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EX-31.A - EXHIBIT 31(A) - COMMERCEFIRST BANCORP INC | c16705exv31wa.htm |
EX-32.A - EXHIBIT 32(A) - COMMERCEFIRST BANCORP INC | c16705exv32wa.htm |
EX-32.B - EXHIBIT 32(B) - COMMERCEFIRST BANCORP INC | c16705exv32wb.htm |
EX-31.B - EXHIBIT 31(B) - COMMERCEFIRST BANCORP INC | c16705exv31wb.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended MARCH 31, 2011
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-51104
CommerceFirst Bancorp, Inc.
(Exact Name of Registrant as Specified in its Charter)
Maryland | 52-2180744 | |
(State or Other Jurisdiction | (I.R.S. Employer Identification No.) | |
of Incorporation or Organization) |
1804 West Street, Suite 200, Annapolis, MD 21401
(Address of Principal Executive Offices)
(Address of Principal Executive Offices)
410-280-6695
(Registrants Telephone Number, Including Area Code)
(Registrants Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
Indicate by check whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate
by check mark whether the registrant has submitted electronically and posted on its
corporate website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definition of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Securities Exchange Act). Yes
o No
þ
As of May 9, 2011 the number of outstanding shares of registrants common stock, par value $0.01
per share was: 1,820,548
CommerceFirst Bancorp, Inc.
FORM 10-Q
INDEX
Page(s) | ||||||||
3 | ||||||||
FOR PERIODS ENDED MARCH 31, 2011 and 2010: |
||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7-10 | ||||||||
10-27 | ||||||||
28 | ||||||||
28 | ||||||||
28 | ||||||||
28 | ||||||||
28 | ||||||||
28 | ||||||||
28 | ||||||||
28 | ||||||||
29 | ||||||||
30 | ||||||||
Exhibit 31(a) | ||||||||
Exhibit 31(b) | ||||||||
Exhibit 32(a) | ||||||||
Exhibit 32(b) |
2
Table of Contents
CommerceFirst Bancorp, Inc. and Subsidiary
Consolidated Statements of Financial Condition
March 31, 2011 and December 31, 2010
(Dollars in thousands except per share data)
(Dollars in thousands except per share data)
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(Unaudited) | (Audited) | |||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 2,860 | $ | 1,437 | ||||
Interest bearing deposits |
12,519 | 12,289 | ||||||
Cash and cash equivalents |
15,379 | 13,726 | ||||||
Investments in restricted stocks, at cost |
527 | 527 | ||||||
Loans receivable |
187,661 | 184,883 | ||||||
Allowance for loan losses |
(3,589 | ) | (3,174 | ) | ||||
Net loans receivable |
184,072 | 181,709 | ||||||
Premises and equipment, net |
507 | 556 | ||||||
Accrued interest receivable |
761 | 750 | ||||||
Deferred income taxes |
1,413 | 1,133 | ||||||
Other real estate owned |
2,799 | 3,324 | ||||||
Other assets |
1,088 | 1,399 | ||||||
Total Assets |
$ | 206,546 | $ | 203,124 | ||||
LIABILITIES |
||||||||
Non-interest bearing deposits |
$ | 25,442 | $ | 23,760 | ||||
Interest bearing deposits |
157,227 | 156,350 | ||||||
Total deposits |
182,669 | 180,110 | ||||||
Accrued interest payable |
117 | 106 | ||||||
Other liabilities |
947 | 543 | ||||||
Total Liabilities |
183,733 | 180,759 | ||||||
STOCKHOLDERS EQUITY |
||||||||
Common stock $.01 par value; authorized 4,000,000 shares |
||||||||
Issued and outstanding: 1,820,548 shares at March 31, 2011
and at December 31, 2010 |
18 | 18 | ||||||
Additional paid-in capital |
17,853 | 17,853 | ||||||
Retained earnings |
4,942 | 4,494 | ||||||
Total Stockholders Equity |
22,813 | 22,365 | ||||||
Total Liabilities and Stockholders Equity |
$ | 206,546 | $ | 203,124 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Table of Contents
CommerceFirst Bancorp, Inc. and Subsidiary
Consolidated Statements of Operations
For the Three Months ended March 31, 2011 and 2010 (Unaudited)
(Dollars in thousands except per share data)
(Dollars in thousands except per share data)
March 31, | March 31, | |||||||
2011 | 2010 | |||||||
Interest income: |
||||||||
Interest and fees on loans |
$ | 3,057 | $ | 3,124 | ||||
Investment in stocks |
7 | 7 | ||||||
Interest bearing deposits |
13 | 9 | ||||||
Total interest income |
3,077 | 3,140 | ||||||
Interest expense: |
||||||||
Deposits |
568 | 886 | ||||||
Total interest expense |
568 | 886 | ||||||
Net interest income |
2,509 | 2,254 | ||||||
Less provision for loan losses |
681 | 447 | ||||||
1,828 | 1,807 | |||||||
Non-interest income: |
||||||||
Gain on sale of SBA loans |
209 | 225 | ||||||
Gain on sale of other real estate owned |
43 | | ||||||
Service charges and other income |
149 | 121 | ||||||
Total non-interest income |
401 | 346 | ||||||
Non-interest expenses: |
||||||||
Compensation and benefits |
772 | 721 | ||||||
Legal and professional |
65 | 55 | ||||||
Rent and occupancy |
145 | 139 | ||||||
Marketing and business development |
18 | 22 | ||||||
FDIC insurance |
89 | 76 | ||||||
Data processing |
37 | 36 | ||||||
Support services |
47 | 47 | ||||||
Communications |
33 | 32 | ||||||
Depreciation and amortization |
52 | 59 | ||||||
Other |
242 | 89 | ||||||
Total non-interest expenses |
1,500 | 1,276 | ||||||
Income before income taxes |
729 | 877 | ||||||
Income tax expense |
281 | 349 | ||||||
Net income and total comprehensive income |
$ | 448 | $ | 528 | ||||
Basic and diluted earnings per share |
$ | 0.25 | $ | 0.29 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
4
Table of Contents
CommerceFirst Bancorp, Inc. and Subsidiary
Consolidated Statements of Stockholders Equity
For the Three Months Ended March 31, 2011 and 2010
(Dollars in thousands)
(Unaudited)
(Dollars in thousands)
(Unaudited)
Additional | ||||||||||||||||
Common | Paid-in | Retained | ||||||||||||||
Stock | Capital | Earnings | Total | |||||||||||||
Balance December 31, 2009 |
$ | 18 | $ | 17,853 | $ | 3,071 | $ | 20,942 | ||||||||
Net income March 31, 2010 |
528 | 528 | ||||||||||||||
Balance March 31, 2010 |
$ | 18 | $ | 17,853 | $ | 3,599 | $ | 21,470 | ||||||||
Balance December 31, 2010 |
$ | 18 | $ | 17,853 | $ | 4,494 | $ | 22,365 | ||||||||
Net income March 31, 2011 |
448 | 448 | ||||||||||||||
Balance March 31, 2011 |
$ | 18 | $ | 17,853 | $ | 4,942 | $ | 22,813 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
Table of Contents
CommerceFirst Bancorp, Inc. and Subsidiary
Consolidated Statement of Cash Flows
For the Three Months Ended March 31, 2011 and 2010
(Dollars in thousands)
(Unaudited)
(Dollars in thousands)
(Unaudited)
March 31, | March 31, | |||||||
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income |
$ | 448 | $ | 528 | ||||
Adjustments to reconcile net income to net cash
provided by operations: |
||||||||
Depreciation and amortization |
52 | 59 | ||||||
Gain on sales of SBA loans |
(209 | ) | (225 | ) | ||||
Gain on sales of other real estate owned |
(43 | ) | | |||||
Provision for loan losses |
681 | 447 | ||||||
Provision for losses on unfunded commitments |
| 2 | ||||||
Valuation allowance on other real estate owned |
75 | | ||||||
Deferred income taxes |
(280 | ) | 39 | |||||
Change in assets and liabilities: |
||||||||
Increase in accrued interest receivable |
(11 | ) | (35 | ) | ||||
Decrease in other assets |
236 | 92 | ||||||
Increase (decrease) in accrued interest payable |
11 | (4 | ) | |||||
Increase in other liabilities |
404 | 346 | ||||||
Net cash provided by operating activities |
1,364 | 1,249 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Increase in loans, net |
(5,171 | ) | (3,358 | ) | ||||
Proceeds from sale of SBA loans |
2,336 | 3,765 | ||||||
Proceeds from sale of other real estate owned |
568 | | ||||||
Purchase of premises and equipment |
(3 | ) | (19 | ) | ||||
Net cash (used by) provided by investing activities |
(2,270 | ) | 388 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Increase in non-interest bearing deposits, net |
1,682 | 2,643 | ||||||
Net increase in other deposits |
877 | 9,790 | ||||||
Net cash provided by financing activities |
2,559 | 12,433 | ||||||
Net increase in cash and cash equivalents |
1,653 | 14,070 | ||||||
Cash and cash equivalents at beginning of period |
13,726 | 10,488 | ||||||
Cash and cash equivalents at end of period |
$ | 15,379 | $ | 24,558 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION |
||||||||
Interest paid |
$ | 557 | $ | 890 | ||||
Income taxes paid |
$ | | $ | | ||||
Transfer of loans to real estate owned |
$ | | $ | 653 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
6
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company and its Significant Accounting Policies
The accompanying unaudited consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly,
they do not contain all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete consolidated financial statements.
In the opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included.
The financial data at December 31, 2010 are derived from audited consolidated financial statements
that are included in the Companys Annual Report for the year ended December 31, 2010. The
financial data at March 31, 2011 and 2010 are derived from unaudited consolidated financial
statements. Interim results are not necessarily indicative of results for the full year.
The consolidated financial statements include the accounts of CommerceFirst Bancorp, Inc. (the
Company) and its subsidiary, CommerceFirst Bank (the Bank). Inter-company balances and
transactions have been eliminated. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those estimates.
Cash and cash equivalents in the statement of cash flows include cash on hand, non-interest bearing
amounts due from correspondent banks, interest and non-interest bearing deposits due from the
Federal Reserve, certificates of deposit with maturities of less than one year and Federal funds
sold.
Certain prior period amounts have been reclassified to conform to the current periods method of
presentation.
