**Table ofContents**

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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,DC  20549**

** **

### **FORM 10-Q**

### ** **

**(MARK ONE)**

 

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

###### ** **

**For the Quarterly Period Ended June 30,2008**

 

**OR**

 

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

###### ** **

**For the transition period from             to             **

 

**Commission File Number: 000-50407**

 

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

(Exactname of registrant as specified in its charter)

 

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

 

#### **9North Market Street**

**Frederick, Maryland 21701**

(Address of registrant’s principal executive offices)

 

**301.620.1400**

(Registrant’stelephone number, including area code)

 

**N/A**

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

 

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

 

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

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

 

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

 

State the number ofshares of each of the issuer’s classes of common equity, as of the latestpractical date.  There were 1,460,602shares of Common Stock outstanding as of July 31, 2008.

 

 

 

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Table of Contents

 

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

**TABLE OF CONTENTS**

 
| **PART I**  | **FINANCIAL  INFORMATION**                                                                                                |
|------------------|---------------------------------------------------------------------------------------------------------------------------|
|             |
| Item 1.          | Financial Statements  (Unaudited)                                                                                         |
|             |                                                                                                                      |
|             | Consolidated****Balance Sheets, June 30, 2008 and  December 31, 2007                                            |
|             |                                                                                                                      |
|             | Consolidated Statements of  Income, Three and Six Months Ended June 30, 2008 and 2007                                |
|             |                                                                                                                      |
|             | Consolidated Statements of  Changes in Shareholders’ Equity, Three and Six Months Ended June 30,  2008 and 2007 |
|             |                                                                                                                      |
|             | Consolidated  Statements of Cash Flows, Six Months Ended June 30, 2008 and 2007                                      |
|             |                                                                                                                      |
|             | 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 4.          | Controls and  Procedures                                                                                                  |
|             |                                                                                                                      |
| **PART II** | **OTHER INFORMATION**                                                                                                     |
| ** **       | ** **                                                                                                                |
| Item 1.          | Legal Proceedings                                                                                                         |
|             |                                                                                                                      |
| Item 1A.         | Risk Factors                                                                                                              |
|             |                                                                                                                      |
| Item 2.          | Unregistered  Sales of Equity Securities and Use of Proceeds                                                              |
|             |                                                                                                                      |
| Item 3.          | Defaults  upon Senior Securities                                                                                          |
|             |                                                                                                                      |
| Item 4.          | Submission  of Matters to a Vote of Security Holders                                                                      |
|             |                                                                                                                      |
| Item 5.          | Other Information                                                                                                         |
|             |                                                                                                                      |
| Item 6.          | Exhibits                                                                                                                  |
|             |                                                                                                                      |
|             | Signatures                                                                                                                |
|                  |                                                                                                                           |  |

 

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Table of Contents

 

**FrederickCounty Bancorp, Inc. and Subsidiaries**

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                  | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(dollars in thousands)**                                                                                                                  | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                                                                                                  | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| ASSETS                                                                                                                                      |       |              |       |                  |       |
| Cash and due  from banks                                                                                                                    |       | $                 | 4,781      |                  | $          | 3,828 |   |
| Federal funds  sold                                                                                                                         |       | 14,153            |       | 6,864                 |       |
| Interest-bearing  deposits in other banks                                                                                                   |       | 329               |       | 1,674                 |       |
| Cash and cash  equivalents                                                                                                                  |       | 19,263            |       | 12,366                |       |
| Investment  securities available-for-sale at fair value                                                                                     |       | 26,460            |       | 27,512                |       |
| Restricted stock                                                                                                                            |       | 1,509             |       | 1,440                 |       |
| Loans                                                                                                                                       |       | 209,969           |       | 209,011               |       |
| Less: Allowance  for loan losses                                                                                                            |       | (2,584            | )          | (2,640                | )          |
| Net loans                                                                                                                                   |       | 207,385           |       | 206,371               |       |
| Bank premises  and equipment                                                                                                                |       | 5,385             |       | 5,512                 |       |
| Other assets                                                                                                                                |       | 2,491             |       | 2,790                 |       |
| Total assets                                                                                                                                |       | $                 | 262,493    |                  | $          | 255,991 |   |
|                                                                                                                                        |       |              |       |                  |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                                  |       |              |       |                  |       |
|                                                                                                                                        |       |              |       |                  |       |
| **Liabilities**                                                                                                                             |       |              |       |                  |       |
| Deposits:                                                                                                                                   |       |              |       |                  |       |
| Noninterest-bearing  deposits                                                                                                               |       | $                 | 35,155     |                  | $          | 33,357 |   |
| Interest-bearing  deposits                                                                                                                  |       | 188,832           |       | 185,871               |       |
| Total deposits                                                                                                                              |       | 223,987           |       | 219,228               |       |
| Long-term  borrowings                                                                                                                       |       | 10,000            |       | 10,000                |       |
| Junior  subordinated debentures                                                                                                             |       | 6,186             |       | 6,186                 |       |
| Accrued interest  and other liabilities                                                                                                     |       | 2,256             |       | 997                   |       |
| Total  liabilities                                                                                                                          |       | 242,429           |       | 236,411               |       |
| ** **                                                                                                                                  |       |              |       |                  |       |
| **Shareholders’  Equity**                                                                                                              |       |              |       |                  |       |
| Common stock,  per share par value $.01; 10,000,000 shares authorized; 1,460,602 and  1,460,602 shares issued and outstanding, respectively |       | 15                |       | 15                    |       |
| Additional  paid-in capital                                                                                                                 |       | 14,687            |       | 14,687                |       |
| Retained  earnings                                                                                                                          |       | 5,470             |       | 4,901                 |       |
| Accumulated  other comprehensive loss                                                                                                       |       | (108              | )          | (23                   | )          |
| Total  shareholders’ equity                                                                                                            |       | 20,064            |       | 19,580                |       |
| Total  liabilities and shareholders’ equity                                                                                            |       | $                 | 262,493    |                  | $          | 255,991 |   |

 

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

 

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

**Consolidated Statements of Income (Unaudited)**

 
| ** **                                                                         | ** ** | **For the Three** | ** ** | **For the Six** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| ** **                                                                         | ** ** | **Months Ended**       | ** ** | **Months Ended**     | ** ** |
| ** **                                                                         | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** |
| **(dollars in thousands, except per share amounts)** | ** ** | **2008**                    | ** ** | **2007**                  | ** ** | **2008** | ** ** | **2007** | ** ** |
| Interest income:                                                                   |       |                        |       |                      |       |   |   |   |   |
| Interest and  fees on loans                                                        |       | $                           | 3,437      |                      | $          | 3,452 |   | $ | 7,047 |   | $ | 6,659 |   |
| Interest and  dividends on investment securities:                                  |       |                        |       |                      |       |   |   |   |   |
| Interest –  taxable                                                           |       | 203                         |       | 231                       |       | 401 |   | 467 |   |
| Interest – tax  exempt                                                        |       | 99                          |       | 99                        |       | 198 |   | 198 |   |
| Dividends                                                                          |       | 21                          |       | 18                        |       | 43 |   | 35 |   |
| Interest on  federal funds sold                                                    |       | 57                          |       | 117                       |       | 134 |   | 224 |   |
| Other interest  income                                                             |       | 22                          |       | 80                        |       | 32 |   | 139 |   |
| Total interest  income                                                             |       | 3,839                       |       | 3,997                     |       | 7,855 |   | 7,722 |   |
| Interest  expense:                                                                 |       |                        |       |                      |       |   |   |   |   |
| Interest on  deposits                                                              |       | 1,595                       |       | 1,796                     |       | 3,369 |   | 3,470 |   |
| Interest on  other short-term borrowings                                           |       | —                      |       | —                    |       | — |   | 2 |   |
| Interest on  long-term borrowings                                                  |       | 116                         |       | 41                        |       | 231 |   | 41 |   |
| Interest on  junior subordinated debentures                                        |       | 101                         |       | 101                       |       | 202 |   | 202 |   |
| Total interest  expense                                                            |       | 1,812                       |       | 1,938                     |       | 3,802 |   | 3,715 |   |
| Net interest  income                                                               |       | 2,027                       |       | 2,059                     |       | 4,053 |   | 4,007 |   |
| Provision for  loan losses                                                         |       | 120                         |       | 125                       |       | 240 |   | 191 |   |
| Net interest  income after provision for loan losses                               |       | 1,907                       |       | 1,934                     |       | 3,813 |   | 3,816 |   |
| Noninterest  income:                                                               |       |                        |       |                      |       |   |   |   |   |
| Gain on sale of  foreclosed properties                                             |       | —                      |       | —                    |       | 15 |   | — |   |
| Service fees                                                                       |       | 61                          |       | 43                        |       | 120 |   | 89 |   |
| Other operating  income                                                            |       | 68                          |       | 54                        |       | 145 |   | 94 |   |
| Total  noninterest income                                                          |       | 129                         |       | 97                        |       | 280 |   | 183 |   |
| Noninterest  expense:                                                              |       |                        |       |                      |       |   |   |   |   |
| Salaries and  employee benefits                                                    |       | 960                         |       | 927                       |       | 1,919 |   | 1,832 |   |
| Occupancy and  equipment expenses                                                  |       | 298                         |       | 247                       |       | 597 |   | 507 |   |
| Other operating  expenses                                                          |       | 392                         |       | 375                       |       | 780 |   | 714 |   |
| Total  noninterest expense                                                         |       | 1,650                       |       | 1,549                     |       | 3,296 |   | 3,053 |   |
| Income before  provision for income taxes                                          |       | 386                         |       | 482                       |       | 797 |   | 946 |   |
| Provision for  income taxes                                                        |       | 116                         |       | 147                       |       | 228 |   | 288 |   |
| Net income                                                                         |       | $                           | 270        |                      | $          | 335 |   | $ | 569 |   | $ | 658 |   |
| Basic earnings  per share                                                          |       | $                           | 0.18       |                      | $          | 0.23 |   | $ | 0.39 |   | $ | 0.45 |   |
| Diluted earnings  per share                                                        |       | $                           | 0.18       |                      | $          | 0.22 |   | $ | 0.38 |   | $ | 0.43 |   |
| Basic weighted  average number of shares outstanding                               |       | 1,460,602                   |       | 1,460,602                 |       | 1,460,602 |   | 1,459,641 |   |
| Diluted weighted  average number of shares outstanding                             |       | 1,507,087                   |       | 1,521,376                 |       | 1,508,066 |   | 1,522,627 |   |

 

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

 

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**FrederickCounty Bancorp, Inc. and Subsidiaries**

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

 
| **Three Months Ended June 30,****(dollars in thousands, except  shares outstanding)** | ** ** | **Shares  Outstanding** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  (Loss)** | ** ** | **Total  Shareholders’   Equity** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| Balance,  March 31, 2007                                                                                                 |       | 1,458,602               |       | $                 | 15         |                             | $          | 14,687                 |       | $                                             | 3,664      |                                        | $          | (58 | ) | $ | 18,308 |   |
| Comprehensive  income:                                                                                                        |       |                    |       |              |       |                             |       |                   |       |                                          |       |                                        |       |
| Net income                                                                                                                    |       | —                  |       | —            |       | —                           |       | 335                    |       | —                                        |       | 335                                         |       |
| Changes in net  unrealized gains on securities available for sale, net of income tax benefits  of $148                        |       | —                  |       | —            |       | —                           |       | —                 |       | (236                                          | )          | (236                                        | )          |
| Comprehensive  income                                                                                                         |       |                    |       |              |       |                             |       |                   |       |                                          |       | 99                                          |       |
| Balance,  June 30, 2007                                                                                                  |       | 1,458,602               |       | $                 | 15         |                             | $          | 14,687                 |       | $                                             | 3,999      |                                        | $          | (294 | ) | $ | 18,407 |   |
| Balance,  March 31, 2008                                                                                                 |       | 1,460,602               |       | $                 | 15         |                             | $          | 14,687                 |       | $                                             | 5,200      |                                        | $          | 206 |   | $ | 20,108 |   |
| Comprehensive  income:                                                                                                        |       |                    |       |              |       |                             |       |                   |       |                                          |       |                                        |       |
| Net income                                                                                                                    |       | —                  |       | —            |       | —                           |       | 270                    |       | —                                        |       | 270                                         |       |
| Changes in net  unrealized gains on securities available for sale, net of income taxes of  $205                               |       | —                  |       | —            |       | —                           |       | —                 |       | (314                                          | )          | (314                                        | )          |
| Comprehensive  income                                                                                                         |       |                    |       |              |       |                             |       |                   |       |                                          |       | (44                                         | )          |
| Balance,  June 30, 2008                                                                                                  |       | 1,460,602               |       | $                 | 15         |                             | $          | 14,687                 |       | $                                             | 5,470      |                                        | $          | (108 | ) | $ | 20,064 |   |

