COMMERCEFIRST BANCORP INC - FORM 10-K - EX-13 - EXHIBIT 13

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10-K - FORM 10-K - COMMERCEFIRST BANCORP INC	c97284e10vk.htm
EX-23 - EXHIBIT 23 - COMMERCEFIRST BANCORP INC	c97284exv23.htm
EX-31.(A) - EXHIBIT 31(A) - COMMERCEFIRST BANCORP INC	c97284exv31wxay.htm
EX-32.(B) - EXHIBIT 32(B) - COMMERCEFIRST BANCORP INC	c97284exv32wxby.htm
EX-31.(B) - EXHIBIT 31(B) - COMMERCEFIRST BANCORP INC	c97284exv31wxby.htm
EX-32.(A) - EXHIBIT 32(A) - COMMERCEFIRST BANCORP INC	c97284exv32wxay.htm

Exhibit 13

Annual Report to Shareholders for the Year Ended December 31, 2009

April 5, 2010

To our Fellow Shareholders:

As you may have expected, the adverse economic environment of 2009 experienced by our economy as a whole continued to challenge the Company and the Bank throughout the year. We consistently monitored the quality of our Bank’s loan portfolio and we significantly increased its loss reserves in recognition of the effect the economic conditions had on our customers. Nevertheless, we are pleased to report that we were able to increase our earnings as the result of asset growth and the reduction of the cost of deposits due to the re-pricing of those deposits at lower market interest rate levels.

Most gratifyingly, we were able to win new business customers during the year as we were one of the few banks in our market areas seeking new business. This effort resulted in a 21.2% increase in net loans and 20.3% increase in total assets during the year. The Bank continues to experience strong loan demand for commercial loans and commercial real estate loans. Key measurements and events for the year ended December 31, 2009 include the following:

•

Total assets as of December 31, 2009 increased by 20.3% to $200 million as compared to $167 million as of December 31, 2008.

•

Net loans outstanding increased by $32 million, or 21.2% to $183 million as of December 31, 2009 from $151 million as of December 31, 2008.

•

Deposits as of December 31, 2009 were $179 million, an increase of $33 million or 23.0% from December 31, 2008.

•

Net interest income, the Bank’s main source of income, increased by $1.7 million or 31.9% during the year ended December 31, 2009 as compared to the same period in 2008.

•

The Company’s net income increased to $678 thousand, or 129.9%, for the year ended December 31, 2009 as compared to net income of $295 thousand for the year ended December 31, 2008.

Our stronger earnings resulted from the increase in earning assets, the management of loan pricing, the decline in the cost of funds and relatively stable operating expenses. Loan loss expense was higher as the result of the current economic environment’s adverse effect on some of our borrowers. We continue to closely monitor our loan portfolio for adverse effects from the weakened economy. At the same time, we continue to search for prudent lending opportunities while managing our growth to stay within well capitalized parameters. We are optimistic that our strong capital base, hands-on management approach to commercial lending, and continued measured growth path, will position us as a strong competitor when the economy gradually recovers.

As always we appreciate your continued support of our bank through your referrals and patronage throughout 2009.

Very truly yours,


Milton D. Jernigan II		Richard J. Morgan
Chairman of the Board		President and CEO

SELECTED CONSOLIDATED FINANCIAL DATA

The following table shows selected historical consolidated financial data for CommerceFirst Bancorp, Inc. You should read it in conjunction with the historical consolidated financial information contained in the Consolidated Financial Statements for the year ended December 31, 2009 included in this Annual Report. Data for the years ended December 31, 2009, 2008, 2007, 2006 and 2005 are derived from the audited Consolidated Financial Statements.


	Year Ended December 31,
(Dollars in thousands, except per share data)	2009			2008			2007			2006			2005
Operation Statement Data:
Net interest income	$	7,341		$	5,567		$	5,895		$	5,301		$	4,200
Provision for loan losses	$	1,616		$	647		$	45		$	225		$	360
Noninterest income	$	720		$	569		$	620		$	633		$	625
Noninterest expense	$	5,315		$	5,028		$	4,688		$	3,652		$	2,773
Federal and state income tax expense	$	(452	)	$	(166	)	$	(694	)	$	(774	)	$	(658	)
Net income	$	678		$	295		$	1,088		$	1,283		$	1,033

Per share data and shares outstanding:
Net income per share, basic	$	0.37		$	0.16		$	0.60		$	0.71		$	0.63
Net income per share, diluted	$	0.37		$	0.16		$	0.59		$	0.69		$	0.62
Book value at period end	$	11.50		$	11.16		$	11.02		$	10.36		$	9.63
Average common shares outstanding during year		1,820,548			1,820,548			1,816,504			1,803,583			1,647,645
Diluted average common shares outstanding during year		1,820,548			1,820,548			1,848,195			1,846,462			1,672,928
Shares outstanding at period end		1,820,548			1,820,548			1,820,548			1,803,583			1,803,583

Financial Condition data:
Total assets	$	200,371		$	166,569		$	148,811		$	141,270		$	112,545
Loans receivable (net)	$	183,102		$	151,101		$	124,670		$	95,081		$	75,367
Allowance for loan losses	$	2,380		$	1,860		$	1,665		$	1,614		$	1,615
Other interest-earning assets	$	8,909		$	9,227		$	18,358		$	40,121		$	31,985
Total deposits	$	178,645		$	145,241		$	123,408		$	112,205		$	88,167
Borrowings	$	—		$	—		$	4,306		$	9,579		$	6,010
Stockholders’ equity	$	20,942		$	20,311		$	20,056		$	18,687		$	17,363

Selected performance ratios:
Return on average earning assets		0.51	%		0.25	%		1.07	%		1.23	%		1.19	%
Return on average equity		4.54	%		1.92	%		7.47	%		7.16	%		6.76	%
Net interest margin		4.00	%		3.59	%		4.38	%		5.06	%		4.86	%
Net interest spread		3.32	%		2.60	%		3.10	%		3.83	%		4.01	%
Efficiency ratio		65.94	%		81.94	%		72.21	%		61.56	%		57.47	%

Asset quality ratios:
Nonperforming loans to gross loans		1.47	%		3.80	%		0.89	%		0.65	%		0.77	%
Allowance for loan losses to loans		1.28	%		1.22	%		1.32	%		1.67	%		2.10	%
Allowance for loan losses to nonperforming loans		.87x			.32x			1.48x			2.57x			2.73x
Nonperforming assets to loans and other real estate		2.76	%		3.80	%		0.89	%		0.65	%		0.77	%
Net loan charge-offs (recoveries) to average loans		0.65	%		0.33	%		0.00	%		0.26	%		(0.15	)%

Capital ratios:
Total risk-based capital ratio		12.25	%		14.14	%		16.48	%		19.10	%		22.50	%
Tier I risk-based capital ratio		10.99	%		12.91	%		15.23	%		17.84	%		21.20	%
Leverage ratio		10.43	%		12.24	%		13.91	%		15.10	%		17.30	%
Average equity to average assets		11.03	%		12.86	%		13.93	%		16.63	%		17.05	%

MANAGEMENT’S DISCUSSION AND ANALYSIS

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 words such as “may,” “anticipates,” “believes,” “expects,” “plans,” “estimates,” “potential,” “continue,” “should,” and similar words or phrases. 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 does not undertake to update any forward-looking statements to reflect occurrences or events that may not have been anticipated as of the date of such statements.

This discussion and analysis provides an overview of the financial condition and results of operations of CommerceFirst Bancorp, Inc. (the “Company”) and CommerceFirst Bank (the “Bank”) for the years 2009 and 2008. It is intended that this discussion and analysis help the readers in their analysis of the accompanying audited Consolidated Financial Statements. You should read this discussion in conjunction with the Consolidated Financial Statements and Notes thereto provided elsewhere in this report.

General

CommerceFirst Bancorp, Inc. is the bank holding company for CommerceFirst Bank, a Maryland chartered commercial bank headquartered in Annapolis, Maryland. The Bank was capitalized, became a wholly owned subsidiary of the Company and commenced operations on June 29, 2000. The Company maintains five banking offices in Anne Arundel, Howard and Prince George’s counties in central Maryland. The Company focuses on providing commercial banking services to small and medium sized businesses in its market areas.

The financial industry experienced significant volatility and stress as economic conditions worsened, unemployment increased and asset values declined during 2009. While the Company did not have direct exposure to the upheaval in the residential mortgage loan market and did not invest in mortgage back securities or the preferred stock of Freddie Mac and Fannie Mae, the slowing economy, declines in housing construction and the related impact on contractors and other small and medium sized businesses, has had an adverse impact on the Company’s business. This impact included increased levels of non-performing assets, loan charge-offs and loan loss provisions. While the Company believes that it has taken adequate reserves for the problem assets in its loan portfolio at December 31, 2009, there can be no assurance that the Company will not be required to take additional charge-offs or make additional provisions for nonperforming loans, or that currently performing loans will continue to perform. Additionally, there can be no assurance that the steps taken to stimulate the economy and stabilize the financial system will prove successful, or that they will improve the financial condition of the Company’s customers or the Company.

Overview

The Company continued a pattern of asset growth during the year ended December 31, 2009. Earning improved as the result of asset growth and the reduction of the cost of deposits due to re-pricing of the deposits to lower current market interest rate levels. The increase in net interest income was partially offset by higher reserves for loan losses reflecting continuing adverse economic conditions. Key measurements and events for the year ended December 31, 2009 include the following:

•

Total assets as of December 31, 2009 increased by 20.3% to $200 million as compared to $167 million as of December 31, 2008.

•

Net loans outstanding increased by $32 million, or 21.2%, to $183 million as of December 31, 2009 from $151 million as of December 31, 2008.

•

Deposits as of December 31, 2009 were $179 million, an increase of $33 million or 23.0% from $146 million at December 31, 2008.

•

The Company’s net income increased to $678 thousand, or 129.9%, for the year ended December 31, 2009 as compared to net income of $295 thousand for the year ended December 31, 2008.

•

Net interest income, the Company’s main source of income, was $7.3 million during the year ended December 31, 2009 compared to $5.6 million for the same period in 2008. This represents an increase of 31.9% for the year December 31, 2009 as compared to 2008.

•

The provision for loan losses increased from $647 thousand in 2008 to $1.6 million in 2009, reflecting increased provisions for loan losses.

A detailed discussion of the factors leading to these changes can be found in the discussion below.

Further asset and loan growth by the Company may be limited by its levels of regulatory capital. Increases in the loan portfolio need to be funded by increases in deposits as the Company has limited amounts of on-balance sheet assets deployable into loans. Growth will depend upon Company earnings and/or the raising of additional capital.

Critical Accounting Policies

The Company’s Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available.

The most significant accounting policies followed by the Company are presented in Note 1 to the Consolidated Financial Statements. 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.

The Company 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. The Company’s assessments may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations and the discovery of information with respect to borrowers which is not known to management at the time of the issuance of the Consolidated Financial Statements. For additional discussion concerning the allowance for loan losses and related matters, see “Provision for Loan Losses” below and Note 1 to the Consolidated Financial Statements.

Financial Condition

The Company’s assets at December 31, 2009 were $200.4 million, an increase of $33.8 million or 20.3%, from December 31, 2008. The increase is primarily the result in the increase in loans of $32.0 million and the increase in cash and cash equivalents of $1.5 million offset by the decrease in investment securities of $3.1 million. The Company funded the increase in loans through increased deposits and the use of excess liquidity during 2009.