Note 2. Fair value
ASC Section 820 Fair Value Measurements and Disclosure 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 as
follows:
Level 1: | Quoted prices in active exchange markets for identical assets or liabilities; also includes certain U.S. Treasury and other U.S. government and agency securities actively traded in over-the-counter markets. | |||
Level 2: | Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans held for sale. | |||
Level 3: | Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category generally includes certain private equity investments, retained interests from securitizations, and certain collateralized debt obligations. |
The Companys bond holdings in the investment securities portfolio, if any, are the only asset or
liability subject to fair value measurement on a recurring basis. No financial assets or
liabilities are valued on a recurring basis under
Level 1or Level 2 inputs at March 31, 2011 or December 31, 2010. The Company has financial and
non-financial assets measured by fair value measurements on a non-recurring basis during 2011. At
March 31, 2011, these assets include $7.1 million of non-accrual loans ($5.2 million after specific
reserves) and other real estate owned of $2.8 million all of which are valued under Level 3 inputs.
7
Table of Contents
The changes in the assets subject to fair value measurements are summarized below by Level:
Level 1 and | ||||||||
In thousands | Level 2 | Level 3 | ||||||
December 31, 2010: |
||||||||
Loans |
$ | | $ | 7,283 | ||||
Other real estate owned |
| 3,324 | ||||||
Total December 31, 2010 |
| 10,607 | ||||||
Activity: |
||||||||
Loans: |
||||||||
New loans measured at fair value |
| 753 | ||||||
Payments and other loan reductions |
| (618 | ) | |||||
Loans charged-off |
| (275 | ) | |||||
Net change in loans |
| (140 | ) | |||||
Other real estate owned: |
||||||||
Sales of other real estate owned |
(450 | ) | ||||||
Provision for valuation reduction |
| (75 | ) | |||||
| (525 | ) | ||||||
March 31, 2011: |
||||||||
Loans |
| 7,143 | ||||||
Other real estate owned |
| 2,799 | ||||||
Total March 31, 2011 |
$ | | $ | 9,942 | ||||
The estimated fair values of the Companys financial instruments at March 31, 2011 and December 31,
2010 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.
March 31, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
In thousands | Amount | Value | Amount | Value | ||||||||||||
Financial assets: |
||||||||||||||||
Cash and due from banks |
$ | 2,860 | $ | 2,860 | $ | 1,437 | $ | 1,437 | ||||||||
Interest bearing deposits |
12,519 | 12,519 | 12,289 | 12,289 | ||||||||||||
Investments in restricted stock |
527 | 527 | 527 | 527 | ||||||||||||
Loans, net |
184,072 | 193,480 | 181,709 | 191,353 | ||||||||||||
Accrued interest receivable |
761 | 761 | 750 | 750 | ||||||||||||
Financial liabilities: |
||||||||||||||||
Non-interest bearing deposits |
$ | 25,442 | $ | 25,442 | $ | 23,760 | $ | 23,760 | ||||||||
Interest bearing deposits |
157,227 | 158,609 | 156,350 | 157,228 | ||||||||||||
Accrued interest payable |
117 | 117 | 106 | 106 | ||||||||||||
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.
8
Table of Contents
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.
Note 3. Net Income per Common Share
Basic earnings per share of common stock are computed by dividing net earnings by the weighted
average number of common shares outstanding during the period. Diluted earnings per share are
calculated by including the average dilutive common equivalents outstanding during the period.
Dilutive common equivalent shares consist of stock options and warrants, calculated using the
treasury stock method.
Three Months | ||||||||
Ended March 31, | ||||||||
In thousands except for per share data | 2011 | 2010 | ||||||
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 (in thousands) |
$ | 448 | $ | 528 | ||||
Basic and diluted earnings per share |
$ | 0.25 | $ | 0.29 |
All of the outstanding warrants and options were excluded from the calculation of diluted income
per share in 2010 because they were anti-dilutive. All of the warrants and options expired in 2010.
Note 4. Related Party Transactions
The Company paid $30 thousand during the first three months of 2011 for legal services to a firm of
which a Director of the Company is a principal. The Company also paid $11 thousand during the three
months ended March 31, 2011 for computer related services to firm of which a Director is a
principal. The above transactions have been consummated on terms equivalent to those that prevail
in arms length transactions.
Executive officers, directors and their affiliated interests enter into loan transactions with the
Company in the ordinary course of business. These loans are made on the same terms, including
interest rates and collateral, as those prevailing at the time for comparable loans with unrelated
borrowers. They do not involve more than normal risk of collectability or present other
unfavorable terms. At March 31, 2011 the amounts of such loans outstanding were $2.8 million.
Deposit balances of executive officers, directors and their affiliated interests totaled $12.4
million at March 31, 2011.
Note 5. Commitments and contingencies
The Company is a party to financial instruments in the normal course of business to meet the
financing needs of its customers. These financial instruments typically include commitments to
extend credit and standby letters of credit, which involve, to varying degrees, elements of credit
and interest rate risk in excess of the amounts recognized in the consolidated financial
statements. Outstanding commitments as of March 31, 2011 are as follows:
In millions | ||||
Loan commitments |
$ | 5.2 | ||
Unused lines of credit |
$ | 34.1 | ||
Letters of Credit |
$ | 1.3 |
9
Table of Contents
Note 6. Recent Relevant Accounting Pronouncements
In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310), Disclosures about the
Credit Quality of Financing Receivables and the Allowance for Credit Losses. The main objective of
this ASU is to provide financial statement users with greater transparency about an entitys
allowance for credit losses and the credit quality of its financing receivables. The ASU requires
that entities provide additional information to assist financial statement users in assessing their
credit risk exposures and evaluating the adequacy of its allowance for credit losses. For the
Company, the disclosures as of the end of a reporting period were required for the annual reporting
periods ended December 31, 2010. Required disclosures about activity that occurs during a
reporting period are effective for interim and annual reporting periods beginning January 1, 2011.
The adoption of this ASU resulted in additional disclosures in the Companys financial statements
regarding its loan portfolio and related allowance for loan losses but does not change the
accounting for loans or the allowance. The Company has complied with the reporting requirements as
of March 31, 2011.
The FASB has issued several exposure drafts which, if adopted, would significantly alter the
Companys (and all other financial institutions) method of accounting for, and reporting, its
financial assets and some liabilities from a historical cost method to a fair value method of
accounting as well as the reported amount of net interest income. Also, the FASB has issued an
exposure draft regarding a change in the accounting for leases. Under this exposure draft, the
total amount of lease rights and total amount of future payments required under all leases would
be reflected on the balance sheets of all entities as assets and debt. If the changes under
discussion in either of these exposure drafts are adopted, the financial statements of the Company
could be materially impacted as to the amounts of recorded assets, liabilities, capital, net
interest income, interest expense, depreciation expense, rent expense and net income. The Company
has not determined the extent of the possible changes at this time. The exposure drafts are in
different stages of review, approval and possible adoption.
In April 2011, the FASB issued ASU No. 2011-02, Receivable (Topic 310), A Creditors Determination
of Whether a Restructuring is a Troubled Debt Restructuring. The main objective of the ASU is to
clarify a creditors evaluation of whether in modifying a loan, it has granted a concession in
circumstances that qualify the loan as a Troubled Debt Restructured (TDR) loan. These loans are
subject to various accounting and disclosure requirements. The ASU is effective for the first
interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively
to the beginning of the annual period of adoption. Certain disclosures are required for loans
considered as TDR loans resulting from the application of the ASU that were not considered TDR
under prior guidance. The Company has not yet determined the effect, if any, of the ASU on its
financial statements; however, it will comply with the new guidance as required.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Forward-Looking Statements
Certain information contained in this discussion may include forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements are generally
identified by phrases such as the Company expects, the Company believes or words of similar
import. Such forward-looking statements involve known and unknown risks including, but not limited
to, changes in general economic and business conditions, interest rate fluctuations, competition
within and from outside the banking industry, new products and services in the banking industry,
risk inherent in making loans such as repayment risks and fluctuating collateral values, problems
with technology utilized by the Company, changing trends in customer profiles and changes in laws,
accounting standards and regulations applicable to the Company. Although the Company believes that
its expectations with respect to the forward-looking statements are based upon reliable assumptions
within the bounds of its knowledge of its business and operations, there can be no assurance that
actual results, performance or achievements of the Company will not differ materially from any
future results, performance or achievements expressed or implied by such forward-looking
statements. Readers are cautioned against placing undue reliance on any such forward-looking
statements. The Companys past results are not necessarily indicative of future performance. Please
refer to the Risk Factors section of the
Companys Annual Report on Form 10-K for the year ended December 31, 2010, and other periodic
reports filed with the Securities and Exchange Commission, for a discussion of various factors
which may affect our performance.
10
Table of Contents
General
CommerceFirst Bancorp, Inc. (the Company) is the bank holding company for CommerceFirst Bank, a
Maryland chartered commercial bank headquartered in Annapolis, Maryland (the Bank). The Bank was
capitalized, became a wholly owned subsidiary of the Company and commenced operations on June 29,
2000. The Companys common stock trades on the NASDAQ Capital Market under the symbol CMFB. The
Company maintains five banking offices in Anne Arundel, Howard and Prince Georges counties in
central Maryland. The Company focuses on providing commercial banking services to small and medium
sized business in its market areas.
The Company assets increased modestly at March 31, 2011 from December 31, 2010 with increases in
cash and cash equivalents and loans receivable. Earnings declined as the increase in the provision
for loan losses and loan collections expenses offset improvements in net interest income. The
provision for loan losses continues to remain relatively high in recognition of the effect of
uncertain economic conditions on the Companys borrowers and collateral values as well as loan
charge-offs. Key measurements and events for the period include the following:
| The Companys net income was $448 thousand during the three months ended March 31,
2011 as compared to net income of $528 thousand for the three months ended March 31,
2010. The $80 thousand decline in net income is primarily attributable to increases in
the provision for loan losses, an established valuation allowance for other real estate
owned and increased loan collection expenses. |
||
| Net interest income, the Companys main source of income, increased by 11.3% from
$2.3 million during the three months ended March 31, 2010 to $2.5 million for the three
months ended March 31, 2011. |
||
| Total assets increased by 1.7% from $203 million at December 31, 2010 to $206
million at March 31, 2011. |
||
| Net loans outstanding increased by 1.3% from $182 million at December 31, 2010 to
$184 million as of March 31, 2011. |
||
| Deposits increased by 1.4% from $180 million at December 31, 2010 to $183 million at
March 31, 2011. |
||
| Non-interest income increased by 15.9% from $346 thousand for the three months ended
March 31, 2010 to $401 thousand for the three months ended March 31, 2011. |
||
| Non-interest expenses increased by 17.6% from $1.3 million for the three months
ended March 31, 2010 to $1.5 million for the three months ended March 31, 2011. |
A discussion of the factors leading to these changes can be found in the discussion below.
Critical Accounting Policies
The Companys consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States and follow general practices within the industry
in which it operates. Application of these principles requires management to make estimates,
assumptions and judgments that affect the amounts reported in the financial statements and
accompanying notes. These estimates, assumptions and judgments are based on information available
as of the date of the financial statements; accordingly, as this information changes, the financial
statements could reflect different estimates, assumptions and judgments. Certain policies
inherently have a greater reliance on the use of estimates, assumptions and judgments and as such
have a greater possibility of producing results that could be materially different than originally
reported. Estimates, assumptions and judgments
are necessary when assets and liabilities are required to be recorded at fair value, when a decline
in the value of an asset not carried on the financial statements at fair value warrants an
impairment write-down or valuation reserve to be established, or when an asset or liability needs
to be recorded contingent upon a future event. Carrying assets and liabilities at fair value
inherently results in more financial statement volatility. The fair values and the information
used to record valuation adjustments for certain assets and liabilities are based either on quoted
market prices or are provided by other third-party sources, when available.
11
Table of Contents
The most significant accounting policies followed by CommerceFirst Bancorp, Inc. are presented in
Note 1 to the Companys audited consolidated financial statements incorporated by reference in its
Annual Report on Form 10-K for the year ended December 31, 2010. 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. These procedures include identifying
and assessing possible impaired loans. The Companys assessments may be affected in future periods
by changes in economic conditions, the impact of regulatory examinations and the discovery of
information with respect to borrowers that is not known to management at the time of the issuance
of the consolidated financial statements.
RESULTS OF OPERATIONS
General. The Company reported net income of $448 thousand for the three months ended March 31, 2011
as compared to net income of $528 thousand for the three month period ended March 31, 2010. Net
earnings declined during 2011 as compared to 2010 in spite of the increase in net interest margin
because of an increase in the provision for loan losses of $234 thousand, expensed valuation
allowance for declines in other real estate owned of $75 thousand and loan collection expenses of
$57 thousand. Net interest margin increased primarily as the result of the reduction in the cost of
deposits. The provision for loan losses was $681 thousand during 2011 as compared to $447 thousand
in 2010, an increase of $234 thousand, or 52.4%. The Company continues to experience the
detrimental effects of the weakened economy on its loan customers which effects are recognized
through the Companys provision for loan losses and loan charge-offs. The amount of non-accrual
loans decreased by $140 thousand, or 1.9%, at March 31, 2011 as compared to December 31, 2010.
Net interest income increased in 2011 as compared to 2010 by $255 thousand, or 11.3%. This
increase resulted primarily from the reduction in the cost of deposits. During 2010 a significant
amount of high interest rate, longer term certificates of deposit matured and were either re-priced
at lower rates or replaced with lower rate accounts resulting in decreases in costs of funds,
increases in net interest income, net interest margin and net interest spread. However, the amount
of such certificates available to be re-priced in future quarters is minimal.
Return on Average Assets and Average Equity. The following table shows the return on average assets
and average equity for the period shown.
Three Months Ended | Year ended | |||||||||||
March 31, | December 31, | |||||||||||
2011 | 2010 | 2010 | ||||||||||
Return on Average Equity |
7.87 | % | 9.89 | % | 8.61 | % | ||||||
Return on Average Earning Assets |
0.91 | % | 1.06 | % | 0.94 | % | ||||||
Ratio of Average Equity to
Average Assets |
11.19 | % | 10.36 | % | 10.62 | % |
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Table of Contents
Net Interest Income and Net Interest Margin. Net interest income is the amount by which interest
earned on assets exceeds the interest paid on interest-bearing liabilities. The Companys
principal interest earning assets are loans to businesses. Interest-bearing liabilities consist
primarily of savings accounts, money market accounts and certificates of deposit. Generally,
changes in net interest income are measured by net interest rate spread and net interest margin.
Net interest rate spread is equal to the difference between the average rate earned on interest
earning assets and the average rate incurred on interest-bearing liabilities. Net interest margin
represents the difference between interest income (including net loan fees earned) and interest
expense calculated as a percentage of average earning assets.
Total interest income decreased by $63 thousand or 2.0% to $3.1 million for the three month period
ended March 31, 2011 as compared to the same period in 2010. This decrease in interest income was
primarily attributable to the decline in the yield on the loans from 6.88% in 2010 to 6.66% in
2011. Further, interest income declined because of the $2.0 million decrease in average earning
assets during 2011 as compared to. Interest income was adversely affected by the 6 basis point
decline in the yield of the average earning assets from 6.37% in 2010 to 6.31% in 2011.
Interest expense decreased by $318 thousand or 35.9% to $568 thousand for the three months ended
March 31, 2011 as compared to $886 thousand during the same three months of 2010. This decrease
was primarily attributable to the 72 basis point decrease in the cost of funds from 2.2% during the
first three months of 2010 to 1.5% during the first three months of 2011. Also contributing to the
reduction in the cost of funds was $8.1 million decrease in average interest bearing liabilities
during 2011 as compared to 2010.
The net interest income for the three month period ended March 31, 2011 was $2.5 million as
compared to $2.3 million for the same period in 2010. Net interest income increased primarily
because of the reduced cost of funds during the three months ended March 31, 2011 as compared to
the three months ended March 31, 2010.
13
Table of Contents
The following table shows the average balances and average rates earned or paid on of the various
categories of the Companys assets and liabilities for the three month period ended March 31 of
each year. Nonperforming loans are included in average loan balances in the following table:
2011 | 2010 | 2009 | ||||||||||||||||||||||||||||||||||
THREE MONTHS | Average | Yields/ | Average | Yields/ | Average | Yields/ | ||||||||||||||||||||||||||||||
In thousands | Balance | Interest | Rates | Balance | Interest | Rates | Balance | Interest | Rates | |||||||||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||||||||||
Securities (1) |
$ | 527 | $ | 7 | 5.39 | % | $ | 527 | $ | 7 | 5.39 | % | $ | 3,539 | $ | 39 | 4.47 | % | ||||||||||||||||||
Loans, net of unearned income (2) |
186,284 | 3,057 | 6.66 | % | 184,219 | 3,124 | 6.88 | % | 156,328 | 2,710 | 7.03 | % | ||||||||||||||||||||||||
Interest-bearing deposits in other banks |
11,036 | 13 | 0.48 | % | 14,927 | 9 | 0.24 | % | 1,966 | 2 | 0.41 | % | ||||||||||||||||||||||||
Federal funds sold |
| | | 129 | | 0.19 | % | 3,277 | 3 | 0.37 | % | |||||||||||||||||||||||||
Total interest-earning assets |
197,847 | 3,077 | 6.31 | % | 199,802 | 3,140 | 6.37 | % | 165,984 | 2,754 | 6.76 | % | ||||||||||||||||||||||||
Less allowance for loan losses |
(3,319 | ) | (2,428 | ) | (2,035 | ) | ||||||||||||||||||||||||||||||
Non interest earning assets |
9,127 | 8,631 | 6,909 | |||||||||||||||||||||||||||||||||
Total assets |
$ | 203,655 | $ | 206,005 | $ | 169,984 | ||||||||||||||||||||||||||||||
Liabilities & Stockholders Equity |
||||||||||||||||||||||||||||||||||||
Interest-bearing deposits |
||||||||||||||||||||||||||||||||||||
Interest bearing demand deposits |
$ | 766 | $ | | 0.05 | % | $ | 712 | $ | | 0.05 | % | $ | 1,842 | $ | | 0.00 | % | ||||||||||||||||||
Money market deposit accounts |
8,628 | 8 | 0.38 | % | 8,453 | 9 | 0.43 | % | 18,093 | 26 | 0.58 | % | ||||||||||||||||||||||||
Savings accounts |
23,780 | 67 | 1.14 | % | 12,036 | 44 | 1.48 | % | 175 | | | |||||||||||||||||||||||||
Certificates of deposit |
122,695 | 493 | 1.63 | % | 142,729 | 833 | 2.37 | % | 109,954 | 1,138 | 4.20 | % | ||||||||||||||||||||||||
Total interest-bearing liabilities |
155,869 | 568 | 1.48 | % | 163,930 | 886 | 2.19 | % | 130,064 | 1,164 | 3.63 | % | ||||||||||||||||||||||||
Demand deposits and other liabilities |
25,005 | 20,727 | 19,543 | |||||||||||||||||||||||||||||||||
Total liabilities |
180,874 | 184,657 | 149,607 | |||||||||||||||||||||||||||||||||
Stockholders equity |
22,781 | 21,348 | 20,377 | |||||||||||||||||||||||||||||||||
Total liabilities and stockholders equity |
$ | 203,655 | $ | 206,005 | $ | 169,984 | ||||||||||||||||||||||||||||||
Interest rate spread |
4.83 | % | 4.18 | % | 3.13 | % | ||||||||||||||||||||||||||||||
Net interest income and margin |
$ | 2,509 | 5.14 | % | $ | 2,254 | 4.58 | % | $ | 1,590 | 3.91 | % | ||||||||||||||||||||||||
(1) | Yields on securities are calculated based on amortized cost. |
|
(2) | Loan balances include loans on nonaccrual |
Net interest margin was 5.14% in the first three months of 2011, as compared to 4.58% in the
comparable period in 2010. Interest spread was 4.83% in the first three months of 2011, as compared
to the 4.18% in the first three months of 2010 reflecting the greater reduction in the cost of
interest bearing funds as compared to the reduction of the earnings rates of interest earning
assets. Absent a reduction in market interest rates, the Company does not anticipate continuing
significant reductions in the cost of its interest bearing funds as a majority of the higher
costing funds have been re-priced to lower levels.
