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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

For the quarterly period ended SEPTEMBER 30, 2008

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

For the transition period from                     to                     

Commission file number   000-51104

CommerceFirst Bancorp, Inc.

 (Exact Name of Registrant as Specified in its Charter)

1804 West Street, Suite 200, Annapolis, MD 21401

(Address of Principal Executive Offices)

410-280-6695

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

Indicate by check whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes x   No o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Securities Exchange Act).    Yes  o   No  x

As of October 30, 2008, the number of outstanding shares of registrant’s common stock, par value $0.01 per share was: 1,820,548

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CommerceFirst Bancorp, Inc.

FORM 10-Q

INDEX

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CommerceFirst Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition

September 30, 2008 and December 31, 2007

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

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CommerceFirst Bancorp, Inc. and Subsidiary

Consolidated Statements of Operations

For the Nine and Three Months ended September 30, 2008 and 2007 (Unaudited)

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

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CommerceFirst Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income

For the Nine and Three Months ended September 30, 2008 and 2007 (Unaudited)

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

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CommerceFirst Bancorp, Inc. and Subsidiary

Consolidated Statements of Stockholders’ Equity

For the Nine Months Ended September 30, 2008 and 2007

(Unaudited)

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

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CommerceFirst Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2008 and 2007

(Unaudited)

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. The Company and its Significant Accounting Policies

Summary of Significant Accounting Policies

Basis of Presentation:

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X.  Accordingly, they do not contain all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

The financial data at December 31, 2007 are derived from audited consolidated financial statements that are included in the Company’s Annual Report for the year ended December 31, 2007.  The financial data at September 30, 2008 and 2007 are derived from unaudited consolidated financial statements. Interim results are not necessarily indicative of results for the full year.

The consolidated financial statements include the accounts of CommerceFirst Bancorp, Inc. (the “Company”) and its subsidiary, CommerceFirst Bank (the “Bank”).  Inter-company balances and transactions have been eliminated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and cash equivalents in the statement of cash flows include cash on hand, non-interest bearing amounts due from correspondent banks and the Federal Reserve and Federal funds sold.

Certain prior period amounts have been reclassified to conform to the current period’s method of presentation.

Note 2. Net Income per Common Share

Basic earnings per share of common stock are computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per share are calculated by including the average dilutive common equivalents outstanding during the period unless their inclusion is anti-dilutive.  Dilutive common equivalent shares consist of stock options and warrants, calculated using the treasury stock method.

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Note 3. Related Party Transactions

The Bank paid $45,932 during the first nine months of 2008 for support services to a computer consulting firm of which a Director of the Bank is also a principal.  The Bank also paid $148,085 during the first nine months of 2008 for various group insurance benefits and the 401k plan for which a Director of the Company and the Bank ultimately receives commission compensation. Expenditures totaling less than $10,000 were paid to several entities in which directors were principals during the first nine months of 2008. All of the above transactions have been consummated on terms equivalent to those that prevail in arms length transactions.

Executive officers, directors and their affiliated interests enter into loan transactions with the Bank in the ordinary course of business.  These loans are made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with unrelated borrowers.  They do not involve more than normal risk of collectability or present other unfavorable terms. At September 30, 2008 the amounts of such loans outstanding were $3.6 million.

Deposits and securities sold under agreements to repurchase held by executive officers, directors and their affiliated interests totaled $11.8 million at September 30, 2008.

Note 4. Commitments and contingencies

The Bank is a party to financial instruments in the normal course of business to meet the financing needs of its customers.  These financial instruments typically include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated financial statements. Outstanding commitments as of September 30, 2008 are as follows:

Note 5. Recent Relevant Accounting Pronouncements

The Company adopted FASB Statement No. 157 (SFAS 157), Fair Value Measurements in January 2008.  SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. The adoption of SFAS 157 did not have a material impact on the Company’s consolidated financial statements in 2008. The clarifications and additional guidance regarding fair value measurement contained in the September 30, 2008 release number 2008-234 by the SEC Office of the Chief Account and FASB Staff had no material effect on the Company’s consolidated financial statements.

ITEM 2.                          MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .

Forward-Looking Statements

Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar import.  Such forward-looking statements involve known and unknown risks including, but not limited to, changes in general economic and business conditions, interest rate fluctuations, competition within and from outside the banking industry, new products and services in the banking industry, risk inherent in making loans such as repayment risks and fluctuating collateral values, problems with technology utilized by the Company, changing trends in customer profiles and changes in laws and regulations applicable to the

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Company.  Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Readers are cautioned against placing undue reliance on any such forward-looking statements. The Company’s past results are not necessarily indicative of future performance.

General

CommerceFirst Bancorp, Inc. (the “Company”) is the bank holding company for CommerceFirst Bank, a Maryland chartered commercial bank headquartered in Annapolis, Maryland (the “Bank”). The Bank was capitalized as a wholly owned subsidiary of the Company and commenced operations on June 29, 2000. The Company’s common stock trades on the NASDAQ Capital Market under the symbol “CMFB”.

The Company continued its efforts to increase investments in loans during 2008. Loans increased by 12.3% during the first nine months of 2008. The increase in loans and the recent decreases in market interest rates have resulted in increases in the Company’s interest income but a decline in its net interest margin.

The Company continued a pattern of asset growth during the nine months of 2008 as revenues remained relatively flat due to declines in market interest rates. Operating results have been adversely affected by a declining interest rate environment and increased expenses relating to the Company’s asset growth and a new branch opened in June 2007. Key measurements and events for the period include the following:

·       Total assets at September 30, 2008 increased by 10.2% to $163.9 million as compared to $148.8 million as of December 31, 2007.

·       Net loans outstanding increased by 12.3% from $124.7 million as of December 31, 2007 to $140.0 million as of September 30, 2008.

·       Deposits at September 30, 2008 were $140.9 million, an increase of $17.5 million or 14.2% from December 31, 2007.

·       The Company’s net income decreased to $401 thousand, or 51.5%, for the nine month period ended September 30, 2008 as compared to net income of $826 thousand for the nine month period ended September 30, 2007.

·       Net interest income, the Company’s main source of income, was $4.2 million during the nine month period ended September 30, 2008 as compared to $4.4 million during the same period in 2007, a 3.7% decline.

·       Non-interest income did not change considerably decreasing to $443 thousand during the nine month period ended September 30, 2008 from $447 thousand in the comparable period in 2007.

·       Non-interest expenses increased by $437 thousand or 12.8%, for the nine months ended September 30, 2008, as compared to the same period in 2007.

A discussion of the factors leading to these changes can be found in the discussion below.

Critical Accounting Policies

CommerceFirst Bancorp, Inc.’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States 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

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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 most significant accounting policies followed by CommerceFirst Bancorp, Inc. are presented in Note 1 to the Company’s annual audited consolidated financial statements included in  its Annual Report on Form 10-KSB for the year ended December 31, 2007. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.  Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan losses as the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.

CommerceFirst Bancorp, Inc. believes it has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio.  CommerceFirst Bancorp, Inc.’s assessments may be affected in future periods by changes in economic conditions, the impact of regulatory examinations and the discovery of information with respect to borrowers that is not known to management at the time of the issuance of the consolidated financial statements.

RESULTS OF OPERATIONS

General .

The Company reported a net profit of $401 thousand for the nine-month period ended September 30, 2008 as compared to a net profit of $826 thousand for the nine-month period ended September 30, 2007. Net interest income declined by $160 thousand during the nine months of 2008 as compared to the nine months of 2007. The Company’s net interest income was negatively affected by the reduced interest rate environment initiated by the Federal Reserve Bank in late 2007 and continuing into 2008.  The reduced earnings are also the result of expense increases attributable to additional personnel required by the Bank’s branch expansion (the Bank opened a branch in June of 2007), expenses necessitated by the growth of the Bank’s loan portfolio, the payment of deposit insurance assessments beginning in 2007 and other higher expenses associated with the new internet banking and core processing platforms which became operational during the second quarter of 2007.

The Company reported a net profit of $91 thousand for the three-month period ended September 30, 2008 as compared to a net profit of $271 thousand for the three-month period ended September 30, 2007. This decline was the result of the same factors mentioned in the above paragraph.

The following table shows the return on average assets and average equity for the period shown.

Return on Average Assets and Average Equity

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Net interest income is the amount by which interest earned on assets exceeds the interest paid on interest-bearing liabilities.  The Company’s principal interest earning assets are loans to businesses.  Interest-bearing liabilities consist primarily of savings accounts, money market accounts and certificates of deposit.  Generally, changes in net interest income are measured by net interest rate spread and net interest margin.  Net interest rate spread is equal to the difference between the average rate earned on interest earning assets and the average rate incurred on interest-bearing liabilities.  Net interest margin represents the difference between interest income (including net loan fees earned) and interest expense calculated as a percentage of average earning assets.

Nine Months Ended September 30, 2008

Net Interest Income and Net Interest Margin

Total interest income increased by $47 thousand or 0.6% to $8.03 million for the nine months ended September 30, 2008 as compared to $7.98 million for the same period in 2007.  This increase in interest income was attributable to the increase in average earning assets during 2008 of $18.2 million (13.5%) as compared to the same period in 2007. Interest income was adversely affected by the decline in the yield of the average earning assets from 7.9% in 2007 to 7.0% in 2008.

Interest expense increased by $207 thousand or 5.7% to $3.8 million for the nine months ended September 30, 2008 as compared to $3.6 million during the first nine months of 2007.  This increase was primarily attributable to increased average interest bearing liabilities of $17.3 million (17.4%) during 2008 as compared to 2007. The effect of the increased interest bearing liabilities was offset to some degree by the decline in the interest cost of the deposits from 4.9% in 2007 as compared to the interest cost of the funds of 4.4% during 2008.

The net interest income for the nine months ended September 30, 2008 was $4.2 million as compared to $4.4 million for the same period in 2007.  Net interest income decreased because the yield on the interest earning assets declined faster than the cost of the interest bearing liabilities during the period of market interest rate declines. The effect of the declining interest rates was partially offset by the increase in interest earning assets exceeding the increase in interest bearing liabilities during 2008.

The following table shows the average balances and the rates of the various categories of the Company’s assets and liabilities. Nonperforming loans are included in average balances in the following table:

AVERAGE BALANCES, RATES AND INTEREST INCOME AND EXPENSE

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AVERAGE BALANCES, RATES AND INTEREST INCOME AND EXPENSE

Yields on securities are calculated based on amortized cost.

Net interest margin was 3.7% in the nine months of 2008, as compared to 4.3% in the comparable period in 2007. Interest spread was 2.6% in the nine months of 2008, as compared to the 3.1% in the nine months of 2007. The yield on interest earning assets declined at a faster rate than the decline in the cost of interest bearing liabilities resulting in the reduction of the net interest margin and net interest spread. Market interest rate reductions during 2008 have resulted in the rates earned on the Company’s loans, a significant proportion of which are floating rate loans which re-price the loans immediately with declines in market interest rates, declining faster than its interest bearing liabilities, which are comprised mostly of fixed rate certificates of deposit which will re-price at their maturity date.  Approximately 64% of the certificates of deposit mature within the next year. The net interest margin declined during the quarter ended September 30, 2008 and is subject to further decline in the event of near term future reductions in market interest rates.

Provision for Loan Losses

The provision for loan losses was $168 thousand during the nine months of 2008 as compared to $45 thousand during the nine months of 2007 reflecting increases in average loans, specific loan reserves on some loans offset somewhat by decreased reserves on other loans resulting from loan pay-downs and payoffs as well as the current economic uncertainties. The majority of the specific loan reserve increase relate to unguaranteed portion of loans partially guaranteed by the SBA.

Non-Interest Income .

Non-interest income principally consists of gains from the sale of investment securities and the guaranteed portion of Small Business Administration loans and from deposit account services charges. For the nine months ended September 30, 2008, gains on sales of SBA loans amounted to $222 thousand as compared to $235 thousand for the same period in 2007. Generally, the Bank desires to sell the guaranteed portion of most additional SBA loans resulting in a continuing stream of income that may vary significantly from quarter to quarter, depending in part upon

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the volume of loans actually sold. During June 2008, the Bank sold an investment security which resulted in a gain of $40 thousand. No securities were sold in 2007. Deposit account service charges amounted to $181 thousand during the nine months ended September 30, 2008 as compared to $212 thousand for the same period in 2007. The decline results from the reduction in overdraft fees incurred by account holders.

Non-Interest Expense .

Non-interest expense totaled $3.8 million for the nine-month period ended September 30, 2008 as compared to $3.4 million for the same period in 2007, a 12.8% increase. Compensation and benefit expense increased $225 thousand reflecting additional personnel required for a branch that was opened in June of 2007 thus incurring non-interest expense for the first nine months of 2008 but only four months of such expenses during the nine months ended September 30, 2007, as well as personnel needed to manage the growth of the Company, particularly its loan portfolio. Other expenses increased because of the additional branch. Non-interest expenses also increased because of the deposit insurance assessment by the Federal Deposit Insurance Corporation (FDIC) in 2008 (none in 2007), the additional expenses of upgraded data processing systems and products installed in the second quarter of 2007 as well as the general growth of the Company.  The Company expects that deposit insurance costs will significantly increase commencing in 2008 as a result of the seven basis point increase in premium brackets proposed by the FDIC.  The Company is currently evaluating participation in the program for unlimited insurance of noninterest bearing demand accounts being offered by the FDIC in connection with the Emergency Economic Stabilization Act, but has not yet made any decisions.

Income Tax Expense .

During the nine months ended September 30, 2008, the Company recorded an income tax expense of $236 thousand as compared to $535 thousand during the same period in 2007. Income tax expense was 37.1% of income before taxes in 2008 and 39.3% of income before taxes in 2007. The effective rate declined because of the effect on deferred tax items of state income tax rate changes in the first quarter of 2008.