Loan Portfolio

At December 31, 2009, loans totaled $183.1 million as compared to loans of $151.1 million at December 31, 2008. The loan portfolio is comprised of commercial loans and real estate loans. The majority of the increase in loans was in the real estate portfolio which increased $22.9 million, or 24.3%, while commercial loans increased $9.7 million, or 16.5%. During 2009, the Company continued its efforts to originate real estate loans where the Company has tangible collateral securing the loans. Real estate retains a value even in down markets unlike other collateral, such as accounts receivable and business assets, which are more susceptible to significant declines in value. The real estate portfolio is largely composed of loans secured by commercial real estate. The Company has only approximately $3.3 million in acquisition and development loans secured by residential building lots. The Company’s residential loans consist of loans to investors in residential property for rental, and are primarily secured by one to four family properties.

The loan portfolio is the largest component of earning assets and accounts for the greatest portion of total interest income. At December 31, 2009, gross loans were $185.5 million, a 21.3% increase from the $153.0 million in gross loans outstanding at December 31, 2008. Loans consist of internally generated loans and participation loans purchased from other local community banks. Lending activity is confined to the Bank’s 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. The Bank does not engage in foreign lending activities.

The following table sets forth information on the composition of the loan portfolio by type at December 31:


	2009						2008						2007
				Percentage						Percentage						Percentage
(In thousands)	Balance			of Loans			Balance			of Loans			Balance			of Loans
Commercial and industrial loans	$	68,476			36.9	%	$	58,783			38.4	%	$	53,437			42.3	%
Real estate loans secured by:
Residential real estate		22,140			11.9	%		19,007			12.4	%		**			**
Commercial real estate		94,947			51.2	%		75,200			49.2	%		72,933			57.7	%

Total real estate loans		117,087			63.1	%		94,207			61.6	%		72,933			57.7	%

		185,563			100.0	%		152,990			100.0	%		126,370			100.0	%

Unearned loan fees, net		(81	)					(29	)					(35	)
Allowance for loan losses		(2,380	)					(1,860	)					(1,665	)

	$	183,102					$	151,101					$	124,670


	2006						2005
				Percentage						Percentage
(In thousands)	Balance			of Loans			Balance			of Loans
Commercial and industrial loans	$	45,350			46.8	%	$	38,555			50.0	%
Real estate loans secured by:
Residential real estate		**			**			**			**
Commercial real estate		51,461			53.2	%		38,516			50.0	%

Total real estate loans		51,461			53.2	%		38,516			50.0	%

		96,811			100.0	%		77,071			100.0	%

Unearned loan fees, net		(116	)					(89	)
Allowance for loan losses		(1,614	)					(1,615	)

	$	95,081					$	75,367


**		delineation by type of real estate is not available.

The tables below set forth the maturity and re-pricing distributions of the loan receivable portfolio as of December 31, 2009.


	LOAN MATURITIES AS OF DECEMBER 31, 2009
	1 year				After
(In thousands)	or less		1-5 years		5 years		Total
Maturity of Loans Receivable:
Commercial and Industrial loans	$	41,619	$	12,442	$	14,415	$	68,476
Real estate loans		23,427		25,297		68,363		117,087

Total loans receivable	$	65,046	$	37,739	$	82,778	$	185,563


Fixed interest rates	$	9,268	$	31,787	$	2,868	$	43,923
Floating and adjustable interest rates		55,778		5,952		79,910		141,640

Total loans receivable	$	65,046	$	37,739	$	82,778	$	185,563


	LOAN RE- PRICING AS OF DECEMBER 31, 2009
	1 year				After
(In thousands)	or less		1-5 years		5 years		Total
Loans with:
Fixed interest rates	$	9,268	$	31,787	$	2,868	$	43,923
Floating and adjustable interest rates		66,920		73,483		1,237		141,640

Total loans receivable	$	76,188	$	105,270	$	4,105	$	185,563

The allowance for loan losses was $2.4 million, or 1.28% of loans, at December 31, 2009 as compared to $1.9 million, or 1.22% of loans, at December 31, 2008. At December 31, 2009, non-accrual loans totaled $2.7 million as compared to $5.8 million at December 31, 2008. The decrease is primarily attributable to the foreclosure of two real estate loans that were placed on non-accrual status in December 2008 in the amount of $2.5 million. Loans charged off in 2009 totaled $1.1 million as compared to $498 thousand during 2008. Recoveries on charged off loans were $5 thousand during 2009 and $45 thousand during 2008.

Of the balance in the allowance account, “specific” reserves were $0.9 million and “general” reserves were $1.5 million, or 0.8% of loans outstanding. Specific reserves are used to individually allocate an allowance for loans identified as impaired, or which otherwise exhibit adverse characteristics that suggest a heightened risk of non-collection. General reserves are those made with respect to unclassified loans in our portfolio based upon the methodology discussed below in order to maintain the allowance at a level which reflects our best estimate of the losses inherent in the portfolio with respect to such loans. Whether specific or general, amounts in the allowance for credit losses are available to absorb losses with respect to any loan. At December 31, 2008, the allowance for credit losses stood at $1.9 million, or 1.22% of outstanding gross loans. Of this amount, “specific” reserves were $1.06 million and “general” reserves were $0.8 million.

The allowance for loan losses is determined based upon various loss ratios applied to categories of loans except for loans rated substandard, doubtful or loss, which are evaluated separately and assigned specific reserve amounts, if necessary, based upon the evaluation. Loss ratios are applied to each category of loan to determine estimated loss amounts. Categories of loans are identified as commercial term or revolving loans, SBA loans, and closed and open ended real estate loans. Additional loss ratios are also applied for risks factors identified beyond individual loan risks, such as economic conditions, underwriting exceptions and loan concentrations based upon management’s estimations of loss exposure. Loss ratios are determined based upon the Bank’s loan loss history adjusted for estimated losses for the effect of current economic conditions (currently stressed), any industry concentration or identified weakness in an industry, and credit management and underwriting policies changes, if any.

At December 31, 2009, the range of the loss ratios used to determine estimated losses by loan category were: commercial loans — 0.78%; SBA loans — 6.5%; and mortgage loans — 0.20% to 1.27%. 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 unsecured credit. These additional loss estimates are not allocated to the separate loan categories.

The computed allowance for loan losses is tested through the use of the Bank’s loan risk rating process. Loans are assigned a risk rating at their origination based upon rating criteria consistent with regulatory definitions. The risk ratings are 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 (usually annually) of the underlying credit indicate 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. Estimated losses and reserves for loans rated as substandard, doubtful or loss are derived from the determination of the allowance for loan losses as discussed above as well as estimated losses resulting from risk factors identified beyond individual loan risks, such as economic conditions, underwriting exceptions and loan concentrations. Loss percentages used are generally based upon management’s best estimates considering losses incurred. Estimated “low” and “high” allowance for loan loss amounts are derived by accumulating the estimated losses using the “low” and “high” loss percentages for each risk rating and adding losses based upon separate loan evaluations and identified other risks. The actual allowance for loan losses is compared to this range to ascertain that it is situated within the range. At December 31, 2009, the “low” and “high” allowance determination resulted in a “low” allowance of 1.08% of loans and a “high” allowance of 1.33% of loans. The actual allowance for loan losses was 1.28% of loans.

During 2009, there were no significant changes in estimation methods or assumptions that affected the methodology for assessing the appropriateness of the allowance. 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. Management believes that the allowance for loan losses is adequate at December 31, 2009.

The activity in the allowance for credit losses for the years ended December 31 is shown in the following table:


(In thousands)	2009			2008			2007			2006			2005
Allowance for loan losses:
Beginning balance	$	1,860		$	1,665		$	1,614		$	1,615		$	1,154
Charge-offs- commercial and industrial loans		(963	)		(497	)		(72	)		(226	)		(15	)
Recoveries- commercial and industrial loans		5			45			78			—			116
Charge-offs- commercial real estate loan		(138	)		—			—			—			—

Net recoveries (charge-offs)		(1,096	)		(452	)		6			(226	)		101

Provision for loan losses		1,616			647			45			225			360

Ending balance	$	2,380		$	1,860		$	1,665		$	1,614		$	1,615


Net recoveries (charge-offs) to average loans		(0.65	%)		(0.33	%)		0.00	%		(0.26	)%		0.15	%

During 2009 loans to nine borrowers and related entities totaling $1.1 million were determined to be uncollectible and were charged-off. Of this amount $463 thousand represented the uninsured portion of SBA loans. The foreclosure of one commercial real estate loan resulted in a charge-off of $138 thousand in 2009; no real estate losses were incurred in 2008. During 2008 six commercial loans totaling $497 thousand, of which $319 thousand were the uninsured portion of SBA loans, were determined to be uncollectible and charged-off. Recoveries of $5 thousand (on one SBA loan) and $45 thousand (three SBA loans) previously charged-off were realized during 2009 and 2008, respectively.

Loan 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 expense of asset quality. At the same time, the extension of credit inevitably carries some risk of non-payment. Loans on which the accrual of interest has been discontinued amounted to $2.7 million and $5.8 million at December 31, 2009 and 2008, respectively. Interest that would have been accrued under the terms of these loans totaled $164 thousand and $340 thousand for the years ended December 31, 2009 and 2008, respectively. The Bank has no commitments to loan additional funds to the borrowers of impaired or non-accrual loans. The accrual of interest on loans is discontinued when a scheduled loan payment has become over ninety days past due.

Non-accrual loan activity is summarized as follows for the years ended December 31:


(In thousands)	2009		2008		2007		2006		2005

Balance at the beginning of the year	$	5,819	$	1,125	$	628	$	592	$	1,057
New loans placed on non-accrual		2,427		5,046		569		262
Less:
Loan restored to interest earning status		1,266		—		—		—		—
Paid-off: sold in foreclosure		576		—		—		—		—
Other real estate owned additions		2,462		—		—		—		—
Charge offs		1,101		236		72		226		15
Other including payments received		107		116						450

Balance at the end of the year	$	2,734	$	5,819	$	1,125	$	628	$	592

Information regarding loans classified as impaired follows:


(In thousands)	2009		2008
Loans classified as impaired with specific reserves	$	2,519	$	1,892
Loans classified as impaired with no specific reserves		215		3,927

Total loans classified as impaired	$	2,734	$	5,819

Allowance for loan losses on impaired loans	$	922	$	840
Average balance of impaired loans during year	$	4,559	$	2,142

The loans classified as impaired with specific reserves at December 31, 2009 include a non-accrual loan in the amount of $483 thousand which loan is secured by an assignment of life insurance proceeds. The specific reserve allocated to this loan is $368 thousand. Two loans outstanding to a borrower and entity controlled by the same borrower totaling $1.5 million have specific reserves established in the total amount of $175 thousand. These two loans are secured by residential real estate and corporate assets. Specific reserves in the amount of $379 thousand have been established for the remaining balance of classified loans with specific reserves consisting of six loans with an aggregate balances of $579 thousand. The above loans are in various stages of collection.

The loans classified as impaired without established specific reserves at December 31, 2009 include a loan in the amount of $122 thousand which is fully guaranteed by the SBA. The remaining balance of such loans is comprised of two loans in various stages of collection.

The Company acquired real property under a foreclosure process concluded in March 2009. The Company recognized a loss of approximately $138 thousand in connection with the foreclosure. The property is a commercial building with an existing tenant for a large part of the premises with a value of approximately $653 thousand. The Company acquired another commercial building by foreclosure in November 2009 with a value of approximately $1.8 million. This property is also leased.

A well secured real estate loan in the carrying amount of $1.3 million at December 31, 2009 was restructured through a forbearance agreement during the first quarter of 2009. The borrower has complied with the requirements under the forbearance agreement including payment requirements and the loan was placed back on an accrual basis in June 2009.

