Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

**FORM 10-Q**

 

**(MARK ONE)**

 

| **x**                                                       | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d)****OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------|-------------------------------------------------------------------------------------------------------|
| ** **                                                  | ** **                                                                                            |
| **For the Quarterly Period Ended September 30,  2010** |
|                                                        |
| **OR**                                                      |
| ** **                                                  |
| **o**                                                       | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d)****OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from                  to                     **

 

**Commission File Number:  000-50407**

 

**FREDERICK COUNTY BANCORP, INC.**

(Exact name of registrant asspecified in its charter)

 

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

 

**9 North Market Street**

**Frederick, Maryland 21701**

(Address of registrant’sprincipal executive offices)

 

**301.620.1400**

(Registrant’s telephonenumber, including area code)

 

**N/A**

(Former name, former addressand former fiscal year, if changed since last report)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. x Yes  o No

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  o Yes  o No

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-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 |

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).  o Yes  x No

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practical date. There were 1,469,364 shares of Common Stock outstanding as of October 31,2010.

 

 

 

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Tableof Contents

 

**FREDERICKCOUNTY BANCORP, INC. AND SUBSIDIARY**

**TABLE OF CONTENTS**

 
| **PART I**  | **FINANCIAL INFORMATION**                                                                                                      |
|------------------|--------------------------------------------------------------------------------------------------------------------------------|
|             |
| Item  1.         | Financial  Statements (Unaudited)                                                                                              |
|             |                                                                                                                           |
|             | Consolidated****Balance Sheets, September 30, 2010  and December 31, 2009                                            |
|             |                                                                                                                           |
|             | Consolidated  Statements of Income, Three and Nine Months Ended September 30, 2010 and  2009                              |
|             |                                                                                                                           |
|             | Consolidated Statements of Changes in Shareholders’  Equity, Three and Nine Months Ended September 30, 2010 and 2009 |
|             |                                                                                                                           |
|             | Consolidated Statements of Cash Flows, Nine Months  Ended September 30, 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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Table of Contents

 

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

**Consolidated Balance Sheets**

 
| ** **                                                                                                                     | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(dollars in thousands)**                                                                                           | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| ** **                                                                                                                     | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| ** **                                                                                                                     | ** ** | ** **             | ** ** | ** **            | ** ** |
| ASSETS                                                                                                                         |       |                   |       |                  |       |
| Cash and due from banks                                                                                                        |       | $                      | 1,485      |                  | $          | 1,447 |   |
| Federal funds sold                                                                                                             |       | 1,400                  |       | 938                   |       |
| Interest-bearing deposits in other banks                                                                                       |       | 26,900                 |       | 9,729                 |       |
| Cash and cash equivalents                                                                                                      |       | 29,785                 |       | 12,114                |       |
| Investment securities available-for-sale at fair  value                                                                        |       | 42,015                 |       | 24,077                |       |
| Restricted stock                                                                                                               |       | 1,521                  |       | 1,566                 |       |
| Loans                                                                                                                          |       | 218,602                |       | 214,943               |       |
| Less: Allowance for loan losses                                                                                                |       | (3,528                 | )          | (3,127                | )          |
| Net loans                                                                                                                      |       | 215,074                |       | 211,816               |       |
| Bank premises and equipment                                                                                                    |       | 4,964                  |       | 4,997                 |       |
| Other assets                                                                                                                   |       | 4,068                  |       | 3,989                 |       |
| Total assets                                                                                                                   |       | $                      | 297,427    |                  | $          | 258,559 |   |
|                                                                                                                           |       |                   |       |                  |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                     |       |                   |       |                  |       |
|                                                                                                                           |       |                   |       |                  |       |
| **Liabilities**                                                                                                                |       |                   |       |                  |       |
| Deposits:                                                                                                                      |       |                   |       |                  |       |
| Noninterest-bearing deposits                                                                                                   |       | $                      | 40,060     |                  | $          | 38,199 |   |
| Interest-bearing deposits                                                                                                      |       | 216,322                |       | 181,113               |       |
| Total deposits                                                                                                                 |       | 256,382                |       | 219,312               |       |
| Short-term borrowings                                                                                                          |       | 300                    |       | 500                   |       |
| Long-term borrowings                                                                                                           |       | 10,000                 |       | 10,000                |       |
| Junior subordinated debentures                                                                                                 |       | 6,186                  |       | 6,186                 |       |
| Accrued interest and other liabilities                                                                                         |       | 1,193                  |       | 811                   |       |
| Total liabilities                                                                                                              |       | 274,061                |       | 236,809               |       |
|                                                                                                                           |       |                   |       |                  |       |
| **Shareholders’ Equity**                                                                                                  |       |                   |       |                  |       |
| Common stock, per share par value $0.01;  10,000,000 shares authorized; 1,469,364 and 1,461,802 shares issued and  outstanding |       | 15                     |       | 15                    |       |
| Additional paid-in capital                                                                                                     |       | 15,013                 |       | 14,702                |       |
| Retained earnings                                                                                                              |       | 7,875                  |       | 6,987                 |       |
| Accumulated other comprehensive income                                                                                         |       | 463                    |       | 46                    |       |
| Total shareholders’ equity                                                                                                |       | 23,366                 |       | 21,750                |       |
| Total liabilities and shareholders’ equity                                                                                |       | $                      | 297,427    |                  | $          | 258,559 |   |

 

Theaccompanying notes are an integral part of these unaudited consolidatedfinancial statements.

 

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

**Consolidated Statements ofIncome (Unaudited)**

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **(dollars in thousands, except per share amounts)** | ** ** | **September 30,  2010**     | ** ** | **September 30,  2009**    | ** ** | **September 30,  2010** | ** ** | **September 30,  2009** | ** ** |
| Interest income:                                                                   |       |                             |       |                            |       |   |   |   |   |
| Interest and fees on loans                                                         |       | $                                | 3,392      |                            | $          | 3,305 |   | $ | 10,059 |   | $ | 9,748 |   |
| Interest and dividends on investment securities:                                   |       |                             |       |                            |       |   |   |   |   |
| Interest — taxable                                                            |       | 218                              |       | 115                             |       | 491 |   | 443 |   |
| Interest — tax exempt                                                         |       | 76                               |       | 58                              |       | 235 |   | 174 |   |
| Dividends                                                                          |       | 12                               |       | 13                              |       | 37 |   | 36 |   |
| Interest on federal funds sold                                                     |       | 1                                |       | 1                               |       | 2 |   | 2 |   |
| Other interest income                                                              |       | 18                               |       | 16                              |       | 42 |   | 37 |   |
| Total interest income                                                              |       | 3,717                            |       | 3,508                           |       | 10,866 |   | 10,440 |   |
| Interest expense:                                                                  |       |                             |       |                            |       |   |   |   |   |
| Interest on deposits                                                               |       | 825                              |       | 1,087                           |       | 2,376 |   | 3,501 |   |
| Interest on short-term borrowings                                                  |       | 4                                |       | 3                               |       | 15 |   | 3 |   |
| Interest on long-term borrowings                                                   |       | 117                              |       | 117                             |       | 346 |   | 346 |   |
| Interest on junior subordinated debentures                                         |       | 101                              |       | 101                             |       | 303 |   | 303 |   |
| Total interest expense                                                             |       | 1,047                            |       | 1,308                           |       | 3,040 |   | 4,153 |   |
| Net interest income                                                                |       | 2,670                            |       | 2,200                           |       | 7,826 |   | 6,287 |   |
| Provision for loan losses                                                          |       | 410                              |       | 275                             |       | 1,010 |   | 875 |   |
| Net interest income after provision for loan  losses                               |       | 2,260                            |       | 1,925                           |       | 6,816 |   | 5,412 |   |
| Noninterest income:                                                                |       |                             |       |                            |       |   |   |   |   |
| Securities gains                                                                   |       | 1                                |       | —                          |       | 85 |   | 117 |   |
| Loss on sale of foreclosed properties                                              |       | —                           |       | (5                              | )          | — |   | (37 | ) |
| Service fees                                                                       |       | 100                              |       | 98                              |       | 284 |   | 267 |   |
| Other operating income                                                             |       | 49                               |       | 50                              |       | 149 |   | 155 |   |
| Total noninterest income                                                           |       | 150                              |       | 143                             |       | 518 |   | 502 |   |
| Noninterest expense:                                                               |       |                             |       |                            |       |   |   |   |   |
| Salaries and employee benefits                                                     |       | 1,201                            |       | 917                             |       | 3,540 |   | 2,807 |   |
| Occupancy and equipment expenses                                                   |       | 307                              |       | 318                             |       | 934 |   | 977 |   |
| Other operating expenses                                                           |       | 531                              |       | 453                             |       | 1,474 |   | 1,369 |   |
| Total noninterest expense                                                          |       | 2,039                            |       | 1,688                           |       | 5,948 |   | 5,153 |   |
| Income before provision for income taxes                                           |       | 371                              |       | 380                             |       | 1,386 |   | 761 |   |
| Provision for income tax expense                                                   |       | 129                              |       | 121                             |       | 498 |   | 218 |   |
| Net income                                                                         |       | $                                | 242        |                            | $          | 259 |   | $ | 888 |   | $ | 543 |   |
| Basic earnings per share                                                           |       | $                                | 0.16       |                            | $          | 0.18 |   | $ | 0.60 |   | $ | 0.37 |   |
| Diluted earnings per share                                                         |       | $                                | 0.16       |                            | $          | 0.18 |   | $ | 0.60 |   | $ | 0.37 |   |
| Basic weighted average number of shares  outstanding                               |       | 1,473,258                        |       | 1,460,900                       |       | 1,469,011 |   | 1,460,835 |   |
| Diluted weighted average number of shares  outstanding                             |       | 1,488,820                        |       | 1,469,858                       |       | 1,481,562 |   | 1,475,909 |   |

 

Theaccompanying notes are an integral part of these unaudited consolidatedfinancial statements.

 

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

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

 

*Three Months Ended September 30,*

 
| **(dollars in thousands)**                                                                    | ** ** | **Shares****Outstanding** | ** ** | **Common****Stock** | ** ** | **Additional  Paid-in****Capital** | ** ** | **Retained****Earnings** | ** ** | **Accumulated****Other Comprehensive  Income (Loss)** | ** ** | **Total****Shareholders’ Equity** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------|------------|------------------------------------|------------|--------------------------|------------|-------------------------------------------------------|------------|----------------------------------------|------------|
|                                                                                                    |       |                      |       |                |       |                               |       |                     |       |                                                  |       |                                   |       |
| Balance, July 1, 2009                                                                              |       | 1,460,802                 |       | $                   | 15         |                               | $          | 14,690                   |       | $                                                     | 6,223      |                                   | $          | 19 |   | $ | 20,947 |   |
| Comprehensive income:                                                                                   |       |                      |       |                |       |                               |       |                     |       |                                                  |       |                                   |       |
| Net income                                                                                              |       |                      |       |                |       |                               |       | 259                      |       |                                                  |       | 259                                    |       |
| Changes in net unrealized gains (losses) on  securities available for sale, net of income taxes of $168 |       |                      |       |                |       |                               |       |                     |       | 258                                                   |       | 258                                    |       |
| Reclassification adjustment for (gains) losses  realized, net of income taxes of $46                    |       |                      |       |                |       |                               |       |                     |       | (71                                                   | )          | (71                                    | )          |
| Total Comprehensive income                                                                              |       |                      |       |                |       |                               |       |                     |       |                                                  |       | 446                                    |       |
| Shares issued under stock option transactions                                                           |       | 1,000                     |       |                |       | 10                                 |       |                     |       |                                                  |       | 10                                     |       |
| Balance, September 30, 2009                                                                        |       | 1,461,802                 |       | $                   | 15         |                               | $          | 14,700                   |       | $                                                     | 6,482      |                                   | $          | 206 |   | $ | 21,403 |   |
| Balance, July 1, 2010                                                                              |       | 1,474,482                 |       | $                   | 15         |                               | $          | 15,015                   |       | $                                                     | 7,633      |                                   | $          | 291 |   | $ | 22,954 |   |
| Comprehensive income:                                                                                   |       |                      |       |                |       |                               |       |                     |       |                                                  |       |                                   |       |
| Net income                                                                                              |       |                      |       |                |       |                               |       | 242                      |       |                                                  |       | 242                                    |       |
| Changes in net unrealized gains (losses) on  securities available for sale, net of income taxes of $145 |       |                      |       |                |       |                               |       |                     |       | 223                                                   |       | 223                                    |       |
| Reclassification adjustment for (gains) losses  realized, net of income taxes of $33                    |       |                      |       |                |       |                               |       |                     |       | (51                                                   | )          | (51                                    | )          |
| Total Comprehensive income                                                                              |       |                      |       |                |       |                               |       |                     |       |                                                  |       | 414                                    |       |
| Shares repurchased under stock repurchase  transactions                                                 |       | (5,118                    | )          |                |       | (62                                | )          |                     |       |                                                  |       | (62                                    | )          |
| Compensation expense from stock option  transactions                                                    |       |                      |       |                |       | 51                                 |       |                     |       |                                                  |       | 51                                     |       |
| Excess tax benefit from equity-based awards                                                             |       |                      |       |                |       | 9                                  |       |                     |       |                                                  |       | 9                                      |       |
| Balance, September 30, 2010                                                                        |       | 1,469,364                 |       | $                   | 15         |                               | $          | 15,013                   |       | $                                                     | 7,875      |                                   | $          | 463 |   | $ | 23,366 |   |

 

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

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

 

*Nine Months Ended September 30,*

 
| **(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                                                                                              |       |                      |       |                |       |                               |       | 543                      |       |                                                 |       | 543                                    |       |
| Changes in net unrealized gains (losses) on  securities available for sale, net of income taxes of $201 |       |                      |       |                |       |                               |       |                     |       | 309                                                  |       | 309                                    |       |
| Reclassification adjustment for (gains) losses  realized, net of income taxes of $46                    |       |                      |       |                |       |                               |       |                     |       | (71                                                  | )          | (71                                    | )          |
| Total Comprehensive income                                                                              |       |                      |       |                |       |                               |       |                     |       |                                                 |       | 781                                    |       |
| Shares issued under stock option transactions                                                           |       | 1,000                     |       |                |       | 10                                 |       |                     |       |                                                 |       | 10                                     |       |
| Balance, September 30, 2009                                                                        |       | 1,461,802                 |       | $                   | 15         |                               | $          | 14,700                   |       | $                                                    | 6,482      |                                   | $          | 206 |   | $ | 21,403 |   |
| Balance, January 1, 2010                                                                           |       | 1,461,802                 |       | $                   | 15         |                               | $          | 14,702                   |       | $                                                    | 6,987      |                                   | $          | 46 |   | $ | 21,750 |   |
| Comprehensive income:                                                                                   |       |                      |       |                |       |                               |       |                     |       |                                                 |       |                                   |       |
| Net income                                                                                              |       |                      |       |                |       |                               |       | 888                      |       |                                                 |       | 888                                    |       |
| Changes in net unrealized gains (losses) on  securities available for sale, net of income taxes of $305 |       |                      |       |                |       |                               |       |                     |       | 468                                                  |       | 468                                    |       |
| Reclassification adjustment for (gains) losses  realized, net of income taxes of $33                    |       |                      |       |                |       |                               |       |                     |       | (51                                                  | )          | (51                                    | )          |
| Total Comprehensive income                                                                              |       |                      |       |                |       |                               |       |                     |       |                                                 |       | 1,305                                  |       |
| Shares repurchased under stock repurchase  transactions                                                 |       | (5,118                    | )          |                |       | (62                                | )          |                     |       |                                                 |       | (62                                    | )          |
| Shares issued under stock option transactions                                                           |       | 12,680                    |       |                |       | 127                                |       |                     |       |                                                 |       | 127                                    |       |
| Compensation expense from stock option  transactions                                                    |       |                      |       |                |       | 204                                |       |                     |       |                                                 |       | 204                                    |       |
| Excess tax benefit from equity-based awards                                                             |       |                      |       |                |       | 42                                 |       |                     |       |                                                 |       | 42                                     |       |
| Balance, September 30, 2010                                                                        |       | 1,469,364                 |       | $                   | 15         |                               | $          | 15,013                   |       | $                                                    | 7,875      |                                   | $          | 463 |   | $ | 23,366 |   |

