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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 March 31, 2010

 

OR

 

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

 

For the transition period from                 to                

 

Commission File Number:  000-50407

 

FREDERICK COUNTY BANCORP, INC.

(Exact name of registrant 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 1,474,322 shares of Common Stock outstanding as of April 30, 2010.

 

 

 



Table of Contents

 

FREDERICK COUNTY BANCORP, INC. AND SUBSIDIARY

TABLE OF CONTENTS

 

PART I

FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

Consolidated Balance Sheets, March 31, 2010 and December 31, 2009

 

 

 

 

 

Consolidated Statements of Income, Three Months Ended March 31, 2010 and 2009

 

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity, Three Months Ended March 31, 2010 and 2009

 

 

 

 

 

Consolidated Statements of Cash Flows, Three Months Ended March 31, 2010 and 2009

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

 

 

 

Item 4T.

Controls and Procedures

 

 

 

PART II

OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

 

 

 

 

Item 1A.

Risk Factors

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

Item 3.

Defaults upon Senior Securities

 

 

 

 

Item 4.

Removed and Reserved

 

 

 

 

Item 5.

Other Information

 

 

 

 

Item 6.

Exhibits

 

 

 

 

 

Signatures

 

 

2



Table of Contents

 

Frederick County Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

 

 

 

March 31,

 

December 31,

 

(dollars in thousands)

 

2010

 

2009

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Cash and due from banks

 

$

1,412

 

$

1,447

 

Federal funds sold

 

1,172

 

938

 

Interest-bearing deposits in other banks

 

28,919

 

9,729

 

Cash and cash equivalents

 

31,503

 

12,114

 

Investment securities available-for-sale at fair value

 

28,052

 

24,077

 

Restricted stock

 

1,566

 

1,566

 

Loans

 

214,586

 

214,943

 

Less: Allowance for loan losses

 

(3,027

)

(3,127

)

Net loans

 

211,559

 

211,816

 

Bank premises and equipment

 

4,994

 

4,997

 

Other assets

 

3,890

 

3,989

 

Total assets

 

$

281,564

 

$

258,559

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Deposits:

 

 

 

 

 

Noninterest-bearing deposits

 

$

38,994

 

$

38,199

 

Interest-bearing deposits

 

203,137

 

181,113

 

Total deposits

 

242,131

 

219,312

 

Short-term borrowings

 

500

 

500

 

Long-term borrowings

 

10,000

 

10,000

 

Junior subordinated debentures

 

6,186

 

6,186

 

Accrued interest and other liabilities

 

671

 

811

 

Total liabilities

 

259,488

 

236,809

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

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

 

15

 

15

 

Additional paid-in capital

 

14,704

 

14,702

 

Retained earnings

 

7,295

 

6,987

 

Accumulated other comprehensive income

 

62

 

46

 

Total shareholders’ equity

 

22,076

 

21,750

 

Total liabilities and shareholders’ equity

 

$

281,564

 

$

258,559

 

 

The accompanying 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
March 31,

 

(dollars in thousands, except per share amounts)

 

2010

 

2009

 

Interest income:

 

 

 

 

 

Interest and fees on loans

 

$

3,289

 

$

3,213

 

Interest and dividends on investment securities:

 

 

 

 

 

Interest – taxable

 

115

 

172

 

Interest – tax exempt

 

80

 

58

 

Dividends

 

12

 

11

 

Interest on federal funds sold

 

 

1

 

Other interest income

 

8

 

9

 

Total interest income

 

3,504

 

3,464

 

Interest expense:

 

 

 

 

 

Interest on deposits

 

746

 

1,249

 

Interest on short-term borrowings

 

5

 

 

Interest on long-term borrowings

 

114

 

114

 

Interest on junior subordinated debentures

 

101

 

101

 

Total interest expense

 

966

 

1,464

 

Net interest income

 

2,538

 

2,000

 

Provision for loan losses

 

400

 

400

 

Net interest income after provision for loan losses

 