The Bank had no loans past due over ninety days and still accruing interest at December 31, 2009 or December 31, 2008 and no real estate owned at December 31, 2008. No interest was included in net income in respect of impaired loans after they were placed on non-accrual status. The accrual of interest on loans is discontinued when, in management’s opinion, the full collection of principal or interest is in doubt, or a scheduled loan payment has become over ninety days past due.

Management has not identified any other loans which it has serious doubts as to the ability of the borrower to comply with the present repayment terms.

The following table shows amounts of non-performing assets at December 31 for the past five years:


(In thousands)	2009			2008			2007			2006			2005
Nonaccrual loans:
Commercial and Industrial	$	2,734		$	2,218		$	1,125		$	628		$	592
Real estate — commercial		—			3,601			—			—			—
Accrual loans -past due 90 days and over		—			—			—			—			—

Total non-performing loans		2,734			5,819			1,125			628			592

Other real estate owned		2,462			—			—			—			—

Total non-performing assets	$	5,196		$	5,819		$	1,125		$	628		$	592


Allowance for loan losses to total non-performing loans		87.1	%		32.0	%		148.0	%		257.0	%		272.8	%
Non-performing loans to total loans		1.47	%		3.80	%		0.89	%		0.65	%		0.77	%
Non-performing assets to total assets		2.76	%		3.80	%		0.89	%		0.65	%		0.77	%

The following table shows the allocation of the allowance for credit losses at the dates indicated. The allocation of portions of the allowance to specific categories of loans is not intended to be indicative of future losses, and does not restrict the use of the allowance to absorb losses in any category of loans.

ALLOWANCE FOR LOAN LOSSES BY CATEGORY


	December 31, 2009					December 31, 2008
			% of Loans in					% of Loans in
	Allocated		each Category to			Allocated		each Category to
	Allowance		Total Loans			Allowance		Total Loans
(In thousands)	Amount		Receivable			Amount		Receivable
Commercial and industrial loans	$	1,898		36.7	%	$	1,538		38.4	%
Real estate loans		436		63.3	%		317		61.6	%
Unallocated to loan type		46		—			5		—

	$	2,380		100.0	%	$	1,860		100.0	%


	December 31, 2007					December 31, 2006
			% of Loans in					% of Loans in
	Allocated		each Category to			Allocated		each Category to
	Allowance		Total Loans			Allowance		Total Loans
(In thousands)	Amount		Receivable			Amount		Receivable
Commercial and industrial loans	$	1,284		42.3	%	$	642		46.8	%
Real estate loans		273		57.7	%		972		53.2	%
Unallocated to loan type		108		—			—		—

	$	1,665		100.0	%	$	1,614		100.0	%


	December 31, 2005
			% of Loans in
	Allocated		each Category to
	Allowance		Total Loans
(In thousands)	Amount		Receivable
Commercial and industrial loans	$	784		50.0	%
Real estate loans		831		50,0	%
Unallocated to loan type		—		—

	$	1,615		100.0	%

Investments

The investment securities portfolio was reduced to zero at December 31, 2009, a decrease of $3.1 million from the amount at December 31, 2008 as the sole security in the portfolio was redeemed in 2009. Funds obtained from the repayment were invested in interest bearing deposits during 2009 as the Company increased the amount of immediately available funds to support its loan growth.

All investments securities are classified as “available for sale” and are reflected in the statement of financial condition at their fair value. The carrying value of the securities includes net unrealized gains of $77 thousand at December 31, 2008. The net unrealized gains and losses are reflected in stockholders equity, net of deferred taxes. Unrealized gains and losses are the result of interest rate levels differing from those existing at the time of the acquisition of the securities. These unrealized gains and losses are considered temporary as they reflect fair values on December 31, 2008 and are subject to change daily as interest rates fluctuate. The Company held the securities to the maturity of the securities in 2009.

The table below presents the composition and carrying amounts of securities in the investment securities portfolio, all of which are classified as available-for-sale and thus recorded at fair value, and investments in restricted stock, recorded at cost, as of December 31, 2009, 2008 and 2007.


(In thousands)	2009		2008		2007
Investment securities:
U.S. Treasuries	$	—	$	3,086	$	9,168
Restricted stock:
Federal Reserve Bank stock		465		405		405
Corporate equities		62		62		62

Total securities	$	527	$	3,553	$	9,635

The restricted stocks do not have maturity dates and are carried at cost on the Company’s books. The Company received a semi-annual cash dividend on the Federal Reserve Bank stock that it owns at a 6% annual rate. Earnings on the other restricted stock are immaterial.

At December 31, 2009 and 2008, there were no issuers, other than the U.S. Government, whose securities owned by the Company have a book or market value exceeding ten percent of the Company’s stockholders’ equity.

Deposits and Liquidity Management

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

The Company’s deposits consist of demand deposits, NOW accounts, money market accounts, savings accounts and certificates of deposit. These accounts provide the Company with a relatively stable source of funds. We generally target larger deposit relationships by offering competitive interest rates on certificates of deposit of $75,000 or more in our local markets. We supplement our local deposits with out-of-area deposits comprised of funds obtained through the use of deposit listing services (national market certificates of deposit), deposits obtained through the use of brokers and through the Certificates of Deposit Account Registry Service (CDARS) program. As a result, a substantial portion of our deposits, 37.8% at December 31, 2009 and 48.0% at December 31, 2008, are comprised of certificate of deposit accounts of $100 thousand or more, while total certificates of deposit represent 77.9% of deposits at December 31, 2009. The Company’s reliance on certificates of deposit, including the use of larger denomination certificates of deposit and brokered deposits facilitates funding the rapid growth in the loan portfolio. The Bank has relied on certificates of deposit as a primary funding source, and has used larger certificates of deposits as a funding source, since its inception. While sometimes requiring higher interest rates, such funds carry lower acquisition costs (marketing, overhead costs) and can be obtained when required at the maturity dates desired. Substantially all of the deposit accounts over $100 thousand are fully insured by the FDIC through differing ownership and trustee arrangements and the temporary increase in insured deposit limit to $250,000. All of the brokered deposits and national market deposits are fully insured by the FDIC. This insurance and the strong capital position of the Bank reduce the likelihood of large deposit withdrawals for reasons other than interest rate competition. Interest rates on these deposits can be higher than other deposits products. There is, however, a risk that some deposits would be lost if rates were to increase and the Bank elected not to remain competitive with its own deposit rates. Under those conditions, the Bank believes that it is positioned to use other sources of funds, such as borrowing on its unsecured credit facilities with other banks or the sale of loans.

At December 31, 2009, deposits totaled $178.6 million as compared to $145.2 million at December 31, 2008. Most of the $33.4 million increase is attributable to the increase in certificates of deposit during 2009. There were $44.8 million and $50.1 million of brokered certificates of deposit at December 31, 2009 and 2008, respectively. Included in these brokered deposits are $13.9 million of certificates of deposits received in exchange for the placement of the Bank’s customers’ deposit funds with other financial institutions under the CDARS program. Included in deposits are deposits of officers and directors (and their affiliated entities), including CDARS program deposits, of $14.4 million.

At December 31, 2009, the Company’s short term liquid assets of cash and cash equivalents in the amount of $10.5 million represented 5.2% of total Company assets. Continued strong growth in deposits will be required to fund loan growth. Accordingly, the Company intends to maintain a competitive posture in its deposit interest rate offerings. While adequate liquidity is imperative, excess liquidity has the effect of a lower interest margin, as funds not invested in loans are placed in short-term investments that earn significantly lower yields.

Interest bearing deposits are summarized below as of December 31:


(In thousands)	2009		2008		2007
NOW accounts	$	309	$	1,247	$	2,440
Money Market accounts		7,841		13,049		16,268
Savings accounts		10,379		148		36
Certificates of deposit accounts:
Less than $100,000		71,593		37,539		11,383
$100,000 or more		67,499		69,659		74,035

	$	157,621	$	121,642	$	104,162

The time deposit accounts mature and/or re-price as follows (in thousands): within one year $94,725; one through three years- $37,587; three years and beyond- $6,780.

The table below shows the maturities and amounts of time certificates in amounts of $100,000 or more:


	December 31,
(In thousands)	2009		2008
Three months or less	$	16,874	$	12,084
Over three but within twelve months		36,912		44,437
Over twelve months through three years		11,139		12,861
Over three years		2,574		277

Total	$	67,499	$	69,659

The table below shows the source of the Company’s certificate of deposits (CDs) as well as the amount equal to or greater than $100,000 at December 31, 2009:


	CDs with balances		CDs with balances
	of less than		of $100,000 or
Source	$100,000		greater		Total
(thousands)
Local markets	$	14,521	$	51,341	$	65,862
National market		27,914		548		28,462
CDARS program:
Customers’ funds		2,636		11,231		13,867
Proprietary funding		9,288		893		10,181
Other brokered funds		17,234		3,486		20,720

Total	$	71,593	$	67,499	$	139,092

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

The Bank has available unsecured credit facilities for short-term liquidity needs from financial institutions of $8,500,000 at December 31, 2009 and 2008. There were no borrowings outstanding under these credit arrangements at December 31, 2009 and 2008.

The Company believes its levels of liquidity are adequate to conduct the business of the Company and Bank.

Borrowed funds

Prior to 2009, the Bank entered into sales of securities under agreements to repurchase the same securities, which matured the next business day, with several commercial customers. This program was discontinued in December 2008 because of the low interest rate environment significantly reduced the program’s value to the Bank and its customers. Furthermore, the expansion of FDIC insurance to all amounts in non-interest bearing accounts replaced the customers’ need for collateral to support their funds in the Bank.

Information concerning securities sold under agreements to repurchase at and during the respective year ended December 31 follows:


	2009		2008			2007
Total outstanding at year-end	$	—	$	—		$	4,305,936
Average rate at year end		—		—			2.40	%
Average balance during the year	$	—	$	2,650,978		$	3,494,779
Average interest rate during the year		—		1.12	%		2.62	%
Maximum amount at any month end	$	—	$	5,494,595		$	9,492,000

Stockholders’ Equity

Total stockholders’ equity was $20.9 million at December 31, 2009 representing an increase of $631 thousand from December 31, 2008. The increase from December 31, 2008 was attributable to the net income of the Company of $678 thousand less a reduction of other comprehensive income of $47 thousand.

At December 31, 2009, the Company and the Bank continued to exceed all regulatory capital requirements to be considered “well capitalized” under federal regulations. The Company believes its level capital is adequate to conduct the business of the Company and Bank.

RESULTS OF OPERATIONS

Net income for the year ended December 31, 2009 was $678 thousand ($0.37 basic and diluted earnings per share), an increase of $383 thousand, or 129.9%, from the net income of $295 thousand ($0.16 basic earnings and diluted earnings per share) during 2008. Net income increased in 2009 as compared to 2008 primarily because of the increase in net interest income of $1.7 million and the increase in non-interest income of $151 thousand. These increases were offset by increased provisions for loan losses of $969 thousand and increased non-interest expenses of $287 thousand (all amounts are before tax effects).

Return on equity, return on assets and ratio of equity to assets are as follows:

RETURN ON AVERAGE ASSETS AND AVERAGE EQUITY
Year Ended December 31,


	2009			2008			2007

Return on Average Equity		4.54	%		1.92	%		7.47	%

Return on Average Earning Assets		0.51	%		0.25	%		1.07	%

Ratio of Average Equity to Average Assets		11.03	%		12.86	%		13.93	%

Net Interest Income and Net Interest Margin

Net interest income is the difference between income on assets and the cost of funds supporting those assets. Earning assets are composed primarily of loans and investments; the expense associated with interest bearing deposits and customer repurchase agreements and other borrowings is the cost of funds. Non-interest bearing deposits and capital are other components representing funding sources. Changes in the volume and mix of assets and funding sources, along with the changes in yields earned and rates paid, determine changes in net interest income.