 

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

**Consolidated Statements ofCash Flows (Unaudited)**

 
| ** **                                                                                       | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(dollars in thousands)**                                                             | ** ** | **2010**                                                | ** ** | **2009** | ** ** |
| Cash flows from operating  activities:                                                           |       |                                                    |       |   |   |
| Net income                                                                                       |       | $                                                       | 888        |   | $ | 543 |   |
| Adjustments to reconcile net  income to net cash provided by  operating activities:              |       |                                                    |       |   |   |
| Depreciation and  amortization                                                                   |       | 225                                                     |       | 245 |   |
| Deferred income benefits                                                                         |       | (168                                                    | )          | (10 | ) |
| Provision for loan losses                                                                        |       | 1,010                                                   |       | 875 |   |
| Securities gains                                                                                 |       | (85                                                     | )          | (117 | ) |
| Net premium amortization on  investment securities                                               |       | 253                                                     |       | 14 |   |
| Stock option compensation  expense                                                               |       | 204                                                     |       | — |   |
| Loss on sale of foreclosed  properties                                                           |       | —                                                  |       | 37 |   |
| Decrease in accrued interest  and other assets                                                   |       | 89                                                      |       | 251 |   |
| Increase (decrease) in  accrued interest and other liabilities                                   |       | 110                                                     |       | (84 | ) |
| Net cash provided by  operating activities                                                       |       | 2,526                                                   |       | 1,754 |   |
| Cash flows from investing  activities:                                                           |       |                                                    |       |   |   |
| Purchases of investment  securities available for sale                                           |       | (26,881                                                 | )          | (8,784 | ) |
| Proceeds from sales of  investment securities available for sale                                 |       | 4,195                                                   |       | 4,115 |   |
| Proceeds from maturities,  prepayments and calls  investment  securities available for sale      |       | 5,269                                                   |       | 2,454 |   |
| Net redemptions of  restricted stock                                                             |       | 45                                                      |       | 33 |   |
| Net increase in loans                                                                            |       | (4,268                                                  | )          | (749 | ) |
| Purchases of bank premises  and equipment                                                        |       | (192                                                    | )          | (70 | ) |
| Proceeds from sale of  foreclosed properties                                                     |       | —                                                  |       | 484 |   |
| Net cash used in investing  activities                                                           |       | (21,832                                                 | )          | (2,517 | ) |
| Cash flows from financing  activities:                                                           |       |                                                    |       |   |   |
| Net increase in NOW, money  market accounts, savings  accounts  and noninterest-bearing deposits |       | 17,123                                                  |       | 26,544 |   |
| Net increase (decrease) in  time deposits                                                        |       | 19,947                                                  |       | (15,641 | ) |
| Net (decrease) increase in  short-term borrowings                                                |       | (200                                                    | )          | 500 |   |
| Proceeds from issuance of  common stock                                                          |       | 127                                                     |       | 10 |   |
| Repurchase of common stock                                                                       |       | (62                                                     | )          | — |   |
| Excess tax benefit from  equity-based awards                                                     |       | 42                                                      |       | — |   |
| Net cash provided by  financing activities                                                       |       | 36,977                                                  |       | 11,413 |   |
| Net increase in cash and  cash equivalents                                                       |       | 17,671                                                  |       | 10,650 |   |
| Cash and cash equivalents —  beginning of period                                            |       | 12,114                                                  |       | 16,055 |   |
| Cash and cash equivalents —  end of period                                                  |       | $                                                       | 29,785     |   | $ | 26,705 |   |
| Supplemental cash flow  disclosures:                                                             |       |                                                    |       |   |   |
| Interest paid                                                                                    |       | $                                                       | 3,051      |   | $ | 4,185 |   |
| Income taxes paid                                                                                |       | $                                                       | 584        |   | $ | 250 |   |
| Foreclosed properties  acquired in settlement of loans                                           |       | $                                                       | —     |   | $ | 654 |   |

 

Theaccompanying notes are an integral part of these unaudited consolidatedfinancial statements.

 

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**FREDERICK COUNTY BANCORP, INC.**

 

Notes to Unaudited Consolidated Financial Statements

 

**Note 1.  General:**

 

Frederick County Bancorp, Inc. (the “Bancorp”), the parent companyfor its wholly-owned subsidiary Frederick County Bank (the “Bank” and togetherwith Bancorp, the “Company”), was organized in September 2003. The Bankwas 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 unauditedconsolidated financial statements of the Company have been prepared inaccordance with accounting principlesgenerally accepted in the United States of America for interim financialinformation, the instructions for Form 10-Q, Regulation S-X, and generalpractices 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.

 

The preparation of financial statements requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. These estimates and assumptions are based on information available as ofthe date of the consolidated financial statements and could differ from actualresults.

 

**RecentAccounting Pronouncements**

 

In June 2009, theFinancial Accounting Standards Board (“FASB”) issued new guidance under ASCTopic 860 *Transfers and Servicing*, also known asAccounting Standards Update (“ASU”) 2009-16,**for guidanceon the transfer and servicing of financial assets.  This guidance eliminates the concept of a “qualifyingspecial-purpose entity” from the original accounting guidance and removes theexception from applying FASB guidance on consolidation of variable interestentities*,*to qualifying special-purposeentities.  This guidance is effective atthe beginning of a reporting entity’s first fiscal year that begins after November 15,2009.  The Company adopted this guidanceon January 1, 2010 and it did not have a material impact on the Company’sconsolidated financial condition or results of operations.

 

In June 2009, the FASBissued new guidance under ASC Topic 810 *Consolidation*,also known as ASU 2009-17, for guidance on the consolidation of variableinterest entities.  This amends theoriginal guidance*,*to require an enterprise toperform an analysis to determine whether the enterprise’s variable interest orinterests give it a controlling financial interest in a variable interestentity (VIE).  This analysis identifiesthe primary beneficiary of a VIE as the enterprise that has both (a) thepower to direct the activities of a VIE that most significantly impact theentity’s economic performance, and (b) the obligation to absorb losses ofthe entity that could potentially be significant to the VIE.  Additionally, this new guidance requires anenterprise to assess whether it has an implicit financial responsibility toensure that a VIE operates as designed when determining it has the power todirect the activities of the VIE that most significantly impact the entity’seconomic performance.  It is effective atthe beginning of a company’s first fiscal year that begins after November 15,2009.  The Company adopted this guidanceon January 1, 2010 and it did not have a material impact on the Company’sconsolidated financial condition or results of operations.

 

In January 2010, theFASB issued new guidance under ASC Topic 820 *Fair ValueMeasurements and Disclosures*, also known as ASU 2010-06, to improvedisclosures about fair value measurements. The guidance requires entities to disclose separately the amounts ofsignificant transfers in and out of Level 1 and Level 2 fair valuemeasurements and describe the reasons for the same.  It also requires Level 3 reconciliationto be presented on a gross basis disclosing purchases, sales, issuances andsettlements separately.  The guidance iseffective for interim and annual financial periods beginning afterDecember 15, 2009 except for gross basis presentation for Level 3reconciliation, which is effective for interim and annual periods beginningafter December 15, 2010.  The disclosure requirements effectivefor interim and annual financial periods beginning after December 15, 2009have been adopted for 

 

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the interim period endedMarch 31, 2010.

 

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In July 2010, the FASB issued new guidanceunder ASC Topic *Receivables - Disclosures aboutthe Credit Quality of Financing Receivables and the Allowance for Credit Losses”* also known as ASU 2010-20. The guidance requires entities to provide disclosures designed tofacilitate financial statement users’ evaluation of (i) the nature ofcredit risk inherent in the entity’s portfolio of financing receivables, (ii) howthat risk is analyzed and assessed in arriving at the allowance for creditlosses and (iii) the changes and reasons for those changes in theallowance for credit losses.  Disclosuresmust be disaggregated by portfolio segment, the level at which an entitydevelops and documents a systematic method for determining its allowance forcredit losses, and class of financing receivable, which is generally adisaggregation of portfolio segment.  Therequired disclosures include, among other things, a roll forward of the allowancefor credit losses as well as information about modified, impaired, non-accrualand past due loans and credit quality indicators.  ASU 2010-20 will be effective for the Company’sfinancial statements as of December 31, 2010, as it relates to disclosuresrequired as of the end of a reporting period. Disclosures that relate to activity during a reporting period will berequired for the Company’s financial statements that include periods beginningon or after January 1, 2011.

 

**Note 2. Earnings Per Share:**

 

Earningsper share (“EPS”) are disclosed as basic and diluted.  Basic EPS is generally computed by dividingnet income by the weighted-average number of common shares outstanding for theperiod, whereas diluted EPS essentially reflects the potential dilution inbasic EPS that could occur if other contracts to issue common stock wereexercised.

 
| ** **                                                                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended****September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-------------------------------------------------------|------------|
| **(dollars in thousands, except per share amounts)** | ** ** | **2010**                                             | ** ** | **2009**                                              | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net income                                                                         |       | $                                                    | 242        |                                                  | $          | 259 |   | $ | 888 |   | $ | 543 |   |
| Basic earnings per share                                                           |       | $                                                    | 0.16       |                                                  | $          | 0.18 |   | $ | 0.60 |   | $ | 0.37 |   |
| Diluted earnings per share                                                         |       | $                                                    | 0.16       |                                                  | $          | 0.18 |   | $ | 0.60 |   | $ | 0.37 |   |
| Basic weighted average number of shares  outstanding                               |       | 1,473,258                                            |       | 1,460,900                                             |       | 1,469,011 |   | 1,460,835 |   |
| Effect of dilutive securities — stock options                                 |       | 15,562                                               |       | 8,958                                                 |       | 12,551 |   | 15,074 |   |
| Diluted weighted average number of shares  outstanding                             |       | 1,488,820                                            |       | 1,469,858                                             |       | 1,481,562 |   | 1,475,909 |   |
| Anti-dilutive securities outstanding                                               |       | 118,700                                              |       | —                                                |       | 121,700 |   | — |   |

 

**Note 3. Employee Stock Option Plan:**

 

The Company maintains an Employee StockOption Plan that provides for grants of incentive and non-incentive stockoptions.  This plan has been presented toand approved by the Company’s shareholders. There were 118,700 stock options granted in April 2010 and 3,000stock options granted in December 2009. All prior grants were fully vested and exercisable as of December 31,2003.  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 is recognized over the vesting period of the award.  Stock-based compensation expense related tostock options for the three and nine-month periods ended September 30,2010 was $51 thousand and $204 thousand, respectively, whereas, no stock-basedcompensation was recognized in either the three or nine-month periods ended September 30,2009.  As of September 30, 2010,there was $179 thousand of total unrecognized compensation cost related tonon-vested stock options that will be expensed over the period October 1,2010 through April 30, 2012.

 

The weighted-average fair value of optionsgranted in the nine months ended September 30, 2010 and the year ended December 31,2009 was $3.17 and $2.97, respectively, and was estimated at the date of grantusing the Black-Scholes Option Pricing Model with the following weightedaverage assumptions.

** **
| ** **                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Risk free interest rate of return |       | 3.80                   | %          | 3.85                  | %          |
| Expected option life (months)     |       | 60                     |       | 120                   |       |
| Expected volatility               |       | 25                     | %          | 25                    | %          |
| Expected dividends                |       | —                 | %          | 2.50                  | %          |

 

Therisk-free interest rate is based on the U.S. Treasury yield curve in effect atthe time of the grant.  The expected lifeis based on historical experience.  Theexpected volatility is based on historic volatility.  The dividend yield assumption is based on theCompany’s expectation of dividend payouts.

