** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC  20549**

** **

### **FORM 10-QSB**

### ** **

**(MARKONE)**

 
| ** ** | **ý** | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d)**    | ** ** |
|------------|------------|--------------------------------------------------------|------------|
| ** ** | ** ** | **OF THE SECURITIES EXCHANGE ACT OF 1934**             | ** ** |
| ** ** | ** ** | ** **                                             | ** ** |
| ** ** | ** ** | **For  the Quarterly Period Ended June 30, 2005** | ** ** |
| ** ** | ** ** | ** **                                             | ** ** |
| ** ** | ** ** | **OR**                                                 | ** ** |
| ** ** | ** ** | ** **                                             | ** ** |
| ** ** | **o**      | **TRANSITION REPORT UNDER SECTION 13 OR 15(d)**   |       |
| ** ** | ** ** | **OF THE SECURITIES EXCHANGE ACT OF 1934**             | ** ** |

 

**For thetransition period from            to           **

 

**Commission File Number:  000-50407**

 

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

(Exact name of issueras specified in its charter)

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

 

**9 NorthMarket Street**

**Frederick,Maryland 21701**

(Address ofprincipal executive offices)

 

**301.620.1400**

(Issuer’s telephonenumber)

 

**30West Patrick Street**

**Frederick,Maryland 21701**

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

 

Check whether the issuer (1) filedall reports required to be filed by Section 13 or 15(d) of the ExchangeAct during the past 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 day.                                          Yes ý                                                             Noo

 

State the number ofshares outstanding of each of the issuer’s classes of common equity, as of thelatest practical date.  There were1,458,602 shares of Common Stock outstanding as of July 29, 2005.

 

Transitional SmallBusiness Disclosure Format (check one)                        Yes o                                                             Noý

 

 

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

**TABLEOF CONTENTS**

 
| **PART I** |                                                                                                           | **FINANCIAL INFORMATION** |   |
|-----------------|----------------------------------------------------------------------------------------------------------------|---------------------------|--------|
| ** **      | ** **                                                                                                     |
| Item 1          | Financial Statements  (Unaudited)                                                                              |                      |
|            |                                                                                                           |                      |
|            | Consolidated** **Balance Sheets, June 30, 2005 and December 31,  2004                           |                      |
|            |                                                                                                           |                      |
|            | Consolidated Statements of  Income, Three and Six Months Ended June 30, 2005 and 2004                     |                      |
|            |                                                                                                           |                      |
|            | Consolidated Statements of  Changes in Shareholders’ Equity, Six Months Ended June 30, 2005 and 2004 |                      |
|            |                                                                                                           |                      |
|            | Consolidated Statements of  Cash Flows, Six Months Ended June 30, 2005 and 2004                           |                      |
|            |                                                                                                           |                      |
|            | Notes to Consolidated Financial Statements                                                                     |                      |
|            |                                                                                                           |                      |
| Item  2         | Management’s  Discussion and Analysis or Plan of Operations                                               |                      |
|            |                                                                                                           |                      |
| Item  3         | Controls  and Procedures                                                                                       |                      |
|            |                                                                                                           |                      |
| PART  II        |                                                                                                           | OTHER  INFORMATION        |   |
|            |                                                                                                           |                      |
| Item  1         | Legal  Proceedings                                                                                             |                      |
|            |                                                                                                           |                      |
| 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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**Frederick County Bancorp, Inc.Consolidated Balance Sheets(Unaudited)**

 
| ** **                                                                                                                                  | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(dollars  in thousands)**                                                                                                                 | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| ASSETS                                                                                                                                      |       |              |       |                  |       |
| Cash  and due from banks                                                                                                                    |       | $                 | 5,083      |                  | $          | 3,524 |   |
| Federal  funds sold                                                                                                                         |       | 9,905             |       | 12,334                |       |
| Interest-bearing  deposits in other banks                                                                                                   |       | 5,097             |       | 781                   |       |
| Cash  and cash equivalents                                                                                                                  |       | 20,085            |       | 16,639                |       |
| Investment  securities available for sale-at fair value                                                                                     |       | 17,909            |       | 16,734                |       |
| Investment  securities held-to-maturity - fair value of $850 and $299                                                                       |       | 849               |       | 299                   |       |
| Restricted  stock                                                                                                                           |       | 821               |       | 715                   |       |
| Loans                                                                                                                                       |       | 148,516           |       | 135,668               |       |
| Less:  Allowance for loan losses                                                                                                            |       | (1,803            | )          | (1,503                | )          |
| Net  loans                                                                                                                                  |       | 146,713           |       | 134,165               |       |
| Bank  premises and equipment                                                                                                                |       | 1,592             |       | 1,481                 |       |
| Other  assets                                                                                                                               |       | 2,412             |       | 1,144                 |       |
| Total  assets                                                                                                                               |       | $                 | 190,381    |                  | $          | 171,177 |   |
|                                                                                                                                        |       |              |       |                  |       |
| LIABILITIES  AND SHAREHOLDERS’ EQUITY                                                                                                  |       |              |       |                  |       |
|                                                                                                                                        |       |              |       |                  |       |
| **Liabilities**                                                                                                                             |       |              |       |                  |       |
| Deposits:                                                                                                                                   |       |              |       |                  |       |
| Noninterest-bearing  deposits                                                                                                               |       | $                 | 31,343     |                  | $          | 23,749 |   |
| Interest-bearing  deposits                                                                                                                  |       | 143,069           |       | 131,842               |       |
| Total  deposits                                                                                                                             |       | 174,412           |       | 155,591               |       |
| Short-term  borrowings                                                                                                                      |       | 450               |       | 450                   |       |
| Accrued  interest and other liabilities                                                                                                     |       | 400               |       | 923                   |       |
| Total  liabilities                                                                                                                          |       | 175,262           |       | 156,964               |       |
|                                                                                                                                        |       |              |       |                  |       |
| **Shareholders’ Equity**                                                                                                               |       |              |       |                  |       |
| Common  stock, per share par value $.01; 10,000,000 shares authorized; 1,458,602 and  1,457,402 shares issued and outstanding, respectively |       | 15                |       | 15                    |       |
| Additional  paid-in capital                                                                                                                 |       | 14,644            |       | 14,632                |       |
| Retained  earnings (deficit)                                                                                                                |       | 505               |       | (411                  | )          |
| Accumulated  other comprehensive income (loss)                                                                                              |       | (45               | )          | (23                   | )          |
| Total  shareholders’ equity                                                                                                            |       | 15,119            |       | 14,213                |       |
| Total  liabilities and shareholders’ equity                                                                                            |       | $                 | 190,381    |                  | $          | 171,177 |   |

 

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

 

3

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**Frederick County Bancorp, Inc.Consolidated Statements ofIncome(Unaudited)**

 
| ** **                                                 | ** ** | **For the Three  Months Ended  June 30,** | ** ** | **For the Six  Months Ended  June 30,** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| **(dollars  in thousands, except per share amounts)**      | ** ** | **2005**                                       | ** ** | **2004**                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest  income:                                          |       |                                           |       |                                         |       |   |   |   |   |
| Interest  and fees on loans                                |       | $                                              | 2,324      |                                         | $          | 1,587 |   | $ | 4,453 |   | $ | 3,060 |   |
| Interest  and dividends on investment securities:          |       |                                           |       |                                         |       |   |   |   |   |
| Interest  – taxable                                   |       | 158                                            |       | 141                                          |       | 313 |   | 279 |   |
| Interest  – tax exempt                                |       | 5                                              |       | —                                       |       | 7 |   | — |   |
| Dividends                                                  |       | 11                                             |       | 9                                            |       | 20 |   | 18 |   |
| Interest  on federal funds sold                            |       | 71                                             |       | 26                                           |       | 127 |   | 51 |   |
| Other  interest income                                     |       | 12                                             |       | 1                                            |       | 14 |   | 2 |   |
| Total  interest income                                     |       | 2,581                                          |       | 1,764                                        |       | 4,934 |   | 3,410 |   |
| Interest  expense:                                         |       |                                           |       |                                         |       |   |   |   |   |
| Interest  on deposits                                      |       | 712                                            |       | 397                                          |       | 1,330 |   | 776 |   |
| Interest  on other short-term borrowings                   |       | 7                                              |       | 4                                            |       | 13 |   | 7 |   |
| Total  interest expense                                    |       | 719                                            |       | 401                                          |       | 1,343 |   | 783 |   |
| Net  interest income                                       |       | 1,862                                          |       | 1,363                                        |       | 3,591 |   | 2,627 |   |
| Provision  for loan losses                                 |       | 150                                            |       | 105                                          |       | 300 |   | 210 |   |
| Net  interest income after provision for loan losses       |       | 1,712                                          |       | 1,258                                        |       | 3,291 |   | 2,417 |   |
| Noninterest  income:                                       |       |                                           |       |                                         |       |   |   |   |   |
| Securities  gains (losses)                                 |       | (1                                             | )          | 1                                            |       | (1 | ) | 1 |   |
| Service  fees                                              |       | 38                                             |       | 36                                           |       | 73 |   | 71 |   |
| Other  operating income                                    |       | 41                                             |       | 25                                           |       | 68 |   | 49 |   |
| Total  noninterest income                                  |       | 78                                             |       | 62                                           |       | 140 |   | 121 |   |
| Noninterest  expenses:                                     |       |                                           |       |                                         |       |   |   |   |   |
| Salaries  and employee benefits                            |       | 676                                            |       | 608                                          |       | 1,312 |   | 1,162 |   |
| Occupancy  and equipment expenses                          |       | 180                                            |       | 161                                          |       | 336 |   | 311 |   |
| Other  operating expenses                                  |       | 279                                            |       | 238                                          |       | 552 |   | 463 |   |
| Total  noninterest expenses                                |       | 1,135                                          |       | 1,007                                        |       | 2,200 |   | 1,936 |   |
| Income  before provision for income taxes                  |       | 655                                            |       | 313                                          |       | 1,231 |   | 602 |   |
| Provision  for income taxes                                |       | 255                                            |       | —                                       |       | 315 |   | — |   |
| Net  income                                                |       | $                                              | 400        |                                         | $          | 313 |   | $ | 916 |   | $ | 602 |   |
| Basic  earnings per share (1)                              |       | $                                              | 0.27       |                                         | $          | 0.22 |   | $ | 0.63 |   | $ | 0.41 |   |
| Diluted  earnings per share (1)                            |       | $                                              | 0.26       |                                         | $          | 0.21 |   | $ | 0.60 |   | $ | 0.40 |   |
| Basic  weighted average number of shares outstanding (1)   |       | 1,458,602                                      |       | 1,455,152                                    |       | 1,458,117 |   | 1,455,152 |   |
| Diluted  weighted average number of shares outstanding (1) |       | 1,527,663                                      |       | 1,500,728                                    |       | 1,526,296 |   | 1,497,634 |   |

 

----

(1)The amounts shown havebeen restated for the effects of a two-for-one stock split effected in the formof a 100% stock dividend declared in August 2004 and paid in September 2004.

 

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

 

4

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**FrederickCounty Bancorp, Inc.****Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)**

 
| **(dollars  in thousands)**                                                                                                     | ** ** | **Shares  Outstanding** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings  (Deficit)** | ** ** | **Accumulated  Other  Comprehensive Income  (Loss)** | ** ** | **Total  Shareholders’ Equity** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------|------------|----------------------------------|------------|-----------------------------------|------------|------------------------------------------------------|------------|--------------------------------------|------------|
|                                                                                                                            |       |                    |       |              |       |                             |       |                              |       |                                                 |       |                                 |       |
| Balance,  January 1, 2004                                                                                                  |       | 727,576                 |       | $                 | 7          |                             | $          | 14,617                            |       | $                                                    | (1,929     | )                                    | $          | 13 |   | $ | 12,708 |   |
| Comprehensive  income:                                                                                                          |       |                    |       |              |       |                             |       |                              |       |                                                 |       |                                 |       |
| Net  income                                                                                                                     |       |                    |       |              |       |                             |       | 602                               |       |                                                 |       | 602                                  |       |
| Changes  in net unrealized losses on securities available for sale, net of income tax  effects and reclassification adjustments |       |                    |       |              |       |                             |       |                              |       | (187                                                 | )          | (187                                 | )          |
| Comprehensive  income                                                                                                           |       |                    |       |              |       |                             |       |                              |       |                                                 |       | 415                                  |       |
| Balance,  June 30, 2004                                                                                                    |       | 727,576                 |       | $                 | 7          |                             | $          | 14,617                            |       | $                                                    | (1,327     | )                                    | $          | (174 | ) | $ | 13,123 |   |
| Balance,  January 1, 2005                                                                                                  |       | 1,457,402               |       | $                 | 15         |                             | $          | 14,632                            |       | $                                                    | (411       | )                                    | $          | (23 | ) | $ | 14,213 |   |
| Comprehensive  income:                                                                                                          |       |                    |       |              |       |                             |       |                              |       |                                                 |       |                                 |       |
| Net  income                                                                                                                     |       |                    |       |              |       |                             |       | 916                               |       |                                                 |       | 916                                  |       |
| Changes  in net unrealized losses on securities available for sale, net of income tax  effects and reclassification adjustments |       |                    |       |              |       |                             |       |                              |       | (22                                                  | )          | (22                                  | )          |
| Comprehensive  income                                                                                                           |       |                    |       |              |       |                             |       |                              |       |                                                 |       | 894                                  |       |
| Shares  issued under stock option transactions                                                                                  |       | 1,200                   |       |              |       | 12                               |       |                              |       |                                                 |       | 12                                   |       |
| Balance,  June 30, 2005                                                                                                    |       | 1,458,602               |       | $                 | 15         |                             | $          | 14,644                            |       | $                                                    | 505        |                                 | $          | (45 | ) | $ | 15,119 |   |

 

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

 

5

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**Frederick County Bancorp, Inc.Consolidated Statementsof Cash Flows (Unaudited)**

 
| ** **                                                                                     | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| **(dollars  in thousands)**                                                                    | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                                          |       |                               |       |   |   |
| Net income                                                                                     |       | $                                  | 916        |   | $ | 602 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities:   |       |                               |       |   |   |
| Depreciation and amortization                                                                  |       | 80                                 |       | 97 |   |
| Provision for loan losses                                                                      |       | 300                                |       | 210 |   |
| Securities losses (gains)                                                                      |       | 1                                  |       | (1 | ) |
| Net premium amortization on investment securities                                              |       | 49                                 |       | 58 |   |
| Increase in other assets                                                                       |       | (1,267                             | )          | (150 | ) |
| Decrease in accrued interest and other liabilities                                             |       | (510                               | )          | (12 | ) |
| Net cash provided by (used in) operating activities                                            |       | (431                               | )          | 804 |   |
| Cash flows from investing activities:                                                          |       |                               |       |   |   |
| Purchases of investment securities available for sale                                          |       | (4,139                             | )          | (3,090 | ) |
| Purchases of investment securities held to maturity                                            |       | (550                               | )          | — |   |
| Proceeds from sale of investment securities available  for sale                                |       | 691                                |       | 695 |   |
| Proceeds from maturities of investment securities  available for sale                          |       | 2,187                              |       | 2,095 |   |
| Purchases of restricted stock                                                                  |       | (106                               | )          | (145 | ) |
| Net increase in loans                                                                          |       | (12,848                            | )          | (19,952 | ) |
| Purchases of bank premises and equipment                                                       |       | (191                               | )          | (102 | ) |
| Net cash used in investing activities                                                          |       | (14,956                            | )          | (20,499 | ) |
| Cash flows from financing activities:                                                          |       |                               |       |   |   |
| Net increase in NOW, money market accounts, savings  accounts and noninterest-bearing deposits |       | 7,925                              |       | 20,245 |   |
| Net increase in time deposits                                                                  |       | 10,896                             |       | 5,279 |   |
| Net increase in short-term borrowings                                                          |       | —                             |       | 330 |   |
| Proceeds from issuance of common stock                                                         |       | 12                                 |       | — |   |
| Net cash provided by financing activities                                                      |       | 18,833                             |       | 25,854 |   |
| Net increase in cash and cash equivalents                                                      |       | 3,446                              |       | 6,159 |   |
| Cash and cash equivalents – beginning of period                                           |       | 16,639                             |       | 17,549 |   |
| Cash and cash equivalents – end of period                                                 |       | $                                  | 20,085     |   | $ | 23,708 |   |
| Supplemental cash flow disclosures:                                                            |       |                               |       |   |   |
| Interest paid                                                                                  |       | $                                  | 1,322      |   | $ | 778 |   |
| Income taxes paid                                                                              |       | $                                  | 771        |   | $ | — |   |

 

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

 

6

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#### **FREDERICK COUNTY BANCORP, INC.**Notes to Financial Statements (Unaudited)

 

**Note 1.  General:**

 

On August 30, 2000, Frederick County Bank,the sole subsidiary of the Company, was incorporated, and in 2001, the Bankbecame engaged in the developmental activities needed to obtain a commercialbank charter in the State of Maryland. The Bank received regulatory approval to commence banking operations on October 18,2001 and, accordingly, became operational during the year ended December 31,2001.  The Company was organized inMay 2003 and on September 30, 2003, the Agreement and Plan ofShare Exchange (the “Exchange”) between the Company and Frederick County Bank(the “Bank”), dated June 9, 2003, approved at the Special Meeting ofShareholders of the Bank held on September 22, 2003, becameeffective.  Pursuant to the Exchange,each of the outstanding shares of common stock $10.00 par value of the Bank wasconverted into one share of the common stock $0.01 par value of theCompany.  As a result of the Exchange,the Bank has become a wholly owned subsidiary of the Company.  DuringFebruary 2004, the Company received approval from the Federal Reserve Bankof Richmond to become a financial holding company. The Bank provides its customerswith various banking services.  The Bankoffers various loan and deposit products to their customers.

 

Theaccompanying consolidated financial statements of the Company have beenprepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information and general practices within the banking industry.  Accordingly, they do not include all of theinformation and disclosures required by generally accepted accountingprinciples for complete financial statements. These statements should be read in conjunction with the financialstatements and accompanying footnotes included in the Company’s 2004 AnnualReport to Shareholders.  In the opinionof management, all adjustments, consisting of normal recurring adjustments,considered necessary for a fair presentation have been included.  The results shown in this interim report arenot necessarily indicative of results to be expected for any other period orfor the full year ended December 31, 2005.

 

Thepreparation of financial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. These estimates and assumptions are based on informationavailable as of the date of the financial statements and could differ fromactual results.

 

**Note 2.Earnings Per Share:**

 

Earnings per share (“EPS”)are disclosed as basic and diluted. Basic EPS is generally computed by dividing net income by theweighted-average number of common shares outstanding for the period, whereasdiluted EPS essentially reflects the potential dilution in basic EPS that couldoccur if other contracts to issue common stock were exercised.

 
| ** **                                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(dollars  in thousands, except per share amounts)**  | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net  income                                            |       | $                                     | 400        |                                | $          | 313 |   | $ | 916 |   | $ | 602 |   |
| Basic  earnings per share                              |       | $                                     | 0.27       |                                | $          | 0.22 |   | $ | 0.63 |   | $ | 0.41 |   |
| Diluted  earnings per share                            |       | $                                     | 0.26       |                                | $          | 0.21 |   | $ | 0.60 |   | $ | 0.40 |   |
| Basic  weighted average number of shares outstanding   |       | 1,458,602                             |       | 1,455,152                           |       | 1,458,117 |   | 1,455,152 |   |
| Effect  of dilutive securities – stock options    |       | 69,061                                |       | 45,576                              |       | 68,179 |   | 42,482 |   |
| Diluted  weighted average number of shares outstanding |       | 1,527,663                             |       | 1,500,728                           |       | 1,526,296 |   | 1,497,634 |   |

 

**Note3.  Employee Stock Option Plan:**

 

The Company maintains anEmployee Stock Option Plan that provides for grants of incentive andnon-incentive stock options.  This planhas been presented to and approved by the Company’s shareholders.  The Company accounts for this plan under therecognition and measurement principles of Accounting Principles Board (“APB”)Opinion No. 25, *Accounting for StockIssued to Employees,*and related interpretations.  Accordingly, no stock-based employeecompensation cost has been recognized, as all options granted under this planhad an exercise price equal to the market value of the underlying common stockon the date of grant.  There were nostock options granted nor vested during the first six months of 2005 or 2004and, accordingly, net income and earnings per share would not have beenaffected if compensation cost for the stock-based compensation plan had beendetermined on the grant date fair values of awards (the method described inStatement of Financial Accounting Standards No. 123 *Accounting for Stock-Based Compensation*).

 

7

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**Note 4.  Investment Portfolio:**

 

Thefollowing tables set forth certain information regarding the Company’sinvestment portfolio at June 30, 2005 and December 31, 2004:

 

**Available-for-sale portfolio**

 

*June 30, 2005*

 
| **(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  after one year through five years                              |       | $                   | 1,501      |                        | $          | 1                           |       | $                          | 13         |               | $          | 1,489 |   | 3.14 | % |
| Mortgage-backed  debt securities                                    |       | 16,132              |       | 28                          |       | 90                          |       | 16,070                     |       | 4.19               | %          |
| Equity  Securities                                                  |       | 350                 |       | —                      |       | —                      |       | 350                        |       | —             |       |
|                                                                |       | $                   | 17,983     |                        | $          | 29                          |       | $                          | 103        |               | $          | 17,909 |   | 4.08 | % |

 

*December 31, 2004*

 
| **(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  after one year through five years                              |       | $                   | 500        |                        | $          | —                      |       | $                          | 13         |               | $          | 487 |   | 2.35 | % |
| Mortgage-backed  debt securities                                    |       | 16,022              |       | 54                          |       | 79                          |       | 15,997                     |       | 4.09               | %          |
| Equity  securities                                                  |       | 250                 |       | —                      |       | —                      |       | 250                        |       | —             |       |
|                                                                |       | $                   | 16,772     |                        | $          | 54                          |       | $                          | 92         |               | $          | 16,734 |   | 4.04 | % |

 

**Held-to-maturity portfolio**

 

*June 30, 2005*

 
| **(dollars  in thousands)**             | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Estimated  Fair  Value** | ** ** | **Average  Yield** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------|------------|----------------------------|------------|--------------------|------------|
| State  and political subdivisions:      | ** ** | ** **          | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                 | ** ** | ** **         | ** ** |
| Due  after five years through ten years |       | $                   | 549        |                        | $          | 1                           |       | $                          | —     |               | $          | 550 |   | 5.04 | % |
| Due  after ten years                    |       | 300                 |       | —                      |       | —                      |       | 300                        |       | 5.73               | %          |
|                                    |       | $                   | 849        |                        | $          | 1                           |       | $                          | —     |               | $          | 850 |   | 5.28 | % |

 

*December 31, 2004*

 
| **(dollars  in thousands)**             | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Estimated  Fair  Value** | ** ** | **Average  Yield** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------|------------|----------------------------|------------|--------------------|------------|
| State  and political subdivisions:      | ** ** | ** **          | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                 | ** ** | ** **         | ** ** |
| Due  after five years through ten years |       | $                   | 299        |                        | $          | —                      |       | $                          | —     |               | $          | 299 |   | 4.78 | % |
|                                         |            |                     |            |                             |            |                             |            |                            |            |                    |            |  |  |  |  |

 

*June 30, 2005*

 
| ** **                                                               | ** ** | **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  |       | $                                                                   | —  |                                                                  | $          | —     |       | $ | 487  |   | $ | 13  |   | $ | 487  |   | $ | 13  |   |
| Mortgage-backed  debt securities                                         |       | 8,975                                                               |         | 34                                                                    |       | 3,095           |       | 56 |   | 12,070 |   | 90 |   |
| Total  temporarily impaired securities                                   |       | $                                                                   | 8,975        |                                                                  | $          | 34              |       | $ | 3,582 |   | $ | 69 |   | $ | 12,557 |   | $ | 103 |   |

 

8

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*December 31, 2004*

 
| ** **                                                         | ** ** | **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 |       | $                                                                   | —     |                                                                  | $          | —          |       | $ | 487 |   | $ | 13 |   | $ | 487 |   | $ | 13 |   |
| Mortgage-backed  debt securities                                   |       | 5,865                                                               |       | 60                                                                    |       | 1,406           |       | 19 |   | 7,271 |   | 79 |   |
| Total  temporarily impaired securities                             |       | $                                                                   | 5,865      |                                                                  | $          | 60              |       | $ | 1,893 |   | $ | 32 |   | $ | 7,758 |   | $ | 92 |   |

 

Becausethe decline in fair value was caused by interest rates and not credit qualityand the Company has both the intent and ability to hold these investments for aperiod of time sufficient to allow for any anticipated recovery in fair value,the Company has not recognized any other-than-temporary impairment inconnection with the unrealized losses reflected in the preceding tables.

 

**RestrictedStock**

 

The following table shows the amounts ofrestricted stock as of June 30, 2005 and December 31, 2004:

 
| ** **                         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(dollars  in thousands)**        | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| Federal  Home Loan Bank of Atlanta |       | $                 | 342        |                  | $          | 261 |   |
| Federal  Reserve Bank              |       | 439               |       | 414                   |       |
| Atlantic  Central Bankers Bank     |       | 40                |       | 40                    |       |
|                               |       | $                 | 821        |                  | $          | 715 |   |

 

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

 

Loansconsist of the following:

 
| ** **                                                                  | ** ** | **June 30,** | ** ** | **% of**  | ** ** | **December 31,** | ** ** | **% of**  | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------|------------|-----------|------------|-----------------------|------------|-----------|------------|
| **(dollars  in thousands)**                                                 | ** ** | **2005**          | ** ** | **Loans** | ** ** | **2004**              | ** ** | **Loans** | ** ** |
| Real  estate loans:                                                         |       |              |       |      |       |                  |       |      |       |
| Construction  and land development                                          |       | $                 | 29,685     |      | 20         | %                     | $          | 21,648    |       | 16 | % |
| Mortgage  loans:                                                            |       |              |       |      |       |                  |       |      |       |
| Secured  by 1 to 4 family residential properties                            |       | 29,083            |       | 20        | %          | 28,066                |       | 21        | %          |
| Secured  by multi-family (5 or more) residential properties                 |       | 4,837             |       | 3         | %          | 2,083                 |       | 2         | %          |
| Secured  by commercial properties                                           |       | 54,184            |       | 36        | %          | 54,325                |       | 40        | %          |
| Secured  by farm land                                                       |       | 4,499             |       | 3         | %          | 3,145                 |       | 2         | %          |
| Total  mortgage loans                                                       |       | 92,603            |       | 62        | %          | 87,619                |       | 65        | %          |
| Loans  to farmers                                                           |       | —            |       | —    | %          | 759                   |       | —    | %          |
| Commercial  and industrial loans                                            |       | 23,686            |       | 16        | %          | 22,683                |       | 17        | %          |
| Loans  to individuals for household, family and other personal expenditures |       | 2,542             |       | 2         | %          | 2,959                 |       | 2         | %          |
|                                                                        |       | 148,516           |       | 100       | %          | 135,668               |       | 100       | %          |
| Less  allowance for loan losses                                             |       | (1,803            | )          |      |       | (1,503                | )          |      |       |
| Net  loans                                                                  |       | $                 | 146,713    |      |       |                  | $          | 134,165   |       |   |   |

 

9

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Transactions in theallowance for loan losses are summarized as follows:

 
| ** **                                     | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------|------------|-------------------------------------|------------|
| **(dollars  in thousands)**                    | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| Average  total loans outstanding during period |       | $                                   | 139,542    |   | $ | 104,357 |   |
| Balance  at beginning of period                |       | $                                   | 1,503      |   | $ | 985 |   |
| Provision  charged to operating expenses       |       | 300                                 |       | 210 |   |
| Recoveries  of loans previously charged-off    |       | —                              |       | — |   |
|                                           |       | 1,803                               |       | 1,195 |   |
| Loans  charged-off                             |       | —                              |       | — |   |
| Balance  at end of period                      |       | $                                   | 1,803      |   | $ | 1,195 |   |

 

**Note 6.  Noninterest Expenses:**

 

Noninterest expensesconsist of the following:

 
| ** **                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(dollars  in thousands)**             | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                    |       |                                  |       |                                |       |   |   |   |   |
| Salaries                                |       | $                                     | 571        |                                | $          | 513 |   | $ | 1,096 |   | $ | 988 |   |
| Bonus                                   |       | 40                                    |       | 58                                  |       | 53 |   | 73 |   |
| Deferred  Personnel Costs               |       | (37                                   | )          | (44                                 | )          | (69 | ) | (73 | ) |
| Payroll  Taxes                          |       | 50                                    |       | 38                                  |       | 115 |   | 80 |   |
| Employee  Insurance                     |       | 25                                    |       | 22                                  |       | 61 |   | 53 |   |
| Other Employee Benefits                 |       | 27                                    |       | 21                                  |       | 56 |   | 41 |   |
| Depreciation                            |       | 42                                    |       | 51                                  |       | 80 |   | 97 |   |
| Rent                                    |       | 64                                    |       | 52                                  |       | 115 |   | 102 |   |
| Utilities                               |       | 15                                    |       | 13                                  |       | 30 |   | 29 |   |
| Repairs  and Maintenance                |       | 24                                    |       | 20                                  |       | 48 |   | 38 |   |
| ATM  Expense                            |       | 15                                    |       | 14                                  |       | 30 |   | 26 |   |
| Other  Occupancy and Equipment Expenses |       | 20                                    |       | 11                                  |       | 33 |   | 19 |   |
| Postage  and Supplies                   |       | 15                                    |       | 13                                  |       | 29 |   | 27 |   |
| Data  Processing                        |       | 98                                    |       | 75                                  |       | 185 |   | 144 |   |
| Advertising  and Promotion              |       | 48                                    |       | 33                                  |       | 89 |   | 73 |   |
| Legal                                   |       | 3                                     |       | 3                                   |       | 7 |   | 20 |   |
| Insurance                               |       | 7                                     |       | 11                                  |       | 14 |   | 21 |   |
| Consulting                              |       | 9                                     |       | 10                                  |       | 19 |   | 20 |   |
| Courier                                 |       | 10                                    |       | 8                                   |       | 20 |   | 15 |   |
| Audit  Fees                             |       | 33                                    |       | 24                                  |       | 66 |   | 44 |   |
| Shareholder  Relations                  |       | 5                                     |       | 2                                   |       | 6 |   | 6 |   |
| Other                                   |       | 51                                    |       | 59                                  |       | 117 |   | 93 |   |
|                                    |       | $                                     | 1,135      |                                | $          | 1,007 |   | $ | 2,200 |   | $ | 1,936 |   |

 

**Note 7.  401(k) Profit Sharing Plan:**

 

TheCompany 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 discretionary contributionsto the Plan based on the Company’s earnings. The Company’s contributions are subject to a vesting schedule (20percent per year) requiring the completion of five years of service with theCompany before these benefits are fully vested. A participant’s account under the Plan, together with investmentearnings thereon, is normally distributable, following retirement, death,disability or other termination of employment, in a single lump-sum payment.

 

TheCompany made contributions to the Plan in the amounts of $42,000 and $17,000for the first six months of 2005 and 2004, respectively, and $21,000 and$15,000 for the three-month periods ended June 30, 2005 and 2004,respectively.

 

10

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**Note 8.  Shareholders’ Equity:**

 

Capital:

 

The Company and the Bankare subject to various regulatory capital requirements administered by thefederal banking agencies.  Failure tomeet minimum capital requirements can initiate certain mandatory - and possiblyadditional discretionary - actions by regulators that, if undertaken, couldhave a direct material effect on the Company’s financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Company and the Bankmust meet specific capital guidelines that involve quantitative measures of theCompany’s and the Bank’s assets, liabilities, and certain off-balance-sheetitems as calculated under regulatory accounting practices.  The Company’s and the Bank’s capital amountsand classification are also subject to qualitative judgments by the regulatorsabout components, risk weightings, and other factors.

 

Quantitative measuresestablished by regulation to ensure capital adequacy require the Company andthe Bank to maintain minimum amounts and ratios (set forth in the followingtable) of total and Tier 1 capital (as defined in the regulations) torisk-weighted assets (as defined), and Tier 1 capital (as defined) to averageassets (as defined).  Management believesthat the Company and the Bank met all capital adequacy requirements to whichthey are subject as of June 30, 2005.

 

As of June 30, 2005,the most recent notification from the regulatory agency categorized the Bank aswell capitalized under the regulatory framework for prompt correctiveaction.  To be categorized as wellcapitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,and Tier 1 leverage ratios as set forth in the table.  There are no conditions or events since thatnotification which management believes have changed the Bank’s category.

 

11

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The Company’s and theBank’s actual capital amounts and ratios at June 30, 2005 and December 31,2004 are presented in the following tables.

 
| **June 30,  2005**           | ** ** | **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 |       | $          | 15,164     |                               | 9.20       | %                                                                               | $          | 6,591 |   | 4.00 | % | N/A |   | N/A |   |
| Bank                              |       | $          | 15,212     |                               | 9.25       | %                                                                               | $          | 6,577 |   | 4.00 | % | $ | 9,866 |   | 6.00 | % |
|                              |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |
| Total Capital                     |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |
| To Risk-Weighted Assets  Company  |       | $          | 16,967     |                               | 10.30      | %                                                                               | $          | 13,182 |   | 8.00 | % | N/A |   | N/A |   |
| Bank                              |       | $          | 17,015     |                               | 10.35      | %                                                                               | $          | 13,154 |   | 8.00 | % | $ | 16,443 |   | 10.00 | % |
|                              |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |
| Tier 1 Capital                    |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |
| To Average Assets  Company        |       | $          | 15,164     |                               | 8.49       | %                                                                               | $          | 7,146 |   | 4.00 | % | N/A |   | N/A |   |
| Bank                              |       | $          | 15,212     |                               | 8.53       | %                                                                               | $          | 7,134 |   | 4.00 | % | $ | 8,917 |   | 5.00 | % |

 
| **December 31,  2004**       | ** ** | **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 |       | $          | 14,236     |                               | 9.46       | %                                                                               | $          | 6,020 |   | 4.00 | % | N/A |   | N/A |   |
| Bank                              |       | $          | 14,282     |                               | 9.51       | %                                                                               | $          | 6,000 |   | 4.00 | % | $ | 9,015 |   | 6.00 | % |
|                              |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |
| Total Capital                     |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |
| To Risk-Weighted Assets  Company  |       | $          | 15,739     |                               | 10.46      | %                                                                               | $          | 12,040 |   | 8.00 | % | N/A |   | N/A |   |
| Bank                              |       | $          | 15,785     |                               | 10.51      | %                                                                               | $          | 12,020 |   | 8.00 | % | $ | 15,025 |   | 10.00 | % |
|                              |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |
| Tier 1 Capital                    |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |
| To Average Assets  Company        |       | $          | 14,236     |                               | 8.84       | %                                                                               | $          | 6,444 |   | 4.00 | % | N/A |   | N/A |   |
| Bank                              |       | $          | 14,282     |                               | 8.88       | %                                                                               | $          | 6,434 |   | 4.00 | % | $ | 8,042 |   | 5.00 | % |

 

**Note 9.****          Recent AccountingStandards:**

 

In May 2005,the Financial Accounting Standards Board (“FASB”) issued Statement No. 154,(“SFAS No. 154”) “Accounting Changes and Error Corrections - A Replacementof APB Opinion No. 20 and FASB Statement No. 3.” This new standardreplaces Accounting Principles Board (“APB”) Opinion No. 20, “AccountingChanges”, and FASB Statement No. 3, “Reporting Accounting Changes inInterim Financial Statements.” Among other changes, SFAS No. 154 requiresthat a voluntary change in accounting principle be applied retrospectively withall prior period financial statements presented on the new accountingprinciple, unless it is impracticable to do so. SFAS No. 154 also providesthat (1) a change in method of depreciating or amortizing a long-livednonfinancial asset be accounted for as a change in estimate (prospectively)that was effected by a change in accounting principle, and (2) correctionof errors in previously issued financial statements should be termed a “restatement.“ The new standard is effective for accounting changes and corrections oferrors made in fiscal years beginning after December 15, 2005. The Companydoes not anticipate this revision will have a material effect on its financialstatements.

 

In December 2004,the FASB issued Statement No. 123 (Revised 2004) (“SFAS No. 123R”) “Share-BasedPayment,” which requires that the compensation cost relating to share-basedpayment transactions be recognized in financial statements.  SFAS No. 123Rreplaces SFAS No. 123, “Accounting for Stock-Based Compensation,” andsupersedes APB Opinion No. 25, “Accounting for Stock 

 

12

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Issuedto Employees.” Share-based compensation arrangements include share options,restricted share plans, performance-based awards, share appreciation rights andemployee share purchase plans. SFAS No. 123R requires all share-basedpayments to employees be valued using a fair valued method on the date of grantand expensed based on that fair value over the applicable vesting period. SFAS No. 123Ralso amends SFAS No. 95 “Statement of Cash Flows,” requiring the benefitsof tax deductions in excess of recognized compensation cost be reported asfinancing instead of operating cash flows.  The Securities and ExchangeCommission (“SEC”) issued Staff Accounting Bulletin No. 107, (“SAB No. 107”)which expresses the SEC’s views regarding the interaction between SFAS No. 123Rand certain SEC rules and regulations. Additionally, SAB No. 107provides guidance related to share-based payment transactions for publiccompanies. The Company will be required to apply SFAS No. 123R as of theannual reporting period that begins after June 15, 2005. The Company doesnot anticipate this revision will have a material effect on its financialstatements.

 

In November 2004,the Emerging Issues Task Force (“EITF”) published Issue 03-1, “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments.”The Task Force discussed the meaning of other-than-temporary impairment and itsapplication to certain investments carried at cost. The Task Force requestedthat the FASB staff consider other impairment models within U.S. GenerallyAccepted Accounting Principles (“GAAP”) when developing its views. The TaskForce also requested that the scope of the impairment issue be expanded toinclude equity investments and investments subject to FASB Statement No. 115,“Accounting for Certain Investments in Debt and Equity Securities,” and thatthe issue be addressed by the Task Force as a separate EITF issue. At the EITFmeeting, the Task Force reached a consensus on one issue that certainquantitative and qualitative disclosures should be required for securitiesaccounted for under Statement 115 that are impaired at the balance sheet datebut for which an other-than-temporary impairment has not been recognized. TheBoard ratified the consensus on that one issue at its November 25, 2004meeting. In September 2004, the Financial Accounting Standards Board (“FASB”)directed the FASB staff to issue two proposed FASB Staff Positions (“FSP”):Proposed FSP EITF Issue 03-1-a, which provides guidance for the application ofparagraph 16 of EITF Issue 03-1 to debt securities that are impaired because ofinterest rate and/or sector spread increases, and Proposed FSP EITF Issue 03-1-b,which delays the effective date of Issue 03-1 for debt securities that areimpaired because of interest rate and/or sector spread increases. In June 2005,the FASB reached a decision whereby they declined to provide additionalguidance on the meaning of other-than-temporary impairment. The Board directedthe FASB staff to issue EITF 03-1a as final and to draft a new FSP that willreplace EITF 03-01. The final FSP (retitled FAS 115-1, “The Meaning ofOther-Than-Temporary Impairment and it Application to Certain Investments”)would be effective for other-than-temporary impairment analysis conducted inperiods beginning after September 15, 2005. The Company does notanticipate this revision will have a material effect on its financialstatements.

 

**Item 2.****           Management’sDiscussion and Analysis or Plan of Operations.**

 

**Forward-LookingStatements**

 

Thismanagement’s discussion and analysis contains forward-looking statements withinthe meaning of the Private Securities Litigation Reform Act of 1995, includingstatements relating to the Frederick County Bancorp, Inc. (the “Company”)beliefs, expectations, anticipations and plans regarding, among other things,general economic trends, interest rates, product expansions and othermatters.  Such forward-looking statementsare identified by terminology such as “may”, “will”, “believe”, “expect”, “estimate”,“anticipate”, “likely”, “unlikely”, “continue”, or similar terms and aresubject to numerous uncertainties, such as federal monetary policy, inflation,employment, profitability and consumer confidence levels, both nationally andin the Company’s market area, the health of the real estate and constructionmarket in the Company’s market area, the Company’s ability to develop andmarket new products and to enter new markets, competitive challenges in theCompany’s market, legislative changes and other factors, and as such, there canbe no assurance that future events will develop in accordance with theforward-looking statements contained herein. Readers are cautioned against placing undue reliance on any suchforward-looking statement.  In addition,the Company’s past results of operations do not necessarily indicate its futureresults.

 

**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.

 

The Company was organized in May 2003and on September 30, 2003, the Agreement and Plan of Share Exchange(the “Exchange”) between the Company and Frederick County Bank (the “Bank”),dated June 9, 2003, approved at the Special Meeting of Shareholders of theBank held on September 22, 2003, became effective.  Pursuant to the Exchange, each of theoutstanding shares of common stock $10.00 par value of the Bank was convertedinto one share of the common stock $0.01 par value of the Company.  As a result of the Exchange, the Bank hasbecome a wholly owned subsidiary of the Company.  DuringFebruary 2004, the Company received approval from the Federal Reserve Bankof Richmond to become a financial holding company.

 

TheBank was incorporated on August 30, 2000 and during 2001 became activelyinvolved in the developmental activities needed to obtain a commercial bankcharter in the State of Maryland.  Allregulatory approvals were received, and the Bank commenced operations on October 18,2001.

 

13

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The Company iscontinually looking for promising branch sites that will contribute to theCompany’s growth and profit expectations. While additional branching activity is anticipated, there can be noassurance as to when or if, additional branches will be established, whetherany such branches can be operated profitably, or whether such expansion willresult in increased assets, earnings, return on equity or shareholdervalue.  The Company has received siteplan approval for the construction of two new branches located at 100 CommerceDrive, Walkersville, Maryland and 6910 Crestwood Boulevard, Frederick, Marylandand anticipates that these facilities will open in late 2005 or early 2006.

 

**Critical Accounting Policies**

 

The Company’s financialstatements are prepared in accordance with accounting principles generallyaccepted (“GAAP”) in the United States of America and follow general practiceswithin the industry in which it operates. Application of these principles requires management to make estimates,assumptions, and judgments that affect the amounts reported in the financialstatements and accompanying notes.  Theseestimates, assumptions, and judgments are based on information available as ofthe date of the financial statements; accordingly, as this information changes,the financial statements could reflect different estimates, assumptions, andjudgments.  Certain policies inherentlyhave a greater reliance on the use of estimates, assumptions, and judgments andas such have a greater possibility of producing results that could bematerially different than originally reported. Estimates, assumptions, and judgments are necessary when assets andliabilities are required to be recorded at fair value, when a decline in thevalue of an asset not carried on the financial statements at fair valuewarrants an impairment write-down or valuation reserve to be established, orwhen an asset or liability needs to be recorded contingent upon a futureevent.  Carrying assets and liabilitiesat fair value inherently results in more financial statement volatility.  The fair values and the information used torecord valuation adjustments for certain assets and liabilities are based eitheron quoted market prices or are provided by other third-party sources, whenavailable. The estimates used in management’s assessment of the adequacy of theallowance for credit 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.  Further information is locatedin the sections labeled Income Taxes and Allowance for Loan Losses, later inthis report.

 

**SixMonths Ended June 30, 2005 and 2004**

 

The net income was$916,000 for the six months ended June 30, 2005, which compares veryfavorably to the $602,000 profit recorded for the same period in 2004.  It should be noted that the Companyrecognized $315,000 of income tax expense in 2005, whereas, no income taxexpense was incurred for the same period in 2004 due to the net operating losscarryforwards available at that time. The basic earnings per share for the six months ended June 30, 2005and 2004 are $0.63 and $0.41, respectively, and are based on theweighted-average number of shares outstanding of 1,458,117 in 2005 and1,455,152, in 2004.  The diluted earningsper share for the six months ended June 30, 2005 and 2004 are $0.60 and$0.40, respectively, and are based on the weighted-average number of sharesoutstanding of 1,526,296 and 1,497,634 respectively.

 

The Company experiencedan annualized return on average assets of 1.05% and 0.88% for the six-monthperiods ended June 30, 2005 and 2004, respectively.  Additionally, the Company experienced anannualized return on average shareholders’ equity of 12.39% and 9.23% for thesix-month periods ended June 30, 2005 and 2004, respectively.

 

**ThreeMonths Ended June 30, 2005 and 2004**

 

The net income was$400,000 for the three months ended June 30, 2005 as compared to the$313,000 net earnings recorded for the same period in 2004.  Again, it should be noted that the Companyrecognized $255,000 of income tax expense during this period in 2005, whereas,no income tax expense was incurred for the same period in 2004 due to the netoperating loss****carryforwards available at that time. The basic earnings per share for the three months ended June 30,2005 and 2004 are $0.27 and $0.22, respectively, and are based on theweighted-average number of shares outstanding of 1,458,602 in 2005 and1,455,152, in 2004.  The diluted earningsper share for the three months ended June 30, 2005 and 2004 are $0.26 and$0.21, respectively, and are based on the weighted-average number of sharesoutstanding of 1,527,663 and 1,500,728, respectively.

 

TheCompany experienced an annualized return on average assets of 0.90% and 0.88%for the three-month periods ended June 30, 2005 and 2004,respectively.  Additionally, the Companyexperienced an annualized return on average shareholders’ equity of 10.66% and9.52% for the three-month periods ended June 30, 2005 and 2004,respectively.

 

14

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

 

The “ComparativeStatement Analysis,” shows average balances of asset and liability categories,interest income and interest paid, and average yields and rates for the periodsindicated.

 

**FrederickCounty Bancorp, Inc.**

 

**ComparativeStatement Analysis**

 

*Six months ended June 30,*

 
| ** **                                            | ** ** | **2005**                         | ** ** | **2004**                         | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| **(dollars in thousands)**                            | ** ** | **Average daily   balance** | ** ** | **Interest Income/   Paid** | ** ** | **Average Yield/   rate** | ** ** | **Average daily   balance** | ** ** | **Interest Income/   Paid** | ** ** | **Average Yield/   rate** | ** ** |
| Assets                                                |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Interest-earning assets:                              |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Federal funds sold                                    |       | $                                | 9,318      |                             | $          | 127 |   | 2.75 | % | $ | 10,548 |   | $ | 51 |   | 0.97 | % |
| Interest bearing deposits in other banks              |       | 1,107                            |       | 14                               |       | 2.55 |   | 417 |   | 2 |   | 0.96 |   |
| Investment securities (1):                            |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Taxable                                               |       | 17,821                           |       | 333                              |       | 3.77 |   | 16,922 |   | 297 |   | 3.52 |   |
| Tax-exempt (2)                                        |       | 382                              |       | 11                               |       | 5.81 |   | — |   | — |   | — |   |
| Loans (3)                                             |       | 139,542                          |       | 4,460                            |       | 6.45 |   | 104,357 |   | 3,060 |   | 5.88 |   |
| Total interest-earning assets                         |       | 168,170                          |       | 4,945                            |       | 5.93 |   | 132,244 |   | 3,410 |   | 5.17 |   |
| Noninterest-earning assets                            |       | 5,673                            |       |                             |       |   |   | 4,640 |   |   |   |   |   |
| Total assets                                          |       | $                                | 173,843    |                             |       |   |   |   | $ | 136,884 |   |   |   |   |   |
|                                                  |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Liabilities and Shareholders’ Equity             |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities                          |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| NOW accounts                                          |       | $                                | 17,220     |                             | 15         |   | 0.18 | % | $ | 15,072 |   | 13 |   | 0.17 | % |
| Savings accounts                                      |       | 3,071                            |       | 8                                |       | 0.53 |   | 3,327 |   | 9 |   | 0.54 |   |
| Money market accounts                                 |       | 27,688                           |       | 173                              |       | 1.26 |   | 28,224 |   | 131 |   | 0.93 |   |
| Certificates of deposit $100,000 or more              |       | 41,918                           |       | 554                              |       | 2.67 |   | 28,037 |   | 290 |   | 2.07 |   |
| Certificates of deposit less than $100,000            |       | 44,274                           |       | 580                              |       | 2.64 |   | 29,986 |   | 333 |   | 2.23 |   |
| Short-term borrowings                                 |       | 450                              |       | 13                               |       | 5.83 |   | 357 |   | 7 |   | 3.93 |   |
| Total interest-bearing liabilities                    |       | 134,621                          |       | 1,343                            |       | 2.01 |   | 105,003 |   | 783 |   | 1.50 |   |
| Noninterest-bearing deposits                          |       | 23,889                           |       |                             |       |   |   | 18,589 |   |   |   |   |   |
| Noninterest-bearing liabilities                       |       | 547                              |       |                             |       |   |   | 250 |   |   |   |   |   |
| Total liabilities                                     |       | 159,057                          |       |                             |       |   |   | 123,842 |   |   |   |   |   |
| Total shareholders’ equity                       |       | 14,786                           |       |                             |       |   |   | 13,042 |   |   |   |   |   |
| Total liabilities and shareholders’  equity |       | $                                | 173,843    |                             |       |   |   |   | $ | 136,884 |   |   |   |   |   |
| Net interest income                                   |       |                             |       | $                                | 3,602      |   |   |   |   |   | $ | 2,627 |   |   |   |
| Net interest spread                                   |       |                             |       |                             |       | 3.92 | % |   |   |   |   | 3.67 | % |
| Net interest margin                                   |       |                             |       |                             |       | 4.32 | % |   |   |   |   | 3.98 | % |

 

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(1)          Yields on securitiesavailable-for-sale have been calculated on the basis of historical cost and donot give effect to changes in the fair value of those securities, which isreflected as a component of shareholders’ equity.

(2)          Presented on ataxable-equivalent basis using the statutory federal income tax rate of34%.  Taxable-equivalent adjustments of$4,000 in 2005 and none in 2004 are included in the calculation of thetax-exempt investment interest income.

