10QSB 1 form10qsb.txt FORM 10QSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB (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, 2004 OR ( ) 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 (I.R.S. Employer incorporation or organization) Identification No.) 30 WEST PATRICK STREET FREDERICK, MARYLAND 21701 (Address of principal executive offices)(Zip Code) 301.620.1400 (Issuer's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and has been subject to such filing requirements for the past 90 day. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date. There were 727,576 shares of Common Stock outstanding as of April 30, 2004. Transitional Small Business Disclosure Format (check one) Yes [ ] No [X] FREDERICK COUNTY BANCORP, INC. TABLE OF CONTENTS Page ---- PART I FINANCIAL INFORMATION Item 1 Financial Statements Consolidated Balance Sheets, March 31, 2004 (Unaudited) and December 31, 2003 3 Consolidated Statements of Operations (Unaudited), Three Months Ended March 31, 2004 and 2003 4 Consolidated Statements of Changes in Shareholders' Equity (Unaudited), Three Months Ended March 31, 2004 and 2003 5 Consolidated Statements of Cash Flows (Unaudited), Three Months Ended March 31, 2004 and 2003 6 Notes to Consolidated Financial Statements (Unaudited) 7 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3 Controls and Procedures 18 PART II OTHER INFORMATION 19 Item 1 Legal Proceedings 19 Item 2 Changes in Securities and Small Business Issuer Purchases of Equity Securities 19 Item 3 Defaults upon Senior Securities 19 Item 4 Submission of Matters to a Vote of Security Holders 19 Item 5 Other Information 19 Item 6 Exhibits and Reports on Form 8-K 19 Signatures 2 FREDERICK COUNTY BANCORP, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED)
March 31, December 31, ------------------------------------------------------------------------------------- 2004 2003 ------------------------------------------------------------------------------------- (dollars in thousands) ------------------------------------------------------------------------------------- ASSETS ------------------------------------------------------------------------------------- Cash and due from banks $ 7,056 $ 5,619 Federal funds sold 19,230 10,355 Interest-bearing deposits in other banks 1,513 1,575 ------------------------------------------------------------------------------------- Cash and cash equivalents 27,799 17,549 ------------------------------------------------------------------------------------- Investment securities available for sale-at fair value 17,160 15,932 ------------------------------------------------------------------------------------- Restricted stock 760 626 ------------------------------------------------------------------------------------- Loans 103,923 96,029 Less: Allowance for loan losses (1,090) (985) ------------------------------------------------------------------------------------- Net loans 102,833 95,044 ------------------------------------------------------------------------------------- Bank premises and equipment 923 936 ------------------------------------------------------------------------------------- Other assets 743 548 ------------------------------------------------------------------------------------- Total assets $ 150,218 $ 130,635 ===================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------- LIABILITIES Deposits: Noninterest-bearing deposits $ 17,709 $ 17,180 Interest-bearing deposits 118,784 100,311 ------------------------------------------------------------------------------------- Total deposits 136,493 117,491 Short-term borrowings 350 120 Accrued interest and other liabilities 307 316 ------------------------------------------------------------------------------------- Total liabilities 137,150 117,927 ------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Common stock, per share par value $.01; 2,000,000 shares authorized; 727,576 issued and outstanding 7 7 Additional paid-in capital 14,617 14,617 Retained earnings (deficit) (1,640) (1,929) Accumulated other comprehensive income 84 13 ------------------------------------------------------------------------------------- Total shareholders' equity 13,068 12,708 ------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 150,218 $ 130,635 =====================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 3 FREDERICK COUNTY BANCORP, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
---------------------- For the three months ended March 31, --------------------------------------------------------------------------------- (dollars in thousands, except per share amounts) 2004 2003 --------------------------------------------------------------------------------- Interest income: Interest and fees on loans $ 1,473 $ 993 Interest and dividends on investment securities: Interest 138 180 Dividends 9 6 Interest on federal funds sold 25 23 Other interest income 1 8 --------------------------------------------------------------------------------- Total interest income 1,646 1,210 --------------------------------------------------------------------------------- Interest expense: Interest on deposits 379 370 Interest on other short-term borrowings 3 -- --------------------------------------------------------------------------------- Total interest expense 382 370 --------------------------------------------------------------------------------- Net interest income 1,264 840 Provision for loan losses 105 105 --------------------------------------------------------------------------------- Net interest income after provision for loan losses 