Frederick County Bancorp (FCBI) 10-Q 2006 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549

FORM 10-Q

(MARK ONE)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934
	For the Quarterly Period Ended March 31, 2006
	OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                        

Commission File Number:  000-50407

FREDERICK COUNTY BANCORP, INC.
(Exact name of issuer as specified in its charter)

Maryland		20-0049496
(State of other jurisdiction of incorporation or organization)		(I.R.S. Employer 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 check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 2 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  x      No     o

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

Large accelerated filer o                          Accelerated filer o                          Non-accelerated filer x

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

State the number of shares of each of the issuer’s classes of common equity, as of the latest practical date. There were 1,458,602 shares of Common Stock outstanding as of April 28, 2006.

FREDERICK COUNTY BANCORP, INC. AND SUBSIDIARY

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets, March 31, 2006 and December 31, 2005
	Consolidated Statements of Income, Three Months Ended March 31, 2006 and 2005
	Consolidated Statements of Changes in Shareholders’ Equity, Three Months Ended March 31, 2006 and 2005
	Consolidated Statements of Cash Flows, Three Months Ended March 31, 2006 and 2005
	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

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Frederick County Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets

	(Unaudited)
	March 31,			December 31,
	2006			2005
(dollars in thousands)
ASSETS
Cash and due from banks	$	6,818		$	5,124
Federal funds sold	17,297			13,386
Interest-bearing deposits in other banks	9,354			10,000
Cash and cash equivalents	33,469			28,510
Investment securities available-for-sale at fair value	18,858			18,952
Investment securities held-to-maturity - fair value of $6,021 and $2,229	6,048			2,246
Restricted stock	893			821
Loans	159,334			155,341
Less: Allowance for loan losses	(2,013		)	(1,953		)
Net loans	157,321			153,388
Bank premises and equipment	1,944			1,811
Other assets	1,882			1,812
Total assets	$	220,415		$	207,540
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits:
Noninterest-bearing deposits	$	32,975		$	31,484
Interest-bearing deposits	169,658			158,571
Total deposits	202,633			190,055
Short-term borrowings	450			450
Long-term debt	250			250
Accrued interest and other liabilities	761			897
Total liabilities	204,094			191,652
Shareholders’ Equity
Common stock, per share par value $.01; 10,000,000 shares authorized; 1,458,602 shares issued and outstanding	15			15
Additional paid-in capital	14,652			14,652
Retained earnings	1,900			1,421
Accumulated other comprehensive loss	(246		)	(200		)
Total shareholders’ equity	16,321			15,888
Total liabilities and shareholders’ equity	$	220,415		$	207,540

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

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Frederick County Bancorp, Inc. and Subsidiary
Consolidated Statements of Income (Unaudited)

	For the ThreeMonths EndedMarch 31,
(dollars in thousands, except per share amounts)	2006		2005
Interest income:
Interest and fees on loans	$	2,723	$	2,129
Interest and dividends on investment securities:
Interest — taxable	208		155
Interest — tax exempt	34		2
Dividends	11		9
Interest on federal funds sold	153		56
Other interest income	45		2
Total interest income	3,174		2,353
Interest expense:
Interest on deposits	1,202		618
Interest on other short-term borrowings	7		6
Interest on long-term debt	5		—
Total interest expense	1,214		624
Net interest income	1,960		1,729
Provision for loan losses	60		150
Net interest income after provision for loan losses	1,900		1,579
Noninterest income:
Service fees	39		35
Other operating income	46		27
Total noninterest income	85		62
Noninterest expense:
Salaries and employee benefits	732		636
Occupancy and equipment expenses	184		156
Other operating expenses	269		273
Total noninterest expense	1,185		1,065
Income before provision for income taxes	800		576
Provision for income taxes	321		60
Net income	$	479	$	516
Basic earnings per share	$	0.33	$	0.35
Diluted earnings per share	$	0.31	$	0.34
Basic weighted average number of shares outstanding	1,458,602		1,457,626
Diluted weighted average number of shares outstanding	1,527,730		1,524,731

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

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Frederick County Bancorp, Inc. and
   Subsidiary
Consolidated Statement of Changes in
Shareholders’ Equity (Unaudited)

(dollars in thousands, except  shares outstanding)	Shares Outstanding	Common Stock		Additional Paid-in Capital		Retained Earnings (Deficit)			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
Balance, December 31, 2004	1,457,402	$	15	$	14,632	$	(411	)	$	(23	)	$	14,213
Comprehensive income:
Net income	—	—		—		516			—			516
Changes in net unrealized losses on securities available for sale, net of income taxes of $60	—	—		—		—			(95		)	(95		)
Comprehensive income												421
Shares issued under stock option transactions	1,200	—		12		—			—			12
Balance, March 31, 2005	1,458,602	$	15	$	14,644	$	105		$	(118	)	$	14,646
Balance, December 31, 2005	1,458,602	$	15	$	14,652	$	1,421		$	(200	)	$	15,888
Comprehensive income:
Net income	—	—		—		479			—			479
Changes in net unrealized losses on securities available for sale, net of income taxes of $28	—	—		—		—			(46		)	(46		)
Comprehensive income	—	—		—		—			—			433
Balance, March 31, 2006	1,458,602	$	15	$	14,652	$	1,900		$	(246	)	$	16,321

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

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Frederick County Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)