2,138

 

1,600

 

Noninterest income:

 

 

 

 

 

Loss on sale of foreclosed properties

 

 

(32

)

Service fees

 

91

 

84

 

Other operating income

 

46

 

56

 

Total noninterest income

 

137

 

108

 

Noninterest expense:

 

 

 

 

 

Salaries and employee benefits

 

1,060

 

979

 

Occupancy and equipment expenses

 

324

 

331

 

Other operating expenses

 

451

 

373

 

Total noninterest expense

 

1,835

 

1,683

 

Income before provision for income taxes

 

440

 

25

 

Provision for income tax expense (benefit)

 

132

 

(20

)

Net income

 

$

308

 

$

45

 

Basic earnings per share

 

$

0.21

 

$

0.03

 

Diluted earnings per share

 

$

0.21

 

$

0.03

 

Basic weighted average number of shares outstanding

 

1,461,802

 

1,460,802

 

Diluted weighted average number of shares outstanding

 

1,468,896

 

1,481,419

 

 

The accompanying 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 March 31,
(dollars in thousands)

 

Shares
Outstanding

 

Common
Stock

 

Additional
Paid-in
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income
(Loss)

 

Total
Shareholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2009

 

1,460,802

 

$

15

 

$

14,690

 

$

5,939

 

$

(32

)

$

20,612

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

45

 

 

45

 

Changes in net unrealized gains (losses) on securities available for sale, net of income taxes of $89

 

 

 

 

 

136

 

136

 

Comprehensive income

 

 

 

 

 

 

181

 

Balance, March 31, 2009

 

1,460,802

 

$

15

 

$

14,690

 

$

5,984

 

$

104

 

$

20,793

 

Balance, January 1, 2010

 

1,461,802

 

$

15

 

$

14,702

 

$

6,987

 

$

46

 

$

21,750

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

308

 

 

308

 

Changes in net unrealized gains (losses) on securities available for sale, net of income taxes of $10

 

 

 

 

 

16

 

16

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

324

 

Compensation expense from stock option transactions

 

 

 

2

 

 

 

2

 

Balance, March 31, 2010

 

1,461,802

 

$

15

 

$

14,704

 

$

7,295

 

$

62

 

$

22,076

 

 

5



Table of Contents

 

Frederick County Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

Three Months Ended March 31,

 

(dollars in thousands)

 

2010

 

2009

 

Cash flows from operating activities:

 

 

 

 

 

Net income

 

$

308

 

$

45

 

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

 

 

 

 

 

Depreciation and amortization

 

77

 

83

 

Deferred income taxes

 

82

 

157

 

Provision for loan losses

 

400

 

400

 

Net premium amortization on investment securities

 

60

 

 

Loss on sale of foreclosed properties

 

 

32

 

Decrease in accrued interest and other assets

 

19

 

387

 

(Decrease) increase in accrued interest and other liabilities

 

(150

)

141

 

Net cash provided by operating activities

 

796

 

1,245

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of investment securities available for sale

 

(6,139

)

 

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

 

2,130

 

609

 

Net purchases of restricted stock

 

 

(12

)

Net (increase) decrease in loans

 

(143

)

2,564

 

Purchases of bank premises and equipment

 

(74

)

(33

)

Proceeds from sale of foreclosed properties

 

 

331

 

Net cash (used in) provided by investing activities

 

(4,226

)

3,459

 

Cash flows from financing activities:

 

 

 

 

 

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

 

6,968

 

6,593

 

Net increase (decrease) in time deposits

 

15,851

 

(1,847

)

Net cash provided by financing activities

 

22,819

 

4,746

 

Net increase in cash and cash equivalents

 

19,389

 

9,450

 

Cash and cash equivalents – beginning of period

 

12,114

 

16,055

 

Cash and cash equivalents – end of period

 

$

31,503

 

$

25,505

 

Supplemental cash flow disclosures:

 

 

 

 

 

Interest paid

 

$

971

 

$

1,482

 

Income taxes paid

 

$

121

 

$

71

 

 

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

 

6


 


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 purchases.  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 trust, established to issue trust preferred securities, and two subsidiaries established to hold foreclosed properties.  The two subsidiaries established to hold foreclosed properties are known as FCB Holdings, Inc. (a direct subsidiary of Bancorp) and FCB Hagerstown, LLC (an indirect subsidiary of Bancorp).  See Note 7 for additional disclosures related to the subsidiary trust.

