UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(MARK ONE)

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

For the Quarterly Period Ended March 31, 2009

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.)

30 West Patrick 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). Yes o No o

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

State the number of shares of each of the issuer’s classes of common equity, as of the latest practical date. There were 1,460,802 shares of Common Stock outstanding as of April 30, 2009.

Table of Contents

Frederick County Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

(dollars in thousands)	March 31, 2009			December 31, 2008
	(unaudited)
ASSETS
Cash and due from banks	$	893		$	808
Federal funds sold	1,175			1,091
Interest-bearing deposits in other banks	23,437			14,156
Cash and cash equivalents	25,505			16,055
Investment securities available-for-sale at fair value	19,654			20,040
Restricted stock	1,611			1,599
Loans	208,231			211,840
Less: Allowance for loan losses	(2,838		)	(3,120		)
Net loans	205,393			208,720
Bank premises and equipment	5,171			5,221
Other assets	2,364			2,927
Total assets	$	259,698		$	254,562

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities
Deposits:
Noninterest-bearing deposits	$	33,982		$	32,740
Interest-bearing deposits	187,647			184,143
Total deposits	221,629			216,883
Long-term borrowings	10,000			10,000
Junior subordinated debentures	6,186			6,186
Accrued interest and other liabilities	1,090			881
Total liabilities	238,905			233,950

Shareholders’ Equity
Common stock, per share par value $.01; 10,000,000 shares authorized; 1,460,802 and 1,460,802 shares issued and outstanding, respectively	15			15
Additional paid-in capital	14,690			14,690
Retained earnings	5,984			5,939
Accumulated other comprehensive income (loss)	104			(32		)
Total shareholders’ equity	20,793			20,612
Total liabilities and shareholders’ equity	$	259,698		$	254,562

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

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

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

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, except shares outstanding)	Shares Outstanding	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity

Balance, January 1, 2008	1,460,602	$	15	$	14,687	$	4,901	$	(23	)	$	19,580
Comprehensive income:
Net income	—	—		—		300		—			300
Changes in net unrealized gains on securities available for sale, net of income taxes of $149	—	—		—		—		229			229
Comprehensive income											529
Balance, March 31, 2008	1,460,602	$	15	$	14,687	$	5,201	$	206		$	20,109
Balance, January 1, 2009	1,460,802	$	15	$	14,690	$	5,939	$	(32	)	$	20,612
Comprehensive income:
Net income	—	—		—		45		—			45
Changes in net unrealized gains on securities available for sale, net of income taxes of $89	—	—		—		—		136			136
Comprehensive income											181
Balance, March 31, 2009	1,460,802	$	15	$	14,690	$	5,984	$	104		$	20,793

Table of Contents

Frederick County Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

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

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

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. The Company 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 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

Statement of Financial Accounting Standards No. 141 (Revised 2007), Business Combinations (“SFAS 141(R)”). During December 2007, the FASB issued SFAS 141(R). SFAS 141(R) 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. In contrast, Statement 141 required the “negative goodwill” amount to be allocated as a pro rata reduction of the amounts assigned to assets acquired. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after December 15, 2008. The Company adopted SFAS No. 141R effective March 31, 2009, and adoption did not have a material impact on the Company’s consolidated financial statements.

Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51 (“SFAS 160”). During December 2007, the FASB issued SFAS 160 to establish 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. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Management adopted this Statement effective March 31, 2009, and adoption did not have a material impact on the Company’s consolidated financial condition or results of operations.

Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133 (“SFAS 161”) . SFAS 161 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. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Adoption of SFAS No. 141R did not have a material impact on the consolidated financial statements.

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

Table of Contents

FASB Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities (“FSP EITF 03-6-1”). FSP EITF 03-6-1 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. FSP EITF 03-6-1 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 FSP EITF 03-6-1 effective March 31, 2009, and adoption did not have a material effect on consolidated results of operations or earnings per share.