	Three Months Ended March 31,
(dollars in thousands)	2006			2005
Cash flows from operating activities:
Net income	$	479		$	516
Adjustments to reconcile net income to net cash provided by  operating activities:
Depreciation and amortization	41			38
Deferred income taxes	(26		)	—
Provision for loan losses	60			150
Net premium amortization on investment securities	12			24
Increase in other assets	(15		)	(239		)
Decrease in accrued interest and other liabilities	(136		)	(304		)
Net cash provided by operating activities	415			185
Cash flows from investing activities:
Purchases of investment securities available-for-sale	(1,476		)	(1,513		)
Purchases of investment securities held-to-maturity	(3,802		)	—
Proceeds from maturities of investment securities available-for-sale	1,483			1,057
Purchases of restricted stock	(72		)	(95		)
Net increase in loans	(3,993		)	(4,361		)
Purchases of bank premises and equipment, net	(174		)	(72		)
Net cash used in investing activities	(8,034		)	(4,984		)
Cash flows from financing activities:
Net increase in NOW, money market accounts, savings accounts and  noninterest-bearing deposits	4,789			6,063
Net increase in time deposits	7,789			7,202
Proceeds from issuance of common stock	—			12
Net cash provided by financing activities	12,578			13,277
Net increase in cash and cash equivalents	4,959			8,478
Cash and cash equivalents — beginning of period	28,510			16,639
Cash and cash equivalents — end of period	$	33,469		$	25,117
Supplemental cash flow disclosures:
Interest paid	$	1,212		$	609
Income taxes paid	$	131		$	230

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

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FREDERICK COUNTY BANCORP, INC.

Notes to Unaudited Consolidated Financial Statements

Note 1. General:

On September 30, 2003, the Agreement and Plan of Share Exchange (the “Exchange”) between the Frederick County Bancorp, Inc. (the “Bancorp”) and Frederick County Bank (the “Bank” and together with Bancorp, the “Company”), dated June 9, 2003, approved at the Special Meeting of Shareholders of the Bank held on September 22, 2003, became effective. Pursuant to the Exchange, each of the outstanding shares of common stock $10.00 par value of the Bank was converted into one share of the common stock $0.01 par value of Bancorp. As a result of the Exchange, the Bank has become a wholly owned subsidiary of Bancorp, and Bancorp recognized the assets and liabilities transferred at the carrying amounts in the accounts of the Bank as of January 1, 2003. During February 2004, the Company received approval from the Federal Reserve Bank of Richmond to become a financial holding company.

The Bank provides its customers with various banking services. The Bank offers various loan and deposit products to their customers. The Bank’s customers include individuals and commercial enterprises within its principal market area consisting of Frederick County, Maryland. Additionally, the Bank maintains correspondent banking relationships and transacts daily federal funds sales on an unsecured basis with regional correspondent banks. Note 4 discusses the 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 significant concentrations to any one industry or customer.

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions for Form 10-Q, regulation S-X, and general practices within the banking industry. Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. These statements should be read in conjunction with the consolidated financial statements and accompanying footnotes included in the Company’s 2005 Annual Report on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. The results shown in this interim report are not necessarily indicative of results to be expected for any other period or for the full year ending December 31, 2006.

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on information available as of the date of the consolidated financial statements and could differ from actual results.

Note 2. Earnings Per Share:

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

	Three Months Ended March 31,
(dollars in thousands, except per share amounts)	2006		2005
Net income	$	479	$	516
Basic earnings per share	$	0.33	$	0.35
Diluted earnings per share	$	0.31	$	0.34
Basic weighted average number of shares outstanding	1,458,602		1,457,626
Effect of dilutive securities — stock options	69,128		67,105
Diluted weighted average number of shares outstanding	1,527,730		1,524,731

Note 3. Employee Stock Option Plan:

The Company maintains an Employee Stock Option Plan that provides for grants of incentive and non-incentive stock options. This plan has been presented to and approved by the Company’s shareholders. Through December 31, 2005, the Company accounted for this plan under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Accordingly, no stock-based employee compensation cost has been recognized, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of grant. As of December 31, 2005, all outstanding stock options were fully vested. No stock options were granted or vested during the first three months of 2006 or 2005 and, accordingly, net income and earnings per share would not have been affected if compensation cost for the stock-based compensation plan had been determined based on the grant date fair values of awards (the

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method described in Statement of Financial Accounting Standards No. 123 Accounting for Stock-Based Compensation). As of January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R) Share-Based Payment and any stock-based employee compensation for future grants will be determined at that time using the Black-Scholes or another appropriate option-pricing model with the following assumptions: option price, dividend yield, expected volatility, risk free interest rate and the expected life.

Note 4. Investment Portfolio:

The following tables set forth certain information regarding the Company’s investment portfolio at March 31, 2006 and December 31, 2005:

Available-for-sale portfolio

March 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 after one year through five years	$	2,441	$	—	$	38	$	2,403	4.26	%
Due after five years through ten years	3,204		—		45		3,159		4.95	%
Mortgage-backed debt securities	13,213		9		326		12,896		4.40	%
Equity Securities	400		—		—		400		—	%
	$	19,258	$	9	$	409	$	18,858	4.38	%

December 31, 2005
(dollars in thousands)	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Estimated Fair Value		Average Yield
U.S. Treasury and other U.S. government Agencies and corporations:
Due after one year through five years	$	1,500	$	—	$	19	$	1,481	4.00	%
Due after five years through ten years	3,333		—		25		3,308		4.94	%
Mortgage-backed debt securities	14,045		7		289		13,763		4.29	%
Equity securities	400		—		—		400		—	%
	$	19,278	$	7	$	333	$	18,952	4.29	%

Held-to-maturity portfolio

March 31, 2006
(dollars in thousands)	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Estimated Fair Value		Average Yield
State and political subdivisions:
Due after five years through ten years	$	1,209	$	—	$	14	$	1,195	5.17	%
Due after ten years	4,839		1		14		4,826		5.79	%
	$	6,048	$	1	$	28	$	6,021	5.67	%

