** **

**UNITED STATES**

**SECURITIES 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 September 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 issuer as specified in its charter)

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

 

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

**Frederick,Maryland 21701**

(Address ofprincipal executive offices)

 

**301.620.1400**

(Issuer’s telephone number)

 

**N/A**

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

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yes o     Noý

 

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 October 28, 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, September 30, 2005  and December 31, 2004                             |       |
|             |                                                                                                                  |       |
|             | Consolidated Statements of  Income, Three and Nine Months Ended September 30, 2005 and 2004                      |       |
|             |                                                                                                                  |       |
|             | Consolidated Statements of  Changes in Shareholders’ Equity, Nine Months Ended September 30, 2005  and 2004 |       |
|             |                                                                                                                  |       |
|             | Consolidated Statements of  Cash Flows, Nine Months Ended September 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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**FrederickCounty Bancorp, Inc.**

**ConsolidatedBalance Sheets (Unaudited)**

 
| *** ***                                                                                                                                | *** *** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|--------------|------------------------|------------|-----------------------|------------|
| **(dollars  in thousands)**                                                                                                                 | ** **   | **2005**               | ** ** | **2004**              | ** ** |
| ASSETS                                                                                                                                      |         |                   |       |                  |       |
| Cash and due from banks                                                                                                                     |         | $                      | 5,927      |                  | $          | 3,524 |   |
| Federal funds sold                                                                                                                          |         | 11,628                 |       | 12,334                |       |
| Interest-bearing deposits in other banks                                                                                                    |         | 4,197                  |       | 781                   |       |
| Cash and cash  equivalents                                                                                                                  |         | 21,752                 |       | 16,639                |       |
| Investment securities available for sale-at fair  value                                                                                     |         | 16,676                 |       | 16,734                |       |
| Investment securities held-to-maturity - fair value  of $1,504 and $299                                                                     |         | 1,507                  |       | 299                   |       |
| Restricted stock                                                                                                                            |         | 821                    |       | 715                   |       |
| Loans                                                                                                                                       |         | 151,721                |       | 135,668               |       |
| Less: Allowance for loan losses                                                                                                             |         | (1,953                 | )          | (1,503                | )          |
| Net loans                                                                                                                                   |         | 149,768                |       | 134,165               |       |
| Bank premises and equipment                                                                                                                 |         | 1,633                  |       | 1,481                 |       |
| Other assets                                                                                                                                |         | 1,524                  |       | 1,144                 |       |
| Total assets                                                                                                                                |         | $                      | 193,681    |                  | $          | 171,177 |   |
|                                                                                                                                        |         |                   |       |                  |       |
| LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                   |         |                   |       |                  |       |
|                                                                                                                                        |         |                   |       |                  |       |
| **Liabilities**                                                                                                                             |         |                   |       |                  |       |
| Deposits:                                                                                                                                   |         |                   |       |                  |       |
| Noninterest-bearing  deposits                                                                                                               |         | $                      | 29,659     |                  | $          | 23,749 |   |
| Interest-bearing  deposits                                                                                                                  |         | 147,241                |       | 131,842               |       |
| Total deposits                                                                                                                              |         | 176,900                |       | 155,591               |       |
| Short-term borrowings                                                                                                                       |         | 700                    |       | 450                   |       |
| Accrued interest and other liabilities                                                                                                      |         | 602                    |       | 923                   |       |
| Total  liabilities                                                                                                                          |         | 178,202                |       | 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                                                                                                                  |         | 14,652                 |       | 14,632                |       |
| Retained earnings (deficit)                                                                                                                 |         | 913                    |       | (411                  | )          |
| Accumulated other comprehensive income (loss)                                                                                               |         | (101                   | )          | (23                   | )          |
| Total  shareholders’ equity                                                                                                            |         | 15,479                 |       | 14,213                |       |
| Total  liabilities and shareholders’ equity                                                                                            |         | $                      | 193,681    |                  | $          | 171,177 |   |

 

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

 

3

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**Frederick County Bancorp, Inc.**

**Consolidated Statements of Income(Unaudited)**

 
| ** **                                             | ** ** | **For the Three  Months Ended  September 30,** | ** ** | **For the Nine  Months Ended  September 30,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| **(dollars  in thousands, except per share amounts)**  | ** ** | **2005**                                            | ** ** | **2004**                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest income:                                       |       |                                                |       |                                               |       |   |   |   |   |
| Interest and  fees on loans                            |       | $                                                   | 2,519      |                                               | $          | 1,784 |   | $ | 6,972 |   | $ | 4,844 |   |
| Interest and  dividends on investment securities:      |       |                                                |       |                                               |       |   |   |   |   |
| Interest –  taxable                               |       | 156                                                 |       | 146                                                |       | 469 |   | 425 |   |
| Interest – tax  exempt                            |       | 10                                                  |       | —                                             |       | 17 |   | — |   |
| Dividends                                              |       | 11                                                  |       | 9                                                  |       | 31 |   | 27 |   |
| Interest on  federal funds sold                        |       | 78                                                  |       | 34                                                 |       | 205 |   | 85 |   |
| Other interest  income                                 |       | 8                                                   |       | 2                                                  |       | 22 |   | 4 |   |
| Total interest  income                                 |       | 2,782                                               |       | 1,975                                              |       | 7,716 |   | 5,385 |   |
| Interest expense:                                      |       |                                                |       |                                               |       |   |   |   |   |
| Interest on  deposits                                  |       | 845                                                 |       | 451                                                |       | 2,175 |   | 1,227 |   |
| Interest on  other short-term borrowings               |       | 10                                                  |       | 5                                                  |       | 23 |   | 12 |   |
| Total interest  expense                                |       | 855                                                 |       | 456                                                |       | 2,198 |   | 1,239 |   |
| Net interest income                                    |       | 1,927                                               |       | 1,519                                              |       | 5,518 |   | 4,146 |   |
| Provision for loan losses                              |       | 150                                                 |       | 105                                                |       | 450 |   | 315 |   |
| Net interest income after provision for loan losses    |       | 1,777                                               |       | 1,414                                              |       | 5,068 |   | 3,831 |   |
| Noninterest income:                                    |       |                                                |       |                                               |       |   |   |   |   |
| Securities  losses                                     |       | (7                                                  | )          | (6                                                 | )          | (8 | ) | (5 | ) |
| Service fees                                           |       | 30                                                  |       | 35                                                 |       | 103 |   | 106 |   |
| Other operating  income                                |       | 43                                                  |       | 28                                                 |       | 111 |   | 77 |   |
| Total  noninterest income                              |       | 66                                                  |       | 57                                                 |       | 206 |   | 178 |   |
| Noninterest expenses:                                  |       |                                                |       |                                               |       |   |   |   |   |
| Salaries and  employee benefits                        |       | 723                                                 |       | 644                                                |       | 2,035 |   | 1,806 |   |
| Occupancy and  equipment expenses                      |       | 185                                                 |       | 168                                                |       | 521 |   | 479 |   |
| Other operating  expenses                              |       | 281                                                 |       | 231                                                |       | 833 |   | 694 |   |
| Total  noninterest expenses                            |       | 1,189                                               |       | 1,043                                              |       | 3,389 |   | 2,979 |   |
| Income before  provision for income taxes              |       | 654                                                 |       | 428                                                |       | 1,885 |   | 1,030 |   |
| Provision for  income taxes                            |       | 246                                                 |       | —                                             |       | 561 |   | — |   |
| Net income                                             |       | $                                                   | 408        |                                               | $          | 428 |   | $ | 1,324 |   | $ | 1,030 |   |
| Basic earnings per share                               |       | $                                                   | 0.28       |                                               | $          | 0.29 |   | $ | 0.91 |   | $ | 0.71 |   |
| Diluted earnings per share                             |       | $                                                   | 0.27       |                                               | $          | 0.28 |   | $ | 0.87 |   | $ | 0.68 |   |
| Basic weighted average number of shares outstanding    |       | 1,458,602                                           |       | 1,455,152                                          |       | 1,458,280 |   | 1,455,152 |   |
| Diluted weighted average number of shares  outstanding |       | 1,526,592                                           |       | 1,514,843                                          |       | 1,526,404 |   | 1,511,325 |   |