FASB Staff Positions FAS 107-1 and APB 28-1, FAS 157-4, FAS 115-2 and FAS 124-2, Other Than Temporary Impairment. FASB has issued FSPs 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 FSPs will be effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company will adopt the FSPs effective for the period ending June 30, 2009, but does not anticipate that adoption will result in a material effect on consolidated 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 March 31, 2009 and 2008, no common stock equivalents were excluded from the diluted EPS calculation.

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

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 of the Statements of Financial Accounting Standards No. 123 Accounting for Stock-Based Compensation and No. 123(R) Share-Based Payment. 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.

Table of Contents

Note 4. Investment Portfolio:

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

Available-for-sale portfolio

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

December 31, 2008 (dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Average Yield
U.S. Treasury and other U.S. government agencies and corporations:
Due after one year through five years	$	2,283	$	20	$	1	$	2,302	4.81	%
Due after five years through ten years	645		5		—		650		5.00	%
State and political subdivisions:
Due after five years through ten years	405		—		13		392		5.25	%
Due after ten years	5,281		15		202		5,094		5.93	%
Mortgage-backed debt securities	11,178		166		42		11,302		5.11	%
Equity securities	300		—		—		300		—	%
	$	20,092	$	206	$	258	$	20,040	5.21	%

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

Table of Contents

	Continuous unrealized losses existing for less than 12 months				Continuous unrealized losses existing for 12 months and greater				Total
December 31, 2008 (dollars in thousands)	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
U.S. Treasury and other U.S. government agencies and corporations	$	942	$	1	$	—	$	—	$	942	$	1
State and political subdivisions	3,299		204		192		11		3,491		215
Mortgage-backed debt securities	2,448		42		—		—		2,448		42
Total temporarily impaired securities	$	6,689	$	247	$	192	$	11	$	6,881	$	258

Management evaluates securities for other-than-temporary impairment 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 March 31, 2009 and December 31, 2008:

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

Note 5. Loans and Allowance for Loan Losses:

Loans consist of the following:

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

Table of Contents

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

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

Note 6. Deposits

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

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

Note 7. Trust preferred securities/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.

Table of Contents

At March 31, 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.

Note 8. Noninterest Expense:

Noninterest expense consists of the following:

	Three Months Ended March 31,
(dollars in thousands)	2009			2008

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

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 $33,000 and $35,000 for the first three months in 2009 and 2008, respectively. On April 1, 2009, the Company suspended its discretionary matching contribution.

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.

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 March 31, 2009.

As of March 31, 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 March 31, 2009 and December 31, 2008 are presented in the following tables.

March 31, 2009	Actual				For Capital Adequacy Purposes				Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Tier 1 Capital
To Risk-Weighted Assets
Company	$	26,689	11.87	%	$	8,990	4.00	%	N/A		N/A
Bank	$	25,746	11.49	%	$	8,965	4.00	%	$	13,447	6.00	%

Total Capital
To Risk-Weighted Assets
Company	$	29,498	13.12	%	$	17,980	8.00	%	N/A		N/A
Bank	$	28,548	12.74	%	$	17,930	8.00	%	$	22,412	10.00	%

Tier 1 Capital
To Average Assets
Company	$	26,689	10.40	%	$	10,265	4.00	%	N/A		N/A
Bank	$	25,746	10.05	%	$	10,245	4.00	%	$	12,807	5.00	%

December 31, 2008	Actual				For Capital Adequacy Purposes				Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Tier 1 Capital
To Risk-Weighted Assets
Company	$	26,644	11.59	%	$	9,194	4.00	%	N/A		N/A
Bank	$	25,637	11.18	%	$	9,174	4.00	%	$	13,761	6.00	%


Total Capital
To Risk-Weighted Assets
Company	$	29,517	12.84	%	$	18,387	8.00	%	N/A		N/A
Bank	$	28,504	12.43	%	$	18,348	8.00	%	$	22,936	10.00	%

Tier 1 Capital
To Average Assets
Company	$	26,644	10.31	%	$	10,338	4.00	%	N/A		N/A
Bank	$	25,637	9.94	%	$	10,319	4.00	%	$	12,899	5.00	%

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 June 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, 2009, there have been no shares repurchased by the Company.

