Frederick County Bancorp, Inc. and Subsidiaries

Consolidated Balance Sheets

	March 31,			December 31,
(dollars in thousands)	2013			2012
	(unaudited)
ASSETS
Cash and due from banks	$	2,342		$	2,202
Federal funds sold	25			—
Interest-bearing deposits in other banks	37,933			30,349
Cash and cash equivalents	40,300			32,551
Investment securities available-for-sale at fair value	32,094			34,788
Restricted stock	1,444			1,504
Loans	230,660			229,288
Less: Allowance for loan losses	(3,565		)	(3,571		)
Net loans	227,095			225,717
Bank premises and equipment	6,688			6,734
Bank owned life insurance	7,851			7,788
Foreclosed properties	2,048			2,048
Other assets	3,092			3,329
Total assets	$	320,612		$	314,459

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities
Deposits:
Noninterest-bearing deposits	$	51,764		$	51,256
Interest-bearing deposits	222,458			216,857
Total deposits	274,222			268,113
Short-term borrowings	2,700			2,700
Long-term borrowings	10,000			10,000
Junior subordinated debentures	6,186			6,186
Accrued interest and other liabilities	937			1,204
Total liabilities	294,045			288,203

Shareholders’ Equity
Common stock, per share par value $0.01; 10,000,000 shares authorized; 1,508,574 and 1,508,574 shares issued and outstanding	15			15
Additional paid-in capital	15,680			15,663
Retained earnings	10,515			10,110
Accumulated other comprehensive income	357			468
Total shareholders’ equity	26,567			26,256
Total liabilities and shareholders’ equity	$	320,612		$	314,459

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

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Frederick County Bancorp, Inc. and Subsidiaries

Consolidated Statements of Income (Unaudited)

	Three Months Ended
(dollars in thousands, except per share amounts)	March 31, 2013		March 31, 2012
Interest income:
Interest and fees on loans	$	2,879	$	2,978
Interest and dividends on investment securities:
Interest — taxable	95		155
Interest — tax exempt	67		95
Dividends	15		13
Other interest income	18		15
Total interest income	3,074		3,256
Interest expense:
Interest on deposits	327		401
Interest on short-term borrowings	17		20
Interest on long-term borrowings	79		80
Interest on junior subordinated debentures	29		34
Total interest expense	452		535
Net interest income	2,622		2,721
Provision for loan losses	—		65
Net interest income after provision for loan losses	2,622		2,656
Noninterest income:
Gain on sale of foreclosed properties	28		—
Bank owned life insurance income	63		40
Service fees	86		77
Other operating income	72		85
Total noninterest income	249		202
Noninterest expense:
Salaries and employee benefits	1,270		1,303
Occupancy and equipment expenses	355		362
Other operating expenses	602		685
Total noninterest expense	2,227		2,350
Income before provision for income taxes	644		508
Provision for income taxes	164		138
Net income	$	480	$	370
Basic earnings per share	$	0.32	$	0.24
Diluted earnings per share	$	0.31	$	0.24
Basic weighted average number of shares outstanding	1,508,574		1,516,445
Diluted weighted average number of shares outstanding	1,542,575		1,516,562
Dividends declared per share	$	0.05	$	0.05

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

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Frederick County Bancorp, Inc. and Subsidiaries

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

Three Months Ended March 31, (dollars in thousands)	Shares Outstanding	Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity

Balance, January 1, 2012	1,514,314	$	15	$	15,621	$	9,018		$	803		$	25,457
Comprehensive income						370			(94		)	276
Dividends paid on common stock						(76		)				(76		)
Shares repurchased
Shares issued under stock option transactions	2,635			30								30
Compensation expense from stock option transactions				19								19
Excess tax benefit from equity-based awards				3								3
Balance, March 31, 2012	1,516,949	$	15	$	15,673	$	9,312		$	709		$	25,709
Balance, January 1, 2013	1,508,574	$	15	$	15,663	$	10,110		$	468		$	26,256
Comprehensive income						480			(111		)	369
Dividends paid on common stock						(75		)				(75		)
Compensation expense from stock option transactions				17								17
Balance, March 31, 2013	1,508,574	$	15	$	15,680	$	10,515		$	357		$	26,567

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

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Frederick County Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

	Three Months Ended March 31,
(dollars in thousands)	2013			2012
Cash flows from operating activities:
Net income	$	480		$	370
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	94			93
Deferred income taxes (benefits)	196			124
Provision for loan losses	—			65
Net premium amortization on investment securities	97			106
Bank owned life insurance income	(63		)	(40		)
Gain on sale of foreclosed properties	(28		)	—
Stock-based compensation expense	17			19
Provision for foreclosed properties	—			100
Excess tax benefit from stock-based awards	—			(3		)
Decrease in accrued interest and other assets	40			136
Decrease in accrued interest and other liabilities	(195		)	(4		)
Net cash provided by operating activities	638			966
Cash flows from investing activities:
Purchases of investment securities available for sale	—			(7,844		)
Proceeds from maturities, prepayments and calls investment securities available for sale	2,414			2,386
Redemption of restricted stock	60			—
Net increase in loans	(1,377		)	(975		)
Purchases of bank premises and equipment	(48		)	(549		)
Proceeds from sale of foreclosed properties	28			—
Net cash provided by (used in) investing activities	1,077			(6,982		)
Cash flows from financing activities:
Net increase in NOW, money market accounts, savings accounts and noninterest-bearing deposits	10,626			12,978
Net decrease in time deposits	(4,517		)	(496		)
Proceeds from issuance of common stock	—			30
Dividends paid on common stock	(75		)	(76		)
Excess tax benefit from stock-based awards	—			3
Net cash provided by financing activities	6,034			12,439
Net increase in cash and cash equivalents	7,749			6,423
Cash and cash equivalents — beginning of period	32,551			26,848
Cash and cash equivalents — end of period	$	40,300		$	33,271
Supplemental cash flow disclosures:
Interest paid	$	447		$	540
Income taxes paid	$	145		—

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

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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)	2013		2012
Net income	$	480	$	370
Basic earnings per share	$	0.32	$	0.24
Diluted earnings per share	$	0.31	$	0.24
Basic weighted average number of shares outstanding	1,508,574		1,516,445
Effect of dilutive securities — stock options	34,001		117
Diluted weighted average number of shares outstanding	1,542,575		1,516,562
Anti-dilutive securities outstanding	—		114,065

Note 3. Stock-Based Compensation Plans:

The Company’s 2001 Stock Option Plan (“2001 Plan”) and 2011 Stock Incentive Plan (“2011 Plan”) provide that 260,000 shares and 250,000 shares, respectively, of the Company’s common stock will be reserved for the award of incentive stock options (“ISO”) and non-incentive stock options (“NQSO”) to purchase shares of common stock, and under the 2011 Plan, shares of restricted stock and restricted stock units. Each plan has been presented to and approved by the Company’s shareholders. At March 31, 2013, there are 200,000 shares remaining that are reserved for future grants under the 2011 Plan, but no shares remaining under the 2001 Plan. The exercise price per share shall not be less than the fair market value of a share of common stock on the date on which such options were granted, subject to adjustments for the effects of any stock splits or stock dividends, and may be exercised not later than ten years after the grant date. There were no awards of stock-based compensation made under the 2011 Plan during the three months ended March 31, 2013. The Company recognizes the cost of employee services received in exchange for a stock-based award based on the grant-date fair value of the award. That cost is recognized over the vesting period of the award. Stock-based compensation expense for the three months ended March 31, 2013 and 2012 was $17 thousand and $19 thousand, respectively. As of March 31, 2013, there was $29 thousand of unrecognized compensation cost related to non-vested stock options that will be expensed over the period ending April 30, 2014.

The following is a summary of stock option transactions during the nine months ended March 31, 2013.

