**Table ofContents**

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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,DC  20549**

** **

### **FORM 10-Q**

### ** **

**(MARKONE)**

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

###### ** **

**For the Quarterly Period Ended March 31,2009**

 

**OR**

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

 

**For the transition period from                  to                  **

 

**Commission File Number:  000-50407**

*** ***

#### **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.) |

 

#### **30West Patrick 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 has submitted electronically and posted on its corporateWeb site, if any, every

Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) duringthe

preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). Yes o  No o

 

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 of sharesof each of the issuer’s classes of common equity, as of the latest practicaldate.  There were 1,460,802 shares ofCommon Stock outstanding as of April 30, 2009.

 

 

 

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

**TABLE OF CONTENTS**

** **
| **PART I**  | **FINANCIAL INFORMATION**                                                                                         |
|------------------|-------------------------------------------------------------------------------------------------------------------|
| ** **       | ** **                                                                                                        |
| Item 1.          | Financial Statements  (Unaudited)                                                                                 |
|             |                                                                                                              |
|             | Consolidated****Balance  Sheets, March 31, 2009 and December 31, 2008                                   |
|             |                                                                                                              |
|             | Consolidated Statements of Income, Three Months Ended  March 31, 2009 and 2008                               |
|             |                                                                                                              |
|             | Consolidated Statements of Changes in Shareholders’  Equity, Three Months Ended March 31, 2009 and 2008 |
|             |                                                                                                              |
|             | Consolidated Statements of Cash Flows, Three Months  Ended March 31, 2009 and 2008                           |
|             |                                                                                                              |
|             | 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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**FrederickCounty Bancorp, Inc. and Subsidiaries**

**Consolidated Balance Sheets**

 
| **(dollars  in thousands)**                                                                                                                 | ** ** | **March 31,  2009** | ** **   | **December 31,  2008** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|--------------|-----------------------------|------------|
| ** **                                                                                                                                  | * *   | **(unaudited)**          | * *     | * *                    | * *   |
| ASSETS                                                                                                                                      |       |                     |         |                        |       |
| Cash and due  from banks                                                                                                                    |       | $                        |  893    |                        | $          |  808 |   |
| Federal funds  sold                                                                                                                         |       | 1,175                    |         | 1,091                       |       |
| Interest-bearing  deposits in other banks                                                                                                   |       | 23,437                   |         | 14,156                      |       |
| Cash and cash  equivalents                                                                                                                  |       | 25,505                   |         | 16,055                      |       |
| Investment  securities available-for-sale at fair value                                                                                     |       | 19,654                   |         | 20,040                      |       |
| Restricted stock                                                                                                                            |       | 1,611                    |         | 1,599                       |       |
| Loans                                                                                                                                       |       | 208,231                  |         | 211,840                     |       |
| Less: Allowance  for loan losses                                                                                                            |       | (2,838                   | )            | (3,120                      | )          |
| Net loans                                                                                                                                   |       | 205,393                  |         | 208,720                     |       |
| Bank premises  and equipment                                                                                                                |       | 5,171                    |         | 5,221                       |       |
| Other assets                                                                                                                                |       | 2,364                    |         | 2,927                       |       |
| Total assets                                                                                                                                |       | $                        | 259,698      |                        | $          | 254,562 |   |
|                                                                                                                                        |       |                     |         |                        |       |
| LIABILITIES AND  SHAREHOLDERS’ EQUITY                                                                                                  |       |                     |         |                        |       |
|                                                                                                                                        |       |                     |         |                        |       |
| **Liabilities**                                                                                                                             |       |                     |         |                        |       |
| Deposits:                                                                                                                                   |       |                     |         |                        |       |
| Noninterest-bearing  deposits                                                                                                               |       | $                        |  33,982 |                        | $          |  32,740 |   |
| Interest-bearing  deposits                                                                                                                  |       | 187,647                  |         | 184,143                     |       |
| Total deposits                                                                                                                              |       | 221,629                  |         | 216,883                     |       |
| Long-term  borrowings                                                                                                                       |       | 10,000                   |         | 10,000                      |       |
| Junior  subordinated debentures                                                                                                             |       | 6,186                    |         | 6,186                       |       |
| Accrued interest  and other liabilities                                                                                                     |       | 1,090                    |         | 881                         |       |
| Total  liabilities                                                                                                                          |       | 238,905                  |         | 233,950                     |       |
|                                                                                                                                        |       |                     |         |                        |       |
| **Shareholders’  Equity**                                                                                                              |       |                     |         |                        |       |
| Common stock,  per share par value $.01; 10,000,000 shares authorized; 1,460,802 and  1,460,802 shares issued and outstanding, respectively |       | 15                       |         | 15                          |       |
| Additional  paid-in capital                                                                                                                 |       | 14,690                   |         | 14,690                      |       |
| Retained  earnings                                                                                                                          |       | 5,984                    |         | 5,939                       |       |
| Accumulated  other comprehensive income (loss)                                                                                              |       | 104                      |         | (32                         | )          |
| Total  shareholders’ equity                                                                                                            |       | 20,793                   |         | 20,612                      |       |
| Total  liabilities and shareholders’ equity                                                                                            |       | $                        | 259,698      |                        | $          | 254,562 |   |

 

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

 

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**FrederickCounty Bancorp, Inc. and Subsidiaries**

**Consolidated Statements of Income (Unaudited)**

 
| *** ***                                           | *** *** | **For the Three  Months Ended  March 31,** | *** *** |
|--------------------------------------------------------|--------------|-------------------------------------------------|--------------|
| **(dollars in thousands, except per share amounts)**   | *** *** | **2009**                                        | ** **   | **2008** | *** *** |
| Interest income:                                       |         |                                            |         |   |   |
| Interest and  fees on loans                            |         | $                                               | 3,213        |   | $ | 3,610 |   |
| Interest and  dividends on investment securities:      |         |                                            |         |   |   |
| Interest –  taxable                               |         | 172                                             |         | 198 |   |
| Interest – tax  exempt                            |         | 58                                              |         | 99 |   |
| Dividends                                              |         | 11                                              |         | 22 |   |
| Interest on  federal funds sold                        |         | 1                                               |         | 77 |   |
| Other interest  income                                 |         | 9                                               |         | 10 |   |
| Total interest  income                                 |         | 3,464                                           |         | 4,016 |   |
| Interest  expense:                                     |         |                                            |         |   |   |
| Interest on  deposits                                  |         | 1,249                                           |         | 1,774 |   |
| Interest on  long-term borrowings                      |         | 114                                             |         | 115 |   |
| Interest on  junior subordinated debentures            |         | 101                                             |         | 101 |   |
| Total interest  expense                                |         | 1,464                                           |         | 1,990 |   |
| Net interest  income                                   |         | 2,000                                           |         | 2,026 |   |
| Provision for  loan losses                             |         | 400                                             |         | 120 |   |
| Net interest  income after provision for loan losses   |         | 1,600                                           |         | 1,906 |   |
| Noninterest  income:                                   |         |                                            |         |   |   |
| (Loss) gain on  sale of foreclosed properties          |         | (32                                             | )            | 15 |   |
| Service fees                                           |         | 84                                              |         | 59 |   |
| Other operating  income                                |         | 56                                              |         | 78 |   |
| Total  noninterest income                              |         | 108                                             |         | 152 |   |
| Noninterest  expense:                                  |         |                                            |         |   |   |
| Salaries and  employee benefits                        |         | 979                                             |         | 959 |   |
| Occupancy and  equipment expenses                      |         | 331                                             |         | 299 |   |
| Other operating  expenses                              |         | 373                                             |         | 388 |   |
| Total  noninterest expense                             |         | 1,683                                           |         | 1,646 |   |
| Income before  provision for income taxes              |         | 25                                              |         | 412 |   |
| Provision for  income tax (benefits) expense           |         | (20)                                            |         | 112 |   |
| Net income                                             |         | $                                               | 45           |   | $ | 300 |   |
| Basic earnings  per share                              |         | $                                               | 0.03         |   | $ | 0.21 |   |
| Diluted earnings  per share                            |         | $                                               | 0.03         |   | $ | 0.20 |   |
| Basic weighted  average number of shares outstanding   |         | 1,460,802                                       |         | 1,460,602 |   |
| Diluted weighted  average number of shares outstanding |         | 1,481,419                                       |         | 1,509,048 |   |

 

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

 

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**Frederick County Bancorp, Inc. andSubsidiariesConsolidated Statement of Changes in Shareholders’ Equity (Unaudited)**

 
| **Three Months Ended  March 31,  (dollars in thousands, except  shares outstanding)**      | ** ** | **Shares  Outstanding** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income  (Loss)** | ** ** | **Total  Shareholders’  Equity** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|-------------------------------------------------------|------------|---------------------------------------|------------|
|                                                                                            |       |                    |       |              |       |                             |       |                   |       |                                                  |       |                                  |       |
| Balance,  January 1, 2008                                                                  |       | 1,460,602               |       | $                 | 15         |                             | $          | 14,687                 |       | $                                                     | 4,901      |                                  | $          | (23 | ) | $ | 19,580 |   |
| Comprehensive  income:                                                                          |       |                    |       |              |       |                             |       |                   |       |                                                  |       |                                  |       |
| Net income                                                                                      |       | —                  |       | —            |       | —                           |       | 300                    |       | —                                                |       | 300                                   |       |
| Changes in net  unrealized gains on securities available for sale, net of income taxes of  $149 |       | —                  |       | —            |       | —                           |       | —                 |       | 229                                                   |       | 229                                   |       |
| Comprehensive  income                                                                           |       |                    |       |              |       |                             |       |                   |       |                                                  |       | 529                                   |       |
| Balance,  March 31, 2008                                                                   |       | 1,460,602               |       | $                 | 15         |                             | $          | 14,687                 |       | $                                                     | 5,201      |                                  | $          | 206 |   | $ | 20,109 |   |
| Balance,  January 1, 2009                                                                  |       | 1,460,802               |       | $                 | 15         |                             | $          | 14,690                 |       | $                                                     | 5,939      |                                  | $          | (32 | ) | $ | 20,612 |   |
| Comprehensive  income:                                                                          |       |                    |       |              |       |                             |       |                   |       |                                                  |       |                                  |       |
| Net income                                                                                      |       | —                  |       | —            |       | —                           |       | 45                     |       | —                                                |       | 45                                    |       |
| Changes in net  unrealized gains on securities available for sale, net of income taxes of $89   |       | —                  |       | —            |       | —                           |       | —                 |       | 136                                                   |       | 136                                   |       |
| Comprehensive  income                                                                           |       |                    |       |              |       |                             |       |                   |       |                                                  |       | 181                                   |       |
| Balance,  March 31, 2009                                                                   |       | 1,460,802               |       | $                 | 15         |                             | $          | 14,690                 |       | $                                                     | 5,984      |                                  | $          | 104 |   | $ | 20,793 |   |

 

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

**ConsolidatedStatements of Cash Flows (Unaudited)**

 
| ** **                                                                                      | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| **(dollars in thousands)**                                                                      | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| Cash flows from operating activities:                                                           |       |                                  |       |   |   |
| Net income                                                                                      |       | $                                     | 45         |   | $ | 300 |   |
| Adjustments to reconcile net income to net cash provided by  operating  activities:             |       |                                  |       |   |   |
| Depreciation and amortization                                                                   |       | 83                                    |       | 83 |   |
| Deferred income taxes                                                                           |       | 157                                   |       | 35 |   |
| Provision for loan losses                                                                       |       | 400                                   |       | 120 |   |
| Net premium amortization (discount accretion) on investment  Securities                         |       | —                                |       | (6 | ) |
| Loss (gain) on sale of foreclosed properties                                                    |       | 32                                    |       | (15 | ) |
| Decrease in accrued interest and other assets                                                   |       | 387                                   |       | 345 |   |
| Increase in accrued interest and other liabilities                                              |       | 141                                   |       | 1,413 |   |
| Net cash provided by operating activities                                                       |       | 1,245                                 |       | 2,275 |   |
| Cash flows from investing activities:                                                           |       |                                  |       |   |   |
| Proceeds from maturities, prepayments and calls of investment  securities  available-for-sale   |       | 609                                   |       | 2,959 |   |
| Purchases of restricted stock                                                                   |       | (12                                   | )          | (39 | ) |
| Net increase (decrease) in loans                                                                |       | 2,564                                 |       | (2,008 | ) |
| Purchases of bank premises and equipment                                                        |       | (33                                   | )          | (18 | ) |
| Proceeds from sale of foreclosed properties                                                     |       | 331                                   |       | 465 |   |
| Net cash provided by investing activities                                                       |       | 3,459                                 |       | 1,359 |   |
| Cash flows from financing activities:                                                           |       |                                  |       |   |   |
| Net increase in NOW, money market accounts, savings  accounts  and noninterest-bearing deposits |       | 6,593                                 |       | 5,150 |   |
| Net (decrease) increase in time deposits                                                        |       | (1,847                                | )          | 18 |   |
| Net cash provided by financing activities                                                       |       | 4,746                                 |       | 5,168 |   |
| Net increase in cash and cash equivalents                                                       |       | 9,450                                 |       | 8,802 |   |
| Cash and cash equivalents – beginning of period                                            |       | 16,055                                |       | 12,366 |   |
| Cash and cash equivalents – end of period                                                  |       | $                                     | 25,505     |   | $ | 21,168 |   |
| Supplemental cash flow disclosures:                                                             |       |                                  |       |   |   |
| Interest paid                                                                                   |       | $                                     | 1,482      |   | $ | 1,898 |   |
| Income taxes paid                                                                               |       | $                                     | 71         |   | $ | 24 |   |

 

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 accountingprinciples generally accepted in the United States of America for interimfinancial information, the instructions for Form 10-Q, Regulation S-X, andgeneral practices within the banking industry. Accordingly, they do not include all of the information and disclosuresrequired by generally accepted accounting principles for complete financialstatements.  These statements should beread in conjunction with the consolidated financial statements and accompanyingfootnotes included in the Company’s 2008 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 31,2009.

 

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

 

**Recent Accounting Pronouncements**

 

*Statement of Financial AccountingStandards No. 141 (Revised 2007), Business Combinations (“SFAS 141(R)”).* During December 2007, the FASBissued SFAS 141(R). SFAS 141(R) recognizes and measures the goodwillacquired in the business combination and defines a bargain purchase, andrequires the acquirer to recognize that excess as a gain attributable to theacquirer. In contrast, Statement 141 required the “negative goodwill” amount tobe allocated as a pro rata reduction of the amounts assigned to assetsacquired. SFAS 141(R) applies prospectively to business combinations forwhich the acquisition date is on or after December 15, 2008. The Companyadopted SFAS No. 141R effective March 31, 2009, and adoption did nothave a material impact on the Company’s consolidated financial statements.

 

*Statement of Financial AccountingStandards No. 160, Noncontrolling Interests in Consolidated FinancialStatements – an amendment of ARB No. 51 (“SFAS 160”).* During December 2007, the FASBissued SFAS 160 to establish accounting and reporting standards for thenoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary. It clarifies that a noncontrolling interest in a subsidiary is anownership interest in the consolidated entity that should be reported as equityin the consolidated financial statement, but separate from the parent’sequity.  SFAS 160 is effective for fiscal years, and interim periodswithin those fiscal years, beginning on or after December 15, 2008.Management adopted this Statement effective March 31, 2009, and adoptiondid not have a material impact on the Company’s consolidated financialcondition or results of operations.

 

*Statement of Financial AccountingStandards No. 161, Disclosures about Derivative Instruments and HedgingActivities – an amendment of FASB Statement No. 133 (“SFAS 161”)* . SFAS 161 requires qualitativedisclosures about objectives and strategies for using derivative, quantitativedisclosures about fair value amounts of and gains and losses on derivativeinstruments, and disclosures about credit-risk-related contingent features inderivative agreements. SFAS 161 is effective for financial statements issuedfor fiscal years and interim periods beginning after November 15, 2008.Adoption of SFAS No. 141R did not have a material impact on theconsolidated financial statements.

 

*Statement of Financial AccountingStandards, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”).* During May 2008, the FASB issuedSFAS 162. This Statement identifies the sources of account principles and theframework for selecting the principles to be used in the preparation offinancial statements of nongovernmental entities that are presented inconformity with generally accepted accounting principles (GAAP) in the UnitedStates. Adoption of SFAS 162 was not a change in the Company’s currentaccounting practices; therefore, it did not have a material impact on theCompany’s consolidated financial condition or results of operations.

 

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*FASB Staff Position EITF 03-6-1,Determining Whether Instruments Granted in Share-Based Payment Transactions areParticipating Securities (“FSP EITF 03-6-1”).* FSP EITF 03-6-1 requires companies to treat unvestedshare-based payment awards that have non-forfeitable rights to dividend ordividend equivalents as a separate class of securities in calculating earningsper share. FSP EITF 03-6-1 is effective for financial statements issued forfiscal years and interim periods beginning after December 15, 2008, andrequires a company to retrospectively adjust its earnings per share data. TheCompany adopted FSP EITF 03-6-1 effective March 31, 2009, and adoption didnot have a material effect on consolidated results of operations or earningsper share.

 

*FASB Staff Positions FAS 107-1 andAPB 28-1, FAS 157-4, FAS 115-2 and FAS 124-2, Other Than Temporary Impairment.* FASB has issued FSPs to address concernsregarding (1) determining whether a market is not active and a transactionis not orderly, (2) recognition and presentation of other-than-temporaryimpairments and (3) interim disclosures of fair values of financialinstruments. The FSPs will be effective for interim and annual periods endingafter June 15, 2009, with early adoption permitted for periods endingafter March 15, 2009. The Company will adopt the FSPs effective for theperiod ending June 30, 2009, but does not anticipate that adoption willresult in a material effect on consolidated results of operations.