(3)          Presented on ataxable-equivalent basis using the statutory federal income tax rate of34%.  Taxable-equivalent adjustments of$7,000 in 2005 and none in 2004 are included in the calculation of the loaninterest income.  Net loan originationexpenses charged against interest income totaled $8,000 in 2004 and in 2005 thefee income and expenses netted to zero.

 

15

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**FrederickCounty Bancorp, Inc.**

**ComparativeStatement Analysis**

 

*Three months ended June 30,*

 
| ** **                                            | ** ** | **2005**                         | ** ** | **2004**                         | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| **(dollars in thousands)**                            | ** ** | **Average Daily   Balance** | ** ** | **Interest Income/   Paid** | ** ** | **Average Yield/   Rate** | ** ** | **Average Daily   Balance** | ** ** | **Interest Income/   Paid** | ** ** | **Average Yield/   Rate** | ** ** |
| Assets                                                |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Interest-earning assets:                              |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Federal funds sold                                    |       | $                                | 9,928      |                             | $          | 71 |   | 2.87 | % | $ | 10,361 |   | $ | 26 |   | 1.01 | % |
| Interest bearing deposits in other banks              |       | 1,740                            |       | 12                               |       | 2.77 |   | 484 |   | 1 |   | 0.83 |   |
| Investment securities (1):                            |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Taxable                                               |       | 18,195                           |       | 169                              |       | 3.73 |   | 17,515 |   | 150 |   | 3.44 |   |
| Tax-exempt (2)                                        |       | 465                              |       | 8                                |       | 6.90 |   | — |   | — |   | — |   |
| Loans (3)                                             |       | 142,120                          |       | 2,328                            |       | 6.57 |   | 108,729 |   | 1,587 |   | 5.85 |   |
| Total interest-earning assets                         |       | 172,448                          |       | 2,588                            |       | 6.02 |   | 137,089 |   | 1,764 |   | 5.16 |   |
| Noninterest-earning assets                            |       | 6,194                            |       |                             |       |   |   | 4,968 |   |   |   |   |   |
| Total assets                                          |       | $                                | 178,642    |                             |       |   |   |   | $ | 142,057 |   |   |   |   |   |
|                                                  |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Liabilities and Shareholders’ Equity             |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities                          |       |                             |       |                             |       |   |   |   |   |   |   |   |   |
| NOW accounts                                          |       | $                                | 18,514     |                             | 8          |   | 0.17 | % | $ | 16,256 |   | 7 |   | 0.17 | % |
| Savings accounts                                      |       | 3,102                            |       | 4                                |       | 0.52 |   | 3,347 |   | 4 |   | 0.48 |   |
| Money market accounts                                 |       | 26,781                           |       | 98                               |       | 1.47 |   | 28,488 |   | 66 |   | 0.93 |   |
| Certificates of deposit $100,000 or more              |       | 42,457                           |       | 291                              |       | 2.75 |   | 27,965 |   | 146 |   | 2.09 |   |
| Certificates of deposit less than $100,000            |       | 45,832                           |       | 311                              |       | 2.72 |   | 31,325 |   | 174 |   | 2.23 |   |
| Short-term borrowings                                 |       | 450                              |       | 7                                |       | 6.24 |   | 428 |   | 4 |   | 3.75 |   |
| Total interest-bearing liabilities                    |       | 137,136                          |       | 719                              |       | 2.10 |   | 107,809 |   | 401 |   | 1.49 |   |
| Noninterest-bearing deposits                          |       | 26,007                           |       |                             |       |   |   | 20,807 |   |   |   |   |   |
| Noninterest-bearing liabilities                       |       | 489                              |       |                             |       |   |   | 284 |   |   |   |   |   |
| Total liabilities                                     |       | 163,632                          |       |                             |       |   |   | 128,900 |   |   |   |   |   |
| Total shareholders’ equity                       |       | 15,010                           |       |                             |       |   |   | 13,157 |   |   |   |   |   |
| Total liabilities and shareholders’  equity |       | $                                | 178,642    |                             |       |   |   |   | $ | 142,057 |   |   |   |   |   |
| Net interest income                                   |       |                             |       | $                                | 1,869      |   |   |   |   |   | $ | 1,363 |   |   |   |
| Net interest spread                                   |       |                             |       |                             |       | 3.92 | % |   |   |   |   | 3.67 | % |
| Net interest margin                                   |       |                             |       |                             |       | 4.35 | % |   |   |   |   | 3.99 | % |

 

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(1)          Yields on securitiesavailable-for-sale have been calculated on the basis of historical cost and donot give effect to changes in the fair value of those securities, which isreflected as a component of shareholders’ equity.

(2)          Presented on a taxable-equivalentbasis using the statutory federal income tax rate of 34%.  Taxable-equivalent adjustments of $3,000 in2005 and none in 2004 are included in the calculation of the tax-exemptinvestment interest income.

(3)          Presented on ataxable-equivalent basis using the statutory federal income tax rate of34%.  Taxable-equivalent adjustments of$4,000 in 2005 and none in 2004 are included in the calculation of the loaninterest income.  Net loan originationexpenses charged against interest income totaled $3,000 in 2004 and net loansfee income of $5,000 in 2005.

 

**Net Interest Income**

 

Netinterest income is generated from the Company’s lending and investmentactivities, and is the most significant component of the Company’searnings.  Net interest income is thedifference between interest and rate-related fee income on earning assets(primarily loans and investment securities) and the interest paid on the funds(primarily deposits) supporting them. While the Company currently relies almost entirely on deposits to fundloans and investments, with minimal short term borrowings, in future periods itmay utilize a higher level of short-term borrowings, including borrowings fromthe Federal Home Loan Bank, federal funds lines with correspondent banks andrepurchase agreements, to fund operations, depending on economic conditions,deposit availability and pricing, interest rates and other factors.

 

16

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TheBank commenced operations on October 18, 2001.  Since it’s opening, management has beenpleased with the Bank’s asset growth. Core deposit relationships are being developed within the local marketplace, driven by competitive pricing and excellent customer service.

 

**SixMonths Ended June 30, 2005 and 2004**

 

Theinterest income (on a taxable-equivalent basis) of $4.95 million in 2005 was$1.54 million, or 45.01%, higher than the amount recognized in 2004.  This dramatic increase in interest income isdue to the growth in average earning assets and increased yield on earningassets.  Average earning assets increasedby $35.93 million, or 27.17%, since June 30, 2004.  The yield on earning assets in 2005 increasedto 5.93% from 5.17% in 2004.  Thisincrease in yield is attributable to the impact of a larger percentage of loansto average interest-earning assets and the impact of the increase in short-termrates by the Federal Reserve.  TheCompany’s net interest margin was 4.32% and 3.98% and the net interest spreadwas 3.92% and 3.67% for the six-month periods ended June 30, 2005 and2004, respectively.  Average loans as apercentage of average interest-earnings assets increased to 82.98% for the sixmonths ended June 30, 2005, as compared to 78.91% for the same period in2004.

 

Theinterest expense increased 71.52% from $783,000 in 2004 to $1.34 million in2005 due to the 28.21% increase in volume of interest-bearing liabilities,along with the increase in the related rates paid on such interest-bearingliabilities, which increased to 2.01% in 2005 from 1.50% in 2004.

 

**Three MonthsEnded June 30, 2005 and 2004**

 

Theinterest income (on a taxable-equivalent basis) of $2.59 million in 2005 was$824,000, or 46.71% higher than the amount recognized in 2004.  As with the six- month period, this increasein interest income is due to the growth in average earning assets and increasedyields on earning assets.  Averageearning assets increased by $35.36 million, or 25.79%, since June 30,2004.  The yield on earning assets in2005 increased to 6.02% from 5.16% in 2004. This increase in yield is attributable to the impact of a largerpercentage of loans to average interest-earning assets and the impact of theincrease in short-term rates by the Federal Reserve.  The Company’s net interest margin was 4.35%and 3.99% and the net interest spread was 3.92% and 3.67% for the three-monthperiods ended June 30, 2005 and 2004, respectively.  Average loans as a percentage of averageinterest-earnings assets increased to 82.41% for the three months ended June 30,2005, as compared to 79.31% for the same period in 2004.

 

Theinterest expense increased 79.30% from $401,000 in 2004 to $719,000 in 2005 dueto the 27.20% increase in volume of interest-bearing liabilities, along withthe increase in the related rates paid on such interest-bearing liabilities,which increased to 2.10% in 2005 from 1.49% in 2004.

 

# **Noninterest Income**

# ** **

Noninterestincome was $140,000 and $121,000 for the six-month periods ended June 30,2005 and 2004, respectively, attributable primarily to service fees on depositaccounts and ATM interchange fees.

 

TheCompany’s management is committed to developing and offering innovative,market-driven products and services that will generate additional sources ofnoninterest income.  However, the futureresults of any of these products or services cannot be predicted at this time.

 

**Noninterest Expenses**

 

SeeNote 6 to the financial statements for a schedule showing a detailedbreakdown of the Company’s noninterest expenses.

 

**SixMonths Ended June 30, 2005 and 2004**

 

Noninterestexpenses amounted to $2.20 million and $1.94 million for the first six monthsof 2005 and 2004, respectively.  Thechanges in noninterest expenses are principally related to the following: anincrease in personnel costs and the increase in data processing expenses, whichincrease as the number and volume of loans and deposit accounts increase.  Salaries expense in 2005 was $1.10 million up$108,000 from the salaries expense incurred in the same period in 2004.  This increase of 10.93% reflects employeeperiodic pay increases and increases to make various employee salariescompetitive with the current employment environment.

 

**ThreeMonths Ended June 30, 2005 and 2004**

 

Noninterestexpenses amounted to $1.14 million and $1.01 million for these three-monthperiods in 2005 and 2004, respectively. The changes in noninterest expenses are principally related to thefollowing: an increase in personnel costs and the increase in data

 

17

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processingexpenses, which increase as the number and volume of loans and deposit accountsincrease.  Salaries expense in 2005 was$571,000 up $58,000 from the salaries expense incurred in the same period in2004.  This increase of 10.16% is foremployee pay increases and to make various employee salaries competitive withthe current employment environment.

 

**Income Taxes**

 

During the six monthsended June 30, 2005, the Company recognized $315,000 of income taxexpense, whereas, no income tax expense was incurred for the same period in2004 due to the net operating loss carryforwards available at that time.  At December 31, 2004, the Companyrecorded a valuation allowance of $158,000 to reduce the carrying value of thenet deferred tax assets carried in the accompanying consolidated balancesheets.  Valuation allowances areprovided for deferred tax assets when in management’s judgment a portion, orall, of the deferred tax assets may not be realized.  Factors influencing management’s judgmentinclude: the existence of sustained periods of taxable income and the extenttaxes paid in prior periods are recoverable with refund claims.  As of June 30, 2005, the Company was notrequired to maintain a valuation allowance.

 

The effective tax ratefor the first six months of 2005 was 25.59%, which was positively impacted bythe elimination of the $158,000 valuation allowance.  Excluding the effects of the valuationallowance, the effective tax rate would have been 38.42%.

 

**Market Risk, Liquidity andInterest 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 through customerdeposits, investment maturities, loan repayments, borrowings, and income.  Management considers the current liquidityposition to be adequate to meet the needs of the Company and its customers.

 

The Company seeks tolimit 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 $(30.61)million.

 

Interest rate sensitivityis an important factor in the management of the composition and maturityconfigurations of the Company’s earning assets and funding sources.  An Asset/Liability Committee manages theinterest rate sensitivity position in order to maintain an appropriate balancebetween the maturity and repricing characteristics of assets and liabilitiesthat is consistent with the Company’s liquidity analysis, growth, and capitaladequacy goals.  It is the objective ofthe Asset/Liability Committee to maximize net interest margins during periodsof both volatile and stable interest rates, to attain earnings growth, and tomaintain sufficient liquidity to satisfy depositors’ requirements and meetcredit needs of customers.

 

The table below, “InterestRate Sensitivity Gap Analysis,” summarizes, as of June 30, 2005, 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 increase earnings.  The converse would be true for a positive gapposition.  Therefore, a positive gap forany time period means that more interest-earning assets will reprice or matureduring 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.

 

18

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It is important to notethat the following table represents the static gap position for interestsensitive assets and liabilities at June 30, 2005.  The table does not give effect to prepaymentsor extensions of loans as a result of changes in general market interest rates.  Moreover, while the table does indicate theopportunities to reprice assets and liabilities within certain time frames, itdoes not account for timing differences that occur during periods of repricing.  For example, changes to deposit rates tend tolag in a rising rate environment and lead in a falling rate environment.

 

**InterestRate Sensitivity Gap Analysis**

**June 30,2005**

 
| ** **                                            | ** ** | **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                                   |       | $                                       | 9,905      |   | $ | — |   | $ | — |   | $ | — |   | $ | 9,905 |   |
| Interest-bearing  deposits in other banks             |       | 5,097                                   |       | — |   | — |   | — |   | 5,097 |   |
| Investment  securities(1)                             |       | 468                                     |       | 3,799 |   | 6,689 |   | 7,452 |   | 18,408 |   |
| Loans                                                 |       | 56,508                                  |       | 26,933 |   | 52,936 |   | 12,139 |   | 148,516 |   |
| Total  interest-earning assets                        |       | 71,978                                  |       | 30,732 |   | 59,625 |   | 19,591 |   | 181,926 |   |
| ** **                                            | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Liabilities                                           | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Savings  and NOW Accounts                             |       | 1,365                                   |       | 2,731 |   | 2,731 |   | 20,480 |   | 27,307 |   |
| Money  Market Accounts                                |       | 1,266                                   |       | 2,533 |   | 2,533 |   | 18,993 |   | 25,325 |   |
| Certificates  of Deposit                              |       | 49,508                                  |       | 32,913 |   | 8,016 |   | — |   | 90,437 |   |
| Short-term  borrowings                                |       | 450                                     |       | — |   | — |   | — |   | 450 |   |
| Total  interest-bearing liabilities                   |       | 52,589                                  |       | 38,177 |   | 13,280 |   | 39,473 |   | 143,519 |   |
| Interest  rate sensitivity gap                        |       | $                                       | 19,389     |   | $ | (7,445 | ) | $ | 46,345 |   | $ | (19,882 | ) | $ | 38,407 |   |
| Cumulative  interest rate sensitivity gap             |       | $                                       | 19,389     |   | $ | 11,944 |   | $ | 58,289 |   | $ | 38,407 |   |   |   |
| Cumulative  gap ratio as a percentage of total assets |       | 10.18                                   | %          | 6.27 | % | 30.62 | % | 20.17 | % |   |   |

 

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(1) Excludes equitysecurities.

 

**CriticalAccounting Policy:**

 

**Allowance for Loan Losses**

** **

The Company makesprovisions for loan losses in amounts deemed necessary to maintain theallowance for loan losses at an appropriate level.  The 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.  The Company’s provision forloan losses for the first six months of 2005 and 2004 were $300,000 and$210,000, respectively.  The loan growthwas $12.85 million for the first six months of 2005 as compared to $19.95million for the same period in 2004.  Dueto the increased exposure to commercial and commercial real estate loans, managementdeemed it necessary to increase the provision for loan losses in 2005 from theamount recorded for the same period in 2004, even though the loan volume islarger in 2004.  At June 30, 2005and December 31, 2004, the allowance for loan losses was $1.80 million and$1.50 million, respectively.

 

The allowance for loan losses is an estimate of thelosses in the loan portfolio. The allowance is based on two basic principles ofaccounting: (i) SFAS No. 5, *Accountingfor Contingencies*, which requires that losses be accrued when theyare probable of occurring and estimatable and (ii) SFAS No. 114, *Accounting by Creditors for Impairment of a Loan*,which requires that losses be accrued based on the differences between the loanbalance and either the value of collateral, or the present value of future cashflows, or the loan’s value as observable in the secondary market.  The provision for loan losses included in thestatements of operations serve 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 allocate an allowance for loans identified as impaired.  Impairment testing includes consideration ofthe borrower’s overall financial condition, resources and payment record,support available from financial guarantors and the fair market value ofcollateral. These factors are combined to estimate the probability and severityof inherent

 

19

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losses. When impairment is identified, then aspecific reserve is established based on the Company’s calculation of the lossembedded in the individual loan. Large groups of smaller balance, homogeneousloans are collectively evaluated for impairment. Accordingly, the Company doesnot separately identify individual consumer and residential loans forimpairment.  At June 30,2005 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, for which no impairment was identified. The loansmeeting the Company’s internal criteria for classification, such as specialmention, substandard, doubtful and loss, as well as, impaired loans, aresegregated from performing loans within the portfolio. These internallyclassified loans are then grouped by loan type (commercial, commercial real estate,commercial construction, residential real estate, residential construction orinstallment). Each loan type is assigned an allowance factor based onmanagement’s estimate of the associated risk, complexity and size of theindividual loans within the particular loan category. Classified loans areassigned a higher allowance factor than non-classified loans due to management’sconcerns regarding collectability or management’s knowledge of particularelements surrounding the borrower. Allowance factors increase with theworsening 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.

 

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

 

As of June 30,2005, the real estate loan portfolio constituted 82% of the total loanportfolio.  The Company does not have aconcentration of loans that exceed 10% of the total loan portfolio to any oneindustry.  An industry for this purposeis defined as a group of counterparties that are engaged in similar activitiesand have similar economic characteristics that would cause their ability tomeet contractual obligations to be similarly affected by changes in economic orother conditions.

 
| ** **                                     | ** ** | **June 30,** | ** ** |
|------------------------------------------------|------------|-------------------|------------|
| **(dollars in thousands)**                     | ** ** | **2005**          | ** ** | **2004** | ** ** |
| Average  total loans outstanding during period |       | $                 | 139,542    |   | $ | 104,357 |   |
| Balance  at beginning of period                |       | $                 | 1,503      |   | $ | 985 |   |
| Provision  charged to operating expenses       |       | 300               |       | 210 |   |
| Recoveries  of loans previously charged-off    |       | —            |       | — |   |
|                                           |       | 1,803             |       | 1,195 |   |
| Loans  charged-off                             |       | —            |       | — |   |
| Balance  at end of period                      |       | $                 | 1,803      |   | $ | 1,195 |   |

 

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

 

**Allocation of Allowance for LoanLosses**

 
| ** **                                                                  | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                  | ** ** | **2005**          | ** ** | **%****of  Loans**    | ** ** | **2004** | ** ** | **% of  Loans** | ** ** |
| Real  estate-construction                                                   |       | $                 | 240        |                  | 20         | % | $ | 186 |   | 16 | % |
| Real  estate-mortgage                                                       |       | 1,110             |       | 62                    | %          | 865 |   | 65 | % |
| Commercial  and industrial loans                                            |       | 413               |       | 16                    | %          | 377 |   | 17 | % |
| Loans  to individuals for household, family and other personal expenditures |       | 40                |       | 2                     | %          | 75 |   | 2 | % |
|                                                                        |       | $                 | 1,803      |                  | 100        | % | $ | 1,503 |   | 100 | % |

 

20

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| ** **                            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2005**          | ** ** | **2004**              | ** ** |
| Nonaccrual  loans                     |       | $                 | 10         |                  | $          | 102 |   |
| Loans  90 days past due               |       | —            |       | —                |       |
| Total  nonperforming loans            |       | 10                |       | 102                   |       |
| Other  real estate owned              |       | —            |       | —                |       |
| Total  nonperforming assets           |       | $                 | 10         |                  | $          | 102 |   |
| Nonperforming  assets to total assets |       | 0.01              | %          | 0.06                  | %          |

 

There were no otherinterest-bearing assets at June 30, 2005 or December 31, 2004classified 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 tofinancial instruments with off-balance sheet risk in the normal course ofbusiness to meet the financing needs of its customers.  These financial instruments includedcommitments to extend credit, including unused portions of lines of credit, andstandby letters of credit.  The Companyhas also entered into long-term lease obligations for some of its premises andequipment, the terms of which generally include options to renew.  The above instruments and obligationsinvolve, to varying degrees, elements of off-balance sheet risk in excess ofthe amount recognized in the statements of financial condition.  None of these instruments or obligations haveor are reasonably likely to have a current or future effect on the Company’sfinancial condition, revenues or expenses, results of operations, liquidity,capital expenditures or capital resources that is material to investors.

