CMFB Commercefirst Bancorp (MM)

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.

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 underwriter’s 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 Company’s 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.

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The most significant accounting policies followed by CommerceFirst Bancorp, Inc. are presented in Note 1 to the Company’s annual audited consolidated financial statements included in  its Annual Report on Form 10-KSB for the year ended December 31, 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 Bank’s branch expansion ( the Bank has opened three branches since June of 2006), expenses necessitated by the growth of the Bank’s 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.

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 Company’s 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.

Yields on securities are calculated based on amortized cost.

Nonaccruing loans are included in the average loan balances outstanding.

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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 Bank’s branch expansion ( the Bank has opened three branches since June of 2006), expenses necessitated by the growth of the Bank’s 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 Company’s 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

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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:

                        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.

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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 Company’s 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.

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.

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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: