperties that amount to $32,000, whereas, there was no loss incurred duringthe same period in 2010..

 

## **Noninterest Expense**

## ** **

Noninterest expense amounted to $1.84 million and $1.68 million for thethree-month periods ended March 31, 2010 and 2009, respectively.  The primary increase in noninterest expensesin 2010 compared to 2009 relates to increases in salaries of $67,000,advertising of $36,000, and FDIC insurance premiums of $34,000, respectively.

 

**IncomeTaxes**

 

During the three monthsended March 31, 2010, the Company recognized a $132,000 income tax expensecompared to a $20,000 income benefit during the same period in 2009.  The effective tax rate for the three-monthperiods in 2010 was 30.00%, while the effective tax rate for the same period in2009 is not a meaningful number and was affected by the amount of tax exemptincome relative to pre-tax income.  Theincrease in income tax expense is due to the higher pre-tax income.

 

**Market Risk, Liquidity andInterest Rate Sensitivity**

 

Asset/liabilitymanagement involves the funding and investment strategies necessary to maintainan appropriate balance between interest sensitive assets and liabilities.  It also involves providing adequate liquiditywhile sustaining stable growth in net interest income.  Regular review and analysis of deposit andloan trends, cash flows in various categories of loans, and monitoring ofinterest spread relationships are vital to this process.

 

The conduct of ourbanking business requires that we maintain adequate liquidity to meet changesin the composition and volume of assets and liabilities due to seasonal,cyclical or other reasons.  Liquiditydescribes the ability of the Company to meet financial obligations that ariseduring the normal course of business. Liquidity is primarily needed to meet the borrowing and depositwithdrawal requirements of the customers of the Company, as well as for meetingcurrent and future planned expenditures. This liquidity is typically provided by the funds received throughcustomer deposits, investment maturities, loan repayments, borrowings, andincome.  Management considers the currentliquidity position to be adequate to meet the needs of the Company and itscustomers.

 

The Company seeksto limit the risks associated with interest rate fluctuations by managing thebalance between interest sensitive assets and liabilities.  Managing to mitigate interest rate risk is,however, not an exact science.  Not onlydoes the interval until repricing of interest rates on assets and liabilitieschange from day to day as the assets and liabilities change, but for someassets and liabilities, contractual maturity and the actual maturityexperienced are not the same.  Similarly,NOW and money market accounts, by contract, may be withdrawn in their entiretyupon demand and savings deposits may be withdrawn on seven days notice.  While these contracts are extremely short, itis the Company’s belief that these accounts turn over at the rate of fivepercent (5%) per year. The Company therefore treats them as having maturitiesstaggered over all periods.  If all ofthe Company’s NOW, money market, and savings accounts were treated as repricingin one year or less, the cumulative gap at one year or less would be $(56.46)million.

 

Interest ratesensitivity is an important factor in the management of the composition andmaturity configurations of the Company’s earning assets and fundingsources.  An Asset/Liability Committeemanages the interest rate sensitivity position in order to maintain anappropriate balance between the maturity and repricing characteristics ofassets and liabilities that is consistent with the Company’s liquidityanalysis, growth, and capital adequacy goals. It is the objective of the Asset/Liability Committee to maximize netinterest margins during periods of both volatile and stable interest rates, toattain earnings growth, and to maintain sufficient liquidity to satisfydepositors’ requirements and meet credit needs of customers.

 

The table below, “InterestRate Sensitivity Gap Analysis,” summarizes, as of March 31, 2010, theanticipated maturities or repricing of the Company’s interest-earning assetsand interest-bearing liabilities, the Company’s interest rate sensitivity gap(interest-earning assets less interest-bearing liabilities), the Company’scumulative interest rate sensitivity gap, and the Company’s cumulative interestsensitivity gap ratio (cumulative interest rate sensitivity gap divided bytotal assets).  A negative gap for anytime period means that more interest-bearing liabilities will reprice or matureduring that time period than interest-earning assets.  During periods of rising interest rates, anegative gap position would generally decrease earnings, and during periods ofdeclining interest rates, a negative gap position would generally increaseearnings.  The converse would be true fora positive gap position.  Therefore, apositive gap for any time period means that more interest-earning assets willreprice or mature during that time period than interest-bearingliabilities.  

 

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During periods ofrising interest rates, a positive gap position would generally increaseearnings, and during periods of declining interest rates, a positive gapposition would generally decrease earnings.