 

**Note2. Earnings Per Share:**

 

Earnings per share (“EPS”)are disclosed as basic and diluted. Basic EPS is generally computed by dividing net income by theweighted-average number of common shares outstanding for the period, whereasdiluted EPS essentially reflects the potential dilution in basic EPS that couldoccur if other contracts to issue common stock were exercised.  As of March 31, 2009 and 2008, no commonstock equivalents were excluded from the diluted EPS calculation.

 
| ** **                                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------|------------|
| **(dollars in thousands, except per share amounts)**   | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| Net income                                             |       | $                                      | 45         |   | $ | 300 |   |
| Basic earnings  per share                              |       | $                                      | 0.03       |   | $ | 0.21 |   |
| Diluted earnings  per share                            |       | $                                      | 0.03       |   | $ | 0.20 |   |
| Basic weighted  average number of shares outstanding   |       | 1,460,802                              |       | 1,460,602 |   |
| Effect of  dilutive securities – stock options    |       | 20,617                                 |       | 48,446 |   |
| Diluted weighted  average number of shares outstanding |       | 1,481,419                              |       | 1,509,048 |   |

 

**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 Accounting StandardsNo. 123 *Accounting for Stock-BasedCompensation* and No. 123(R) *Share-Based Payment. * As of December 31, 2007, all outstandingstock options were fully vested.  Nostock options were granted in 2008 or 2009 and, accordingly, net income has notbeen affected by stock-based compensation.  Any stock-based employee compensation for future grants will bedetermined at that time using the Black-Scholes or another appropriateoption-pricing model.

 

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**Note 4.  Investment Portfolio:**

 

Thefollowing tables set forth certain information regarding the Company’sinvestment portfolio at March 31, 2009 and December 31, 2008:

 

## **Available-for-saleportfolio**

** **
| **March 31, 2009  (dollars in thousands)**                     | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gains** | ** ** | **Gross  Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** | **Average  Yield** | ** ** |
|---------------------------------------------------------------------|------------|---------------------|------------|------------------------------|------------|-------------------------------|------------|----------------------------|------------|--------------------|------------|
| U.S. Treasury  and other U.S. government agencies and corporations: | ** ** | ** **          | ** ** | ** **                   | ** ** | ** **                    | ** ** | ** **                 | ** ** | ** **         | ** ** |
| Due within one  year                                                |       | $                   | 640        |                         | $          | 9                             |       | $                          | —     |               | $          | 649 |   | 4.48 | % |
| Due after one  year through five years                              |       | 1,543               |       | 6                            |       | 1                             |       | 1,548                      |       | 4.94               | %          |
| Due after five  years through ten years                             |       | 612                 |       | 26                           |       | —                        |       | 638                        |       | 4.99               | %          |
| State and  political subdivisions:                                  |       |                |       |                         |       |                          |       |                       |       |               |       |
| Due after five  years through ten years                             |       | 405                 |       | 1                            |       | 11                            |       | 395                        |       | 5.25               | %          |
| Due after ten  years                                                |       | 5,281               |       | 7                            |       | 136                           |       | 5,152                      |       | 5.93               | %          |
| Mortgage-backed  debt securities                                    |       | 10,701              |       | 274                          |       | 3                             |       | 10,972                     |       | 5.04               | %          |
| Equity  securities                                                  |       | 300                 |       | —                       |       | —                        |       | 300                        |       | —             | %          |
|                                                                |       | $                   | 19,482     |                         | $          | 323                           |       | $                          | 151        |               | $          | 19,654 |   | 5.03 | % |

** **
| **December 31, 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 after one  year through five years                              |       | $                   | 2,283      |                         | $          | 20                            |       | $                          | 1          |               | $          | 2,302 |   | 4.81 | % |
| Due after five  years through ten years                             |       | 645                 |       | 5                            |       | —                        |       | 650                        |       | 5.00               | %          |
| State and  political subdivisions:                                  |       |                |       |                         |       |                          |       |                       |       |               |       |
| Due after five  years through ten years                             |       | 405                 |       | —                       |       | 13                            |       | 392                        |       | 5.25               | %          |
| Due after ten  years                                                |       | 5,281               |       | 15                           |       | 202                           |       | 5,094                      |       | 5.93               | %          |
| Mortgage-backed  debt securities                                    |       | 11,178              |       | 166                          |       | 42                            |       | 11,302                     |       | 5.11               | %          |
| Equity  securities                                                  |       | 300                 |       | —                       |       | —                        |       | 300                        |       | —             | %          |
|                                                                |       | $                   | 20,092     |                         | $          | 206                           |       | $                          | 258        |               | $          | 20,040 |   | 5.21 | % |

 
| ** **                                                         | ** ** | **Continuous unrealized  losses existing for less than  12 months** | ** ** | **Continuous unrealized  losses existing for 12  months and greater** | ** ** | **Total**                    | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------|------------|
| **March 31, 2009  (dollars in thousands)**                    | ** ** | **Estimated  Fair****Value**                                        | ** ** | **Unrealized  Losses**                                                | ** ** | **Estimated  Fair****Value** | ** ** | **Unrealized  Losses** | ** ** | **Estimated  Fair****Value** | ** ** | **Unrealized  Losses** | ** ** |
| U.S. Treasury  and other U.S. government agencies and corporations |       | $                                                                   | —     |                                                                  | $          | —                       |       | $ | 904 |   | $ | 1 |   | $ | 904 |   | $ | 1 |   |
| Mortgage-backed  debt securities                                   |       | 1,084                                                               |       | 3                                                                     |       | —                       |       | — |   | 1,084 |   | 3 |   |
| State and  political subdivisions                                  |       | 3,461                                                               |       | 125                                                                   |       | 434                          |       | 22 |   | 3,895 |   | 147 |   |
| Total  temporarily impaired securities                             |       | $                                                                   | 4,545      |                                                                  | $          | 128                          |       | $ | 1,338 |   | $ | 23 |   | $ | 5,883 |   | $ | 151 |   |

 

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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, 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 |       | $                                                                   | 942        |                                                                  | $          | 1                          |       | $ | — | ** ** | $ | — |   | $ | 942 |   | $ | 1 |   |
| State and  political subdivisions                                  |       | 3,299                                                               |       | 204                                                                   |       | 192                        |       | 11 |   | 3,491 |   | 215 |   |
| Mortgage-backed  debt securities                                   |       | 2,448                                                               |       | 42                                                                    |       | —                     |       | — |   | 2,448 |   | 42 |   |
| Total  temporarily impaired securities                             |       | $                                                                   | 6,689      |                                                                  | $          | 247                        |       | $ | 192 |   | $ | 11 |   | $ | 6,881 |   | $ | 258 |   |

 

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 March 31, 2009and December 31, 2008:

 
| **(dollars in thousands)**         | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Federal Home  Loan Bank of Atlanta |       | $                        | 997        |                        | $          | 1,000 |   |
| Federal Reserve  Bank              |       | 574                      |       | 559                         |       |
| Atlantic Central  Bankers Bank     |       | 40                       |       | 40                          |       |
|                               |       | $                        | 1,611      |                        | $          | 1,599 |   |

 

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

 

Loansconsist of the following:

 
| **(dollars in thousands)**                                                  | ** ** | **March 31,  2009** | ** ** | **% of  Loans** | ** ** | **December 31,  2008** | ** ** | **% of  Loans** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------|------------|-----------------|------------|-----------------------------|------------|-----------------|------------|
| Real estate  loans:                                                         |       |                     |       |            |       |                        |       |            |       |
| Construction and  land development                                          |       | $                        | 20,960     |            | 10         | %                           | $          | 17,049          |       | 8 | % |
| Mortgage loans:                                                             |       |                     |       |            |       |                        |       |            |       |
| Secured by 1 to  4 family residential properties                            |       | 38,852                   |       | 19              | %          | 36,986                      |       | 17              | %          |
| Secured by  multi-family (5 or more) residential properties                 |       | 8,384                    |       | 4               | %          | 8,856                       |       | 4               | %          |
| Secured by  commercial properties                                           |       | 102,041                  |       | 49              | %          | 105,637                     |       | 51              | %          |
| Secured by farm  land                                                       |       | 7,517                    |       | 3               | %          | 6,747                       |       | 3               | %          |
| Total mortgage  loans                                                       |       | 156,794                  |       | 75              | %          | 158,226                     |       | 75              | %          |
| Loans to farmers                                                            |       | 48                       |       | —          | %          | 48                          |       | —          | %          |
| Commercial and  industrial loans                                            |       | 28,416                   |       | 14              | %          | 34,779                      |       | 16              | %          |
| Loans to  individuals for household, family and other personal expenditures |       | 2,013                    |       | 1               | %          | 1,738                       |       | 1               | %          |
|                                                                        |       | 208,231                  |       | 100             | %          | 211,840                     |       | 100             | %          |
| Less allowance  for loan losses                                             |       | (2,838                   | )          |            |       | (3,120                      | )          |            |       |
| Net loans                                                                   |       | $                        | 205,393    |            |       |                        | $          | 208,720         |       |   |   |

 

