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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC  20549

 

FORM 10-Q

 

(MARK ONE)

 

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

 

For the Quarterly Period Ended September 30, 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

 

FREDERICK COUNTY BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

Maryland

 

20-0049496

(State of other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

7 North Market Street

Frederick, Maryland 21701

(Address of registrant’s principal executive offices)

 

301.620.1400

(Registrant’s telephone number, including area code)

 

N/A

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

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” 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 mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o Yes  x No

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.  There were 1,461,802 shares of Common Stock outstanding as of October 31, 2009.

 

 

 



Table of Contents

 

FREDERICK COUNTY BANCORP, INC. AND SUBSIDIARY

TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

Consolidated Balance Sheets, September 30, 2009 and December 31, 2008

 

 

 

 

 

Consolidated Statements of Income, Three and Nine Months Ended September 30, 2009 and 2008

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity, Three and Nine Months Ended September 30, 2009 and 2008

 

 

 

 

 

Consolidated Statements of Cash Flows, Nine Months Ended September 30, 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

 

 

2



Table of Contents

 

Frederick County Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

 

 

 

September 30,

 

December 31,

 

(dollars in thousands)

 

2009

 

2008

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Cash and due from banks

 

$

888

 

$

808

 

Federal funds sold

 

1,146

 

1,091

 

Interest-bearing deposits in other banks

 

24,671

 

14,156

 

Cash and cash equivalents

 

26,705

 

16,055

 

Investment securities available-for-sale at fair value

 

22,752

 

20,040

 

Restricted stock

 

1,566

 

1,599

 

Loans

 

211,150

 

211,840

 

Less: Allowance for loan losses

 

(3,210

)

(3,120

)

Net loans

 

207,940

 

208,720

 

Bank premises and equipment

 

5,046

 

5,221

 

Other assets

 

2,798

 

2,927

 

Total assets

 

$

266,807

 

$

254,562

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest-bearing deposits

 

$

37,205

 

$

32,740

 

Interest-bearing deposits

 

190,581

 

184,143

 

Total deposits

 

227,786

 

216,883

 

Short-term borrowings

 

500

 

 

Long-term borrowings

 

10,000

 

10,000

 

Junior subordinated debentures

 

6,186

 

6,186

 

Accrued interest and other liabilities

 

932

 

881

 

Total liabilities

 

245,404

 

233,950

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

Common stock, per share par value $.01; 10,000,000 shares authorized; 1,461,802 and 1,460,802 shares issued and outstanding, respectively

 

15

 

15

 

Additional paid-in capital

 

14,700

 

14,690

 

Retained earnings

 

6,482

 

5,939

 

Accumulated other comprehensive income (loss)

 

206

 

(32

)

Total shareholders’ equity

 

21,403

 

20,612

 

Total liabilities and shareholders’ equity

 

$

266,807

 

$

254,562

 

 

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

 

3



Table of Contents

 

Frederick County Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income (Unaudited)

 

 

 

For the Three
Months Ended
September 30,

 

For the Nine
Months Ended
September 30,

 

(dollars in thousands, except per share amounts)

 

2009

 

2008

 

2009

 

2008

 

Interest income:

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

3,305

 

$

3,554

 

$

9,748

 

$

10,601

 

Interest and dividends on investment securities:

 

 

 

 

 

 

 

 

 

Interest - taxable

 

115

 

185

 

443

 

586

 

Interest - tax exempt

 

58

 

87

 

174

 

285

 

Dividends

 

13

 

25

 

36

 

68

 

Interest on federal funds sold

 

1

 

46

 

2

 

180

 

Other interest income

 

16

 

3

 

37

 

35

 

Total interest income

 

3,508

 

3,900

 

10,440

 

11,755

 

Interest expense:

 

 

 

 

 

 

 

 

 

Interest on deposits

 

1,087

 

1,446

 

3,501

 

4,815

 

Interest on short-term borrowings

 

3

 

18

 

3

 

18

 

Interest on long-term borrowings

 

117

 

116

 

346

 

347

 

Interest on junior subordinated debentures

 

101

 

101

 

303

 

303

 

Total interest expense

 

1,308

 

1,681

 

4,153

 

5,483

 

Net interest income

 

2,200

 

2,219

 

6,287

 

6,272

 

Provision for loan losses

 

275

 

220

 

875

 

460

 

Net interest income after provision for loan losses

 

1,925

 

1,999

 

5,412

 

5,812

 

Noninterest income:

 

 

 

 

 

 

 

 

 

Securities gains

 

 

26

 

117

 

26

 

(Loss) gain on sale of foreclosed properties

 

(5

)

 

(37

)

15

 

Service fees

 

98

 

73

 

267

 

193

 

Other operating income

 

50

 

54

 

155

 

199

 

Total noninterest income

 

143

 

153

 

502

 

433

 

Noninterest expense:

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

917

 

966

 

2,807

 

2,885

 

Occupancy and equipment expenses

 

318

 

308

 

977

 

905

 