 

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

 

4

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**FrederickCounty Bancorp, Inc.**

**ConsolidatedStatement 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                                                                                                                      |       | —                  |       | —            |       | —                           |       | 1,030                             |       | —                                                |       | 1,030                           |       |
| Changes in net  unrealized losses on securities available for sale, net of income tax effects  and reclassification adjustments |       | —                  |       | —            |       | —                           |       | —                            |       | (8                                                    | )          | (8                              | )          |
| Comprehensive  income                                                                                                           |       |                    |       |              |       |                             |       |                              |       |                                                  |       | 1,022                           |       |
| Shares issued  with stock split, effected in the form of a stock dividend                                                       |       | 727,576                 |       | 8                 |       | (8                               | )          | —                            |       | —                                                |       | —                          |       |
| Balance, September 30, 2004                                                                                                |       | 1,455,152               |       | $                 | 15         |                             | $          | 14,609                            |       | $                                                     | (899       | )                               | $          | 5 |   | $ | 13,730 |   |
| Balance, January 1, 2005                                                                                                   |       | 1,457,402               |       | $                 | 15         |                             | $          | 14,632                            |       | $                                                     | (411       | )                               | $          | (23 | ) | $ | 14,213 |   |
| Comprehensive income:                                                                                                           |       |                    |       |              |       |                             |       |                              |       |                                                  |       |                            |       |
| Net income                                                                                                                      |       | —                  |       | —            |       | —                           |       | 1,324                             |       | —                                                |       | 1,324                           |       |
| Changes in net  unrealized losses on securities available for sale, net of income tax effects  and reclassification adjustments |       | —                  |       | —            |       | —                           |       | —                            |       | (78                                                   | )          | (78                             | )          |
| Comprehensive income                                                                                                            |       |                    |       |              |       |                             |       |                              |       |                                                  |       | 1,246                           |       |
| Shares issued  under stock option transactions                                                                                  |       | 1,200                   |       | —            |       | 20                               |       | —                            |       | —                                                |       | 20                              |       |
| Balance, September 30, 2005                                                                                                |       | 1,458,602               |       | $                 | 15         |                             | $          | 14,652                            |       | $                                                     | 913        |                            | $          | (101 | ) | $ | 15,479 |   |

 

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

 

5

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**Frederick County Bancorp, Inc.**

**ConsolidatedStatements of Cash Flows (Unaudited)**

 
| ** **                                                                                     | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| **(dollars  in thousands)**                                                                    | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| Cash flows from operating  activities:                                                         |       |                                     |       |   |   |
| Net income                                                                                     |       | $                                        | 1,324      |   | $ | 1,030 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities:             |       |                                     |       |   |   |
| Depreciation and amortization                                                                  |       | 123                                      |       | 149 |   |
| Provision for loan losses                                                                      |       | 450                                      |       | 315 |   |
| Securities losses                                                                              |       | 8                                        |       | 5 |   |
| Net premium amortization on investment securities                                              |       | 76                                       |       | 78 |   |
| Increase in other assets                                                                       |       | (343                                     | )          | (233 | ) |
| Increase (decrease) in accrued interest and other liabilities                                  |       | (308                                     | )          | 294 |   |
| Net cash provided by operating activities                                                      |       | 1,330                                    |       | 1,638 |   |
| Cash flows from investing activities:                                                          |       |                                     |       |   |   |
| Purchases of investment securities available for sale                                          |       | (5,161                                   | )          | (5,144 | ) |
| Purchases of investment securities held to maturity                                            |       | (1,208                                   | )          | (299 | ) |
| Proceeds from sale of investment securities available for sale                                 |       | 1,208                                    |       | 1,188 |   |
| Proceeds from maturities of investment securities available for sale                           |       | 3,799                                    |       | 3,110 |   |
| Purchases of restricted stock                                                                  |       | (106                                     | )          | (147 | ) |
| Net increase in loans                                                                          |       | (16,053                                  | )          | (27,564 | ) |
| Purchases of bank premises and equipment                                                       |       | (275                                     | )          | (682 | ) |
| Net cash used in investing activities                                                          |       | (17,796                                  | )          | (29,538 | ) |
| Cash flows from financing  activities:                                                         |       |                                     |       |   |   |
| Net increase in NOW, money market accounts, savings accounts and  noninterest-bearing deposits |       | 8,470                                    |       | 14,512 |   |
| Net increase in time deposits                                                                  |       | 12,839                                   |       | 12,405 |   |
| Net increase in short-term borrowings                                                          |       | 250                                      |       | 330 |   |
| Proceeds from issuance of common stock                                                         |       | 20                                       |       | — |   |
| Net cash provided by financing activities                                                      |       | 21,579                                   |       | 27,247 |   |
| Net increase (decrease) in  cash and cash equivalents                                          |       | 5,113                                    |       | (653 | ) |
| Cash and cash equivalents –  beginning of period                                          |       | 16,639                                   |       | 17,549 |   |
| Cash and cash equivalents –  end of period                                                |       | $                                        | 21,752     |   | $ | 16,896 |   |
| Supplemental cash flow  disclosures:                                                           |       |                                     |       |   |   |
| Interest paid                                                                                  |       | $                                        | 2,176      |   | $ | 1,227 |   |
| Income taxes paid                                                                              |       | $                                        | 1,010      |   | — |   |

 

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

 