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Transactions in theallowance for loan losses are summarized as follows:

 
| ** **                                             | ** ** | **Three Months Ended****March 31,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------|------------|
| **(dollars in thousands)**                             | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| Average total  loans outstanding during period         |       | $                                        | 211,872    |   | $ | 210,436 |   |
| Balance at  beginning of period                        |       | $                                        | 3,120      |   | $ | 2,640 |   |
| Recoveries of  loans previously charged-off (consumer) |       | 3                                        |       | 9 |   |
| Loans  charged-off (commercial and industrial)         |       | (226                                     | )          | (223 | ) |
| Loans  charged-off (commercial real estate)            |       | (448                                     | )          | (76 | ) |
| Loans charged-off  (consumer)                          |       | (11                                      | )          | — |   |
| Net charge-offs                                        |       | (682                                     | )          | (290 | ) |
| Provision  charged to operating expenses               |       | 400                                      |       | 120 |   |
| Balance at end  of period                              |       | $                                        | 2,838      |   | $ | 2,470 |   |
| Ratios of net  charge-offs to average loans            |       | 0.32                                     | %          | 0.14 | % |

 

**Note6.   Deposits**

 

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

 
| **(dollars in thousands)**           | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Noninterest-bearing  demand deposits |       | $                        | 33,982     |                        | $          | 32,740 |   |
| Interest-bearing  demand deposits:   |       |                     |       |                        |       |
| NOW accounts                         |       | 14,238                   |       | 11,472                      |       |
| Money market  accounts               |       | 40,833                   |       | 38,600                      |       |
| Savings accounts                     |       | 4,241                    |       | 3,888                       |       |
| Certificates of  deposit:            |       |                     |       |                        |       |
| $100,000 or more                     |       | 53,757                   |       | 57,835                      |       |
| Less than  $100,000                  |       | 74,578                   |       | 72,348                      |       |
| Total deposits                       |       | $                        | 221,629    |                        | $          | 216,883 |   |

 

**Note 7. Trust preferred securities/juniorsubordinated debentures and other long-term borrowings:**

 

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

 

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

 

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AtMarch 31, 2009 and December 31, 2008, the Company had $10,000,000 inborrowings under its credit facility from the Federal Home Loan Bank of Atlanta(“FHLB”).  Both are in the amount of$5,000,000 with the first being a 4.56% fixed rate advance that matures on April 27,2012 and the second being a 4.56% convertible advance with a maturity date of September 4,2012, unless called on September 4, 2010 by the FHLB.  Outstanding advances are secured bycollateral consisting of a blanket lien on qualifying loans in the Bank’sresidential mortgage loan portfolio.

 

**Note 8.  Noninterest Expense:**

 

Noninterest expenseconsists of the following:

* *
| ** **                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|
| **(dollars in thousands)**              | ** ** | **2009**                               | ** ** | **2008** | ** ** |
|                                    |       |                                   |       |   |   |
| Salaries                                |       | $                                      | 814        |   | $ | 812 |   |
| Deferred  Personnel Costs               |       | (13                                    | )          | (26 | ) |
| Payroll Taxes                           |       | 67                                     |       | 68 |   |
| Employee  Insurance                     |       | 63                                     |       | 57 |   |
| Other Employee Benefits                 |       | 48                                     |       | 48 |   |
| Depreciation                            |       | 84                                     |       | 82 |   |
| Rent                                    |       | 97                                     |       | 79 |   |
| Utilities                               |       | 28                                     |       | 26 |   |
| Repairs and  Maintenance                |       | 61                                     |       | 58 |   |
| ATM Expense                             |       | 27                                     |       | 23 |   |
| Other Occupancy  and Equipment Expenses |       | 34                                     |       | 31 |   |
| Postage and  Supplies                   |       | 19                                     |       | 17 |   |
| Data Processing                         |       | 97                                     |       | 88 |   |
| Advertising and  Promotion              |       | 34                                     |       | 81 |   |
| Legal                                   |       | 11                                     |       | 12 |   |
| Insurance                               |       | 12                                     |       | 12 |   |
| Consulting                              |       | 11                                     |       | 1 |   |
| Courier                                 |       | 4                                      |       | 5 |   |
| Audit Fees                              |       | 45                                     |       | 61 |   |
| Other                                   |       | 140                                    |       | 111 |   |
|                                    |       | $                                      | 1,683      |   | $ | 1,646 |   |

 

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

 

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

 

The Company made contributions to the Plan in the amounts of $33,000 and$35,000 for the first three months in 2009 and 2008, respectively.  On April 1, 2009, the Company suspendedits discretionary matching contribution.

 

**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 March 31, 2009.

 

As of March 31,2009, the most recent notification from the regulatory agency categorized theBank as well capitalized under the regulatory framework for prompt correctiveaction.  To be categorized as wellcapitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,and Tier 1 leverage ratios as set forth in the table.  There are no conditions or events since thatnotification which management believes have changed the Bank’s category.

 

The Company’s and theBank’s actual capital amounts and ratios at March 31, 2009 and December 31,2008 are presented in the following tables.

 
| **March 31,  2009**    | ** ** | **Actual** | ** ** | **For  Capital  Adequacy Purposes** | ** ** | **Minimum  To Be Well  Capitalized Under  Prompt Corrective  Action Provisions** | ** ** |
|-----------------------------|------------|------------|------------|-------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| **(dollars  in thousands)** | ** ** | **Amount** | ** ** | **Ratio**                           | ** ** | **Amount**                                                                       | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| Tier 1 Capital              |       |       |       |                                |       |                                                                             |       |   |   |   |   |   |   |
| To Risk-Weighted  Assets    |       |       |       |                                |       |                                                                             |       |   |   |   |   |   |   |
| Company                     |       | $          | 26,689     |                                | 11.87      | %                                                                                | $          | 8,990 |   | 4.00 | % | N/A |   | N/A |   |
| Bank                        |       | $          | 25,746     |                                | 11.49      | %                                                                                | $          | 8,965 |   | 4.00 | % | $ | 13,447 |   | 6.00 | % |
|                        |       |       |       |                                |       |                                                                             |       |   |   |   |   |   |   |
| Total Capital               |       |       |       |                                |       |                                                                             |       |   |   |   |   |   |   |
| To Risk-Weighted Assets     |       |       |       |                                |       |                                                                             |       |   |   |   |   |   |   |
| Company                     |       | $          | 29,498     |                                | 13.12      | %                                                                                | $          | 17,980 |   | 8.00 | % | N/A |   | N/A |   |
| Bank                        |       | $          | 28,548     |                                | 12.74      | %                                                                                | $          | 17,930 |   | 8.00 | % | $ | 22,412 |   | 10.00 | % |
|                        |       |       |       |                                |       |                                                                             |       |   |   |   |   |   |   |
| Tier 1 Capital              |       |       |       |                                |       |                                                                             |       |   |   |   |   |   |   |
| To Average Assets           |       |       |       |                                |       |                                                                             |       |   |   |   |   |   |   |
| Company                     |       | $          | 26,689     |                                | 10.40      | %                                                                                | $          | 10,265 |   | 4.00 | % | N/A |   | N/A |   |
| Bank                        |       | $          | 25,746     |                                | 10.05      | %                                                                                | $          | 10,245 |   | 4.00 | % | $ | 12,807 |   | 5.00 | % |

 
| **December 31, 2008** | ** ** | **Actual** | ** ** | **For Capital  Adequacy Purposes** | ** ** | **Minimum To Be Well  Capitalized Under  Prompt Corrective  Action Provisions** | ** ** |
|----------------------------|------------|------------|------------|------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **(dollars in thousands)** | ** ** | **Amount** | ** ** | **Ratio**                          | ** ** | **Amount**                                                                      | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| Tier 1 Capital             |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |
| To Risk-Weighted  Assets   |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |
| Company                    |       | $          | 26,644     |                               | 11.59      | %                                                                               | $          | 9,194 |   | 4.00 | % | N/A |   | N/A |   |
| Bank                       |       | $          | 25,637     |                               | 11.18      | %                                                                               | $          | 9,174 |   | 4.00 | % | $ | 13,761 |   | 6.00 | % |
|                       |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |
|                       |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |
| Total Capital              |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |
| To Risk-Weighted Assets    |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |
| Company                    |       | $          | 29,517     |                               | 12.84      | %                                                                               | $          | 18,387 |   | 8.00 | % | N/A |   | N/A |   |
| Bank                       |       | $          | 28,504     |                               | 12.43      | %                                                                               | $          | 18,348 |   | 8.00 | % | $ | 22,936 |   | 10.00 | % |
|                       |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |
| Tier 1 Capital             |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |
| To Average Assets          |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |
| Company                    |       | $          | 26,644     |                               | 10.31      | %                                                                               | $          | 10,338 |   | 4.00 | % | N/A |   | N/A |   |
| Bank                       |       | $          | 25,637     |                               | 9.94       | %                                                                               | $          | 10,319 |   | 4.00 | % | $ | 12,899 |   | 5.00 | % |

 

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On June 26, 2007,the Company authorized the repurchase of up to 146,000 shares of its commonstock, for an aggregate expenditure of not more than $4.5 million, through 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 March 31,2009, there have been no shares repurchased by the Company.

 

**Note11.  Fair Value**

 

The Companyfollows the guidance of State of Financial Accounting Standards (“SFAS”) 159, *The**Fair Value Option forFinancial Assets and Liabilities*. This Statement permits entities tomeasure many financial instruments and certain other items at fair value.  The objective is to improve financialreporting by providing entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions.  The election to use the fair value option isavailable when an entity first recognizes a financial asset or financialliability or upon entering into a Company commitment.  Subsequent changes must be recorded inearnings.  The Company has yet to applythe fair value option to any assets or liabilities.  In conjunction with SFAS 159, the Companyalso follows the guidance of SFAS 157, *Fair Value Measurements*.  SFAS 157 clarifies that fair value is an exitprice, representing the amount that would be received to sell an asset or paidto transfer a liability in an orderly transaction between market participants.  Under SFAS 157, fair value measurements arenot adjusted for transaction costs.  SFAS157 establishes a fair value hierarchy that prioritizes the inputs to valuationtechniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices inactive markets for identical assets or liabilities (Level 1 measurements) andthe lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchyunder SFAS 157 are described below.

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

 

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

 

The types ofinstruments valued based on quoted market prices in active markets include mostU.S. government and agency securities, liquid mortgage products, active listedequities and most money market securities. Such instruments are generally classified within Level 1 or Level 2 ofthe fair value hierarchy.  As required bySFAS 157, the Company does not adjust the quoted price for such instruments.

 

The types ofinstruments valued based on quoted prices in markets that are not active, brokeror dealer quotations, or alternative pricing sources with reasonable levels ofprice transparency include most investment-grade and high-yield corporatebonds, less liquid mortgage products, less liquid equities, state, municipaland provincial obligations, and certain physical commodities.  Such instruments are generally classifiedwithin Level 2 of the fair value hierarchy.

 

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

 

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

 

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knowledge of theclient and client’s business.  Impairedloans are reviewed and evaluated on at least a quarterly basis for additionalimpairment and adjusted accordingly, based on the same factors identifiedabove.

 

The following tables setforth the Company’s financial assets and liabilities that were accounted for ordisclosed at fair value on a recurring and nonrecurring basis as of March 31,2009.

 

The following tables showdetails of the financial instruments as of March 31, 2009 for which fairvalue accounting was applied:

 

*Recurringbasis*

 
| ** **                           | ** ** | ** **   | ** ** | ** **         | ** ** | **Significant**    | ** ** | ** **       | ** ** |
|--------------------------------------|------------|--------------|------------|--------------------|------------|--------------------|------------|------------------|------------|
| ** **                           | ** ** | **Carrying** | ** ** | ** **         | ** ** | **Other**          | ** ** | **Significant**  | ** ** |
| ** **                           | ** ** | **Value**    | ** ** | **Quoted**         | ** ** | **Observable**     | ** ** | **Unobservable** | ** ** |
| ** **                           | ** ** | **(Fair**    | ** ** | **Prices**         | ** ** | **Inputs**         | ** ** | **Inputs**       |       |
| **(dollars in thousands)** | ** ** | **Value)**   | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **(Level  3)**   | ** ** |
| Securities  available for sale       |       | $            | 19,654     |               | $          | —             |       | $                | 19,654     |   | $ | — |   |
|                                      |            |              |            |                    |            |                    |            |                  |            |  |  |  |  |

 

*Nonrecurring basis*

 
| ** **                           | ** ** | ** **   | ** ** | ** **         | ** ** | **Significant**    | ** ** | ** **       | ** ** |
|--------------------------------------|------------|--------------|------------|--------------------|------------|--------------------|------------|------------------|------------|
| ** **                           | ** ** | **Carrying** | ** ** | ** **         | ** ** | **Other**          | ** ** | **Significant**  | ** ** |
| ** **                           | ** ** | **Value**    | ** ** | **Quoted**         | ** ** | **Observable**     | ** ** | **Unobservable** | ** ** |
| ** **                           | ** ** | **(Fair**    | ** ** | **Prices**         | ** ** | **Inputs**         | ** ** | **Inputs**       | ** ** |
| **(dollars in thousands)** | ** ** | **Value)**   | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **(Level 3)**    | ** ** |
| Impaired loans                       |       | $            | 1,076      |               | $          | —             |       | $                | —     |   | $ | 1,076 |   |
|                                      |            |              |            |                    |            |                    |            |                  |            |  |  |  |  |

 

**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 one industryor customer.  The Company also has asubsidiary called FCBI Statutory Trust I. See Note 7 for additional disclosures.

 

## **Critical Accounting Policies**

## ** **

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

 

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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 decreased by$3.61 million, or (1.70)%, from December 31, 2008, to a balance of $208.23million as of March 31, 2009, and by $2.05 million, or (0.97)% from March 31,2008.  The Company has taken a low tomoderate loan growth strategy to maintain its strong capital and liquiditypositions during these current uncertain economic times, which may result inthe loan portfolio contracting at various times.

 

## **Deposits**

## ** **

Deposits increased by$4.75 million, or 2.19%, from December 31, 2008 to a balance of $221.63million as of March 31, 2009, but dropped by $2.77 million, or (1.23)%from March 31, 2008.  The Company’sdeposit strategy involves reducing the Company’s reliance on higher costcertificates of deposit and placing more emphasis on noninterest-bearing demanddeposits and other lower cost NOW and money market accounts.  The balance of certificates of depositdropped to $128.34 million as of March 31, 2009 from $130.18 million as ofDecember 31, 2008; while noninterest-bearing demand deposits increased to$33.98 million from $32.74 million, NOW accounts increased to $18.48 millionfrom $15.36 million, and money market accounts increased to $40.83 million from$38.60 million, all for the same periods.

 

**ThreeMonths Ended March 31, 2009 and 2008**

 

Net income was $45,000for the quarter ended March 31, 2009, as compared to $300,000 of netincome for the same period in 2008.  Thedecrease in earnings for this quarter in 2009 is primarily related to a$280,000 increase in provision for loan losses, an increase in operatingexpenses of $37,000 and lower taxes in the amount of $132,000.  Basicearnings per share for the three months ended March 31, 2009 and 2008 were$0.03 and $0.21, respectively, and were based on weighted-average number ofshares outstanding of 1,460,802 and 1,460,602, respectively.  Diluted earnings per share for the threemonths ended March 31, 2009 and 2008 were $0.03 and $0.20, respectively,and were based on weighted-average number of shares outstanding of 1,481,419and 1,509,048, respectively.  The Companyexperienced an annualized return on average assets of 0.07% and 0.47% for thethree-month periods ended March 31, 2009 and 2008, respectively.  Additionally, the Company experienced anannualized return on average shareholders’ equity of 0.86% and 5.99% for thethree-month periods ended March 31, 2009 and 2008, respectively.

 

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

 

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

** **
| ** **                                                     | ** ** | **2009**                    | ** ** | **2008**                       | ** ** |
|----------------------------------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|
| **Three  Months Ended March 31,  (dollars in thousands)** | ** ** | **Average  daily  balance** | ** ** | **Interest  Income/  Expense** | ** ** | **Average  Yield/  rate** | ** ** | **Average  daily  balance** | ** ** | **Interest  Income/  Expense** | ** ** | **Average  Yield/  rate** | ** ** |
| Assets                                                         |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| Interest-earning assets:                                       |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| Federal funds sold                                             |       | $                           | 1,127      |                           | $          | 1 |   | 0.36 | % | $ | 9,625 |   | $ | 77 |   | 3.21 | % |
| Interest bearing deposits in other banks                       |       | 17,102                      |       | 9                              |       | 0.21 |   | 1,385 |   | 10 |   | 2.90 |   |
| Investment securities (1):                                     |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| Taxable                                                        |       | 15,814                      |       | 183                            |       | 4.69 |   | 17,530 |   | 220 |   | 5.03 |   |
| Tax-exempt (2)                                                 |       | 5,686                       |       | 88                             |       | 6.28 |   | 9,820 |   | 150 |   | 6.13 |   |
| Loans (3)                                                      |       | 211,872                     |       | 3,229                          |       | 6.18 |   | 210,436 |   | 3,624 |   | 6.91 |   |
| Total interest-earning assets                                  |       | 251,601                     |       | 3,510                          |       | 5.66 |   | 248,796 |   | 4,081 |   | 6.58 |   |
| Noninterest-earning assets                                     |       | 5,016                       |       |                           |       |   |   | 9,263 |   |   |   |   |   |
| Total assets                                                   |       | $                           | 256,617    |                           |       |   |   |   | $ | 258,059 |   |   |   |   |   |
|                                                           |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| Liabilities and Shareholders’ Equity                      |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                  |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| NOW accounts                                                   |       | $                           | 11,917     |                           | 7          |   | 0.24 | % | $ | 12,234 |   | 6 |   | 0.20 | % |
| Savings accounts                                               |       | 4,136                       |       | 3                              |       | 0.29 |   | 4,178 |   | 5 |   | 0.48 |   |
| Money market accounts                                          |       | 38,757                      |       | 115                            |       | 1.20 |   | 38,768 |   | 235 |   | 2.43 |   |
| Certificates of deposit  $100,000 or  more                     |       | 55,838                      |       | 489                            |       | 3.55 |   | 59,731 |   | 700 |   | 4.70 |   |
| Certificates of deposit  less than  $100,000                   |       | 74,184                      |       | 635                            |       | 3.47 |   | 72,198 |   | 828 |   | 4.60 |   |
| Long-term borrowings                                           |       | 10,000                      |       | 114                            |       | 4.62 |   | 10,000 |   | 115 |   | 4.61 |   |
| Junior subordinated debentures                                 |       | 6,186                       |       | 101                            |       | 6.62 |   | 6,186 |   | 101 |   | 6.55 |   |
| Total interest-bearing liabilities                             |       | 201,018                     |       | 1,464                          |       | 2.95 |   | 203,295 |   | 1,990 |   | 3.93 |   |
| Noninterest-bearing deposits                                   |       | 34,170                      |       |                           |       |   |   | 33,797 |   |   |   |   |   |
| Noninterest-bearing liabilities                                |       | 545                         |       |                           |       |   |   | 932 |   |   |   |   |   |
| Total liabilities                                              |       | 235,733                     |       |                           |       |   |   | 238,024 |   |   |   |   |   |
| Total shareholders’ equity                                |       | 20,884                      |       |                           |       |   |   | 20,035 |   |   |   |   |   |
| Total liabilities and shareholders’  equity               |       | $                           | 256,617    |                           |       |   |   |   | $ | 258,059 |   |   |   |   |   |
| Net interest income                                            |       |                        |       | $                              | 2,046      |   |   |   |   |   | $ | 2,091 |   |   |   |
| Net interest spread                                            |       |                        |       |                           |       | 2.71 | % |   |   |   |   | 2.65 | % |
| Net interest margin                                            |       |                        |       |                           |       | 3.30 | % |   |   |   |   | 3.37 | % |

