**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, DC 20549**

###  

### **FORM 10-Q**

 

(MARK ONE)

 
| **x**                                             | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES**  |
|---------------------------------------------------|------------|--------------------------------------------------------------------------|
|                                              | ** ** | **EXCHANGE ACT OF 1934**                                                 |
| ** **                                        | ** ** | ** **                                                               |
| **For the  Quarterly Period Ended June 30, 2007** |
|                                              |       |                                                                     |
| **OR**                                            |
|                                              |       |                                                                     |
| **o**                                             | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES** |
| ** **                                        | ** ** | **EXCHANGE ACT OF 1934**                                                 |

 

**For thetransition period from                to                **

*** ***

***Commission File Number:  000-50407***

####  

#### **FREDERICK COUNTYBANCORP, INC.**

(Exact name of issuer asspecified in its charter)

 

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

** **

**9 North Market Street****Frederick, Maryland 21701**

(Address of principal executiveoffices)

 

**301.620.1400**

(Issuer’stelephone number)

 

**N/A**

(Formername, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. x Yes   No o

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

Large acceleratedfiler o               Acceleratedfiler o               Non-acceleratedfiler x

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). o Yes   No x

Statethe number of shares of each of the issuer’s classes of common equity, as ofthe latest practical date.  There were1,460,602 shares of Common Stock outstanding as of July 20, 2007.

 

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**FREDERICK COUNTYBANCORP, INC. AND SUBSIDIARY**

**TABLE OF CONTENTS**
| PART I       | ** ** | **FINANCIAL  INFORMATION**                                                                                          |
|--------------|------------|---------------------------------------------------------------------------------------------------------------------|
| ** **   | ** ** | ** **                                                                                                          |
| Item  1.     |       | Financial  Statements (Unaudited)                                                                                   |
|         |       |                                                                                                                |
|         |       | Consolidated Balance  Sheets, June 30, 2007 and December 31, 2006                                                   |
|         |       |                                                                                                                |
|         |       | Consolidated Statements of Income, Three and Six  Months Ended June 30, 2007 and 2006                               |
|         |       |                                                                                                                |
|         |       | Consolidated Statements of Changes in Shareholders’  Equity, Three and Six Months Ended June 30, 2007 and 2006 |
|         |       |                                                                                                                |
|         |       | Consolidated Statements of Cash Flows, Six Months  Ended June 30, 2007 and 2006                                     |
|         |       |                                                                                                                |
|         |       | Notes to Unaudited Consolidated Financial Statements                                                                |
|         |       |                                                                                                                |
| Item 2.      |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                         |
|         |       |                                                                                                                |
| Item 3.      |       | Quantitative and Qualitative Disclosures About Market  Risk                                                         |
|         |       |                                                                                                                |
|         |       | See “Market  Risk, Liquidity and Interest Rate Sensitivity” at Page 20.                                   |
|         |       |                                                                                                                |
| Item 4.      |       | Controls and Procedures                                                                                             |
|         |       |                                                                                                                |
| **PART  II** | ** ** | **OTHER  INFORMATION**                                                                                              |
|         |       |                                                                                                                |
| Item 1.      |       | Legal Proceedings                                                                                                   |
|         |       |                                                                                                                |
| Item 1A.     |       | Risk Factors                                                                                                        |
|         |       |                                                                                                                |
| Item 2.      |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                        |
|         |       |                                                                                                                |
| Item 3.      |       | Defaults upon Senior Securities                                                                                     |
|         |       |                                                                                                                |
| Item 4.      |       | Submission of Matters to a Vote of Security Holders                                                                 |
|         |       |                                                                                                                |
| Item  5.     |       | Other  Information                                                                                                  |
|         |       |                                                                                                                |
| Item 6.      |       | Exhibits                                                                                                            |
|         |       |                                                                                                                |
|         |       | Signatures                                                                                                          |

 

2

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

**ConsolidatedBalance Sheets (Unaudited)**
| ** **                                                                                                                                  | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(dollars in thousands)**                                                                                                        | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| **ASSETS**                                                                                                                                  | ** ** | ** **        | ** ** | ** **            | ** ** |
| Cash and due from banks                                                                                                                     |       | $                 | 4,773      |                  | $          | 3,695 |   |
| Federal funds sold                                                                                                                          |       | 15,840            |       | 15,035                |       |
| Interest-bearing  deposits in other banks                                                                                                   |       | 371               |       | 7,753                 |       |
| Cash and cash  equivalents                                                                                                                  |       | 20,984            |       | 26,483                |       |
| Investment securities  available-for-sale at fair value                                                                                     |       | 28,146            |       | 29,174                |       |
| Restricted stock                                                                                                                            |       | 1,185             |       | 938                   |       |
| Loans                                                                                                                                       |       | 199,403           |       | 173,954               |       |
| Less: Allowance for  loan losses                                                                                                            |       | (2,351            | )          | (2,166                | )          |
| Net loans                                                                                                                                   |       | 197,052           |       | 171,788               |       |
| Bank premises and  equipment                                                                                                                |       | 4,149             |       | 4,362                 |       |
| Other assets                                                                                                                                |       | 2,805             |       | 2,206                 |       |
| Total assets                                                                                                                                |       | $                 | 254,321    |                  | $          | 234,951 |   |
|                                                                                                                                        |       |              |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                              | ** ** | ** **        | ** ** | ** **            | ** ** |
|                                                                                                                                        |       |              |       |                  |       |
| **Liabilities**                                                                                                                             |       |              |       |                  |       |
| Deposits:                                                                                                                                   |       |              |       |                  |       |
| Noninterest-bearing  deposits                                                                                                               |       | $                 | 32,570     |                  | $          | 32,796 |   |
| Interest-bearing  deposits                                                                                                                  |       | 189,106           |       | 176,582               |       |
| Total deposits                                                                                                                              |       | 221,676           |       | 209,378               |       |
| Short-term borrowings                                                                                                                       |       | —            |       | 450                   |       |
| Long-term borrowings                                                                                                                        |       | 5,000             |       | —                |       |
| Junior subordinated  debentures                                                                                                             |       | 6,186             |       | 6,186                 |       |
| Accrued interest and other  liabilities                                                                                                     |       | 3,052             |       | 1,044                 |       |
| Total liabilities                                                                                                                           |       | 235,914           |       | 217,058               |       |
|                                                                                                                                        |       |              |       |                  |       |
| **Shareholders’ Equity**                                                                                                               |       |              |       |                  |       |
| Common stock, per share  par value $.01; 10,000,000 shares authorized; 1,460,602 and 1,458,602 shares  issued and outstanding, respectively |       | 15                |       | 15                    |       |
| Additional paid-in  capital                                                                                                                 |       | 14,687            |       | 14,652                |       |
| Retained earnings                                                                                                                           |       | 3,999             |       | 3,341                 |       |
| Accumulated other  comprehensive loss                                                                                                       |       | (294              | )          | (115                  | )          |
| Total  shareholders’ equity                                                                                                            |       | 18,407            |       | 17,893                |       |
| Total liabilities and  shareholders’ equity                                                                                            |       | $                 | 254,321    |                  | $          | 234,951 |   |

 

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

3

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

**ConsolidatedStatements of Income (Unaudited)**
| ** **                                                                         | ** ** | **For the Three  Months Ended  June 30,** | ** ** | **For the Six  Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| **(dollars in thousands, except per share amounts)** | ** ** | **2007**                                                      | ** ** | **2006**                                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Interest income:                                                                   |       |                                                          |       |                                                        |       |   |   |   |   |
| Interest and  fees on loans                                                        |       | $                                                             | 3,452      |                                                        | $          | 2,900 |   | $ | 6,659 |   | $ | 5,623 |   |
| Interest and  dividends on investment securities:                                  |       |                                                          |       |                                                        |       |   |   |   |   |
| Interest —  taxable                                                           |       | 231                                                           |       | 198                                                         |       | 467 |   | 406 |   |
| Interest — tax  exempt                                                        |       | 99                                                            |       | 69                                                          |       | 198 |   | 103 |   |
| Dividends                                                                          |       | 18                                                            |       | 12                                                          |       | 35 |   | 23 |   |
| Interest on  federal funds sold                                                    |       | 117                                                           |       | 177                                                         |       | 224 |   | 330 |   |
| Other interest  income                                                             |       | 80                                                            |       | 84                                                          |       | 139 |   | 129 |   |
| Total interest  income                                                             |       | 3,997                                                         |       | 3,440                                                       |       | 7,722 |   | 6,614 |   |
| Interest expense:                                                                  |       |                                                          |       |                                                        |       |   |   |   |   |
| Interest on  deposits                                                              |       | 1,796                                                         |       | 1,343                                                       |       | 3,470 |   | 2,545 |   |
| Interest on  other short-term borrowings                                           |       | —                                                        |       | 7                                                           |       | 2 |   | 14 |   |
| Interest on  long-term borrowings                                                  |       | 41                                                            |       | 5                                                           |       | 41 |   | 10 |   |
| Interest on  junior subordinated debentures                                        |       | 101                                                           |       | —                                                      |       | 202 |   | — |   |
| Total interest  expense                                                            |       | 1,938                                                         |       | 1,355                                                       |       | 3,715 |   | 2,569 |   |
| Net interest income                                                                |       | 2,059                                                         |       | 2,085                                                       |       | 4,007 |   | 4,045 |   |
| Provision for loan losses                                                          |       | 125                                                           |       | 60                                                          |       | 191 |   | 120 |   |
| Net interest income  after provision for loan losses                               |       | 1,934                                                         |       | 2,025                                                       |       | 3,816 |   | 3,925 |   |
| Noninterest income:                                                                |       |                                                          |       |                                                        |       |   |   |   |   |
| Service fees                                                                       |       | 43                                                            |       | 37                                                          |       | 89 |   | 76 |   |
| Other operating  income                                                            |       | 54                                                            |       | 37                                                          |       | 94 |   | 83 |   |
| Total  noninterest income                                                          |       | 97                                                            |       | 74                                                          |       | 183 |   | 159 |   |
| Noninterest expense:                                                               |       |                                                          |       |                                                        |       |   |   |   |   |
| Salaries and  employee benefits                                                    |       | 927                                                           |       | 821                                                         |       | 1,832 |   | 1,553 |   |
| Occupancy and  equipment expenses                                                  |       | 247                                                           |       | 190                                                         |       | 507 |   | 374 |   |
| Other operating  expenses                                                          |       | 375                                                           |       | 291                                                         |       | 714 |   | 560 |   |
| Total  noninterest expense                                                         |       | 1,549                                                         |       | 1,302                                                       |       | 3,053 |   | 2,487 |   |
| Income before provision  for income taxes                                          |       | 482                                                           |       | 797                                                         |       | 946 |   | 1,597 |   |
| Provision for income  taxes                                                        |       | 147                                                           |       | 284                                                         |       | 288 |   | 605 |   |
| Net income                                                                         |       | $                                                             | 335        |                                                        | $          | 513 |   | $ | 658 |   | $ | 992 |   |
| Basic earnings per  share                                                          |       | $                                                             | 0.23       |                                                        | $          | 0.35 |   | $ | 0.45 |   | $ | 0.68 |   |
| Diluted earnings per  share                                                        |       | $                                                             | 0.22       |                                                        | $          | 0.34 |   | $ | 0.43 |   | $ | 0.65 |   |
| Basic weighted average  number of shares outstanding                               |       | 1,460,602                                                     |       | 1,458,602                                                   |       | 1,459,641 |   | 1,458,602 |   |
| Diluted weighted average number of shares outstanding                              |       | 1,521,376                                                     |       | 1,527,496                                                   |       | 1,522,627 |   | 1,527,623 |   |