 

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**FrederickCounty Bancorp, Inc. and Subsidiaries**

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

 
| **Six Months Ended June 30,****(dollars in thousands, except  shares outstanding)** | ** ** | **Shares  Outstanding** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  (Loss)** | ** ** | **Total  Shareholders’   Equity** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| Balance,  January 1, 2007                                                                                              |       | 1,458,602               |       | $                 | 15         |                             | $          | 14,652                 |       | $                                             | 3,341      |                                        | $          | (115 | ) | $ | 17,893 |   |
| Comprehensive  income:                                                                                                      |       |                    |       |              |       |                             |       |                   |       |                                          |       |                                        |       |
| Net income                                                                                                                  |       | —                  |       | —            |       | —                           |       | 658                    |       | —                                        |       | 658                                         |       |
| Changes in net  unrealized gains on securities available for sale, net of income tax benefits  of $113                      |       | —                  |       | —            |       | —                           |       | —                 |       | (179                                          | )          | (179                                        | )          |
| Comprehensive  income                                                                                                       |       |                    |       |              |       |                             |       |                   |       |                                          |       | 479                                         |       |
| Shares issued  under stock option transactions                                                                              |       | 2,000                   |       | —            |       | 35                               |       | —                 |       | —                                        |       | 35                                          |       |
| Balance,  June 30, 2007                                                                                                |       | 1,458,602               |       | $                 | 15         |                             | $          | 14,687                 |       | $                                             | 3,999      |                                        | $          | (294 | ) | $ | 18,407 |   |
| Balance,  January 1, 2008                                                                                              |       | 1,460,602               |       | $                 | 15         |                             | $          | 14,687                 |       | $                                             | 4,901      |                                        | $          | (23 | ) | $ | 19,580 |   |
| Comprehensive  income:                                                                                                      |       |                    |       |              |       |                             |       |                   |       |                                          |       |                                        |       |
| Net income                                                                                                                  |       | —                  |       | —            |       | —                           |       | 569                    |       | —                                        |       | 569                                         |       |
| Changes in net  unrealized gains on securities available for sale, net of income taxes of $55                               |       | —                  |       | —            |       | —                           |       | —                 |       | (85                                           | )          | (85                                         | )          |
| Comprehensive  income                                                                                                       |       |                    |       |              |       |                             |       |                   |       |                                          |       | 484                                         |       |
| Balance,  June 30, 2008                                                                                                |       | 1,460,602               |       | $                 | 15         |                             | $          | 14,687                 |       | $                                             | 5,470      |                                        | $          | (108 | ) | $ | 20,064 |   |

 

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

 

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

**ConsolidatedStatements of Cash Flows (Unaudited)**

 
| ** **                                                                                                | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(dollars in thousands)**                                                                      | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
| Cash flows from operating activities:                                                                     |       |                                              |       |   |   |
| Net income                                                                                                |       | $                                                 | 569        |   | $ | 658 |   |
| Adjustments to reconcile net income to net cash provided by  operating activities:                        |       |                                              |       |   |   |
| Depreciation and amortization                                                                             |       | 166                                               |       | 142 |   |
| Deferred income taxes (benefits)                                                                          |       | (12                                               | )          | (68 | ) |
| Provision for loan losses                                                                                 |       | 240                                               |       | 191 |   |
| Net (discount accretion) premium amortization on investment  securities                                   |       | (2                                                | )          | 5 |   |
| Gain on sale of foreclosed property                                                                       |       | (15                                               | )          | — |   |
| Decrease (increase) in accrued interest and other assets                                                  |       | 368                                               |       | (308 | ) |
| Increase in accrued interest and other liabilities                                                        |       | 1,259                                             |       | 2,008 |   |
| Net cash provided by operating activities                                                                 |       | 2,573                                             |       | 2,628 |   |
| Cash flows from investing activities:                                                                     |       |                                              |       |   |   |
| Purchases of investment securities available-for-sale                                                     |       | (3,053                                            | )          | (2,124 | ) |
| Proceeds from maturities, prepayments and calls of investment  securities available-for-sale              |       | 3,965                                             |       | 2,855 |   |
| Purchases of restricted stock                                                                             |       | (69                                               | )          | (247 | ) |
| Net increase in loans                                                                                     |       | (1,704                                            | )          | (25,455 | ) |
| Purchases of bank premises and equipment                                                                  |       | (39                                               | )          | (39 | ) |
| Proceeds from sale of foreclosed property                                                                 |       | 465                                               |       | — |   |
| Net cash used in investing activities                                                                     |       | (435                                              | )          | (25,010 | ) |
| Cash flows from financing activities:                                                                     |       |                                              |       |   |   |
| Net increase (decrease) in NOW, money market accounts, savings  accounts and noninterest-bearing deposits |       | 7,530                                             |       | (1,029 | ) |
| Net (decrease) increase in time deposits                                                                  |       | (2,771                                            | )          | 13,327 |   |
| Net decrease in short-term borrowings                                                                     |       | —                                            |       | (450 | ) |
| Repayment of long-term debt                                                                               |       | —                                            |       | 5,000 |   |
| Proceeds from issuance of common stock                                                                    |       | —                                            |       | 35 |   |
| Net cash provided by financing activities                                                                 |       | 4,759                                             |       | 16,883 |   |
| Net increase (decrease) in cash and cash equivalents                                                      |       | 6,897                                             |       | (5,499 | ) |
| Cash and cash equivalents – beginning of period                                                      |       | 12,366                                            |       | 26,483 |   |
| Cash and cash equivalents – end of period                                                            |       | $                                                 | 19,263     |   | $ | 20,984 |   |
| Supplemental cash flow disclosures:                                                                       |       |                                              |       |   |   |
| Interest paid                                                                                             |       | $                                                 | 3,858      |   | $ | 3,687 |   |
| Income taxes paid                                                                                         |       | $                                                 | 254        |   | $ | 285 |   |

 

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

 

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

#### ** **

Notes to UnauditedConsolidated Financial Statements

 

**Note1.  General:**

 

Frederick County Bancorp, Inc. (the “Bancorp”), theparent company for its wholly-owned subsidiary Frederick County Bank (the “Bank”and together with Bancorp, the “Company”), was organized in September 2003.The Bank was incorporated under the laws of the state of Maryland in August 2000and commenced banking operations in October 2001.  The Bank provides its customers with variousbanking services.  The Bank offersvarious loan and deposit products to its customers.  The Bank’s customers include individuals andcommercial enterprises within its principal market area consisting of FrederickCounty, Maryland.  Additionally, the Bankmaintains correspondent banking relationships and transacts daily federal fundssales on an unsecured basis with regional correspondent banks.  Note 4 discusses the types of securities theBank invests in.  Note 5 discusses thetypes of lending that the Bank engages in. The Bank does not have any significant concentrations to any oneindustry or customer.  The Company alsohas a subsidiary called FCBI Statutory Trust I. See Note 7 for additional disclosures.

 

The accompanying unaudited consolidated financialstatements of the Company have been prepared in accordance with accounting principles generally accepted inthe United States of America for interim financial information, theinstructions for Form 10-Q, regulation S-X, and general practices withinthe banking industry.  Accordingly, theydo not include all of the information and disclosures required by generallyaccepted accounting principles for complete financial statements.  These statements should be read inconjunction with the consolidated financial statements and accompanyingfootnotes included in the Company’s 2007 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 31,2008.

 

The preparation of financial statements requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Theseestimates and assumptions are based on information available as of the date ofthe consolidated financial statements and could differ from actual results.

 

**Recent Accounting Pronouncements**

 

In September 2006, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)157, *Fair Value Measurements.*  SFAS 157 defines fair value, establishes aframework for measuring fair value, and expands disclosures about fair valuemeasurements.  It clarifies that fairvalue is the price that would be received to sell an asset or paid to transfera liability in an orderly transaction between market participants in the marketin which the reporting entity transacts. This Statement does not require any new fair value measurements, butrather, it provides enhanced guidance to other pronouncements that require orpermit assets or liabilities to be measured at fair value.  This Statement is effective for fiscal yearsbeginning after November 15, 2007, with earlier adoption permitted.  In February 2008, the FASB issued FASBStaff Position (“FSP”) FAS 157-2, *EffectiveDate of FASB Statement No.157.* This FSP defers the effective date of SFAS 157 for nonfinancial assetsand nonfinancial liabilities, except those that are recognized or disclosed atfair value in the financial statements on a recurring basis (at leastannually), to years beginning after November 15, 2008, and interim periodswithin those fiscal years.  The adoptionof this Statement did not have a material impact on the Company’s financialposition, results of operations or cash flows.

 

In December 2007,the FASB issued SFAS 141, Revised 2007 (SFAS 141R), *BusinessCombinations.*  SFAS 141R’sobjective is to improve the relevance, representational faithfulness, andcomparability of the information that a reporting entity provides in itsfinancial reports about a business combination and its effects.  SFAS 141R applies prospectively to businesscombinations for which the acquisition date is on or after December 31,2008.  The Company does not expect theimplementation of SFAS 141R to have a material impact on its consolidatedfinancial statements.

 

In December 2007,the FASB issued SFAS 160, *Noncontrolling Interestsin Consolidated Financial Statements.*  SFAS 160’s objective is to improve therelevance, comparability, and transparency of the financial information that areporting entity provides in its consolidated financial statements byestablishing accounting and reporting standards for the noncontrolling interestin a subsidiary and for the deconsolidation of a subsidiary.  SFAS 160 shall be effective for fiscal yearsand interim periods within those fiscal years, beginning on or after December 15,2008.  The Company does not expect theimplementation of SFAS 160 to have a material impact on its consolidatedfinancial statements.

 

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In March 2008, theFASB issued SFAS 163, *Disclosures aboutDerivative Instruments and Hedging Activities*, an amendment of SFAS133.  SFAS 163 establishes, among otherthings, the disclosure requirements for derivative instruments and for hedgingactivities.  SFAS 163 amends and expandsthe disclosure requirements of SFAS 133 with the intent to provide usersfinancial statements with enhanced understanding of: (a) How and why anentity uses derivatives instruments; (b) How derivative instruments andrelated hedged items are account for under SFAS 133 and its relatedinterpretations; and (c) how derivative instruments and related hedgeditems affect an entity’s financial position, financial performance, and cashflows.  SFAS 163 shall be effective forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008.    TheCompany does not expect the implementation of SFAS 162 to have a materialimpact on its consolidated financial statements.

 

In May 2008, theFASB issued SFAS 162, *The Hierarchy of GenerallyAccepted Accounting Principles*. SFAS 162 identifies the sources of accounting principles and theframework for selecting the principles used in the preparation of financialstatements of nongovernmental entities that are presented in conformity withgenerally accepted accounting principles in the United States.  SFAS 162 shall be effective 60 days followingthe SEC’s approval of the Public Company Accounting Oversight Board amendmentto AU 411, *The Meaning of Present Fairly in Conformity WithGenerally Accepted Accounting Principles*. The Company does notexpect the implementation of SFAS 162 to have a material impact on itsconsolidated financial statements.