Other operating expenses

 

453

 

410

 

1,369

 

1,190

 

Total noninterest expense

 

1,688

 

1,684

 

5,153

 

4,980

 

Income before provision for income taxes

 

380

 

468

 

761

 

1,265

 

Provision for income tax expense

 

121

 

153

 

218

 

381

 

Net income

 

$

259

 

$

315

 

$

543

 

$

884

 

Basic earnings per share

 

$

0.18

 

$

0.22

 

$

0.37

 

$

0.61

 

Diluted earnings per share

 

$

0.18

 

$

0.21

 

$

0.37

 

$

0.59

 

Basic weighted average number of shares outstanding

 

1,460,900

 

1,460,674

 

1,460,835

 

1,460,626

 

Diluted weighted average number of shares outstanding

 

1,469,858

 

1,502,443

 

1,475,909

 

1,506,352

 

 

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

 

4



Table of Contents

 

Frederick County Bancorp, Inc. and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

 

Three Months Ended September 30,

 

(dollars in thousands)

 

Shares
Outstanding

 

Common
Stock

 

Additional Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income
(Loss)

 

Total
Shareholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, July 1, 2008

 

1,460,602

 

$

15

 

$

14,687

 

$

5,470

 

$

(108

)

$

20,064

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

315

 

 

315

 

Reclassification adjustment for (gains) losses realized, net of income taxes of $10

 

 

 

 

 

(16

)

(16

)

Changes in net unrealized gains (losses) on securities available for sale, net of income tax benefits of $44

 

 

 

 

 

(67

)

(67

)

Comprehensive income

 

 

 

 

 

 

232

 

Shares issued under stock option transactions

 

200

 

 

3

 

 

 

3

 

Balance, September 30, 2008

 

1,460,802

 

$

15

 

$

14,690

 

$

5,785

 

$

(191

)

$

20,299

 

Balance, July 1, 2009

 

1,460,802

 

$

15

 

$

14,690

 

$

6,223

 

$

19

 

$

20,947

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

259

 

 

259

 

Changes in net unrealized gains (losses) on securities available for sale, net of income taxes of $122

 

 

 

 

 

187

 

187

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

446

 

Shares issued under stock option transactions

 

1,000

 

 

10

 

 

 

10

 

Balance, September 30, 2009

 

1,461,802

 

$

15

 

$

14,700

 

$

6,482

 

$

206

 

$

21,403

 

 

5



Table of Contents

 

Frederick County Bancorp, Inc. and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

 

Nine Months Ended September 30,

 

(dollars in thousands)

 

Shares
Outstanding

 

Common
Stock

 

Additional Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income
(Loss)

 

Total
Shareholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2008

 

1,460,602

 

$

15

 

$

14,687

 

$

4,901

 

$

(23

)

$

19,580

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

884

 

 

884

 

Reclassification adjustment for (gains) losses realized, net of income taxes of $10

 

 

 

 

 

(16

)

(16

)

Changes in net unrealized gains (losses) on securities available for sale, net of income tax benefits of $99

 

 

 

 

 

(152

)

(152

)

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

716

 

Shares issued under stock option transactions

 

200

 

 

3

 

 

 

3

 

Balance, September 30, 2008

 

1,460,802

 

$

15

 

$

14,690

 

$

5,785

 

$

(191

)

$

20,299

 

Balance, January 1, 2009

 

1,460,802

 

$

15

 

$

14,690

 

$

5,939

 

$

(32

)

$

20,612

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

543

 

 

543

 

Reclassification adjustment for (gains) losses realized, net of income taxes of $46

 

 

 

 

 

(71

)

(71

)

Changes in net unrealized gains (losses) on securities available for sale, net of income taxes of $201

 

 

 

 

 

309

 

309

 

Comprehensive income

 

 

 

 

 

 

781

 

Shares issued under stock option transactions

 

1,000

 

 

10

 

 

 

10

 

Balance, September 30, 2009

 

1,461,802

 

$

15

 

$

14,700

 

$

6,482

 

$

206

 

$

21,403

 

 

6



Table of Contents

 

Frederick County Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

Nine Months Ended September 30,

 

(dollars in thousands)

 

2009

 

2008

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

543

 

$

884

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

245

 

250

 

Deferred income tax benefits

 

(10

)

(39

)

Provision for loan losses

 

875

 

460

 

Securities gains

 

(117

)

(26

)

Net premium amortization on investment securities

 

14

 

1

 

Losses (gains) on sale of foreclosed properties

 

37

 

(15

)

Excess tax benefit from equity-based awards

 

 

1

 

Decrease (increase) in accrued interest and other assets

 

251

 

(32

)

(Decrease) increase in accrued interest and other liabilities

 

(84

)

252

 

Net cash provided by operating activities

 

1,754

 

1,736

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of investment securities available for sale

 

(8,784

)

(3,053

)

Proceeds from sales of investment securities available for sale

 

4,115

 

5,040

 

Proceeds from maturities, prepayments and calls investment securities available for sale