 

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

4

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

**Consolidated Statement of Changes in**

**Shareholders’Equity**(Unaudited)
| ** **                                                                                                     | ** ** | **Three Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(dollars in thousands,   except shares outstanding)**                               | ** ** | **Shares  Outstanding**                             | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  (Loss)** | ** ** | **Total  Shareholders’  Equity** | ** ** |
| Balance, March 31, 2006                                                                                        |       | 1,458,602                                           |       | $ | 15 |   | $ | 14,652 |   | $ | 1,900 |   | $ | (246 | ) | $ | 16,321 |   |
| Comprehensive income:                                                                                          |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                     |       | —                                              |       | — |   | — |   | 513 |   | — |   | 513 |   |
| Changes in net  unrealized gains (losses) on securities available for sale, net of income tax  benefits of $64 |       | —                                              |       | — |   | — |   | — |   | (102 | ) | (102 | ) |
| Comprehensive  income                                                                                          |       |                                                |       |   |   |   |   |   |   |   |   | 411 |   |
| Balance, June 30, 2006                                                                                         |       | 1,458,602                                           |       | $ | 15 |   | $ | 14,652 |   | $ | 2,413 |   | $ | (348 | ) | $ | 16,732 |   |
| Balance, March 31, 2007                                                                                        |       | 1,460,602                                           |       | $ | 15 |   | $ | 14,687 |   | $ | 3,664 |   | $ | (58 | ) | $ | 18,308 |   |
| Comprehensive income:                                                                                          |       |                                                |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                     |       | —                                              |       | — |   | — |   | 335 |   | — |   | 335 |   |
| Changes in net  unrealized gains (losses) on securities available for sale, net of income  taxes of $148       |       | —                                              |       | — |   | — |   | — |   | (236 | ) | (236 | ) |
| Comprehensive income                                                                                           |       |                                                |       |   |   |   |   |   |   |   |   | 99 |   |
| Balance, June 30, 2007                                                                                         |       | 1,460,602                                           |       | $ | 15 |   | $ | 14,687 |   | $ | 3,999 |   | $ | (294 | ) | $ | 18,407 |   |

 

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

5

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

**Consolidated Statement ofChanges in**

**Shareholders’Equity**(Unaudited)
| ** **                                                                                                    | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(dollars in thousands, except     shares outstanding)**                            | ** ** | **Shares  Outstanding**                           | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  (Loss)** | ** ** | **Total  Shareholders’  Equity** | ** ** |
| Balance, January  1, 2006                                                                                     |       | 1,458,602                                         |       | $ | 15 |   | $ | 14,652 |   | $ | 1,421 |   | $ | (200 | ) | $ | 15,888 |   |
| Comprehensive  income:                                                                                        |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                    |       | —                                            |       | — |   | — |   | 992 |   | — |   | 992 |   |
| Changes in net unrealized gains (losses) on  securities available for sale, net of income tax benefits of $93 |       | —                                            |       | — |   | — |   | — |   | (148 | ) | (148 | ) |
| Comprehensive income                                                                                          |       |                                              |       |   |   |   |   |   |   |   |   | 844 |   |
| Balance, June  30, 2006                                                                                       |       | 1,458,602                                         |       | $ | 15 |   | $ | 14,652 |   | $ | 2,413 |   | $ | (348 | ) | $ | 16,732 |   |
| Balance, January  1, 2007                                                                                     |       | 1,458,602                                         |       | $ | 15 |   | $ | 14,652 |   | $ | 3,341 |   | $ | (115 | ) | $ | 17,893 |   |
| Comprehensive  income:                                                                                        |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                                                    |       | —                                            |       | — |   | — |   | 658 |   | — |   | 658 |   |
| Changes in net unrealized gains (losses) on  securities available for sale, net of income taxes of $113       |       | —                                            |       | — |   | — |   | — |   | (179 | ) | (179 | ) |
| Comprehensive  income                                                                                         |       |                                              |       |   |   |   |   |   |   |   |   | 479 |   |
| Shares issued  under stock option transactions                                                                |       | 2,000                                             |       | — |   | 35 |   | — |   | — |   | 35 |   |
| Balance, June 30, 2007                                                                                        |       | 1,460,602                                         |       | $ | 15 |   | $ | 14,687 |   | $ | 3,999 |   | $ | (294 | ) | $ | 18,407 |   |

 

6

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

**ConsolidatedStatements of Cash Flows (Unaudited)**
| ** **                                                                                                | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(dollars in thousands)**                                                                      | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| Cash  flows from operating activities:                                                                    |       |                                              |       |   |   |
| Net income                                                                                                |       | $                                                 | 658        |   | $ | 992 |   |
| Adjustments to reconcile net income to net cash provided by  operating activities:                        |       |                                              |       |   |   |
| Depreciation and amortization                                                                             |       | 142                                               |       | 86 |   |
| Deferred income tax benefits                                                                              |       | (68                                               | )          | (48 | ) |
| Provision for loan losses                                                                                 |       | 191                                               |       | 120 |   |
| Net premium amortization on investment securities                                                         |       | 5                                                 |       | 22 |   |
| Increase in accrued interest and other assets                                                             |       | (308                                              | )          | (33 | ) |
| Increase (decrease) in accrued interest and other liabilities                                             |       | 2,008                                             |       | (331 | ) |
| Net cash provided by operating activities                                                                 |       | 2,628                                             |       | 808 |   |
| Cash  flows from investing activities:                                                                    |       |                                              |       |   |   |
| Purchases of investment securities available-for-sale                                                     |       | (2,124                                            | )          | (1,475 | ) |
| Purchases of investment securities held-to-maturity                                                       |       | —                                            |       | (5,933 | ) |
| Proceeds from maturities, prepayments and calls of investment  securities available-for-sale              |       | 2,855                                             |       | 2,345 |   |
| Purchases of restricted stock                                                                             |       | (247                                              | )          | (72 | ) |
| Net increase in loans                                                                                     |       | (25,455                                           | )          | (8,683 | ) |
| Purchases of bank premises and equipment                                                                  |       | (39                                               | )          | (1,100 | ) |
| Net cash used in investing activities                                                                     |       | (25,010                                           | )          | (14,918 | ) |
| Cash  flows from financing activities:                                                                    |       |                                              |       |   |   |
| Net (decrease) increase in NOW, money market accounts, savings  accounts and noninterest-bearing deposits |       | (1,029                                            | )          | 10,734 |   |
| Net increase in time deposits                                                                             |       | 13,327                                            |       | 7,942 |   |
| Net decrease in short-term borrowings                                                                     |       | (450                                              | )          | — |   |
| Proceeds from issuance of long-term borrowings                                                            |       | 5,000                                             |       | — |   |
| Proceeds from issuance of common stock                                                                    |       | 35                                                |       | — |   |
| Net cash provided by financing activities                                                                 |       | 16,883                                            |       | 18,676 |   |
| Net  (decrease) increase in cash and cash equivalents                                                     |       | (5,499                                            | )          | 4,566 |   |
| Cash  and cash equivalents — beginning of period                                                     |       | 26,483                                            |       | 28,510 |   |
| Cash  and cash equivalents — end of period                                                           |       | $                                                 | 20,984     |   | $ | 33,076 |   |
| Supplemental  cash flow disclosures:                                                                      |       |                                              |       |   |   |
| Interest paid                                                                                             |       | $                                                 | 3,687      |   | $ | 2,569 |   |
| Income  taxes paid                                                                                        |       | $                                                 | 285        |   | $ | 778 |   |

 

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

7

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**FREDERICK COUNTYBANCORP, INC.**

Notes to UnauditedConsolidated Financial Statements

**Note 1.  General:**

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

The accompanying unauditedconsolidated financial statements of the Company have been prepared inaccordance with accounting principles generally accepted in the UnitedStates of America for interim financial information, the instructions for Form10-Q, regulation S-X, 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 consolidatedfinancial statements and accompanying footnotes included in the Company’s 2006Annual Report on Form 10-K.  In theopinion of management, all adjustments, consisting of normal recurringadjustments, 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 ending December 31, 2007.

The preparation of financial statements requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. These estimates and assumptions are based on information available as ofthe date of the consolidated financial statements and could differ from actualresults.

**Recent AccountingPronouncements**

In February 2006, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 155, *“Accountingfor Certain Hybrid Financial Instruments”,* an amendment of SFAS No.133 and SFAS No. 140. This statement permits fair value re-measurement for anyhybrid financial instrument that contains an embedded derivative that otherwisewould require bifurcation. It establishes a requirement to evaluate interestsin securitized financial assets to identify interests that are freestandingderivatives or that are hybrid financial instruments that contain an embeddedderivative requiring bifurcation. In addition, SFAS 155 clarifies whichinterest-only strips and principal-only strips are not subject to therequirements of Statement 133. It also clarifies that concentrations of creditrisk in the form of subordination are not embedded derivatives. SFAS 155 amendsStatement 140 to eliminate the prohibition on a qualifying special purposeentity from holding a derivative financial instrument that pertains to abeneficial interest other than another derivative financial instrument.  On January 1, 2007, the Company adopted SFAS155 and determined that it did not have any impact on its financial conditionor results of operations.

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

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

In June 2006, the FASB issued FASB Interpretation No.48, “*Accounting for Uncertainty in IncomeTaxes*” (“FIN 48”). FIN 48

8

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clarifies when tax benefits should be recorded infinancial statements, requires certain disclosures of uncertain tax matters andindicates how any tax reserves should be classified in a balance sheet. OnJanuary 1, 2007, the Company adopted FIN 48 and determined that it did not haveany impact on its financial condition or results of operations.