	Options Issued and Outstanding	Weighted-Average Exercise Price
Balance at January 1, 2013	152,840	$	11.26
Exercised	—	—
Terminated	—	—
Granted	—	—
Balance at March 31, 2013	152,840	$	11.26
Exercisable at March 31, 2013	117,840	$	11.30

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Note 4. Investment Portfolio:

The following tables set forth certain information regarding the Company’s investment portfolio at March 31, 2013 and December 31, 2011:

Available-for-sale portfolio

March 31, 2013 (dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Average Yield
State and political subdivisions:
Due after five years through ten years	$	2,633	$	67	$	2	$	2,698	4.26	%
Due after ten years	6,459		111		39		6,531		3.96	%
	9,092		178		41		9,229
Small business administration:
Due after ten years	1,715		67		—		1,782		2.96	%
Residential mortgage-backed debt securities	20,397		386		—		20,783		1.98	%
Equity securities	300		—		—		300		—	%
	$	31,504	$	631	$	41	$	32,094	2.61	%

December 31, 2012 (dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value		Average Yield
State and political subdivisions:
Due after five years through ten years	$	3,234	$	82	$	—	$	3,316	4.59	%
Due after ten years	6,468		146		9		6,605		4.09	%
	9,702		228		9		9,921
Small business administration:
Due after ten years	1,763		84		—		1,847		2.94	%
Residential mortgage-backed debt securities	22,250		470		—		22,720		2.14	%
Equity securities	300		—		—		300		—	%
	$	34,015	$	782	$	9	$	34,788	2.77	%

	Continuous unrealized losses existing for less than 12 months				Continuous unrealized losses existing for 12 months and greater				Total
March 31, 2013 (dollars in thousands)	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
State and political subdivisions	$	3,773	$	41	$	—	$	—	$	3,773	$	41
Total temporarily impaired securities	$	3,773	$	41	$	—	$	—	$	3,773	$	41

	Continuous unrealized losses existing for less than 12 months				Continuous unrealized losses existing for 12 months and greater				Total
December 31, 2012 (dollars in thousands)	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
Residential mortgage-backed debt securities	$	1,534	$	9	$	—	$	—	$	1,534	$	9
Total temporarily impaired securities	$	1,534	$	9	$	—	$	—	$	1,534	$	9

Management systematically evaluates investment securities for other-than-temporary declines in fair value on a quarterly basis. This analysis requires management to consider various factors, which include: (1) duration and magnitude of the decline in value; (2) the financial condition of the issuer or issuers; and (3) the structure of the security. An impairment loss on a debt security is recognized in earnings only when: (1) we intend to sell the debt security; (2) it is more likely than not that we will be required to sell the security

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before recovery of its amortized cost basis; or (3) we do not expect to recover the entire amortized cost basis of the security. In situations where we intend to sell or when it is more likely than not that we will be required to sell the security, the entire impairment loss must be recognized in earnings. In all other situations, only the portion of the impairment loss representing the credit loss must be recognized in earnings, with the remaining portion being recognized in shareholders’ equity as a component of other comprehensive income, net of deferred taxes. Credit loss is determined by calculating the present value of future cash flows of the security compared to the amortized cost of the security. Realized gains or losses on the sale of investment and mortgage-backed securities are reported in earnings and determined using the amortized cost of the specific security sold.

Restricted Stock

The following table shows the amounts of restricted stock as of March 31, 2013 and December 31, 2012:

	March 31,		December 31,
(dollars in thousands)	2013		2012
Federal Home Loan Bank of Atlanta	$	824	$	884
Federal Reserve Bank	580		580
Atlantic Central Bankers Bank	40		40
	$	1,444	$	1,504

Note 5. Loans and Allowance for Loan Losses:

Loans consist of the following:

	March 31,			% of		December 31,			% of
(dollars in thousands)	2013			Loans		2012			Loans
Construction and land development	$	21,557		9	%	$	19,448		8	%
Real estate:
Commercial real estate mortgage	134,283			58	%	137,217			60	%
Residential real estate mortgage	41,854			18	%	40,288			18	%
Total construction and real estate mortgage	176,137			76	%	177,505			78	%
Commercial and industrial	31,330			14	%	30,470			13	%
Consumer	1,636			1	%	1,865			1	%
	230,660			100	%	229,288			100	%
Less allowance for loan losses	(3,565		)			(3,571		)
Net loans	$	227,095				$	225,717

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The allowance for loan losses and recorded investment in loans for the three and nine month periods ended March 31, 2013 and 2012 are summarized as follows:

(dollars in thousands)	Construction and Land Development		Commercial Real Estate			Residential Real Estate		Commercial and Industrial			Consumer		Total
Three months ended March 31, 2013
Allowance for loan losses:
Beginning balance	$	348	$	2,060		$	468	$	680		$	15	$	3,571
Charge-offs	—		(48		)	—		—			—		(48		)
Recoveries	—		—			—		42			—		42
Provisions	116		(266		)	209		(59		)	—		—
Ending balance	$	464	$	1,746		$	677	$	663		$	15	$	3,565
As of March 31, 2013
Allowance for loan losses:
Individually evaluated for impairment	$	228	$	108		$	396	$	56		$	3	$	791
Collectively evaluated for impairment	236		1,638			281		607			12		2,774
Ending balance	$	464	$	1,746		$	677	$	663		$	15	$	3,565
Loans:
Individually evaluated for impairment	$	2,385	$	7,776		$	1,539	$	720		$	55	$	12,475
Collectively evaluated for impairment	19,172		126,507			40,315		30,610			1,581		218,185
Ending balance	$	21,557	$	134,283		$	41,854	$	31,330		$	1,636	$	230,660

(dollars in thousands)	Construction and Land Development		Commercial Real Estate			Residential Real Estate		Commercial and Industrial			Consumer			Total
Three months ended March 31, 2012
Allowance for loan losses:
Beginning balance	$	326	$	2,064		$	460	$	351		$	15		$	3,216
Charge-offs	—		—			—		—			—			—
Recoveries	—		—			—		5			—			5
Provisions	69		(22		)	47		(28		)	(1		)	65
Ending balance	$	395	$	2,042		$	507	$	328		$	14		$	3,286
As of March 31, 2012
Allowance for loan losses:
Individually evaluated for impairment	$	169	$	81		$	109	$	—		$	—		$	359
Collectively evaluated for impairment	226		1,961			398		328			14			2,927
Ending balance	$	395	$	2,042		$	507	$	328		$	14		$	3,286
Loans:
Individually evaluated for impairment	$	4,017	$	10,026		$	2,711	$	4,024		$	16		$	20,794
Collectively evaluated for impairment	14,343		120,321			33,275		22,619			1,943			192,501
Ending balance	$	18,360	$	130,347		$	35,986	$	26,643		$	1,959		$	213,295

Credit quality indicators as of March 31, 2013 and December 31, 2012 are as follows:

Internally assigned grade:

Pass — loans in this category have strong asset quality and liquidity along with a multi-year track record of profitability.

Special mention — loans in this category are currently protected but are potentially weak. The credit risk may be relatively minor, yet constitute an increased risk in light of the circumstances surrounding a specific loan.

Substandard — loans in this category show signs of continuing negative financial trends and unprofitability and therefore, is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

Doubtful — loans in this category contain weaknesses that make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the asset, its classification as loss is deferred

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until its more exact status may be determined.

Loss - loans classified in this category are considered uncollectible and of such little value that their continuance as bankable loans is not warranted. This classification does not mean that the loan has no recovery value, but that it is not practical to defer writing it off, even though partial recovery may be affected in the future. Such credits should be recommended for charge-off.

