ITEM 2.
MANAGEMENTS 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 Companys 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.
During
the first quarter of 2005 the Company sold an aggregate of 981,333 additional
shares of common stock. Of the shares sold, 175,000 were sold on a rights
offering basis to shareholders of record as of December 9, 2004 at a price of
$10.50 per share, and 806,333 shares were sold in a public offering also at a
price of $10.50 per share. The
offerings, which closed on February 28, 2005, raised an aggregate of
approximately $9.6 million, net of expenses of the offering, financial advisory
fees and underwriters commission. In
March 2005, the Company contributed $6,000,000 to the capital of the Bank. The
remaining proceeds of the offerings are available for general corporate
purposes, included further contribution to the Bank for use in its lending and
investment activities and other operations.
The
Companys common stock trades on the NASDAQ Capital Market under the symbol CMFB.
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.
9
The most significant accounting policies followed by
CommerceFirst Bancorp, Inc. are presented in Note 1 to the Companys annual
audited consolidated financial statements included in its Annual Report on Form 10-KSB for the year
ended December 31, 2006. 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.
1. RESULTS OF OPERATIONS.
General
.
The Company reported a net
profit of $826 thousand for the nine-month period ended September 30, 2007, as
compared to a net profit of $940 thousand for the nine-month period ended
September 30, 2006. The Company reported a net profit of $271 thousand for the
three-month period ended September 30, 2007 as compared to a net profit of $371
thousand for the three-month period ended September 30, 2006. The reduced
earnings are primarily the result of expense increases attributable to
additional personnel required by the Banks branch expansion ( the Bank has
opened three branches since June of 2006), expenses necessitated by the growth
of the Banks loan portfolio and expenses associated with conversion to a new
internet banking platform and to the Metavante Bankway core processing system
in 2007. The conversions were done in response to the ageing of the previous
core processing and internet banking systems, the growth of the Company and
acquire the use of a more flexible system.
Return
on Average Assets and Average Equity
. The following table shows the
return on average assets and average equity for the period shown.
Return on Average Assets and Average Equity
|
|
Nine Months Ended
|
|
Year ended
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
2007
|
|
2006
|
|
2006
|
|
Return on Average
Equity
|
|
5.72
|
%
|
7.02
|
%
|
7.16
|
%
|
|
|
|
|
|
|
|
|
Return on
Average Earning Assets
|
|
0.82
|
%
|
1.26
|
%
|
1.23
|
%
|
|
|
|
|
|
|
|
|
Ratio of Average
Equity to Average Assets
|
|
13.94
|
%
|
17.47
|
%
|
16.63
|
%
|
Net Interest Income and Net Interest Margin
. Net interest
income is the difference between interest earned on various assets (principally
loans and investments) and interest expense incurred to attract and retain
deposits (principally money market deposit accounts and certificates of
deposit) and other funding (principally repurchase agreements) used to support
those assets. Additional sources of funding include capital and
non-interest-bearing demand deposits, and, to a lesser extent, NOW accounts and
savings accounts. The net interest income for the nine-month period ended September
30, 2007 was $4.42 million as compared to $3.90 million for the nine-month
period ended September 30, 2006. The net interest income for the three-month
period ended September 30, 2007 was $1.55 million as compared to $1.36 million
for the same period in 2006. Total interest income for the nine-month period
ended September 30, 2007 was $8.03 million as compared to $5.81 million for the
same period in 2006. Total
10
interest income for the three-month period ended September 30, 2007 was
$2.76 million as compared to $2.10 million for the same period in 2006. Total
interest expense for the nine-month periods ended September 30, 2007 and 2006
was $3.61 million and $1.91 million, respectively. Total interest expense for
the three-month periods ended September 30, 2007 and 2006 was $1.22 million and
$739 thousand, respectively. The
increase in net interest income is principally the result of the increase in
average earning assets in excess of the increase in average interest bearing
liabilities, offset somewhat by the decline in the net interest margin.