 

Commitments to extend credit and standby letters ofcredit as of June 30, 2005 were as follows:

 
| ** **                                                                       | ** ** | **June 30,**       | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                       | ** ** | **2005**                | ** ** |
| **(dollars  in thousands)**                                                      | ** ** | **Contractual  Amount** | ** ** |
| Financial  instruments whose notional or contract amounts represent credit risk: |       |                    |       |
| Commitments  to extend credit                                                    |       | $                       | 28,979     |   |
| Standby  letters of credit                                                       |       | 2,393                   |       |
| Total                                                                            |       | $                       | 31,372     |   |

 

SeeNote 8 to the Notes to the Financial Statements included in the Company’sAnnual Report on Form 10-KSB for the year ended December 31, 2004 foradditional information regarding the Company’s long-term lease obligations.

 

**Capital Resources**

 

The ability of theCompany to grow is dependent on the availability of capital with which to meetregulatory requirements, discussed below. To the extent the Company is successful it may need to acquireadditional capital through the sale of additional common stock, otherqualifying equity instruments or subordinated debt, or through incurrence ofdebt which does not qualify as holding company capital, but which can becontributed as capital to the Bank or utilized for other corporatepurposes.  There can be no assurance thatadditional capital will be available to the Company on a timely basis or onattractive terms.  At June 30, 2005,the Company had an outstanding unsecured loan from an unaffiliated third partyin the amount of $450,000 with a variable interest rate, which is tied to theWall Street Journal Prime Rate, and matures on January 27, 2006.  In addition, the Company has an unsecuredrevolving line of credit borrowing arrangement with the Atlantic CentralBankers Bank in the amount of $2.00 million with no outstanding balance as of June 30,2005.  This facility matures on May 1,2007, has a floating interest rate equal to the Wall Street Journal Prime Rateand requires monthly interest payments only. The purpose of this facility is to provide capital to the Bank, asneeded.

 

The Company and the Bankare subject to various regulatory capital requirements administered by thefederal banking agencies.  Failure tomeet minimum capital requirements can initiate certain mandatory - and possiblyadditional discretionary - actions by regulators that, if undertaken, couldhave a direct material effect on the Company’s financial statements.  Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Company and the Bankmust meet specific capital guidelines that involve quantitative measures of theCompany’s and the Bank’s assets, liabilities, and certain off-balance-sheetitems as calculated under regulatory accounting practices.  The Company’s and the Bank’s capital amountsand classification are also subject to qualitative judgments by the regulatorsabout components, risk weightings, and other factors.

 

21

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Quantitative measuresestablished by regulation to ensure capital adequacy require the Company andthe Bank to maintain minimum amounts and ratios of total and Tier 1 capital (asdefined in the regulations) to risk-weighted assets (as defined), and Tier 1capital (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 of June 30,2005.  See Note 8 to the unaudited consolidated financial statements for a tabledepicting compliance with regulatory capital requirements.

 

As of June 30, 2005,the most recent notification from the regulatory agency categorized the Bank aswell capitalized under the regulatory framework for prompt correctiveaction.  To be categorized as wellcapitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,and Tier 1 leverage ratios as set forth in the table in Note 8.  There are no conditions or events since thatnotification which management believes have changed the Bank’s category.

 

Additionally, the Companyhas not repurchased any outstanding shares of its common stock, nor does ithave an approved repurchase program at this time.

 

**Inflation**

 

The effect of changingprices on financial institutions is typically different than on non-bankingcompanies since virtually all of a Company’s assets and liabilities aremonetary in nature. In particular, interest rates are significantly affected byinflation, but neither the timing nor magnitude of the changes are directlyrelated to price level indices; therefore, the Company can best counterinflation over the long term by managing net interest income and controllingnet increases in noninterest income and expenses.

 

###### **Item.3  Controls and Procedures**

###### ** **

The Company’s management,under the supervision and with the participation of the Company’s ChiefExecutive Officer and Chief Financial Officer, evaluated, as of the last day ofthe period covered by this report, the effectiveness of the design andoperation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) underthe Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures were adequate.  There were nochanges in the Company’s internal control over financial reporting (as definedin Rule 13a-15 under the Securities Act of 1934) during the quarter ended June 30,2005 that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

 

22

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**PART II– Other Information**

 
| Item 1. |     | Legal Proceedings                                            | None            |
|---------|----------|--------------------------------------------------------------|-----------------|
|    |     |                                                         |            |
| Item 2  |     | Unregistered Sales of  Equity Securities and Use of Proceeds |            |
|    |     |                                                         |            |
| (a)     | * * | *Sales of Unregistered  Securities.*                         | None            |
|    |     |                                                         |            |
| (b)     | * * | *Use of Proceeds.*                                           | Not Applicable. |
|    |     |                                                         |            |
| (c)     | * * | *Small Business Issuer Purchases  of Securities*             | None            |
|    |     |                                                         |            |
| Item 3. |     | Defaults upon Senior  Securities                             | None            |
|    |     |                                                         |            |
| Item 4. |     | Submission of Matters  to a Vote of Security Holders         |            |
|    |     |                                                         |            |
|    |     | (a)                                                          |            | The annual meeting of shareholders of Frederick  County Bancorp, Inc. was held on April 19, 2005. |
|    |     |                                                         |            |   |
|    |     | (b)                                                          |            | There were 1,457,402  shares of Common Stock entitled to vote at the meeting and a total of  1,185,884 shares, or 81.0%, were represented at the meeting. |
|    |     |                                                         |            |   |
|    |     | (1)                                                          |            | Election of Directors – The following Directors,  comprising the entire Board of Directors, were elected to serve a one-year  term until the 2006 Annual Meeting of Shareholders: |
|         |          |                                                              |                 |  |  |  |  |  |  |  |

 
| **DIRECTOR**                 | ** ** | **FOR**   | ** ** | **WITHHOLD** | ** ** | **BROKER  NON-VOTES** | ** ** |
|------------------------------|------------|-----------|------------|--------------|------------|-----------------------|------------|
| Emil  D. Bennett             |       | 1,181,684 |       | 4,200        |       | 0                     |       |
| John  N. Burdette            |       | 1,182,684 |       | 3,200        |       | 0                     |       |
| John  Denham Crum            |       | 1,184,184 |       | 1,700        |       | 0                     |       |
| George  E. Dredden, Jr. |       | 1,184,184 |       | 1,700        |       | 0                     |       |
| William  S. Fout             |       | 1,184,184 |       | 1,700        |       | 0                     |       |
| Helen  G. Hahn               |       | 1,183,984 |       | 1,900        |       | 0                     |       |
| William  J. Kissner          |       | 1,182,820 |       | 3,064        |       | 0                     |       |
| Martin  S. Lapera            |       | 1,184,184 |       | 1,700        |       | 0                     |       |
| Kenneth  G. McCombs          |       | 1,184,184 |       | 1,700        |       | 0                     |       |
| Farhad  Memarsadeghi         |       | 1,181,668 |       | 4,216        |       | 0                     |       |
| Raymond  Raedy               |       | 1,182,684 |       | 3,200        |       | 0                     |       |

 
| Item 5. |   | Other Information                                                        |   |
|---------|--------|--------------------------------------------------------------------------|--------|
|    |   |                                                                     |   |
| (a)     |   | Information which  should have been Reported on Form 8-K.           | None   |
|    |   |                                                                     |   |
| (b)     |   | Material Changes to  Procedures for Director Nomination by Shareholders. | None   |
|    |   |                                                                     |   |
| 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)                                                               |
| 10(a)                |       | 2001 Stock Option  Plan(3)                                                              |
| 10(b)                |       | Employment Agreement  between the Bank and Martin S. Lapera(4)                          |
| 10(c)                |       | Employment Agreement  between the Bank and William R. Talley, Jr. (5)              |
| 10(d)                |       | Consulting Agreement  between the Bank and Raymond Raedy (6)                            |
| 10(e)                |       | 2002 Executive and  Director Deferred Compensation Plan (7)                             |
| 10(f)                |       | Amendment No. 1 to  the 2002 Executive and Director Deferred Compensation Plan (7) |
| 10(g)                |       | Loan Agreement with  Atlantic Central Bankers Bank(8)                                   |
| 10(h)                |       | Promissory Note with  Atlantic Central Bankers Bank (8)                                 |

 

23

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| 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 byreference to exhibit of the same number to the Company’s Quarterly Report on Form 10-QSBfor the quarter ended March 31, 2004, as filed with the Securities andExchange Commission.

(2)          Incorporated byreference to exhibit of the same number to the Company’s Quarterly Report on Form 10-QSBfor the quarter ended September 30, 2003, as filed with the Securities andExchange Commission.

(3)          Incorporatedby reference to exhibit 4 to the Company’s Registration Statement on Form S-8(No. 333-111761).

(4)          Incorporatedby reference to Exhibit 10.1 to the Company’s Current Report on Form 8-Kfiled on May 24, 2005.

(5)          Incorporatedby reference to Exhibit 10.2 to the Company’s Current Report on Form 8-Kfiled on May 24, 2005.

(6)          Incorporatedby reference to exhibit of the same number to the Bank’s Registration Statementon Form 10-SB as filed with the Board of Governors of the Federal ReserveSystem.

(7)          Incorporated byreference to exhibit of the same number to the Company’s Annual Report on Form 10-KSBfor the year ended December 31, 2004, as filed with the Securities andExchange Commission.

(8)          Incorporated byreference to exhibit of the same number to the Company’s Quarterly Report on Form 10-QSBfor the quarter ended March 31, 2005, as filed with the Securities andExchange Commission

 

24

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**SIGNATURES**

 

In accordance with therequirements 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:   August 2,  2005 | By:                             | /s/ Martin S. Lapera |   |
|                                        |                            | Martin S. Lapera |   |
|                                        |                            | President and Chief  Executive Officer |   |
|                                        |                            |
|                                        |                            |
| Date:   August 2,  2005 | By:                             | /s/ William R. Talley, Jr. |   |
|                                        |                            | William R. Talley, Jr. |   |
|                                        |                            | Executive Vice  President and Chief Financial   Officer |

 

25

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