 

**Note2. Earnings Per Share:**

 

Earnings per share (“EPS”)are disclosed as basic and diluted. Basic EPS is generally computed by dividing net income by theweighted-average number of common shares outstanding for the period, whereasdiluted EPS essentially reflects the potential dilution in basic EPS that couldoccur if other contracts to issue common stock were exercised.  As of June 30, 2008 and 2007, no commonstock equivalents were excluded from the diluted EPS calculation.

 
| ** **                                             | ** **   | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------|--------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(dollars in thousands, except  per share amounts)**  | *** *** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | *** *** |
| Net income                                             |         | $                                               | 270        |                                          | $          | 335 |   | $ | 569 |   | $ | 658 |   |
| Basic earnings  per share                              |         | $                                               | 0.18       |                                          | $          | 0.23 |   | $ | 0.39 |   | $ | 0.45 |   |
| Diluted earnings  per share                            |         | $                                               | 0.18       |                                          | $          | 0.22 |   | $ | 0.38 |   | $ | 0.43 |   |
| Basic weighted  average number of shares outstanding   |         | 1,460,602                                       |       | 1,460,602                                     |       | 1,460,602 |   | 1,459,641 |   |
| Effect of  dilutive securities – stock options    |         | 46,485                                          |       | 60,774                                        |       | 47,464 |   | 62,986 |   |
| Diluted weighted  average number of shares outstanding |         | 1,507,087                                       |       | 1,521,376                                     |       | 1,508,066 |   | 1,522,627 |   |

 

**Note3.  Employee Stock Option Plan:**

 

The Company maintains an Employee Stock Option Plan that provides forgrants of incentive and non-incentive stock options.  This plan has been presented to and approvedby the Company’s shareholders.  TheCompany follows the guidance of the Statements of Financial AccountingStandards No. 123 *Accounting forStock-Based Compensation* and No. 123(R) *Share-Based Payment. * As of December 31,2006, all outstanding stock options were fully vested.  No stock options were granted in 2007 or 2008and, accordingly, net income and earnings per share have not been affected bystock-based compensation.   Anystock-based employee compensation for future grants will be determined at thattime using the Black-Scholes or another appropriate option-pricing model.

 

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**Note 4.  Investment Portfolio:**

 

Thefollowing tables set forth certain information regarding the Company’sinvestment portfolio at June 30, 2008 and December 31, 2007:

 

**Available-for-sale portfolio**

 
| **June 30, 2008****(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                                                |       | $                   | 499        |                         | $          | 3                             |       | $                          | —     |               | $          | 502 |   | 4.74 | % |
| Due after one  year through five years                              |       | 2,399               |       | 13                           |       | 1                             |       | 2,411                      |       | 4.81               | %          |
| Due after five  years through ten years                             |       | 677                 |       | —                       |       | 14                            |       | 663                        |       | 4.99               | %          |
| State and  political subdivisions:                                  |       |                |       |                         |       |                          |       |                       |       |               |       |
| Due after one  year through five years                              |       | 101                 |       | —                       |       | 1                             |       | 100                        |       | 4.51               | %          |
| Due after five  years through ten years                             |       | 2,825               |       | 2                            |       | 29                            |       | 2,798                      |       | 5.53               | %          |
| Due after ten  years                                                |       | 6,894               |       | 9                            |       | 149                           |       | 6,754                      |       | 5.91               | %          |
| Mortgage-backed  debt securities                                    |       | 12,944              |       | 91                           |       | 103                           |       | 12,932                     |       | 4.93               | %          |
| Equity  securities                                                  |       | 300                 |       | —                       |       | —                        |       | 300                        |       | —             | %          |
|                                                                |       | $                   | 26,639     |                         | $          | 118                           |       | $                          | 297        |               | $          | 26,460 |   | 5.18 | % |

 
| **December 31, 2007****(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                                                |       | $                   | 1,495      |                         | $          | —                        |       | $                          | 1          |               | $          | 1,494 |   | 5.09 | % |
| Due after one  year through five years                              |       | 3,549               |       | 13                           |       | 13                            |       | 3,549                      |       | 4.96               | %          |
| Due after five  years through ten years                             |       | 718                 |       | —                       |       | 15                            |       | 703                        |       | 4.99               | %          |
| State and  political subdivisions:                                  |       |                |       |                         |       |                          |       |                       |       |               |       |
| Due within one  year through five years                             |       | 200                 |       | —                       |       | 6                             |       | 194                        |       | 4.64               | %          |
| Due after five  years through ten years                             |       | 3,186               |       | 24                           |       | 13                            |       | 3,197                      |       | 5.57               | %          |
| Due after ten  years                                                |       | 6,435               |       | 32                           |       | 61                            |       | 6,406                      |       | 5.94               | %          |
| Mortgage-backed  debt securities                                    |       | 11,666              |       | 70                           |       | 67                            |       | 11,669                     |       | 4.77               | %          |
| Equity  securities                                                  |       | 300                 |       | —                       |       | —                        |       | 300                        |       | —             | %          |
|                                                                |       | $                   | 27,549     |                         | $          | 139                           |       | $                          | 176        |               | $          | 27,512 |   | 5.13 | % |

** **
| ** **                                                         | ** ** | **Continuous unrealized  losses existing for less than  12 months** | ** ** | **Continuous unrealized  losses existing for 12  months and greater** | ** ** | **Total**                  | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| **June 30, 2008****(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 |       | $                                                                                                 | 993        |                                                                                                | $          | 1                          |       | $ | 662 |   | $ | 14 |   | $ | 1,655  |   | $ | 15 |   |
| State and  political subdivisions                                  |       | 5,464                                                                                             |       | 80                                                                                                  |       | 576                        |       | 23 |   | 6,040 |   | 103 |   |
| Mortgage-backed  debt securities                                   |       | 8,253                                                                                             |       | 179                                                                                                 |       | —                     |       | — |   | 8,253 |   | 179 |   |
| Total  temporarily impaired securities                             |       | $                                                                                                 | 14,710     |                                                                                                | $          | 260                        |       | $ | 1,238 |   | $ | 37 |   | $ | 15,948 |   | $ | 297 |   |

 

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| ** **                                                         | ** ** | **Continuous unrealized  losses existing for less than  12 months** | ** ** | **Continuous unrealized  losses existing for 12  months and greater** | ** ** | **Total**                  | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| **December 31, 2007  (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 |       | $                                                                                                 | 2,547      |                                                                                                | $          | 7                          |       | $ | 1,439  |   | $ | 22 |   | $ | 3,986 |   | $ | 29 |   |
| State and  political subdivisions                                  |       | 4,748                                                                                             |       | 71                                                                                                  |       | 290                        |       | 9 |   | 5,038 |   | 80 |   |
| Mortgage-backed  debt securities                                   |       | 813                                                                                               |       | 2                                                                                                   |       | 5,382                      |       | 65 |   | 6,195 |   | 67 |   |
| Total  temporarily impaired securities                             |       | $                                                                                                 | 8,108      |                                                                                                | $          | 80                         |       | $ | 7,111 |   | $ | 96 |   | $ | 15,219 |   | $ | 176 |   |

 

Management evaluates securities for other-than-temporary impairment atleast on a quarterly basis, and more frequently when economic or marketconcerns warrant such evaluation. Consideration is given to (1) the length of time and the extent towhich the fair value has been less than cost, (2) the financial conditionand near-term prospects of the issuer, and (3) the intent and ability ofthe Company to retain its investment in the issuer for a period of timesufficient to allow for any anticipated recovery in fair value.  The Company has not recognized anyother-than-temporary impairment in connection with the unrealized lossesreflected in the preceding tables.  Allof these declines can be attributable to increases in interest rates and not achange in credit quality.  As Managementhas the ability and intent to hold debt securities until maturity, or until theunrealized loss is recouped, no declines are deemed to be other than temporary.

 

**Restricted Stock**

 

Thefollowing table shows the amounts of restricted stock as of June 30, 2008and December 31, 2007:

 
| ** **                         | ** **   | **March 31,** | ** ** | **December 31,** | ** **   |
|------------------------------------|--------------|--------------------|------------|-----------------------|--------------|
| **(dollars in thousands)**         | *** *** | **2008**           | ** ** | **2007**              | *** *** |
| Federal Home  Loan Bank of Atlanta |         | $                  | 910        |                  | $            | 871 |   |
| Federal Reserve  Bank              |         | 559                |       | 529                   |         |
| Atlantic Central  Bankers Bank     |         | 40                 |       | 40                    |         |
|                               |         | $                  | 1,509      |                  | $            | 1,440 |   |

 

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

 

Loansconsist of the following:

 
| ** **                                                                  | ** ** | **June 30,** | ** ** | **% of** | ** ** | **December 31,** | ** ** | **% of** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------|------------|---------------|------------|-----------------------|------------|---------------|------------|
| **(dollars in thousands)**                                        | ** ** | **2008**          | ** ** | **Loans**     | ** ** | **2007**              | ** ** | **Loans**     | ** ** |
| Real estate  loans:                                                         |       |              |       |          |       |                  |       |          |       |
| Construction and  land development                                          |       | $                 | 23,947     |          | 11         | %                     | $          | 28,077        |       | 13 | % |
| Mortgage loans:                                                             |       |              |       |          |       |                  |       |          |       |
| Secured by 1 to  4 family residential properties                            |       | 35,459            |       | 17            | %          | 38,414                |       | 18            | %          |
| Secured by  multi-family (5 or more) residential properties                 |       | 9,339             |       | 4             | %          | 5,926                 |       | 3             | %          |
| Secured by  commercial properties                                           |       | 107,194           |       | 52            | %          | 101,920               |       | 49            | %          |
| Secured by farm  land                                                       |       | 7,053             |       | 3             | %          | 5,570                 |       | 3             | %          |
| Total mortgage  loans                                                       |       | 159,045           |       | 76            | %          | 151,830               |       | 73            | %          |
| Loans to farmers                                                            |       | 49                |       | —        | %          | 50                    |       | —        | %          |
| Commercial and  industrial loans                                            |       | 24,838            |       | 12            | %          | 27,281                |       | 13            | %          |
| Loans to  individuals for household, family and other personal expenditures |       | 2,090             |       | 1             | %          | 1,773                 |       | 1             | %          |
|                                                                        |       | 209,969           |       | 100           | %          | $                     | 209,011    |          | 100        | % |
| Less allowance  for loan losses                                             |       | (2,584            | )          |          |       | (2,640                | )          |          |       |
| Net loans                                                                   |       | $                 | 207,385    |          |       |                  | $          | 206,371       |       |   |   |

 

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Transactions in theallowance for loan losses are summarized as follows:

 
| ** **                                             | ** ** | **Three Months Ended****June 30,** | ** ** | **Six Months Ended****June 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------------|------------|-------------------------------------------------|------------|
| **(dollars in thousands)**                   | ** ** | **2008**                                          | ** ** | **2007**                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Average total  loans outstanding during period         |       | $                                                 | 209,712    |                                            | $          | 189,013 |   | $ | 210,074 |   | $ | 183,241 |   |
| Balance at  beginning of period                        |       | $                                                 | 2,470      |                                            | $          | 2,226 |   | $ | 2,640 |   | $ | 2,166 |   |
| Recoveries of  loans previously charged-off (consumer) |       | —                                            |       | —                                          |       | 9 |   | — |   |
| Loans  charged-off (commercial and industrial)         |       | —                                            |       | —                                          |       | (223 | ) | — |   |
| Loans  charged-off (commercial real estate)            |       | —                                            |       | —                                          |       | (76 | ) | — |   |
| Loans  charged-off (residential real estate)           |       | (6                                                | )          | —                                          |       | (6 | ) | — |   |
| Loans  charged-off (consumer)                          |       | —                                            |       | —                                          |       | — |   | (6 | ) |
| Net charge-offs                                        |       | (6                                                | )          | —                                          |       | (296 | ) | (6 | ) |
| Provision  charged to operating expenses               |       | 120                                               |       | 125                                             |       | 240 |   | 191 |   |
| Balance at end  of period                              |       | $                                                 | 2,584      |                                            | $          | 2,351 |   | $ | 2,584 |   | $ | 2,351 |   |
| Ratios of net  charge-offs to average loans            |       | —                                            | %          | —                                          | %          | 0.14 | % | — | % |

 

**Note6.   Deposits**

 

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

 
| ** **                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(dollars in thousands)** | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Noninterest-bearing  demand deposits |       | $                 | 35,155     |                  | $          | 33,357 |   |
| Interest-bearing  demand deposits:   |       |              |       |                  |       |
| NOW accounts                         |       | 14,693            |       | 12,197                |       |
| Money market  accounts               |       | 41,260            |       | 38,179                |       |
| Savings accounts                     |       | 3,885             |       | 3,727                 |       |
| Certificates of  deposit:            |       |              |       |                  |       |
| $100,000 or more                     |       | 57,429            |       | 60,556                |       |
| Less than  $100,000                  |       | 71,565            |       | 71,212                |       |
| Total deposits                       |       | $                 | 223,987    |                  | $          | 219,228 |   |

 

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

 

InDecember 2006, Bancorp completed the private placement of an aggregate of$6,000,000 of trust preferred securities through FCBI Statutory Trust I (the “Trust”),a newly formed trust subsidiary organized under Connecticut law, of whichBancorp owns all of the common securities of $186,000. The principal asset ofthe Trust is a similar amount of Bancorp’s junior subordinated debentures. Thejunior subordinated debentures bear interest at a fixed rate of 6.5375% until December 15,2011, at which time the interest rate becomes a variable rate, adjustedquarterly, equal to 163 basis points over three-month LIBOR. The juniorsubordinated debentures mature on December 15, 2036, and may be redeemedat par, at Bancorp’s option, on any interest payment date commencing December 15,2011. The securities are redeemable prior to December 15, 2011, at apremium ranging up to 103.525% of the principal amount thereof, upon theoccurrence of certain regulatory or legal events. The obligations of Bancorpwith respect to the Trust’s preferred securities constitute a full andunconditional guarantee by Bancorp of Trust’s obligations with respect to thetrust preferred securities to the extent set forth in the related guarantee.Subject to certain exceptions and limitations, Bancorp may elect from time totime to defer interest payments on the junior subordinated debentures,resulting in a deferral of distribution payments on the related trust preferredsecurities.   If the Companydefers interest payments on the junior subordinated debentures, or otherwise isin default of the obligations, the Company would be prohibited from makingdividend payments to its shareholders. The proceeds from this issuance were used to repay a $450,000 short-termdebt obligation that matured in January 2007 and the remaining proceedswill be used to supplement the Company’s capital for continued growth and othergeneral corporate purposes.