The following
table shows the average balances and the rates of the various categories of the
Companys assets and liabilities. The table includes a measurement of spread
and margin. Interest spread is the mathematical difference between the average
interest earned on interest earning assets and interest paid on interest
bearing liabilities. Interest margin represents the net interest yield on
interest earning assets and is derived by dividing net interest income by
average interest earning assets. Management believes the interest margin gives
a reader a better indication of asset earning results when compared to peer
groups or industry standards. Nonperforming loans are included in average
balances in the following table.
AVERAGE
BALANCES, RATES AND INTEREST INCOME AND EXPENSE
|
|
Nine Months Ended September 30,
|
|
|
|
2007
|
|
2006
|
|
|
|
Average
|
|
|
|
Yield/
|
|
Average
|
|
|
|
Yield/
|
|
(in thousands)
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable
|
|
$
|
108,020
|
|
$
|
7,094
|
|
8.78
|
%
|
$
|
84,944
|
|
$
|
5,369
|
|
8.45
|
%
|
Investment securities
|
|
11,143
|
|
353
|
|
4.24
|
%
|
8,053
|
|
208
|
|
3.45
|
%
|
Federal funds sold
|
|
15,564
|
|
586
|
|
5.03
|
%
|
6,470
|
|
232
|
|
4.79
|
%
|
Total Interest Earning Assets
|
|
134,727
|
|
8,033
|
|
7.97
|
%
|
99,467
|
|
5,809
|
|
7.81
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less allowance for loan losses
|
|
(1,695
|
)
|
|
|
|
|
(1,738
|
)
|
|
|
|
|
Non-Interest Earning Assets
|
|
5,072
|
|
|
|
|
|
4,748
|
|
|
|
|
|
Total Assets
|
|
$
|
138,104
|
|
|
|
|
|
$
|
102,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest -Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits
|
|
$
|
2,504
|
|
$
|
27
|
|
1.44
|
%
|
$
|
1,628
|
|
$
|
18
|
|
1.46
|
%
|
Money market deposit accounts
|
|
19,209
|
|
583
|
|
4.06
|
%
|
18,944
|
|
465
|
|
3.28
|
%
|
Savings accounts
|
|
159
|
|
1
|
|
0.84
|
%
|
395
|
|
3
|
|
0.98
|
%
|
Certificates of deposit
|
|
73,690
|
|
2,924
|
|
5.31
|
%
|
42,295
|
|
1,340
|
|
4.24
|
%
|
Securities sold under agreements
to repurchase
|
|
3,784
|
|
76
|
|
2.69
|
|
4,344
|
|
83
|
|
2.57
|
|
Total Interest Bearing Liabilities
|
|
99,346
|
|
3,611
|
|
4.86
|
%
|
67,606
|
|
1,910
|
|
3.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Interest Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
18,531
|
|
|
|
|
|
16,159
|
|
|
|
|
|
Other
|
|
979
|
|
|
|
|
|
810
|
|
|
|
|
|
Total Liabilities
|
|
19,510
|
|
|
|
|
|
16,969
|
|
|
|
|
|
Stockholders Equity
|
|
19,248
|
|
|
|
|
|
17,902
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
138,104
|
|
|
|
|
|
$
|
102,477
|
|
|
|
|
|
Net Interest Income
|
|
|
|
$
|
4,422
|
|
|
|
|
|
$
|
3,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Spread
|
|
|
|
|
|
3.11
|
%
|
|
|
|
|
4.03
|
%
|
Net Interest Margin
|
|
|
|
|
|
4.39
|
%
|
|
|
|
|
5.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yields on securities are
calculated based on amortized cost.
Nonaccruing loans are included in
the average loan balances outstanding.
11
Net interest margin was 4.39% in the
first nine months of 2007, as compared to 5.24% in the comparable period in
2006. Interest spread was 3.11% in the first nine months of 2007, as compared
to the 4.03% recorded in the first nine months of 2006. The decreased margin
reflects the increased cost of attracting deposits to fund loan growth. The
loan growth in 2007 has been a positive impact on net interest income, although
this growth has been offset by increases in funding costs. The loan growth has
required the raising of additional funding which has been achieved by increases
in certificate of deposits, a higher costing deposit product. The average yield
on earning assets for the nine month period ended September 30, 2007 increased
16 basis points, or 2.0%, as compared to the average yield recorded during the
same period in 2006. However, the average rate paid on interest bearing
liabilities increased 108 basis points, or 28.6%, during the comparable nine
month periods in 2007 and 2006. The net interest margin of 4.39% for the nine
month period ended September 30, 2007 is a 85 basis point decline from the
5.24% recorded for the nine month period ended September 30, 2006.
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-month period ended September 30, 2007,
gains on sales of SBA loans amounted to $235 thousand as compared to $215
thousand for the same period in 2006.
For the three month period ended September 30, 2007, gains on sales of
SBA loans amounted to $80 thousand as compared to $124 thousand for the same
period in 2006.
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.
For the nine-month period ended September 30, 2007,
deposit account service charges amounted to $212 thousand as compared to $247
thousand for the same period in 2006. For the three-month period ended
September 30, 2007, deposit account service charges amounted to $65 thousand as
compared to $77 thousand for the same period in 2006.
As
the Bank continues to develop these and additional sources of income, it is
expected that non-interest income will continue to be a significant contributor
to the overall profitability of the Company, although there can be no assurance
of this.
Non-Interest Expense
. Non-interest expense totaled
$3.46 million for the nine-month period ended September 30, 2007 as compared to
$2.65 million for the same period in 2006. In each period, salary and benefit
expense was the largest component: $2.00 million and $1.63 million in 2007 and
2006, respectively. Non-interest expense totaled $1.24 million for the
three-month period ended September 30, 2007 as compared to $914 thousand for
the same period in 2006. In each period, salary and benefit expense was the
largest component: $719 thousand and $584 thousand in 2007 and 2006,
respectively. The expense increases are
attributable to additional personnel required by the Banks branch expansion (
the Bank has opened three branches since June of 2006), expenses necessitated
by the growth of the Banks loan portfolio and expenses associated with
conversion to a new internet banking platform and to the Metavante Bankway core
processing system in 2007.
Income Tax Expense
. During the
nine-month period ended September 30, 2007, the Company recorded an income tax
expense of $535 thousand.
During the three-month period ended
September 30, 2007, the Company recorded income tax expense of $182 thousand.
During the nine-month period ended September 30,
2006, the Company recorded an income tax expense of $547 thousand.
During
the three-month period ended September 30, 2006, the Company recorded income
tax expense of $228 thousand.
2. FINANCIAL CONDITION.
General
.
The Companys assets at
September 30, 2007 were $139 million, a decrease of $1.8 million or 1.3%, from
December 31, 2006. At September 30,
2007, gross loans totaled $119 million, principally commercial term loans and
lines of credit ($45 million) and real estate secured term loans ($74 million).
By comparison, at December 31, 2006, gross loans totaled $97 million,
principally commercial term loans and lines of credit ($45 million) and real
estate secured term loans ($51.5 million). At September 30, 2007, deposits
totaled $116 million, principally
12
certificates of deposit ($79 million),
demand deposits ($18 million), and money market deposit accounts ($16 million).
By comparison, deposits at December 31, 2006 totaled $112 million, principally
certificates of deposits ($66 million), demand deposits ($19 million) and money
market deposit accounts ($19 million). A significant additional funding source
is provided by the securities sold under agreement to repurchase program. At
September 30, 2007, balances in this program totaled $2 million in comparison
to $10 million at December 31, 2006. On September 30, 2007 and December 31,
2006 and September 30, 2006, respectively, loans in the amount of $691 thousand
and $628 thousand were in non-accrual status.
Federal funds sold totaled $6
million at September 30, 2007 as compared to $29 million on December 31,
2006. Investments in securities
(principally U.S. Treasury securities) were $9 million at September 30, 2007 as
compared to $11 million at December 31, 2006.