Three Months Ended September 30, 2008

Net Interest Income and Net Interest Margin

Total interest income decreased by $88 thousand or 3.2% for the three-month period ended September 30, 2008 as compared the same period in 2007.  The increase in interest earning assets was offset by the reduction in the interest rates on the assets as the reduced interest rate environment continues to adversely affect interest earnings.

Interest expense increased by $61 thousand or 5.0% to $1.3 million for the three months ended September 30, 2008 as compared to $1.2 million during the first nine months of 2007.  This increase was primarily attributable to increased average interest bearing liabilities during 2008 as compared to 2007. The effect of the increased interest bearing liabilities was offset to some degree by the decline in the interest cost of the deposits.

The net interest income for the three-month period ended September 30, 2008 was $1.4 million as compared to $1.5 million for the same period in 2007.  Net interest income decreased primarily because the interest earning assets are re-pricing downward faster than the interest bearing liabilities during the recent period of declining market interest rates.

Provision for Loan Losses

The provision for loan losses was $108 thousand during the three month period ended September 30, 2008 as compared to no provision during the three months ended September 30, 2007, reflecting increases in average loans, higher reserves on some loans offset somewhat by decreased reserves on other loans resulting from loan pay-downs and payoffs as well as the current economic uncertainties.

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Non-Interest Income .

Non-interest income totaled $156 thousand for the three months ended September 30, 2008 as compared to $144 thousand during the three months ended September 30, 2007. For the three months ended September 30, 2008, gains on sales of SBA loans amounted to $92 thousand as compared to $80 thousand for the same period in 2007.  Deposit account service charges amounted to $64 thousand during the three months ended September 30, 2008 as compared to $65 thousand for the same period in 2007.

Non-Interest Expense .

Non-interest expense totaled $1.3 million for the three-month period ended September 30, 2008 as compared to $1.2 million for the same period in 2007, a 4.7% increase. Compensation and benefit expense increased $29 thousand, a 4.1% increase, reflecting salary increases and increased costs of benefits. Other expenses increased because of deposit insurance assessments by the FDIC in 2008 (none in 2007) and other expenses resulting from the growth of the Company.

Income Tax Expense .

During the three months ended September 30, 2008, the Company recorded an income tax expense of $59 thousand as compared to $182 thousand during the same period in 2007. Income tax expense was 39.1% of income before taxes in 2008 and 40.2% of income before taxes in 2007.

FINANCIAL CONDITION.

General . The Company’s assets at September 30, 2008 were $163.9 million, an increase of $15.1 million or 10.2%, from December 31, 2007.  Net loans totaled $140.0 million comprised of commercial real estate loans of $85.7 million, an increase of $12.8 million, or 17.5%, from December 31, 2007 and commercial loans of $56.2 million, an increase of $2.7 million, or 5.1% from December 31, 2007. At September 30, 2008, deposits totaled $140.9 million, an increase of $17.5 million, or 14.2%, from December 31, 2007. Deposits at September 30, 2008 are comprised primarily of certificates of deposit of $107.2 million, Money Market accounts of $13.5 million, and noninterest bearing deposits of $19.4 million.

Loan Portfolio.  The loan portfolio is the largest component of earning assets and accounts for the greatest portion of total interest income.  At September 30, 2008, net loans were $140.0 million, a 12.3% increase from the $124.7 million in net loans outstanding at December 31, 2007. In general, loans consist of internally generated loans and, to lesser degree, participation loans purchased from other local community banks.  Lending activity is generally confined to our immediate market areas. The strong growth is attributable to the satisfactory culmination of efforts to attract quality credits; there has been no dilution of credit underwriting standards. The percentage of total loans comprised of real estate loans has increased as the Company has concentrated on this type of lending. Loans secured by real estate provide the Bank with tangible collateral to support the loans in the case of loan default which management believes is superior to intangible collateral typically securing commercial loans. The majority of the real estate loans (approximately 69.2% and 77.3% at September 30, 2008 and December 31, 2007, respectively) are secured by real property that is occupied by the borrowers’ businesses.

Loans secured by residential real estate are loans to investors for the financing of rental properties or other business ventures. Residential real estate loans include loans to local builders and developers for acquisition and development and home building totaling $1.9 million at September 30, 2008 and $.8 million at December 31, 2007. None of these loans are delinquent and all are performing satisfactorily at September 30, 2008.

The Company does not engage in foreign lending activities. The following table presents the composition of the loan portfolio by type of loan at the dates indicated.

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Loans receivable, net is comprised of the following: