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Table of Contents

 
 
UNITED STATES
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 SEPTEMBER 30, 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)
410-280-6695
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by checkmark 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 þ 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 Rule12b-2 of the Securities Exchange Act). Yes o No þ
As of November 1, 2011 the number of outstanding shares of registrant’s 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 SEPTEMBER 30, 2011 and 2010:
       
 
       
    4  
 
       
    5  
 
       
    6  
 
       
    7-10  
 
       
    11-30  
 
       
    30  
 
       
    30  
 
       
       
 
       
    30  
 
       
    30  
 
       
    30  
 
       
    30  
 
       
    30  
 
       
    30  
 
       
    31  
 
       
    31  
 
       
 Exhibit 31(a)
 Exhibit 31(b)
 Exhibit 32(a)
 Exhibit 32(b)
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 

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CommerceFirst Bancorp, Inc. and Subsidiary
Consolidated Statements of Financial Condition
September 30, 2011 and December 31, 2010
(Dollars in thousands except per share data)
                 
    September 30,     December 31,  
    2011     2010  
    (Unaudited)     (Audited)  
ASSETS
               
 
               
Cash and due from banks
  $ 2,158     $ 1,437  
Interest bearing deposits
    18,059       12,289  
 
           
Cash and cash equivalents
    20,217       13,726  
Investments in restricted stocks, at cost
    527       527  
 
               
Loans receivable
    180,748       184,883  
Allowance for loan losses
    (3,038 )     (3,174 )
 
           
Net loans receivable
    177,710       181,709  
 
           
Premises and equipment, net
    442       556  
Accrued interest receivable
    754       750  
Deferred income taxes
    1,087       1,133  
Other real estate owned
    2,637       3,324  
Other assets
    1,423       1,399  
 
           
Total Assets
  $ 204,797     $ 203,124  
 
           
 
               
LIABILITIES
               
 
               
Non-interest bearing deposits
  $ 28,059     $ 23,760  
Interest bearing deposits
    152,208       156,350  
 
           
Total deposits
    180,267       180,110  
 
               
Accrued interest payable
    99       106  
Other liabilities
    670       543  
 
           
Total Liabilities
    181,036       180,759  
 
           
 
               
STOCKHOLDERS’ EQUITY
               
Common stock — $.01 par value; authorized 4,000,000 shares. Issued and outstanding: 1,820,548 shares at September 30, 2011 and at December 31, 2010
    18       18  
Additional paid-in capital
    17,853       17,853  
Retained earnings
    5,890       4,494  
 
           
Total Stockholders’ Equity
    23,761       22,365  
 
           
Total Liabilities and Stockholders’ Equity
  $ 204,797     $ 203,124  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

 

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CommerceFirst Bancorp, Inc. and Subsidiary
Consolidated Statements of Operations
For the Nine and Three Months ended September 30, 2011 and 2010 (Unaudited)
(Dollars in thousands except per share data)
                                 
    Nine Months Ended     Three Months Ended  
    September 30,     September 30,  
    2011     2010     2011     2010  
Interest income:
                               
Interest and fees on loans
  $ 9,099     $ 9,471     $ 3,024     $ 3,179  
Investment in stocks
    21       21       7       7  
Interest bearing deposits
    44       41       16       17  
 
                       
Total interest income
    9,164       9,533       3,047       3,203  
 
                       
 
                               
Interest expense:
                               
Deposits
    1,628       2,500       510       753  
 
                       
Total interest expense
    1,628       2,500       510       753  
 
                       
 
                               
Net interest income
    7,536       7,033       2,537       2,450  
 
                               
Less provision for loan losses
    1,894       1,646       586       612  
 
                       
 
    5,642       5,387       1,951       1,838  
 
                       
 
                               
Non-interest income:
                               
Gain on sales of SBA loans
    366       419       23       49  
Gain on sales of other real estate owned
    97             45        
Service charges and other income
    448       361       158       115  
 
                       
Total non-interest income
    911       780       226       164  
 
                       
 
                               
Non-interest expenses:
                               
Compensation and benefits
    2,328       2,220       785       756  
Legal and professional
    172       188       53       56  
Rent and occupancy
    429       424       147       145  
Marketing and business development
    64       64       18       16  
FDIC insurance
    168       239       13       83  
Data processing
    115       109       40       37  
Support services
    157       149       49       47  
Loan collection
    145       49       56       12  
Other real estate owned loss provision
    125       75             75  
Communications
    99       95       32       32  
Depreciation and amortization
    148       175       46       57  
Other
    322       261       114       92  
 
                       
Total non-interest expenses
    4,272       4,048       1,353       1,408  
 
                       
Income before income taxes
    2,281       2,119       824       594  
Income tax expense
    885       847       329       238  
 
                       
Net income
  $ 1,396     $ 1,272     $ 495     $ 356  
 
                       
Basic and diluted earnings per share
  $ 0.77     $ 0.70     $ 0.27     $ 0.20  
 
                       
The accompanying notes are an integral part of these consolidated financial statements.

 

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CommerceFirst Bancorp, Inc. and Subsidiary
Consolidated Statements of Stockholders’ Equity
For the Nine Months Ended September 30, 2011 and 2010
(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- September 30, 2010
                1,272       1,272  
 
                       
 
                               
Balance September 30, 2010
  $ 18     $ 17,853     $ 4,343     $ 22,214  
 
                       
 
                               
Balance December 31, 2010
  $ 18     $ 17,853     $ 4,494     $ 22,365  
 
                               
Net income- September 30, 2011
                1,396       1,396  
 
                       
 
                               
Balance September 30, 2011
  $ 18     $ 17,853     $ 5,890     $ 23,761  
 
                       
The accompanying notes are an integral part of these consolidated financial statements.

 

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CommerceFirst Bancorp, Inc. and Subsidiary
Consolidated Statement of Cash Flows
For the Nine Months Ended September 30, 2011 and 2010
(Dollars in thousands)
(Unaudited)
                 
    September 30,     September 30,  
    2011     2010  
CASH FLOWS FROM OPERATING ACTIVITIES
               
Net income
  $ 1,396     $ 1,272  
Adjustments to reconcile net income to net cash provided by operations:
               
Depreciation and amortization
    148       175  
Gain on sales of SBA loans
    (366 )     (419 )
Gain on sales of other real estate owned
    (97 )      
Provision for loan losses
    1,894       1,646  
Provision for losses on unfunded commitments
          6  
Write-downs of other real estate owned
    125       75  
Deferred income taxes
    46       29  
Change in assets and liabilities:
               
Increase in accrued interest receivable
    (4 )     (89 )
Increase in other assets
    (24 )     (64 )
Decrease in accrued interest payable
    (7 )     (25 )
Increase in other liabilities
    127       42  
 
           
Net cash provided by operating activities
    3,238       2,648  
 
           
 
               
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from sale of SBA loans
    5,132       6,635  
Increase in loans, net
    (3,738 )     (6,858 )
Proceeds from sales of other real estate owned
    1,736        
Purchase of premises and equipment
    (34 )     (32 )
 
           
Net cash provided (used) by investing activities
    3,096       (255 )
 
           
 
               
CASH FLOWS FROM FINANCING ACTIVITIES
               
Increase in non-interest bearing deposits, net
    4,299       4,308  
(Decrease) increase in other deposits, net
    (4,142 )     13  
 
           
Net cash provided by financing activities
    157       4,321  
 
           
 
               
Net increase in cash and cash equivalents
    6,491       6,714  
Cash and cash equivalents at beginning of period
    13,726       10,488  
 
           
Cash and cash equivalents at end of period
  $ 20,217     $ 17,202  
 
           
 
               
SUPPLEMENTAL CASH FLOW INFORMATION
               
Interest paid
  $ 1,635     $ 2,525  
 
           
Income taxes paid
  $ 1,275     $ 1,140  
 
           
Transfer of loans to real estate owned
  $ 1,077     $  
 
           
The accompanying notes are an integral part of these consolidated financial statements.

