** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, DC  20549**

 

### **FORM 10-Q**

 
| **(MARK ONE)** | ** **                                                                                                                              |
|----------------|-----------------------------------------------------------------------------------------------------------------------------------------|
| **x**          | (**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                           |
|           |                                                                                                                                    |
|           | **For the Quarterly Period Ended September 30,  2007**                                                                                  |
|           |                                                                                                                                    |
|           | **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 ofregistrant as specified in its charter)

 

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

 

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

**Frederick, Maryland 21701**

(Address of registrant’sprincipal executive offices)

 

**301.620.1400**

(Registrant’s telephonenumber, including area code)

 

**N/A**

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

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  x  Yes    o  No

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer or a non-accelerated filer.  See definition of “large accelerated filerand accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large acceleratedfiler  o             Acceleratedfiler  o             Non-acceleratedfiler  x

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).  oYes    x  No

 

State the number of shares of each of the issuer’s classes of commonequity, as of the latest practical date. There were 1,460,602 shares of Common Stock outstanding as of October26, 2007.

 

 

----

 

 

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

**TABLE OFCONTENTS**

 

 
| **PART I**  | **FINANCIAL INFORMATION**                                                                                                                     |
|-------------|-----------------------------------------------------------------------------------------------------------------------------------------------|
|        |                                                                                                                                          |
| Item 1.     | Financial Statements (Unaudited)                                                                                                              |
|        |                                                                                                                                          |
|        | Consolidated Balance Sheets, September 30, 2007 and  December 31, 2006                                                                        |
|        |                                                                                                                                          |
|        | Consolidated Statements of Income, Three and Nine  Months Ended September 30, 2007 and 2006                                                   |
|        |                                                                                                                                          |
|        | Consolidated Statements of Changes in Shareholders’  Equity, Three and Nine Months Ended  September 30, 2007 and 2006                    |
|        |                                                                                                                                          |
|        | Consolidated Statements of Cash Flows, Nine Months  Ended September 30, 2007 and 2006                                                         |
|        |                                                                                                                                          |
|        | 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  See “Market Risk, Liquidity and Interest Rate Sensitivity” at Page 21. |
|        |                                                                                                                                          |
| Item 4.     | Controls and  Procedures                                                                                                                      |
|        |                                                                                                                                          |
| **PART II** | **OTHER INFORMATION**                                                                                                                         |
|        |                                                                                                                                          |
| Item 1.     | Legal Proceedings                                                                                                                             |
|        |                                                                                                                                          |
| Item 1A.    | Risk Factors                                                                                                                                  |
|        |                                                                                                                                          |
| Item 2.     | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                  |
|        |                                                                                                                                          |
| Item 3.     | Defaults upon  Senior Securities                                                                                                              |
|        |                                                                                                                                          |
| Item 4.     | Submission of  Matters to a Vote of Security Holders                                                                                          |
|        |                                                                                                                                          |
| Item  5.    | Other  Information                                                                                                                            |
|        |                                                                                                                                          |
| Item  6.    | Exhibits                                                                                                                                      |
|        |                                                                                                                                          |
|        | Signatures                                                                                                                                    |

 

 

2

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**FrederickCounty Bancorp, Inc. and Subsidiaries**

**ConsolidatedBalance Sheets (Unaudited)**

 

 
| **(dollars  in thousands)**                                                                                                                 | ** ** | **September  30,  2007** | ** ** | **December  31,  2006** | * *   |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| **ASSETS**                                                                                                                                  | ** ** | ** **               | ** ** | ** **              | ** ** |
| Cash and due  from banks                                                                                                                    |       | $                        | 4,550      |                    | $          | 3,695 |   |
| Federal funds  sold                                                                                                                         |       | 10,734                   |       | 15,035                  |       |
| Interest-bearing  deposits in other banks                                                                                                   |       | 4,017                    |       | 7,753                   |       |
| Cash and cash  equivalents                                                                                                                  |       | 19,301                   |       | 26,483                  |       |
| Investment  securities available-for-sale at fair value                                                                                     |       | 28,383                   |       | 29,174                  |       |
| Restricted stock                                                                                                                            |       | 1,440                    |       | 938                     |       |
| Loans                                                                                                                                       |       | 210,365                  |       | 173,954                 |       |
| Less: Allowance  for loan losses                                                                                                            |       | (2,401                   | )          | (2,166                  | )          |
| Net loans                                                                                                                                   |       | 207,964                  |       | 171,788                 |       |
| Bank premises  and equipment                                                                                                                |       | 5,496                    |       | 4,362                   |       |
| Other assets                                                                                                                                |       | 2,695                    |       | 2,206                   |       |
| Total assets                                                                                                                                |       | $                        | 265,279    |                    | $          | 234,951 |   |
|                                                                                                                                        |       |                     |       |                    |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                              |       |                     |       |                    |       |
|                                                                                                                                        |       |                     |       |                    |       |
| **Liabilities**                                                                                                                             | ** ** | ** **               | ** ** | ** **              | ** ** |
| Deposits:                                                                                                                                   |       |                     |       |                    |       |
| Noninterest-bearing  deposits                                                                                                               |       | $                        | 34,038     |                    | $          | 32,796 |   |
| Interest-bearing  deposits                                                                                                                  |       | 194,999                  |       | 176,582                 |       |
| Total deposits                                                                                                                              |       | 229,037                  |       | 209,378                 |       |
| Short-term  borrowings                                                                                                                      |       | —                   |       | 450                     |       |
| Long-term  borrowings                                                                                                                       |       | 10,000                   |       | —                  |       |
| Junior  subordinated debentures                                                                                                             |       | 6,186                    |       | 6,186                   |       |
| Accrued interest  and other liabilities                                                                                                     |       | 1,037                    |       | 1,044                   |       |
| Total  liabilities                                                                                                                          |       | 246,260                  |       | 217,058                 |       |
|                                                                                                                                        |       |                     |       |                    |       |
| **Shareholders’  Equity**                                                                                                              | ** ** | ** **               | ** ** | ** **              | ** ** |
| Common stock,  per share par value $.01; 10,000,000 shares authorized; 1,460,602 and 1,458,602  shares issued and outstanding, respectively |       | 15                       |       | 15                      |       |
| Additional  paid-in capital                                                                                                                 |       | 14,687                   |       | 14,652                  |       |
| Retained  earnings                                                                                                                          |       | 4,407                    |       | 3,341                   |       |
| Accumulated  other comprehensive loss                                                                                                       |       | (90                      | )          | (115                    | )          |
| Total  shareholders’ equity                                                                                                            |       | 19,019                   |       | 17,893                  |       |
| Total liabilities  and shareholders’ equity                                                                                            |       | $                        | 265,279    |                    | $          | 234,951 |   |

 

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

 

 

3

----

 

 

**FrederickCounty Bancorp, Inc. and Subsidiaries**

**ConsolidatedStatements of Income (Unaudited)**

 
| ** **                                             | ** ** | **For the Three  Months Ended  September 30,** | ** ** | **For the Nine  Months Ended  September 30,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|
| **(dollars in thousands, except per share amounts)**   | ** ** | **2007**                                       | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest income:                                       |       |                                           |       |                                          |       |   |   |   |   |
| Interest and fees  on loans                            |       | $                                              | 3,758      |                                          | $          | 3,006 |   | $ | 10,417 |   | $ | 8,629 |   |
| Interest and  dividends on investment securities:      |       |                                           |       |                                          |       |   |   |   |   |
| Interest —  taxable                               |       | 233                                            |       | 215                                           |       | 700 |   | 621 |   |
| Interest — tax  exempt                            |       | 100                                            |       | 93                                            |       | 298 |   | 196 |   |
| Dividends                                              |       | 20                                             |       | 14                                            |       | 55 |   | 37 |   |
| Interest on federal  funds sold                        |       | 109                                            |       | 143                                           |       | 333 |   | 473 |   |
| Other interest  income                                 |       | 45                                             |       | 63                                            |       | 184 |   | 192 |   |
| Total interest  income                                 |       | 4,265                                          |       | 3,534                                         |       | 11,987 |   | 10,148 |   |
| Interest  expense:                                     |       |                                           |       |                                          |       |   |   |   |   |
| Interest on  deposits                                  |       | 1,938                                          |       | 1,472                                         |       | 5,408 |   | 4,017 |   |
| Interest on  other short-term borrowings               |       | —                                         |       | 12                                            |       | 2 |   | 26 |   |
| Interest on  long-term borrowings                      |       | 76                                             |       | —                                        |       | 117 |   | 10 |   |
| Interest on  junior subordinated debentures            |       | 101                                            |       | —                                        |       | 303 |   | — |   |
| Total interest  expense                                |       | 2,115                                          |       | 1,484                                         |       | 5,830 |   | 4,053 |   |
| Net interest  income                                   |       | 2,150                                          |       | 2,050                                         |       | 6,157 |   | 6,095 |   |
| Provision for  loan losses                             |       | 50                                             |       | 60                                            |       | 241 |   | 180 |   |
| Net interest  income after provision for loan losses   |       | 2,100                                          |       | 1,990                                         |       | 5,916 |   | 5,915 |   |
| Noninterest  income:                                   |       |                                           |       |                                          |       |   |   |   |   |
| Service fees                                           |       | 60                                             |       | 44                                            |       | 149 |   | 120 |   |
| Other operating  income                                |       | 40                                             |       | 36                                            |       | 134 |   | 119 |   |
| Total  noninterest income                              |       | 100                                            |       | 80                                            |       | 283 |   | 239 |   |
| Noninterest  expense:                                  |       |                                           |       |                                          |       |   |   |   |   |
| Salaries and  employee benefits                        |       | 912                                            |       | 849                                           |       | 2,744 |   | 2,402 |   |
| Occupancy and  equipment expenses                      |       | 264                                            |       | 216                                           |       | 771 |   | 590 |   |
| Other operating  expenses                              |       | 422                                            |       | 307                                           |       | 1,136 |   | 867 |   |
| Total  noninterest expense                             |       | 1,598                                          |       | 1,372                                         |       | 4,651 |   | 3,859 |   |
| Income before  provision for income taxes              |       | 602                                            |       | 698                                           |       | 1,548 |   | 2,295 |   |
| Provision for  income taxes                            |       | 194                                            |       | 230                                           |       | 482 |   | 835 |   |
| Net income                                             |       | $                                              | 408        |                                          | $          | 468 |   | $ | 1,066 |   | $ | 1,460 |   |
| Basic earnings  per share                              |       | $                                              | 0.28       |                                          | $          | 0.32 |   | $ | 0.73 |   | $ | 1.00 |   |
| Diluted earnings  per share                            |       | $                                              | 0.27       |                                          | $          | 0.31 |   | $ | 0.70 |   | $ | 0.96 |   |
| Basic weighted  average number of shares outstanding   |       | 1,460,602                                      |       | 1,458,602                                     |       | 1,459,965 |   | 1,458,602 |   |
| Diluted weighted  average number of shares outstanding |       | 1,515,716                                      |       | 1,526,297                                     |       | 1,520,638 |   | 1,527,193 |   |

 

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

 

 