 

----

| (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 $30,000 in 2009 and $51,000 in 2008 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 $16,000 in 2009 and $14,000 in 2008 are  included in the calculation of the loan interest income. Net loan origination  income (expense) in interest income totaled $(4,000) in 2009 and $4,000 in  2008. |

 

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**Rate/VolumeAnalysis**

 

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

 
| *** ***                                | *** *** | **Three Months Ended March 31,  2009 compared to 2008** | *** *** |
|---------------------------------------------|--------------|--------------------------------------------------------------|--------------|
| ** **                                  | ** **   | **Increase (decrease)  Due to**                              | ** **   | **Net  Increase  (Decrease)** | ** ** |
| **(dollars in thousands)**                  | ** **   | **Volume**                                                   | ** **   | **Rate** | ** ** | ** ** | ** ** |
| Interest income                             |         |                                                         |         |   |   |   |   |
| Interest-earning  assets:                   |         |                                                         |         |   |   |   |   |
| Federal funds  sold                         |         | $                                                            | (68          | ) | $ | (8 | ) | $ | (76 | ) |
| Interest-bearing  deposits in other banks   |         | 114                                                          |         | (115 | ) | (1 | ) |
| Investment  securities:                     |         |                                                         |         |   |   |   |   |
| Taxable                                     |         | (22                                                          | )            | (15 | ) | (37 | ) |
| Tax-exempt                                  |         | (63                                                          | )            | 1 |   | (62 | ) |
| Loans                                       |         | 25                                                           |         | (420 | ) | (395 | ) |
| Total interest  income                      |         | (14                                                          | )            | (557 | ) | (571 | ) |
|                                        |         |                                                         |         |   |   |   |   |
| Interest expense                            |         |                                                         |         |   |   |   |   |
| Interest-bearing  liabilities:              |         |                                                         |         |   |   |   |   |
| NOW accounts                                |         | —                                                       |         | 1 |   | 1 |   |
| Savings accounts                            |         | —                                                       |         | (2 | ) | (2 | ) |
| Money market  accounts                      |         | —                                                       |         | (120 | ) | (120 | ) |
| Certificates of  deposit $100,000 or more   |         | (46                                                          | )            | (165 | ) | (211 | ) |
| Certificates of  deposit less than $100,000 |         | 23                                                           |         | (216 | ) | (193 | ) |
| Long-term  borrowings                       |         | —                                                       |         | (1 | ) | (1 | ) |
| Total interest  expense                     |         | (23                                                          | )            | (503 | ) | (526 | ) |
| Net interest  income                        |         | $                                                            | 9            |   | $ | (54 | ) | $ | (45 | ) |

 

## **NetInterest Income**

## ** **

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

 

**Three Months Ended March 31, 2009 and 2008**

 

Net interest income (on a taxable-equivalent basis) was $2.05 million in2009 and $2.09 million in 2008.  Thedecrease in net interest income was primarily driven by lower yields on theloan portfolio and interest-bearing deposits in other banks, which wasprimarily offset by lower rates paid on all deposit categories.  Average earning assets increased by $2.81million, or 1.13%, since March 31, 2008. The yield on earning assets in 2009 decreased to 5.66% from 6.58% in2008, or 92 basis points, primarily as a result of the Federal Reserve’sdecrease in the federal funds rate of 400 bps since January 1, 2008.  The decrease of 98 basis points in the ratepaid on interest-bearing liabilities primarily is the result of the lower ratespaid on money market accounts and certificates of deposit.  The Company’s net interest margin was 3.30%and 3.37%, and the net interest spread was 2.71% and 2.65%, for the three-monthperiods ended March 31, 2009 and 2008, respectively.

 

Interest expense decreased 26.43% from $1.99 million in 2008 to $1.46million in 2009 due to the reduced rates paid on interest-bearing liabilities,which decreased to 2.95% in 2009 from 3.93% in 2008.

 

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**NoninterestIncome**

 

## **Noninterest income in 2009 was $108,000, afterrecording a loss on the sale of a foreclosed property in the amount of $32,000,compared to $152,000, which includes a gain on the sale of a foreclosedproperty in the amount of $15,000, for the three-month period ended March 31,2008.**

## ** **

## **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 $1.68 million and $1.65 million for thethree-month periods ended March 31, 2009 and 2008, respectively.  The change in noninterest expense isprincipally related to an increase in rent expense of $18,000, due primarily tothe annual increase adjustments, as salary expense remained constant atapproximately $814,000.

 

The Federal Deposit Insurance Corporation (“FDIC”) has a proposal toimplement a one-time special assessment fee of up to 20 basis points on every$100 of domestic deposits as of June 30, 2009.  Therefore, in the case of the Company, thiscould amount to additional FDIC insurance charges of up to $440,000, whichwould impact the Company’s second quarter earnings for the period ending June 30,2009.

 

**IncomeTaxes**

 

During the three monthsended March 31, 2009, the Company recognized a $20,000 income tax benefitcompared to an $112,000 income tax expense during the same period in 2008.  The effective tax rate for the three-monthperiod in 2008 was 27.18%.  The declinein income tax expense is due to the lower pre-tax income and the largerproportion of tax-free income to pre-tax income in 2009.

 

**Market Risk, Liquidity andInterest Rate Sensitivity**

 

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

 

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

 

The Company seeksto limit the risks associated with interest rate fluctuations by managing thebalance between interest sensitive assets and liabilities.  Managing to mitigate interest rate risk is,however, not an exact science.  Not onlydoes the interval until repricing of interest rates on assets and liabilitieschange from day to day as the assets and liabilities change, but for someassets and liabilities, contractual maturity and the actual maturityexperienced are not the same.  Similarly,NOW and money market accounts, by contract, may be withdrawn in their entiretyupon demand and savings deposits may be withdrawn on seven days notice.  While these contracts are extremely short, itis the Company’s belief that these accounts turn over at the rate of fivepercent (5%) per year. The Company therefore treats them as having maturitiesstaggered over all periods.  If all ofthe Company’s NOW, money market, and savings accounts were treated as repricingin one year or less, the cumulative gap at one year or less would be $(65.26)million.

 

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

 

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The table below, “InterestRate Sensitivity Gap Analysis,” summarizes, as of March 31, 2009, theanticipated maturities or repricing of the Company’s interest-earning assetsand interest-bearing liabilities, the Company’s interest rate sensitivity gap(interest-earning assets less interest-bearing liabilities), the Company’scumulative interest rate sensitivity gap, and the Company’s cumulative interestsensitivity gap ratio (cumulative interest rate sensitivity gap divided bytotal assets).  A negative gap for anytime period means that more interest-bearing liabilities will reprice or matureduring that time period than interest-earning assets.  During periods of rising interest rates, anegative gap position would generally decrease earnings, and during periods ofdeclining interest rates, a negative gap position would generally increaseearnings.  The converse would be true fora positive gap position.  Therefore, apositive gap for any time period means that more interest-earning assets willreprice or mature during that time period than interest-bearingliabilities.  During periods of risinginterest rates, a positive gap position would generally increase earnings, andduring periods of declining interest rates, a positive gap position wouldgenerally decrease earnings.