 

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 2009 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, 2010.

 

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

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance under ASC Topic 860 Transfers and Servicing for 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 adopted this guidance on January 1, 2010 and it did not have a material impact on the Company’s consolidated financial condition or results of operations.

 

In June 2009, the FASB issued new guidance under ASC Topic 810 Consolidation for 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 adopted this guidance on January 1, 2010 and it did not have a material impact on the Company’s consolidated financial condition or results of operations.

 

In January 2010, the FASB issued new guidance under ASC Topic 820 Fair Value Measurements and Disclosures to improve disclosures about fair value measurements.  The guidance requires entities to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the same.  It also requires Level 3 reconciliation to be presented on a gross basis disclosing purchases, sales, issuances and settlements separately.  The guidance is effective for interim and annual financial periods beginning after December 15, 2009 except for gross basis presentation for Level 3 reconciliation, which is effective for interim and annual periods beginning after December 15, 2010.  The disclosure requirements effective for interim and annual financial periods beginning after December 15, 2009 have been adopted for the interim period ended March 31, 2010.

 

7



Table of Contents

 

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 March 31, 2010 there were 3,000 common stock equivalents excluded from the diluted EPS calculation, but none as of March 31, 2009.

 

 

 

Three Months Ended
March 31,

 

(dollars in thousands, except per share amounts)

 

2010

 

2009

 

Net income

 

$

308

 

$

45

 

Basic earnings per share

 

$

0.21

 

$

0.03

 

Diluted earnings per share

 

$

0.21

 

$

0.03

 

Basic weighted average number of shares outstanding

 

1,461,802

 

1,460,802

 

Effect of dilutive securities — stock options

 

7,094

 

20,617

 

Diluted weighted average number of shares outstanding

 

1,468,896

 

1,481,419

 

 

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 guidance issued by FASB regarding stock compensation.   There were 3,000 stock options granted in December 2009 and no options granted in 2010.  All prior grants were fully vested and exercisable as of December 31, 2008.  The Company recognizes the cost of employee services received in exchange for an award of equity investment based on the grant-date fair value of the award.  That cost will be recognized over the vesting period of the award.  Stock-based compensation expense related to stock options for the three-month period ended March 31, 2010 was $2,000, whereas, no stock-based compensation was recognized in the three-month period ended March 31, 2009.  As of March 31, 2010, there was $4,000 of total unrecognized compensation cost related to non-vested stock options that will be expensed over the period April 1, 2010 through December 31, 2011.

 

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

 

 

 

December 31,

 

 

 

2009

 

Risk free interest rate of return

 

3.85

%

Expected option life (months)

 

120

 

Expected volatility

 

25

%

Expected dividends

 

2.50

%

 

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant.  The expected life is based on historical experience.  The expected volatility is based on historic volatility.  The dividend yield assumption is based on the Company’s expectation of dividend payouts.

 

8



Table of Contents

 

Note 4.  Investment Portfolio:

 

The following tables set forth certain information regarding the Company’s investment portfolio at March 31, 2010 and December 31, 2009:

 

Available-for-sale portfolio

 

March 31, 2010
(dollars in thousands)

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair
Value

 

Average
Yield

 

U.S. Treasury and other U.S. government agencies and corporations:

 

 

 

 

 

 

 

 

 

 

 

Due after one year through five years

 

$

488

 

$

28

 

$

 

516

 

4.83

%

Due after five years through ten years

 

468

 

30

 

 

498

 