The following table sets forth certain information regarding changes in interest income and
interest expense of the Company. For each category of interest-earning assets and interest-bearing
liabilities, information is provided on changes attributable to: (i) changes in volume (change in
volume of the asset multiplied by the prior years rate) and (ii) changes in rates (change in rate
multiplied by the current years volume).
14
Table of Contents
March 31, 2011 vs. 2010 | March 31, 2010 vs. 2009 | |||||||||||||||||||||||
Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||
In thousands | Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||
Interest-Earning Assets: |
||||||||||||||||||||||||
Federal funds sold |
$ | | $ | | $ | | $ | (3 | ) | $ | | $ | (3 | ) | ||||||||||
Interest bearing deposits |
(2 | ) | 6 | 4 | 14 | (7 | ) | 7 | ||||||||||||||||
Investment portfolio |
| | | (33 | ) | 1 | (32 | ) | ||||||||||||||||
Loans receivable |
35 | (102 | ) | (67 | ) | 484 | (70 | ) | 414 | |||||||||||||||
Net Change in Interest Income |
33 | (96 | ) | (63 | ) | 462 | (76 | ) | 386 | |||||||||||||||
Interest Bearing Liabilities: |
||||||||||||||||||||||||
Interest bearing deposits |
(44 | ) | (274 | ) | (318 | ) | 318 | (596 | ) | (278 | ) | |||||||||||||
Net Change in Interest Expense |
(44 | ) | (274 | ) | (318 | ) | 318 | (596 | ) | (278 | ) | |||||||||||||
Change in Net Interest Income |
$ | 77 | $ | 178 | $ | 255 | $ | 144 | $ | 520 | $ | 664 | ||||||||||||
Provision for Loan Losses. The provision for loan losses represents the amount charged against
earnings to increase the allowance for loan losses to the level deemed appropriate by management.
The provision for loan losses and the allowance for loan losses are based on managements ongoing
assessment of the Companys credit exposure and consideration of certain other relevant factors.
The provision for loan losses was $681 thousand the three months ended March 31, 2011 as compared
to $447 thousand for the three months ended March 31, 2010. The Company has increased its provision
for loan losses to address identified loan concerns and in recognition of the detrimental effect of
the weakened economy. The allowance is comprised of specific and general allowance amounts.
Non-Interest Income. Non-interest income principally consists of gains from the sale of the
guaranteed portion of Small Business Administration loans and from deposit account services
charges. For the three months ended March 31, 2011, gains on sales of the guaranteed portion of SBA
loans was $209 thousand whereas gains on sales of SBA loans amounted to $225 thousand during the
first three months of 2010. Generally, the Company desires to sell the guaranteed portion of most
additional SBA loans resulting in a continuing stream of income that may vary significantly from
quarter to quarter, depending in part upon the volume of loans actually sold. Deposit account
service charges and other income amounted to $149 thousand during the three months ended March 31,
2011 as compared to $121 thousand for the same period in 2010, reflecting an increase in the number
of accounts subject to service charges on such deposit accounts. Also included in this increase was
the increase in net rental income from rental of other real estate owned properties.
Non-Interest Expense. Total non-interest expenses increased by $224 thousand during the three
month period ended March 31, 2011 as compared to the same period in 2010, a 17.6% increase. The
2011 expenses reflect $75 thousand of provision for declining value of other real estate owned; no
such provision was expensed in 2010. Loan collection expenses increased by $41 thousand from $16
thousand during 2010 to $57 thousand in 2011 resulting from increased loan collection efforts.
Income Tax Expense. During the three months ended March 31, 2011, the Company recorded an income
tax expense of $281 thousand as compared to a $349 thousand expense during the same period in 2010.
The income tax expense was 38.6% of income before taxes in 2011 and 39.8% of income before taxes in
2010.
FINANCIAL CONDITION.
General. The Companys assets at March 31, 2011 were $206.5 million, an increase of $3.4 million or
1.7%, from December 31, 2010. The gross loans totaled $187.7 million at March 31, 2011 and are
comprised of real estate loans of $132.7 million, an increase of $2.1 million, or 1.6%, from
December 31, 2010 and commercial loans of $52.3 million, an increase of $.7 million, or 1.3% from
December 31, 2010. The changes noted above reflect the effect of reclassifying approximately $9.5
million of commercial loans to real estate loans during the second quarter of 2010. The
reclassification resulted from a review by the Company of the risk profile of the loan portfolio.
The majority of the reclassified loans are to entities whose cash flow is directly or indirectly
significantly dependent upon the sale, refinance, or management of real estate assets or
collections of the entities financing of real estate. None of
these loans were on non-accrual or classified as substandard at the time of reclassification. At
March 31, 2011, deposits totaled $182.7 million, an increase of $2.6 million, or 1.4%, from
December 31, 2010. Deposits at March 31, 2011 are comprised primarily of certificates of deposit of
$124.6 million, NOW and Money Market accounts of $8.9 million, savings accounts of $23.8 million
and noninterest bearing deposits of $25.4 million.
15
Table of Contents
Loan Portfolio. The loan portfolio is the largest component of earning assets and accounts for the
greatest portion of total interest income. At March 31, 2011, net loans were $184.1 million, a
1.3% increase from the $181.7 million in loans outstanding at December 31, 2010. Generally, loans
are internally generated but the Company does periodically purchase loan participations from other
local community banks. Lending activity is generally confined to the Companys immediate market
areas. The $2.4 million increase in loans is net of the sales of SBA guaranteed portions of loans
in the amount of $2.1 million during the first quarter of 2011. Without these sales, loan balances
would have increased by $4.5 million. The Company is continuing its efforts to attract quality
credits with no dilution of credit underwriting standards. The current economic conditions have
reduced the number of loan requests as well as the number of applicants that meet the Companys
underwriting standards.
The percentage of total loans comprised of commercial real estate loans has increased as the
Company has concentrated on this type of lending. The majority of these loans are secured by real
property that is occupied by the borrowers businesses. The Company has approximately $0.9 million
of acquisition and construction loans secured by residential building lots. The Company does not
engage in foreign lending activities. Loans secured by residential real estate are loans to
investors for commercial purposes. The Bank does not lend funds to consumers. The following table
presents the composition of the loan portfolio by type of loan at the dates indicated.
Loans receivable, net is comprised of the following:
March 31, 2011 | March 31, 2010 | December 31, 2010 | ||||||||||||||||||||||
Percentage | Percentage | Percentage | ||||||||||||||||||||||
(In thousands) | Balance | of Loans | Balance | of Loans | Balance | of Loans | ||||||||||||||||||
Commercial and Industrial loans |
$ | 45,956 | 24.5 | % | $ | 59,187 | 34.5 | % | $ | 44,582 | 24.1 | % | ||||||||||||
SBA loans |
7,071 | 3.8 | % | 6,933 | 2.4 | % | 7,742 | 4.2 | % | |||||||||||||||
Real estate loans: |
||||||||||||||||||||||||
Owner occupied |
85,296 | 45.4 | % | 72,918 | 39.5 | % | 85,633 | 46.3 | % | |||||||||||||||
Non owner occupied |
49,449 | 26.3 | % | 45,897 | 23.6 | % | 47,040 | 25.4 | % | |||||||||||||||
Total real estate loans |
134,745 | 71.7 | % | 118,815 | 63.1 | % | 132,673 | 71.7 | % | |||||||||||||||
187,772 | 100.0 | % | 184,935 | 100.0 | % | 184,997 | 100.0 | % | ||||||||||||||||
Unearned loan fees, net |
(111 | ) | (86 | ) | (114 | ) | ||||||||||||||||||
Allowance for loan losses |
(3,589 | ) | (2,376 | ) | (3,174 | ) | ||||||||||||||||||
$ | 184,072 | $ | 182,473 | $ | 181,709 | |||||||||||||||||||
Note: | The loan amounts and percentages for March 31, 2010 above do not reflect the
effect of reclassifying approximately $9.5 million of commercial and industrial loans to
real estate loans during the second quarter of 2010. |
Real estate loans are secured by residential and commercial properties as follows:
(In thousands) | March 31, 2011 | March 31, 2010 | December 31, 2010 | |||||||||
Real estate loans secured by: |
||||||||||||
Residential real estate |
$ | 24,908 | $ | 22,747 | $ | 24,307 | ||||||
Commercial real estate |
109,837 | 96,068 | 108,366 | |||||||||
Total real estate loans |
$ | 134,745 | $ | 118,815 | $ | 132,673 | ||||||
None of the loans secured by residential real estate are owner occupied properties.
16
Table of Contents
The following table shows the interest rate sensitivity of the loan portfolio at March 31, 2011.
Demand loans, loans without a stated maturity and overdrafts are reported as re-pricing in one year
or less. Floating rate loans are reported to reflect the period until re-pricing.
Loan Re-pricing as of March 31, 2011 | ||||||||||||||||
1 year | After | |||||||||||||||
In thousands | or less | 1-5 years | 5 years | Total | ||||||||||||
Loans with: |
||||||||||||||||
Fixed interest rates |
$ | 13,172 | $ | 38,123 | $ | 938 | $ | 52,233 | ||||||||
Floating and adjustable
interest rates |
64,227 | 71,312 | | 135,539 | ||||||||||||
Total loans receivable |
$ | 77,399 | $ | 109,435 | $ | 938 | $ | 187,772 | ||||||||
Allowance for loan losses. The adequacy of the allowance for loan losses is evaluated based upon
loan categories except for loans rated substandard, doubtful or loss, which are evaluated
separately and assigned loss amounts based upon the evaluation. Loss ratios are applied to each
category of loan to determine estimated loss amounts. Categories of loans are identified as
commercial, SBA and mortgage loans. Loss ratios are determined based upon historical losses
incurred adjusted for the effect of current economic conditions, any industry concentration or
identified weakness in an industry, credit management and underwriting policy changes and secured
versus unsecured nature of the loan category. At March 31, 2011, the range of the loss ratios used
to determine estimated losses by loan category were: commercial loans 1.1%; SBA loans
(unguaranteed portion) 6.9% and real estate loans- 0.2% to 1.5%. These loss ratios are
approximately the same as those ratios applied at December 31, 2010. Additional losses are
estimated resulting from additional identified risks factors, such as loans with underwriting
exceptions, the level and direction of payment delinquencies and the level of large loans. Not all
of these additional loss estimates are allocated to the separate loan categories.
