** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC  20549**

** **

** **

**FORM 10-Q**

**(MARK ONE)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

**For the Quarterly PeriodEnded March 31, 2007**

** **

** **

**OR**

** **

** **

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

**For the transition periodfrom                   to                   **

** **

** **

**Commission FileNumber:  000-50407**

** **

** **

**FREDERICK COUNTY BANCORP, INC.**

(Exact name of issuer as specified in its charter)

 

 

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

 

**9 North Market Street**

**Frederick, Maryland 21701**

(Address of principal executive offices)

 

 

**301.620.1400**

(Issuer’s telephone number)

 

 

**N/A**

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

 

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding2 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.   Yes x  No  o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated fileror a non-accelerated filer.  Seedefinition of “large accelerated filer and accelerated filer” in Rule 12b-2 ofthe Exchange Act.

Large acceleratedfiler    o          Acceleratedfiler    o          Non-acceleratedfiler    x

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).Yes  oNo  x

State the numberof shares of each of the issuer’s classes of common equity, as of the latestpractical date.  There were 1,460,602shares of Common Stock outstanding as of April 20, 2007.

 

----

** **

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

**TABLEOF CONTENTS**
| **PART I**   |       | **FINANCIAL  INFORMATION**                                                                                   |
|--------------|------------|--------------------------------------------------------------------------------------------------------------|
|         |       | ** **                                                                                                   |
| Item 1.      |       | Financial Statements (Unaudited)                                                                             |
|         |       |                                                                                                         |
|         |       | Consolidated Balance  Sheets, March 31, 2007 and December 31, 2006                                           |
|         |       |                                                                                                         |
|         |       | Consolidated Statements of Income, Three Months Ended  March 31, 2007 and 2006                               |
|         |       |                                                                                                         |
|         |       | Consolidated Statements of Changes in Shareholders’  Equity, Three Months Ended March 31, 2007 and 2006 |
|         |       |                                                                                                         |
|         |       | Consolidated Statements of Cash Flows, Three Months  Ended March 31, 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 17.                            |
|         |       |                                                                                                         |
| 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

----

** **

**FrederickCounty Bancorp, Inc. and SubsidiaryConsolidated Balance Sheets (Unaudited)**
| ** **                                                                                                                                  | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ***(****dollars in thousands)*                                                                                                    | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| **ASSETS**                                                                                                                                  |       |               |       |                  |       |
| Cash and due from banks                                                                                                                     |       | $                  | 6,229      |                  | $          | 3,695 |   |
| Federal funds sold                                                                                                                          |       | 11,999             |       | 15,035                |       |
| Interest-bearing  deposits in other banks                                                                                                   |       | 2,846              |       | 7,753                 |       |
| Cash and cash  equivalents                                                                                                                  |       | 21,074             |       | 26,483                |       |
| Investment securities  available-for-sale at fair value                                                                                     |       | 30,421             |       | 29,174                |       |
| Restricted stock                                                                                                                            |       | 945                |       | 938                   |       |
| Loans                                                                                                                                       |       | 183,738            |       | 173,954               |       |
| Less: Allowance for  loan losses                                                                                                            |       | (2,226             | )          | (2,166                | )          |
| Net loans                                                                                                                                   |       | 181,512            |       | 171,788               |       |
| Bank premises and  equipment                                                                                                                |       | 4,193              |       | 4,362                 |       |
| Other assets                                                                                                                                |       | 2,304              |       | 2,206                 |       |
| Total assets                                                                                                                                |       | $                  | 240,449    |                  | $          | 234,951 |   |
|                                                                                                                                        |       |               |       |                  |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                              |       |               |       |                  |       |
|                                                                                                                                        |       |               |       |                  |       |
| **Liabilities**                                                                                                                             |       |               |       |                  |       |
| Deposits:                                                                                                                                   |       |               |       |                  |       |
|  Noninterest-bearing deposits                                                                                                          |       | $                  | 32,809     |                  | $          | 32,796 |   |
|  Interest-bearing deposits                                                                                                             |       | 182,372            |       | 176,582               |       |
| Total deposits                                                                                                                              |       | 215,181            |       | 209,378               |       |
| Short-term borrowings                                                                                                                       |       | —             |       | 450                   |       |
| Junior subordinated  debentures                                                                                                             |       | 6,186              |       | 6,186                 |       |
| Accrued interest and  other liabilities                                                                                                     |       | 774                |       | 1,044                 |       |
| Total  liabilities                                                                                                                          |       | 222,141            |       | 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                                                                                                                           |       | 3,664              |       | 3,341                 |       |
| Accumulated other  comprehensive loss                                                                                                       |       | (58                | )          | (115                  | )          |
| Total  shareholders’ equity                                                                                                            |       | 18,308             |       | 17,893                |       |
| Total liabilities and  shareholders’ equity                                                                                            |       | $                  | 240,449    |                  | $          | 234,951 |   |

 

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

3

----

 

**FrederickCounty Bancorp, Inc. and Subsidiary****Consolidated Statements of Income (Unaudited)**
| ** **                                                                           | ** ** | **For the Three  Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ***(dollars in thousands, except per share amounts)*** | ** ** | **2007**                                                       | ** ** | **2006** | ** ** |
| Interest income:                                                                     |       |                                                           |       |   |   |
|  Interest and  fees on loans                                                    |       | $                                                              | 3,207      |   | $ | 2,723 |   |
|  Interest and  dividends on investment securities:                              |       |                                                           |       |   |   |
| Interest — taxable                                                              |       | 236                                                            |       | 208 |   |
| Interest — tax exempt                                                           |       | 99                                                             |       | 34 |   |
| Dividends                                                                            |       | 17                                                             |       | 11 |   |
|  Interest on federal funds sold                                                 |       | 107                                                            |       | 153 |   |
|  Other interest income                                                          |       | 59                                                             |       | 45 |   |
| Total interest income                                                                |       | 3,725                                                          |       | 3,174 |   |
| Interest  expense:                                                                   |       |                                                           |       |   |   |
| Interest on deposits                                                                 |       | 1,674                                                          |       | 1,202 |   |
| Interest on other short-term borrowings                                              |       | 2                                                              |       | 7 |   |
| Interest on long-term debt                                                           |       | —                                                         |       | 5 |   |
| Interest on junior subordinated debentures                                           |       | 101                                                            |       | — |   |
| Total interest expense                                                               |       | 1,777                                                          |       | 1,214 |   |
| Net interest  income                                                                 |       | 1,948                                                          |       | 1,960 |   |
| Provision for  loan losses                                                           |       | 66                                                             |       | 60 |   |
| Net interest  income after provision for loan losses                                 |       | 1,882                                                          |       | 1,900 |   |
| Noninterest  income:                                                                 |       |                                                           |       |   |   |
| Service fees                                                                         |       | 46                                                             |       | 39 |   |
| Other operating income                                                               |       | 40                                                             |       | 46 |   |
| Total noninterest income                                                             |       | 86                                                             |       | 85 |   |
| Noninterest  expense:                                                                |       |                                                           |       |   |   |
| Salaries and employee benefits                                                       |       | 905                                                            |       | 732 |   |
| Occupancy and equipment expenses                                                     |       | 260                                                            |       | 184 |   |
| Other operating expenses                                                             |       | 339                                                            |       | 269 |   |
| Total noninterest expense                                                            |       | 1,504                                                          |       | 1,185 |   |
| Income before  provision for income taxes                                            |       | 464                                                            |       | 800 |   |
| Provision for  income taxes                                                          |       | 141                                                            |       | 321 |   |
| Net income                                                                           |       | $                                                              | 323        |   | $ | 479 |   |
| Basic earnings  per share                                                            |       | $                                                              | 0.22       |   | $ | 0.33 |   |
| Diluted earnings  per share                                                          |       | $                                                              | 0.21       |   | $ | 0.31 |   |
| Basic weighted  average number of shares outstanding                                 |       | 1,458,669                                                      |       | 1,458,602 |   |
| Diluted weighted  average number of shares outstanding                               |       | 1,523,749                                                      |       | 1,527,730 |   |

 

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

4

----

 

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

## **ConsolidatedStatement of Changes in**

## **Shareholders’Equity****(Unaudited)**

 

*ThreeMonths Ended March 31,*
| ***(dollars in thousands, except   shares outstanding)***                            | ** ** | **Shares  Outstanding** | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total  Shareholders’  Equity** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------|------------|
| Balance, January  1, 2006                                                                                     |       | 1,458,602               |       | $                 | 15         |                             | $          | 14,652                 |       | $                                                         | 1,421      |                                  | $          | (200 | ) | $ | 15,888 |   |
| Comprehensive  income:                                                                                        |       |                    |       |              |       |                             |       |                   |       |                                                      |       |                                  |       |
| Net income                                                                                                    |       | —                  |       | —            |       | —                           |       | 479                    |       | —                                                    |       | 479                                   |       |
| Changes in net unrealized gains (losses) on  securities available for sale, net of income tax benefits of $29 |       | —                  |       | —            |       | —                           |       | —                 |       | (46                                                       | )          | (46                                   | )          |
| Comprehensive income                                                                                          |       |                    |       |              |       |                             |       |                   |       |                                                      |       | 433                                   |       |
| Balance, March  31, 2006                                                                                      |       | 1,458,602               |       | $                 | 15         |                             | $          | 14,652                 |       | $                                                         | 1,900      |                                  | $          | (246 | ) | $ | 16,321 |   |
| Balance, January  1, 2007                                                                                     |       | 1,458,602               |       | $                 | 15         |                             | $          | 14,652                 |       | $                                                         | 3,341      |                                  | $          | (115 | ) | $ | 17,893 |   |
| Comprehensive  income:                                                                                        |       |                    |       |              |       |                             |       |                   |       |                                                      |       |                                  |       |
| Net income                                                                                                    |       | —                  |       | —            |       | —                           |       | 323                    |       | —                                                    |       | 323                                   |       |
| Changes in net unrealized gains (losses) on  securities available for sale, net of income taxes of $36        |       | —                  |       | —            |       | —                           |       | —                 |       | 57                                                        |       | 57                                    |       |
| Comprehensive  income                                                                                         |       |                    |       |              |       |                             |       |                   |       |                                                      |       | 380                                   |       |
| Shares issued  under stock option transactions                                                                |       | 2,000                   |       | —            |       | 35                               |       | —                 |       | —                                                    |       | 35                                    |       |
| Balance, March 31, 2007                                                                                       |       | 1,460,602               |       | $                 | 15         |                             | $          | 14,687                 |       | $                                                         | 3,664      |                                  | $          | (58 | ) | $ | 18,308 |   |

 

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

5

----

 

**FrederickCounty Bancorp, Inc. and Subsidiary**

**Consolidated Statements of Cash Flows(Unaudited)**
| ** **                                                                                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ***(dollars in thousands)***                                                                    | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Cash flows from operating activities:                                                                     |       |                                                 |       |   |   |
| Net income                                                                                                |       | $                                                    | 323        |   | $ | 479 |   |
| Adjustments to reconcile net  income to net cash provided by  operating  activities:                      |       |                                                 |       |   |   |
| Depreciation and amortization                                                                             |       | 74                                                   |       | 41 |   |
| Deferred income tax benefits                                                                              |       | (23                                                  | )          | (26 | ) |
| Provision for loan losses                                                                                 |       | 66                                                   |       | 60 |   |
| Net premium amortization on  investment securities                                                        |       | 3                                                    |       | 12 |   |
| Increase in accrued interest  and other assets                                                            |       | —                                               |       | (15 | ) |
| Decrease in accrued interest  and other liabilities                                                       |       | (270                                                 | )          | (136 | ) |
| Net cash provided by operating  activities                                                                |       | 173                                                  |       | 415 |   |
| Cash flows from investing activities:                                                                     |       |                                                 |       |   |   |
| Purchases of investment  securities available-for-sale                                                    |       | (2,124                                               | )          | (1,476 | ) |
| Purchases of investment  securities held-to-maturity                                                      |       | —                                               |       | (3,802 | ) |
| Proceeds from maturities,  prepayments and calls of investment  securities available-for-sale             |       | 966                                                  |       | 1,483 |   |
| Purchases of restricted stock                                                                             |       | (7                                                   | )          | (72 | ) |
| Net increase in loans                                                                                     |       | (9,790                                               | )          | (3,993 | ) |
| Purchases of bank premises and  equipment                                                                 |       | (15                                                  | )          | (174 | ) |
| Net cash used in investing  activities                                                                    |       | (10,970                                              | )          | (8,034 | ) |
| Cash flows from financing activities:                                                                     |       |                                                 |       |   |   |
| Net (decrease) increase in  NOW, money market accounts, savings accounts and noninterest-bearing deposits |       | (949                                                 | )          | 4,789 |   |
| Net increase in time deposits                                                                             |       | 6,752                                                |       | 7,789 |   |
| Repayment of short-term  borrowings                                                                       |       | (450                                                 | )          | — |   |
| Proceeds from issuance of  common stock                                                                   |       | 35                                                   |       | — |   |
| Net cash provided by financing  activities                                                                |       | 5,388                                                |       | 12,578 |   |
| Net (decrease) increase in cash and cash equivalents                                                      |       | (5,409                                               | )          | 4,959 |   |
| Cash and cash equivalents — beginning of period                                                      |       | 26,483                                               |       | 28,510 |   |
| Cash and cash equivalents — end of period                                                            |       | $                                                    | 21,074     |   | $ | 33,469 |   |
| Supplemental cash flow disclosures:                                                                       |       |                                                 |       |   |   |
| Interest paid                                                                                             |       | $                                                    | 1,789      |   | $ | 1,212 |   |
| Income taxes paid                                                                                         |       | $                                                    | —     |   | $ | 131 |   |

 

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

6

----

** **

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

**Notes toUnaudited Consolidated Financial Statements**

**Note1.  General:**

FrederickCounty Bancorp, Inc. (the “Bancorp”), the parent company for its wholly-ownedsubsidiary Frederick County Bank (the “Bank” and together with Bancorp, the “Company”),was organized in September 2003. The Bank was incorporated under the laws ofthe state of Maryland in August 2000 and commenced banking operations inOctober 2001.  The Bank provides itscustomers with various banking services. The Bank offers various loan and deposit products to theircustomers.  The Bank’s customers includeindividuals and commercial enterprises within its principal market areaconsisting of Frederick County, Maryland. Additionally, the Bank maintains correspondent banking relationships andtransacts daily federal funds sales on an unsecured basis with regionalcorrespondent banks.  Note 4 discussesthe types of securities the Bank invests in. Note 5 discusses the types of lending that the Bank engages in.  The Bank does not have any significantconcentrations to any one industry or customer. The Company also has a subsidiary called FCBI Statutory Trust I.  See Note 7 for additional disclosures.

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

Thepreparation of financial statements requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  These estimates andassumptions are based on information available as of the date of theconsolidated financial statements and could differ from actual results.

## **Recent Accounting Pronouncements**

In February 2006, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 155, *“Accounting for Certain Hybrid Financial Instruments”,*an amendment of SFAS No. 133 and SFAS No. 140. This statement permits fairvalue re-measurement for any hybrid financial instrument that contains anembedded derivative that otherwise would require bifurcation. It establishes arequirement to evaluate interests in securitized financial assets to identifyinterests that are freestanding derivatives or that are hybrid financialinstruments that contain an embedded derivative requiring bifurcation. Inaddition, SFAS 155 clarifies which interest-only strips and principal-onlystrips are not subject to the requirements of Statement 133. It also clarifiesthat concentrations of credit risk in the form of subordination are notembedded derivatives. SFAS 155 amends Statement 140 to eliminate theprohibition on a qualifying special purpose entity from holding a derivativefinancial instrument that pertains to a beneficial interest other than anotherderivative financial instrument.  On January1, 2007, the Company adopted SFAS 155 and determined that it did not have anyimpact on its financial condition or results of operations.

In March 2006, the FASBissued SFAS No. 156, “*Accounting forServicing of Financial Assets*”. This Statement amends SFAS No. 140, “*Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities*”, and requires that allseparately recognized servicing assets and servicing liabilities be initiallymeasured at fair value, if practicable, and permits the entities to electeither fair value measurement with changes in fair value reflected in earningsor the amortization and impairment requirements of SFAS No. 140 for subsequentmeasurement. The subsequent measurement of separately recognized servicingassets and servicing liabilities at fair value eliminates the necessity forentities that manage the risks inherent in servicing assets and servicingliabilities with derivatives to qualify for hedge accounting treatment andeliminates the characterization of declines in fair value as impairments ordirect write-downs. The Company adopted SFAS 156 on January 1, 2007 anddetermined that it did not have any impact on its financial condition orresults of operations.

In June 2006, the FASBissued FASB Interpretation No. 48, “*Accountingfor Uncertainty in Income Taxes*” (“FIN 48”). FIN 48 clarifieswhen tax benefits should be recorded in financial statements, requires certaindisclosures of uncertain tax matters and indicates how any tax reserves shouldbe classified in a balance sheet. On January 1, 2007, the Company adopted FIN48 and determined that it did not have any impact on its financial condition orresults of operations.

In February 2007, theFASB issued SFAS No. 159, “The *Fair ValueOption for Financial Assets and Liabilities*”. This statement permitsentities to measure many financial instruments and certain other items at fairvalue.  The objective is to improvefinancial 

7

----

reporting by providingentities with the opportunity to mitigate volatility in reported earningscaused by measuring related assets and liabilities differently without havingto apply complex hedge accounting provisions. This pronouncement is effective as of the beginning of an entity’s firstfiscal year that begins after November 15, 2007.  The Company is evaluating the impact of thisnew standard, but currently believes that adoption will not have a materialimpact on its financial position or results of operations.

**Note2. Earnings Per Share:**

Earnings per share (“EPS”)are disclosed as basic and diluted. Basic EPS is generally computed by dividing net income by theweighted-average number of common shares outstanding for the period, whereasdiluted EPS essentially reflects the potential dilution in basic EPS that couldoccur if other contracts to issue common stock were exercised.  As of March 31, 2007 and 2006, no commonstock equivalents were excluded from the diluted EPS calculation.

|                                                                                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ***(dollars in thousands, except per share amounts)*** | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Net income                                                                           |       | $                                                | 323        |   | $ | 479 |   |
| Basic earnings  per share                                                            |       | $                                                | 0.22       |   | $ | 0.33 |   |
| Diluted earnings  per share                                                          |       | $                                                | 0.21       |   | $ | 0.31 |   |
| Basic weighted  average number of shares outstanding                                 |       | 1,458,669                                        |       | 1,458,602 |   |
| Effect of  dilutive securities — stock options                                  |       | 65,080                                           |       | 69,128 |   |
| Diluted weighted  average number of shares outstanding                               |       | 1,523,749                                        |       | 1,527,730 |   |

 

**Note3.  Employee Stock Option Plan:**

The Company maintains an Employee Stock Option Plan that provides forgrants of incentive and non-incentive stock options.  This plan has been presented to and approvedby the Company’s shareholders.  TheCompany follows the guidance of the Statements of Financial AccountingStandards No. 123 *Accounting for Stock-BasedCompensation* and No. 123(R) *Share-BasedPayment. * As of December 31, 2005, all outstanding stockoptions were fully vested.  No stockoptions were granted in 2006 or 2007 and, accordingly, net income and earningsper share 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 employeecompensation for future grants will be determined at that time using theBlack-Scholes or another appropriate option-pricing model with the followingassumptions: option price, dividend yield, expected volatility, risk freeinterest rate and the expected life.

**Note 4.  Investment Portfolio:**

Thefollowing tables set forth certain information regarding the Company’sinvestment portfolio at March 31, 2007 and December 31, 2006:

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

| ***March 31, 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                                                 |       | $                   | 1,982      |   | $ | — |   | $ | 4 |   | $ | 1,978 |   | 4.64 | % |
| Due after one year through five years                               |       | 1,325               |       | — |   | 9 |   | 1,316 |   | 4.62 | % |
| Due after five years through ten years                              |       | 2,774               |       | — |   | 25 |   | 2,749 |   | 4.95 | % |
| State and  political subdivisions:                                  |       |                |       |   |   |   |   |   |   |   |   |
| Due after five years through ten years                              |       | 1,401               |       | — |   | 12 |   | 1,389 |   | 5.23 | % |
| Due after ten years                                                 |       | 8,422               |       | 83 |   | — |   | 8,505 |   | 5.88 | % |
| Mortgage-backed  debt securities                                    |       | 14,212              |       | 32 |   | 160 |   | 14,084 |   | 4.75 | % |
| Equity  securities                                                  |       | 400                 |       | — |   | — |   | 400 |   | — | % |
|                                                                |       | $                   | 30,516     |   | $ | 115 |   | $ | 210 |   | $ | 30,421 |   | 5.03 | % |

 

8

----

** **
| ***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 | % |

 
| ***March 31, 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 |       | $                                                                                                             | —  |                                                                                                            | $          | —     |       | $ | 5,061 |   | $ | 39  |   | $ | 5,061 |   | $ | 39  |   |
|                                                               |       |                                                                                                          |         |                                                                                                            |       |            |       |   |   |   |   |   |   |
| State and  political subdivisions                                  |       | —                                                                                                        |         | —                                                                                                          |       | 9,218           |       | 159 |   | 9,218 |   | 159 |   |
| Mortgage-backed  debt securities                                   |       | —                                                                                                        |         | —                                                                                                          |       | 1,239           |       | 12 |   | 1,239 |   | 12 |   |
| Total temporarily impaired  securities                             |       | $                                                                                                             | —       |                                                                                                            | $          | —          |       | $ | 15,518 |   | $ | 210 |   | $ | 15,518 |   | $ | 210 |   |

 
| ***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 to hold debt securities until maturity, or until the unrealizedloss is recouped, no declines are deemed to be other than temporary.