6

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

#### ** **

Notes to FinancialStatements (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 principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. These estimates and assumptions are based oninformation available as of the date of the financial statements and coulddiffer from actual 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  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(dollars  in thousands, except per share amounts)**  | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income                                             |       | $                                          | 408        |                                      | $          | 428 |   | $ | 1,324 |   | $ | 1,030 |   |
| Basic earnings  per share                              |       | $                                          | 0.28       |                                      | $          | 0.29 |   | $ | 0.91 |   | $ | 0.71 |   |
| Diluted earnings  per share                            |       | $                                          | 0.27       |                                      | $          | 0.28 |   | $ | 0.87 |   | $ | 0.68 |   |
| Basic weighted  average number of shares outstanding   |       | 1,458,602                                  |       | 1,455,152                                 |       | 1,458,280 |   | 1,455,152 |   |
| Effect of  dilutive securities – stock options    |       | 67,990                                     |       | 59,691                                    |       | 68,124 |   | 56,173 |   |
| Diluted weighted  average number of shares outstanding |       | 1,526,592                                  |       | 1,514,843                                 |       | 1,526,404 |   | 1,511,325 |   |
|                                                        |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |

 

**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.  No stock optionswere granted or vested during the first nine months of 2005 or 2004 and,accordingly, net income and earnings per share would not have been affected ifcompensation cost for the stock-based compensation plan had been determinedbased 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:**

 

The following tables set forth certain information regarding theCompany’s investment portfolio at September 30, 2005 and December 31, 2004:

 

**Available-for-sale portfolio**

 
| **September 30,  2005**                                        | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Estimated  Fair  Value** | ** ** | **Average  Yield** | ** ** |
|---------------------------------------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------|------------|----------------------------|------------|--------------------|------------|
| **(dollars  in thousands)**                                         | ** ** | ** **          | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                 | ** ** | ** **         | ** ** |
| U.S. Treasury  and other U.S. government Agencies and corporations: | ** ** | ** **          | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                 | ** ** | ** **         | ** ** |
| Due after one  year through five years                              |       | $                   | 1,500      |                        | $          | —                      |       | $                          | 18         |               | $          | 1,482 |   | 3.86 | % |
| Due after five  years through ten years                             |       | 987                 |       | —                      |       | 9                           |       | 978                        |       | 4.94               | %          |
| Mortgage-backed  debt securities                                    |       | 13,993              |       | 14                          |       | 151                         |       | 13,856                     |       | 4.05               | %          |
| Equity  Securities                                                  |       | 360                 |       | —                      |       | —                      |       | 360                        |       | —             |       |
|                                                                |       | $                   | 16,840     |                        | $          | 14                          |       | $                          | 178        |               | $          | 16,676 |   | 4.08 | % |

 
| **December 31,  2004**                                         | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Estimated  Fair  Value** | ** ** | **Average  Yield** | ** ** |
|---------------------------------------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------|------------|----------------------------|------------|--------------------|------------|
| **(dollars  in thousands)**                                         | ** ** | ** **          | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                 | ** ** | ** **         | ** ** |
| 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**

 
| **September 30,  2005**            | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Estimated  Fair  Value** | ** ** | **Average  Yield** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------|------------|----------------------------|------------|--------------------|------------|
| **(dollars  in thousands)**             | ** ** | ** **          | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                 | ** ** | ** **         | ** ** |
| State and  political subdivisions:      | ** ** | ** **          | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                 | ** ** | ** **         | ** ** |
| Due after five  years through ten years |       | $                   | 705        |                        | $          | —                      |       | $                          | 3          |               | $          | 702 |   | 5.08 | % |
| Due after ten  years                    |       | 802                 |       | 2                           |       | 2                           |       | 802                        |       | 5.63               | %          |
|                                    |       | $                   | 1,507      |                        | $          | 2                           |       | $                          | 5          |               | $          | 1,504 |   | 5.37 | % |

 
| **December 31,  2004**             | ** ** | **Amortized  Cost** | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Estimated  Fair  Value** | ** ** | **Average  Yield** | ** ** |
|-----------------------------------------|------------|---------------------|------------|-----------------------------|------------|-----------------------------|------------|----------------------------|------------|--------------------|------------|
| **(dollars  in thousands)**             | ** ** | ** **          | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                 | ** ** | ** **         | ** ** |
| State and  political subdivisions:      | ** ** | ** **          | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                 | ** ** | ** **         | ** ** |
| Due after five  years through ten years |       | $                   | 299        |                        | $          | —                      |       | $                          | —     |               | $          | 299 |   | 4.78 | % |
|                                         |            |                     |            |                             |            |                             |            |                            |            |                    |            |  |  |  |  |

 
| ** **                                                         | ** ** | **Continuous unrealized  losses existing for less than  12 months** | ** ** | **Continuous unrealized  losses existing for 12  months and greater** | ** ** | **Total**       | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------|------------|
| **September   30, 2005**                                      | ** ** | **Fair****Value**                                                   | ** ** | **Unrealized  Losses**                                                | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** |
| **(dollars  in thousands)**                                        | ** ** | ** **                                                          | ** ** | ** **                                                            | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| U.S. Treasury  and other U.S. government agencies and corporations |       | $                                                                   | 1,975      |                                                                  | $          | 12              |       | $ | 485 |   | $ | 15 |   | $ | 2,460 |   | $ | 27 |   |
| Mortgage-backed  debt securities                                   |       | 8,953                                                               |       | 75                                                                    |       | 3,621           |       | 76 |   | 12,574 |   | 151 |   |
| State and  political subdivisions                                  |       | 1,011                                                               |       | 5                                                                     |       | —          |       | — |   | 1,011 |   | 5 |   |
|                                                               |       |                                                                |       |                                                                  |       |            |       |   |   |   |   |   |   |
| Total  temporarily impaired securities                             |       | $                                                                   | 11,939     |                                                                  | $          | 92              |       | $ | 4,106 |   | $ | 91 |   | $ | 16,045 |   | $ | 183 |   |

 

8

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| ** **                                                         | ** ** | **Continuous unrealized  losses existing for less than  12 months** | ** ** | **Continuous unrealized  losses existing for 12  months and greater** | ** ** | **Total**       | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------|------------|
| **December 31,  2004**                                        | ** ** | **Fair****Value**                                                   | ** ** | **Unrealized  Losses**                                                | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** |
| **(dollars  in thousands)**                                        | ** ** | ** **                                                          | ** ** | ** **                                                            | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| 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 |   |

 

Because the decline in fair value was causedby interest rates and not credit quality and the Company has both the intentand ability to hold these investments for a period of time sufficient to allowfor any anticipated recovery in fair value, the Company has not recognized anyother-than-temporary impairment in connection with the unrealized lossesreflected in the preceding tables.

 

**Restricted Stock**

 

Thefollowing table shows the amounts of restricted stock as of September 30,2005 and December 31, 2004:

 
| ** **                         | ** ** | **September 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:

 
| ** **                                                                  | ** ** | **September 30,** | ** ** | **% of**  | ** ** | **December 31,** | ** ** | **% of**  | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|-----------|------------|-----------------------|------------|-----------|------------|
| **(dollars  in thousands)**                                                 | ** ** | **2005**               | ** ** | **Loans** | ** ** | **2004**              | ** ** | **Loans** | ** ** |
| Real estate  loans:                                                         |       |                   |       |      |       |                  |       |      |       |
| Construction and  land development                                          |       | $                      | 30,727     |      | 20         | %                     | $          | 21,648    |       | 16 | % |
| Mortgage loans:                                                             |       |                   |       |      |       |                  |       |      |       |
| Secured by 1 to  4 family residential properties                            |       | 29,848                 |       | 20        | %          | 28,066                |       | 21        | %          |
| Secured by  multi-family (5 or more) residential properties                 |       | 5,424                  |       | 4         | %          | 2,083                 |       | 2         | %          |
| Secured by  commercial properties                                           |       | 54,775                 |       | 36        | %          | 54,325                |       | 40        | %          |
| Secured by farm  land                                                       |       | 4,400                  |       | 2         | %          | 3,145                 |       | 2         | %          |
| Total mortgage  loans                                                       |       | 94,447                 |       | 62        | %          | 87,619                |       | 65        | %          |
| Loans to farmers                                                            |       | —                 |       | —    | %          | 759                   |       | —    | %          |
| Commercial and  industrial loans                                            |       | 24,146                 |       | 16        | %          | 22,683                |       | 17        | %          |
| Loans to  individuals for household, family and other personal expenditures |       | 2,401                  |       | 2         | %          | 2,959                 |       | 2         | %          |
|                                                                        |       | 151,721                |       | 100       | %          | 135,668               |       | 100       | %          |
| Less allowance  for loan losses                                             |       | (1,953                 | )          |      |       | (1,503                | )          |      |       |
| Net loans                                                                   |       | $                      | 149,768    |      |       |                  | $          | 134,165   |       |   |   |

 

9

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Transactions in theallowance for loan losses are summarized as follows:

 
| ** **                                     | ** ** | **Nine Months Ended****September 30,** | ** ** |
|------------------------------------------------|------------|---------------------------------------------|------------|
| **(dollars  in thousands)**                    | ** ** | **2005**                                    | ** ** | **2004** | ** ** |
| Average total  loans outstanding during period |       | $                                           | 142,972    |   | $ | 109,138 |   |
| Balance at  beginning of period                |       | $                                           | 1,503      |   | $ | 985 |   |
| Provision  charged to operating expenses       |       | 450                                         |       | 315 |   |
| Recoveries of  loans previously charged-off    |       | —                                      |       | — |   |
|                                           |       | 1,953                                       |       | 1,300 |   |
| Loans  charged-off                             |       | —                                      |       | (4 | ) |
| Balance at end  of period                      |       | $                                           | 1,953      |   | $ | 1,296 |   |

 

**Note 6.  Noninterest Expenses:**

 

Noninterest expensesconsist of the following:

 
| ** **                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **(dollars  in thousands)**             | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                    |       |                                       |       |                                      |       |   |   |   |   |
| Salaries                                |       | $                                          | 584        |                                      | $          | 522 |   | 1,680 |   | 1,510 |   |
| Bonus                                   |       | 85                                         |       | 80                                        |       | 138 |   | 153 |   |
| Deferred Personnel  Costs               |       | (38                                        | )          | (42                                       | )          | (107 | ) | (115 | ) |
| Payroll Taxes                           |       | 35                                         |       | 35                                        |       | 150 |   | 115 |   |
| Employee  Insurance                     |       | 32                                         |       | 28                                        |       | 93 |   | 81 |   |
| Other Employee Benefits                 |       | 25                                         |       | 21                                        |       | 81 |   | 62 |   |
| Depreciation                            |       | 43                                         |       | 52                                        |       | 123 |   | 149 |   |
| Rent                                    |       | 67                                         |       | 60                                        |       | 182 |   | 162 |   |
| Utilities                               |       | 14                                         |       | 13                                        |       | 44 |   | 42 |   |
| Repairs and  Maintenance                |       | 26                                         |       | 15                                        |       | 74 |   | 53 |   |
| ATM Expense                             |       | 16                                         |       | 13                                        |       | 46 |   | 39 |   |
| Other Occupancy  and Equipment Expenses |       | 19                                         |       | 15                                        |       | 52 |   | 34 |   |
| Postage and  Supplies                   |       | 13                                         |       | 17                                        |       | 42 |   | 44 |   |
| Data Processing                         |       | 95                                         |       | 74                                        |       | 280 |   | 218 |   |
| Advertising and  Promotion              |       | 56                                         |       | 31                                        |       | 145 |   | 104 |   |
| Legal                                   |       | 5                                          |       | 2                                         |       | 12 |   | 22 |   |
| Insurance                               |       | 9                                          |       | 12                                        |       | 23 |   | 33 |   |
| Consulting                              |       | 9                                          |       | 11                                        |       | 28 |   | 31 |   |
| Courier                                 |       | 9                                          |       | 10                                        |       | 29 |   | 25 |   |
| Audit Fees                              |       | 33                                         |       | 22                                        |       | 99 |   | 66 |   |
| Shareholder  Relations                  |       | —                                     |       | 2                                         |       | 6 |   | 8 |   |
| Other                                   |       | 52                                         |       | 50                                        |       | 169 |   | 143 |   |
|                                    |       | $                                          | 1,189      |                                      | $          | 1,043 |   | $ | 3,389 |   | $ | 2,979 |   |
|                                         |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |

 

**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 voluntary contributionsto 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 $63,000 and $45,000for the first nine months of 2005 and 2004, respectively, and $21,000 and$15,000 for the three-month periods ended September 30, 2005 and 2004,respectively.

 

10

----

 

**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 September 30, 2005.

 

As of September 30,2005, the most recent notification from the regulatory agency categorized theBank as well 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 September 30, 2005 and December 31,2004 are presented in the following tables.

 
| ** **                   | ** ** | **Actual** | ** ** | **For Capital  Adequacy Purposes** | ** ** | **Minimum To Be Well  Capitalized Under  Prompt Corrective  Action Provisions** | ** ** |
|------------------------------|------------|------------|------------|------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **September 30,  2005** | ** ** | **Amount** | ** ** | **Ratio**                          | ** ** | **Amount**                                                                      | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| **(dollars  in thousands)**  |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |
| Tier 1 Capital               |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |
| To  Risk-Weighted Assets     |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |
| Company                      |       | $          | 15,580     |                               | 9.32       | %                                                                               | $          | 6,686 |   | 4.00 | % | N/A |   | N/A |   |
| Bank                         |       | $          | 15,636     |                               | 9.37       | %                                                                               | $          | 6,671 |   | 4.00 | % | $ | 10,007 |   | 6.00 | % |
|                         |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |
| Total  Capital               |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |
| To Risk-Weighted Assets      |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |
| Company                      |       | $          | 17,533     |                               | 10.49      | %                                                                               | $          | 13,372 |   | 8.00 | % | N/A |   | N/A |   |
| Bank                         |       | $          | 17,589     |                               | 10.55      | %                                                                               | $          | 13,343 |   |  8.00 | % | $ | 16,679 |   | 10.00 | % |
|                         |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |
| Tier  1 Capital              |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |
| To Average Assets            |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |   |   |
| Company                      |       | $          | 15,580     |                               | 8.42       | %                                                                               | $          | 7,399 |   | 4.00 | % | N/A |   | N/A |   |
| Bank                         |       | $          | 15,636     |                               | 8.47       | %                                                                               | $          | 7,385 |   | 4.00 | % | $ | 9,231 |   | 5.00 | % |