 

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Thefollowing is a summary of stock option transactions during the nine monthsended September 30, 2010.

 
| ** **                             | ** ** | **Options Issued  and Outstanding** | ** ** | **Weighted-Average  Exercise Price** | ** ** |
|----------------------------------------|------------|-----------------------------------------------|------------|-------------------------------------------|------------|
| Balance at January 1, 2010        |       | 129,810                                       |       | $                                         | 10.02      |   |
| Exercised                              |       | 12,680                                        |       | 10.00                                     |       |
| Granted                                |       | 118,700                                       |       | 11.35                                     |       |
| Balance at September 30 , 2010    |       | 235,830                                       |       | $                                         | 10.57      |   |
| Exercisable at September 30, 2010 |       | 150,640                                       |       | $                                         | 10.32      |   |

 

**Note4.  Investment Portfolio:**

 

The following tables set forth certain informationregarding the Company’s investment portfolio at September 30, 2010 and December 31,2009:

 

**Available-for-sale portfolio**

** **

*September 30, 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                               |       | $                   | 431        |                                     | $          | 27                                        |       | $                          | —     |               | $          | 458 |   | 4.82 | % |
| Due after five years  through ten years                              |       | 872                 |       | 30                                       |       | —                                    |       | 902                        |       | 2.82               | %          |
|                                                                 |       | 1,303               |       | 57                                       |       | —                                    |       | 1,360                      |       |               |       |
| State and political  subdivisions:                                   |       |                |       |                                     |       |                                      |       |                       |       |               |       |
| Due after five years  through ten years                              |       | 2,095               |       | 52                                       |       | —                                    |       | 2,147                      |       | 5.36               | %          |
| Due after ten years                                                  |       | 7,007               |       | 285                                      |       | —                                    |       | 7,292                      |       | 5.74               | %          |
|                                                                 |       | 9,102               |       | 337                                      |       | —                                    |       | 9,439                      |       |               |       |
| Mortgage-backed debt  securities                                     |       | 30,545              |       | 418                                      |       | 47                                        |       | 30,916                     |       | 3.08               | %          |
| Equity securities                                                    |       | 300                 |       | —                                   |       | —                                    |       | 300                        |       | —             | %          |
|                                                                 |       | $                   | 41,250     |                                     | $          | 812                                       |       | $                          | 47         |               | $          | 42,015 |   | 3.64 | % |

 

*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               | %          |
|                                                                 |       | 2,378               |       | 61                                       |       | 5                                         |       | 2,434                      |       |               |       |
| 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               | %          |
|                                                                 |       | 7,845               |       | 37                                       |       | 31                                        |       | 7,851                      |       |               |       |
| Mortgage-backed debt  securities                                     |       | 13,478              |       | 83                                       |       | 69                                        |       | 13,492                     |       | 3.63               | %          |
| Equity securities                                                    |       | 300                 |       | —                                   |       | —                                    |       | 300                        |       | —             | %          |
|                                                                 |       | $                   | 24,001     |                                     | $          | 181                                       |       | $                          | 105        |               | $          | 24,077 |   | 4.38 | % |

 

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| ** **                                                         | ** ** | **Continuous unrealized  losses existing for less than  12 months** | ** ** | **Continuous unrealized  losses existing for 12  months and greater** | ** ** | **Total**                    | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| **September 30, 2010  (dollars in thousands)** | ** ** | **Estimated  Fair****Value**                                                                      | ** ** | **Unrealized  Losses**                                                                              | ** ** | **Estimated  Fair****Value** | ** ** | **Unrealized  Losses** | ** ** | **Estimated  Fair****Value** | ** ** | **Unrealized  Losses** | ** ** |
| Mortgage-backed debt securities                                    |       | $                                                                                                 | 8,678      |                                                                                                | $          | 47                           |       | $ | — |   | $ | — |   | $ | 8,678 |   | $ | 47 |   |
| Total temporarily impaired securities                              |       | $                                                                                                 | 8,678      |                                                                                                | $          | 47                           |       | $ | — |   | $ | — |   | $ | 8,678 |   | $ | 47 |   |

 
| ** **                                                         | ** ** | **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 |   |

 

Managementsystematically evaluates investment securities for other-than-temporarydeclines in fair value on a quarterly basis. This analysis requires management to consider various factors, whichinclude (1) duration and magnitude of the decline in value, (2) thefinancial condition of the issuer or issuers and (3) the structure of thesecurity. An impairment loss is recognized in earnings only when: (1) weintend to sell the debt security; (2) it is more likely than not that wewill be required to sell the security before recovery of its amortized costbasis; or (3) we do not expect to recover the entire amortized cost basisof the security.  In situations where weintend to sell or when it is more likely than not that we will be required tosell the security, the entire impairment loss must be recognized inearnings.  In all other situations, onlythe portion of the impairment loss representing the credit loss must berecognized in earnings, with the remaining portion being recognized inshareholders’ equity as a component of other comprehensive income, net ofdeferred taxes.  Credit loss isdetermined by calculating the present value of future cash flows of thesecurity compared to the amortized cost of the security.  Realized gains or losses on the sale ofinvestment and mortgage-backed securities are reported in earnings anddetermined using the amortized cost of the specific security sold.

 

**Restricted Stock**

 

The following table shows the amounts of restrictedstock as of September 30, 2010 and December 31, 2009:

 
| ** **                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(dollars in thousands)** | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Federal Home Loan Bank of Atlanta    |       | $                      | 907        |                  | $          | 952 |   |
| Federal Reserve Bank                 |       | 574                    |       | 574                   |       |
| Atlantic Central Bankers Bank        |       | 40                     |       | 40                    |       |
|                                 |       | $                      | 1,521      |                  | $          | 1,566 |   |

 

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**Note5.  Loans and Allowance for Loan Losses:**

 

Loans consist of the following:

 
| ** **                                                                  | ** ** | **September 30,** | ** ** | **% of** | ** ** | **December 31,** | ** ** | **% of** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|---------------|------------|-----------------------|------------|---------------|------------|
| **(dollars in thousands)**                                        | ** ** | **2010**               | ** ** | **Loans**     | ** ** | **2009**              | ** ** | **Loans**     | ** ** |
| Real estate loans:                                                          |       |                   |       |          |       |                  |       |          |       |
| Construction and land development                                           |       | $                      | 22,050     |          | 10         | %                     | $          | 15,726        |       | 7 | % |
| Mortgage loans:                                                             |       |                   |       |          |       |                  |       |          |       |
| Secured by 1 to 4 family residential properties                             |       | 38,176                 |       | 17            | %          | 36,369                |       | 17            | %          |
| Secured by multi-family (5 or more) residential  properties                 |       | 11,615                 |       | 5             | %          | 12,348                |       | 6             | %          |
| Secured by commercial properties                                            |       | 109,109                |       | 50            | %          | 106,378               |       | 49            | %          |
| Secured by farm land                                                        |       | 7,827                  |       | 4             | %          | 6,995                 |       | 3             | %          |
| Total mortgage loans                                                        |       | 166,727                |       | 76            | %          | 162,090               |       | 75            | %          |
| Loans to farmers                                                            |       | 76                     |       | —        | %          | 46                    |       | —        | %          |
| Commercial and industrial loans                                             |       | 28,040                 |       | 13            | %          | 35,351                |       | 17            | %          |
| Loans to individuals for household, family and  other personal expenditures |       | 1,709                  |       | 1             | %          | 1,730                 |       | 1             | %          |
|                                                                        |       | 218,602                |       | 100           | %          | 214,943               |       | 100           | %          |
| Less allowance for loan losses                                              |       | (3,528                 | )          |          |       | (3,127                | )          |          |       |
| Net loans                                                                   |       | $                      | 215,074    |          |       |                  | $          | 211,816       |       |   |   |

 

Transactionsin the allowance for loan losses are summarized as follows:

 
| ** **                                    | ** ** | **Three Months Ended****September 30,** | ** ** | **Nine Months Ended****September 30,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| **(dollars in thousands)**          | ** ** | **2010**                                               | ** ** | **2009**                                              | ** ** | **2010** | ** ** | **2009** | ** ** |
| Average total loans outstanding during period |       | $                                                      | 218,681    |                                                  | $          | 208,906 |   | $ | 216,775 |   | $ | 209,434 |   |
| Balance at beginning of period                |       | $                                                      | 3,139      |                                                  | $          | 3,038 |   | $ | 3,127 |   | $ | 3,120 |   |
| Recoveries of loans previously charged-off    |       | 82                                                     |       | —                                                |       | 86 |   | 4 |   |
| Loans charged-off (construction)              |       | (103                                                   | )          | —                                                |       | (103 | ) | — |   |
| Loans charged-off (commercial and industrial) |       | —                                                 |       | (72                                                   | )          | — |   | (298 | ) |
| Loans charged-off (commercial real estate)    |       | —                                                 |       | (31                                                   | )          | (500 | ) | (479 | ) |
| Loans charged-off (residential real estate)   |       | —                                                 |       | —                                                |       | (92 | ) | — |   |
| Loans charged-off (consumer)                  |       | —                                                 |       | —                                                |       | — |   | (12 | ) |
| Net charge-offs                               |       | (21                                                    | )          | (103                                                  | )          | (609 | ) | (785 | ) |
| Provision charged to operating expenses       |       | 410                                                    |       | 275                                                   |       | 1,010 |   | 875 |   |
| Balance at end of period                      |       | $                                                      | 3,528      |                                                  | $          | 3,210 |   | $ | 3,528 |   | $ | 3,210 |   |
| Ratios of net charge-offs to average loans    |       | 0.01                                                   | %          | 0.05                                                  | %          | 0.28 | % | 0.37 | % |

 

TheCompany’s charge-off policy states after all collection efforts have beenexhausted and the loan is deemed to be a loss, it will be charged to theCompany’s established allowance for loan losses.  Consumer loans subject to the Uniform RetailCredit Classification are charged-off as follows (a) closed end loans arecharged-off no later than 120 days after becoming delinquent, (b) consumerloans to borrowers who subsequently declare bankruptcy, where the Company is anunsecured creditor, are charged-off within 60 days of receipt of thenotification from the bankruptcy court, (c) fraudulent loans arecharged-off within 90 days of discovery and (d) death of a borrower willcause a charge-off to be incurred at such time an actual loss isdetermined.  All other types of loans aregenerally evaluated for loss potential at the 90th day past duethreshold, and any loss is recognized no later than the 120th day past due threshold; each loss is evaluatedon its specific facts regarding the appropriate timing to recognize the loss.

 

TheCompany does not normally engage in partial charge-offs and has not incurredany in the nine months ended September 30, 2010.

 

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**Note 6.   Deposits**

 

The following table provides a summary of theCompany’s deposit base at the dates indicated.

 
| ** **                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(dollars in thousands)** | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Noninterest-bearing  demand deposits |       | $                      | 40,060     |                  | $          | 38,199 |   |
| Interest-bearing demand  deposits:   |       |                   |       |                  |       |
| NOW accounts                         |       | 14,974                 |       | 12,366                |       |
| Money market accounts                |       | 67,149                 |       | 54,886                |       |
| Savings accounts                     |       | 5,226                  |       | 4,835                 |       |
| Certificates of deposit:             |       |                   |       |                  |       |
| $100,000 or more                     |       | 53,977                 |       | 42,752                |       |
| Less than $100,000                   |       | 74,996                 |       | 66,274                |       |
| Total deposits                       |       | $                      | 256,382    |                  | $          | 219,312 |   |

 

**Note 7.Trust preferred securities/junior subordinated debentures and other long-termborrowings:**

 

In December 2006, Bancorp completed the privateplacement of an aggregate of $6,000,000 of trust preferred securities throughFCBI Statutory Trust I (the “Trust”), a newly formed trust subsidiary organizedunder Connecticut law, of which Bancorp owns all of the common securities of$186 thousand. The principal asset of the Trust is a similar amount of Bancorp’sjunior subordinated debentures. The junior subordinated debentures bearinterest at a fixed rate of 6.5375% until December 15, 2011, at which timethe interest rate becomes a variable rate, adjusted quarterly, equal to 163basis points over three-month LIBOR. The junior subordinated debentures matureon December 15, 2036, and may be redeemed at par, at Bancorp’s option, onany interest payment date commencing December 15, 2011. The securities areredeemable prior to December 15, 2011, at a premium ranging up to 103.525%of the principal amount thereof, upon the occurrence of certain regulatory orlegal events. The obligations of Bancorp with respect to the Trust’s preferredsecurities constitute a full and unconditional guarantee by Bancorp of Trust’sobligations with respect to the trust preferred securities to the extent setforth in the related guarantee. Subject to certain exceptions and limitations,Bancorp may elect from time to time to defer interest payments on the juniorsubordinated debentures, resulting in a deferral of distribution payments onthe related trust preferred securities.  If the Company defers interest payments on the junior subordinateddebentures, or otherwise is in default of the obligations, the Company would beprohibited from making dividend payments to its shareholders.

 

Thetrust preferred securities may be included in Tier 1 capital for regulatorycapital adequacy purposes up to 25% of Tier 1 capital, net of goodwill afterits inclusion. The portion of the trust preferred securities not qualifying asTier 1 capital may be included as part of total qualifying capital in Tier 2capital, subject to limitation.

 

At September 30, 2010 and December 31,2009, the Company had $10,000,000 in borrowings under its credit facility fromthe Federal Home Loan Bank of Atlanta (“FHLB”). Both are in the amount of $5,000,000 with the first being a 4.56% fixedrate advance that matures on April 27, 2012 and the second being a 4.56%convertible advance with a maturity date of September 4, 2012, unlesscalled on September 4, 2010 by the FHLB. Outstanding advances are secured by collateral consisting of a blanketlien on qualifying loans in the Bank’s residential mortgage loan portfolio andcertain commercial real estate loans.

 

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**Note 8.  Noninterest Expense:**

 

Noninterestexpense consists of the following:

* *
| ** **                             | ** ** | **Three Months Ended****September 30, 2010** | ** ** | **Nine Months Ended****September 30, 1010** | ** ** |
|----------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| **(dollars in thousands)**   | ** ** | **2010**                                                         | ** ** | **2009**                                                        | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                   |       |                                                             |       |                                                            |       |   |   |   |   |
| Salaries                               |       | $                                                                | 1,027      |                                                            | $          | 817 |   | $ | 3,005 |   | $ | 2,445 |   |
| Bonus                                  |       | —                                                           |       | —                                                          |       | 5 |   | — |   |
| Deferred Personnel Costs               |       | (11                                                              | )          | (20                                                             | )          | (45 | ) | (53 | ) |
| Payroll Taxes                          |       | 65                                                               |       | 54                                                              |       | 210 |   | 179 |   |
| Employee Insurance                     |       | 69                                                               |       | 55                                                              |       | 207 |   | 173 |   |
| Other Employee Benefits                |       | 51                                                               |       | 11                                                              |       | 158 |   | 63 |   |
| Depreciation                           |       | 74                                                               |       | 80                                                              |       | 226 |   | 245 |   |
| Rent                                   |       | 100                                                              |       | 96                                                              |       | 300 |   | 290 |   |
| Utilities                              |       | 22                                                               |       | 24                                                              |       | 76 |   | 77 |   |
| Repairs and Maintenance                |       | 52                                                               |       | 59                                                              |       | 160 |   | 183 |   |
| ATM Expense                            |       | 21                                                               |       | 25                                                              |       | 66 |   | 79 |   |
| Other Occupancy and Equipment Expenses |       | 38                                                               |       | 34                                                              |       | 106 |   | 103 |   |
| Postage and Supplies                   |       | 16                                                               |       | 17                                                              |       | 47 |   | 50 |   |
| Data Processing                        |       | 90                                                               |       | 102                                                             |       | 276 |   | 310 |   |
| Advertising and Promotion              |       | 46                                                               |       | 50                                                              |       | 188 |   | 122 |   |
| FDIC insurance                         |       | 100                                                              |       | 80                                                              |       | 274 |   | 321 |   |
| Legal                                  |       | 24                                                               |       | 6                                                               |       | 46 |   | 23 |   |
| Insurance                              |       | 16                                                               |       | 13                                                              |       | 44 |   | 34 |   |
| Consulting                             |       | 8                                                                |       | 2                                                               |       | 17 |   | 19 |   |
| Courier                                |       | 4                                                                |       | 4                                                               |       | 13 |   | 12 |   |
| Audit Fees                             |       | 48                                                               |       | 45                                                              |       | 144 |   | 141 |   |
| Other                                  |       | 179                                                              |       | 134                                                             |       | 425 |   | 337 |   |
|                                   |       | $                                                                | 2,039      |                                                            | $          | 1,688 |   | $ | 5,948 |   | $ | 5,153 |   |

 

**Note 9.  401(k) ProfitSharing Plan:**

 

The Company has a Section 401(k) profitsharing plan covering employees meeting certain eligibility requirements as tominimum age and years of service. Employees may make voluntary contributions to the Plan through payrolldeductions on a pre-tax basis.  TheCompany has the discretion to make matching contributions of 100% of theemployee’s contributions up to 4% of the employee’s salary.  A participant’s account under the Plan,together with investment earnings thereon, is normally distributable, followingretirement, death, disability or other termination of employment, in a singlelump-sum payment.