## **Restricted Stock**

Thefollowing table shows the amounts of restricted stock as of March 31, 2007 andDecember 31, 2006:

|                                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|--------------------|------------|-----------------------|------------|
| **(*dollars in thousands)*** | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| Federal Home  Loan Bank of Atlanta     |       | $                  | 466        |                  | $          | 459 |   |
| Federal Reserve  Bank                  |       | 439                |       | 439                   |       |
| Atlantic Central  Bankers Bank         |       | 40                 |       | 40                    |       |
|                                   |       | $                  | 945        |                  | $          | 938 |   |

** **

9

----

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

Loansconsist of the following:
| ** **                                                                  | ** **   | **March 31,** | ** ** | **% of** | ** ** | **December 31,** | ** ** | **% of** | ** **   |
|-----------------------------------------------------------------------------|--------------|--------------------|------------|---------------|------------|-----------------------|------------|---------------|--------------|
| ***(dollars in thousands)***                                      | *** *** | **2007**           | ** ** | **Loans**     | ** ** | **2006**              | ** ** | **Loans**     | *** *** |
| Real estate  loans:                                                         |         |               |       |          |       |                  |       |          |         |
| Construction and  land development                                          |         | $                  | 41,820     |          | 23         | %                     | $          | 30,183        |         | 17 | % |
| Mortgage loans:                                                             |         |               |       |          |       |                  |       |          |         |
| Secured by 1 to  4 family residential properties                            |         | 33,586             |       | 18            | %          | 34,194                |       | 20            | %            |
| Secured by  multi-family (5 or more) residential properties                 |         | 8,918              |       | 5             | %          | 4,640                 |       | 3             | %            |
| Secured by  commercial properties                                           |         | 68,840             |       | 37            | %          | 73,582                |       | 42            | %            |
| Secured by farm  land                                                       |         | 6,088              |       | 3             | %          | 4,302                 |       | 2             | %            |
| Total mortgage loans                                                        |         | 117,432            |       | 63            | %          | 116,718               |       | 67            | %            |
| Commercial and  industrial loans                                            |         | 22,196             |       | 12            | %          | 24,806                |       | 14            | %            |
| Loans to  individuals for household, family and other personal expenditures |         | 2,290              |       | 2             | %          | 2,247                 |       | 2             | %            |
|                                                                        |         | 183,738            |       | 100           | %          | 173,954               |       | 100           | %            |
| Less allowance  for loan losses                                             |         | (2,226             | )          |          |       | (2,166                | )          |          |         |
| Net loans                                                                   |         | $                  | 181,512    |          |       |                  | $          | 171,788       |         |   |   |

 

Transactions in theallowance for loan losses are summarized as follows:

|                                                      | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(*dollars in thousands)***               | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Balance at  beginning of period                      |       | $                                                | 2,166      |   | $ | 1,953 |   |
| Provision  charged to operating expenses             |       | 66                                               |       | 60 |   |
| Recoveries of  loans previously charged-off          |       | —                                           |       | — |   |
|                                                 |       | 2,232                                            |       | 2,013 |   |
| Loans  charged-off — consumer                   |       | (6                                               | )          | — |   |
| Balance at end  of period                            |       | $                                                | 2,226      |   | $ | 2,013 |   |
|  Average total loans outstanding during  period |       | $                                                | 177,404    |   | $ | 157,145 |   |

 

**Note6.   Deposits**

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

|                                                 | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ***(dollars in thousands)***          | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| Noninterest-bearing  demand deposits            |       | $                  | 32,809     |                  | $          | 32,796 |   |
| Interest-bearing  demand deposits: NOW accounts |       | 17,690             |       | 18,233                |       |
|  Money market accounts                     |       | 31,304             |       | 32,023                |       |
| Savings accounts                                |       | 2,861              |       | 2,562                 |       |
| Certificates of  deposit:                       |       |               |       |                  |       |
|  $100,000 or more                          |       | 64,395             |       | 61,315                |       |
|  Less than $100,000                        |       | 66,122             |       | 62,449                |       |
| Total deposits                                  |       | $                  | 215,181    |                  | $          | 209,378 |   |

 

10

----

 

**Note 7. Trust preferredsecurities/junior subordinated debentures:**

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 subordinateddebentures. The junior subordinated debentures bear interest at a fixed rate of6.5375% until December 15, 2011, at which time the interest rate becomes avariable rate, adjusted quarterly, equal to 163 basis points over three-monthLIBOR. The junior subordinated debentures mature on December 15, 2036, and maybe redeemed at par, at Bancorp’s option, on any interest payment datecommencing December 15, 2011. The securities are redeemable prior to December15, 2011, at a premium ranging up to 103.525% of the principal amount thereof,upon the occurrence of certain regulatory or legal events. The obligations ofBancorp with respect to the Trust’s preferred securities constitute a full andunconditional guarantee by Bancorp of Trust’s obligations with respect to thetrust preferred securities to the extent set forth in the related guarantee.Subject to certain exceptions and limitations, Bancorp may elect from time totime to defer interest payments on the junior subordinated debentures, resultingin a deferral of distribution payments on the related trust preferredsecurities.  The proceeds from thisissuance will be used to supplement the Company’s regulatory capital forcontinued 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.

**Note8.  Noninterest Expense:**

Noninterest expenseconsists of the following:

|                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|
| ***(dollars in thousands)***  | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
|                                    |       |                                             |       |   |   |
| Salaries                                |       | $                                                | 761        |   | $ | 566 |   |
| Bonus                                   |       | 13                                               |       | 83 |   |
| Deferred  Personnel Costs               |       | (37                                              | )          | (46 | ) |
| Payroll Taxes                           |       | 78                                               |       | 63 |   |
| Employee  Insurance                     |       | 47                                               |       | 34 |   |
| Other Employee Benefits                 |       | 43                                               |       | 32 |   |
| Depreciation                            |       | 74                                               |       | 41 |   |
| Rent                                    |       | 50                                               |       | 64 |   |
| Utilities                               |       | 27                                               |       | 18 |   |
| Repairs and  Maintenance                |       | 55                                               |       | 23 |   |
| ATM Expense                             |       | 23                                               |       | 17 |   |
| Other Occupancy  and Equipment Expenses |       | 31                                               |       | 21 |   |
| Postage and  Supplies                   |       | 22                                               |       | 14 |   |
| Data Processing                         |       | 94                                               |       | 64 |   |
| Advertising and  Promotion              |       | 56                                               |       | 61 |   |
| Legal                                   |       | 9                                                |       | 7 |   |
| Insurance                               |       | 11                                               |       | 8 |   |
| Consulting                              |       | 11                                               |       | 7 |   |
| Courier                                 |       | 12                                               |       | 10 |   |
| Audit Fees                              |       | 59                                               |       | 38 |   |
| Other                                   |       | 65                                               |       | 60 |   |
|                                    |       | $                                                | 1,504      |   | $ | 1,185 |   |

 

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

The Company has a Section 401(k) profit sharing plan covering employeesmeeting certain eligibility requirements as to minimum age and years ofservice.  Employees may make voluntarycontributions to the Plan through payroll deductions on a pre-tax basis.  The Company makes matching contributions 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.