 
| ** **                  | ** ** | **Actual** | ** ** | **For Capital  Adequacy Purposes** | ** ** | **Minimum To Be Well  Capitalized Under  Prompt Corrective  Action Provisions** | ** ** |
|-----------------------------|------------|------------|------------|------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| **December 31,  2004** | ** ** | **Amount** | ** ** | **Ratio**                          | ** ** | **Amount**                                                                      | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| **(dollars  in thousands)** |       |       |       |                               |       |                                                                            |       |   |   |   |   |   |   |
| 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 Accounting Standards:**

 

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 accountingchanges and corrections of errors made in fiscal years beginning after December 15,2005. The Company does not anticipate this revision will have a material effecton its financial statements.

 

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. 123R

 

12

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replacesSFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedesAPB Opinion No. 25, “Accounting for Stock Issued to Employees.”Share-based compensation arrangements include share options, restricted shareplans, performance-based awards, share appreciation rights and employee sharepurchase plans. SFAS No. 123R requires all share-based payments toemployees be valued using a fair valued method on the date of grant andexpensed 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’s Discussionand 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 200 CommerceDrive, Walkersville, Maryland and 6910 Crestwood Boulevard, Frederick, Marylandand anticipates that these facilities will open in early to mid 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 basedeither on quoted market prices or are provided by other third-party sources,when available. The estimates used in management’s assessment of the adequacyof the allowance for credit losses require that management make assumptionsabout matters 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.

 

## **Deposits**

## ** **

Deposits grew by $2.49million, or 1.43%, from June 30, 2005 to a balance of $176.90 million asof September 30, 2005, by $32.49 million, or 22.50% from September 30,2004 and by $21.31 million, or 13.70% from December 31, 2004.  The Company’s deposit growth strategy is toincrease deposits in response to loan demand. Since the Company’s best return is obtained from the lending function,it has decided to slow the growth in deposits in conjunction with the slowerloan growth.

 

**NineMonths Ended September 30, 2005 and 2004**

 

The net income was $1.32million for the nine months ended September 30, 2005, which compares veryfavorably to the $1.03 million profit recorded for the same period in2004.  It should be noted that theCompany recognized $561,000 of income tax expense in 2005, whereas, no incometax expense was incurred for the same period in 2004 due to the net operatingloss carryforwards available at that time. The basic earnings per share for the nine months ended September 30,2005 and 2004 are $0.91 and $0.71, respectively, and are based on theweighted-average number of shares outstanding of 1,458,280 in 2005 and1,455,152, in 2004.  The diluted earningsper share for the nine months ended September 30, 2005 and 2004 are $0.87and $0.68, respectively, and are based on the weighted-average number of sharesoutstanding of 1,526,404 and 1,511,325 respectively.

 

The Company experiencedan annualized return on average assets of 0.99% and 0.97% for the nine-monthperiods ended September 30, 2005 and 2004, respectively.  Additionally, the Company experienced anannualized return on average shareholders’ equity of 11.76% and 10.41% for thenine-month periods ended September 30, 2005 and 2004, respectively.

 

Muchof the Company’s success can be attributed to the strength and stability of thelocal economy.  However, Management hassome concerns that national economic conditions will be negatively affected byhigher energy costs and increasing interest rates.  Consequently, the strain on the ability ofconsumers and businesses to handle these added costs can be expected to have anegative impact on the banking industry’s financial performance, specificallywith respect to loan portfolio growth, loan quality and profitability.  Although the Company is not immune to theeffects of an economic slowdown, Management believes the Company is wellpositioned with sound financial condition and positive earnings momentum.

 

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

 

The net income was$408,000 for the three months ended September 30, 2005 as compared to the$428,000 net earnings recorded for the same period in 2004.  Again, it should be noted that the Companyrecognized $246,000 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 September 30,2005 and 2004 are $0.28 and $0.29,

 

14

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respectively,and are based on the weighted-average number of shares outstanding of 1,458,602in 2005 and 1,455,152, in 2004.  Thediluted earnings per share for the three months ended September 30, 2005and 2004 are $0.27 and $0.28, respectively, and are based on theweighted-average number of shares outstanding of 1,526,592 and 1,514,843,respectively.

 

TheCompany experienced an annualized return on average assets of 0.88% and 1.14%for the three-month periods ended September 30, 2005 and 2004,respectively.  Additionally, the Companyexperienced an annualized return on average shareholders’ equity of 10.58% and12.71% for the three-month periods ended September 30, 2005 and 2004,respectively.

 