The Company monitors its loan portfolio for indications of weaknesses through the review of
borrowers financial condition, cash flows, loan payment delinquencies, economic factors occurring
in borrowers business sectors and other information which may come to the Company through its
contacts in the market place. The determination of the effect of the weaknesses noted on the
repayment of the loans is an ongoing process as to each borrower. The Company may set aside
specific loss reserves during this process in amounts determined on subjective bases until such
time as the collectability of the loan from the borrowers primary repayment source(s) is in doubt.
During this time, secondary and tertiary repayment sources, including liquidation of collateral,
are evaluated which may result in additional specific loss reserves being established. Independent
or internal appraisals and evaluations are performed to determine potential recovery amounts, or
range of amounts, from the loan collateral and other payment sources. Collateral values are subject
to change depending on market factors, collateral condition and method and timing of liquidation
efforts. Loans, or portions of loans, for which the Company does not expect to obtain repayment are
charged-off. In most cases, the Company has established specific reserves for the amount of the
loans loss prior to the point of charge-off.
The adequacy of the allowance for loan losses is also reviewed at least quarterly using risk
ratings applied to the loans based upon rating criteria consistent with regulatory definitions.
The risk rating is adjusted, as necessary, if loans become delinquent, if significant adverse
information is discovered regarding the underlying credit and, in the case of commercial loans and
commercial real estate loans, the normal periodic review of the underlying credit indicates that a
change in risk rating is appropriate. An estimated low and high loss percentage is applied to
loans in each risk rating. These loss percentages increase as the loan risk rating increases.
Loans rated as substandard, doubtful or loss are evaluated separately and assigned loss amounts
based upon the separate evaluation. Risks factors identified beyond individual loan risks, such as
economic conditions, underwriting exceptions and loan concentrations are quantified based upon
managements estimations of loss exposure. Loss percentages used are generally based upon
managements best estimates considering losses incurred. Estimated low and high allowance for
loan loss amounts are derived by accumulating the estimated losses using the low and high loss
percentages for each risk rating and adding losses based upon separate loan evaluations and
identified other risks. The actual allowance for loan losses is compared to this range to
ascertain that it is reasonably situated within the range. In addition, on at least a quarterly
basis, the recorded allowance for loan losses (as a percent of loans) is compared to peer group
levels to ascertain the reasonableness of the estimate. At March 31, 2011, the actual
allowance for loan losses of 1.91% was between the high allowance amount of 1.94% and the low
range percent of 1.69%.
17
Table of Contents
The allowance for loan losses represents 1.91% and 1.72% of loans receivable at March 31, 2011 and
December 31, 2010, respectively. The increase in the allowance for loan losses as a percent of
loans at March 31, 2011 as compared to December 31, 2010 resulted from increased specific reserves
as well as general reserves reflecting the effect of the current economic conditions. There was no
change in the methodology of determining the allowance for loan losses at March 31, 2011 as
compared to December 31, 2010 apart from changes to loss factors based on managements perception
of economic environmental factors and trends. Management believes that the allowance for loan
losses is adequate for each period presented.
The activity in the allowance for loan losses is shown in the following table.
Three Months | ||||||||||||||||||||
Ended | Year Ended December 31, | |||||||||||||||||||
(In thousands) | March 31, 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||
Beginning balance |
$ | 3,174 | $ | 2,380 | $ | 1,860 | $ | 1,665 | $ | 1,614 | ||||||||||
Charge-offs Commercial and Industrial
loans |
(85 | ) | (1,140 | ) | (500 | ) | (179 | ) | (72 | ) | ||||||||||
Charge-offs SBA loans |
(143 | ) | (447 | ) | (463 | ) | (318 | ) | | |||||||||||
Recoveries Commercial and Industrial
loans |
6 | 26 | | 45 | 78 | |||||||||||||||
Recoveries SBA loans |
3 | 25 | 5 | | | |||||||||||||||
Real estate loans: |
||||||||||||||||||||
Charge-offs Owner occupied |
(47 | ) | | (138 | ) | | | |||||||||||||
Charge-offs Non owner occupied |
| (386 | ) | | | | ||||||||||||||
Net recoveries (charge-offs) |
(266 | ) | (1,922 | ) | (1,096 | ) | (452 | ) | 6 | |||||||||||
Provision for loan losses |
681 | 2,716 | 1,616 | 647 | 45 | |||||||||||||||
Ending balance |
$ | 3,589 | $ | 3,174 | $ | 2,380 | $ | 1,860 | $ | 1,665 | ||||||||||
Net recoveries (charge-offs) to average loans |
(0.14 | %) | (1.04 | %) | (0.65 | %) | (0.33 | %) | 0.00 | % |
During 2011, loans to seven borrowers and related entities totaling $0.3 million were determined to
be uncollectible and were charged-off.
The activity in the allowance for loan losses by category during the three months ended March 31,
2011 is shown in the following table.
Real Estate Loans | ||||||||||||||||||||||||
Commercial | Non- | |||||||||||||||||||||||
and | SBA | Owner | Owner | |||||||||||||||||||||
In thousands | Industrial | Loans | Occupied | Occupied | Unallocated | Total | ||||||||||||||||||
Balance at December 31, 2010 |
$ | 1,023 | $ | 627 | $ | 682 | $ | 715 | $ | 127 | $ | 3,174 | ||||||||||||
Less loan charge offs |
85 | 143 | 47 | | | 275 | ||||||||||||||||||
Loss recoveries |
6 | 3 | | | | 9 | ||||||||||||||||||
Provision for loan losses |
367 | 11 | 229 | 63 | 11 | 681 | ||||||||||||||||||
Balance at March 31, 2011 |
$ | 1,311 | $ | 498 | $ | 864 | $ | 778 | $ | 138 | $ | 3,589 | ||||||||||||
Allowance for loans
individually evaluated for
impairment |
$ | 822 | $ | 119 | $ | 646 | $ | 426 | $ | | $ | 2,013 | ||||||||||||
Amount of loans
individually evaluated for
impairment |
$ | 1,445 | $ | 319 | $ | 8,673 | $ | 3,234 | $ | | $ | 13,671 | ||||||||||||
18
Table of Contents
The activity in the allowance for loan losses by category during the three months ended March 31,
2010 is shown in the following table.
Real Estate Loans | ||||||||||||||||||||||||
Commercial | Non- | |||||||||||||||||||||||
and | SBA | Owner | Owner | |||||||||||||||||||||
In thousands | Industrial | Loans | Occupied | Occupied | Unallocated | Total | ||||||||||||||||||
Balance at December 31, 2009 |
$ | 1,290 | $ | 576 | $ | 168 | $ | 242 | $ | 104 | $ | 2,380 | ||||||||||||
Loan charge offs |
150 | 325 | | | | 475 | ||||||||||||||||||
Loss recoveries |
21 | 3 | | | | 24 | ||||||||||||||||||
Provision for loan losses |
198 | 163 | 21 | 78 | (13 | ) | 447 | |||||||||||||||||
Balance at March 31, 2010 |
$ | 1,359 | $ | 417 | $ | 189 | $ | 320 | $ | 91 | $ | 2,376 | ||||||||||||
Allowance for loans
individually evaluated for
impairment |
$ | 886 | $ | 54 | $ | 22 | $ | 46 | $ | | $ | 988 | ||||||||||||
Amount of loans
individually evaluated for
impairment |
$ | 2,631 | $ | 256 | $ | 8,725 | $ | 1,854 | $ | | $ | 13,466 | ||||||||||||
Additionally, the Company has established a reserve for unfunded commitments that is recorded by a
provision charged to other expenses. At March 31, 2011 the balance of this reserve was $60
thousand. The reserve, based on evaluations of the collectability of loans, is an amount that
management believes will be adequate over time to absorb possible losses on unfunded commitments
(off-balance sheet financial instruments) that may become uncollectible in the future.
Asset Quality. In its lending activities, the Company seeks to develop sound loans with customers
who will grow with the Company. There has not been an effort to rapidly build the portfolio and
earnings at the sacrifice of asset quality. At the same time, the extension of credit inevitably
carries some risk of non-payment.