Total interest income increased by $1.3 million or 12.0% to $11.9 million for the year ended December 31, 2009 as compared to 2008. This increase was primarily attributable to the growth in Company’s loan portfolio. The increase attributable to growth was somewhat offset by the reduction in yield on earning assets. Average interest earning assets increased by $28.5 million (18.4%) during 2009 as compared to 2008; however, the yield on earning assets decreased to 6.51% in 2009 from 6.86% in 2008.

Interest expense decreased by $0.5 million or 9.8% to $4.6 million for the year ended December 31, 2009 as compared $5.1 million in 2008. This decrease was attributable to the decrease in the cost of deposits during 2009 to 3.19% from 4.26% in 2008. This decrease resulted primarily from the re-pricing or replacement of higher rate certificate of deposits as they matured during 2009. The effect of the reduction in the cost of deposits was partially offset by the increase in average interest bearing liabilities of $24.8 million (20.9%).

Net interest income was $7.3 million in 2009, a $1.7 million increase from the $5.6 million net interest income in 2008, a 31.9% increase. The increase in net interest income results primarily from the growth in earning assets and the reduction in interest costs resulting from the re-pricing of the interest bearing liabilities during 2009.

The following table provides information for the designated periods with respect to average balances, income and expense and annualized yields and costs associated with various categories of interest earning assets and interest bearing liabilities for the past three years. Non-accrual loans have been included in the preparation of the table. The table includes a measurement of spread and margin. Interest spread is the mathematical difference between the average interest yield on interest earning assets and average interest paid on interest bearing liabilities. Interest margin is the net interest yield on interest earning assets and is derived by dividing net interest income by average interest earning assets.

AVERAGE BALANCES, RATES AND INTEREST INCOME AND EXPENSE
Years Ended


	2009								2008
	Average					Yield/			Average					Yield/
(In thousands)	Balance			Interest		Rate			Balance			Interest		Rate
Assets:
Interest Earning Assets:
Loans receivable	$	169,888		$	11,791		6,94	%	$	138,166		$	10,130		7.31	%
Investment securities		2,391			108		4.52	%		7,718			341		4.41	%
Interest bearing deposits		10,127			26		0.26	%		306			8		2.61	%
Federal funds sold		949			3		0.32	%		8,654			171		1.97	%


Total Interest Earning Assets		183,355			11,928		6.51	%		154,844			10,650		6.86	%


Less allowance for loan losses		(2,146	)							(1,738	)
Non-Interest Earning Assets		5,830								5,971

Total Assets	$	187,039							$	159,077


Liabilities and Stockholders’ Equity:
Interest -Bearing Liabilities:
Interest bearing demand deposits	$	1,600		$	1		0.06	%	$	1,373		$	3		0.22	%
Money market deposit accounts		11,942			63		0.53	%		17,852			321		1.79	%
Savings accounts		3,942			71		1.80	%		91			—		—
Certificates of deposit		126,451			4,452		3.52	%		97,124			4,729		4.86	%
Securities sold under agreements to repurchase		—			—					2,651			302		1.13	%

Total Interest Bearing Liabilities		143,935			4,587		3.19	%		119,091			5,083		4.26	%


Non-Interest Bearing Liabilities:
Demand deposits		21,413								18,608
Other		1,058								917

Total Liabilities		166,406								138,616

Stockholders’ Equity		20,633								20,461

Total Liabilities and Equity	$	187,039							$	159,077

Net Interest Income				$	7,341							$	5,567


Net Interest Spread							3.32	%							2.60	%

Net Interest Margin							4.00	%							3.59	%

Yields on securities are calculated based on amortized cost.

AVERAGE BALANCES, RATES AND INTEREST INCOME AND EXPENSE
Year Ended


	2007
	Average					Yield/
(In thousands)	Balance			Interest		Rate
Assets:
Interest Earning Assets:
Loans receivable	$	111,385		$	9,680		8.69	%
Investment securities		10,750			460		4.28	%
Interest bearing deposits		—			—		—
Federal funds sold		13,810			683		4.95	%


Total Interest Earning Assets		135,945			10,823		7.96	%


Less allowance for loan losses		(1,705	)
Non-Interest Earning Assets		5,236

Total Assets	$	139,476


Liabilities and Stockholders’ Equity:
Interest -Bearing Liabilities:
Interest bearing demand deposits	$	2,333		$	32		1.37	%
Money market deposit accounts		18,466			715		3.87	%
Savings accounts		141			1		0.71	%
Certificates of deposit		75,651			4,027		5.32	%
Securities sold under agreements to repurchase		3,495			92		2.63	%

Total Interest Bearing Liabilities		100,086			4,867		4.86	%


Non-Interest Bearing Liabilities:
Demand deposits		18,884
Other		1,075

Total Liabilities		120,045

Stockholders’ Equity		19,431

Total Liabilities and Equity	$	139,476

Net Interest Income				$	5,956


Net Interest Spread							3.10	%

Net Interest Margin							4.38	%

Yields on securities are calculated based on amortized cost.

The increase in net interest margin and net interest spread in 2009 as compared to 2008 primarily results from the Bank’s reduction of cost of deposits as the result of re-pricing or replacing higher rate certificates of deposit as they matured during 2009.

Rate/Volume Analysis of Net Interest Income

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

RATE/VOLUME ANALYSIS


	2009 vs. 2008									2008 vs. 2007
	Increase (Decrease)									Increase (Decrease)
In thousands)	Volume			Rate			Total			Volume			Rate			Total
Interest-Earning Assets:
Federal funds sold	$	(152	)	$	(16	)	$	(168	)	$	(255	)	$	(257	)	$	(512	)
Interest bearing deposits		18			—			18			8			—			8
Investment portfolio		(258	)		24			(234	)		(130	)		12			(118	)
Loans receivable		2,325			(664	)		1,661			2,313			(1,802	)		511

Net Change in Interest Income		1,933			(656	)		1,277			1,936			(2,047	)		(111	)


Interest Bearing Liabilities:
Interest bearing deposits		1,193			(1,660	)		(467	)		981			(703	)		278
Other borrowed funds		—			—			—			—			—			—
Securities sold under agreements to repurchase		(30	)		—			(30	)		(22	)		(40	)		(62	)

Net Change in Interest Expense		1,163			(1,660	)		(497	)		959			(743	)		216


Change in Net Interest Income	$	770		$	1,004		$	1,774		$	977		$	(558	)	$	(327	)

Provision for Loan Losses

The provision for loan losses represents the expense recognized to fund the allowance for loan losses. The loan loss expense of $1.6 million for the year ended December 31, 2009 reflected an increase of $969 thousand from the provision of $647 thousand for the year ended December 31, 2008. This increase is the result of specific valuation reserves on loans experiencing repayment problems as well as increases in general reserves in recognition of adverse economic conditions that are effecting the Company’s borrowing customers.

Additionally, the Bank has established a reserve for unfunded commitments that is recorded by a provision charged to other expenses. The balance of this reserve was $54 thousand and $48 thousand at December 31, 2009 and 2008, respectively. The reserve 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.

Non-interest Income

Non-interest income principally consists of gains from the sale of the guaranteed portion of Small Business Administration loans, gain on sale of securities, net income from operation of other real estate owned properties (OREO) and deposit account services charges.

For the years ended December 31, 2009 and 2008, gains from the sales of SBA loans amounted to $257 thousand and $241 thousand, respectively. The guaranteed portion of most SBA loans is usually sold to others resulting in gains on the sales. The volume of loan sales and resultant gains will vary depending of the volume of originations of loans with SBA guarantees and the pricing of the sales of the loans. Gain on the sale of securities amounted to $40 thousand in 2008; none in 2009.

When possible, the Company leases OREO to others while awaiting final resolution of the properties. During 2009, rental income less expenses totaled $19 thousand. There was no OREO in 2008.

For the year ended December 31, 2009, deposit account services charges amounted to $443 thousand as compared to $287 thousand for the year ended December 31, 2008.

Non-interest Expense

Non-interest expense totaled $5.3 million for the year ended December 31, 2009 as compared to $5.0 million in 2008, a $287 thousand or 5.7% increase. This increase is primarily attributable to the $264 thousand increase in the cost of deposit insurance. The FDIC raised assessment rates in 2009 and also charged banks a special assessment. The Bank’s 2009 special assessment was $86 thousand. In each period, salary and benefit expense was the largest component: $2.9 million in each of 2009 and 2008. The Company continues to control its expenses even during periods of asset growth.

Income Taxes

The Company uses the liability method of accounting for income taxes as required by ASC 825-10-50, Accounting for Income Taxes. Under the liability method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the enacted rates that will be in effect when these differences reverse. Income tax expense for 2009 was $452 thousand, 39.9% of pretax income and $166 thousand, 36.1% of pretax income in 2008.

Off-Balance Sheet Arrangements

With the exception of the Bank’s obligations in connection with its irrevocable letters of credit and loan commitments, the Bank has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Bank’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, that is material to investors. For additional information on off-balance sheet arrangements, please see the notes to the Consolidated Financial Statements.

Interest Rate Risk Management

Banks and other financial institutions are dependent upon net interest income, the difference between interest earned on interest earning assets and interest paid on interest bearing liabilities. Changes in interest rates inevitably have an impact on interest income. GAP, a measure of the difference in volume between interest bearing assets and interest bearing liabilities, is a means of monitoring the sensitivity of a financial institution to changes in interest rates. The chart below provides an indicator of the rate sensitivity of the Company. A positive GAP indicates the degree to which the volume of repriceable assets exceeds repriceable liabilities in particular time periods. The Company has a negative GAP, a liability sensitive position, during for a one year period which would generally indicate decreased net interest income in a rising rate environment and increased net interest income in a declining rate environment. However, this measurement of interest rate risk sensitivity represents a static position as of a single day and is not necessarily indicative of the interest rate risk position at any other point in time, does not take into account the sensitivity of yields and costs of specific assets and liabilities to changes in market rates, and does not take into account the specific timing of when changes to a specific asset or liability will occur. Further this measurement does not take into account the effect of competitive factors on interest rates, and the effect of changes in interest rates on the capacity of customers to meet their obligations. The Company will be addressing the current negative GAP level for the purpose of reducing its exposure to interest rate changes, although there can be no assurance that the Company’s efforts will be successful in reducing its exposure to interest rate changes, or that it will correctly predict the timing and magnitude of changes in interest rate.

RATE SENSITIVITY ANALYSIS (Static GAP)
December 31, 2009


	0-3		4-12			1-3			>3<5
*(In thousands)*	Months		Months			Years			Years		5 YRS +		Total
Interest earning assets
Interest bearing deposits	$	8,228	$	—		$	—		$	—	$	—	$	8,228
Federal funds sold		154		—			—			—		—		154
Loans*		60,029		14,270			41,380			62,964		4,105		182,748

Total		68,411		14,270			41,380			62,964		4,105		191,130


Interest bearing liabilities
Savings/Money
Market/NOW		18,529		—			—			—		—		18,529
Certificates of deposit		26,607		68,118			37,587			6,780		—		139,092

Total		45,136		68,118			37,587			6,780		—		157,621

GAP:
Period	$	23,275		(53,848	)		3,793			56,184		4,105	$	33,509

Cumulative			$	(30,573	)	$	(26,780	)	$	29,404	$	33,509


*		Loan amounts above exclude $2.7 million of loans on non-interest accrual.

Capital Resources and Adequacy

The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, and changing competitive conditions and economic forces. The adequacy of the Company’s capital is reviewed by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses. The ability of the Company to grow is dependent on the availability of capital with which to meet regulatory capital requirements, discussed below. To the extent the Company is successful it may need to acquire additional capital through the sale of additional common stock, other qualifying equity instruments, such as trust preferred securities, or subordinated debt. There can be no assurance that additional capital will be available to the Company on a timely basis or on attractive terms.

Under recent 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.

The capital positions of the Company and the Bank continue to meet and exceed regulatory requirements. Details of these requirements are shown in the notes to the Consolidated Financial Statements.

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

Market for Common Stock and Dividends

The Company’s Common Stock is listed for trading on the NASDAQ Capital Market under the symbol “CFMB.” The following table sets forth the high and low sales prices for the Common Stock during each calendar quarter of 2009 and 2008. These quotations do not necessarily reflect the intrinsic or market values of the Common Stock. As of December 31, 2009, there were 1,820,548 shares of Common Stock outstanding, held by approximately 300 shareholders of record.


	2009				2008
	High		Low		High		Low
First Quarter	$	5.60		4.05	$	11.30	$	9.90
Second Quarter		6.25		4.50		10.75		8.32
Third Quarter		6.75		5.26		8.82		7.09
Fourth Quarter		6.25		5.08		8.25		5.25

The Company has not paid dividends through December 31, 2009. The payment of dividends by the Company may depend largely upon the ability of the Bank, its sole operating business, to declare and pay dividends to the Company. Regulations of the Federal Reserve Board and Maryland law place limits on the amount of dividends the Bank may pay to the Company without prior approval. Prior regulatory approval is required to pay dividends which exceed the Bank’s net profits for the current year plus its retained net profits for the preceding two calendar years, less required transfers to surplus. Additionally, without prior approval, the Bank may pay dividends only out of its undivided profits. Even if the Bank and the Company have earnings in an amount sufficient to pay dividends, the Board of Directors may determine to retain earnings for the purpose of funding the growth of the Company and the Bank.

Financial Statements

The audited financial statements for the Company as of December 31, 2009 and 2008 and for each of the years then ended are included herewith.

TGM Group LLC letterhead

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors
CommerceFirst Bancorp, Inc. and Subsidiary
Annapolis, Maryland

We have audited the accompanying consolidated statements of financial condition of CommerceFirst Bancorp, Inc. and subsidiary as of December 31, 2009 and 2008, and the related consolidated statement of operations, comprehensive income, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2009. CommerceFirst Bancorp, Inc. and subsidiary’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of CommerceFirst Bancorp, Inc. and subsidiary as of December 31, 2009 and 2008, and the consolidated results of their operations and their consolidated cash flows for each of the years in the two-year period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.

/s/ TGM Group LLC

Salisbury, Maryland
March 5, 2010

CommerceFirst Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition

December 31, 2009 and December 31, 2008


	December 31,		December 31,
	2009		2008
ASSETS

Cash and due from banks	$	2,105,545	$	3,290,691
Interest bearing deposits		8,228,452		—
Federal funds sold		154,310		5,673,666

Cash and cash equivalents		10,488,307		8,964,357
Investment securities — available-for-sale, at fair value		—		3,085,770
Investments in restricted stocks, at cost		527,000		467,000
Loans receivable, net of allowance for loan losses of $2,380,000 at December 31, 2009 and $1,860,000 at December 31, 2008		183,101,808		151,101,169
Premises and equipment, net		739,479		1,000,967
Accrued interest receivable		680,549		639,538
Deferred income taxes		919,299		667,993
Other real estate owned		2,461,957		—
Other assets		1,452,938		642,280

Total Assets	$	200,371,337	$	166,569,074


LIABILITIES

Non-interest bearing deposits	$	21,024,369	$	23,598,842
Interest bearing deposits		157,621,122		121,642,218

Total deposits		178,645,491		145,241,060

Accrued interest payable		183,958		265,105
Other liabilities		599,914		752,352

Total Liabilities		179,429,363		146,258,517


STOCKHOLDERS’ EQUITY
Common stock — $.01 par value; authorized 4,000,000 shares. Issued and outstanding: 1,820,548 shares at December 31, 2009 and at December 31, 2008		18,205		18,205
Additional paid-in capital		17,852,931		17,852,931
Retained earnings		3,070,838		2,392,882
Accumulated other comprehensive income:
Net unrealized gain on securities available-for-sale		—		46,539

Total Stockholders’ Equity		20,941,974		20,310,557

Total Liabilities and Stockholders’ Equity	$	200,371,337	$	166,569,074

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

CommerceFirst Bancorp, Inc. and Subsidiary

Consolidated Statements of Operations

For the Years Ended December 31, 2009 and 2008


	December 31,		December 31,
	2009		2008
Interest income:
Interest and fees on loans	$	11,791,357	$	10,129,748
U.S. Treasury securities		82,093		316,944
Investment in stocks		26,350		25,093
Interest bearing deposits		25,723		7,960
Federal funds sold		2,618		171,009

Total interest income		11,928,141		10,650,754

Interest expense:
Deposits		4,586,705		5,053,614
Repurchase agreements		—		29,852

Total interest expense		4,586,705		5,083,466


Net interest income		7,341,436		5,567,288

Provision for loan losses		1,616,167		647,105

Net interest income after provision for loan losses		5,725,269		4,920,183


Non-interest income:
Gain on sale of SBA loans		257,233		241,220
Gain on sale of securities		—		40,431
Service charges and other income		462,452		287,417

Total non-interest income		719,685		569,068


Non-interest expenses:
Compensation and benefits		2,903,142		2,865,510
Legal and professional		249,752		298,167
Rent and occupancy		557,898		536,940
Marketing and business development		58,515		121,660
FDIC insurance		365,996		101,550
Data processing		138,522		132,206
Support services		184,725		179,586
Communications		121,316		112,437
Depreciation and amortization		279,514		294,009
Other		455,959		385,874

Total non-interest expenses		5,315,339		5,027,939

Income before income taxes		1,129,615		461,312
Income tax expense		451,659		166,397

Net income	$	677,956	$	294,915

Basic earnings per share	$	0.37	$	0.16

Diluted earnings per share	$	0.37	$	0.16

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

CommerceFirst Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income

For the Years Ended December 31, 2009 and 2008


	December 31,			December 31,
	2009			2008
Net income	$	677,956		$	294,915

Reclassification adjustment for gain included in net income, net of tax		—			(28,679	)

Change in unrealized gains and (losses) on securities available-for-sale, net of tax		(46,539	)		(12,040	)


Other comprehensive income (loss)		(46,539	)		(40,719	)


Total comprehensive income	$	631,417		$	254,196

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

CommerceFirst Bancorp, Inc. and Subsidiary

Consolidated Statements of Stockholders’ Equity

For the Years Ended December 31, 2009 and 2008


							Accumulated
			Additional				Other
	Common		Paid-in		Retained		Comprehensive
	Stock		Capital		Earnings		Income (Loss)			Total

Balance December 31, 2007	$	18,205	$	17,852,931	$	2,097,967	$	87,258		$	20,056,361

Net income in 2008						294,915					294,915

Net change in unrealized gains and (losses) on securities available-for-sale								(40,719	)		(40,719	)


Balance December 31, 2008		18,205		17,852,931		2,392,882		46,539			20,310,557


Net income in 2009						677,956					677,956

Net change in unrealized gains and (losses) on securities available-for-sale								(46,539	)		(46,539	)


Balance December 31, 2009	$	18,205	$	17,852,931	$	3,070,838	$	—		$	20,941,974

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

CommerceFirst Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2009 and 2008


	December 31,			December 31,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	677,956		$	294,915
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		279,514			294,009
Gain on sale of investment security		—			(40,431	)
Gain on sales of SBA loans		(257,233	)		(241,220	)
Provision for loan losses		1,616,167			647,105
Provision for losses on unfunded commitments		6,000			6,000
Deferred income taxes		(220,991	)		(91,524	)
Change in assets and liabilities:
(Increase) decrease in accrued interest receivable		(41,011	)		103,228
Increase in other assets		(810,658	)		(253,650	)
(Decrease) increase in accrued interest payable		(81,147	)		63,852
Decrease in other liabilities		(158,438	)		(92,835	)
Other		8,916			17,680

Net cash provided by operating activities		1,019,075			707,129


CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of restricted stock		(60,000	)		—
Maturities of investment securities		3,000,000			3,000,000
Proceeds from sale of investment security		—			3,039,375
Proceeds from sales of SBA loans		4,821,753			4,129,121
Increase in loans, net		(38,181,326	)		(30,966,385	)
Increase in other real estate owned		(2,461,957	)		—
Purchase of premises and equipment		(18,026	)		(197,049	)

Net cash used by investing activities		(32,899,556	)		(20,994,938	)


CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) increase in non-interest bearing deposits, net		(2,574,473	)		4,352,955
Net increase in other deposits		35,978,904			17,480,259
Net decrease in securities sold under agreements to repurchase		—			(4,305,936	)

Net cash provided by financing activities		33,404,431			17,527,278


Net increase (decrease) in cash and cash equivalents		1,523,950			(2,760,531	)
Cash and cash equivalents at beginning of period		8,964,357			11,724,888

Cash and cash equivalents at end of period	$	10,488,307		$	8,964,357


SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid	$	4,667,852		$	5,019,614

Total decrease in unrealized gains on available for sale securities	$	(76,854	)	$	(65,306	)

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. The Company and its Significant Accounting Policies

CommerceFirst Bancorp, Inc. (the “Company”), through its wholly owned subsidiary, CommerceFirst Bank (the “Bank”) provides financial services to individuals and corporate customers located primarily in Anne Arundel County, Howard County and Prince George’s County, Maryland, and is subject to competition from other financial institutions. The Company and the Bank are also subject to the regulations of certain Federal and State of Maryland agencies and undergoes periodic examinations by those regulatory authorities. The accounting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry.

Principles of Consolidation

The consolidated financial statements include the accounts of CommerceFirst Bancorp, Inc. and its subsidiary, CommerceFirst Bank. Intercompany balances and transactions have been eliminated. The Parent Only financial statements (see Note 15) of the Company account for the subsidiary using the equity method of accounting.

Use of Estimates

The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses. See below for a discussion of the determination of that estimate.

Investment Securities

Available-for-sale securities consist of bonds and notes not classified as trading securities or as held-to-maturity securities. These securities are reported at their fair value with the unrealized holding gains and losses, net of tax, reported as a net amount in a separate component of stockholders’ equity until realized. Gains and losses on the sale of available-for-sale securities are determined using the specific identification method. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. The Company has no trading securities as of December 31, 2009 and 2008.

Securities for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. A charge to operations would occur if the fair value of the securities declines below cost and the Company’s intention or ability to hold the securities to maturity changes. The Company has no investment securities classified as held to maturity as of December 31, 2009 and 2008.

Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary would result in write-downs of the individual securities to their fair value. In estimating other-then-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in the fair value. The related charge-offs would be recorded as realized losses in the income statement as to credit related amounts and accumulated other comprehensive income as to non-credit related amounts.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. The Company and its Significant Accounting Policies (continued)

Restricted Securities

As a member of the Federal Reserve Bank of Richmond (Federal Reserve), the Company is required to acquire and hold stock in this entity. Ownership of this stock is restricted to members and can only be sold to and acquired from the respective entity at par. The Company also owns stock in Atlantic Central Bankers Bank (ACBB) and Maryland Financial Bank (MFB), banks that generally offers product and services only to other banks. Ownership of the ACBB shares is restricted to banks, and there is no active market for the ACBB or the MFB shares. As there is no readily determinable fair value for these securities, they are carried at cost.

Loans and Allowance for Loan Losses

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for loan losses and any unamortized deferred fees, costs, premiums and discounts. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan.

The accrual of interest on loans is discontinued when, in management’s opinion, the full collection of principal or interest is in doubt or a scheduled loan payment has become over ninety days past due. Interest received on non-accrual loans is applied against the loan principal amount.

The Company determines and recognizes impairment of loans in accordance with the provisions of Section 310- Receivables of The FASB Accounting Standards Codification (ASC) (formerly, Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan as amended by Statement 118, Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures). A loan is determined to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. A loan is not considered impaired during the period of delay in payment if the Company expects to collect all amounts due, including past-due interest. An impaired loan is measured at the present value of its expected future cash flows discounted at the loan’s effective interest rate or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. ASC Section 310 is generally applicable to all loans except large groups of smaller balance homogeneous loans that are evaluated collectively for impairment unless such loans are subject to a restructuring agreement. Interest payments received are applied to the loan principal balance unless the collection of all amounts due, both principal and interest, on the loan is considered probable, in which case the interest payments would be recognized as interest income.

The allowance for loan losses is increased by charges to expense and decreased by charge-offs (net of recoveries). Management’s periodic determination and evaluation of the adequacy of the allowance assesses various factors including inherent losses in all significant loans; known deterioration in concentrations of credit, certain classes of loans or collateral; historical loss experiences; results of independent reviews of loan quality and the allowance for loan losses; trends in portfolio quality, maturity and composition; volumes and trends in delinquencies and non-accrual loans, risk management policies and practices; lending policies and procedures; economic conditions and downturns in specific local industries; loss history; and the experience and quality of lending management and staff. Estimated losses in the portfolio are determined by applying loss ratios to loan categories, other than impaired loans and loans considered substandard or doubtful, which are evaluated separately to determine loss estimates.

The determination of the allowance for loan losses involves the use of various subjective estimates by management and may result in over or under estimations of the amount of inherent losses in the loan portfolio.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. The Company and its Significant Accounting Policies (continued)

Unearned Discounts and Servicing Rights of SBA Loans Sold

The Company generally sells the SBA-guaranteed portions of its SBA loans in the secondary market. In connection with such sales, the Company receives a cash premium related to the guaranteed portion being sold. A portion of the cash premium received from the sale of the guaranteed portion of the SBA loan is deferred as a discount on retained premiums based on the relative fair value of the guaranteed and unguaranteed portions to the total loan and the remainder is recognized as a gain at the time of the sale. The resulting unearned discount is recognized in interest income using an adjustable interest method.

SBA loan servicing rights are initially valued by allocating the total cost between the loan and the servicing right based on their relative fair values. Since sales of SBA loans tend to occur in private transactions and the precise terms and conditions of the sales are typically not readily available, there is a limited market to refer to in determining the fair value of these servicing rights. As such, the Company relies primarily on a discounted cash flow model to estimate the fair value of its servicing rights. This model calculates estimated fair value of these servicing rights by utilizing certain key characteristics such as interest rates, type of product (fixed vs. variable), age (new, seasoned, moderate), and other factors. Management believes that the assumptions used in the model are comparable to those used by brokers and other service providers. The Company also compares its estimates of fair value and assumptions to recent market activity and against its own experience. The resulting servicing rights are recognized in other non-interest expense using an adjustable interest method.

Other Real Estate Owned (OREO)

OREO is comprised of real estate properties acquired in partial or total satisfaction of problem loans. The properties are recorded at the lower of cost or fair value (appraised value) at the date acquired. Losses occurring at the time of acquisition of such properties are charged against the allowance for loan losses. Subsequent write-downs that may be required are included in non-interest expenses. Gains and losses realized from the sale of OREO as well as any net income or loss from the operations of the properties are included in non-interest income or non-interest expenses, as appropriate. OREO is comprised of two commercial properties at December 31, 2009 both of which are leased to third parties under short term leases. Net income from the operations of the properties was $18,949 in 2009. There was no OREO at December 31, 2008 and no financing of OREO during 2009 or 2008.

Reserve for Unfunded Commitments

The reserve for unfunded commitments is established through a provision for unfunded commitments charged to other expenses. The reserve is calculated by utilizing the same methodology and factors as the allowance for loan losses. The reserve, based on evaluations of the collectability of loans and prior loan loss experience, 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.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. The provision for depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated over the lesser of the terms of the leases or their estimated useful lives. Expenditures for improvements that extend the life of an asset are capitalized and depreciated over the asset’s remaining useful life. Any gains or losses realized on the disposition of premises and equipment are reflected in the consolidated statements of operations. Expenditures for repairs and maintenance are charged to other expenses as incurred. Computer software is recorded at cost and amortized over three years.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. The Company and its Significant Accounting Policies (continued)

Long-Lived Assets

The carrying value of long-lived assets and identifiable intangibles is reviewed by the Company for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable as prescribed in ASC Section 360 - Property, Plant and Equipment (formerly, SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Asset). At December 31, 2009 and 2008, management considered certain loans to be impaired (see Note 3).

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Deferred Income Taxes

Deferred income taxes are recognized for temporary differences between the financial reporting basis and the income tax basis of assets and liabilities. Deferred tax assets are recognized only to the extent that it is more likely than not that such amounts will be realized based on consideration of available evidence. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. No valuation allowance for deferred tax assets was recorded at December 31, 2009 and 2008 as management believes it is more likely than not that all of the deferred tax assets will be realized because they were supported by recoverable taxes paid in prior years.

Securities Sold under Agreements to Repurchase

Securities sold under agreements to repurchase are accounted for as borrowings and recorded as a liability at the amount of the repurchase obligation. These transactions mature the next business day. The Company’s repurchase obligations are secured by Company owned securities with market values exceeding the obligations. These securities are segregated from other, non-pledged securities.

Concentration of Credit Risk

The Company grants loans to customers primarily in its market area in Maryland. The debtors’ ability to honor their contracts, including borrowing agreements, may be influenced by the economic conditions in the Company’s lending area.

The Company maintains deposits with other banking institutions in amounts which can, at times, exceed insurance limits of the Federal Deposit Insurance Corporation (FDIC). Such institutions include the Federal Reserve Bank of Richmond and bankers’ banks. Further, the Company periodically sells federal funds, which are not insured by the FDIC, to three banking entities.

Comprehensive Income or Loss

Unrealized gains and losses on available for sale securities, net of tax, are reported as a separate component of the equity section in the consolidated statement of financial condition. Changes in the net unrealized gains and losses are components of comprehensive income or loss and are not included in reported net income or loss.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. The Company and its Significant Accounting Policies (continued)

Statement of Cash Flows

Cash and cash equivalents in the statement of cash flows include cash on hand, non-interest bearing amounts due from correspondent banks, both interest bearing and non-interest bearing balances maintained at the Federal Reserve and Federal funds sold.

Earnings Per Share

Basic earnings per share (EPS) is computed based upon income available to common shareholders and the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would share in the earnings of the Company, using the treasury stock method, unless they are anti-dilutive. The Company uses the average market price of the common shares during the year in the determination of the amount of common stock equivalents arising from the warrants and options issued.

The weighted average number of common shares and dilutive securities (comprised of warrants and options) and resultant per share computations are as follows:


	2009		2008
Weighted average shares outstanding		1,820,548		1,820,548
Common stock equivalents		—		—

Average common shares and equivalents		1,820,548		1,820,548

Net income	$	677,956	$	294,915
Basic earnings per share	$	0.37	$	0.16
Diluted earnings per share	$	0.37	$	0.16

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

Stock Options

The Company accounts and reports for stock-based compensation plans in accordance with ASC Section 718- Stock Compensation (formerly, SFAS No. 123R Share-Based Payments) which requires that the fair value at grant date based method of accounting for measuring compensation expense for stock-based plans to be recognized in the statement of operations. The Company did not record any compensation expense under Section 718 during 2009 or 2008 as no new options were granted during the periods and all options under the existing plans were previously fully vested.

Fair Value

ASC Section 820- Fair Value Measurements and Disclosures (formerly, FASB Statement No. 157 Fair Value Measurements) defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Topic 820 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. These inputs are summarized in three broad levels: Level 1 — Quoted prices in active markets for identical securities, Level 2 — Other significant observable inputs (including quoted prices in active markets for similar securities) and Level 3 — Significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. The Company and its Significant Accounting Policies (continued)

Fair Value (continued)

The Company’s bond holdings in the investment securities are the only asset or liability subject to fair value measurement on a recurring basis. No assets are valued under Level 1 inputs at December 31, 2009. The Company has assets measured on a non-recurring basis during 2009. At December 31, 2009, these assets include $1,457,427 of impaired loans ($1,282,536 after specific reserve) and other real estate owned of $2,461,957 which are valued under Level 2 inputs. The remaining $1,276,246 ($529,501 after specific reserves) of impaired loans are valued under Level 3 inputs.

Review of Subsequent Events

The Company has evaluated subsequent events through the date of issuance of the financial data included herein, March 5, 2010.

Reclassification

Certain prior years’ amounts have been reclassified to conform to the current year’s method of presentation.

Note 2. Investment Securities

All investment securities are classified as available-for-sale securities and are summarized as follows at December 31, 2008:

Gross

Estimated

Amortized

Unrealized

Fair

Cost

Gains

Losses

Value

December 31, 2008:

U.S. Treasury (due within one year)

3,008,916

76,854

—

3,085,770

There are no investment securities at December 31, 2009.

In June 2008, a U.S. Treasury Note in the face amount of $3,000,000 and a carrying value (amortized cost) of $2,998,944 was sold for $3,039,375 resulting in a gain on the sale of $40,431. There were no such sales during 2009.

Restricted securities are comprised of common stock in the following entities at cost:


	December 31,
	2009		2008
Federal Reserve Bank of Richmond	$	465,000	$	405,000

Atlantic Central Bankers Bank		37,000		37,000

Maryland Financial Bank		25,000		25,000

	$	527,000	$	467,000

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Loans

The Bank grants commercial loans to customers primarily in Anne Arundel County, Prince George’s County, Howard County and surrounding areas of central Maryland. The principal categories of the loan portfolio are as follows:


	December 31, 2009						December 31, 2008
				Percentage						Percentage
	Balance			of Loans			Balance			of Loans
Commercial & Industrial loans	$	68,476,247			36.9	%	$	58,782,633			38.4	%
Real estate loans secured by:
Residential real estate		22,140,255			11.9	%		19,006,592			12.4	%
Commercial real estate		94,946,433			51.2	%		75,200,348			49.2	%

Total real estate loans		117,086,688			63.1	%		94,206,940			61.6	%

		185,562,935			100.0	%		152,989,573			100.0	%

Unearned loan fees, net		(81,127	)					(28,404	)
Allowance for loan losses		(2,380,000	)					(1,860,000	)

	$	183,101,808					$	151,101,169

Loans secured by residential real estate are loans to investors for commercial purposes. The Bank does not lend funds to consumers.

The allowance for loan losses activity for the years ended December 31, 2009 and 2008 is as follows:


	2009			2008
Balance at beginning of period	$	1,860,000		$	1,665,000
Provision for loan losses		1,616,167			647,105

Commercial and Industrial loans charged off		(963,172	)		(497,510	)
Commercial real estate loan charge off		(137,947	)		—
Commercial and Industrial loans recovery		4,952			45,405

Net charge off		(1,096,167	)		(452,105	)


Balance at end of period	$	2,380,000		$	1,860,000

Certain officers and directors (and companies in which they have a 10% or more beneficial ownership) have loans with the Bank. 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. The activity of these loans during 2009 and 2008 is as follows:


	2009			2008
Total loans at beginning of year	$	3,603,709		$	4,621,497
New loans and funding during the year		353,766			41,692
Repayments during the year		(363,340	)		(1,059,480	)

Total loans at end of year	$	3,594,135		$	3,603,709

Loans on which the accrual of interest has been discontinued amounted to $2,733,673 and $5,819,139 at December 31, 2009 and 2008, respectively. Interest that would have been accrued under the terms of these loans totaled $164,126 and $339,704 for the years ended December 31, 2009 and 2008, respectively. The Bank has no commitments to loan additional funds to the borrowers of impaired or non-accrual loans.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. Loans (continued)

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


	Loan Amount

Balance at December 31, 2008	$	5,819,139
New loans placed on non-accrual		2,426,957
Less:
Loan restored to interest earning status		1,265,991
Pay-off : Sold in foreclosure		575,774
Other real estate owned addition		2,461,957
Charge — offs		1,101,118
Other including payments		107,583

Balance at December 31, 2009	$	2,733,673

Information regarding loans classified as impaired follows:


	December 31,		December 31,
	2009		2008
Loans classified as impaired with specific reserves	$	2,518,689	$	1,892,056
Loans classified as impaired with no specific reserves		214,984		3,927,083

Total loans classified as impaired	$	2,733,673	$	5,819,139

Allowance for loan losses on impaired loans	$	921,636	$	840,429
Average balance of impaired loans during period	$	4,558,766	$	2,141,744

The loans classified as impaired with specific reserves at December 31, 2009 include a non-accrual loan in the amount of $483,014 which loan is secured by an assignment of life insurance proceeds. The specific reserve allocated to this loan is $367,778. Two loans outstanding to a borrower and entity controlled by the same borrower totaling $1,457,427 have specific reserves established in the total amount of $174,891. These two loans are secured by residential real estate and corporate assets. Specific reserves in the amount of $378,967 have been established for the remaining balance of classified loans (six loans with balances totaling $578,248) with specific reserves. The above loans are in various stages of collection.

The loans classified as impaired without established specific reserves at December 31, 2009 include a loan in the amount of $122,230 which is fully guaranteed by the SBA. The remaining balance of such loans is comprised of two loans in various stages of collection.

The Company acquired real property under a foreclosure process concluded in March 2009. The Company recognized a loss of approximately $138,000 in connection with the foreclosure. The property is a commercial building with an existing tenant for a large part of the premises with a value of approximately $653,000. The Company acquired another commercial building by foreclosure in November 2009 with a value of approximately $1,809,000. This property is also leased.

A well secured real estate loan in the carrying amount of $1,265,992 at December 31, 2009 was restructured through a forbearance agreement during the first quarter of 2009. The borrower has complied with the requirements under the forbearance agreement including payment requirements and the loan was placed back on an accrual basis.

At December 31, 2009 and 2008, the balance of commercial and real estate loans serviced by the Company for others under loan participation agreements was $25,065,303 and $22,676,966, respectively. The related servicing rights are not material and are included in other assets.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. Premises and Equipment

Property, equipment and leasehold improvements are as follows at December 31:


	Useful
	Lives	2009		2008
Equipment	3-10 years	$	652,723	$	686,198
Furniture and fixtures	3-5 years		645,872		652,620
Leasehold improvements	4-10 years		343,698		343,698
Software	3 years		17,025		27,165

			1,659,318		1,709,681
Accumulated depreciation and amortization			919,839		708,714

Net		$	739,479	$	1,000,967

Note 5. Deposits

Interest bearing deposits are summarized below as of December 31:


	2009		2008

NOW accounts	$	309,310	$	1,247,466
Money Market accounts		7,840,804		13,049,169
Savings accounts		10,379,367		147,096
Certificates of deposit accounts:
Less than $100,000		71,592,556		37,538,787
$100,000 or more		67,499,085		69,659,700

	$	157,621,122	$	121,642,218

The time deposit accounts mature as follows: within one year $94,724,854; one through three years- $37,586,527; three years and beyond- $6,780,260

Interest expense on interest bearing deposits is as follows:


	2009		2008

NOW accounts	$	800	$	2,938
Money Market accounts		63,032		321,781
Savings accounts		71,476		162
Certificates of deposit, $100,000 or more		2,919,894		3,671,349
Certificates of deposit, less than $100,00		1,531,503		1,057,384

	$	4,586,705	$	5,053,614

Deposit and repurchase agreement balances of executive officers and directors and their affiliated interests totaled approximately $14,435,000 and $15,981,000 at December 31, 2009 and 2008, respectively.

Included in certificates of deposits are $44,768,334 and $50,099,276 of brokered certificates at December 31, 2009 and 2008, respectively. Included in the brokered certificates of deposits at December 31, 2009 are $13,866,771 of certificates of deposits received in exchange for the placement of the Bank’s customers’ deposit funds in the same amounts with other financial institutions under the Certificate of Deposit Account Registry Service (CDARS) program. Brokered certificates of deposits in the amount of $27,548,519 mature on or before December 31, 2010.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6. Short-term borrowings

During 2008, the Bank entered into sales of securities under agreements to repurchase the same securities with commercial customers, which matured the next business day. The Bank discontinued this program in December 2008. Information concerning securities sold under agreements to repurchase at and during the year ended December 31, 2008:


	2008
Total outstanding at year-end	$	—
Average balance during the year	$	2,650,978
Average interest rate during the year		1.12	%

The Bank has unsecured credit facilities for short-term liquidity needs from financial institutions of $8,500,000 at December 31, 2009 and 2008. There were no borrowings outstanding under these credit arrangements at December 31, 2009 and 2008.

Note 7. Income Taxes

The income tax expense consists of the following for the years ended December 31, 2009 and 2008:


	2009			2008
Current:
Federal	$	532,298		$	217,239
State		140,352			40,682

		672,650			257,921

Deferred:
Federal		(178,305	)		(56,749	)
State		(42,686	)		(34,775	)

		(220,991	)		(91,524	)

	$	451,659		$	166,397

The reasons for the differences between the statutory federal income tax rates and actual rates are summarized as follows:


	2009		2008
Federal tax at statutory rates	$	384,069	$	156,846
State income taxes net of federal tax benefit		64,460		18,073
Other		3,130		(8,522	)

	$	451,659	$	166,397

The deferred income tax account is comprised of the following at December 31, 2009 and 2008:


	2009		2008
Deferred tax assets:
Allowance for loan losses	$	787,340	$	647,795
Deferred unpaid leave		86,779		95,496
Non-accrued interest income		81,872		—
Other		21,304		18,934

		977,295		762,225


Deferred tax liabilities:
Accumulated depreciation		57,996		63,917
Unrealized gain on securities, net		—		30,315

		57,996		94,232

Net deferred tax assets	$	919,299	$	667,993

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8. 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 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 loan commitments, un-advanced loan funds and standby letters of credit are approximately as follows at December 31, 2009:


	2009
Loan commitments:
Commercial	$	3,730,000
Commercial real estate		3,503,000

	$	7,233,000


Un-advanced loan funds:
Commercial	$	31,836,000
Commercial real estate		6,907,000

	$	38,743,000


Standby letters of credit	$	774,000

At December 31, 2008, loan commitments, un-advanced loan funds and standby letters of credit totaled $5,093,000, $37,829,000 and $1,573,000, respectively.

Loan commitments and un-advanced loan funds are agreements to lend funds to customers under loan commitment contracts and loan agreements as long as the borrowers are in compliance with the loan commitment contracts and loan agreements. Loan commitments generally have interest rates reflecting current market conditions, fixed expiration dates, and may require payment of a fee. Funding under loans with un-advanced loan funds generally have variable interest rates. Some of the loan commitments and un-advanced loan funds are expected to expire or not be used without being drawn upon; accordingly, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral or other security obtained, if deemed necessary by the Bank upon extension of credit, is based on the Bank’s credit evaluation.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to guarantee the installation of real property improvements and similar transactions. 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 and obtains personal guarantees supporting those commitments for which collateral or other securities is deemed necessary.

The Bank’s exposure to credit loss in the event of nonperformance by the customer is the contractual amount of the commitment. Loan commitments and standby letters of credit are made on the same terms, including collateral, as outstanding loans. As of December 31, 2009 and 2008 the Bank has accrued $54,000 and $48,000, respectively, for unfunded commitments related to these financial instruments with off balance sheet risk, which is included in other liabilities.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8. Commitments and Contingencies (continued)

The Bank has entered into leases for its branches and office space, most of which contain renewal options and expense sharing provisions. The minimum net non-cancelable future rental commitments at December 31, 2009 are as follows:


Year Ending
December 31,
2010	$	416,868
2011		397,317
2012		317,972
2013		323,164
2014		321,881
2015		134,947
2016		59,400

The related net rent expense was $466,893 and $454,233 in 2009 and 2008, respectively.

Note 9. Regulatory Matters

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company will be subject to the capital guidelines when its assets exceed $500 million, it engages in certain highly leveraged activities or it has publicly issued debt. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The Company and the Bank must maintain minimum capital and other requirements of regulatory authorities when declaring and paying dividends. The Company and the Bank are in compliance with such capital requirements. Banking regulations limit the amount of dividends that may be paid to the Company without prior approval of the Bank’s regulatory agencies. Regulatory approval is required to pay dividends that exceed the Bank’s net profits for the current year plus its retained net profits for the preceding two years.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulation) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of December 31, 2009, that the Company and the Bank meet capital adequacy requirements to which they are subject. As of December 31, 2009, the most recent notification from the regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must meet minimum total risk-based, Tier I risk-based and Tier I leverage ratios. There are no conditions or events since that notification that management believes have changed the Company’s and the Bank’s category.

Actual capital amounts and ratios are presented in the table below:


						For Capital						To be “Well Capitalized
						Adequacy						For Purposes of Prompt
	Actual					Purposes						Corrective Action
December 31, 2009	Amount		Ratio			Amount			Ratio			Amount			Ratio
Total Capital (1):
Company	$	23,357,414		12.3	%	$	15,238,056	³		8.0	%		N/A
Bank		21,835,410		11.5	%		15,237,781	³		8.0	%	$	19,047,227	³		10.0	%
Tier I Capital (1):
Company		20,965,979		11.0	%		7,619,028	³		4.0	%		N/A
Bank		19,443,975		10.2	%		7,618,891	³		4.0	%		11,428,336	³		6.0	%
Tier I Capital (2):
Company		20,965,979		10.4	%		8,033,821	³		4.0	%		N/A
Bank		19,443,975		9.7	%		8,033,683	³		4.0	%		10,042,104	³		5.0	%

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9. Regulatory Matters (continued)


						For Capital						To be “Well Capitalized
						Adequacy						For Purposes of Prompt
	Actual					Purposes						Corrective Action
December 31, 2008	Amount		Ratio			Amount			Ratio			Amount			Ratio
Total Capital (1):
Company	$	22,195,139		14.1	%	$	12,555,275	³		8.0	%		N/A
Bank		18,590,109		11.9	%		12,555,149	³		8.0	%	$	15,693,936	³		10.0	%
Tier I Capital (1):
Company		20,264,018		12.9	%		6,277,637	³		4.0	%		N/A
Bank		16,682,109		10.6	%		6,277,574	³		4.0	%		9,416,362	³		6.0	%
Tier I Capital (2):
Company		20,264,018		12.2	%		6,622,065	³		4.0	%		N/A
Bank		16,682,109		10.1	%		6,618,837	³		4.0	%		8,273,547	³		5.0	%


(1)		to risk weighted assets

(2)		to average assets

Note 10. Warrant and Option Plans

At December 31, 2009 and 2008 there were 106,372 fully vested warrants outstanding. No warrants were exercised during 2009 or 2008. The exercise price of each warrant is $10 per share and must be exercised, unless earlier called by the Company, not later than 10 years from August 18, 2000. Generally, vested warrants also expire 90 days following the date that the warrant holder ceases to be a director of the Bank. Warrants may be called by the Company in the event that a merger, sale, acquisition, share exchange or other similar extraordinary event is approved by the Board of Directors of the Company. Upon call by the Company, warrant holders have 90 days in which to exercise their warrants. If they are not exercised, the Company will pay the warrant holder the difference between the exercise price of the warrant and the fair market value of the stock of the Company at the time of the closing of the transaction. In the event that an applicable Federal or state regulatory authority determine that the Bank’s capital fails to meet minimum capital requirements, such regulatory authority may direct the Company to call all outstanding warrants. Any warrants not exercised will be thereafter forfeited.

The Board of Directors of the Company also adopted a stock option plan as a performance incentive for two current and one former Bank officers. The employment contracts obligated the Company to issue 20,000 non-transferable stock options at an exercise price of $10 per share. At December 31, 2009 all stock options had been issued by the Company and were fully vested, of which no options had been exercised.

Note 11. Employee Benefit Plans

The Bank has employee benefit programs that include health and dental insurance, life and long-term and short-term disability insurance and a 401(k) retirement plan. Under the 401(k) plan, the Bank made a 50% match of eligible employee contributions up to 6% of base salary in 2009 and 2008. The Bank’s contributions to the plan included in compensation and benefits, totaled $50,202 and $43,460 for the years ended December 31, 2009 and 2008, respectively.

Note 12. Related Party Transactions

The Bank paid $42,268 and $58,841 during the years ended December 31, 2009 and 2008 respectively, to a computer services firm of which a Director is also a principal. Expenditures included computer hardware, software, installation, training, compliance and real-time support. The Bank paid $51,296 during 2009 to a law firm of which a Director is a partner for various legal services provided. The Bank paid $148,085 during the year ended December 31, 2008 (none in 2009) for various group insurance benefits for which a Director ultimately received compensation.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 12. Related Party Transactions (continued)

Expenditures totaling less than $25,000 were paid to several entities in which directors were principals during 2009 and 2008.

All of the above transactions have been consummated on terms equivalent to those that prevail in arms length transactions.

Note 13. Fair Values of Financial Instruments

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


	December 31, 2009				December 31, 2008
	Carrying		Fair		Carrying		Fair
(In thousands)	Amount		Value		Amount		Value
Financial assets:
Cash and due from banks	$	2,106	$	2,106	$	3,291	$	3,291
Interest bearing deposits		8,228		8,228		—		—
Federal funds sold		154		154		5,674		5,674
Investment securities		—		—		3,086		3,086
Investments in restricted stock		527		527		467		467
Loans, net		183,102		192,687		151,101		158,169
Accrued interest receivable		681		681		640		640

Financial liabilities:
Non-interest bearing deposits	$	21,024	$	21,024	$	23,599	$	23,599
Interest bearing deposits		157,621		160,450		121,642		124,499
Securities sold under agreements to repurchase		—		—		—		—
Accrued interest payable		184		184		265		265

Off-balance sheet commitments		—		—		—		—

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

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14. Recently Issued Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) 2009-01 — Topic 105 Generally Accepted Accounting Principles-amendments based on Statement of Financial Accounting Standards No. 168 - The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles (formerly FASB Statement No. 168). Under the ASU, The FASB Accounting Standards Codification (ASC) became the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this ASU, September 15, 2009, the Codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. In the FASB’s view, the issuance of this ASU and the Codification will not change GAAP, except for those nonpublic nongovernmental entities that must now apply the American Institute of Certified Public Accountants Technical Inquiry Service Section 5100, “Revenue Recognition,” paragraphs 38-76. The adoption of ASU 2009-01 did not have a material impact on the Company’s consolidated financial statements.

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

On January 12, 2009, the FASB amended Topic 820 — Fair Value Measurement and Disclosures of the ASC to reduce complexity and achieve more consistent determinations as to whether other-than-temporary impairments of available for sale or held to maturity debt securities have occurred. The ASU was effective for interim and annual reporting periods ending after December 15, 2008. The adoption of this ASU did not have an impact on the Company’s consolidated financial statements. This ASU was formerly FASB Staff Position EITF 99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20 (FSP).

In August 2009 the FASB amended Topic 820- Fair Value Measurements and Disclosures by issuance of ASU No. 2009-05. The update addresses measuring liabilities at fair value. The update provides clarification that in circumstances in which a quoted price is an active market for the identical liability is not available, other specified techniques may be used to measure fair value. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

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

FSP FAS 157-4. “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly", provides guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased. This amendment is included in ASC 820-10-35.

FSP FAS 115-2 and FAS 124-2 Recognition and Presentation of Other-Than-Temporary Impairment provided guidance for impaired debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in financial statements. This amendment is included in ASC 320-10-25.

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14. Recently Issued Accounting Pronouncements (continued)

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

In June 2009, the FASB issued FASB Statement No. 166, Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140 to improve the reporting for the transfer of financial assets resulting from 1) practices that have developed since the issuance of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, that are not consistent with the original intent and key requirements of that Statement and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. This Statement must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Earlier application is prohibited. The adoption of this Statement did not have a material impact on the Company’s consolidated financial statements. This amendment is included in ASU 2009-16, an amendment to ASC 860-10.

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

In January 2010, the FASB issued ASU No. 2010-06- Fair Value Measurements and Disclosures amending Topic 820. The ASU provides for additional disclosures of transfers between assets and liabilities valued under Level 1 and 2 inputs as well as additional disclosures regarding those assets and liabilities valued under Level 3 inputs. The new disclosures are effective for interim and annual reporting periods beginning after December 15, 2009 except for those provisions addressing Level 3 fair value measurements which provisions are effective for fiscal years, and periods therein, beginning after December 15, 2010.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15. Parent Company Financial Information

Information as to the financial position of CommerceFirst Bancorp, Inc. as of December 31, 2009 and 2008 and results of operations and cash flows for the years then ended follows:


	December 31,		December 31,
Statements of Financial Condition	2009		2008
Assets
Cash in CommerceFirst Bank	$	1,536,500	$	3,615,334
Investment in subsidiary		19,443,974		16,728,648
Other assets		—		1,575

	$	20,980,474	$	20,345,557

Liabilities and Stockholders’ Equity
Accrued expenses	$	38,500	$	35,000
Stockholders’ equity		20,941,974		20,310,557

	$	20,980,474	$	20,345,557


	Year ended			Year ended
	December 31,			December 31,
Statements of Operations	2009			2008
Interest income from deposit in CommerceFirst Bank	$	17,343		$	1,575
Administrative expenses		144,478			173,510

Loss before equity in undistributed net income of bank subsidiary and income tax benefit		(127,135	)		(171,935	)
Income tax benefit		43,226			58,458

Loss before equity in undistributed net income of bank subsidiary		(83,909	)		(113,477	)
Equity in undistributed net income of bank subsidiary		761,865			408,392

Net income	$	677,956		$	294,915


	Year ended			Year ended
	December 31,			December 31,
Statements of Cash Flows	2009			2008
Cash flows from operating activities:
Net income	$	677,956		$	294,915
Equity in undistributed earnings of bank subsidiary		(761,865	)		(408,392	)
Decrease in other assets		1,575			3,537
Increase in payables		3,500			25,000

Net cash used in operating activities		(78,834	)		(84,940	)


Cash flows used by investing activities:
Investment in CommerceFirst Bank		(2,000,000	)		—

Net cash used by investing activities		(2,000,000	)		—


(Decrease) in cash and cash equivalents		(2,078,834	)		(84,940	)
Cash and cash equivalents at beginning of period		3,615,334			3,700,274

Cash and cash equivalents at end of period	$	1,536,500		$	3,615,334

Directors & Officers of
CommerceFirst Bancorp, Inc. and CommerceFirst Bank

Milton D. Jernigan II, Esquire^*
Chairman of the Board
Managing Partner
McNamee, Hosea, Jernigan, Kim, Greenan & Walker, P.A.


Richard J. Morgan^*		Robert R. Mitchell*
President & Chief Executive Officer		Private Investor and Former President,
		Mitchell Business Equipment, Inc.

Wilfred T. Azar, III		John A. Richardson, Sr.*
President, Empire Management Services		President, Crofton Bowling Center, Former
		President, Branch Electric Supply Co., Inc.

William F. Chesley		Don E. Riddle, Jr.
President, W. F. Chesley Real Estate, Inc.		Chairman & Chief Executive Officer,
		Homestead Gardens, Inc.

Charles F. Delavan, Esquire		Stephen C. Samaras
Principal, Blumenthal, Delavan & Williams, P.A.		Owner, Zymotic, Inc. (Zachary’s Jewelers)

Edward B. Howlin, Jr.*		George C. Shenk, Jr.*
President, Howlin Realty Management, Inc.		President, Whitmore Group, Inc.

Charles L. Hurtt, Jr., CPA*		Lamont Thomas^*
President, Charles L. Hurtt, Jr., PA		Former Executive Vice President & Chief
		Operating Officer, CommerceFirst Bancorp, Inc.

Milton D. Jernigan, Sr.		Dale R. Watson
Private Investor and Retired Former Founder,		President, Alpha Engineering Associates, Inc.
Chairman and President, AAA
Rentals, Inc. and AAA Tools, Inc.

Nicholas J. Marino		Jerome A. Watts*
President, Marino Transportation Services, LLC		Private Investor and Former Owner, Plan
		Management

Michael J. Miller		J. Scott Wimbrow
Vice President, Concrete General, Inc. &		Senior Vice President, MacKenzie Commercial
Tri M Leasing Corp		Real Estate Services LLC


^*		Director of CommerceFirst Bancorp, Inc.

Officers of
CommerceFirst Bank


Michael T. Storm		Thomas L. Bolander
Executive Vice President &		Senior Vice President
Chief Operating Officer and Chief
Financial Officer

James R. Baldwin		Penny L. Cantwell
Senior Vice President		Senior Vice President

George Kapusta		Candace M. Springmann
Senior Vice President		Vice President & Corporate Secretary

Jean J. Barnes		Melonee Fleming, CCE
Vice President		Vice President

David Steinhoff		Susan M. Liebenthal
Vice President		Assistant Vice President

Irma Russell		Meghan T. Stumpf
Assistant Vice President		Assistant Vice President

Robert W. Smith IV		Sean D. Wamsley
Loan Officer		Loan Officer

Gregory N. Krum
Credit Officer

Locations of
CommerceFirst Bank


Annapolis		Lanham
1804 West Street, Suite 200		4451 Parliament Place
Annapolis MD 21401		Lanham MD 20706

BWI		Old Dobbin Lane
910 Cromwell Park Drive		6230 Old Dobbin Lane
Glen Burnie MD 21061		Columbia MD 21045

Severna Park
485 Ritchie Highway
Severna Park, MD 21146

The Company will provide, without charge, to any shareholder of record or any beneficial owner of Common Stock, a copy of its 2009 Annual Report on Form 10-K filed with the Securities and Exchange Commission, upon the written request. Requests should be directed to Candace M. Springmann, Corporate Secretary, at the Company’s executive offices at 1804 West Street, Suite 200, Annapolis MD 21401.

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COMMERCEFIRST BANCORP INC Reports