5.00

%

State and political subdivisions:

 

 

 

 

 

 

 

 

 

 

 

Due after one year through five years

 

155

 

 

2

 

153

 

5.17

%

Due after five years through ten years

 

755

 

4

 

 

759

 

5.53

%

Due after ten years

 

6,934

 

56

 

7

 

6,983

 

5.90

%

Mortgage-backed debt securities

 

18,850

 

124

 

131

 

18,843

 

3.47

%

Equity securities

 

300

 

 

 

300

 

%

 

 

$

27,950

 

$

242

 

$

140

 

$

28,052

 

4.15

%

 

December 31, 2009
(dollars in thousands)

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair
Value

 

Average
Yield

 

U.S. Treasury and other U.S. government agencies and corporations:

 

 

 

 

 

 

 

 

 

 

 

Due within one year

 

$

490

 

$

3

 

$

 

$

493

 

4.46

%

Due after one year through five years

 

1,391

 

29

 

5

 

1,415

 

4.03

%

Due after five years through ten years

 

497

 

29

 

 

526

 

5.00

%

State and political subdivisions:

 

 

 

 

 

 

 

 

 

 

 

Due after five years through ten years

 

910

 

2

 

3

 

909

 

5.47

%

Due after ten years

 

6,935

 

35

 

28

 

6,942

 

5.90

%

Mortgage-backed debt securities

 

13,478

 

83

 

69

 

13,492

 

3.63

%

Equity securities

 

300

 

 

 

300

 

%

 

 

$

24,001

 

$

181

 

$

105

 

$

24,077

 

4.38

%

 

 

 

Continuous unrealized
losses existing for less than
12 months

 

Continuous unrealized
losses existing for 12
months and greater

 

Total

 

March 31, 2010
(dollars in thousands)

 

Estimated
Fair

Value

 

Unrealized
Losses

 

Estimated
Fair

Value

 

Unrealized
Losses

 

Estimated
Fair

Value

 

Unrealized
Losses

 

Mortgage-backed debt securities

 

$

11,257

 

$

131

 

$

 

$

 

$

11,257

 

$

131

 

State and political subdivisions

 

1,151

 

7

 

153

 

2

 

1,304

 

9

 

Total temporarily impaired securities

 

$

12,408

 

$

138

 

$

153

 

$

2

 

$

12,561

 

$

140

 

 

9



Table of Contents

 

 

 

Continuous unrealized
losses existing for less than
12 months

 

Continuous unrealized
losses existing for 12
months and greater

 

Total

 

December 31, 2009
(dollars in thousands)

 

Estimated
Fair

Value

 

Unrealized
Losses

 

Estimated
Fair

Value

 

Unrealized
Losses

 

Estimated
Fair

Value

 

Unrealized
Losses

 

U.S. Treasury and other U.S. government agencies and corporations

 

$

870

 

$

5

 

$

 

$

 

$

870

 

$

5

 

State and political subdivisions

 

4,112

 

28

 

152

 

3

 

4,264

 

31

 

Mortgage-backed debt securities

 

7,233

 

69

 

 

 

7,233

 

69

 

Total temporarily impaired securities

 

$

12,215

 

$

102

 

$

152

 

$

3

 

$

12,367

 

$

105

 

 

Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis.  This analysis requires management to consider various factors, which include (1) duration and magnitude of the decline in value, (2) the financial condition of the issuer or issuers and (3) the structure of the security. An impairment loss is recognized in earnings only when: (1) we intend to sell the debt security; (2) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis; or (3) we do not expect to recover the entire amortized cost basis of the security.  In situations where we intend to sell or when it is more likely than not that we will be required to sell the security, the entire impairment loss must be recognized in earnings.  In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in shareholders’ equity as a component of other comprehensive income, net of deferred taxes.  Credit loss is determined by calculating the present value of future cash flows of the security compared to the amortized cost of the security.  Realized gains or losses on the sale of investment and mortgage-backed securities are reported in earnings and determined using the amortized cost of the specific security sold.