Below is a summary of the Companys impaired loans at March 31, 2011 and December 31, 2010:
For Period: | ||||||||||||||||||||||||||||
Average | ||||||||||||||||||||||||||||
Related Allowance for | Recorded | Interest Income | ||||||||||||||||||||||||||
Recorded Investment | Losses | Investment | Recognized | |||||||||||||||||||||||||
March 31, | December 31, | March 31, | December 31, | March 31, | March 31, | December 31, | ||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2011 | 2010 | ||||||||||||||||||||||
Non-accrual loans: |
||||||||||||||||||||||||||||
Commercial and Industrial loans: |
||||||||||||||||||||||||||||
With specific reserves |
$ | 1,186 | $ | 963 | $ | 791 | $ | 445 | $ | 985 | $ | | $ | 25 | ||||||||||||||
Without specific reserves |
| | | | | | ||||||||||||||||||||||
1,186 | 963 | 791 | 445 | 985 | | 25 | ||||||||||||||||||||||
SBA loans: |
||||||||||||||||||||||||||||
With specific reserves |
248 | 359 | 119 | 194 | 325 | | 8 | |||||||||||||||||||||
Without specific reserves |
27 | 29 | | | 29 | | | |||||||||||||||||||||
275 | 388 | 119 | 194 | 354 | | 8 | ||||||||||||||||||||||
Real Estate Owner Occupied: |
||||||||||||||||||||||||||||
With specific reserves |
3,202 | 3,140 | 646 | 483 | 3,179 | | 64 | |||||||||||||||||||||
Without specific reserves |
545 | 816 | | | 613 | | 17 | |||||||||||||||||||||
3,747 | 3,956 | 646 | 483 | 3,792 | | 81 | ||||||||||||||||||||||
19
Table of Contents
For Period: | ||||||||||||||||||||||||||||
Average | ||||||||||||||||||||||||||||
Related Allowance for | Recorded | Interest Income | ||||||||||||||||||||||||||
Recorded Investment | Losses | Investment | Recognized | |||||||||||||||||||||||||
March 31, | December 31, | March 31, | December 31, | March 31, | March 31, | December 31, | ||||||||||||||||||||||
Continued | 2011 | 2010 | 2011 | 2010 | 2011 | 2011 | 2010 | |||||||||||||||||||||
Real Estate Non Owner Occupied: |
||||||||||||||||||||||||||||
With specific reserves |
1,935 | 1,976 | 426 | 399 | 1,966 | | 41 | |||||||||||||||||||||
Without specific reserves |
| | | | | | | |||||||||||||||||||||
1,935 | 1,976 | 426 | 399 | 1,966 | | 41 | ||||||||||||||||||||||
Total Non-accrual loans |
||||||||||||||||||||||||||||
With specific reserves |
$ | 6,571 | $ | 6,438 | $ | 1,982 | $ | 1,521 | $ | 6,455 | $ | | $ | 138 | ||||||||||||||
Without specific reserves |
572 | 845 | | | 642 | | 17 | |||||||||||||||||||||
Total Non-accrual loans |
$ | 7,143 | $ | 7,283 | $ | 1,982 | $ | 1,521 | $ | 7,097 | $ | | $ | 155 | ||||||||||||||
TDR** loans: |
||||||||||||||||||||||||||||
Commercial and Industrial loans: |
||||||||||||||||||||||||||||
With specific reserves |
$ | | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||||
Without specific reserves |
45 | 154 | | | 150 | 1 | 13 | |||||||||||||||||||||
$ | 45 | $ | 154 | | | 150 | 1 | 13 | ||||||||||||||||||||
Number of loans |
1 | 1 | ||||||||||||||||||||||||||
Real Estate Owner Occupied: |
||||||||||||||||||||||||||||
With specific reserves |
2,051 | 2,051 | 13 | 13 | 2,051 | 60 | 125 | |||||||||||||||||||||
Without specific reserves |
| | | | | | | |||||||||||||||||||||
2,051 | 2,051 | 13 | 13 | 2,051 | 60 | 125 | ||||||||||||||||||||||
Number of loans |
1 | 1 | ||||||||||||||||||||||||||
Real Estate Non Owner Occupied: |
||||||||||||||||||||||||||||
With specific reserves |
1,599 | 1,603 | 11 | 11 | 1,600 | 16 | 82 | |||||||||||||||||||||
Without specific reserves |
174 | 177 | | | 177 | 3 | 12 | |||||||||||||||||||||
1,773 | 1,780 | 11 | 11 | 1,777 | 19 | 94 | ||||||||||||||||||||||
Number of loans |
7 | 7 | ||||||||||||||||||||||||||
Total Loans: |
||||||||||||||||||||||||||||
With specific reserves |
$ | 3,650 | $ | 3,654 | $ | 25 | $ | 25 | $ | 3,651 | $ | 76 | 207 | |||||||||||||||
Without specific reserves |
219 | 331 | | | 327 | 4 | 25 | |||||||||||||||||||||
Total TDR loans |
$ | 3,869 | $ | 3,985 | $ | 25 | $ | 25 | $ | 3,978 | $ | 80 | $ | 232 | ||||||||||||||
Number of loans |
9 | 9 | ||||||||||||||||||||||||||
Other Impaired loans: |
||||||||||||||||||||||||||||
Commercial and Industrial loans: |
||||||||||||||||||||||||||||
With specific reserves |
$ | | $ | 250 | $ | | $ | 125 | 125 | $ | | $ | 19 | |||||||||||||||
Without specific reserves |
| | | | | | | |||||||||||||||||||||
Total Other Impaired loans |
$ | | $ | 250 | $ | | $ | 125 | 125 | $ | | $ | 19 | |||||||||||||||
Total Impaired Loans: |
||||||||||||||||||||||||||||
With specific reserves |
$ | 10,221 | $ | 10,342 | $ | 1,005 | $ | 1,671 | 10,231 | $ | 76 | $ | 364 | |||||||||||||||
Without specific reserves |
791 | 1,176 | | | 969 | 4 | 42 | |||||||||||||||||||||
Total Impaired loans |
$ | 11,012 | $ | 11,518 | $ | 1,005 | $ | 1,671 | 11,200 | $ | 80 | $ | 406 | |||||||||||||||
** | Troubled Debt Restructured |
20
Table of Contents
Non-accrual loan activity is summarized as follows:
Three Months | ||||||||||||||||||||
Ended | Year Ended December 31, | |||||||||||||||||||
In thousands | March 31, 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Balance at the beginning of the period |
$ | 7,283 | $ | 2,734 | $ | 5,819 | $ | 1,125 | $ | 628 | ||||||||||
New loans placed on non-accrual |
753 | 7,846 | 2,427 | 5,046 | 569 | |||||||||||||||
Less: |
||||||||||||||||||||
Loan restored to interest earning status |
| | 1,266 | | | |||||||||||||||
Paid-off: sold in foreclosure |
| | 576 | | | |||||||||||||||
Other real estate owned additions |
| 945 | 2,462 | | | |||||||||||||||
Charge offs |
275 | 1,973 | 1,101 | 236 | 72 | |||||||||||||||
Other including payments received |
618 | 379 | 107 | 116 | | |||||||||||||||
Balance at the end of the period |
$ | 7,143 | $ | 7,283 | $ | 2,734 | $ | 5,819 | $ | 1,125 | ||||||||||
Non-accrual loan activity by category during the three month period ended March 31, 2011 is
summarized as follows:
Commercial | Real Estate | Real Estate | ||||||||||||||||||
and | Owner | Non Owner | ||||||||||||||||||
In thousands | Total | Industrial | SBA | Occupied | Occupied | |||||||||||||||
Balance at the beginning of the period |
$ | 7,283 | $ | 963 | $ | 388 | $ | 3,956 | $ | 1,976 | ||||||||||
New loans placed on non-accrual |
753 | 404 | 70 | 279 | | |||||||||||||||
Less: |
||||||||||||||||||||
Charge offs |
275 | 85 | 143 | 47 | | |||||||||||||||
Other including payments received |
618 | 96 | 40 | 441 | 41 | |||||||||||||||
Balance at the end of the period |
$ | 7,143 | $ | 1,186 | $ | 275 | $ | 3,747 | $ | 1,935 | ||||||||||
Non-accrual loan activity by category during the three month period ended March 31, 2010 is
summarized as follows:
Commercial | Real Estate | Real Estate | ||||||||||||||||||
and | Owner | Non Owner | ||||||||||||||||||
In thousands | Total | Industrial | SBA | Occupied | Occupied | |||||||||||||||
Balance at the beginning of the period |
$ | 2,734 | $ | 2,280 | $ | 454 | $ | | $ | | ||||||||||
New loans placed on non-accrual |
403 | | 403 | | | |||||||||||||||
Less: |
||||||||||||||||||||
Charge offs |
475 | | 475 | | | |||||||||||||||
Other including payments received |
126 | | 126 | | | |||||||||||||||
Balance at the end of the period |
$ | 2,536 | $ | 2,280 | $ | 256 | $ | | $ | | ||||||||||
Non-accrual loans with specific reserves at March 31, 2011 are comprised of:
Commercial loans eight loans to seven borrowers totaling $1.2 million with $0.8
million of specific reserves established.
SBA loans four loans to three borrowers totaling $248 thousand with $119 thousand of
specific reserves established.
Owner-occupied Real Estate loans five loans to six borrowers secured by commercial
property in the amount of $3.2 million with specific reserves established for these loans in the
amount of $646 thousand.
Non-owner
Occupied Real Estate loans five loans to four borrowers, secured by the
residential and commercial property in the amount of $1.9 million, after a partial charge-off of
$106 thousand and with specific reserves of $426 thousand established for the loans. The
borrowers of four of the above loans are controlled by the same individual.
All of these loans are in various stages of collection.
21
Table of Contents
At March 31, 2011, the Company has modified nine loans in amounts totaling $3.9 million which
modifications qualify the loans as Troubled Debt Restructuring (TDR). These loans are included in
the schedule above of accruing impaired loans. These borrowers are in compliance with the modified
terms and are accruing interest. Changes made to the loans included the reduction of loan payments
from principal and interest payments to interest only payments for specific time periods, the
decrease in interest rates charged on a loan and the extension of the maturity of a loan. Specific
reserves were established on the loans as appropriate. The majority of these loans were modified in
the third quarter of 2010 as the adverse economic conditions hampered borrowers current cash
flows.
TDRs included in non-accruing loans are summarized below. Generally the borrowers have not shown
sustained compliance with the modified loan terms.
Recorded | Specific | Recorded | Specific | |||||||||||||
Amount | Reserve | Amount | Reserve | |||||||||||||
March 31, | March 31, | December 31, | December 31, | |||||||||||||
In thousands | 2011 | 2011 | 2010 | 2010 | ||||||||||||
TDR on Non-accrual loans: |
||||||||||||||||
Commercial and Industrial loans: |
||||||||||||||||
With specific reserves |
$ | 151 | $ | 31 | $ | | $ | | ||||||||
Without specific reserves |
| |||||||||||||||
151 | 31 | | | |||||||||||||
Number of loans |
1 | |||||||||||||||
SBA loans: |
||||||||||||||||
With specific reserves |
| | 50 | 50 | ||||||||||||
Without specific reserves |
| | | | ||||||||||||
| | 50 | 50 | |||||||||||||
Number of loans |
1 | |||||||||||||||
Real Estate Owner Occupied: |
||||||||||||||||
With specific reserves |
3,140 | 600 | 3,140 | 483 | ||||||||||||
Without specific reserves |
| | | | ||||||||||||
3,140 | 600 | 3,140 | 483 | |||||||||||||
Number of loans |
4 | 4 | ||||||||||||||
Real Estate Non Owner
Occupied: |
||||||||||||||||
With specific reserves* |
807 | 244 | 819 | 223 | ||||||||||||
Without specific reserves |
| | | | ||||||||||||
807 | 244 | 819 | 223 | |||||||||||||
Number of loans |
2 | 2 | ||||||||||||||
Total TDR Non-accrual Loans: |
||||||||||||||||
With specific reserves |
$ | 4,098 | $ | 875 | $ | 4,009 | $ | 756 | ||||||||
Without specific reserves |
| | | | ||||||||||||
Total TDR Non-accrual loans |
$ | 4,098 | $ | 875 | $ | 4,009 | $ | 756 | ||||||||
Number of loans |
7 | 7 |
At March 31, 2011, there were $4.4 million of performing loans considered potential problem loans,
defined as loans which are not included in the 90 day past due, not reported as troubled debt
restructures or as nonaccrual loans, but for which known information about possible credit problems
causes the Company to be uncertain as to the ability of the borrowers to comply with the present
loan repayment terms which may in the future result in disclosure in the past due, nonaccrual or
restructured loans. The Company closely monitors the financial status of these borrowers.
Generally, the accrual of interest is discontinued when a loan is specifically determined to be
impaired or when principal or interest is delinquent for ninety days or more. Interest may accrue
on TDRs if the borrowers are consistently in compliance with the modified loan terms. During 2011,
there were no amounts included in gross interest income attributable to loans in non-accrual
status.
22
Table of Contents
The following table shows the amounts of non-performing assets on the dates indicated:
March 31, | December 31: | |||||||||||||||||||
In thousands | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Nonaccrual loans: |
||||||||||||||||||||
Commercial and Industrial |
$ | 1,187 | $ | 963 | $ | 2,280 | $ | 1,676 | $ | 868 | ||||||||||
SBA |
275 | 388 | 454 | 542 | 257 | |||||||||||||||
Real estate owner occupied |
3,746 | 3,956 | | 3,601 | | |||||||||||||||
Real estate non owner occupied |
1,935 | 1,976 | | | | |||||||||||||||
Accrual loans past due 90 days and over |
| | | | | |||||||||||||||
Total non-performing loans |
7,143 | 7,283 | 2,734 | 5,819 | 1,125 | |||||||||||||||
Other real estate owned |
2,799 | 3,324 | 2,462 | | | |||||||||||||||
Total non-performing assets |
$ | 9,942 | $ | 10,607 | $ | 5,196 | $ | 5,819 | $ | 1,125 | ||||||||||
Accruing Troubled Debt Restructured loans |
$ | 3,869 | $ | 3,985 | $ | 1,263 | | | ||||||||||||
Allowance for loan losses to total non-performing loans |
50.2 | % | 43.6 | % | 87.1 | % | 32.0 | % | 148.0 | % | ||||||||||
Non-performing loans to total loans |
3.81 | % | 3.94 | % | 1.47 | % | 3.80 | % | 0.89 | % | ||||||||||
Non-performing assets to total assets |
4.81 | % | 5.22 | % | 2.59 | % | 3.49 | % | 0.76 | % |
The payment status of loans receivable at March 31, 2011 is as follows:
Commercial | Real Estate | Real Estate | ||||||||||||||||||
and | Owner | Non Owner | ||||||||||||||||||
In thousands | Total | Industrial | SBA | Occupied | Occupied | |||||||||||||||
Current accruing loans |
$ | 178,752 | $ | 44,765 | $ | 6,722 | $ | 81,142 | $ | 46,123 | ||||||||||
Current non-accruing loans |
1,415 | 167 | | 1,248 | | |||||||||||||||
Past due loans: |
||||||||||||||||||||
30 to 89 days past due |
1,877 | | 74 | 412 | 1,391 | |||||||||||||||
90 days plus past due and accruing |
| | | | | |||||||||||||||
Non-accrual loans, non current |
5,728 | 1,020 | 275 | 2,498 | 1,935 | |||||||||||||||
Total past due loans |
7,605 | 1,020 | 349 | 2,910 | 3,326 | |||||||||||||||
Total loans at the end of the period |
$ | 187,772 | $ | 45,952 | $ | 7,071 | $ | 85,300 | $ | 49,449 | ||||||||||
The Company applies risk ratings to the loans 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 the normal
periodic reviews of the underlying credits indicate that a change in risk rating is appropriate. A
summary of the risk rating of loans receivable at March 31, 2011 follows:
Commercial | Real Estate | Real Estate | ||||||||||||||||||
and | Owner | Non Owner | ||||||||||||||||||
In thousands | Total | Industrial | SBA | Occupied | Occupied | |||||||||||||||
Risk rated pass |
$ | 174,103 | $ | 44,507 | $ | 6,752 | $ | 76,629 | $ | 46,215 | ||||||||||
Risk rated special mention (loan
weaknesses noted which could lead
to loan loss) |
4,236 | 323 | 44 | 2,570 | 1,299 | |||||||||||||||
Risk rated- substandard or doubtful
(loans with significant weaknesses
that could, or has, result in loan
losses) |
9,433 | 1,122 | 275 | 6,101 | 1,935 | |||||||||||||||
Total loans at the end of the period |
$ | 187,772 | $ | 45,952 | $ | 7,071 | $ | 85,300 | $ | 49,449 | ||||||||||
23
Table of Contents
Real estate acquired through or in the process of foreclosure is recorded at fair value less
estimated disposal costs. The Company periodically evaluates the recoverability of the carrying
value of the real estate acquired through foreclosure using current estimates of fair value when it
has reason to believe that real estate values have declined for the particular type and location of
the real estate owned. In the event of a subsequent decline, an allowance would be provided to
reduce real estate acquired through foreclosure to fair value less estimated disposal cost. The
Company
acquired through foreclosure a commercial building with a fair value of approximately $653 thousand
in March 2009. Because of the decline in real estate values in this buildings area, the Company
has reduced the carrying value of this owned building by $153 thousand during 2010 and $75 thousand
in 2011 offsetting these reductions as increases in non-interest expenses. The Company acquired
another commercial building by foreclosure in November 2009 with a fair value of approximately $1.8
million. The Company also acquired through foreclosure five residential properties, comprised of
four condominium units and one single family residence, during the fourth quarter of 2010. The
house and one of the condominiums were sold in 2011. The fair value of these properties, and the
recorded amount of the other real estate owned was $555 thousand at March 31, 2011. The Company is
leasing the commercial properties and several of the residential condominiums to others under short
term leases as it offers them for sale. Net income from the operations of the properties was $16
thousand during the three months ended March 31, 2011 and $4 thousand during the first three months
of 2010. There was no financing of OREO sales during 2011 or 2010.
Investment Portfolio. At March 31, 2011, December 31, 2010 and March 31, 2010, the Company had no
investments in securities other than investments in Federal Reserve Bank stock as required by
regulation and stock in two bankers banks. The Company is maintaining its liquid assets in its
account at the Federal Reserve and fully FDIC insured certificates of deposits in other financial
institutions for safety and liquidity purposes. The Company will make additional investments when
interest rates have increased and the Company has sufficient excess liquidity. The following table
provides information regarding the composition of the Companys investment securities portfolio at
the dates indicated.
Investment in Stocks | ||||||||||||||||
March 31, 2011 | December 31, 2010 | |||||||||||||||
In thousands | Amount | Percent | Amount | Percent | ||||||||||||
Investments in
stocks, at cost; |
||||||||||||||||
Federal Reserve Stock |
$ | 465 | 88.24 | % | $ | 465 | 88.24 | % | ||||||||
Corporate equities |
62 | 11.76 | % | 62 | 11.76 | % | ||||||||||
Total stocks |
$ | 527 | 100.00 | % | $ | 527 | 100.00 | % | ||||||||
These stock holdings are recorded at cost as they are not readily marketable.
Deposits and Liquidity. The Company currently has no business other than that of the Bank and does
not currently have any material funding commitments unrelated to that business. The Banks
principal sources of funds for loans, investments and general operations are deposits from its
primary market area, principal and interest payments on loans, and proceeds from maturing
investment securities. Its principal funding commitments are for the origination or purchase of
loans and the payment of maturing deposits, and the payment for checks drawn upon it. The Banks
most liquid assets are cash and cash equivalents, which are cash on hand, amounts due from other
financial institutions including the Federal Reserve and Federal funds sold. The levels of such
assets are dependent on the Banks lending, investment and operating activities at any given time.
The variations in levels of liquid assets are influenced by deposit flows and loan demand, both
current and anticipated.
The Companys 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. The Company generally targets larger deposit relationships by offering competitive
interest rates on certificates of deposit of $75 thousand or more in our local markets. Deposits
from the local market areas are supplemented 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, 23.1% at March 31,
2011 and 24.5% at December 31, 2010 and 34.2% at March 31, 2010, are comprised of certificate of
deposit accounts of $100 thousand or more. Total certificates of deposit represent 68.2% of
deposits at March 31, 2011 and 68.5% of deposits at December 31, 2010 and 75.9% at March 31, 2010.
24
Table of Contents
The Companys reliance on certificates of deposit, including the use of larger denomination
certificates of deposit and brokered deposits, facilitates funding the growth in the loan
portfolio. The Company 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 insured deposit limit of $250 thousand. All of the brokered deposits
and national market deposits are fully insured by the FDIC. This insurance and the strong capital
position of the Company reduce the likelihood of large deposit withdrawals for reasons other than
interest rate competition. Interest rates on these deposits can be, but are not always, higher than
other deposits products. There is, however, a risk that some deposits would be lost if rates were
to increase and the Company elected not to remain competitive with its own deposit rates. Under
those conditions, the Company 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 March 31, 2011, deposits totaled $182.7 million as compared to $180.1 million at December 31,
2010. The $2.6 million increase in deposits resulted from the $1.7 million increase in noninterest
bearing deposits, the $0.8 million increase in savings accounts balance, the increase of $1.3
million in the amount of certificates of deposit and the decrease of $1.3 million in interest
bearing demand deposits and money market accounts. There were $34.1 million and $33.1 million of
brokered certificates of deposit at March 31, 2011 and December 31, 2010, respectively. Included in
these brokered deposits at March 31, 2011 are $8.2 million of certificates of deposits received in
exchange for the placement of the Companys customers deposit funds with other financial
institutions under the CDARS program. Included in deposits are deposits of officers and directors
(and their affiliated entities) of $12.4 million at March 31, 2011.
As a result of the enactment of the Dodd-Frank Act, banks are no longer prohibited from paying
interest on demand deposit accounts, including those from businesses, effective in July 2011. If
the Company starts to pay interest on these accounts, its net interest margin would decline. It is
not clear what affect the elimination of this prohibition will have on the Banks interest expense,
allocation of deposits, deposit pricing, loan pricing, net interest margin, ability to compete,
ability to establish and maintain customer relationships, or profitability.
Deposits are summarized below as of dates indicated:
March 31, | % | December 31: | ||||||||||||||||||
2011 | Change | 2010 | 2009 | 2008 | ||||||||||||||||
In thousands |
||||||||||||||||||||
Non-interest bearing deposits |
$ | 25,442 | 7.1 | % | $ | 23,760 | $ | 21,024 | $ | 23,599 | ||||||||||
Interest bearing deposits: |
||||||||||||||||||||
NOW accounts |
251 | (80.4 | %) | 1,279 | $ | 309 | $ | 1,247 | ||||||||||||
Money Market accounts |
8,618 | (2.3 | %) | 8,824 | 7,841 | 13,049 | ||||||||||||||
Savings accounts |
23,796 | 3.6 | % | 22,962 | 10,379 | 148 | ||||||||||||||
Certificates of deposit accounts: |
||||||||||||||||||||
Less than $100,000 |
82,437 | 4.1 | % | 79,209 | 71,593 | 37,539 | ||||||||||||||
$100,000 or more |
42,125 | (4.4 | %) | 44,076 | 67,499 | 69,659 | ||||||||||||||
Total interest bearing
deposits |
157,227 | 0.6 | % | 156,350 | 157,621 | 121,642 | ||||||||||||||
Total deposits |
$ | 182,669 | 1.4 | % | $ | 180,110 | $ | 178,645 | $ | 145,241 | ||||||||||
25
Table of Contents
The table below shows the maturities of certificates of deposit:
March 31, 2011 | December 31, 2010 | |||||||||||||||
CDs of | ||||||||||||||||
CDs of $100,000 | $100,000 or | |||||||||||||||
or more | All CDs | more | All CDs | |||||||||||||
In thousands |
||||||||||||||||
Three months or less |
$ | 15,520 | $ | 28,518 | $ | 9,228 | $ | 21,682 | ||||||||
Over three months to six months |
7,226 | 17,788 | 15,492 | 28,124 | ||||||||||||
Over six months to twelve months |
1,946 | 15,744 | 7,486 | 29,325 | ||||||||||||
Over twelve months through three years |
14,973 | 57,107 | 9,058 | 36,497 | ||||||||||||
Over three years |
2,460 | 5,405 | 2,812 | 7,657 | ||||||||||||
Total |
$ | 42,125 | $ | 124,562 | $ | 44,076 | $ | 123,285 | ||||||||
The table below shows the source of the Companys certificate of deposits as well as the amount
equal to or greater than $100,000 at March 31, 2011:
CDs with | CDs with balances | |||||||||||
balances of less | of $100,000 or | |||||||||||
In thousands | than $100,000 | greater | Total | |||||||||
Source |
||||||||||||
Local markets |
$ | 6,472 | $ | 26,574 | $ | 33,046 | ||||||
National market |
56,937 | 448 | 57,385 | |||||||||
CDARS program: |
||||||||||||
Customers funds |
571 | 7,545 | 8,116 | |||||||||
Proprietary funding |
3,704 | 6,355 | 10,059 | |||||||||
Other brokered funds |
14,753 | 1,203 | 15,956 | |||||||||
Total |
$ | 82,437 | $ | 42,125 | $ | 124,562 | ||||||
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 of $250,000. 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 Companys short term liquid assets of cash and cash equivalents were $15.4 million, or 7.5% of
assets, and $13.7 million, or 6.8%, of assets at March 31, 2011 and December 31, 2010,
respectively. Continued growth in deposits will be required to fund any 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.
The Company has available unsecured credit facilities for short-term liquidity needs from financial
institutions of $8.5 million at March 31, 2011 and December 31, 2010. There were no borrowings
outstanding under these credit arrangements at during 2011 or 2010.
The Company believes its levels of liquidity are adequate to conduct the business of the Company
and Bank.
OFF-BALANCE SHEET ARRANGEMENTS
Standby letters of credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. The credit risk involved in issuing letters of credit
is essentially the same as that involved in extending loan facilities to customers. The Company
holds collateral supporting those commitments for which collateral is deemed necessary. The Company
has not been required to perform on any financial guarantees and has not recorded or incurred any
losses on its commitments. The issuance of letters of credit is not a significant activity of the
Company. Outstanding letters of credit at March 31, 2011 and December 31, 2010 totaled $1.3
million.
Commitments to extend credit are agreements to lend funds to customers as long as there are no
violations of any condition established in the loan contracts. These commitments include
commitments to lend funds as well as un-advanced loan funds. These commitments at March 31, 2011
totaled $34.1 million and $41.6 million at December 31, 2010. Commitments generally have fixed
expiration dates or other termination clauses and may require payment
of a fee. Since many of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
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With the exception of these off-balance sheet arrangements, the Company has no off-balance sheet
arrangements that have or are reasonably likely to have a current or future effect on the Companys
financial condition, changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures, or capital resources, that is material to investors.
CAPITAL ADEQUACY
The Federal Reserve Board and the FDIC have established guidelines with respect to the maintenance
of appropriate levels of capital by bank holding companies and state non-member banks,
respectively. The regulations impose two sets of capital adequacy requirements: minimum leverage
rules, which require bank holding companies and banks to maintain a specified minimum ratio of
capital to total assets, and risk-based capital rules, which require the maintenance of specified
minimum ratios of capital to risk-weighted assets. At March 31, 2011, the Company and the Bank
were in full compliance with these guidelines, as follows:
Minimum Ratios | ||||||||||||||||
March 31, | December 31, | To be Adequately | To be Well | |||||||||||||
2011 | 2010 | Capitalized | Capitalized | |||||||||||||
Total capital: |
||||||||||||||||
Company |
13.1 | % | 13.1 | % | 8.0 | % | N/A | |||||||||
Bank |
12.4 | % | 12.3 | % | 8.0 | % | 10.0 | % | ||||||||
Tier I: |
||||||||||||||||
Company |
11.9 | % | 11.8 | % | 4.0 | % | N/A | |||||||||
Bank |
11.2 | % | 11.1 | % | 4.0 | % | 6.0 | % | ||||||||
Leverage Total: |
||||||||||||||||
Company |
11.2 | % | 11.0 | % | 4.0 | % | N/A | |||||||||
Bank |
10.5 | % | 10.3 | % | 4.0 | % | 5.0 | % |
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
Companys 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 preferred stock (which the Company is
not currently authorized to issue), 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 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 the Company may be required to maintain higher levels of
capital than it would otherwise be expected to maintain as a result of its levels of construction,
development and commercial real estate loans, which may require us to obtain additional capital.
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.
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ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 4 CONTROLS AND PROCEDURES
The Companys management, under the supervision and with the participation of the Chief Executive
Officer and Chief Financial Officer, evaluated, as of the last day of the period covered by this
report, the effectiveness of the design and operation of the Companys disclosure controls and
procedures, as defined in Rule 13a-15 under the Securities Exchange Act of 1934. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys
disclosure controls and procedures were effective. There were no changes in the Companys internal
control over financial reporting (as defined in Rule 13a-15 under the Securities Act of 1934)
during the quarter ended March 31, 2011 that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial reporting.
PART II OTHER INFORMATION
Item 1 Legal Proceedings
In the normal course of its business, the Company is involved in litigation arising from banking,
financial, and other activities it conducts. Management, after consultation with legal counsel,
does not anticipate that the ultimate liability, if any, arising out of these matters will have a
material effect on the Companys financial condition, operating results or liquidity.
Item 1A Risk Factors
Not applicable
Item 2 Unregistered Sale of Equity Securities and Use of Proceeds
(a) Sales of Unregistered Securities. None
(b) Use of Proceeds.Not applicable.
(c) Issuer Purchases of Securities. None
Item 3. Defaults Upon Senior Securities. None
Item 4 [Removed and Reserved]
Item 5 Other Information
(a) Information Required to be Reported on Form 8-K. None
(b) Changes in Security Holder Nomination Procedures. None
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Item 6 Exhibits
Exhibit No. | Description of Exhibits | |||
3 | (a) | Certificate of Incorporation of the Company, as amended (1) |
||
3 | (b) | Bylaws of the Company (1) |
||
10 | (a) | Employment Agreement between Richard J. Morgan and the Company (2) |
||
10 | (b) | Employment Agreement between Lamont Thomas and the Company (3) |
||
10 | (c) | First Amendment to Employment Agreement between Lamont Thomas and the Company (4) |
||
10 | (d) | Employment Agreement between Michael T. Storm and CommerceFirst Bank (5) |
||
10 | (e) | Extension of Employment Agreement between Richard J. Morgan and the Company (6) |
||
11 | Statement regarding Computation of Per Share Income See Notes to Financial Statements. |
|||
21 | Subsidiaries of the Registrant -The sole subsidiary of the Registrant is CommerceFirst Bank,
a Maryland chartered commercial bank. |
|||
31 | (a) | Certification of Richard J. Morgan, President and CEO |
||
31 | (b) | Certification of Michael T. Storm, Executive Vice President and Chief Financial Officer |
||
32 | (a) | Certification of Richard J. Morgan, President and Chief Executive Officer |
||
32 | (b) | Certification of Michael T. Storm, Executive Vice President and Chief Financial Officer |
(1) | Incorporated by reference to exhibit of the same number filed with the Companys
Registration Statement on Form SB-2, as amended, (File No. 333-91817) |
|
(2) | Incorporated by reference to exhibit 10(b) to the Companys to Registration Statement on Form
SB-2, as amended) (File No. 333-91817) |
|
(3) | Incorporated by reference to exhibits 10(c) to the Companys to Registration Statement on
Form SB-2, as amended) (File No. 333-91817) |
|
(4) | Incorporated by reference to Exhibit 10(d) to the Companys Quarterly Report on Form 10-QSB
for the period ended March 31, 2007. |
|
(5) | Incorporated by reference to Exhibit 10(e) to the Companys Quarterly Report on Form 10-QSB
for the period ended September 30, 2007. |
|
(6) | Incorporated by reference to Exhibit 99 to the Companys Current Report on Form 8-K filed on
January 30, 2009. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
COMMERCEFIRST BANCORP, INC. |
||||
Date: May 9, 2011 | By: | /s/ Richard J. Morgan | ||
Richard J. Morgan, President and Chief Executive Officer | ||||
Date: May 9, 2011 | By: | /s/ Michael T. Storm | ||
Michael T. Storm, Executive Vice President and Chief Financial Officer |
30