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

**Note 2. EarningsPer Share:**

Earnings per share (“EPS”) are disclosed as basic anddiluted.  Basic EPS is generally computedby dividing net income by the weighted-average number of common sharesoutstanding for the period, whereas diluted EPS essentially reflects thepotential dilution in basic EPS that could occur if other contracts to issuecommon stock were exercised.  As of June30, 2007 and 2006, no common stock equivalents were excluded from the dilutedEPS calculation.
| ** **                                                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(dollars in thousands, except per share amounts)** | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                                                                         |       | $                                               | 335        |                                          | $          | 513 |   | $ | 658 |   | $ | 992 |   |
| Basic earnings  per share                                                          |       | $                                               | 0.23       |                                          | $          | 0.35 |   | $ | 0.45 |   | $ | 0.68 |   |
| Diluted earnings  per share                                                        |       | $                                               | 0.22       |                                          | $          | 0.34 |   | $ | 0.43 |   | $ | 0.65 |   |
| Basic weighted  average number of shares outstanding                               |       | 1,460,602                                       |       | 1,458,602                                     |       | 1,459,641 |   | 1,458,602 |   |
| Effect of  dilutive securities — stock options                                |       |  60,774                                    |       | 68,894                                        |       | 62,986 |   | 69,021 |   |
| Diluted weighted  average number of shares outstanding                             |       | 1,521,376                                       |       | 1,527,496                                     |       | 1,522,627 |   | 1,527,623 |   |

 

**Note 3.  Employee Stock Option Plan:**

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

**Note 4.  Investment Portfolio:**

The following tables set forth certain informationregarding the Company’s investment portfolio at June 30, 2007 and December 31,2006:

**Available-for-saleportfolio**
| ** **                                                          | ** **   | **June 30, 2007** | ** ** |
|---------------------------------------------------------------------|--------------|-----------------------------|------------|
| **(dollars in thousands)**                                | *** *** | **Amortized  Cost**         | ** ** | **Gross  Unrealized  Gain** | ** ** | **Gross  Unrealized  Loss** | ** ** | **Estimated  Fair  Value** | ** ** | **Average  Yield** | *** *** |
| U.S. Treasury  and other U.S. government Agencies and corporations: |         |                        |       |   |   |   |   |   |   |   |   |
| Due within one year                                                 |         | $                           | 987        |   | $ | — |   | $ | 1 |   | $ | 986 |   | 5.26 | % |
| Due after one year through five years                               |         | 1,296                       |       | — |   | 20 |   | 1,276 |   | 4.62 | % |
| Due after five years through ten years                              |         | 2,673                       |       | — |   | 57 |   | 2,616 |   | 4.95 | % |
| State and  political subdivisions:                                  |         |                        |       |   |   |   |   |   |   |   |   |
| Due after five years through ten years                              |         | 1,722                       |       | — |   | 45 |   | 1,677 |   | 5.33 | % |
| Due after ten years                                                 |         | 8,100                       |       | 1 |   | 114 |   | 7,987 |   | 5.88 | % |
| Mortgage-backed  debt securities                                    |         | 13,447                      |       | 15 |   | 258 |   | 13,204 |   | 4.76 | % |
| Equity  securities                                                  |         | 400                         |       | — |   | — |   | 400 |   | — | % |
|                                                                |         | $                           | 28,625     |   | $ | 16 |   | $ | 495 |   | $ | 28,146 |   | 5.07 | % |

 

9

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

 
| ** **                                                         | ** ** | **June 30, 2007**                                                                       | ** ** |
|--------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **Continuous unrealized  losses existing for less than  12 months** | ** ** | **Continuous unrealized  losses existing for 12  months and greater** | ** ** | **Total** | ** ** |
| **(dollars in thousands)**                               | ** ** | **Fair  Value**                                                                                   | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** |
| U.S. Treasury  and other U.S. government agencies and corporations |       | $                                                                                                 | 986        |   | $ | 1 |   | $ | 3,893 |   | $ | 77 |   | $ | 4,879 |   | $ | 78 |   |
| State and  political subdivisions                                  |       | 2,747                                                                                             |       | 9 |   | 8,295 |   | 249 |   | 11,042 |   | 258 |   |
| Mortgage-backed  debt securities                                   |       | 8,109                                                                                             |       | 119 |   | 1,211 |   | 40 |   | 9,320 |   | 159 |   |
| Total temporarily  impaired securities                             |       | $                                                                                                 | 11,842     |   | $ | 129 |   | $ | 13,399 |   | $ | 366 |   | $ | 25,241 |   | $ | 495 |   |

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

 

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

**Restricted Stock**

The following table shows theamounts of restricted stock as of June 30, 2007 and December 31, 2006:
| ** **                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(dollars in thousands)** | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| Federal Home  Loan Bank of Atlanta   |       | $                 | 646        |                  | $          | 459 |   |
| Federal Reserve  Bank                |       | 499               |       | 439                   |       |
| Atlantic Central  Bankers Bank       |       | 40                |       | 40                    |       |
|                                 |       | $                 | 1,185      |                  | $          | 938 |   |

 

10

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** **

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

Loansconsist of the following:
| ** **                                                                  | ** **   | **June 30,** | ** ** | **%*** *of | ** ** | **December 31,** | ** ** | **% of** | ** **   |
|-----------------------------------------------------------------------------|--------------|-------------------|------------|-----------------|------------|-----------------------|------------|---------------|--------------|
| **(dollars in thousands)**                                        | *** *** | **2007**          | ** ** | **Loans**       | ** ** | **2006**              | ** ** | **Loans**     | *** *** |
| Real estate loans:                                                          |         |              |       |            |       |                  |       |          |         |
| Construction and land  development                                          |         | $                 | 45,931     |            | 23         | %                     | $          | 30,183        |         | 17 | % |
| Mortgage loans:                                                             |         |              |       |            |       |                  |       |          |         |
| Secured by 1 to 4  family residential properties                            |         | 32,864            |       | 17              | %          | 34,194                |       | 20            | %            |
| Secured by multi-family  (5 or more) residential properties                 |         | 8,252             |       | 4               | %          | 4,640                 |       | 3             | %            |
| Secured by commercial  properties                                           |         | 78,260            |       | 39              | %          | 73,582                |       | 42            | %            |
| Secured by farm land                                                        |         | 7,476             |       | 4               | %          | 4,302                 |       | 2             | %            |
| Total mortgage  loans                                                       |         | 126,852           |       | 64              | %          | 116,718               |       | 67            | %            |
| Loans to farmers                                                            |         | 50                |       | —          | %          | —                |       | —        | %            |
| Commercial and  industrial loans                                            |         | 24,072            |       | 12              | %          | 24,806                |       | 14            | %            |
| Loans to individuals  for household, family and other personal expenditures |         | 2,498             |       | 1               | %          | 2,247                 |       | 2             | %            |
|                                                                        |         | 199,403           |       | 100             | %          | 173,954               |       | 100           | %            |
| Less allowance for loan  losses                                             |         | (2,351            | )          |            |       | (2,166                | )          |          |         |
| Net loans                                                                   |         | $                 | 197,052    |            |       |                  | $          | 171,788       |         |   |   |

 

Transactions in theallowance for loan losses are summarized as follows:
| ** **                                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(dollars in thousands)**           | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Balance at beginning of  period                |       | $                                               | 2,226      |                                          | $          | 2,013 |   | $ | 2,166 |   | $ | 1,953 |   |
| Provision charged to  operating expenses       |       | 125                                             |       | 60                                            |       | 191 |   | 120 |   |
| Recoveries of loans  previously charged-off    |       | —                                          |       | —                                        |       | — |   | — |   |
|                                           |       | 2,351                                           |       | 2,073                                         |       | 2,357 |   | 2,073 |   |
| Loans charged-off —  consumer             |       | —                                          |       | —                                        |       | (6 | ) | — |   |
| Balance at end of  period                      |       | $                                               | 2,351      |                                          | $          | 2,073 |   | $ | 2,351 |   | $ | 2,073 |   |
| Average total loans  outstanding during period |       | $                                               | 189,013    |                                          | $          | 161,916 |   | $ | 183,241 |   | $ | 159,544 |   |

 

**Note6.   Deposits**

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

|                                      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(dollars in thousands)** | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| Noninterest-bearing  demand deposits |       | $                 | 32,570     |                  | $          | 32,796 |   |
| Interest-bearing  demand deposits:   |       |              |       |                  |       |
| NOW accounts                         |       | 14,428            |       | 18,233                |       |
| Money market accounts                |       | 34,690            |       | 32,023                |       |
| Savings accounts                     |       | 2,897             |       | 2,562                 |       |
| Certificates of  deposit:            |       |              |       |                  |       |
| $100,000 or more                     |       | 68,027            |       | 61,315                |       |
| Less than $100,000                   |       | 69,064            |       | 62,449                |       |
| Total deposits                       |       | $                 | 221,676    |                  | $          | 209,378 |   |

 

11

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**Note 7. Trust preferredsecurities/junior subordinated debentures and other long-term borrowings:**

In December 2006, Bancorp completed the private placement of an aggregateof $6,000,000 of trust preferred securities through FCBI Statutory Trust I (the“Trust”), a newly formed trust subsidiary organized under Connecticut law, ofwhich Bancorp owns all of the common securities of $186,000. The principalasset of the Trust is a similar amount of Bancorp’s junior subordinated debentures.The junior subordinated debentures bear interest at a fixed rate of 6.5375%until December 15, 2011, at which time the interest rate becomes a variablerate, adjusted quarterly, equal to 163 basis points over three-month LIBOR. Thejunior subordinated debentures mature on December 15, 2036, and may be redeemedat par, at Bancorp’s option, on any interest payment date commencing December15, 2011. The securities are redeemable prior to December 15, 2011, at apremium ranging up to 103.525% of the principal amount thereof, upon theoccurrence of certain regulatory or legal events. The obligations of Bancorpwith respect to the Trust’s preferred securities constitute a full andunconditional guarantee by Bancorp of Trust’s obligations with respect to the trustpreferred securities to the extent set forth in the related guarantee. Subjectto certain exceptions and limitations, Bancorp may elect from time to time todefer interest payments on the junior subordinated debentures, resulting in adeferral of distribution payments on the related trust preferredsecurities.  Deferral of such paymentswould result in significant restrictions on Bancorp’s ability to pay dividendsor purchase shares of its common stock. The proceeds from this issuance will be used to supplement the Company’sregulatory capital for continued growth and other general corporate purposes.

The trust preferred securities may be included in Tier 1 capital forregulatory capital adequacy purposes up to 25% of Tier 1 capital after itsinclusion. The portion of the trust preferred securities not qualifying as Tier1 capital may be included as part of total qualifying capital in Tier 2capital, subject to limitation.

At June 30, 2007, the Company had $5,000,000 in borrowings under itscredit facility from the Federal Home Loan Bank of Atlanta (“FHLB”), ascompared to no outstanding balances at December 31, 2006.  This is a convertible advance at a rate of4.56% with a maturity date of April 27, 2012, unless it is called on April 27,2009 by the FHLB.  Outstanding advancesare secured by collateral consisting of a blanket lien on qualifying loans inthe Bank’s residential mortgage loan portfolio.

**Note8.  Noninterest Expense:**

Noninterest expenseconsists of the following:
| ** **                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(dollars in thousands)**    | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                    |       |                                            |       |                                          |       |   |   |   |   |
| Salaries                                |       | $                                               | 791        |                                          | $          | 663 |   | $ | 1,552 |   | $ | 1,229 |   |
| Bonus                                   |       | 26                                              |       | 99                                            |       | 39 |   | 182 |   |
| Deferred  Personnel Costs               |       | (41                                             | )          | (45                                           | )          | (78 | ) | (91 | ) |
| Payroll Taxes                           |       | 60                                              |       | 47                                            |       | 138 |   | 110 |   |
| Employee Insurance                      |       | 46                                              |       | 28                                            |       | 93 |   | 62 |   |
| Other Employee Benefits                 |       | 45                                              |       | 29                                            |       | 88 |   | 61 |   |
| Depreciation                            |       | 68                                              |       | 45                                            |       | 142 |   | 86 |   |
| Rent                                    |       | 66                                              |       | 64                                            |       | 116 |   | 128 |   |
| Utilities                               |       | 24                                              |       | 12                                            |       | 51 |   | 30 |   |
| Repairs and  Maintenance                |       | 42                                              |       | 26                                            |       | 97 |   | 49 |   |
| ATM Expense                             |       | 19                                              |       | 18                                            |       | 42 |   | 35 |   |
| Other Occupancy  and Equipment Expenses |       | 28                                              |       | 25                                            |       | 59 |   | 46 |   |
| Postage and  Supplies                   |       | 23                                              |       | 15                                            |       | 45 |   | 29 |   |
| Data Processing                         |       | 88                                              |       | 70                                            |       | 182 |   | 134 |   |
| Advertising and  Promotion              |       | 70                                              |       | 58                                            |       | 126 |   | 119 |   |
| Legal                                   |       | 1                                               |       | 6                                             |       | 10 |   | 13 |   |
| Insurance                               |       | 12                                              |       | 9                                             |       | 23 |   | 17 |   |
| Consulting                              |       | 10                                              |       | 15                                            |       | 21 |   | 22 |   |
| Courier                                 |       | 11                                              |       | 12                                            |       | 23 |   | 22 |   |
| Audit Fees                              |       | 58                                              |       | 37                                            |       | 117 |   | 75 |   |
| Other                                   |       | 102                                             |       | 69                                            |       | 167 |   | 129 |   |
|                                    |       | $                                               | 1,549      |                                          | $          | 1,302 |   | $ | 3,053 |   | $ | 2,487 |   |

 

12

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

TheCompany has a Section 401(k) profit sharing plan covering employees meetingcertain eligibility requirements as to minimum age and years of service.  Employees may make voluntary contributions tothe Plan through payroll deductions on a pre-tax basis.  The Company makes matching contributions of100% of the employee’s contributions up to 4% of the employee’s salary.  A participant’s account under the Plan,together with investment earnings thereon, is normally distributable, followingretirement, death, disability or other termination of employment, in a singlelump-sum payment.