11

----

The Company made contributions to the Plan in the amounts of $35,000 and$24,000 for the first three months of 2007 and 2006, respectively.

**Note10.  Shareholders’ Equity:**

Capital:

The Company and the Bankare subject to various regulatory capital requirements administered by thefederal banking agencies.  Failure tomeet minimum capital requirements can initiate certain mandatory - and possiblyadditional discretionary - actions by regulators that, if undertaken, couldhave a direct material effect on the Company’s 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.

Quantitative measuresestablished by regulation to ensure capital adequacy require the Company andthe Bank to maintain minimum amounts and ratios (set forth in the followingtable) of total and Tier 1 capital (as defined in the regulations) torisk-weighted assets (as defined), and Tier 1 capital (as defined) to averageassets (as defined).  Management believesthat the Company and the Bank met all capital adequacy requirements to whichthey are subject as of March 31, 2007.

As of March 31, 2007, themost recent notification from the regulatory agency categorized the Bank aswell capitalized under the regulatory framework for prompt correctiveaction.  To be categorized as wellcapitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based,and Tier 1 leverage ratios as set forth in the table.  There are no conditions or events since thatnotification which management believes have changed the Bank’s category.

TheCompany’s and the Bank’s actual capital amounts and ratios at March 31, 2007and December 31, 2006 are presented in the following tables.
| ***March 31, 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                                  |       | $          | 24,366     |                                         | 11.76      | %                                                                                                             | $          | 8,287 |   | 4.00 | % | N/A |   | N/A |   |
| Bank                                     |       | $          | 19,471     |                                         | 9.42       | %                                                                                                             | $          | 8,264 |   | 4.00 | % | $ | 12,396 |   | 6.00 | % |
|                                     |       |       |       |                                         |       |                                                                                                          |       |   |   |   |   |   |   |
| Total Capital  To Risk-Weighted Assets   |       |       |       |                                         |       |                                                                                                          |       |   |   |   |   |   |   |
| Company                                  |       | $          | 26,592     |                                         | 12.84      | %                                                                                                             | $          | 16,574 |   | 8.00 | % | N/A |   | N/A |   |
| Bank                                     |       | $          | 21,697     |                                         | 10.50      | %                                                                                                             | $          | 16,528 |   | 8.00 | % | $ | 20,659 |   | 10.00 | % |
|                                     |       |       |       |                                         |       |                                                                                                          |       |   |   |   |   |   |   |
| Tier 1 Capital  To Average Assets        |       |       |       |                                         |       |                                                                                                          |       |   |   |   |   |   |   |
| Company                                  |       | $          | 24,366     |                                         | 10.60      | %                                                                                                             | $          | 9,193 |   | 4.00 | % | N/A |   | N/A |   |
| Bank                                     |       | $          | 19,471     |                                         | 8.50       | %                                                                                                             | $          | 9,167 |   | 4.00 | % | $ | 11,459 |   | 5.00 | % |

 

12

----

** **
| ***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% |   |

 

**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 overview of the financial conditionand results of operations of the Company. This discussion is intended to assist the readers in their analysis ofthe accompanying financial statements and notes thereto.

 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 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.

## **Critical Accounting Policies**

The Company’sconsolidated financial statements are prepared in accordance with accountingprinciples generally accepted in the United States of America (“GAAP”) andfollow general practices within the industry in which it operates.  Application of these principles requiresmanagement to make estimates, assumptions, and judgments that affect theamounts reported in the financial statements and accompanying notes.  These estimates, assumptions, and judgmentsare based on information available as of the date of the financial statements;accordingly, as this information changes, the financial statements couldreflect different estimates, assumptions, and judgments.  Certain policies inherently have a greaterreliance on the use of estimates, assumptions, and judgments 

13

----

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 are requiredto be recorded at fair value, when a decline in the value of an asset notcarried 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 based eitheron quoted market prices or are provided by other third-party sources, whenavailable. The estimates used in management’s assessment of the adequacy of theallowance for 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$9.78 million, or 5.62%, from December 31, 2006 to a balance of $183.74 millionas of March 31, 2007, and by $24.40 million, or 15.32% from March 31, 2006.

## **Deposits**

Deposits grew by $5.80million, or 2.77%, from December 31, 2006 to a balance of $215.18 million as ofMarch 31, 2007, and by $12.55 million, or 6.19% from March 31, 2006.  The Company’s deposit growth has mainly beenin certificates of deposit over the past year.

**Three Months Ended March 31, 2007 and 2006**

The net income was$323,000 for the quarter ended March 31, 2007 as compared to the $479,000 netincome for the same period in 2006.  Thedecrease in earnings for the first quarter of 2007 compared to the firstquarter of 2006 is primarily related to the increase in personnel and occupancyexpenses for the two new branches opened during the third quarter of 2006 andnet interest margin compression.  The basic earnings per share for the threemonths ended March 31, 2007 and 2006 were $0.22 and $0.33, respectively, andwere based on the weighted-average number of shares outstanding of 1,458,669and 1,458,602, respectively.  The dilutedearnings per share for the three months ended March 31, 2007 and 2006 were$0.21 and $0.31, respectively, and were based on the weighted-average number ofshares outstanding of 1,523,749 and 1,527,730, respectively.   The Company recorded loan loss provisions of$66,000 and $60,000 for the three-month periods ended March 31, 2007 and 2006,respectively.

TheCompany experienced an annualized return on average assets of 0.56% and 0.93%for the three-month periods ended March 31, 2007 and 2006, respectively.  Additionally, the Company experienced an annualizedreturn on average shareholders’ equity of 7.12% and 11.80% for the three-monthperiods ended March 31, 2007 and 2006, respectively.

OnFebruary 19, 2007 the Company’s branch located at 1595 Opossumtown Pike,Frederick, Maryland was completely destroyed as a result of a fire.  The Company has determined that its insurancecoverage is adequate, and the fire damage should not result in a materialloss.  Management continues to explorevarious options to maintain service to customers of the branch, includingincreased courier service to its commercial customers and relocating the branchoffice.  As of March 31, 2007 the Companyhas not lost any material loan or deposit customers.

