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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 MARCH 31, 2009

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 April 30, 2009, 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

March 31, 2009 and December 31, 2008

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 Three Months Ended March 31, 2009 and 2008

( 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 (Loss)

For the Three Months Ended March 31, 2009 and 2008

(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 Three Months Ended March 31, 2009 and 2008

(Unaudited)

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

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CommerceFirst Bancorp, Inc. and Subsidiary

Consolidated Statement of Cash Flows

For the Three Months Ended March 31, 2009 and 2008

(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, 2008 are derived from audited consolidated financial statements that are included in the Company’s Annual Report for the year ended December 31, 2008.  The financial data at March 31, 2009 and 2008 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, interest and non-interest bearing deposits due from 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. Fair value

FASB Statement No. 157 (SFAS 157), Fair Value Measurements defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. These inputs are summarized in three broad levels: Level 1 — Quoted prices in active markets for identical securities, Level 2 — Other significant observable inputs (including quoted prices in active markets for similar securities) and Level 3 — Significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments)

The Company’s bond holdings in the investment securities are the only asset or liability subject to fair value measurement on a recurring basis. These assets are valued under Level 1 inputs. $3.1 million of impaired loans are valued under Level 2 inputs with the remaining $1.7 million of impaired loans being valued under Level 3 inputs. Other real estate owned is valued at $664 thousand under Level 2 inputs

Note 3. 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

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including the average dilutive common equivalents outstanding during the period.  Dilutive common equivalent shares consist of stock options and warrants, calculated using the treasury stock method.

All of the warrants and options were excluded from the calculation of diluted income per share in 2009 because they are anti-dilutive, while none were excluded in 2008.

Note 4. Related Party Transactions

The Bank paid $10,854 during the first three months of 2009 for legal services to a firm of which a Director of the Bank is a principal.  Expenditures totaling less than $10,000 were paid to several entities in which directors were principals during the first three months of 2009. 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 March 31, 2009 the amounts of such loans outstanding were $3,491,739.

Deposit balances of executive officers, directors and their affiliated interests totaled $12.1 million at March 31, 2009.

Note 5. 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 March 31, 2009 are as follows:

Note 6. Recent Relevant Accounting Pronouncements

On January 12, 2009, the FASB issued FASB Staff Position EITF 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20 (FSP). FASB FSP 99-20-1 amends the impairment guidance in FASB EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be held by a Transferor in Securitized Financial Assets . The intent of the FSP is to reduce complexity and achieve more consistent determinations as to whether other-than-temporary impairments of available for sale or held to maturity debt securities have occurred. The FSP is effective for interim and annual reporting periods ending after December 15, 2008. The adoption of this FSP did not have an impact on the Company’s consolidated financial statements.

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In April 2009, the FASB issued three Final Staff Positions (FSPs) to provide additional guidance and disclosures regarding fair value measurements and impairments of securities:

FSP FAS 157-4. “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” , provides guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased. The Company does not expect that FSP FAS 157-4 will have a material impact on the Company’s consolidated financial statements.

FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, amends the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in financial statements. The Company does not expect that FSP FAS 115-2 and FAS 124-2 will have a material impact on the Company’s consolidated financial statements.

FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments , requires disclosure about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The Company will review the requirements of FSP FAS 107-1 and comply with its requirements.

These three FSPs are effective for interim and annual periods ending after June 15, 2009.

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 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, became 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 2009 to better utilize its resources and leverage new capital obtained from the issuance of common stock in 2005. Loans increased by 3.2% during the first three months of 2009. The increase in loans and the reduction of the cost of deposits resulted in an increase in net interest margin.

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The Company continued a pattern of asset and revenue growth during the first quarter of 2009 but operating results have been adversely affected through the increase in the provision for loan losses in recognition of the effect on the Company’s loans of uncertain economic conditions. Key measurements and events for the period include the following:

·                  Total assets at March 31, 2009 increased by 3.6% to $172.6 million as compared to $166.6 million as of December 31, 2008.

·                  Net loans outstanding increased by 3.2% from $151.1 million as of December 31, 2008 to $156.0 million as of March 31, 2009.

·                  Deposits at March 31, 2009 were $151.2 million, an increase of $6.0 million or 4.1% from December 31, 2008.

·                  The Company incurred a loss of $77 thousand during the three months ended March 31, 2009 as compared to net income of $149 thousand for the three month period ended March 31, 2008 primarily resulting from increased provision for loan losses during 2009.

·                  Net interest income, the Company’s main source of income, was $1.59 million during the three month period ended March 31, 2009 compared to $1.42 million for the same period in 2008, an increase of 12.2%

·                  Non-interest income increased by $5 thousand for the three month period ended March 31, 2009 as compared to the three month period ended March 31, 2008.

·                  Non-interest expenses increased by $6 thousand or 0.5%, for the three months ended March 31, 2009, as compared to the same period in 2008.

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 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-K for the year ended December 31, 2008. 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

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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 loss of $77 thousand for the three-month period ended March 31, 2009 as compared to a net profit of $149 thousand for the three-month period ended March 31, 2008. The reduced earnings in 2009 are the result of the increase in the provision for loan losses from $9 thousand during the first three months of 2008 to $529 thousand for the same period in 2009. The Company is increasing its allowance for loan losses in recognition of the detrimental effect of the weakened economy on its loan customers. The level of impaired loans and the amount of loans for which specific reserves have been established have increased as compared to the first quarter of 2008 resulting in the increase of provisions for loan losses during the first quarter of 2009 as compared to the same period in 2008.  Net interest income increased in 2009 as compared to 2008 by $172 thousand (12.2%).  During 2008, the Company’s net interest income was negatively affected by the reduced interest rate environment initiated by the Federal Reserve Bank in late 2007. In the first quarter of 2009, the average interest rate paid on interest bearing funds declined at a more rapid pace then the decline in the average interest rate earned on interest earning assets. This resulted in increases in net interest spread, net interest margin and net interest income.  Increases in non-interest expenses were offset by similar increases in non- interest income.

Return on Average Assets and Average Equity . The following table shows the return on average assets and average equity for the period shown.

Net Interest Income and Net Interest Margin . 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.

Total interest income increased by $26 thousand or 1.0% to $2.7 million for the three-month period ended March 31, 2009.  This increase in interest income was attributable to the increase in average earning assets during the first quarter of 2009 of $15.7 million as compared to the same period in 2008. Interest income was adversely affected by the decline in the yield of the average earning assets from 7.3% in 2008 to 6.8% in 2009.

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Interest expense decreased by $146 thousand or 11.1% to $1.2 million for the three months ended March 31, 2009 as compared to $1.3 million during the first three months of 2008.  This decrease was primarily attributable to the decrease in the cost of funds from 4.6% during the first quarter of 2008 to 3.6% during the first quarter of 2009. The decline in the cost of funds was partially offset by the increase in average interest bearing liabilities of $16.5 million during 2009 as compared to 2008.

The net interest income for the three-month period ended March 31, 2009 was $1.6 million as compared to $1.4 million for the same period in 2008.  Net interest income increased primarily because of the increase in average earning assets and the reduced cost of funds during the three months ended March 31, 2009 as compared to the three months ended March 31, 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

Yields on securities are calculated based on amortized cost.

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Net interest margin was 3.9% in the first quarter of 2009, as compared to 3.8% in the comparable period in 2008. Interest spread was 3.1% in the first quarter of 2009, as compared to the 2.7% in the first quarter of 2008 reflecting the greater reduction in the cost of interest bearing funds as compared to the reduced earnings rate of interest earning assets. The growth in loans receivable as well as the re-pricing of interest bearing deposits at lower interest rates combined to improve the net interest spread and net interest margin.

The following table sets forth certain information regarding changes in interest income and interest expense of the Company.  For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (i) changes in volume (change in volume of the asset multiplied by the prior year’s rate) and (ii) changes in rates (change in rate multiplied by the current year’s volume).

Provision for Loan Losses. The provision for loan losses represents the amount charged against earnings to increase the allowance for loan losses to the level deemed appropriate by management.  The provision for loan losses and the allowance for loan losses are based on management’s ongoing assessment of the Company’s credit exposure and consideration of certain other relevant factors. The provision for loan losses was $529 thousand during the three months ended March 31, 2009 as compared to $9 thousand for the three months ended March 31, 2008. The Company is increasing its allowance for loan losses to address identified loan concerns and in recognition of the detrimental effect of the weakened economy. The allowance is comprised of specific and general allowance amounts.

Non-Interest Income . Non-interest income principally consists of gains from the sale of the guaranteed portion of Small Business Administration loans and from deposit account services charges. For the three months ended March 31, 2009, there were no sales of the guaranteed portion of SBA loans whereas gains on sales of SBA loans amounted to $31 thousand during the first quarter of 2008.  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 the volume of loans actually sold. As the result of the current uncertainties in the secondary market for SBA loans, the Company did not sell any of these loans during the first quarter of 2009. Deposit account service charges amounted to $101 thousand during the three months ended March 31, 2009 as compared to $64 thousand for the same period in 2008 reflecting higher service charges assessed on deposit account activities.

Non-Interest Expense .  Non-interest expense increased by $6 thousand during the three-month period ended March 31, 2009 as compared to the same period in 2008, a 0.5% increase. Increases in FDIC insurance assessments and loan collection expenses were generally offset by reductions in compensation and professional expenses.

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Income Tax Expense . During the three months ended March 31, 2009, the Company recorded an income tax benefit of $49 thousand as compared to a $73 thousand expense during the same period in 2008. The income tax benefit was 39.2% of loss before taxes in 2009 and income tax expense was 33.0% of income before taxes in 2008. In the three month period ended March 31, 2008, the effective income tax rate was reduced 5.9% because the effect of 2008 state tax rate changes on deferred tax items.

FINANCIAL CONDITION.

General . The Company’s assets at March 31, 2009 were $172.6 million, an increase of $6.0 million or 3.6%, from December 31, 2008.  Gross loans totaled $158.2 million comprised of real estate loans of $94.2 million, an increase of $5.3 million, or 3.5%, from December 31, 2008 and commercial loans of $58.8 million, a decrease of $1.1 million, or 1.9% from December 31, 2008. At March 31, 2009, deposits totaled $151.2 million an increase of $6.0 million, or 4.1%, from December 31, 2008. Deposits at March 31, 2009 are comprised primarily of certificates of deposit of $112.2 million, NOW and Money Market accounts of $16.7 million, and noninterest bearing deposits of $22.1 million.

Loan Portfolio.  The loan portfolio is the largest component of earning assets and accounts for the greatest portion of total interest income.  At March 31, 2009, net loans were $156.0 million, a 3.2% increase from the $151.1 million in loans outstanding at December 31, 2008. 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 Company’s continuing efforts to attract quality credits; there has been no dilution of credit underwriting standards. The percentage of total loans comprised of commercial real estate loans has increased as the Company has concentrated on this type of lending. The majority of these loans are secured by real property that is occupied by the borrowers’ businesses. The Company has approximately $2.9 million of acquisition and construction loans secured by residential building lots. The Company does not engage in foreign lending activities. Loans secured by residential real estate are loans to investors for commercial purposes. The Bank does not lend funds to consumers. The following table presents the composition of the loan portfolio by type of loan at the dates indicated.

Loans receivable, net is comprised of the following:

The following table shows the interest rate sensitivity of the loan portfolio at March 31, 2009. Demand loans, loans without a stated maturity and overdrafts are reported as due in one year or less. Floating rate loans are reported to reflect the period until re-pricing.

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Allowance for loan losses. The adequacy of the allowance for loan losses is evaluated based upon loan categories except for loans rated substandard, doubtful or loss, which are evaluated separately and assigned loss amounts based upon the evaluation.  Loss ratios are applied to each category of loan to determine estimated loss amounts.  Categories of loans are identified commercial, SBA and mortgage loans.  Loss ratios are determined based upon losses incurred adjusted for the effect of current economic conditions, any industry concentration or identified weakness in an industry, credit management and underwriting policies changes and secured versus unsecured nature of loan category. At March 31, 2009, the range of the loss ratios used to determine estimated losses by loan category were: commercial loans - 0.6%; SBA loans (unguaranteed portion) - 6.0% and real estate loans- 0.15% to 1.05%. These loss ratios are about 0.1% higher than the ratios applied at December 31, 2008 except as to the 6.0% loss ratio for SBA loans which remained unchanged.  Additional losses are estimated resulting from additional identified risks factors, such as loans with underwriting exceptions, the level and direction of payment delinquencies and the level of large loans.  These additional loss estimates are not allocated to the separate loan categories.

The adequacy of the allowance for loan losses is also reviewed at least quarterly using risk ratings applied to the loans based upon rating criteria consistent with regulatory definitions.  The risk rating is adjusted, as necessary, if loans become delinquent, if significant adverse information is discovered regarding the underlying credit and, in the case of commercial loans and commercial real estate loans, the normal periodic review of the underlying credit indicates that a change in risk rating is appropriate.  An estimated “low” and “high” loss percentage is applied to loans in each risk rating.  These loss percentages increase as the loan risk rating increases.  Loans rated as substandard, doubtful or loss are evaluated separately and assigned loss amounts based upon the separate evaluation.  Risks factors identified beyond individual loan risks, such as economic conditions, underwriting exceptions and loan concentrations are quantified based upon management’s estimations of loss exposure.  Loss percentages used are generally based upon management’s best estimates considering losses incurred.  Estimated “low” and “high” allowance for loan loss amounts are derived by accumulating the estimated losses using the “low” and “high” loss percentages for each risk rating and adding losses based upon separate loan evaluations and identified other risks.  The actual allowance for loan losses is compared to this range to ascertain that it is reasonably situated within the range. In addition, on at least a quarterly basis, the recorded allowance for loan losses (as a percent of loans) is compared to peer group levels to ascertain the reasonableness of the estimate. At March 31, 2009, the actual allowance for loan losses of 1.42% was between the “low” and “high” allowance amounts of 1.34% and 1.59%, respectively.

The allowance for loan losses represents 1.42% and 1.22% of loans receivable at March 31, 2009 and December 31, 2008, respectively. The Company has no exposure to foreign countries or foreign borrowers.  Management believes that the allowance for loan losses is adequate for each period presented.

The activity in the allowance for loan losses is shown in the following table.

Additionally, the Company has established a reserve for unfunded commitments that is recorded by a provision charged to other expenses. At March 31, 2009 the balance of this reserve was $49.5 thousand. The reserve, based on

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evaluations of the collectability of loans, is an amount that management believes will be adequate over time to absorb possible losses on unfunded commitments (off-balance sheet financial instruments) that may become uncollectible in the future.

Asset Quality . In its lending activities, the Company seeks to develop sound loans with customers who will grow with the Company. There has not been an effort to rapidly build the portfolio and earnings at the sacrifice of asset quality.  At the same time, the extension of credit inevitably carries some risk of non-payment.

Non-accrual loan activity is summarized as follows since December 31, 2008: