CMFB Commercefirst Bancorp (MM)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended SEPTEMBER 30, 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)

Maryland		52-2180744
(State or Other Jurisdiction		(I.R.S. Employer Identification No.)
of Incorporation or Organization)

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 mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 þ No o

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ 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.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ

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

As of November 4, 2009, the number of outstanding shares of registrant’s common stock, par value $0.01 per share was: 1,820,548

 

 

CommerceFirst Bancorp, Inc.

FORM 10-Q

INDEX

		Page(s)
PART I — FINANCIAL INFORMATION
Item 1 — Financial Statements
Consolidated Statements of Financial Condition — September 30, 2009 (Unaudited) and December 31, 2008 (Audited)			3
FOR PERIODS ENDED September 30, 2009 and 2008:
Consolidated Statements of Operations — Three and Nine months (Unaudited)			4
Consolidated Statements of Comprehensive Income — Three and Nine months (Unaudited)			5
Consolidated Statements of Stockholders’ Equity — Nine months (Unaudited)			6
Consolidated Statements of Cash Flows — Nine months (Unaudited)			7
Notes to Consolidated Financial Statements			8-11
Item 2 — Management’s Discussion and Analysis			11-24
Item 3 — Quantitative and Qualitative Disclosures About Market Risk			24
Item 4 — Controls and Procedures			24
PART II — OTHER INFORMATION
Item 1 — Legal Proceedings			24
Item 1A — Risk Factors			24
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds			25
Item 3 — Defaults Upon Senior Securities			25
Item 4 — Submission of Matters to a Vote of Security Holders			25
Item 5 — Other Information			25
Item 6 — Exhibits			25
SIGNATURES			26
Exhibit 31(a)
Exhibit 31(b)
Exhibit 32(a)
Exhibit 32(b)

CommerceFirst Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition

September 30, 2009 and December 31, 2008

		September 30,				December 31,
		2009				2008
ASSETS
Cash and due from banks		$	1,897,290			$	3,290,691
Interest bearing deposits			11,649,128				—
Federal funds sold			172,810				5,673,666
Cash and cash equivalents			13,719,228				8,964,357
Investment securities — available-for-sale, at fair value			—				3,085,770
Investments in restricted stocks, at cost			527,000				467,000
Loans receivable, net of allowance for loan losses of $2,150,000 at September 30, 2009 and $1,860,000 at December 31, 2008			177,604,477				151,101,169
Premises and equipment, net			797,123				1,000,967
Accrued interest receivable			660,604				639,538
Deferred income taxes			917,379				667,993
Other real estate owned			653,000				—
Other assets			388,979				642,280
Total Assets		$	195,267,790			$	166,569,074
LIABILITIES
Non-interest bearing deposits		$	21,626,649			$	23,598,842
Interest bearing deposits			152,079,518				121,642,218
Total deposits			173,706,167				145,241,060
Accrued interest payable			269,117				265,105
Other liabilities			736,136				752,352
Total Liabilities			174,711,420				146,258,517
STOCKHOLDERS’ EQUITY
Common stock — $.01 par value; authorized 4,000,000 shares
Issued and outstanding:1,820,548 shares at September 30, 2009 and at December 31, 2008			18,205				18,205
Additional paid-in capital			17,852,931				17,852,931
Retained earnings			2,685,234				2,392,882
Accumulated other comprehensive income:
Net unrealized gain on securities available-for-sale			—				46,539
Total Stockholders’ Equity			20,556,370				20,310,557
Total Liabilities and Stockholders’ Equity		$	195,267,790			$	166,569,074

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

CommerceFirst Bancorp, Inc. and Subsidiary

Consolidated Statements of Operations

For the Nine and Three Months ended September 30, 2009 and 2008 (Unaudited)

		Nine Months Ended								Three Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Interest income:
Interest and fees on loans		$	8,605,562			$	7,587,752			$	3,019,352			$	2,536,366
U.S. Treasury securities			82,093				261,980				16,633				66,870
Investment in stocks			19,375				19,085				6,365				6,142
Interest bearing deposits			16,799				—				9,174				—
Federal funds sold			2,535				160,317				92				57,815
Total interest income			8,726,364				8,029,134				3,051,616				2,667,193
Interest expense:
Deposits			3,547,066				3,789,785				1,204,289				1,270,698
Repurchase agreements			—				28,414				—				5,697
Total interest expense			3,547,066				3,818,199				1,204,289				1,276,395
Net interest income			5,179,298				4,210,935				1,847,327				1,390,798
Less provision for loan losses			1,149,588				167,578				350,335				108,301
			4,029,710				4,043,357				1,496,992				1,282,497
Non-interest income:
Gain on sale of SBA loans			164,413				222,116				46,879				92,069
Gain on sale of securities			—				40,431				—				—
Service charges and other income			338,602				180,743				130,836				63,864
Total non-interest income			503,015				443,290				177,715				155,933
Non-interest expenses:
Compensation and benefits			2,184,684				2,230,027				722,291				748,071
Legal and professional			195,636				206,403				68,402				47,185
Rent and occupancy			419,735				410,374				138,699				139,600
Marketing and business development			46,150				113,616				21,345				53,539
FDIC insurance			331,963				73,461				120,351				49,461
Data processing			104,262				95,354				36,839				31,092
Support services			141,952				137,713				48,215				53,690
Communications			88,572				83,306				33,175				27,745
Depreciation and amortization			219,025				220,034				70,826				74,774
Other			311,884				279,504				94,118				63,531
Total non-interest expenses			4,043,863				3,849,792				1,354,261				1,288,688
Income before income taxes			488,862				636,855				320,446				149,742
Income tax expense			196,510				236,224				128,015				58,589
Net income		$	292,352			$	400,631			$	192,431			$	91,153
Basic earnings per share		$	0.16			$	0.22			$	0.11			$	0.05
Diluted earnings per share		$	0.16			$	0.22			$	0.11			$	0.05

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

CommerceFirst Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income

For the Nine and Three Months ended September 30, 2009 and 2008 (Unaudited)

		Nine Months Ended								Three Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Net income		$	292,352			$	400,631			$	192,431			$	91,153
Reclassification adjustment for gain included in net income, net of taxes			—				(24,663	)			—				—
Change in unrealized gains on securities available for sale, net of taxes			(46,539	)			(13,001	)			(10,985	)			(3,073	)
Other comprehensive loss			(46,539	)			(37,664	)			(10,985	)			(3,073	)
Total comprehensive income		$	245,813			$	362,967			$	181,446			$	88,080

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

CommerceFirst Bancorp, Inc. and Subsidiary

Consolidated Statements of Stockholders’ Equity

For the Nine Months Ended September 30, 2009 and 2008

(Unaudited)

														Accumulated
						Additional								Other
		Common				Paid-in				Retained				Comprehensive
		Stock				Capital				Earnings				Income				Total
Balance December 31, 2007		$	18,205			$	17,852,931			$	2,097,967			$	87,258			$	20,056,361
Net income- September 30, 2008											400,631								400,631
Net change in unrealized gains on securities available-for-sale															(37,664	)			(37,664	)
Balance September 30, 2008		$	18,205			$	17,852,931			$	2,498,598			$	49,594			$	20,419,328
Balance December 31, 2008		$	18,205			$	17,852,931			$	2,392,882			$	46,539			$	20,310,557
Net income- September 30, 2009											292,352								292,352
Net change in unrealized gains on securities available-for-sale															(46,539	)			(46,539	)
Balance September 30, 2009		$	18,205			$	17,852,931			$	2,685,234			$	—			$	20,556,370

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

CommerceFirst Bancorp, Inc. and Subsidiary

Consolidated Statement of Cash Flows

For the Nine Months Ended September 30, 2009 and 2008

(Unaudited)

		September 30,				September 30,
		2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	292,352			$	400,631
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization			219,025				220,034
Gain on sale of investment securities			—				(40,431	)
Gain on sales of SBA loans			(164,413	)			(222,116	)
Provision for loan losses			1,149,588				167,578
Provision for losses on unfunded commitments			4,500				4,500
Deferred income taxes			(219,071	)			(165,059	)
Change in assets and liabilities:
(Increase) decrease in accrued interest receivable			(21,066	)			53,039
(Increase) decrease in other assets			253,301				(111,939	)
Increase in accrued interest payable			4,012				4,300
Increase (decrease) in other liabilities			(20,716	)			17,108
Other amortization and accretion, net			8,916				13,335
Net cash provided by operating activities			1,506,428				340,980
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of restricted stock			60,000				—
Proceeds from redemption of investment securities			3,000,000
Proceeds from sale of investment securities			—				3,039,375
Proceeds from sale of SBA loans			2,607,943				3,604,179
Increase in loans, net			(30,096,426	)			(18,910,019	)
Increase in other real estate owned			(653,000	)			—
Purchase of premises and equipment			(15,181	)			(51,719	)
Net cash used by investing activities			(25,216,664	)			(12,318,184	)
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease (increase) in non-interest bearing deposits, net			(1,972,193	)			198,766
Net increase in other deposits			30,437,300				17,285,646
Net decrease in securities sold under agreements to repurchase			—				(2,739,045	)
Net cash provided by financing activities			28,465,107				14,745,367
Net increase in cash and cash equivalents			4,754,871				2,768,163
Cash and cash equivalents at beginning of period			8,964,357				11,724,888
Cash and cash equivalents at end of period		$	13,719,228			$	14,493,051
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid		$	3,543,054			$	3,513,899
Total decrease in unrealized gains on available for sale securities		$	(46,539	)		$	(60,261	)

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

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 September 30, 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.

The Company has evaluated subsequent events through the date of issuance of the financial data included herein, November 4, 2009.

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. Topic 820 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 — none at September 30, 2009. The Company has assets measured on a non-recurring basis during the period. These assets include $1.8 million of impaired loans, other real estate owned of $653 thousand and $62 thousand of investments in corporate equities which are valued under Level 2 inputs. The remaining $3.0 million of impaired loans are valued under Level 3 inputs.

The estimated fair values of the Company’s financial instruments at September 30, 2009 and December 31, 2008 are summarized below. The fair values of a significant portion of these financial instruments are estimates derived using present value techniques and may not be indicative of the net realizable or liquidation values. Also, the calculation of estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values.

		September 30, 2009								December 31, 2008
		Carrying				Fair				Carrying				Fair
(In thousands)		Amount				Value				Amount				Value
Financial assets:
Cash and due from banks		$	1,897			$	1,897			$	3,291			$	3,291
Interest bearing deposits			11,649				11,649				—				—
Federal funds sold			173				173				5,674				5,674
Investment securities			—				—				3,086				3,086
Investments in restricted stock			527				527				467				467
Loans, net			177,604				186,477				151,101				158,169
Accrued interest receivable			661				661				640				640
Financial liabilities:
Non-interest bearing deposits		$	21,627			$	21,627			$	23,599			$	23,599
Interest bearing deposits			152,080				154,649				121,642				124,499
Accrued interest payable			269				269				265				265
Off-balance sheet commitments			—				—				—				—

Fair values are based on quoted market prices for similar instruments or estimated using discounted cash flows. The discounts used are estimated using comparable market rates for similar types of instruments adjusted to be commensurate with the credit risk, overhead costs and optionality of such instruments.

The fair value of cash and due from banks, federal funds sold, investments in restricted stocks and accrued interest receivable are equal to the carrying amounts. The fair values of investment securities are determined using market quotations. The fair value of loans receivable is estimated using discounted cash flow analysis.

The fair value of non-interest bearing deposits, interest-bearing checking, savings, and money market deposit accounts, and accrued interest payable are equal to the carrying amounts. The fair value of fixed-maturity time deposits is estimated using discounted cash flow analysis.

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 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.

		Nine Months Ended								Three Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Weighted average shares outstanding			1,820,548				1,820,548				1,820,548				1,820,548
Common stock equivalents			—				—				—				—
Average common shares and equivalents			1,820,548				1,820,548				1,820,548				1,820,548
Net income		$	292,352			$	400,631			$	192,431			$	91,153
Basic earnings per share		$	0.16			$	0.22			$	0.11			$	0.05
Diluted earnings per share		$	0.16			$	0.22			$	0.11			$	0.05

All of the 126,372 outstanding warrants and options were excluded from the calculation of diluted income per share in 2009 and 2008 because they are anti-dilutive.

Note 4. Related Party Transactions

The Bank paid $31 thousand during the first nine months of 2009 for legal services to a firm of which a Director of the Bank is a principal. Also, the Bank paid $31 thousand for support services to a computer consulting firm of which a Director of the Bank is a principal during this time frame. Expenditures totaling less than $10 thousand were paid to several entities in which directors were principals during the first nine 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 September 30, 2009 the amounts of such loans outstanding were $3.9 million.

Deposit balances of executive officers, directors and their affiliated interests totaled $14.7 million at September 30, 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 September 30, 2009 are as follows:

Loan commitments		$	7.4 million
Unused lines of credit		$	37.8 million
Letters of credit		$	0.8 million

Note 6. Recent Relevant Accounting Pronouncements

In June 2009, the FASB issued ASU 2009-01 — Topic105 Generally Accepted Accounting Principles-amendments based on Statement of Financial Accounting Standards No. 168 — The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles (formerly FASB Statement No. 168). Under the ASU The FASB Accounting Standards Codification (Codification) became the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this ASU of September 15, 2009, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. In the FASB’s view, the issuance of this ASU and the Codification will not change GAAP, except for those nonpublic nongovernmental entities that must now apply the American Institute of Certified Public Accountants Technical Inquiry Service Section 5100, “Revenue Recognition,” paragraphs 38-76. The adoption of ASU 2009-01 did not have a material impact on the Company’s consolidated financial statements.

The FASB Accounting Standards Codification (Codification) is the single source of authoritative nongovernmental U.S. generally accepted accounting principles. An Accounting Standards Update (ASU) is not authoritative; it only provides background information about an issue, updates the Codification and provides the basis for conclusions for the Board’s decisions to update the Codification.

On January 12, 2009, the FASB amended Topic 820 Fair Value Measurement and Disclosures of The FASB Accounting Standards Codification (ASC) 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 ASU was effective for interim and annual reporting periods ending after December 15, 2008. The adoption of this ASU did not have an impact on the Company’s consolidated financial statements. This ASU was formerly FASB Staff Position EITF 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20 (FSP).

In April 2009, the FASB issued three amendments to provide additional guidance and disclosures regarding fair value measurements and impairments of securities. These three amendments were effective for interim and annual periods ending after June 15, 2009. The adoption of these amendments did not have a material impact on the Company’s consolidated financial statements. These amendments were formerly:

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. This amendment is included in ASC 820-10-35.

FSP FAS 115-2 and FAS 124-2 Recognition and Presentation of Other-Than-Temporary Impairment provided guidance for impaired 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 . This amendment is included in ASC 320-10-25.

FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments , required disclosure about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This amendment is included in ASC 825-10-50.

In May 2009, the FASB issued FASB Statement No. 165, Subsequent Events, which established general standards of and accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This FASB was effective for interim and annual periods ending after June 15, 2009. The Company has complied with the requirements of FASB 165. This amendment is included in ASC 855-10-50 and 55.

In June 2009, the FASB issued FASB Statement No. 166, Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140 to improve the reporting for the transfer of financial assets resulting from 1) practices that have developed since the issuance of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, that are not consistent with the original intent and key requirements of that Statement and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. This Statement must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company will review the requirements of FASB No. 166 and comply with its requirements. The Company does not expect that the adoption of this Statement will have a material impact on the Company’s consolidated financial statements. This amendment is included in ASC 860-10.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) to amend certain requirements of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. The Statement is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company will review the requirements of FASB No. 167 and comply with its requirements. The Company does not expect that the adoption of this Statement will have a material impact on the Company’s consolidated financial statements. This amendment is included in ASC 942-810.

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 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 17.5% during the first nine months of 2009. The increase in loan volume and the reduction of the cost of deposits resulted in an increase in net interest margin.

The Company continued a pattern of asset and revenue growth during the first nine months of 2009 but operating results have been adversely affected by increases in federal deposit insurance premiums, including a special assessment, and increases in the provision for loan losses in recognition of the effect of uncertain economic conditions on the Company’s loans. Key measurements and events for the period include the following:

	•		Total assets at September 30, 2009 increased by 17.2% to $195.3 million as compared to $166.6 million as of December 31, 2008.
	•		Net loans outstanding increased by 17.5% from $151.1 million as of December 31, 2008 to $177.6 million as of September 30, 2009.
	•		Deposits at September 30, 2009 were $173.7 million, an increase of $28.5 million or 19.6% from $145.2 million as of December 31, 2008.

	•		The Company’s net income for the nine month period ended September 30, 2009 was $292.4 thousand as compared to net income of $400.6 thousand for the nine month period ended September 30, 2008. The decline was primarily the result of increased provision for loan losses during 2009 as well as increases in federal deposit insurance premiums.
	•		Net interest income, the Company’s main source of income, was $5.2 million during the nine month period ended September 30, 2009 compared to $4.2 million for the same period in 2008, an increase of 23.0%, reflecting increased loan volume and higher net interest margins.
	•		Non-interest income increased by $60 thousand for the nine month period ended September 30, 2009 as compared to the nine month period ended September 30, 2008.
	•		Non-interest expenses increased by $194 thousand or 5.0%, for the nine months ended September 30, 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 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 net income of $292.4 thousand for the nine month period ended September 30, 2009 as compared to net income of $400.6 thousand for the nine month period ended September 30, 2008. The reduced earnings in 2009 are the result of the increase in the provision for loan losses from $167.6 thousand during the first nine months of 2008 to $1.15 million 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 and increases in loan volume. The level of impaired loans and the amount of loans for which specific reserves have been established have increased as compared to the nine months of 2008 resulting in the increase of provisions for loan losses during the nine months of 2009 as compared to the same period in 2008. Net interest income increased during 2009 as compared to 2008 by $968.4 thousand (23.0%). 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 nine months 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. The increase in non-interest expenses of $194.1 thousand was somewhat offset by increases in non- interest income of $59.7 thousand. The largest non-interest expense increase was the $258.5 thousand increase in federal deposit insurance premiums.

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

		Nine Months Ended								Year ended
		September 30,								December 31,
		2009				2008				2008
Return on Average Equity			1.91	%			2.63	%			1.92	%
Return on Average Earning Assets			0.22	%			0.35	%			0.25	%
Ratio of Average Equity to Average Assets			11.24	%			12.96	%			12.86	%

Nine months ended September 30, 2009

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 $697.2 thousand or 8.7% to $8.7 million for the nine month period ended September 30, 2009. This increase in interest income was attributable to the increase in average earning assets during the first nine months of 2009 of $25.9 million as compared to the same period in 2009. Interest income was adversely affected by the decline in the yield of the average earning assets from 7.0% in 2008 to 6.5% in 2009.

Interest expense decreased by $271.1 thousand or 7.1% to $3.5 million for the nine months ended September 30, 2009 as compared to $3.8 million during the first nine months of 2008. This decrease was primarily attributable to the decrease in the cost of funds from 4.4% during the first nine of 2008 to 3.4% during the first nine months of 2009 as the result of declining interest rates on certificates of deposit. The decline in the cost of funds was partially offset by the increase in average interest bearing liabilities of $23.1 million during 2009 as compared to 2008.

The net interest income for the nine month period ended September 30, 2009 was $5.2 million as compared to $4.2 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 nine months ended September 30, 2009 as compared to the nine months ended September 30, 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

		Nine Months Ended September 30:
		2009												2008
		Average								Yield/				Average								Yield/
(in thousands)		Balance				Interest				Rate				Balance				Interest				Rate
Assets:
Interest Earning Assets:
Loans receivable		$	165,615			$	8,606				6.95	%		$	135,163			$	7,588				7.48	%
Investment securities			3,018				101				4.47	%			8,480				281				4.41	%
Interest bearing deposits			8,984				17				0.25	%			—				—				—
Federal funds sold			1,211				2				0.22	%			9,269				160				2.30	%
Total Interest Earning Assets			178,828				8,726				6.52	%			152,912				8,029				7.00	%
Less allowance for loan losses			(2,133	)											(1,729	)
Non-Interest Earning Assets			5,693												5,780
Total Assets		$	182,388											$	156,963
Liabilities and Stockholders’ Equity:
Interest -Bearing Liabilities:
Interest bearing demand deposits		$	1,965				1				0.07	%		$	1,550			$	3				0.26	%
Money market deposit accounts			12,335				49				0.53	%			18,391				286				2.07	%
Savings accounts			2,183				31				1.90	%			55				—				0.00	%
Certificates of deposit			123,267				3,466				3.76	%			93,905				3,501				4.97	%
Securities sold under agreements to repurchase			—								—				2,763				28				1.35	%
Total Interest Bearing Liabilities			139,750				3,547				3.39	%			116,664				3,818				4.36	%
Non-Interest Bearing Liabilities:
Demand deposits			21,078												19,028
Other			1,052												929
Total Liabilities			161,880												136,621
Stockholders’ Equity			20,508												20,342
Total Liabilities and Equity		$	182,388											$	156,963
Net Interest Income						$	5,179											$	4,211
Net Interest Spread											3.13	%											2.64	%
Net Interest Margin											3.87	%											3.67	%

Yields on securities are calculated based on amortized cost.

Net interest margin was 3.9% in the first nine months of 2009 as compared to 3.7% in the comparable period in 2008. Interest spread was 3.1% in the first nine months of 2009, as compared to the 2.6% in the comparable period in 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).

		September 30, 2009 vs. September 30, 2008
		Increase (Decrease)
(In thousands)		Volume				Rate				Total
Interest-Earning Assets:
Federal funds sold		$	(139	)		$	(19	)		$	(158	)
Interest bearing deposits			17				—				17
Investment portfolio			(181	)			1				(180	)
Loans receivable			1,710				(692	)			1,018
Net Change in Interest Income			1,407				(710	)			697
Interest Bearing Liabilities:
Interest bearing deposits			949				(1,192	)			(243	)
Securities sold under agreements to repurchase			(28	)			—				(28	)
Net Change in Interest Expense			921				(1,192	)			(271	)
Change in Net Interest Income		$	486			$	482			$	968

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 $1.15 million during the nine months ended September 30, 2009 as compared to $167.5 thousand for the nine months ended September 30, 2008. The Company is increasing its provision for loan losses to address identified loan concerns and in recognition of the detrimental effect of the weakened economy. The provision was also increased because of the increase in loan balances from 2008 to 2009. 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 nine months ended September 30, 2009, gains on sales of the guaranteed portion of SBA loans were $164.4 thousand whereas gains on sales of SBA loans amounted to $222.1 thousand during the first nine months 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. Deposit account service charges amounted to $338.6 thousand during the nine months ended September 30, 2009 as compared to $180.7 thousand for the same period in 2008 reflecting higher service charges assessed on deposit account activities. The Company increased service charge rates as well as chargeable items during 2009.

Non-Interest Expense . Non-interest expense increased by $194.1 thousand during the nine month period ended September 30, 2009 as compared to the same period in 2008, a 5.0% increase. The increase in FDIC insurance assessments of $258.5 thousand, including $86.6 thousand in special assessment paid and $43 thousand of possible special assessments accrued for the fourth quarter of 2009, was the primary cause of the increase in non-interest expense for the nine months ended September 30, 2009. The status of further special insurance premium assessments is unknown as the FDIC continues to consider strategies to increase its liquidity and capital reserves, including the potential requirement to prepay three years of premiums.

Income Tax Expense . During the nine months ended September 30, 2009, the Company recorded an income tax expense of $196.5 thousand as compared to a $236.2 thousand expense during the same period in 2008. The income tax expense was 40.2% of income before taxes in 2009 and 37.1% of income before taxes in 2008. In the nine month period ended September 30, 2008, the effective income tax rate was reduced because of the effect of a 2008 state tax rate change on deferred tax items.

Three months ended September 30, 2009

Net Interest Income and Net Interest Margin .

Total interest income increased by $384.4 thousand or 14.4% to $3.1 million for the three-month period ended September 30, 2009. This increase in interest income was attributable to the increase in average earning assets during 2009 as compared to 2008. The interest income was adversely affected by the decline in the yield of the average earning assets.

Interest expense decreased by $72.1 thousand or 5.7% to $1.2 million for the three months ended September 30, 2009 as compared to the same period of 2008. This decrease was primarily attributable to the decrease in the cost of funds. The decline in the cost of funds was partially offset by the increase in average interest bearing liabilities during 2009 as compared to 2008.

The net interest income for the three-month period ended September 30, 2009 was $1.8 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 September 30, 2009 as compared to the three months ended September 30, 2008.

Provision for Loan Losses. The provision for loan losses was $350.3 thousand during the three months ended September 30, 2009 as compared to $108.3 thousand for the three months ended September 30, 2008. The Company is increasing its provision for loan losses to address identified loan concerns and in recognition of the detrimental effect of the weakened economy. The provision was also increased because of the increase in loan balances from 2008 to 2009. The allowance is comprised of specific and general allowance amounts.

Non-Interest Income . For the three months ended September 30, 2009, gains on sales of the guaranteed portion of SBA loans were $46.9 thousand whereas gains on sales of SBA loans amounted to $92.1 thousand during the same period in 2008. Deposit account service charges amounted to $130.8 thousand during the three months ended September 30, 2009 as compared to $63.8 thousand for the same period in 2008 reflecting higher service charges assessed on deposit account activities. The Company increased service charge rates as well as chargeable items during 2009.

Non-Interest Expense . Non-interest expense increased by $65.6 thousand during the three-month period ended September 30, 2009 as compared to the same period in 2008, a 5.1% increase. The increase in FDIC insurance assessments of $70.9 thousand, including the accrual of $43 thousand in possible special assessments, was the primary cause of the increase in non-interest expense for the three months ended September 30, 2009. The status of further special insurance premium assessments is unknown as the FDIC continues to consider strategies to increase its liquidity and capital reserves, including the potential requirement to prepay three years of premiums.

Income Tax Expense . During the three months ended September 30, 2009, the Company recorded an income tax expense of $128 thousand as compared to a $58.6 thousand expense during the same period in 2008. The income tax expense was 40.0% of income before taxes in 2009 and 39.1% of income before taxes in 2008.

FINANCIAL CONDITION.

General . The Company’s assets at September 30, 2009 were $195.3 million, an increase of $28.7 million or 17.2%, from December 31, 2008. Gross loans totaled $179.8 million is comprised of real estate loans of $113.1 million, an increase of $26.8 million, or 17.5%, from December 31, 2008 and commercial loans of $66.7 million, an increase of $7.9 million, or 13.5% from December 31, 2008. At September 30, 2009, deposits totaled $173.7 million an increase of $28.5 million, or 19.5%, from December 31, 2008. Deposits at September 30, 2009 are comprised primarily of certificates of deposit of $135.8 million, NOW and Money Market accounts of $9.3 million, savings accounts of $7.0 million and noninterest bearing deposits of $21.6 million.

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

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, 2009, net loans were $177.6 million, a 17.5% 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 Company continues its efforts to increase investments in loans to better utilize its resources and leverage capital obtained from the issuance of common stock in 2005. The Company has not reduced its credit underwriting standards to achieve loan growth. The Company has approximately $2.7 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:

		September 30, 2009								December 31, 2008
						Percentage								Percentage
(in thousands)		Balance				of Loans				Balance				of Loans
Commercial & industrial loans		$	66,727				37.1	%		$	58,783				38.4	%
Real estate loans secured by:
Residential real estate			22,261				12.4	%			19,007				12.4	%
Commercial real estate			90,843				50.5	%			75,200				49.2	%
Total real estate loans			113,104				62.9	%			94,207				61.6	%
			179,831				100.0	%			152,990				100.0	%
Unearned loan fees, net			(77	)							(29	)
Allowance for loan losses			(2,150	)							(1,860	)
		$	177,604							$	151,101

The following table shows the interest rate sensitivity of the loan portfolio at September 30, 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.

		Interest rate sensitivity of loan portfolio
		One Year				After One Year				After Five
(In thousands)		or Less				through Five Years				Years				Total
		$	75,636			$	98,169			$	6,026			$	179,831

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 September 30, 2009, the range of the loss ratios used to determine estimated losses by loan category were: commercial loans — 0.75%; SBA loans (unguaranteed portion) — 5.5% and real estate loans- 0.20% to 1.24%. These loss ratios are about 0.30% higher than the ratios applied at December 31, 2008 reflecting general weaknesses in economic conditions. 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 September 30, 2009, the actual allowance for loan losses of 1.20% was between the “low” and “high” allowance amounts of 1.03% and 1.28%, respectively.

The allowance for loan losses represents 1.20% and 1.22% of loans receivable at September 30, 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.

		Nine Months Ended				Year Ended
		September 30,				December 31,
(In thousands)		2009				2008
Allowance for loan losses:
Beginning balance		$	1,860			$	1,665
Charge-offs:
Commercial loans			(726	)			(497	)
Commercial real estate loan			(138	)			—
Recoveries:
Commercial loans			4				45
Net charge offs			(860	)			(452	)
Provision for loan losses			1,150				647
Ending balance		$	2,150			$	1,860

The ratio of net charge-offs as a percentage of average loans was 0.52% during the nine months ended September 30, 2009 and 0.33% during the year ended December 31, 2008.

Additionally, the Company has established a reserve for unfunded commitments that is recorded by a provision charged to other expenses. At September 30, 2009 the balance of this reserve was $52.5 thousand. The reserve, based on 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:

(in thousands)		Loan Amount
Balance at December 31, 2008		$	5,819
New loans placed on non-accrual			2,331
Less:
Loan restored to interest earning status			1,266
Pay-off : Sold in foreclosure			576
Other real estate owned addition			653
Charge offs			873
Other			12
Balance at September 30, 2009		$	4,770

Included in the amount of non-accrual loans at September 30, 2009 is a loan in the amount of $1,809 thousand which is well secured by real estate.

Information regarding loans classified as impaired follows:

		September 30,				December 31,
(in thousands)		2009				2008
Loans classified as impaired with specific reserves		$	2,783			$	1,892
Loans classified as impaired with no specific reserves			1,987				3,927
Total loans classified as impaired		$	4,770			$	5,819
Allowance for loan losses on impaired loans		$	759			$	840
Average balance of impaired loans during period		$	4,704			$	2,142

The loans classified as impaired with specific reserves at September 30, 2009 include a non-accrual loan in the amount of $483 thousand which loan is secured by an assignment of life insurance proceeds. The specific reserve allocated to this loan is $342 thousand. Two loans outstanding to a borrower and entity controlled by the same borrower totaling $1,457 thousand have specific reserves established in the total amount of $58 thousand. These loans were placed on non-accrual status in September 2009. These two loans are secured by residential real estate and corporate assets. Specific reserves in the amount of $359 thousand have been established for the remaining balance of classified loans (eight loans with balances totaling $843 thousand) with specific reserves. The above loans are in various stages of collection.

The loans classified as impaired without established specific reserves at September 30, 2009 include a loan well secured by commercial real estate in the amount of $1,809 thousand. The remaining balance of such loans is comprised of four loans in various stages of collection.

The Company acquired real property under a foreclosure process concluded in March 2009. The Company recognized a loss of approximately $138 thousand in connection with the foreclosure. The property is a commercial building with an existing tenant for a large part of the premises with a value of approximately $653 thousand. The Company intends to market the property when the real estate market can support a sale at a reasonable price.

Generally, the accrual of interest is discontinued when a loan is specifically determined to be impaired or when principal or interest is delinquent for ninety days or more. During 2009, there were no amounts included in gross interest income attributable to loans in non-accrual status.

A well secured real estate loan in the carrying amount of $1,266 thousand at September 30, 2009 was restructured through a forbearance agreement during the first quarter of 2009. The borrower has complied with the requirements under the forbearance agreement including payment requirements and the loan was placed back on an accrual basis. Interest payments of $39 thousand had been received on this previously classified non-accrual impaired loan and recognized in interest income in the second quarter of 2009.

Investment Portfolio . During September 2009 the U.S. Treasury note held in the investment portfolio matured and was redeemed. These funds have not been reinvested in notes or bonds as of September 30, 2009. Fluctuations in this portfolio will occur dependent upon estimated future excess liquidity (as opposed to short term investments such as Federal funds). Timing of investments in this portfolio can be affected by conditions in the bond markets. The Company has purchased Federal Reserve stock in accordance with regulation and expects to maintain small equity positions in stock in two banker’s banks to facilitate loan participations.

The following table provides information regarding the composition of the Bank’s investment securities portfolio at the dates indicated.

		Investment in Securities and Stocks
		September 30, 2009								December 31, 2008
						Percent								Percent
(In thousands)		Amount				of Total				Amount				of Total
Investment securities, at fair value:
U.S. Treasuries		$	—				100.00	%		$	3,086				100.00	%
Investments in stocks, at cost:
Federal Reserve Stock			465				88.2	%			405				86.7	%
Corporate equities			62				11.8	%			62				13.3	%
Total stocks		$	527				100.0	%		$	467				100.00	%

The value of the U.S. Treasury investment securities were derived from market quotes as reported to the Company by a third party brokerage firm. Corporate equities are comprised of common stock in two “bankers’ banks” and are generally not readily marketable.

Deposits. Deposits are the major source of funds for lending and investment activities. Deposits increased $28.5 million (19.6%) to $173.7 million at September 30, 2009 from $145.2 million at December 31, 2008. Non-interest bearing deposits decreased $2.0 million or 8.4%, interest bearing demand accounts (Money Market and NOW accounts) increased by $5.0 million or 35.0%, savings accounts deposits increased $6.8 million from $147 thousand at December 31, 2008 and certificates of deposit increased $28.6 million, or 26.7%, during the nine months ended September 30, 2009. Certificates of deposit in amounts of $100 thousand and over totaled $76.0 million at September 30, 2009 and $65.7 million at December 31, 2008. Deposits are comprised of the following:

		September 30,				December 31,
(in thousands)		2009				2008
Non-interest bearing deposits		$	21,627			$	23,599
Savings deposits			6,961				148
Interest bearing demand deposits			9,293				14,296
Certificates of deposit			135,825				107,198
		$	173,706			$	145,241

The Company began to offer a new “premium” saving account during 2009 resulting in the substantial increase in the balances of saving accounts at September 30, 2009. This account is attractively priced to increase deposits and to increase the Company’s deposit customer base. The fluctuation in interest bearing demand deposits is generally attributable to fluctuations in deposit accounts of title companies. Brokered deposits, including funds obtained under the CDARS program, decreased by $1.4 million to $48.7 million during the nine months ended September 30, 2009.

LIQUIDITY AND CAPITAL RESOURCES.