1,159 735 --------------------------------------------------------------------------------- Noninterest income: Securities gains -- 34 Service fees 35 20 Other operating income 24 17 --------------------------------------------------------------------------------- Total noninterest income 59 71 --------------------------------------------------------------------------------- Noninterest expenses: Salaries and employee benefits 554 504 Occupancy and equipment expenses 150 148 Other operating expenses 225 150 --------------------------------------------------------------------------------- Total noninterest expenses 929 802 --------------------------------------------------------------------------------- Income before provision for income taxes 289 4 Provision for income taxes -- -- --------------------------------------------------------------------------------- Net income $ 289 $ 4 ================================================================================= Basic earnings per share $ 0.40 $ 0.01 ================================================================================= Diluted earnings per share $ 0.39 $ 0.01 ================================================================================= Basic weighted average number of shares outstanding 727,576 727,576 ================================================================================= Diluted weighted average number of shares outstanding 747,081 736,872 =================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 4 FREDERICK COUNTY BANCORP, INC. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
Accumulated Additional Retained Other Total Shares Common Paid-in Earnings Comprehensive Shareholders' (dollars in thousands) Outstanding Stock Capital (Deficit) Income Equity ------------------------------------------------------------------------------------------------------------------- Balance, January 1, 2003 727,576 $7 $14,617 $(2,359) $100 $12,365 Comprehensive income (loss): Net income 4 4 Other comprehensive income (loss) (21) (21) ------- Comprehensive income (loss) (17) ------------------------------------------------------------------------------------------------------------------- Balance, March 31, 2003 727,576 $7 $14,617 $(2,355) $ 79 $12,348 =================================================================================================================== Balance, January 1, 2004 727,576 $7 $14,617 $(1,929) $ 13 $12,708 Comprehensive income: Net income 289 289 Other comprehensive income 71 71 ------- Comprehensive income 360 ------------------------------------------------------------------------------------------------------------------- Balance, March 31, 2004 727,576 $7 $14,617 $(1,640) $ 84 $13,068 ===================================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 5 FREDERICK COUNTY BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 31, ------------------------------------------------------------------------------------------------------ (dollars in thousands) 2004 2003 ------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income $ 289 $ 4 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 46 45 Provision for loan losses 105 105 Securities gains -- (34) Net premium amortization on investment securities 27 76 Decrease (increase) in other assets (196) 85 Decrease in accrued interest and other liabilities (53) (226) ------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 218 55 ------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Purchases of investment securities available for sale (1,925) (3,042) Proceeds from sale of investment securities available for sale -- 2,382 Proceeds from maturities of investment securities available for sale 786 4,348 Purchases of restricted stock (134) (194) Net increase in loans (7,894) (11,862) Purchases of bank premises and equipment (33) (5) ------------------------------------------------------------------------------------------------------ Net cash used in investing activities (9,200) (8,373) ------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Net increase in NOW, money market accounts, savings accounts and noninterest-bearing deposits 16,135 5,530 Net increase in time deposits 2,867 4,493 Net increase (decrease) in short-term borrowings 230 (200) ------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 19,232 9,823 ------------------------------------------------------------------------------------------------------ Net increase in cash and cash equivalents 10,250 1,505 Cash and cash equivalents - beginning of period 17,549 19,948 ------------------------------------------------------------------------------------------------------ Cash and cash equivalents - end of period $ 27,799 $ 21,453 ====================================================================================================== Supplemental cash flow disclosures: Interest paid $ 377 $ 368 ======================================================================================================