 

It is important tonote that the following table represents the static gap position for interestsensitive assets and liabilities at March 31, 2009.  The table does not give effect to prepaymentsor extensions of loans as a result of changes in general market interestrates.  Moreover, while the table doesindicate the opportunities to reprice assets and liabilities within certaintime frames, it does not account for timing differences that occur duringperiods of repricing.  For example,changes to deposit rates tend to lag in a rising rate environment and lead in afalling rate environment, although this will not always be the case.  Nor does it account for the effects ofcompetition on pricing of deposits and loans. For example, under current market conditions, market rates paid ondeposits may not be able to adjust by the full amount of downward adjustmentsin the federal funds target rate, while rates on loans will tend to adjust bythe full amount, subject to certain limitations.

 

**InterestRate Sensitivity Gap AnalysisMarch 31, 2009**

 
| ** **                                            | ** ** | **Expected Repricing or Maturity Date** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------|------------|
| **(dollars in thousands)**                            | ** ** | **Within  One Year**                    | ** ** | **One to  Three Years** | ** ** | **Three to  Five Years** | ** ** | **After  Five Years** | ** ** | **Total** | ** ** |
| Assets                                                | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal funds  sold                                   |       | $                                       | 1,175      |   | $ | — |   | $ | — |   | $ | — |   | $ | 1,175 |   |
| Interest-bearing  deposits in other banks             |       | 23,437                                  |       | — |   | — |   | — |   | 23,437 |   |
| Investment  securities(1)                             |       | 3,594                                   |       | 1,202 |   | 3,522 |   | 11,036 |   | 19,354 |   |
| Loans                                                 |       | 76,051                                  |       | 65,401 |   | 48,789 |   | 17,990 |   | 208,231 |   |
| Total  interest-earning assets                        |       | 104,257                                 |       | 66,603 |   | 52,311 |   | 29,026 |   | 252,197 |   |
| ** **                                            | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Liabilities                                           | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Savings and NOW  accounts                             |       | 924                                     |       | 1,848 |   | 1,848 |   | 13,859 |   | 18,479 |   |
| Money Market  accounts                                |       | 2,042                                   |       | 4,083 |   | 4,083 |   | 30,625 |   | 40,833 |   |
| Certificates of  deposit                              |       | 105,203                                 |       | 22,260 |   | 872 |   | — |   | 128,335 |   |
| Long-term  borrowings                                 |       | 5,000                                   |       | 5,000 |   | — |   | — |   | 10,000 |   |
| Junior  subordinated debentures                       |       | —                                  |       | 6,186 |   | — |   | — |   | 6,186 |   |
| Total  interest-bearing liabilities                   |       | 113,169                                 |       | 39,377 |   | 6,803 |   | 44,484 |   | 203,833 |   |
| Interest rate  sensitivity gap                        |       | $                                       | (8,912     | ) | $ | 27,226 |   | $ | 45,508 |   | $ | (15,458 | ) | $ | 48,364 |   |
| Cumulative  interest rate sensitivity gap             |       | $                                       | (8,912     | ) | $ | 18,314 |   | $ | 63,822 |   | $ | 48,364 |   |   |   |
| Cumulative gap  ratio as a percentage of total assets |       | (3.51                                   | )%         | 7.21 | % | 25.13 | % | 19.05 | % |   |   |

 

----

(1) Excludes equitysecurities.

 

In addition to theInterest Rate Sensitivity Gap Analysis, the Company also uses an earningssimulation model on a quarterly basis to closely monitor interest sensitivityand to expose its balance sheet and income statement to differentscenarios.  The model is based on currentCompany data and adjusted by assumptions as to growth patterns, noninterestincome and noninterest expense and interest rate sensitivity, based on historicaldata, for both assets and liabilities projected for a one-year period.  The model is then subjected to a “shock test”assuming a sudden prime interest rate increase of 200 basis points or adecrease of 200 basis points, but not below zero.  The results show that with a 200 basis pointrise in the prime interest rate the Company’s net interest income wouldincrease by 2.68%.  However, a decreasein the prime interest rate of 200 basis was not considered to be feasible sincethis would infer that the federal funds interest rate would fall below zero.

 

Certainshortcomings are inherent in this method of analysis.  For example, although certain assets andliabilities may have similar maturities or repricing periods, they may react indifferent degrees to changes in market interest rates.  Also, the interest rates on 

 

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certain types ofassets and liabilities may fluctuate in advance of changes in market interestrates, while interest rates on other types may lag behind changes in marketrates.  Additionally, certain assets,such as adjustable-rate mortgage loans, have features that restrict changes ininterest rates on a short-term basis and over the life of the loan.  Further, in the event of a change in interestrates, prepayment and early withdrawal levels could deviate significantly fromthose assumed.  Finally, the ability ofmany borrowers to service their debt may decrease in the event of a significantinterest rate increase.

 

**CriticalAccounting Policy:**

 

**Allowance for Loan Losses**

** **

The Company makesprovisions for loan losses in amounts deemed necessary to maintain theallowance for loan losses at an appropriate level.  The Company’s provision for loan losses forthe three months ended March 31, 2009 and 2008 was $400,000 and $120,000,respectively.  The loan growth was $2.51million since December 31, 2008 and $1.15 million since March 31,2008.  The provision for loan losses isdetermined based upon Management’s estimate of the amount required to maintainan adequate allowance for loan losses reflective of the risks in the Company’sloan portfolio.  At March 31, 2009and December 31, 2008, the allowance for loan losses was $2.84 million and$3.12 million, respectively.  Thedecrease in the allowance from December 31, 2008, reflects the provisionof $400,000 less net charge-offs of $682,000, as compared to a provision of$120,000 less net charge-offs of $290,000 in the same period of 2008.  The increase in charge-offs in 2009 is aresult of two (2) commercial real estate relationships in the amount of$448,000, three (3) commercial and industrial loan relationships for$226,000 and three (3) consumer loan relationships which totaled $11,000.

 

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

 

Theallowance for loan losses is established as losses are estimated to haveoccurred through a provision for loan losses charged to earnings.  The allowance is based on two basicprinciples of accounting: (i) 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,including the length of the delay, the reason for the delay, the borrower’sprior payment record, and the amount of the shortfall in relation to theprincipal and interest owed.  Theprovision for loan losses included in the statements of operations serves tomaintain the allowance at a level Management considers adequate.

 

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

 

Thespecific allowance component is used to individually establish an allowance forloans identified for impairment testing. When impairment is identified, a specific reserve may be establishedbased on the Company’s calculation of the estimated loss embedded in theindividual loan.  Impairment testingincludes consideration of the borrower’s overall financial condition, resourcesand payment record, support available from financial guarantors and the fairmarket value of collateral. These factors are combined to estimate theprobability and severity of inherent losses. Large groups of smaller balance, homogeneous loans are collectivelyevaluated for impairment. Accordingly, the Company does not separately identifyindividual consumer and residential mortgage loans for impairment.   At March 31, 2009 there was only onecommercial real estate loan in the amount of $600,000, which was in anonaccrual status, that was deemed to be impaired and had a specific reserve of$50,000.

 

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

 

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

 

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

 

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

 

As of March 31,2009, the real estate loan portfolio constituted 85% 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 $7.87 million of at March 31, 2009.

** **
| ** **                                             | ** ** | **Three Months Ended**     | *** *** |
|--------------------------------------------------------|------------|----------------------------|--------------|
| **(dollars in thousands)**                             | ** ** | **March 31,****2009** | ** **   | **March 31,****2008** | *** *** |
| Average total  loans outstanding during period         |       | $                          | 211,872      |   | $ | 210,436 |   |
| Balance at  beginning of period                        |       | $                          | 3,120        |   | $ | 2,640 |   |
| Recoveries of  loans previously charged-off (consumer) |       | 3                          |         | 9 |   |
| Loans  charged-off (commercial and industrial)         |       | (226                       | )            | (223 | ) |
| Loans  charged-off (commercial real estate)            |       | (448                       | )            | (76 | ) |
| Loans  charged-off (consumer)                          |       | (11                        | )            | — |   |
| Net charge-offs                                        |       | (682                       | )            | (290 | ) |
| Provision  charged to operating expenses               |       | 400                        |         | 120 |   |
| Balance at end  of period                              |       | $                          | 2,838        |   | $ | 2,470 |   |
| Ratios of net  charge-offs to average loans            |       | 0.32                       | %            | 0.14 | % |

 

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

** **
| ** **                                                                  | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **Allocation of Allowance for Loan Losses**                                 | ** ** | **2009**           | ** ** | **% of  Loans**       | ** ** | **2008** | ** ** | **% of  Loans** | ** ** |
| Real  estate-construction                                                   |       | $                  | 363        |                  | 10         | % | $ | 333 |   | 8 | % |
| Real  estate-mortgage                                                       |       | 1,854              |       | 75                    | %          | 2,278 |   | 75 | % |
| Commercial and  industrial loans                                            |       | 584                |       | 14                    | %          | 472 |   | 16 | % |
| Loans to  individuals for household, family and other personal expenditures |       | 37                 |       | 1                     | %          | 37 |   | 1 | % |
|                                                                        |       | $                  | 2,838      |                  | 100        | % | $ | 3,120 |   | 100 | % |