 

It is important tonote that the following table represents the static gap position for interestsensitive assets and liabilities at March 31, 2010.  The table does not give effect to prepaymentsor extensions of loans as a result of changes in general market interestrates.  Moreover, while the table doesindicate the opportunities to reprice assets and liabilities within certaintime frames, it does not account for timing differences that occur duringperiods of repricing.  For example,changes to deposit rates tend to lag in a rising rate environment and lead in afalling rate environment, although this will not always be the case.  Nor does it account for the effects ofcompetition on pricing of deposits and loans. For example, under current market conditions, market rates paid ondeposits may not be able to adjust by the full amount of downward adjustmentsin the federal funds target rate, while rates on loans will tend to adjust bythe full amount, subject to certain limitations.  In response to the weak economic climate, theCompany has maintained a higher level of liquidity over the past year, mostlyin interest-bearing deposits in other banks with the majority being held at theFederal Reserve.

 

**InterestRate Sensitivity Gap Analysis**

**March 31,2010**

 
| ** **                                            | ** ** | **Expected Repricing or Maturity Date** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------|------------|
| **(dollars in thousands)**                            | ** ** | **Within  One Year**                    | ** ** | **One to****Three Years** | ** ** | **Three to****Five Years** | ** ** | **After****Five Years** | ** ** | **Total** | ** ** |
| Assets                                                | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal  funds sold                                   |       | $                                       | 1,172      |   | $ | — |   | $ | — |   | $ | — |   | $ | 1,172 |   |
| Interest-bearing  deposits in other banks             |       | 28,919                                  |       | — |   | — |   | — |   | 28,919 |   |
| Investment  securities(1)                             |       | 1,230                                   |       | 5,124 |   | 7,218 |   | 14,180 |   | 27,752 |   |
| Loans                                                 |       | 80,455                                  |       | 84,291 |   | 32,799 |   | 17,041 |   | 214,586 |   |
| Total  interest-earning assets                        |       | 111,776                                 |       | 89,415 |   | 40,017 |   | 31,221 |   | 272,429 |   |
|                                                  | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Liabilities                                           |       |                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Savings  and NOW accounts                             |       | 916                                     |       | 1,832 |   | 1,832 |   | 13,736 |   | 18,316 |   |
| Money  Market accounts                                |       | 2,997                                   |       | 5,994 |   | 5,994 |   | 44,958 |   | 59,943 |   |
| Certificates  of deposit                              |       | 84,472                                  |       | 30,513 |   | 9,893 |   | — |   | 124,878 |   |
| Short-term  borrowings                                |       | 500                                     |       | — |   | — |   | — |   | 500 |   |
| Long-term  borrowings                                 |       | 5,000                                   |       | 5,000 |   | — |   | — |   | 10,000 |   |
| Junior  subordinated debentures                       |       | —                                  |       | 6,186 |   | — |   | — |   | 6,186 |   |
| Total  interest-bearing liabilities                   |       | 93,885                                  |       | 49,525 |   | 17,719 |   | 58,694 |   | 219,823 |   |
| Interest  rate sensitivity gap                        |       | $                                       | 17,891     |   | $ | 39,890 |   | $ | 22,298 |   | $ | (27,473 | ) | $ | 52,606 |   |
| Cumulative  interest rate sensitivity gap             |       | $                                       | 17,891     |   | $ | 57,781 |   | $ | 80,079 |   | $ | 52,606 |   |   |   |
| Cumulative  gap ratio as a percentage of total assets |       | 6.35                                    | %          | 20.52 | % | 28.44 | % | 18.68 | % |   |   |

 

----

(1) Excludes equitysecurities.

 

In addition to theInterest Rate Sensitivity Gap Analysis, the Company also uses an earningssimulation model on a quarterly basis to closely monitor interest sensitivityand to expose its balance sheet and income statement to differentscenarios.  The model is based on currentCompany data and adjusted by assumptions as to growth patterns, noninterestincome and noninterest expense and interest rate sensitivity, based on historicaldata, for both assets and liabilities projected for a one-year period.  The model is then subjected to a “shock test”assuming a sudden prime interest rate increase of 200 basis points or adecrease of 200 basis points, but not below zero.  The results show that with a 200 basis pointrise in the prime interest rate the Company’s net interest income woulddecrease by 1.04%.  However, a decreasein the prime interest rate of 200 basis points was not considered to befeasible since this would infer that the federal funds interest rate would fallbelow zero.

 

Certainshortcomings are inherent in this method of analysis.  For example, although certain assets andliabilities may have similar maturities or repricing periods, they may react indifferent degrees to changes in market interest rates.  Also, the interest rates on certain types ofassets and liabilities may fluctuate in advance of changes in market interestrates, while interest rates on other types may lag behind changes in marketrates.  Additionally, certain assets,such as adjustable-rate mortgage loans, have features that restrict changes ininterest rates on a short-term basis and over the life of the loan.  Further, in the event of a change in interestrates, prepayment and early withdrawal levels could deviate significantly fromthose assumed.  Finally, the ability ofmany borrowers to service their debt may decrease in the event of a significantinterest rate increase.

 

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**CriticalAccounting Policy:**

 

**Allowance for Loan Losses**

** **

The Company makesprovisions for loan losses in amounts deemed necessary to maintain theallowance for loan losses at an appropriate level.  The Company’s provision for loan losses forthe three months ended March 31, 2010 and 2009 was $400,000 for eachperiod.  The provision for loan losses isdetermined based upon Management’s estimate of the amount required to maintainan adequate allowance for loan losses reflective of the risks in the Company’sloan portfolio.  At March 31, 2010and December 31, 2009, the allowance for loan losses was $3.03 million and$3.13 million, respectively.  Thedecrease in the allowance from December 31, 2009 reflects the provision of$400,000 less net charge-offs of $500,000, as compared to a provision of$400,000 less net charge-offs of $682,000 in the same period of 2009.  The $500,000 of charge-offs in 2010 is aresult of one (1) commercial real estate relationship, as compared to the$682,000 of charge-offs in 2009, which consisted of two (2) commercialreal estate relationships in the amount of $448,000, three (3) commercialand industrial relationships in the amount of $226,000 and three (3) consumerrelationships in the amount of $8,000.

 

The Company prepares aquarterly analysis of the allowance for loan losses, with the objective ofquantifying portfolio risk into a dollar amount of inherent losses.  The determination of the allowance for loanlosses is based on eight qualitative factors and one quantitative factor foreach category and type of loan along with any specific allowance for adverselyclassified loans within each category. Each factor is assigned a percentage weight and that total weight isapplied to each loan category.  Factorsare different for each category. Qualitative factors include: levels and trends in delinquencies andnonaccrual loans; trends in volumes and terms of loans; effects of any changesin lending policies, the experience, ability and depth of management; nationaland local economic trends and conditions; concentrations of credit; quality ofthe Company’s loan review system; and regulatory requirements.  The total allowance required thus changes asthe percentage weight assigned to each factor increased or decreased due to theparticular circumstances, as the various types and categories of loans changeas a percentage of total loans and as specific allowances are required due toincreases in adversely classified loans.

 

Theallowance for loan losses is established as losses are estimated to haveoccurred through a provision for loan losses charged to earnings.  The allowance is based on two basicprinciples of accounting: (i) Accounting Standards Codification (“ASC”) ContingenciesTopic, which requires that losses be accrued when they are probable ofoccurring and estimable and (ii) ASC Receivables Topic, which requiresthat losses be accrued based on the differences between the loan balance andeither the value of collateral, or the present value of future cash flows, orthe loan’s value as observable in the secondary market.  A loan is considered impaired when, based oncurrent information and events, it is probable that the Bank will be unable tocollect the scheduled payments of principal or interest when due according tothe contractual terms of the loan agreement. Factors considered by Management in determining impairment includepayment status, collateral value, and the probability of collecting scheduledprincipal and interest payments when due. Loans that experience insignificant payment delays and paymentshortfalls generally are not classified as impaired.  Management determines the significance ofpayment delays and payment shortfalls on a case-by-case basis, taking intoconsideration all of the circumstances surrounding the loan and borrower,including the length of the delay, the reason for the delay, the borrower’sprior payment record, and the amount of the shortfall in relation to theprincipal and interest owed.  Theprovision for loan losses included in the statements of operations serves tomaintain the allowance at a level Management considers adequate.

 

TheCompany’s allowance for loan losses has three basic components: the specificallowance, the formula allowance and the pooled allowance.  Each of these components is determined basedupon estimates that can and do change when the actual events occur.  As a result of the uncertainties inherent inthe estimation process, Management’s estimate of loan losses and the relatedallowance could change in the near term.

 

Thespecific allowance component is used to individually establish an allowance forloans identified for impairment testing. When impairment is identified, a specific reserve may be establishedbased on the Company’s calculation of the estimated loss embedded in theindividual loan.  Impairment testingincludes consideration of the borrower’s overall financial condition, resourcesand payment record, support available from financial guarantors and the fairmarket value of collateral. These factors are combined to estimate theprobability and severity of inherent losses. Large groups of smaller balance, homogeneous loans are collectivelyevaluated for impairment. Accordingly, the Company does not separately identifyindividual consumer and residential mortgage loans for impairment.  At March 31, 2010 there were $12.60million of impaired loans, classified by internal measurements in thesubstandard category which required specific reserves of $384,000 for acarrying value $12.21 million.  Includedin this amount were three (3) commercial real estate loan relationships inthe amount of $479,000 and one (1) construction loan relationship in theamount of $102,000, totaling $581,000, all of which were in a nonaccrualstatus, that were deemed to be impaired, but required no reserve.  In addition, there were $3.61 million ofpotentially impaired loans that required specific reserves of $384,000 and theremaining loans of $8.41 million which did not require any additional specificreserve.  At March 31, 2009 therewere $15.72 million of impaired loans, classified by internal measurements inthe substandard category which required specific reserves of $292,000 for acarrying value $15.43 million.  Includedin this amount were four (4) commercial real estate loan relationships inthe amount of $894,000, one (1) construction loan relationship in theamount of $161,000 and one (1) commercial and industrial loan relationshipin the amount of 

 

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$71,000,totaling $1.13, all of which were in a nonaccrual status, that were deemed tobe impaired and required a specific reserve of $50,000.  In addition, there were $3.96 million ofpotentially impaired loans that required specific reserves of $243,000 and theremaining loans of $10.63 million which did not require any additional specificreserve.    All of the impaired loan relationshipsdiscussed are in different types of businesses.

 

Theformula allowance component is used for estimating the loss on internally riskrated loans and those loans identified for impairment testing.  The loans meeting the Company’s internalcriteria for classification, such as special mention, substandard, doubtful andloss are segregated from performing loans within the portfolio. Theseinternally classified loans are then grouped by loan type (commercial,commercial real estate, commercial construction, residential real estate,residential construction or installment). Each loan type is assigned an allowance factor based on Management’sestimate of the associated risk, complexity and size of the individual loanswithin the particular loan category. Classified loans are assigned a higherallowance factor than non-classified loans due to Management’s concernsregarding collectability or Management’s knowledge of particular elementssurrounding the borrower. Allowance factors increase with the worsening of theinternal risk rating.

 

Thepooled formula component is used to estimate the losses inherent in the poolsof non-classified loans.  These loans arethen also segregated by loan type and allowance factors are assigned byManagement based on delinquencies, loss history, trends in volume and terms ofloans, effects of changes in lending policy, the experience and depth ofManagement, national and local economic trends, concentrations of credit,quality of loan review system and the effect of external factors (i.e.competition and regulatory requirements). The allowance factors assigned differ by loan type.

 

Allowancefactors and overall size of the allowance may change from period to periodbased on Management’s assessment of the above-described factors and therelative weights given to each factor. In addition, various regulatory agencies periodically review theallowance for loan losses.  Theseagencies may require the Bank to make additions to the allowance for loanlosses based on their judgments of collectibility based on informationavailable to them at the time of their examination.

 

Managementbelieves that the allowance for loan losses is adequate.  There can be no assurance, however, thatadditional provisions for loan losses will not be required in the future,including as a result of changes in the economic assumptions underlyingManagement’s estimates and judgments, adverse developments in the economy, on anational basis or in the Company’s market area, or changes in the circumstancesof particular borrowers.

 

As of March 31,2010, the real estate loan portfolio constituted 86% of the total loanportfolio, as compared to 82% at December 31, 2009.  While this exceeds the 10% threshold fordetermining a concentration of credit risk within an industry, we do notconsider this to be a concentration with adverse risk characteristics given thediversity of borrowers within the real estate portfolio and other sources ofrepayment.  An industry for this purposeis defined as a group of counterparties that are engaged in similar activitiesand have similar economic characteristics that would cause their ability tomeet contractual obligations to be similarly affected by changes in economic orother conditions.  Additionally, the loanportfolio does not include concentrations of credit risk in residential loanproducts that permit the deferral of principal payments that are smaller thannormal interest accruals (negative amortization); loans with high loan-to-valueratios; or loans, such as option adjustable-rate mortgages, that may expose theborrower to future increases in repayments that are in excess of increases thatwould result solely from increases in market interest rates.  However, the Company does have interest onlyhome equity lines of credit with outstanding balances of $8.94 million of at March 31,2010.

** **
| ** **                                             | ** ** | **Three Months Ended**     | ** ** |
|--------------------------------------------------------|------------|----------------------------|------------|
| **(dollars in thousands)**                             | ** ** | **March 31,****2010** | ** ** | **March 31,****2009** | ** ** |
| Average  total loans outstanding during period         |       | $                          | 214,714    |   | $ | 211,872 |   |
| Balance  at beginning of period                        |       | $                          | 3,127      |   | $ | 3,120 |   |
| Recoveries  of loans previously charged-off (consumer) |       | —                     |       | 3 |   |
| Loans  charged-off (commercial and industrial)         |       | —                     |       | (226 | ) |
| Loans  charged-off (commercial real estate)            |       | (500                       | )          | (448 | ) |
| Loans  charged-off (consumer)                          |       | —                     |       | (11 | ) |
| Net  charge-offs                                       |       | (500                       | )          | (682 | ) |
| Provision  charged to operating expenses               |       | 400                        |       | 400 |   |
| Balance  at end of period                              |       | $                          | 3,027      |   | $ | 2,838 |   |
| Ratios  of net charge-offs to average loans            |       | 0.23                       | %          | 0.32 | % |

 

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Theallocation of the allowance, presented in the following table, is basedprimarily on the factors discussed above in evaluating the adequacy of theallowance as a whole.  Since all of thosefactors are subject to change, the allocation is not necessarily indicative ofthe category of recognized loan losses, and does not restrict the use of theallowance to absorb losses in any category.

 

**Allocation of Allowance for Loan Losses**

 
| ** **                                                                  | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                  | ** ** | **2010**           | ** ** | **% of********Loans** | ** ** | **2009** | ** ** | **% of********Loans** | ** ** |
| Real  estate-construction                                                   |       | $                  | 186        |                  | 8          | % | $ | 195 |   | 7 | % |
| Real  estate-mortgage                                                       |       | 2,305              |       | 78                    | %          | 2,296 |   | 75 | % |
| Commercial  and industrial loans                                            |       | 521                |       | 13                    | %          | 617 |   | 17 | % |
| Loans  to individuals for household, family and other personal expenditures |       | 15                 |       | 1                     | %          | 19 |   | 1 | % |
|                                                                        |       | $                  | 3,027      |                  | 100        | % | $ | 3,127 |   | 100 | % |

 
| ** **                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| Nonaccrual loans:                          |       |               |       |                  |       |
| Construction                               |       | $                  | 102        |                  | $          | 103 |   |
| Commercial real estate                     |       | 479                |       | 840                   |       |
| Total nonaccrual loans                     |       | 581                |       | 943                   |       |
| Loans 90 days past due  and still accruing |       | —             |       | —                |       |
| Total nonperforming  loans                 |       | 518                |       | 943                   |       |
| Foreclosure properties                     |       | 495                |       | 495                   |       |
| Total nonperforming  assets                |       | $                  | 1,076      |                  | $          | 1,438 |   |
| Nonperforming assets to  total assets      |       | 0.38               | %          | 0.56                  | %          |

 

There were no otherinterest-bearing assets at March 31, 2010 or December 31, 2009classified as past due 90 days or more and still accruing, restructured orproblem assets, and no loans which were currently performing in accordance withtheir terms, but as to which information known to Management caused it to haveserious doubts about the ability of the borrower to comply with the loan ascurrently written.

 

Informationconcerning the Company’s recorded investment in impaired loans is as follows:

 
| ** **                               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(dollars in thousands)**               | ** ** | **2010**           | ** ** | **2009**              | ** ** |
| Impaired loans with related allowance    |       | $                  | 4,378      |                  | $          | 4,982 |   |
| Specific allocation of allowance         |       | $                  | 384        |                  | $          | 600 |   |
| Impaired loans with no related allowance |       | $                  | 8,219      |                  | $          | 7,968 |   |

 
| ** **                                                                               | ** ** | **Three months ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                               | ** ** | **March 31,**     | ** ** | **March 31,** | ** ** |
| **(dollars in thousands)**                                                               | ** ** | **2010**               | ** ** | **2009** | ** ** |
| Average recorded investment in impaired loans                                            |       | $                      | 12,774     |   | $ | 9,323 |   |
| Interest income recognized on nonaccrual impaired  loans based on cash payments received |       | $                      | —     |   | $ | — |   |
| Interest income forgone on nonaccrual loans                                              |       | $                      | 19         |   | $ | 30 |   |

 

**Off-BalanceSheet Arrangements**

 

The Company is a party tofinancial instruments with off-balance sheet risk in the normal course ofbusiness to meet the financing needs of its customers.  These financial instruments includecommitments to extend credit, including unused portions of lines of credit, andstandby letters of credit.  The Companyhas also entered into long-term lease obligations for some of its premises andequipment, the terms of which generally include options to renew.  The above instruments and obligationsinvolve, to varying degrees, elements of off-balance sheet risk in excess ofthe amount recognized in the consolidated statements of financialcondition.  With the exception of theseinstruments and the Company’s obligations relating to its trust preferredsecurities, the Company does not have any off balance sheet arrangements thathave or are reasonably likely to have a current or future effect on the Company’sfinancial condition, 

 

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revenues or expenses,results of operations, liquidity, capital expenditures or capital resourcesthat is material to investors.

 

Commitments to extend credit and standby letters ofcredit were as follows:

 
| ** **                                                                       | ** ** | **March 31,**     | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                       | ** ** | **2010**               | ** ** |
| **(dollars in thousands)**                                                       | ** ** | **Contractual Amount** | ** ** |
| Financial  instruments whose notional or contract amounts represent credit risk: |       |                   |       |
| Commitments  to extend credit                                                    |       | $                      | 30,804     |   |
| Standby  letters of credit                                                       |       | 2,393                  |       |
| Total                                                                            |       | $                      | 33,197     |   |

 

SeeNote 9 to the Notes to the Consolidated Financial Statements included in theCompany’s Annual Report on Form 10-K for the year ended December 31,2009 for additional information regarding the Company’s long-term leaseobligations.

 

**CapitalResources**

 

Theability of the Company to grow is dependent on the availability of capital withwhich to meet regulatory capital requirements, discussed below.  To the extent the Company is successful itmay need to acquire additional capital through the sale of additional commonstock, other qualifying equity instruments or subordinated debt.  There can be no assurance that additionalcapital will be available to the Company on a timely basis or on attractiveterms.  On December 15, 2006, theCompany completed the issuance of $6.00 million of trust preferred securities,as discussed above, that can be recognized as capital for regulatorypurposes.  The Company has an unsecured revolving line of creditborrowing arrangement with an unaffiliated financial institution in the amountof $4.00 million with a $500,000 outstanding balance as of March 31, 2010and December 31, 2009.  Thisfacility matures on July 22, 2010, has a floating interest rate equal tothe Wall Street Journal prime rate plus 0.50%, subject to a minimum rate of4.25%, and requires monthly interest payments only.  The purpose of this facility is to providecapital to the Bank, as needed.  The Bankexpects to have this credit facility renewed, but there can be no assurance.

 

The Bank is subject tovarious regulatory capital requirements administered by the federal bankingagencies.  The Company will be subject tosuch requirements when its assets exceed $500 million, it has publicly issueddebt or it engages in certain highly leveraged activities.  Failure to meet minimum capital requirementscan initiate certain mandatory - and possibly additional discretionary -actions by regulators that, if undertaken, could have a direct material effecton the Company’s consolidated financial statements.

 

Under capital adequacyguidelines and the regulatory framework for prompt corrective action, the Bankmust meet specific capital guidelines that involve quantitative measures of theBank’s assets, liabilities, and certain off-balance-sheet items as calculatedunder regulatory accounting practices. The Bank’s capital amounts and classification are also subject toqualitative judgments by the regulators about components, risk weightings, andother factors.

 

Quantitative measures establishedby regulation to ensure capital adequacy require the Bank to maintain minimumamounts and ratios of total and Tier 1 capital (as defined in the regulations)to risk-weighted assets (as defined), and Tier 1 capital (as defined) toaverage assets (as defined).  Managementbelieves that the Bank met all capital adequacy requirements to which it issubject as of March 31, 2010 and that the Company would meet suchrequirements if applicable.  See Note 10to the consolidated financial statements for a table depicting compliance withregulatory capital requirements.