The accompanying notes are an integral part of these consolidated financial statements. 6 FREDERICK COUNTY BANCORP, INC. Notes to Financial Statements (Unaudited) NOTE 1. GENERAL: On September 30, 2003, the Agreement and Plan of Share Exchange (the "Exchange") between Frederick County Bancorp, Inc. (the "Bancorp") and Frederick County Bank (the "Bank"), 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 the Bancorp. As a result of the Exchange, the Bank has become a wholly owned subsidiary of the Bancorp and Bancorp recognized the assets and liabilities transferred at the carrying amounts in the accounts of the Bank. The accompanying consolidated financial statements of Frederick County Bancorp, Inc. and its wholly-owned subsidiary, Frederick County Bank, (collectively, the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and are presented as if the exchange of shares occurred on January 1, 2003. Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. The financial statements for the three-month period ended March 31, 2003 reflect only the operations of the Bank, since the Bancorp had not been formed at that time. These statements should be read in conjunction with the financial statements and accompanying footnotes included in the Company's 2003 Annual Report to Shareholders. 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 ended December 31, 2004. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 financial statements and could differ from actual results. On August 30, 2000, the Bank was incorporated and in 2001, 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. 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) 2004 2003 -------------------------------------------------------------------------------- Net income $ 289 $ 4 -------------------------------------------------------------------------------- Basic earnings per share $ 0.40 $ 0.01 -------------------------------------------------------------------------------- Diluted earnings per share $ 0.39 $ 0.01 -------------------------------------------------------------------------------- Basic weighted average number of shares outstanding 727,576 727,576 Effect of dilutive securities - stock options 19,505 9,296 -------------------------------------------------------------------------------- Diluted weighted average number of shares outstanding 747,081 736,872 ================================================================================ NOTE 3. EMPLOYEE STOCK OPTION PLAN: On April 10, 2002, the shareholders of the Bank approved the stock-based compensation plan, which was assumed by the Company in connection with the Exchange. The Company accounts 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. The following table illustrates the effect on net income and earnings (loss) per share had compensation cost for the stock-based compensation plan been determined based on the grant date fair values of awards (the method described in SFAS No. 123, Accounting for Stock-Based Compensation): 7 Three Months Ended March 31, -------------------------------------------------------------------------------- (dollars in thousands, except per share amounts) 2004 2003 -------------------------------------------------------------------------------- Net income (loss): As reported $ 289 $ 4 -------------------------------------------------------------------------------- Deduct total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects -- (11) -------------------------------------------------------------------------------- Pro forma net income (loss) $ 289 $ (7) ================================================================================ Basic earnings (loss) per share: As reported $0.40 $ 0.01 ================================================================================ Pro forma $0.40 $(0.01) ================================================================================ Diluted earnings (loss) per share: As reported $0.39 $ 0.01 ================================================================================ Pro forma $0.39 $(0.01) ================================================================================ The stock options granted during 2001 to purchase 66,830 shares have a vesting schedule of 30% on October 18, 2001, 30% on October 18, 2002, and the remaining 40% on October 18, 2003. There were no options granted in 2004 or 2003. The fair value of the options granted in 2001 were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: -------------------------------------------------------------------------------- Dividend yield 2.5% -------------------------------------------------------------------------------- Expected Volatility 10.00% -------------------------------------------------------------------------------- Risk free interest rate 4.57% -------------------------------------------------------------------------------- Expected life, in years 10 -------------------------------------------------------------------------------- Weighted-average fair value of options granted during the year $3.50 -------------------------------------------------------------------------------- NOTE 4. INVESTMENT PORTFOLIO: The following tables set forth certain information regarding the Company's investment portfolio at March 31, 2004 and December 31, 2003: AVAILABLE-FOR-SALE PORTFOLIO
March 31, 2004 -------------------------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Average (dollars in thousands) Cost Gain Loss Value Yield -------------------------------------------------------------------------------------------------------- U.S. Treasury and other U.S. government agencies and corporations: Due after one year through five years $ 1,000 $ -- $ 2 $ 998 2.21% Mortgage-backed debt securities 16,022 165 25 16,162 4.02% -------------------------------------------------------------------------------------------------------- $17,022 $165 $27 $17,160 3.92% ========================================================================================================
The unrealized losses reflected in the preceding table are considered to be temporary as the Company has both the intent and ability to hold these investments for a period of time sufficient to allow for any anticipated recovery in fair value.