 

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

 

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AtJune 30, 2008 and December 31, 2007, the Company had $10,000,000 inborrowings under its credit facility from the Federal Home Loan Bank of Atlanta(“FHLB”).  There are two convertibleadvances in the amounts of $5,000,000 each, which are both at a rate of 4.56%,with a maturity dates of April 27, 2012 and September 4, 2012, unlesscalled on April 27, 2009 or September 4, 2010, respectively, by theFHLB.  Outstanding advances are securedby collateral consisting of a blanket lien on qualifying loans in the Bank’sresidential mortgage loan portfolio.

 

**Note8.  Noninterest Expense:**

 

Noninterest expenseconsists of the following:

* *
| ** **                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(dollars in thousands)**    | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                    |       |                                            |       |                                          |       |   |   |   |   |
| Salaries                                |       | $                                               | 825        |                                          | $          | 791 |   | $ | 1,637 |   | $ | 1,552 |   |
| Bonus                                   |       | —                                          |       | 26                                            |       | — |   | 39 |   |
| Deferred  Personnel Costs               |       | (25                                             | )          | (41                                           | )          | (51 | ) | (78 | ) |
| Payroll Taxes                           |       | 60                                              |       | 60                                            |       | 128 |   | 138 |   |
| Employee  Insurance                     |       | 55                                              |       | 46                                            |       | 112 |   | 93 |   |
| Other Employee Benefits                 |       | 45                                              |       | 45                                            |       | 93 |   | 88 |   |
| Depreciation                            |       | 84                                              |       | 68                                            |       | 166 |   | 142 |   |
| Rent                                    |       | 75                                              |       | 66                                            |       | 154 |   | 116 |   |
| Utilities                               |       | 25                                              |       | 24                                            |       | 51 |   | 51 |   |
| Repairs and  Maintenance                |       | 51                                              |       | 42                                            |       | 109 |   | 97 |   |
| ATM Expense                             |       | 27                                              |       | 19                                            |       | 50 |   | 42 |   |
| Other Occupancy  and Equipment Expenses |       | 36                                              |       | 28                                            |       | 67 |   | 59 |   |
| Postage and  Supplies                   |       | 15                                              |       | 23                                            |       | 32 |   | 45 |   |
| Data Processing                         |       | 87                                              |       | 88                                            |       | 175 |   | 182 |   |
| Advertising and  Promotion              |       | 86                                              |       | 70                                            |       | 167 |   | 126 |   |
| Legal                                   |       | 2                                               |       | 1                                             |       | 14 |   | 10 |   |
| Insurance                               |       | 13                                              |       | 12                                            |       | 25 |   | 23 |   |
| Consulting                              |       | 1                                               |       | 10                                            |       | 2 |   | 21 |   |
| Courier                                 |       | 4                                               |       | 11                                            |       | 9 |   | 23 |   |
| Audit Fees                              |       | 62                                              |       | 58                                            |       | 123 |   | 117 |   |
| Other                                   |       | 122                                             |       | 102                                           |       | 233 |   | 167 |   |
|                                    |       | $                                               | 1,650      |                                          | $          | 1,549 |   | $ | 3,296 |   | $ | 3,053 |   |

 

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

 

The Company has a Section 401(k) profit sharing plan coveringemployees meeting certain eligibility requirements as to minimum age and yearsof service.  Employees may make voluntarycontributions to the Plan through payroll deductions on a pre-tax basis.  The Company makes matching contributions of100% of the employee’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 contributions to the Plan in the amounts of $71,000 and$36,000 for the each of the first six-month and three-month periods ended June 30,2008 and 2007, respectively.

 

**Note10.  Shareholders’ Equity:**

 

Capital:

 

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

 

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Quantitative measuresestablished by regulation to ensure capital adequacy require the Company andthe Bank to maintain minimum amounts and ratios (set forth in the followingtable) 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 capital adequacy requirements to whichthey are subject as of June 30, 2008.

 

As of June 30, 2008,the most recent notification from the regulatory agency categorized the Bank aswell capitalized under the regulatory framework for prompt correctiveaction.  To be categorized as wellcapitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,and Tier 1 leverage ratios as set forth in the table.  There are no conditions or events since thatnotification which management believes have changed the Bank’s category.

 

The Company’s and theBank’s actual capital amounts and ratios at June 30, 2008 and December 31,2007 are presented in the following tables.

 
| ** **                  | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **            | ** **   | ** **                 | ** ** | **Minimum To Be Well** | ** ** |
|-----------------------------|------------|------------|------------|----------------------------|------------|-----------------------|--------------|----------------------------|------------|---------------------------------------|------------|
| ** **                  | ** ** | ** ** | ** ** | ** **                 | ** ** | ** **            | ** **   | ** **                 | ** ** | **Capitalized Under**            | ** ** |
| ** **                  | ** ** | ** ** | ** ** | ** **                 | ** ** | **For Capital**  | ** **   | **Prompt Corrective** | ** ** |
| **June 30, 2008** | ** ** | **Actual** | ** ** | **Adequacy Purposes** | ** ** | **Action Provisions** | *** *** |
| **(dollars in thousands)**  | ** ** | **Amount** | ** ** | **Ratio**                  | ** ** | **Amount**            | ** **   | **Ratio**                  | ** ** | **Amount**                            | ** ** | **Ratio** | ** ** |
| Tier 1 Capital              |       |       |       |                       |       |                  |         |                       |       |                                  |       |   |   |
| To Risk-Weighted  Assets    |       |       |       |                       |       |                  |         |                       |       |                                  |       |   |   |
| Company                     |       | $          | 26,172     |                       | 11.19      | %                     | $            | 9,354                      |       | 4.00                                  | %          | N/A |   | N/A |   |
| Bank                        |       | $          | 24,538     |                       | 10.52      | %                     | $            | 9,334                      |       | 4.00                                  | %          | $ | 14,001 |   | 6.00 | % |
|                        |       |       |       |                       |       |                  |         |                       |       |                                  |       |   |   |
| Total Capital               |       |       |       |                       |       |                  |         |                       |       |                                  |       |   |   |
| To Risk-Weighted Assets     |       |       |       |                       |       |                  |         |                       |       |                                  |       |   |   |
| Company                     |       | $          | 28,756     |                       | 12.30      | %                     | $            | 18,707                     |       | 8.00                                  | %          | N/A |   | N/A |   |
| Bank                        |       | $          | 27,122     |                       | 11.62      | %                     | $            | 18,668                     |       | 8.00                                  | %          | $ | 23,335 |   | 10.00 | % |
|                        |       |       |       |                       |       |                  |         |                       |       |                                  |       |   |   |
| Tier 1 Capital              |       |       |       |                       |       |                  |         |                       |       |                                  |       |   |   |
| To Average Assets           |       |       |       |                       |       |                  |         |                       |       |                                  |       |   |   |
| Company                     |       | $          | 26,172     |                       | 10.02      | %                     | $            | 10,449                     |       | 4.00                                  | %          | N/A |   | N/A |   |
| Bank                        |       | $          | 24,538     |                       | 9.41       | %                     | $            | 10,429                     |       | 4.00                                  | %          | $ | 13,037 |   | 5.00 | % |

 
| ** **                      | ** **   | ** ** | ** **   | ** **                 | ** **   | ** **            | ** **   | ** **                 | ** ** | **Minimum To Be Well** | ** ** |
|---------------------------------|--------------|------------|--------------|----------------------------|--------------|-----------------------|--------------|----------------------------|------------|---------------------------------------|------------|
| ** **                      | ** **   | ** ** | ** **   | ** **                 | ** **   | ** **            | ** **   | ** **                 | ** ** | **Capitalized Under**            | ** ** |
| ** **                      | ** **   | ** ** | ** **   | ** **                 | ** **   | **For Capital**  | ** **   | **Prompt Corrective** | ** ** |
| **December 31, 2007** | *** *** | **Actual** | *** *** | **Adequacy Purposes** | *** *** | **Action Provisions** | *** *** |
| **(dollars in thousands)**      | ** **   | **Amount** | ** **   | **Ratio**                  | ** **   | **Amount**            | ** **   | **Ratio**                  | ** ** | **Amount**                            | ** ** | **Ratio** | ** ** |
| Tier 1 Capital                  |         |       |         |                       |         |                  |         |                       |       |                                  |       |   |   |
| To Risk-Weighted  Assets        |         |       |         |                       |         |                  |         |                       |       |                                  |       |   |   |
| Company                         |         | $          | 25,603       |                       | 11.14        | %                     | $            | 9,193                      |       | 4.00                                  | %          | N/A |   | N/A |   |
| Bank                            |         | $          | 23,834       |                       | 10.39        | %                     | $            | 9,173                      |       | 4.00                                  | %          | $ | 13,760 |   | 6.00 | % |
|                            |         |       |         |                       |         |                  |         |                       |       |                                  |       |   |   |
| Total Capital                   |         |       |         |                       |         |                  |         |                       |       |                                  |       |   |   |
| To Risk-Weighted Assets         |         |       |         |                       |         |                  |         |                       |       |                                  |       |   |   |
| Company                         |         | $          | 28,243       |                       | 12.29        | %                     | $            | 18,385                     |       | 8.00                                  | %          | N/A |   | N/A |   |
| Bank                            |         | $          | 26,474       |                       | 11.54        | %                     | $            | 18,347                     |       | 8.00                                  | %          | $ | 22,933 |   | 10.00 | % |
|                            |         |       |         |                       |         |                  |         |                       |       |                                  |       |   |   |
| Tier 1 Capital                  |         |       |         |                       |         |                  |         |                       |       |                                  |       |   |   |
| To Average Assets               |         |       |         |                       |         |                  |         |                       |       |                                  |       |   |   |
| Company                         |         | $          | 25,603       |                       | 9.88         | %                     | $            | 10,368                     |       | 4.00                                  | %          | N/A |   | N/A |   |
| Bank                            |         | $          | 23,834       |                       | 9.21         | %                     | $            | 10,348                     |       | 4.00                                  | %          | $ | 12,935 |   | 5.00 | % |

 

14

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On June 26, 2007,the Company authorized the repurchase of up to 146,000 shares of its commonstock, for an aggregate expenditure of not more than $4.5 million, through June 30,2012, or earlier termination of the program by the Board of Directors.  Repurchases, if any, by the Company pursuantto this authorization are expected to enable the Company to repurchase itsshares at an attractive price, and to provide a source of liquidity for theCompany’s shares.  As of June 30,2008, there have been no shares repurchased by the Company.

 

**Note11.  Fair Value**

 

We group financial assetsand financial liabilities measured at fair value in three levels, based on themarkets in which the assets and liabilities are traded and the reliability ofthe assumptions used to determine fair value.  These levels are:

 
| 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.                                                                                                                                                                                                                                                                                                                                                                                           |

 

The following table showsdetails of the financial instruments as of June 30, 2008 for which weelected to apply the fair value option:

 
| ** **                           | ** ** | ** **   | ** ** | ** **         | ** ** | **Significant**    | ** ** | ** **         | ** ** | ** **                   | ** ** |
|--------------------------------------|------------|--------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|------------------------------|------------|
| ** **                           | ** ** | **Carrying** | ** ** | ** **         | ** ** | **Other**          | ** ** | ** **         | ** ** | **Total Changes**       | ** ** |
| ** **                           | ** ** | **Value**    | ** ** | **Quoted**         | ** ** | **Observable**     | ** ** | **Trading**        | ** ** | **In Fair Values** | ** ** |
| ** **                           | ** ** | **(Fair**    | ** ** | **Prices**         | ** ** | **Inputs**         | ** ** | **Gains and** | ** ** | **Included In**         | ** ** |
| **(dollars in thousands)** | ** ** | **Value)**   | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **(Losses)**       | ** ** | **Period Earnings**     | ** ** |
|                                 |       |         |       |               |       |               |       |               |       |                         |       |
| Securities  available for sale       |       | $            | 26,460     |               | —     |               | $          | 26,460             |       | —                       |       | — |   |
|                                      |            |              |            |                    |            |                    |            |                    |            |                              |            |  |  |

 

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

 

**Forward-LookingStatements**

 

This management’s discussion and analysis contains forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995, including statements relating to Frederick County Bancorp, Inc.’s(“Bancorp”) and Frederick County Bank’s (the “Bank” and together with Bancorp,the “Company”) beliefs, expectations, anticipations and plans regarding, amongother things, general economic trends, interest rates, product expansions andother matters.  Such forward-lookingstatements are identified by terminology such as “may”, “will”, “believe”, “expect”,“estimate”, “anticipate”, “likely”, “unlikely”, “continue”, or similar termsand are subject to numerous uncertainties, such as federal monetary policy,inflation, employment, profitability and consumer confidence levels, bothnationally and in the Company’s market area, the health of the real estate andconstruction market in the Company’s market area, the Company’s ability todevelop and market new products and to enter new markets, competitivechallenges in the Company’s market, legislative changes and other factors, andas such, there can be no assurance that future events will develop inaccordance 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 overview of the financial conditionand results of operations of the Company. This discussion is intended to assist the readers in their analysis ofthe accompanying financial statements and notes thereto.

 

Bancorp, the parent company for the Bank, its wholly-ownedsubsidiary, was organized in September 2003. The Bank was incorporatedunder the laws of the state of Maryland in August 2000 and commencedbanking operations in October 2001. The Bank provides its customers with various banking services.  The Bank offers various loan and depositproducts to their customers.  The Bank’scustomers include individuals and commercial enterprises within its principalmarket 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 inwhich the Bank invests.  Note 5 discussesthe types of lending in which the Bank engages. The Bank does not have any significant concentrations to any oneindustry or customer.  The Company alsohas a subsidiary called FCBI Statutory Trust I. See Note 7 for additional disclosures.

 

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**Critical Accounting Policies**

 

The Company’sconsolidated financial statements are prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”) andfollow general practices within the industry in which it operates.  Application of these principles requiresmanagement to make estimates, assumptions, and judgments that affect the amountsreported in the financial statements and accompanying notes.  These estimates, assumptions, and judgmentsare based on information available as of the date of the financial statements;accordingly, as this information changes, the financial statements couldreflect different estimates, assumptions, and judgments.  Certain policies inherently have a greaterreliance on the use of estimates, assumptions, and judgments and as such have agreater possibility of producing results that could be materially differentthan originally reported.  Estimates,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$958,000, or 0.46%, from December 31, 2007, to a balance of $209.97million as of June 30, 2008, and by $10.57 million, or 5.30% from June 30,2007.  During the fourth quarter of 2007,the Company has taken on a more conservative lending approach which has slowedthe rate of loan growth due to the current uncertainty in the economy.

 

## **Deposits**

 

Deposits grew by $4.76million, or 2.17%, from December 31, 2007 to a balance of $223.99 millionas of June 30, 2008, and by $2.31 million, or 1.04% from June 30,2007.  During the fourth quarter of 2007,the Company decided to slow its deposit growth in response to the slower loangrowth as discussed above.  Since thedeposit growth during the past year has mainly been in certificates of deposit,it was decided to lower these rates to slow the rate of growth in, or to reducethe aggregate amount of these deposits by allowing some of the higher ratecertificates of deposit to mature without being renewed.

 

**ThreeMonths Ended June 30, 2008**

 

Net income was $270,000for the quarter ended June 30, 2008, as compared to $335,000 of net incomefor the same period in 2007.  Thedecrease in earnings for this quarter in 2008 is primarily related to anincrease in operating expenses of $101,000 that was partially offset by anincrease in noninterest income of $32,000. Basic earnings per share for thethree months ended June 30, 2008 and 2007 were $0.18 and $0.23,respectively, and were based on weighted-average number of shares outstandingof 1,460,602 for each period.  Dilutedearnings per share for the three months ended June 30, 2008 and 2007 were$0.18 and $0.22, respectively, and were based on weighted-average number ofshares outstanding of 1,507,087 and 1,521,376, respectively.

 

TheCompany experienced an annualized return on average assets of 0.41% and 0.55%for the three-month periods ended June 30, 2008 and 2007,respectively.  Additionally, the Companyexperienced an annualized return on average shareholders’ equity of 5.33% and7.21% for the three-month periods ended June 30, 2008 and 2007,respectively.

 

**SixMonths Ended June 30, 2008**

 

Net income was $569,000for the six months ended June 30, 2008, as compared to $658,000 of netincome for the same period in 2007.  Thedecrease in earnings for this period in 2008 is primarily related to anincrease in operating expenses of $243,000 that was partially offset by anincrease in noninterest income of $97,000 and lower taxes in the amount of$60,000.  Basic earnings per share for the six months ended June 30, 2008 and2007 were $0.39 and $0.45, respectively, and were based on weighted-averagenumber of shares outstanding of 1,460,602 and 1,459,641, respectively.  Diluted earnings per share for the threemonths ended June 30, 2008 and 2007 were $0.38 and $0.43, respectively,and were based on weighted-average number of shares outstanding of 1,508,066and 1,522,627, respectively.

 

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TheCompany experienced an annualized return on average assets of 0.44% and 0.56%for the six-month periods ended June 30, 2008 and 2007, respectively.  Additionally, the Company experienced anannualized return on average shareholders’ equity of 5.66% and 7.16% for thesix-month periods ended June 30, 2008 and 2007, respectively.

 

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

 

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

 
| ** **                                                                              | ** ** | **2008**                    | ** ** | **2007**                       | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|
| **Three Months Ended June 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                                                                      |       | $                           | 10,311     |                           | $          | 57 |   | 2.22 | % | $ | 9,097 |   | $ | 117 |   | 5.16 | % |
| Interest bearing deposits in other banks                                                |       | 4,411                       |       | 22                             |       | 2.00 |   | 6,126 |   | 80 |   | 5.24 |   |
| Investment securities (1):                                                              |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| Taxable                                                                                 |       | 18,120                      |       | 224                            |       | 4.96 |   | 21,311 |   | 249 |   | 4.69 |   |
| Tax-exempt (2)                                                                          |       | 9,820                       |       | 150                            |       | 6.13 |   | 9,822 |   | 150 |   | 6.13 |   |
| Loans (3)                                                                               |       | 209,712                     |       | 3,451                          |       | 6.60 |   | 189,013 |   | 3,466 |   | 7.36 |   |
| Total interest-earning assets                                                           |       | 252,374                     |       | 3,904                          |       | 6.20 |   | 235,369 |   | 4,062 |   | 6.92 |   |
| Noninterest-earning assets                                                              |       | 8,945                       |       |                           |       |   |   | 8,044 |   |   |   |   |   |
| Total assets                                                                            |       | $                           | 261,319    |                           |       |   |   |   | $ | 243,413 |   |   |   |   |   |
|                                                                                    |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| Liabilities and Shareholders’ Equity                                               |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                                           |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| NOW accounts                                                                            |       | $                           | 12,379     |                           | 13         |   | 0.42 | % | $ | 12,812 |   | 5 |   | 0.16 | % |
| Savings accounts                                                                        |       | 3,922                       |       | 5                              |       | 0.51 |   | 2,948 |   | 4 |   | 0.54 |   |
| Money market accounts                                                                   |       | 41,916                      |       | 188                            |       | 1.80 |   | 32,255 |   | 221 |   | 2.75 |   |
| Certificates of deposit  $100,000  or more                                              |       | 58,300                      |       | 628                            |       | 4.32 |   | 65,600 |   | 786 |   | 4.81 |   |
| Certificates of deposit  less  than $100,000                                            |       | 72,147                      |       | 761                            |       | 4.23 |   | 67,490 |   | 780 |   | 4.64 |   |
| Long-term borrowings                                                                    |       | 10,000                      |       | 116                            |       | 4.65 |   | 3,571 |   | 41 |   | 4.61 |   |
| Junior subordinated debentures                                                          |       | 6,186                       |       | 101                            |       | 6.55 |   | 6,186 |   | 101 |   | 6.55 |   |
| Total interest-bearing liabilities                                                      |       | 204,850                     |       | 1,812                          |       | 3.55 |   | 190,862 |   | 1,938 |   | 4.07 |   |
| Noninterest-bearing deposits                                                            |       | 35,408                      |       |                           |       |   |   | 33,365 |   |   |   |   |   |
| Noninterest-bearing liabilities                                                         |       | 785                         |       |                           |       |   |   | 598 |   |   |   |   |   |
| Total liabilities                                                                       |       | 241,043                     |       |                           |       |   |   | 224,825 |   |   |   |   |   |
| Total shareholders’ equity                                                         |       | 20,276                      |       |                           |       |   |   | 18,588 |   |   |   |   |   |
| Total liabilities and shareholders’  equity                                        |       | $                           | 261,319    |                           |       |   |   |   | $ | 243,413 |   |   |   |   |   |
| Net interest income                                                                     |       |                        |       | $                              | 2,092      |   |   |   |   |   | $ | 2,124 |   |   |   |
| Net interest spread                                                                     |       |                        |       |                           |       | 2.65 | % |   |   |   |   | 2.85 | % |
| Net interest margin                                                                     |       |                        |       |                           |       | 3.32 | % |   |   |   |   | 3.62 | % |

 

----

| (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 $51,000 in 2008 and 2007 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 $14,000 in 2008 and 2007 are included in  the calculation of the loan interest income. Net loan origination income (expense)  in interest income totaled $(6,000) in 2008 and $9,000 in 2007. |

 

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| ** **                                                                            | ** ** | **2008**                    | ** ** | **2007**                       | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|
| **Six Months Ended June 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                                                                    |       | $                           | 9,968      |                           | $          | 134 |   | 2.70 | % | $ | 8,552 |   | $ | 224 |   | 5.28 | % |
| Interest bearing deposits in other banks                                              |       | 2,898                       |       | 32                             |       | 2.21 |   | 5,270 |   | 139 |   | 5.32 |   |
| Investment securities (1):                                                            |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| Taxable                                                                               |       | 17,826                      |       | 444                            |       | 5.00 |   | 21,515 |   | 502 |   | 4.71 |   |
| Tax-exempt (2)                                                                        |       | 9,820                       |       | 300                            |       | 6.13 |   | 9,822 |   | 300 |   | 6.16 |   |
| Loans (3)                                                                             |       | 210,074                     |       | 7,075                          |       | 6.75 |   | 183,241 |   | 6,680 |   | 7.35 |   |
| Total interest-earning assets                                                         |       | 250,586                     |       | 7,985                          |       | 6.39 |   | 228,400 |   | 7,845 |   | 6.93 |   |
| Noninterest-earning assets                                                            |       | 9,067                       |       |                           |       |   |   | 8,220 |   |   |   |   |   |
| Total assets                                                                          |       | $                           | 259,653    |                           |       |   |   |   | $ | 236,620 |   |   |   |   |   |
|                                                                                  |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| Liabilities and Shareholders’ Equity                                             |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                                         |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| NOW accounts                                                                          |       | $                           | 12,307     |                           | 19         |   | 0.31 | % | $ | 12,633 |   | 11 |   | 0.18 | % |
| Savings accounts                                                                      |       | 4,050                       |       | 10                             |       | 0.50 |   | 2,799 |   | 7 |   | 0.50 |   |
| Money market accounts                                                                 |       | 40,353                      |       | 423                            |       | 2.10 |   | 31,719 |   | 432 |   | 2.75 |   |
| Certificates of deposit  $100,000  or more                                            |       | 59,015                      |       | 1,328                          |       | 4.51 |   | 64,137 |   | 1,512 |   | 4.75 |   |
| Certificates of deposit  less  than $100,000                                          |       | 72,172                      |       | 1,589                          |       | 4.42 |   | 65,925 |   | 1,508 |   | 4.61 |   |
| Short-term borrowings                                                                 |       | —                      |       | —                         |       | — |   | 62 |   | 2 |   | 6.51 |   |
| Long-term borrowings                                                                  |       | 10,000                      |       | 231                            |       | 4.63 |   | 1,796 |   | 41 |   | 4.60 |   |
| Junior subordinated debentures                                                        |       | 6,186                       |       | 202                            |       | 6.55 |   | 6,186 |   | 202 |   | 6.58 |   |
| Total interest-bearing liabilities                                                    |       | 204,083                     |       | 3,802                          |       | 3.74 |   | 185,257 |   | 3,715 |   | 4.04 |   |
| Noninterest-bearing deposits                                                          |       | 34,602                      |       |                           |       |   |   | 32,378 |   |   |   |   |   |
| Noninterest-bearing liabilities                                                       |       | 859                         |       |                           |       |   |   | 614 |   |   |   |   |   |
| Total liabilities                                                                     |       | 239,544                     |       |                           |       |   |   | 218,249 |   |   |   |   |   |
| Total shareholders’ equity                                                       |       | 20,109                      |       |                           |       |   |   | 18,371 |   |   |   |   |   |
| Total liabilities and shareholders’  equity                                      |       | $                           | 259,653    |                           |       |   |   |   | $ | 236,620 |   |   |   |   |   |
| Net interest income                                                                   |       |                        |       | $                              | 4,183      |   |   |   |   |   | $ | 4,130 |   |   |   |
| Net interest spread                                                                   |       |                        |       |                           |       | 2.65 | % |   |   |   |   | 2.89 | % |
| Net interest margin                                                                   |       |                        |       |                           |       | 3.35 | % |   |   |   |   | 3.65 | % |