 

As of March 31,2010, the most recent notification from the regulatory agency categorized theBank as well capitalized under the regulatory framework for prompt correctiveaction.  To be categorized as wellcapitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,and Tier 1 leverage ratios as set forth in the table in Note 10.  There are no conditions or events since thatnotification which management believes have changed the Bank’s category.

 

On June 26, 2007,the Company authorized the repurchase of up to 146,000 shares of its commonstock, for an aggregate expenditure of not more than $4.5 million, through September 30,2012, or earlier termination of the program by the Board of Directors.  Repurchases, if any, by the Company pursuantto this authorization are expected to enable the Company to repurchase itsshares at an attractive price, and to provide a source of liquidity for theCompany’s shares.  As of March 31,2010, there have been no shares repurchased by the Company.

 

## **Inflation**

## ** **

The effect of changingprices on financial institutions is typically different than on non-bankingcompanies since virtually all of a Company’s assets and liabilities aremonetary in nature. In particular, interest rates are significantly affected byinflation, but neither the 

 

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timing nor magnitudeof the changes are directly related to price level indices; therefore, theCompany can best counter inflation over the long term by managing net interestincome and controlling net increases in noninterest income and expenses.

 

###### **Item 3.**                                                           Quantitative and Qualitative Disclosures About Market Risk

###### ** **

See“Market Risk, Liquidity and Interest Rate Sensitivity” at Page 21.

 

###### **Item 4T.**                                                   Controls and Procedures

###### ** **

## **The Company’s management, under the supervision and withthe participation of the Company’s Chief Executive Officer and Chief FinancialOfficer, evaluated, as of the last day of the period covered by this report,the effectiveness of the design and operation of the Company’s disclosurecontrols and procedures, as defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934.  Basedon that evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that the Company’s disclosure controls and procedures wereeffective.  There were no changes in theCompany’s internal control over financial reporting (as defined in Rule 13a-15under the Securities Act of 1934) during the quarter ended March 31, 2010that has materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.**

## ** **

## **PART II— Other Information**

## ** **

Item1.                       Legal Proceedings.  None

 

Item1A.             Risk Factors.  Not Applicable.

 

Item2.                       Unregistered Sales of Equity Securitiesand Use of Proceeds

 

(a)                    *Sales of UnregisteredSecurities. *None

 

(b)                   *Use of Proceeds. *Not Applicable.

 

(c)                    *Registrant**Purchases of Securities*

 

The following tableprovides information on the Company’s purchases of its common stock during thequarter ended March 31, 2010.

 
| **Period**               | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs(1)** | ** ** | **Maximum Number of  Shares that may yet be  Purchased Under the  Plans or Programs** | ** ** |
|--------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|
| January 1-31, 2010  |       | 0                                                    |       | N/A                                              |       | 0                                                                                                                                   |       | 0                                                                                                                                       |       |
| February 1-28, 2010 |       | 0                                                    |       | N/A                                              |       | 0                                                                                                                                   |       | 0                                                                                                                                       |       |
| March 1-31, 2010    |       | 0                                                    |       | N/A                                              |       | 0                                                                                                                                   |       | 146,000                                                                                                                                 | (2)        |

 

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(1)        On June 26, 2007, the Company’sBoard of Directors approved a share repurchase program that authorizes therepurchase of up to 146,000 shares of the Company’s outstanding common stock,subject to a maximum expenditure of $4.5 million.  Repurchases under the program may be made onthe open market and in privately negotiated transactions from time to timeuntil September 30, 2012, or earlier termination of the program by theBoard.

 

(2)        Subject to a maximum expenditure of $4.5million.  Number of shares indicated isthe remaining number of shares authorized for repurchase as of the end of theindicated period.