4

----

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

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

 
| ** **                                                                                                                  | ** ** | **Three Months Ended September 30,** | *** *** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|--------------|
| **(dollars in thousands, except  shares outstanding)**                                                                      | ** ** | **Shares  Outstanding**              | ** **   | **Common  Stock** | ** ** | **Additional Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive (Loss)** | ** ** | **Total  Shareholders’  Equity** | *** *** |
|                                                                                                                        |       |                                 |         |   |   |   |   |   |   |   |   |   |   |
| Balance, June  30, 2006                                                                                                     |       | 1,458,602                            |         | $ | 15 |   | $ | 14,652 |   | $ | 2,413 |   | $ | (348 | ) | $ | 16,732 |   |
| Comprehensive  income:                                                                                                      |       |                                 |         |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                                  |       | —                               |         | — |   | — |   | 468 |   | — |   | 468 |   |
| Changes in net  unrealized gains on securities available for sale, net of income tax benefits  of $182                      |       | —                               |         | — |   | — |   | — |   | 289 |   | 289 |   |
| Net unrealized  losses on transfer of held-to-maturity securities to available for sale, net  of income tax benefits of $51 |       | —                               |         | — |   | — |   | — |   | (81 | ) | (81 | ) |
| Comprehensive  income                                                                                                       |       |                                 |         |   |   |   |   |   |   |   |   | 676 |   |
| Balance,  September 30, 2006                                                                                                |       | 1,458,602                            |         | $ | 15 |   | $ | 14,652 |   | $ | 2,881 |   | $ | (140 | ) | $ | 17,408 |   |
| Balance, June  30, 2007                                                                                                     |       | 1,460,602                            |         | $ | 15 |   | $ | 14,687 |   | $ | 3,999 |   | $ | (294 | ) | $ | 18,407 |   |
| Comprehensive  income:                                                                                                      |       |                                 |         |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                                  |       | —                               |         | — |   | — |   | 408 |   | — |   | 408 |   |
| Changes in net  unrealized gains on securities available for sale, net of income taxes of  $128                             |       | —                               |         | — |   | — |   | — |   | 204 |   | 204 |   |
| Comprehensive  income                                                                                                       |       |                                 |         |   |   |   |   |   |   |   |   | 612 |   |
| Balance,  September 30, 2007                                                                                                |       | 1,460,602                            |         | $ | 15 |   | $ | 14,687 |   | $ | 4,407 |   | $ | (90 | ) | $ | 19,019 |   |

 

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

 

 

5

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

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

 

 
| ** **                                                                                                                  | ** ** | **Nine  Months Ended September 30,** | *** *** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|--------------|
| **(dollars  in thousands, except  shares outstanding)**                                                                | ** ** | **Shares  Outstanding**              | ** **   | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  (Loss)** | ** ** | **Total  Shareholders’  Equity** | *** *** |
|                                                                                                                        |       |                                 |         |   |   |   |   |   |   |   |   |   |   |
| Balance, January  1, 2006                                                                                                   |       | 1,458,602                            |         | $ | 15 |   | $ | 14,652 |   | $ | 1,421 |   | $ | (200 | ) | $ | 15,888 |   |
| Comprehensive  income:                                                                                                      |       |                                 |         |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                                  |       | —                               |         | — |   | — |   | 1,460 |   | — |   | 1,460 |   |
| Changes in net  unrealized gains on securities available for sale, net of income tax benefits  of $89                       |       | —                               |         | — |   | — |   | — |   | 141 |   | 141 |   |
| Net unrealized  losses on transfer of held-to-maturity securities to available for sale, net  of income tax benefits of $51 |       | —                               |         | — |   | — |   | — |   | (81 | ) | (81 | ) |
| Comprehensive  income                                                                                                       |       |                                 |         |   |   |   |   |   |   |   |   | 1,520 |   |
| Balance,  September 30, 2006                                                                                                |       | 1,458,602                            |         | $ | 15 |   | $ | 14,652 |   | $ | 2,881 |   | $ | (140 | ) | $ | 17,408 |   |
| Balance, January  1, 2007                                                                                                   |       | 1,458,602                            |         | $ | 15 |   | $ | 14,652 |   | $ | 3,341 |   | $ | (115 | ) | $ | 17,893 |   |
| Comprehensive  income:                                                                                                      |       |                                 |         |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                                  |       | —                               |         | — |   | — |   | 1,066 |   | — |   | 1,066 |   |
| Changes in net  unrealized gains (losses) on securities available for sale, net of income  taxes of $16                     |       | —                               |         | — |   | — |   | — |   | 25 |   | 25 |   |
| Comprehensive  income                                                                                                       |       |                                 |         |   |   |   |   |   |   |   |   | 1,091 |   |
| Shares issued  under stock option transactions                                                                              |       | 2,000                                |         | — |   | 35 |   | — |   | — |   | 35 |   |
| Balance,  September 30, 2007                                                                                                |       | 1,460,602                            |         | $ | 15 |   | $ | 14,687 |   | $ | 4,407 |   | $ | (90 | ) | $ | 19,019 |   |

 

 

6

----

 

 

 

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

**ConsolidatedStatements of Cash Flows (Unaudited)**

 
| ** **                                                                                      | ** ** | **Nine Months Ended September 30,** | *** *** |
|-------------------------------------------------------------------------------------------------|------------|-------------------------------------|--------------|
| **(dollars in thousands)**                                                                      | ** ** | **2007**                            | ** **   | **2006** | *** *** |
| Cash flows from operating activities:                                                           |       |                                |         |   |   |
| Net income                                                                                      |       | $                                   | 1,066        |   | $ | 1,460 |   |
| Adjustments to reconcile net income to net cash provided by  operating  activities:             |       |                                |         |   |   |
| Depreciation and amortization                                                                   |       | 213                                 |         | 146 |   |
| Deferred income taxes (benefits)                                                                |       | (83                                 | )            | (37 | ) |
| Provision for loan losses                                                                       |       | 241                                 |         | 180 |   |
| Net (discount accretion) premium amortization on investment  securities                         |       | (5                                  | )            | 30 |   |
| Increase in accrued interest and other assets                                                   |       | (312                                | )            | (226 | ) |
| Decrease in accrued interest and other liabilities                                              |       | (7                                  | )            | (102 | ) |
| Net cash provided by operating activities                                                       |       | 1,113                               |         | 1,451 |   |
| Cash flows from investing activities:                                                           |       |                                |         |   |   |
| Purchases of investment securities available-for-sale                                           |       | (3,116                              | )            | (6,439 | ) |
| Purchases of investment securities held-to-maturity                                             |       | —                              |         | (5,933 | ) |
| Proceeds from maturities, prepayments and calls of investment  securities  available-for-sale   |       | 3,953                               |         | 3,336 |   |
| Purchases of restricted stock                                                                   |       | (502                                | )            | (72 | ) |
| Net increase in loans                                                                           |       | (36,417                             | )            | (11,196 | ) |
| Purchases of bank premises and equipment                                                        |       | (1,457                              | )            | (2,427 | ) |
| Net cash used in investing activities                                                           |       | (37,539                             | )            | (22,731 | ) |
| Cash flows from financing activities:                                                           |       |                                |         |   |   |
| Net increase in NOW, money market accounts, savings  accounts  and noninterest-bearing deposits |       | 6,184                               |         | 5,935 |   |
| Net increase in time deposits                                                                   |       | 13,475                              |         | 7,707 |   |
| Net decrease in short-term borrowings                                                           |       | (450                                | )            | — |   |
| Proceeds from long-term borrowings                                                              |       | 10,000                              |         | — |   |
| Proceeds from issuance of common stock                                                          |       | 35                                  |         | — |   |
| Net cash provided by financing activities                                                       |       | 29,244                              |         | 13,642 |   |
| Net decrease in cash and cash equivalents                                                       |       | (7,182                              | )            | (7,638 | ) |
| Cash and cash equivalents — beginning of period                                            |       | 26,483                              |         | 28,510 |   |
| Cash and cash equivalents — end of period                                                  |       | $                                   | 19,301       |   | $ | 20,872 |   |
| Non-cash activities:                                                                            |       |                                |         |   |   |
| Amortized cost of held-to-maturity securities transferred to  available-for-sale                |       | $                                   | —       |   | $ | 8,179 |   |
| Reclassification of long-term borrowings to short-term borrowings                               |       | $                                   | —       |   | $ | 250 |   |
| Supplemental cash flow disclosures:                                                             |       |                                |         |   |   |
| Interest paid                                                                                   |       | $                                   | 5,757        |   | $ | 4,013 |   |
| Income taxes paid                                                                               |       | $                                   | 491          |   | $ | 1,050 |   |

 

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

 

 

7

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

 

Notes to UnauditedConsolidated Financial Statements

** **

**Note1.  General:**

 

FrederickCounty Bancorp, Inc. (the “Bancorp”), the parent company for its wholly-ownedsubsidiary Frederick County Bank (the “Bank” and together with Bancorp, the“Company”), was organized in September 2003. The Bank was incorporated underthe laws of the state of Maryland in August 2000 and commenced bankingoperations in October 2001.  The Bankprovides its customers with various banking services.  The Bank offers various loan and depositproducts to their customers.  The Bank’scustomers include individuals and commercial enterprises within its principalmarket area consisting of Frederick County, Maryland.  Additionally, the Bank maintains correspondentbanking relationships and transacts daily federal funds sales on an unsecuredbasis with regional correspondent banks. Note 4 discusses the types of securities the Bank invests in.  Note 5 discusses the types of lending thatthe Bank engages in.  The Bank does nothave any significant concentrations to any one industry or customer.  The Company also has a subsidiary called FCBIStatutory Trust I.  See Note 7 foradditional disclosures.

 

The accompanying unaudited consolidated financialstatements of the Company have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information, the instructions for Form 10-Q, regulation S-X, andgeneral practices within the banking industry. Accordingly, they do not include all of the information and disclosuresrequired by generally accepted accounting principles for complete financialstatements.  These statements should beread in conjunction with the consolidated financial statements and accompanyingfootnotes included in the Company’s 2006 Annual Report on Form 10-K.  In the opinion of management, alladjustments, consisting of normal recurring adjustments, considered necessaryfor a fair presentation have been included. The results shown in this interim report are not necessarily indicativeof results to be expected for any other period or for the full year endingDecember 31, 2007.

 

The preparation of financial statementsrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period.  These estimates and assumptions are based oninformation available as of the date of the consolidated financial statementsand could differ from actual results.

 

## **Recent AccountingPronouncements**

 

In February 2006, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 155, *“Accounting for Certain Hybrid FinancialInstruments”,* an amendment of SFAS No. 133 and SFAS No. 140. Thisstatement permits fair value re-measurement for any hybrid financial instrumentthat contains an embedded derivative that otherwise would require bifurcation.It establishes a requirement to evaluate interests in securitized financialassets to identify interests that are freestanding derivatives or that arehybrid financial instruments that contain an embedded derivative requiringbifurcation. In addition, SFAS 155 clarifies which interest-only strips andprincipal-only strips are not subject to the requirements of Statement 133. Italso clarifies that concentrations of credit risk in the form of subordination arenot embedded derivatives. SFAS 155 amends Statement 140 to eliminate theprohibition on a qualifying special purpose entity from holding a derivativefinancial instrument that pertains to a beneficial interest other than anotherderivative financial instrument.  OnJanuary 1, 2007, the Company adopted SFAS 155 and determined that it did nothave any impact on its financial condition or results of operations.

 

In March 2006, the FASB issued SFAS No. 156, “*Accounting for Servicing of Financial Assets*”.This Statement amends SFAS No. 140, “*Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities*”, and requires that all separately recognized servicingassets and servicing liabilities be initially measured at fair value, if practicable,and permits the entities to elect either fair value measurement with changes infair value reflected in earnings or the amortization and impairmentrequirements of SFAS No. 140 for subsequent measurement. The subsequentmeasurement of separately recognized servicing assets and servicing liabilitiesat fair value eliminates the necessity for entities that manage the risksinherent in servicing assets and servicing liabilities with derivatives toqualify for hedge accounting treatment and eliminates the characterization ofdeclines in fair value as impairments or direct write-downs. The Companyadopted SFAS 156 on January 1, 2007 and determined that it did not have anyimpact on its financial condition or results of operations.

 

In September 2006, the FASB issued Statement No. 157(SFAS No. 157), “Fair Value Measurements.” SFAS 157 defines fair value, establishes a framework for measuring fairvalue in generally accepted accounting principles, and expands disclosuresabout fair value measurements.   SFAS 157is effective for financial statements issued for fiscal years beginning afterNovember 15, 2007 and interim periods within those years.  The Company does not expect theimplementation of SFAS 157 to have a material impact on its financial statements.

 

 

8

----

 

 

In June 2006, the FASB issued FASB Interpretation No. 48, “*Accounting for Uncertainty in Income Taxes*”(“FIN 48”). FIN 48 clarifies when tax benefits should be recorded infinancial statements, requires certain disclosures of uncertain tax matters andindicates how any tax reserves should be classified in a balance sheet. OnJanuary 1, 2007, the Company adopted FIN 48 and determined that it did not haveany impact on its financial condition or results of operations.  It is the Company’s policy to recognizeinterest and penalties related to unrecognized tax liabilities within incometax expense in the consolidated statements of income.