**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**

 
| ** **                                            | ** ** | **2005**                    | ** ** | **2004**                    | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Nine months ended September 30,**              | ** ** | **Average  daily  balance** | ** ** | **Interest  Income/  Paid** | ** ** | **Average  Yield/  rate** | ** ** | **Average  daily  balance** | ** ** | **Interest  Income/  Paid** | ** ** | **Average  Yield/  rate** | ** ** |
| **(dollars in thousands)**                            |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Assets                                                |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                             |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Federal funds sold                                    |       | $                           | 9,171      |                        | $          | 205 |   | 2.99 | % | $ | 10,262 |   | $ | 85 |   | 1.10 | % |
| Interest bearing deposits in other banks              |       | 1,075                       |       | 22                          |       | 2.74 |   | 527 |   | 4 |   | 1.01 |   |
| Investment securities (1):                            |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Taxable                                               |       | 17,991                      |       | 500                         |       | 3.72 |   | 16,934 |   | 452 |   | 3.56 |   |
| Tax-exempt (2)                                        |       | 646                         |       | 26                          |       | 5.38 |   | — |   | — |   | — |   |
| Loans (3)                                             |       | 142,972                     |       | 6,983                       |       | 6.53 |   | 109,138 |   | 4,844 |   | 5.91 |   |
| Total interest-earning assets                         |       | 171,855                     |       | 7,736                       |       | 6.02 |   | 136,861 |   | 5,385 |   | 5.24 |   |
| Noninterest-earning  assets                           |       | 5,744                       |       |                        |       |   |   | 4,700 |   |   |   |   |   |
| Total assets                                          |       | $                           | 177,599    |                        |       |   |   |   | $ | 141,561 |   |   |   |   |   |
|                                                  |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Liabilities  and Shareholders’ Equity            |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities                         |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| NOW accounts                                          |       | $                           | 16,696     |                        | 22         |   | 0.18 | % | $ | 15,623 |   | 20 |   | 0.17 | % |
| Savings accounts                                      |       | 3,040                       |       | 12                          |       | 0.53 |   | 3,396 |   | 13 |   | 0.51 |   |
| Money market accounts                                 |       | 27,809                      |       | 303                         |       | 1.46 |   | 28,814 |   | 201 |   | 0.93 |   |
| Certificates of deposit $100,000 or more              |       | 42,548                      |       | 894                         |       | 2.81 |   | 29,266 |   | 472 |   | 2.15 |   |
| Certificates of deposit less than $100,000            |       | 45,779                      |       | 944                         |       | 2.76 |   | 30,986 |   | 521 |   | 2.24 |   |
| Short-term borrowings                                 |       | 503                         |       | 23                          |       | 6.11 |   | 388 |   | 12 |   | 4.12 |   |
| Total interest-bearing liabilities                    |       | 136,375                     |       | 2,198                       |       | 2.15 |   | 108,473 |   | 1,239 |   | 1.52 |   |
| Noninterest-bearing  deposits                         |       | 25,705                      |       |                        |       |   |   | 19,617 |   |   |   |   |   |
| Noninterest-bearing  liabilities                      |       | 509                         |       |                        |       |   |   | 283 |   |   |   |   |   |
| Total liabilities                                     |       | 162,589                     |       |                        |       |   |   | 128,373 |   |   |   |   |   |
| Total shareholders’ equity                       |       | 15,010                      |       |                        |       |   |   | 13,188 |   |   |   |   |   |
| Total liabilities and shareholders’  equity |       | $                           | 177,599    |                        |       |   |   |   | $ | 141,561 |   |   |   |   |   |
| Net  interest income                                  |       |                        |       | $                           | 5,538      |   |   |   |   |   | $ | 4,146 |   |   |   |
| Net  interest spread                                  |       |                        |       |                        |       | 3.87 | % |   |   |   |   | 3.72 | % |
| Net  interest margin                                  |       |                        |       |                        |       | 4.31 | % |   |   |   |   | 4.04 | % |

 

----

(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$9,000 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$11,000 in 2005 and none in 2004 are included in the calculation of the loaninterest income.  Net loan originationexpenses charged against interest income totaled $4,000 in 2004 and $10,000 in2005 the fee income and expenses netted to zero.

 

15

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**FrederickCounty Bancorp, Inc.**

**ComparativeStatement Analysis**

 
| ** **                                            | ** ** | **2005**                    | ** ** | **2004**                    | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Three months ended September 30,**             |       | **Average  Daily  Balance** |       | **Interest  Income/  Paid** |       | **Average  Yield/  Rate** |   | **Average  Daily  Balance** |   | **Interest  Income/  Paid** |   | **Average  Yield/  Rate** |   |
| **(dollars in thousands)**                            |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Assets                                                |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                             |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Federal funds sold                                    |       | $                           | 8,883      |                        | $          | 78 |   | 3.48 | % | $ | 9,697 |   | $ | 34 |   | 1.39 | % |
| Interest bearing deposits in other banks              |       | 1,010                       |       | 8                           |       | 3.14 |   | 746 |   | 2 |   | 1.06 |   |
| Investment securities (1):                            |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Taxable                                               |       | 18,326                      |       | 167                         |       | 3.62 |   | 16,960 |   | 155 |   | 3.63 |   |
| Tax-exempt (2)                                        |       | 1,163                       |       | 15                          |       | 5.12 |   | — |   | — |   | — |   |
| Loans (3)                                             |       | 149,721                     |       | 2,523                       |       | 6.69 |   | 118,598 |   | 1,784 |   | 5.97 |   |
| Total interest-earning assets                         |       | 179,103                     |       | 2,791                       |       | 6.18 |   | 146,001 |   | 1,975 |   | 5.37 |   |
| Noninterest-earning  assets                           |       | 5,874                       |       |                        |       |   |   | 4,812 |   |   |   |   |   |
| Total assets                                          |       | $                           | 184,977    |                        |       |   |   |   | $ | 150,813 |   |   |   |   |   |
|                                                  |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Liabilities  and Shareholders’ Equity            |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities                         |       |                        |       |                        |       |   |   |   |   |   |   |   |   |
| NOW accounts                                          |       | $                           | 15,664     |                        | $          | 7 |   | 0.18 | % | $ | 16,712 |   | $ | 7 |   | 0.17 | % |
| Savings accounts                                      |       | 2,978                       |       | 4                           |       | 0.53 |   | 3,534 |   | 4 |   | 0.45 |   |
| Money market accounts                                 |       | 28,045                      |       | 129                         |       | 1.82 |   | 29,982 |   | 70 |   | 0.93 |   |
| Certificates of deposit $100,000 or more              |       | 43,788                      |       | 340                         |       | 3.08 |   | 31,700 |   | 182 |   | 2.28 |   |
| Certificates of deposit less than $100,000            |       | 48,742                      |       | 365                         |       | 2.97 |   | 32,966 |   | 188 |   | 2.26 |   |
| Short-term borrowings                                 |       | 608                         |       | 10                          |       | 6.53 |   | 450 |   | 5 |   | 4.41 |   |
| Total interest-bearing liabilities                    |       | 139,825                     |       | 855                         |       | 2.43 |   | 115,344 |   | 456 |   | 1.57 |   |
| Noninterest-bearing  deposits                         |       | 29,278                      |       |                        |       |   |   | 21,648 |   |   |   |   |   |
| Noninterest-bearing  liabilities                      |       | 448                         |       |                        |       |   |   | 348 |   |   |   |   |   |
| Total liabilities                                     |       | 169,551                     |       |                        |       |   |   | 137,340 |   |   |   |   |   |
| Total shareholders’ equity                       |       | 15,426                      |       |                        |       |   |   | 13,473 |   |   |   |   |   |
| Total liabilities and shareholders’  equity |       | $                           | 184,977    |                        |       |   |   |   | $ | 150,813 |   |   |   |   |   |
| Net  interest income                                  |       |                        |       | $                           | 1,936      |   |   |   |   |   | $ | 1,519 |   |   |   |
| Net  interest spread                                  |       |                        |       |                        |       | 3.75 | % |   |   |   |   | 3.80 | % |
| Net  interest margin                                  |       |                        |       |                        |       | 4.29 | % |   |   |   |   | 4.13 | % |

 

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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$5,000 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$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 $4,000 in 2005 and $2,000 in2004.

 

## **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.

 

## **Nine** Months Ended September 30, 2005 and 2004

## ** **

Theinterest income (on a taxable-equivalent basis) of $7.74 million in 2005 was$2.35 million, or 43.66%, 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 $34.99 million, or 25.57%, since September 30, 2004.  The yield on earning assets in 2005 increasedto 6.02% from 5.24% 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 4.31% and 4.04% and the net interest spreadwas 3.86% and 3.72% for the nine-month periods ended September 30, 2005and 2004, respectively.  Average loans asa percentage of average interest-earnings assets increased to 83.19% for thenine months ended September 30, 2005, as compared to 79.74% for the sameperiod in 2004.

 

Theinterest expense increased 77.40% from $1.24 million in 2004 to $2.20 millionin 2005 due to the 25.72% increase in volume of interest-bearing liabilities,along with the increase in the related rates paid on such interest-bearingliabilities, which increased to 2.15% in 2005 from 1.52% in 2004.

 

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

 

Theinterest income (on a taxable-equivalent basis) of $2.79 million in 2005 was$816,000, or 41.32% higher than the amount recognized in 2004.  As with the nine-month period, this increasein interest income is due to the growth in average earning assets and increasedyields on earning assets.  Average earningassets increased by  $33.10 million, or22.67%, since September 30, 2004. The yield on earning assets in 2005 increased to 6.18% from 5.37% in2004.  This increase in yield isattributable to the impact of a larger percentage of loans to average interest-earningassets and the impact of the increase in short-term rates by the FederalReserve.  The Company’s net interestmargin was 4.29% and 4.13% and the net interest spread was 3.76% and 3.80% forthe three-month periods ended September 30, 2005 and 2004,respectively.  Average loans as apercentage of average interest-earnings assets increased to 83.59% for thethree months ended September 30, 2005, as compared to  81.23% for the same period in 2004.

 

Theinterest expense increased 87.50% from $456,000 in 2004 to $855,000 in 2005 dueto the 21.22% increase in volume of interest-bearing liabilities, along withthe increase in the related rates paid on such interest-bearing liabilities,which increased to 2.43% in 2005 from 1.57% in 2004.

 

Sinceshort-term interest rates are on the rise, as noted above, the Company’sfunding costs have been increasing also. This increase in funding costs has decreased the net interest marginfrom 4.35% during the second quarter of 2005 to 4.29% during the third quarterof 2005, a drop of 6 basis points.  Thisbrings the net interest margin back to the level recognized in the firstquarter of 2005.

 

# **Noninterest Income**

# ** **

Noninterestincome was $206,000 and $178,000 for the nine-month periods ended September 30,2005 and 2004, respectively, the increase being attributable primarily to the$25,000 of income generated during 2005 by the Company’s mortgage subsidiary,which was established in the fourth quarter of 2004.

 

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.

 

**Nine Months Ended September 30, 2005 and2004**

 

Noninterestexpenses amounted to $3.39 million and $2.98 million for the first nine monthsof 2005 and 2004, respectively.  Thechanges in noninterest expenses are principally related to the following: anincrease in personnel costs, the increase in data processing expenses, whichincrease as the number and volume of loans and deposit accounts increase, and increasedadvertising expenses.  Salaries expensein 2005 was $1.68 million, up $170,000 from the salaries expense incurred inthe same period in 2004.  This increaseof 11.25% reflects employee periodic pay increases and increases to makevarious employee salaries competitive with the current

 

17

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employmentenvironment.

 

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

 

Noninterestexpenses amounted to $1.19 million and $1.04 million for these three-month periodsin 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, andincreased advertising expenses.  Salariesexpense in 2005 was $584,000, up $62,000 from the salaries expense incurred inthe same period in 2004.  This increaseof 11.88% is for employee pay increases and to make various employee salariescompetitive with the current employment environment.

 

**Income Taxes**

 

During the nine monthsended September 30, 2005, the Company recognized $561,000 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 September 30, 2005, the Companywas not required to maintain a valuation allowance.

 

The effective tax ratefor the first nine months of 2005 was 29.76%, 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 38.14%.

 

**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 throughcustomer deposits, investment maturities, loan repayments, borrowings, andincome.  Management considers the currentliquidity position to be adequate to meet the needs of the Company and itscustomers.

 

The Company 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 $(38.56)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 September 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 increaseearnings.  The converse would be true fora positive gap position.  Therefore, a

 

18

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positive gap for any timeperiod means that more interest-earning assets will reprice or mature duringthat time period than interest-bearing liabilities.  During periods of rising interest rates, apositive gap position would generally increase earnings, and during periods ofdeclining interest rates, a positive gap position would generally decreaseearnings.

 

It is important to notethat the following table represents the static gap position for interestsensitive assets and liabilities at September 30, 2005.  The table does not give effect to prepaymentsor extensions of loans as a result of changes in general market interestrates.  Moreover, while the table doesindicate the opportunities to reprice assets and liabilities within certaintime frames, it does not account for timing differences that occur during periodsof repricing.  For example, changes todeposit rates tend to lag in a rising rate environment and lead in a fallingrate environment.

 

**InterestRate Sensitivity Gap Analysis**

**September 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                                   |       | $                                       | 11,628     |   | $ | — |   | $ | — |   | $ | — |   | $ | 11,628 |   |
| Interest-bearing  deposits in other banks             |       | 4,197                                   |       | — |   | — |   | — |   | 4,197 |   |
| Investment  securities(1)                             |       | 945                                     |       | 4,425 |   | 4,559 |   | 7,894 |   | 17,823 |   |
| Loans                                                 |       | 52,195                                  |       | 32,800 |   | 53,552 |   | 13,174 |   | 151,721 |   |
| Total interest-earning  assets                        |       | 68,965                                  |       | 37,225 |   | 58,111 |   | 21,068 |   | 185,369 |   |
| ** **                                            | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Liabilities                                           | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Savings  and NOW Accounts                             |       | 1,105                                   |       | 2,210 |   | 2,210 |   | 16,575 |   | 22,100 |   |
| Money  Market Accounts                                |       | 1,638                                   |       | 3,276 |   | 3,276 |   | 24,571 |   | 32,761 |   |
| Certificates  of Deposit                              |       | 51,963                                  |       | 32,762 |   | 7,655 |   | — |   | 92.380 |   |
| Short-term  borrowings                                |       | 700                                     |       | — |   | — |   | — |   | 700 |   |
| Total  interest-bearing liabilities                   |       | 55,406                                  |       | 38,248 |   | 13,141 |   | 41,146 |   | 147,941 |   |
| Interest  rate sensitivity gap                        |       | $                                       | 13,559     |   | $ | (1,023 | ) | $ | 44,970 |   | $ | (20,078 | ) | $ | 37,428 |   |
| Cumulative  interest rate sensitivity gap             |       | $                                       | 13,559     |   | $ | 12,536 |   | $ | 57,506 |   | $ | 37,428 |   |   |   |
| Cumulative  gap ratio as a percentage of total assets |       | 7.00                                    | %          | 6.47 | % | 29.69 | % | 19.32 | % |   |   |

 

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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 nine months of 2005 and 2004 were $450,000 and$315,000, respectively.  The loan growthwas $16.05 million for the first nine months of 2005 as compared to $27.56million for the same period in 2004.  Dueto the increased exposure to commercial and commercial real estate loans,Management deemed it necessary to increase the provision for loan losses in2005 from the amount recorded for the same period in 2004, even though the loanvolume is larger in 2004.  At September 30,2005 and December 31, 2004, the allowance for loan losses was $1.95million 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.

 

19

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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 losses. When impairment is identified, then a specific reserve isestablished based on the Company’s calculation of the loss embedded in theindividual loan. Large groups of smaller balance, homogeneous loans arecollectively evaluated for impairment. Accordingly, the Company does notseparately identify individual consumer and residential loans for impairment.   At September 30, 2005 there were noloans 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 realestate, commercial construction, residential real estate, residentialconstruction or installment). Each loan type is assigned an allowance factorbased on Management’s estimate of the associated risk, complexity and size ofthe individual 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 September 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.

 
| ** **                                     | ** ** | **September 30,** | ** ** |
|------------------------------------------------|------------|------------------------|------------|
| **(dollars  in thousands)**                    | ** ** | **2005**               | ** ** | **2004** | ** ** |
| Average total loans  outstanding during period |       | $                      | 142,972    |   | $ | 109,138 |   |
| Balance at beginning of  period                |       | $                      | 1,503      |   | $ | 985 |   |
| Provision charged to  operating expenses       |       | 450                    |       | 315 |   |
| Recoveries of loans  previously charged-off    |       | —                 |       | — |   |
|                                           |       | 1,953                  |       | 1,300 |   |
| Loans charged-off                              |       | —                 |       | (4 | ) |
| Balance at end of  period                      |       | $                      | 1,953      |   | $ | 1,296 |   |

 

20

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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.

 
| ** **                                                                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **Allocation  of Allowance for Loan Losses**                                | ** ** | **2005**               | ** ** | **%****of  Loans**    | ** ** | **2004** | ** ** | **% of  Loans** | ** ** |
| Real  estate-construction                                                   |       | $                      | 267        |                  | 20         | % | $ | 186 |   | 16 | % |
| Real estate-mortgage                                                        |       | 1,216                  |       | 62                    | %          | 865 |   | 65 | % |
| Commercial and  industrial loans                                            |       | 421                    |       | 16                    | %          | 377 |   | 17 | % |
| Loans  to individuals for household, family and other personal expenditures |       | 49                     |       | 2                     | %          | 75 |   | 2 | % |
|                                                                        |       | $                      | 1,953      |                  | 100        | % | $ | 1,503 |   | 100 | % |

 
| ** **                            | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| Nonaccrual loans                      |       | $                      | 9          |                  | $          | 102 |   |
| Loans 90 days past due                |       | —                 |       | —                |       |
| Total  nonperforming loans            |       | 9                      |       | 102                   |       |
| Other real estate owned               |       | —                 |       | —                |       |
| Total  nonperforming assets           |       | $                      | 9          |                  | $          | 102 |   |
| Nonperforming assets to  total assets |       | 0.00                   | %          | 0.06                  | %          |

 

There were no otherinterest-bearing assets at September 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 September 30, 2005 were as follows:

 
| ** **                                                                       | ** ** | **September 30,**  | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                       | ** ** | **2005**                | ** ** |
| **(dollars in thousands)**                                                       | ** ** | **Contractual  Amount** | ** ** |
| Financial  instruments whose notional or contract amounts represent credit risk: |       |                    |       |
| Commitments  to extend credit                                                    |       | $                       | 29,319     |   |
| Standby  letters of credit                                                       |       | 2,352                   |       |
| Total                                                                            |       | $                       | 31,671     |   |

 

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

 

21

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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 September 30,2005, the Company had an outstanding unsecured loan from an unaffiliated thirdparty in the amount of $450,000 with a variable interest rate, which is tied tothe Wall 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 an outstanding balance of$250,000 as of September 30, 2005. This facility matures on May 1, 2007, has a floating interest rateequal to the Wall Street Journal Prime Rate and requires monthly interestpayments only.  The purpose of thisfacility is to provide capital to the Bank, as needed.  Management intends to renew the creditfacility that matures on January 26, 2006, but if that does not occur theCompany has assess to other funding sources to replace this credit facility.

 

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 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 September 30,2005.  See Note 8 to the unaudited consolidated financial statements for a tabledepicting compliance with regulatory capital requirements.

 

As of September 30,2005, the most recent notification from the regulatory agency categorized theBank as well 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 effective.  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 September 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 Salesof Equity Securities and Use of Proceeds

 

(a)          *Sales ofUnregistered Securities.*                None

 

(b)         *Use ofProceeds.**      *NotApplicable.

 

(c)          *SmallBusiness Issuer Purchases of Securities**                                          *None

 

Item 3.             Defaults upon SeniorSecurities                        None

 

Item 4.             Submission of Mattersto a Vote of Security Holders          None

 

Item 5.             Other Information

 

(a)          Information which shouldhave been Reported on Form 8-K.                 None

 

(b)         Material Changes toProcedures 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)                                                                                                |
| 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                                                   |

 

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| (1) |   | Incorporated by  reference to exhibit of the same number to the Company’s Quarterly Report on Form 10-QSB  for the quarter ended March 31, 2004, as filed with the Securities and  Exchange Commission.     |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Incorporated by  reference to exhibit of the same number to the Company’s Quarterly Report on Form 10-QSB  for the quarter ended September 30, 2003, as filed with the Securities  and Exchange Commission. |
| (3) |   | Incorporated by  reference to exhibit 4 to the Company’s Registration Statement on Form S-8  (No. 333-111761).                                                                                              |
| (4) |   | Incorporated by  reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K  filed on May 24, 2005.                                                                                         |
| (5) |   | Incorporated by  reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K  filed on May 24, 2005.                                                                                         |
| (6) |   | Incorporated by  reference to exhibit of the same number to the Bank’s Registration Statement  on Form 10-SB as filed with the Board of Governors of the Federal  Reserve System.                                |
| (7) |   | Incorporated by  reference to exhibit of the same number to the Company’s Annual Report on Form 10-KSB  for the year ended December 31, 2004, as filed with the Securities and  Exchange Commission.        |
| (8) |   | Incorporated by  reference to exhibit of the same number to the Company’s Quarterly Report on Form 10-QSB  for the quarter ended March 31, 2005, as filed with the Securities and  Exchange Commission      |

 

23

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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:    October 31,  2005 | By:                             | /s/ Martin S. Lapera |   |
|                                                |                            | Martin S. Lapera |
|                                                |                            | President and Chief  Executive Officer |
|                                                |                            |
|                                                |                            |
| Date:    October 31,  2005 | By:                             | /s/ William R. Talley, Jr. |   |
|                                                |                            | William R. Talley, Jr. |
|                                                |                            | Executive Vice  President and Chief Financial  Officer |

 

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