Credit exposure - Credit risk profile by internally assigned grade

March 31, 2013 (dollars in thousands)	Construction and Land Development		Commercial Real Estate		Commercial and Industrial		Residential Real Estate		Consumer
Pass	$	17,225	$	120,604	$	27,352	$	39,668	$	1,541
Special mention	1,670		6,159		2,984		1,140		40
Substandard	2,662		7,520		994		1,046		55
Total	$	21,557	$	134,283	$	31,330	$	41,854	$	1,636

December 31, 2012 (dollars in thousands)	Construction and Land Development		Commercial Real Estate		Commercial and Industrial		Residential Real Estate		Consumer
Pass	$	14,974	$	123,535	$	27,139	$	37,594	$	1,731
Special mention	1,957		5,899		2,258		1,438		95
Substandard	2,517		7,783		1,073		1,256		39
Total	$	19,448	$	137,217	$	30,470	$	40,288	$	1,865

An age analysis of past due loans as of March 31, 2013 and 2011 are as follows:

March 31, 2013 (dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total		Greater than 90 Days and Still Accruing
Construction and land development	$	80	$	114	$	728	$	922	$	20,635	$	21,557	$	—
Commercial real estate	593		495		223		1,311		132,972		134,283		—
Residential real estate	236		198		26		460		41,394		41,854		—
Commercial and industrial	24		—		—		24		31,306		31,330		—
Consumer	26		—		—		26		1,610		1,636		—
Total	$	959	$	807	$	977	$	2,743	$	227,917	$	230,660	$	—

December 31, 2012 (dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total		Greater than 90 Days and Still Accruing
Construction and land development	$	—	$	—	$	689	$	689	$	18,759	$	19,448	$	—
Commercial real estate	473		—		222		695		136,522		137,217		—
Residential real estate	260		198		129		587		39,701		40,288		—
Commercial and industrial	67		—		—		67		30,403		30,470		—
Consumer	13		—		—		13		1,852		1,865		—
Total	$	813	$	198	$	1,040	$	2,051	$	227,237	$	229,228	$	—

The Company’s charge-off policy states after all collection efforts have been exhausted and the loan is deemed to be a loss, it will be charged to the Company’s established allowance for loan losses. Consumer loans subject to the Uniform Retail Credit Classification are charged-off as follows: (a) closed end loans are charged-off no later than 120 days after becoming delinquent; (b) consumer loans to borrowers who subsequently declare bankruptcy, where the Company is an unsecured creditor, are charged-off within 60 days of receipt of the notification from the bankruptcy court; (c) fraudulent loans are charged-off within 90 days of discovery; and (d) death of a borrower will cause a charge-off to be incurred at such time an actual loss is determined. All other types of loans are generally

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evaluated for loss potential at the 90th day past due threshold; and any loss is recognized no later than the 120th day past due threshold; each loss is evaluated on its specific facts regarding the appropriate timing to recognize the loss.

The Company has recorded partial charge-offs of $163 thousand in prior years and none in 2013 on loans that are still in the loan portfolio as of March 31, 2013.

Information on impaired loans for the three months ended March 31, 2013 and 2012 is as follows:

	For the three months Ended March 31, 2013				For the three months Ended March 31, 2012
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized

With no allowance recorded:
Construction and land development	$	1,121	$	15	$	2,761	$	52
Commercial real estate	6,730		113		9,277		143
Residential real estate	886		3		1,955		22
Commercial and industrial	932		6		4,594		58
Consumer	32		—		17		—
Total with no allowance	$	9,701	$	137	$	18,604	$	275
With an allowance recorded:
Construction and land development	$	1,192	$	25	$	1,388	$	18
Commercial real estate	1,236		22		689		12
Residential real estate	786		19		471		11
Commercial and industrial	58		2		16		—
Consumer	22		1		—		—
Total with an allowance	$	3,294	$	69	$	2,564	$	41
Grand total:
Construction and land development	$	2,313	$	40	$	4,149	$	70
Commercial real estate	7,966		135		9,966		155
Residential real estate	1,672		22		2,426		33
Commercial and industrial	990		8		4,610		58
Consumer	54		1		17		—
Grand total	$	12,995	$	206	$	21,168	$	316

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	As of March 31, 2013						As of December 31, 2012
(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
With no allowance recorded:
Construction and land development	$	790	$	818	$	—	$	1,452	$	1,477	$	—
Commercial real estate	6,421		6,531		—		7,039		7,721		—
Residential real estate	153		153		—		1,619		1,619		—
Commercial and industrial	604		604		—		1,259		1,614		—
Consumer	12		12		—		52		52		—
Total with no allowance	$	7,980	$	8,118	$	—	$	11,421	$	12,483	$	—
With an allowance recorded:
Construction and land development	$	1,595	$	1,620	$	228	$	788	$	788	$	99
Commercial real estate	1,355		1,355		108		1,116		1,116		90
Residential real estate	1,386		1,386		396		186		186		46
Commercial and industrial	116		116		56		—		—		—
Consumer	43		43		3		—		—		—
Total with an allowance	$	4,495	$	4,520	$	791	$	2,090	$	2,090	$	235
Grand total:
Construction and land development	$	2,385	$	2,438	$	228	$	2,240	$	2,265	$	99
Commercial real estate	7,776		7,886		108		8,155		8,837		90
Residential real estate	1,539		1,539		396		1,805		1,805		46
Commercial and industrial	720		720		56		1,259		1,614		—
Consumer	55		55		3		52		52		—
Grand total	$	12,475	$	12,638	$	791	$	13,511	$	14,573	$	235

Information on performing and nonaccrual impaired loans as of March 31, 2013 and December 31, 2012 is as follows:

	March 31,		December 31,
(dollars in thousands)	2013		2012
Impaired performing loans:
Construction and land development	$	1,543	1,551
Commercial real estate	4,753		5,110
Residential real estate	184		486
Commercial and industrial	—		443
Troubled debt restructurings:
Commercial real estate	256		257
Residential real estate	1,050		1,057
Commercial and industrial	720		769
Consumer	18		13
Total impaired performing loans	8,524		9,686
Impaired nonperforming loans (nonaccrual):
Construction and land development	810		657
Commercial real estate	684		909
Residential real estate	305		262
Consumer	37		39
Troubled debt restructurings:
Construction and land development	32		32
Commercial real estate	2,083		1,879
Commercial and Industrial	—		47
Total impaired nonperforming loans (nonaccrual):	3,951		3,825
Total impaired loans	$	12,475	13,511

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No loans were modified in troubled debt restructurings during the three months ended March 31, 2013 and 2012. In addition, there were no loans that had been modified and subsequently re-defaulted as of March 31, 2013 or 2012.

Note 6. Deposits:

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

	March 31,		December 31,
(dollars in thousands)	2013		2012
Noninterest-bearing demand deposits	$	51,764	$	51,256
Interest-bearing demand deposits:
NOW accounts	20,292		17,082
Money market accounts	89,963		83,675
Savings accounts	7,270		6,651
Certificates of deposit:
$ 100,000 or more	47,104		48,628
Less than $100,000	57,829		60,821
Total deposits	$	274,222	$	268,113

Note 7. Trust preferred securities/junior subordinated debentures and other long-term borrowings:

In December 2006, Bancorp completed the private placement of an aggregate of $6.00 million of trust preferred securities through FCBI Statutory Trust I (the “Trust”), a trust subsidiary organized under Connecticut law, of which Bancorp owns all of the common securities of $186 thousand. The principal asset of the Trust is a similar amount of Bancorp’s junior subordinated debentures. The interest rate on the junior subordinated debentures was a fixed rate of 6.5375% through December 15, 2011, and is adjusted quarterly thereafter to 163 basis points over three-month LIBOR. On March 15, 2013, the most recent interest reset date; the interest rate was adjusted to 1.91010% for the period ending June 15, 2013. The junior subordinated debentures mature on December 15, 2036, and may be redeemed at par, at Bancorp’s option, on any interest payment date. The obligations of Bancorp with respect to the Trust’s preferred securities constitute a full and unconditional guarantee by Bancorp of Trust’s obligations with respect to the trust preferred securities to the extent set forth in the related guarantee. Subject to certain exceptions and limitations, Bancorp may elect from time to time to defer interest payments on the junior subordinated debentures, resulting in a deferral of distribution payments on the related trust preferred securities. If the Company defers interest payments on the junior subordinated debentures, or otherwise is in default of the obligations, the Company would be prohibited from making dividend payments to its shareholders.

The trust preferred securities may currently be included in Tier 1 capital for regulatory capital adequacy purposes up to 25% of Tier 1 capital, net of goodwill after its inclusion. The portion of the trust preferred securities not qualifying as Tier 1 capital may be included as part of total qualifying capital in Tier 2 capital, subject to limitation.