December 31, 2005
(dollars in thousands)	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Estimated Fair Value		Average Yield
State and political subdivisions:
Due after five years through ten years	$	705	$	—	$	11	$	694	5.08	%
Due after ten years	1,541		1		7		1,535		5.68	%
	$	2,246	$	1	$	18	$	2,229	5.49	%

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March 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	$	5,078	$	67	$	484	$	16	$	5,562	$	83
Mortgage-backed debt securities	6,416		129		5,768		197		12,184		326
State and political subdivisions	3,392		28		—		—		3,392		28
Total temporarily impaired securities	$	14,886	$	224	$	6,252	$	213	$	21,138	$	437

December 31, 2005
	Continuous unrealized  losses existing for  less than 12 months				Continuous unrealized losses existing  for 12 months  and greater				Total
(dollars in thousands)	Fair Value		Unrealized  Losses		Fair Value		Unrealized  Losses		Fair Value		Unrealized  Losses
U.S. Treasury and other U.S. government agencies and corporations	$	3,356	$	27	$	483	$	17	$	3,839	$	44
Mortgage-backed debt securities	8,182		144		4,758		145		12,940		289
State and political subdivisions	2,078		18		—		—		2,078		18
Total temporarily impaired securities	$	13,616	$	189	$	5,241	$	162	$	18,857	$	351

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The Company has not recognized any other-than-temporary impairment in connection with the unrealized losses reflected in the preceding tables.

Restricted Stock

The following table shows the amounts of restricted stock as of March 31, 2006 and December 31, 2005:

	March 31,		December 31,
(dollars in thousands)	2006		2005
Federal Home Loan Bank of Atlanta	$	414	$	342
Federal Reserve Bank	439		439
Atlantic Central Bankers Bank	40		40
	$	893	$	821

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Note 5. Loans and Allowance for Loan Losses:

Loans consist of the following:

(dollars in thousands)	March 31, 2006			% of Loans		December 31, 2005			% of Loans
Real estate loans:
Construction and land development	$	36,376		23	%	$	29,140		19	%
Mortgage loans:
Secured by 1 to 4 family residential properties	30,258			19	%	31,128			20	%
Secured by multi-family (5 or more) residential properties	7,569			5	%	3,942			3	%
Secured by commercial properties	55,266			34	%	60,087			39	%
Secured by farm land	4,339			3	%	2,836			2	%
Total mortgage loans	97,432			61	%	97,993			64	%
Loans to farmers	—			—	%	756			—	%
Commercial and industrial loans	22,917			14	%	25,140			16	%
Loans to individuals for household, family and other personal expenditures	2,609			2	%	2,312			1	%
	159,334			100	%	155,341			100	%
Less allowance for loan losses	(2,013		)			(1,953		)
Net loans	$	157,321				$	153,388

Transactions in the allowance for loan losses are summarized as follows:

	Three Months  Ended March 31,
(dollars in thousands)	2006		2005
Balance at beginning of period	$	1,953	$	1,503
Provision charged to operating expenses	60		150
Recoveries of loans previously charged-off	—		—
	2,013		1,653
Loans charged-off	—		—
Balance at end of period	$	2,013	$	1,653
Average total loans outstanding during period	$	157,145	$	136,935

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Note 6. Noninterest Expense:

Noninterest expense consists of the following:

	Three Months  Ended March 31,
(dollars in thousands)	2006			2005
Salaries	$	566		$	525
Bonus	83			13
Deferred Personnel Costs	(46		)	(32		)
Payroll Taxes	63			65
Employee Insurance	34			36
Other Employee Benefits	32			29
Depreciation	41			38
Rent	64			51
Utilities	18			15
Repairs and Maintenance	23			24
ATM Expense	17			15
Other Occupancy and Equipment Expenses	21			13
Postage and Supplies	14			14
Data Processing	64			87
Advertising and Promotion	61			41
Legal	7			4
Insurance	8			7
Consulting	7			10
Courier	10			10
Audit Fees	38			33
Shareholder Relations	—			1
Other	60			66
	$	1,185		$	1,065

Note 7. 401(k) Profit Sharing Plan:

The Company has a Section 401(k) profit sharing plan covering employees meeting certain eligibility requirements as to minimum age and years of service. Employees may make voluntary contributions to the Plan through payroll deductions on a pre-tax basis. The Company makes discretionary contributions to the Plan based on the Company’s earnings. The Company’s contributions are subject to a vesting schedule (20 percent per year) requiring the completion of five years of service with the Company before these benefits are fully vested. A participant’s account under the Plan, together with investment earnings thereon, is normally distributable, following retirement, death, disability or other termination of employment, in a single lump-sum payment.

The Company made contributions to the Plan in the amounts of $24,000 and $21,000 for the first three months of 2006 and 2005, respectively.

Note 8. Shareholders’ Equity:

Capital:

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined). Management believes that the Company and the Bank met all capital adequacy requirements to which they are subject as of March 31, 2006.

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As of March 31, 2006, the most recent notification from the regulatory agency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized 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 that notification which management believes have changed the Bank’s category.

The Company’s and the Bank’s actual capital amounts and ratios at March 31, 2006 and December 31, 2005 are presented in the following tables.

March 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	$	16,567	9.29%	$	7,134	4.00%	N/A		N/A
Bank	$	16,632	9.35%	$	7,118	4.00%	$	10,677	6.00%
Total Capital To Risk-Weighted Assets  Company	$	18,580	10.42%	$	14,268	8.00%	N/A		N/A
Bank	$	18,645	10.48%	$	14,236	8.00%	$	17,795	10.00%
Tier 1 Capital  To Average Assets Company	$	16,567	8.06%	$	8,219	4.00%	N/A		N/A
Bank	$	16,632	8.11%	$	8,203	4.00%	$	10,254	5.00%

December 31, 2005
	Actual			For Capital Adequacy Purposes			Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
(dollars in thousands)	Amount		Ratio	Amount		Ratio	Amount		Ratio
Tier 1 Capital To Risk-Weighted Assets Company	$	16,088	9.36%	$	6,877	4.00%	N/A		N/A
Bank	$	16,145	9.41%	$	6,860	4.00%	$	10,290	6.00%
Total Capital To Risk-Weighted Assets  Company	$	18,041	10.49%	$	13,753	8.00%	N/A		N/A
Bank	$	18,098	10.55%	$	13,720	8.00%	$	17,150	10.00%
Tier 1 Capital  To Average Assets  Company	$	16,088	8.26%	$	7,787	4.00%	N/A		N/A
Bank	$	16,145	8.31%	$	7,772	4.00%	$	9,716	5.00%

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This management’s discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to the Frederick County Bancorp, Inc. (the “Company”) beliefs, expectations, anticipations and plans regarding, among other things, general economic trends, interest rates, product expansions and other matters. Such forward-looking statements are identified by terminology such as “may”, “will”, “believe”, “expect”, “estimate”, “anticipate”, “likely”, “unlikely”, “continue”, or similar terms and are subject to numerous uncertainties, such as federal monetary policy, inflation, employment, profitability and consumer confidence levels, both nationally and in the Company’s market area, the health of the real estate and construction market in the Company’s market area, the Company’s ability to develop and market new

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products and to enter new markets, competitive challenges in the Company’s market, legislative changes and other factors, and as such, there can be no assurance that future events will develop in accordance with the forward-looking statements contained herein. Readers are cautioned against placing undue reliance on any such forward-looking statement. In addition, the Company’s past results of operations do not necessarily indicate its future results.

General

The following paragraphs provide an overview of the financial condition and results of operations of the Company. This discussion is intended to assist the readers in their analysis of the accompanying financial statements and notes thereto.

On September 30, 2003, the Agreement and Plan of Share Exchange (the “Exchange”) between the Frederick County Bancorp, Inc. (the “Bancorp”) and Frederick County Bank (the “Bank” and together with Bancorp, the “Company”), dated June 9, 2003, approved at the Special Meeting of Shareholders of the Bank held on September 22, 2003, became effective. Pursuant to the Exchange, each of the outstanding shares of common stock $10.00 par value of the Bank was converted into one share of the common stock $0.01 par value of Bancorp. As a result of the Exchange, the Bank has become a wholly owned subsidiary of Bancorp, and Bancorp recognized the assets and liabilities transferred at the carrying amounts in the accounts of the Bank as of January 1, 2003. During February 2004, the Company received approval from the Federal Reserve Bank of Richmond to become a financial holding company.

The Bank was incorporated on August 30, 2000, and in 2001 it became engaged in the developmental activities needed to obtain a commercial bank charter in the State of Maryland. The Bank received regulatory approval to commence banking operations on October 18, 2001 and, accordingly, became operational during the year ended December 31, 2001. The Bank provides its customers with various banking services. The Bank offers various loan and deposit products to their customers. The Bank’s customers include individuals and commercial enterprises within its principal market area consisting of Frederick County, Maryland.

The Company is continually looking for promising branch sites that will contribute to the Company’s growth and profit expectations. While additional branching activity is anticipated, there can be no assurance as to when or if, additional branches will be established, whether any such branches can be operated profitably, or whether such expansion will result in increased assets, earnings, return on equity or shareholder value. Two new branches, located at 200 Commerce Drive, Walkersville, Maryland and 6910 Crestwood Boulevard, Frederick, Maryland, are currently under construction and the Company anticipates that these facilities will open in the third and fourth quarters of 2006.

Critical Accounting Policies

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and follow general practices within the industry in which it operates. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available. The estimates used in management’s assessment of the adequacy of the allowance for credit losses require that management make assumptions about matters that are uncertain at the time of estimation. Differences in these assumptions and differences between the estimated and actual losses could have a material effect. For discussions related to the critical accounting policies of the Company, refer to the sections in this Management’s Discussion and Analysis entitled “Income Taxes” and “Allowance for Loan Losses.”

Deposits

Deposits grew by $12.58 million, or 6.62%, from December 31, 2005 to a balance of $202.63 million as of March 31, 2006 and by $33.78 million, or 20.00% from March 31, 2005. The Company’s deposit growth strategy is to increase deposits in response to loan demand.

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Three Months Ended March 31, 2006 and 2005

The net income was $479,000 for the three months ended March 31, 2006 as compared to the $516,000 net earnings recorded for the same period in 2005. It should be noted that the Company recognized $321,000 of income tax expense during this period in 2006, whereas, only $60,000 of income tax expense was incurred for the same period in 2005 due to the release of the valuation allowance associated with the net operating losscarryforwards available at that time. The basic earnings per share for the three months ended March 31, 2006 and 2005 are $0.33 and $0.35, respectively, and are based on the weighted-average number of shares outstanding of 1,458,602 in 2006 and 1,457,626, in 2005. The diluted earnings per share for the three months ended March 31, 2006 and 2005 are $0.31 and $0.34, respectively, and are based on the weighted-average number of shares outstanding of 1,527,730 and 1,524,731, respectively.

The Company experienced an annualized return on average assets of 0.93% and 1.22% for the three-month periods ended March 31, 2006 and 2005, respectively. Additionally, the Company experienced an annualized return on average shareholders’ equity of 11.80% and 14.17% for the three-month periods ended March 31, 2006 and 2005, respectively.

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

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

Three months ended March 31,	2006						2005
(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	$	13,650	$	153	4.55	%	$	8,773	$	56	2.59	%
Interest bearing deposits in other banks	4,004		45		4.56		467		2		1.74
Investment securities (1):
Taxable	20,870		219		4.26		17,442		164		3.81
Tax-exempt (2)	3,512		52		6.00		299		3		4.07
Loans (3)	157,145		2,727		7.04		136,935		2,133		6.32
Total interest-earning assets	199,181		3,196		6.51		163,916		2,358		5.83
Noninterest-earning assets	6,305						5,074
Total assets	$	205,486					$	168,990
Liabilities and Shareholders’ Equity
Interest-bearing liabilities
NOW accounts	$	13,055	6		0.19	%	$	15,911	7		0.18	%
Savings accounts	2,806		3		0.43		3,040		4		0.53
Money market accounts	31,237		190		2.47		28,605		76		1.08
Certificates of deposit $100,000 or more	52,180		499		3.88		41,373		263		2.58
Certificates of deposit less than $100,000	57,710		504		3.54		42,697		268		2.55
Short-term borrowings	450		7		6.31		450		6		5.41
Long-term debt	250		5		8.11		—		—		—
Total interest-bearing liabilities	157,688		1,214		3.12		132,076		624		1.92
Noninterest-bearing deposits	30,956						21,747
Noninterest-bearing liabilities	608						604
Total liabilities	189,252						154,427
Total shareholders’ equity	16,234						14,563
Total liabilities and shareholders’ equity	$	205,486					$	168,990
Net interest income			$	1,982					$	1,734
Net interest spread					3.39	%					3.92	%
Net interest margin					4.04	%					4.29	%

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

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(2)Presented on a taxable-equivalent basis using the statutory federal income tax rate of 34%. Taxable-equivalent adjustments of $18,000 in 2006 and $1,000 in 2005 are included in the calculation of the tax-exempt investment interest income.

(3)Presented on a taxable-equivalent basis using the statutory federal income tax rate of 34%. Taxable-equivalent adjustments of $4,000 in 2006 and $4,000 in 2005 are included in the calculation of the loan interest income. Net loan origination income (expenses) in interest income totaled $7,000 in 2006 and $(5,000) in 2005.

Net Interest Income

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

The Bank commenced operations on October 18, 2001. Since it’s opening, Management has been pleased with the Bank’s asset growth. Core deposit relationships are being developed within the local market place, driven by competitive pricing and excellent customer service.

Three Months Ended March 31, 2006 and 2005

The net interest income (on a taxable-equivalent basis) of $1.98 million in 2006 was $248,000, or 14.30% higher than the amount recognized in 2005. This increase in interest income is due to the growth in average earning assets and increased yields on earning assets. Average earning assets increased by  $35.27 million, or 21.51%, since March 31, 2005. The yield on earning assets in 2006 increased to 6.51% from 5.83% in 2005. This increase in yield is attributable to the impact of the increase in short-term rates by the Federal Reserve. However, the increase by 120 basis points in the rate paid on interest earning liabilities, primarily a result of prior Federal Reserve increases of the discount rate and stiff competition for deposits, more than offset the increase in yield on interest earning assets. The Company’s net interest margin was 4.04% and 4.29% and the net interest spread was 3.39% and 3.92% for the three-month periods ended March 31, 2006 and 2005, respectively. Average loans as a percentage of average interest-earnings assets decreased to 78.90% for the three months ended March 31, 2006, as compared to 83.54% for the same period in 2005. The decline in average loans as a percentage of average earning assets is in part reflective of the Company’s preference to not make loans rather than assume riskier loans for which the Company will not be adequately compensated.

The interest expense increased 94.55% from $624,000 in 2005 to $1.21 million in 2006 due to the 19.39% increase in volume of interest-bearing liabilities, along with the increase in the related rates paid on such interest-bearing liabilities, which increased to 3.12% in 2006 from 1.92% in 2005.

Noninterest Income

Noninterest income was $85,000 and $62,000 for the three-month periods ended March 31, 2006 and 2005, respectively.

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

Noninterest Expense

See Note 6 to the unaudited consolidated financial statements for a schedule showing a detailed breakdown of the Company’s noninterest expense.

Three Months Ended March 31, 2006 and 2005

Noninterest expense amounted to $1.19 million and $1.07 million for these three-month periods in 2006 and 2005, respectively. The changes in noninterest expense are principally related to an increase in personnel costs. Salaries expense in 2006 was $566,000, up $41,000 from the salaries expense incurred in the same period in 2005. This increase of 7.81% is for employee pay increases and to make various employee salaries competitive with the current employment environment.

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Income Taxes

During the three months ended March 31, 2006, the Company incurred $321,000 of income tax expense compared to only $60,000 during the same period in 2005 due to the net operating loss carryforwards available at that time. At December 31, 2004, the Company recorded a valuation allowance of $158,000 to reduce the carrying value of the net deferred tax assets carried in the consolidated balance sheet. Valuation allowances are provided for deferred tax assets when in Management’s judgment a portion, or all, of the deferred tax assets may not be realized. During the first quarter of 2005, Management’s judgment changed and, accordingly, no longer believed a valuation allowance was needed. The primary factor influencing management’s judgment was the existence of sustained periods of taxable income. As of March 31, 2006, the Company was not required to maintain a valuation allowance.

The effective tax rates for the first three months of 2006 and 2005 were 40.13% and 10.42%. The rate for 2005 was positively impacted by the elimination of the $158,000 valuation allowance during that period. Excluding the effects of the valuation allowance, the effective tax rate would have been 37.85%.