December 31, 2003 -------------------------------------------------------------------------------------------------------- Gross Gross Estimated Amortized Unrealized Unrealized Fair Average (dollars in thousands) Cost Gain Loss Value Yield -------------------------------------------------------------------------------------------------------- U.S. Treasury and other U.S. government agencies and corporations: Due after one year through five years $ 1,000 $-- $16 $ 984 2.21% Mortgage-backed debt securities 14,911 89 52 14,948 3.73% -------------------------------------------------------------------------------------------------------- $15,911 $89 $68 $15,932 3.63% ========================================================================================================
8 NOTE 5. LOANS AND ALLOWANCE FOR LOAN LOSSES: Loans consist of the following:
March 31, % of December 31, % of (dollars in thousands) 2004 Loans 2003 Loans ---------------------------------------------------------------------------------------------------------------- Real estate loans: Construction and land development $ 14,676 14% $10,741 11% ---------------------------------------------------------------------------------------------------------------- Mortgage loans: Secured by 1 to 4 family residential properties 19,088 19% 18,349 19% Secured by multi-family (5 or more) residential properties 2,092 2% -- --% Secured by commercial properties 45,032 43% 43,726 46% Secured by farm land 3,230 3% 1,139 1% ---------------------------------------------------------------------------------------------------------------- Total mortgage loans 69,442 67% 63,214 66% ---------------------------------------------------------------------------------------------------------------- Loans to farmers -- --% 775 1% Commercial and industrial loans 17,330 17% 19,290 20% Loans to individuals for household, family and other personal expenditures 2,475 2% 2,009 2% ---------------------------------------------------------------------------------------------------------------- 103,923 100% 96,029 100% === === Less allowance for credit losses (1,090) (985) --------------------------------------------------------------------------- ------- $102,833 $95,044 =========================================================================== =======
Transactions in the allowance for loan losses are summarized as follows: -------------------------------------------------------------------------------- Three months ended March 31, -------------------------------------------------------------------------------- (dollars in thousands) 2004 2003 -------------------------------------------------------------------------------- Average total loans outstanding during year $99,985 $62,862 -------------------------------------------------------------------------------- Balance at beginning of period $ 985 $ 613 Provision charged to operating expenses 105 105 Recoveries of loans previously charged-off -- 2 -------------------------------------------------------------------------------- 1,090 720 Loans charged-off -- -- -------------------------------------------------------------------------------- Balance at end of period $ 1,090 $ 720 ================================================================================ 9 NOTE 6. NONINTEREST EXPENSES: Noninterest expenses consist of the following: -------------------------------------------------------------------------------- Three months ended March 31, -------------------------------------------------------------------------------- (dollars in thousands) 2004 2003 -------------------------------------------------------------------------------- Salaries $490 $446 Deferred Personnel Costs (29) (32) Payroll Taxes 42 48 Employee Insurance 31 19 Other Employee Benefits 20 23 Depreciation 46 45 Rent 50 47 Utilities 16 15 Repairs and Maintenance 18 21 ATM Expense 12 11 Other Occupancy and Equipment Expenses 8 9 Postage and Supplies 14 10 Data Processing 69 53 Advertising and Promotion 40 17 Legal 17 6 Insurance 10 10 Consulting 10 10 Courier 7 7 Audit Fees 20 9 Shareholder Relations 4 -- Other 34 28 -------------------------------------------------------------------------------- $929 $802 ================================================================================ NOTE 7. 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). In addition, since the Bank is a new financial institution, it is required by the Federal Reserve Bank to maintain a 9.0% Tier 1 capital to average asset ratio (leverage ratio) until October 2004. Management believes that the Company and the Bank met all capital adequacy requirements to which they are subject as of March 31, 2004. As of March 31, 2004, 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. 10 The Company's and the Bank's actual capital amounts and ratios at March 31, 2004 and December 31, 2003 are presented in the following tables.