The Company’s principal sources of funds are deposits, consisting of demand deposits, NOW accounts, money market accounts, savings accounts and certificates of deposit. These accounts provide the Company with a relatively stable source of funds. We generally target larger deposit relationships by offering competitive interest rates on certificates of deposit of $100,000 or more in our local markets. We supplement our local deposits with out-of-area deposits including deposits obtained through the use of brokers and through the CDARS program. As a result, a substantial portion of our deposits, 43.8% at September 30, 2009 (37.8% at December 31, 2008), are comprised of certificate of deposit accounts of $100 thousand or more, while total certificates of deposit represent 78.2% of deposits at September 30, 2009. The Company’s reliance on certificates of deposit, including the use of larger denomination certificates of deposit and brokered deposits facilitates funding the rapid growth in the loan portfolio. The Bank has relied on certificates of deposit as a primary funding source, and has used larger certificates of deposits as a funding source, since its inception. While sometimes requiring higher interest rates, such funds carry lower acquisition costs (marketing, overhead costs) and can be obtained when required at the maturity dates desired. Substantially all of the deposit accounts over $100 thousand are fully insured by the FDIC through differing ownership and trustee arrangements. All of the brokered deposits and national market deposits are fully insured by the FDIC. This insurance and the strong capital position of the Bank reduce the likelihood of large deposit withdrawals for reasons other than interest rate competition. Interest rates on these deposits can be higher than other deposits products. There is, however, a risk that some deposits would be lost if rates were to increase and the Bank elected not to remain competitive with its own deposit rates. Under those conditions, the Bank believes that it is positioned to use other sources of funds, such as borrowing on its unsecured credit facilities with other banks or the sale of investment securities or borrowing using the securities as collateral, to offset a decline in deposits in the short run.

The table below shows the source of the Company’s certificate of deposits (CDs) as well as the amount equal to or greater than $100,000:

		CDs with balances				CDs with balances
Source		of less than				of $100,000 or
(thousands)		$100,000				greater				Total
Local markets		$	13,605			$	57,291			$	70,896
National market			15,656				548				16,204
CDARS program:
Customers’ funds			6,019				7,404				13,423
Proprietary funding			9,235				1,893				11,128
Other brokered funds			15,296				8,878				24,174
Total		$	59,811			$	76,014			$	135,825

CDARS program funding is reflected in the above schedule as “Customers’ funds” and “Proprietary funding”. The Company, acting as agent for its customers, places customer funds in other financial institutions under the program up to the FDIC insurance limit. Under the CDARS program, other financial institutions place deposits in the Company for the same amount of the customers’ funds. “Customers’ funds” are comprised of deposits from these customer transactions. The Company can obtain funding under the CDARS program by bidding for deposit funds without customers’ involvement. This “Proprietary funding” results in traditional brokered deposits.

At September 30, 2009 the company had cash and cash equivalents in the amount of $13.7 million as compared to $9.0 million at December 31, 2008. Cash and cash equivalents increased by $3 million from the maturity of a U.S. Treasury note which was not re-invested as of September 30, 2009.

The Company currently has no business other than that of the Bank and does not currently have any material funding commitments unrelated to that business. The Bank’s principal sources of funds for loans, investments and general operations are deposits from its primary market area, principal and interest payments on loans, and proceeds from maturing investment securities. Its principal funding commitments are for the origination or purchase of loans and the payment of maturing deposits, and the payment for checks drawn upon it. The Bank’s most liquid assets are cash and cash equivalents, which are cash on hand, amounts due from other financial institutions and Federal funds sold. The levels of such assets are dependent on the Bank’s lending, investment and operating activities at any given time. The variations in levels of cash and cash equivalents are influenced by deposit flows and loan demand, both current and anticipated.

At September 30, 2009, the Bank has $8.5 million available under unsecured Federal funds borrowing facilities from other financial institutions; no amounts were outstanding under these facilities. The Company believes its levels of liquidity and capital are adequate to conduct the business of the Company and Bank.

OFF-BALANCE SHEET ARRANGEMENTS

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds collateral supporting those commitments for which collateral is deemed necessary. The Bank has not been required to perform on any financial guarantees and has not recorded or incurred any losses on its commitments. The issuance of letters of credit is not a significant activity of the Bank. Outstanding letters of credit at September 30, 2009 total $0.8 million ($1.6 million at December 31, 2008).

Commitments to extend credit are agreements to lend funds to customers as long as there are no violations of any condition established in the loan contracts. These commitments include commitments to lend funds as well as un-advanced loan funds. These commitments at September 30, 2009 totaled $45.2 million ($42.9 million at December 31, 2008). Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

CAPITAL ADEQUACY

The Federal Reserve Board and the FDIC have established guidelines with respect to the maintenance of appropriate levels of capital by bank holding companies and state non-member banks, respectively. The regulations impose two sets of capital adequacy requirements: minimum leverage rules, which require bank holding companies and banks to maintain a specified minimum ratio of capital to total assets, and risk-based capital rules, which require the maintenance of specified minimum ratios of capital to “risk-weighted” assets. At September 30, 2009, the Company and the Bank was in full compliance with these guidelines, as follows:

										Minimum Ratios
		September 30,				December 31,				To be “Adequately				To be “Well
		2009				2008				Capitalized”				Capitalized”
Total capital:
Company			12.4	%			14.1	%			8.0	%			N/A
Bank			11.6	%			11.9	%			8.0	%			10.0	%
Tier I:
Company			11.2	%			12.9	%			4.0	%			—
Bank			10.4	%			10.6	%			4.0	%			6.0	%
Leverage Total:
Company			10.4	%			12.2	%			4.0	%			—
Bank			9.7	%			10.1	%			4.0	%			5.0	%