Market Risk, Liquidity and Interest Rate Sensitivity

Asset/liability management involves the funding and investment strategies necessary to maintain an appropriate balance between interest sensitive assets and liabilities. It also involves providing adequate liquidity while sustaining stable growth in net interest income. Regular review and analysis of deposit and loan trends, cash flows in various categories of loans, and monitoring of interest spread relationships are vital to this process.

The conduct of our banking business requires that we maintain adequate liquidity to meet changes in the composition and volume of assets and liabilities due to seasonal, cyclical or other reasons. Liquidity describes the ability of the Company to meet financial obligations that arise during the normal course of business. Liquidity is primarily needed to meet the borrowing and deposit withdrawal requirements of the customers of the Company, as well as for meeting current and future planned expenditures. This liquidity is typically provided by the funds received through customer deposits, investment maturities, loan repayments, borrowings, and income. Management considers the current liquidity position to be adequate to meet the needs of the Company and its customers.

The Company seeks to limit the risks associated with interest rate fluctuations by managing the balance between interest sensitive assets and liabilities. Managing to mitigate interest rate risk is, however, not an exact science. Not only does the interval until repricing of interest rates on assets and liabilities change from day to day as the assets and liabilities change, but for some assets and liabilities, contractual maturity and the actual maturity experienced are not the same. Similarly, NOW and money market accounts, by contract, may be withdrawn in their entirety upon demand and savings deposits may be withdrawn on seven days notice. While these contracts are extremely short, it is the Company’s belief that these accounts turn over at the rate of five percent (5%) per year. The Company therefore treats them as having maturities staggered over all periods. If all of the Company’s NOW, money market, and savings accounts were treated as repricing in one year or less, the cumulative gap at one year or less would be $(50.49) million.

Interest rate sensitivity is an important factor in the management of the composition and maturity configurations of the Company’s earning assets and funding sources. An Asset/Liability Committee manages the interest rate sensitivity position in order to maintain an appropriate balance between the maturity and repricing characteristics of assets and liabilities that is consistent with the Company’s liquidity analysis, growth, and capital adequacy goals. It is the objective of the Asset/Liability Committee to maximize net interest margins during periods of both volatile and stable interest rates, to attain earnings growth, and to maintain sufficient liquidity to satisfy depositors’ requirements and meet credit needs of customers.

The table below, “Interest Rate Sensitivity Gap Analysis,” summarizes, as of March 31, 2006, the anticipated maturities or repricing of the Company’s interest-earning assets and interest-bearing liabilities, the Company’s interest rate sensitivity gap (interest-earning assets less interest-bearing liabilities), the Company’s cumulative interest rate sensitivity gap, and the Company’s cumulative interest sensitivity gap ratio (cumulative interest rate sensitivity gap divided by total assets). A negative gap for any time period means that more interest-bearing liabilities will reprice or mature during that time period than interest-earning assets. During periods of rising interest rates, a negative gap position would generally decrease earnings, and during periods of declining interest rates, a negative gap position would generally increase earnings. The converse would be true for a positive gap position. Therefore, a positive gap for any time period means that more interest-earning assets will reprice or mature during that time period than interest-bearing liabilities. During periods of rising interest rates, a positive gap position would generally increase earnings, and during periods of declining interest rates, a positive gap position would generally decrease earnings.

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It is important to note that the following table represents the static gap position for interest sensitive assets and liabilities at March 31, 2006. The table does not give effect to prepayments or extensions of loans as a result of changes in general market interest rates. Moreover, while the table does indicate the opportunities to reprice assets and liabilities within certain time frames, it does not account for timing differences that occur during periods of repricing. For example, changes to deposit rates tend to lag in a rising rate environment and lead in a falling rate environment.

Interest Rate Sensitivity Gap Analysis

March 31, 2006

	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	$	17,297		$	—		$	—		$	—		$	17,297
Interest-bearing deposits in other banks	9,354			—			—			—			9,354
Investment securities(1)	711			4,393			4,464			14,938			24,506
Loans	51,917			36,404			53,842			17,171			159,334
Total interest-earning assets	79,279			40,797			58,306			32,109			210,491
Liabilities
Savings and NOW Accounts	1,165			2,330			2,330			17,479			23,304
Money Market Accounts	1,583			3,166			3,166			23,746			31,661
Certificates of Deposit	74,100			34,834			5,759			—			114,693
Short-term borrowings	450			—			—			—			450
Long-term debt	250			—			—			—			250
Total interest-bearing liabilities	77,548			40,330			11,255			41,225			170,358
Interest rate sensitivity gap	$	1,731		$	467		$	47,051		$	(9,116	)	$	40,133
Cumulative interest rate sensitivity gap	$	1,731		$	2,198		$	49,249		$	40,133
Cumulative gap ratio as a percentage of total assets	0.79		%	1.00		%	22.34		%	18.21		%

(1)Excludes equity securities.

In addition to the Interest Rate Sensitivity Gap Analysis, the Company also uses an earnings simulation model on a quarterly basis to closely monitor interest sensitivity and to expose its balance sheet and income statement to different scenarios. The model is based on current Company data and adjusted by assumptions as to growth patterns, noninterest income and noninterest expense and interest rate sensitivity, based on historical data, for both assets and liabilities projected for a one-year period. The model is then subjected to a “shock test” assuming a sudden interest rate increase of 200 basis points or a decrease of 200 basis points, but not below zero. The results show that with a 200 basis point rise in interest rates the Company’s net interest income would decline by 8.41% and net income would decline by 18.05%. With a decrease in interest rates of 200 basis points the Company’s net interest income would increase by 5.40% and net income would increase by 11.58%.

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

Critical Accounting Policy:

Allowance for Loan Losses

The Company makes provisions for loan losses in amounts deemed necessary to maintain the allowance for loan losses at an appropriate level. The provision for loan losses is determined based upon Management’s estimate of the amount required to maintain an adequate allowance for loan losses reflective of the risks in the Company’s loan portfolio. The Company’s provision for loan losses for the first three months of 2006 and 2005 were $60,000 and $150,000, respectively. The loan growth was $3.99 million for the first three months of 2006 as compared to $4.36 million for the same period in 2005. Due to the increased exposure to commercial

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and commercial real estate loans in early 2005, Management deemed it necessary to increase the provision for loan losses during the first quarter of 2005. During 2006, Management feels that it is not necessary to have as large of a provision as the prior year, even though the new loan volume is about the same. At March 31, 2006 and December 31, 2005, the allowance for loan losses was $2.01 million and $1.95 million, respectively.

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

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. The allowance is based on two basic principles of accounting: (i) SFAS No. 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimatable and (ii) SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the loan balance and either the value of collateral, or the present value of future cash flows, or the loan’s value as observable in the secondary market. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by Management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis., taking into consideration all of the circumstances surrounding the loan and borrower, including the length of the delay, the reason for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The provision for loan losses included in the statements of operations serve to maintain the allowance at a level Management considers adequate.

The Company’s allowance for loan losses has three basic components: the specific allowance, the formula allowance and the pooled allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. As a result of the uncertainties inherent in the estimation process, Management’s estimate of loan losses and the related allowance could change in the near term.

The specific allowance component is used to individually establish an allowance for loans identified for impairment testing. When impairment is identified, a specific reserve may be established based on the Company’s calculation of the estimated loss embedded in the individual loan. Impairment testing includes consideration of the borrower’s overall financial condition, resources and payment record, support available from financial guarantors and the fair market value of collateral. These factors are combined to estimate the probability and severity of inherent losses. Large groups of smaller balance, homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment.  At March 31, 2006 there were no loans deemed to be impaired.

The formula allowance component is used for estimating the loss on internally risk rated loans and those loans identified for impairment testing. The loans meeting the Company’s internal criteria for classification, such as special mention, substandard, doubtful and loss are segregated from performing loans within the portfolio. These internally classified loans are then grouped by loan type (commercial, commercial real estate, commercial construction, residential real estate, residential construction or installment). Each loan type is assigned an allowance factor based on Management’s estimate of the associated risk, complexity and size of the individual loans within the particular loan category. Classified loans are assigned a higher allowance factor than non-classified loans due to Management’s concerns regarding collectability or Management’s knowledge of particular elements surrounding the borrower. Allowance factors increase with the worsening of the internal risk rating.

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

Allowance factors and overall size of the allowance may change from period to period based on Management’s assessment of the above-described factors and the relative weights given to each factor. In addition, various regulatory agencies periodically review the

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allowance for loan losses. These agencies may require the Bank to make additions to the allowance for loan losses based on their judgments of collectibility based on information available to them at the time of their examination.

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

As of March 31, 2006, the real estate loan portfolio constituted 84% of the total loan portfolio. While this exceeds the 10% threshold for determining a concentration of credit risk within an industry, we do not consider this to be a concentration with adverse risk characteristics given the diversity of borrowers within the real estate portfolio and other sources of repayment. An industry for this purpose is defined as a group of counterparties that are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. Additionally, the loan portfolio does not include concentrations of credit risk in loan products that permit the deferral of principal payments that are smaller than normal interest accruals (negative amortization); loans with high loan-to-value ratios; or loans, such as option adjustable-rate mortgages, that may expose the borrower to future increases in repayments that are in excess of increases that would result solely from increases in market interest rates.  The Company has $6.00 million of interest only home equity lines of credit at March 31, 2006.

	March 31,
(dollars in thousands)	2006		2005
Balance at beginning of period	$	1,953	$	1,503
Provision charged to operating expenses	60		150
Recoveries of loans previously charged-off	—		—
Loans charged-off	—		—
Balance at end of period	$	2,013	$	1,653
Average total loans outstanding during period	$	157,145	$	136,935

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

Allocation of Allowance for Loan Losses	March 31,				December 31,
	2006		% of Loans		2005		% of Loans
Real estate-construction	$	306	23	%	$	318	19	%
Real estate-mortgage	1,270		61	%	1,171		64	%
Commercial and industrial loans	380		14	%	408		16	%
Loans to individuals for household, family and other personal expenditures	57		2	%	56		1	%
	$	2,013	100	%	$	1,953	100	%

	March 31,			December 31,
	2006			2005
Nonaccrual loans	$	7		$	8
Loans 90 days past due	—			—
Total nonperforming loans	7			8
Other real estate owned	—			—
Total nonperforming assets	$	7		$	8
Nonperforming assets to total assets	0.00		%	0.00		%

There were no other interest-bearing assets at March 31, 2006 or December 31, 2005 classified as 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 serious doubts about the ability of the borrower to comply with the loan as currently written.

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Off-Balance Sheet Arrangements

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, including unused portions of lines of credit, and standby letters of credit. The Company has also entered into long-term lease obligations for some of its premises and equipment, the terms of which generally include options to renew. The above instruments and obligations involve, to varying degrees, elements of off-balance sheet risk in excess of the amount recognized in the consolidated statements of financial condition. None of these instruments or obligations have or are reasonably likely to have a current or future effect on the Company’s financial 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 of credit as of March 31, 2006 were as follows:

	March 31,
	2006
(dollars in thousands)	Contractual Amount
Financial instruments whose notional or contract amounts represent credit risk:
Commitments to extend credit	$	29,286
Standby letters of credit	2,451
Total	$	31,737

See Note 8 to the Notes to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 for additional information regarding the Company’s long-term lease obligations.