TheCompany made contributions to the Plan in the amounts of $71,000 and $48,000for the first six months of 2007 and 2006, respectively, and $36,000 and$24,000 for the three month periods ended June 30, 2007 and 2006, respectively.

**Note10.  Shareholders’ Equity:**

**Capital:**

The Company andthe Bank are subject to various regulatory capital requirements administered bythe federal 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 consolidated financialstatements.  Under capital adequacyguidelines and the regulatory framework for prompt corrective action, theCompany and the Bank must meet specific capital guidelines that involvequantitative measures of the Company’s and the Bank’s assets, liabilities, andcertain off-balance-sheet items as calculated under regulatory accountingpractices.  The Company’s and the Bank’scapital amounts and classification are also subject to qualitative judgments bythe regulators about components, risk weightings, and other factors.

Quantitativemeasures established by regulation to ensure capital adequacy require theCompany and the Bank to maintain minimum amounts and ratios (set forth in the followingtable) of total and Tier 1 capital (as defined in the regulations) torisk-weighted assets (as defined), and Tier 1 capital (as defined) to averageassets (as defined).  Management believesthat the Company and the Bank met all capital adequacy requirements to whichthey are subject as of June 30, 2007.

Asof June 30, 2007, the most recent notification from the regulatory agencycategorized the Bank as well capitalized under the regulatory framework forprompt corrective action.  To becategorized as well capitalized the Bank must maintain minimum totalrisk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in thetable.  There are no conditions or eventssince that notification which management believes have changed the Bank’s category.

The Company’s and the Bank’s actual capital amounts andratios at June 30, 2007 and December 31, 2006 are presented in the followingtables.
| **June 30, 2007**          | ** ** | **Actual** | ** ** | **For Capital  Adequacy Purposes** | ** ** | **Minimum To Be Well  Capitalized Under  Prompt Corrective  Action Provisions** | ** ** |
|--------------------------------------|------------|------------|------------|----------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|
| **(dollars in thousands)** | ** ** | **Amount** | ** ** | **Ratio**                                    | ** ** | **Amount**                                                                                                    | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| Tier 1 Capital                       |       |       |       |                                         |       |                                                                                                          |       |   |   |   |   |   |   |
| To Risk-Weighted Assets              |       |       |       |                                         |       |                                                                                                          |       |   |   |   |   |   |   |
| Company                              |       | $          | 24,701     |                                         | 10.95      | %                                                                                                             | $          | 9,023 |   | 4.00 | % | N/A |   | N/A |   |
| Bank                                 |       | $          | 20,843     |                                         | 9.27       | %                                                                                                             | $          | 8,998 |   | 4.00 | % | $ | 13,497 |   | 6.00 | % |
|                                 |       |       |       |                                         |       |                                                                                                          |       |   |   |   |   |   |   |
| Total Capital                        |       |       |       |                                         |       |                                                                                                          |       |   |   |   |   |   |   |
| To Risk-Weighted Assets              |       |       |       |                                         |       |                                                                                                          |       |   |   |   |   |   |   |
| Company                              |       | $          | 27,052     |                                         | 11.99      | %                                                                                                             | $          | 18,045 |   | 8.00 | % | N/A |   | N/A |   |
| Bank                                 |       | $          | 23,194     |                                         | 10.31      | %                                                                                                             | $          | 17,996 |   | 8.00 | % | $ | 22,496 |   | 10.00 | % |
|                                 |       |       |       |                                         |       |                                                                                                          |       |   |   |   |   |   |   |
| Tier 1 Capital                       |       |       |       |                                         |       |                                                                                                          |       |   |   |   |   |   |   |
| To Average Assets                    |       |       |       |                                         |       |                                                                                                          |       |   |   |   |   |   |   |
| Company                              |       | $          | 24,701     |                                         | 10.15      | %                                                                                                             | $          | 9,735 |   | 4.00 | % | N/A |   | N/A |   |
| Bank                                 |       | $          | 20,843     |                                         | 8.59       | %                                                                                                             | $          | 9,711 |   | 4.00 | % | $ | 12,139 |   | 5.00 | % |

 

13

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| **December 31, 2006**      | ** ** | **Actual** | ** ** | **For Capital  Adequacy Purposes** | ** ** | **Minimum To Be Well  Capitalized Under  Prompt Corrective  Action Provisions** | ** ** |
|--------------------------------------|------------|------------|------------|----------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|
| **(dollars in thousands)** | ** ** | **Amount** | ** ** | **Ratio**                                    | ** ** | **Amount**                                                                                                    | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| Tier 1 Capital                       |       |       |       |                                         |       |                                                                                                          |       |   |   |   |   |   |   |
| To Risk-Weighted Assets              |       |       |       |                                         |       |                                                                                                          |       |   |   |   |   |   |   |
| Company                              |       | $          | 24,008     |                                         | 12.10      | %                                                                                                             | $          | 7,937 |   | 4.00 | % | N/A |   | N/A |   |
| Bank                                 |       | $          | 18,119     |                                         | 9.15       | %                                                                                                             | $          | 7,920 |   | 4.00 | % | $ | 11,880 |   | 6.00 | % |
|                                 |       |       |       |                                         |       |                                                                                                          |       |   |   |   |   |   |   |
| Total Capital                        |       |       |       |                                         |       |                                                                                                          |       |   |   |   |   |   |   |
| To Risk-Weighted Assets              |       |       |       |                                         |       |                                                                                                          |       |   |   |   |   |   |   |
| Company                              |       | $          | 26,174     |                                         | 13.19      | %                                                                                                             | $          | 15,873 |   | 8.00 | % | N/A |   | N/A |   |
| Bank                                 |       | $          | 20,285     |                                         | 10.24      | %                                                                                                             | $          | 15,840 |   | 8.00 | % | $ | 19,800 |   | 10.00 | % |
|                                 |       |       |       |                                         |       |                                                                                                          |       |   |   |   |   |   |   |
| Tier 1 Capital                       |       |       |       |                                         |       |                                                                                                          |       |   |   |   |   |   |   |
| To Average Assets                    |       |       |       |                                         |       |                                                                                                          |       |   |   |   |   |   |   |
| Company                              |       | $          | 24,008     |                                         | 10.96      | %                                                                                                             | $          | 8,762 |   | 4.00 | % | N/A |   | N/A |   |
| Bank                                 |       | $          | 18,119     |                                         | 8.29       | %                                                                                                             | $          | 8,746 |   | 4.00 | % | $ | 10,932 |   | 5.00 | % |

 

On June 26, 2007,the Company authorized the repurchase of up to 146,000 shares of its commonstock, for an aggregate expenditure of not more than $4.5 million, through June30, 2012, or earlier termination of the program by the Board of Directors.  Repurchases, if any, by the Company pursuantto this authorization are expected to enable the Company to repurchase its sharesat an attractive price, and to provide a source of liquidity for the Company’sshares.  As of June 30, 2007, there havebeen no shares repurchased by the Company.

**Item2.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

**Forward-LookingStatements**

This management’s discussion and analysis contains forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995, including statements relating to Frederick County Bancorp, Inc.’s (the“Company”) beliefs, expectations, anticipations and plans regarding, amongother things, general economic trends, interest rates, product expansions andother matters.  Such forward-lookingstatements are identified by terminology such as “may”, “will”, “believe”, “expect”,“estimate”, “anticipate”, “likely”, “unlikely”, “continue”, or similar termsand are subject to numerous uncertainties, such as federal monetary policy,inflation, employment, profitability and consumer confidence levels, bothnationally and in the Company’s market area, the health of the real estate andconstruction market in the Company’s market area, the Company’s ability todevelop and market new products and to enter new markets, competitivechallenges in the Company’s market, legislative changes and other factors, andas such, there can be no assurance that future events will develop inaccordance with the forward-looking statements contained herein.  Readers are cautioned against placing unduereliance on any such forward-looking statement. In addition, the Company’s past results of operations do not necessarilyindicate its future results.

**General**

The following paragraphs provide an overviewof the financial condition and results of operations of the Company.  This discussion is intended to assist thereaders in their analysis of the accompanying financial statements and notesthereto.

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

14

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## **Critical Accounting Policies**

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

## **Loans**

Loans increased by $25.45 million, or 14.63%, from December 31, 2006 toa balance of $199.40 million as of June 30, 2007, and by $35.38 million, or21.57% from June 30, 2006.

## **Deposits**

Deposits grew by$12.30 million, or 5.87%, from December 31, 2006 to a balance of $221.68million as of June 30, 2007, and by $12.95 million, or 6.20% from June 30,2006.  The Company’s deposit growth hasmainly been in certificates of deposit over the past year.

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

The net income was$335,000 for the quarter ended June 30, 2007 as compared to the $513,000 netincome for the same period in 2006.  Thedecrease in earnings for this quarter in 2007 compared to the same quarter in 2006is primarily related to the increase in personnel and occupancy expenses forthe two new branches opened during the third quarter of 2006 and net interestmargin compression.  The basic earnings per share for the threemonths ended June 30, 2007 and 2006 were $0.23 and $0.35, respectively, andwere based on the weighted-average number of shares outstanding of 1,460,602and 1,458,602, respectively.  The dilutedearnings per share for the three months ended June 30, 2007 and 2006 were $0.22and $0.34, respectively, and were based on the weighted-average number ofshares outstanding of 1,521,376 and 1,527,496, respectively.   The Company recorded loan loss provisions of$125,000 and $60,000 for the three-month periods ended June 30, 2007 and 2006,respectively.

The Company experienced an annualized return on average assets of 0.55%and 0.95% for the three-month periods ended June 30, 2007 and 2006,respectively.  Additionally, the Companyexperienced an annualized return on average shareholders’ equity of 7.21% and12.32% for the three-month periods ended June 30, 2007 and 2006, respectively.