14

----

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

The following tables showaverage balances of asset and liability categories, interest income andinterest expense, and average yields and rates for the periods indicated.
| ***Three Months Ended March 31,*** | ** ** | **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                                     |       | $                           | 8,029      |                           | $          | 107 |   | 5.40 | % | $ | 13,650 |   | $ | 153 |   | 4.55 | % |
| Interest bearing deposits in  other banks              |       | 4,404                       |       | 59                             |       | 5.43 |   | 4,004 |   | 45 |   | 4.56 |   |
| Investment securities (1):                             |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| Taxable                                                |       | 21,722                      |       | 253                            |       | 4.72 |   | 20,870 |   | 219 |   | 4.26 |   |
| Tax-exempt (2)                                         |       | 9,823                       |       | 150                            |       | 6.19 |   | 3,512 |   | 52 |   | 6.00 |   |
| Loans (3)                                              |       | 177,404                     |       | 3,217                          |       | 7.35 |   | 157,145 |   | 2,727 |   | 7.04 |   |
| Total interest-earning assets                          |       | 221,382                     |       | 3,786                          |       | 6.94 |   | 199,181 |   | 3,196 |   | 6.51 |   |
| Noninterest-earning assets                             |       | 8,432                       |       |                           |       |   |   | 6,305 |   |   |   |   |   |
| Total assets                                           |       | $                           | 229,814    |                           |       |   |   |   | $ | 205,486 |   |   |   |   |   |
|                                                   |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| Liabilities and Shareholders’ Equity              |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                          |       |                        |       |                           |       |   |   |   |   |   |   |   |   |
| NOW accounts                                           |       | $                           | 12,452     |                           | 6          |   | 0.20 | % | $ | 13,055 |   | 6 |   | 0.19 | % |
| Savings accounts                                       |       | 2,648                       |       | 3                              |       | 0.46 |   | 2,806 |   | 3 |   | 0.43 |   |
| Money market accounts                                  |       | 31,177                      |       | 211                            |       | 2.74 |   | 31,237 |   | 190 |   | 2.47 |   |
| Certificates of deposit $100,000  or more              |       | 62,655                      |       | 726                            |       | 4.70 |   | 52,180 |   | 499 |   | 3.88 |   |
| Certificates of deposit less  than $100,000            |       | 64,347                      |       | 728                            |       | 4.59 |   | 57,710 |   | 504 |   | 3.54 |   |
| Short-term borrowings                                  |       | 125                         |       | 2                              |       | 6.49 |   | 450 |   | 7 |   | 6.31 |   |
| Long-term debt                                         |       | —                      |       | —                         |       | — |   | 250 |   | 5 |   | 8.11 |   |
| Junior subordinated debentures                         |       | 6,186                       |       | 101                            |       | 6.62 |   | — |   | — |   | — |   |
| Total interest-bearing  liabilities                    |       | 179,590                     |       | 1,777                          |       | 4.01 |   | 157,688 |   | 1,214 |   | 3.12 |   |
| Noninterest-bearing deposits                           |       | 31,379                      |       |                           |       |   |   | 30,956 |   |   |   |   |   |
| Noninterest-bearing liabilities                        |       | 699                         |       |                           |       |   |   | 608 |   |   |   |   |   |
| Total liabilities                                      |       | 211,668                     |       |                           |       |   |   | 189,252 |   |   |   |   |   |
| Total shareholders’ equity                        |       | 18,146                      |       |                           |       |   |   | 16,234 |   |   |   |   |   |
| Total liabilities and  shareholders’  equity      |       | $                           | 229,814    |                           |       |   |   |   | $ | 205,486 |   |   |   |   |   |
| Net interest income                                    |       |                        |       | $                              | 2,009      |   |   |   |   |   | $ | 1,982 |   |   |   |
| Net interest spread                                    |       |                        |       |                           |       | 2.93 | % |   |   |   |   | 3.39 | % |
| Net  interest margin                                   |       |                        |       |                           |       | 3.68 | % |   |   |   |   | 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)             Presentedon a taxable-equivalent basis using the statutory federal income tax rate of34%.  Taxable-equivalent adjustments of$51,000 in 2007 and $18,000 in 2006 are included in the calculation of thetax-exempt investment interest income.

(3)             Presentedon a taxable-equivalent basis using the statutory federal income tax rate of34%.  Taxable-equivalent adjustments of$10,000 in 2007 and $4,000 in 2006 are included in the calculation of the loaninterest income.  Net loan originationincome in interest income totaled $10,000 in 2007 and $7,000 in 2006.

15

----

**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 March 31,  2007 compared to 2006** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| **(*dollars in thousands)***     | ** ** | **Increase (decrease)  due to**                                                  | ** ** | **Net   Increase** | ** ** |
| ** **                                 | ** ** | **Volume**                                                                                 | ** ** | **Rate(1)** | ** ** | **(decrease)** | ** ** |
| Interest income                            |       |                                                                                       |       |   |   |   |   |
| Interest-earning  assets:                  |       |                                                                                       |       |   |   |   |   |
| Federal funds sold                         |       | $                                                                                          | (64        | ) | $ | 18 |   | $ | (46 | ) |
| Interest-bearing deposits in other banks   |       | 5                                                                                          |       | 9 |   | 14 |   |
| Investment securities:                     |       |                                                                                       |       |   |   |   |   |
| Taxable                                    |       | 9                                                                                          |       | 25 |   | 34 |   |
| Tax-exempt                                 |       | 95                                                                                         |       | 3 |   | 98 |   |
| Loans                                      |       | 356                                                                                        |       | 134 |   | 490 |   |
| Total interest income                      |       | 401                                                                                        |       | 189 |   | 590 |   |
|                                       |       |                                                                                       |       |   |   |   |   |
| Interest expense                           |       |                                                                                       |       |   |   |   |   |
| Interest-bearing  liabilities:             |       |                                                                                       |       |   |   |   |   |
| NOW accounts                               |       | —                                                                                     |       | — |   | — |   |
| Savings accounts                           |       | —                                                                                     |       | — |   | — |   |
| Money market accounts                      |       | —                                                                                     |       | 21 |   | 21 |   |
| Certificates of deposit $100,000 or more   |       | 102                                                                                        |       | 125 |   | 227 |   |
| Certificates of deposit less than $100,000 |       | 59                                                                                         |       | 165 |   | 224 |   |
| Short-term borrowings                      |       | (5                                                                                         | )          | — |   | (5 | ) |
| Long-term debt                             |       | (5                                                                                         | )          | — |   | (5 | ) |
| Junior subordinated debentures             |       | 101                                                                                        |       | — |   | 101 |   |
| Total interest  expense                    |       | 252                                                                                        |       | 311 |   | 563 |   |
| Net interest income                        |       | $                                                                                          | 149        |   | $ | (122 | ) | $ | 27 |   |

----

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

## **Net Interest Income**

Netinterest income is generated from the Company’s lending and investmentactivities, and is the most significant component of the Company’searnings.  Net interest income is thedifference between interest and rate-related fee income on earning assets(primarily loans and investment securities) and the interest paid on the funds(primarily deposits) supporting them. 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 March 31, 2007 and 2006**

The net interest income (on a taxable-equivalent basis) of $2.01 millionin 2007 was $27,000, or 1.36% higher than the amount recognized in 2006.  This increase in net interest income is dueto the growth in average earning assets and increased yields on earningassets.  Average earning assets increasedby  $22.21 million, or 11.15%, sinceMarch 31, 2006.  The yield on earningassets in 2007 increased to 6.94% from 6.51% in 2006.  This increase in yield is attributable to theimpact of the increase in short-term rates by the Federal Reserve.  However, the increase by 89 basis points in therate paid on interest earning liabilities, primarily a result of Federal Reserveincreases of the federal funds rate, the issuance of junior subordinateddebentures in December 2006 and stiff competition for deposits, more thanoffset the increase in yield on interest earning assets.  The Company’s net interest margin was 3.68% and4.04%, and the net interest spread was 2.93% and 3.39%, for the three-monthperiods ended March 31, 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.