 

The Company made matching contributions of$42 thousand for the three months ended September 30, 2010, but nomatching contributions for the same period in 2009.  For the nine months ended September 30,2010 and 2009, the Company made matching contributions of $126 thousand and $30thousand, respectively.

 

**Note 10.  Shareholders’ Equity:**

 

Capital:

 

TheCompany and the Bank are subject to various regulatory capital requirementsadministered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certainmandatory - and possibly additional discretionary - actions by regulators that,if undertaken, could have a direct material effect on the Company’sconsolidated financial statements.  Undercapital adequacy guidelines and the regulatory framework for prompt correctiveaction, the Company, once it exceeds $500 million in assets, and the Bank mustmeet specific capital guidelines that involve quantitative measures of theCompany’s and the Bank’s assets, liabilities, and certain off-balance-sheetitems as calculated 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.

 

Quantitativemeasures established by regulation to ensure capital adequacy require theCompany and the Bank to maintain minimum amounts and ratios (set forth in thefollowing table) of total and Tier 1 capital (as defined in the regulations) torisk-weighted assets (as defined), and Tier 1 capital (as defined) to averageassets (as defined).  Management believesthat the Company and the Bank met all 

 

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capitaladequacy requirements to which they are subject as of September 30, 2010.

 

Asof September 30, 2010, the most recent notification from the regulatoryagency categorized the Bank as well capitalized under the regulatory frameworkfor prompt corrective action.  To becategorized as well capitalized the Bank must maintain minimum totalrisk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in thetable.  There are no conditions or eventssince that notification which management believes have changed the Bank’scategory.

 

The Company’s and the Bank’s actual capital amounts andratios at September 30, 2010 and December 31, 2009 are presented inthe following tables.

 
| ** **                           | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | **Minimum To Be Well** | ** ** |
|--------------------------------------|------------|------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|---------------------------------------|------------|
| ** **                           | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **                 | ** ** | ** **                 | ** ** | **Capitalized Under**            | ** ** |
| ** **                           | ** ** | ** ** | ** ** | ** **                 | ** ** | **For Capital**       | ** ** | **Prompt Corrective** | ** ** |
| **September 30, 2010**     | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | ** ** |
| **(dollars in thousands)** | ** ** | **Amount** | ** ** | **Ratio**                  | ** ** | **Amount**                 | ** ** | **Ratio**                  | ** ** | **Amount**                            | ** ** | **Ratio** | ** ** |
| Tier 1 Capital                       |       |       |       |                       |       |                       |       |                       |       |                                  |       |   |   |
| To Risk-Weighted Assets              |       |       |       |                       |       |                       |       |                       |       |                                  |       |   |   |
| Company                              |       | $          | 28,903     |                       | 12.33      | %                          | $          | 9,376                      |       | 4.00                                  | %          | N/A |   | N/A |   |
| Bank                                 |       | $          | 28,085     |                       | 12.03      | %                          | $          | 9,336                      |       | 4.00                                  | %          | $ | 14,004 |   | 6.00 | % |
|                                 |       |       |       |                       |       |                       |       |                       |       |                                  |       |   |   |
| Total Capital                        |       |       |       |                       |       |                       |       |                       |       |                                  |       |   |   |
| To Risk-Weighted Assets              |       |       |       |                       |       |                       |       |                       |       |                                  |       |   |   |
| Company                              |       | $          | 31,840     |                       | 13.58      | %                          | $          | 18,752                     |       | 8.00                                  | %          | N/A |   | N/A |   |
| Bank                                 |       | $          | 31,010     |                       | 13.29      | %                          | $          | 18,672                     |       | 8.00                                  | %          | $ | 23,340 |   | 10.00 | % |
|                                 |       |       |       |                       |       |                       |       |                       |       |                                  |       |   |   |
| Tier 1 Capital                       |       |       |       |                       |       |                       |       |                       |       |                                  |       |   |   |
| To Average Assets                    |       |       |       |                       |       |                       |       |                       |       |                                  |       |   |   |
| Company                              |       | $          | 28,903     |                       | 9.69       | %                          | $          | 11,927                     |       | 4.00                                  | %          | N/A |   | N/A |   |
| Bank                                 |       | $          | 28,085     |                       | 9.46       | %                          | $          | 11,881                     |       | 4.00                                  | %          | $ | 14,851 |   | 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 | % |

 

OnJune 26, 2007, the Company authorized the repurchase of up to 146,000shares of its common stock, for an aggregate expenditure of not more than $4.5million, through September 30, 2012, or earlier termination of the programby the Board of Directors.  Repurchases,if any, by the Company pursuant to this authorization are expected to enablethe Company to repurchase its shares at an attractive price, and to provide asource of liquidity for the Company’s shares. As of September 30, 2010, there have been 5,118 shares repurchasedby the Company at an average price of $12.10.

 

**Note11.  Fair Value Measurements**

 

The Company follows the guidance issued by the FASB under ASC Topic 825*Financial Instruments*regarding fairvalue 

 

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measurements and disclosures topic. This guidance permits entities to measure many financial instruments andcertain other items at fair value.  The objectiveis to improve financial reporting by providing entities with the opportunity tomitigate volatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions.  The election to use the fairvalue option is available when an entity first recognizes a financial asset orfinancial liability or upon entering into a Company commitment.  Subsequent changes must be recorded in earnings.  The Company has yet to apply the fair valueoption to any assets or liabilities. This guidance clarifies that fair value is an exit price, representingthe amount that would be received to sell an asset or paid to transfer aliability in an orderly transaction between market participants.  Under this guidance, fair value measurementsare not adjusted for transaction costs. This guidance establishes a fair value hierarchy that prioritizes theinputs to valuation techniques used to measure fair value.  The hierarchy gives the highest priority tounadjusted quoted prices in active markets for identical assets or liabilities(Level 1 measurements) and the lowest priority to unobservable inputs (Level 3measurements).  The three levels of thefair value hierarchy under this guidance are described 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.                                                                                                                                                                                                                                                                                                                                                                                           |

 

Afinancial instrument’s level within the fair value hierarchy is based on thelowest level of input that is significant to the fair value measurement.

 

Thetypes of instruments valued based on quoted market prices in active marketsinclude most U.S. government and agency securities, liquid mortgage products,active listed equities and most money market securities.  Such instruments are generally classifiedwithin Level 1 or Level 2 of the fair value hierarchy.  As required by fair value measurement anddisclosures guidance, the Company does not adjust the quoted price for suchinstruments.

 

Thetypes of instruments valued based on quoted prices in markets that are notactive, broker or dealer quotations, or alternative pricing sources withreasonable levels of price transparency include most investment-grade andhigh-yield corporate bonds, less liquid mortgage products, less liquidequities, state, municipal and provincial obligations.  Such instruments are generally classifiedwithin Level 2 of the fair value hierarchy.

 

Level3 is for positions that are not traded in active markets or are subject totransfer restrictions, 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.

 

Impairedloans are evaluated and valued at the time the loan is identified as impaired,at the lower of cost or market value. Market value is measured based on the value of the collateral securingthese loans and is 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.

 

Thefollowing table sets forth the Company’s financial assets and liabilities thatwere accounted for or disclosed at fair value on a recurring basis as of September 30,2010.

 

| ** **                           | ** ** | ** **   | ** ** | ** **         | ** ** | **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        |       | $            | 42,015     |               | $          | —             |       | $                  | 42,015     |   | $ | — |   |
|                                      |            |              |            |                    |            |                    |            |                    |            |  |  |  |  |

 

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Thefollowing table sets forth the Company’s financial assets and liabilities thatwere accounted for or disclosed at fair value on a nonrecurring basis as of September 30,2010.

*** ***

| ** **                           | ** ** | ** **   | ** ** | ** **         | ** ** | **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                         |       | $            | 2,275      |               | $          | —             |       | $                  | —     |   | $ | 2,275 |   |
| Commercial real estate               |       | 11,122       |       | —             |       | —             |       | 11,122             |       |
| Commercial and industrial            |       | 4,547        |       | —             |       | —             |       | 4,547              |       |
| Residential real estate              |       | 717          |       | —             |       | —             |       | 717                |       |
| Total impaired loans                 |       | $            | 18,661     |               | $          | —             |       | $                  | —     |   | $ | 18,661 |   |
| Foreclosed properties                |       | $            | 495        |               | $          | —             |       | $                  | —     |   | $ | 495 |   |

 

Thefollowing table provides a reconciliation of all assets measured at fair valueon a nonrecurring basis using significant unobservable inputs (Level 3) for thenine months ended September 30, 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                                          |       | —         |       | 7,387        |       |
| Transfers out                                         |       | —         |       | (1,076       | )          |
| Balance at September 30, 2010                         |       | $              | 495        |         | $          | 18,661 |   |

 

**Note12.  Fair Value of Financial Instruments**

 

Theestimated fair values of the Company’s financial instruments are as follows:

 

| ** **                               | ** ** | **September 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| **(dollars in thousands)**     | ** ** | **Carrying  Amount**             | ** ** | **Fair Value**             | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** |
| FINANCIAL ASSETS                         |       |                             |       |                            |       |   |   |   |   |
| Cash and cash equivalents                |       | $                                | 29,785     |                            | $          | 29,785 |   | $ | 12,114 |   | $ | 12,114 |   |
| Investment securities available for sale |       | 42,015                           |       | 42,015                          |       | 24,077 |   | 24,077 |   |
| Restricted stock                         |       | 1,521                            |       | 1,521                           |       | 1,566 |   | 1,566 |   |
| Net loans                                |       | 215,074                          |       | 215,772                         |       | 211,816 |   | 212,777 |   |
| Accrued interest receivable              |       | 856                              |       | 856                             |       | 871 |   | 871 |   |
|                                     |       |                             |       |                            |       |   |   |   |   |
| FINANCIAL LIABILITIES                    |       |                             |       |                            |       |   |   |   |   |
| Deposits                                 |       | $                                | 256,382    |                            | $          | 266,609 |   | $ | 219,312 |   | $ | 224,694 |   |
| Short-term borrowings                    |       | 300                              |       | 300                             |       | 500 |   | 500 |   |
| Long-term borrowings                     |       | 10,000                           |       | 10,701                          |       | 10,000 |   | 10,695 |   |
| Junior subordinated debentures           |       | 6,186                            |       | 6,033                           |       | 6,186 |   | 5,960 |   |
| Accrued interest payable                 |       | 183                              |       | 183                             |       | 194 |   | 194 |   |

 

The following methods and assumptions were used to estimate the fairvalue disclosures for financial instruments as of September 30, 2010 and December 31,2009:

 

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Cash and cash equivalents:

 

The fair value of cash and cash equivalents is estimated to approximatethe carrying amounts.

 

Investment securities and restricted stock:

 

Fair values are based on quoted market prices for Level 1 and 2, except for certain restricted stocks wherefair value equals par value because of certain redemption restrictions.

 

Loans:

 

Fair values are estimated for portfolios of loans with similarfinancial characteristics.  Eachportfolio is further segmented into fixed and adjustable rate interest terms byperforming and non-performing categories.

 

The fair value of performing loans is calculated by discountingestimated cash flows using current rates at which similar loans would be madeto borrowers with similar credit ratings and for the same remainingmaturities.  The estimated cash flows donot anticipate prepayments.

 

Management has made estimates of fair value discount rates that itbelieves to be reasonable.  However,because there is no market for many of these financial instruments, managementhas no basis to determine whether the fair value presented for loans would beindicative of the value negotiated in an actual sale.

 

Deposits:

 

The fair value of deposits with no stated maturity, such asnoninterest-bearing demand deposits, savings, NOW accounts and money marketaccounts, is equal to the amount payable on demand at the reporting date (thatis, their carrying amounts).  The fairvalue of certificates of deposit is based on the discounted value ofcontractual cash flows.  The discountrate is estimated using the rates currently offered for deposits of similarremaining maturities.  The fair valueestimates do not include the benefit that results from the low-cost fundingprovided by the deposit liabilities compared to the cost of borrowing funds inthe market.

 

Short-term borrowings:

 

The fair value of short-term borrowings is determined using ratescurrently available to the Company for debt with similar terms and remainingmaturities.

 

Long-termborrowings:

 

The fair value of the long-term borrowings is determined using ratescurrently available to the Company for debt with similar terms and remainingmaturities.

 

Junior subordinated debentures:

 

The junior subordinated debentures are unsecured obligations of theCompany and are subordinate and junior in right of payment to all present andfuture senior indebtedness of the Company. The Company has entered into a guarantee, which together with itsobligations under the junior subordinated debentures and the declaration oftrust governing the Trust provides a full and unconditional guarantee of theTrust’s preferred securities.  The fairvalue of junior subordinated debentures is determined using rates currentlyavailable to the Company for debt with similar terms and remainingmaturities.  See Note 7 for additionaldisclosures.

 

Accrued Interest:

 

The carrying amounts of accrued interest approximate fair value.

 

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

 

**Forward-Looking Statements**

 

This management’s discussion and analysiscontains forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995, including statements relating toFrederick County Bancorp, Inc.’s (“Bancorp”) and Frederick County Bank’s(the “Bank” and together with Bancorp, the “Company”) beliefs, expectations,anticipations and plans regarding, among other things, general economic trends,interest rates, product expansions and other matters.  Such forward-looking statements areidentified by terminology such as “may”, “will”, “believe”, “expect”, “estimate”,“anticipate”, “likely”, “unlikely”, “continue”, or similar terms 

 

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and are subject to numerous uncertainties,such as federal monetary policy, inflation, employment, profitability and consumerconfidence levels, both nationally and in the Company’s market area, the healthof the real estate and construction market in the Company’s market area, theCompany’s ability to develop and market new products and to enter new markets,competitive challenges in the Company’s market, legislative and regulatorychanges, changes in accounting principles or the application thereof and otherfactors, and as such, there can be no assurance that future events will developin accordance with the 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 overviewof the financial condition and results of operations of the Company.  This discussion is intended to assist thereaders in their analysis of the accompanying financial statements and notes thereto.

 

Bancorp, the parent company for the Bank, its wholly-owned subsidiary,was organized in September 2003. The Bank was incorporated under the lawsof the state of Maryland in August 2000 and commenced banking operationsin October 2001.  The Bank providesits customers with various banking services, from three banking offices in theCity of Frederick and one in Walkersville, Maryland.  The Bank is currently planning to establish afifth banking office located in the City of Frederick, which has receivedfederal and state banking regulatory approvals and is in the process ofobtaining the construction permits, and is expected to open in the secondquarter of 2011.  The Bank offers variousloan and deposit products to its customers. The Bank’s customers include individuals and commercial enterpriseswithin its principal market area consisting of Frederick County, Maryland.  Additionally, the Bank maintainscorrespondent banking relationships and transacts daily federal funds sales onan 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, which issued trust preferred securities.