 

2,454

 

4,802

 

Net redemption (purchases) of restricted stock

 

33

 

(159

)

Net increase in loans

 

(749

)

(3,356

)

Purchases of bank premises and equipment

 

(70

)

(76

)

Proceeds from sale of foreclosed properties

 

484

 

465

 

Net cash (used in) provided by investing activities

 

(2,517

)

3,663

 

Cash flows from financing activities:

 

 

 

 

 

Net increase in NOW, money market accounts, savings accounts and noninterest-bearing deposits

 

26,544

 

7,251

 

Net decrease in time deposits

 

(15,641

)

(3,219

)

Net increase in short-term borrowings

 

500

 

 

Proceeds from issuance of common stock

 

10

 

2

 

Net cash provided by financing activities

 

11,413

 

4,034

 

Net increase in cash and cash equivalents

 

10,650

 

9,433

 

Cash and cash equivalents – beginning of period

 

16,055

 

12,366

 

Cash and cash equivalents – end of period

 

$

26,705

 

$

21,799

 

Supplemental cash flow disclosures:

 

 

 

 

 

Interest paid

 

$

4,185

 

$

5,554

 

Income taxes paid

 

$

250

 

$

399

 

Foreclosed properties acquired in settlement of loans

 

$

654

 

$

 

 

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

 

7



Table of Contents

 

FREDERICK COUNTY BANCORP, INC.

 

Notes to Unaudited Consolidated Financial Statements

 

Note 1.  General:

 

Frederick County Bancorp, Inc. (the “Bancorp”), the parent 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 2000 and commenced banking operations in October 2001.  The Bank provides its customers with various banking services.  The Bank offers various loan and deposit products to its customers.  The Bank’s customers include individuals and commercial enterprises within its principal market area consisting of Frederick County, Maryland.  Additionally, the Bank maintains correspondent banking relationships and transacts daily federal funds sales on an unsecured basis with regional correspondent banks.  Note 4 discusses the types of securities the Bank invests in.  Note 5 discusses the types of lending that the Bank engages in.  The Bank does not have any significant concentrations to any one industry or customer.  Bancorp also has a subsidiary called FCBI Statutory Trust I.  See Note 7 for additional disclosures.

 

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions for Form 10-Q, Regulation S-X, and general practices within the banking industry.  Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements.  These statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in the Company’s 2008 Annual Report on Form 10-K.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included.  The results shown in this interim report are not necessarily indicative of results to be expected for any other period or for the full year ending December 31, 2009.  The Company has evaluated subsequent events for potential  recognition and/or disclosure through November 5, 2009, the date the consolidated financial statements included in this Quarterly Report on Form 10-Q were issued.

 

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  These estimates and assumptions are based on information available as of the date of the consolidated financial statements and could differ from actual results.

 

Recent Accounting Pronouncements

 

During December 2007, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance for business combinations in the Accounting Standards Codification (“ASC”).  This guidance is for business combinations which the acquisition date is on or after December 15, 2008.  These business combinations use “acquisition accounting” which recognizes and measures the goodwill acquired in the business combination and defines a bargain purchase, and requires the acquirer to recognize that excess as a gain attributable to the acquirer.  The Company adopted this new guidance effective March 31, 2009, and adoption did not have a material impact on the Company’s consolidated financial statements.

 

During December 2007, the FASB issued accounting guidance for consolidations which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statement, but separate from the parent’s equity.  This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Management adopted this guidance effective March 31, 2009, and adoption did not have a material impact on the Company’s consolidated financial condition or results of operations.

 

In March 2008, the FASB issued new guidance regarding disclosures for derivatives.  This guidance requires qualitative disclosures about objectives and strategies for using derivative, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. This guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Adoption of this new guidance, effective January 1, 2009, did not have a material impact on the consolidated financial statements.

 

In June 2008, the FASB issued guidance regarding earnings per share which requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. This guidance is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008, and requires a company to retrospectively adjust its earnings per share data. The Company adopted this guidance effective March 31, 2009, and adoption did not have a material effect on consolidated results of operations or earnings per share.

 

8



Table of Contents

 

In April 2009, the FASB issued guidance regarding the application of fair value accounting to address concerns regarding (1) determining whether a market is not active and a transaction is not orderly, (2) recognition and presentation of other-than-temporary impairments and (3) interim disclosures of fair values of financial instruments.  The Company adopted this guidance effective September 30, 2009, and adoption did not have a material effect on consolidated results of operations.

 

During May 2009, the FASB issued guidance regarding subsequent events.  The objective of this guidance is to establish general standards of accounting for and disclosure of events that occur after the balance sheet date, but before financial statements are issued or are available to be issued.  The Company adopted this guidance effective September 30, 2009, and adoption did not have a material impact on the Company’s consolidated financial condition or results of operations.

