Table of Contents
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
x
|
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
|
For the
quarterly period ended JUNE 30, 2008
|
|
|
|
o
|
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
|
For the
transition period from
to
|
Commission
file number 000-51104
CommerceFirst
Bancorp, Inc.
(Exact Name of Registrant as Specified in its
Charter)
Maryland
|
|
52-2180744
|
(State or Other
Jurisdiction
of Incorporation or Organization)
|
|
(I.R.S. Employer
Identification No.)
|
1804 West Street, Suite 200,
Annapolis, MD 21401
(Address of
Principal Executive Offices)
410-280-6695
(Registrants
Telephone Number, Including Area Code)
N/A
(Former Name,
Former Address and Former Fiscal Year, If Changed Since Last Report)
Indicate by check whether
the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definition of large
accelerated filer, accelerated filer and smaller reporting company in Rule
12b-2 of the Exchange Act.
Large accelerated filer
o
|
Accelerated
filer
o
|
Non-accelerated
filer
o
|
Smaller
reporting company
x
|
Indicate by check mark
whether the registrant is a shell company (as defined in Rule12b-2 of the
Securities Exchange Act). Yes
o
No
x
As of July 24, 2008,
the number of outstanding shares of registrants common stock, par value $0.01
per share was: 1,820,548
Table
of Contents
CommerceFirst Bancorp, Inc. and Subsidiary
Consolidated Statements of Financial Condition
June 30,
2008 and December 31, 2007
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due
from banks
|
|
$
|
4,598,272
|
|
$
|
3,001,573
|
|
Federal funds
sold
|
|
9,221,608
|
|
8,723,315
|
|
Cash and cash
equivalents
|
|
13,819,880
|
|
11,724,888
|
|
Investment
securities available-for-sale, at fair value
|
|
6,105,000
|
|
9,167,700
|
|
Investments in
restricted stocks, at cost
|
|
467,000
|
|
467,000
|
|
Loans
receivable, net of allowance for loan losses of $1,741,000 at June 30,
2008 and $1,665,000 at December 31, 2007
|
|
138,436,695
|
|
124,669,790
|
|
Premises and
equipment, net
|
|
985,404
|
|
1,097,927
|
|
Accrued interest
receivable
|
|
619,114
|
|
742,766
|
|
Deferred income
taxes
|
|
662,820
|
|
551,882
|
|
Other assets
|
|
296,439
|
|
388,630
|
|
Total Assets
|
|
$
|
161,392,352
|
|
$
|
148,810,583
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
bearing deposits
|
|
$
|
18,595,004
|
|
$
|
19,245,887
|
|
Interest bearing
deposits
|
|
117,279,992
|
|
104,161,959
|
|
Total deposits
|
|
135,874,996
|
|
123,407,846
|
|
|
|
|
|
|
|
Securities sold
under agreements to repurchase
|
|
4,283,104
|
|
4,305,936
|
|
Accrued interest
payable
|
|
194,911
|
|
201,253
|
|
Other
liabilities
|
|
708,093
|
|
839,187
|
|
Total
Liabilities
|
|
141,061,104
|
|
128,754,222
|
|
|
|
|
|
|
|
STOCKHOLDERS
EQUITY
|
|
|
|
|
|
Common stock -
$.01 par value; authorized 4,000,000 shares.
|
|
|
|
|
|
Issued and
outstanding: 1,820,548 shares at June 30, 2008 and December 31,
2007
|
|
18,205
|
|
18,205
|
|
Additional
paid-in capital
|
|
17,852,931
|
|
17,852,931
|
|
Retained
earnings
|
|
2,407,445
|
|
2,097,967
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|
Accumulated
other comprehensive income:
|
|
|
|
|
|
Net unrealized
gain on securities available-for-sale
|
|
52,667
|
|
87,258
|
|
Total
Stockholders Equity
|
|
20,331,248
|
|
20,056,361
|
|
Total
Liabilities and Stockholders Equity
|
|
$
|
161,392,352
|
|
$
|
148,810,583
|
|
The accompanying notes
are an integral part of these consolidated financial statements.
3
Table
of Contents
CommerceFirst Bancorp, Inc. and Subsidiary
Consolidated
Statements of Operations
For the Six and Three Months ended June 30, 2008
and 2007 (Unaudited)
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|
Six Months Ended
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Three Months Ended
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|
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June 30,
|
|
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
Interest and
fees on loans
|
|
$
|
5,051,386
|
|
$
|
4,519,002
|
|
$
|
2,505,064
|
|
$
|
2,342,355
|
|
U.S. Treasury
securities
|
|
195,110
|
|
225,060
|
|
94,907
|
|
115,639
|
|
Investment in
stocks
|
|
12,943
|
|
12,990
|
|
6,076
|
|
6,075
|
|
Federal funds
sold
|
|
102,502
|
|
470,767
|
|
28,742
|
|
167,340
|
|
Total interest
income
|
|
5,361,941
|
|
5,227,819
|
|
2,634,789
|
|
2,631,409
|
|
Interest
expense:
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
2,519,087
|
|
2,335,823
|
|
1,224,755
|
|
1,149,056
|
|
Repurchase
agreements
|
|
22,717
|
|
60,272
|
|
7,586
|
|
23,040
|
|
Total interest
expense
|
|
2,541,804
|
|
2,396,095
|
|
1,232,341
|
|
1,172,096
|
|
Net interest
income
|
|
2,820,137
|
|
2,831,724
|
|
1,402,448
|
|
1,459,313
|
|
|
|
|
|
|
|
|
|
|
|
Provision for
loan losses
|
|
59,277
|
|
45,000
|
|
50,000
|
|
|
|
Net interest
income after provision for loan losses
|
|
2,760,860
|
|
2,786,724
|
|
1,352,448
|
|
1,459,313
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
income:
|
|
|
|
|
|
|
|
|
|
Gain on sale of
SBA loans
|
|
130,047
|
|
154,854
|
|
98,665
|
|
68,691
|
|
Gain on sale of
securities
|
|
40,431
|
|
|
|
40,431
|
|
|
|
Service charges
and other income
|
|
116,879
|
|
147,742
|
|
52,701
|
|
61,780
|
|
Total
non-interest income
|
|
287,357
|
|
302,596
|
|
191,797
|
|
130,471
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest
expenses:
|
|
|
|
|
|
|
|
|
|
Compensation and
benefits
|
|
1,481,956
|
|
1,286,008
|
|
739,539
|
|
661,214
|
|
Legal and
professional
|
|
159,218
|
|
106,743
|
|
63,052
|
|
46,285
|
|
Rent and
occupancy
|
|
270,774
|
|
228,186
|
|
133,303
|
|
115,071
|
|
Marketing and
business development
|
|
60,077
|
|
51,206
|
|
36,905
|
|
19,831
|
|
Core processing
conversion
|
|
|
|
53,038
|
|
|
|
29,170
|
|
Insurance
|
|
17,960
|
|
20,385
|
|
9,480
|
|
10,193
|
|
Data processing
|
|
64,262
|
|
57,299
|
|
31,247
|
|
28,093
|
|
Support services
|
|
84,023
|
|
67,090
|
|
50,463
|
|
36,607
|
|
Communications
|
|
55,561
|
|
47,262
|
|
29,693
|
|
22,409
|
|
Office supplies
|
|
32,004
|
|
49,222
|
|
16,944
|
|
28,375
|
|
Depreciation and
amortization
|
|
145,260
|
|
99,205
|
|
72,631
|
|
54,104
|
|
Other
|
|
190,009
|
|
115,431
|
|
96,622
|
|
60,534
|
|
Total
non-interest expenses
|
|
2,561,104
|
|
2,181,075
|
|
1,279,879
|
|
1,111,886
|
|
Income before
income taxes
|
|
487,113
|
|
908,245
|
|
264,366
|
|
477,898
|
|
Income tax
expense
|
|
177,635
|
|
352,700
|
|
104,222
|
|
190,700
|
|
Net income
|
|
$
|
309,478
|
|
$
|
555,545
|
|
$
|
160,144
|
|
$
|
287,198
|
|
Basic earnings
per share
|
|
$
|
0.17
|
|
$
|
0.31
|
|
$
|
0.09
|
|
$
|
0.16
|
|
Diluted earnings
per share
|
|
$
|
0.17
|
|
$
|
0.30
|
|
$
|
0.09
|
|
$
|
0.15
|
|
The accompanying notes
are an integral part of these consolidated financial statements.
4
Table
of Contents
CommerceFirst Bancorp, Inc. and Subsidiary
Consolidated
Statements of Comprehensive Income
For the Six and Three Months ended June 30, 2008
and 2007 (Unaudited)
|
|
Six Months Ended
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
309,478
|
|
$
|
555,545
|
|
$
|
160,144
|
|
$
|
287,198
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustment for gain included in net income, net of tax
|
|
(24,663
|
)
|
|
|
(24,663
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
unrealized gains and (losses) on securities available for sale, net of tax
|
|
(9,928
|
)
|
(31,608
|
)
|
(74,681
|
)
|
(31,128
|
)
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive (loss)
|
|
(34,591
|
)
|
(31,608
|
)
|
(99,344
|
)
|
(31,128
|
)
|
Total
comprehensive income
|
|
$
|
274,887
|
|
$
|
523,937
|
|
$
|
60,800
|
|
$
|
256,070
|
|
The accompanying notes
are an integral part of these consolidated financial statements.
5
Table
of Contents
CommerceFirst Bancorp, Inc. and Subsidiary
Consolidated
Statements of Stockholders Equity
For the Six Months Ended June 30, 2008 and 2007
(Unaudited)
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2006
|
|
$
|
18,036
|
|
$
|
17,683,450
|
|
$
|
1,010,153
|
|
$
|
(24,654
|
)
|
$
|
18,686,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
June 30, 2007
|
|
|
|
|
|
555,545
|
|
|
|
555,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in
unrealized losses on securities available-for-sale
|
|
|
|
|
|
|
|
(31,608
|
)
|
(480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
common stock, net of costs
|
|
169
|
|
169,481
|
|
|
|
|
|
169,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
June 30, 2007
|
|
$
|
18,205
|
|
$
|
17,852,931
|
|
$
|
1,565,698
|
|
$
|
(56,262
|
)
|
$
|
19,380,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2007
|
|
$
|
18,205
|
|
$
|
17,852,931
|
|
$
|
2,097,967
|
|
$
|
87,258
|
|
$
|
20,056,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income-
June 30, 2008
|
|
|
|
|
|
309,478
|
|
|
|
309,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in
unrealized gains on securities available-for-sale
|
|
|
|
|
|
|
|
(34,591
|
)
|
(34,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
June 30, 2008
|
|
$
|
18,205
|
|
$
|
17,852,931
|
|
$
|
2,407,445
|
|
$
|
52,667
|
|
$
|
20,331,248
|
|
The accompanying notes
are an integral part of these consolidated financial statements.
6
Table
of Contents
CommerceFirst Bancorp, Inc. and Subsidiary
Consolidated
Statements of Cash Flows
For the Six Months Ended June 30, 2008 and 2007
(Unaudited)
|
|
June 30,
|
|
June 30,
|
|
|
|
2008
|
|
2007
|
|
CASH FLOWS FROM
OPERATING ACTIVITIES
|
|
|
|
|
|
Net income
|
|
$
|
309,478
|
|
$
|
555,545
|
|
Adjustments to
reconcile net income to net cash provided by operations:
|
|
|
|
|
|
Depreciation and
amortization
|
|
145,260
|
|
99,205
|
|
Gain on sale of
investment securities
|
|
(40,431
|
)
|
|
|
Gain on sale of
SBA loans
|
|
(130,047
|
)
|
(154,854
|
)
|
Provision for
loan losses
|
|
59,277
|
|
45,000
|
|
Provision for
losses on unfunded commitments
|
|
3,000
|
|
3,000
|
|
Deferred income
taxes
|
|
(90,344
|
)
|
(18,537
|
)
|
Change in assets
and liabilities:
|
|
|
|
|
|
Decrease
(increase) in accrued interest receivable
|
|
123,652
|
|
(128,555
|
)
|
Decrease in
other assets
|
|
92,191
|
|
276,017
|
|
Decrease in
accrued interest payable
|
|
(6,342
|
)
|
(21,674
|
)
|
(Decrease)
increase in other liabilities
|
|
(134,094
|
)
|
99,056
|
|
Other
amortization and accretion. net
|
|
8,571
|
|
12,372
|
|
Net cash
provided by operating activities
|
|
340,171
|
|
766,575
|
|
|
|
|
|
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES
|
|
|
|
|
|
Investment in
securities available for sale
|
|
|
|
(2,997,187
|
)
|
Maturities of
investment securities
|
|
|
|
3,000,000
|
|
Proceeds from
sale of investment securities
|
|
3,039,375
|
|
|
|
Proceeds from
sales of SBA loans
|
|
1,972,967
|
|
1,708,001
|
|
Increase in
loans, net
|
|
(15,669,102
|
)
|
(14,138,836
|
)
|
Purchase of
premises and equipment
|
|
(32,737
|
)
|
(451,218
|
)
|
Net cash used by
investing activities
|
|
(10,689,497
|
)
|
(12,879,240
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM
FINANCING ACTIVITIES
|
|
|
|
|
|
(Decrease)
increase in non-interest bearing deposits, net
|
|
(650,883
|
)
|
2,788,264
|
|
Net increase
(decrease) in other deposits
|
|
13,118,033
|
|
(327,881
|
)
|
Net decrease in
securities sold under agreements to repurchase
|
|
(22,832
|
)
|
(6,544,335
|
)
|
Exercise of warrants
to purchase common stock
|
|
|
|
169,650
|
|
Net cash
provided by (used in) financing activities
|
|
12,444,318
|
|
(3,914,302
|
)
|
|
|
|
|
|
|
Net increase
(decrease) in cash and cash equivalents
|
|
2,094,992
|
|
(16,026,967
|
)
|
Cash and cash
equivalents at beginning of period
|
|
11,724,888
|
|
32,355,480
|
|
Cash and cash
equivalents at end of period
|
|
$
|
13,819,880
|
|
$
|
16,328,513
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION
|
|
|
|
|
|
Interest paid
|
|
$
|
2,548,146
|
|
$
|
2,417,769
|
|
Total decrease
in unrealized gains/losses on available for sale securities
|
|
$
|
(55,187
|
)
|
$
|
(47,890
|
)
|
The accompanying notes
are an integral part of these consolidated financial statements.
7
Table of Contents
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Note 1.
The Company and its Significant Accounting Policies
Summary
of Significant Accounting Policies
Basis
of Presentation:
The
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form 10-Q
and Article 8 of Regulation S-X. Accordingly, they do not contain all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete consolidated financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included.
The
financial data at December 31, 2007 are derived from audited consolidated
financial statements that are included in the Companys Annual Report for the
year ended December 31, 2007. The financial data at June 30, 2008 and
2007 are derived from unaudited consolidated financial statements. Interim
results are not necessarily indicative of results for the full year.
The
consolidated financial statements include the accounts of CommerceFirst Bancorp, Inc.
(the Company) and its subsidiary, CommerceFirst Bank (the Bank). Inter-company
balances and transactions have been eliminated. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash
and cash equivalents in the statement of cash flows include cash on hand,
non-interest bearing amounts due from correspondent banks and the Federal
Reserve and Federal funds sold.
Certain prior period amounts have been reclassified to
conform to the current periods method of presentation.
Note 2.
Net Income per
Common Share
Basic
earnings per share of common stock are computed by dividing net earnings by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share are calculated by including the average dilutive common
equivalents outstanding during the period. Dilutive common equivalent shares
consist of stock options and warrants, calculated using the treasury stock method.
|
|
Six Months
Ended June 30,
|
|
Three Months
Ended June 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Weighted average
shares outstanding
|
|
1,820,548
|
|
1,812,581
|
|
1,820,548
|
|
1,820,548
|
|
Common stock
equivalents
|
|
3,919
|
|
37,179
|
|
2,112
|
|
37,399
|
|
Average common
shares and equivalents
|
|
1,824,467
|
|
1,849,760
|
|
1,822,660
|
|
1,857,947
|
|
Net income
|
|
$
|
309,478
|
|
$
|
555,545
|
|
$
|
160,144
|
|
$
|
287,198
|
|
Basic earnings
per share
|
|
$
|
0.17
|
|
$
|
0.31
|
|
$
|
0.09
|
|
$
|
0.16
|
|
Diluted earnings
per share
|
|
$
|
0.17
|
|
$
|
0.30
|
|
$
|
0.09
|
|
$
|
0.15
|
|
8
Table
of Contents
Note 3.
Related Party Transactions
The Bank paid $25,083 during the first six months of 2008 for support
services to a computer consulting firm of which a Director of the Bank is also
a principal. The Bank also paid $129,036 during the first six months of 2008
for various group insurance benefits and the 401k plan for which a Director of
the Company and the Bank ultimately receives commission compensation.
Expenditures totaling less than $10,000 were paid to several entities in which
directors were principals during the first six months of 2008. All of the above
transactions have been consummated on terms equivalent to those that prevail in
arms length transactions.
Executive
officers, directors and their affiliated interests enter into loan transactions
with the Bank in the ordinary course of business. These loans are made on the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable loans with unrelated borrowers. They do not involve more
than normal risk of collectability or present other unfavorable terms. At June 30,
2008 the amounts of such loans outstanding were
$3,995,190.
Deposits
and securities sold under agreements to repurchase held by executive officers,
directors and their affiliated interests totaled $21.9 million at June 30,
2008.
Note 4. Commitments and contingencies
The
Bank is a party to financial instruments in the normal course of business to
meet the financing needs of its customers. These financial instruments
typically include commitments to extend credit and standby letters of credit,
which involve, to varying degrees, elements of credit and interest rate risk in
excess of the amounts recognized in the consolidated financial statements.
Outstanding commitments as of June 30, 2008 are as follows:
Loan commitments
|
|
$
|
15,223,600
|
|
Unused lines of
credit
|
|
$
|
35,948,382
|
|
Letters of
Credit
|
|
$
|
1,593,268
|
|
Note 5.
Recent Relevant Accounting Pronouncements
The
Company adopted FASB Statement No. 157 (SFAS 157),
Fair Value
Measurements in January 2008. SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. SFAS 157 applies whenever other standards require (or
permit) assets or liabilities to be measured at fair value but does not expand
the use of fair value in any new circumstances. The adoption of SFAS 157 did
not have a material impact on the Companys consolidated financial statements
in 2008.
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
9
Table
of Contents
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. The Companys common stock trades on the
NASDAQ Capital Market under the symbol CMFB.
The Company continued its
efforts to increase investments in loans during 2008. Loans increased by 11.0%
during the first six months of 2008. The increase in loans and the recent
decreases in market interest rates have resulted in increases in the Companys
interest income but a decline in its net interest margin.
The
Company continued a pattern of asset and revenue growth during the first half
of 2008 but operating results have been adversely affected through a rapidly
declining interest rate environment and increased expenses relating to the Companys
growth. Key measurements and events for the period include the following:
·
Total assets at June 30, 2008 increased
by 8.5% to $161.4 million as compared to $148.8 million as of December 31,
2007.
·
Net loans outstanding increased by 11.0% from
$124.7 million as of December 31, 2007 to $138.4 million as of June 30,
2008.
·
Deposits at June 30, 2008 were $135.9
million, an increase of $12.5 million or 10.1% from December 31, 2007.
·
The Companys net income decreased to $309
thousand, or 44.3%, for the six month period ended June 30, 2008 as
compared to net income of $556 thousand for the six month period ended June 30,
2007.
·
Net interest income, the Companys main
source of income, was $2.8 million during the six month periods ended June 30,
2008 and 2007.
·
Non-interest income declined by $15 thousand
or 5.0%, for the six month period ended June 30, 2008, as compared to the
six month period ended June 30, 2007.
·
Non-interest expenses increased by $380
thousand or 17.4%, for the six months ended June 30, 2008, as compared to
the same period in 2007.
A discussion of
the factors leading to these changes can be found in the discussion below.
Critical Accounting Policies
CommerceFirst
Bancorp, Inc.s consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the United States
and follow general practices within the industry in which it operates. Application
of these principles requires management to make estimates, assumptions and
judgments that affect the amounts reported in the financial statements and
accompanying notes. These estimates, assumptions and 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
10
Table
of Contents
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 Companys annual audited consolidated financial
statements included in its Annual Report
on Form 10-KSB for the year ended December 31, 2007. These policies,
along with the disclosures presented in the other financial statement notes and
in this discussion, provide information on how significant assets and
liabilities are valued in the financial statements and how those values are
determined. Based on the valuation techniques used and the sensitivity of
financial statement amounts to the methods, assumptions and estimates
underlying those amounts, management has identified the determination of the
allowance for loan losses as the accounting area that requires the most
subjective or complex judgments, and as such could be most subject to revision
as new information becomes available.
CommerceFirst
Bancorp, Inc. believes it has developed appropriate policies and
procedures for assessing the adequacy of the allowance for loan losses,
recognizing that this process requires a number of assumptions and estimates
with respect to its loan portfolio. CommerceFirst Bancorp, Inc.s
assessments may be affected in future periods by changes in economic
conditions, the impact of regulatory examinations and the discovery of
information with respect to borrowers that is not known to management at the
time of the issuance of the consolidated financial statements.
RESULTS
OF OPERATIONS
General
.
The Company reported a
net profit of $309 thousand for the six-month period ended June 30, 2008
as compared to a net profit of $556 thousand for the six-month period ended June 30,
2007. Net interest income declined by $12 thousand during the first half of
2008 as compared to the first half of 2007. The Companys net interest income
was negatively affected by the reduced interest rate environment initiated by
the Federal Reserve Bank in late 2007 and continuing into 2008. The reduced
earnings are also the result of expense increases attributable to additional
personnel required by the Banks branch expansion (the Bank opened a branch in June of
2007), expenses necessitated by the growth of the Banks loan portfolio,
deposit insurance assessments begun in 2007 and other higher expenses
associated with the new internet banking and core processing platforms which
became operational during the second quarter of 2007.
The Company reported a
net profit of $160 thousand for the three-month period ended June 30, 2008
as compared to a net profit of $287 thousand for the three-month period ended June 30,
2007. This decline was the result of the same factors mentioned in the above
paragraph.
The following table shows
the return on average assets and average equity for the period shown.
Return on Average Assets and Average Equity
|
|
Six Months Ended
|
|
Year ended
|
|
|
|
June 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
2007
|
|
|
|
|
|
|
|
|
|
Return on
Average Equity
|
|
3.05
|
%
|
5.87
|
%
|
7.47
|
%
|
|
|
|
|
|
|
|
|
Return on
Average Earning Assets
|
|
0.41
|
%
|
0.83
|
%
|
1.07
|
%
|
|
|
|
|
|
|
|
|
Ratio of Average
Equity to Average Assets
|
|
13.13
|
%
|
13.83
|
%
|
13.93
|
%
|
11
Table
of Contents
Net interest income is
the amount by which interest earned on assets exceeds the interest paid on
interest-bearing liabilities. The Companys 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.
Six
Months Ended June 30, 2008
Net
Interest Income and Net Interest Margin
Total interest income
increased by $134 thousand or 2.6% to $5.4 million for the six months ended June 30,
2008 as compared to $5.2 million for the same period in 2007. This increase in
interest income was attributable to the increase in average earning assets
during the first quarter of 2008 of $16.4 million as compared to the same
period in 2007. Interest income was adversely affected by the decline in the
yield of the average earning assets from 7.9% in 2007 to 7.1% in 2008.
Interest expense increased by $146
thousand or 6.1% to $2.5 million for the six months ended June 30, 2008 as
compared to $2.4 million during the first six months of 2007. This increase was
primarily attributable to increased average interest bearing liabilities of
$14.7 million during 2008 as compared to 2007. The effect of the increased
interest bearing liabilities was offset to some degree by the decline in the
interest cost of the deposits from 4.8% in 2007 as compared to the interest
cost of the funds of 4.5% during 2008.
The net interest income for the six
months ended June 30, 2008 was $2.82 million as compared to $2.83 million
for the same period in 2007. Net interest income decreased because the yield on
the interest earning assets declining faster than the cost of the interest
bearing liabilities during the period of market interest rate declines. The
effect of the declining interest rates was partially offset by the increase in
interest earning assets exceeding the increase in interest bearing liabilities
during 2008.
The following table shows the average
balances and the rates of the various categories of the Companys assets and
liabilities. Nonperforming loans are included in average balances in the
following table:
AVERAGE
BALANCES, RATES AND INTEREST INCOME AND EXPENSE
|
|
Six Months Ended June 30:
|
|
|
|
2008
|
|
2007
|
|
|
|
Average
|
|
|
|
Yield/
|
|
Average
|
|
|
|
Yield/
|
|
(in thousands)
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Earning Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable
|
|
$
|
133,223
|
|
$
|
5,051
|
|
7.60
|
%
|
$
|
104,442
|
|
$
|
4,519
|
|
8.73
|
%
|
Investment securities
|
|
9,445
|
|
208
|
|
4.42
|
%
|
11,560
|
|
238
|
|
4.15
|
%
|
Federal funds sold
|
|
7,976
|
|
103
|
|
2.59
|
%
|
18,265
|
|
471
|
|
5.20
|
%
|
Total Interest Earning Assets
|
|
150,644
|
|
5,362
|
|
7.14
|
%
|
134,267
|
|
5,228
|
|
7.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less allowance for loan losses
|
|
(1,719
|
)
|
|
|
|
|
(1,673
|
)
|
|
|
|
|
Non-Interest Earning Assets
|
|
5,670
|
|
|
|
|
|
5,344
|
|
|
|
|
|
Total Assets
|
|
$
|
154,595
|
|
|
|
|
|
$
|
137,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Table
of Contents
|
|
Six Months Ended June 30:
|
|
|
|
2008
|
|
2007
|
|
|
Average
|
|
|
|
Yield/
|
|
Average
|
|
|
|
Yield/
|
|
(in thousands)
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Balance
|
|
Interest
|
|
Rate
|
|
Liabilities and Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest -Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing demand deposits
|
|
$
|
1,814
|
|
$
|
2
|
|
0.22
|
%
|
$
|
2,579
|
|
$
|
19
|
|
1.48
|
%
|
Money market deposit accounts
|
|
19,728
|
|
215
|
|
2.19
|
%
|
20,661
|
|
427
|
|
4.17
|
%
|
Savings accounts
|
|
63
|
|
|
|
0.00
|
%
|
132
|
|
1
|
|
1.00
|
%
|
Certificates of deposit
|
|
90,014
|
|
2,302
|
|
5.13
|
%
|
71,975
|
|
1,889
|
|
5.29
|
%
|
Securities sold under agreements to repurchase
|
|
3,040
|
|
23
|
|
1.52
|
%
|
4,582
|
|
60
|
|
2.65
|
%
|
Total Interest Bearing Liabilities
|
|
114,659
|
|
2,542
|
|
4.45
|
%
|
99,929
|
|
2,396
|
|
4.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Interest Bearing Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits
|
|
18,814
|
|
|
|
|
|
18,090
|
|
|
|
|
|
Other
|
|
828
|
|
|
|
|
|
838
|
|
|
|
|
|
Total Liabilities
|
|
134,301
|
|
|
|
|
|
118,857
|
|
|
|
|
|
Stockholders Equity
|
|
20,294
|
|
|
|
|
|
19,081
|
|
|
|
|
|
Total Liabilities and Equity
|
|
$
|
154,595
|
|
|
|
|
|
$
|
137,938
|
|
|
|
|
|
Net Interest Income
|
|
|
|
$
|
2,820
|
|
|
|
|
|
$
|
2,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Interest Spread
|
|
|
|
|
|
2.69
|
%
|
|
|
|
|
3.02
|
%
|
Net Interest Margin
|
|
|
|
|
|
3.75
|
%
|
|
|
|
|
4.25
|
%
|
Yields on
securities are calculated based on amortized cost.
Net interest margin was 3.8% in the first
half of 2008, as compared to 4.3% in the comparable period in 2007. Interest
spread was 2.7% in the first half of 2008, as compared to the 3.0% in the first
half of 2007. The yield on interest earning assets declined at a faster rate
than the decline in the cost of interest bearing liabilities resulting in the
reduction of the net interest margin and net interest spread. The rapid market
interest rate reductions have resulted in the rates earned on the Companys
loans, a significant proportion of which are floating rate loans which re-price
the loans immediately with declines in market interest rates, declining faster
than its interest bearing liabilities, which are comprised mostly of fixed rate
certificates of deposit which will re-price at their maturity date
Provision for Loan Losses
The provision for loan losses was $59
thousand during the first half of 2008 as compared to $45 thousand during the
first half of 2007, a 31.7% increase, reflecting increases in average loans and
current economic uncertainties.
Non-Interest
Income
.
Non-interest income principally consists
of gains from the sale of investment securities and the guaranteed portion of
Small Business Administration loans and from deposit account services charges.
For the six months ended June 30, 2008, gains on sales of SBA loans
amounted to $130 thousand as compared to $155 thousand for the same period in
2007. Generally, the Bank desires to sell the guaranteed portion of most
additional SBA loans resulting in a continuing stream of income that may vary
significantly from quarter to quarter, depending in part upon the volume of
loans actually sold. During June 2008, the Bank sold an investment
security which resulted in a gain of $40 thousand. No securities were sold in
2007. Deposit account service charges amounted to $117 thousand during the six
months ended June 30, 2008 as compared to $148 thousand for the same
period in 2007. The decline results from the reduction in overdraft fees incurred
by account holders.
13
Table
of Contents
Non-Interest Expense
.
Non-interest expense
totaled $2.6 million for the six-month period ended June 30, 2008 as
compared to $2.2 million for the same period in 2007, a 17.2% increase.
Compensation and benefit expense increased $196 thousand reflecting additional
personnel required for a branch that was opened in June 2007 thus
incurring non-interest expense for the first six months of 2008 but only one
month of such expenses in the six month ended June 30, 2007, as well as
personnel needed to manage the growth of the Company, particularly its loan
portfolio. Other expenses increased because of the additional branch.
Non-interest expenses also increased because of the deposit insurance
assessment by the FDIC in 2008 (none in 2007), the additional expenses of
upgraded data processing systems and products installed in the second quarter
of 2007 as well as the general growth of the Company.
Income
Tax Expense
.
During the six months
ended June 30, 2008, the Company recorded an income tax expense of $178
thousand as compared to $353 thousand during the same period in 2007. Income
tax expense was 36.5% of income before taxes in 2008 and 38.8% of income before
taxes in 2007. The effective rate declined because of the effect on deferred
tax items of state income tax rate changes in the first quarter of 2008.
Three Months Ended June 30,
2008
Net
Interest Income and Net Interest Margin
Total interest income
increased by $3 thousand or 0.1% for the three-month period ended June 30,
2008 as compared the same period in 2007. The increase in interest earning
assets was offset by the reduction in the interest rates on the assets as the
reduced interest rate environment continues to adversely affect interest
earnings.
Interest expense increased by $60
thousand or 5.0% to $1.23 million for the three months ended June 30, 2008
as compared to $1.17 million during the first six months of 2007. This increase
was primarily attributable to increased average interest bearing liabilities
during 2008 as compared to 2007. The effect of the increased interest bearing
liabilities was offset to some degree by the decline in the interest cost of
the deposits.
The net interest income for the
three-month period ended June 30, 2008 was $1.40 million as compared to
$1.46 million for the same period in 2007. Net interest income decreased
primarily because the interest earning assets are re-pricing downward faster
than the interest bearing liabilities during the recent period of declining
market interest rates.
Provision for Loan Losses
The provision for loan losses was $50
thousand during the three month period ended June 30, 2008 as compared to
no provision during the three months ended June 30, 2007, reflecting
increases in average loans and current economic uncertainties.
Non-Interest
Income
.
Non-interest income totaled $192 thousand
for the three months ended June 30, 2008 as compared to $130 thousand
during the three months ended June 30, 2007. For the three months ended June 30,
2008, gains on sales of SBA loans amounted to $99 thousand as compared to $69
thousand for the same period in 2007. During June 2008, the Bank sold an
investment security which resulted in a gain of $40 thousand. No securities
were sold in 2007. Deposit account service charges amounted to $53 thousand
during the three months ended June 30, 2008 as compared to $62 thousand
for the same period in 2007. The decline results from the reduction in
overdraft fees incurred by account holders.
14
Table of Contents
Non-Interest Expense
.
Non-interest expense
totaled $1.3 million for the three-month period ended June 30, 2008 as
compared to $1.1 million for the same period in 2007, a 15.1% increase.
Compensation and benefit expense increased $78 thousand, a 11.8% increase,
reflecting additional personnel required for a branch that was opened in June 2007
thus incurring non-interest expense for the all three months of the quarter
ended June 30, 2008 but only one month of such expenses in the quarter
ended June 30, 2007, as well as personnel needed to manage the growth of
the Company, particularly its loan portfolio. Other expenses also increased
because of the additional branch. Non-interest expenses also increased because
of the deposit insurance assessment by the FDIC in 2008 (none in 2007), the
additional expenses of upgraded data processing systems and products installed
in the second quarter of 2007 as personnel needed to manage the growth of the
Company, particularly its loan portfolio.
Income
Tax Expense
.
During the three months
ended June 30, 2008, the Company recorded an income tax expense of $104
thousand as compared to $191 thousand during the same period in 2007. Income
tax expense was 39.4% of income before taxes in 2008 and 39.9% of income before
taxes in 2007.
FINANCIAL CONDITION.
General
.
The Companys assets at June 30,
2008 were $161.4 million, an increase of $12.6 million or 8.5%, from December 31,
2007. Gross loans totaled $140.2 million comprised of commercial real estate
loans of $81.5 million, an increase of $8.6 million, or 11.8%, from December 31,
2007 and commercial loans of $58.6 million, an increase of $5.2 million, or
9.8% from December 31, 2007. At June 30, 2008, deposits totaled
$135.9 million an increase of $12.5 million, or 10.1%, from December 31,
2007. Deposits at June 30, 2008 are comprised primarily of certificates of
deposit of $95.9 million, Money Market accounts of $20.4 million, and
noninterest bearing deposits of $18.6 million.
Loan Portfolio.
The loan portfolio is
the largest component of earning assets and accounts for the greatest portion
of total interest income. At June 30, 2008, net loans were $138.4 million,
an 11.0% increase from the $124.7 million in loans outstanding at December 31,
2007. In general, loans consist of internally generated loans and, to lesser
degree, participation loans purchased from other local community banks. Lending
activity is generally confined to our immediate market areas. The strong growth
is attributable to the satisfactory culmination of efforts to attract quality
credits; there has been no dilution of credit underwriting standards. The
percentage of total loans comprised of real estate loans has increased as the
Company has concentrated on this type of lending. The majority of these loans
(approximately 73.8% and 77.3% at June 30, 2008 and December 31,
2207, respectively) are secured by real property that is occupied by the
borrowers businesses.
Loans secured by
residential real estate are loans to investors for the financing of rental
properties or other business ventures. Residential real estate loans include
loans to local builders and developers for acquisition and development and home
building totaling $1.7 million at June 30, 2008 and $.8 million at December 31,
2007. None of these loans are delinquent and all are performing satisfactorily
at June 30, 2008.
The Company does not
engage in foreign lending activities. The following table presents the
composition of the loan portfolio by type of loan at the dates indicated.
15
Table
of Contents
Loans
receivable, net is comprised of the following:
|
|
June 30, 2008
|
|
December 31, 2007
|
|
|
|
|
|
Percentage
|
|
|
|
Percentage
|
|
(In thousands)
|
|
Balance
|
|
of Loans
|
|
Balance
|
|
of Loans
|
|
Commercial loans
|
|
$
|
58,648
|
|
41.8
|
%
|
$
|
53,437
|
|
42.3
|
%
|
Real estate
loans secured by:
|
|
|
|
|
|
|
|
|
|
Residential real
estate
|
|
15,872
|
|
11.3
|
%
|
12,100
|
|
9.6
|
%
|
Commercial real
estate
|
|
65,685
|
|
46.9
|
%
|
60,833
|
|
48.1
|
%
|
Total real
estate loans
|
|
81,557
|
|
58.2
|
%
|
72,933
|
|
57.7
|
%
|
|
|
140,205
|
|
100.0
|
%
|
126,370
|
|
100.0
|
%
|
Unearned loan
fees, net
|
|
(27
|
)
|
|
|
(35
|
)
|
|
|
Allowance for
loan losses
|
|
(1,741
|
)
|
|
|
(1,665
|
)
|
|
|
|
|
$
|
138,437
|
|
|
|
$
|
124,670
|
|
|
|
The following
table shows the interest rate sensitivity of the loan portfolio at June 30,
2008. 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
64,696
|
|
$
|
72,004
|
|
$
|
3,505
|
|
$
|
140,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 managements ongoing assessment of the
Companys credit exposure and consideration of certain other relevant factors.
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 June 30, 2008, the range of the loss ratios used to determine
estimated losses by loan category were: commercial loans - 0.50% to 0.57%; SBA
loans (unguaranteed portion) - 6.5% and real estate loans- 0.15% to 0.95%. 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.
16
Table
of Contents
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 managements estimations of loss exposure. Loss percentages used are generally based
upon managements 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 June 30, 2008, the actual
allowance for loan losses was between the low and high allowance amounts.
The provision for loan
losses was $59 thousand during the six months ended June 30, 2008 as
compared to $45 thousand for the six months ended June 30, 2007 reflecting
increases in loans and current economic conditions with recognition of the
small amount of loan charge-offs incurred.
The allowance for loan
losses represents 1.24% and 1.32% of loans receivable at June 30, 2008 and
December 31, 2007, 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 credit losses is shown in the following table. All charge offs
and recoveries relate to commercial loans.
|
|
Six Months
Ended
|
|
Year Ended
|
|
(In thousands)
|
|
June 30, 2008
|
|
December 31, 2007
|
|
Allowance for loan losses:
|
|
|
|
|
|
Beginning balance
|
|
$
|
1,665
|
|
$
|
1,614
|
|
Charge-offs:
|
|
|
|
|
|
Commercial loans
|
|
|
|
(72
|
)
|
Recoveries:
|
|
|
|
|
|
Commercial loans
|
|
17
|
|
78
|
|
Net recoveries
|
|
17
|
|
6
|
|
Provision for loan losses
|
|
59
|
|
45
|
|
Ending balance
|
|
$
|
1,741
|
|
$
|
1,665
|
|
Additionally, the Company
has established a reserve for unfunded commitments that is recorded by a
provision charged to other expenses. At June 30, 2008 the balance of this
reserve was $45 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 credits 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.
17
Table
of Contents
The following table shows
an analysis of nonperforming assets at the dates indicated:
|
|
Analysis of Nonperforming Assets
|
|
(Dollars in thousands)
|
|
June 30, 2008
|
|
December 31, 2007
|
|
|
|
|
|
|
|
Non-accrual
loans - Commercial
|
|
$
|
1,234
|
|
$
|
1,125
|
|
|
|
|
|
|
|
|
|
At
June 30, 2008 the Company had eleven loans to eight unrelated entities in
non-accrual status; all but two of these loans were in non-accrual status at December 31,
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.
An
affiliated group of borrowers have three commercial loans totaling $130
thousand for which no specific reserves have been established. Another borrower
has a commercial loan in the amount of $169 thousand for which a specific
reserve of $69 thousand has been established.
Collection proceedings are continuing on these loans.
Six
other loans totaling $352 thousand were
considered potential problem loans and $253 thousand specific reserves were
established
.
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 2008, 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 2008.
Investment Portfolio
.
At June 30, 2008, the carrying value of the
investment securities portfolio was $6.1 million, a decrease of $3.1 million
from the carrying value of $9.2 million at December 31, 2007. In order to
increase its short-term liquidity position, the Company sold a U.S. Treasury
Note for with a carrying value of $3.0 million realizing a profit on the sale
of $40 thousand in June 2008. The Company 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
addition, the Company 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.
18
Table of Contents
|
|
Investment in Securities and Stocks
|
|
|
|
June 30, 2008
|
|
December 31, 2007
|
|
|
|
|
|
Percent
|
|
|
|
Percent
|
|
(In thousands)
|
|
Amount
|
|
of Total
|
|
Amount
|
|
of Total
|
|
Investment
securities, at fair value:
|
|
|
|
|
|
|
|
|
|
U.S. Treasuries
|
|
$
|
6,105
|
|
100.00
|
%
|
$
|
9,168
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
Investments in
stocks, at cost:
|
|
|
|
|
|
|
|
|
|
Federal Reserve
Stock
|
|
405
|
|
86.72
|
%
|
405
|
|
86.72
|
%
|
Corporate
equities
|
|
62
|
|
13.28
|
%
|
62
|
|
13.28
|
%
|
Total stocks
|
|
$
|
467
|
|
100.00
|
%
|
$
|
467
|
|
100.00
|
%
|
The value of the U.S. treasury investment securities
is 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 $12.5 million (10.1%) to $136 million at June 30, 2008 from $123
million at December 31, 2007.
Non-interest bearing deposits decreased $651 thousand or 3.4%, money
market accounts increased $4.1 million or 25.3% and certificates of deposit
increased $10.4 million, or 12.2% during the six months ended June 30,
2008. Certificates of deposit in amounts of $100 thousand or more totaled $69.8
million at June 30, 2008 and $74.0 at December 31, 2007.
Deposits
are comprised of the following:
|
|
June 30,
|
|
December 31,
|
|
(in thousands)
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Non-interest
bearing deposits
|
|
$
|
18,595
|
|
$
|
19,246
|
|
Savings deposits
|
|
40
|
|
36
|
|
Interest bearing
demand deposits
|
|
21,372
|
|
18,708
|
|
Certificates of
deposit:
|
|
|
|
|
|
Balances equal
to or greater than $100,000
|
|
76,760
|
|
74,036
|
|
Balances less
than $100,000
|
|
19,108
|
|
11,382
|
|
Total
certificates of deposit
|
|
95,868
|
|
85,418
|
|
|
|
$
|
135,875
|
|
$
|
123,408
|
|
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 June 30, 2008, the Banks cash and cash equivalents
totaled $13.8 million, an increase of $2.1 million from December 31, 2007,
primarily as the result of increases in deposits and the sale of an investment
security.
19
Table of Contents
At June 30,
2008, 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 is 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 June 30, 2008 total $1.6
million ($2.0 million at December 31, 2007).
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 June 30, 2008 totaled $51 million ($58 million
at December 31, 2007). 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 June 30,
2008, the Company and the Bank was in full compliance with these guidelines, as
follows:
|
|
|
|
|
|
Minimum Ratios
|
|
|
|
June 30,
2008
|
|
December 31,
2007
|
|
To be Adequately
Capitalized
|
|
To be Well
Capitalized
|
|
|
|
|
|
|
|
|
|
|
|
Total capital:
|
|
|
|
|
|
|
|
|
|
Company
|
|
15.3
|
%
|
16.5
|
%
|
8.0
|
%
|
N/A
|
|
Bank
|
|
12.7
|
%
|
13.7
|
%
|
8.0
|
%
|
10.0
|
%
|
Tier I:
|
|
|
|
|
|
|
|
|
|
Company
|
|
14.0
|
%
|
15.2
|
%
|
4.0
|
%
|
|
|
Bank
|
|
11.5
|
%
|
12.4
|
%
|
4.0
|
%
|
6.0
|
%
|
Leverage Total:
|
|
|
|
|
|
|
|
|
|
Company
|
|
13.0
|
%
|
13.9
|
%
|
4.0
|
%
|
|
|
Bank
|
|
10.7
|
%
|
11.3
|
%
|
4.0
|
%
|
5.0
|
%
|
Under guidance by the
federal banking regulators, banks which have concentrations in construction,
land development or commercial real estate loans (other than loans for majority
owner occupied properties) would be expected to maintain higher levels of risk
management and, potentially, higher levels of capital. It is possible that we may be required to
maintain higher levels of capital than we would otherwise be expected to
maintain as a result of our levels of construction, development and commercial
real estate loans, which may require us to obtain additional capital, sooner
than we otherwise would expect to.
20
Table of Contents
ITEM 3 -
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 4 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 Companys internal
control over financial reporting (as defined in Rule 13a-15 under the
Securities Act of 1934) during the quarter ended June 30, 2008 that has materially affected, or is
reasonably likely to materially affect, the Companys 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 June 30, 2008, 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 $3 million. The Company and
the plaintiffs have entered into an agreement to settle the suit. The Company
did not incur any losses under the agreement.
Item 1A Risk Factors
Not applicable
Item 2 Unregistered
Sale of Equity Securities and Use of Proceeds
(a)
Sales of Unregistered
Securities.
None
(b)
Use of Proceeds.
Not applicable.
(c)
Issuer Purchases of
Securities.
None
Item 3. Defaults Upon Senior Securities. None
Item 4 - Submission of Matters to a Vote of Security
Holders.
At the Companys annual shareholders meeting held on April 16,
2008, the shareholders of the Company elected Milton D. Jernigan, II, John
A. Richardson, Sr., and Jerome A. Watts as directors for three-year terms,
all with 1,579,623 votes for and 1,214 votes withheld. There were no
solicitations in opposition to managements nominees and all such nominees were
elected. These director-nominees were incumbent directors previously elected by
the shareholders to three-year terms. Directors continuing in office are Edwin
B. Howlin, Jr, Charles L. Hurtt, Jr, Robert R. Mitchell, Richard J Morgan,
George C. Shenk, Jr. and Lamont Thomas.
Item 5 Other Information
(a)
Information
Required to be Reported on Form 8-K.
None
21
Table
of Contents
(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 (7)
|
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 3.2 to the
Companys Current Report on Form 8-K filed on August 17, 2007
|
(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)
|
(7)
|
|
Incorporated by reference to
Exhibit 10(e) to the Companys Quarterly Report on Form 10-QSB
for the period ended September 30, 2007.
|
22
Table of Contents
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.
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COMMERCEFIRST BANCORP, INC.
|
|
|
|
|
Date: July 24,
2008
|
By:
|
/s/ Richard J. Morgan
|
|
Richard J. Morgan,
President and Chief Executive Officer
|
|
|
|
|
Date: July 24,
2008
|
By:
|
/s/ Michael T. Storm
|
|
Michael T. Storm,
Executive Vice President and Chief Financial Officer
|
23
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