 

In February 2007, the FASB issued SFAS No. 159, “The *Fair Value Option for Financial Assets andLiabilities*”. This statement permits entities to measure manyfinancial instruments and certain other items at fair value.  The objective is to improve financialreporting by providing entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions.  This pronouncement is effective as of thebeginning of an entity’s first fiscal year that begins after November 15,2007.  The Company is evaluating theimpact of this new standard, but currently believes that adoption will not havea material impact on its financial position or results of operations.

 

**Note2. Earnings Per Share:**

 

Earnings per share (“EPS”) are disclosed as basic and diluted.  Basic EPS is generally computed by dividingnet income by the weighted-average number of common shares outstanding for theperiod, whereas diluted EPS essentially reflects the potential dilution inbasic EPS that could occur if other contracts to issue common stock wereexercised.  As of September 30, 2007 and2006, no common stock equivalents were excluded from the diluted EPScalculation.

 
| ** **                                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | *** *** |
|--------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|--------------|
| **(dollars in thousands, except per share amounts)**   | ** ** | **2007**                              | ** ** | **2006**                             | ** **   | **2007** | ** ** | **2006** | *** *** |
| Net income                                             |       | $                                     | 408        |                                 | $            | 468 |   | $ | 1,066 |   | $ | 1,460 |   |
| Basic earnings  per share                              |       | $                                     | 0.28       |                                 | $            | 0.32 |   | $ | 0.73 |   | $ | 1.00 |   |
| Diluted earnings  per share                            |       | $                                     | 0.27       |                                 | $            | 0.31 |   | $ | 0.70 |   | $ | 0.96 |   |
| Basic weighted  average number of shares outstanding   |       | 1,460,602                             |       | 1,458,602                            |         | 1,459,965 |   | 1,458,602 |   |
| Effect of  dilutive securities — stock options    |       | 55,114                                |       | 67,695                               |         | 60,673 |   | 68,591 |   |
| Diluted weighted  average number of shares outstanding |       | 1,515,716                             |       | 1,526,297                            |         | 1,520,638 |   | 1,527,193 |   |

 

**Note3.  Employee Stock Option Plan:**

 

The Company maintains an Employee Stock Option Plan that provides forgrants of incentive and non-incentive stock options.  This plan has been presented to and approvedby the Company’s shareholders.  TheCompany follows the guidance of the Statements of Financial AccountingStandards No. 123 *Accounting for Stock-BasedCompensation* and No. 123(R) *Share-BasedPayment. * As of December 31, 2005, all outstanding stockoptions were fully vested.  No stockoptions were granted in 2006 or 2007 and, accordingly, net income and earningsper share have not been affected by stock-based compensation.   Any stock-based employee compensation forfuture grants will be determined at that time using the Black-Scholes oranother appropriate option-pricing model.

** **

**Note 4. Investment Portfolio:**

** **

The following tables set forth certaininformation regarding the Company’s investment portfolio at September 30, 2007and December 31, 2006:

 

## **Available-for-sale portfolio**

** **
| ** **                                                          | ** ** | **September 30, 2007** | *** *** |
|---------------------------------------------------------------------|------------|------------------------|--------------|
| **(dollars in thousands)**                                          | ** ** | **Amortized Cost**     | ** **   | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Estimated Fair Value** | ** ** | **Average Yield** | *** *** |
| U.S. Treasury  and other U.S. government agencies and corporations: |       |                   |         |   |   |   |   |   |   |   |   |
| Due within one year                                                 |       | $                      |  992    |   | $ |  — |   | $ |  — |   | $ |  992 |   | 5.26 | % |
| Due after one  year through five years                              |       | 3,016                  |         | 3 |   | 34 |   | 2,985 |   | 4.91 | % |
| Due after five  years through ten years                             |       | 1,827                  |         | — |   | 34 |   | 1,793 |   | 5.00 | % |
| State and  political subdivisions:                                  |       |                   |         |   |   |   |   |   |   |   |   |
| Due after one year  through five years                              |       | 101                    |         | — |   | 2 |   | 99 |   | 4.51 | % |
| Due after five  years through ten years                             |       | 1,621                  |         | 4 |   | 8 |   | 1,617 |   | 5.41 | % |
| Due after ten  years                                                |       | 8,099                  |         | 51 |   | 5 |   | 8,145 |   | 5.88 | % |
| Mortgage-backed  debt securities                                    |       | 12,474                 |         | 25 |   | 147 |   | 12,352 |   | 5.08 | % |
| Equity securities                                                   |       | 400                    |         | — |   | — |   | 400 |   | — | % |
|                                                                |       | $                      | 28,530       |   | $ | 83 |   | $ | 230 |   | $ | 28,383 |   | 5.23 | % |

** **

 

9

----

 
| ** **                                                          | ** ** | **December 31, 2006** | *** *** |
|---------------------------------------------------------------------|------------|-----------------------|--------------|
| **(dollars in thousands)**                                          | ** ** | **Amortized Cost**    | ** **   | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Estimated Fair Value** | ** ** | **Average Yield** | *** *** |
| U.S. Treasury  and other U.S. government agencies and corporations: |       |                  |         |   |   |   |   |   |   |   |   |
| Due within one  year                                                |       | $                     |  1,000  |   | $ |  — |   | $ |  8 |   | $ |  992 |   | 3.94 | % |
| Due after one  year through five years                              |       | 2,325                 |         | 2 |   | 11 |   | 2,316 |   | 4.90 | % |
| Due after five  years through ten years                             |       | 2,861                 |         | — |   | 31 |   | 2,830 |   | 4.95 | % |
| State and  political subdivisions:                                  |       |                  |         |   |   |   |   |   |   |   |   |
| Due after five  years through ten years                             |       | 1,400                 |         | — |   | 9 |   | 1,391 |   | 5.23 | % |
| Due after ten  years                                                |       | 8,423                 |         | 54 |   | 5 |   | 8,472 |   | 5.88 | % |
| Mortgage-backed  debt securities                                    |       | 12,952                |         | 17 |   | 196 |   | 12,773 |   | 4.69 | % |
| Equity  securities                                                  |       | 400                   |         | — |   | — |   | 400 |   | — | % |
|                                                                |       | $                     | 29,361       |   | $ | 73 |   | $ | 260 |   | $ | 29,174 |   | 5.01 | % |

** **
| ** **                                                         | ** ** | **September 30, 2007**                                            | *** *** |
|--------------------------------------------------------------------|------------|-------------------------------------------------------------------|--------------|
| ** **                                                         | ** ** | **Continuous unrealized losses existing for less than 12 months** | ** **   | **Continuous unrealized losses existing for 12 months and greater** | ** ** | **Total** | *** *** |
| **(dollars in thousands)**                                         | ** ** | **Fair****Value**                                                 | ** **   | **Unrealized Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized Losses** | *** *** |
| U.S. Treasury  and other U.S. government agencies and corporations |       | $                                                                 | —       |   | $ |  — |   | $ | 3,783 |   | $ |  68 |   | $ | 3,783 |   | $ | 68 |   |
| State and  political subdivisions                                  |       | 1,805                                                             |         | 6 |   | 7,544 |   | 141 |   | 9,349 |   | 147 |   |
| Mortgage-backed  debt securities                                   |       | 1,710                                                             |         | 5 |   | 1,240 |   | 10 |   | 2,950 |   | 15 |   |
| Total  temporarily impaired securities                             |       | $                                                                 | 3,515        |   | $ | 11 |   | $ | 12,567 |   | $ | 219 |   | $ | 16,082 |   | $ | 230 |   |

 
| ** **                                                         | ** ** | **December 31, 2006**                                             | *** *** |
|--------------------------------------------------------------------|------------|-------------------------------------------------------------------|--------------|
| ** **                                                         | ** ** | **Continuous unrealized losses existing for less than 12 months** | ** **   | **Continuous unrealized losses existing for 12 months and greater** | ** ** | **Total** | *** *** |
| **(dollars in thousands)**                                         | ** ** | **Fair****Value**                                                 | ** **   | **Unrealized Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized Losses** | *** *** |
| U.S. Treasury  and other U.S. government agencies and corporations |       | $                                                                 |  827    |   | $ | 10 |   | $ |  4,332 |   | $ |  40 |   | $ |  5,159 |   | $ |  50 |   |
| State and  political subdivisions                                  |       | 3,046                                                             |         | 6 |   | 559 |   | 8 |   | 3,605 |   | 14 |   |
| Mortgage-backed  debt securities                                   |       | 1,034                                                             |         | 6 |   | 8,922 |   | 190 |   | 9,956 |   | 196 |   |
| Total  temporarily impaired securities                             |       | $                                                                 | 4,907        |   | $ | 22 |   | $ | 13,813 |   | $ | 238 |   | $ | 18,720 |   | $ | 260 |   |

 

Management evaluates securities for other-than-temporary impairment atleast on a quarterly basis, and more frequently when economic or marketconcerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to whichthe fair value has been less than cost, (2) the financial condition andnear-term prospects of the issuer, and (3) the intent and ability of theCompany to retain its investment in the issuer for a period of time sufficientto allow for any anticipated recovery in fair value.  The Company has not recognized anyother-than-temporary impairment in connection with the unrealized losses reflectedin the preceding tables.  All of thesedeclines can be attributable to increases in interest rates and not a change incredit quality.  As Management has theability and intent to hold debt securities until maturity, or until theunrealized loss is recouped, no declines are deemed to be other than temporary.

** **

 

10

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## **Restricted Stock**

 

The following table shows the amounts ofrestricted stock as of September 30, 2007 and December 31, 2006:

 

| **(dollars in thousands)**         | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | *** *** |
|------------------------------------|------------|-------------------------|------------|------------------------|--------------|
| Federal Home  Loan Bank of Atlanta |       | $                       |  871  |                   | $            | 459 |   |
| Federal Reserve  Bank              |       | 529                     |       | 439                    |         |
| Atlantic Central  Bankers Bank     |       | 40                      |       | 40                     |         |
|                               |       | $                       | 1,440      |                   | $            | 938 |   |

** **

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

** **

Loans consist of the following:

 
| **(dollars in thousands)**                                                  | *** *** | **September 30,  2007** | ** **   | **% of  Loans** | ** ** | **December 31,  2006** | ** ** | **% of  Loans** | *** *** |
|-----------------------------------------------------------------------------|--------------|-------------------------|--------------|-----------------|------------|------------------------|------------|-----------------|--------------|
| Real estate  loans:                                                         |         |                    |         |            |       |                   |       |            |         |
| Construction and  land development                                          |         | $                       |  34,487 |            | 16         | %                      | $          |  30,183    |         | 17 | % |
| Mortgage loans:                                                             |         |                    |         |            |       |                   |       |            |         |
| Secured by 1 to  4 family residential properties                            |         | 36,315                  |         | 17              | %          | 34,194                 |       | 20              | %            |
| Secured by  multi-family (5 or more) residential properties                 |         | 10,548                  |         | 5               | %          | 4,640                  |       | 3               | %            |
| Secured by  commercial properties                                           |         | 96,753                  |         | 46              | %          | 73,582                 |       | 42              | %            |
| Secured by farm  land                                                       |         | 7,517                   |         | 4               | %          | 4,302                  |       | 2               | %            |
| Total mortgage  loans                                                       |         | 151,133                 |         | 72              | %          | 116,718                |       | 67              | %            |
| Loans to farmers                                                            |         | 50                      |         | —          | %          | —                 |       | —          | %            |
| Commercial and  industrial loans                                            |         | 22,271                  |         | 11              | %          | 24,806                 |       | 14              | %            |
| Loans to  individuals for household, family and other personal expenditures |         | 2,424                   |         | 1               | %          | 2,247                  |       | 2               | %            |
|                                                                        |         | 210,365                 |         | 100             | %          | 173,954                |       | 100             | %            |
| Less allowance  for loan losses                                             |         | (2,401                  | )            |            |       | (2,166                 | )          |            |         |
| Net loans                                                                   |         | $                       | 207,964      |            |       |                   | $          | 171,788         |         |   |   |

 

Transactions in the allowance for loan losses are summarized asfollows:

 
| ** **                                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| **(dollars in thousands)**                     | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| Balance at  beginning of period                |       | $                                     | 2,351      |                                 | $          | 2,073 |   | $ | 2,166 |   | $ | 1,953 |   |
| Provision  charged to operating expenses       |       | 50                                    |       | 60                                   |       | 241 |   | 180 |   |
| Recoveries of  loans previously charged-off    |       | —                                |       | —                               |       | — |   | — |   |
|                                           |       | 2,401                                 |       | 2,133                                |       | 2,407 |   | 2,133 |   |
| Loans  charged-off — consumer             |       | —                                |       | —                               |       | (6 | ) | — |   |
| Balance at end  of period                      |       | $                                     | 2,401      |                                 | $          | 2,133 |   | $ | 2,401 |   | $ | 2,133 |   |
| Average total  loans outstanding during period |       | $                                     | 203,863    |                                 | $          | 163,989 |   | $ | 190,190 |   | $ | 161,042 |   |

 

 

 

11

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**Note6.   Deposits**

** **

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

 

| **(dollars in thousands)**           | ** ** | **September 30,  2007** | ** **   | **December 31,  2006** | *** *** |
|--------------------------------------|------------|-------------------------|--------------|------------------------|--------------|
| Noninterest-bearing  demand deposits |       | $                       |  34,038 |                   | $            |  32,796 |   |
| Interest-bearing  demand deposits    |       |                    |         |                   |         |
| NOW accounts                         |       | 15,752                  |         | 18,233                 |         |
| Money market  accounts               |       | 38,703                  |         | 32,023                 |         |
| Savings accounts                     |       | 3,305                   |         | 2,562                  |         |
| Certificates of  deposit:            |       |                    |         |                   |         |
| $100,000 or more                     |       | 66,911                  |         | 61,315                 |         |
| Less than  $100,000                  |       | 70,328                  |         | 62,449                 |         |
| Total deposits                       |       | $                       | 229,037      |                   | $            | 209,378 |   |

** **

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

** **

In December 2006, Bancorp completed theprivate placement of an aggregate of $6,000,000 of trust preferred securitiesthrough FCBI Statutory Trust I (the “Trust”), a newly formed trust subsidiaryorganized under Connecticut law, of which Bancorp owns all of the commonsecurities of $186,000. The principal asset of the Trust is a similar amount ofBancorp’s junior subordinated debentures. The junior subordinated debenturesbear interest at a fixed rate of 6.5375% until December 15, 2011, at which timethe interest rate becomes a variable rate, adjusted quarterly, equal to 163 basispoints over three-month LIBOR. The junior subordinated debentures mature onDecember 15, 2036, and may be redeemed at par, at Bancorp’s option, on anyinterest payment date commencing December 15, 2011. The securities areredeemable prior to December 15, 2011, at a premium ranging up to 103.525% ofthe principal amount thereof, upon the occurrence of certain regulatory orlegal events. The obligations of Bancorp with respect to the Trust’s preferredsecurities constitute a full and unconditional guarantee by Bancorp of Trust’sobligations with respect to the trust preferred securities to the extent setforth in the related guarantee. Subject to certain exceptions and limitations,Bancorp may elect from time to time to defer interest payments on the juniorsubordinated debentures, resulting in a deferral of distribution payments onthe related trust preferred securities. Deferral of such payments would result in significant restrictions onBancorp’s ability to pay dividends or purchase shares of its common stock.  The proceeds from this issuance will be usedto supplement the Company’s regulatory capital for continued growth and othergeneral corporate purposes.

 

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

 

At September 30, 2007, the Company had$10,000,000 in borrowings under its credit facility from the Federal Home LoanBank of Atlanta (“FHLB”), as compared to no outstanding balances at December31, 2006.  There are two convertibleadvances in the amounts of $5,000,000 each, which are both at a rate of 4.56%,with a maturity dates of April 27, 2012 and September 4, 2012, unless called onApril 27, 2009 or September 4, 2010, respectively, by the FHLB.  Outstanding advances are secured by collateralconsisting of a blanket lien on qualifying loans in the Bank’s residentialmortgage loan portfolio.

 

 

12

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**Note8.  Noninterest Expense:**

 

Noninterest expense consists of the following:

 
| ** **                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | *** *** |
|-----------------------------------------|------------|---------------------------------------|------------|--------------------------------------|--------------|
| **(dollars in thousands)**              | ** ** | **2007**                              | ** ** | **2006**                             | ** **   | **2007** | ** ** | **2006** | *** *** |
|                                    |       |                                  |       |                                 |         |   |   |   |   |
| Salaries                                |       | $                                     |  799  |                                 | $            |  719 |   | $ | 2,351 |   | $ | 1,948 |   |
| Bonus                                   |       | 20                                    |       | 51                                   |         | 59 |   | 233 |   |
| Deferred  Personnel Costs               |       | (49                                   | )          | (41                                  | )            | (127 | ) | (132 | ) |
| Payroll Taxes                           |       | 51                                    |       | 46                                   |         | 189 |   | 156 |   |
| Employee  Insurance                     |       | 56                                    |       | 46                                   |         | 149 |   | 108 |   |
| Other Employee Benefits                 |       | 35                                    |       | 28                                   |         | 123 |   | 89 |   |
| Depreciation                            |       | 71                                    |       | 59                                   |         | 213 |   | 145 |   |
| Rent                                    |       | 74                                    |       | 61                                   |         | 190 |   | 189 |   |
| Utilities                               |       | 25                                    |       | 24                                   |         | 76 |   | 54 |   |
| Repairs and  Maintenance                |       | 48                                    |       | 29                                   |         | 145 |   | 78 |   |
| ATM Expense                             |       | 21                                    |       | 22                                   |         | 63 |   | 57 |   |
| Other Occupancy  and Equipment Expenses |       | 25                                    |       | 21                                   |         | 84 |   | 67 |   |
| Postage and  Supplies                   |       | 34                                    |       | 29                                   |         | 79 |   | 58 |   |
| Data Processing                         |       | 89                                    |       | 82                                   |         | 271 |   | 216 |   |
| Advertising and  Promotion              |       | 89                                    |       | 61                                   |         | 215 |   | 180 |   |
| Legal                                   |       | 8                                     |       | 2                                    |         | 18 |   | 15 |   |
| Insurance                               |       | 14                                    |       | 12                                   |         | 37 |   | 29 |   |
| Consulting                              |       | 21                                    |       | 17                                   |         | 42 |   | 39 |   |
| Courier                                 |       | 11                                    |       | 11                                   |         | 34 |   | 33 |   |
| Audit Fees                              |       | 59                                    |       | 37                                   |         | 176 |   | 112 |   |
| Other                                   |       | 97                                    |       | 56                                   |         | 264 |   | 185 |   |
|                                    |       | $                                     | 1,598      |                                 | 1,372        |   | $ | 4,651 |   | $ | 3,859 |   |
|                                         |            |                                       |            |                                      |              |  |  |  |  |  |  |  |  |

** **

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

** **

The Company has a Section 401(k) profit sharing plan covering employeesmeeting certain eligibility requirements as to minimum age and years ofservice.  Employees may make voluntarycontributions to the Plan through payroll deductions on a pre-tax basis.  The Company makes 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, followingretirement, death, disability or other termination of employment, in a singlelump-sum payment.

 

The Company made contributions to the Plan in the amounts of $100,000 and$72,000 for the first nine months of 2007 and 2006, respectively, and $29,000and $24,000 for the three month periods ended September 30, 2007 and 2006,respectively.

 

**Note10.  Shareholders’ Equity:**

 

Capital:

 

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

 

Quantitative measures established by regulation toensure capital adequacy require the Company and the Bank to maintain minimumamounts and ratios (set forth in the following table) of total and Tier 1capital (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 theBank met all capital adequacy requirements to which they are subject as ofSeptember 30, 2007.

 

 

13

----

 

 

As of September 30, 2007, the most recent notificationfrom the regulatory agency categorized the Bank as well capitalized under theregulatory framework for prompt corrective action.  To be categorized as well capitalized theBank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1leverage ratios as set forth in the table. There are no conditions or events since that notification whichmanagement believes have changed the Bank’s category.

 

TheCompany’s and the Bank’s actual capital amounts and ratios at September 30,2007 and December 31, 2006 are presented in the following tables.

 
| **September 30, 2007**     | ** ** | **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                    |       | $          | 25,109     |                               | 10.70      | %                                                                               | $            | 9,387 |   | 4.00 | % | N/A |   | N/A |   |
| Bank                       |       | $          | 22,303     |                               | 9.53       | %                                                                          | $            | 9,364 |   | 4.00 | % | $ | 14,046 |   | 6.00 | %  |
| Total Capital              |       |       |       |                               |       |                                                                            |         |   |   |   |   |   |   |
| To Risk-Weighted Assets    |       |       |       |                               |       |                                                                            |         |   |   |   |   |   |   |
| Company                    |       | $          | 27,510     |                               | 11.72      | %                                                                               | $            | 18,775 |   | 8.00 | % | N/A |   | N/A |   |
| Bank                       |       | $          | 24,704     |                               | 10.55      | %                                                                          | $            | 18,728 |   |  8.00 | % | $ | 23,410 |   |  10.00 | % |
| Tier 1 Capital             |       |       |       |                               |       |                                                                            |         |   |   |   |   |   |   |
| To Average Assets          |       |       |       |                               |       |                                                                            |         |   |   |   |   |   |   |
| Company                    |       | $          | 25,109     |                               | 9.87       | %                                                                               | $            | 10,171 |   | 4.00 | % | N/A |   | N/A |   |
| Bank                       |       | $          | 22,303     |                               |  8.79 | %                                                                               | $            | 10,148 |   |  4.00 | % | $ | 12,685 |   |  5.00 | % |

 

 
| **December 31, 2006**      | ** ** | **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                    |       | $          | 24,008     |                               | 12.10      | %                                                                               | $            | 7,937 |   | 4.00 | % | N/A |   | N/A |   |
| Bank                       |       | $          | 18,119     |                               | 9.15       | %                                                                          | $            | 7,920 |   | 4.00 | % | $ | 11,880 |   | 6.00 | %  |
| Total Capital              |       |       |       |                               |       |                                                                            |         |   |   |   |   |   |   |
| To Risk-Weighted Assets    |       |       |       |                               |       |                                                                            |         |   |   |   |   |   |   |
| Company                    |       | $          | 26,174     |                               | 13.19      | %                                                                               | $            | 15,873 |   | 8.00 | % | N/A |   | N/A |   |
| Bank                       |       | $          | 20,285     |                               | 10.24      | %                                                                          | $            | 15,840 |   |  8.00 | % | $ | 19,800 |   |  10.00 | % |
| Tier 1 Capital             |       |       |       |                               |       |                                                                            |         |   |   |   |   |   |   |
| To Average Assets          |       |       |       |                               |       |                                                                            |         |   |   |   |   |   |   |
| Company                    |       | $          | 24,008     |                               | 10.96      | %                                                                               | $            | 8,762 |   | 4.00 | % | N/A |   | N/A |   |
| Bank                       |       | $          | 18,119     |                               |  8.29 | %                                                                               | $            | 8,746 |   | 4.00 | % | $ | 10,932 |   |  5.00 | % |

** **

On June 26, 2007, the Company authorized the repurchase of up to146,000 shares of its common stock, for an aggregate expenditure of not morethan $4.5 million, through June 30, 2012, or earlier termination of the programby the Board of Directors.  Repurchases,if any, by the Company pursuant to this authorization are expected to enablethe Company to repurchase its shares at an attractive price, and to provide asource of liquidity for the Company’s shares. As of September 30, 2007, there have been no shares repurchased by theCompany.

 

**Item 2.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

** **

**Forward-LookingStatements**

 

This management’s discussion and analysis contains forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995, including statements relating to Frederick County Bancorp, Inc.’s (the“Company”) beliefs, expectations, anticipations and plans regarding, amongother things, general economic trends, interest rates, product expansions

 

 

14

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and other matters.  Suchforward-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 asfederal monetary policy, inflation, employment, profitability and consumer confidencelevels, both nationally and in the Company’s market area, the health of thereal estate and construction market in the Company’s market area, the Company’sability to develop and market new products and to enter new markets,competitive challenges in the Company’s market, legislative changes and otherfactors, and as such, there can be no assurance that future events will developin accordance with the forward-looking statements contained herein.  Readers are cautioned against placing unduereliance on any such forward-looking statement. In addition, the Company’s past results of operations do not necessarilyindicate its future results.

 

**General**

 

Thefollowing paragraphs provide an overview of the financial condition and resultsof operations of the Company.  Thisdiscussion is intended to assist the readers in their analysis of theaccompanying financial statements and notes thereto.

 

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

 

## **Critical Accounting Policies**

 

The Company’sconsolidated financial statements are prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”) andfollow general practices within the industry in which it operates.  Application of these principles requiresmanagement to make estimates, assumptions, and judgments that affect theamounts reported in the financial statements and accompanying notes.  These estimates, assumptions, and judgmentsare based on information available as of the date of the financial statements;accordingly, as this information changes, the financial statements couldreflect different estimates, assumptions, and judgments.  Certain policies inherently have a greaterreliance on the use of estimates, assumptions, and judgments and as such have agreater possibility of producing results that could be materially differentthan originally reported.  Estimates,assumptions, and judgments are necessary when assets and liabilities arerequired to be recorded at fair value, when a decline in the value of an assetnot carried on the financial statements at fair value warrants an impairmentwrite-down or valuation reserve to be established, or when an asset orliability needs to be recorded contingent upon a future event.  Carrying assets and liabilities at fair valueinherently results in more financial statement volatility.  The fair values and the information used torecord valuation adjustments for certain assets and liabilities are basedeither on quoted market prices or are provided by other third-party sources,when available. The estimates used in management’s assessment of the adequacyof the allowance for loan losses require that management make assumptions aboutmatters that are uncertain at the time of estimation.  Differences in these assumptions anddifferences between the estimated and actual losses could have a materialeffect.  For discussions related to thecritical accounting policies of the Company, refer to the sections in thisManagement’s Discussion and Analysis entitled “Income Taxes” and “Allowance forLoan Losses.”

 

## **Loans**

 

Loans increased by $36.4million, or 20.93%, from December 31, 2006, to a balance of $210.37 million asof September 30, 2007, and by $43.83 million, or 26.32% from September 30, 2006.

 

## **Deposits**

 

Deposits grew by $19.66 million, or 9.39%, from December 31, 2006 to abalance of $229.04 million as of September 30, 2007, and by $25.34 million, or12.44% from September 30, 2006.  TheCompany’s deposit growth has mainly been in certificates of deposit over thepast year.

 

**                Three Months Ended September 30,2007 and 2006**

** **

Net income was $408,000 for the quarter ended September 30, 2007, ascompared to $468,000 of net income for the same period in 2006.  The decrease in earnings for this quarter in2007 compared to the same quarter in 2006 is primarily related to the increasein personnel and occupancy expenses for the two new branches opened late in thethird quarter of 2006 and net interest margin compression.  Basicearnings per share for the three months ended September 30, 2007 and 2006 were$0.28 and $0.32, respectively,

 

 

15

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and were based on weighted-average number ofshares outstanding of 1,460,602 and 1,458,602, respectively.  Diluted earnings per share for the threemonths ended September 30, 2007 and 2006 were $0.27 and $0.31, respectively,and were based on weighted-average number of shares outstanding of 1,515,716and 1,526,297, respectively.   TheCompany recorded loan loss provisions of $50,000 and $60,000 for thethree-month periods ended September 30, 2007 and 2006, respectively.

 

The Company experienced an annualized returnon average assets of 0.64% and 0.86% for the three-month periods endedSeptember 30, 2007 and 2006, respectively. Additionally, the Company experienced an annualized return on averageshareholders’ equity of 8.68% and 10.92% for the three-month periods endedSeptember 30, 2007 and 2006, respectively.

 

**                Nine Months Ended September 30,2007 and 2006**

** **

Net income was $1.07 million for the nine months ended September 30,2007, as compared to $1.46 million of net income for the same period in2006.  The decrease in earnings for thisperiod in 2007 compared to the same quarter in 2006 is primarily related to theincrease in personnel and occupancy expenses for the two new branches openedlate in the third quarter of 2006, higher loan loss provisions and net interestmargin compression.  Basic earnings per share for the nine-monthperiods ended September 30, 2007 and 2006 were $0.73 and $1.00, respectively,and were based on weighted-average number of shares outstanding of 1,459,965and 1,458,602, respectively.  Dilutedearnings per share for the nine-month periods ended September 30, 2007 and 2006were $0.70 and $0.96, respectively, and were based on weighted-average numberof shares outstanding of 1,520,638 and 1,527,193, respectively.   The Company recorded loan loss provisions of$241,000 and $180,000 for the nine months ended September 30, 2007 and 2006,respectively.

 

The Company experienced an annualized returnon average assets of 0.59% and 0.91% for the nine-month periods ended September30, 2007 and 2006, respectively. Additionally, the Company experienced an annualized return on averageshareholders’ equity of 7.68% and 11.68% for the nine-month periods endedSeptember 30, 2007 and 2006, respectively.

 

 

16

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

 

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

** **
| ** **                                       | ** ** | **Three  Months Ended September 30,** | *** *** |
|--------------------------------------------------|------------|---------------------------------------|--------------|
| ** **                                       | ** ** | **2007**                              | ** **   | **2006** | *** *** |
| **(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                               |       | $                                     | 8,094        |   | $ | 109 |   | 5.34 | % | $ | 10,915 |   | $ | 143 |   | 5.20 | % |
| Interest bearing deposits in other banks         |       | 3,541                                 |         | 45 |   | 5.04 |   | 4,779 |   | 63 |   | 5.23 |   |
| Investment securities (1):                       |       |                                  |         |   |   |   |   |   |   |   |   |   |   |
| Taxable                                          |       | 20,341                                |         | 253 |   | 4.93 |   | 20,871 |   | 229 |   | 4.35 |   |
| Tax-exempt (2)                                   |       | 9,822                                 |         | 152 |   | 6.14 |   | 9,297 |   | 141 |   | 6.02 |   |
| Loans (3)                                        |       | 203,863                               |         | 3,773 |   | 7.34 |   | 163,989 |   | 3,010 |   | 7.28 |   |
| Total interest-earning assets                    |       | 245,661                               |         | 4,332 |   | 7.00 |   | 209,851 |   | 3,586 |   | 6.78 |   |
| Noninterest-earning assets                       |       | 8,609                                 |         |   |   |   |   | 7,367 |   |   |   |   |   |
| Total assets                                     |       | $                                     | 254,270      |   |   |   |   |   | $ | 217,218 |   |   |   |   |   |
|                                             |       |                                  |         |   |   |   |   |   |   |   |   |   |   |
| Liabilities and Shareholders’ Equity        |       |                                  |         |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                    |       |                                  |         |   |   |   |   |   |   |   |   |   |   |
| NOW accounts                                     |       | $                                     | 12,017       |   | 6 |   | 0.20 | % | $ | 15,866 |   | 7 |   | 0.18 | % |
| Savings accounts                                 |       | 3,088                                 |         | 4 |   | 0.51 |   | 2,474 |   | 3 |   | 0.48 |   |
| Money market accounts                            |       | 37,121                                |         | 265 |   | 2.83 |   | 33,196 |   | 237 |   | 2.83 |   |
| Certificates of deposit $100,000 or more         |       | 67,159                                |         | 822 |   | 4.86 |   | 57,521 |   | 636 |   | 4.39 |   |
| Certificates of deposit less than $100,000       |       | 69,680                                |         | 841 |   | 4.79 |   | 57,134 |   | 589 |   | 4.09 |   |
| Short-term borrowings                            |       | —                                |         | — |   | — |   | 700 |   | 12 |   | 6.80 |   |
| Long-term borrowings                             |       | 6,467                                 |         | 76 |   | 4.66 |   | — |   | — |   | — |   |
| Junior subordinated debentures                   |       | 6,186                                 |         | 101 |   | 6.54 |   | — |   | — |   | — |   |
| Total interest-bearing liabilities               |       | 201,718                               |         | 2,115 |   | 4.16 |   | 166,891 |   | 1,484 |   | 3.53 |   |
| Noninterest-bearing deposits                     |       | 32,760                                |         |   |   |   |   | 32,507 |   |   |   |   |   |
| Noninterest-bearing liabilities                  |       | 996                                   |         |   |   |   |   | 680 |   |   |   |   |   |
| Total liabilities                                |       | 235,474                               |         |   |   |   |   | 200,078 |   |   |   |   |   |
| Total shareholders’ equity                  |       | 18,796                                |         |   |   |   |   | 17,140 |   |   |   |   |   |
| Total liabilities and shareholders’  equity |       | $                                     | 254,270      |   |   |   |   |   | $ | 217,218 |   |   |   |   |   |
| Net interest income                              |       |                                  |         | $ | 2,217 |   |   |   |   |   | $ | 2,102 |   |   |   |
| Net interest spread                              |       |                                  |         |   |   | 2.84 | % |   |   |   |   | 3.25 | % |
| Net interest margin                              |       |                                  |         |   |   | 3.58 | % |   |   |   |   | 3.97 | % |

----

(1)          Yields on securities available-for-sale have beencalculated on the basis of historical cost and do not give effect to changes inthe fair value of those securities, which is reflected as a component ofshareholders’ equity.

(2)          Presented on a taxable-equivalent basis using thestatutory federal income tax rate of 34%. Taxable-equivalent adjustments of $52,000 in 2007 and $48,000 in 2006are included in the calculation of the tax-exempt investment interest income.

(3)          Presented on a taxable-equivalent basis using thestatutory federal income tax rate of 34%. Taxable-equivalent adjustments of $15,000 in 2007 and $4,000 in 2006 areincluded in the calculation of the loan interest income.  Net loan origination income in interestincome totaled $3,000 in 2006, but was an expense of $2,000 in 2007.

 

 

17

----

 

 
| ** **                                       | ** ** | **Nine Months Ended September 30,** | ** **   |
|--------------------------------------------------|------------|-------------------------------------|--------------|
| ** **                                       | ** ** | **2007**                            | ** **   | **2006** | ** ** |
| **(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                               |       | $8,397                              |         | $333 |   | 5.30 | % | $13,031 |   | $473 |   | 4.85 | % |
| Interest bearing deposits in other banks         |       | 4,687                               |         | 184 |   | 5.25 |   | 5,269 |   | 192 |   | 4.87 |   |
| Investment securities (1):                       |       |                                |         |   |   |   |   |   |   |   |   |   |   |
| Taxable                                          |       | 21,120                              |         | 755 |   | 4.78 |   | 20,503 |   | 658 |   | 4.29 |   |
| Tax-exempt (2)                                   |       | 9,822                               |         | 452 |   | 6.15 |   | 6,620 |   | 297 |   | 6.00 |   |
| Loans (3)                                        |       | 190,190                             |         | 10,456 |   | 7.35 |   | 161,042 |   | 8,640 |   | 7.17 |   |
| Total interest-earning assets                    |       | 234,216                             |         | 12,180 |   | 6.95 |   | 206,465 |   | 10,260 |   | 6.64 |   |
| Noninterest-earning assets                       |       | 8,353                               |         |   |   |   |   | 6,500 |   |   |   |   |   |
| Total assets                                     |       | $242,569                            |         |   |   |   |   | $212,965 |   |   |   |   |   |
|                                             |       |                                |         |   |   |   |   |   |   |   |   |   |   |
| Liabilities and Shareholders’ Equity        |       |                                |         |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                    |       |                                |         |   |   |   |   |   |   |   |   |   |   |
| NOW accounts                                     |       | $12,425                             |         | 17 |   | 0.18 | % | $14,438 |   | 19 |   | 0.18 | % |
| Savings accounts                                 |       | 2,897                               |         | 11 |   | 0.51 |   | 2,676 |   | 10 |   | 0.50 |   |
| Money market accounts                            |       | 33,540                              |         | 697 |   | 2.78 |   | 31,919 |   | 641 |   | 2.68 |   |
| Certificates of deposit $100,000 or more         |       | 65,154                              |         | 2,333 |   | 4.79 |   | 55,625 |   | 1,709 |   | 4.11 |   |
| Certificates of deposit less than $100,000       |       | 67,192                              |         | 2,350 |   | 4.68 |   | 57,756 |   | 1,638 |   | 3.79 |   |
| Short-term borrowings                            |       | 41                                  |         | 2 |   | 6.52 |   | 534 |   | 26 |   | 6.51 |   |
| Long-term borrowings                             |       | 3,370                               |         | 117 |   | 4.64 |   | 166 |   | 10 |   | 8.05 |   |
| Junior subordinated debentures                   |       | 6,186                               |         | 303 |   | 6.55 |   | — |   | — |   | — |   |
| Total interest-bearing liabilities               |       | 190,805                             |         | 5,830 |   | 4.09 |   | 163,114 |   | 4,053 |   | 3.32 |   |
| Noninterest-bearing deposits                     |       | 32,504                              |         |   |   |   |   | 32,549 |   |   |   |   |   |
| Noninterest-bearing liabilities                  |       | 747                                 |         |   |   |   |   | 629 |   |   |   |   |   |
| Total liabilities                                |       | 224,056                             |         |   |   |   |   | 196,292 |   |   |   |   |   |
| Total shareholders’ equity                  |       | 18,513                              |         |   |   |   |   | 16,673 |   |   |   |   |   |
| Total liabilities and shareholders’  Equity |       | $242,569                            |         |   |   |   |   | $212,965 |   |   |   |   |   |
| Net interest income                              |       |                                |         | $6,350 |   |   |   |   |   | $6,207 |   |   |   |
| Net interest spread                              |       |                                |         |   |   | 2.87 | % |   |   |   |   | 3.32 | % |
| Net interest margin                              |       |                                |         |   |   | 3.62 | % |   |   |   |   | 4.02 | % |

----

(1)          Yields on securities available-for-sale have beencalculated on the basis of historical cost and do not give effect to changes inthe fair value of those securities, which is reflected as a component ofshareholders’ equity.

(2)          Presented on a taxable-equivalent basis using thestatutory federal income tax rate of 34%. Taxable-equivalent adjustments of $154,000 in 2007 and $101,000 in 2006are included in the calculation of the tax-exempt investment interest income.

(3)          Presented on a taxable-equivalent basis using thestatutory federal income tax rate of 34%. Taxable-equivalent adjustments of $39,000 in 2007 and $11,000 in 2006are included in the calculation of the loan interest income.  Net loan origination income in interestincome totaled $17,000 in 2007 and $13,000 in 2006.

 

 

18

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**Rate/VolumeAnalysis**

 

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

 
| ** **                                  | ** ** | **Three Months Ended September 30,  2007 compared to 2006** | ** ** | **Nine Months Ended September 30,  2007 compared to 2006** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                  | ** ** | **Increase (decrease)  Due to**                             | ** ** | ** **                                                 | ** ** | **Increase (decrease)  Due to** | ** ** | ** ** | ** ** |
| **(dollars in thousands)**                  | ** ** | **Volume**                                                  | ** ** | **Rate(1)**                                                | ** ** | **Net Increase (Decrease)** | ** ** | **Volume** | ** ** | **Rate(1)** | ** ** | **Net Increase  (Decrease)** | ** ** |
| Interest income                             |       |                                                        |       |                                                       |       |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                   |       |                                                        |       |                                                       |       |   |   |   |   |   |   |   |   |
| Federal funds  sold                         |       | $                                                           | (37        | )                                                          | $          | 3 |   | $ | (34 | ) | $ | (300 | ) | $ | 160 |   | $ | (140 | ) |
| Interest-bearing  deposits in other banks   |       | (16                                                         | )          | (2                                                         | )          | (18 | ) | (38 | ) | 30 |   | (8 | ) |
| Investment  securities:                     |       |                                                        |       |                                                       |       |   |   |   |   |   |   |   |   |
| Taxable                                     |       | (6                                                          | )          | 30                                                         |       | 24 |   | 35 |   | 62 |   | 97 |   |
| Tax-exempt                                  |       | 8                                                           |       | 3                                                          |       | 11 |   | 256 |   | (101 | ) | 155 |   |
| Loans                                       |       | 726                                                         |       | 37                                                         |       | 763 |   | 2,788 |   | (972 | ) | 1,816 |   |
| Total interest  income                      |       | 675                                                         |       | 71                                                         |       | 746 |   | 2,741 |   | (821 | ) | 1,920 |   |
|                                        |       |                                                        |       |                                                       |       |   |   |   |   |   |   |   |   |
| Interest expense                            |       |                                                        |       |                                                       |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:              |       |                                                        |       |                                                       |       |   |   |   |   |   |   |   |   |
| NOW accounts                                |       | —                                                      |       | (1                                                         | )          | (1 | ) | — |   | (2 | ) | (2 | ) |
| Savings accounts                            |       | 1                                                           |       | —                                                     |       | 1 |   | 1 |   | — |   | 1 |   |
| Money market  accounts                      |       | 28                                                          |       | —                                                     |       | 28 |   | 58 |   | (2 | ) | 56 |   |
| Certificates of  deposit $100,000 or more   |       | 106                                                         |       | 80                                                         |       | 186 |   | 522 |   | 102 |   | 624 |   |
| Certificates of  deposit less than $100,000 |       | 128                                                         |       | 124                                                        |       | 252 |   | 477 |   | 235 |   | 712 |   |
| Short-term  borrowings                      |       | (12                                                         | )          | —                                                     |       | (12 | ) | (43 | ) | 19 |   | (24 | ) |
| Long-term  borrowings                       |       | 76                                                          |       | —                                                     |       | 76 |   | 344 |   | (237 | ) | 107 |   |
| Junior  subordinated debentures             |       | 101                                                         |       | —                                                     |       | 101 |   | 303 |   | — |   | 303 |   |
| Total interest  expense                     |       | 428                                                         |       | 203                                                        |       | 631 |   | 1,662 |   | 115 |   | 1,777 |   |
| Net interest  income                        |       | $                                                           | 247        |                                                       | $          | (132 | ) | $ | 115 |   | $ | 1,079 |   | $ | (936 | ) | $ | 143 |   |

----

(1)    The volume/rate variance is allocatedentirely to change in rates.

 

## **NetInterest Income**

 

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

 

## **                Three Months Ended September 30, 2007 and 2006**

 

Netinterest income (on a taxable-equivalent basis) was $2.22 million in 2007 and$2.10 million in 2006.  The increase ininterest income was primarily driven by the volume of loans in the loanportfolio.  Average earning assetsincreased by $35.81 million, or 17.06%, since September 30, 2006.  The yield on earning assets in 2007 increasedto 7.00% from 6.78% in 2006.  Theincrease of 63 basis points in the rate paid on interest-bearing liabilitiesprimarily is a result of the issuance of junior subordinated debentures inDecember 2006, the repricing of maturing certificates of deposit with higherrates and stiff competition for deposits. The Company’s net interest margin was 3.58% and 3.97%, and the netinterest spread was 2.84% and 3.25%, for the three-month periods endedSeptember 30, 2007 and 2006, respectively. This decrease relates primarily to the increased costs of funds as aresult of more funding of higher costs certificates of deposit and the reducedaverage balances of the low cost title company deposits.

 

 

19

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Interestexpense increased 42.59% from $1.48 million in 2006 to $2.12 million in 2007due to the 20.87% increase in volume of average interest-bearing liabilities,along with the increase in the related rates paid on such interest-bearingliabilities, which increased to 4.16% in 2007 from 3.53% in 2006.

 

## **                Nine Months Ended September 30, 2007 and 2006**

 

Netinterest income (on a taxable-equivalent basis) of $6.35 million in 2007 was$143,000, or 2.30% higher than the amount recognized in 2006.  This increase in net interest income is dueto the growth in average earning assets, primarily the volume of loan in theloan portfolio, which was partially offset by the increased volume ofinterest-bearing liabilities and an increase in the rates paid.  Average earning assets increased by $27.75million, or 13.44%, since September 30, 2006. The yield on earning assets in 2007 increased to 6.95% from 6.64% in2006.  This increase in yield isattributable to the higher ratio of average loans to average interest-earningassets in 2007 compared to 2006. However, the increase by 77 basis points in the rate paid oninterest-bearing liabilities, primarily is a result of the issuance of juniorsubordinated debentures in December 2006, the borrowings from the FHLB, therepricing of maturing certificates of deposit with higher rates and stiffcompetition for deposits, partially offset the increase in yield on interestearning assets.  The Company’s netinterest margin was 3.62% and 4.02%, and the net interest spread was 2.87% and3.32%, for the nine-month periods ended September 30, 2007 and 2006,respectively.  This decrease relates primarilyto the increased costs of funds as a result of more funding of higher costscertificates of deposit and the reduced average balances of the low cost titlecompany deposits.

 

Theinterest expense increased 43.84% from $4.05 million in 2006 to $5.83 millionin 2007 due to the 16.98% increase in volume of average interest-bearingliabilities, along with the increase in the rates paid on such interest-bearingliabilities, which increased to 4.09% in 2007 from 3.32% in 2006.

 

TheCompany has seen the volume of certificates of deposit increase over the pastyear from an average of total deposits at September 30, 2006 of 58.16% to61.93% at September 30, 2007.

 

# **Noninterest Income**

 

Noninterest income was $100,000 and $80,000 for the three-month periodsended September 30, 2007 and 2006, respectively and $283,000 and $239,000 forthe nine-month periods September 30, 2007 and 2006, respectively.  The most significant increase relates to NSFfees which increased $15,000 for the three month period and $27,000 for thenine month period.

 

The Company’s management is committed to developing and offeringinnovative, market-driven products and services that will generate additionalsources of noninterest income.  However,the future results of any of these products or services cannot be predicted atthis time.

 

## **Noninterest Expense**

 

See Note 8 to the unaudited consolidatedfinancial statements for a schedule showing a detailed breakdown of the Company’snoninterest expense.

 

**ThreeMonths Ended September 30, 2007 and 2006**

 

Noninterestexpense amounted to $1.60 million and $1.37 million for the three-month periodsin 2007 and 2006, respectively.  Thechanges in noninterest expense are principally related to an increase inpersonnel costs and branch operating expenses for the two new branches openedlate in the third quarter of 2006, and increased advertising costs.  Salaries expense in 2007 was $799,000, up$80,000 from the salaries expense incurred in the same period in 2006.  This increase of 11.13% is for the additionalcosts of adding seventeen (17) new employees for the new branches and backoffice positions along with employee pay increases.  However, the personnel expenses have alsobeen favorably impacted by the reduced bonus accrual in 2007 of $20,000compared to $51,000 in 2006.  The reducedbonus accrual is the result of lower earnings in 2007 compared to 2006.

 

**NineMonths Ended September 30, 2007 and 2006**

 

Noninterestexpense amounted to $4.65 million and $3.86 million for the nine-month periodsin 2007 and 2006, respectively.  Thechanges in noninterest expense are principally related to an increase inpersonnel costs and branch operating expenses for the two new branches openedlate in the third quarter of 2006, additional data processing fees, increasedadvertising costs and increased audit fees related to the compliance with theSarbanes-Oxley requirements.  Salariesexpense in 2007 was $2.35 million, up $403,000 from the salaries expenseincurred in the same period in 2006. This increase of 20.69% is for the additional costs of adding seventeen(17) new employees for the new branches and back office positions along withemployee pay increases.  However, thepersonnel expenses have also been favorably impacted by the reduced bonusaccrual in 2007 of $59,000 compared to $233,000 in 2006.  The reduced bonus accrual is the result oflower earnings in 2007 compared to 2006.

 

 

20

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**IncomeTaxes**

 

**                  Three Months Ended September30, 2007 and 2006**

 

During the three months ended September 30, 2007, the Company incurred$194,000 of income tax expense compared to $230,000 during the same period in2006.  The effective tax rates for thesethree-month periods in 2007 and 2006 were 32.23% and 32.95%.

 

**                  Nine Months Ended September 30,2007 and 2006**

 

During the nine months ended September 30, 2007, the Company incurred$482,000 of income tax expense compared to $835,000 during the same period in2006.  The effective tax rates for thesenine-month periods in 2007 and 2006 were 31.14% and 36.38%.  The effective tax rate for 2007 has beenpositively impacted by the addition of tax-free municipal securities to theCompany’s investment portfolio during 2006.

 

 **Market Risk,Liquidity and Interest Rate Sensitivity**

 

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

 

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

 

The Company seeksto limit the risks associated with interest rate fluctuations by managing thebalance between interest sensitive assets and liabilities.  Managing to mitigate interest rate risk is,however, not an exact science.  Not onlydoes the interval until repricing of interest rates on assets and liabilitieschange from day to day as the assets and liabilities change, but for someassets and liabilities, contractual maturity and the actual maturityexperienced are not the same.  Similarly,NOW and money market accounts, by contract, may be withdrawn in their entiretyupon demand and savings deposits may be withdrawn on seven days notice.  While these contracts are extremely short, itis the Company’s belief that these accounts turn over at the rate of fivepercent (5%) per year. The Company therefore treats them as having maturitiesstaggered over all periods.  If all ofthe Company’s NOW, money market, and savings accounts were treated as repricingin one year or less, the cumulative gap at one year or less would be $(84.99)million.

 

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

 

The table below, “InterestRate Sensitivity Gap Analysis,” summarizes, as of September 30, 2007, theanticipated maturities or repricing of the Company’s interest-earning assetsand interest-bearing liabilities, the Company’s interest rate sensitivity gap(interest-earning assets less interest-bearing liabilities), the Company’scumulative interest rate sensitivity gap, and the Company’s cumulative interestsensitivity gap ratio (cumulative interest rate sensitivity gap divided bytotal assets).  A negative gap for anytime period means that more interest-bearing liabilities will reprice or matureduring that time period than interest-earning assets.  During periods of rising interest rates, anegative gap position would generally decrease earnings, and during periods ofdeclining interest rates, a negative gap position would generally increaseearnings.  The converse would be true fora positive gap position.  Therefore, apositive gap for any time period means that more interest-earning assets willreprice or mature during that time period than interest-bearing liabilities.  During periods of rising interest rates, apositive gap position would generally increase earnings, and during periods ofdeclining interest rates, a positive gap position would generally decreaseearnings.

 

It is important tonote that the following table represents the static gap position for interestsensitive assets and liabilities at September 30, 2007.  The table does not give effect to prepaymentsor extensions of loans as a result of changes in general market interestrates.  Moreover, while the table doesindicate the opportunities to reprice assets and liabilities within certaintime frames, it does not account for timing differences that occur duringperiods of repricing.  For example,changes to deposit rates tend to lag in a rising rate environment and lead in afalling rate environment.

 

 

21

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**InterestRate Sensitivity Gap Analysis**

**September30, 2007**

 

 
| ** **                                            | ** ** | **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                                   |       | $                                       | 10,734       |   | $ | — |   | $ | — |   | $ | — |   | $ | 10,734 |   |
| Interest-bearing  deposits in other banks             |       | 4,017                                   |         | — |   | — |   | — |   | 4,017 |   |
| Investment  securities(1)                             |       | 2,957                                   |         | 5,839 |   | 2,353 |   | 16,834 |   | 27,983 |   |
| Loans                                                 |       | 67,540                                  |         | 53,468 |   | 62,526 |   | 26,831 |   | 210,365 |   |
| Total  interest-earning assets                        |       | 85,248                                  |         | 59,307 |   | 64,879 |   | 43,665 |   | 253,099 |   |
|                                                  |       |                                    |         |   |   |   |   |   |   |   |   |
| Liabilities                                           |       |                                    |         |   |   |   |   |   |   |   |   |
| Savings and NOW  accounts                             |       | 953                                     |         | 1,906 |   | 1,906 |   | 14,292 |   | 19,057 |   |
| Money Market  accounts                                |       | 1,935                                   |         | 3,870 |   | 3,870 |   | 29,028 |   | 38,703 |   |
| Certificates of  deposit                              |       | 112,478                                 |         | 24,310 |   | 451 |   | — |   | 137,239 |   |
| Long-term  borrowings                                 |       | —                                  |         | 10,000 |   | — |   | — |   | 10,000 |   |
| Junior  subordinated debentures                       |       | —                                  |         | — |   | 6,186 |   | — |   | 6,186 |   |
| Total  interest-bearing liabilities                   |       | 115,366                                 |         | 40,086 |   | 12,413 |   | 43,320 |   | 211,185 |   |
| Interest rate  sensitivity gap                        |       | $                                       | (30,118      | ) | $ | 19,221 |   | $ | 52,466 |   | $ | 345 |   | $ | 41,914 |   |
| Cumulative  interest rate sensitivity gap             |       | $                                       | (30,118      | ) | $ | (10,897 | ) | $ | 41,569 |   | $ | 41,914 |   |   |   |
| Cumulative gap  ratio as a percentage of total assets |       | (11.35                                  | )%           | (4.11 | )% | 15.67 | % | 15.80 | % |   |   |

----

(1) Excludes equity securities.

 

In addition to theInterest Rate Sensitivity Gap Analysis, the Company also uses an earningssimulation model on a quarterly basis to closely monitor interest sensitivityand to expose its balance sheet and income statement to differentscenarios.  The model is based on currentCompany data and adjusted by assumptions as to growth patterns, noninterestincome and noninterest expense and interest rate sensitivity, based onhistorical data, for both assets and liabilities projected for a one-yearperiod.  The model is then subjected to a“shock test” assuming a sudden interest rate increase of 200 basis points or adecrease of 200 basis points, but not below zero.  The results show that with a 200 basis pointrise in interest rates the Company’s net interest income would decline by7.51%.  With a decrease in interest ratesof 200 basis points the Company’s net interest income would increase by 3.91%.

 

Certainshortcomings are inherent in this method of analysis.  For example, although certain assets andliabilities may have similar maturities or repricing periods, they may react indifferent degrees to changes in market interest rates.  Also, the interest rates on certain types ofassets and liabilities may fluctuate in advance of changes in market interestrates, while interest rates on other types may lag behind changes in marketrates.  Additionally, certain assets,such as adjustable-rate mortgage loans, have features that restrict changes ininterest rates on a short-term basis and over the life of the loan.  Further, in the event of a change in interestrates, prepayment and early withdrawal levels could deviate significantly fromthose assumed.  Finally, the ability ofmany borrowers to service their debt may decrease in the event of a significantinterest rate increase.

 

**Critical Accounting Policy:**

 

**Allowance for Loan Losses**

 

The Company makes provisions for loan losses in amounts deemednecessary to maintain the allowance for loan losses at an appropriatelevel.  The Company’s provision for loanlosses for the three months ended September 30, 2007 and 2006 was $50,000 and$60,000, respectively and for the nine months ended September 30, 2007 and 2006was $241,000 and $180,000, respectively. The loan growth was $36.41 million since December 31, 2006 and $10.96million since June 30, 2007 compared to $11.20 million for the first nine monthsof 2006 and $2.51 million for the third quarter of 2006.  The provision for loan losses is determinedbased upon Management’s estimate of the amount required to maintain an adequateallowance for loan losses reflective of the risks in the Company’s loanportfolio.  At September 30, 2007 and December31, 2006, the allowance for loan losses was $2.40 million and $2.17 million,respectively.

 

 

22

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

The allowance for loan losses is established aslosses are estimated to have occurred through a provision for loan lossescharged to earnings.  The allowance isbased on two basic principles of accounting: (i) SFAS No. 5, *Accounting for Contingencies*, whichrequires that losses be accrued when they are probable of occurring andestimatable and (ii) SFAS No. 114, *Accountingby Creditors for Impairment of a Loan*, which requires that losses beaccrued based on the differences between the loan balance and either the valueof collateral, or the present value of future cash flows, or the loan’s valueas observable in the secondary market.  Aloan is considered impaired when, based on current information and events, itis probable that the Bank will be unable to collect the scheduled payments ofprincipal or interest when due according to the contractual terms of the loanagreement.  Factors considered byManagement in determining impairment include payment status, collateral value,and the probability of collecting scheduled principal and interest paymentswhen due.  Loans that experienceinsignificant payment delays and payment shortfalls generally are notclassified as impaired.  Managementdetermines the significance of payment delays and payment shortfalls on acase-by-case basis, taking into consideration all of the circumstancessurrounding the loan and borrower, including the length of the delay, thereason for the delay, the borrower’s prior payment record, and the amount ofthe shortfall in relation to the principal and interest owed.  The provision for loan losses included in thestatements of operations serves to maintain the allowance at a level Managementconsiders adequate.

The Company’s allowance for loan losses has threebasic components: the specific allowance, the formula allowance and the pooledallowance.  Each of these components isdetermined based upon estimates that can and do change when the actual eventsoccur.  As a result of the uncertaintiesinherent in the estimation process, Management’s estimate of loan losses andthe related allowance could change in the near term.

The specific allowance component is used toindividually establish an allowance for loans identified for impairmenttesting.  When impairment is identified,a specific reserve may be established based on the Company’s calculation of theestimated loss embedded in the individual loan. Impairment testing includes consideration of the borrower’s overallfinancial condition, resources and payment record, support available fromfinancial guarantors and the fair market value of collateral. These factors arecombined to estimate the probability and severity of inherent losses.  Large groups of smaller balance, homogeneousloans are collectively evaluated for impairment. Accordingly, the Company doesnot separately identify individual consumer and residential mortgage loans forimpairment.   At September 30, 2007 therewere no loans deemed to be impaired.

The formula allowance component is used forestimating the loss on internally risk rated loans and those loans identifiedfor impairment testing.  The loansmeeting the Company’s internal criteria for classification, such as specialmention, substandard, doubtful and loss are segregated from performing loanswithin the portfolio. These internally classified loans are then grouped byloan type (commercial, commercial real estate, commercial construction,residential real estate, residential construction or installment).  Each loan type is assigned an allowancefactor based on Management’s estimate of the associated risk, complexity andsize of the individual loans within the particular loan category. Classifiedloans are assigned a higher allowance factor than non-classified loans due toManagement’s concerns regarding collectability or Management’s knowledge ofparticular elements surrounding the borrower. Allowance factors increase withthe worsening of the internal risk rating.

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

Allowance factors and overall size of the allowancemay change from period to period based on Management’s assessment of theabove-described factors and the relative weights given to each factor.  In addition, various regulatory agenciesperiodically review the allowance for loan losses.  These agencies may require the Bank to makeadditions to the allowance for loan losses based on their judgments ofcollectibility based on information available to them at the time of theirexamination.

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

 

 

23

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As ofSeptember 30, 2007, the real estate loan portfolio constituted 88% of the totalloan portfolio.  While this exceeds the10% threshold for determining a concentration of credit risk within anindustry, we do not consider this to be a concentration with adverse riskcharacteristics given the diversity of borrowers within the real estateportfolio and other sources of repayment. An industry for this purpose is defined as a group of counterpartiesthat are engaged in similar activities and have similar economiccharacteristics that would cause their ability to meet contractual obligationsto be similarly affected by changes in economic or other conditions.  Additionally, the loan portfolio does notinclude concentrations of credit risk in loan products that permit the deferralof principal payments that are smaller than normal interest accruals (negativeamortization); loans with high loan-to-value ratios; or loans, such as optionadjustable-rate mortgages, that may expose the borrower to future increases inrepayments that are in excess of increases that would result solely fromincreases in market interest rates.  TheCompany has interest only home equity lines of credit with outstanding balancesof $5.68 million of at September 30, 2007.

** **
| ** **                                     | ** ** | **Three Months Ended**    | ** ** | **Nine Months Ended**     | *** *** |
|------------------------------------------------|------------|---------------------------|------------|---------------------------|--------------|
| **(dollars in thousands)**                     | ** ** | **September 30,****2007** | ** ** | **September 30,****2006** | ** **   | **September 30,****2007** | ** ** | **September 30,****2006** | *** *** |
| Balance at  beginning of period                |       | $2,351                    |       | $2,073                    |         | $2,166 |   | $1,953 |   |
| Provision charged  to operating expenses       |       | 50                        |       | 60                        |         | 241 |   | 180 |   |
| Recoveries of  loans previously charged-off    |       | —                    |       | —                    |         | — |   | — |   |
| Loans  charged-off — consumer             |       | —                    |       | —                    |         | (6 | ) | — |   |
| Balance at end  of period                      |       | $2,401                    |       | $2,133                    |         | $2,401 |   | $2,133 |   |
| Average total  loans outstanding during period |       | $203,863                  |       | $163,989                  |         | $190,190 |   | $161,042 |   |

 

The allocation of the allowance, presented in thefollowing table, is based primarily on the factors discussed above inevaluating the adequacy of the allowance as a whole.  Since all of those factors are subject tochange, the allocation is not necessarily indicative of the category ofrecognized loan losses, and does not restrict the use of the allowance toabsorb losses in any category.

**               **

**Allocation of Allowance for Loan Losses**

** **
| *** ***                                                                | *** *** | **September 30,** | ** ** | **December 31,** | *** *** |
|-----------------------------------------------------------------------------|--------------|-------------------|------------|------------------|--------------|
| *** ***                                                                | *** *** | **2007**          | ** ** | **% of  Loans**  | ** **   | **2006** | ** ** | **% of  Loans** | *** *** |
| Real  estate-construction                                                   |         | $                 | 248        |             | 16           | % | $ | 218 |   | 17 | % |
| Real  estate-mortgage                                                       |         | 1,753             |       | 72               | %            | 1,529 |   | 67 | % |
| Commercial and  industrial loans                                            |         | 360               |       | 11               | %            | 400 |   | 14 | % |
| Loans to  individuals for household, family and other personal expenditures |         | 40                |       | 1                | %            | 39 |   | 2 | % |
|                                                                        |         | $                 | 2,401      |             | 100          | % | $ | 2,166 |   | 100 | % |

** **

| ** **                                 | ** ** | **September  30,**

**2007** | ** ** | **December  31,**

**2006** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Nonaccrual loans                           |       | $                            | 163        |                        | $          | 60 |   |
| Loans 90 days  past due and still accruing |       | 1                            |       | —                      |       |
| Total  nonperforming loans                 |       | 164                          |       | 60                          |       |
| Other real  estate owned                   |       | —                       |       | —                      |       |
| Total  nonperforming assets                |       | $                            | 164        |                        | $          | 60 |   |
| Nonperforming  assets to total assets      |       | 0.06                         | %          | 0.03                        | %          |

 

There were noother interest-bearing assets at September 30, 2007 or December 31, 2006classified as past due 90 days or more and still accruing, restructured orproblem assets, and no loans which were currently performing in accordance withtheir terms, but as to which information known to Management caused it to haveserious doubts about the ability of the borrower to comply with the loan ascurrently written.

 

**Off-Balance SheetArrangements**

 

The Company is a party to financial instruments with off-balance sheetrisk in the normal course of business to meet the financing needs of itscustomers.  These financial instrumentsinclude commitments to extend credit, including unused portions of lines ofcredit, and standby letters of credit. The Company has also entered into long-term lease obligations for someof its premises and equipment, the terms of which generally include options torenew.  The above instruments andobligations involve, to varying degrees, elements of off-balance sheet risk inexcess of the amount recognized in the consolidated statements of financialcondition.  With the exception

 

 

24

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of these instruments and the Company’s obligations relating to itstrust preferred securities, the Company does not have any off balance sheetarrangements that have or are reasonably likely to have a current or futureeffect on the Company’s financial condition, revenues or expenses, results ofoperations, liquidity, capital expenditures or capital resources that ismaterial to investors.

 

Commitments toextend credit and standby letters of credit as of September 30, 2007 were as follows:

 

| **(dollars in thousands)**                                                             | ** ** | **September 30,  2007  Contractual Amount** | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| Financial  instruments whose notional or contract amounts represent credit risk:  |       |                                        |       |
| Commitments to  extend credit                                                          |       | $                                           | 38,727     |   |
| Standby letters  of credit                                                             |       | 3,163                                       |       |
| Total                                                                                  |       | $                                           | 41,890     |   |

 

See Note 9 to the Notes to the ConsolidatedFinancial Statements included in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2006 for additional information regarding theCompany’s long-term lease obligations.

 

**CapitalResources**

 

The ability of the Company to grow is dependent on the availability ofcapital with which to meet regulatory capital requirements, discussedbelow.  To the extent the Company issuccessful it may need to acquire additional capital through the sale of additionalcommon stock, other qualifying equity instruments or subordinated debt.  There can be no assurance that additionalcapital will be available to the Company on a timely basis or on attractiveterms.  On December 15, 2006, the Companycompleted the issuance of $6.00 million of trust preferred securities, asdiscussed above, that can be recognized as capital for regulatorypurposes.  At December 31, 2006, theCompany had an outstanding unsecured loan from an unaffiliated third party inthe amount of $450,000 with a fixed interest rate of 6.00%, which matured andwas repaid on January 27, 2007.  Inaddition, the Company has an unsecured revolving line of credit borrowingarrangement with an unaffiliated financial institution in the amount of $2.00million with no outstanding balance as of September 30, 2007.  This facility matures on May 1, 2008, has afloating interest rate equal to the Wall Street Journal prime rate and requiresmonthly interest payments only.  Thepurpose of this facility is to provide capital to the Bank, as needed.

 

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

 

Under capital adequacy guidelines and the regulatoryframework for prompt corrective action, the Bank must meet specific capitalguidelines that involve quantitative measures of the Bank’s assets, liabilities,and certain off-balance-sheet items as calculated under regulatory accountingpractices.  The Bank’s capital amountsand classification are also subject to qualitative judgments by the regulatorsabout components, risk weightings, and other factors.

 

Quantitative measuresestablished by regulation to ensure capital adequacy require the Bank tomaintain minimum amounts and ratios of total and Tier 1 capital (as defined inthe regulations) to risk-weighted assets (as defined), and Tier 1 capital (asdefined) to average assets (as defined). Management believes that the Bank met all capital adequacy requirementsto which it is subject as of September 30, 2007 and that the Company would meetsuch requirements if applicable.  SeeNote 10 to the consolidated financial statements for a table depictingcompliance with regulatory capital requirements.

 

As of September 30, 2007, the most recent notification from theregulatory agency categorized the Bank as well capitalized under the regulatoryframework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimumtotal risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth inthe table in Note 10.  There are noconditions or events since that notification which management believes havechanged the Bank’s category.

 

On June 26, 2007, the Company authorized the repurchase of up to146,000 shares of its common stock, for an aggregate expenditure of not morethan $4.5 million, through June 30, 2012, or earlier termination of the programby the Board of Directors.  Repurchases,if any, by the Company pursuant to this authorization are expected to enablethe Company to repurchase its shares at an attractive price, and to provide asource of liquidity for the Company’s shares. As of September 30, 2007, there have been no shares repurchased by theCompany.

** **

 

 

25

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## **Inflation**

 

The effect of changing prices onfinancial institutions is typically different than on non-banking companiessince virtually all of a Company’s assets and liabilities are monetary innature. In particular, interest rates are significantly affected by inflation,but neither the timing nor magnitude of the changes are directly related toprice level indices; therefore, the Company can best counter inflation over thelong term by managing net interest income and controlling net increases innoninterest income and expenses.

 

###### **Item 3.    Quantitativeand Qualitative Disclosures About Market Risk**

 

See “Market Risk, Liquidityand Interest Rate Sensitivity” at Page 21.

 

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

## ** **

## **TheCompany’s management, under the supervision and with the participation of theCompany’s Chief Executive Officer and Chief Financial Officer, evaluated, as ofthe last day of the period covered by this report, the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures, asdefined in Rule 13a-15(e) under the Securities Exchange Act of 1934.  Based on that evaluation, the Chief ExecutiveOfficer and Chief Financial Officer concluded that the Company’s disclosurecontrols and procedures were effective. There were no changes in the Company’s internal control over financialreporting (as defined in Rule 13a-15 under the Securities Act of 1934) duringthe quarter ended September 30, 2007 that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.**

## ** **

## **PART II — OtherInformation**

## ** **

Item1.    Legal Proceedings.  None

 

Item1A.  Risk Factors.   There have been no material changes to therisk factors as of September 30, 2007 from those disclosed in the Company’s 2006Annual Report on Form 10-K.

 

Item2.    Unregistered Sales of EquitySecurities and Use of Proceeds

 

                        (a)   *Sales of UnregisteredSecurities. *None

 

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

 

                        (c)   *Registrant**Purchases of Securities*

 

                        The following table providesinformation on the Company’s purchases of its common stock during the quarterended September 30, 2007.

 
| **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** | *** *** |
|-----------------------|------------|--------------------------------------|------------|----------------------------------|------------|------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|--------------|
| July 1-31, 2007       |       | 0                                    |       | N/A                              |       | 0                                                                                        |       | 0                                                                                   |         |
| August 1-31,  2007    |       | 0                                    |       | N/A                              |       | 0                                                                                        |       | 0                                                                                   |         |
| September 1-30,  2007 |       | 0                                    |       | N/A                              |       | 0                                                                                        |       | 146,000                                                                             | (2)          |

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

 

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

 

Item 3.             Defaults upon Senior Securities.  None

 

 

 

26

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Item4.    Submission of Matters to a Vote ofSecurity Holder.    None.

 

Item 5.             Other Information

 

                        (a)   Information which should have been reportedon Form 8-K.  None

 

                        (b)   Material Changes to Procedures for DirectorNomination by Shareholders.   None

 

 

27

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| Item 6. Exhibits |        |                                                                                                                                                                                                                                 |                    |   |   |   |
|------------------|-------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------|--------|--------|--------|
|             |        |                                                                                                                                                                                                                                 |                    |   |   |
|             | Exhibit No. |                                                                                                                                                                                                                                 | Description of Exhibits |   |   |
|             |        |                                                                                                                                                                                                                                 |                    |
|             | 3(a)        | Articles of  Incorporation of the Company, as amended(1)                                                                                                                                                                             |                    |
|             | 3(b)        | Bylaws of the  Company(2)                                                                                                                                                                                                            |                    |
|             | 4(a)        | Indenture, dated as of  December 15, 2006 between Frederick County Bancorp, Inc. and U.S. Bank  National Association, as trustee(3)                                                                                                  |                    |
|             | 4(b)        | Amended and Restated  Declaration of Trust, dated as December 15, 2006 between Frederick County  Bancorp, Inc. and U.S. Bank National Association, as trustee, and Martin S.  Lapera and William R. Talley, Jr. as Administrators(3) |                    |
|             | 4(c)        | Guarantee Agreement  dated as of December 15, 2006 between Frederick County Bancorp, Inc. and U.S.  Bank National Association, as Guarantee Trustee(3)                                                                               |                    |
|             | 10(a)       | 2001 Stock Option  Plan(4)                                                                                                                                                                                                           |                    |
|             | 10(b)       | Employment Agreement  between the Bank and Martin S. Lapera(5)                                                                                                                                                                       |                    |
|             | 10(c)       | Employment Agreement  between the Bank and William R. Talley, Jr. (6)                                                                                                                                                                |                    |
|             | 10(d)       | Consulting Agreement  between the Bank and Raymond Raedy (7)                                                                                                                                                                         |                    |
|             | 10(e)       | 2002 Executive  and Director Deferred Compensation Plan (8)                                                                                                                                                                          |                    |
|             | 10(f)       | Amendment No. 1  to the 2002 Executive and Director Deferred Compensation Plan (8)                                                                                                                                                   |                    |
|             | 10(g)       | Loan Agreement  with Atlantic Central Bankers Bank(9)                                                                                                                                                                                |                    |
|             | 10(h)       | Promissory Note  with Atlantic Central Bankers Bank (9)                                                                                                                                                                              |                    |
|             | 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 of the same number to the Company’s Annual Report on  Form 10-K for the year ended December 31, 2006, as filed with the Securities  and Exchange Commission.                              |                    |
|             | (8)         | 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.                            |                    |
|             | (9)         | 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.                         |                    |
|                  |             |                                                                                                                                                                                                                                      |                         |        |        |        |  |  |  |  |  |  |  |  |

 

 

 

28

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**SIGNATURES**

 

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

 

 

 
|   |             | FREDERICK COUNTY BANCORP, INC. |
|--------|------------------|--------------------------------|
|   |             |                           |   |
|   |             |                           |   |
|   |             |                           |   |
| Date:  | November 5, 2007 | By:                            | /s/ Martin S. Lapera |
|   |             |                           | Martin S. Lapera |
|   |             |                           | President and Chief Executive Officer |

 

 

 
| Date:  | November 5, 2007 | By:    | /s/ William R. Talley, Jr.                   |
|--------|------------------|--------|----------------------------------------------|
|   |             |   | William R. Talley, Jr                        |
|   |             |   | Executive Vice President and Chief Financial |
|   |             |   | Officer                                      |

 

 

 

29

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