 

----

| (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 $102,000 in 2008 and 2007 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 $28,000 in 2008 and $21,000 in 2007 are  included in the calculation of the loan interest income. Net loan origination  income (expense) in interest income totaled $(2,000) in 2008 and $19,000 in  2007. |

 

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**Rate/VolumeAnalysis**

 

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

 
| ** **                                  | ** ** | **Three Months Ended June 30,  2008 compared to 2007** | ** ** | **Six Months Ended June 30,  2008 compared to 2007** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| ** **                                  | ** ** | **Increase (decrease)  Due to**                                                 | ** ** | **Net  Increase**                                                                       | ** ** | **Increase (decrease)  Due to** | ** ** | **Net  Increase** | ** ** |
| **(dollars in thousands)**        | ** ** | **Volume**                                                                                | ** ** | **Rate(1)**                                                                             | ** ** | **(Decrease)** | ** ** | **Volume** | ** ** | **Rate(1)** | ** ** | **(Decrease)** | ** ** |
| Interest income                             |       |                                                                                      |       |                                                                                    |       |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                   |       |                                                                                      |       |                                                                                    |       |   |   |   |   |   |   |   |   |
| Federal funds  sold                         |       | $                                                                                         | 16         |                                                                                    | $          | (76 | ) | $ | (60 | ) | $ | 37 |   | $ | (127 | ) | $ | (90 | ) |
| Interest-bearing  deposits in other banks   |       | (22                                                                                       | )          | (36                                                                                     | )          | (58 | ) | (63 | ) | (44 | ) | (107 | ) |
| Investment  securities:                     |       |                                                                                      |       |                                                                                    |       |   |   |   |   |   |   |   |   |
| Taxable                                     |       | (37                                                                                       | )          | 12                                                                                      |       | (25 | ) | (87 | ) | 29 |   | (58 | ) |
| Tax-exempt                                  |       | —                                                                                    |       | —                                                                                  |       | — |   | — |   | — |   | — |   |
| Loans                                       |       | 381                                                                                       |       | (396                                                                                    | )          | (15 | ) | 986 |   | (591 | ) | 395 |   |
| Total interest  income                      |       | 338                                                                                       |       | (496                                                                                    | )          | (158 | ) | 873 |   | (733 | ) | 140 |   |
|                                        |       |                                                                                      |       |                                                                                    |       |   |   |   |   |   |   |   |   |
| Interest expense                            |       |                                                                                      |       |                                                                                    |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:              |       |                                                                                      |       |                                                                                    |       |   |   |   |   |   |   |   |   |
| NOW accounts                                |       | —                                                                                    |       | 8                                                                                       |       | 8 |   | — |   | 8 |   | 8 |   |
| Savings accounts                            |       | 1                                                                                         |       | —                                                                                  |       | 1 |   | 3 |   | — |   | 3 |   |
| Money market  accounts                      |       | 66                                                                                        |       | (99                                                                                     | )          | (33 | ) | 119 |   | (128 | ) | (9 | ) |
| Certificates of  deposit $100,000 or more   |       | (88                                                                                       | )          | (70                                                                                     | )          | (158 | ) | (122 | ) | (62 | ) | (184 | ) |
| Certificates of  deposit less than $100,000 |       | 54                                                                                        |       | (73                                                                                     | )          | (19 | ) | 144 |   | (63 | ) | 81 |   |
| Short-term  borrowings                      |       | —                                                                                    |       | —                                                                                  |       | — |   | (2 | ) | — |   | (2 | ) |
| Long-term  borrowings                       |       | 116                                                                                       |       | (41                                                                                     | )          | 75 |   | 189 |   | 1 |   | 190 |   |
| Junior  subordinated debentures             |       | —                                                                                    |       | —                                                                                  |       | — |   | 202 |   | (202 | ) | — |   |
| Total interest  expense                     |       | 149                                                                                       |       | (275                                                                                    | )          | (126 | ) | 533 |   | (446 | ) | 87 |   |
| Net interest  income                        |       | $                                                                                         | 189        |                                                                                    | $          | (221 | ) | $ | (32 | ) | $ | 340 |   | $ | (287 | ) | $ | 53 |   |

 

----

(1) Thevolume/rate variance is allocated entirely to change in rates.

 

**Net Interest Income**

 

Netinterest income is generated from the Company’s lending and investmentactivities, and is the most significant component of the Company’s earnings. Netinterest income is the difference between interest and rate-related fee incomeon earning assets (primarily loans and investment securities) and the interestpaid on the funds (primarily deposits) supporting them. The Company primarilyutilizes deposits to fund loans and investments, with a small amount of additionalfunding from junior subordinated debentures and minimal short-term andlong-term borrowings, in future periods it may utilize a higher level ofshort-term and long-term borrowings, including borrowings from the Federal HomeLoan Bank, federal funds lines with correspondent banks and repurchaseagreements, to fund operations, depending on economic conditions, depositavailability and pricing, interest rates and other factors.

 

**ThreeMonths Ended June 30, 2008**

 

Net interest income (on a taxable-equivalent basis) was $2.09 million in2008 and $2.12 million in 2007. The decrease in interest income was primarilydriven by the lower yield earned on the loan portfolio. Average earning assetsincreased by $17.01 million, or 7.22%, since June 30, 2007. The yield onearning assets in 2008 decreased to 6.20% from 6.92% in 2007, primarily as aresult of the Federal Reserve’s decrease in the federal funds rate of 300 basispoints since September 2007. The decrease of 52 basis points in the ratepaid on interest-bearing liabilities primarily is the result of the higheraverage balances in the money market accounts, along with less reliance onhigher cost certificates of deposit. The Company’s net interest margin was3.32% and 3.62%, and the net interest spread was 2.65% and 2.85%, for thethree-month periods ended June 30, 2008 and 2007, respectively. Thisdecrease relates primarily to the reduced yields earned on the loan portfolioand federal funds sold.

 

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Interest expense decreased 6.50% from $1.94 million in 2007 to $1.81million in 2008 due to the reduced rates paid on interest-bearing liabilities,which decreased to 3.55% in 2008 from 4.07% in 2007.

 

**SixMonths Ended June 30, 2008**

 

Net interest income (on a taxable-equivalent basis) was $4.18 million in2008 and $4.13 million in 2007. The increase in interest income was primarilydriven by the increased loan volume, which was partially offset by lower yieldsearned on the loan portfolio. Average earning assets increased by $22.19million, or 9.71%, since June 30, 2007. The yield on earning assets in2008 decreased to 6.39% from 6.93% in 2007, primarily as a result of theFederal Reserve’s decrease in the federal funds rate of 300 bps since September2007. The decrease of 30 basis points in the rate paid on interest-bearingliabilities primarily is the result of the higher average balances in the moneymarket accounts, along with less reliance on higher cost certificates ofdeposit. The Company’s net interest margin was 3.35% and 3.65%, and the netinterest spread was 2.65% and 2.89%, for the six-month periods ended June 30,2008 and 2007, respectively. This decrease relates primarily to the reducedyields earned on the loan portfolio and federal funds sold.

 

Interest expense increased 2.34% from $3.72 million in 2007 to $3.80million in 2008 due to the reduced rates paid on interest-bearing liabilities,which decreased to 3.74% in 2008 from 4.04% in 2007.

 

**NoninterestIncome**

 

## **Noninterest income was $129,000 and $97,000 for thethree-month periods ended June 30, 2008 and 2007, respectively, and was$280,000 and $183,000 for the six-month periods ended June 30, 2008 and2007, respectively. For the three-month periods the most significant increasesrelate to sweep management fees, ATM interchange fees and NSF fees, whichincreased $10,000, $9,000, and $13,000, respectively. For the six-month periodsthe most significant increases relate to sweep management fees, ATM interchangefees and NSF fees, which increased $19,000, $17,000, and $20,000, respectively.**

 

**Noninterest Expense**

 

SeeNote 8 to the unaudited consolidated financial statements for a scheduleshowing a detailed breakdown of the Company’s noninterest expense.

 

Noninterest expense amounted to $1.65 million and $1.55 million for thethree-month periods in 2008 and 2007, respectively, and was $3.30 million and$3.05 million for the six-month periods ended June 30, 2008 and 2007,respectively. For the three-month periods the changes in noninterest expenseare principally related to an increase in personnel costs, depreciation andadvertising. Salaries expense in 2008 was $825,000, up $34,000 from thesalaries expense incurred in the same period in 2007. This increase of 4.30% isfor the additional costs of adding three (3) new employees along withmoderate employee pay increases. For the six-month periods the changes innoninterest expense are principally related to an increase in personnel costs,depreciation, rent and advertising. Salaries expense in 2008 was $1.64 million,up $85,000 from the salaries expense incurred in the same period in 2007. Thisincrease of 5.48% is for the additional costs of adding three (3) new employeesalong with moderate employee pay increases. The major reason for the increasein rent expense is due to the new Antietam Office which relocated to a largerfacility after the fire destroyed the previous location in February 2007.

 

**IncomeTaxes**

 

During the three monthsended June 30, 2008, the Company incurred $116,000 of income tax expensecompared to $147,000 during the same period in 2007. During the six monthsended June 30, 2008, the Company incurred $228,000 of income tax expensecompared to $288,000 during the same period in 2007. The effective tax ratesfor the three-month periods in 2008 and 2007 were 30.05% and 30.50% and for thesix month periods in 2008 and 2007 were 28.61% and 30.44%. The decline inincome tax expense for the three months is due to the lower pre-tax income in2008 and for the six months the lower pre-tax income in 2008 along with anincome tax benefit of $19,000 the Company recognized on $2.36 million ofdeferred tax assets as a result of the change in the Maryland income tax ratefrom 7.0% to 8.25% which became effective January 1, 2008.

 

**Market Risk, Liquidity andInterest Rate Sensitivity**

 

Asset/liabilitymanagement involves the funding and investment strategies necessary to maintainan appropriate balance between interest sensitive assets and liabilities. Italso involves providing adequate liquidity while sustaining stable growth innet interest income. Regular review and analysis of deposit and loan trends,cash flows in various categories of loans, and monitoring of interest spreadrelationships are vital to this process.

 

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The conduct of ourbanking business requires that we maintain adequate liquidity to meet changesin the composition and volume of assets and liabilities due to seasonal,cyclical or other reasons. Liquidity describes the ability of the Company tomeet financial obligations that arise during the normal course of business. Liquidityis primarily needed to meet the borrowing and deposit withdrawal requirementsof the customers of the Company, as well as for meeting current and futureplanned expenditures. This liquidity is typically provided by the fundsreceived through customer deposits, investment maturities, loan repayments,borrowings, and income. Management considers the current liquidity position tobe adequate to meet the needs of the Company and its customers.