 

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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 Company’s Annual Report for the year ended December 31, 2010. The financial data at September 30, 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, certificate of deposits with maturities of less than one year and Federal funds sold, if any.
Certain prior period amounts have been reclassified to conform to the current period’s 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 is 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 Company’s 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 1 or Level 2 inputs at September 30, 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 September 30, 2011, these assets include $5.0 million of non-accrual loans ($3.7 million after specific reserves) and other real estate owned of $2.6 million all of which are valued under Level 3 inputs.

 

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The changes in the assets subject to fair value measurements on a non-recurring basis 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
          2,323  
Payments and other loan reductions
          (1,479 )
Foreclosed — to other real estate owned
          (979 )
Loans charged-off
          (2,158 )
 
           
Net change in loans
          (2,293 )
 
           
 
               
Other real estate owned:
               
Additions to other real estate owned
          1,077  
Sales of other real estate owned
          (1,639 )
Provision for valuation reduction
          (125 )
 
           
Net change in other real estate owned
          (687 )
 
           
September 30, 2011:
               
Loans
          4,990  
Other real estate owned
          2,637  
 
           
Total September 30, 2011
  $     $ 7,627  
 
           
The estimated fair values of the Company’s financial instruments at September 30, 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.
                                 
    September 30, 2011     December 31, 2010  
    Carrying     Fair     Carrying     Fair  
In thousands   Amount     Value     Amount     Value  
Financial assets:
                               
Cash and due from banks
  $ 2,158     $ 2,158     $ 1,437     $ 1,437  
Interest bearing deposits
    18,059       18,059       12,289       12,289  
Investments in restricted stock
    527       527       527       527  
Loans, net
    177,710       187,774       181,709       191,353  
Accrued interest receivable
    754       754       750       750  
 
                               
Financial liabilities:
                               
Non-interest bearing deposits
  $ 28,059     $ 28,059     $ 23,760     $ 23,760  
Interest bearing deposits
    152,208       153,834       156,350       157,228  
Accrued interest payable
    99       99       106       106  
 
                               
Off-balance sheet commitments
                       

 

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Fair values are based on quoted market prices for similar instruments or estimated using discounted cash flows. The discounts used are estimated using comparable market rates for similar types of instruments adjusted to be commensurate with the credit risk, overhead costs and optionality of such instruments.
The fair value of cash and due from banks, interest bearing deposits, federal funds sold, investments in restricted stocks and accrued interest receivable are equal to the carrying amounts. The fair values of investment securities are determined using market quotations. The fair value of loans receivable is estimated using discounted cash flow analysis.
The fair value of non-interest bearing deposits, interest-bearing checking, savings, and money market deposit accounts, securities sold under agreements to repurchase, and accrued interest payable are equal to the carrying amounts. The fair value of fixed maturity time deposits is estimated using discounted cash flow analysis.
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.
                                 
    Nine Months     Three Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
Weighted average shares outstanding
    1,820,548       1,820,548       1,820,548       1,820,548  
Common stock equivalents
                       
 
                       
Average common shares and equivalents
    1,820,548       1,820,548       1,820,548       1,820,548  
 
                       
Net income
  $ 1,396     $ 1,272     $ 495     $ 356  
Basic earnings per share
  $ 0.77     $ 0.70     $ 0.27     $ 0.20  
Diluted earnings per share
  $ 0.77     $ 0.70     $ 0.27     $ 0.20  
During 2010, all of the outstanding warrants and options were excluded from the calculation of diluted income per share because they were anti-dilutive. All the warrants and options expired in 2010.
Note 4. Related Party Transactions
The Company paid $90 thousand during the first nine months of 2011 for legal services to a firm of which a Director of the Company is a principal. The Company also paid $37 thousand during the nine months ended September 30, 2011 for computer related services to a 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 September 30, 2011 the amounts of such loans outstanding were $2.9 million.
Deposit balances of executive officers, directors and their affiliated interests totaled $11.8 million at September 30, 2011.

 

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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 September 30, 2011 are as follows:
         
In millions        
Loan commitments
  $ 8.2  
Unused lines of credit
  $ 32.8  
Letters of Credit
  $ 1.3  
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 entity’s 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 Company’s 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 September 30, 2011.
In April 2011, the FASB issued ASU No. 2011-02, Receivable (Topic 310), A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. The main objective of the ASU is to clarify a creditor’s 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 loans under prior guidance. The Company has complied with ASU No. 2011-02 as of September 30, 2011.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The main objective of the ASU is to conform the requirements for measuring fair value and the disclosure information under U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS). The amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for the disclosure about fair value measurements. Other amendments clarify existing requirements and change particular principles or requirements for measuring fair value or disclosing information about fair value measurements. The ASU is effective for the first interim or annual period beginning on or after December 15, 2011, early application for public entities is not permitted. The Company will review the requirements of ASU No. 2011-04 and comply with its requirements. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

 

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The FASB has issued several exposure drafts which, if adopted, would significantly alter the Company’s (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 and consideration. The FASB is scheduled to complete their deliberations by year end, December 31, 2011.
ITEM 2.  
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements
Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar import. Such forward-looking statements involve known and unknown risks including, but not limited to, changes in general economic and business conditions, interest rate fluctuations, competition within and from outside the banking industry, new products and services in the banking industry, risk inherent in making loans such as repayment risks and fluctuating collateral values, problems with technology utilized by the Company, changing trends in customer profiles and changes in laws, 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 Company’s past results are not necessarily indicative of future performance. Please refer to the “Risk Factors” section of the Company’s 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.
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 Company’s common stock trades on the NASDAQ Capital Market under the symbol “CMFB”. The Company maintains five banking offices in Anne Arundel, Howard and Prince George’s counties in central Maryland. The Company focuses on providing commercial banking services to small and medium sized business in its market areas.
The Company’s assets increased modestly at September 30, 2011 from December 31, 2010 with increases in cash and cash equivalents offset by a decline in loans receivable. Earnings increased 9.8% in the nine month period ended September 30, 2011 as compared to the nine months ended September 30, 2010. The improvement in net interest income offset the increases in the provision for loan losses, write-downs on other real estate owned and loan collections expenses. The provision for loan losses continues to be high in recognition of the effect of uncertain economic conditions on the Company’s borrowers and collateral values as well as loan charge-offs. Key measurements and events for the period include the following:
   
The Company’s net income was $1.4 million during the nine months ended September 30, 2011 as compared to net income of $1.3 million for the nine months ended September 30, 2010.
   