Note 11. Fair Value

The Company follows the guidance of State of Financial Accounting Standards (“SFAS”) 159, The Fair Value Option for Financial Assets and Liabilities. This Statement 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. In conjunction with SFAS 159, the Company also follows the guidance of SFAS 157, Fair Value Measurements. SFAS 157 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 SFAS 157, fair value measurements are not adjusted for transaction costs. SFAS 157 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 SFAS 157 are described below.

Level 1		Valuations for assets and liabilities traded in active exchange markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2		Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3		Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

A 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 SFAS 157, 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, and certain physical commodities. 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

Table of Contents

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.

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 March 31, 2009.

The following tables show details of the financial instruments as of March 31, 2009 for which fair value accounting was applied:

Recurring basis

Significant

Carrying

Other

Significant

Value

Quoted

Observable

Unobservable

(Fair

Prices

Inputs

(dollars in thousands)

Value)

(Level 1)

(Level 2)

(Level 3)

Securities available for sale

19,654

—

19,654

—

Nonrecurring basis

Significant

Carrying

Other

Significant

Value

Quoted

Observable

Unobservable

(Fair

Prices

Inputs

(dollars in thousands)

Value)

(Level 1)

(Level 2)

(Level 3)

Impaired loans

1,076

—

1,076

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. 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. The Company 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

Table of Contents

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.

	2009						2008
Three Months Ended March 31, (dollars in thousands)	Average daily balance		Interest Income/ Expense		Average Yield/ rate		Average daily balance		Interest Income/ Expense		Average Yield/ rate
Assets
Interest-earning assets:
Federal funds sold	$	1,127	$	1	0.36	%	$	9,625	$	77	3.21	%
Interest bearing deposits in other banks	17,102		9		0.21		1,385		10		2.90
Investment securities (1):
Taxable	15,814		183		4.69		17,530		220		5.03
Tax-exempt (2)	5,686		88		6.28		9,820		150		6.13
Loans (3)	211,872		3,229		6.18		210,436		3,624		6.91
Total interest-earning assets	251,601		3,510		5.66		248,796		4,081		6.58
Noninterest-earning assets	5,016						9,263
Total assets	$	256,617					$	258,059

Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
NOW accounts	$	11,917	7		0.24	%	$	12,234	6		0.20	%
Savings accounts	4,136		3		0.29		4,178		5		0.48
Money market accounts	38,757		115		1.20		38,768		235		2.43
Certificates of deposit $100,000 or more	55,838		489		3.55		59,731		700		4.70
Certificates of deposit less than $100,000	74,184		635		3.47		72,198		828		4.60
Long-term borrowings	10,000		114		4.62		10,000		115		4.61
Junior subordinated debentures	6,186		101		6.62		6,186		101		6.55
Total interest-bearing liabilities	201,018		1,464		2.95		203,295		1,990		3.93
Noninterest-bearing deposits	34,170						33,797
Noninterest-bearing liabilities	545						932
Total liabilities	235,733						238,024
Total shareholders’ equity	20,884						20,035
Total liabilities and shareholders’ equity	$	256,617					$	258,059
Net interest income			$	2,046					$	2,091
Net interest spread					2.71	%					2.65	%
Net interest margin					3.30	%					3.37	%

(1)	Yields on securities available-for-sale have been calculated on the basis of historical cost and do not give effect to changes in the fair value of those securities, which is reflected as a component of shareholders’ equity.
(2)	Presented on a taxable-equivalent basis using the statutory federal income tax rate of 34%. Taxable-equivalent adjustments of $30,000 in 2009 and $51,000 in 2008 are included in the calculation of the tax-exempt investment interest income.
(3)	Presented on a taxable-equivalent basis using the statutory federal income tax rate of 34%. Taxable-equivalent adjustments of $16,000 in 2009 and $14,000 in 2008 are included in the calculation of the loan interest income. Net loan origination income (expense) in interest income totaled $(4,000) in 2009 and $4,000 in 2008.