 

**Critical Accounting Policies**

 

The Company’s consolidated financial statements are prepared inaccordance with accounting principles generally accepted in the United Statesof America (“GAAP”) and follow general practices within the industry in whichit operates.  Application of theseprinciples requires management to make estimates, assumptions, and judgmentsthat affect the amounts reported in the financial statements and accompanyingnotes.  These estimates, assumptions, andjudgments are based on information available as of the date of the financialstatements; accordingly, as this information changes, the financial statementscould reflect 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,assumptions, and judgments are necessary when assets and liabilities arerequired to be recorded at fair value, when a decline in the value of an assetnot carried on the financial statements at fair value warrants an impairmentwrite-down or valuation reserve to be established, or when an asset orliability needs to be recorded contingent upon a future event.  Carrying assets and liabilities at fair valueinherently results in more financial statement volatility.  The fair values and the information used torecord valuation adjustments for certain assets and liabilities are basedeither on quoted market prices or are provided by other third-party sources,when available. The estimates used in management’s assessment of the adequacyof the allowance for loan losses require that management make assumptions aboutmatters that are uncertain at the time of estimation.  Differences in these assumptions anddifferences between the estimated and actual losses could have a materialeffect.  For discussions related to thecritical accounting policies of the Company, refer to the sections in thisManagement’s Discussion and Analysis entitled “Income Taxes” and “Allowance forLoan Losses.”

 

**Loans**

 

Loans increased by $3.66 million, or 1.70%, from December 31,2009, to a balance of $218.60 million as of September 30, 2010 and by$7.45 million, or 3.53% from September 30, 2009.  Management continues to be cautious about theeconomy and therefore has maintained the lower growth loan strategy.

 

**Deposits**

 

Depositsincreased by $37.07 million, or 16.90%, from December 31, 2009 to abalance of $256.38 million as of September 30, 2010, and by $28.60million, or 12.55% from September 30, 2009.  The balance of certificates of depositincreased to $128.97 million as of September 30, 2010 from $109.03 millionas of December 31, 2009; while noninterest-bearing demand depositsincreased by $1.86 million from $38.20 million, NOW and savings accountsincreased to $20.20 million from $17.20 million, and money market accountsincreased to $67.15 million from $54.89 million, all for the same periods.  As a result of the enactment of theDodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank”) banksare no longer prohibited from paying interest on demand 

 

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depositaccounts, including those from businesses, effective in July 2011.  It is not clear what affect the eliminationof this prohibition will have on the Bank’s interest expense, allocation ofdeposits, deposit pricing, loan pricing, net interest margin, ability tocompete, ability to establish and maintain customer relationships, orprofitability.

 

**Three Months Ended September 30, 2010 and 2009**

 

Netincome was $242 thousand for the three months ended September 30, 2010, ascompared to $259 thousand of net income for the same period in 2009.  The decline in earnings for this quarter in2010 is primarily related to an increase in net interest noninterest expense of$351 thousand primarily reflecting higher salary and compensation expense.  Net interest income for the quarter ended September 30,2010 increased (on a tax-equivalent basis) to $2.74 million from $2.25 millionfor the same period in 2009.  Basic earnings per share for the three monthsended September 30, 2010 and 2009 were $0.16 and $0.18, respectively, andwere based on weighted-average number of shares outstanding of 1,473,258 and1,460,900, respectively.  Dilutedearnings per share for the three months ended September 30, 2010 and 2009were $0.16 and $0.18, respectively, and were based on weighted-average numberof shares outstanding of 1,488,820 and 1,469,858, respectively.

 

The Company experienced an annualized return onaverage assets of 0.32% and 0.39% for the three-month periods ended September 30,2010 and 2009, respectively. Additionally, the Company experienced an annualized return on averageshareholders’ equity of 4.14% and 4.86% for the three-month periods ended September 30,2010 and 2009, respectively.

 

**Nine Months Ended September 30, 2010 and 2009**

 

Netincome was $888 thousand for the nine months ended September 30, 2010, ascompared to $543 thousand of net income for the same period in 2009.  The increase in earnings for this quarter in2010 is primarily related to an increase in net interest income (on atax-equivalent basis) to $8.05 million from $6.43 million for the same periodin 2009, which is offset by an increase in income taxes of $300 thousand and bya $204 thousand stock option compensation expense, with the associated taxbenefit of $42 thousand being recorded as additional paid in capital and notused to reduce the current period’s income tax expense, and was the result ofissuing 118,700 stock options to directors and employees during thisperiod.  Basic earnings per share for the nine months ended September 30, 2010and 2009 were $0.60 and $0.37, respectively, and were based on weighted-averagenumber of shares outstanding of 1,469,011 and 1,460,835, respectively.  Diluted earnings per share for the ninemonths ended September 30, 2010 and 2009 were $0.60 and $0.37,respectively, and were based on weighted-average number of shares outstandingof 1,481,562 and 1,475,909, respectively.

 

The Company experienced an annualized return onaverage assets of 0.42% and 0.28% for the nine-month periods ended September 30,2010 and 2009, respectively. Additionally, the Company experienced an annualized return on averageshareholders’ equity of 5.20% and 3.43% for the nine-month periods ended September 30,2010 and 2009, respectively.

 

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**Distributionof Assets, Liabilities and Shareholders’ Equity; Interest Rates and InterestDifferential**

 

Thefollowing tables show average balances of asset and liability categories,interest income and interest expense, and average yields and rates for theperiods indicated.

 
| ** **                                                                                 | ** ** | **2010**                     | ** ** | **2009**                        | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| **Three Months Ended September 30,  (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                                                                         |       | $                            | 1,355      |                            | $          | 1 |   | 0.29 | % | $ | 1,072 |   | $ | 1 |   | 0.37 | % |
| Interest bearing deposits in  other banks                                                  |       | 29,661                       |       | 18                              |       | 0.24 |   | 28,310 |   | 16 |   | 0.22 |   |
| Investment securities (1):                                                                 |       |                         |       |                            |       |   |   |   |   |   |   |   |   |
| Taxable                                                                                    |       | 33,355                       |       | 230                             |       | 2.74 |   | 12,735 |   | 128 |   | 3.99 |   |
| Tax-exempt (2)                                                                             |       | 7,458                        |       | 115                             |       | 6.12 |   | 5,686 |   | 88 |   | 6.14 |   |
| Loans (3)                                                                                  |       | 218,681                      |       | 3,426                           |       | 6.22 |   | 208,906 |   | 3,329 |   | 6.32 |   |
| Total interest-earning  assets                                                             |       | 290,510                      |       | 3,790                           |       | 5.18 |   | 256,709 |   | 3,562 |   | 5.51 |   |
| Noninterest-earning assets                                                                 |       | 7,657                        |       |                            |       |   |   | 5,589 |   |   |   |   |   |
| Total assets                                                                               |       | $                            | 298,167    |                            |       |   |   |   | $ | 262,298 |   |   |   |   |   |
|                                                                                       |       |                         |       |                            |       |   |   |   |   |   |   |   |   |
| Liabilities and  Shareholders’ Equity                                                 |       |                         |       |                            |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                                             |       |                         |       |                            |       |   |   |   |   |   |   |   |   |
| NOW accounts                                                                               |       | $                            | 14,634     |                            | $          | 10 |   | 0.27 | % | $ | 14,927 |   | $ | 7 |   | 0.19 | % |
| Savings accounts                                                                           |       | 5,281                        |       | 2                               |       | 0.15 |   | 4,464 |   | 1 |   | 0.09 |   |
| Money market accounts                                                                      |       | 67,275                       |       | 185                             |       | 1.09 |   | 47,417 |   | 143 |   | 1.20 |   |
| Certificates of deposit $100,000  or more                                                  |       | 53,464                       |       | 271                             |       | 2.01 |   | 49,907 |   | 398 |   | 3.16 |   |
| Certificates of deposit less  than $100,000                                                |       | 75,495                       |       | 357                             |       | 1.88 |   | 70,468 |   | 538 |   | 3.03 |   |
| Short-term borrowings                                                                      |       | 424                          |       | 4                               |       | 3.74 |   | 228 |   | 3 |   | 5.22 |   |
| Long-term borrowings                                                                       |       | 10,000                       |       | 117                             |       | 4.64 |   | 10,000 |   | 117 |   | 4.64 |   |
| Junior subordinated  debentures                                                            |       | 6,186                        |       | 101                             |       | 6.48 |   | 6,186 |   | 101 |   | 6.48 |   |
| Total interest-bearing  liabilities                                                        |       | 232,759                      |       | 1,047                           |       | 1.78 |   | 203,597 |   | 1,308 |   | 2.55 |   |
| Noninterest-bearing deposits                                                               |       | 40,938                       |       |                            |       |   |   | 36,466 |   |   |   |   |   |
| Noninterest-bearing  liabilities                                                           |       | 1,061                        |       |                            |       |   |   | 931 |   |   |   |   |   |
| Total liabilities                                                                          |       | 274,758                      |       |                            |       |   |   | 240,994 |   |   |   |   |   |
| Total shareholders’ equity                                                            |       | 23,409                       |       |                            |       |   |   | 21,304 |   |   |   |   |   |
| Total liabilities and  shareholders’  equity                                          |       | $                            | 298,167    |                            |       |   |   |   | $ | 262,298 |   |   |   |   |   |
| Net interest income                                                                        |       |                         |       | $                               | 2,743      |   |   |   |   |   | $ | 2,254 |   |   |   |
| Net interest spread                                                                        |       |                         |       |                            |       | 3.40 | % |   |   |   |   | 2.96 | % |
| Net interest margin                                                                        |       |                         |       |                            |       | 3.75 | % |   |   |   |   | 3.48 | % |

 

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| (1)    | Yields  on securities available-for-sale have been calculated on the basis of  historical cost and do not give effect to changes in the fair value of those  securities, which is reflected as a component of shareholders’ equity.                                                                                                                      |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                          |
| (2)    | Presented  on a taxable-equivalent basis using the statutory federal income tax rate of  34%. Taxable-equivalent adjustments of $39 thousand in 2010 and $30 thousand  in 2009 are included in the calculation of the tax-exempt investment interest  income.                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                          |
| (3)    | Presented on a  taxable-equivalent basis using the statutory federal income tax rate of 34%.  Taxable-equivalent adjustments of $34 thousand in 2010 and $24 thousand in  2009 are included in the calculation of the loan interest income. Net loan  origination income (expense) in interest income totaled $10 thousand in 2010  and $24 thousand in 2009. |

 

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| ** **                                                                                | ** ** | **2010**                     | ** ** | **2009**                        | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| **Nine Months Ended September 30,  (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                                                                        |       | $                            | 1,208      |                            | $          | 2 |   | 0.22 | % | $ | 1,103 |   | $ | 2 |   | 0.24 | % |
| Interest bearing deposits in  other banks                                                 |       | 24,739                       |       | 42                              |       | 0.23 |   | 22,328 |   | 37 |   | 0.22 |   |
| Investment securities (1):                                                                |       |                         |       |                            |       |   |   |   |   |   |   |   |   |
| Taxable                                                                                   |       | 25,762                       |       | 528                             |       | 2.74 |   | 14,449 |   | 479 |   | 4.43 |   |
| Tax-exempt (2)                                                                            |       | 7,702                        |       | 356                             |       | 6.18 |   | 5,686 |   | 264 |   | 6.21 |   |
| Loans (3)                                                                                 |       | 216,775                      |       | 10,159                          |       | 6.27 |   | 209,434 |   | 9,805 |   | 6.26 |   |
| Total interest-earning  assets                                                            |       | 276,186                      |       | 11,087                          |       | 5.37 |   | 253,000 |   | 10,587 |   | 5.59 |   |
| Noninterest-earning assets                                                                |       | 7,569                        |       |                            |       |   |   | 5,445 |   |   |   |   |   |
| Total assets                                                                              |       | $                            | 283,755    |                            |       |   |   |   | $ | 258,445 |   |   |   |   |   |
|                                                                                      |       |                         |       |                            |       |   |   |   |   |   |   |   |   |
| Liabilities and  Shareholders’ Equity                                                |       |                         |       |                            |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                                                            |       |                         |       |                            |       |   |   |   |   |   |   |   |   |
| NOW accounts                                                                              |       | $                            | 13,549     |                            | $          | 21 |   | 0.21 | % | $ | 13,064 |   | $ | 20 |   | 0.20 | % |
| Savings accounts                                                                          |       | 5,088                        |       | 4                               |       | 0.11 |   | 4,296 |   | 6 |   | 0.19 |   |
| Money market accounts                                                                     |       | 62,904                       |       | 535                             |       | 1.14 |   | 42,452 |   | 373 |   | 1.17 |   |
| Certificates of deposit $100,000  or more                                                 |       | 49,569                       |       | 763                             |       | 2.06 |   | 52,461 |   | 1,327 |   | 3.38 |   |
| Certificates of deposit less  than $100,000                                               |       | 72,479                       |       | 1,053                           |       | 1.94 |   | 72,914 |   | 1,775 |   | 3.25 |   |
| Short-term borrowings                                                                     |       | 474                          |       | 15                              |       | 4.23 |   | 77 |   | 3 |   | 5.21 |   |
| Long-term borrowings                                                                      |       | 10,000                       |       | 346                             |       | 4.63 |   | 10,000 |   | 346 |   | 4.63 |   |
| Junior subordinated  debentures                                                           |       | 6,186                        |       | 303                             |       | 6.55 |   | 6,186 |   | 303 |   | 6.55 |   |
| Total interest-bearing  liabilities                                                       |       | 220,249                      |       | 3,040                           |       | 1.85 |   | 201,450 |   | 4,153 |   | 2.76 |   |
| Noninterest-bearing deposits                                                              |       | 39,906                       |       |                            |       |   |   | 35,087 |   |   |   |   |   |
| Noninterest-bearing  liabilities                                                          |       | 835                          |       |                            |       |   |   | 792 |   |   |   |   |   |
| Total liabilities                                                                         |       | 260,990                      |       |                            |       |   |   | 237,329 |   |   |   |   |   |
| Total shareholders’ equity                                                           |       | 22,765                       |       |                            |       |   |   | 21,116 |   |   |   |   |   |
| Total liabilities and  shareholders’  equity                                         |       | $                            | 283,755    |                            |       |   |   |   | $ | 258,445 |   |   |   |   |   |
| Net interest income                                                                       |       |                         |       | $                               | 8,047      |   |   |   |   |   | $ | 6,434 |   |   |   |
| Net interest spread                                                                       |       |                         |       |                            |       | 3.52 | % |   |   |   |   | 2.83 | % |
| Net interest margin                                                                       |       |                         |       |                            |       | 3.90 | % |   |   |   |   | 3.40 | % |

 

----

| (1)    | Yields  on securities available-for-sale have been calculated on the basis of  historical cost and do not give effect to changes in the fair value of those  securities, which is reflected as a component of shareholders’ equity.                                                                                                                       |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                           |
| (2)    | Presented  on a taxable-equivalent basis using the statutory federal income tax rate of  34%. Taxable-equivalent adjustments of $121 thousand in 2010 and $90 thousand  in 2009 are included in the calculation of the tax-exempt investment interest  income.                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                           |
| (3)    | Presented  on a taxable-equivalent basis using the statutory federal income tax rate of  34%. Taxable-equivalent adjustments of $100 thousand in 2010 and $57 thousand  in 2009 are included in the calculation of the loan interest income. Net loan  origination income (expense) in interest income totaled $46 thousand in 2010  and $18 thousand in 2009. |

 

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**Rate/Volume Analysis**

 

The following table indicates the changes in interest income andinterest expense that are attributable to changes in average volume and averagerates, in comparison with the same period in the preceding year on a fullytaxable equivalent basis.  The change ininterest due to the combined rate-volume variance has been allocated entirelyto the change in rate.

 
| ** **                                 | ** ** | **Three Months Ended September 30,****2010 compared to 2009** | ** ** | **Nine Months Ended September 30,****2010 compared to 2009** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ** **                                 | ** ** | **Increase (decrease)  Due to**                                                        | ** ** | **Net  increase**                                                                               | ** ** | **Increase (decrease)  Due to** | ** ** | **Net  increase** | ** ** |
| **(dollars in thousands)**       | ** ** | **Volume**                                                                                       | ** ** | **Rate**                                                                                        | ** ** | **(decrease)** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **(decrease)** | ** ** |
| Interest income                            |       |                                                                                             |       |                                                                                            |       |   |   |   |   |   |   |   |   |
| Interest-earning assets:                   |       |                                                                                             |       |                                                                                            |       |   |   |   |   |   |   |   |   |
| Interest-bearing deposits in other banks   |       | $                                                                                                | 1          |                                                                                            | $          | 1 |   | $ | 2 |   | $ | 3 |   | $ | 2 |   | $ | 5 |   |
| Investment securities:                     |       |                                                                                             |       |                                                                                            |       |   |   |   |   |   |   |   |   |
| Taxable                                    |       | 206                                                                                              |       | (104                                                                                            | )          | 102 |   | 251 |   | (202 | ) | 49 |   |
| Tax-exempt                                 |       | 27                                                                                               |       | —                                                                                          |       | 27 |   | 63 |   | 29 |   | 92 |   |
| Loans                                      |       | 154                                                                                              |       | (57                                                                                             | )          | 97 |   | 230 |   | 124 |   | 354 |   |
| Total interest income                      |       | 388                                                                                              |       | (160                                                                                            | )          | 228 |   | 547 |   | (47 | ) | 500 |   |
|                                       |       |                                                                                             |       |                                                                                            |       |   |   |   |   |   |   |   |   |
| Interest expense                           |       |                                                                                             |       |                                                                                            |       |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:              |       |                                                                                             |       |                                                                                            |       |   |   |   |   |   |   |   |   |
| NOW accounts                               |       | —                                                                                           |       | 3                                                                                               |       | 3 |   | — |   | 1 |   | 1 |   |
| Savings accounts                           |       | —                                                                                           |       | 1                                                                                               |       | 1 |   | 1 |   | (3 | ) | (2 | ) |
| Money market accounts                      |       | 59                                                                                               |       | (17                                                                                             | )          | 42 |   | 120 |   | 42 |   | 162 |   |
| Certificates of deposit $100,000 or more   |       | 28                                                                                               |       | (155                                                                                            | )          | (127 | ) | (49 | ) | (515 | ) | (564 | ) |
| Certificates of deposit less than $100,000 |       | 38                                                                                               |       | (219                                                                                            | )          | (181 | ) | (7 | ) | (715 | ) | (722 | ) |
| Short-term borrowings                      |       | 3                                                                                                |       | (2                                                                                              | )          | 1 |   | 10 |   | 2 |   | 12 |   |
| Total interest expense                     |       | 128                                                                                              |       | (389                                                                                            | )          | (261 | ) | 75 |   | (1,188 | ) | (1,113 | ) |
| Net interest income                        |       | $                                                                                                | 260        |                                                                                            | $          | 229 |   | $ | 489 |   | $ | 472 |   | $ | 1,141 |   | $ | 1,613 |   |

 

**Net Interest Income**

 

Net interest income is generated from the Company’slending and investment activities, and is the most significant component of theCompany’s earnings.  Net interest incomeis the difference between interest and rate-related fee income on earningassets (primarily loans and investment securities) and the interest paid on thefunds (primarily deposits) supporting them. The Company primarily utilizes deposits to fund loans and investments,with a small amount of additional funding from junior subordinated debenturesand minimal short-term and long-term borrowings.  In future periods, the Company may utilize ahigher level of short-term and long-term borrowings, including borrowings fromthe Federal Home Loan Bank, federal funds lines with correspondent banks andrepurchase agreements, to fund operations, depending on economic conditions,deposit availability and pricing, interest rates and other factors.

 

**Three Months Ended September 30, 2010 and 2009**

 

Net interest income (on a taxable-equivalentbasis) was $2.74 million in 2010 and $2.25 million in 2009.  The change in net interest income wasprimarily driven by lower rates paid on certificates of deposit, along with animprovement in the volume of investment securities and loans.  Average earning assets increased by $33.80million, or 13.17%, since September 30, 2009.  The yield on earning assets in 2010 decreasedby 33 basis points to 5.18% from 5.51% in 2009. The decrease of 77 basis points in the rate paid on interest-bearingliabilities primarily is the result of the lower rates paid certificates ofdeposit.  The Company’s net interestmargin was 3.75% and 3.48%, and the net interest spread was 3.40% and 2.96%,for the three-month periods ended September 30, 2010 and 2009,respectively.

 

Interest expense decreased 19.95% from $1.31million in 2009 to $1.05 million in 2010 due to the reduced rates paid oninterest-bearing liabilities, which decreased to 1.78% in 2010 from 2.55% in2009 primarily as a result in declines in rates on certificates of deposit.

 

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**Nine Months Ended September 30, 2010 and 2009**

 

Net interest income (on a taxable-equivalentbasis) was $8.05 million in 2010 and $6.43 million in 2009.  The change in net interest income wasprimarily driven by lower rates paid on certificates of deposit, along with anincrease in the volume of investment securities and loans and an increase inthe yield earned on the loan portfolio. Average earning assets increased by $26.19 million, or 10.35%, since September 30,2009.  The yield on earning assets in2010 decreased by 22 basis points to 5.37% from 5.59% in 2009.  The decrease of 91 basis points in the ratepaid on interest-bearing liabilities primarily is the result of the lower ratespaid on certificates of deposit.  TheCompany’s net interest margin was 3.90% and 3.40%, and the net interest spreadwas 3.52% and 2.83%, for the nine-month periods ended September 30, 2010and 2009, respectively.

 

Interest expense decreased 26.80% from $4.15million in 2009 to $3.04 million in 2010 due to the reduced rates paid oninterest-bearing liabilities, which decreased to 1.85% in 2010 from 2.76% in2009 primarily as a result in declines in rates on and volumes of certificatesof deposit.

 

**Noninterest Income**

 

Noninterestincome was $150 thousand in 2010 and $143 thousand in 2009 for the respectivequarters ended September 30.  Gainson sale of securities were $1 thousand in 2010 and none were realized in thesame quarter in 2009; however, there were $5 thousand of losses on sale offoreclosed properties in 2009 and none in the third quarter of 2010.  For the nine month-periods ended September 30,2010 and 2009, noninterest income was $518 thousand and $502 thousand,respectively.   Gains on sale ofsecurities were $85 thousand and $117 thousand for the nine months ended September 30,2010 and 2009, respectively.  The ninemonth period in 2009 includes a $37 thousand loss on the sale of foreclosedproperties, while, there was no loss on the sale of foreclosed propertiesduring the same period in 2010.

 

**Noninterest Expense**

 

Noninterest expense amounted to $2.04 millionand $1.69 million for the three-month periods ended September 30, 2010 and2009, respectively.  The primary increasein noninterest expense in 2010 compared to 2009 relates to increases insalaries of $210 thousand, which includes $51 thousand of stock optioncompensation expense in 2010, an increase in 401(k) matching contributionsof $42 thousand and an increase in FDIC insurance premiums of $20 thousand,reflecting an increase in deposit levels. Noninterest expense amounted to $5.95 million and $5.15 million for thenine-month periods ended September 30, 2010 and 2009, respectively.  The primary increase in noninterest expensein 2010 compared to 2009 relates to increases in salaries of $560 thousand,which includes $204 thousand of stock option compensation expense in 2010, butnone in 2009, an increase in 401(k) matching contributions of $96 thousandand increased advertising expenses of $66 thousand.  Salaries expense was also impacted in 2010due to promotions at the end of 2009, additional personnel for compliance,retail lending and staffing for the anticipated new branch opening in the firstquarter of 2011, along with a merit increase for all employees.

 

**Income Taxes**

 

Duringthe three months ended September 30, 2010, the Company recognized incometax expense of $129 thousand compared to $121 thousand during the same periodin 2009.  The effective tax rates for thethree-month periods in 2010 and 2009 were 34.77% and 31.84%, respectively.  The increase in income tax expense in 2010 isdue to the of the impact of the $51 thousandof stock option compensation expense with the associated tax benefit of$9 thousand being recorded as additional paid in capital and not used to reducethe current period’s income tax expense. During the nine months ended September 30, 2010, the Companyrecognized income tax expense of $498 thousand compared to $218 thousand duringthe same period in 2009.  The effectivetax rates for the nine-month periods in 2010 and 2009 were 35.93% and 29.03%,respectively.  The increase in income taxexpense in 2010 is due to the higher pre-tax income and the impact of the $204 thousand of stock option compensationexpense with the associated tax benefit of $42 thousand being recordedas additional paid in capital and not used to reduce the current period’s incometax expense.

 

**MarketRisk, Liquidity and Interest Rate Sensitivity**

 

Asset/liability management involves the funding and investmentstrategies necessary to maintain an appropriate balance between interestsensitive assets and liabilities.  Italso involves providing adequate liquidity while sustaining stable growth innet interest income.  Regular review andanalysis of deposit and loan trends, cash flows in various categories of loans,and monitoring of interest spread relationships are vital to this process.

 

The conduct of our banking business requires that we maintain adequateliquidity to meet changes in the composition and volume of assets andliabilities due to seasonal, cyclical or other reasons.  Liquidity describes the ability of theCompany to meet financial obligations that arise during the normal course ofbusiness.  Liquidity is primarily neededto meet the borrowing and deposit withdrawal requirements of the customers ofthe Company, as well as for meeting current and future planned expenditures.  This 

 

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liquidity is typically provided by the funds received through customerdeposits, investment maturities, loan repayments, borrowings, and income.  Management considers the current liquidityposition to be adequate to meet the needs of the Company and its customers.

 

The Company seeks to limit the risks associated with interest ratefluctuations by managing the balance between interest sensitive assets andliabilities.  Managing to mitigateinterest rate risk is, however, not an exact science.  Not only does the interval until repricing ofinterest rates on assets and liabilities change from day to day as the assetsand liabilities change, but for some assets and liabilities, contractualmaturity and the actual maturity experienced are not the same.  Similarly, NOW and money market accounts, bycontract, may be withdrawn in their entirety upon demand and savings depositsmay be withdrawn on seven days notice. While these contracts are extremely short, it is the Company’s beliefthat these accounts turn over at the rate of five percent (5%) per year. TheCompany therefore treats them as having maturities staggered over allperiods.  If all of the Company’s NOW,money market, and savings accounts were treated as repricing in one year orless, the cumulative gap at one year or less would be $(59.32) million.

 

Interest rate sensitivity is an important factor in the management ofthe composition and maturity configurations of the Company’s earning assets andfunding sources.  An Asset/LiabilityCommittee manages the interest rate sensitivity position in order to maintainan appropriate 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, “Interest Rate Sensitivity Gap Analysis,” summarizes,as of September 30, 2010, the anticipated maturities or repricing of theCompany’s interest-earning assets and interest-bearing liabilities, the Company’sinterest rate sensitivity gap (interest-earning assets less interest-bearingliabilities), the Company’s cumulative interest rate sensitivity gap, and theCompany’s cumulative interest sensitivity gap ratio (cumulative interest ratesensitivity gap divided by total assets). A negative gap for any time period means that more interest-bearingliabilities will reprice or mature during that time period thaninterest-earning assets.  During periodsof rising interest rates, a negative gap position would generally decreaseearnings, and during periods of declining interest rates, a negative gapposition would generally increase earnings. The converse would be true for a positive gap position.  Therefore, a positive gap for any time periodmeans that more interest-earning assets will reprice or mature during that timeperiod than interest-bearing liabilities. During periods of rising interest rates, a positive gap position wouldgenerally increase earnings, and during periods of declining interest rates, apositive gap position would generally decrease earnings.

 

It is important to note that the following table represents the staticgap position for interest sensitive assets and liabilities at September 30,2010.  The table does not give effect toprepayments or extensions of loans as a result of changes in general marketinterest rates.  Moreover, while thetable does indicate the opportunities to reprice assets and liabilities withincertain time frames, it does not account for timing differences that occurduring periods of repricing.  Forexample, changes to deposit rates tend to lag in a rising rate environment andlead in a falling rate environment, although this will not always be thecase.  Nor does it account for theeffects of competition on pricing of deposits and loans.  For example, under current market conditions,market rates paid on deposits may not be able to adjust by the full amount ofdownward adjustments in the federal funds target rate, while rates on loanswill tend to adjust by the 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.

 

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**Interest Rate Sensitivity Gap Analysis**

**September 30, 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                                    |       | $                                                           | 1,400      |   | $ | — |   | $ | — |   | $ | — |   | $ | 1,400 |   |
| Interest-bearing deposits in other banks              |       | 26,900                                                      |       | — |   | — |   | — |   | 26,900 |   |
| Investment securities(1)                              |       | 881                                                         |       | 10,491 |   | 7,901 |   | 22,442 |   | 41,715 |   |
| Loans                                                 |       | 90,827                                                      |       | 84,581 |   | 30,540 |   | 12,654 |   | 218,602 |   |
| Total interest-earning assets                         |       | 120,008                                                     |       | 95,072 |   | 38,441 |   | 35,096 |   | 288,617 |   |
| ** **                                            | ** ** | ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Liabilities                                           |       |                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Savings and NOW accounts                              |       | 1,010                                                       |       | 2,020 |   | 2,020 |   | 15,150 |   | 20,200 |   |
| Money Market accounts                                 |       | 3,357                                                       |       | 6,715 |   | 6,715 |   | 50,362 |   | 67,149 |   |
| Certificates of deposit                               |       | 86,681                                                      |       | 27,302 |   | 14,990 |   | — |   | 128,973 |   |
| Short-term borrowings                                 |       | 300                                                         |       | — |   | — |   | — |   | 300 |   |
| Long-term borrowings                                  |       | 5,000                                                       |       | 5,000 |   | — |   | — |   | 10,000 |   |
| Junior subordinated debentures                        |       | —                                                      |       | 6,186 |   | — |   | — |   | 6,186 |   |
| Total interest-bearing liabilities                    |       | 96,348                                                      |       | 47,223 |   | 23,725 |   | 65,512 |   | 232,808 |   |
| Interest rate sensitivity gap                         |       | $                                                           | 23,660     |   | $ | 47,849 |   | $ | 14,716 |   | $ | (30,416 | ) | $ | 55,809 |   |
| Cumulative interest rate sensitivity gap              |       | $                                                           | 23,660     |   | $ | 71,509 |   | $ | 86,225 |   | $ | 55,809 |   |   |   |
| Cumulative gap ratio as a percentage of total  assets |       | 7.95                                                        | %          | 24.04 | % | 28.99 | % | 18.76 | % |   |   |

 

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(1) Excludesequity securities.

 

In addition to the Interest Rate Sensitivity Gap Analysis, the Companyalso uses an earnings simulation model on a quarterly basis to closely monitorinterest sensitivity and to expose its balance sheet and income statement todifferent scenarios.  The model is basedon current Company data and adjusted by assumptions as to growth patterns,noninterest income and noninterest expense and interest rate sensitivity, basedon historical data, for both assets and liabilities projected for a one-yearperiod.  The model is then subjected to a“shock test” assuming a sudden prime interest rate increase of 200 basis pointsor a decrease 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 1.68%.  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.

 

Certain shortcomings 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.

 

**Critical Accounting Policy:**

 

**Allowance for Loan Losses**

 

TheCompany makes provisions for loan losses in amounts deemed necessary tomaintain the allowance for loan losses at an appropriate level.  The Company’s provision for loan losses forthe three months ended September 30, 2010 and 2009 was $410 thousand and$275 thousand, respectively, and for the nine month periods ended September 30,2010 and 2009 was $1.01 million and $875 thousand, respectively.  The provision for loan losses is determinedbased upon Management’s estimate of the amount required to maintain an adequateallowance for loan losses reflective of the risks in the Company’s loanportfolio.  At September 30, 2010and December 31, 2009, the allowance for loan losses was $3.53 million and$3.13 million, respectively.  The changein the allowance from December 31, 2009 reflects the provision of $1.01million less net charge-offs of $609 thousand, consisting of $695 thousand incharge-offs and $86 thousand in recoveries, as compared to a provision of $875thousand less net charge-offs of $785 thousand, consisting of $789 thousand incharge-offs and $4 thousand in recoveries in the same period of 2009.  The $695 thousand of charge-

 

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offsin 2010 is a result of one (1) commercial real estate relationship in theamount of $500 thousand, one (1) commercial construction in the amount of$103 thousand and one (1) residential real estate relationship in theamount of $92 thousand, as compared to the $789 thousand of charge-offs in2009, which consisted of three (3) commercial real estate relationships inthe amount of $480 thousand, four (4) commercial and industrialrelationships in the amount of $298 thousand and three (3) consumerrelationships in the amount of $11 thousand.

 

TheCompany prepares a quarterly analysis of the allowance for loan losses, withthe objective of quantifying portfolio risk into a dollar amount of inherentlosses.  The determination of the allowancefor loan losses is based on eight qualitative factors and one quantitativefactor for each category and type of loan along with any specific allowance foradversely classified loans within each category.  Each factor is assigned a percentage weightand that total weight is applied to each loan category.  Factors are different for each category.  Qualitative factors include: levels andtrends in delinquencies and nonaccrual loans; trends in volumes and terms ofloans; effects of any changes in lending policies, the experience, ability anddepth of management; national and local economic trends and conditions;concentrations of credit; quality of the Company’s loan review system; andregulatory requirements.  The totalallowance required thus changes as the percentage weight assigned to eachfactor increased or decreased due to the particular circumstances, as thevarious types and categories of loans change as a percentage of total loans andas specific allowances are required due to increases in adversely classifiedloans.

 

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”)Contingencies Topic, which requires that losses be accrued when they areprobable of occurring and estimable and (ii) ASC Receivables Topic, whichrequires that losses be accrued based on the differences between the loanbalance and either the value of collateral, or the present value of future cashflows, or the 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. Impaired loans are any loans that have been classified by internalmeasurements as substandard or worse. Factors considered by Management in determining impairment includepayment status, collateral value, and the projected potential cash flow of theborrower.  Loans that experienceinsignificant payment delays and payment shortfalls generally are notclassified as impaired.  Managementdetermines the significance of payment delays and payment shortfalls on acase-by-case basis, taking into consideration all of the circumstancessurrounding the loan and borrower, including the length of the delay, thereason for the delay, the borrower’s prior payment record, and the amount ofthe shortfall in relation to the principal and interest owed.  The provision for loan losses included in thestatements of operations serves to maintain the allowance at a level Managementconsiders 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 as impaired.  Whenimpairment is identified, a specific reserve may be established based on theCompany’s calculation of the estimated loss embedded in the individualloan.  Impaired loans are any loans thathave been classified by internal measurements as substandard or worse.  Impairment testing includes consideration ofthe borrower’s overall financial condition, resources and payment record,support available from financial guarantors and the fair market value ofcollateral. These factors are combined to estimate the probability and severityof inherent losses.  Large groups ofsmaller balance, homogeneous loans are collectively evaluated for impairment.Accordingly, the Company does not separately identify individual consumer andresidential mortgage loans for impairment. At September 30, 2010 there were $19.74 million of impaired loans,classified by internal measurements in the substandard category.  Included in this amount were four (4) commercialreal estate loan relationships in the amount of $1.85 million and two (2) commercialand industrial loan relationships in the amount of $387 thousand, totaling$2.23 million, all of which were in a nonaccrual status, that were deemed to beimpaired, and required a special reserve of $21 thousand.  In addition, there were $4.98 million ofperforming impaired loans that required specific reserves of $1.06 million andthe remaining loans of $12.52 million which did not require any additionalspecific reserve.  At December 31,2009 there were $12.95 million of impaired loans, classified by internalmeasurements in the substandard category. Included in this amount were three (3) commercial real estate loanrelationships in the amount of $840 thousand and one (1) construction loanrelationship in the amount of $103 thousand, totaling $943 thousand, all ofwhich were in a nonaccrual status, that were deemed to be impaired and requireda specific reserve of $223 thousand.  Inaddition, there were $4.38 million of performing impaired loans that requiredspecific reserves of $377 thousand and the remaining loans of $7.63 millionwhich did not require any additional specific reserve.  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 meeting the Company’s internal criteria for classification asspecial mention are segregated from performing loans within the portfolio.These internally 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 

 

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thannon-classified loans due to Management’s concerns regarding collectability orManagement’s knowledge of particular elements surrounding the borrower.Allowance factors increase with the worsening of the internal 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.

 

Management believes that the allowance for loan losses is adequate at September 30,2010.  There can be no assurance,however, that additional provisions for loan losses will not be required in thefuture, 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.

 

Asof September 30, 2010, the real estate loan portfolio constituted 86% ofthe total loan portfolio, 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 $9.43 million of at September 30,2010.

** **
| ** **                                    | ** ** | **Three Months Ended**   | ** ** | **Nine Months Ended**    | ** ** |
|-----------------------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| **(dollars in thousands)**          | ** ** | **September 30,********2010** | ** ** | **September 30,********2009** | ** ** | **September 30,****2010** | ** ** | **September 30,****2009** | ** ** |
| Average total loans outstanding during period |       | $                                  | 218,681    |                               | $          | 208,906 |   | $ | 216,775 |   | $ | 209,434 |   |
| Balance at beginning of period                |       | $                                  | 3,139      |                               | $          | 3,038 |   | $ | 3,127 |   | $ | 3,120 |   |
| Recoveries of loans previously charged-off    |       | 82                                 |       | —                             |       | 86 |   | 4 |   |
| Loans charged-off (construction)              |       | (103                               | )          | —                             |       | (103 | ) | — |   |
| Loans charged-off (commercial and industrial) |       | —                             |       | (72                                | )          | — |   | (298 | ) |
| Loans charged-off (commercial real estate)    |       | —                             |       | (31                                | )          | (500 | ) | (479 | ) |
| Loans charged-off (residential real estate)   |       | —                             |       | —                             |       | (92 | ) | — |   |
| Loans charged-off (consumer)                  |       | —                             |       | —                             |       | — |   | (12 | ) |
| Net charge-offs                               |       | (21                                | )          | (103                               | )          | (609 | ) | (785 | ) |
| Provision charged to operating expenses       |       | 410                                |       | 275                                |       | 1,010 |   | 875 |   |
| Balance at end of period                      |       | $                                  | 3,528      |                               | $          | 3,210 |   | $ | 3,528 |   | $ | 3,210 |   |
| Ratios of net charge-offs to average loans    |       | 0.01                               | %          | 0.05                               | %          | 0.28 | % | 0.37 | % |

 

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The allocation of the allowance, presented in thefollowing table, is based primarily on the factors discussed above inevaluating the adequacy of the allowance as a whole.  Since all of those factors are subject tochange, the allocation is not necessarily indicative of the category ofrecognized loan losses, and does not restrict the use of the allowance toabsorb losses in any category.

 

**Allocationof Allowance for Loan Losses**

 
| ** **                                                                  | ** ** | **September 30,** | ** ** | **December 31,**      | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| **(dollars in thousands)**                                        | ** ** | **2010**               | ** ** | **% of********Loans** | ** ** | **2009** | ** ** | **% of********Loans** | ** ** |
| Real estate loans:                                                          |       |                   |       |                       |       |   |   |   |   |
| Construction and land development                                           |       | $                      | 339        |                       | 10         | % | $ | 195 |   | 7 | % |
| Mortgage loans:                                                             |       |                   |       |                       |       |   |   |   |   |
| Secured by 1 to 4 family properties                                         |       | 785                    |       | 17                         | %          | 354 |   | 17 | % |
| Secured by multi-family (5 or more) residential  properties                 |       | 368                    |       | 5                          | %          | 244 |   | 6 | % |
| Secured by commercial properties                                            |       | 1,311                  |       | 50                         | %          | 1,624 |   | 49 | % |
| Secured by farm land                                                        |       | 100                    |       | 4                          | %          | 74 |   | 3 | % |
| Total mortgage loans                                                        |       | 2,564                  |       | 76                         | %          | 2,296 |   | 75 | % |
| Loans to farmers                                                            |       | —                 |       | —                     | %          | — |   | — | % |
| Commercial and industrial loans                                             |       | 613                    |       | 13                         | %          | 617 |   | 17 | % |
| Loans to individuals for household, family and  other personal expenditures |       | 12                     |       | 1                          | %          | 19 |   | 1 | % |
|                                                                        |       | $                      | 3,528      |                       | 100        | % | $ | 3,127 |   | 100 | % |

 
| ** **                                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Nonaccrual  loans:                         |       |                   |       |                  |       |
| Construction                               |       | $                      | —     |                  | $          | 103 |   |
| Commercial  real estate                    |       | 1,847                  |       | 840                   |       |
| Commercial  and industrial                 |       | 387                    |       | —                |       |
| Total  nonaccrual loans                    |       | 2,234                  |       | 943                   |       |
| Loans  90 days past due and still accruing |       | —                 |       | —                |       |
| Total  nonperforming loans                 |       | 2,234                  |       | 943                   |       |
| Foreclosure  properties                    |       | 495                    |       | 495                   |       |
| Total  nonperforming assets                |       | $                      | 2,729      |                  | $          | 1,438 |   |
| Nonperforming  assets to total assets      |       | 0.92                   | %          | 0.56                  | %          |

 

There were no other interest-bearing assets at September 30, 2010or December 31, 2009 classified as past due 90 days or more and stillaccruing, restructured or problem assets, and no non-impaired loans which werecurrently performing in accordance with their terms, but as to whichinformation known to Management caused it to have serious doubts about theability of the borrower to comply with the loan as currently written.

 

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Information concerning the Company’s recorded investment in impairedloans is as follows:

 
| ** **                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(dollars in thousands)**   | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Impaired loans with no allowance:      |       |                   |       |                  |       |
| Construction                           |       | $                      | 2 ,031     |                  | $          | 2,125 |   |
| Commercial real estate                 |       | 7,458                  |       | 2,561                 |       |
| Commercial and industrial              |       | 4,220                  |       | 3,282                 |       |
| Residential real estate                |       | 367                    |       | —                |       |
| Total impaired loans with no allowance |       | $                      | 14,076     |                  | $          | 7,968 |   |
| Impaired loans with allowance:         |       |                   |       |                  |       |
| Construction                           |       | $                      | 365        |                  | $          | 365 |   |
| Commercial real estate                 |       | 4,240                  |       | 3,853                 |       |
| Commercial and industrial              |       | 537                    |       | 239                   |       |
| Residential real estate                |       | 521                    |       | 525                   |       |
| Total impaired loans with allowance    |       | $                      | 5,663      |                  | $          | 4,982 |   |
| Specific allocation of allowance       |       | $                      | 1,078      |                  | $          | 600 |   |

 
| ** **                                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(dollars in thousands)**       | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Impaired performing loans:                 |       |                   |       |                  |       |
| Real estate — construction            |       | $                      | 2,396      |                  | $          | 2,387 |   |
| Commercial real estate                     |       | 9,851                  |       | 5,574                 |       |
| Commercial and industrial                  |       | 4,370                  |       | 3,521                 |       |
| Residential real estate                    |       | 888                    |       | 525                   |       |
| Total impaired performing loans            |       | $                      | 17,505     |                  | $          | 12,007 |   |
| Impaired nonperforming loans (nonaccrual): |       |                   |       |                  |       |
| Real estate — construction            |       | $                      | —     |                  | $          | 103 |   |
| Commercial real estate                     |       | 1,847                  |       | 840                   |       |
| Commercial and industrial                  |       | 387                    |       | —                |       |
| Total impaired nonperforming loans         |       | $                      | 2,234      |                  | $          | 943 |   |
| Total impaired loans                       |       | $                      | 19,739     |                  | $          | 12,950 |   |

 
| ** **                                                                               | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                               | ** ** | **September 30,**          | ** ** | **September 30,** | ** ** |
| **(dollars in thousands)**                                                     | ** ** | **2010**                        | ** ** | **2009** | ** ** |
| Average recorded investment in impaired loans                                            |       | $                               | 15,431     |   | $ | 11,551 |   |
| Interest income recognized on nonaccrual impaired  loans based on cash payments received |       | $                               | —     |   | $ | — |   |
| Interest income forgone on nonaccrual loans                                              |       | $                               | —     |   | $ | 32 |   |

 

AtSeptember 30, 2010, there were $14.08 million of impaired loans with nospecific reserves that consisted of two (2) construction loans in theaggregate amount to $2.03 million, seven (7) commercial real estate loansin the aggregate amount of $7.46 million, seven (7) commercial andindustrial loans totaling $4.22 million and one (1) residential mortgageloan for $367 thousand.  By comparison atDecember 31, 2009 there were $7.97 million of impaired loans whichrequired no specific reserves consisting of six (6) commercial real estateloans in the aggregate amount of $2.56 million, five (5) commercial andindustrial loans totaling $3.28 million and three (3) construction loansfor an aggregate of $2.13 million at December 31, 2009.  In addition at September 30, 2010, therewere $5.66 million of impaired loans, which required specific reserves totaling$1.08 million, that consisted of one (1) construction loan for $365thousand, ten (10) commercial real estate loans in the aggregate amount of$4.24 million, two (2) commercial and industrial loans totaling $537thousand, and one (1) residential mortgage loan for $521 thousand comparedto $4.98 million of impaired loans, which required specific reserves totaling$600 thousand, that consisted of one (1) construction loan for $365thousand, seven (7) commercial real estate loans in the aggregate amountof $3.85 million, two (2) commercial and industrial loans totaling $239thousand and one (1) residential mortgage loan for $525 thousand at December 31,2009.

 

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Theincrease in impaired loans is primarily related to two (2) commercial realestate loan relationships, aggregating $5.81 million, with no missed paymentsas of September 30, 2010 and two (2) commercial and industrial loanrelationships totaling $575 thousand, with missed payment history, whichrequired specific reserves of $231 thousand at September 30, 2010.  They all have been experiencing some cashflow problems, which causes the Company to have concerns about the ability ofthe borrowers to continue to perform in accordance with the current terms ofthe loan.

 

Thereare no loans that had a specific allowance as of December 31, 2009 thatare still in the Company’s loan portfolio as of September 30, 2010 wherethe specific allowance has been reduced or eliminated.

 

Loansare placed into a nonaccruing status and classified as nonperforming when theprincipal or interest has been in default for a period of 90 days or moreunless the obligation is well secured and in the process of collection.  A debt is “well secured” if it is secured by (i) pledgesof real or personal property, including securities, that have a realizablevalue sufficient to discharge the debt, (including accrued interest), in full,or (ii) the guarantee of a financially responsible party.   A debt is “in the process of collection” ifcollection on the debt is proceeding in due course either through legal action,including judgment enforcement procedure, or, in appropriate circumstances,through collection efforts not involving legal action which are reasonablyexpected to result in repayment of the debt or in its restoration to a currentstatus.

 

Loansclassified as substandard or worse are considered for impairment testing.  A substandard loan shows signs of continuingnegative financial trends and unprofitability and therefore, is inadequatelyprotected by the current sound worth and paying capacity of the obligor or ofthe collateral pledged, if any.  Theborrower on such loans typically exhibit one or more of the followingcharacteristics: financial ratios and profitability margins are well belowindustry average; a negative cash flow position exists; debt service capacityis insufficient to the service debt and an improvement in the cash flowposition is unlikely within the next twelve months; secondary and tertiarymeans of debt repayment are weak.  Loansclassified as substandard are characterized by the probability that the Bankwill not collect amounts due according to the contractual terms or sustain someloss if the deficiencies are not corrected.

 

Losspotential, while existing with respect to the aggregate amount of substandard(or worse) loans, does not have to exist in any individual assets classified assubstandard.  Such credits are alsoevaluated for nonaccrual status.

 

Impairedloans include loans that have been classified as substandard or worse.  However, certain of such loans have beenpaying as agreed and have remained current, with some financial issues relatedto cash flow that has caused some concern as to the ability of the borrower toperform in accordance with the current loan terms, but it has not been extremeenough to require the loan be put into a nonaccruing status.

 

TheCompany does not have a formal modification program such as the Making HomeAffordable Program, but instead uses a system whereby loans are modified on acase-by-case basis, based upon an analysis of the individual borrower’ssituation and the causes of the weakness in the individual loan.  To date, loan modifications have primarilyinvolved commercial real estate mortgages and commercial and industrial loansand have included reducing the interest rate on the loan to a level that is inline with current market rates for similar type loans, converting to aninterest only period, usually six to twelve months, or re-amortizing theloan.  For the first none months of 2010,the Company has made concessions on only a few residential mortgage loans whichincluded reducing the interest rate on two (2) residential mortgage loansin the amount $830 thousand and an interest only period of six to twelve monthsfor a $473 thousand residential loan.

 

Troubleddebt restructured loans, which are included in the total of impaired loans,amounted to $9.83 million as of September 30, 2010: loans converted tointerest only periods for six to twelve months in the amount of $5.83 million,reduced interest rates on loans in the amount of $1.20 million, and loans thathave been re-amortized in the amount of $2.80 million.  These loans have specific reserves of $589thousand based on the collateral value.

 

Asnoted above the Company does not have a formal modification program; however,it had four (4) loan relationships as of September 30, 2010 that hadbeen modified and then subsequently re-defaulted.  First of the loan relationships involves a$760 thousand commercial real estate loan, the second involves a $612 thousandcommercial real estate loan, the third is a commercial and industrial loan inthe amount of $178 thousand and the last is a loan relationship for a $70thousand commercial real estate loan.

 

Loansclassified as non-performing are nonaccrual loans and loans 90 days or morepast due.  The Company does not have anyloans 90 days or more past due that are still in an accruing status. If a loanhas been modified and it is current as to principal and interest for a periodof at least six months then it is classified as a performing loan, otherwise itis considered to be a non-performing loan.

 

TheCompany’s charge-off policy states after all collection efforts have beenexhausted and the loan is deemed to be a loss, it will be charged to theCompany’s established allowance for loan losses.  Consumer loans subject to the Uniform RetailCredit Classification are charged-off as follows (a) closed end loans arecharged-off no later than 120 days after becoming delinquent, (b) consumerloans to borrowers who subsequently declare bankruptcy, where the Company is anunsecured creditor, are charged-off within 60 days of 

 

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receiptof the notification from the bankruptcy court, (c) fraudulent loans arecharged-off within 90 days of discovery and (d) death of a borrower willcause a charge-off to be incurred at such time an actual loss isdetermined.  All other types of loans aregenerally evaluated for loss potential at the 90th day past duethreshold, and any loss is recognized no later than the 120th day past due threshold; each loss is evaluatedon its specific facts regarding the appropriate timing to recognize the loss.

 

TheCompany does not normally engage in partial charge-offs and has not incurredany in the nine months ended September 30, 2010.

 

**Off-Balance Sheet Arrangements**

 

TheCompany is a party to financial instruments with off-balance sheet risk in thenormal course of business 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, revenues or expenses, results of operations, liquidity,capital expenditures or capital resources that is material to investors.

 

Commitments to extend creditand standby letters of credit were as follows:

 
| ** **                                                                       | ** ** | **September 30,**  | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                       | ** ** | **2010**                | ** ** |
| **(dollars in thousands)**                                             | ** ** | **Contractual  Amount** | ** ** |
| Financial instruments whose notional or contract  amounts represent credit risk: |       |                    |       |
| Commitments to extend credit                                                     |       | $                       | 22,640     |   |
| Standby letters of credit                                                        |       | 2,956                   |       |
| Total                                                                            |       | $                       | 25,596     |   |

 

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.

 

**Capital Resources**

 

The ability of the Company to grow is dependent onthe availability of capital with which to meet regulatory capital requirements,discussed below.  To the extent theCompany is successful it may need to acquire additional capital through thesale of additional common stock, preferred stock (which the Company does notcurrently have authorized), 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.  Under Dodd-Frank, the capitaltreatment of the Company’s trust preferred securities is grandfathered, but wewill not be able to issue additional trust preferred securities which count ascapital at the holding company.  The Company hasan unsecured revolving line of credit borrowing arrangement with anunaffiliated financial institution in the amount of $4.00 million withoutstanding balances of $300 thousand and $500 thousand as of September 30,2010 and December 31, 2009, respectively. This facility matures on July 22, 2011, has a floating interestrate equal to the Wall Street Journal prime rate plus 0.50%, subject to aminimum rate of 4.25%, 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.

 

TheBank is subject to various regulatory capital requirements administered by thefederal banking agencies.  The Companywill be subject to such requirements when its assets exceed $500 million, ithas publicly issued debt 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.

 

Undercapital adequacy guidelines and the regulatory framework for prompt correctiveaction, the Bank must meet specific capital guidelines that involvequantitative measures of the Bank’s assets, liabilities, and certainoff-balance-sheet items as calculated under regulatory accountingpractices.  The Bank’s capital amountsand classification are also subject to qualitative judgments by the regulatorsabout components, risk weightings, and other factors.

 

Significantfurther growth of the Company may be limited because the current level ofcapital will not support rapid short term growth while meeting regulatorycapital expectations.  Loan portfoliogrowth will need to be funded primarily by increases in deposits as the 

 

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Companyhas limited amounts of on-balance sheets assets deployable into loans.  Growth will depend upon Company earningsand/or the raising of additional capital.

 

Quantitativemeasures established by regulation to ensure capital adequacy require the Bankto maintain minimum amounts and ratios of total and Tier 1 capital (as definedin the regulations) to risk-weighted assets (as defined), and Tier 1 capital(as defined) to average assets (as defined). Management believes that the Bank met all capital adequacy requirementsto which it is subject as of September 30, 2010 and that the Company wouldmeet such requirements if applicable. See Note 10 to the consolidated financial statements for a tabledepicting compliance with regulatory capital requirements.

 

Asof September 30, 2010, the most recent notification from the regulatoryagency categorized the Bank as well capitalized under the regulatory frameworkfor prompt corrective action.  To becategorized as well capitalized the Bank must maintain minimum totalrisk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in thetable in Note 10.  There are noconditions or events since that notification which management believes havechanged the Bank’s category.

 

OnJune 26, 2007, the Company authorized the repurchase of up to 146,000shares of its common stock, for an aggregate expenditure of not more than $4.5million, through September 30, 2012, or earlier termination of the programby the Board of Directors.  Repurchases,if any, by the Company pursuant to this authorization are expected to enablethe Company to repurchase its shares at an attractive price, and to provide asource of liquidity for the Company’s shares. As of September 30, 2010, there have been 5,118 shares repurchasedby the Company at an average price of $12.10.

 

**Inflation**

 

Theeffect of changing prices on financial institutions is typically different thanon non-banking companies since virtually all of a Company’s assets andliabilities are monetary in nature. In particular, interest rates aresignificantly affected by inflation, but neither the timing nor magnitude ofthe changes are directly related to price level indices; therefore, the Companycan best counter inflation over the long term by managing net interest incomeand controlling net increases in noninterest income and expenses.

 

**Item 3.                    Quantitative and Qualitative Disclosures AboutMarket Risk**

 

See“Market Risk, Liquidity and Interest Rate Sensitivity” at Page 25.

 

**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 September 30,2010 that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

**PART II — Other Information**

 

Item1.    Legal Proceedings. On July 30, 2010, the Bank was served with a lawsuit, Pionteck, v.Frederick County Bank, filed in the United States District Court for theDistrict of Maryland, Greenbelt Division, alleging noncompliance the ATM noticerequirements of the Electronic Funds Transfer Act.  The complaint, whichpurports to be a class action, was filed on July 15, 2010.  If theclass action proceeds and the Bank is ultimately found to be liable, statutorydamages from the noncompliance could be up to 1% of the Bank’s net worth,approximately $270 thousand at September 30, 2010.  The Bank is inthe process of discussions with respect to the possible settlement of theclaims for an amount, inclusive of plaintiff legal fees and costs, below themaximum statutory damages.  The Company’sSeptember 30, 2010 financial statements reflect a reserve for litigationand settlement costs that the Company believes to cover substantially allremaining expense to be incurred in connection with this matter.  If settlement on the terms under discussionis reached and approved by the court, the Company believes that it would nothave a material adverse affect on the Company’s financial position.  There can be no assurance that any settlementcan be reached, or that final settlement will not result in greater expensethan that anticipated in as a result of the current discussions.

 

Item1A.  Risk Factors.  Not Applicable.

 

Item2.    Unregistered Sales of EquitySecurities and Use of Proceeds

 

(a)   *Sales of Unregistered Securities. *None

 

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

 

(c)   *Registrant**Purchases of Securities*

 

The following table provides information on the Company’s purchases ofits common stock during the quarter ended September 30, 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** | ** ** |
|---------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|
| July 1-31, 2010      |       | 0                                                    |       | N/A                                              |       | 0                                                                                                                                   |       | 0                                                                                                                                       |       |
| August 1-31, 2010    |       | 0                                                    |       | N/A                                              |       | 0                                                                                                                                   |       | 0                                                                                                                                       |       |
| September 1-30, 2010 |       | 5,118                                                |       | $                                                | 12.10      |                                                                                                                                | 5,118      |                                                                                                                                    | 140,882    | (2) |
|                           |            |                                                      |            |                                                  |            |                                                                                                                                     |            |                                                                                                                                         |            |  |

 

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(1)          On June 26, 2007, theCompany’s Board of Directors approved a share repurchase program thatauthorizes the repurchase of up to 146,000 shares of the Company’s outstandingcommon 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 maximumexpenditure of $4.5 million.  Number ofshares indicated is the remaining number of shares authorized for repurchase asof the end of the indicated period.

 

Item 3.             Defaults uponSenior Securities.  None

 

Item4.    Removed and Reserved

 

Item 5.             OtherInformation            None

 

Item 6.  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)                                                                                                                                                                                              |
| 10(i)                |       | Amendment  to Loan Documents (9)                                                                                                                                                                                                                     |
| 11                   |       | Statement  Regarding Computation of Per Share Income — Please refer to Note 2 to the  unaudited consolidated financial statements included herein                                                                                               |
| 21                   |       | Subsidiaries  of the Registrant                                                                                                                                                                                                                      |
| 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 toExhibit of the same number to the Company’s Quarterly Report on Form 10-QSBfor the quarter ended September 30, 2004, as filed with the Securities andExchange Commission.

(2)          Incorporated by reference toExhibit of the same number to the Company’s Quarterly Report on Form 10-QSBfor the quarter ended September 30, 2003, as filed with the Securities andExchange Commission.

(3)          Not filed in accordance withthe provision of Item 601(b)(4)(v) of Regulation SK.  The Company agrees to provide a copy of thesedocuments to the Commission upon request.

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

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

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

(7)          Incorporated by reference toExhibit of the same number to the Company’s Annual Report on Form 10-KSBfor the year ended December 31, 2004, as filed with the Securities andExchange Commission.

(8)          Incorporated by reference toExhibit of the same number to the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2009, as filed with the Securities andExchange Commission.

(9)          Incorporated by reference toExhibit of the same number to the Company’s Quarterly Report on Form 10-Qfor the quarter ended June 30, 2010, as filed with the Securities andExchange Commission.

 

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**SIGNATURES**

 

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|   |                   | FREDERICK  COUNTY BANCORP, INC.                                           |
|--------|------------------------|--------------------------------------------------------------------------------|
|   |                   |                                                                           |
|   |                   |                                                                           |
| Date:  | November 8,  2010 |    By:                                                          | /s/  Martin S. Lapera |
|   |                   | Martin  S. Lapera                                                              |
|   |                   | President  and Chief Executive Officer                                         |
|   |                   |                                                                           |
|   |                   |                                                                           |
| Date:  | November 8,  2010 |    By:                                                          | /s/  William R. Talley, Jr. |
|   |                   | William  R. Talley, Jr.                                                   |
|   |                   | Executive Vice President, Chief Financial Officer and  Chief Operating Officer |
|        |                        |                                                                                |  |  |

 

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