Net interest income, the Company’s main source of income, increased by 7.2% from $7.0 million during the nine months ended September 30, 2010 to $7.5 million for the nine months ended September 30, 2011.

 

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Total assets increased by 0.8% from $203 million at December 31, 2010 to $205 million at September 30, 2011.
   
Net loans outstanding decreased by 2.2% from $182 million at December 31, 2010 to $178 million as of September 30, 2011.
   
Deposits increased by 0.1% from $180.1 million at December 31, 2010 to $180.3 million at September 30, 2011.
   
Non-interest income increased by 16.8% from $780 thousand for the nine months ended September 30, 2010 to $911 thousand for the nine months ended September 30, 2011.
   
Non-interest expenses increased by 5.5% from $4.0 million for the nine months ended September 30, 2010 to $4.3 million for the nine months ended September 30, 2011.
A discussion of the factors leading to these changes can be found in the discussion below.
Critical Accounting Policies
The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow general practices within the 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.
The most significant accounting policies followed by CommerceFirst Bancorp, Inc. are presented in Note 1 to the Company’s 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 Company’s assessments may be affected in future periods by changes in economic conditions, the impact of regulatory examinations and the discovery of information with respect to borrowers that is not known to management at the time of the issuance of the consolidated financial statements.

 

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RESULTS OF OPERATIONS
General. The Company reported net income of $1.4 million for the nine months ended September 30, 2011 as compared to net income of $1.3 million for the nine month period ended September 30, 2010. Earnings increased during 2011 as compared to 2010 because the increase in net interest income exceeded the increase in the provision for loan losses of $248 thousand, the write-downs of other real estate owned of $125 thousand and the increase in loan collection expenses of $96 thousand. Net interest margin increased primarily as the result of the reduction in the cost of deposits. The provision for loan losses was $1.9 million during 2011 as compared to $1.6 million in 2010, an increase of $248 thousand, or 15.1%. The Company continues to experience the detrimental effects of the weakened economy on its loan customers which effects are recognized through the Company’s provision for loan losses and loan charge-offs. The amount of non-accrual loans decreased by $2.3 million, or 31.5%, at September 30, 2011 as compared to December 31, 2010.
Net interest income increased by $503 thousand, or 7.2%, in 2011 as compared to 2010. This increase resulted primarily from the reduction in the cost of deposits. During the second half of 2010 and the first half of 2011 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 high interest rate 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.
                         
    Nine Months Ended     Year ended  
    September 30,     December 31,  
    2011     2010     2010  
 
                       
Return on Average Equity
    8.03 %     7.80 %     8.61 %
 
                       
Return on Average Earning Assets
    0.93 %     0.84 %     0.94 %
 
                       
Ratio of Average Equity to Average Assets
    11.27 %     10.45 %     10.62 %
Nine months ended September 30, 2011
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 Company’s 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 $369 thousand or 3.9% to $9.2 million for the nine month period ended September 30, 2011 as compared to the same period in 2010. This decrease in interest income was primarily attributable to the decline in the yield on loans from 6.86% in 2010 to 6.63% in 2011.
Interest expense decreased by $872 thousand or 34.9% to $1.6 million for the nine months ended September 30, 2011 as compared to $2.5 million during the same nine months of 2010. This decrease was primarily attributable to the 65 basis point decrease in the cost of funds from 2.04% during the first nine months of 2010 to 1.39% during the first nine months of 2011. Also contributing to the reduction in the cost of funds was a $7.5 million decrease in average interest bearing liabilities during 2011 as compared to 2010.

 

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The net interest income for the nine month period ended September 30, 2011 was $7.5 million as compared to $7.0 million for the same period in 2010. Net interest income increased primarily because of the reduced cost of funds during the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010.
The following table shows the average balances and average rates earned or paid on of the various categories of the Company’s assets and liabilities for the nine month period ended September 30 of each year. Nonperforming loans are included in average loan balances in the following table:
                                                                         
NINE MONTHS   2011     2010     2009  
    Average             Yields/     Average             Yields/     Average             Yields/  
In thousands   Balance     Interest     Rates     Balance     Interest     Rates     Balance     Interest     Rates  
Assets
                                                                       
Loans, net of unearned income (2)
  $ 183,500     $ 9,099       6.63 %   $ 184,680     $ 9,471       6.86 %   $ 165,615     $ 8,606       6.95 %
Interest-bearing deposits in other banks
    16,603       44       0.35 %     17,330       41       0.32 %     8,984       17       0.25 %
Securities (1)
    527       21       5.33 %     527       21       5.33 %     3,018       101       4.47 %
Federal funds sold
                      43             0.19 %     1,211       2       0.22 %
 
                                                     
Total interest-earning assets
    200,630       9,164       6.10 %     202,580       9,533       6.29 %     178,828       8,726       6.52 %
 
                                                     
 
                                                                       
Less allowance for loan losses
    (3,492 )                     (2,326 )                     (2,133 )                
Non interest earning assets
    9,108                       8,454                       5,693                  
 
                                                                 
Total assets
  $ 206,246                     $ 208,708                     $ 182,388                  
 
                                                                 
Liabilities & Stockholders’ Equity
                                                                       
Interest-bearing deposits
                                                                       
Interest bearing demand deposits
  $ 645     $       0.04 %   $ 714     $       0.04 %   $ 1,965     $ 1       0.07 %
Money market deposit accounts
    8,536       24       0.38 %     7,911       28       0.47 %     12,335       49       0.53 %
Savings accounts
    24,547       207       1.13 %     15,563       164       1.41 %     2,183       31       1.90 %
Certificates of deposit
    122,434       1,397       1.53 %     139,435       2,308       2.21 %     123,267       3,466       3.76 %
 
                                                     
Total interest-bearing liabilities
    156,162       1,628       1.39 %     163,623       2,500       2.04 %     139,750       3,547       3.39 %
 
                                                                 
Demand deposits and other liabilities
    26,850                       23,275                       22,130                  
 
                                                                 
Total liabilities
    183,012                       186,898                       161,880                  
 
                                                                 
Stockholders’ equity
    23,234                       21,810                       20,508                  
 
                                                                 
Total liabilities and stockholders’ equity
  $ 206,246                     $ 208,708                     $ 182,388                  
 
                                                                 
Interest rate spread
                    4.71 %                     4.25 %                     3.13 %
 
                                                                 
Net interest income and margin
          $ 7,536       5.02 %           $ 7,033       4.64 %           $ 5,179       3.87 %
 
                                                           
     
(1)  
Yields on securities are calculated based on amortized cost.
 
(2)  
Loan balances include loans on nonaccrual
Net interest margin was 5.02% in the first nine months of 2011, as compared to 4.64% in the comparable period in 2010. Interest spread was 4.71% in the first nine months of 2011, as compared to the 4.25% in the first nine months of 2010 reflecting the larger 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 substantially all of the significantly higher costing funds have been re-priced to lower levels.