 

Restricted Stock

 

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

 

 

 

March 31,

 

December 31,

 

(dollars in thousands)

 

2010

 

2009

 

Federal Home Loan Bank of Atlanta

 

$

952

 

$

952

 

Federal Reserve Bank

 

574

 

574

 

Atlantic Central Bankers Bank

 

40

 

40

 

 

 

$

1,566

 

$

1,566

 

 

Note 5.  Loans and Allowance for Loan Losses:

 

Loans consist of the following:

 

 

 

March 31,

 

% of

 

December 31,

 

% of

 

(dollars in thousands)

 

2010

 

Loans

 

2009

 

Loans

 

Real estate loans:

 

 

 

 

 

 

 

 

 

Construction and land development

 

$

18,097

 

8

%

$

15,726

 

7

%

Mortgage loans:

 

 

 

 

 

 

 

 

 

Secured by 1 to 4 family residential properties

 

39,293

 

18

%

36,369

 

17

%

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

 

11,876

 

6

%

12,348

 

6

%

Secured by commercial properties

 

108,051

 

50

%

106,378

 

49

%

Secured by farm land

 

7,811

 

4

%

6,995

 

3

%

Total mortgage loans

 

167,031

 

78

%

162,090

 

75

%

Loans to farmers

 

467

 

%

46

 

%

Commercial and industrial loans

 

27,539

 

13

%

35,351

 

17

%

Loans to individuals for household, family and other personal expenditures

 

1,873

 

1

%

1,730

 

1

%

 

 

214,586

 

100

%

214,943

 

100

%

Less allowance for loan losses

 

(3,027

)

 

 

(3,127

)

 

 

Net loans

 

$

211,559

 

 

 

$

211,816

 

 

 

 

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

 

 

 

Three Months Ended
March 31,

 

(dollars in thousands)

 

2010

 

2009

 

Average total loans outstanding during period

 

$

214,714

 

$

211,872

 

Balance at beginning of period

 

$

3,127

 

$

3,120

 

Recoveries of loans previously charged-off

 

 

3

 

Loans charged-off (commercial and industrial)

 

 

(226

)

Loans charged-off (commercial real estate)

 

(500

)

(448

)

Loans charged-off (consumer)

 

 

(11

)

Net charge-offs

 

(500

)

(682

)

Provision charged to operating expenses

 

400

 

400

 

Balance at end of period

 

$

3,027

 

$

2,838

 

Ratios of net charge-offs to average loans

 

0.23

%

0.32

%

 

Note 6.   Deposits

 

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

 

 

 

March 31,

 

December 31,

 

(dollars in thousands)

 

2010

 

2009

 

Noninterest-bearing demand deposits

 

$

38,994

 

$

38,199

 

Interest-bearing demand deposits:

 

 

 

 

 

NOW accounts

 

13,463

 

12,366

 

Money market accounts

 

59,943

 

54,886

 

Savings accounts

 

4,853

 

4,835

 

Certificates of deposit:

 

 

 

 

 

$100,000 or more

 

51,099

 

42,752

 

Less than $100,000

 

73,779

 

66,274

 

Total deposits

 

$

242,131

 

$

219,312

 

 

Note 7. Trust 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.

 

At March 31, 2010 and December 31, 2009, 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

 

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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
March 31,

 

(dollars in thousands)

 

2010

 

2009

 

 

 

 

 

 

 

Salaries

 

$

881

 

$

814

 

Deferred Personnel Costs

 

(14

)

(13

)

Payroll Taxes

 

76

 

67

 

Employee Insurance

 

62

 

63

 

Other Employee Benefits

 

55

 

48

 

Depreciation

 

77

 

84

 

Rent

 

104

 

97

 

Utilities

 

27

 

28

 

Repairs and Maintenance

 

57

 

61

 

ATM Expense

 

24

 

27

 

Other Occupancy and Equipment Expenses

 

35

 

34

 

Postage and Supplies

 

15

 

19

 

Data Processing

 

98

 

97

 

Advertising and Promotion

 

70

 

34

 

FDIC insurance

 

81

 

47

 

Legal

 

10

 

11

 

Insurance

 

14

 

12

 

Consulting

 

5

 

11

 

Courier

 

4

 

4

 

Audit Fees

 

48

 

45

 

Other

 

106

 

93

 

 

 

$

1,835

 

$

1,683

 

 

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 $42,000 and $33,000 for the three months ended March 31, 2010 and 2009, respectively.

 

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.

 

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum

 

12



Table of Contents

 

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 March 31, 2010.

 

As of March 31, 2010, 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 March 31, 2010 and December 31, 2009 are presented in the following tables.

 

 

 

 

 

 

 

 

 

 

 

Minimum To Be Well

 

 

 

 

 

 

 

 

 

 

 

Capitalized Under

 

 

 

 

 

 

 

For Capital

 

Prompt Corrective

 

March 31, 2010

 

Actual

 

Adequacy Purposes

 

Action Provisions

 

(dollars in thousands)

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Tier 1 Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

To Risk-Weighted Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

28,014

 

12.03

%

$

9,315

 

4.00

%

N/A

 

N/A

 

Bank

 

$

27,363

 

11.79

%

$

9,280

 

4.00

%

$

13,920

 

6.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

To Risk-Weighted Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

30,925

 

13.28

%

$

18,630

 

8.00

%

N/A

 

N/A

 

Bank

 

$

30,263

 

13.04

%

$

18,560

 

8.00

%

$

23,201

 

10.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

To Average Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

28,014

 

10.60

%

$

10,568

 

4.00

%

N/A

 

N/A

 

Bank

 

$

27,363

 

10.39

%

$

10,532

 

4.00

%

$

13,164

 

5.00

%

 

 

 

 

 

 

 

 

 

 

 

Minimum To Be Well

 

 

 

 

 

 

 

 

 

 

 

Capitalized Under

 

 

 

 

 

 

 

For Capital

 

Prompt Corrective

 

December 31, 2009

 

Actual

 

Adequacy Purposes

 

Action Provisions

 

(dollars in thousands)

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Amount

 

Ratio

 

Tier 1 Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

To Risk-Weighted Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

27,704

 

11.81

%

$

9,384

 

4.00

%

N/A

 

N/A

 

Bank

 

$

26,987

 

11.55

%

$

9,344

 

4.00

%

$

14,016

 

6.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

To Risk-Weighted Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

30,636

 

13.06

%

$

18,767

 

8.00

%

N/A

 

N/A

 

Bank

 

$

29,907

 

12.80

%

$

18,688

 

8.00

%

$

23,360

 

10.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tier 1 Capital

 

 

 

 

 

 

 

 

 

 

 

 

 

To Average Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

27,704

 

10.53

%

$

10,522

 

4.00

%

N/A

 

N/A

 

Bank

 

$

26,987

 

10.24

%

$

10,545

 

4.00

%

$

13,181

 

5.00

%

 

13



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 March 31, 2010, there have been no shares repurchased by the Company.

 

Note 11.  Fair Value Measurements

 

The Company follows the new guidance issued by the FASB under ASC Topic 825 Financial Instruments 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.

 

14



Table of Contents

 

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

 

 

 

 

 

 

 

Significant

 

 

 

 

 

Carrying

 

 

 

Other

 

Significant

 

 

 

Value

 

Quoted

 

Observable

 

Unobservable

 

 

 

(Fair

 

Prices

 

Inputs

 

Inputs

 

(dollars in thousands)

 

Value)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Securities available for sale

 

$

28,052

 

$

 

$

28,052

 

$

 

 

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

 

 

 

 

 

 

 

Significant

 

 

 

 

 

Carrying

 

 

 

Other

 

Significant

 

 

 

Value

 

Quoted

 

Observable

 

Unobservable

 

 

 

(Fair

 

Prices

 

Inputs

 

Inputs

 

(dollars in thousands)

 

Value)

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Impaired loans:

 

 

 

 

 

 

 

 

 

Construction

 

$

2,428

 

$

 

$

 

$

2,428

 

Commercial real estate

 

5,738

 

 

 

5,738

 

Commercial and industrial

 

3,532

 

 

 

3,532

 

Residential real estate

 

515

 

 

 

515

 

Total impaired loans

 

$

12,213

 

$

 

$

 

$

12,213

 

Foreclosed properties

 

$

495

 

$

 

$

 

$

495

 

 

The following table provides a reconciliation of all assets measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2010.

 

 

 

Foreclosed

 

Impaired

 

(dollars in thousands)

 

Properties

 

Loans

 

Balance at December 31, 2009

 

$

495

 

$

12,350

 

Total net gains (losses) for the period included in:

 

 

 

 

 

Gain on sale of foreclosed properties

 

 

 

Other comprehensive gain (loss)

 

 

 

Purchases

 

 

 

Sales

 

 

 

Transfers in

 

 

242

 

Transfers out

 

 

(379

)

Balance at March 31, 2010

 

$

495

 

$

12,213

 

 

15


 


Table of Contents

 

Note 12.  Fair Value of Financial Instruments

 

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

 

 

 

March 31, 2010

 

December 31, 2009

 

(dollars in thousands)

 

Carrying
Amount

 

Fair Value

 

Carrying
Amount

 

Fair Value

 

FINANCIAL ASSETS

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

31,503

 

$

31,503

 

$

12,114

 

$

12,114

 

Investment securities available for sale

 

28,052

 

28,052

 

24,077

 

24,077

 

Restricted stock

 

1,566

 

1,566

 

1,566

 

1,566

 

Net loans

 

211,559

 

212,450

 

211,816

 

212,777

 

Accrued interest receivable

 

858

 

858

 

871

 

871

 

 

 

 

 

 

 

 

 

 

 

FINANCIAL LIABILITIES

 

 

 

 

 

 

 

 

 

Deposits

 

$

242,131

 

$

248,054

 

$

219,312

 

$

224,694

 

Short-term borrowings

 

500

 

500

 

500

 

500

 

Long-term borrowings

 

10,000

 

10,720

 

10,000

 

10,695

 

Junior subordinated debentures

 

6,186

 

5,984

 

6,186

 

5,960

 

Accrued interest payable

 

189

 

189

 

194

 

194

 

 

The following methods and assumptions were used to estimate the fair value disclosures for financial instruments as of March 31, 2010 and December 31, 2009:

 

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 for Level 1 and 2, 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 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.

 

16



Table of Contents

 

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 customers with various banking services, from three banking offices in the City of Frederick and one in Walkersville, Maryland.  The Bank is currently planning to establish a fifth banking office located in the City of Frederick, which is subject to regulatory approvals and construction, and is expected to open in the first quarter of 2011.  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 purchases.  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 trust, established to issue trust preferred securities, and two subsidiaries established to hold foreclosed properties.  The two subsidiaries established to hold foreclosed properties are known as FCB Holdings, Inc. (a direct subsidiary of Bancorp) and FCB Hagerstown, LLC (an indirect subsidiary of Bancorp).  See Note 7 for additional disclosures related to the subsidiary trust.

 

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,

 

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

 

Deposits

 

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

 

Three Months Ended March 31, 2010 and 2009

 

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

 

The Company experienced an annualized return on average assets of 0.47% and 0.07% for the three-month periods ended March 31, 2010 and 2009, respectively.  Additionally, the Company experienced an annualized return on average shareholders’ equity of 5.55% and 0.86% for the three-month periods ended March 31, 2010 and 2009, respectively.

 

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

 

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

 

 

 

2010

 

2009

 

Three Months Ended March 31,
(dollars in thousands)

 

Average
daily
balance

 

Interest
Income/
Expense

 

Average
Yield/
rate

 

Average
daily
balance

 

Interest
Income/
Expense

 

Average
Yield/
rate

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold

 

$

1,086

 

$

 

%

$

1,127

 

$

1

 

0.36

%

Interest bearing deposits in other banks

 

15,500

 

8

 

0.21

 

17,102

 

9

 

0.21

 

Investment securities (1):

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

17,777

 

127

 

2.90

 

15,814

 

183

 

4.69

 

Tax-exempt (2)

 

7,845

 

121

 

6.26

 

5,686

 

88

 

6.28

 

Loans (3)

 

214,714

 

3,322

 

6.27

 

211,872

 

3,229

 

6.18

 

Total interest-earning assets

 

256,922

 

3,578

 

5.65

 

251,601

 

3,510

 

5.66

 

Noninterest-earning assets

 

7,267

 

 

 

 

 

5,016

 

 

 

 

 

Total assets

 

$

264,189

 

 

 

 

 

$

256,617

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

NOW accounts

 

$

12,359

 

5

 

0.16

%

$

11,917

 

7

 

0.24

%

Savings accounts

 

4,874

 

1

 

0.08

 

4,136

 

3

 

0.29

 

Money market accounts

 

58,143

 

166

 

1.16

 

38,757

 

115

 

1.20

 

Certificates of deposit $100,000 or more

 

43,195

 

231

 

2.17

 

55,838

 

489

 

3.55

 

Certificates of deposit less than $100,000

 

67,689

 

343

 

2.06

 

74,184

 

635

 

3.47

 

Short-term borrowings

 

500

 

5

 

4.06

 

 

 

 

Long-term borrowings

 

10,000

 

114

 

4.62

 

10,000

 

114

 

4.62

 

Junior subordinated debentures

 

6,186

 

101

 

6.62

 

6,186

 

101

 

6.62

 

Total interest-bearing liabilities

 

202,946

 

966

 

1.93

 

201,018

 

1,464

 

2.95

 

Noninterest-bearing deposits

 

38,353

 

 

 

 

 

34,170

 

 

 

 

 

Noninterest-bearing liabilities

 

706

 

 

 

 

 

545

 

 

 

 

 

Total liabilities

 

242,005

 

 

 

 

 

235,733

 

 

 

 

 

Total shareholders’ equity

 

22,184

 

 

 

 

 

20,884

 

 

 

 

 

Total liabilities and shareholders’ equity

 

$

264,189

 

 

 

 

 

$

256,617

 

 

 

 

 

Net interest income

 

 

 

$

2,612

 

 

 

 

 

$

2,046

 

 

 

Net interest spread

 

 

 

 

 

3.72

%

 

 

 

 

2.71

%

Net interest margin

 

 

 

 

 

4.12

%

 

 

 

 

3.30

%

 


(1)          Yields on securities available-for-sale have 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 $41,000 in 2010 and $30,000 in 2009 are included in the calculation of the tax-exempt investment interest income.

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

 

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Rate/Volume Analysis

 

The following tables indicate the changes in interest income and interest expense that are attributable to changes in average volume and average rates, in comparison with the same period in the preceding year on a fully taxable equivalent basis.  The change in interest due to the combined rate-volume variance has been allocated entirely to the change in rate.

 

 

 

Three Months Ended March 31,
2010 compared to 2009

 

 

 

Increase (decrease)
Due to

 

Net
increase

 

(dollars in thousands)

 

Volume

 

Rate

 

(decrease)

 

Interest income

 

 

 

 

 

 

 

Interest-earning assets:

 

 

 

 

 

 

 

Federal funds sold

 

$

 

$

(1

)

$

(1

)

Interest-bearing deposits in other banks

 

(1

)

 

(1

)

Investment securities:

 

 

 

 

 

 

 

Taxable

 

23

 

(79

)

(56

)

Tax-exempt

 

34

 

(1

)

33

 

Loans

 

44

 

49

 

93

 

Total interest income

 

100

 

(32

)

68