16

----

The interest expense increased 46.38% from $1.21 million in 2006 to $1.78million in 2007 due to the 13.89% increase in volume of averageinterest-bearing liabilities, along with the increase in the related rates paidon such interest-bearing liabilities, which increased to 4.01% in 2007 from3.12% in 2006.

# **Noninterest Income**

Noninterest income was $86,000 and $85,000 for the three-month periodsended March 31, 2007 and 2006, respectively.

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**

SeeNote 8 to the unaudited consolidated financial statements for a scheduleshowing a detailed breakdown of the Company’s noninterest expense.

**ThreeMonths Ended March 31, 2007 and 2006**

Noninterest expense amounted to $1.50 million and $1.19 million for thethree-month periods in 2007 and 2006, respectively.  The changes in noninterest expense areprincipally related to an increase in personnel costs.  Salaries expense in 2007 was $761,000, up$195,000 from the salaries expense incurred in the same period in 2006.  This increase of 34.45% is for the additionalcosts of adding fourteen (14) new employees for the new branches and employeepay increases.

**IncomeTaxes**

**ThreeMonths Ended March 31, 2007 and 2006**

During the three monthsended March 31, 2007, the Company incurred $141,000 of income tax expensecompared to $321,000 during the same period in 2006.  The effective tax rates for thesethree-months in 2007 and 2006 were 30.39% and 40.13%.  The effective tax rate for 2007 has beenpositively impacted by the addition of tax-free municipal securities to theCompany’s investment portfolio during 2006.

**MarketRisk, Liquidity and Interest Rate Sensitivity**

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

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

The Company seeksto limit the risks associated with interest rate fluctuations by managing thebalance between interest sensitive assets and liabilities.  Managing to mitigate interest rate risk is,however, not an exact science.  Not onlydoes the interval until repricing of interest rates on assets and liabilitieschange from day to day as the assets and liabilities change, but for someassets and liabilities, contractual maturity and the actual maturityexperienced are not the same.  Similarly,NOW and money market accounts, by contract, may be withdrawn in their entiretyupon demand and savings deposits may be withdrawn on seven days notice.  While these contracts are extremely short, itis the Company’s belief that these accounts turn over at the rate of fivepercent (5%) per year. The Company therefore treats them as having maturitiesstaggered over all periods.  If all ofthe Company’s NOW, money market, and savings accounts were treated as repricingin one year or less, the cumulative gap at one year or less would be $(89.99)million.

Interest ratesensitivity is an important factor in the management of the composition andmaturity configurations of the Company’s earning assets and fundingsources.  An Asset/Liability Committeemanages the interest rate sensitivity position in order to maintain anappropriate balance between the maturity and repricing characteristics ofassets and liabilities that is consistent with the Company’s 

17

----

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 March 31, 2007, theanticipated maturities or repricing of the Company’s interest-earning assetsand interest-bearing liabilities, the Company’s interest rate sensitivity gap(interest-earning assets less interest-bearing liabilities), the Company’scumulative interest rate sensitivity gap, and the Company’s cumulative interestsensitivity gap ratio (cumulative interest rate sensitivity gap divided bytotal assets).  A negative gap for anytime period means that more interest-bearing liabilities will reprice or matureduring that time period than interest-earning assets.  During periods of rising interest rates, anegative gap position would generally decrease earnings, and during periods ofdeclining interest rates, a negative gap position would generally increaseearnings.  The converse would be true fora positive gap position.  Therefore, apositive gap for any time period means that more interest-earning assets willreprice or mature during that time period than interest-bearingliabilities.  During periods of risinginterest rates, a positive gap position would generally increase earnings, andduring periods of declining interest rates, a positive gap position wouldgenerally decrease earnings.

It is important tonote that the following table represents the static gap position for interestsensitive assets and liabilities at March 31, 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**

**March31, 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                                    |       | $                                                           | 11,999     |   | $ | — |   | $ | — |   | $ | — |   | $ | 11,999 |   |
| Interest-bearing deposits in other banks              |       | 2,846                                                       |       | — |   | — |   | — |   | 2,846 |   |
| Investment securities(1)                              |       | 3,385                                                       |       | 5,688 |   | 1,236 |   | 19,712 |   | 30,021 |   |
| Loans                                                 |       | 60,165                                                      |       | 50,530 |   | 53,588 |   | 19,455 |   | 183,738 |   |
| Total  interest-earning assets                        |       | 78,395                                                      |       | 56,218 |   | 54,824 |   | 39,167 |   | 228,604 |   |
|                                                  | ** ** | ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Liabilities                                           |       |                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Savings and NOW accounts                              |       | 1,028                                                       |       | 2,055 |   | 2,055 |   | 15,413 |   | 20,551 |   |
| Money Market accounts                                 |       | 1,565                                                       |       | 3,130 |   | 3,131 |   | 23,478 |   | 31,304 |   |
| Certificates of deposit                               |       | 116,534                                                     |       | 12,641 |   | 1,342 |   | — |   | 130,517 |   |
| Junior subordinated debentures                        |       | —                                                      |       | — |   | 6,186 |   | — |   | 6,186 |   |
| Total  interest-bearing liabilities                   |       | 119,127                                                     |       | 17,826 |   | 12,714 |   | 38,891 |   | 188,558 |   |
| Interest rate  sensitivity gap                        |       | $                                                           | (40,732    | ) | $ | 38,392 |   | $ | 42,110 |   | $ | 276 |   | $ | 40,046 |   |
| Cumulative  interest rate                             |       |                                                        |       |   |   |   |   |   |   |   |   |
| sensitivity gap                                       |       | $                                                           | (40,732    | ) | $ | (2,340 | ) | $ | 39,770 |   | $ | 40,046 |   |   |   |
| Cumulative gap ratio as  a percentage of total assets |       | (16.94                                                      | )%         | (0.97 | %) | 16.54 | % | 16.65 | % |   |   |

----

(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 by14.05%.  With a decrease in interestrates of 200 basis points the Company’s net interest income would increase by12.47%.

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 market rates.  Additionally, certain assets, such asadjustable-rate mortgage loans, have features that restrict changes in interestrates 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.

18

----

**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 provision for loan losses is determinedbased upon Management’s estimate of the amount required to maintain an adequateallowance for loan losses reflective of the risks in the Company’s loanportfolio.  The Company’s provision forloan losses for the first three months of 2007 and 2006 was $66,000 and$60,000, respectively.  The loan growthwas $9.78 million for the first three months of 2007 as compared to $3.99million for the same period in 2006.  AtMarch 31, 2007 and December 31, 2006, the allowance for loan losses was $2.23million and $2.17 million, respectively.