Table of Contents

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, 2009 compared to 2008
	Increase (decrease) Due to						Net Increase (Decrease)
(dollars in thousands)	Volume			Rate
Interest income
Interest-earning assets:
Federal funds sold	$	(68	)	$	(8	)	$	(76	)
Interest-bearing deposits in other banks	114			(115		)	(1		)
Investment securities:
Taxable	(22		)	(15		)	(37		)
Tax-exempt	(63		)	1			(62		)
Loans	25			(420		)	(395		)
Total interest income	(14		)	(557		)	(571		)

Interest expense
Interest-bearing liabilities:
NOW accounts	—			1			1
Savings accounts	—			(2		)	(2		)
Money market accounts	—			(120		)	(120		)
Certificates of deposit $100,000 or more	(46		)	(165		)	(211		)
Certificates of deposit less than $100,000	23			(216		)	(193		)
Long-term borrowings	—			(1		)	(1		)
Total interest expense	(23		)	(503		)	(526		)
Net interest income	$	9		$	(54	)	$	(45	)

Net Interest Income

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

Three Months Ended March 31, 2009 and 2008

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

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

Table of Contents

Noninterest Income

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

Noninterest Expense

See Note 8 to the unaudited consolidated financial statements for a schedule showing a detailed breakdown of the Company’s noninterest expense.

Noninterest expense amounted to $1.68 million and $1.65 million for the three-month periods ended March 31, 2009 and 2008, respectively. The change in noninterest expense is principally related to an increase in rent expense of $18,000, due primarily to the annual increase adjustments, as salary expense remained constant at approximately $814,000.

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

Income Taxes

During the three months ended March 31, 2009, the Company recognized a $20,000 income tax benefit compared to an $112,000 income tax expense during the same period in 2008. The effective tax rate for the three-month period in 2008 was 27.18%. The decline in income tax expense is due to the lower pre-tax income and the larger proportion of tax-free income to pre-tax income in 2009.

Market Risk, Liquidity and Interest Rate Sensitivity

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

The conduct of our banking business requires that we maintain adequate liquidity to meet changes in the composition and volume of assets and liabilities due to seasonal, cyclical or other reasons. Liquidity describes the ability of the Company to meet financial obligations that arise during the normal course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of the customers of the Company, as well as for meeting current and future planned expenditures. This liquidity is typically provided by the funds received through customer deposits, investment maturities, loan repayments, borrowings, and income. Management considers the current liquidity position to be adequate to meet the needs of the Company and its customers.

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

Interest rate sensitivity is an important factor in the management of the composition and maturity configurations of the Company’s earning assets and funding sources. An Asset/Liability Committee manages the interest rate sensitivity position in order to maintain an appropriate balance between the maturity and repricing characteristics of assets and liabilities that is consistent with the Company’s liquidity analysis, growth, and capital adequacy goals. It is the objective of the Asset/Liability Committee to maximize net interest margins during periods of both volatile and stable interest rates, to attain earnings growth, and to maintain sufficient liquidity to satisfy depositors’ requirements and meet credit needs of customers.

Table of Contents

The table below, “Interest Rate Sensitivity Gap Analysis,” summarizes, as of March 31, 2009, the anticipated maturities or repricing of the Company’s interest-earning assets and interest-bearing liabilities, the Company’s interest rate sensitivity gap (interest-earning assets less interest-bearing liabilities), the Company’s cumulative interest rate sensitivity gap, and the Company’s cumulative interest sensitivity gap ratio (cumulative interest rate sensitivity gap divided by total assets). A negative gap for any time period means that more interest-bearing liabilities will reprice or mature during that time period than interest-earning assets. During periods of rising interest rates, a negative gap position would generally decrease earnings, and during periods of declining interest rates, a negative gap position would generally increase earnings. The converse would be true for a positive gap position. Therefore, a positive gap for any time period means that more interest-earning assets will reprice or mature during that time period than interest-bearing liabilities. During periods of rising interest rates, a positive gap position would generally increase earnings, and during periods of declining interest rates, a positive gap position would generally decrease earnings.

It is important to note that the following table represents the static gap position for interest sensitive assets and liabilities at March 31, 2009. The table does not give effect to prepayments or extensions of loans as a result of changes in general market interest rates. Moreover, while the table does indicate the opportunities to reprice assets and liabilities within certain time frames, it does not account for timing differences that occur during periods of repricing. For example, changes to deposit rates tend to lag in a rising rate environment and lead in a falling rate environment, although this will not always be the case. Nor does it account for the effects of competition on pricing of deposits and loans. For example, under current market conditions, market rates paid on deposits may not be able to adjust by the full amount of downward adjustments in the federal funds target rate, while rates on loans will tend to adjust by the full amount, subject to certain limitations.

Interest Rate Sensitivity Gap Analysis
March 31, 2009

	Expected Repricing or Maturity Date
(dollars in thousands)	Within One Year			One to Three Years			Three to Five Years			After Five Years			Total
Assets
Federal funds sold	$	1,175		$	—		$	—		$	—		$	1,175
Interest-bearing deposits in other banks	23,437			—			—			—			23,437
Investment securities(1)	3,594			1,202			3,522			11,036			19,354
Loans	76,051			65,401			48,789			17,990			208,231
Total interest-earning assets	104,257			66,603			52,311			29,026			252,197

Liabilities
Savings and NOW accounts	924			1,848			1,848			13,859			18,479
Money Market accounts	2,042			4,083			4,083			30,625			40,833
Certificates of deposit	105,203			22,260			872			—			128,335
Long-term borrowings	5,000			5,000			—			—			10,000
Junior subordinated debentures	—			6,186			—			—			6,186
Total interest-bearing liabilities	113,169			39,377			6,803			44,484			203,833
Interest rate sensitivity gap	$	(8,912	)	$	27,226		$	45,508		$	(15,458	)	$	48,364
Cumulative interest rate sensitivity gap	$	(8,912	)	$	18,314		$	63,822		$	48,364
Cumulative gap ratio as a percentage of total assets	(3.51		)%	7.21		%	25.13		%	19.05		%

(1) Excludes equity securities.

In addition to the Interest Rate Sensitivity Gap Analysis, the Company also uses an earnings simulation model on a quarterly basis to closely monitor interest sensitivity and to expose its balance sheet and income statement to different scenarios. The model is based on current Company data and adjusted by assumptions as to growth patterns, noninterest income and noninterest expense and interest rate sensitivity, based on historical data, for both assets and liabilities projected for a one-year period. The model is then subjected to a “shock test” assuming a sudden prime interest rate increase of 200 basis points or a decrease of 200 basis points, but not below zero. The results show that with a 200 basis point rise in the prime interest rate the Company’s net interest income would increase by 2.68%. However, a decrease in the prime interest rate of 200 basis was not considered to be feasible since this would infer that the federal funds interest rate would fall below zero.

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

Table of Contents

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

Critical Accounting Policy:

Allowance for Loan Losses

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

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

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. The allowance is based on two basic principles of accounting: (i) SFAS No. 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable and (ii) SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the loan balance and either the value of collateral, or the present value of future cash flows, or the loan’s value as observable in the secondary market. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by Management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and borrower, including the length of the delay, the reason for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The provision for loan losses included in the statements of operations serves to maintain the allowance at a level Management considers adequate.

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

The specific allowance component is used to individually establish an allowance for loans identified for impairment testing. When impairment is identified, a specific reserve may be established based on the Company’s calculation of the estimated loss embedded in the individual loan. Impairment testing includes consideration of the borrower’s overall financial condition, resources and payment record, support available from financial guarantors and the fair market value of collateral. These factors are combined to estimate the probability and severity of inherent losses. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential mortgage loans for impairment. At March 31, 2009 there was only one commercial real estate loan in the amount of $600,000, which was in a nonaccrual status, that was deemed to be impaired and had a specific reserve of $50,000.

Table of Contents

The formula allowance component is used for estimating the loss on internally risk rated loans and those loans identified for impairment testing. The loans meeting the Company’s internal criteria for classification, such as special mention, substandard, doubtful and loss are segregated from performing loans within the portfolio. These internally classified loans are then grouped by loan type (commercial, commercial real estate, commercial construction, residential real estate, residential construction or installment). Each loan type is assigned an allowance factor based on Management’s estimate of the associated risk, complexity and size of the individual loans within the particular loan category. Classified loans are assigned a higher allowance factor than non-classified loans due to Management’s concerns regarding collectability or Management’s knowledge of particular elements surrounding the borrower. Allowance factors increase with the worsening of the internal risk rating.

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

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

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

As of March 31, 2009, the real estate loan portfolio constituted 85% of the total loan portfolio. While this exceeds the 10% threshold for determining a concentration of credit risk within an industry, we do not consider this to be a concentration with adverse risk characteristics given the diversity of borrowers within the real estate portfolio and other sources of repayment. An industry for this purpose is defined as a group of counterparties that are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. Additionally, the loan portfolio does not include concentrations of credit risk in residential loan products that permit the deferral of principal payments that are smaller than normal interest accruals (negative amortization); loans with high loan-to-value ratios; or loans, such as option adjustable-rate mortgages, that may expose the borrower to future increases in repayments that are in excess of increases that would result solely from increases in market interest rates. However, the Company does have interest only home equity lines of credit with outstanding balances of $7.87 million of at March 31, 2009.

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

Table of Contents

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

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

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

There were no other interest-bearing assets at March 31, 2009 or December 31, 2008 classified as past due 90 days or more and still accruing, restructured or problem assets, and no loans which were currently performing in accordance with their terms, but as to which information known to Management caused it to have serious doubts about the ability of the borrower to comply with the loan as currently written.

Off-Balance Sheet Arrangements

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

Commitments to extend credit and standby letters of credit as of March 31, 2009 were as follows:

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

See Note 9 to the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 for additional information regarding the Company’s long-term lease obligations.

Table of Contents

Capital Resources

The ability of the Company to grow is dependent on the availability of capital with which to meet regulatory capital requirements, discussed below. To the extent the Company is successful it may need to acquire additional capital through the sale of additional common stock, other qualifying equity instruments or subordinated debt. There can be no assurance that additional capital will be available to the Company on a timely basis or on attractive terms. On December 15, 2006, the Company completed the issuance of $6.00 million of trust preferred securities, as discussed above, that can be recognized as capital for regulatory purposes. The Company has an unsecured revolving line of credit borrowing arrangement with an unaffiliated financial institution in the amount of $3.00 million with no outstanding balance as of March 31, 2009 or December 31, 2008. This facility matures on September 1, 2009, has a floating interest rate equal to the Wall Street Journal prime rate and requires monthly interest payments only. The purpose of this facility is to provide capital to the Bank, as needed. The Bank expects to have this credit facility renewed, but there can be no assurance.

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. The Company will be subject to such requirements when its assets exceed $500 million, it has publicly issued debt or it engages in certain highly leveraged activities. 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 Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. 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 Bank to maintain minimum amounts and ratios 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 Bank met all capital adequacy requirements to which it is subject as of March 31, 2009 and that the Company would meet such requirements if applicable. See Note 10 to the consolidated financial statements for a table depicting compliance with regulatory capital requirements.

As of March 31, 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 in Note 10. There are no conditions or events since that notification which management believes have changed the Bank’s category.

Inflation

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

See “Market Risk, Liquidity and Interest Rate Sensitivity” at Page 18.

Item 4. Controls and Procedures

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

Table of Contents

Item 6. Exhibits

Exhibit No.		Description of Exhibits

3(a)		Articles of Incorporation of the Company, as amended(1)
3(b)		Bylaws of the Company(2)
4(a)		Indenture, dated as of December 15, 2006 between Frederick County Bancorp, Inc. and U.S. Bank National Association, as trustee(3)
4(b)		Amended and Restated Declaration of Trust, dated as December 15, 2006 between Frederick County Bancorp, Inc. and U.S. Bank National Association, as trustee, and Martin S. Lapera and William R. Talley, Jr. as Administrators(3)
4(c)		Guarantee Agreement dated as of December 15, 2006 between Frederick County Bancorp, Inc. and U.S. Bank National Association, as Guarantee Trustee(3)
10(a)		2001 Stock Option Plan(4)
10(b)		Employment Agreement between the Bank and Martin S. Lapera(5)
10(c)		Employment Agreement between the Bank and William R. Talley, Jr. (6)
10 (d)		Amendment to Employment Agreement between the Bank and Martin S. Lapera (7)
10 (e)		Amendment to Employment Agreement between the Bank and William R. Talley, Jr. (8)
10(f)		2002 Executive and Director Deferred Compensation Plan, as amended(9)
10(g)		Amendment No. 1 to the 2002 Executive and Director Deferred Compensation Plan(9)
10(h)		Loan Agreement with Atlantic Central Bankers Bank (10)
10(i)		Promissory Note with Atlantic Central Bankers Bank (10)
10(j)		Amendment to Line of Credit with Atlantic Central Bankers Bank(11)
11		Statement Regarding Computation of Per Share Income — Please refer to Note 2 to the unaudited consolidated financial statements included herein
31(a)		Certification of Martin S. Lapera, President and Chief Executive Officer
31(b)		Certification of William R. Talley, Jr., Executive Vice President and Chief Financial Officer
32(a)		Certification of Martin S. Lapera, President and Chief Executive Officer
32(b)		Certification of William R. Talley, Jr., Executive Vice President and Chief Financial Officer

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

PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets, March 31, 2009 and December 31, 2008

	Consolidated Statements of Income, Three Months Ended March 31, 2009 and 2008

	Consolidated Statements of Changes in Shareholders’ Equity, Three Months Ended March 31, 2009 and 2008

	Consolidated Statements of Cash Flows, Three Months Ended March 31, 2009 and 2008

	Notes to Unaudited Consolidated Financial Statements

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

Item 3.	Quantitative and Qualitative Disclosures about Market Risk

Item 4.	Controls and Procedures

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings

Item 1A.	Risk Factors

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.	Defaults upon Senior Securities

Item 4.	Submission of Matters to a Vote of Security Holders

Item 5.	Other Information

Item 6.	Exhibits

	Signatures

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

	FREDERICK COUNTY BANCORP, INC.


Date: May 7, 2009	By:	/s/ Martin S. Lapera
		Martin S. Lapera
		President and Chief Executive Officer


Date: May 7, 2009	By:	/s/ William R. Talley, Jr.
		William R. Talley, Jr.
		Executive Vice President and Chief Financial Officer

FORM 10-Q

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

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

FREDERICK COUNTY BANCORP, INC.

30 West Patrick Street

FREDERICK COUNTY BANCORP, INC. AND SUBSIDIARY

PART I

FINANCIAL INFORMATION

PART II

OTHER INFORMATION

FREDERICK COUNTY BANCORP, INC.

Available-for-sale portfolio

Restricted Stock

Critical Accounting Policies

Loans

Deposits

Net Interest Income

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

Noninterest Expense

Inflation

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

PART II — Other Information

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

(2)	Subject to a maximum expenditure of $4.5 million. Number of shares indicated is the remaining number of shares authorized for repurchase as of the end of the indicated period.