 

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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 year’s rate) and (ii) changes in rates (change in rate multiplied by the current year’s volume).
                                                 
    September 30, 2011 vs.     September 30, 2010 vs.  
    2010     2009  
    Increase (Decrease)     Increase (Decrease)  
In thousand   Volume     Rate     Total     Volume     Rate     Total  
Interest-Earning Assets:
                                               
Loans receivable
  $ (61 )   $ (311 )   $ (372 )   $ 991     $ (126 )   $ 865  
Interest bearing deposits
    (2 )     5       3       16       8       24  
Investment portfolio
                      (84 )     4       (80 )
Federal funds sold
                      (2 )           (2 )
 
                                   
Net Change in Interest Income
    (63 )     (306 )     (369 )     921       (114 )     807  
 
                                   
 
                                               
Interest Bearing Liabilities:
                                               
Interest bearing deposits
    (113 )     (759 )     (872 )     528       (1,575 )     (1,047 )
 
                                   
Net Change in Interest Expense
    (113 )     (759 )     (872 )     528       (1,575 )     (1,047 )
 
                                   
Change in Net Interest Income
  $ 50     $ 453     $ 503     $ 393     $ 1,461     $ 1,854  
 
                                   
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 management’s ongoing assessment of the Company’s credit exposure and consideration of certain other relevant factors. The provision for loan losses was $1.9 million the nine months ended September 30, 2011 as compared to $1.6 million for the nine months ended September 30, 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 sales of other real estate owned as well as from deposit account services charges. For the nine months ended September 30, 2011, gains on sales of the guaranteed portion of SBA loans were $366 thousand whereas gains on sales of SBA loans amounted to $419 thousand during the first nine 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. The volume of SBA loans origination has been declining and the Company expects continued reduced gains on these loan sales. The Company had gains from the sales of other real estate owned of $97 thousand in the first nine months of 2011. There were no sales of other real estate owned in 2010. Deposit account service charges and other income amounted to $448 thousand during the nine months ended September 30, 2011 as compared to $361 thousand for the same period in 2010, reflecting an increase in the number of accounts and activity subject to service charges on such deposit accounts.
Non-Interest Expense. Total non-interest expenses increased by $224 thousand during the nine month period ended September 30, 2011 as compared to the same period in 2010, a 5.5% increase. The 2011 expenses reflect $125 thousand of write-downs of other real estate owned reflecting declining market values as compared to $75 thousand of write-downs during 2010. Loan collection expenses increased by $96 thousand from $49 thousand during 2010 to $145 thousand in 2011 resulting from increased loan collection efforts.
Income Tax Expense. During the nine months ended September 30, 2011, the Company recorded an income tax expense of $885 thousand as compared to an $847 thousand expense during the same period in 2010. The income tax expense was 38.8% of income before taxes in 2011 and 40.0% of income before taxes in 2010.
Three months ended September 30, 2011
Net Interest Income and Net Interest Margin. Total interest income decreased by $156 thousand or 4.9% to $3.0 million for the three month period ended September 30, 2011 as compared to the same period in 2010. This decrease in interest income was primarily attributable to the decline in the yield on loans from 6.79% in 2010 to 6.67% in 2011. Interest income was adversely affected by the 23 basis point decline in the yield of the average earning assets from 6.26% in 2010 to 6.00% in 2011.

 

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Interest expense decreased by $243 thousand or 32.3% to $510 thousand for the three months ended September 30, 2011 as compared to $753 thousand during the same three months of 2010. This decrease was attributable to the decline in interest bearing deposits and the 55 basis point decrease in the cost of funds from 1.85% during the third quarter of 2010 to 1.3% during the third quarter of 2011. Also contributing to the reduction in the cost of funds was $6.0 million decrease in average interest bearing liabilities during 2011 as compared to 2010.
The net interest income for the three month periods ended September 30, 2011 and 2010 was $2.5 million.
The following table shows the average balances and average rates earned or paid on of the various categories of the Company’s assets and liabilities for the three month period ended September 30 of each year. Nonperforming loans are included in average loan balances in the following table:
                                                                         
THREE MONTHS   2011     2010     2009  
    Average             Yields/     Average             Yields/     Average             Yields/  
In thousands   Balance     Interest     Rates     Balance     Interest     Rates     Balance     Interest     Rates  
Assets
                                                                       
Loans, net of unearned income (2)
  $ 179,745     $ 3,024       6.67 %   $ 185,858     $ 3,179       6.79 %   $ 176,419     $ 3,019       6.87 %
Interest-bearing deposits in other banks
    21,070       16       0.30 %     16,466       17       0.41 %     14,510       9       0.25 %
Securities (1)
    527       7       5.27 %     527       7       5.27 %     1,540       23       5.99 %
Federal funds sold
                                        198       0       0.00 %
 
                                                     
Total interest-earning assets
    201,342       3,047       6.00 %     202,851       3,203       6.26 %     192,667       3,051       6.35 %
 
                                                     
Less allowance for loan losses
    (3,403 )                     (2,197 )                     (2,096 )                
Non interest earning assets
    9,221                       8,211                       6,317                  
 
                                                                 
Total assets
  $ 207,160                     $ 208,865                     $ 196,888                  
 
                                                                 
Liabilities & Stockholders’ Equity
                                                                       
Interest-bearing deposits
                                                                       
Interest bearing demand deposits
  $ 512     $       0.02 %   $ 692     $       0.06 %   $ 1,522     $       0.00 %
Money market deposit accounts
    8,331       8       0.38 %     7,695       8       0.41 %     8,930       13       0.58 %
Savings accounts
    25,922       70       1.07 %     19,630       63       1.27 %     5,375       27       2.01 %
Certificates of deposit
    120,485       432       1.42 %     133,226       682       2.03 %     137,938       1,164       3.38 %
 
                                                     
Total interest-bearing liabilities
    155,250       510       1.30 %     161,243       753       1.85 %     153,765       1,204       3.14 %
 
                                                                 
Demand deposits and other liabilities
    28,231                       25,407                       21,303                  
 
                                                                 
Total liabilities
    183,481                       186,650                       175,068                  
 
                                                                 
Stockholders’ equity
    23,679                       22,215                       21,820                  
 
                                                                 
Total liabilities and stockholders’ equity
  $ 207,160                     $ 208,865                     $ 196,888                  
 
                                                                 
Interest rate spread
                    4.70 %                     4.41 %                     3.21 %
 
                                                                 
Net interest income and margin
          $ 2,537       5.00 %           $ 2,450       4.79 %           $ 1,847       3.85 %
 
                                                           
     
(1)  
Yields on securities are calculated based on amortized cost.
 
(2)  
Loan balances include loans on nonaccrual
Net interest margin was 5.00% in the third quarter of 2011, as compared to 4.79% in the comparable period in 2010. Interest spread was 4.70% in the third quarter of 2011, as compared to the 4.41% in the third quarter 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 substantially all of the higher costing funds have been re-priced to lower levels.
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 management’s ongoing assessment of the Company’s credit exposure and consideration of certain other relevant factors. The provision for loan losses was $586 thousand the three months ended September 30, 2011 as compared to $612 thousand for the three months ended September 30, 2010. The decline in the provision for the three months ended September 30, 2011 as compared to the same period in 2010 primarily results from lower amount of loans outstanding. The allowance is comprised of specific and general allowance amounts.

 

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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 September 30, 2011, gains on sales of the guaranteed portion of SBA loans was $23 thousand whereas gains on sales of SBA loans amounted to $49 thousand during the same period in 2010. The Company had gains from the sales of other real estate owned of $45 thousand during the quarter ended September 30, 2011. There were no sales of other real estate owned in 2010. Deposit account service charges and other income amounted to $158 thousand during the three months ended September 30, 2011 as compared to $115 thousand for the same period in 2010, reflecting an increase in the number of accounts subject to service charges on such deposit accounts.
Non-Interest Expense. Total non-interest expenses decreased by $55 thousand during the three month period ended September 30, 2011 as compared to the same period in 2010, a 3.9% decrease. The 2010 expenses include $75 thousand of write-downs of other real estate owned reflecting declining values; no such provision was expensed in 2011. Loan collection expenses increased by $44 thousand from expenses of $12 thousand during 2010 to expenses of $56 thousand in 2011 resulting from increased loan collection efforts. These expense increases were offset by the reduction in FDIC insurance costs of $70 thousand for the third quarter of 2011 as compared to the same quarter in 2010 reflecting the changes made by the FDIC in the method of computation of insurance premiums.
Income Tax Expense. During the three months ended September 30, 2011, the Company recorded an income tax expense of $329 thousand as compared to a $238 thousand expense during the same period in 2010. The income tax expense was 39.9% of income before taxes in 2011 and 40.0% of income before taxes in 2010.
FINANCIAL CONDITION.
General. The Company’s assets at September 30, 2011 were $205 million, an increase of $1.7 million or 0.8%, from December 31, 2010. The gross loans totaled $181 million at September 30, 2011 and are comprised of real estate loans of $129 million, a decrease of $3.3 million, or 2.5%, from December 31, 2010 and commercial loans, including SBA loans, of $52 million, a decrease of $0.8 million, or 1.6% from December 31, 2010. At September 30, 2011 and December 31, 2010, deposits totaled $180 million. Deposits at September 30, 2011 are comprised primarily of certificates of deposit of $117 million, NOW and Money Market accounts of $8 million, savings accounts of $27 million and noninterest bearing deposits of $28 million.
Loan Portfolio. The loan portfolio is the largest component of earning assets and accounts for the greatest portion of total interest income. At September 30, 2011, net loans were $178 million, a 2.2% decrease from the $182 million in the net loans 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 Company’s immediate market areas. The $4 million decrease in loans is net of the sales of SBA guaranteed portions of loans in the amount of $5 million during 2011. Without these sales, loan balances would have increased by $1 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 Company’s underwriting standards.

 

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The loan portfolio includes a significant amount of commercial real estate loans. The majority of these loans are secured by real property that is occupied by the borrowers’ businesses. The Company has approximately $0.8 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.
                                                 
    September 30, 2011     September 30, 2010     December 31, 2010  
            Percentage             Percentage             Percentage  
(In thousands)   Balance     of Loans     Balance     of Loans     Balance     of Loans  
Commercial and Industrial loans
  $ 43,708       24.2 %   $ 47,331       25.6 %   $ 44,582       24.1 %
SBA loans
    7,831       4.3 %     5,880       3.2 %     7,742       4.2 %
Real estate loans:
                                               
Owner occupied
    79,730       44.1 %     83,712       45.3 %     85,633       46.3 %
Non owner occupied
    49,560       27.4 %     47,822       25.9 %     47,040       25.4 %
 
                                   
Total real estate loans
    129,290       71.5 %     131,534       71.2 %     132,673       71.7 %
 
                                   
 
    180,829       100.0 %     184,745       100.0 %     184,997       100.0 %
 
                                         
Unearned loan fees, net
    (81 )             (114 )             (114 )        
Allowance for loan losses
    (3,038 )             (2,533 )             (3,174 )        
 
                                         
 
  $ 177,710             $ 182,098             $ 181,709          
 
                                         
Real estate loans are secured by residential and commercial properties as follows:
                         
    September 30,     September 30,     December 31,  
(In thousands)   2011     2010     2010  
Real estate loans secured by:
                       
Residential real estate
  $ 26,204     $ 26,510     $ 24,307  
Commercial real estate
    103,086       105,024       108,366  
 
                 
Total real estate loans
  $ 129,290     $ 131,534     $ 132,673  
 
                 
The following table shows the interest rate sensitivity of the loan portfolio at September 30, 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 September 30, 2011  
    1 year     Over 1 to     After        
In thousands   or less     5 years     5 years     Total  
Loans with:
                               
Fixed interest rates
  $ 12,303     $ 33,969     $ 1,338     $ 47,610  
Floating and adjustable interest rates
    66,549       66,670             133,219  
 
                       
Total loans receivable
  $ 78,852     $ 100,639     $ 1,338     $ 180,829  
 
                       
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 September 30, 2011, the range of the loss ratios used to determine estimated losses by loan category were: commercial loans — 1.3%; SBA loans (unguaranteed portion) — 6.7% and real estate loans- 0.2% to 0.9%. These loss ratios approximate 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 loan’s loss prior to the point of charge-off.

 

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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 management’s estimations of loss exposure. Loss percentages used are generally based upon management’s best estimates considering losses incurred. Estimated “low” and “high” allowance for loan loss amounts are derived by accumulating the estimated losses using the “low” and “high” loss percentages for each risk rating and adding losses based upon separate loan evaluations and identified other risks. The actual allowance for loan losses is compared to this range to ascertain that it is 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 September 30, 2011, the actual allowance for loan losses of 1.68% of loans was between the “high” allowance amount of 1.69% and the low range percent of 1.43%.
The allowance for loan losses represents 1.68% and 1.72% of loans receivable at September 30, 2011 and December 31, 2010, respectively. The decrease in the allowance for loan losses as a percent of loans at September 30, 2011 as compared to December 31, 2010 resulted from $2 million in net loan charge-offs taken during 2011. There was no change in the methodology of determining the allowance for loan losses at September 30, 2011 as compared to December 31, 2010 apart from changes to loss factors based on management’s 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.
                                         
    Nine Months Ended     Year Ended December 31,  
(In thousands)   September 30, 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
    (806 )     (1,140 )     (500 )     (179 )     (72 )
Charge-offs — SBA loans
    (285 )     (447 )     (463 )     (318 )      
Real estate loans:
                                       
Charge-offs — Owner occupied
    (535 )           (138 )            
Charge-offs — Non owner occupied
    (532 )     (386 )                  
Recoveries — Commercial and Industrial loans
    100       26             45       78  
Recoveries — SBA loans
    28       25       5              
 
                             
Net recoveries (charge-offs)
    (2,030 )     (1,922 )     (1,096 )     (452 )     6  
 
                             
Provision for loan losses
    1,894       2,716       1,616       647       45  
 
                             
Ending balance
  $ 3,038     $ 3,174     $ 2,380     $ 1,860     $ 1,665  
 
                             
 
                                       
Net recoveries (charge-offs) to average loans
    (1.11 %)     (1.04 %)     (0.65 %)     (0.33 %)     0.00 %
During 2011, loans to twenty one borrowers and related entities totaling $2.2 million were determined to be uncollectible and were charged-off.

 

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The activity in the allowance for loan losses by category during the nine months ended September 30, 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
    (806 )     (285 )     (535 )     (532 )           (2,158 )
Loss recoveries
    100       28                         128  
Provision for loan losses
    650       136       355       730       23       1,894  
 
                                   
Balance at September 30, 2011
  $ 967     $ 506     $ 502     $ 913     $ 150     $ 3,038  
 
                                   
Allowance for loans individually evaluated for impairment
  $ 417     $ 103     $ 364     $ 579             $ 1,463  
 
                                     
Amount of loans individually evaluated for impairment
  $ 1,030     $ 1,641     $ 7,685     $ 4,292             $ 14,648  
 
                                     
The activity in the allowance for loan losses by category during the nine months ended September 30, 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
    1,005       424             106             1,535  
Loss recoveries
    23       19                         42  
Provision for loan losses
    401       247       306       629       63       1,646  
 
                                   
Balance at September 30, 2010
  $ 709     $ 418     $ 474     $ 765     $ 167     $ 2,533  
 
                                   
Allowance for loans individually evaluated for impairment
  $ 264     $ 35     $ 262     $ 433     $     $ 994  
 
                                   
Amount of loans individually evaluated for impairment
  $ 2,127     $ 317     $ 8,714     $ 2,317     $     $ 13,475  
 
                                   
Additionally, the Company has established a reserve for unfunded commitments that is recorded by a provision charged to other expenses. At September 30, 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.

 

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Asset Quality. In its lending activities, the Company seeks to develop sound loans with customers who will grow with the Company. The Company has not, and does not intend 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 recorded investment amount and related allowance for losses of the Company’s impaired loans at September 30, 2011 and December 31, 2010:
                                 
    Recorded Investment     Related Allowance for Losses  
    September 30,     December 31,     September 30,     December 31,  
    2011     2010     2011     2010  
LOANS WITH SPECIFIC RESERVES:
                               
Non-accrual loans:
                               
Commercial and Industrial loans
  $ 758     $ 963     $ 335     $ 445  
SBA loans
    106       359       103       194  
Real Estate — Owner Occupied
    1,643       3,140       364       483  
Real Estate — Non Owner Occupied
    1,939       1,976       477       399  
 
                       
Total Non-accrual loans
    4,446       6,438       1,279       1,521  
 
                       
TDR** loans:
                               
Real Estate — Owner Occupied
          2,051             13  
Real Estate — Non Owner Occupied
    1,742       1,603       102       11  
 
                       
Total TDR loans
    1,742       3,654       102       24  
 
                       
Number of loans
    7       7                  
Other Impaired loans:
                               
Commercial and Industrial loans
    82       250       82       125  
 
                       
Total Other Impaired loans
    82       250       82       125  
 
                       
 
                               
LOANS WITHOUT SPECIFIC RESERVES:
                               
Non-accrual loans:
                               
SBA loans
          29              
Real Estate — Owner Occupied
    544       816              
 
                       
Total Non-accrual loans
    544       845              
 
                       
TDR** loans:
                               
Commercial and Industrial loans
    45       154              
Real Estate — Owner Occupied
    1,494                    
Real Estate — Non Owner Occupied
          177              
 
                       
Total TDR loans
    1,539       331              
 
                       
Number of loans
    2       2                  
 
                               
Total Impaired Loans:
                               
Commercial and Industrial loans
  $ 885     $ 1,367     $ 417     $ 570  
SBA loans
    106       388       103       194  
Real Estate — Owner Occupied
    3,681       6,007       364       496  
Real Estate — Non Owner Occupied
    3,681       3,756       579       410  
 
                       
Total Impaired loans
    8,353     $ 11,518     $ 1,463     $ 1,670  
 
                       
     
**  
Troubled Debt Restructured

 

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Below is a summary of the average recorded investment amount and recognized interest income related to the Company’s impaired loans during the nine month and three month periods ended at September 30, 2011:
                                 
    Average Recorded Amount     Income Recorded  
    For Periods Ended     For Periods Ended  
    September 30, 2011     September 30, 2011  
    Nine Months     Three months     Nine Months     Three Months  
LOANS WITH SPECIFIC RESERVES:
                               
Non-accrual loans:
                               
Commercial and Industrial loans
  $ 1,149     $ 1,220     $ 6     $  
SBA loans
    271       210              
Real Estate — Owner Occupied
    2,613       1,668              
Real Estate — Non Owner Occupied
    2,019       2,041              
 
                       
Total Non-accrual loans
    6,052       5,139       6        
 
                       
TDR** loans:
                               
Real Estate — Owner Occupied
                       
Real Estate — Non Owner Occupied
    1,764       1,745       48       13  
 
                       
Total TDR loans
    1,764       1,745       48       13  
 
                       
Other Impaired loans:
                               
Commercial and Industrial loans
    132       92       3       1  
 
                       
Total Other Impaired loans
    132       92       3       1  
 
                       
 
                               
LOANS WITHOUT SPECIFIC RESERVES:
                               
Non-accrual loans:
                               
SBA loans
    17                    
Real Estate — Owner Occupied
    572       545              
 
                       
Total Non-accrual loans
    589       545              
 
                       
TDR** loans:
                               
Commercial and Industrial loans
    87       45       3       1  
Real Estate — Owner Occupied
    747       1,494       79       27  
 
                       
Total TDR loans
    834       1,539       82       28  
 
                       
 
                               
Total Impaired Loans:
                               
Commercial and Industrial loans
  $ 1,368     $ 1,357     $ 12     $ 2  
SBA loans
    288       210              
Real Estate — Owner Occupied
    3,932       3,707       79       27  
Real Estate — Non Owner Occupied
    3,783       3,786       48       13  
 
                       
Total Impaired loans
  $ 9,371     $ 9,060     $ 139     $ 42  
 
                       

 

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Non-accrual loan activity is summarized as follows:
                                         
    Nine Months        
    Ended     Year Ended December 31,  
In thousands   September 30, 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
    2,322       7,846       2,427       5,046       569  
Less:
                                       
Loan restored to interest earning status
                1,266              
Other real estate owned additions
    979       945       2,462              
Charge offs
    2,158       1,973       1,101       236       72  
Other including payments received
    1,478       379       683       116        
 
                             
Balance at the end of the period
  $ 4,990     $ 7,283     $ 2,734     $ 5,819     $ 1,125  
 
                             
Non-accrual loan activity by category during the nine month period ended September 30, 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     $ 667     $ 388     $ 3,956     $ 2,272  
New loans placed on non-accrual
    2,322       1,089       129       581       523  
Less:
                                       
Other real estate owned additions
    979                   720       259  
Charge offs
    2,158       806       285       535       532  
Other including payments received
    1,478       192       126       1,095       65  
 
                             
Balance at the end of the period
  $ 4,990     $ 758     $ 106     $ 2,187     $ 1,939  
 
                             
Non-accrual loan activity by category during the nine month period ended September 30, 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
    2,109       346       505             1,258  
Less:
                                       
Charge offs
    1,535       855       574             106  
Other including payments received
    312       148       164              
 
                             
Balance at the end of the period
  $ 2,996     $ 1,623     $ 221     $     $ 1,152  
 
                             
Non-accrual loans with specific reserves at September 30, 2011 are comprised of:
Commercial loans — six loans to five borrowers totaling $758 thousand with $335 thousand of specific reserves established.
SBA loans — three loans totaling $106 thousand with $103 thousand of specific reserves established.
Owner-occupied Real Estate loans — three loans secured by commercial property in the amount of $1.6 million with specific reserves established for these loans in the amount of $364 thousand.
Non-owner Occupied Real Estate loans — five loans to four borrowers in the amount of $1.9 million, secured by the residential and commercial property after partial charge-off of $246 thousand and with specific reserves of $477 thousand established for the loans. The borrowers on four of the above loans are controlled by the same individual.
All of these loans are in various stages of collection.

 

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At September 30, 2011, the Company has modified nine loans in amounts totaling $3.3 million which modifications qualify the loans as Troubled Debt Restructuring (TDR). 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 Investment     Related Allowance for Losses  
    September 30,     December 31,     September 30,     December 31,  
In thousands   2011     2010     2011     2010  
TDRs with specific reserves:
                               
Commercial and Industrial loans
  $     $     $     $  
SBA loans
          50             40  
Real Estate — Owner Occupied:
    1,340       3,140       285       483  
Real Estate — Non Owner Occupied:
    782       819       255       223  
 
                       
Total non-accruing loans
  $ 2,122     $ 4,009     $ 540     $ 746  
 
                       
Number of loans
    5       7                  
Accruing TDR loan activity for the three and nine months ended September 30, 2011 is shown in the following table.
                                         
                    Real Estate Loans        
    Commercial                     Non-        
    and     SBA     Owner     Owner        
In thousands   Industrial     Loans     Occupied     Occupied     Total  
Three Months
                                       
TDR loans at June 30, 2011
  $ 45     $     $ 1,494     $ 1,753     $ 3,292  
New TDR loans
                             
Principal payments received
                      (11 )     (11 )
 
                             
Balance at September 30, 2011
  $ 45     $     $ 1,494     $ 1,742     $ 3,281  
 
                             
 
                                       
Nine Months
                                       
TDR loans at December 31, 2010
  $ 154     $     $ 2,051     $ 1,780     $ 3,985  
New TDR loans
    45             1,494             1,539  
Principal payments received
                (2,051 )     (38 )     (2,089 )
Loans moved to non-accrual*
    (154 )                       (154 )
 
                             
Balance at September 30, 2011
  $ 45     $     $ 1,494     $ 1,742     $ 3,281  
 
                             
     
*  
Accrued income reversed upon move to non-accrual
At September 30, 2011, there were $3.8 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.

 

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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.
The following table shows the amounts of non-performing assets on the dates indicated:
                                         
    September 30,     December 31:  
In thousands   2011     2010     2009     2008     2007  
Nonaccrual loans:
                                       
Commercial and Industrial
  $ 758     $ 963     $ 2,280     $ 1,676     $ 868  
SBA
    106       388       454       542       257  
Real estate — owner occupied
    2,187       3,956             3,601        
Real estate — non owner occupied
    1,939       1,976                    
Accrual loans —past due 90 days and over
                             
 
                             
Total non-performing loans
    4,990       7,283       2,734       5,819       1,125  
 
                               
Other real estate owned
    2,637       3,324       2,462              
 
                               
Total non-performing assets
  $ 7,627     $ 10,607     $ 5,196     $ 5,819     $ 1,125  
 
                             
 
                                       
Accruing Troubled Debt Restructured loans
  $ 3,281     $ 3,985     $ 1,263              
Allowance for loan losses/total non-performing loans
    60.9 %     43.6 %     87.1 %     32.0 %     148.0 %
Non-performing loans to total loans
    2.76 %     3.94 %     1.47 %     3.80 %     0.89 %
Non-performing assets to total assets
    3.72 %     5.22 %     2.59 %     3.49 %     0.76 %
The payment status of loans receivable at September 30, 2011 is as follows:
                                         
            Commercial             Real Estate     Real Estate  
            and             Owner     Non Owner  
In thousands   Total     Industrial     SBA     Occupied     Occupied  
Current accruing loans
  $ 173,303     $ 42,469     $ 7,488     $ 75,923     $ 47,423  
Current non-accruing loans
    778       254                   524  
Past due loans:
                                       
30 to 89 days past due
    2,536       481       237       1,620       198  
90 days plus past due and accruing
                             
Non-accrual loans, non current
    4,212       504       106       2,187       1,415  
 
                             
Total past due loans
    6,748       985       343       3,807       1,613  
 
                             
Total loans at the end of the period
  $ 180,829     $ 43,708     $ 7,831     $ 79,730     $ 49,560  
 
                             
Above amounts exclude deferred fees
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 September 30, 2011 follows:
                                         
            Commercial             Real Estate     Real Estate  
            and             Owner     Non Owner  
In thousands   Total     Industrial     SBA     Occupied     Occupied  
Risk rated — pass
  $ 170,707     $ 42,724     $ 7,684     $ 73,786     $ 46,513  
Risk rated — special mention (loan weaknesses noted which could lead to loan loss)
    2,859       144       41       1,603       1,071  
Risk rated- substandard or doubtful (loans with significant weaknesses that could, or has, result in loan losses)
    7,263       840       106       4,341       1,976  
 
                             
Total loans
  $ 180,829     $ 43,708     $ 7,831     $ 79,730     $ 49,560  
 
                             

 

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Above amounts exclude deferred fees
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.
Other Real Estate owned (ORE) activity for the nine months ended September 30, 2011 is summarized below:
                         
            Commercial     Residential  
In thousands   Total     Property     Property  
Balance December 31, 2010
  $ 3,324     $ 2,309     $ 1,015  
New ORE properties and improvements
    1,077       730       347  
Valuation reductions
    (125 )     (85 )     (40 )
Sales
    (1,639 )     (490 )     (1,149 )
 
                 
Balance at September 30, 2011
  $ 2,637     $ 2,464     $ 173  
 
                 
Number of properties
    3       2       1  
 
                 
Investment Portfolio. At September 30, 2011, December 31, 2010 and September 30, 2010, the Company had no investments in securities other than investments in Federal Reserve Bank stock as required by regulation and stock in two banker’s 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 Company’s investment securities portfolio at the dates indicated.
                                 
    Investment in Stocks  
    September 30, 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 Bank’s principal sources of funds for loans, investments and general operations are deposits from its primary market area, principal and interest payments on loans, and proceeds from maturing investment securities. Its principal funding commitments are for the origination or purchase of loans and the payment of maturing deposits, and the payment for checks drawn upon it. The Bank’s most liquid assets are cash and cash equivalents, which are cash on hand, amounts due from other financial institutions including the Federal Reserve. The levels of such assets are dependent on the Bank’s lending, investment and operating activities at any given time. The variations in levels of liquid assets are influenced by deposit flows and loan demand, both current and anticipated.
The Company’s deposits consist of demand deposits, NOW accounts, money market accounts, savings accounts and certificates of deposit. These accounts provide the Company with a relatively stable source of funds. 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, 19.6% at September 30, 2011 and 24.5% at December 31, 2010 and 28.4% at September 30, 2010, are comprised of certificate of deposit accounts of $100 thousand or more. Total certificates of deposit represent 64.9% of deposits at September 30, 2011 and 68.5% of deposits at December 31, 2010 and 79.7% at September 30, 2010.

 

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The Company’s 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 September 30, 2011, deposits totaled $180.3 million as compared to $180.1 million at December 31, 2010. While the total of deposits remained level, the composition of the deposits changed as noninterest bearing deposits increased by $4.3 million, savings deposits increased $4.1 million, certificates of deposit decreased by $6.3 million, Money Market and Now accounts decreased by $1.9 million. There were $35.0 million and $33.1 million of brokered certificates of deposit at September 30, 2011 and December 31, 2010, respectively. Included in these brokered deposits at September 30, 2011 are $7.2 million of certificates of deposits received in exchange for the placement of the Company’s customers’ deposit funds with other financial institutions under the CDARS program. Included in deposits are deposits of officers and directors (and their affiliated entities) of $11.8 million at September 30, 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 Bank’s interest expense, allocation of deposits, deposit pricing, loan pricing, net interest margin, ability to compete, ability to establish and maintain customer relationships, or profitability. The Company has decided not to offer interest on demand deposit accounts at this time.
Deposits are summarized below as of dates indicated:
                                         
    September 30,     %     December 31:  
In thousands   2011     Change     2010     2009     2008  
Non-interest bearing deposits
  $ 28,059       18.1 %   $ 23,760     $ 21,024     $ 23,599  
Interest bearing deposits:
                                       
NOW accounts
    432       (65.2 %)     1,279     $ 309     $ 1,247  
Money Market accounts
    7,729       (12.4 %)     8,824       7,841       13,049  
Savings accounts
    27,014       17.6 %     22,962       10,379       148  
Certificates of deposit accounts:
                                       
Less than $100,000
    81,630       3.1 %     79,209       71,593       37,539  
$100,000 or more
    35,403       (19.7 %)     44,076       67,499       69,659  
 
                             
Total interest bearing deposits
    152,208       (2.6 %)     156,350       157,621       121,642  
 
                             
Total deposits
  $ 180,267       0.1 %   $ 180,110     $ 178,645     $ 145,241  
 
                             

 

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The table below shows the maturities of certificates of deposit:
                                 
    September 30, 2011     December 31, 2010  
    CDs of $100,000             CDs of $100,000        
In thousands   or more     All CDs     or more     All CDs  
Three months or less
  $ 7,507     $ 23,138     $ 9,228     $ 21,682  
Over three months to six months
    6,254       20,051       15,492       28,124  
Over six months to twelve months
    7,651       26,970       7,486       29,325  
Over twelve months through three years
    13,610       41,785       9,058       36,497  
Over three years
    381       5,089       2,812       7,657  
 
                       
Total
  $ 35,403     $ 117,033     $ 44,076     $ 123,285  
 
                       
The table below shows the source of the Company’s certificate of deposits as well as the amount equal to or greater than $100,000 at September 30, 2011:
                         
    CDs with     CDs with balances        
    balances of less     of $100,000 or        
In thousands   than $100,000     greater     Total  
Source
                       
Local markets
  $ 5,446     $ 22,419     $ 27,865  
National market
    54,192             54,192  
CDARS program:
                       
Customers’ funds
          7,153       7,153  
Proprietary funding
    4,192       5,831       10,023  
Other brokered funds
    17,800             17,800  
 
                 
Total
  $ 81,630     $ 35,403     $ 117,033  
 
                 
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 Company’s short term liquid assets of cash and cash equivalents were $20.2 million, or 9.9% of assets, and $13.7 million, or 6.8% of assets at September 30, 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 September 30, 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.

 

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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 totaled $1.3 million at September 30, 2011 and December 31, 2010.
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 September 30, 2011 totaled $40.9 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.
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 Company’s 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 September 30, 2011, the Company and the Bank were in full compliance with these guidelines, as follows:
                                 
                    Minimum Ratios  
    September 30,     December 31,     To be “Adequately     To be “Well  
    2011     2010     Capitalized”     Capitalized”  
Total capital:
                               
Company
    14.1 %     13.1 %     8.0 %     N/A  
Bank
    13.4 %     12.3 %     8.0 %     10.0 %
Tier I:
                               
Company
    12.8 %     11.8 %     4.0 %     N/A  
Bank
    12.1 %     11.1 %     4.0 %     6.0 %
Leverage Total:
                               
Company
    11.5 %     11.0 %     4.0 %     N/A  
Bank
    10.8 %     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 Company’s capital is reviewed by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses. The ability of the Company to grow is dependent on the availability of capital with which to meet regulatory capital requirements, discussed below. To the extent the Company is successful it may need to acquire additional capital through the sale of additional common stock, other qualifying equity instruments, such as 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 Company’s 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 Company’s 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 Company’s disclosure controls and procedures were effective. There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15 under the Securities Act of 1934) during the quarter ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s 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 Company’s 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
  101    
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statement of Financial Position at September 30, 2011 and December 31, 2010 (ii) the Consolidated Statement of Earnings for the nine and three month periods ended September 30, 2011 and 2010, (iii) the Consolidated Statement of Cash Flows for the nine months ended September 30, 2011 and 2010 and (iv) the Notes to the Consolidated Financial Statements.
 
     
(1)  
Incorporated by reference to exhibit of the same number filed with the Company’s Registration Statement on Form SB-2, as amended, (File No. 333-91817)
 
(2)  
Incorporated by reference to exhibit 10(b) to the Company’s to Registration Statement on Form SB-2, as amended) (File No. 333-91817)
 
(3)  
Incorporated by reference to exhibits 10(c) to the Company’s to Registration Statement on Form SB-2, as amended) (File No. 333-91817)
 
(4)  
Incorporated by reference to Exhibit 10(d) to the Company’s Quarterly Report on Form 10-QSB for the period ended March 31, 2007.
 
(5)  
Incorporated by reference to Exhibit 10(e) to the Company’s Quarterly Report on Form 10-QSB for the period ended September 30, 2007.
 
(6)  
Incorporated by reference to Exhibit 99 to the Company’s Current Report on Form 8-K filed on January 30, 2009.
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: November 1, 2011  By:   /s/ Richard J. Morgan    
    Richard J. Morgan, President and Chief Executive Officer   
       
 
     
Date: November 1, 2011  By:   /s/ Michael T. Storm    
    Michael T. Storm, Executive Vice President and Chief Financial Officer   
       
 

 

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