 

The Company seeksto limit the risks associated with interest rate fluctuations by managing thebalance between interest sensitive assets and liabilities. Managing to mitigateinterest rate risk is, however, not an exact science. Not only does theinterval until repricing of interest rates on assets and liabilities changefrom day to day as the assets and liabilities change, but for some assets andliabilities, contractual maturity and the actual maturity experienced are notthe same. Similarly, NOW and money market accounts, by contract, may be withdrawnin their entirety upon demand and savings deposits may be withdrawn on sevendays notice. While these contracts are extremely short, it is the Company’sbelief that these accounts turn over at the rate of five percent (5%) per year.The Company therefore treats them as having maturities staggered over allperiods. If all of the Company’s NOW, money market, and savings accounts weretreated as repricing in one year or less, the cumulative gap at one year orless would be $(48.03) million.

 

Interest rate sensitivityis an important factor in the management of the composition and maturityconfigurations of the Company’s earning assets and funding sources. AnAsset/Liability Committee manages the interest rate sensitivity position inorder to maintain an appropriate balance between the maturity and repricingcharacteristics of assets and liabilities that is consistent with the Company’sliquidity analysis, growth, and capital adequacy goals. It is the objective ofthe Asset/Liability Committee to maximize net interest margins during periodsof both volatile and stable interest rates, to attain earnings growth, and tomaintain sufficient liquidity to satisfy depositors’ requirements and meetcredit needs of customers.

 

The table below, “InterestRate Sensitivity Gap Analysis,” summarizes, as of June 30, 2008, theanticipated maturities or repricing of the Company’s interest-earning assetsand interest-bearing liabilities, the Company’s interest rate sensitivity gap(interest-earning assets less interest-bearing liabilities), the Company’scumulative interest rate sensitivity gap, and the Company’s cumulative interestsensitivity gap ratio (cumulative interest rate sensitivity gap divided bytotal assets). A negative gap for any time period means that more interest-bearingliabilities will reprice or mature during that time period thaninterest-earning assets. During periods of rising interest rates, a negativegap position would generally decrease earnings, and during periods of declininginterest rates, a negative gap position would generally increase earnings. Theconverse would be true for a positive gap position. Therefore, a positive gapfor any time period means that more interest-earning assets will reprice ormature during that time period than interest-bearing liabilities. Duringperiods of rising interest rates, a positive gap position would generallyincrease earnings, and during periods of declining interest rates, a positivegap position would generally decrease earnings.

 

It is important tonote that the following table represents the static gap position for interestsensitive assets and liabilities at June 30, 2008. The table does not giveeffect to prepayments or extensions of loans as a result of changes in generalmarket interest rates. Moreover, while the table does indicate theopportunities to reprice assets and liabilities within certain time frames, itdoes not account for timing differences that occur during periods of repricing.For example, changes to deposit rates tend to lag in a rising rate environmentand lead in a falling rate environment, although this will not always be thecase. Nor does it account for the effects of competition on pricing of depositsand loans. For example, under current market conditions, market rates paid ondeposits may not be able to adjust by the full amount of downward adjustmentsin the federal funds target rate, while rates on loans will tend to adjust bythe full amount, subject to certain limitations.

 

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**InterestRate Sensitivity Gap Analysis**

**June 30,2008**

 
| ** **                                            | ** ** | **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                                   |       | $                                                           | 14,153     |   | $ | — |   | $ | — |   | $ | — |   | $ | 14,153 |   |
| Interest-bearing  deposits in other banks             |       | 329                                                         |       | — |   | — |   | — |   | 329 |   |
| Investment  securities(1)                             |       | 1,934                                                       |       | 4,478 |   | 3,899 |   | 15,849 |   | 26,160 |   |
| Loans                                                 |       | 85,005                                                      |       | 46,276 |   | 57,973 |   | 20,715 |   | 209,969 |   |
| Total  interest-earning assets                        |       | 101,421                                                     |       | 50,754 |   | 61,872 |   | 36,564 |   | 250,611 |   |
| ** **                                            | ** ** | ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Liabilities                                           | ** ** | ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Savings and NOW  accounts                             |       | 929                                                         |       | 1,858 |   | 1,858 |   | 13,933 |   | 18,578 |   |
| Money Market  accounts                                |       | 2,063                                                       |       | 4,126 |   | 4,126 |   | 30,945 |   | 41,260 |   |
| Certificates of  deposit                              |       | 84,617                                                      |       | 43,819 |   | 558 |   | — |   | 128,994 |   |
| Long-term  borrowings                                 |       | 5,000                                                       |       | 5,000 |   | — |   | — |   | 10,000 |   |
| Junior  subordinated debentures                       |       | —                                                      |       | — |   | 6,186 |   | — |   | 6,186 |   |
| Total  interest-bearing liabilities                   |       | 92,609                                                      |       | 54,803 |   | 12,728 |   | 44,878 |   | 205,018 |   |
| Interest rate  sensitivity gap                        |       | $                                                           | 8,812      |   | $ | (4,049 | ) | $ | 49,144 |   | $ | (8,314 | ) | $ | 45,593 |   |
| Cumulative  interest rate sensitivity gap             |       | $                                                           | 8,812      |   | $ | 4,763 |   | $ | 53,907 |   | $ | 45,593 |   |   |   |
| Cumulative gap  ratio as a percentage of total assets |       | 3.36                                                        | %          | 1.81 | % | 20.54 | % | 17.37 | % |   |   |

 

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(1) Excludes equitysecurities.

 

In addition to theInterest Rate Sensitivity Gap Analysis, the Company also uses an earningssimulation model on a quarterly basis to closely monitor interest sensitivityand to expose its balance sheet and income statement to different scenarios. Themodel is based on current Company data and adjusted by assumptions as to growthpatterns, noninterest income and noninterest expense and interest rate sensitivity,based on historical data, for both assets and liabilities projected for aone-year period. The model is then subjected to a “shock test” assuming asudden interest rate increase of 200 basis points or a decrease of 200 basispoints, but not below zero. The results show that with a 200 basis point risein interest rates the Company’s net interest income would decline by 2.84%. Witha decrease in interest rates of 200 basis points the Company’s net interestincome would increase by 1.60%.

 

Certain shortcomingsare inherent in this method of analysis. For example, although certain assetsand liabilities may have similar maturities or repricing periods, they mayreact in different degrees to changes in market interest rates. Also, theinterest rates on certain types of assets and liabilities may fluctuate inadvance of changes in market interest rates, while interest rates on othertypes may lag behind changes in market rates. 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, inthe event of a change in interest rates, prepayment and early withdrawal levelscould deviate significantly from those assumed. Finally, the ability of manyborrowers to service their debt may decrease in the event of a significantinterest rate increase.

 

**CriticalAccounting Policy:**

 

**Allowance for Loan Losses**

 

The Company makesprovisions for loan losses in amounts deemed necessary to maintain theallowance for loan losses at an appropriate level. The Company’s provision forloan losses for the three months ended June 30, 2008 and 2007 was $120,000and $125,000, respectively, and for the six-month periods was $240,000 and$191,000, respectively. The loan growth was $958,000 since December 31,2007 and $10.57 million since June 30, 2007. The provision for loan lossesis determined based upon Management’s estimate of the amount required tomaintain an adequate allowance for loan losses reflective of the risks in theCompany’s loan portfolio. At June 30, 2008 and December 31, 2007, theallowance for loan losses was $2.58 million and $2.64 million, respectively.

 

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The decline in theallowance from December 31, 2007, reflects net charge-offs of $296,000, ascompared to net charge-offs of $6,000 in the same period of 2007.  The increase in charge-offs is a result ofone unsecured commercial relationship in the amount of $223,000 and thewrite-down on two foreclosed residential properties in the amount of $82,000when they were transferred to other real estate owned.  Management has increased the allowance forloan losses recently due to the weak economic conditions and the effects thatit has had on several commercial and industrial and consumer borrowers.

 

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 theallowance for loan losses is based on eight qualitative factors and onequantitative factor for each category and type of loan along with any specificallowance for adversely 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) SFAS No. 5, *Accounting for Contingencies*, which requires that losses beaccrued when they are probable of occurring and estimable and (ii) SFAS No. 114,*Accounting by Creditors for Impairment of aLoan*, which requires that losses be accrued based on the differencesbetween the loan balance and either the value of collateral, or the presentvalue of future cash flows, or the loan’s value as observable in the secondarymarket.  A loan is considered impairedwhen, based on current information and events, it is probable that the Bankwill be unable to collect the scheduled payments of principal or interest whendue according to the contractual terms of the loan agreement.  Factors considered by Management indetermining impairment include payment status, collateral value, and theprobability of collecting scheduled principal and interest payments when due.  Loans that experience insignificant paymentdelays and payment shortfalls generally are not classified as impaired.  Management determines the significance ofpayment delays and payment shortfalls on a case-by-case basis, taking intoconsideration all of the circumstances surrounding the loan and borrower, includingthe length of the delay, the reason for the delay, the borrower’s prior paymentrecord, and the amount of the shortfall in relation to the principal andinterest owed.  The provision for loanlosses included in the statements of operations serves to maintain theallowance at a level Management considers adequate.

 

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

 

Thespecific allowance component is used to individually establish an allowance forloans identified for impairment testing. When impairment is identified, a specific reserve may be establishedbased on the Company’s calculation of the estimated loss embedded in theindividual loan.  Impairment testingincludes consideration of the borrower’s overall financial condition, resourcesand payment record, support available from financial guarantors and the fairmarket value of collateral. These factors are combined to estimate the probabilityand severity of inherent losses.  Largegroups of smaller balance, homogeneous loans are collectively evaluated forimpairment. Accordingly, the Company does not separately identify individualconsumer and residential mortgage loans for impairment.   At June 30, 2008 there were $1.86million of loans deemed to be impaired, which had specific reserves of$294,000.  This included $1.86 million innonaccrual loans.  These loans amount to$1.57 million in commercial real estate for three relationships and $307,000 incommercial and industrial loans for two relationships.  All of the impaired loan relationshipsdiscussed are in different types of businesses.

 

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

 

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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 the relativeweights given to each factor.  Inaddition, various regulatory agencies periodically review the allowance forloan losses.  These agencies may requirethe Bank to make additions to the allowance for loan losses based on theirjudgments of collectibility based on information available to them at the timeof their examination.

 

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

 

As of June 30,2008, the real estate loan portfolio constituted 87% of the total loanportfolio.  While this exceeds the 10%threshold for determining a concentration of credit risk within an industry, wedo not consider this to be a concentration with adverse risk characteristicsgiven the diversity of borrowers within the real estate portfolio and othersources of repayment.  An industry forthis purpose is defined as a group of counterparties that are engaged insimilar activities and have similar economic characteristics that would causetheir ability to meet contractual obligations to be similarly affected bychanges in economic or other conditions. Additionally, the loan portfolio does not include concentrations ofcredit risk in residential loan products that permit the deferral of principalpayments that are smaller than normal interest accruals (negativeamortization); loans with high loan-to-value ratios; or loans, such as optionadjustable-rate mortgages, that may expose the borrower to future increases inrepayments that are in excess of increases that would result solely fromincreases in market interest rates. However, the Company does have interest only home equity lines of creditwith outstanding balances of $6.98 million of at June 30, 2008.

** **
| ** **                                     | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(dollars in thousands)**           | ** ** | **June 30,****2008**        | ** ** | **June 30,****2007**      | ** ** | **June 30,****2008** | ** ** | **June 30,  2007** | ** ** |
| Average total  loans outstanding during period |       | $                                | 209,712    |                           | $          | 189,013 |   | $ | 210,074 |   | $ | 183,241 |   |
| Balance at  beginning of period                |       | $                                | 2,470      |                           | $          | 2,226 |   | $ | 2,640 |   | $ | 2,166 |   |
| Recoveries of  loans previously charged-off    |       | —                           |       | —                         |       | 9 |   | — |   |
| Loans  charged-off (commercial and industrial) |       | —                           |       | —                         |       | (223 | ) | — |   |
| Loans  charged-off (commercial real estate)    |       | —                           |       | —                         |       | (76 | ) | — |   |
| Loans charged-off  (residential real estate)   |       | (6                               | )          | —                         |       | (6 | ) | — |   |
| Loans  charged-off (consumer)                  |       | —                           |       | —                         |       | — |   | (6 | ) |
| Net charge-offs                                |       | (6                               | )          | —                         |       | (296 | ) | (6 | ) |
| Provision  charged to operating expenses       |       | 120                              |       | 125                            |       | 240 |   | 191 |   |
| Balance at end  of period                      |       | $                                | 2,584      |                           | $          | 2,351 |   | $ | 2,584 |   | $ | 2,351 |   |
| Ratios of net  charge-offs to average loans    |       | —                           | %          | —                         | %          | 0.14 | % | — | % |

 

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

** **
| ** **                                                                  | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **Allocation of Allowance for Loan Losses**        | ** ** | **2008**          | ** ** | **% of  Loans**  | ** ** | **2007** | ** ** | **% of  Loans** | ** ** |
| Real  estate-construction                                                   |       | $                 | 274        |                  | 11         | % | $ | 240 |   | 13 | % |
| Real  estate-mortgage                                                       |       | 1,759             |       | 76                    | %          | 1,774 |   | 73 | % |
| Commercial and  industrial loans                                            |       | 511               |       | 12                    | %          | 532 |   | 13 | % |
| Loans to  individuals for household, family and other personal expenditures |       | 40                |       | 1                     | %          | 94 |   | 1 | % |
|                                                                        |       | $                 | 2,584      |                  | 100        | % | $ | 2,640 |   | 100 | % |

 

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| ** **                                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Nonaccrual loans                           |       | $                 | 1,843      |                  | $          | 310 |   |
| Loans 90 days  past due and still accruing |       | —            |       | —                |       |
| Total  nonperforming loans                 |       | 1,843             |       | 310                   |       |
| Other real  estate owned                   |       | —            |       | —                |       |
| Total  nonperforming assets                |       | $                 | 1,843      |                  | $          | 310 |   |
| Nonperforming assets  to total assets      |       | 0.70              | %          | 0.12                  | %          |

 

There were noother interest-bearing assets at June 30, 2008 or December 31, 2007classified as past due 90 days or more and still accruing, restructured orproblem assets, and no loans which were currently performing in accordance withtheir terms, but as to which information known to Management caused it to haveserious doubts about the ability of the borrower to comply with the loan ascurrently written.

 

**Off-BalanceSheet Arrangements**

** **

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

 

Commitments to extend credit and standby letters ofcredit as of June 30, 2008 were as follows:

 
| ** **                                                                                                     | ** ** | **June 30,**       | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                                     | ** ** | **2008**                | ** ** |
| **(dollars in thousands)**                                                                           | ** ** | **Contractual  Amount** | ** ** |
| Financial  instruments whose notional or contract amounts represent credit risk: Commitments  to extend credit |       | $                       | 32,074     |   |
| Standby letters  of credit                                                                                     |       | 3,879                   |       |
| Total                                                                                                          |       | $                       | 35,953     |   |

 

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 31,2007 for additional information regarding the Company’s long-term leaseobligations.

 

**CapitalResources**

 

Theability of the Company to grow is dependent on the availability of capital withwhich to meet regulatory capital requirements, discussed below.  To the extent the Company is successful itmay need to acquire additional capital through the sale of additional commonstock, other qualifying equity instruments or subordinated debt.  There can be no assurance that additionalcapital will be available to the Company on a timely basis or on attractiveterms.  On December 15, 2006, theCompany completed the issuance of $6.00 million of trust preferred securities,as discussed above, that can be recognized as capital for regulatorypurposes.  The Company has anunsecured revolving line of credit borrowing arrangement with an unaffiliatedfinancial institution in the amount of $2.00 million with no outstandingbalance as of June 30, 2008 or December 31, 2007.  This facility matures on May 1, 2009,has a floating interest rate equal to the Wall Street Journal prime rate andrequires monthly interest payments only. The purpose of this facility is to provide capital to the Bank, asneeded.  The Bank expects to have thiscredit facility renewed.

 

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

 

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

 

Quantitative measuresestablished by regulation to ensure capital adequacy require the Bank tomaintain minimum amounts and ratios of total and Tier 1 capital (as defined inthe regulations) to risk-weighted assets (as defined), and Tier 1 capital (asdefined) to average assets (as defined). Management believes that the Bank met all capital adequacy requirementsto which it is subject as of June 30, 2008 and that the Company would meetsuch requirements if applicable.  SeeNote 10 to the consolidated financial statements for a table depictingcompliance with regulatory capital requirements.

 

As of June 30, 2008,the most recent notification from the regulatory agency categorized the Bank aswell capitalized under the regulatory framework for prompt correctiveaction.  To be categorized as wellcapitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,and Tier 1 leverage ratios as set forth in the table in Note 10.  There are no conditions or events since thatnotification which management believes have changed the Bank’s category.

 

On June 26, 2007,the Company authorized the repurchase of up to 146,000 shares of its commonstock, for an aggregate expenditure of not more than $4.5 million, through June 30,2012, or earlier termination of the program by the Board of Directors.  Repurchases, if any, by the Company pursuantto this authorization are expected to enable the Company to repurchase itsshares at an attractive price, and to provide a source of liquidity for theCompany’s shares.  As of June 30,2008, there have been no shares repurchased by the Company.

 

## **Inflation**

 

The effect of changingprices on financial institutions is typically different than on non-bankingcompanies since virtually all of a Company’s assets and liabilities aremonetary in nature. In particular, interest rates are significantly affected byinflation, but neither the timing nor magnitude of the changes are directlyrelated to price level indices; therefore, the Company can best counterinflation over the long term by managing net interest income and controllingnet increases in noninterest income and expenses.

 

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

 

See“Market Risk, Liquidity and Interest Rate Sensitivity” at Page 20.

 

###### **Item 4.**           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 June 30, 2008that has materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.**

 

**PART II – Other Information**

 

Item 1.             LegalProceedings.  None

 

Item 1A.  RiskFactors   There have been no material changes to therisk factors as of June 30, 2008 from those disclosed in the Company’s2007 Annual Report on Form 10-K.

 

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Item 2.             Unregistered Sales ofEquity Securities and Use of Proceeds

 

(a)          *Sales of Unregistered Securities. *None

 

(b)         *Use of Proceeds.**      *NotApplicable.

 

(c)          *Registrant**Purchasesof Securities*

 

The followingtable provides information on the Company’s purchases of its common stockduring the quarter ended June 30, 2008.

 
| **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** | ** ** |
|------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|
| April 1-30,  2008 |       | 0                                                    |       | N/A                                              |       | 0                                                                                                                                   |       | 0                                                                                                                                       |       |
| May 1-31,  2008   |       | 0                                                    |       | N/A                                              |       | 0                                                                                                                                   |       | 0                                                                                                                                       |       |
| June 1-30,  2008  |       | 0                                                    |       | N/A                                              |       | 0                                                                                                                                   |       | 146,000                                                                                                                                 | (2)        |

 

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(1)         OnJune 26, 2007, the Company’s Board of Directors approved a share repurchaseprogram that authorizes the repurchase of up to 146,000 shares of the Company’soutstanding common stock, subject to a maximum expenditure of $4.5million.  Repurchases under the programmay be made on the open market and in privately negotiated transactions fromtime to time until June 30, 2012, or earlier termination of the program bythe Board.

 

(2)         Subjectto a maximum expenditure of $4.5 million. Number of shares indicated is the remaining number of shares authorizedfor repurchase as of the end of the indicated period.

 

Item 3.             Defaults upon SeniorSecurities.  None

 

Item 4.             Submission of Mattersto a Vote of Security Holder.

 

On April 8, 2008, the annual meeting ofshareholders of the Company was held for the purpose of electing eleven (11)directors to serve until the next annual meeting and until their successors areduly elected and qualified.

 

The name of each director elected at the meeting, andthe votes cast for such persons, who constitute the entire Board of Directorsin office following the meeting, are set forth below:

 
| **DIRECTOR**                 | ** ** | **FOR**   | ** ** | **WITHHOLD** | ** ** | **BROKER  NON-VOTES** | ** ** |
|------------------------------|------------|-----------|------------|--------------|------------|-----------------------|------------|
| Emil D. Bennett              |       | 1,152,330 |       | 900          |       | None                  |       |
| John N. Burdette             |       | 1,151,830 |       | 1,400        |       | None                  |       |
| John Denham Crum             |       | 1,152,330 |       | 900          |       | None                  |       |
| George E.  Dredden, Jr. |       | 1,152,330 |       | 900          |       | None                  |       |
| William S. Fout              |       | 1,152,330 |       | 900          |       | None                  |       |
| Helen G. Hahn                |       | 1,152,330 |       | 900          |       | None                  |       |
| William J.  Kissner          |       | 1,152,330 |       | 900          |       | None                  |       |
| Martin S. Lapera             |       | 1,152,330 |       | 900          |       | None                  |       |
| Kenneth G.  McCombs          |       | 1,152,330 |       | 900          |       | None                  |       |
| Farhad  Memarsadeghi         |       | 1,149,880 |       | 3,350        |       | None                  |       |
| Raymond Raedy                |       | 1,150,930 |       | 2,300        |       | None                  |       |

 

Item 5.             Other Information                                     None

 

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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 (d)               |       | Amendment to Employment  Agreement between the Bank and Martin S. Lapera (7)                                                                                                                                                              |
| 10 (e)               |       | Amendment to Employment  Agreement between the Bank and William R. Talley, Jr. (8)                                                                                                                                                   |
| 10(f)                |       | 2002 Executive and  Director Deferred Compensation Plan, as amended(9)                                                                                                                                                                    |
| 10(g)                |       | Amendment No. 1 to  the 2002 Executive and Director Deferred Compensation Plan(9)                                                                                                                                                    |
| 10(h)                |       | Loan Agreement with  Atlantic Central Bankers Bank (10)                                                                                                                                                                                   |
| 10(i)                |       | Promissory Note with  Atlantic Central Bankers Bank (10)                                                                                                                                                                                  |
| 11                   |       | Statement Regarding  Computation of Per Share Income – Please refer to Note 2 to the unaudited  consolidated financial statements included herein                                                                                    |
| 31(a)                |       | Certification of  Martin S. Lapera, President and Chief Executive Officer                                                                                                                                                                 |
| 31(b)                |       | Certification of  William R. Talley, Jr., Executive Vice President and Chief Financial  Officer                                                                                                                                      |
| 32(a)                |       | Certification of  Martin S. Lapera, President and Chief Executive Officer                                                                                                                                                                 |
| 32(b)                |       | Certification of  William R. Talley, Jr., Executive Vice President and Chief Financial  Officer                                                                                                                                      |

 

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(1)          Incorporatedby reference to exhibit of the same number to the Company’s Quarterly Report onForm 10-QSB for the quarter ended March 31, 2004, as filed with theSecurities and Exchange Commission.

(2)          Incorporatedby reference to exhibit of the same number to the Company’s Quarterly Report onForm 10-QSB for the quarter ended September 30, 2003, as filed withthe Securities and Exchange Commission.

(3)          Notfiled in accordance with the provision of Item 601(b)(4)(v) of RegulationSK.  The Company agrees to provide a copyof these documents to the Commission upon request.

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

(5)          Incorporatedby reference to Exhibit 10.1 to the Company’s Current Report on Form 8-Kfiled on May 24, 2005.

(6)          Incorporatedby reference to Exhibit 10.2 to the Company’s Current Report on Form 8-Kfiled on May 24, 2005.

(7)          Incorporatedby reference to Exhibit 99.1 to the Company’s Current Report on Form 8-Kfiled on December 12, 2007.

(8)          Incorporated byreference to Exhibit 99.2 to the Company’s Current Report on Form 8-Kfiled on December 12, 2007.

(9)          Incorporatedby reference to Exhibit of the same number to the Company’s Annual Reporton Form 10-KSB for the year ended December 31, 2004, as filed withthe Securities and Exchange Commission.

(10)    Incorporatedby reference to Exhibit of the same number to the Company’s QuarterlyReport on Form 10-QSB for the quarter ended March 31, 2005, as filedwith the Securities and Exchange Commission.

 

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**SIGNATURES**

 

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

 

 
|                             | FREDERICK COUNTY  BANCORP, INC. |
|----------------------------------|---------------------------------|
|                             |                            |
|                             |                            |
| Date:  August 12, 2008 | By:                        | /s/ Martin S. Lapera |
|                             |                            | Martin S. Lapera |
|                             |                            | President and Chief  Executive Officer |
|                             |                            |
|                             |                            |
| Date:  August 12, 2008 | By:                        | /s/ William R.  Talley, Jr. |
|                             |                            | William R.  Talley, Jr. |
|                             |                            | Executive Vice  President and Chief Financial Officer |

 

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