--------------------------------------------------------------------------------------- Minimum To Be Well Capitalized Under For Capital Prompt Corrective March 31, 2004 Actual Adequacy Purposes Action Provisions --------------------------------------------------------------------------------------- (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio -------------------------------------------------------------------------------------- Tier 1 Capital To Risk-Weighted Assets Company $12,984 10.99% $4,724 4.00% N/A N/A Bank $13,025 11.05% $4,716 4.00% $ 7,075 6.00% --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- Total Capital To Risk-Weighted Assets Company $14,074 11.92% $9,449 8.00% N/A N/A Bank $14,115 11.97% $9,433 8.00% $11,791 10.00% --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- Tier 1 Capital To Average Assets(1) Company $12,984 9.86% $5,268 4.00% N/A N/A Bank $13,025 9.90% $5,265 4.00% $ 6,581 5.00% --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- Minimum To Be Well Capitalized Under For Capital Prompt Corrective December 31, 2003 Actual Adequacy Purposes Action Provisions --------------------------------------------------------------------------------------- (dollars in thousands) Amount Ratio Amount Ratio Amount Ratio --------------------------------------------------------------------------------------- Tier 1 Capital To Risk-Weighted Assets Company $12,695 11.95% $4,250 4.00% N/A N/A Bank $12,733 11.99% $4,247 4.00% $ 6,370 6.00% --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- Total Capital To Risk-Weighted Assets Company $13,680 12.88% $8,499 8.00% N/A N/A Bank $13,718 12.92% $8,494 8.00% $10,617 10.00% --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- Tier 1 Capital To Average Assets(1) Company $12,695 10.39% $4,886 4.00% N/A N/A Bank $12,733 10.43% $4,885 4.00% $ 6,107 5.00% ---------------------------------------------------------------------------------------
(1) The Bank is required to have a Tier 1 Capital to Average Assets Ratios of only 4.00% and 5.00% for Capital Adequacy Purposes and to be Well Capitalized Under Prompt Corrective Action Provisions, respectively. However, under the approval received from the Federal Reserve Bank, the Bank is also required to maintain a minimum Tier 1 Capital to Average Assets of 9.00% until October 2004. At March 31, 2004, and December 31, 2003, the level of Tier 1 Capital required to meet the 9% requirement totaled $11,845,000 and $10,992,000, respectively. Additionally, the Company has not repurchased any outstanding shares of its common stock , nor does it have an approved repurchase program at this time. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL 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", 11 "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 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. During February 2004, the Company received approval from the Federal Reserve Bank of Richmond to become a financial holding company. 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. The Company was organized in May 2003 and on September 30, 2003, the Agreement and Plan of Share Exchange (the "Exchange") between the Company and Frederick County Bank (the "Bank"), dated June 9, 2003, approved at the Special Meeting of Shareholders of 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 the Company. As a result of the Exchange, the Bank has become a wholly owned subsidiary of the Company. The Bank was incorporated on August 30, 2000 and during 2001 became actively involved in the developmental activities needed to obtain a commercial bank charter in the State of Maryland. All regulatory approvals were received, and the Bank commenced operations on October 18, 2001. 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. CRITICAL ACCOUNTING POLICIES The Company's financial statements are prepared in accordance with generally accepted accounting principles ("GAAP") in the United States of America 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. Further information is located in the section labeled Allowance for Loan Losses, later in this report. THREE MONTHS ENDED MARCH 31, 2004 The net income was $289,000 and $4,000 for the three month periods ended March 31, 2004 and 2003, respectively. The basic earnings per share for the three months ended March 31, 2004 and 2003 are $0.40 and $0.01, respectively, and based on the weighted-average number of shares outstanding of 727,576 for each period. The diluted earnings per share for the three months ended March 31, 2004 and 2003 are $0.39 and $0.01, respectively, and based on the weighted-average number of shares outstanding of 747,081 and 736,872, respectively. The Company experienced a return on average assets of 0.88% and 0.02% for the three-month periods ended March 31, 2004 and 2003, respectively. Additionally, the Company experienced a return on average shareholders' equity of 8.94% and 0.13% for the three-month periods ended March 31, 2004 and 2003, respectively. As of March 31, 2004, the Company experienced significant asset growth of $39.18 million, or 35.3%, reaching $150.22 million at March 31, 2004, up from $111.04 million at March 31, 2003 and the $130.64 million as of December 31, 2003. Gross loans increased $33.79 million, or 48.2% since March 31, 2003, to end the period at $103.92 million, which is also up from $96.03 million as of 12 December 31, 2003. Deposits also grew, and stood at $136.49 million at March 31, 2004, an increase of 38.7% since March 31, 2003 and 16.2% since December 31, 2003. However, included in the deposits is a $9.0 million short-term escrow account for a new company for their initial public stock offering. Subsequent to March 31, 2004, this escrow account was closed and the client received the escrowed funds. DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL The "Comparative Statement Analysis," shows average balances of asset and liability categories, interest income and interest paid, and average yields and rates for the periods indicated. FREDERICK COUNTY BANCORP, INC. COMPARATIVE STATEMENT ANALYSIS