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, 2007, net loans were $117 million, a 23.6% increase
from the $95 million in loans outstanding at December 31, 2006 and 29.0%
increase from September 30, 2006. In general, loans consist of internally
generated loans and, to lesser degree, participation loans purchased from other
local community banks. Lending activity
is confined to our market area. The strong growth is attributable to the
satisfactory culmination of efforts to attract quality credits; there has been
no dilution of credit underwriting standards. Commercial real estate loans
percentage of total 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 Bank does not engage in foreign
lending activities. The following table presents the composition of the loan
portfolio by type of loan at the dates indicated.
Loans
receivable, net is comprised of the following:
|
|
September 30, 2007
|
|
December 31,2006
|
|
September 30, 2006
|
|
(In thousands)
|
|
|
|
Percentage
|
|
|
|
Percentage
|
|
|
|
Percentage
|
|
|
|
Balance
|
|
of Loans
|
|
Balance
|
|
of Loans
|
|
Balance
|
|
of Loans
|
|
Commercial
|
|
$
|
44,917
|
|
37.66
|
%
|
$
|
45,350
|
|
46.84
|
%
|
$
|
45,929
|
|
49.37
|
%
|
Commercial real
estate
|
|
74,346
|
|
62.34
|
%
|
51,461
|
|
53.16
|
%
|
47,108
|
|
50.63
|
%
|
|
|
119,263
|
|
100.00
|
%
|
96,811
|
|
100.00
|
%
|
93,037
|
|
100.00
|
%
|
Unearned loan
fees, net
|
|
(43
|
)
|
|
|
(116
|
)
|
|
|
(101
|
)
|
|
|
Allowance for
loan losses
|
|
(1,737
|
)
|
|
|
(1,614
|
)
|
|
|
(1,840
|
)
|
|
|
|
|
$
|
117,483
|
|
|
|
$
|
95,081
|
|
|
|
$
|
91,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table shows the interest
rate sensitivity of the loan portfolio at September 30, 2007. 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
|
|
|
|
(In thousands)
|
|
One Year
|
|
After One Year
|
|
After Five
|
|
|
|
|
|
or Less
|
|
through Five Years
|
|
Years
|
|
Total
|
|
|
|
$
|
54,046
|
|
$
|
53,413
|
|
$
|
11,804
|
|
$
|
119,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
Provision for
Credit Losses
.
The provision for credit losses represents the expense recognized to fund the
allowance for credit losses. Provision expense of $45 thousand was recorded in
the first nine months of 2007; provision expense was $225 thousand in the same
period in 2006. Satisfactory performance
of the loan portfolio, the larger portion of real estate secured loans, the
ageing of the loan portfolio with little net charges as well as a recovery in
May 2007 of $78 thousand related to a commercial loan charged off in 2003
permitted the reduction in the provision. At September 30, 2007, the allowance
for credit losses stood at $1.7 million, or 1.5% of outstanding gross loans, as
compared to $1.6 million or 1.7% of gross loans at December 31, 2006. Of the
$1.7 million at September 30, 2007, general reserves are $1.1 million and
specific reserves are $656 thousand.
Management has devised and refined a comprehensive
review methodology to assess the adequacy of the allowance. This methodology
permits several different assessments to be made. Currently, principal
consideration is accorded the assessment based upon the risk rating assigned to
individual credits. Other assessments may be made by general categories of
credits and by industry groups (at a number of levels) based upon Standard
Industrial Classification codes. The
methodology has the flexibility to permit additional evaluation criteria if so
desired. Risk ratings are assigned to all credits at inception. Consideration
is given to many different factors: past credit record, capacity to repay,
character of borrower, value of collateral, industry standards and overall
economic conditions. Management also considers the growth and composition of
the portfolio, the loss experience of other banks in our peer group, the
results of examinations and evaluations of the overall portfolio by regulatory
examiners and by external auditors, and the local, state and national economic
outlook.
In addition to the above adequacy review, management
also considers some bulk measures of adequacy. Specifically, an analysis is
made of the entire portfolio, less the government guaranteed portion of SBA
loans and those loans secured by cash deposits within the bank. An additional
measure compares the gross loan total without consideration of guarantees
and/or collateral to the allowance. Each quarter, management formally
recommends to the Board of the Bank the proposed amount to be allocated monthly
to the allowance and accordingly charged to the appropriate expense account.
Based principally on current economic conditions,
perceived asset quality, loan-loss experience of comparable institutions in the
Companys market area and a strong capital position, the allowance is believed
to be adequate as of September 30, 2007.
The activity in the
allowance for credit losses is shown in the following table. All charge offs
and recoveries relate to commercial loans.
|
|
Nine Months Ended
|
|
Year Ended
|
|
Nine Months Ended
|
|
(In thousands)
|
|
September 30, 2007
|
|
December 31, 2006
|
|
September 30, 2006
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,614
|
|
$
|
1,615
|
|
$
|
1,615
|
|
Charge-offs:
|
|
|
|
|
|
|
|
Commercial loans
|
|
|
|
(226
|
)
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
Commercial loans
|
|
78
|
|
|
|
|
|
Net (charge-offs) recoveries
|
|
78
|
|
(226
|
)
|
|
|
Provision for loan losses
|
|
45
|
|
225
|
|
225
|
|
Ending balance
|
|
$
|
1,737
|
|
$
|
1,614
|
|
$
|
1,840
|
|
Additionally, the Bank
has established a reserve for unfunded commitments that is recorded by a
provision charged to other expenses. At September 30, 2007, the balance of this
reserve was $40.5 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.
14
Asset Quality
.
In its lending activities, the Bank
seeks to develop sound credits with customers who will grow with the Bank.
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 (see
Provision for Credit Losses).
The following table shows an analysis of nonperforming
assets at the dates indicated:
|
|
Analysis of nonperforming assets
|
|
|
|
(Dollars in thousands)
|
|
September 30,
2007
|
|
December 31,
2006
|
|
September 30,
2006
|
|
Non-accrual
loans - Commercial
|
|
$
|
691
|
|
$
|
628
|
|
$
|
895
|
|
|
|
|
|
|
|
|
|
|
|
|
At
September 30, 2007, the Bank had four loans totaling $691 thousand to three
unrelated entities in non-accrual status; three of these loans to two unrelated
entities totaling $628 thousand were in non-accrual status at December 31, 2006
and June 30, 2007.
One
loan in the amount of $583 thousand is the remaining balance of a relationship
totaling $958 thousand recognized as impaired in September 2004 and placed in
non-accrual status at that time. This loan is partially secured by real estate
and by assignment of life insurance proceeds.
The specific reserves allocated to this loan are $426 thousand and
collection proceedings continue.
The
second relationship has two loans totaling $45 thousand. Collection proceedings continue; the Bank has
established specific reserves of $45
thousand
for these two loans.
The
third relationship has one loan of $63 thousand. Collection proceedings have
commenced; the Bank has established specific reserves of $32
thousand
for this loan.
At September 30, 2007, other loans totaling $154
thousand were considered potential problem loans and fully reserved for in the
allowance for loan losses. An additional $33 thousand of loans (two loans) were
past due over ninety days but still accruing interest
.
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 2007, there were no amounts included in gross interest income
attributable to loans in non-accrual status. There was no real estate owned at
any time during 2007.
Investment Portfolio
. At September 30, 2007, the
carrying value of the investment securities portfolio was approximately $9
million, a decrease of approximately $2 million from the carrying value of $11
million at December 31, 2006. Treasury Notes of $2 million were allowed to
mature in August 2007 and reinvested in Federal funds pending loan
closings. The Bank currently classifies
its entire securities portfolio as available for sale. Increases in the
portfolio will occur whenever deposit growth outpaces loan demand and the
forecast for growth is such that the investment of excess liquidity in
investment securities (as opposed to short term investments such as Federal
funds) is warranted. In general, the Banks investment policy is to acquire
direct U.S. Treasury securities and fully guaranteed U.S. government agency
issues with a remaining maturity of four years or less. As the Bank develops
its loan portfolio, it anticipates that it will maintain the average maturity
of the securities portfolio at two years or less. In addition, the Bank has
purchased Federal Reserve stock in accordance with regulation and expects to
maintain small equity positions in stock in two bankers banks to facilitate
loan participations.
The following table provides information regarding
the composition of the Banks investment securities portfolio at the dates
indicated.
15
|
|
Investment
in Securities and Stocks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007
|
|
December 31, 2006
|
|
September 30, 2006
|
|
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Percent
|
|
(In thousands)
|
|
Amount
|
|
of Total
|
|
Amount
|
|
of Total
|
|
Amount
|
|
of Total
|
|
Investment
securities, at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries
|
|
$
|
9,074
|
|
100.00
|
%
|
$
|
11,013
|
|
100.00
|
%
|
$
|
4,952
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in
stocks, at cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Reserve
Stock
|
|
405
|
|
86.72
|
%
|
405
|
|
86.72
|
%
|
405
|
|
86.72
|
%
|
Corporate
equities
|
|
62
|
|
13.28
|
%
|
62
|
|
13.28
|
%
|
62
|
|
13.28
|
%
|
Total stocks
|
|
$
|
467
|
|
100.00
|
%
|
$
|
467
|
|
100.00
|
%
|
$
|
467
|
|
100.00
|
%
|
Corporate equities are comprised of common stock in
two bankers banks and are generally not readily marketable.
3. LIQUIDITY AND CAPITAL RESOURCES.
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 Banks 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 Banks 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 Banks 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, 2007, the Banks cash and cash equivalents
totaled $10 million, a decrease of $22 million from December 31, 2006,
primarily as the result of increases in the loan portfolio and secondarily to
seasonal fluctuation in the securities sold under agreement to repurchase
program.
At September 30, 2007, the Bank could have drawn upon $8.5 million
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.
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,
2007, the Bank was in full compliance with these guidelines, as follows:
16
|
|
|
|
|
|
Minimum Ratios
|
|
|
|
September 30,
2007
|
|
December 31,
2006
|
|
To be Adequately Capitalized
|
|
To be Well Capitalized
|
|
Total capital:
|
|
|
|
|
|
|
|
|
|
Company
|
|
17.3
|
%
|
19.1
|
%
|
8.0
|
%
|
N/A
|
|
Bank
|
|
14.3
|
%
|
15.7
|
%
|
8.0
|
%
|
10.0
|
%
|
Tier I:
|
|
|
|
|
|
|
|
|
|
Company
|
|
16.1
|
%
|
17.8
|
%
|
4.0
|
%
|
|
|
Bank
|
|
13.1
|
%
|
14.4
|
%
|
4.0
|
%
|
6.0
|
%
|
Leverage Total:
|
|
|
|
|
|
|
|
|
|
Company
|
|
14.2
|
%
|
15.1
|
%
|
4.0
|
%
|
|
|
Bank
|
|
11.6
|
%
|
12.2
|
%
|
4.0
|
%
|
5.0
|
%
|
ITEM 3
CONTROLS AND PROCEDURES
The Companys management, under
the supervision and with the participation of the Chief Executive Officer and
Chief Financial Officer, evaluated, as of the last day of the period covered by
this report, the effectiveness of the design and operation of the Companys
disclosure controls and procedures, as defined in Rule 13a-15 under the
Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that the Companys disclosure
controls and procedures were effective. There were no changes in the Banks
internal control over financial reporting (as defined in Rule 13a-15 under the
Securities Act of 1934) during the quarter ended September 30, 2007 that has
materially affected, or is reasonably likely to materially affect, the Banks
internal control over financial reporting.
PART II
- OTHER INFORMATION
Item
1 Legal Proceedings
In the ordinary course of its business, the Company may become involved
in routine legal proceedings. At
September 30, 2007, the Company is a party to a lawsuit filed by a loan
customer alleging, primarily, the lack of commercially reasonable efforts to
collect loan repayments from collateral liquidation by the Company. The
plaintiffs are seeking release of remaining debts in the amount of $583
thousand, release of remaining collateral related thereto and certain damages
approximating $3million. The Company believes that the allegations are without
merit and will vigorously defend itself against the lawsuit. The Company
believes that it will not incur any loss from the suit.
Item 2 Unregistered Sale
of Equity Securities and Use of Proceeds
(a)
Sales of Unregistered
Securities.
None
(b)
Use of Proceeds.
Not applicable.
(c)
Small Business Issuer
Purchases of Securities.
None
Item 3. Default
upon
Senior Securities. None
Item
4 Submission
of Matters to a Vote of Security Holders. None
17
Item
5 Other Information
(a)
Information Required to be Reported on Form 8-K.
None
(b)
Changes in Security Holder Nomination
Procedures.
None
Item
6 - Exhibits
Exhibit No.
|
|
Description of Exhibits
|
|
|
|
3(a)
|
|
Certificate of
Incorporation of the Company, as amended (1)
|
3(b)
|
|
Bylaws of the
Company (1)
|
10(a)
|
|
Employment
Agreement between Richard J. Morgan and the Company (2)
|
10(b)
|
|
Employment
Agreement between Lamont Thomas and the Company (3)
|
10(c)
|
|
2004 Non Incentive Option Plan (4)
|
10(d)
|
|
First Amendment to Employment Agreement between Lamont
Thomas and the Company (5)
|
10(e)
|
|
Employment
Agreement between Michael T. Storm and CommerceFirst Bank attached hereto
|
11
|
|
Statement
Regarding Computation of Per Share Income- See Notes to Financial Statements
|
21
|
|
Subsidiaries of
the Registrant
|
|
|
|
|
The sole
subsidiary of the Registrant is CommerceFirst Bank, a Maryland chartered
commercial bank.
|
|
|
|
31(a)
|
|
Certification of Richard J.
Morgan, President and CEO
|
31(b)
|
|
Certification of Michael T
Storm, Senior Vice President and CFO
|
32(a)
|
|
Certification of Richard J.
Morgan, President and Chief Executive Officer
|
32(b)
|
|
Certification of Michael T.
Storm, Senior Vice President and Chief Financial Officer
|
99(a)
|
|
Amended and Restated Organizers
Agreement (6)
|
(1)
Incorporated by reference to exhibit of
the same number filed with the Companys Registration Statement on Form SB-2,
as amended, (File No. 333-91817)
(2)
Incorporated by reference to exhibit
10(b) to the Companys to Registration Statement on Form SB-2, as amended)
(File No. 333-91817)
(3)
Incorporated by reference to exhibits
10(c) to the Companys to Registration Statement on Form SB-2, as amended)
(File No. 333-91817)
(4)
Incorporated by reference to Exhibit 4 to
the Companys Registration Statement on Form S-8 (File No. 333-119988).
(5)
Incorporated by reference to Exhibit
10(d) to the Companys Quarterly Report on Form 10-QSB for the period ended
March 31, 2007.
(6)
Incorporated by reference to exhibit s
99(b) and 99(d) to the Companys
Registration Statement on Form
SB-2, as amended (File No. 333-91817)
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
|
COMMERCEFIRST
BANCORP, INC.
|
|
|
|
|
|
Date:
October 25, 2007
|
By:
|
/s/
Richard J. Morgan
|
|
|
Richard
J. Morgan, President and Chief Executive Officer
|
|
|
|
|
|
Date:
October 25, 2007
|
By:
|
/s/
Michael T. Storm
|
|
|
Michael
T. Storm, Senior Vice President and Chief Financial Officer
|
19
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