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

The allowance for loan losses is established aslosses are estimated to have occurred through a provision for loan lossescharged to earnings.  The allowance isbased on two basic principles of accounting: (i) SFAS No. 5, *Accounting for Contingencies*, whichrequires that losses be accrued when they are probable of occurring andestimatable and (ii) SFAS No. 114, *Accountingby Creditors for Impairment of a Loan*, which requires that losses beaccrued based on the differences between the loan balance and either the valueof collateral, or the present value of future cash flows, or the loan’s valueas observable in the secondary market.  Aloan is considered impaired when, based on current information and events, itis probable that the Bank will be unable to collect the scheduled payments ofprincipal or interest when due according to the contractual terms of the loanagreement.  Factors considered byManagement in determining impairment include payment status, collateral value,and the probability of collecting scheduled principal and interest payments whendue.  Loans that experience insignificantpayment delays and payment shortfalls generally are not classified asimpaired.  Management determines thesignificance of payment delays and payment shortfalls on a case-by-case basis,taking into consideration all of the circumstances surrounding the loan andborrower, including the length of the delay, the reason for the delay, theborrower’s prior payment record, and the amount of the shortfall in relation tothe principal and interest owed.  Theprovision for loan losses included in the statements of operations serve tomaintain the allowance at a level Management considers adequate.

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

The specific allowance component is used toindividually establish an allowance for loans identified for impairmenttesting.  When impairment is identified,a specific reserve may be established based on the Company’s calculation of theestimated loss embedded in the individual loan. Impairment testing includes consideration of the borrower’s overallfinancial condition, resources and payment record, support available fromfinancial guarantors and the fair market value of collateral. These factors arecombined to estimate the probability and severity of inherent losses.  Large groups of smaller balance, homogeneousloans are collectively evaluated for impairment. Accordingly, the Company doesnot separately identify individual consumer and residential loans for impairment.   At March 31, 2007 there were no loans deemedto be impaired.

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

19

----

** **

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

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

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

As ofMarch 31, 2007, the real estate loan portfolio constituted 86% of the totalloan portfolio.  While this exceeds the10% threshold for determining a concentration of credit risk within anindustry, we do not consider this to be a concentration with adverse 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 insimilar activities and have similar economic characteristics that would causetheir ability to meet contractual obligations to be similarly affected bychanges in economic 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 has $5.46million of interest only home equity lines of credit at March 31, 2007.

|                                               | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|
| ***(dollars in thousands)***        | ** ** | **March 31,  2007**         | ** ** | **March 31,  2006** | ** ** |
| Balance at beginning of  period               |       | $                                | 2,166      |   | $ | 1,953 |   |
| Provision charged to  operating expenses      |       | 66                               |       | 60 |   |
| Recoveries of loans  previously charged-off   |       | —                           |       | — |   |
| Loans charged-off -  consumer                 |       | (6                               | )          | — |   |
| Balance at end of  period                     |       | $                                | 2,226      |   | $ | 2,013 |   |
| Average total loans outstanding during period |       | $                                | 177,404    |   | $ | 157,145 |   |

 

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**        | *** *** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------|--------------|--------------------|------------|-----------------------|------------|
| ** **                                                                  | *** *** | **2007**           | ** ** | **% of  Loans**  | ** ** | **2006** | ** ** | **% of  Loans** | ** ** |
| Real  estate-construction                                                   |         | $                  | 253        |                  | 23         | % | $ | 218 |   | 17 | % |
| Real  estate-mortgage                                                       |         | 1,511              |       | 63                    | %          | 1,529 |   | 67 | % |
| Commercial and  industrial loans                                            |         | 433                |       | 12                    | %          | 400 |   | 14 | % |
| Loans to  individuals for household, family and other personal expenditures |         | 29                 |       | 2                     | %          | 39 |   | 2 | % |
|                                                                        |         | $                  | 2,226      |                  | 100        | % | $ | 2,166 |   | 100 | % |

 

20

----

 

 

|                                            | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| Nonaccrual loans                           |       | $                  | 18         |                  | $          | 60 |   |
| Loans 90 days  past due and still accruing |       | —             |       | —                |       |
|  Total nonperforming loans            |       | 18                 |       | 60                    |       |
| Other real  estate owned                   |       | —             |       | —                |       |
|  Total nonperforming assets           |       | $                  | 18         |                  | $          | 60 |   |
| Nonperforming assets to  total assets      |       | 0.01               | %          | 0.03                  | %          |

 

There were noother interest-bearing assets at March 31, 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 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 March 31, 2007 were as follows:

|                                                                                  | ** ** | **March 31,**            | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                       | ** ** | **2007**                      | ** ** |
| ***(dollars in thousands)***                                           | ** ** | **Contractual   Amount** | ** ** |
| Financial  instruments whose notional or contract amounts represent credit risk: |       |                          |       |
| Commitments to extend credit                                                     |       | $                             | 38,087     |   |
| Standby letters of credit                                                        |       | 3,343                         |       |
| Total                                                                            |       | $                             | 41,430     |   |

 

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 March 31, 2007.  This facility matures on May 1, 2007, 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.

21

----

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 March 31, 2007 and that the Company would meetsuch requirements if applicable.  SeeNote 10 to the consolidated financial statements for a table depictingcompliance with regulatory capital requirements.

As of March 31,2007, 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 that notificationwhich management believes have changed the Bank’s category.

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

## **Inflation**

The effect of 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 17.

###### **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 March31, 2007 that has materially affected, or is reasonably likely to materiallyaffect, the Company’s internal control over financial reporting.

22

----

## **PART II — Other Information**

**Item 1.      Legal Proceedings    None**

**Item 1A. Risk Factors  **There havebeen no material changes to the risk factors as of March 31, 2007 from thosedisclosed in the Company’s 2006 Annual Report on Form 10-K.

**Item 2       Unregistered Sales of Equity Securities and Useof Proceeds**

(a)   *Sales of Unregistered Securities.*      None

(b)   *Use of Proceeds. *NotApplicable.

(c)   *Registrant**Purchasesof Securities         *None

**Item 3.     Defaults uponSenior Securities**       None

**Item 4.     Submission ofMatters to a Vote of Security Holders**     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

23

----

 

**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                                                                                                                                        |       |       |

----

(1)             Incorporatedby reference 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)             Incorporatedby reference to exhibit of the same number to the Company’s Quarterly Report onForm 10-QSB for the quarter ended September 30, 2003, as filed with theSecurities and Exchange Commission.

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

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

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

(7)             Incorporatedby reference to exhibit of the same number to the Company’s Annual Report onForm 10-K for the year ended December 31, 2006, as filed with the Securitiesand Exchange Commission.

(8)             Incorporatedby reference to exhibit of the same number to the Company’s Annual Report onForm 10-KSB for the year ended December 31, 2004, as filed with the Securitiesand Exchange Commission.

(9)             Incorporatedby reference 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.

24

----

**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: April 27,  2007 | By:                            | /s/ Martin S. Lapera |
|                  |                           | Martin S. Lapera |
|                  |                           | President and Chief Executive Officer |
|                  |                           |   |
|                  |                           |   |
| Date: April 27,  2007 | By:                            | /s/ William R. Talley, Jr. |
|                  |                           | William R. Talley, Jr. |
|                  |                           | Executive Vice President and Chief Financial Officer |

 

25

----