Three months ended March 31, 2004 2003 ---------------------------------------------------------------------------------------------------------- Average Interest Average Average Interest Average daily Income/ Yield/ daily Income/ Yield/ (dollars in thousands) balance Paid rate balance Paid rate ---------------------------------------------------------------------------------------------------------- Assets Interest-earning assets: Federal funds sold $ 10,690 $ 25 0.94% $ 7,948 $ 23 1.17% Interest bearing deposits in other banks 350 1 1.15 2,530 8 1.28 Investment securities: Taxable 16,327 147 3.61 21,063 186 3.58 Loans 99,985 1,473 5.91 62,862 993 6.41 ---------------------------------------------------------------------------------------------------------- Total interest-earning assets 127,352 1,646 5.18 94,403 1,210 5.20 ---------------------------------------------------------------------------------------------------------- Noninterest-earning assets 4,359 3,848 ---------------------------------------------------------------------------------------------------------- Total assets $131,711 $98,251 ========================================================================================================== Liabilities and Shareholders' Equity Interest-bearing liabilities NOW accounts $ 13,888 6 0.17% $11,295 6 0.22% Savings accounts 3,307 4 0.49 2,082 4 0.78 Money market accounts 27,958 65 0.93 18,419 49 1.08 Certificates of deposit $100,000 or more 28,108 145 2.07 18,251 131 2.91 Certificates of deposit less than $100,000 28,647 159 2.23 25,003 180 2.92 Short-term borrowings 286 3 4.00 52 -- -- ---------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 102,194 382 1.50 75,102 370 2.00 ---------------------------------------------------------------------------------------------------------- Noninterest-bearing deposits 16,371 10,516 Noninterest-bearing liabilities 215 238 ---------------------------------------------------------------------------------------------------------- Total liabilities 118,780 85,856 ---------------------------------------------------------------------------------------------------------- Total shareholders' equity 12,931 12,395 ---------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $131,711 $98,251 ========================================================================================================== Net interest income $1,264 $ 840 ========================================================================================================== Net interest spread 3.68% 3.20% ========================================================================================================== Net interest margin 3.98% 3.61% ==========================================================================================================
13 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, 2004 AND 2003 The interest income of $1.65 million in 2004 was $436,000 higher than the amount recognized in 2003. This dramatic increase in interest income is due to the growth in average earning assets of $32.95 million or 34.9% since March 31, 2003. The yield on average earning assets in 2004 decreased to 5.18% from 5.20% in 2003. This decrease in yield is attributable to the drop in the yield earned on all categories of average earnings assets, but predominantly declines in the yield on the loan portfolio, which went from 6.41% in 2003 to 5.91% in 2004. The interest expense increased marginally from $370,000 in 2003 to $382,000 in 2004 due to the 36.1% increase in volume of average interest-bearing liabilities that increased from $75.10 million as of March 31, 2003 to $102.19 million as of March 31, 2004, net of the offset caused by the decline in the average rate paid on these liabilities from 2.00% in 2003 to 1.50% in 2004. The declines in the earning assets and interest-bearing liabilities for the first quarter 2004 from the levels in 2003, reflect the continued impact of the significant rate reductions effected by the Federal Reserve in 2001 and continued into 2002 with the last rate reduction occurring in June 2003. The Company's net interest margin was 3.98% and 3.61% and the net interest spread was 3.68% and 3.20% for the three-month periods ended March 31, 2004 and 2003, respectively. NONINTEREST INCOME Noninterest income was $59,000 and $71,000 for the three-month periods ended March 31, 2004 and 2003, respectively, attributable primarily to service fees on deposit accounts and ATM interchange fees. Included in the noninterest income for 2003 is $34,000 of securities gains, which were realized, in the first quarter. Due to the decreasing interest rate environment and the corresponding increase in market value of the fixed income securities in the investment portfolio, management decided to sell approximately $2.4 million in securities during the first quarter of 2003 and use the proceeds to aid in the funding of the loan portfolio. 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 EXPENSES Noninterest expenses amounted to $929,000 and $802,000 for the first three months of 2004 and 2003, respectively. See Note 6 to the financial statements for a schedule showing a detailed breakdown of the Company's noninterest expenses. The changes in noninterest expenses are principally related to the following: an increase in personnel costs; the increase in data processing expenses, which increase as the number and volume of loans and deposit accounts increase, along with the introduction of new products; and the additional advertising expense to increase the Bank's name recognition in the local community. INCOME TAXES The Company has recorded a 100% deferred tax valuation allowance related to various temporary differences, principally consisting of the provision for loan losses and its net operating loss carryforward, totaling $644,000 and $910,000 as of March 31, 2004 and 2003, respectively. The Company earned $289,000 for the first quarter of 2004, $430,000 for the year ended December 31, 2003, but recorded net losses for 2002 and 2001 in the amounts of $1.49 million and $872,000, respectively. Therefore the Company had remaining net loss carryforwards of $1.93 million at the start of 2004. 14 Since the Company has only been in existence since October 18, 2001 and earned $430,000 for the year 2003 and $289,000 for the first quarter of 2004, it is management's opinion that it is prudent at this time to reduce the deferred tax valuation allowance only to the extent that income tax benefits are realized. Based on historical performance, the Company feels that since it does not have a proven track record for its earnings potential, it is more likely than not that some portion or all of the deferred tax asset may not be realized. 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 $(30.81) 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, 2004, 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. It is important to note that the following table represents the static gap position for interest sensitive assets and liabilities at March 31, 2004. 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. 15
INTEREST RATE SENSITIVITY GAP ANALYSIS MARCH 31, 2004 Expected Repricing or Maturity Date ------------------------------------------------------------------------------------------------------ Within One to Three to After (dollars in thousands) One Year Three Years Five Years Five Years Total ------------------------------------------------------------------------------------------------------ Assets Federal funds sold $19,230 $ -- $ -- $ -- $ 19,230 Interest-bearing deposits in other banks 1,513 -- -- -- 1,513 Investment securities 1,383 2,420 4,278 9,079 17,160 Loans 38,420 17,729 38,278 9,496 103,923 ------------------------------------------------------------------------------------------------------ Total interest-earning assets 60,546 20,149 42,556 18,575 141,826 ------------------------------------------------------------------------------------------------------ Liabilities Savings and NOW Accounts 1,289 2,578 2,578 19,335 25,780 Money Market Accounts 1,729 3,459 3,459 25,941 34,588 Certificates of Deposit 30,640 14,753 13,023 -- 58,416 Short-term borrowings 350 -- -- -- 350 ------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 34,008 20,790 19,060 45,276 119,134 ------------------------------------------------------------------------------------------------------ Interest rate sensitivity gap $26,538 $ (641) $23,496 $(26,701) $ 22,692 ====================================================================================================== Cumulative interest rate Sensitivity gap $26,538 $25,897 $49,393 $ 22,692 ====================================================================================================== Cumulative gap ratio as a percentage of total assets 17.67% 17.24% 32.88% 15.11% =========================================================== ==========================================
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 quarter of 2004 and 2003 was $105,000. The loan growth was $7.89 million and $11.86 million for the first quarter of 2004 and 2003, respectively. At March 31, 2004 and 2003, the allowance for loan losses was $1.09 million and $720,000, respectively. The allowance for loan losses is an estimate of the losses that are inherent in the loan portfolio. 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. 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 allocate an allowance for loans identified as impaired. 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. When impairment is identified, then a specific reserve is established based on the Company's calculation of the loss embedded in the individual loan. 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, 2004 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, for which no impairment was identified. The loans meeting the Company's internal criteria for classification, such 16 as special mention, substandard, doubtful and loss, as well as, impaired loans 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. 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. Total nonperforming assets as of March 31, 2004 totaled $56,000, consisting entirely of nonaccrual commercial and industrial loans, and were .04% of total assets. There were no other interest-bearing assets at March 31, 2004, 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. As of March 31, 2004, the real estate loan portfolio constituted 81% of the total loan portfolio. The Company does not have a concentration of loans that exceed 10% of the total loan portfolio to any one industry. 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. March 31, -------------------------------------------------------------------------------- (dollars in thousands) 2004 2003 -------------------------------------------------------------------------------- Average total loans outstanding during period $99,985 $62,862 -------------------------------------------------------------------------------- Balance at beginning of period $ 985 $ 613 Provision charged to operating expenses 105 105 Recoveries of loans previously charged-off -- 2 -------------------------------------------------------------------------------- 1,090 720 Loans charged-off -- -- -------------------------------------------------------------------------------- Balance at end of period $ 1,090 $ 720 ================================================================================ 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, 2004 % of Loans ------------------------------------------------------------------ Real estate-construction $ 68 14% Real estate-mortgage 670 67% Commercial and industrial loans 296 17% Loans to individuals 56 2% ------------------------------------------------------------------ $1,090 100% ================================================================== 17 CAPITAL RESOURCES In the fourth quarter of 2001, the Bank completed its offering of common stock, raising an aggregate of $9.44 million net of expenses of the offering. During the third quarter of 2002, the Bank completed the sale of 250,000 shares of common stock in a secondary stock offering, raising an additional $5.17 million, net of expenses of the offering. The ability of the Company to grow is dependent on the availability of capital with which to meet regulatory requirements, discussed below, and to absorb initial operating losses. 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. There can be no assurance that additional capital will be available to the Company on a timely basis or on attractive terms. 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). In addition, since the Bank is a new financial institution, it is required by the Federal Reserve Bank to maintain a 9.0% Tier 1 capital to average asset ratio (leverage ratio) until October 2004. Management believes that the Company and the Bank met all capital adequacy requirements to which they are subject as of March 31, 2004. See Note 7 to the consolidated financial statements for a table depicting compliance with regulatory capital requirements. As of March 31, 2004, 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 7. There are no conditions or events since that notification which management believes have changed the Bank's category. 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. 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 adequate. 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, 2004 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 18 PART II - OTHER INFORMATION Item 1. Legal Proceedings - None Item 2 - Changes in Securities and Small Business Issuer Purchases of Equity Securities (a) Modification of Rights of Registered Securities. None (b) Issuance or Modification of Other Securities Affecting Rights of Registered Securities. None (c) Sales of Unregistered Securities. None (d) Use of Proceeds. Not Applicable. (e) Small Business Issuer Purchases of Securities. None Item 3. Defaults upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - None Item 5. Other Information - None Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit No. Description of Exhibits 3(a) Articles of Incorporation of the Company, as amended, filed herewith 3(b) Bylaws of the Company(1) 10(a) 2001 Stock Option Plan(2) 10(b) Employment Agreement between the Bank and Martin S. Lapera (2) 10(c) Employment Agreement between the Bank and William R. Talley, Jr. (2) 10(d) Consulting Agreement between the Bank and Raymond Raedy (2) 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 September 30, 2003, as filed with the Securities and Exchange Commission. (2) Incorporated by reference to exhibit 4 to the Company's Registration Statement on Form S-8 (No. 333-111761). (b) Reports on Form 8-K. A Form 8-K was filed on February 10, 2004 with the Securities and Exchange Commission, which included a press release reporting the year ended December 31, 2003 earnings. 19 SIGNATURES In accordance the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FREDERICK COUNTY BANCORP, INC. Date: May 6, 2004 By: /s/ Martin S. Lapera -------------------------------------------- Martin S. Lapera President and Chief Executive Officer Date: May 6, 2004 By: /s/ William R. Talley, Jr. -------------------------------------------- William R. Talley, Jr. Executive Vice President and Chief Financial Officer