**Six  MonthsEnded June 30, 2007 and 2006**

The net income was$658,000 for the six months ended June 30, 2007 as compared to the $992,000 netincome for the same period in 2006.  Thedecrease in earnings for this period in 2007 compared to the same quarter in2006 is primarily related to the increase in personnel and occupancy expensesfor the two new branches opened during the third quarter of 2006 and netinterest margin compression.  The basic earnings per share for thesix-month periods ended June 30, 2007 and 2006 were $0.45 and $0.68,respectively, and were based on the weighted-average number of sharesoutstanding of 1,459,641 and 1,458,602, respectively.  The diluted earnings per share for thesix-month periods ended June 30, 2007 and 2006 were $0.43 and $0.65,respectively, and were based on the weighted-average number of sharesoutstanding of 1,522,627 and 1,527,623, respectively.   The Company recorded loan loss provisions of$191,000 and $120,000 for the six months ended June 30, 2007 and 2006,respectively.

The Company experienced an annualized return on average assets of 0.56%and 0.94% for the six-month periods ended June 30, 2007 and 2006,respectively.  Additionally, the Companyexperienced an annualized return on average shareholders’ equity of 7.16% and12.06% for the three-month periods ended June 30, 2007 and 2006, respectively.

15

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** **

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

The followingtables show average balances of asset and liability categories, interest incomeand interest expense, and average yields and rates for the periods indicated.

** **
| **Three Months Ended June 30,** | ** ** | **2007**                    | ** ** | **2006**                       | ** ** |
|-----------------------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|
| **(dollars in thousands)**                | ** ** | **Average  daily  balance** | ** ** | **Interest  Income/  Expense** | ** ** | **Average  Yield/  rate** | ** ** | **Average  daily  balance** | ** ** | **Interest  Income/  Expense** | ** ** | **Average  Yield/  rate** | ** ** |
| Assets                                              |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                           |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
|  Federal funds sold                            |       | $                           | 9,097      |                           | $          | 117 |   | 5.16 | % | $ | 14,466 |   | $ | 177 |   | 4.91 | % |
|  Interest bearing deposits in other banks      |       | 6,126                       |       | 80                             |       | 5.24 |   | 7,015 |   | 84 |   | 4.80 |   |
|  Investment securities (1):                    |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| Taxable                                             |       | 21,311                      |       | 249                            |       | 4.69 |   | 19,769 |   | 210 |   | 4.26 |   |
| Tax-exempt  (2)                                     |       | 9,822                       |       | 150                            |       | 6.13 |   | 6,987 |   | 105 |   | 6.03 |   |
|  Loans (3)                                     |       | 189,013                     |       | 3,466                          |       | 7.36 |   | 161,916 |   | 2,904 |   | 7.19 |   |
| Total  interest-earning assets                      |       | 235,369                     |       | 4,062                          |       | 6.92 |   | 210,153 |   | 3,480 |   | 6.64 |   |
| Noninterest-earning  assets                         |       | 8,044                       |       |                           |       |   |   | 5,917 |   |   |   |   |   |
| Total  assets                                       |       | $                           | 243,413    |                           |       |   |   |   | $ | 216,070 |   |   |   |   |   |
|                                                |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| Liabilities  and Shareholders’ Equity          |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                      |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| NOW  accounts                                       |       | $                           | 12,812     |                           | 5          |   | 0.16 | % | $ | 14,361 |   | 6 |   | 0.17 | % |
| Savings  accounts                                   |       | 2,948                       |       | 4                              |       | 0.54 |   | 2,753 |   | 4 |   | 0.58 |   |
| Money  market accounts                              |       | 32,255                      |       | 221                            |       | 2.75 |   | 31,302 |   | 214 |   | 2.74 |   |
| Certificates  of deposit                            |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| $100,000  or more                                   |       | 65,600                      |       | 786                            |       | 4.81 |   | 57,115 |   | 574 |   | 4.03 |   |
| Certificates  of deposit                            |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| less  than $100,000                                 |       | 67,490                      |       | 780                            |       | 4.64 |   | 58,427 |   | 545 |   | 3.74 |   |
| Short-term  borrowings                              |       | —                      |       | —                         |       | — |   | 450 |   | 7 |   | 6.24 |   |
| Long-term  borrowings                               |       | 3,571                       |       | 41                             |       | 4.61 |   | 250 |   | 5 |   | 8.02 |   |
| Junior  subordinated debentures                     |       | 6,186                       |       | 101                            |       | 6.55 |   | — |   | — |   | — |   |
|  Total interest-bearing liabilities            |       | 190,862                     |       | 1,938                          |       | 4.07 |   | 164,658 |   | 1,355 |   | 3.30 |   |
| Noninterest-bearing  deposits                       |       | 33,365                      |       |                           |       |   |   | 34,166 |   |   |   |   |   |
| Noninterest-bearing  liabilities                    |       | 598                         |       |                           |       |   |   | 584 |   |   |   |   |   |
| Total  liabilities                                  |       | 224,825                     |       |                           |       |   |   | 199,408 |   |   |   |   |   |
| Total  shareholders’ equity                    |       | 18,588                      |       |                           |       |   |   | 16,662 |   |   |   |   |   |
| Total  liabilities and shareholders’  equity   |       | $                           | 243,413    |                           |       |   |   |   | $ | 216,070 |   |   |   |   |   |
| Net  interest income                                |       |                        |       | $                              | 2,124      |   |   |   |   |   | $ | 2,125 |   |   |   |
| Net  interest spread                                |       |                        |       |                           |       | 2.85 | % |   |   |   |   | 3.34 | % |
| Net interest margin                                 |       |                        |       |                           |       | 3.62 | % |   |   |   |   | 4.06 | % |

----

(1)             Yieldson securities available-for-sale have been calculated on the basis ofhistorical cost and do not give effect to changes in the fair value of thosesecurities, which is reflected as a component of shareholders’ equity.

(2)Presented                             on a taxable-equivalentbasis using the statutory federal income tax rate of 34%.  Taxable-equivalent adjustments of $51,000 in2007 and $36,000 in 2006 are included in the calculation of the tax-exemptinvestment interest income.

(3)             Presentedon a taxable-equivalent basis using the statutory federal income tax rate of34%.  Taxable-equivalent adjustments of$14,000 in 2007 and $4,000 in 2006 are included in the calculation of the loaninterest income.  Net loan originationincome in interest income totaled $9,000 in 2007 and $3,000 in 2006.

16

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| **Six Months Ended June 30,** | ** ** | **2007**                    | ** ** | **2006**                       | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|
| **(dollars in thousands)**              | ** ** | **Average  daily  balance** | ** ** | **Interest  Income/  Expense** | ** ** | **Average  Yield/  rate** | ** ** | **Average  daily  balance** | ** ** | **Interest  Income/  Expense** | ** ** | **Average  Yield/  rate** | ** ** |
| Assets                                            |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| Interest-earning assets:                          |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| Federal funds sold                                |       | $                           | 8,552      |                           | $          | 224 |   | 5.28 | % | $ | 14,068 |   | $ | 330 |   | 4.73 | % |
| Interest bearing deposits in  other banks         |       | 5,270                       |       | 139                            |       | 5.32 |   | 5,518 |   | 129 |   | 4.71 |   |
| Investment securities (1):                        |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| Taxable                                           |       | 21,515                      |       | 502                            |       | 4.71 |   | 20,316 |   | 429 |   | 4.26 |   |
| Tax-exempt (2)                                    |       | 9,822                       |       | 300                            |       | 6.16 |   | 5,259 |   | 156 |   | 5.98 |   |
| Loans (3)                                         |       | 183,241                     |       | 6,680                          |       | 7.35 |   | 159,544 |   | 5,630 |   | 7.12 |   |
| Total interest-earning assets                     |       | 228,400                     |       | 7,845                          |       | 6.93 |   | 204,705 |   | 6,674 |   | 6.57 |   |
| Noninterest-earning assets                        |       | 8,220                       |       |                           |       |   |   | 6,104 |   |   |   |   |   |
| Total assets                                      |       | $                           | 236,620    |                           |       |   |   |   | $ | 210,809 |   |   |   |   |   |
|                                              |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| Liabilities and Shareholders’ Equity         |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                     |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| NOW accounts                                      |       | $                           | 12,633     |                           | 11         |   | 0.18 | % | $ | 13,712 |   | 12 |   | 0.18 | % |
| Savings accounts                                  |       | 2,799                       |       | 7                              |       | 0.50 |   | 2,780 |   | 7 |   | 0.51 |   |
| Money market accounts                             |       | 31,719                      |       | 432                            |       | 2.75 |   | 31,269 |   | 404 |   | 2.61 |   |
| Certificates of deposit$100,000  or more          |       | 64,137                      |       | 1,512                          |       | 4.75 |   | 54,661 |   | 1,074 |   | 3.96 |   |
| Certificates of depositless  than $100,000        |       | 65,925                      |       | 1,508                          |       | 4.61 |   | 58,070 |   | 1,048 |   | 3.64 |   |
| Short-term borrowings                             |       | 62                          |       | 2                              |       | 6.51 |   | 450 |   | 14 |   | 6.27 |   |
| Long-term borrowings                              |       | 1,796                       |       | 41                             |       | 4.60 |   | 250 |   | 10 |   | 8.07 |   |
| Junior subordinated debentures                    |       | 6,186                       |       | 202                            |       | 6.58 |   | — |   | — |   | — |   |
| Total interest-bearing  liabilities               |       | 185,257                     |       | 3,715                          |       | 4.04 |   | 161,192 |   | 2,569 |   | 3.21 |   |
| Noninterest-bearing deposits                      |       | 32,378                      |       |                           |       |   |   | 32,570 |   |   |   |   |   |
| Noninterest-bearing liabilities                   |       | 614                         |       |                           |       |   |   | 599 |   |   |   |   |   |
| Total liabilities                                 |       | 218,249                     |       |                           |       |   |   | 194,361 |   |   |   |   |   |
| Total shareholders’ equity                   |       | 18,371                      |       |                           |       |   |   | 16,448 |   |   |   |   |   |
| Total liabilities and  shareholders’  equity |       | $                           | 236,620    |                           |       |   |   |   | $ | 210,809 |   |   |   |   |   |
| Net interest income                               |       |                        |       | $                              | 4,130      |   |   |   |   |   | $ | 4,105 |   |   |   |
| Net interest spread                               |       |                        |       |                           |       | 2.89 | % |   |   |   |   | 3.36 | % |
| Net  interest margin                              |       |                        |       |                           |       | 3.65 | % |   |   |   |   | 4.04 | % |

----

(1)             Yieldson securities available-for-sale have been calculated on the basis ofhistorical cost and do not give effect to changes in the fair value of thosesecurities, which is reflected as a component of shareholders’ equity.

(2)Presented                             on a taxable-equivalentbasis using the statutory federal income tax rate of 34%.  Taxable-equivalent adjustments of $102,000 in2007 and $53,000 in 2006 are included in the calculation of the tax-exemptinvestment interest income.

(3)             Presentedon a taxable-equivalent basis using the statutory federal income tax rate of34%.  Taxable-equivalent adjustments of$21,000 in 2007 and $7,000 in 2006 are included in the calculation of the loaninterest income.  Net loan originationincome in interest income totaled $19,000 in 2007 and $10,000 in 2006.

17

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**Rate/VolumeAnalysis**

The followingtables indicate the changes in interest income and interest expense that areattributable to changes in average volume and average rates, in comparison withthe same period in the preceding year on a fully taxable equivalent basis.  The change in interest due to the combinedrate-volume variance has been allocated entirely to the change in rate.
| ** **                                 | ** ** | **Three Months  Ended   June 30,  2007 compared to 2006** | ** ** | **Six Months Ended June 30,  2007 compared** | ** ** |
|--------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| **(dollars in thousands)**       | ** ** | **Increase  (decrease)  due to**                                                   | ** ** | **Net  Increase**                                                     | ** ** | **Increase  (decrease)   Due to** | ** ** | **Net  Increase** | ** ** |
| ** **                                 | ** ** | **Volume**                                                                                   | ** ** | **Rate(1)**                                                           | ** ** | **(decrease)** | ** ** | **Volume** | ** ** | **Rate(1)** | ** ** | **(decrease)** | ** ** |
| Interest income                            |       |                                                                                         |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Interest-earning  assets:                  |       |                                                                                         |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Federal funds sold                         |       | $                                                                                            | (66        | )                                                                     | $          | 6 |   | $ | (60 | ) | $ | (130 | ) | $ | 24 |   | $ | (106 | ) |
| Interest-bearing deposits in other banks   |       | (11                                                                                          | )          | 7                                                                     |       | (4 | ) | (6 | ) | 16 |   | 10 |   |
| Investment securities:                     |       |                                                                                         |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Taxable                                    |       | 16                                                                                           |       | 23                                                                    |       | 39 |   | 26 |   | 47 |   | 73 |   |
| Tax-exempt                                 |       | 43                                                                                           |       | 2                                                                     |       | 45 |   | 136 |   | 8 |   | 144 |   |
| Loans                                      |       | 487                                                                                          |       | 75                                                                    |       | 562 |   | 843 |   | 207 |   | 1,050 |   |
| Total interest income                      |       | 469                                                                                          |       | 113                                                                   |       | 582 |   | 869 |   | 302 |   | 1,171 |   |
|                                       |       |                                                                                         |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Interest expense                           |       |                                                                                         |       |                                                                  |       |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:             |       |                                                                                         |       |                                                                  |       |   |   |   |   |   |   |   |   |
| NOW accounts                               |       | —                                                                                       |       | (1                                                                    | )          | (1 | ) | — |   | (1 | ) | (1 | ) |
| Savings accounts                           |       | —                                                                                       |       | —                                                                |       | — |   | — |   | — |   | — |   |
| Money market accounts                      |       | 7                                                                                            |       | —                                                                |       | 7 |   | 6 |   | 22 |   | 28 |   |
| Certificates of deposit $100,000 or more   |       | 86                                                                                           |       | 126                                                                   |       | 212 |   | 188 |   | 250 |   | 438 |   |
| Certificates of deposit less than $100,000 |       | 85                                                                                           |       | 150                                                                   |       | 235 |   | 143 |   | 317 |   | 460 |   |
| Short-term borrowings                      |       | (7                                                                                           | )          | —                                                                |       | (7 | ) | (12 | ) | — |   | (12 | ) |
| Long-term borrowings                       |       | 67                                                                                           |       | (31                                                                   | )          | 36 |   | 62 |   | (31 | ) | 31 |   |
| Junior subordinated debentures             |       | 101                                                                                          |       | —                                                                |       | 101 |   | 202 |   | — |   | 202 |   |
| Total interest  expense                    |       | 339                                                                                          |       | 244                                                                   |       | 583 |   | 589 |   | 557 |   | 1,146 |   |
| Net interest income                        |       | $                                                                                            | 130        |                                                                  | $          | (131 | ) | $ | (1 | ) | $ | 280 |   | $ | (255 | ) | $ | 25 |   |

----

(1)             Thevolume/rate variance is allocated entirely to change in rates.

## **Net Interest Income**

Net interest income is generated from the Company’s lending andinvestment activities, 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. The Company primarily utilizes deposits to fund loans and investments,with a small amount of additional funding from junior subordinated debenturesand minimal short term borrowings, in future periods it may utilize a higherlevel of short-term borrowings, including borrowings from the Federal Home LoanBank, federal funds lines with correspondent banks and repurchase agreements,to fund operations, depending on economic conditions, deposit availability andpricing, interest rates and other factors.

## **ThreeMonths Ended June 30, 2007 and 2006**

The net interest income (on ataxable-equivalent basis) was $2.12 million in 2007 and 2006.  The increase in interest income was offsetentirely by the increase in interest expense. Average earning assets increased by $25.22 million, or 12.00%, sinceJune 30, 2006.  The yield on earningassets in 2007 increased to 6.92% from 6.64% in 2006.  This increase in yield is attributable to thehigher ratio of average loans to average interest-earning assets in 2007compared to 2006.  However, the increaseby 77 basis points in the rate paid on interest-bearing liabilities, primarilya result of the issuance of junior subordinated debentures in December 2006,the repricing of maturing certificates of deposit with higher rates and stiffcompetition for deposits, offset the increase in yield on interest earning assets.  The Company’s net interest margin was 3.62%and 4.06%, and the net interest spread was 2.85% and 3.34%, for the three-monthperiods ended June 30, 2007 and 2006, respectively.  This decrease relates primarily to theincreased costs of funds as a result of more funding of higher costscertificates of deposit and the reduced average balances of the low cost titlecompany deposits.

18

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The interest expense increased 43.03% from$1.36 million in 2006 to $1.94 million in 2007 due to the 15.91% increase in volumeof average interest-bearing liabilities, along with the increase in the relatedrates paid on such interest-bearing liabilities, which increased to 4.07% in2007 from 3.30% in 2006.

##                 **Six Months Ended June 30, 2007 and 2006**

The net interest income (on ataxable-equivalent basis) of $4.13 million in 2007 was $25,000, or 0.61% higherthan the amount recognized in 2006.  Thisslight increase in net interest income is primarily due to the growth inaverage earning assets offset mostly by the increased volume ofinterest-bearing liabilities and an increase in the rates paid.  Average earning assets increased by $23.70million, or 11.58%, since June 30, 2006. The yield on earning assets in 2007 increased to 6.93% from 6.57% in2006.  This increase in yield isattributable to the higher ratio of average loans to average interest-earningassets in 2007 compared to 2006. However, the increase by 83 basis points in the rate paid oninterest-bearing liabilities, primarily a result of the issuance of juniorsubordinated debentures in December 2006, the repricing of maturingcertificates of deposit with higher rates and stiff competition for deposits,partially offset the increase in yield on interest earning assets.  The Company’s net interest margin was 3.65%and 4.04%, and the net interest spread was 2.89% and 3.36%, for the six-monthperiods ended June 30, 2007 and 2006, respectively.  This decrease relates primarily to theincreased costs of funds as a result of more funding of higher costscertificates of deposit and the reduced average balances of the low cost titlecompany deposits.

The interest expense increased 44.61% from$2.57 million in 2006 to $3.72 million in 2007 due to the 14.93% increase involume of average interest-bearing liabilities, along with the increase in therelated rates paid on such interest-bearing liabilities, which increased to4.04% in 2007 from 3.21% in 2006.

The Company has seen the volume ofcertificates of deposit increase over the past year from an average of totaldeposits at June 30, 2006 of 55.02% to 61.84% at June 30, 2007.

# **Noninterest Income**

Noninterest income was $97,000 and $74,000 for the three-month periodsended June 30, 2007 and 2006, respectively and $183,000 and $159,000 for thesix-month periods June 30, 2007 and 2006, respectively.  The most significant increase relates to NSFfees which increased $8,000 for the three month period and $14,000 for the sixmonth period.

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

## **Noninterest Expense**

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

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

Noninterest expense amounted to $1.55 millionand $1.30 million for the three-month periods in 2007 and 2006,respectively.  The changes in noninterestexpense are principally related to an increase in personnel costs.  Salaries expense in 2007 was $791,000, up$128,000 from the salaries expense incurred in the same period in 2006.  This increase of 19.31% is for the additionalcosts of adding seventeen (17) new employees for the new branches and backoffice positions along with employee pay increases.  However, the personnel expenses have alsobeen favorably impacted by the reduced bonus accrual in 2007 of $26,000compared to $99,000 in 2006.

**SixMonths Ended June 30, 2007 and 2006**

Noninterest expense amounted to $3.05 millionand $2.49 million for the six-month periods in 2007 and 2006,respectively.  The changes in noninterestexpense are principally related to an increase in personnel costs.  Salaries expense in 2007 was $1.55 million,up $323,000 from the salaries expense incurred in the same period in 2006.  This increase of 26.28% is for the additionalcosts of adding seventeen (17) new employees for the new branches and backoffice positions along with employee pay increases.  However, the personnel expenses have alsobeen favorably impacted by the reduced bonus accrual in 2007 of $39,000compared to $182,000 in 2006.  Thereduced bonus accrual is the result of lower earnings in 2007 compared to 2006.

19

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**IncomeTaxes**

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

During the threemonths ended June 30, 2007, the Company incurred $147,000 of income tax expensecompared to $284,000 during the same period in 2006.  The effective tax rates for these three-monthperiods in 2007 and 2006 were 30.50% and 35.63%.  The effective tax rate for 2007 has beenpositively impacted by the addition of tax-free municipal securities to theCompany’s investment portfolio during 2006.

**SixMonths Ended June 30, 2007 and 2006**

During the sixmonths ended June 30, 2007, the Company incurred $288,000 of income tax expensecompared to $605,000 during the same period in 2006.  The effective tax rates for these six-monthperiods in 2007 and 2006 were 30.44% and 37.88%.  The effective tax rate for 2007 has beenpositively impacted by the addition of tax-free municipal securities to theCompany’s investment portfolio during 2006.

 **Market Risk, Liquidity andInterest Rate Sensitivity**

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

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

The Company seeksto limit the risks associated with interest rate fluctuations by managing thebalance between interest sensitive assets and liabilities.  Managing to mitigate interest rate risk is,however, not an exact science.  Not onlydoes the interval until repricing of interest rates on assets and liabilitieschange from day to day as the assets and liabilities change, but for someassets and liabilities, contractual maturity and the actual maturityexperienced are not the same.  Similarly,NOW and money market accounts, by contract, may be withdrawn in their entiretyupon demand and savings deposits may be withdrawn on seven days notice.  While these contracts are extremely short, itis the Company’s belief that these accounts turn over at the rate of fivepercent (5%) per year. The Company therefore treats them as having maturitiesstaggered over all periods.  If all ofthe Company’s NOW, money market, and savings accounts were treated as repricingin one year or less, the cumulative gap at one year or less would be $(89.02)million.

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

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

20

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It is important tonote that the following table represents the static gap position for interestsensitive assets and liabilities at June 30, 2007.  The table does not give effect to prepaymentsor extensions of loans as a result of changes in general market interest rates.  Moreover, while the table does indicate theopportunities to reprice assets and liabilities within certain time frames, itdoes not account for timing differences that occur during periods ofrepricing.  For example, changes todeposit rates tend to lag in a rising rate environment and lead in a fallingrate environment.

**InterestRate Sensitivity Gap Analysis**

**June30, 2007**

 
| ** **                                            | ** ** | **Expected Repricing or Maturity Date** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| **(dollars in thousands)**                  | ** ** | **Within  One Year**                                   | ** ** | **One to  Three Years** | ** ** | **Three to  Five Years** | ** ** | **After  Five Years** | ** ** | **Total** | ** ** |
| Assets                                                | ** ** | ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Federal funds  sold                                   |       | $                                                           | 15,840     |   | $ | — |   | $ | — |   | $ | — |   | $ | 15,840 |   |
| Interest-bearing  deposits in other banks             |       | 371                                                         |       | — |   | — |   | — |   | 371 |   |
| Investment  securities (1)                            |       | 2,279                                                       |       | 5,888 |   | 1,794 |   | 17,785 |   | 27,746 |   |
| Loans                                                 |       | 65,844                                                      |       | 54,543 |   | 55,280 |   | 23,736 |   | 199,403 |   |
| Total  interest-earning assets                        |       | 84,334                                                      |       | 60,431 |   | 57,074 |   | 41,521 |   | 243,360 |   |
|                                                  | ** ** | ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Liabilities                                           |       |                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Savings and NOW  accounts                             |       | 866                                                         |       | 1,733 |   | 1,733 |   | 12,993 |   | 17,325 |   |
| Money Market  accounts                                |       | 1,735                                                       |       | 3,469 |   | 3,469 |   | 26,017 |   | 34,690 |   |
| Certificates of  deposit                              |       | 121,342                                                     |       | 15,367 |   | 382 |   | — |   | 137,091 |   |
| Long-term  borrowings                                 |       | —                                                      |       | 5,000 |   | — |   | — |   | 5,000 |   |
| Junior  subordinated debentures                       |       | —                                                      |       | — |   | 6,186 |   | — |   | 6,186 |   |
| Total  interest-bearing liabilities                   |       | 123,943                                                     |       | 25,569 |   | 11,770 |   | 39,010 |   | 200,292 |   |
| Interest rate  sensitivity gap                        |       | $                                                           | (39,609    | ) | $ | 34,862 |   | $ | 45,304 |   | $ | 2,511 |   | $ | 43,068 |   |
| Cumulative  interest rate sensitivity gap             |       | $                                                           | (39,609    | ) | $ | (4,747 | ) | $ | 40,557 |   | $ | 43,068 |   |   |   |
| Cumulative gap ratio as  a percentage of total assets |       | (15.57                                                      | )%         | (1.87 | )% | 15.95 | % | 16.93 | % |   |   |

----

(1)             Excludesequity securities.

In addition to theInterest Rate Sensitivity Gap Analysis, the Company also uses an earningssimulation model on a quarterly basis to closely monitor interest sensitivityand to expose its balance sheet and income statement to differentscenarios.  The model is based on currentCompany data and adjusted by assumptions as to growth patterns, noninterestincome and noninterest expense and interest rate sensitivity, based onhistorical data, for both assets and liabilities projected for a one-yearperiod.  The model is then subjected to a“shock test” assuming a sudden interest rate increase of 200 basis points or adecrease of 200 basis points, but not below zero.  The results show that with a 200 basis pointrise in interest rates the Company’s net interest income would decline by22.44%.  With a decrease in interestrates of 200 basis points the Company’s net interest income would increase by19.42%.

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

**CriticalAccounting Policy:**

**Allowancefor Loan Losses**

The Company makesprovisions for loan losses in amounts deemed necessary to maintain theallowance for loan losses at an appropriate level.  The Company’s provision for loan losses forthe three months ended June 30, 2007 and 2006 was $125,000 and $60,000,respectively and for the six months ended June 30, 2007 and 2006 was $191,000and $120,000, respectively.  The loangrowth was $25.45 million since December 31, 2006 and $15.67 million sinceMarch 31, 2007 compared to $8.68 million for the first six months of 2006.  The provision for loan losses is determinedbased upon Management’s estimate of the amount required to maintain an adequateallowance for loan losses reflective of the risks in the Company’s loanportfolio.  For the three months endedJune 30, 2007, the Company determined that it needed to increase the provisionfrom the prior quarter due to the additional loan volume and increased riskfrom of a slowing real estate market.  At June 30, 2007 and December 31, 2006, the allowance for loan losseswas $2.35 million and $2.17 million, respectively.

21

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The Company prepares aquarterly analysis of the allowance for loan losses, with the objective ofquantifying portfolio risk into a dollar amount of inherent losses.  The determination of the allowance for loanlosses is based on eight qualitative factors and one quantitative factor foreach category and type of loan along with any specific allowance for adverselyclassified loans within each category. Each factor is assigned a percentage weight and that total weight isapplied to each loan category.  Factorsare different for each category. Qualitative factors include: levels and trends in delinquencies andnonaccrual loans; trends in volumes and terms of loans; effects of any changesin lending policies, the experience, ability and depth of management; nationaland local economic trends and conditions; concentrations of credit; quality ofthe Company’s loan review system; and regulatory requirements.  The total allowance required thus changes asthe percentage weight assigned to each factor increased or decreased due to theparticular circumstances, as the various types and categories of loans changeas a percentage of total loans and as specific allowances are required due toincreases in adversely classified loans.

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

The Company’s allowance forloan losses has three basic components: the specific allowance, the formulaallowance and the pooled allowance.  Eachof these components is determined based upon estimates that can and do changewhen the actual events occur.  As aresult of the uncertainties inherent in the estimation process, Management’sestimate of loan losses and the related allowance could change in the nearterm.

The specific allowancecomponent is used to individually establish an allowance for loans identifiedfor impairment testing.  When impairmentis identified, a specific reserve may be established based on the Company’scalculation of the estimated loss embedded in the individual loan.  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.  Large groups of smallerbalance, homogeneous loans are collectively evaluated for impairment.Accordingly, the Company does not separately identify individual consumer andresidential loans for impairment.   AtJune 30, 2007 there were no loans deemed to be impaired.

The formula allowancecomponent is used for estimating the loss on internally risk rated loans andthose loans identified for impairment testing. The loans meeting the Company’s internal criteria for classification,such as special mention, substandard, doubtful and loss are segregated fromperforming loans within the portfolio. These internally classified loans arethen grouped by loan type (commercial, commercial real estate, commercialconstruction, residential real estate, residential construction orinstallment).  Each loan type is assignedan allowance factor based on Management’s estimate of the associated risk,complexity and size of the individual loans within the particular loancategory. Classified loans are assigned a higher allowance factor thannon-classified loans due to Management’s concerns regarding collectability orManagement’s knowledge of particular elements surrounding the borrower.Allowance factors increase with the worsening of the internal risk rating.

The pooled formula componentis used to estimate the losses inherent in the pools of non-classifiedloans.  These loans are then alsosegregated by loan type and allowance factors are assigned by Management basedon delinquencies, loss history, trends in volume and terms of loans, effects ofchanges in lending policy, the experience and depth of Management, national andlocal economic trends, concentrations of credit, quality of loan review systemand the effect of external factors (i.e. competition and regulatoryrequirements).  The allowance factorsassigned differ by loan type.

Allowance factors andoverall size of the allowance may change from period to period based onManagement’s assessment of the above-described factors and the relative weightsgiven to each factor.  In addition,various regulatory agencies periodically review the allowance for loanlosses.  These agencies may require theBank to make additions to the allowance for loan losses based on theirjudgments of collectibility based on information available to them at the timeof their examination.

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

 

22

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** **

As ofJune 30, 2007, the real estate loan portfolio constituted 87% of the total loanportfolio.  While this exceeds the 10%threshold for determining a concentration of credit risk within an industry, wedo not consider this to be a concentration with adverse risk characteristicsgiven the diversity of borrowers within the real estate portfolio and othersources of repayment.  An industry forthis purpose is defined as a group of counterparties that are engaged in similaractivities and have similar economic characteristics that would cause theirability to meet contractual obligations to be similarly affected by changes ineconomic or other conditions. Additionally, the loan portfolio does not include concentrations ofcredit risk in loan products that permit the deferral of principal paymentsthat are smaller than normal interest accruals (negative amortization); loanswith high loan-to-value ratios; or loans, such as option adjustable-ratemortgages, that may expose the borrower to future increases in repayments thatare in excess of increases that would result solely from increases in marketinterest rates.   The Company hasinterest only home equity lines of credit with outstanding balances of $5.46million of at June 30, 2007.
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **(dollars in thousands)**          | ** ** | **June 30,  2007**          | ** ** | **June 30,  2006**        | ** ** | **June 30,  2007** | ** ** | **June 30,  2006** | ** ** |
| Balance at beginning of  period               |       | $                                | 2,226      |                           | $          | 2,013 |   | $ | 2,166 |   | $ | 1,953 |   |
| Provision charged to  operating expenses      |       | 125                              |       | 60                             |       | 191 |   | 120 |   |
| Recoveries of loans  previously charged-off   |       | —                           |       | —                         |       | — |   | — |   |
| Loans charged-off -  consumer                 |       | —                           |       | —                         |       | (6 | ) | — |   |
| Balance at end of  period                     |       | $                                | 2,351      |                           | $          | 2,073 |   | $ | 2,351 |   | $ | 2,073 |   |
| Average total loans outstanding during period |       | $                                | 189,013    |                           | $          | 161,916 |   | $ | 183,241 |   | $ | 159,544 |   |

 

The allocation of the allowance, presented in the following table, isbased primarily on the factors discussed above in evaluating the adequacy ofthe allowance as a whole.  Since all ofthose factors are subject to change, the allocation is not necessarilyindicative of the category of recognized loan losses, and does not restrict theuse of the allowance to absorb losses in any category.
| **Allocation of Allowance for Loan Losses**        | *** *** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------|--------------|-------------------|------------|-----------------------|------------|
| ** **                                                                  | *** *** | **2007**          | ** ** | **% of  Loans**  | ** ** | **2006** | ** ** | **% of  Loans** | ** ** |
| Real  estate-construction                                                   |         | $                 | 276        |                  | 23         | % | $ | 218 |   | 17 | % |
| Real estate-mortgage                                                        |         | 1,543             |       | 64                    | %          | 1,529 |   | 67 | % |
| Commercial and  industrial loans                                            |         | 478               |       | 12                    | %          | 400 |   | 14 | % |
| Loans to individuals  for household, family and other personal expenditures |         | 54                |       | 1                     | %          | 39 |   | 2 | % |
|                                                                        |         | $                 | 2,351      |                  | 100        | % | $ | 2,166 |   | 100 | % |

 
| ** **                                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| Nonaccrual loans                           |       | $                 | 165        |                  | $          | 60 |   |
| Loans 90 days  past due and still accruing |       | —            |       | —                |       |
|  Total nonperforming loans            |       | 165               |       | 60                    |       |
| Other real  estate owned                   |       | —            |       | —                |       |
|  Total nonperforming assets           |       | $                 | 165        |                  | $          | 60 |   |
| Nonperforming assets to  total assets      |       | 0.06              | %          | 0.03                  | %          |

 

There were noother interest-bearing assets at June 30, 2007 or December 31, 2006 classifiedas past due 90 days or more and still accruing, restructured or problem assets,and no loans which were currently performing in accordance with their terms,but as to which information known to Management caused it to have seriousdoubts about the ability of the borrower to comply with the loan as currentlywritten.

**Off-Balance Sheet Arrangements**

The Company is aparty to financial instruments with off-balance sheet risk in the normal courseof business to meet the financing needs of its customers.  These financial instruments includecommitments 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 consolidated statements of financialcondition.  With the exception 

23

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of theseinstruments and the Company’s obligations relating to its trust preferredsecurities, the Company does not have any off balance sheet arrangements thathave or are reasonably likely to have a current or future effect on the Company’sfinancial condition, revenues or expenses, results of operations, liquidity,capital expenditures or capital resources that is material to investors.