 

During June 2009, the FASB issued guidance on the transfer and servicing of financial assets.  This guidance eliminates the concept of a “qualifying special-purpose entity” from the original accounting guidance and removes the exception from applying FASB guidance on consolidation of variable interest entities, to qualifying special-purpose entities.  This guidance is effective at the beginning of a reporting entity’s first fiscal year that begins after November 15, 2009.  The Company does not anticipate that its adoption would have a material impact on the Company’s consolidated financial condition or results of operations.

 

During June 2009, the FASB guidance on the consolidation of variable interest entities.  This amends the original guidance, to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity (VIE).  This analysis identifies the primary beneficiary of a VIE as the enterprise that has both (a) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, and (b) the obligation to absorb losses of the entity that could potentially be significant to the VIE.  Additionally, this new guidance requires an enterprise to assess whether it has an implicit financial responsibility to ensure that a VIE operates as designed when determining it has the power to direct the activities of the VIE that most significantly impact the entity’s economic performance.  It is effective at the beginning of a company’s first fiscal year that begins after November 15, 2009.  The Company does not anticipate that its adoption would have a material impact on the Company’s consolidated financial condition or results of operations.

 

Note 2. Earnings Per Share:

 

Earnings per share (“EPS”) are disclosed as basic and diluted.  Basic EPS is generally computed by dividing net income by the weighted-average number of common shares outstanding for the period, whereas diluted EPS essentially reflects the potential dilution in basic EPS that could occur if other contracts to issue common stock were exercised.  As of September 30, 2009 and 2008, no common stock equivalents were excluded from the diluted EPS calculation.

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(dollars in thousands, except per share amounts)

 

2009

 

2008

 

2009

 

2008

 

Net income

 

$

259

 

$

315

 

$

543

 

$

884

 

Basic earnings per share

 

$

0.18

 

$

0.22

 

$

0.37

 

$

0.61

 

Diluted earnings per share

 

$

0.18

 

$

0.21

 

$

0.37

 

$

0.59

 

Basic weighted average number of shares outstanding

 

1,460,900

 

1,460,674

 

1,460,835

 

1,460,626

 

Effect of dilutive securities – stock options

 

8,958

 

41,769

 

15,074

 

45,726

 

Diluted weighted average number of shares outstanding

 

1,469,858

 

1,502,443

 

1,475,909

 

1,506,352

 

 

Note 3.  Employee Stock Option Plan:

 

The Company maintains an Employee Stock Option Plan that provides for grants of incentive and non-incentive stock options.  This plan has been presented to and approved by the Company’s shareholders.  The Company follows the stock compensation guidance of the ASC.   As of December 31, 2007, all outstanding stock options were fully vested.  No stock options were granted in 2008 or 2009 and, accordingly, net income has not been affected by stock-based compensation.   Any stock-based employee compensation for future grants will be determined at that time using the Black-Scholes or another appropriate option-pricing model.

 

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Table of Contents

 

Note 4.  Investment Portfolio:

 

The following tables set forth certain information regarding the Company’s investment portfolio at September 30, 2009 and December 31, 2008:

 

Available-for-sale portfolio

 

September 30, 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

 

$

520

 

$

7

 

$

 

$

527

 

4.46

%

Due after one year through five years

 

3,329

 

72

 

 

3,401

 

4.11

%

Due after five years through ten years

 

520

 

10

 

 

530

 

4.99

%

State and political subdivisions:

 

 

 

 

 

 

 

 

 

 

 

Due after five years through ten years

 

605

 

6

 

4

 

607

 

5.36

%

Due after ten years

 

5,081

 

78

 

 

5,159

 

5.94

%

Mortgage-backed debt securities

 

12,056

 

181

 

9

 

12,228

 

3.96

%

Equity securities

 

300

 

 

 

300

 

%

 

 

$

22,411

 

$

354

 

$

13

 

$

22,752

 

4.35

%

 

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

%

 

September 30, 2009

 

 

 

Continuous unrealized
losses existing for less than
12 months

 

Continuous unrealized
losses existing for 12
months and greater

 

Total

 

(dollars in thousands)

 

Estimated
Fair

Value

 

Unrealized
Losses

 

Estimated
Fair

Value

 

Unrealized
Losses

 

Estimated
Fair

Value

 

Unrealized
Losses

 

Mortgage-backed debt securities

 

$

1,721

 

$

9

 

$

 

$

 

$

1,721

 

9

 

State and political subdivisions

 

 

 

151

 

4

 

151

 

4

 

Total temporarily impaired securities

 

$

1,721

 

$

9

 

$

151

 

$

4

 

$

1,872

 

$

13

 

 

10



Table of Contents

 

December 31, 2008

 

 

 

Continuous unrealized
losses existing for less than
12 months

 

Continuous unrealized
losses existing for 12
months and greater

 

Total

 

(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 at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.  Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.  The Company has not recognized any other-than-temporary impairment in connection with the unrealized losses reflected in the preceding tables.  All of these declines can be attributable to increases in interest rates and not a change in credit quality.  As Management has the ability and intent to hold debt securities until maturity or until the unrealized loss is recouped, no declines are deemed to be other than temporary.

 

Restricted Stock

 

The following table shows the amounts of restricted stock as of September 30, 2009 and December 31, 2008:

 

 

 

September 30,

 

December 31,

 

(dollars in thousands)

 

2009

 

2008

 

Federal Home Loan Bank of Atlanta

 

$

952

 

$

1,000

 

Federal Reserve Bank

 

574

 

559

 

Atlantic Central Bankers Bank

 

40

 

40

 

 

 

$

1,566

 

$

1,599

 

 

Note 5.  Loans and Allowance for Loan Losses:

 

Loans consist of the following:

 

 

 

September 30,

 

% of

 

December 31,

 

% of

 

(dollars in thousands)

 

2009

 

Loans

 

2008

 

Loans

 

Real estate loans:

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

22,794

 

11

%

$

17,049

 

8

%

Mortgage loans:

 

 

 

 

 

 

 

 

 

Secured by 1 to 4 family residential properties

 

39,375

 

19

%

36,986

 

17

%

Secured by multi-family (5 or more) residential properties

 

12,243

 

6

%

8,856

 

4

%

Secured by commercial properties

 

98,585

 

46

%

105,637

 

51

%

Secured by farm land

 

7,433

 

4

%

6,747

 

3

%

Total mortgage loans

 

157,636

 

75

%

158,226

 

75

%

Loans to farmers

 

47

 

%

48

 

%

Commercial and industrial loans

 

28,618

 

13

%

34,779

 

16

%

Loans to individuals for household, family and other personal expenditures

 

2,055

 

1

%

1,738

 

1

%

 

 

211,150

 

100

%

211,840

 

100

%

Less allowance for loan losses

 

(3,210

)

 

 

(3,120

)

 

 

Net loans

 

$

207,940

 

 

 

$

208,720

 

 

 

 

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Table of Contents

 

Transactions in the allowance for loan losses are summarized as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(dollars in thousands)

 

2009

 

2008

 

2009

 

2008

 

Average total loans outstanding during period

 

$

208,906

 

$

213,884

 

$

209,434

 

$

211,353

 

Balance at beginning of period

 

$

3,038

 

$

2,584

 

$

3,120

 

$

2,640

 

Recoveries of loans previously charged-off

 

 

 

4

 

9

 

Loans charged-off (commercial and industrial)

 

(72

)

(104

)

(298

)

(327

)

Loans charged-off (commercial real estate)

 

(31

)

 

(479

)

(76

)

Loans charged-off (residential real estate)

 

 

 

 

(6

)

Loans charged-off (consumer)

 

 

 

(12

)

 

Net charge-offs

 

(103

)

(104

)

(785

)

(400

)

Provision charged to operating expenses

 

275

 

220

 

875

 

460

 

Balance at end of period

 

$

3,210

 

$

2,700

 

$

3,210

 

$

2,700

 

Ratios of net charge-offs to average loans

 

0.05

%

0.05

%

0.37

%

0.19

%

 

Note 6.   Deposits

 

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

 

 

 

September 30,

 

December 31,

 

(dollars in thousands)

 

2009

 

2008

 

Noninterest-bearing demand deposits

 

$

37,205

 

$

32,740

 

Interest-bearing demand deposits:

 

 

 

 

 

NOW accounts

 

16,572

 

11,472

 

Money market accounts

 

54,952

 

38,600

 

Savings accounts

 

4,515

 

3,888

 

Certificates of deposit:

 

 

 

 

 

$100,000 or more

 

46,263

 

57,835

 

Less than $100,000

 

68,279

 

72,348

 

Total deposits

 

$

227,786

 

$

216,883

 

 

Note 7. Trust preferred securities/junior subordinated debentures and other long-term borrowings:

 

In December 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 which Bancorp owns all of the common securities of $186,000. The principal asset of the Trust is a similar amount of Bancorp’s junior subordinated debentures. The junior 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, adjusted quarterly, equal to 163 basis points over three-month LIBOR. The junior subordinated debentures mature on December 15, 2036, and may be redeemed at par, at Bancorp’s option, on any interest payment date commencing December 15, 2011. The securities are redeemable prior to December 15, 2011, at a premium ranging up to 103.525% of the principal amount thereof, upon the occurrence of certain regulatory or legal events. The obligations of Bancorp with respect to the Trust’s preferred securities constitute a full and unconditional guarantee by Bancorp of Trust’s obligations with respect to the trust preferred securities to the extent set forth in the related guarantee. Subject to certain exceptions and limitations, Bancorp may elect from time to time to defer interest payments on the junior subordinated debentures, resulting in a deferral of distribution payments on the related trust preferred securities.   If the Company defers interest payments on the junior subordinated debentures, or otherwise is in default of the obligations, the Company would be prohibited from making dividend payments to its shareholders.

 

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

 

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Table of Contents

 

At September 30, 2009 and December 31, 2008, the Company had $10,000,000 in borrowings 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 by collateral consisting of a blanket lien on qualifying loans in the Bank’s residential mortgage loan portfolio and certain commercial real estate loans.