** **
| ** **                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| Nonaccrual loans                           |       | $                  | 1,126      |                  | $          | 1,197 |   |
| Loans 90 days  past due and still accruing |       | —             |       | —                |       |
| Total nonperforming  loans                 |       | 1,126              |       | 1,197                 |       |
| Foreclosure  properties                    |       | —             |       | 363                   |       |
| Total  nonperforming assets                |       | $                  | 1,126      |                  | $          | 1,560 |   |
| Nonperforming  assets to total assets      |       | 0.43               | %          | 0.61                  | %          |

 

There were noother interest-bearing assets at March 31, 2009 or December 31, 2008classified 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 March 31, 2009 were as follows:

 
| ** **                                                                       | ** ** | **March 31,**      | *** *** |
|----------------------------------------------------------------------------------|------------|-------------------------|--------------|
| ** **                                                                       | ** ** | **2009**                | *** *** |
| **(dollars in thousands)**                                                       | ** ** | **Contractual  Amount** | *** *** |
| Financial  instruments whose notional or contract amounts represent credit risk: |       |                    |         |
| Commitments to  extend credit                                                    |       | $                       | 28,295       |   |
| Standby letters  of credit                                                       |       | 3,303                   |         |
| Total                                                                            |       | $                       | 31,598       |   |

 

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 31,2008 for additional information regarding the Company’s long-term leaseobligations.

 

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**CapitalResources**

 

Theability of the Company to grow is dependent on the availability of capital withwhich to meet regulatory capital requirements, discussed below.  To the extent the Company is successful itmay need to acquire additional capital through the sale of additional commonstock, other qualifying equity instruments or subordinated debt.  There can be no assurance that additionalcapital will be available to the Company on a timely basis or on attractiveterms.  On December 15, 2006, theCompany completed the issuance of $6.00 million of trust preferred securities,as discussed above, that can be recognized as capital for regulatorypurposes.  The Company has an unsecured revolving line of creditborrowing arrangement with an unaffiliated financial institution in the amountof $3.00 million with no outstanding balance as of March 31, 2009 or December 31,2008.  This facility matures on September 1,2009, has a floating interest rate equal to the Wall Street Journal prime rateand requires 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, but there can be no assurance.

 

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

 

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

 

Quantitative 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 March 31, 2009 and that the Company wouldmeet such requirements if applicable. See Note 10 to the consolidated financial statements for a tabledepicting compliance with regulatory capital requirements.

 

As of March 31,2009, the most recent notification from the regulatory agency categorized theBank as well capitalized under the regulatory framework for prompt correctiveaction.  To be categorized as wellcapitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,and Tier 1 leverage ratios as set forth in the table in Note 10.  There are no conditions or events since thatnotification which management believes have changed the Bank’s category.

 

On June 26, 2007,the Company authorized the repurchase of up to 146,000 shares of its commonstock, for an aggregate expenditure of not more than $4.5 million, through 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 March 31,2009, 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 are monetaryin 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 18.

 

###### **Item 4.    Controlsand Procedures**

###### ** **

## **The Company’s management, under the supervision and withthe participation of the Company’s Chief Executive Officer and Chief FinancialOfficer, evaluated, as of the last day of the period covered by this report,the effectiveness of the design and operation of the Company’s disclosurecontrols and procedures, as defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934.  Basedon that evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that the Company’s disclosure controls and procedures wereeffective.  There were no changes in theCompany’s internal control over financial reporting (as defined in Rule 13a-15under the Securities Act of 1934) during the quarter ended March 31, 2009that has materially affected, or is reasonably likely to materially affect, theCompany’s internal control over financial reporting.**

 

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## **PART II— Other Information**

## ** **

Item 1.    Legal Proceedings.  None

 

Item 1A.  RiskFactors There have been no material changes to the risk factors as of March 31,2009 from those disclosed in the Company’s 2008 Annual Report on Form 10-K.

 

Item 2.    Unregistered Sales of Equity Securities andUse of Proceeds

 

(a)   *Sales of UnregisteredSecurities. *None

 

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

 

(c)   *Registrant**Purchases of Securities*

 

The following tableprovides information on the Company’s purchases of its common stock during thequarter ended March 31, 2009.

 
| **Period**               | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs(1)** | ** ** | **Maximum Number of  Shares that may yet be  Purchased Under the  Plans or Programs** | ** ** |
|--------------------------|------------|---------------------------------------|------------|-----------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|
| January 1-31, 2009  |       | 0                                     |       | N/A                               |       | 0                                                                                                |       | 0                                                                                     |       |
| February 1-28, 2009 |       | 0                                     |       | N/A                               |       | 0                                                                                                |       | 0                                                                                     |       |
| March 1-31, 2009    |       | 0                                     |       | N/A                               |       | 0                                                                                                |       | 146,000                                                                               | (2)        |

 

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| (1)    | On June 26, 2007,  the Company’s Board of Directors approved a share repurchase program that  authorizes the repurchase of up to 146,000 shares of the Company’s  outstanding common stock, subject to a maximum expenditure of $4.5 million.  Repurchases under the program may be made on the open market and in privately  negotiated transactions from time to time until June 30, 2012, or  earlier termination of the program by the Board. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| (2)    | Subject to a maximum  expenditure of $4.5 million.  Number of  shares indicated is the remaining number of shares authorized for repurchase  as of the end of the indicated period.                                                                                                                                                                                                                                                                              |

 

Item 3.             Defaults upon Senior Securities.  None

 

Item 4.    Submission of Matters to a Vote of SecurityHolder.    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)                                                                                                                                                                                            |
| 10(j)                |       | Amendment to Line of  Credit with Atlantic Central Bankers Bank(11)                                                                                                                                                                                 |
| 11                   |       | Statement Regarding  Computation of Per Share Income — Please refer to Note 2 to the unaudited consolidated  financial statements included herein                                                                                              |
| 31(a)                |       | Certification of  Martin S. Lapera, President and Chief Executive Officer                                                                                                                                                                           |
| 31(b)                |       | Certification of  William R. Talley, Jr., Executive Vice President and Chief Financial  Officer                                                                                                                                                |
| 32(a)                |       | Certification of  Martin S. Lapera, President and Chief Executive Officer                                                                                                                                                                           |
| 32(b)                |       | Certification of  William R. Talley, Jr., Executive Vice President and Chief Financial  Officer                                                                                                                                                |

 

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| (1)  |   | Incorporated by  reference to exhibit of the same number to the Company’s Quarterly Report on  Form 10-QSB for the quarter ended March 31, 2004, as filed with the  Securities and Exchange Commission.          |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)  |   | Incorporated by  reference to exhibit of the same number to the Company’s Quarterly Report on  Form 10-QSB for the quarter ended September 30, 2003, as filed with  the Securities and Exchange Commission.      |
| (3)  |   | Not filed in  accordance with the provision of Item 601(b)(4)(v) of Regulation SK. The  Company agrees to provide a copy of these documents to the Commission upon  request.                                               |
| (4)  |   | Incorporated by reference to exhibit 4 to the Company’s Registration  Statement on Form S-8 (No. 333-111761).                                                                                                    |
| (5)  |   | Incorporated by reference to Exhibit 10.1 to the Company’s  Current Report on Form 8-K filed on May 24, 2005.                                                                                               |
| (6)  |   | Incorporated by reference to Exhibit 10.2 to the Company’s  Current Report on Form 8-K filed on May 24, 2005.                                                                                               |
| (7)  |   | Incorporated by  reference to Exhibit 99.1 to the Company’s Current Report on  Form 8-K filed on December 12, 2007.                                                                                         |
| (8)  |   | Incorporated by  reference to Exhibit 99.2 to the Company’s Current Report on  Form 8-K filed on December 12, 2007.                                                                                         |
| (9)  |   | Incorporated by  reference to Exhibit of the same number to the Company’s Annual Report  on Form 10-KSB for the year ended December 31, 2004, as filed with  the Securities and Exchange Commission.        |
| (10) |   | Incorporated by  reference to Exhibit of the same number to the Company’s Quarterly  Report on Form 10-QSB for the quarter ended March 31, 2005, as  filed with the Securities and Exchange Commission.     |
| (11) |   | Incorporated by  reference to Exhibit of the same number to the Company’s Quarterly  Report on Form 10-QSB for the quarter ended September 30, 2008, as  filed with the Securities and Exchange Commission. |

 

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**SIGNATURES**

 

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

 

 
|                   | FREDERICK COUNTY  BANCORP, INC. |
|------------------------|---------------------------------|
|                   |                            |
|                   |                            |
| Date: May 7, 2009 | By:                             | /s/ Martin S. Lapera |
|                   |                            | Martin S. Lapera |
|                   |                            | President and Chief  Executive Officer |
|                   |                            |   |
|                   |                            |   |
| Date: May 7, 2009 | By:                             | /s/ William R.  Talley, Jr. |
|                   |                            | William R.  Talley, Jr. |
|                   |                            | Executive Vice  President and Chief Financial Officer |

 

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