 

Item3.                       Defaults upon Senior Securities.  None

 

Item4.                       Removed and Reserved

 

Item5.                       Other Information  None

 

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Item6.                  Exhibits

 
| **Exhibit No.** | ** ** | **Description of Exhibits**                                                                                                                                                                                                               |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                                                                                                                |
| 3(a)                 |       | Articles of  Incorporation of the Company, as amended(1)                                                                                                                                                                                            |
| 3(b)                 |       | Bylaws of the  Company(2)                                                                                                                                                                                                                           |
| 4(a)                 |       | Indenture, dated as of  December 15, 2006 between Frederick County Bancorp, Inc. and U.S.  Bank National Association, as trustee(3)                                                                                                       |
| 4(b)                 |       | Amended and Restated  Declaration of Trust, dated as December 15, 2006 between Frederick  County Bancorp, Inc. and U.S. Bank National Association, as trustee, and  Martin S. Lapera and William R. Talley, Jr. as Administrators(3) |
| 4(c)                 |       | Guarantee Agreement  dated as of December 15, 2006 between Frederick County  Bancorp, Inc. and U.S. Bank National Association, as Guarantee  Trustee(3)                                                                                   |
| 10(a)                |       | 2001 Stock  Option Plan(4)                                                                                                                                                                                                                          |
| 10(b)                |       | Employment  Agreement between the Bank and Martin S. Lapera(5)                                                                                                                                                                                      |
| 10(c)                |       | Employment  Agreement between the Bank and William R. Talley, Jr. (6)                                                                                                                                                                          |
| 10(f)                |       | 2002 Executive and  Director Deferred Compensation Plan, as amended(7)                                                                                                                                                                              |
| 10(g)                |       | Amendment No. 1 to  the 2002 Executive and Director Deferred Compensation Plan(7)                                                                                                                                                              |
| 10(h)                |       | Promissory Note with  Atlantic Central Bankers Bank (8)                                                                                                                                                                                             |
| 11                   |       | Statement Regarding  Computation of Per Share Income — Please refer to Note 2 to the unaudited  consolidated financial statements included herein                                                                                              |
| 31(a)                |       | Certification of  Martin S. Lapera, President and Chief Executive Officer                                                                                                                                                                           |
| 31(b)                |       | Certification of  William R. Talley, Jr., Executive Vice President and Chief Financial  Officer                                                                                                                                                |
| 32(a)                |       | Certification of  Martin S. Lapera, President and Chief Executive Officer                                                                                                                                                                           |
| 32(b)                |       | Certification of  William R. Talley, Jr., Executive Vice President and Chief Financial  Officer                                                                                                                                                |

 

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(1)          Incorporated by reference to Exhibit of the samenumber to the Company’s Quarterly Report on Form 10-QSB for the quarterended September 30, 2004, as filed with the Securities and ExchangeCommission.

(2)          Incorporated by reference to Exhibit of the samenumber to the Company’s Quarterly Report on Form 10-QSB for the quarterended September 30, 2003, as filed with the Securities and ExchangeCommission.

(3)          Not filed in accordance with the provision of Item601(b)(4)(v) of Regulation SK.  TheCompany agrees to provide a copy of these documents to the Commission upon request.

(4)          Incorporated by reference to Exhibit 4 to theCompany’s Registration Statement on Form S-8 (No. 333-111761).

(5)          Incorporated by reference to Exhibit 10.1 to theCompany’s Current Report on Form 8-K filed on September 29, 2009.

(6)          Incorporated by reference to Exhibit 10.2 to theCompany’s Current Report on Form 8-K filed on September 29, 2009.

(7)          Incorporated by reference to Exhibit of the samenumber to the Company’s Annual Report on Form 10-KSB for the year ended December 31,2004, as filed with the Securities and Exchange Commission.

(8)          Incorporated by reference to Exhibit ofthe same number to the Company’s Annual Report on Form 10-K for the yearended December 31, 2009, as filed with the Securities and ExchangeCommission.

(9)          Incorporated by reference to Exhibit ofthe same number to the Company’s Quarterly Report on Form 10-QSB for thequarter ended September 30, 2008, as filed with the Securities andExchange Commission.

 

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**SIGNATURES**

 

In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 

 
|                          |   |   | FREDERICK  COUNTY BANCORP, INC.                       |
|-------------------------------|--------|--------|-------------------------------------------------------|
|                          |   |   |                                                  |
|                          |   |   |                                                  |
| Date:  May 11, 2010 |   | By:    | /s/ Martin S. Lapera                                  |
|                          |   |   | Martin  S. Lapera                                     |
|                          |   |   | President  and Chief Executive Officer                |
|                          |   |   |
|                          |   |   |
| Date:  May 11, 2010 |   | By:    | /s/ William R.  Talley, Jr.                      |
|                          |   |   | William  R. Talley, Jr.                          |
|                          |   |   | Executive  Vice President and Chief Financial Officer |

 

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