Commitments to extend credit and standby letters ofcredit as of June 30, 2007 were as follows:

|                                                                                                                | ** ** | **June 30,**             | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                     | ** ** | **2007**                      | ** ** |
| **(dollars in thousands)**                                                                           | ** ** | **Contractual   Amount** | ** ** |
| Financial  instruments whose notional or contract amounts represent credit risk:  Commitments to extend credit |       | $                             | 41,888     |   |
| Standby letters  of credit                                                                                     |       | 3,286                         |       |
| Total                                                                                                          |       | $                             | 45,174     |   |

 

See Note 9 to the Notes to the Consolidated Financial Statementsincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2006 for additional information regarding the Company’s long-termlease obligations.

**CapitalResources**

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

TheBank is subject to various regulatory capital requirements administered by thefederal banking agencies.  The Companywill be subject to such requirements when its assets exceed $500 million, ithas publicly issued debt or it engages in certain highly leveragedactivities.  Failure to meet minimumcapital requirements can initiate certain mandatory - and possibly additionaldiscretionary - actions by regulators that, if undertaken, could have a directmaterial effect on the Company’s consolidated financial statements.

Undercapital adequacy guidelines and the regulatory framework for prompt correctiveaction, the Bank must meet specific capital guidelines that involvequantitative measures of the Bank’s assets, liabilities, and certainoff-balance-sheet items as calculated under regulatory accountingpractices.  The Bank’s capital amountsand classification are also subject to qualitative judgments by the regulatorsabout components, risk weightings, and other factors.

Quantitativemeasures established by regulation to ensure capital adequacy require the Bankto maintain minimum amounts and ratios of total and Tier 1 capital (as definedin the regulations) to risk-weighted assets (as defined), and Tier 1 capital(as defined) to average assets (as defined). Management believes that the Bank met all capital adequacy requirementsto which it is subject as of June 30, 2007 and that the Company would meet suchrequirements if applicable.  See Note 10to the consolidated financial statements for a table depicting compliance withregulatory capital requirements.

As of June 30,2007, 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 10.  There are no conditions or events since thatnotification which management believes have changed the Bank’s category.

On June 26, 2007,the Company authorized the repurchase of up to 146,000 shares of its commonstock, for an aggregate expenditure of not more than $4.5 million, through June30, 2012, or earlier termination of the program by the Board of Directors.  Repurchases, if any, by the Company pursuantto this authorization are expected to enable the Company to repurchase itsshares at an attractive price, and to provide a source of liquidity for theCompany’s shares.  As of June 30, 2007,there have been no shares repurchased by the Company.

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## **Inflation**

The effect of changing prices on financialinstitutions is typically different than on non-banking companies sincevirtually all of a Company’s assets and liabilities are monetary in nature. Inparticular, interest rates are significantly affected by inflation, but neitherthe timing nor magnitude of the changes are directly related to price levelindices; therefore, the Company can best counter inflation over the long termby managing net interest income and controlling net increases in noninterestincome and expenses.

###### **Item3.  Quantitative and QualitativeDisclosures About Market Risk**

See “Market Risk, Liquidity and Interest Rate Sensitivity” at Page 20.

###### **Item 4.    Controls and Procedures**

## The Company’s management, under thesupervision and with the participation of the Company’s Chief Executive Officerand Chief Financial Officer, evaluated, as of the last day of the periodcovered by this report, the effectiveness of the design and operation of theCompany’s disclosure controls and procedures, as defined in Rule 13a-15(e)under the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and 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 June30, 2007 that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

## **PART II — Other Information**

**Item 1.    Legal Proceedings.  None**

**Item 1A. Risk Factors   There have been nomaterial changes to the risk factors as of June 30, 2007 from those disclosedin the Company’s 2006 Annual Report on Form 10-K.**

**Item 2     Unregistered Sales ofEquity Securities and Use of Proceeds**

(a)   *Sales of Unregistered Securities. *None

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

(c)   *Registrant**Purchasesof Securities*

Thefollowing table provides information on the Company’s purchases of its commonstock during the quarter ended June 30, 2007.
| **Period**       | ** ** | **Total Number of   Shares Purchased** | ** ** | **Average Price Paid   per Share** | ** ** | **Total Number of   Shares Purchased as   Part of Publicly   Announced Plans or   Programs(1)** | ** ** | **Maximum Number of   Shares that may yet be   Purchased Under the   Plans or Programs** | ** ** |
|------------------|------------|------------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| April 1-30, 2006 |       | 0                                                          |       | N/A                                                    |       | 0                                                                                                                                                           |       | 0                                                                                                                                                         |       |
| May 1-31, 2007   |       | 0                                                          |       | N/A                                                    |       | 0                                                                                                                                                           |       | 0                                                                                                                                                         |       |
| June 1-30, 2007  |       | 0                                                          |       | N/A                                                    |       | 0                                                                                                                                                           |       | 146,000                                                                                                                                                   | (2)        |

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

(2)             Subjectto a maximum expenditure of $4.5 million. Number of shares indicated is the remaining number of shares authorizedfor repurchase as of the end of the indicated period.

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**Item 3.****           Defaultsupon Senior Securities.  None**

**Item 4.    Submission of Mattersto a Vote of Security Holders**

On April 10, 2007, the annual meeting of shareholdersof the Company was held for the purpose of electing eleven (11) directors toserve until the next annual meeting and until their successors are duly electedand qualified.

The name of each directorelected at the meeting, and the votes cast for such persons, who constitute theentire Board of Directors in office following the meeting, are set forth below:
| **DIRECTOR**            | ** ** | **FOR**   | ** ** | **WITHHOLD** | ** ** | **BROKER   NON-VOTES** | ** ** |
|-------------------------|------------|-----------|------------|--------------|------------|-----------------------------|------------|
| Emil D. Bennett         |       | 1,035,263 |       | 2,500        |       | None                        |       |
| John N. Burdette        |       | 1,035,263 |       | 2,500        |       | None                        |       |
| John Denham Crum        |       | 1,035,263 |       | 2,500        |       | None                        |       |
| George E.  Dredden, Jr. |       | 1,035,263 |       | 2,500        |       | None                        |       |
| William S. Fout         |       | 1,035,263 |       | 2,500        |       | None                        |       |
| Helen G. Hahn           |       | 1,035,263 |       | 2,500        |       | None                        |       |
| William J.  Kissner     |       | 1,035,263 |       | 2,500        |       | None                        |       |
| Martin S. Lapera        |       | 1,035,263 |       | 2,500        |       | None                        |       |
| Kenneth G.  McCombs     |       | 1,034,513 |       | 3,250        |       | None                        |       |
| Farhad  Memarsadeghi    |       | 1,031,613 |       | 6,150        |       | None                        |       |
| Raymond Raedy           |       | 1,035,263 |       | 2,500        |       | None                        |       |

 

**Item 5.****           OtherInformation**

(a)          Information which should have been reported onForm 8-K.  None

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

 

26

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** **

**Item6.  Exhibits**
| Exhibit No. | ** ** | **Description of Exhibits**                                                                                                                                                                                                          |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3(a)        |       | Articles of Incorporation of the Company, as  amended(1)                                                                                                                                                                             |
| 3(b)        |       | Bylaws of the Company(2)                                                                                                                                                                                                             |
| 4(a)        |       | Indenture, dated as of December 15, 2006 between  Frederick County Bancorp, Inc. and U.S. Bank National Association, as  trustee(3)                                                                                                  |
| 4(b)        |       | Amended and Restated Declaration of Trust, dated as  December 15, 2006 between Frederick County Bancorp, Inc. and U.S. Bank  National Association, as trustee, and Martin S. Lapera and William R. Talley,  Jr. as Administrators(3) |
| 4(c)        |       | Guarantee Agreement dated as of December 15, 2006  between Frederick County Bancorp, Inc. and U.S. Bank National Association, as  Guarantee Trustee(3)                                                                               |
| 10(a)       |       | 2001 Stock Option Plan(4)                                                                                                                                                                                                            |
| 10(b)       |       | Employment Agreement between the Bank and Martin S.  Lapera(5)                                                                                                                                                                       |
| 10(c)       |       | Employment Agreement between the Bank and William R.  Talley, Jr. (6)                                                                                                                                                                |
| 10(d)       |       | Consulting Agreement between the Bank and Raymond  Raedy (7)                                                                                                                                                                         |
| 10(e)       |       | 2002 Executive and Director Deferred Compensation  Plan (8)                                                                                                                                                                          |
| 10(f)       |       | Amendment No. 1 to the 2002 Executive and Director  Deferred Compensation Plan (8)                                                                                                                                                   |
| 10(g)       |       | Loan Agreement with Atlantic Central Bankers Bank(9)                                                                                                                                                                                 |
| 10(h)       |       | Promissory Note with Atlantic Central Bankers Bank  (9)                                                                                                                                                                              |
| 11          |       | Statement Regarding Computation of Per Share Income  — Please refer to Note 2 to the unaudited consolidated financial statements  included herein                                                                               |
| 31(a)       |       | Certification of Martin S. Lapera, President and  Chief Executive Officer                                                                                                                                                            |
| 31(b)       |       | Certification of William R. Talley, Jr., Executive  Vice President and Chief Financial Officer                                                                                                                                       |
| 32(a)       |       | Certification of Martin S. Lapera, President and  Chief Executive Officer                                                                                                                                                            |
| 32(b)       |       | Certification of William R. Talley, Jr., Executive  Vice President and Chief Financial Officer                                                                                                                                       |

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(1)             Incorporated byreference to exhibit of the same number to the Company’s Quarterly Report onForm 10-QSB for the quarter ended March 31, 2004, as filed with the Securitiesand Exchange Commission.

(2)             Incorporated byreference to exhibit of the same number to the Company’s Quarterly Report on Form10-QSB for the quarter ended September 30, 2003, as filed with the Securitiesand Exchange Commission.

(3)             Not filed inaccordance with the provision of Item 601(b)(4)(v) of Regulation SK.  The Company agrees to provide a copy of thesedocuments to the Commission upon request.

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

(5)             Incorporated byreference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed onMay 24, 2005.

(6)             Incorporated byreference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed onMay 24, 2005.

(7)             Incorporated byreference to exhibit of the same number to the Company’s Annual Report on Form10-K for the year ended December 31, 2006, as filed with the Securities andExchange Commission.

(8)             Incorporated byreference to exhibit of the same number to the Company’s Annual Report on Form10-KSB for the year ended December 31, 2004, as filed with the Securities andExchange Commission.

(9)             Incorporated byreference to exhibit of the same number to the Company’s Quarterly Report onForm 10-QSB for the quarter ended March 31, 2005, as filed with the Securitiesand Exchange Commission.

27

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** **

**SIGNATURES**

Inaccordance with the requirements of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.
|                     |   | FREDERICK COUNTY BANCORP, INC.                       |
|---------------------|--------|------------------------------------------------------|
|                |   |                                                 |
|                |   |                                                 |
| Date: July 23, 2007 | By:    | /s/ Martin S. Lapera                                 |
|                |   | Martin S. Lapera                                     |
|                |   | President and Chief Executive Officer                |
|                |   |                                                 |
|                |   |                                                 |
| Date: July 23, 2007 | By:    | /s/ William R. Talley, Jr.                           |
|                |   | William R. Talley, Jr.                               |
|                |   | Executive Vice President and Chief Financial Officer |

 

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