Capital Resources

The ability of the Company to grow is dependent on the availability of capital with which to meet regulatory requirements, discussed below. To the extent the Company is successful it may need to acquire additional capital through the sale of additional common stock, other qualifying equity instruments or subordinated debt, or through incurrence of debt which does not qualify as holding company capital, but which can be contributed as capital to the Bank or utilized for other corporate purposes. There can be no assurance that additional capital will be available to the Company on a timely basis or on attractive terms. At March 31, 2006, the Company had an outstanding unsecured loan from an unaffiliated third party in the amount of $450,000 with a fixed interest rate of 6.00% and matures on January 27, 2007. In addition, the Company has an unsecured revolving line of credit borrowing arrangement with an unaffiliated financial institution in the amount of $2.00 million with an outstanding balance of $250,000 as of March 31, 2006. This facility matures on May 1, 2007, has a floating interest rate equal to the Wall Street Journal Prime Rate and requires monthly interest payments only. The purpose of this facility is to provide capital to the Bank, as needed.

The Board of Directors of the Company has authorized management to investigate and take such actions as may be necessary to effect a private issuance of up to $5.0 million of trust preferred securities at such time as management shall deem appropriate. The Company has not determined when such securities would be issued, and the terms of such securities would be subject to determination at the time of issuance. There can be no assurance that the Company will issue any trust preferred securities.

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and Tier 1 capital (as defined) to average assets (as defined).  Management believes that the Company and the Bank met all capital adequacy requirements to which they are subject as of March 31, 2006. See Note 8 to the unaudited consolidated financial statements for a table depicting compliance with regulatory capital requirements.

As of March 31, 2006, the most recent notification from the regulatory agency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table in Note 8. There are no conditions or events since that notification which Management believes have changed the Bank’s category.

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Additionally, the Company has not repurchased any outstanding shares of its common stock, nor does it have an approved repurchase program at this time.

Inflation

The effect of changing prices on financial institutions is typically different than on non-banking companies since virtually all of a Company’s assets and liabilities are monetary in nature. In particular, interest rates are significantly affected by inflation, but neither the timing nor magnitude of the changes are directly related to price level indices; therefore, the Company can best counter inflation over the long term by managing net interest income and controlling net increases in noninterest income and expenses.

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

The Company’s management, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated, as of the last day of the period covered by this report, the effectiveness of the design and operation of the Company’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 Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15 under the Securities Act of 1934) during the quarter ended March 31, 2006 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II — Other Information

Item 1. Legal Proceedings    None

Item 1A. Risk Factors   There have been no material changes to the risk factors as of March 31, 2006 from those disclosed in the Company’s 2005 Annual Report on Form 10-K.

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

(a)Sales of Unregistered Securities.   None

(b)Use of Proceeds. Not Applicable.

(c)Registrant Purchases of Securities    None

Item 3.Defaults upon Senior Securities    None

Item 4.Submission of Matters to a Vote of Security Holders    None

Item 5.Other Information

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

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

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Item 6. Exhibits

Exhibit No.	Description of Exhibits
3(a)	Articles of Incorporation of the Company, as amended(1)
3(b)	Bylaws of the Company(2)
10(a)	2001 Stock Option Plan(3)
10(b)	Employment Agreement between the Bank and Martin S. Lapera(4)
10(c)	Employment Agreement between the Bank and William R. Talley, Jr. (5)
10(d)	Consulting Agreement between the Bank and Raymond Raedy (6)
10(e)	2002 Executive and Director Deferred Compensation Plan (7)
10(f)	Amendment No. 1 to the 2002 Executive and Director Deferred Compensation Plan (7)
10(g)	Loan Agreement with Atlantic Central Bankers Bank(8)
10(h)	Promissory Note with Atlantic Central Bankers Bank (8)
11	Statement Regarding Computation of Per Share Income — Please refer to Note 2 to the unaudited consolidated financial statements included herein
31(a)	Certification of Martin S. Lapera, President and Chief Executive Officer
31(b)	Certification of William R. Talley, Jr., Executive Vice President and Chief Financial Officer
32(a)	Certification of Martin S. Lapera, President and Chief Executive Officer
32(b)	Certification of William R. Talley, Jr., Executive Vice President and Chief Financial Officer

(1)Incorporated by reference to exhibit of the same number to the Company’s Quarterly Report on Form 10-QSB for the quarter ended March 31, 2004, as filed with the Securities and Exchange Commission.

(2)Incorporated by reference to exhibit of the same number to the Company’s Quarterly Report on Form 10-QSB for the quarter ended September 30, 2003, as filed with the Securities and Exchange Commission.

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

(4)Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 24, 2005.

(5)Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 24, 2005.

(6)Incorporated by reference to exhibit of the same number to the Bank’s Registration Statement on Form 10-SB as filed with the Board of Governors of the Federal Reserve System.

(7)Incorporated by reference to exhibit of the same number to the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2004, as filed with the Securities and Exchange Commission.

(8)Incorporated by reference to exhibit of the same number to the Company’s Quarterly Report on Form 10-QSB for the quarter ended March 31, 2005, as filed with the Securities and Exchange Commission.

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SIGNATURES

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

		FREDERICK COUNTY BANCORP, INC
Date: 05/04/06	By:	/s/ Martin S. Lapera
		Martin S. Lapera
		President and Chief Executive Officer
Date: 05/04/06	By:	/s/ William R. Talley, Jr.
		William R. Talley, Jr.
		Executive Vice President and Chief Financial Officer

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