At March 31, 2013 and December 31, 2012, the Company had a total of $10.00 million in borrowings under its credit facility from the Federal Home Loan Bank of Atlanta (“FHLB”). This amount consists of two (2) $5.00 million borrowings with fixed interest rates of 3.29% and 3.05%, with a maturity of November 19, 2015. Outstanding advances are secured by collateral consisting of a blanket lien on qualifying loans in the Bank’s residential mortgage loan portfolio and certain commercial real estate loans.

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Note 8. Noninterest Expense:

Noninterest expense consists of the following:

	Three Months Ended March 31,
(dollars in thousands)	2013			2012

Salaries	$	1,060		$	1,052
Stock-based compensation	17			19
Bonus	—			20
Deferred Personnel Costs	(30		)	(23		)
Payroll Taxes	87			98
Employee Insurance	76			84
Other Employee Benefits	60			53
Depreciation	94			93
Rent	98			97
Utilities	21			36
Repairs and Maintenance	68			59
ATM Expense	27			25
Other Occupancy and Equipment Expenses	47			52
Postage and Supplies	12			19
Data Processing	125			105
Advertising and Promotion	137			110
Provision for foreclosed properties	—			100
FDIC insurance	58			60
Legal	18			17
Insurance	14			16
Consulting	19			14
Courier	5			4
Audit Fees	55			50
Other	159			190
	$	2,227		$	2,350

Note 9. 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 has the discretion to make matching contributions of 100% of the employee’s contributions up to 4% of the employee’s salary. A participant’s account under the Plan, together with investment earnings thereon, is normally distributable, following retirement, death, disability or other termination of employment, in a single lump-sum payment.

The Company made matching contributions of $48 thousand and $41 thousand for the three months ended March 31, 2013 and 2012, respectively.

Note 10. 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 consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company, once it exceeds $500 million in assets, 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

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capital adequacy requirements to which they are subject as of March 31, 2013.

As of March 31, 2013, 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, 2013 and December 31, 2012 are presented in the following tables.

March 31, 2013	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	$	32,210	12.47	%	$	10,334	4.00	%	N/A		N/A
Bank	$	31,634	12.36	%	$	10,235	4.00	%	$	15,352	6.00	%
Total Capital
To Risk-Weighted Assets
Company	$	35,444	13.72	%	$	20,669	8.00	%	N/A		N/A
Bank	$	34,837	13.62	%	$	20,470	8.00	%	$	25,587	10.00	%
Tier 1 Capital
To Average Assets
Company	$	32,210	10.20	%	$	12,628	4.00	%	N/A		N/A
Bank	$	31,634	10.10	%	$	12,532	4.00	%	$	15,665	5.00	%

December 31, 2012	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	$	31,788	12.25	%	$	10,383	4.00	%	N/A		N/A
Bank	$	31,206	12.14	%	$	10,284	4.00	%	$	15,426	6.00	%

Total Capital
To Risk-Weighted Assets
Company	$	35,037	13.50	%	$	20,766	8.00	%	N/A		N/A
Bank	$	34,424	13.39	%	$	20,568	8.00	%	$	25,710	10.00	%

Tier 1 Capital
To Average Assets
Company	$	31,788	10.09	%	$	12,606	4.00	%	N/A		N/A
Bank	$	31,206	9.98	%	$	12,513	4.00	%	$	15,642	5.00	%

On June 25, 2012, the Company authorized the repurchase of up to 300,000 shares of its common stock, for an aggregate expenditure of not more than $5.0 million, through September 30, 2017, or earlier termination of the program by the Board of Directors. Repurchases, if any, by the Company pursuant to this authorization are expected to enable the Company to repurchase its shares at an attractive price, and to provide a source of liquidity for the Company’s shares. As of March 31, 2013, there have been no shares repurchased by the Company under this authorization.

Note 11. Fair Value Measurements:

The Company follows the guidance issued by the FASB under ASC Topic 825 Financial Instruments regarding fair value measurements and disclosures topic. This guidance permits entities to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability or upon

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The following tables set forth the Company’s financial assets and liabilities that were accounted for or disclosed at fair value on a recurring basis as of March 31, 2013 and December 31, 2012.

					Significant
	Carrying				Other		Significant
	Value		Quoted		Observable		Unobservable
March 31, 2013	(Fair		Prices		Inputs		Inputs
(dollars in thousands)	Value)		(Level 1)		(Level 2)		(Level 3)
Securities available for sale:
State and political subdivisions	$	9,229	$	—	$	9,229	$	—
Small business administration	1,782		—		1,782		—
Residential mortgage-backed debt	20,783		—		20,783		—
Equity securities	300		—		300		—
Total	$	32,094	$	—	$	32,094	$	—

					Significant
	Carrying				Other		Significant
	Value		Quoted		Observable		Unobservable
December 31, 2012	(Fair		Prices		Inputs		Inputs
(dollars in thousands)	Value)		(Level 1)		(Level 2)		(Level 3)
Securities available for sale:
State and political subdivisions	$	9,921	$	—	$	9,921	$	—
Small business administration	1,847		—		1,847		—
Residential mortgage-backed debt	22,720		—		22,720		—
Equity securities	300		—		300		—
Total	$	34,788	$	—	$	34,788	$	—

The following tables set forth the Company’s financial assets and liabilities that were accounted for or disclosed at fair value on a nonrecurring basis as of March 31, 2013 and December 31, 2012.

					Significant
	Carrying				Other		Significant
	Value		Quoted		Observable		Unobservable
March 31, 2013	(Fair		Prices		Inputs		Inputs
(dollars in thousands)	Value)		(Level 1)		(Level 2)		(Level 3)
Impaired loans:
Construction and land development	$	2,104	$	—	$	—	$	2,104
Commercial real estate	7,558		—		—		7,558
Residential real estate	1,143		—		—		1,143
Commercial and industrial	664		—		—		664
Consumer	52		—		—		52
Total impaired loans	$	11,521	$	—	$	—	$	11,521
Foreclosed properties:
Commercial real estate	$	2,048	$	—	$	—	$	2,048
Total foreclosed properties	$	2,048	$	—	$	—	$	2,048

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					Significant
	Carrying				Other		Significant
	Value		Quoted		Observable		Unobservable
December 31, 2012	(Fair		Prices		Inputs		Inputs
(dollars in thousands)	Value)		(Level 1)		(Level 2)		(Level 3)
Impaired loans:
Construction and land development	$	2,141	$	—	$	—	$	2,141
Commercial real estate	8,065		—		—		8,065
Residential real estate	1,759		—		—		1,759
Commercial and industrial	1,259		—		—		1,259
Consumer	52		—		—		52
Total impaired loans	$	13,276	$	—	$	—	$	13,276
Foreclosed properties:
Commercial real estate	$	2,048	$	—	$	—	$	2,048
Residential real estate	—		$	—	$	—	—
Total foreclosed properties	$	2,048	$	—	$	—	2,048

Note 12. Fair Value of Financial Instruments:

The estimated fair values of the Company’s financial instruments are as follows:

					Fair Value Measurements
(dollars in thousands)	Carrying Amount		Fair Value		Quoted Prices (Level1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
March 31, 2013
FINANCIAL ASSETS
Cash and cash equivalents	$	40,300	$	40,300	$	40,300	$	—	$	—
Investment securities available for sale	32,094		32,094		—		32,094		—
Restricted stock	1,444		1,444		—		1,444		—
Net loans	227,095		241,464		—		—		241,464

FINANCIAL LIABILITIES
Deposits	$	274,222	$	282,014	—		—		$	282,014
Short-term borrowings	2,700		2,700		—		—		2,700
Long-term borrowings	10,000		10,674		—		—		10,674
Junior subordinated debentures	6,186		6,186		—		—		6,186

December 31, 2012
FINANCIAL ASSETS
Cash and cash equivalents	$	32,551	$	32,551	$	32,551	$	—	$	—
Investment securities available for sale	34,788		34,788		—		34,788		—
Restricted stock	1,504		1,504		—		1,514		—
Net loans	225,717		241,739		—		—		241,739

FINANCIAL LIABILITIES
Deposits	$	268,113	$	278,563	—		—		278,563
Short-term borrowings	2,700		2,700		—		—		2,700
Long-term borrowings	10,000		10,740		—		—		10,740
Junior subordinated debentures	6,186		6,186		—		—		6,186

The following methods and assumptions were used to estimate the fair value disclosures for financial instruments as of March 31, 2013 and December 31, 2012:

Cash and cash equivalents:

The fair value of cash and cash equivalents is estimated to approximate the carrying amounts.

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Investment securities and restricted stock:

Fair values are based on quoted market prices for Level 1 and 2, except for certain restricted stocks where fair value equals par value because of certain redemption restrictions.

Loans:

Fair values are estimated for portfolios of loans with similar financial characteristics. Each portfolio is further segmented into fixed and adjustable rate interest terms by performing and non-performing categories.

The fair value of performing loans is calculated by discounting estimated cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The estimated cash flows do not anticipate prepayments.

Management has made estimates of fair value discount rates that it believes to be reasonable. However, because there is no market for many of these financial instruments, management has no basis to determine whether the fair value presented for loans would be indicative of the value negotiated in an actual sale.

Deposits:

The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, NOW accounts and money market accounts, is equal to the amount payable on demand at the reporting date (that is, their carrying amounts). The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.

Short-term borrowings:

The fair value of short-term borrowings is determined using rates currently available to the Company for debt with similar terms and remaining maturities.

Long-term borrowings:

The fair value of the long-term borrowings is determined using rates currently available to the Company for debt with similar terms and remaining maturities.

Junior subordinated debentures:

The junior subordinated debentures are unsecured obligations of the Company and are subordinate and junior in right of payment to all present and future senior indebtedness of the Company. The Company has entered into a guarantee, which together with its obligations under the junior subordinated debentures and the declaration of trust governing the Trust provides a full and unconditional guarantee of the Trust’s preferred securities. The fair value of junior subordinated debentures is determined using rates currently available to the Company for debt with similar terms and remaining maturities. See Note 7 for additional disclosures.

Accrued Interest:

The carrying amounts of accrued interest approximate fair value.

Note 13. Changes in Accumulated Other Comprehensive Income (Net of Tax) by Component:

Three Months Ended March 31, 2013 (dollars in thousands)	Unrealized Gains and Losses on Available-for- Sale Securities			Total
Balance at January 1, 2013	$	468		$	468
Other comprehensive income before adjustments	(111		)	(111		)
Balance at March 31, 2013	$	357		$	357

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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 Frederick County Bancorp, Inc.’s (“Bancorp”) and Frederick County Bank’s (the “Bank” and together with Bancorp, 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 products and to enter new markets, competitive challenges in the Company’s market, legislative and regulatory changes, changes in accounting principles or the application thereof 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.

Bancorp, the parent company for the Bank, its wholly-owned subsidiary, was organized in September 2003. The Bank was incorporated under the laws of the state of Maryland in August 2000 and commenced banking operations in October 2001. The Bank provides its customers with various banking services, from four banking offices in the City of Frederick and one in Walkersville, Maryland. The Bank offers various loan and deposit products to its 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 purchases. Note 5 discusses the types of lending in which the Bank engages. The Bank does not have any significant concentrations to any one industry or customer. Bancorp also has a subsidiary trust, established to issue trust preferred securities, and two subsidiaries established to hold foreclosed properties. The two subsidiaries established to hold foreclosed properties are known as FCB Holdings, Inc. (a direct subsidiary of Bancorp) and FCB Hagerstown, LLC (an indirect subsidiary of Bancorp). See Note 7 for additional disclosures related to the subsidiary trust, which issued trust preferred securities.

Critical Accounting Policies

The Company’s consolidated 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 loan 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,” “Allowance for Loan Losses” and “Investment Portfolio.”

Loans

Loans increased by $1.37 million, or 0.60%, from December 31, 2012, to a balance of $230.66 million as of March 31, 2013, and by

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

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

	2013						2012
Three Months Ended March 31, (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	$	1	$	—	—	%	$	573	$	—	—	%
Interest bearing deposits in other banks	32,458		18		0.22		25,419		15		0.24
Investment securities (1):
Taxable	26,174		110		1.70		28,948		168		2.33
Tax-exempt (2)	8,613		102		4.80		10,762		144		5.37
Loans (3)	230,092		2,908		5.13		212,753		3,009		5.67
Total interest-earning assets	297,338		3,138		4.28		278,455		3,336		4.81
Noninterest-earning assets	18,359						17,294
Total assets	$	315,697					$	295,749

Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
NOW accounts	$	17,597	$	8	0.18	%	$	16,131	$	8	0.20	%
Savings accounts	6,847		1		0.06		5,366		1		0.07
Money market accounts	88,180		77		0.35		76,314		89		0.47
Certificates of deposit $100,000 or more	48,049		117		0.99		39,882		127		1.28
Certificates of deposit less than $100,000	58,894		124		0.85		68,257		176		1.03
Short-term borrowings	2,700		17		2.55		2,700		20		2.97
Long-term borrowings	10,000		79		3.20		10,000		80		3.21
Junior subordinated debentures	6,186		29		1.90		6,186		34		2.20
Total interest-bearing liabilities	238,453		452		0.77		224,836		535		0.95
Noninterest-bearing deposits	49,663						43,999
Noninterest-bearing liabilities	925						983
Total liabilities	289,041						269,818
Total shareholders’ equity	26,656						25,931
Total liabilities and shareholders’ equity	$	315,697					$	295,749
Net interest income			$	2,686					$	2,801
Net interest spread					3.51	%					3.86	%
Net interest margin					3.66	%					4.03	%

(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.

(2) Presented on a taxable-equivalent basis using the statutory federal income tax rate of 34%. Taxable-equivalent adjustments of $35 thousand in 2013 and $49 thousand in 2012 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 $29 thousand in 2013 and $31 thousand in 2012 are included in the calculation of the loan interest income. Net loan origination income in interest income totaled $11 thousand in 2013 and $9 thousand in 2012.

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Rate/Volume Analysis

The following table indicates the changes in interest income and interest expense that are attributable to changes in average volume and average rates, in comparison with the same period in the preceding year on a fully taxable equivalent basis. The change in interest due to the combined rate-volume variance has been allocated entirely to the change in rate.

	Three Months Ended March 31, 2013 compared to 2012
	Increase (decrease) Due to						Net increase
(dollars in thousands)	Volume			Rate			(decrease)
Interest income
Interest-earning assets:
Interest-bearing deposits in other banks	$	4		$	(1	)	$	3
Investment securities:
Taxable	(16		)	(42		)	(58		)
Tax-exempt	(29		)	(13		)	(42		)
Loans	246			(347		)	(101		)
Total interest income	205			(403		)	(198		)

Interest expense
Interest-bearing liabilities:
Money market accounts	14			(26		)	(12		)
Certificates of deposit $100,000 or more	26			(36		)	(10		)
Certificates of deposit less than $100,000	(24		)	(28		)	(52		)
Short-term borrowings	—			(3		)	(3		)
Long-term borrowings	—			(1		)	(1		)
Junior subordinated debentures	—			(5		)	(5		)
Total interest expense	16			(99		)	(83		)
Net interest income	$	189		$	(304	)	$	(115	)

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. The Company primarily utilizes deposits to fund loans and investments, with a small amount of additional funding from junior subordinated debentures and minimal short-term and long-term borrowings. In future periods, the Company may utilize a higher level of short-term and long-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.

Three Months Ended March 31, 2013 and 2012

Net interest income (on a taxable-equivalent basis) was $2.69 million in 2013 and $2.80 million in 2012. The change in net interest income was primarily driven by lower yields earned on the loan portfolio, which was partially offset by lower rates paid on certificates of deposit and money market accounts, along with a slightly higher volume of loans, but at lower rates. Average earning assets increased by $18.88 million, or 6.78%, since March 31, 2012. The yield on earning assets in 2013 decreased by 53 basis points to 4.28% from 4.81% in 2012. The decrease of 18 basis points in the rate paid on interest-bearing liabilities primarily is the result of the lower rates paid on certificates of deposit and money market accounts. The Company’s net interest margin was 3.66% and 4.03%, and the net interest spread was 3.51% and 3.85%, for the three-month periods ended March 31, 2013 and 2012, respectively.

Interest expense decreased 15.51% from $535 thousand in 2012 to $452 thousand in 2013, due to the reduced rates paid on interest-bearing liabilities, which decreased to 0.77% in 2013 from 0.95% in 2012 primarily as a result in declines in rates on certificates of deposit and money market accounts. The net interest margin is not expected to improve substantially through the re-pricing of the certificates of deposit portfolio since the majority are priced at current market interest rates.

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Noninterest Income

Noninterest income was $249 thousand and $202 thousand for the three months ended March 31, 2013 and 2012, respectively. There was a $28 thousand gain on sale of foreclosed properties in 2013 and no gain in 2012. The Company purchased $4.50 million and $3.00 million in bank owned life insurance in May 2011 and September 2012, respectively, which has generated $63 thousand and $40 thousand of income for the three months ended March 31, 2013 and 2012, respectively.

Noninterest Expense

Noninterest expense amounted to $2.23 million and $2.35 million for the three months ended March 31, 2013 and 2012, respectively. The primary decrease in noninterest expense for the three months in 2013 compared to 2012 relates to a decrease in the provision for foreclosed properties of $100 thousand recognized in 2012 while no provision was necessary in 2013.

Income Taxes

During the three months ended March 31, 2013 and 2012, the Company incurred an income tax expense of $164 thousand and $138 thousand, respectively. The effective tax rates for the three months in 2013 and 2012 were 25.47% and 27.17%, respectively. The increase in income tax expense in 2013 is due to the higher level of pre-tax income.

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 $(84.08) 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, 2013, 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, 2013. 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, although this will not always be the case. Nor does it account for the effects of competition on pricing of deposits and loans. For example, under current market conditions, market rates paid on deposits may not be able to adjust by the full amount of downward adjustments in the federal funds target rate, while rates on loans will tend to adjust by the full amount, subject to certain limitations. In response to the weak economic climate, the Company has maintained a higher level of liquidity over the past year, mostly in interest-bearing deposits in other banks with the majority being held at the Federal Reserve.

Interest Rate Sensitivity Gap Analysis

March 31, 2013

	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	$	25		$	—		$	—		$	—		$	25
Interest-bearing deposits in other banks	37,933			—			—			—			37,933
Investment securities(1)	—			5,492			7,657			18,645			31,794
Loans	64,471			51,409			75,743			39,037			230,660
Total interest-earning assets	102,429			56,901			83,400			57,682			300,412

Liabilities
Savings and NOW accounts	1,378			2,756			2,756			20,672			27,562
Money Market accounts	448			896			896			87,723			89,963
Certificates of deposit	50,095			33,400			11,428			10			94,933
Brokered Deposits	10,000			—									10,000
Short-term borrowings	2,700			—			—			—			2,700
Long-term borrowings	—			10,000			—			—			10,000
Junior subordinated debentures	6,186			—			—			—			6,186
Total interest-bearing liabilities	70,807			47,052			15,080			108,405			241,344
Interest rate sensitivity gap	$	31,622		$	9,849		$	68,320		$	(50,723	)	$	59,068
Cumulative interest rate sensitivity gap	$	31,622		$	41,471		$	109,791		$	59,068
Cumulative gap ratio as a percentage of total assets	9.78		%	12.82		%	33.94		%	18.26		%

(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 prime interest rate increase of 100, 200, 300 and 400 basis points or a decrease for the same amounts, but not below zero. The results show that with a rise in the prime interest rate the Company’s net interest income would decrease by 3.53%, 5.70%, 7.23% and 8.77% for 100, 200, 300 and 400 basis points, respectively. A decrease in the prime interest rate of 100 basis points or more was not considered to be feasible since this would infer that the federal funds interest rate would fall below zero.

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.

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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 Company’s provision for loan losses for the three months ended March 31, 2012 was $65 thousand, but no provision was required for the same period in 2013. 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. At March 31, 2013 and December 31, 2012, the allowance for loan losses was $3.57 million for both dates. The change in the allowance from December 31, 2012 reflects the deduction of net charge-offs of $6 thousand, consisting of $48 thousand in charge-offs and $42 thousand in recoveries, as compared to a provision of $65 thousand plus recoveries of $5 thousand in the same period of 2012. The $48 thousand of charge-offs in 2013 is a result of one (1) commercial real estate relationship, as compared to no charge-offs for the same period in 2012.

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) Accounting Standards Codification (“ASC”) Contingencies Topic, which requires that losses be accrued when they are probable of occurring and estimable; and (ii) ASC Receivables Topic, 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. Impaired loans are any loans that have been classified by internal measurements as substandard or worse. Factors considered by Management in determining impairment include payment status, collateral value, and the projected potential cash flow of the borrower. 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 serves 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 as impaired. 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. Impaired loans are any loans that have been classified by internal measurements as substandard or worse. 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 mortgage loans for impairment.

The formula allowance component is used for estimating the loss on internally risk rated loans meeting the Company’s internal criteria for classification as special mention 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.

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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 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 at March 31, 2013. 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, 2013 and December 31, 2012, the real estate loan portfolio constituted 85% of the total loan portfolio for both periods. 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 residential 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. However, the Company does have interest only home equity lines of credit with outstanding balances of $11.67 million of at March 31, 2013.

	Three Months Ended
(dollars in thousands)	March 31, 2013			March 31, 2012
Average total loans outstanding during period	$	230,092		$	212,753
Balance at beginning of period	$	3,216		$	3,216
Recoveries — construction and land development	—			—
Recoveries — residential real estate	—			—
Recoveries — commercial and industrial	42			5
Recoveries — consumer	—			—
Total recoveries	42			5
Charge-offs — construction and land development	—			—
Charge-offs — commercial real estate	(48		)	—
Charge-offs — residential real estate	—			—
Charge-offs — commercial and industrial	—			—
Charge-offs — consumer	—			—
Total charge-offs	(48		)	—
Net (charge-offs) recoveries	(6		)	5
Provision charged to operating expenses	—			65
Balance at end of period	$	3,565		$	3,286
Ratios of net charge-offs to average loans	0.00		%	0.00		%

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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,
(dollars in thousands)	2013		% of Loans		2012		% of Loans
Construction and land development	$	464	9	%	$	348	8	%
Real estate - mortgage loans:
Commercial real estate	1,746		58	%	2,060		60	%
Residential real estate	677		18	%	468		18	%
Total mortgage loans	2,423		76	%	2,528		78	%
Commercial and industrial	663		14	%	680		13	%
Consumer	15		1	%	15		1	%
	$	3,565	100	%	$	3,571	100	%

Information concerning the Company’s nonperforming assets is as follows:

	March 31,			December 31,
(dollars in thousands)	2013			2012
Nonperforming assets:
Nonaccrual loans:
Construction and land development	$	842		$	689
Commercial real estate	2,767			2788
Residential real estate	305			262
Commercial and industrial	—			47
Consumer	37			39
Total nonaccrual loans	3,951			3,825
Accruing troubled debt restructurings:
Construction and land development	—			257
Commercial real estate	256			1,057
Residential real estate	1,050			769
Commercial and industrial	720			—
Consumer	18			13
Total accruing troubled debt restructurings	2,044			2,096
Total nonperforming loans	5,995			5,921
Foreclosed properties:
Foreclosed properties — commercial real estate	2,048			2,048
Total foreclosed properties	2,048			2,048
Total nonperforming assets	$	8,043		$	7,969
Nonperforming assets to total assets	2.51		%	2.53		%

There were no other interest-bearing assets at March 31, 2013 or December 31, 2012 classified as past due 90 days or more and still accruing, problem assets, and no non-impaired 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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Information concerning the Company’s recorded investment in impaired loans is as follows:

	March 31,		December 31,
(dollars in thousands)	2013		2012
Impaired loans with no allowance:
Construction and land development	$	790	$	1,452
Commercial real estate	6,421		7,039
Residential real estate	153		1,619
Commercial and industrial	604		1,259
Consumer	12		52
Total impaired loans with no allowance	$	7,980	$	11,421

Impaired loans with allowance:
Construction and land development	$	1,595	$	788
Commercial real estate	1,355		1,116
Residential real estate	1,386		186
Commercial and industrial	116		—
Consumer	43		—
Total impaired loans with allowance	$	4,495	$	2,090
Specific allocation of allowance	$	791	$	235

	March 31,		December 31,
(dollars in thousands)	2013		2012
Impaired performing loans:
Construction and land development	$	1,543	$	1,551
Commercial real estate	4,753		5,110
Residential real estate	184		486
Commercial and industrial	—		443
Troubled debt restructurings:
Commercial real estate	256		257
Residential real estate	1,050		1,057
Commercial and industrial	720		769
Consumer	18		13
Total impaired performing loans	$	8,524	$	9,686

Impaired nonperforming loans (nonaccrual):
Construction and land development	$	810	$	657
Commercial real estate	684		909
Residential real estate	305		262
Consumer	37		39
Troubled debt restructurings:
Construction and land development	32		32
Commercial real estate	2,083		1,879
Commercial and industrial	—		47
Total impaired nonperforming loans	$	3,951	$	3,825
Total impaired loans	$	12,475	$	13,511

At March 31, 2013, there were $7.98 million of impaired loans with no specific reserves that consisted of three (3) construction and land development loan relationships in the aggregate amount to $790 thousand, seven (7) commercial real estate loan relationships in the aggregate amount of $6.42 million, four (4) residential real estate loan relationships in the aggregate amount of $153 thousand, one (1) commercial and industrial loan relationship totaling $604 thousand and one (1) consumer loan for $12 thousand. By comparison at December 31, 2012 there were $11.42 million of impaired loans which required no specific reserves consisting of four (4) construction and land development loans in the aggregate amount to $1.45 million, fourteen (14) commercial real estate loans in the aggregate amount of $7.04 million, nine (9) residential real estate loans in the aggregate amount of $1.62 million, three (3) commercial and industrial loans totaling $1.26 million and two (2) consumer loans in the aggregate amount of $52 thousand. In addition at March 31, 2013, there were $4.50 million of impaired loans which required specific reserves, totaling $791 thousand, that consisted of three (3) construction and land development loan relationships in the aggregate amount of $1.59 million, three (3) commercial real estate loan relationships in the aggregate amount of $1.36 million, five (5) residential real estate loans aggregating

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$1.37 million, one (1) commercial and industrial loan relationship in the amount of $116 thousand and two (2) consumer loan relationships in the aggregate amount of $43 thousand, compared to $2.09 million of impaired loans which required specific reserves totaling $235 thousand, that consisted of one (1) construction and land development loan in the amount of $787 thousand, five (5) commercial real estate loans in the aggregate amount of $1.11 million and one (1) residential real estate loan for $186 thousand at December 31, 2012. All of the impaired loan relationships discussed are in different types of businesses.

There are no loans that had a specific allowance as of December 31, 2012 that are still in the Company’s loan portfolio as of March 31, 2013 where the specific allowance has been reduced or eliminated.

Loans are placed into a nonaccruing status and classified as nonperforming when the principal or interest has been in default for a period of 90 days or more unless the obligation is well secured and in the process of collection. A debt is “well secured” if it is secured by (i) pledges of real or personal property, including securities, that have a realizable value sufficient to discharge the debt, (including accrued interest), in full, or (ii) the guarantee of a financially responsible party. A debt is “in the process of collection” if collection on the debt is proceeding in due course either through legal action, including judgment enforcement procedure, or, in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or in its restoration to a current status.

Loans classified as substandard or worse are considered for impairment testing. A substandard loan shows signs of continuing negative financial trends and unprofitability and therefore, is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. The borrower on such loans typically exhibit one or more of the following characteristics: financial ratios and profitability margins are well below industry average; a negative cash flow position exists; debt service capacity is insufficient to the service debt and an improvement in the cash flow position is unlikely within the next twelve months; secondary and tertiary means of debt repayment are weak. Loans classified as substandard are characterized by the probability that the Bank will not collect amounts due according to the contractual terms or sustain some loss if the deficiencies are not corrected.

Loss potential, while existing with respect to the aggregate amount of substandard (or worse) loans, does not have to exist in any individual assets classified as substandard. Such credits are also evaluated for nonaccrual status.

Impaired loans include loans that have been classified as substandard or worse. However, certain of such loans have been paying as agreed and have remained current, with some financial issues related to cash flow that has caused some concern as to the ability of the borrower to perform in accordance with the current loan terms, but it has not been extreme enough to require the loan be put into a nonaccruing status.

The Company does not have a formal modification program such as the Making Home Affordable Program, but instead uses a system whereby loans are modified on a case-by-case basis, based upon an analysis of the individual borrower’s situation and the causes of the weakness in the individual loan. To date, loan modifications have primarily involved commercial real estate mortgages and commercial and industrial loans and have included reducing the interest rate on the loan to a level that is in line with current market rates for similar type loans, converting to an interest only period, usually six to twelve months, or re-amortizing the loan. For the first nine months of 2012, the Company has not made any concessions on any residential mortgage loans.

Troubled debt restructured loans, which are included in the total of impaired loans, amounted to $4.16 million as of March 31, 2013. These included loans converted to interest only periods for six to twelve months in the amount of $1.68 million, reduced interest rates on loans in the amount of $888 thousand, and loans that have been re-amortized in the amount of $1.60 million. These loans have specific reserves of $172 thousand based on the collateral value.

As noted above the Company does not have a formal modification program and it does not have any loans as of March 31, 2013 that had been modified and then subsequently re-defaulted in 2013.

Loans classified as non-performing are nonaccrual loans and loans 90 days or more past due. The Company has no loans that are 90 days or more past due that is still in an accruing status. If a loan has been modified and it is current as to principal and interest for a period of at least six months then it is classified as a performing loan, otherwise it is considered to be a non-performing loan.

The Company’s charge-off policy states after all collection efforts have been exhausted and the loan is deemed to be a loss, it will be charged to the Company’s established allowance for loan losses. Consumer loans subject to the Uniform Retail Credit Classification are charged-off as follows (a) closed end loans are charged-off no later than 120 days after becoming delinquent, (b) consumer loans to borrowers who subsequently declare bankruptcy, where the Company is an unsecured creditor, are charged-off within 60 days of receipt of the notification from the bankruptcy court, (c) fraudulent loans are charged-off within 90 days of discovery and (d) death of a borrower will cause a charge-off to be incurred at such time an actual loss is determined. All other types of loans are generally evaluated for loss potential at the 90th day past due threshold, and any loss is recognized no later than the 120th day past due threshold; each loss is evaluated on its specific facts regarding the appropriate timing to recognize the loss.

The Company has recorded partial charge-offs of $163 thousand in prior years and none in 2013 on loans that are still in the loan

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portfolio as of March 31, 2013.

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. With the exception of these instruments and the Company’s obligations relating to its trust preferred securities, the Company does not have any off balance sheet arrangements that 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 were as follows:

	March 31,
	2013
(dollars in thousands)	Contractual Amount
Financial instruments whose notional or contract amounts represent credit risk:
Commitments to extend credit	$	30,929
Standby letters of credit	2,306
Total	$	33,235

See Note 9 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, 2012 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 capital 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, subordinated debt or other qualifying capital instruments. There can be no assurance that additional capital will be available to the Company on a timely basis or on attractive terms. On December 15, 2006, the Company completed the issuance of $6.00 million of trust preferred securities that can be recognized as capital for regulatory purposes. The interest rate on the trust preferred securities and underlying subordinated debentures was a fixed rate of 6.5375% through December 15, 2011, and is adjusted quarterly to 163 basis points over three-month LIBOR. On March 15, 2013, the most recent interest reset date, the interest rate was adjusted to 1.91010% for the period ending June 15, 2013. The Company has an unsecured revolving line of credit borrowing arrangement with an unaffiliated financial institution in the amount of $4.00 million with no outstanding balance as of March 31, 2013 or December 31, 2012. This facility matures on July 22, 2013, has a floating interest rate equal to the Wall Street Journal prime rate, subject to a minimum rate of 3.75%, and requires monthly interest payments only. The purpose of this facility is to provide capital to the Bank, as needed. The Company also has an unsecured borrowing arrangement with an unaffiliated third party in the amount of $2.7 million as of March 31, 2013. This facility matures on July 12, 2013, at a fixed rate of 2.50%, and requires quarterly interest payments only. The Company expects to have these credit facilities renewed, but there can be no assurance.

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. The Company will be subject to such requirements when its assets exceed $500 million, it has publicly issued debt or it engages in certain highly leveraged activities. 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 consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Significant further growth of the Company may be limited because the current level of capital will not support rapid short term growth while meeting regulatory capital expectations. Loan portfolio growth will need to be funded primarily by increases in deposits as the Company has limited amounts of on-balance sheets assets deployable into loans. Growth will depend upon Company earnings and/or the raising of additional capital.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios

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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 Bank met all capital adequacy requirements to which it is subject as of March 31, 2013 and that the Company would meet such requirements if applicable. See Note 10 to the consolidated financial statements for a table depicting compliance with regulatory capital requirements.

As of March 31, 2013, 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 10. There are no conditions or events since that notification which management believes have changed the Bank’s category.

Proposed Changes in Capital Requirements. In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation (“Basel III”). Basel III, when implemented by the U.S. banking agencies and fully phased-in, will require bank holding companies and their bank subsidiaries to maintain more capital, with a greater emphasis on common equity. Implementation was to be phased in between 2013 and 2019, but has been delayed pending further review of the proposed implementing regulations discussed below.

The Basel III final capital framework, among other things, (i) introduces as a new capital measure “Common Equity Tier 1” (“CET1”), (ii) specifies that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expands the scope of the adjustments as compared to existing regulations.

When fully phased in, Basel III requires banks to maintain (i) as a newly adopted international standard, a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a “capital conservation buffer” of 2.5 %; (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer; (iii) a minimum ratio of Total (Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0% plus the capital conservation buffer and (iv) as a newly adopted international standard, a minimum leverage ratio of 3%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter).

Basel III also provides for a “countercyclical capital buffer,” generally to be imposed when national regulators determine that excess aggregate credit growth becomes associated with a buildup of systemic risk that would be a CET1 add-on to the capital conservation buffer in the range of 0% to 2.5% when fully implemented. The capital conservation buffer is designed to absorb losses during periods of economic stress.

Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) may face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

The Basel III final framework provides for a number of new deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.

The FRB, the FDIC and the OCC issued a joint Notice of Proposed Rulemaking in June 2012 (the “Basel III Notice”), which proposes to implement Basel III under regulations substantially consistent with the above. One additional proposed change from current practice proposed in the Basel III Notice, included as part of the definition of CET1 capital, would require banking institutions to generally include the amount of Additional Other Comprehensive Income (which primarily consists of unrealized gains and losses on available for sale securities which are not required to be treated as OTTI, net of tax) in calculating regulatory capital. The Basel III Notice also proposes a 4% minimum leverage ratio.

Additionally, the FRB, the FDIC and the OCC issued a second Notice of Proposed Rulemaking in June 2012 (the “Standardized Approach Notice”) which would change the manner of calculating risk weighted assets. Under this Notice, new methodologies for determining risk-weighted assets in the general capital rules are proposed, including revisions to recognition of credit risk mitigation, including a greater recognition of financial collateral and a wider range of eligible guarantors. They also include risk weighting of equity exposures and past due loans, potential changes in the weighting of residential mortgage loans depending on the risk characteristics of the loan; and higher (greater than 100%) risk weighting for certain commercial real estate exposures that have higher credit risk profiles, including higher loan to value and equity components.

The components of the Basel III framework remain subject to revision or amendment, as are the rules proposed by the U.S. regulatory agencies in the Basel III Notice and Standardized Approach Notice. Accordingly, the regulations ultimately applicable to us may be substantially different from the Basel III final framework as published in December 2010, and as proposed in the Basel III Notice and Standardized Approach Notice. Requirements to maintain higher levels of capital or to maintain higher levels of liquid assets, and

Table of Contents

Item 1A. Risk Factors. Not Applicable.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) Sales of Unregistered Securities. None

(b) Use of Proceeds. Not Applicable.

The following table provides information on the Company’s purchases of its common stock during the quarter ended March 31, 2013.

Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)	Maximum Number of Shares that may yet be Purchased Under the Plans or Programs
January 1-31, 2013	0	N/A	0	0
February 1-28, 2013	0	N/A	0	0
March 1-31, 2013	0	N/A	0	300,000	(2)

(1) On June 25, 2012, the Company’s Board of Directors approved a share repurchase program that authorizes the repurchase of up to 300,000 shares of the Company’s outstanding common stock, subject to a maximum expenditure of $5.0 million. Repurchases under the program may be made on the open market and in privately negotiated transactions from time to time until September 30, 2017, or earlier termination of the program by the Board.

(2) Subject to a maximum expenditure of $5.0 million. Number of shares indicated is the remaining number of shares authorized for repurchase as of the end of the indicated period.

Item 3. Defaults upon Senior Securities. None

Item 4. Mine Safety Disclosures. None

Item 5. Other Information None

Item 6. Exhibits

Exhibit No. Description of Exhibits

3(a) Articles of Incorporation of the Company, as amended(1)

3(b) Bylaws of the Company(2)

4(a) Indenture, dated as of December 15, 2006 between Frederick County Bancorp, Inc. and U.S. Bank National Association, as trustee(3)

4(b) Amended and Restated Declaration of Trust, dated as December 15, 2006 between Frederick County Bancorp, Inc. and U.S. Bank National Association, as trustee, and Martin S. Lapera and William R. Talley, Jr. as Administrators(3)

4(c) Guarantee Agreement dated as of December 15, 2006 between Frederick County Bancorp, Inc. and U.S. Bank National Association, as Guarantee Trustee(3)

10(a) 2001 Stock Option Plan(4)

10(b) Employment Agreement between the Bank and Martin S. Lapera(5)

10(c) Employment Agreement between the Bank and William R. Talley, Jr. (6)

10(d) Amendment No. 1 to Employment Agreement for Martin S. Lapera(7)

10(e) Amendment No. 1 to Employment Agreement for William R. Talley, Jr. (8)

10(f) Amendment No. 2 to Employment Agreement for Martin S. Lapera(9)

10(g) Amendment No. 2 to Employment Agreement for William R. Talley, Jr. (10)

10(h) 2002 Executive and Director Deferred Compensation Plan, as amended(11)

10(i) Amendment No. 1 to the 2002 Executive and Director Deferred Compensation Plan(11)

10(j) Promissory Note with Atlantic Central Bankers Bank (12)

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

Large accelerated filer o		Accelerated filer o

Non-accelerated filer o		Smaller reporting company x

PART I		FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets, March 31, 2013 and December 31, 2012

	Consolidated Statements of Income, Three Months Ended March 31, 2013 and 2012

	Consolidated Statements of Comprehensive Income, Three Months Ended March 31, 2013 and 2012

	Consolidated Statements of Changes in Shareholders’ Equity, Three Months Ended March 31, 2013 and 2012

	Consolidated Statements of Cash Flows, Three Months Ended March 31, 2013 and 2012

	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

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.	Mine Safety Disclosures

Item 5.	Other Information

Item 6.	Exhibits

	Signatures

	FREDERICK COUNTY BANCORP, INC.


Date: May 7, 2013	By:	/s/ Martin S. Lapera
		Martin S. Lapera
		President and Chief Executive Officer


Date: May 7, 2013	By:	/s/ William R. Talley, Jr.
		William R. Talley, Jr.
		Executive Vice President, Chief Financial Officer and Chief Operating Officer

Level 1		Valuations for assets and liabilities traded in active exchange markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2		Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities which use observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in active markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3		Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.