 

Note 8.  Noninterest Expense:

 

Noninterest expense consists of the following:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(dollars in thousands)

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Salaries

 

$

817

 

$

835

 

$

2,445

 

$

2,472

 

Deferred Personnel Costs

 

(20

)

(28

)

(53

)

(79

)

Payroll Taxes

 

54

 

56

 

179

 

184

 

Employee Insurance

 

55

 

59

 

173

 

171

 

Other Employee Benefits

 

11

 

44

 

63

 

137

 

Depreciation

 

80

 

84

 

245

 

250

 

Rent

 

96

 

85

 

290

 

239

 

Utilities

 

24

 

23

 

77

 

74

 

Repairs and Maintenance

 

59

 

58

 

183

 

167

 

ATM Expense

 

25

 

25

 

79

 

75

 

Other Occupancy and Equipment Expenses

 

34

 

33

 

103

 

100

 

Postage and Supplies

 

17

 

14

 

50

 

46

 

Data Processing

 

102

 

90

 

310

 

265

 

Advertising and Promotion

 

50

 

54

 

122

 

221

 

Legal

 

6

 

2

 

23

 

16

 

Insurance

 

13

 

16

 

34

 

41

 

Consulting

 

2

 

7

 

19

 

9

 

Courier

 

4

 

5

 

12

 

14

 

Audit Fees

 

45

 

62

 

141

 

185

 

Other

 

214

 

160

 

658

 

393

 

 

 

$

1,688

 

$

1,684

 

$

5,153

 

$

4,980

 

 

Note 9.  401(k) Profit Sharing Plan:

 

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

 

The Company made contributions to the Plan in the amounts of $0 and $35,000 for the three months ended September 30, 2009 and 2008, respectively, and $30,000 and $106,000, for the nine months then ended, respectively.  On April 1, 2009, the Company suspended its discretionary matching contribution and therefore, there was no contribution made in the third quarter of 2009.

 

Note 10.  Shareholders’ Equity:

 

Capital:

 

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company, once it exceeds $500 million in assets, and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.  The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

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Table of Contents

 

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined).  Management believes that the Company and the Bank met all capital adequacy requirements to which they are subject as of September 30, 2009.

 

As of September 30, 2009, the most recent notification from the regulatory agency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well capitalized 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 that notification which management believes have changed the Bank’s category.

 

The Company’s and the Bank’s actual capital amounts and ratios at September 30, 2009 and December 31, 2008 are presented in the following tables.

 

September 30, 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

 

$

27,196

 

11.88

%

$

9,154

 

4.00

%

N/A

 

N/A

 

Bank

 

$

26,398

 

11.59

%

$

9,114

 

4.00

%

$

13,671

 

6.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

To Risk-Weighted Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

30,057

 

13.13

%

$

18,308

 

8.00

%

N/A

 

N/A

 

Bank

 

$

29,246

 

12.84

%

$

18,228

 

8.00

%

$

22,785

 

10.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

To Average Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

27,196

 

10.37

%

$

10,492

 

4.00

%

N/A

 

N/A

 

Bank

 

$

26,398

 

10.10

%

$

10,456

 

4.00

%

$

13,070

 

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

%

 

14



Table of Contents

 

On June 26, 2007, the Company authorized the repurchase of up to 146,000 shares of its common stock, for an aggregate expenditure of not more than $4.5 million, through September 30, 2012, or earlier termination of the program by the Board of Directors.  Repurchases, if any, by the Company pursuant to this authorization are expected to enable the Company to repurchase its shares at an attractive price, and to provide a source of liquidity for the Company’s shares.  As of September 30, 2009, there have been no shares repurchased by the Company.

 

Note 11.  Fair Value Measurements

 

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

 

Level 1

 

Valuations for assets and liabilities traded in active exchange markets.  Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

 

 

 

Level 2

 

Valuations for assets and liabilities traded in less active dealer or broker markets.  Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

 

 

Level 3

 

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

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

 

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

 

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence.  In the absence of such evidence, management’s best estimate is used.

 

Impaired loans are evaluated and valued at the time the loan is identified as impaired, at the lower of cost or market value.  Market value is measured based on the value of the collateral securing these loans and is classified at a Level 3 in the fair value hierarchy.  Collateral may be real estate and/or business assets including equipment, inventory and/or accounts receivable.  The value of real estate collateral is determined based on appraisal by qualified licensed appraisers hired by the Company.  The value of business equipment, inventory and accounts receivable collateral is based on the net book value on the business’ financial statements and, if necessary, discounted based on management’s review and analysis.  Appraised and reported values may be discounted based on management’s historical knowledge, changes in market conditions from the time of valuation, and/or management’s expertise and knowledge of the client and client’s business.  Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors identified above.

 

15



Table of Contents

 

The following tables set forth the Company’s financial assets and liabilities that were accounted for or disclosed at fair value on a recurring and nonrecurring basis as of September 30, 2009.

 

 

 

 

 

 

 

Significant

 

 

 

 

 

Carrying

 

 

 

Other

 

Significant

 

 

 

Value

 

Quoted

 

Observable

 

Unobservable

 

Recurring basis

 

(Fair

 

Prices

 

Inputs

 

Inputs

 

(dollars in thousands)

 

Value)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Securities available for sale

 

$

22,752

 

$

 

$

22,752

 

$

 

 

 

 

 

 

 

 

Significant

 

 

 

 

 

Carrying

 

 

 

Other

 

Significant

 

 

 

Value

 

Quoted

 

Observable

 

Unobservable

 

Nonrecurring basis

 

(Fair

 

Prices

 

Inputs

 

Inputs

 

(dollars in thousands)

 

Value)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Impaired loans

 

$

11,193

 

$

 

$

 

$

11,193

 

Foreclosed properties

 

$

495

 

$

 

$

 

$

495

 

 

Note 12.  Fair Value of Financial Instruments

 

In accordance with the disclosure requirements of ASC financial instruments topic, the estimated fair values of the Company’s financial instruments are as follows:

 

 

 

September 30, 2009

 

December 31, 2008

 

(dollars in thousands)

 

Carrying
Amount

 

Fair Value

 

Carrying
Amount

 

Fair Value

 

FINANCIAL ASSETS

 

 

 

 

 

 

 

 

 

Cash  and cash equivalents

 

$

 26,705

 

$

 26,705

 

$

 16,055

 

$

 16,055

 

Investment securities available for sale

 

22,752

 

22,752

 

20,040

 

20,040

 

Restricted stock

 

1,566

 

1,566

 

1,599

 

1,599

 

Net loans

 

207,940

 

205,496

 

208,720

 

207,678

 

Accrued interest receivable

 

783

 

783

 

821

 

821

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES

 

 

 

 

 

 

 

 

 

Deposits

 

$

227,786

 

$

236,145

 

$

216,883

 

$

223,718

 

Short-term borrowings

 

500

 

500

 

 

 

Long-term borrowings

 

10,000

 

10,773

 

10,000

 

10,914

 

Junior subordinated debentures

 

6,186

 

5,973

 

6,186

 

6,048

 

Accrued interest payable

 

217

 

217

 

290

 

290

 

 

The following methods and assumptions were used to estimate the fair value disclosures for financial instruments as of September 30, 2009 and December 31, 2008:

 

Cash and cash equivalents:

 

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

 

Investment securities and restricted stock:

 

Fair values are based on quoted market prices, except for certain restricted stocks where fair value equals par value because of certain redemption restrictions.

 

Loans:

 

Fair values are estimated for portfolios of loans with similar financial characteristics.  Each portfolio is further segmented into fixed and adjustable rate interest terms by performing and non-performing categories.

 

The fair value of performing loans is calculated by discounting estimated cash flows using current rates at which similar loans would

 

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be made to borrowers with similar credit ratings and for the same remaining maturities.  The estimated cash flows do not anticipate prepayments.

 

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

 

Deposits:

 

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

 

Short-term borrowings:

 

The fair value of short-term borrowings is determined using rates currently available to the Company for debt with similar terms and remaining maturities.

 

Long-term borrowings:

 

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

 

Junior subordinated debentures:

 

The junior subordinated debentures are unsecured obligations of the Company and are subordinate and junior in right of payment to all present and future senior indebtedness of the Company.  The Company has entered into a guarantee, which together with its obligations under the junior subordinated debentures and the declaration of trust governing the Trust provides a full and unconditional guarantee of the Trust’s preferred securities.  The fair value of junior subordinated debentures is determined using rates currently available to the Company for debt with similar terms and remaining maturities.  See Note 7 for additional disclosures.

 

Accrued Interest:

 

The carrying amounts of accrued interest approximate fair value.

 

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

 

Forward-Looking Statements

 

This management’s discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 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, among other things, general economic trends, interest rates, product expansions and other matters.  Such forward-looking statements are identified by terminology such as “may”, “will”, “believe”, “expect”, “estimate”, “anticipate”, “likely”, “unlikely”, “continue”, or similar terms and are subject to numerous uncertainties, such as federal monetary policy, inflation, employment, profitability and consumer confidence levels, both nationally and in the Company’s market area, the health of the real estate and construction market in the Company’s market area, the Company’s ability to develop and market new products and to enter new markets, competitive challenges in the Company’s market, legislative changes and other factors, and as such, there can be no assurance that future events will develop in accordance with the forward-looking statements contained herein.  Readers are cautioned against placing undue reliance on any such forward-looking statement.  In addition, the Company’s past results of operations do not necessarily indicate its future results.

 

General

 

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

 

Bancorp, the parent company for the Bank, its wholly-owned subsidiary, was organized in September 2003. The Bank was incorporated under the laws of the state of Maryland in August 2000 and commenced banking operations in October 2001.  The Bank provides its

 

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customers with various banking services.  The Bank offers various loan and deposit products to their customers.  The Bank’s customers include individuals and commercial enterprises within its principal market area consisting of Frederick County, Maryland.  Additionally, the Bank maintains correspondent banking relationships and transacts daily federal funds sales on an unsecured basis with regional correspondent banks.  Note 4 discusses the types of securities in which the Bank invests.  Note 5 discusses the types of lending in which the Bank engages.  The Bank does not have any significant concentrations to any one industry or customer.  Bancorp also has a subsidiary called FCBI Statutory Trust I.  See Note 7 for additional disclosures.

 

Critical Accounting Policies

 

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and follow general practices within the industry in which it operates.  Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes.  These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments.  Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported.  Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event.  Carrying assets and liabilities at fair value inherently results in more financial statement volatility.  The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. The estimates used in management’s assessment of the adequacy of the allowance for loan losses require that management make assumptions about matters that are uncertain at the time of estimation.  Differences in these assumptions and differences between the estimated and actual losses could have a material effect.  For discussions related to the critical accounting policies of the Company, refer to the sections in this Management’s Discussion and Analysis entitled “Income Taxes” and “Allowance for Loan Losses.”

 

Loans

 

Loans decreased by $690,000, or (0.33)%, from December 31, 2008, to a balance of $211.15 million as of September 30, 2009, and by $367,000, or (0.17)% from September 30, 2008.  The Company has taken a low to moderate loan growth strategy to maintain its strong capital and liquidity positions during these current uncertain economic times, which may result in the periodic contraction of the loan portfolio.

 

Deposits

 

Deposits increased by $10.90 million, or 5.03%, from December 31, 2008 to a balance of $227.79 million as of September 30, 2009, and by $4.53 million, or 2.03% from September 30, 2008.  The Company’s deposit strategy involves reducing the Company’s reliance on higher cost certificates of deposit and placing more emphasis on noninterest-bearing demand deposits and other lower cost NOW and money market accounts.  The balance of certificates of deposit dropped to $114.54 million as of September 30, 2009 from $130.18 million as of December 31, 2008; while noninterest-bearing demand deposits increased to $37.21 million from $32.74 million, NOW and savings accounts increased to $21.09 million from $15.36 million, and money market accounts increased to $54.95 million from $38.60 million, all for the same periods.

 

Three Months Ended September 30, 2009 and 2008

 

Net income was $259,000 for the quarter ended September 30, 2009, as compared to $315,000 of net income for the same period in 2008.  The decrease in earnings for this quarter in 2009 is primarily related to a $55,000 increase in provision for loan losses and no securities gains, while there were $26,000 in securities gains in the same quarter of 2008.  Basic earnings per share for the three months ended September 30, 2009 and 2008 were $0.18 and $0.22, respectively, and were based on weighted-average number of shares outstanding of 1,460,900 and 1,460,674, respectively.  Diluted earnings per share for the three months ended September 30, 2009 and 2008 were $0.18 and $0.21, respectively, and were based on weighted-average number of shares outstanding of 1,469,858 and 1,502,443, respectively.

 

The Company experienced an annualized return on average assets of 0.39% and 0.49% for the three-month periods ended September 30, 2009 and 2008, respectively.  Additionally, the Company experienced an annualized return on average shareholders’ equity of 4.86% and 6.25% for the three-month periods ended September 30, 2009 and 2008, respectively.

 

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Nine Months Ended September 30, 2009 and 2008

 

Net income was $543,000 for the nine months ended September 30, 2009, as compared to $884,000 of net income for the same period in 2008.  The decrease in earnings for this period in 2009 is primarily related to a $415,000 increase in provision for loan losses.  Included in this nine-month period in 2009 are securities gains of $117,000, which were generated to offset the impact of the Federal Deposit Insurance Corporation (“FDIC”) one-time special assessment fee of $115,000.  Basic earnings per share for the nine months ended September 30, 2009 and 2008 were $0.37 and $0.61, respectively, and were based on weighted-average number of shares outstanding of 1,460,835 and 1,460,626, respectively.  Diluted earnings per share for the nine months ended September 30, 2009 and 2008 were $0.37 and $0.59, respectively, and were based on weighted-average number of shares outstanding of 1,475,909 and 1,506,352, respectively.

 

The Company experienced an annualized return on average assets of 0.28% and 0.45% for the nine-month periods ended September 30, 2009 and 2008, respectively.  Additionally, the Company experienced an annualized return on average shareholders’ equity of 3.43% and 5.84% for the nine-month periods ended September 30, 2009 and 2008, respectively.

 

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

 

The following tables show average balances of asset and liability categories, interest income and interest expense, and average yields and rates for the periods indicated.

 

Three Months Ended September 30,

 

 

 

2009

 

2008

 

(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

 

$

 1,072

 

$

 1

 

0.37

%

$

 8,782

 

$

 46

 

2.08

%

Interest bearing deposits in other banks

 

28,310

 

16

 

0.22

 

816

 

3

 

1.46

 

Investment securities (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable