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EX-31.A - EXHIBIT 31(A) - COMMERCEFIRST BANCORP INC | c25943exv31wa.htm |
EX-32.B - EXHIBIT 32(B) - COMMERCEFIRST BANCORP INC | c25943exv32wb.htm |
EX-31.B - EXHIBIT 31(B) - COMMERCEFIRST BANCORP INC | c25943exv31wb.htm |
Table of Contents
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
þ | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended December 31, 2011
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to .
Commission File No.: 000-51104
CommerceFirst Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Maryland | 52-2180744 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1804 West Street, Annapolis MD | 21401 | |
(Address of principal executive offices) | (Zip Code) |
Registrants Telephone Number: 410-280-6695
Securities registered pursuant to Section 12(b) of the Act
Title of class | Name of each exchange on which registered | |
Common Stock, $0.01 par value | Nasdaq Capital Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act Yes o No þ
Indicate by check mark if 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 past 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 if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§225.405 of this chapter) is not contained herein and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K o
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The aggregate market value of the outstanding Common Stock held by non-affiliates as of June 30,
2011 was approximately $13.3 million.
As of February 16, 2012, the number of outstanding shares of the Common Stock, $0.01 par value, of
CommerceFirst Bancorp, Inc. was 1,820,548.
DOCUMENTS INCORPORATED BY REFERENCE
None.
TABLE OF CONTENTS
Table of Contents
PART I
ITEM 1. | Business. |
CommerceFirst Bancorp, Inc. (the Company) was incorporated under the laws of the State of
Maryland on July 9, 1999, to serve as the bank holding company for a newly formed Maryland
chartered commercial bank. The Company was formed by a group of local businessmen and
professionals with significant prior experience in community banking in the Companys market area,
together with an experienced community bank senior management team. The Companys sole subsidiary,
CommerceFirst Bank (the Bank), a Maryland chartered commercial bank and member of the Federal
Reserve System, commenced banking operations on June 29, 2000.
The Company operates from its main headquarters in Annapolis, Maryland, and from branch
offices in Lanham, Maryland opened in September 2004, Glen Burnie, Maryland opened in June 2006,
Columbia, Maryland opened in August 2006, and Severna Park, Maryland opened in June 2007.
Further asset and loan growth by the Company may be limited by its levels of regulatory
capital. Increases in the loan portfolio need to be funded by increases in deposits as the Company
has limited amounts of on-balance sheet assets deployable into loans. Growth will depend upon
Company earnings providing sufficient capital to support growth and/or the raising of additional
capital.
The Company operates as a community bank alternative to the super-regional financial
institutions that dominate its primary market area. The cornerstone of the Companys philosophy is
to provide superior, individualized service to its customers. The Company focuses on relationship
banking, providing each customer with a number of services, familiarizing itself with, and
addressing itself to, customer needs in a proactive, personalized fashion.
Entry into a Material Definitive Agreement
On December 20, 2011, the Company entered into an Agreement and Plan of Merger (Merger
Agreement) with Sandy Spring Bancorp, Inc. (Sandy Spring), whereby Sandy Spring will acquire the
Company by way of a merger of the Company with and into Sandy Spring. A separate merger agreement
provides for the merger of CommerceFirst Bank with and into Sandy Spring Bank (SSB), a Maryland
bank and trust company, a wholly owned subsidiary of Sandy Spring (Bank Merger Agreement).
In connection with the Merger Agreement, certain stockholders of the Company who are directors
or executive officers of the Company and the Bank, entered into a Voting Agreement with Sandy
Spring, under which they have agreed to vote their shares in favor of the Merger. Sandy Springs
common stock is listed on the Nasdaq Global Select Market under the symbol SASR.
The Merger Agreement
Pursuant to the Merger Agreement, at the effective time of the merger, each outstanding share
of the Companys common stock will be converted into the right to receive either (i) $13.60 in cash
(Cash Consideration), or (ii) 0.8043 of a share of Sandy Springs common stock (Stock
Consideration), subject to adjustment in accordance with the provisions of the Merger
Agreement. The Merger Agreement provides that 50% of the outstanding shares of Company
common stock will be converted into Stock Consideration and 50% of the outstanding shares of
Company common stock will be converted into Cash Consideration. Each stockholder of the Company
will be entitled to elect the number of shares of Company common stock held by such stockholder
that will exchanged for the Stock Consideration or the Cash Consideration subject to proration in
the event that a selected form of consideration is over-elected. The merger is intended to be a
tax-free reorganization as to the portion of the merger consideration received as Sandy Spring
common stock.
The Merger Agreement contains customary representations, warranties and covenants from both
the Company and Sandy Spring. Among other covenants, the Company has agreed: (i) to convene and
hold a meeting of its shareholders to consider and vote upon the Merger, (ii) that, subject to
certain exceptions, the board of directors of the Company will recommend the adoption and approval
of the Merger and the Merger Agreement by its shareholders, and (iii) not to (A) solicit
alternative third-party acquisition proposals or, (B) subject to certain exceptions, conduct
discussions concerning or provided confidential information in connection with any alternative
third-party acquisition proposal.
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Completion of the Merger is subject to various customary conditions, including, among others:
(i) approval of the Merger and the Merger Agreement by the shareholders of the Company, (ii)
receipt of required regulatory approvals, (iii) the absence of legal impediments to the Merger and
(iv) the absence of certain material adverse changes or events. The Merger Agreement contains
certain termination rights for the Company and Sandy Spring, as the case may be. The Merger
Agreement further provides that, upon termination of the Merger Agreement under certain
circumstances, the Company will be required to pay to Sandy Spring a termination fee of $1,000,000.
The representations and warranties contained in the Merger Agreement are not intended to, and
do not, modify the statements and information about the Company contained in its periodic reports
on Forms 10-K, 10-Q and 8-K, or the information contained in other documents filed with the
Securities and Exchange Commission or their respective banking regulators. Representations and
warranties in agreements such as the Merger Agreement are not intended as statements of fact, but
rather are negotiated provisions which allocate risks related to the subject matter of the
statements between the parties to the agreement. Additionally, the representations and warranties
are modified in the Agreement by materiality standards and conditions, and clarifications,
exclusions and exceptions set forth on schedules and exhibits which are not public documents. As
such, readers should not place reliance on the representations and warranties as accurate
statements of the current condition of any party to the agreement, their respective subsidiaries,
operations, assets or liabilities.
The foregoing summary is qualified in its entirety by reference to the full text of the Merger
Agreement, a copy of which was previously filed as Exhibit 2.1 to our Current Report on Form 8-K
dated December 20, 2011.
Business of CommerceFirst
Description of Services. The Company offers full commercial banking services to its business
and professional clients. The Company emphasizes providing commercial banking services to sole
proprietorships, small and medium-sized businesses, partnerships, corporations, and non-profit
organizations and associations in and near the Companys primary service areas. Limited retail
banking services are offered to accommodate the personal needs of commercial customers as well as
members of the communities the Company serves.
The Companys loan portfolio consists of business and real estate loans. The business loans
generally have variable rates and/or short maturities where the cash flow of the borrower is the
principal source of debt service, with a secondary emphasis on collateral. Real estate loans are
made generally on commercial property as well as 1-4 family residential properties held as
investments, and are structured with fixed rates that adjust in three to five years, generally with
maturities of five to ten years, or with variable rates tied to various indices and adjusting as
the indices change. The Companys portfolio contains a small amount of acquisition and construction
loans (approximately $1 million), one of which in the amount of $635 thousand is on nonaccrual.
In general, the Company offers the following credit services:
1) | Commercial loans for business purposes, including working capital, equipment
purchases, real estate, lines of credit, and government contract financing. Asset
based lending and accounts receivable financing are available on a selective basis. |
2) | Real estate loans for business and investment purposes. |
3) | Commercial lines of credit. |
4) | Merchant credit card services are offered through an outside vendor. |
The Company has developed an expertise in making loans under the guarantee programs of the
Small Business Administration (SBA). The Company currently expects that it will sell the guaranteed
portion of SBA loans to secondary market investors as soon as possible after funding, while
retaining the uninsured portion. The sale of the guaranteed portion of such loans is expected to
result in gains, and the Company expects to receive fees for servicing the loans. SBA guaranteed
loans are subjected to the same underwriting standards applied to other loans.
The Companys lending activities carry the risk that the borrowers will be unable to
perform on their obligations. Interest rate policies of the Board of Governors of the Federal
Reserve System (the Federal Reserve Board or the Federal Reserve) as well as national and local
economic conditions can have a significant impact on the Company and the Companys results of
operations. To the extent that economic conditions deteriorate, business and individual borrowers
may be less able to meet their obligations to the Company in full, in a timely manner, resulting in
decreased earnings or losses to the Company. To the extent the Company makes fixed rate loans,
general increases in interest rates will tend to reduce the Companys spread as the interest rates
the Company must pay for deposits increase while interest income is flat. Economic conditions and
interest rates may also adversely affect the value of property pledged as security for loans.
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Deposit services include business and personal checking accounts, NOW accounts, premium
savings accounts, and a tiered Money Market Account basing the payment of interest on balances on
deposit. Certificates of deposits are offered with various maturities. The Company supplements
its local deposits with out-of-area deposits comprised of funds obtained through the use of deposit
listing services, deposits obtained through the use of brokers and through the Certificates of
Deposit Account Registry Service program. The acceptance of brokered deposits is utilized when
deemed appropriate by management in order to have available funding sources for loans and
investments, especially during times when competing local deposit institutions drive up their rate
offering well beyond rates available to the Company in national markets.
Other services for business accounts include remote deposit and internet banking services.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), enacted
in July 2010, eliminated the historic prohibition on paying interest on checking and demand deposit
accounts maintained by businesses. While the Company has not elected to offer interest on these
deposits at this time, and it has not become common in the Companys marketplace to do so, it is
possible that the Company may be required to pay interest on some portion of its non-interest
bearing deposits in order to compete against other banks. As a significant portion of its deposits
are non-interest bearing demand deposits established by businesses, payment of interest on these
deposits could have a significant negative impact on its net income, net interest income, interest
margin, return on assets and equity, and other indices of financial performance. The Company
expects that other banks would be faced with similar negative impacts and that the quality of
customer service will be the primary element of competition. At December 31, 2011 the Company does
not, and has no plans to, offer interest on demand deposit accounts established by businesses.
Source of Business. Management believes that the market segments which the Company targets,
small to medium sized businesses and the professional base of the Companys market area, demand the
convenience and personal service that a smaller, independent financial institution such as the
Company can offer. It is these themes of convenience and personal service that form the basis for
the Companys business development strategies. The Company provides services from its headquarters
and main branch offices located in Annapolis, Maryland, and from its branch offices in Lanham, Glen
Burnie, Columbia and Severna Park, Maryland. It believes these locations meet the needs of the
Companys existing and potential customers, and provide prospects for additional growth and
expansion.
The Company has capitalized upon the extensive business and personal contacts and
relationships of its Directors and Executive Officers to establish the Companys initial customer
base. To introduce new customers to the Company, reliance is placed on aggressive
officer-originated calling programs and director, customer and shareholder referrals.
The risk of nonpayment (or deferred payment) of loans is inherent in commercial banking. The
Companys marketing focus on small to medium sized businesses may result in the assumption by the
Company of certain lending risks that are different from those attendant to loans to larger
companies. Management of the Company carefully evaluates all loan applications and attempts to
minimize its credit risk exposure by use of thorough loan application, approval and monitoring
procedures; however, there can be no assurance that such procedures can significantly reduce such
lending risks.
Economic Conditions and Concentrations. The Company has a substantial amount of loans secured
by real estate in the Annapolis, Maryland/suburban Washington D.C. metropolitan areas as
collateral, and substantially all of its loans are to borrowers in that area and contiguous markets
in Maryland. At December 31, 2011, 72.3% of the Companys loans were commercial real estate loans
(including loans to investors in residential property for rental purposes primarily secured by 1-4
family properties). The remaining loans in its portfolio were commercial and industrial loans which
are not primarily secured by real estate. These concentrations expose the Company to the risk that
adverse developments in the real estate market, or in the general economic conditions in its market
area, could increase the levels of nonperforming loans and charge-offs, and reduce loan demand and
deposit growth. In that event, the Company would likely experience lower earnings or losses.
Additionally, if economic conditions in the area deteriorate, or there is significant volatility or
weakness in the economy or any significant sector of the areas economy, the
Companys ability to develop our business relationships may be diminished, the quality and
collectability of the loans may be adversely affected, the value of collateral may decline and
loan demand may be reduced.
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The financial industry continues to experience significant volatility and stress as economic
conditions remain generally stagnant, unemployment levels are high and asset values remain
depressed. While the Company did not have direct exposure to the upheaval in the residential
mortgage loan market and did not invest in mortgage back securities or the preferred stock of
Freddie Mac and Fannie Mae, the slow economy, decline in housing construction and the related
impact on contractors and other small and medium sized businesses, has had an adverse impact on the
Companys business. This impact included increased levels of nonperforming assets, loan charge-offs
and increased loan loss provisions. While the Company believes that it has taken adequate reserves
for the problem assets in its loan portfolio at December 31, 2011, there can be no assurance that
the Company will not be required to take additional charge-offs or make additional provisions for
nonperforming loans, or that currently performing loans will continue to perform. Additionally,
there can be no assurance that the steps taken to stimulate the economy and stabilize the financial
system will prove successful, or that they will improve the financial condition of the Companys
customers or the Company.
Employees
At December 31, 2011 the Company had 37 full time equivalent employees, two of whom are
executive officers. The Chairman of the Board, an attorney in private practice, devotes
considerable time each month to the advancement of the Company, principally in business development
activities. The Company (as distinguished from the Bank) does not have any employees or officers
who are not employees or officers of the Bank. None of the Companys employees are represented by
any collective bargaining group, and the Company believes that its employee relations are good.
The Company provides a benefit program that includes health and dental insurance, a 401(k) plan,
and life, short-term and long-term disability insurance for substantially all full time employees.
Market Area and Competition
Location and Market Area. The main office and the headquarters are located at 1804 West
Street, Annapolis, Maryland 21401. The second office is located at 4451 Parliament Place, Lanham,
Maryland 20706, and opened in the third quarter of 2004. The third office is located at 910
Cromwell Park Drive, Glen Burnie, Maryland 21061 and opened late in the second quarter of 2006. The
fourth office is located at 6230 Old Dobbin Lane, Columbia, Maryland and opened in the third
quarter of 2006. The Company opened its fifth branch office located at 487 Ritchie
Highway, Severna Park, Maryland, in June 2007.
The Company is located in one of the most dynamic regions in the United States. The Federal
Government has a major direct and indirect influence on the economies, infrastructure and land use
management of Washington, D.C. and the Maryland and Virginia counties surrounding Washington.
According to the State of Marylands Department of Business and Economic Development (the
Department), the region is the nations 4th largest market with a population of 6.9
million and a workforce of 3.4 million and is the home to three major airports, the nations
capital and a highly educated workforce. The regional economy is usually strong and diverse, boasts
consistently higher job growth and lower unemployment rates as compared to other regions and is
increasingly service sector and small business oriented. Information technology, the medical
industry and tourism are all major growth industries for the region. These industries are
characterized by small niche oriented enterprises that thrive on their ability to tap the highly
educated workforce and abundant access to the regions substantial communications infrastructure.
Current economic conditions have negatively impacted business activities in the region.
The Companys market strategy involves growth within the Central Maryland corridor, which
consists of Anne Arundel, Prince Georges, Montgomery and Howard counties, areas which it believes
have significant growth opportunities. The Company does not have a branch in Montgomery county at
this time and does not have near term plans to open a branch in the county.
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Anne Arundel County. The county is located in central Maryland on the western shore of the
Chesapeake Bay and lies wholly in the Atlantic Coastal Plain, east of the Appalachian mountain
chain. The County is centered within the Baltimore-Washington corridor with its County Seat, The
City of Annapolis, just 24 miles from Baltimore City and 33 miles from Washington, D.C. The land
area is 416 square miles or 266,078 acres, making Anne Arundel the tenth in size among Maryland
Counties. The county evolved from a bedroom community to Baltimore to be more
heavily influenced by Washington growth factors. The county has developed its own unique and
diverse economy due to growth opportunities presented by Baltimore/Washington International (BWI)
Airport, which has long been considered one of the State of Marylands prime economic engines.
Unemployment rates in Anne Arundel County have been consistently lower than those in Maryland and
the United States. The unemployment rate in the county as of November 2011 was 5.8% (6.6% as of
November 2010) as compared to the Maryland rate of 6.9% and the national unemployment rate of
approximately 9.1% as of the same date. Anne Arundel Countys economy has diversified in the last
25 years, trending toward more private sector employment but government employment still dominates
because Anne Arundel County contains the State Capital of Maryland, the United States Naval
Academy, the National Security Agency (NSA) headquarters and numerous other Federal, State, County
and City of Annapolis jobs. The largest private sector employer in the county is Northrop Grumman.
Outside the government sector, the local economy is dominated by small and mid-sized service sector
enterprises providing internet based services; high-technology telecommunications; product
distribution, a result of proximity of goods arriving to the Port of Baltimore and BWI Airport; and
technical support services.
In 2005, Congress authorized the Department of Defense to reorganize its base structure- a
process commonly known as BRAC or Base Realignment and Closure. Marylands Ft. Meade was chosen to
absorb military workers from Northern Virginia in a process that will continue through 2013.
Maryland, specifically Anne Arundel County, is expected to gain more jobs from military base
shuffling than any other state in the nation. Ft. Meades tenants include NSA, Defense Information
Schools, the EPA, as well as the Department of the Defense intelligence training facilities.
Employees at Ft. Meade are expected to number 42,000 when BRAC consolidation is completed
Once home to large Maryland-based regional banks, financial services are now primarily
provided by larger super-regional institutions such as Bank of America, SunTrust, Wells Fargo, M &
T Bank, BB&T and Capital One, all of which expanded into this highly attractive banking market
over the past decade by acquisition.
Prince Georges County. Prince Georges County wraps around the east side of Washington,
D.C. According to the Maryland Department of Business & Economic Development, 15,400 businesses
employ over 218,000 workers in the County; an estimated 360 of these businesses have 100 or more
employees. The county has one of the largest technology and aerospace sectors in Maryland.
Approximately 72% of the workforce is employed in the private sector. Major employers include
the University System of Maryland, Computer Sciences Corporation, the Beltsville Agricultural
Research Center, Safeway, Target, United Parcel Service and Verizon. Additionally, Andrews Air
Force Base in Camp Springs is a large military facility that provides transportation for the
President and other high-ranking government officials and foreign dignitaries. New technology
companies are nurtured in several business incubators in the county.
Expanding businesses are attracted to Prince Georges County due to its competitively priced
land and buildings, an integrated transportation system, proximity to Washington, D.C., and
attractive business incentives. Government is a significant economic influence, with 80 thousand
Federal, state and county employees. The unemployment rate in the county as of November 2011 was
6.5% as compared to the Maryland rate of 6.9% and the national unemployment rate of approximately
9.1% as of the same date.
Similar to Anne Arundel County, large super-regional banking institutions have obtained
additional market share in the suburban Washington market from the acquisition of many of the
community banks that once existed in this area. Prince Georges County has a population of over 850
thousand.
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Howard County. Howard County is situated in the heart of the corridor between Washington, D.C.
and Baltimore. Howard Countys population is projected to grow to 327,000 by 2035, according to the
Howard County Department of Planning and Zoning. Currently the countys citizens are among the
wealthiest in Maryland. Howard Countys geographic location has resulted in the substantial growth
of a wide variety of industries, including high-tech and life science businesses, in addition to
transportation and education related activities. Accessible to I-95 and I-70, the county is located
within a 20-minute drive of Baltimore/Washington International Airport and the Port of Baltimore,
and serves as a bedroom community for both Baltimore and Washington DC area employers.
Additionally, Dulles International and Washington National Airports are within an hours drive.
Howard County has a strong economic base of its own with over 7,000 Howard County businesses
employing more than 122,000 people. The countys unemployment rate was 4.7% as of November 2011.
Competition. Deregulation of financial institutions and holding company acquisitions of banks
across state
lines has resulted in widespread, fundamental changes in the financial services industry. This
transformation, although occurring nationwide, is particularly intense in the greater
Baltimore/Washington, DC area. In Anne Arundel, Prince Georges and Howard Counties, competition
is exceptionally keen from large banking institutions headquartered outside of Maryland. In
addition, the Company competes with other community banks, savings and loan associations, credit
unions, mortgage companies, finance companies and others providing financial services. Among the
advantages that many of these institutions have over the Company are their abilities to finance
extensive advertising campaigns, maintain extensive branch networks and technology investments, and
to directly offer certain services, such as international banking and trust services, which the
Company does not directly offer. Further, the greater capitalization of the larger institutions
allows for substantially higher lending limits than the Company. Certain of these competitors have
other advantages, such as tax exemption in the case of credit unions, and lesser regulation in the
case of mortgage companies and finance companies. As a result of the Dodd-Frank Act, almost
unlimited interstate de novo branching is available to all state and federally chartered banks. As
a result, institutions which previously were ineligible to establish de novo branches in Maryland
may elect to do so.
Regulation
The following summaries of statutes and regulations affecting bank holding companies do not
purport to be complete discussions of all aspects of such statutes and regulations and are
qualified in their entirety by reference to the full text thereof.
The Company. The Company is a bank holding company registered under the Bank Holding Company
Act of 1956, as amended, (the Act) and is subject to supervision by the Federal Reserve Board.
As a bank holding company, the Company is required to file with the Federal Reserve Board an annual
report and such other additional information as the Federal Reserve Board may require pursuant to
the Act. The Federal Reserve Board may also make examinations of the Company and each of its
subsidiaries.
The Act requires approval of the Federal Reserve Board for, among other things, the
acquisition by a proposed bank holding company of control of more than five percent (5%) of the
voting shares, or substantially all the assets, of any bank or the merger or consolidation by a
bank holding company with another bank holding company. The Act also generally permits the
acquisition by a bank holding company of control or substantially all the assets of any bank
located in a state other than the home state of the bank holding company, except where the bank has
not been in existence for the minimum period of time required by state law, but if the bank is at
least five years old, the Federal Reserve Board may approve the acquisition. A presumption of
control arises under the Change in Bank Control Act where a person controls 10% or more of a class
of the voting stock of a company or insured bank which is a reporting company under the Securities
Exchange Act of 1934, such as the Company.
With certain limited exceptions, a bank holding company is prohibited from acquiring control
of any voting shares of any company which is not a bank or bank holding company and from engaging
directly or indirectly in any activity other than banking or managing or controlling banks or
furnishing services to or performing service for its authorized subsidiaries. A bank holding
company may, however, engage in or acquire an interest in, a company that engages in activities
which the Federal Reserve Board has determined by order or regulation to be so closely related to
banking or managing or controlling banks as to be properly incident thereto. In making such a
determination, the Federal Reserve Board is required to consider whether the performance of such
activities can reasonably be expected to produce benefits to the public, such as convenience,
increased competition or gains in efficiency, which outweigh possible adverse effects, such as
undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound
banking practices. The Federal Reserve Board is also empowered to differentiate between activities
commenced de novo and activities commenced by the acquisition, in whole or in part, of a going
concern. Some of the activities that the Federal Reserve Board has determined by regulation to be
closely related to banking include making or servicing loans, performing certain data processing
services, acting as a fiduciary or investment or financial advisor, and making investments in
corporations or projects designed primarily to promote community welfare.
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Subsidiary banks of a bank holding company are subject to certain restrictions imposed by the
Federal Reserve Act on any extensions of credit to the bank holding company or any of its
subsidiaries, or investments in the stock or other securities thereof, and on the taking of such
stock or securities as collateral for loans to any borrower. Further, a holding company and any
subsidiary bank are prohibited from engaging in certain tie-in arrangements in connection with the
extension of credit. A subsidiary bank may not extend credit, lease or sell property, or furnish
any services, or fix or vary the consideration for any of the foregoing on the condition that: (i)
the customer obtain or provide some
additional credit, property or services from or to such bank other than a loan, discount, deposit
or trust service; (ii) the customer obtain or provide some additional credit, property or service
from or to the Company or any other subsidiary of the Company; or (iii) the customer not obtain
some other credit, property or service from competitors, except for reasonable requirements to
assure the soundness of credit extended.
The Gramm-Leach-Bliley Act of 1999 (the GLB Act) allows a bank holding company or other
company to certify status as a financial holding company, which allows such company to engage in
activities that are financial in nature, that are incidental to such activities, or are
complementary to such activities. The GLB Act enumerates certain activities that are deemed
financial in nature, such as underwriting insurance or acting as an insurance principal, agent or
broker, underwriting, dealing in or making markets in securities, and engaging in merchant banking
under certain restrictions. It also authorizes the Federal Reserve Board to determine by
regulation what other activities are financial in nature, or incidental or complementary thereto.
The GLB Act allows a wider array of companies to own banks, which could result in companies with
resources substantially in excess of the Companys entering into competition with the Company and
the Bank.
The GLB Act made substantial changes in the historic restrictions on non-bank activities of
bank holding companies, and allows affiliations between types of companies that were previously
prohibited. The GLB Act also allows banks to engage in a wider array of non-banking activities
through financial subsidiaries.
The Dodd-Frank Act contains various provisions designed to enhance the regulation of
depository institutions and prevent the recurrence of a financial crisis such as occurred in
2008-2009. Also included is the creation of a new federal agency to administer and enforce consumer
and fair lending laws, a function that is now performed by the depository institution regulators.
The full impact of the Dodd-Frank Act on the Companys business and operations will not be known
for years until regulations implementing the statute are written and adopted. The Dodd-Frank Act
may have a material impact on the Companys operations, particularly through increased compliance
costs resulting from possible future consumer and fair lending regulations.
The Bank. The Bank, as a Maryland chartered commercial bank which is a member of the Federal
Reserve System (a state member bank) and whose accounts are insured by the Deposit Insurance Fund
of the Federal Deposit Insurance Corporation (the FDIC) up to the maximum legal limits of the
FDIC, is subject to regulation, supervision and regular examination by the Maryland Department of
Financial Institutions and the Federal Reserve Board. The regulations of these various agencies
govern most aspects of the Banks business, including required reserves against deposits, loans,
investments, mergers and acquisitions, borrowing, dividends and location and number of branch
offices. The laws and regulations governing the Bank generally have been promulgated to protect
depositors and the Deposit Insurance Fund, and not for the purpose of protecting stockholders.
Competition among commercial banks, savings and loan associations, and credit unions has
increased following enactment of legislation that greatly expanded the ability of banks and bank
holding companies to engage in interstate banking or acquisition activities. As a result of
federal and state legislation, banks in the Washington D.C./Maryland/Virginia area can, subject to
limited restrictions, acquire or merge with a bank in another of the jurisdictions, and can branch
de novo in any of the jurisdictions.
Banking is a business that depends on interest rate differentials. In general, the
differences between the interest paid by a bank on its deposits and its other borrowings and the
interest received by a bank on loans extended to its customers and securities held in its
investment portfolio constitute the major portion of the banks earnings. Thus, the earnings and
growth of the Bank will be subject to the influence of economic conditions generally, both domestic
and foreign, and also to the monetary and fiscal policies of the United States and its agencies,
particularly the Federal Reserve Board, which regulates the supply of money through various means
including open market dealings in United States government securities. The nature and timing of
changes in such policies and their impact on the Bank cannot be predicted.
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Branching and Interstate Banking. The federal banking agencies are authorized to approve
interstate bank merger transactions without regard to whether such transaction is prohibited by the
law of any state, unless the home state of one of the banks has opted out of the interstate bank
merger provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
Riegle-Neal Act) by adopting a law after the date of enactment of the Riegle-Neal Act and prior
to June 1, 1997 which applies equally to all out-of-state banks and expressly prohibits merger
transactions involving out-of-state banks. Interstate acquisitions of branches are permitted only
if the law of the state in
which the branch is located permits such acquisitions. Such interstate bank mergers and branch
acquisitions are also subject to the nationwide and statewide insured deposit concentration
limitations described in the Riegle-Neal Act. The District of Columbia, Maryland and Virginia have
each enacted laws which permit interstate acquisitions of banks and bank branches. The Dodd-Frank
Act authorizes national and state banks to establish de novo branches in other states to the same
extent as a bank chartered by that state would be permitted to branch. Previously, banks could only
establish branches in other states if the host state expressly permitted out-of-state banks to
establish branches in that state.
Although the District of Columbia, Maryland and Virginia had all enacted laws which permitted
banks in these jurisdictions to branch freely, the branching provisions of the Dodd-Frank Act could
result in banks from other states establishing de novo branches in the Banks market area.
Transaction with Affiliates. The Bank is subject to the provisions of Section 23A and 23B of
the Federal Reserve Act and Federal Reserve Regulation W of the Federal Reserve Bank which place
limits on the amount of loans or extensions of credit to affiliates (as defined in the Federal
Reserve Act), investments in or certain other transactions with affiliates and on the amount of
advances to third parties collateralized by the securities or obligations of affiliates. The law
and regulation limit the aggregate amount of transactions with any individual affiliate to ten
percent (10%) of the capital and surplus of the Bank and also limit the aggregate amount of
transactions with all affiliates to twenty percent (20%) of capital and surplus. Loans and certain
other extensions of credit to affiliates are required to be secured by collateral in an amount and
of a type described in the regulation, and the purchase of low quality assets from affiliates is
generally prohibited. The law and Regulation W also, among other things, prohibit an institution
from engaging in certain transactions with certain affiliates (as defined in the Federal Reserve
Act) unless the transactions are on terms substantially the same, or at least as favorable to such
institution and/or its subsidiaries, as those prevailing at the time for comparable transactions
with non-affiliated entities. In the absence of comparable transactions, such transactions may
only occur under terms and circumstances, including credit standards that in good faith would be
offered to or would apply to non-affiliated companies.
The Company is subject to the restrictions contained in Section 22(h) of the Federal Reserve
Act and the Federal Reserve Boards Regulation O thereunder on loans to executive officers,
directors and principal stockholders. Under Section 22(h), loans to a director, an executive
officer or a greater-than-10% stockholder of a bank as well as certain affiliated interests of any
of the foregoing may not exceed, together with all other outstanding loans to such person and
affiliated interests, the loans-to-one-borrower limit applicable to national banks (generally 15%
of the institutions unimpaired capital and surplus), and all loans to all such persons in the
aggregate may not exceed the institutions unimpaired capital and unimpaired surplus. Regulation O
also prohibits the making of loans in an amount greater than $25,000 or 5% of capital and surplus
but in any event not over $500,000, to directors, executive officers and greater-than-10%
stockholders of a bank, and their respective affiliates, unless such loans are approved in advance
by a majority of the board of directors of the bank with any interested director not
participating in the voting. Furthermore, Regulation O requires that loans to directors, executive
officers and principal stockholders of a bank be made on terms substantially the same as those that
are offered in comparable transactions to unrelated third parties unless the loans are made
pursuant to a benefit or compensation program that is widely available to all employees of the bank
and does not give preference to insiders over other employees. Regulation O also prohibits a
depository institution from paying overdrafts over $1,000 of any of its executive officers or
directors unless they are paid pursuant to written pre-authorized extension of credit or transfer
of funds plans. Violations on the insider transaction provisions of law and regulation could
result in severe regulatory consequences for the Bank and Company, including the imposition of
civil money penalties, or regulatory enforcement agreements or orders which require time consuming
or expensive corrective actions.
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Community Reinvestment Act. The Community Reinvestment Act (CRA) requires that, in
connection with examinations of financial institutions within their respective jurisdictions, the
Federal Reserve Board, the FDIC, the Office of the Comptroller of the Currency or the Office of
Thrift Supervision shall evaluate the record of the financial institutions in meeting the credit
needs of their local communities, including low and moderate income neighborhoods, consistent with
the safe and sound operation of those institutions. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an institutions discretion
to develop the types of products and services that it believes are best suited to its particular
community, consistent with the CRA. An institutions CRA activities are considered in, among other
things, evaluating mergers, acquisitions and applications to open a branch or facility, as well as
determining whether the institution will be permitted to exercise certain of the powers allowed by
the GLB Act. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Company was last examined for CRA compliance as of August
17, 2009 and received a CRA rating of satisfactory.
USA Patriot Act. Under the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act, commonly referred to as the USA Patriot Act or
the Patriot Act, financial institutions are subject to prohibitions against specified financial
transactions and account relationships, as well as enhanced due diligence standards intended to
detect, and prevent, the use of the United States financial system for money laundering and
terrorist financing activities. The Patriot Act requires financial institutions, including banks,
to establish anti-money laundering programs, including employee training and independent audit
requirements, meet minimum standards specified by the act, follow minimum standards for customer
identification and maintenance of customer identification records, and regularly compare customer
lists against lists of suspected terrorists, terrorist organizations and money launderers. The
costs or other effects of the compliance burdens imposed by the Patriot Act or future
anti-terrorist, homeland security or anti-money laundering legislation or regulations cannot be
predicted with certainty.
Capital Adequacy Guidelines. The Federal Reserve Board and the FDIC have adopted risk based
capital adequacy guidelines pursuant to which they assess the adequacy of capital in examining and
supervising banks and bank holding companies and in analyzing bank regulatory applications.
Risk-based capital requirements determine the adequacy of capital based on the risk inherent in
various classes of assets and off-balance sheet items. Under the Dodd-Frank Act, the Federal
Reserve Board is required to apply consolidated capital requirements to depository institution
holding companies that are no less stringent than those currently applied to depository
institutions. The Dodd-Frank Act additionally requires capital requirements to be countercyclical
so that the required amount of capital increases in times of economic expansion and decreases in
times of economic contraction, consistent with safety and soundness.
State member banks are expected to meet a minimum ratio of total qualifying capital (the sum
of core capital (Tier 1) and supplementary capital (Tier 2)) to risk weighted assets of 8%. At
least half of this amount (4%) should be in the form of core capital. These requirements apply to
the Bank and will apply to the Company (a bank holding company) once its total assets equal
$500,000,000 or more, it engages in certain highly leveraged activities or it has publicly held
debt securities.
Tier 1 Capital generally consists of the sum of common stockholders equity and perpetual
preferred stock (subject in the case of the latter to limitations on the kind and amount of such
stock which may be included as Tier 1 Capital), less goodwill, without adjustment for changes in
the market value of securities classified as available-for- sale in accordance with ASC Topic 320.
Tier 2 Capital consists of the following: hybrid capital instruments; perpetual preferred stock
which is not otherwise eligible to be included as Tier 1 Capital; term subordinated debt and
intermediate-term preferred stock; and, subject to limitations, general allowances for loan losses.
Assets are adjusted under the risk-based guidelines to take into account different risk
characteristics, with the categories ranging from 0% (requiring no risk-based capital) for assets
such as cash, to 100% for the bulk of assets which are typically held by a bank holding company,
including certain multi-family residential and commercial real estate loans, commercial business
loans and consumer loans. Residential first mortgage loans on 1-4 family residential real estate
and certain seasoned multi-family residential real estate loans, which are not 90 days or more
past-due or nonperforming and which have been made in accordance with prudent underwriting
standards are assigned a 50% level in the risk-weighing system, as are certain privately-issued
mortgage-backed securities representing indirect ownership of such loans. Off-balance sheet items
also are adjusted to take into account certain risk characteristics.
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In addition to the risk-based capital requirements, the Federal Reserve Board has established
a minimum 3.0% Leverage Capital Ratio (Tier 1 Capital to total adjusted assets) requirement for the
most highly-rated banks, with an additional cushion of at least 100 to 200 basis points for all
other banks, which effectively increases the minimum Leverage Capital Ratio for such other banks to
4.0% 5.0% or more. The highest-rated banks are those that are not anticipating or experiencing
significant growth and have well diversified risk, including no undue interest rate risk exposure,
excellent asset quality, high liquidity, good earnings and, in general, those which are considered
a strong banking organization. A bank having less than the minimum Leverage Capital Ratio
requirement shall, within 60 days of the date as of which it fails to comply with such requirement,
submit a reasonable plan describing the means and timing by which the bank shall achieve its
minimum Leverage Capital Ratio requirement. A bank which fails to file such plan is deemed to be
operating in an unsafe and unsound manner, and could subject the bank to a cease-and-desist order.
Any insured depository institution with a Leverage Capital Ratio that is less than 2.0% is deemed
to be operating in an unsafe or unsound condition pursuant to Section 8(a) of the Federal Deposit
Insurance Act (the FDIA) and is subject
to potential termination of deposit insurance. The capital regulations also provide, among other
things, for the issuance of a capital directive, which is a final order issued to a bank that fails
to maintain minimum capital or to restore its capital to the minimum capital requirement within a
specified time period. Such directive is enforceable in the same manner as a final
cease-and-desist order.
The foregoing capital requirements represent minimum requirements. State and federal
regulators have the discretion to require the Company to maintain higher capital levels based upon
its concentrations of loans, the risk of lending or other activities, the performance of the loan
and investment portfolios and other factors. Failure to maintain such higher capital expectations
could result in a lower composite regulatory rating, which would impact the deposit insurance
premiums and could affect the Companys ability to borrow, and costs of borrowing, and could result
in additional or more severe enforcement actions.
Under guidance from 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 would otherwise be expected to maintain as a result of the levels of
construction, development and commercial real estate loans, which may require the Company to obtain
additional capital.
Proposed Changes in Capital Requirements. In December 2010, the Basel Committee released its
final framework for strengthening international capital and liquidity regulation (Basel III).
Basel III, when implemented by the U.S. banking agencies and fully phased-in, will require bank
holding companies and their bank subsidiaries to maintain more capital, with a greater emphasis on
common equity. Implementation is presently scheduled to be phased in between 2013 and 2019,
although it is possible that implementation may be delayed as a result of multiple factors
including the current condition of the banking industry within the U.S. and abroad.
The Basel III final capital framework, among other things, (i) introduces as a new capital
measure Common Equity Tier 1 (CET1), (ii) specifies that Tier 1 capital consists of CET1 and
Additional Tier 1 capital instruments meeting specified requirements, (iii) defines CET1 narrowly
by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the
other components of capital and (iv) expands the scope of the adjustments as compared to existing
regulations.
When fully phased in, Basel III requires banks to maintain (i) as a newly adopted
international standard, a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a
capital conservation buffer of 2.5%; (ii) a minimum ratio of Tier 1 capital to risk-weighted
assets of at least 6.0%, plus the capital conservation buffer; (iii) a minimum ratio of Total (Tier
1 plus Tier 2) capital to risk-weighted assets of at least 8.0% plus the capital conservation
buffer and (iv) as a newly adopted international standard, a minimum leverage ratio of 3%,
calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet
exposures (computed as the average for each quarter of the month-end ratios for the quarter).
Basel III also provides for a countercyclical capital buffer, generally to be imposed when
national regulators determine that excess aggregate credit growth becomes associated with a buildup
of systemic risk that would be a CET1 add-on to the capital conservation buffer in the range of 0%
to 2.5% when fully implemented. The capital conservation buffer is designed to absorb losses during
periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above
the minimum but below the conservation buffer (or below the combined capital conservation buffer
and countercyclical capital buffer, when the latter is applied) may face constraints on dividends,
equity repurchases and compensation based on the amount of the shortfall.
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The Basel III final framework provides for a number of new deductions from and adjustments to
CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax
assets dependent upon future taxable income and significant investments in non-consolidated
financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of
CET1 or all such categories in the aggregate exceed 15% of CET1.
Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2014
and will be phased-in over a five-year period (20% per year). The implementation of the capital
conservation buffer will begin on January 1, 2016 at 0.625% and be phased in over a four-year
period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1,
2019).
The U.S. banking agencies have indicated that they expect to propose regulations implementing
Basel III, with final adoption of implementing regulations in mid-2012. Notwithstanding its release
of the Basel III framework as a final framework, the Basel Committee is considering further
amendments to Basel III. In addition to Basel III, Dodd-Frank requires or permits the Federal
banking agencies to adopt regulations affecting banking institutions capital requirements in a
number of respects, including potentially more stringent capital requirements for systemically
important financial institutions. Accordingly, the regulations ultimately applicable to us may be
substantially different from the Basel III final framework as published in December 2010.
Requirements to maintain higher levels of capital or to maintain higher levels of liquid assets
could adversely impact our net income and return on equity.
Prompt Corrective Action. Under Section 38 of the FDIA, each federal banking agency is
required to implement a system of prompt corrective action for institutions that it regulates. The
federal banking agencies have promulgated substantially similar regulations to implement the system
of prompt corrective action established by Section 38 of the FDIA. Under the regulations, a bank
shall be deemed to be: (i) well capitalized if it has a Total Risk Based Capital Ratio of 10.0%
or more, a Tier 1 Risk Based Capital Ratio of 6.0% or more, a Leverage Capital Ratio of 5.0% or
more and is not subject to any written capital order or directive; (ii) adequately capitalized if
it has a Total Risk Based Capital Ratio of 8.0% or more, a Tier 1 Risk Based Capital Ratio of 4.0%
or more and a Tier 1 Leverage Capital Ratio of 4.0% or more (3.0% under certain circumstances) and
does not meet the definition of well capitalized; (iii) undercapitalized if it has a Total Risk
Based Capital Ratio that is less than 8.0%, a Tier 1 Risk based Capital Ratio that is less than
4.0% or a Leverage Capital Ratio that is less than 4.0% (3.0% under certain circumstances); (iv)
significantly undercapitalized if it has a Total Risk Based Capital Ratio that is less than 6.0%,
a Tier 1 Risk Based Capital Ratio that is less than 3.0% or a Leverage Capital Ratio that is less
than 3.0%; and (v) critically undercapitalized if it has a ratio of tangible equity to total
assets that is equal to or less than 2.0%.
An institution generally must file a written capital restoration plan which meets specified
requirements with an appropriate federal banking agency within 45 days of the date the institution
receives notice or is deemed to have notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. A federal banking agency must provide the
institution with written notice of approval or disapproval within 60 days after receiving a capital
restoration plan, subject to extensions by the applicable agency.
An institution that is required to submit a capital restoration plan must concurrently submit
a performance guaranty by each company that controls the institution. Such guaranty is limited to
the lesser of (i) an amount equal to 5.0% of the institutions total assets at the time the
institution was notified or deemed to have notice that it was undercapitalized or (ii) the amount
necessary at such time to restore the relevant capital measures of the institution to the levels
required for the institution to be classified as adequately capitalized. Such a guaranty shall
expire after the federal banking agency notifies the institution that it has remained adequately
capitalized for each of four consecutive calendar quarters. An institution which fails to submit a
written capital restoration plan within the requisite period, including any required performance
guaranty, or fails in any material respect to implement a capital restoration plan, shall be
subject to the restrictions in Section 38 of the FDIA which are applicable to significantly
undercapitalized institutions.
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A critically undercapitalized institution is to be placed in conservatorship or receivership
within 90 days unless the FDIC formally determines that forbearance from such action would better
protect the deposit insurance fund. Unless the FDIC or other appropriate federal banking
regulatory agency makes specific further findings and certifies that the institution is viable and
is not expected to fail, an institution that remains critically undercapitalized on average during
the fourth calendar quarter after the date it becomes critically undercapitalized must be placed in
receivership. The general rule is that the FDIC will be appointed as receiver within 90 days after
a bank becomes critically undercapitalized unless extremely good cause is shown and the federal
regulators agree to an extension. In general, good cause is defined as capital that has been
raised and is imminently available for infusion into the Bank except for certain technical
requirements that may delay the infusion for a period of time beyond the 90 day time period.
Immediately upon becoming undercapitalized, an institution shall become subject to the
provisions of Section 38 of the FDIA, which (i) restrict payment of capital distributions and
management fees; (ii) require that the appropriate federal banking agency monitor the condition of
the institution and its efforts to restore its capital; (iii) require submission of a capital
restoration plan; (iv) restrict the growth of the institutions assets; and (v) require prior
approval of certain expansion proposals. The appropriate federal banking agency for an
undercapitalized institution also may take any number of discretionary supervisory actions if the
agency determines that any of these actions is necessary to resolve the problems of the institution
at the least possible long-term cost to the deposit insurance fund, subject in certain cases
to specified procedures. These discretionary supervisory actions include: requiring the
institution to raise additional capital; restricting transactions with affiliates; requiring
divestiture of the institution or the sale of the institution to a willing purchaser; and any other
supervisory action that the agency deems appropriate. These and additional mandatory and
permissive supervisory actions may be taken with respect to significantly undercapitalized and
critically undercapitalized institutions.
Additionally, under Section 11(c)(5) of the FDIA, a conservator or receiver may be appointed
for an institution where: (i) an institutions obligations exceed its assets; (ii) there is
substantial dissipation of the institutions assets or earnings as a result of any violation of law
or any unsafe or unsound practice; (iii) the institution is in an unsafe or unsound condition;
(iv) there is a willful violation of a cease-and-desist order; (v) the institution is unable to
pay its obligations in the ordinary course of business; (vi) losses or threatened losses deplete
all or substantially all of an institutions capital, and there is no reasonable prospect of
becoming adequately capitalized without assistance; (vii) there is any violation of law or
unsafe or unsound practice or condition that is likely to cause insolvency or substantial
dissipation of assets or earnings, weaken the institutions condition, or otherwise seriously
prejudice the interests of depositors or the insurance fund; (viii) an institution ceases to be
insured; (ix) the institution is undercapitalized and has no reasonable prospect that it will
become adequately capitalized, fails to become adequately capitalized when required to do so, or
fails to submit or materially implement a capital restoration plan; or (x) the institution is
critically undercapitalized or otherwise has substantially insufficient capital.
Regulatory Enforcement Authority. Federal banking law grants substantial enforcement powers
to federal banking regulators. This enforcement authority includes, among other things, the
ability to assess civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions against banking organizations and institution-affiliated parties. In
general, these enforcement actions may be initiated for violations of laws and regulations and
unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with regulatory authorities.
As a result of the volatility and instability in the financial system during 2008, 2009, 2010
and 2011, the Congress, the bank regulatory authorities and other government agencies have called
for or proposed additional regulation and restrictions on the activities, practices and operations
of banks and their holding companies. While many of these proposals relate to institutions that
have accepted investments from, or sold troubled assets to, the Department of the Treasury or other
government agencies, or otherwise participate in government programs intended to promote financial
stabilization, the Congress and the federal banking agencies have broad authority to require all
banks and holding companies to adhere to more rigorous or costly operating procedures, corporate
governance procedures, or to engage in activities or practices which they would not otherwise
elect. Any such requirement could adversely affect the Companys business and results of
operations. The Company did not accept any investment by the Treasury Department in its preferred
stock or warrants to purchase common stock, and except for the temporary increases in deposit
insurance for customer accounts, has not participated in any of the programs adopted by the
Treasury Department, FDIC or Federal Reserve.
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FDIC Insurance Premiums. The FDIC maintains a risk-based assessment system for determining
deposit insurance premiums. Four risk categories (I-IV), each subject to different premium rates,
are established, based upon an institutions status as well capitalized, adequately capitalized or
undercapitalized, and the institutions supervisory rating. The levels of rates are subject to
periodic adjustment by the FDIC.
Dodd-Frank permanently increased the maximum deposit insurance amount for banks, savings
institutions and credit unions to $250,000 per depositor, and extended unlimited deposit insurance
to non-interest bearing transaction accounts through December 31, 2012. Dodd-Frank also broadened
the base for FDIC insurance assessments. Assessments are now based on a financial institutions
average consolidated total assets less tangible equity capital. Dodd-Frank requires the FDIC to
increase the reserve ratio of the Deposit Insurance Fund from 1.15% to 1.35% of insured deposits by
2020 and eliminates the requirement that the FDIC pay dividends to insured depository institutions
when the reserve ratio exceeds certain thresholds. Dodd-Frank eliminated the statutory prohibition
against the payment of interest on business checking accounts, effective in July 2011.
There are three adjustments that can be made to an institutions initial base assessment rate:
(1) a potential decrease for long-term unsecured debt, including senior and subordinated debt and,
for small institutions, a portion of Tier 1 capital; (2) a potential increase for secured
liabilities above a threshold amount; and (3) for non-Risk Category I institutions, a potential
increase for brokered deposits above a threshold amount. The current schedule for base
assessment rates and potential adjustment is set forth in the following table.
Risk | Risk | Risk | Risk | Large and | ||||||
Category | Category | Category | Category | Highly Complex | ||||||
I | II | III | IV | Institutions | ||||||
Initial Base Assessment Rate |
5 to 9 | 14 | 23 | 35 | 5 to 35 | |||||
Unsecured Debt Adjustment (added) |
(4.5) to 0 | (5) to 0 | (5) to 0 | (5) to 0 | (5) to 0 | |||||
Brokered Deposit Adjustment (added) |
N/A | 0 to 10 | 0 to 10 | 0 to 10 | 0 to 10 | |||||
Total Base Assessment Rate |
2.5 to 9 | 9 to 24 | 18 to 33 | 30 to 45 | 2.5 to 45 |
Additionally, the FDIC may impose special assessments from time to time.
Consumer Financial Protection Bureau. The Dodd-Frank Act created a new, independent federal
agency called the Consumer Financial Protection Bureau (CFPB) which was granted broad rulemaking,
supervisory and enforcement powers under various federal consumer financial protection laws,
including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures
Act, Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions
of the Gramm-Leach-Bliley Act and certain other statutes. The CFPB has examination and primary
enforcement authority with respect to depository institutions with $10 billion or more in assets.
Smaller institutions are subject to rules promulgated by the CFPB but continue to be examined and
supervised by federal banking regulators for consumer compliance purposes. The CFPB has authority
to prevent unfair, deceptive or abusive practices in connection with the offering of consumer
financial products. The Dodd-Frank Act authorized the CFPB to establish certain minimum standards
for the origination of residential mortgages including a determination of the borrowers ability to
repay. In addition, Dodd-Frank allows borrowers to raise certain defenses to foreclosure if they
receive any loan other than a qualified mortgage as defined by the CFPB. The Dodd-Frank Act
permits states to adopt consumer protection laws and standards that are more stringent than those
adopted at the federal level and, in certain circumstances, permits state attorneys general to
enforce compliance with both the state and federal laws and regulations.
It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to
be written implementing rules and regulations will have on community banks. However, it is expected
that at a minimum they will increase the Companys operating and compliance costs and could
increase its interest expense.
As a result of competitive pressures for deposits, the Company may not be able to adjust
deposit rates to offset the cost of increased deposit insurance premiums.
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ITEM 1A. | Risk Factors. |
An investment in the Companys common stock involves various risks. The Company has identified
the following material risks affecting its business. These risk factors may cause our future
earnings to be lower or our financial condition to be less favorable than the Company expects. In
addition, other risks of which the Company is not aware, which relate to the banking and financial
services industries in general, or which it does not believe are material, may cause earnings to be
lower, or hurt the Companys future financial condition.
The pending merger with Sandy Spring is not guaranteed to occur. Compliance with the terms of
the Merger Agreement in the interim could adversely affect our business. If the Merger does not
occur, it could have a material and adverse affect on our business, results of operations and our
stock price
In December 2011, the Company entered into the Merger Agreement and related agreements with
Sandy Spring, pursuant to which the Company would be merged into Sandy Spring, and the Bank would
be merged into SSB, and each share of the Companys common stock would be converted in to $13.60 in
cash, or 0.8043 shares of Sandy Spring common stock, subject to adjustment. Consummation of the
merger is subject to the satisfaction of a number of conditions, including but not limited to (i)
approval of the Merger by the holders of at least two-thirds of the outstanding shares of the
Companys common stock; (ii) the receipt of all required regulatory approvals, without significant
adverse or burdensome conditions; and (iii) the absence of a material adverse change with respect
to the Company, as well as other conditions to closing as are
customary in transactions such as the
Merger.
As a result of the pending merger: (i) the attention of management and employees may be
diverted from day to day operations as they focus on matters relating to preparation for
integrating the Companys operations with those of Sandy Spring; (ii) the restrictions and
limitations on the conduct of the Companys business pending the merger may disrupt or otherwise
adversely affect its business and our relationships with its customers, and may not be in the best
interests of the Company if it were to have to act as an independent entity following a termination
of the Merger Agreement; (iii) the Companys ability to retain its existing employees may be
adversely affected due to the uncertainties created by the Merger; and (iv) the Companys ability
to maintain existing customer relationships, or to establish new ones, may be adversely affected.
Any delay in consummating the merger may exacerbate these issues.
There can be no assurance that all of the conditions to closing will be satisfied, or where
possible, waived, or that the Merger will become effective. If the Merger does not become
effective because all conditions to closing are not satisfied, or because one of the parties, or
all of the parties mutually, terminate the Merger Agreement, then, among other possible adverse
effects: (i) the Companys shareholders will not receive the consideration which Sandy Spring has
agreed to pay; (ii) the Companys stock price may decline significantly; (iii) the Companys
business may have been adversely affected; (iv) the Company will have incurred significant
transaction costs; and (v) under certain circumstances, the Company may have to pay Sandy Spring a
termination fee of $1 million.
The Company may not be able to successfully manage continued growth.
The Company intends to seek further growth in the level of assets and deposits and may
consider expanding the branch network in the future. The Company may not be able to manage
increased levels of assets and liabilities, and an expanded branch system, without increased
expenses and higher levels of nonperforming assets. The Company may be required to make additional
investments in equipment and personnel to manage higher asset levels and loan balances and a larger
branch network, which may adversely impact earnings, shareholder returns and efficiency ratio.
Increases in operating expenses or nonperforming assets may have an adverse impact on the value of
the Companys common stock. There can be no assurance that the Company will establish any
additional branches, or if established, that they can be operated profitably.
The Company has a lower level of core deposits and a higher level of wholesale funding, relative
to peer institutions.
During 2007, 2008 and 2009, the Company had achieved significant growth in our loan portfolio.
Because the Companys deposits had not grown at similar rates, the Company supplemented its funding
sources to include the use of the national market to attract funds. While the level of loans has
not changed substantially during 2010 and 2011, the Company has maintained the funds obtained from
the national market. During an environment when interest rates are rising and the related U.S.
Treasury interest rate curve is flattening, the use of this funding source may result in an
increase in interest costs disproportionate to loan yields. This results in less net interest
income, which could adversely impact earnings, the stock price and shareholder returns.
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The Companys concentrations of loans may create a greater risk of loan defaults and losses.
A substantial portion of the Companys loans are secured by real estate, including a
significant amount of commercial real estate loans, in the Companys market areas in Maryland.
While Management believes that the commercial real estate concentration risk is mitigated by
diversification among the types and characteristics of real estate collateral properties, sound
underwriting practices, and ongoing portfolio monitoring and market analysis, the repayments of
these loans usually depends on the successful operation of a business or the sale of the underlying
property. As a result, these loans are more likely to be adversely affected by adverse conditions
in the real estate market or the economy in general. The remaining loans in the loan portfolio are
commercial or industrial loans. These loans are collateralized by various business assets the value
of which may decline during adverse market conditions. These loans are also susceptible to adverse
economic conditions. Adverse conditions in the real estate market and the economy may result in
increasing levels of loan charge-offs and nonperforming assets and the reduction of earnings.
Commercial and commercial real estate loans tend to have larger balances than residential
mortgage loans. Because the loan portfolio contains a significant number of commercial and
commercial real estate with relatively large balances, the deterioration of one or a few of these
loans may cause a significant increase in nonperforming assets. An increase in nonperforming loans
could result in: a loss of earnings from these loans, an increase in the
provision for loan losses, or an increase in loan charge-offs, which could have an adverse impact
on the Companys results of operations and financial condition.
Further, under guidance adopted 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 Bank may be required
to maintain higher levels of capital than it would otherwise be expected to maintain as a result of
the Banks levels of commercial real estate loans, which may require the Company to obtain
additional capital sooner than it would otherwise seek it, which may reduce shareholder returns.
The Companys financial condition and results of operations would be adversely affected if its
allowance for loan losses is not sufficient to absorb actual losses or if it is required to
increase the allowance for loan losses.
Although the Company believes that the allowance for loan losses is maintained at a level
adequate to absorb any inherent losses in the loan portfolio, these estimates of loan losses are
necessarily subjective and their accuracy depends on the outcome of future events. If the Company
needs to make significant and unanticipated increases in the loss allowance in the future, its
results of operations and financial condition would be materially adversely affected at that time.
While the Company strives to carefully monitor credit quality and to identify loans that may
become nonperforming, at any time there are loans included in the portfolio that will result in
losses, but that have not been identified as nonperforming, impaired or potential problem loans.
The Company cannot be sure that it will be able to identify deteriorating loans before they become
nonperforming assets, or that it will be able to limit losses on those loans that are identified.
As a result, future additions to the allowance may be necessary.
The Companys continued growth depends on its ability to meet minimum regulatory capital levels.
Growth and shareholder returns may be adversely affected if sources of capital are not available to
help the Company meet them.
The Company is required to maintain its regulatory capital levels at or above the required
minimum levels. If earnings do not meet current estimates, if it incurs unanticipated losses or
expenses, or if it grows faster than expected, the Company may need to obtain additional capital
sooner than expected, through borrowing, additional issuances of debt or equity securities, or
otherwise. If it does not have continued access to sufficient capital, it may be required to reduce
its level of assets or reduce its rate of growth in order to maintain regulatory compliance. Under
those circumstances net income and the rate of growth of net income may be adversely affected.
Additional issuances of equity securities could have a dilutive effect on existing shareholders.
The Company cannot be certain that it will be able to acquire additional capital when it is
required, or that the terms upon which it is available will not be disadvantageous to existing
shareholders.
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The Company may not be able to successfully compete with others for business.
The Company competes for loans and deposits with numerous regional and national banks, online
divisions of out-of-market banks, and other community banking institutions, as well as other kinds
of financial institutions and enterprises, such as securities firms, insurance companies, savings
associations, credit unions, mortgage brokers, and private lenders. As a result of the Dodd-Frank
Act, additional competitors who have not previously been able to establish de novo branches in
Maryland may elect to do so. Many competitors have substantially greater resources than the
Company, and operate under less stringent regulatory environments. The differences in resources and
regulations may make it harder for the Company to compete profitably, reduce the rates that it can
earn on loans and investments increase the rates it must offer on deposits, and adversely affect
the Companys overall financial condition and earnings.
Liquidity challenges may increase due to turmoil in the financial markets.
The turmoil in the financial markets over the last several years resulted in sharp declines in
real estate values and financial instruments. These declines resulted in large losses at many
financial institutions detrimentally affecting depositors confidence in all financial
institutions. This lack of confidence resulted in rapid withdrawals by depositors in several
institutions causing the institutions to fail and/or require federal assistance.
The Company positions itself in the marketplace as a business bank. It does not (and did not)
originate or
acquire home loans or securities dependent upon home loans for repayment. Nevertheless, possible
additional turmoil in the financial markets could cause depositors to seek safety in government
securities, resulting in liquidity challenges for all banks. Should such turmoil in the markets
occur, the Company may be forced to pay higher interest rates to obtain deposits to meet the needs
of its depositors and borrowers, resulting in reduced net interest income. If conditions worsen
significantly, it is possible that banks such as the Bank may be unable to meet the needs of their
depositors and borrowers, which could, in the worst case, result in the Company being placed into
receivership.
The current economic environment poses significant challenges for the Company and could adversely
affect its financial condition and results of operations.
The Company is operating in a challenging and uncertain economic environment. Financial
institutions continue to be affected by sharp declines in the real estate market and constrained
financial markets. Dramatic declines in the housing market over the past years, with falling home
prices and high levels of foreclosures and unemployment, have resulted in significant write-downs
of asset values by financial institutions. Continued declines in real estate values, home sales
volumes, and financial stress on borrowers as a result of the uncertain economic environment could
have an adverse effect on the Companys borrowers or their customers, which could adversely affect
the Companys financial condition and results of operations. A worsening of these conditions would
likely exacerbate the adverse effects on the Company and others in the financial institutions
industry. For example, further deterioration in local economic conditions in the Companys market
could drive losses beyond that which is provided for in its allowance for loan losses. The Company
may also face the following risks in connection with these events:
| Economic conditions that negatively affect housing prices and the job market have
resulted, and may continue to result, in a deterioration in credit quality of the loan
portfolios, and such deterioration in credit quality has had, and could continue to
have, a negative impact on the Companys business; |
| The methodologies the Company uses to establish its allowance for loan losses may no
longer be reliable because they rely on complex judgments, including forecasts of
economic conditions, which may no longer be capable of accurate estimation; |
| Continued turmoil in the market, and loss of confidence in the banking system, could
require the Company to pay higher interest rates to obtain deposits to meet the needs
of its depositors and borrowers, resulting in reduced margin and net interest income.
If conditions worsen significantly, it is possible that banks such as the Company may
be unable to meet the needs of their depositors and borrowers, which could, in the
worst case, result in the Company being placed into receivership; and |
| Compliance with increased regulation of the banking industry may increase its costs,
limit its ability to pursue business opportunities, and divert management efforts. |
As these conditions or similar ones continue to exist or worsen, the Company could experience
continuing or increased adverse effects on its financial condition.
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There can be no assurance that recent legislation and regulatory actions taken by the federal
government will help stabilize the financial system in the United States.
Several pieces of federal legislation have been enacted, and the United States Department of
the Treasury, the Federal Reserve, the FDIC, and other federal agencies have enacted numerous
programs, policies and regulations to address the current liquidity and credit crises. These
measures include the Emergency Economic Stimulus Act of 2008 (EESA), the American Reinvestment
and Recovery Act of 2009 (ARRA), and the numerous programs, including the TARP Capital Purchase
Program, in which the Company did not participate, and expanded deposit insurance coverage, enacted
thereunder.
On July 21, 2010, the President signed into law The Dodd-Frank Wall Street Reform and Consumer
Protection Act (the Dodd-Frank Act). The Dodd-Frank Act contains various provisions designed to
enhance the regulation of depository institutions and prevent the recurrence of a financial crisis
such as occurred in 2007-2009. Also included is the creation of a new federal agency to administer
and enforce consumer and fair lending laws, a function that is now performed by the depository
institution regulators. The full impact of the Dodd-Frank Act on the Companys business and
operations will not be known for years until regulations implementing the statute are written and
adopted. The
Dodd-Frank Act may have a material impact on the Companys operations, particularly through
increased compliance costs.
The Company cannot predict the actual effects of EESA, ARRA, the regulatory reform measures
and various governmental, regulatory, monetary and fiscal initiatives which have been and may be
enacted on the financial markets, on the Company and the Bank. The terms and costs of these
activities, or the failure of these actions to help stabilize the financial markets, asset prices,
market liquidity and a continuation or worsening of current financial market and economic
conditions could materially and adversely affect the Companys business, financial condition,
results of operations, and the trading prices of its securities.
The Company expects to face increased regulation of its industry, including as a result of
EESA, the ARRA and the Dodd-Frank Act and related initiatives by the federal government. Compliance
with such regulations may increase costs and limit the Companys ability to pursue business
opportunities.
Trading in the common stock has been light. As a result, shareholders may not be able to quickly
and easily sell their common stock.
Although the Companys common stock is listed for trading on the NASDAQ Capital Market and a
number of brokers offer to make a market in the common stock on a regular basis, trading volume to
date has been limited. A more liquid market for the Companys common stock may not develop (or if
one develops, it may not be sustainable). As a result, shareholders may find it difficult to sell a
significant number of shares at the prevailing market price.
Directors and officers of CommerceFirst Bancorp own approximately 22% of the outstanding common
stock. As a result of their combined ownership, they could make it more difficult to obtain
approval for some matters submitted to shareholder vote, including acquisition of the Company. The
results of the vote may be contrary to the desires or interests of the public shareholders.
Directors and executive officers own approximately 22% of the outstanding shares of common
stock. By voting against a proposal submitted to shareholders, the directors and officers, as a
group, may be able to make approval more difficult for proposals requiring the vote of
shareholders, such as some mergers, share exchanges, asset sales, and amendments to the Articles of
Incorporation.
Changes in interest rates and other factors beyond the Companys control could have an adverse
impact on its financial performance and results.
The Companys operating income and net income depend to a great extent on its net interest
margin, i.e., the difference between the interest yields it receive on loans, securities and other
interest bearing assets and the interest rates it pay on interest bearing deposits and other
liabilities. Net interest margin is affected by changes in market interest rates, because different
types of assets and liabilities may react differently, and at different times, to market interest
rate changes. When interest bearing liabilities mature or reprice more quickly than interest
earning assets in a period, an increase in market rates of interest could reduce net interest
income. Similarly, when interest earning assets mature or reprice more quickly than interest
bearing liabilities, falling interest rates could reduce net interest income These rates are highly
sensitive to many factors beyond our control, including competition, general economic conditions
and monetary and fiscal policies of various governmental and regulatory authorities, including the
Federal Reserve Board.
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The Company attempts to manage itsr risk from changes in market interest rates by adjusting
the rates, maturity, re-pricing, and balances of the different types of interest earning assets and
interest bearing liabilities, but interest rate risk management techniques are not exact. As a
result, a rapid increase or decrease in interest rates could have an adverse effect on the
Companys net interest margin and results of operations. The results of the interest rate
sensitivity simulation model depend upon a number of assumptions which may not prove to be
accurate. There can be no assurance that the Company will be able to successfully manage its
interest rate risk. Increases in market rates and adverse changes in the local residential real
estate market, the general economy or consumer confidence would likely have a significant adverse
impact on noninterest income, as a result of reduced demand for SBA guaranteed loans, the majority
of which the Company sells.
Changes in laws, including that which permit banks to pay interest on checking and demand
deposit accounts established by businesses in July 2011, could have a significant negative effect
on net interest income, net
income, net interest margin, return on assets and return on equity. Usually, more than 10% of the
Companys deposits were noninterest bearing demand deposits.
Substantial regulatory limitations on changes of control and anti-takeover provisions of Maryland
law may make it more difficult for shareholders to receive a change in control premium.
With certain limited exceptions, federal regulations prohibit a person or company or a group
of persons deemed to be acting in concert from, directly or indirectly, acquiring more than 10%
(5% if the acquiror is a bank holding company) of any class of the Companys voting stock or
obtaining the ability to control in any manner the election of a majority of its directors or
otherwise direct the management or policies of the Company without prior notice or application to
and the approval of the Federal Reserve. There are comparable prior approval requirements for
changes in control under Maryland law. Also, Maryland corporate law contains several provisions
that may make it more difficult for a third party to acquire control of the Company without the
approval of its Board of Directors, and may make it more difficult or expensive for a third party
to acquire a majority of its outstanding common stock.
Government regulation will significantly affect the Companys business, and may result in higher
costs and lower shareholder returns.
The banking industry is heavily regulated. Banking regulations are primarily intended to
protect the federal deposit insurance funds and depositors, not shareholders. The Company and Bank
are regulated and supervised by the Maryland Department of Financial Regulation, the Federal
Reserve Board and the FDIC. The burden imposed by federal and state regulations puts banks at a
competitive disadvantage compared to less regulated competitors such as finance companies, mortgage
banking companies and leasing companies. Changes in the laws, regulations and regulatory practices
affecting the banking industry may increase the costs of doing business or otherwise adversely
affect the Company and create competitive advantages for others. Regulations affecting banks and
financial services companies undergo continuous change, and the Company cannot predict the ultimate
effect of these changes, which could have a material adverse effect on its profitability or
financial condition. Federal economic and monetary policy may also affect the Companys ability to
attract deposits and other funding sources, make loans and investments, and achieve satisfactory
interest spreads.
The loss of the services of any key employees could adversely affect investor returns.
Our business is service oriented, and our success depends to a large extent upon the services
of Richard J. Morgan, our President and the Banks Market Leaders. The loss of the services of any
of these officers could adversely affect the Companys business.
ITEM 1B. | Unresolved Staff Comments |
None.
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ITEM 2. | Properties. |
The main branch office and the executive offices of the Bank and the Company are located at
1804 West Street, Annapolis, Maryland, in a brick and masonry structure. The Company leases 8,100
square feet in the building under a lease, which commenced in April 2000. Rent expense was $230,113
and $224,219 for the years ended December 31, 2011 and 2010, respectively. The Company has
exercised the second of three five-year renewal options.
The second office of the Company is located at 4451 Parliament Place, Lanham, Maryland in a
masonry structure. The Company leases 2,100 square feet in the building under a ten-year lease
which commenced in June 2004. Rent expense was $35,044 and $35,848 for the years ended December 31,
2011 and 2010, respectively.
The third office of the Company is located at 910 Cromwell Park Drive, Glen Burnie, Maryland
in a masonry structure. The Company leases 2,600 square feet in the building under a five-year
lease which commenced in June 2006. The Company exercised its only five-year renewal option in
2011. Rent expense was $88,745 and $85,230 for the years ended December 31, 2011 and 2010,
respectively.
The fourth office of the Company is located at 6230 Old Dobbin Lane, Columbia, Maryland in a
masonry structure. The Company leases 2,400 square feet in the building under a ten-year lease
(with one five-year renewal
option) which commenced in August 2006. Rent expense was $73,272 and $73,602 for the years ended
December 31, 2011 and 2010, respectively.
The fifth office of the Company is located at 485 Ritchie Highway, Severna Park, Maryland in a
masonry structure. The Company leases approximately 1,500 square feet in the building under a
five-year lease with two five-year renewal options, which commenced in June 2007. The Company
exercised the first five-year renewal option in 2012. Rent expense was $57,998 in 2011 and $57,169
during 2010.
Management believes adequate insurance coverage is in force on all of its properties.
ITEM 3. | Legal Proceedings. |
In the normal course of its business, the Company is involved in litigation arising from
banking, financial, and other activities it conducts. Management, after consultation with legal
counsel, does not anticipate that the ultimate liability, if any, arising out of these matters will
have a material effect on the Companys financial condition, operating results or liquidity.
ITEM 4. | Mine Safety Disclosures |
Not applicable.
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PART II
ITEM 5. | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities. |
(a) Market for Common Stock and Dividends.
The Companys Common Stock is listed for trading on the NASDAQ Capital Market under the symbol
CFMB. The following table sets forth the high and low sales prices for the Common Stock during
each calendar quarter of 2011 and 2010. These quotations do not necessarily reflect the intrinsic
or market values of the Common Stock. As of December 31, 2011, there were 1,820,548 shares of
Common Stock outstanding, held by approximately 300 shareholders of record.
2011 | 2010 | |||||||||||||||
High | Low | High | Low | |||||||||||||
First Quarter |
$ | 9.80 | $ | 7.07 | $ | 7.75 | $ | 5.25 | ||||||||
Second Quarter |
$ | 9.85 | $ | 8.75 | $ | 9.50 | $ | 5.00 | ||||||||
Third Quarter |
$ | 10.00 | $ | 5.86 | $ | 11.00 | $ | 8.29 | ||||||||
Fourth Quarter |
$ | 13.99 | $ | 6.16 | $ | 10.68 | $ | 8.50 |
From its organization through December 31, 2011 the Company has not paid any dividends. The
payment of dividends by the Company may depend largely upon the ability of the Bank, its sole
operating business, to declare and pay dividends to the Company. Regulations of the Federal
Reserve Board and Maryland law place limits on the amount of dividends the Bank may pay to the
Company without prior approval. Prior regulatory approval is required to pay dividends which
exceed the Banks net profits for the current year plus its retained net profits for the preceding
two calendar years, less required transfers to surplus. Additionally, without prior approval, the
Bank may pay dividends only out of its undivided profits. Even if the Bank and the Company have
earnings in an amount sufficient to pay dividends, the Board of Directors may determine to retain
earnings for the purpose of funding the growth of the Company and the Bank.
Recent Sales of Unregistered Shares. None.
(b) Use of Proceeds: Not applicable
(c) Issuer Repurchases of Securities during the Fourth Quarter of 2011. None.
ITEM 6. | Selected Financial Data. |
The following table shows selected historical Company consolidated financial data and should
be read in conjunction with the historical consolidated financial information contained in the
Consolidated Financial Statements for the year ended December 31, 2011 included in Item 8. Data for
all periods are derived from the respective audited consolidated financial statements.
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SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended December 31, | ||||||||||||||||||||
(Dollars in thousands, except per share data.) | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Operation Statement Data: |
||||||||||||||||||||
Net interest income |
$ | 10,155 | $ | 9,430 | $ | 7,341 | $ | 5,567 | $ | 5,895 | ||||||||||
Provision for loan losses |
$ | 2,533 | $ | 2,716 | $ | 1,616 | $ | 647 | $ | 45 | ||||||||||
Noninterest income |
$ | 1,146 | $ | 1,094 | $ | 720 | $ | 569 | $ | 620 | ||||||||||
Noninterest expense |
$ | 5,784 | $ | 5,434 | $ | 5,315 | $ | 5,028 | $ | 4,688 | ||||||||||
Federal and state income tax expense |
$ | 1,169 | $ | 951 | $ | 452 | $ | 166 | $ | 694 | ||||||||||
Net income |
$ | 1,815 | $ | 1,423 | $ | 678 | $ | 295 | $ | 1,088 | ||||||||||
Per share data and shares outstanding: |
||||||||||||||||||||
Net income per share, basic |
$ | 1.00 | $ | 0.78 | $ | 0.37 | $ | 0.16 | $ | 0.60 | ||||||||||
Net income per share, diluted |
$ | 1.00 | $ | 0.78 | $ | 0.37 | $ | 0.16 | $ | 0.59 | ||||||||||
Book value at period end |
$ | 13.28 | $ | 12.28 | $ | 11.50 | $ | 11.16 | $ | 11.02 | ||||||||||
Average common shares outstanding during year |
1,820,548 | 1,820,548 | 1,820,548 | 1,820,548 | 1,816,504 | |||||||||||||||
Diluted average common shares outstanding during year |
1,820,548 | 1,820,548 | 1,820,548 | 1,820,548 | 1,848,195 | |||||||||||||||
Shares outstanding at period end |
1,820,548 | 1,820,548 | 1,820,548 | 1,820,548 | 1,820,548 | |||||||||||||||
Financial Condition data: |
||||||||||||||||||||
Total assets |
$ | 207,339 | $ | 203,124 | $ | 200,371 | $ | 166,569 | $ | 148,811 | ||||||||||
Loans receivable (net) |
$ | 181,265 | $ | 181,709 | $ | 183,102 | $ | 151,101 | $ | 124,670 | ||||||||||
Allowance for loan losses |
$ | 3,033 | $ | 3,174 | $ | 2,380 | $ | 1,860 | $ | 1,665 | ||||||||||
Other interest-earning assets |
$ | 15,639 | $ | 12,289 | $ | 8,382 | $ | 9,227 | $ | 18,358 | ||||||||||
Total deposits |
$ | 182,608 | $ | 180,110 | $ | 178,645 | $ | 145,241 | $ | 123,408 | ||||||||||
Borrowings |
$ | | $ | | $ | | $ | | $ | 4,306 | ||||||||||
Stockholders equity |
$ | 24,180 | $ | 22,365 | $ | 20,942 | $ | 20,311 | $ | 20,056 | ||||||||||
Selected performance ratios: |
||||||||||||||||||||
Return on average earning assets |
0.90 | % | 0.71 | % | 0.37 | % | 0.19 | % | 0.80 | % | ||||||||||
Return on average equity |
7.74 | % | 6.46 | % | 3.29 | % | 1.44 | % | 5.60 | % | ||||||||||
Net interest margin |
5.04 | % | 4.69 | % | 4.00 | % | 3.59 | % | 4.38 | % | ||||||||||
Net interest spread |
4.73 | % | 4.30 | % | 3.32 | % | 2.60 | % | 3.10 | % | ||||||||||
Efficiency ratio |
51.18 | % | 51.63 | % | 65.94 | % | 81.94 | % | 72.21 | % | ||||||||||
Asset quality ratios: |
||||||||||||||||||||
Nonperforming loans to gross loans |
1.45 | % | 3.94 | % | 1.47 | % | 3.80 | % | 0.89 | % | ||||||||||
Allowance for loan losses to loans |
1.65 | % | 1.72 | % | 1.28 | % | 1.22 | % | 1.32 | % | ||||||||||
Allowance for loan losses to nonperforming loans |
1.14 | x | 0.44 | x | 0.87 | x | 0.32 | x | 1.48 | x | ||||||||||
Nonperforming assets to loans and other real estate |
3.66 | % | 5.64 | % | 2.76 | % | 3.80 | % | 0.89 | % | ||||||||||
Net loan charge-offs (recoveries) to average loans |
1.46 | % | 1.04 | % | 0.65 | % | 0.33 | % | 0.00 | % | ||||||||||
Capital ratios: |
||||||||||||||||||||
Total risk-based capital ratio |
14.00 | % | 13.06 | % | 12.25 | % | 14.14 | % | 16.48 | % | ||||||||||
Tier I risk-based capital ratio |
12.74 | % | 11.80 | % | 10.99 | % | 12.91 | % | 15.23 | % | ||||||||||
Leverage ratio |
11.51 | % | 11.03 | % | 10.43 | % | 12.24 | % | 13.91 | % | ||||||||||
Average equity to average assets |
11.32 | % | 10.62 | % | 11.03 | % | 12.86 | % | 13.93 | % |
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ITEM 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
MANAGEMENTS DISCUSSION AND ANALYSIS
Forward Looking Statements. Certain information contained in this discussion may
include forward-looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These
forward-looking statements are generally identified by words such as may, anticipates,
believes, expects, plans, estimates, potential, continue, should, and similar words
or phrases. Such forward-looking statements involve known and unknown risks including, but not
limited to, changes in general economic and business conditions, interest rate fluctuations,
competition within and from outside the banking industry, new products and services in the banking
industry, risk inherent in making loans such as repayment risks and fluctuating collateral values,
problems with technology utilized by the Company, changing trends in customer profiles and changes
in laws and regulations applicable to the Company or the banking industry as a whole. Although the
Company believes that its expectations with respect to the forward-looking statements are based
upon reliable assumptions within the bounds of its knowledge of its business and operations, there
can be no assurance that actual results, performance or achievements of the Company will not differ
materially from any future results, performance or achievements expressed or implied by such
forward-looking statements. Readers are cautioned against placing undue reliance on any such
forward-looking statements. The Company does not undertake to update any forward-looking statements
to reflect occurrences or events that may not have been anticipated as of the date of such
statements.
This discussion and analysis provides an overview of the financial condition and results of
operations of CommerceFirst Bancorp, Inc. (the Company) and CommerceFirst Bank (the Bank) for
the years 2011 and 2010. It is intended that this discussion and analysis help the readers in
their analysis of the accompanying audited Consolidated Financial Statements. You should read this
discussion in conjunction with the Consolidated Financial Statements and Notes thereto provided
elsewhere in this report.
General
CommerceFirst Bancorp, Inc. is the bank holding company for CommerceFirst Bank, a Maryland
chartered commercial bank headquartered in Annapolis, Maryland. The Bank was capitalized, became a
wholly owned subsidiary of the Company and commenced operations on June 29, 2000. The Company
maintains five banking offices in Anne Arundel, Howard and Prince Georges counties in central
Maryland. The Company focuses on providing commercial banking services to small and medium sized
businesses in its market areas.
Proposed Merger
On December 20, 2011, the Company entered into an Agreement and Plan of Merger (Merger
Agreement) with Sandy Spring Bancorp, Inc. (Sandy Spring), whereby Sandy Spring will acquire the
Company by way of a merger of the Company with and into Sandy Spring. The Merger Agreement also
provides for the merger of CommerceFirst Bank with and into Sandy Spring Bank, a Maryland bank and
trust company, a wholly owned subsidiary of Sandy Spring. Pursuant to the Merger Agreement, at the
effective time of the merger, each outstanding share of the Companys common stock will be
converted into the right to receive either (i) $13.60 in cash (Cash Consideration), or (ii) 0.8043
of a share of Sandy Springs common stock, subject to adjustment in accordance with the provisions
of the Merger Agreement. The Merger Agreement provides that 50% of the outstanding shares of
Company common stock will be converted into Stock Consideration and 50% of the outstanding shares
of Company common stock will be converted into Cash Consideration. Each stockholder of the Company
will be entitled to elect the number of shares of Company common stock held by such stockholder
that will exchanged for the Stock Consideration or the Cash Consideration subject to proration in
the event that a selected form of consideration is over-elected. The merger is intended to be a
tax-free reorganization as to the portion of the merger consideration received as Sandy Spring
common stock.
The Merger Agreement contains customary representations, warranties and covenants from both
the Company and Sandy Spring. Among other covenants, the Company has agreed: (i) to convene and
hold a meeting of its shareholders to consider and vote upon the Merger, (ii) that, subject to
certain exceptions, the board of directors of the Company will recommend the adoption and approval
of the Merger and the Merger Agreement by its shareholders, and (iii) not to (A) solicit
alternative third-party acquisition proposals or, (B) subject to certain exceptions, conduct
discussions concerning or provided confidential information in connection with any alternative
third-party acquisition proposal.
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Table of Contents
Completion of the Merger is subject to various customary conditions, including, among others:
(i) approval of the Merger and the Merger Agreement by the shareholders of the Company, (ii)
receipt of required regulatory approvals, (iii) the absence of legal impediments to the Merger and
(iv) the absence of certain material adverse changes or events. The Merger Agreement contains
certain termination rights for the Company and Sandy Spring, as the case may be. The Merger
Agreement further provides that, upon termination of the Merger Agreement under certain
circumstances, the Company will be required to pay to Sandy Spring a termination fee of $1,000,000.
The representations and warranties contained in the Merger Agreement are not intended do, and
do not, modify the statements and information about the Company contained in its periodic reports
on Forms 10-K, 10-Q and 8-K, or the information contained in other documents filed with the
Securities and Exchange Commission or their respective banking regulators. Representations and
warranties in agreements such as the Merger Agreement are not intended as statements of fact, but
rather are negotiated provisions which allocate risks related to the subject matter of the
statements between the parties to the agreement. Additionally, the representations and warranties
are modified in the Agreement by materiality standards and conditions, and clarifications,
exclusions and exceptions set forth on schedules and exhibits which are not public documents. As
such, readers should not place reliance on the representations and warranties as accurate
statements of the current condition of any party to the agreement, their respective subsidiaries,
operations, assets or liabilities.
General
The financial industry continues to experience significant volatility and stress as economic
conditions remain generally stagnant, unemployment levels are high and asset values remain
depressed. While the Company did not have direct exposure to the upheaval in the residential
mortgage loan market, declines in housing construction that started in 2008 and the related impact
on contractors and other small and medium sized businesses have had an adverse impact on the
Companys business. This impact included increased levels of non-performing assets, loan
charge-offs and increased loan loss provisions. While the Company believes that it has taken
adequate reserves for the problem assets in its loan portfolio at December 31, 2011, there can be
no assurance that the Company will not be required to take additional charge-offs or make
additional provisions for nonperforming loans, or that currently performing loans will continue to
perform. Additionally, there can be no assurance that the steps taken to stimulate the economy and
stabilize the financial system will prove successful, or that they will improve the financial
condition of the Companys customers or the Company.
Overview
The Companys assets increased modestly at December 31, 2011 from December 31, 2010, primarily
reflecting an increase in cash and cash equivalents as the Company increased its liquidity
position. Earnings improved as the result of the reduction of the cost of deposits particularly the
reduction in the cost of certificates of deposits due to re-pricing of these deposits to lower
current market interest rates. Despite a decline from 2010, the provision for loan losses continues
to remain relatively high in recognition of the effect of uncertain economic conditions on the
Companys borrowers and collateral values as well as loan charge-offs. Key measurements and events
for the period include the following:
| The Companys net income was $1.8 million for the year ended December 31, 2011
as compared to net income of $1.4 million for the year ended December 31, 2010, a
27.6% increase, largely resulting from increased net interest income during 2011. |
| Net interest income, the Companys main source of income, increased by 7.7% from
$9.4 million in 2010 to $10.2 million in 2011. |
| The provision for loan losses decreased by 6.7% from $2.7 million in 2010 to
$2.5 million during 2011. |
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| Total assets increased by 2.1% from $203.1 million at December 31, 2010 to
$207.3 million at December 31, 2011. |
| Net loans outstanding decreased by 0.2% from $181.7 million at December 31, 2010
to $181.3 million as of December 31, 2011. |
| Deposits increased by 1.4% from $180.1 million at December 31, 2010 to $182.6
million at December 31, 2011. |
| Non-interest income increased by 4.8% from $1.09 million for the year ended
December 31, 2010 to $1.15 million for the year ended December 31, 2011. |
| Non-interest expenses increased by 6.4% from $5.4 million during 2010 to $5.8
million in 2011. |
A detailed discussion of the factors leading to these changes can be found in the discussion
below.
Further asset and loan growth by the Company may be limited by its levels of regulatory
capital. Increases in the loan portfolio need to be funded by increases in deposits as the Company
has limited amounts of on-balance sheet assets deployable into loans. Growth will depend upon
Company earnings and/or the raising of additional capital.
Critical Accounting Policies
The Companys Consolidated Financial Statements are prepared in accordance with accounting
principles generally accepted in the United States and follow general practices within the
industries in which it operates. Application of these principles requires management to make
estimates, assumptions and judgments that affect the amounts reported in the financial statements
and accompanying notes. These estimates, assumptions and judgments are based on information
available as of the date of the financial statements; accordingly, as this information changes, the
financial statements could reflect different estimates, assumptions and judgments. Certain
policies inherently have a greater reliance on the use of estimates, assumptions and judgments and
as such have a greater possibility of producing results that could be materially different than
originally reported. Estimates, assumptions and judgments are necessary when assets and
liabilities are required to be recorded at fair value, when a decline in the value of an asset not
carried on the financial statements at fair value warrants an impairment write-down or valuation
reserve to be established, or when an asset or liability needs to be recorded contingent upon a
future event. Carrying assets and liabilities at fair value inherently results in more financial
statement volatility. The fair values and the information used to record valuation adjustments for
certain assets and liabilities are based either on quoted market prices or are provided by other
third-party sources, when available.
The most significant accounting policies followed by the Company are presented in Note 1 to
the Consolidated Financial Statements. These policies, along with the disclosures presented in the
other financial statement notes and in this discussion, provide information on how significant
assets and liabilities are valued in the financial statements and how those values are determined.
Based on the valuation techniques used and the sensitivity of financial statement amounts to the
methods, assumptions and estimates underlying those amounts, management has identified the
determination of the allowance for loan losses as the accounting area that requires the most
subjective or complex judgments, and as such could be most subject to revision as new information
becomes available.
The Company believes it has developed appropriate policies and procedures for assessing the
adequacy of the allowance for loan losses, recognizing that this process requires a number of
assumptions and estimates with respect to its loan portfolio. The Companys assessments may be
impacted in future periods by changes in economic conditions, the impact of regulatory examinations
and the discovery of information with respect to borrowers which is not known to management at the
time of the issuance of the Consolidated Financial Statements. For additional discussion
concerning the allowance for loan losses and related matters, see Provision for Loan Losses below
and Note 1 to the Consolidated Financial Statements.
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Table of Contents
Financial Condition
The Companys assets at December 31, 2011 were $207.3 million, an increase of $4.2 million or
2.1%, from December 31, 2010. The increase is primarily the result of the increase in cash and cash
equivalents of $4.1
million offset by the decrease in net loans of $0.4 million. Increases in deposits during 2011
were primarily maintained in interest bearing cash deposit accounts at other financial
institutions.
Loan Portfolio
At December 31, 2011, net loans totaled $181.3 million as compared to $181.7 million at
December 31, 2010. The loan portfolio is comprised of commercial loans and real estate loans. The
net decrease in loans is attributable to the $1.2 million decline, or 2.3%, in commercial and
industrial loans, the increase of $0.6 million in real estate loans, or 0.5%, as well as a $0.1
million decrease, or 4.4%, in the allowance for loan losses. During 2011, the Company continued its
efforts to originate real estate loans, where the Company has tangible collateral securing the
loans. Real estate retains a value even in down markets unlike other collateral such as accounts
receivable and business assets, which are more susceptible to significant declines in value. The
real estate portfolio is largely composed of loans secured by commercial real estate. The Company
has only approximately $1 million in acquisition and development loans secured by residential
building lots. The Companys residential loans consist of loans to investors in residential
property for rental, and are primarily secured by one to four family properties.
The loan portfolio is the largest component of earning assets and accounts for the greatest
portion of total interest income. At December 31, 2011, gross loans were $184.3 million, a 0.3%
decline from the $184.9 million in gross loans outstanding at December 31, 2010. Loans consist of
internally generated loans and participation loans purchased from other local community banks.
Lending activity is confined to the Banks market area. The Company continues to seek quality
credits. There has been no dilution of credit underwriting standards. The Company does not engage
in foreign lending activities.
The following table sets forth information on the composition of the loan portfolio by type at
December 31:
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||||
% of | % of | % of | % of | % of | ||||||||||||||||||||||||||||||||||||
(In thousands) | Balance | Loans | Balance | Loans | Balance | Loans | Balance | Loans | Balance | Loans | ||||||||||||||||||||||||||||||
Commercial and Industrial loans |
$ | 43,051 | 23.3 | % | $ | 44,645 | 24.1 | % | $ | 63,959 | 34.5 | % | $ | 54,195 | 35.4 | % | $ | 49,596 | 39.3 | % | ||||||||||||||||||||
SBA loans |
8,049 | 4.4 | % | 7,742 | 4.2 | % | 4,517 | 2.4 | % | 4,588 | 3.0 | % | 3,841 | 3.0 | % | |||||||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||||||||||||||||||||||
Owner occupied |
77,288 | 41.9 | % | 85,570 | 46.3 | % | 73,327 | 39.5 | % | 61,417 | 40.1 | % | 44,967 | 35.6 | % | |||||||||||||||||||||||||
Non owner occupied |
55,999 | 30.4 | % | 47,040 | 25.4 | % | 43,760 | 23.6 | % | 32,790 | 21.5 | % | 27,966 | 22.1 | % | |||||||||||||||||||||||||
Total real estate loans |
133,287 | 72.3 | % | 132,610 | 71.7 | % | 117,087 | 63.1 | % | 94,207 | 61.6 | % | 72,933 | 57.7 | % | |||||||||||||||||||||||||
184,387 | 100.0 | % | 184,997 | 100.0 | % | 185,563 | 100.0 | % | 152,990 | 100.0 | % | 126,370 | 100.0 | % | ||||||||||||||||||||||||||
Unearned loan fees, net |
(89 | ) | (114 | ) | (81 | ) | (29 | ) | (35 | ) | ||||||||||||||||||||||||||||||
Allowance for loan losses |
(3,033 | ) | (3,174 | ) | (2,380 | ) | (1,860 | ) | (1,665 | ) | ||||||||||||||||||||||||||||||
$ | 181,265 | $ | 181,709 | $ | 183,102 | $ | 151,101 | $ | 124,670 | |||||||||||||||||||||||||||||||
Note: |
The loan amounts and percentages for December 31, 2010 above reflect the effect of
reclassifying approximately $9.5 million of commercial and industrial loans to real estate
loans during the second quarter of 2010. The reclassification resulted from a review by the
Company of the risk profile of the loan portfolio. The majority of the reclassified loans
were to entities whose cash flow were directly or indirectly significantly dependent upon
the sale, refinance, or management of real estate assets or collections of the entities
financing of real estate. Without the reclassification, the commercial and industrial loans
would have comprised approximately 33.4% of the total loans at December 31, 2010. |
Non owner occupied real estate loans include loans secured by residential property in
the amount of $26.5 million, $24.3 million, $22.1 million, $19.0 million in 2011, 2010, 2009 and
2008, respectively. Delineation as to residential versus commercial property for 2007 is not
available.
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Table of Contents
The tables below set forth the maturity and re-pricing distributions of the loan receivable
portfolio as of December 31, 2011.
LOAN MATURITIES AS OF DECEMBER 31, 2011 | ||||||||||||||||
1 year | After | |||||||||||||||
(In thousands) | or less | >1-5 years | 5 years | Total | ||||||||||||
Commercial and Industrial
loans (1) |
$ | 27,813 | $ | 10,369 | $ | 12,918 | $ | 51,100 | ||||||||
Real estate loans |
29,787 | 29,998 | 73,502 | 133,287 | ||||||||||||
Total loans receivable |
$ | 57,600 | $ | 40,367 | $ | 86,420 | $ | 184,387 | ||||||||
(1) | Includes SBA loans |
LOAN RE- PRICING AS OF DECEMBER 31, 2011 | ||||||||||||||||
1 year | After | |||||||||||||||
(In thousands) | or less | >1-5 years | 5 years | Total | ||||||||||||
Loans with: |
||||||||||||||||
Fixed interest rates |
$ | 10,692 | $ | 35,605 | $ | 1,049 | $ | 47,346 | ||||||||
Floating and adjustable
interest rates |
70,793 | 66,248 | | 137,041 | ||||||||||||
Total loans receivable |
$ | 81,485 | $ | 101,853 | $ | 1,049 | $ | 184,387 | ||||||||
Allowance for Loan Losses
The allowance for loan losses was $3.0 million, or 1.65% of loans, at December 31, 2011 as
compared to $3.2 million, or 1.72% of loans, at December 31, 2010. At December 31, 2011,
non-accrual loans totaled $2.7 million as compared to $7.3 million at December 31, 2010. The
decrease is primarily attributable to decreases in non-accrual real estate loans. The majority of
the non-accrual loans are commercial real estate loans: $0.4 million in loans to businesses
occupying the real estate collateral to conduct the borrowers primary business operations and $1.3
million in loans on real estate for investment purposes. The long period of reduced economic
activity has negatively impacted businesses resulting in the reduction of resources to make
required loan payments. Loans charged-off in 2011 totaled $2.8 million as compared to $2.0 million
during 2010. Recoveries on charged-off loans were $138 thousand during 2011 and $51 thousand during
2010.
Of the balance in the allowance account at December 31, 2011, specific reserves were $1.4
million, or 0.77% of gross loans outstanding, and general reserves were $1.6 million, or 0.88% of
gross loans outstanding at December 31, 2011. Specific reserves are used to individually allocate
an allowance for loans identified as impaired, or which otherwise exhibit adverse characteristics
that suggest a heightened risk of non-collection. General reserves are those made with respect to
unclassified loans in our portfolio based upon the methodology discussed below in order to maintain
the allowance at a level which reflects our best estimate of the losses inherent in the portfolio
with respect to such loans. Whether specific or general, amounts in the allowance for credit
losses are available to absorb losses with respect to any loan. At December 31, 2010, the allowance
for credit losses stood at $3.2 million, or 1.72% of outstanding gross loans. Of this amount,
specific reserves were $1.6 million and general reserves were $1.6 million.
The allowance for loan losses is determined based upon various loss ratios applied to
categories of loans except for loans rated substandard, doubtful or loss, which are evaluated
separately and assigned specific reserve amounts, if necessary, based upon the evaluation. Loss
ratios are applied to each category of loan to determine estimated loss amounts. Categories of
loans are identified as commercial term or revolving loans, SBA loans, owner occupied real estate
loans and non owner occupied real estate loans. Additional loss ratios are also applied for risks
factors identified beyond individual loan risks, such as economic conditions, underwriting
exceptions and loan concentrations based upon managements estimations of loss exposure. Loss
ratios are determined based upon the Banks loan loss history adjusted for estimated losses for the
effect of current economic conditions (currently stressed), any industry concentration or
identified weakness in an industry, and credit management and underwriting policies changes, if
any.
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Table of Contents
The Company monitors its loan portfolio for indications of weaknesses through the review of
borrowers financial condition, cash flows, loan payment delinquencies, economic factors occurring
in borrowers business sectors and other information which may come to the Company through its
contacts in the market place. The determination of the effect of the weaknesses noted on the
repayment of the loans is an ongoing process as to each borrower. The Company may set aside
specific loss reserves during this process in amounts determined on subjective bases until such
time as the collectability of the loan from the borrowers primary repayment source(s) is in doubt.
During this time, secondary and tertiary repayment sources, including liquidation of collateral,
are evaluated which may result in additional specific loss reserves being established. Independent
or internal appraisals and evaluations are performed to determine potential recovery amounts, or
range of amounts, from the loan collateral and other
payment sources. Collateral values are subject to change depending on market factors,
collateral condition and method and timing of liquidation efforts. Loans, or portions of loans, for
which the Company does not expect to obtain repayment are charged-off. In most cases, the Company
has established specific reserves for the amount of the loans losses prior to the point of
charge-off.
At December 31, 2011, the range of the loss ratios used to determine estimated losses by loan
category were: commercial loans 1.31%; SBA loans 6.29%; owner occupied mortgage loans 0.40%
and non owner occupied mortgage loans 0.25% to 0.47%. Additional losses are estimated based on
additional identified risks factors, such as loans with underwriting exceptions, the level and
direction of payment delinquencies and the level of unsecured credit. These additional loss
estimates are not allocated to the separate loan categories.
The computed allowance for loan losses is tested through the use of the Companys loan risk
rating process. Loans are assigned a risk rating at their origination based upon rating criteria
consistent with regulatory definitions. The risk ratings are adjusted, as necessary, if loans
become delinquent, if significant adverse information is discovered regarding the underlying credit
and, in the case of commercial loans and commercial real estate loans, the normal periodic review
(usually annually) of the underlying credit 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. Estimated losses and reserves for loans
rated as substandard, doubtful or loss are derived from the determination of the allowance for loan
losses as discussed above as well as estimated losses resulting from risk factors identified beyond
individual loan risks, such as economic conditions, underwriting exceptions and loan
concentrations. Loss percentages used are generally based upon managements best estimates
considering losses incurred. Estimated low and high allowance for loan loss amounts are
derived by accumulating the estimated losses using the low and high loss percentages for each
risk rating and adding losses based upon separate loan evaluations and identified other risks. The
actual allowance for loan losses is compared to this range to ascertain that it is situated within
the range. At December 31, 2011, the low and high allowance determination resulted in a low
allowance of 1.39% of loans and a high allowance of 1.66% of loans. The actual allowance for
loan losses was 1.65% of loans.
The allowance for loan losses represents 1.65% and 1.72% of loans receivable at December 31,
2011 and December 31, 2010, respectively. The decrease in the allowance for loan losses as a
percent of loans at December 31, 2011 as compared to December 31, 2010 resulted from the increase
in loan charge-offs, decline in loan balances and increase in foreclosure activities. During 2011,
there were no significant changes made in the estimation methods or assumptions used in the
determination of the allowance for loan losses at December 31, 2011 as compared to December 31,
2010 apart from changes to loss factors based on managements perception of economic environmental
factors and trends. In addition, on at least a quarterly basis, the recorded allowance for loan
losses (as a percent of loans) is compared to peer group levels to ascertain the reasonableness of
the estimate. Management believes that the allowance for loan losses is adequate at December 31,
2011.
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Table of Contents
The activity in the allowance for credit losses for the years ended December 31 is shown in
the following table:
(In thousands) | 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 |
(1,043 | ) | (1,140 | ) | (500 | ) | (179 | ) | (72 | ) | |||||||||||
Charge-offs SBA loans |
(284 | ) | (447 | ) | (463 | ) | (318 | ) | | ||||||||||||
Recoveries Commercial and Industrial
loans |
101 | 26 | | 45 | 78 | ||||||||||||||||
Recoveries SBA loans |
35 | 25 | 5 | | | ||||||||||||||||
Real estate loans: |
|||||||||||||||||||||
Charge-offs Owner occupied |
(765 | ) | | (138 | ) | | | ||||||||||||||
Charge-offs Non owner occupied |
(720 | ) | (386 | ) | | | | ||||||||||||||
Recoveries Non owner occupied real
estate |
2 | | | | | ||||||||||||||||
Net recoveries (charge-offs) |
(2,674 | ) | (1,922 | ) | (1,096 | ) | (452 | ) | 6 | ||||||||||||
Provision for loan losses |
2,533 | 2,716 | 1,616 | 647 | 45 | ||||||||||||||||
Ending balance |
$ | 3,033 | $ | 3,174 | $ | 2,380 | $ | 1,860 | $ | 1,665 | |||||||||||
Net recoveries (charge-offs) to average loans |
(1.46 | %) | (1.04 | %) | (0.65 | %) | (0.33 | %) | 0.00 | % |
During 2011, loans to twenty one borrowers and related entities totaling $2.1 million were
determined to be uncollectible and were charged-off. The foreclosure of three commercial real
estate loan resulted in a charge-off of $736 thousand in 2011. During 2010, loans to twelve
borrowers and related entities totaling $2.0 million were determined to be uncollectible and were
charged-off.
The following table shows the allocation of the allowance for credit losses at the dates
indicated. The allocation of portions of the allowance to specific categories of loans is not
intended to be indicative of future losses, and does not restrict the use of the allowance to
absorb losses in any category of loans. The amount column in the table below represents the dollar
amount allocated; the percentage column represents the percentage of loans in each category to
total loans.
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||||||||||
(In thousands) | Amount | % | Amount | % | Amount | % | Amount | % | Amount | % | ||||||||||||||||||||||||||||||
Commercial and Industrial loans |
$ | 921 | 23.4 | % | $ | 1,023 | 24.1 | % | $ | 1,290 | 34.9 | % | $ | 789 | 35.2 | % | $ | 941 | 37.9 | % | ||||||||||||||||||||
SBA loans |
458 | 4.4 | % | 627 | 4.2 | % | 576 | 2.1 | % | 749 | 3.9 | % | 343 | 4.4 | % | |||||||||||||||||||||||||
Real estate loans: |
||||||||||||||||||||||||||||||||||||||||
Owner occupied |
535 | 41.8 | % | 682 | 46.2 | % | 168 | 38.2 | % | 212 | 39.3 | % | 217 | 44.6 | % | |||||||||||||||||||||||||
Non owner occupied |
969 | 30.4 | % | 715 | 25.5 | % | 242 | 24.8 | % | 105 | 21.6 | % | 56 | 13.1 | % | |||||||||||||||||||||||||
Total real estate loans |
1,504 | 72.2 | % | 1,397 | 71.7 | % | 410 | 63.0 | % | 317 | 60.9 | % | 273 | 57.7 | % | |||||||||||||||||||||||||
Unallocated to loan type |
150 | | 127 | | 104 | | 5 | | 108 | | ||||||||||||||||||||||||||||||
$ | 3,033 | 100.0 | % | $ | 3,174 | 100.0 | % | $ | 2,380 | 100.0 | % | $ | 1,860 | 100.0 | % | $ | 1,665 | 100.0 | % | |||||||||||||||||||||
The Company has also established a reserve for unfunded commitments that is recorded by a
provision charged to other expenses. At December 31, 2011 the balance of this reserve was $60
thousand. The reserve, based on evaluations of the collectability of loans, is an amount that
management believes will be adequate over time to absorb possible losses on unfunded commitments
(off-balance sheet financial instruments) that may become uncollectible in the future.
Loan Quality
In its lending activities, the Company seeks to develop sound credits with customers who will
grow with the Company. There has not been an effort to rapidly build the portfolio and earnings at
the expense of asset quality. At the same time, the extension of credit inevitably carries some
risk of non-payment. Loans on which the accrual of interest has been discontinued amounted to $2.7
million and $7.3 million at December 31, 2011 and 2010, respectively. Interest that would have been
accrued under the terms of these loans totaled $391 thousand and $324 thousand for the years ended
December 31, 2011 and 2010, respectively. No interest was included in income in respect to such
loans after being placed in non-accrual status as prior uncollected interest was reversed from
income.
The Company has no commitments to loan additional funds to the borrowers of impaired or
non-accrual loans. The accrual of interest on loans is discontinued when a scheduled loan payment
has become over ninety days past due.
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Table of Contents
Non-accrual loan activity is summarized as follows for the years ended December 31:
(In thousands) | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Balance at the beginning of the year |
$ | 7,283 | $ | 2,734 | $ | 5,819 | $ | 1,125 | $ | 628 | ||||||||||
New loans placed on non-accrual |
2,693 | 7,846 | 2,427 | 5,046 | 569 | |||||||||||||||
Less: |
||||||||||||||||||||
Loan restored to interest earning status |
| | 1,266 | | | |||||||||||||||
Other real estate owned additions |
2,529 | 945 | 2,462 | | | |||||||||||||||
Charge-offs |
2,812 | 1,973 | 1,101 | 236 | 72 | |||||||||||||||
Other including payments received |
1,967 | 379 | 683 | 116 | | |||||||||||||||
Balance at the end of the year |
$ | 2,668 | $ | 7,283 | $ | 2,734 | $ | 5,819 | $ | 1,125 | ||||||||||
Non-accrual loans with specific reserves at December 31, 2011 are comprised of $895 thousand
of commercial loans, $103 thousand of SBA loans, $404 thousand of owner occupied real estate loans
and $1.3 million of non owner occupied real estate loans. All of these loans are in various stages
of collection.
The following table shows the amounts of non-performing assets on the dates indicated:
December 31: | ||||||||||||||||||||
(In thousands) | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Non-accrual loans: |
||||||||||||||||||||
Commercial and Industrial |
$ | 895 | $ | 667 | $ | 2,280 | $ | 1,676 | $ | 868 | ||||||||||
SBA |
103 | 388 | 454 | 542 | 257 | |||||||||||||||
Real estate- owner occupied |
404 | 3,956 | | 3,601 | | |||||||||||||||
Real estate- non owner occupied |
1,266 | 2,272 | | | | |||||||||||||||
Accrual loans -past due 90 days and over |
| | | | | |||||||||||||||
Total non-performing loans |
2,668 | 7,283 | 2,734 | 5,819 | 1,125 | |||||||||||||||
Other real estate owned |
4,232 | 3,324 | 2,462 | | | |||||||||||||||
Total non-performing assets |
$ | 6,900 | $ | 10,607 | $ | 5,196 | $ | 5,819 | $ | 1,125 | ||||||||||
Accruing Troubled Debt Restructured loans |
$ | 3,272 | $ | 3,985 | $ | 1,263 | | | ||||||||||||
Allowance for loan losses to total
non-performing loans |
113.7 | % | 43.6 | % | 87.1 | % | 32.0 | % | 148.0 | % | ||||||||||
Non-performing loans to total loans |
1.45 | % | 3.94 | % | 1.47 | % | 3.80 | % | 0.89 | % | ||||||||||
Non-performing assets to total assets |
3.33 | % | 5.22 | % | 2.59 | % | 3.49 | % | 0.76 | % |
Management has not identified any other loans which it has serious doubts as to the ability of
the borrower to comply with the present repayment terms.
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.
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Table of Contents
Further information regarding the Companys other real estate owned and loan portfolio,
including non accrual loans and Troubled Debt Restructured loans, is contained in Note 4 Loans
and Allowance for Loan Losses in the accompanying Consolidated Financial Statements.
Investments
The Company does not maintain an investment securities portfolio as the portfolio was reduced
to zero in December 2009 as the sole security in the portfolio was redeemed. 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 securities investments when interest rates have increased and the
Company has sufficient excess liquidity
All investments securities, if any are held, are classified as available for sale and are
reflected in the statement of financial condition at their fair value.
(In thousands) | 2011 | 2010 | 2009 | |||||||||
Restricted stock: |
||||||||||||
Federal Reserve Bank stock |
465 | 465 | 465 | |||||||||
Corporate equities |
44 | 62 | 62 | |||||||||
Total securities |
$ | 509 | $ | 527 | $ | 527 | ||||||
The restricted stocks do not have maturity dates and are carried at cost on the Companys
books less any other-than-temporary-value-impairment. The Company received a semi-annual cash
dividend on the Federal Reserve Bank stock that it owns at a 6% annual rate. Earnings on the other
restricted stock are immaterial.
At December 31, 2011, there were no issuers whose securities owned by the Company have a book
or market value exceeding ten percent of the Companys stockholders equity.
Deposits and Liquidity Management
The Company currently has no business other than that of the Bank and does not currently have
any material funding commitments unrelated to that business. The Banks principal sources of funds
for loans, investments and general operations are deposits from its primary market area, principal
and interest payments on loans, and proceeds from maturing investment securities. Its principal
funding commitments are for the origination or purchase of loans and the payment of maturing
deposits, and the payment for checks drawn upon it. The Banks most liquid assets are cash and cash
equivalents, which are cash on hand, amounts due from other financial institutions including the
Federal Reserve and Federal funds sold, if any. The levels of such assets are dependent on the
Banks lending, investment and operating activities at any given time. The variations in levels of
liquid assets are influenced by deposit flows and loan demand, both current and anticipated.
The Companys deposits consist of demand deposits, NOW accounts, money market accounts,
savings accounts and certificates of deposit. These accounts provide the Company with a relatively
stable source of funds. The Company generally targets larger deposit relationships by offering
competitive interest rates on certificates of deposit of $75 thousand or more in our local markets.
Deposits from the local market areas are supplemented with out-of-area deposits comprised of funds
obtained through the use of deposit listing services (national market certificates of deposit),
deposits obtained through the use of brokers and through the Certificates of Deposit Account
Registry Service (CDARS) program. As a result, a substantial portion of our deposits, 19.5% at
December 31, 2011 and 24.5% at December 31, 2010, are comprised of certificate of deposit accounts
of $100 thousand or more. Total certificates of deposit represent 62.7% of deposits at December 31,
2011 and 68.5% of deposits at December 31, 2010.
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Table of Contents
The Companys reliance on certificates of deposit, including the use of larger denomination
certificates of deposit and brokered deposits, facilitates funding the growth in the loan
portfolio. The Company has relied on certificates of deposit as a primary funding source and has
used larger certificates of deposits as a funding source since its inception. While sometimes
requiring higher interest rates, such funds carry lower acquisition costs (marketing, overhead
costs) and can be obtained when required at the maturity dates desired. Substantially all of the
deposit accounts over $100 thousand are fully insured by the FDIC through differing ownership and
trustee arrangements and the insured deposit limit of $250 thousand. All of the brokered deposits
and national market deposits are fully insured by the FDIC. This insurance and the strong capital
position of the Company reduce the likelihood of large deposit withdrawals for reasons other than
interest rate competition. Interest rates on these deposits can be, but are not always, higher than
other deposits products. There is, however, a risk that some deposits
would be lost if rates were to increase and the Company elected not to remain competitive with its
own deposit rates. Under those conditions, the Company believes that it is positioned to use other
sources of funds, such as borrowing on its unsecured credit facilities with other banks or the sale
of loans.
At December 31, 2011, deposits totaled $182.6 million as compared to $180.1 million at
December 31, 2010. The $2.5 million increase in deposits resulted from the $7.8 million increase in
noninterest bearing deposits, the $5.8 million increase in savings accounts balance, the decline of
$8.7 million in the amount of certificates of deposit and the decrease of $2.4 million in other
deposit accounts. The decline in the amount of certificates of deposit results from several factors
including customers desire to avoid long term, fixed rate deposit commitments during a period of
low interest rates as well as the Companys efforts to reduce interest expense and manage liquidity
needs. The decline in the amount of certificates of deposit was accompanied by the increase in
savings deposits as some customers moved their funds to more liquid deposit accounts while waiting
for market interest rates, and/or the return on alternative investments to increase. The increase
in noninterest deposits results from the increase in commercial demand accounts as the slowed
business activity reduces commercial investments in times of uncertainty. There were $35.2 million
and $33.1 million of brokered certificates of deposit at December 31, 2011 and December 31, 2010,
respectively. Included in these brokered deposits at December 31, 2011 are $7.6 million of
certificates of deposits received in exchange for the placement of the Companys customers deposit
funds with other financial institutions under the CDARS program. Included in deposits are deposits
of officers and directors (and their affiliated entities) of $11.8 million at December 31, 2011.
As a result of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act,
banks are no longer prohibited from paying interest on demand deposit accounts, including those
from businesses, effective in July 2011. The Company does not currently pay interest on business
owned demand deposit accounts. If the Company starts to pay interest on these accounts, its net
interest margin would decline. It is not clear what effect the elimination of this prohibition will
have on the Companys interest expense, allocation of deposits, deposit pricing, loan pricing, net
interest margin, ability to compete, ability to establish and maintain customer relationships, or
profitability.
Under a temporary deposit insurance program, all non-interest bearing demand deposit accounts,
regardless of amount, are fully insured by the FDIC. This program extends to December 31, 2012 at
which time normal deposit insurance limits will apply to non-interest bearing demand deposits. The
Company does not know what effect this change will have on the amount of its non-bearing deposits
but anticipates some customer withdrawals to reduce their deposit balances to the normal insurance
limit of $250,000.
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Deposits are summarized below as of dates indicated:
December 31, | % | December 31: | ||||||||||||||||||
(In thousands) | 2011 | Change | 2010 | 2009 | 2008 | |||||||||||||||
Non-interest bearing deposits |
$ | 31,586 | 32.9 | % | $ | 23,760 | $ | 21,024 | $ | 23,599 | ||||||||||
Interest bearing deposits: |
||||||||||||||||||||
NOW accounts |
411 | (67.9 | %) | 1,279 | 309 | 1,247 | ||||||||||||||
Money Market accounts |
7,350 | (16.7 | %) | 8,824 | 7,841 | 13,049 | ||||||||||||||
Savings accounts |
28,714 | 25.1 | % | 22,962 | 10,379 | 148 | ||||||||||||||
Certificates of deposit accounts: |
||||||||||||||||||||
Less than $100,000 |
78,965 | (.3 | %) | 79,209 | 71,593 | 37,539 | ||||||||||||||
$100,000 or more |
35,582 | (19.3 | %) | 44,076 | 67,499 | 69,659 | ||||||||||||||
Total interest bearing
deposits |
151,022 | (3.4 | %) | 156,350 | 157,621 | 121,642 | ||||||||||||||
Total deposits |
$ | 182,608 | 1.4 | % | $ | 180,110 | $ | 178,645 | $ | 145,241 | ||||||||||
The table below shows the maturities of certificates of deposit:
December 31, 2011 | ||||||||
CDs of $100,000 | ||||||||
(In thousands) | or more | All CDs | ||||||
Three months or less |
$ | 4,543 | $ | 19,164 | ||||
Over three months to six months |
10,580 | 22,960 | ||||||
Over six months to twelve months |
9,372 | 29,623 | ||||||
Over twelve months through three years |
10,945 | 38,165 | ||||||
Over three years |
142 | 4,635 | ||||||
Total |
$ | 35,582 | $ | 114,547 | ||||
The table below shows the source of the Companys certificate of deposits as well as the
amount equal to or greater than $100,000 at December 31, 2011:
CDs with balances | CDs with balances | |||||||||||
of less than | of $100,000 or | |||||||||||
Source | $100,000 | greater | Total | |||||||||
(in thousands) |
||||||||||||
Local markets |
$ | 5,515 | $ | 21,489 | $ | 27,004 | ||||||
National market |
52,329 | | 52,329 | |||||||||
CDARS program: |
||||||||||||
Customers funds |
247 | 7,329 | 7,576 | |||||||||
Proprietary
funding |
3,353 | 6,664 | 10,017 | |||||||||
Other brokered funds |
17,521 | 100 | 17,621 | |||||||||
Total |
$ | 78,965 | $ | 35,582 | $ | 114,547 | ||||||
CDARS program funding is reflected in the above schedule as Customers funds and
Proprietary funding. The Company, acting as agent for its customers, places customer funds in
other financial institutions under the program up to the FDIC insurance limit. Under the CDARS
program, other financial institutions place deposits in the Company for the same amount of the
customers funds. Customers funds are comprised of deposits from these customer transactions.
The Company can obtain funding under the CDARS program by bidding for deposit funds without
customers involvement. This proprietary funding results in traditional brokered deposits.
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Table of Contents
The Companys short term liquid assets of cash and cash equivalents were $17.8 million, or
8.6% of assets at December 31, 2011 and $13.7 million, or 6.8% of assets, at December 31, 2010.
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 Bank has available unsecured credit facilities for short-term liquidity needs from
financial institutions of $8,500,000 at December 31, 2011 and 2010. There were no borrowings
outstanding under these credit arrangements at December 31, 2011 and 2010.
The Company believes its levels of liquidity are adequate to conduct the business of the
Company and Bank.
Stockholders Equity
Total stockholders equity was $24.2 million at December 31, 2011 representing an increase of
$1.8 million from December 31, 2010. The increase from December 31, 2010 was attributable to the
net income of the Company of $1.8 million.
At December 31, 2011, the Company and the Bank continued to exceed all regulatory capital
requirements to be considered well capitalized under federal regulations. The Company believes
its level of capital is adequate to conduct the business of the Company and Bank.
RESULTS OF OPERATIONS
Net income for the year ended December 31, 2011 was $1.8 million ($1.00 basic and diluted
earnings per share), an increase of $0.4 million, or 27.6%, from the net income of $1.4 million
($0.78 basic earnings and diluted earnings per share) during 2010. Net income increased in 2011 as
compared to 2010 primarily because of the increase in net interest income of $0.7 million and the
decrease in the provision for loan losses of $0.2 million. This increase was partially offset by
the increase in non-interest expenses of $0.4 million (all amounts are before tax effects).
Return on equity, return on assets and ratio of equity to assets are as follows:
Year Ended December 31,
2011 | 2010 | 2009 | ||||||||||
Return on Average Equity |
7.74 | % | 6.46 | % | 3.29 | % | ||||||
Return on Average Earning Assets |
0.90 | % | 0.71 | % | 0.37 | % | ||||||
Ratio of Average Equity to Average Assets |
11.32 | % | 10.62 | % | 11.03 | % |
Net Interest Income and Net Interest Margin
Net interest income is the difference between income on assets and the cost of funds
supporting those assets. Earning assets are composed primarily of loans and investments; the
expense associated with interest bearing deposits and customer repurchase agreements and other
borrowings is the cost of funds. Non-interest bearing deposits and capital are other components
representing funding sources. Changes in the volume and mix of assets and funding sources, along
with the changes in yields earned and rates paid, determine changes in net interest income.
Total interest income decreased by $0.3 million or 2.5% to $12.2 million for the year ended
December 31, 2011 as compared to $12.6 million in 2010. This decrease was primarily attributable
to the reduction of the yield on average earning assets. Average interest earning assets increased
by $0.4 million or 0.2% during 2011 as compared to 2010; however, the yield on earning assets
decreased to 6.07% in 2011 from 6.24% in 2010, primarily as a result of a 15 basis point decline in
yields on loans.
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Table of Contents
Interest expense decreased by $1.0 million, or 33.4% to $2.1 million for the year ended
December 31, 2011 as compared to $3.1 million in 2010. This decrease was attributable to the
reduction in average interest bearing liabilities of $5.8 million or 3.6% in 2011 as compared to
2010, and the decrease in the cost of deposits during 2011
to 1.34% from 1.94% in 2010. This interest rate decrease resulted primarily from the
re-pricing or replacement of higher rate certificates of deposit as they matured during 2011.
Net interest income was $10.2 million in 2011, a $0.8 million increase from the $9.4 million
net interest income in 2010, a 7.7% increase. The increase in net interest income results primarily
from the reduction of deposit interest expense in 2011.
The following table provides information for the designated periods with respect to average
balances, income and expense and annualized yields and costs associated with various categories of
interest earning assets and interest bearing liabilities for the past three years. Non-accrual
loans have been included in loans receivable in the table. The table includes a measurement of
spread and margin. Interest spread is the mathematical difference between the average interest
yield on interest earning assets and average interest paid on interest bearing liabilities.
Interest margin is the net interest yield on interest earning assets and is derived by dividing net
interest income by average interest earning assets.
AVERAGE BALANCES, RATES AND INTEREST INCOME AND EXPENSE | ||||||||||||||||||||||||||||||||||||
Years Ended December 31: | ||||||||||||||||||||||||||||||||||||
2011 | 2010 | 2009 | ||||||||||||||||||||||||||||||||||
Average | Yield/ | Average | Yield/ | Average | Yield/ | |||||||||||||||||||||||||||||||
(In thousands) | Balance | Interest | Rate | Balance | Interest | Rate | Balance | Interest | Rate | |||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||||||||
Interest Earning Assets: |
||||||||||||||||||||||||||||||||||||
Loans receivable |
$ | 183,253 | $ | 12,151 | 6.63 | % | $ | 184,036 | $ | 12,474 | 6.78 | % | $ | 169,888 | $ | 11,791 | 6.94 | % | ||||||||||||||||||
Investment securities |
524 | 28 | 5.34 | % | 527 | 28 | 5.31 | % | 2,391 | 108 | 4.52 | % | ||||||||||||||||||||||||
Interest bearing deposits |
17,881 | 62 | 0.35 | % | 16,619 | 58 | 0.35 | % | 10,127 | 26 | 0.26 | % | ||||||||||||||||||||||||
Federal funds sold |
| | 0.00 | % | 32 | | 0.00 | % | 949 | 3 | 0.32 | % | ||||||||||||||||||||||||
Total Interest Earning Assets |
201,658 | 12,241 | 6.07 | % | 201,214 | 12,560 | 6.24 | % | 183,355 | 11,928 | 6.51 | % | ||||||||||||||||||||||||
Less allowance for loan losses |
(3,417 | ) | (2,461 | ) | (2,146 | ) | ||||||||||||||||||||||||||||||
Non-Interest Earning Assets |
8,967 | 8,455 | 5,830 | |||||||||||||||||||||||||||||||||
Total Assets |
$ | 207,208 | $ | 207,208 | $ | 187,039 | ||||||||||||||||||||||||||||||
Liabilities and Stockholders Equity: |
||||||||||||||||||||||||||||||||||||
Interest Bearing Liabilities: |
||||||||||||||||||||||||||||||||||||
Interest bearing demand deposits |
$ | 746 | $ | 1 | 0.05 | % | $ | 746 | $ | 1 | 0.07 | % | $ | 1,600 | $ | 1 | 0.06 | % | ||||||||||||||||||
Money market deposit accounts |
8,364 | 30 | 0.36 | % | 7,946 | 36 | 0.45 | % | 11,942 | 63 | 0.53 | % | ||||||||||||||||||||||||
Savings accounts |
25,631 | 268 | 1.05 | % | 17,465 | 223 | 1.28 | % | 3,942 | 71 | 1.80 | % | ||||||||||||||||||||||||
Certificates of deposit |
120,841 | 1,787 | 1.48 | % | 135,237 | 2,871 | 2.12 | % | 126,451 | 4,452 | 3.52 | % | ||||||||||||||||||||||||
Total Interest Bearing Liabilities |
155,582 | 2,086 | 1.34 | % | 161,394 | 3,131 | 1.94 | % | 143,935 | 4,587 | 3.19 | % | ||||||||||||||||||||||||
Non-Interest Bearing Liabilities: |
||||||||||||||||||||||||||||||||||||
Demand deposits |
27,403 | 22,996 | 21,413 | |||||||||||||||||||||||||||||||||
Other |
765 | 807 | 1,058 | |||||||||||||||||||||||||||||||||
Total Liabilities |
183,750 | 185,197 | 166,406 | |||||||||||||||||||||||||||||||||
Stockholders Equity |
23,458 | 22,011 | 20,633 | |||||||||||||||||||||||||||||||||
Total Liabilities and Equity |
$ | 207,208 | $ | 207,208 | $ | 187,039 | ||||||||||||||||||||||||||||||
Net Interest Income |
$ | 10,155 | $ | 9,430 | $ | 7,341 | ||||||||||||||||||||||||||||||
Net Interest Spread |
4.73 | % | 4.30 | % | 3.32 | % | ||||||||||||||||||||||||||||||
Net Interest Margin |
5.04 | % | 4.69 | % | 4.00 | % | ||||||||||||||||||||||||||||||
Yields on securities are calculated based on amortized cost. Loans receivable include
non-accrual loans.
The increase in net interest margin and net interest spread in 2011 as compared to 2010
primarily results from the Banks reduction in average interest bearing deposits as well as a
reduction in the cost of deposits because of the re-pricing or replacing higher rate certificates
of deposit as they matured during 2011.
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Table of Contents
Rate/Volume Analysis of Net Interest Income
The following table sets forth certain information regarding changes in interest income and
interest expense of the Company for the years indicated. For each category of interest-earning
assets and interest-bearing liabilities, information is provided on changes attributable to: (i)
changes in volume (change in volume of the asset multiplied by the prior years rate) and (ii)
changes in rates (change in rate multiplied by the current years volume).
RATE/VOLUME ANALYSIS
2011 vs. 2010 | 2010 vs. 2009 | |||||||||||||||||||||||
Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||
Due to | Due to | |||||||||||||||||||||||
(In thousands) | Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||
Interest-Earning Assets: |
||||||||||||||||||||||||
Federal funds sold |
$ | | $ | | $ | | $ | (3 | ) | $ | | $ | (3 | ) | ||||||||||
Loans receivable |
(53 | ) | (270 | ) | (323 | ) | 982 | (299 | ) | 683 | ||||||||||||||
Interest bearing deposits |
3 | 1 | 4 | 18 | 14 | 32 | ||||||||||||||||||
Investment portfolio |
| | | (78 | ) | (2 | ) | (80 | ) | |||||||||||||||
Net Change in Interest Income |
(50 | ) | (269 | ) | (319 | ) | 919 | (287 | ) | 632 | ||||||||||||||
Interest Bearing Liabilities: |
||||||||||||||||||||||||
Interest bearing deposits |
(113 | ) | (931 | ) | (1,044 | ) | 602 | (2,059 | ) | (1,457 | ) | |||||||||||||
Net Change in Interest Expense |
(113 | ) | (931 | ) | (1,044 | ) | 602 | (2,059 | ) | (1,457 | ) | |||||||||||||
Change in Net Interest Income |
$ | 63 | $ | 662 | $ | 725 | $ | 317 | $ | 1,772 | $ | 2,089 | ||||||||||||
Provision for Loan Losses
The provision for loan losses represents the expense recognized to fund the allowance for loan
losses. The loan loss expense of $2.5 million for the year ended December 31, 2011 reflected a
slight decrease of $0.2 million from the provision of $2.7 million for the year ended December 31,
2010 reflecting in part the reduced amount of average loans during 2011 as compared to 2010.
Additionally, the Bank has established a reserve for unfunded commitments that is recorded by
a provision charged to other expenses. The balance of this reserve was $60 thousand at December
31, 2011 and 2010. The reserve is an amount that management believes will be adequate over time to
absorb possible losses on unfunded commitments (off-balance sheet financial instruments) that may
become uncollectible in the future.
Non-interest Income
Non-interest income principally consists of gains from the sale of the guaranteed portion of
Small Business Administration (SBA) loans, net rental income and gains on sales of other real
estate owned and from deposit account services charges. For the year ended December 31, 2011, gains
on sales of the guaranteed portion of SBA loans was $450 thousand as compared to $615 thousand
during 2010 reflecting reduced SBA loan sales during 2011. 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. Gains on sales of other real estate owned were $97 thousand during 2011. There were no such
sales in 2010. Net rental income was $32 thousand during 2011 as compared to $3 thousand during
2010. Substantially all of the properties which produced the net rental income were sold during
2011. Deposit account service charges and other income amounted to $567 thousand during the year
ended December 31, 2011 as compared to $476 thousand in 2010, reflecting an increase in the number
of accounts subject to service charges.
Non-interest Expense
Total non-interest expenses increased by $350 thousand during the 2011 as compared to those in
2010, a 6.44% increase. The 2011 expenses included $228 thousand of a loan collection expenses as
compared to $66 thousand in 2010. Employee compensation and benefit expense increased by $157
thousand, or 5.3% during 2011 as compared to 2010. In each year, salary and benefit expense was
the largest component of non-interest expenses: $3.1 million in 2011 and $3.0 million in 2010.
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Table of Contents
Income Taxes
The Company uses the liability method of accounting for income taxes as required by ASC 740,
Accounting for Income Taxes. Under the liability method, deferred tax assets and liabilities are
determined based on differences between the financial statement carrying amounts and the enacted
rates that will be in effect when these differences reverse. Income tax expense for 2011 was $1.2
million, 39.2% of pretax income, and $951 thousand, 40.0% of pretax income, in 2010.
Off-Balance Sheet Arrangements
With the exception of the Banks obligations in connection with its irrevocable letters of
credit and loan commitments, the Bank has no off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on the Banks financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity, capital expenditures,
or capital resources, that is material to investors. For additional information on off-balance
sheet arrangements, please see Note 9 to the Consolidated Financial Statements.
Interest Rate Risk Management
Banks and other financial institutions are dependent upon net interest income, the difference
between interest earned on interest earning assets and interest paid on interest bearing
liabilities. Changes in interest rates inevitably have an impact on interest income. GAP, a measure
of the difference in volume between interest bearing assets and interest bearing liabilities, is a
means of monitoring the sensitivity of a financial institution to changes in interest rates. The
chart below provides an indicator of the rate sensitivity of the Company. A positive GAP indicates
the degree to which the volume of repriceable assets exceeds repriceable liabilities in particular
time periods. The Company has a negative GAP, a liability sensitive position, for a one year
period which would generally indicate decreased net interest income in a rising rate environment
and increased net interest income in a declining rate environment. However, this measurement of
interest rate risk sensitivity represents a static position as of a single day and is not
necessarily indicative of the interest rate risk position at any other point in time, does not take
into account the sensitivity of yields and costs of specific assets and liabilities to changes in
market rates, and does not take into account the specific timing of, or the extent to which,
changes to a specific asset or liability will occur. Further this measurement does not take into
account the effect of competitive factors on interest rates, and the effect of changes in interest
rates on the capacity of customers to meet their obligations. The Company will be addressing the
current negative GAP level for the purpose of reducing its exposure to interest rate changes,
although there can be no assurance that the Companys efforts will be successful in reducing its
exposure to interest rate changes, or that it will correctly predict the timing and magnitude of
changes in interest rates.
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Table of Contents
RATE SENSITIVITY ANALYSIS (Static GAP)
December 31, 2011
December 31, 2011
0-3 | 4-12 | >1-3 | >3<5 | |||||||||||||||||||||
(In thousands) | Months | Months | Years | Years | 5 YRS + | Total | ||||||||||||||||||
Interest earning assets: |
||||||||||||||||||||||||
Interest bearing deposits |
$ | 11,959 | $ | 3,680 | $ | | $ | | $ | | $ | 15,639 | ||||||||||||
Loans* |
61,135 | 17,682 | 56,170 | 45,594 | 1,049 | 181,630 | ||||||||||||||||||
Total |
73,094 | 21,362 | 56,170 | 45,594 | 1,049 | 197,269 | ||||||||||||||||||
Interest bearing liabilities: |
||||||||||||||||||||||||
Savings/Money |
||||||||||||||||||||||||
Market/NOW |
36,475 | | | | | 36,475 | ||||||||||||||||||
Certificates of deposit |
19,164 | 52,584 | 38,164 | 4,635 | | 114,547 | ||||||||||||||||||
Total |
55,639 | 52,584 | 38,164 | 4,635 | | 151,022 | ||||||||||||||||||
GAP: |
||||||||||||||||||||||||
Period |
$ | 17,455 | (31,222 | ) | 18,006 | 40,959 | 1,049 | $ | 46,247 | |||||||||||||||
Cumulative |
$ | (13,767 | ) | $ | 4,239 | $ | 45,198 | $ | 46,247 | |||||||||||||||
* | Loan amounts above exclude $2.7 million of loans on non-interest accrual and deferred fees |
Capital Resources and Adequacy
The assessment of capital adequacy depends on a number of factors such as asset quality,
liquidity, earnings performance, and changing competitive conditions and economic forces. The
adequacy of the Companys capital is reviewed by management on an ongoing basis. Management seeks
to maintain a capital structure that will assure an adequate level of capital to support
anticipated asset growth and to absorb potential losses. The ability of the Company to grow is
dependent on the availability of capital with which to meet regulatory capital requirements. To
the extent the Company is successful it may need to acquire additional capital through the sale of
additional common stock, other qualifying equity instruments, such as trust preferred securities,
or subordinated debt. There can be no assurance that additional capital will be available to the
Company on a timely basis or on attractive terms.
Under guidance from the federal banking regulators, banks which have concentrations in
construction, land development or commercial real estate loans (other than loans for majority owner
occupied properties) would be expected to maintain higher levels of risk management and,
potentially, higher levels of capital. It is possible that we may be required to maintain higher
levels of capital than we would otherwise be expected to maintain as a result of our levels of
construction, development and commercial real estate loans, which may require us to obtain
additional capital.
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Under capital adequacy guidelines and the regulatory framework for prompt corrective action,
the Bank must meet specific capital guidelines that involve quantitative measures of assets,
liabilities and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company will be subject to the capital guidelines when its assets exceed $500
million, it engages in certain highly leveraged activities or it has publicly issued debt. The
Companys and the Banks capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors. At December 31,
2011, the Company and the Bank were in full compliance with these guidelines, as follows:
Minimum Ratios | ||||||||||||||||
December 31, | December 31, | To be Adequately | To be Well | |||||||||||||
2011 | 2010 | Capitalized | Capitalized | |||||||||||||
Total capital: |
||||||||||||||||
Company |
14.0 | % | 13.1 | % | 8.0 | % | N/A | |||||||||
Bank |
13.3 | % | 12.3 | % | 8.0 | % | 10.0 | % | ||||||||
Tier I: |
||||||||||||||||
Company |
12.7 | % | 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 |
10.9 | % | 10.3 | % | 4.0 | % | 5.0 | % |
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.
ITEM 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
As the Company is a smaller reporting company, this item is not applicable.
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ITEM 8. | Financial Statements and Supplementary Data |
TGM GROUP LLC LETTERHEAD
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
CommerceFirst Bancorp, Inc. and Subsidiary
Annapolis, Maryland
CommerceFirst Bancorp, Inc. and Subsidiary
Annapolis, Maryland
We have audited the accompanying consolidated statements of financial condition of CommerceFirst
Bancorp, Inc. and subsidiary as of December 31, 2011 and 2010, and the related consolidated
statement of operations, stockholders equity, and cash flows for each of the years in the two-year
period ended December 31, 2011. CommerceFirst Bancorp, Inc. and subsidiarys management is
responsible for these consolidated financial statements. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of CommerceFirst Bancorp, Inc. and
subsidiary as of December 31, 2011 and 2010, and the consolidated results of their operations and
their consolidated cash flows for each of the years in the two-year period ended December 31, 2011
in conformity with accounting principles generally accepted in the United States of America.
Salisbury, Maryland
February 16, 2012
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CommerceFirst Bancorp, Inc. and Subsidiary
Consolidated Statements of Financial Condition
December 31, 2011 and December 31, 2010
(Dollars in thousands)
Consolidated Statements of Financial Condition
December 31, 2011 and December 31, 2010
(Dollars in thousands)
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 2,161 | $ | 1,437 | ||||
Interest bearing deposits |
15,639 | 12,289 | ||||||
Cash and cash equivalents |
17,800 | 13,726 | ||||||
Investments in restricted stocks, at cost |
509 | 527 | ||||||
Loans receivable |
184,298 | 184,883 | ||||||
Allowance for loan losses |
(3,033 | ) | (3,174 | ) | ||||
Net loans receivable |
181,265 | 181,709 | ||||||
Premises and equipment, net |
418 | 556 | ||||||
Accrued interest receivable |
767 | 750 | ||||||
Deferred income taxes |
843 | 1,133 | ||||||
Other real estate owned |
4,232 | 3,324 | ||||||
Other assets |
1,505 | 1,399 | ||||||
Total Assets |
$ | 207,339 | $ | 203,124 | ||||
LIABILITIES |
||||||||
Non-interest bearing deposits |
$ | 31,586 | $ | 23,760 | ||||
Interest bearing deposits |
151,022 | 156,350 | ||||||
Total deposits |
182,608 | 180,110 | ||||||
Accrued interest payable |
71 | 106 | ||||||
Other liabilities |
480 | 543 | ||||||
Total Liabilities |
183,159 | 180,759 | ||||||
STOCKHOLDERS EQUITY |
||||||||
Common stock $.01 par value; authorized 4,000,000 shares |
||||||||
Issued and outstanding: 1,820,548 shares at December 31, 2011
and at December 31, 2010 |
18 | 18 | ||||||
Additional paid-in capital |
17,853 | 17,853 | ||||||
Retained earnings |
6,309 | 4,494 | ||||||
Total Stockholders Equity |
24,180 | 22,365 | ||||||
Total Liabilities and Stockholders Equity |
$ | 207,339 | $ | 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 Years Ended December 31, 2011 and 2010
(Dollars in thousands except per share data)
Consolidated Statements of Operations
For the Years Ended December 31, 2011 and 2010
(Dollars in thousands except per share data)
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
Interest income: |
||||||||
Interest and fees on loans |
$ | 12,151 | $ | 12,474 | ||||
Investment in stocks |
28 | 28 | ||||||
Interest bearing deposits |
62 | 58 | ||||||
Total interest income |
12,241 | 12,560 | ||||||
Interest expense: |
||||||||
Deposits |
2,086 | 3,130 | ||||||
Total interest expense |
2,086 | 3,130 | ||||||
Net interest income |
10,155 | 9,430 | ||||||
Provision for loan losses |
2,533 | 2,716 | ||||||
Net interest income after provision for loan losses |
7,622 | 6,714 | ||||||
Non-interest income: |
||||||||
Gains on sales of SBA loans |
450 | 615 | ||||||
Gains on sales of other real estate owned |
97 | | ||||||
Service charges and other income |
599 | 479 | ||||||
Total non-interest income |
1,146 | 1,094 | ||||||
Non-interest expenses: |
||||||||
Compensation and benefits |
3,118 | 2,961 | ||||||
Legal and professional |
288 | 235 | ||||||
Rent and occupancy |
578 | 567 | ||||||
Marketing and business development |
75 | 76 | ||||||
FDIC insurance |
200 | 321 | ||||||
Data processing |
153 | 147 | ||||||
Support services |
216 | 194 | ||||||
Communications |
131 | 129 | ||||||
Loan collection |
228 | 66 | ||||||
Other real estate owned loss provision |
125 | 153 | ||||||
Depreciation and amortization |
192 | 231 | ||||||
Other |
480 | 354 | ||||||
Total non-interest expenses |
5,784 | 5,434 | ||||||
Income before income taxes |
2,984 | 2,374 | ||||||
Income tax expense |
1,169 | 951 | ||||||
Net income |
$ | 1,815 | $ | 1,423 | ||||
Basic and diluted earnings per share |
$ | 1.00 | $ | 0.78 | ||||
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 Years Ended December 31, 2011 and 2010
(Dollars in thousands)
Consolidated Statements of Stockholders Equity
For the Years Ended December 31, 2011 and 2010
(Dollars in thousands)
Additional | ||||||||||||||||
Common | Paid-in | Retained | ||||||||||||||
Stock | Capital | Earnings | Total | |||||||||||||
Balance December 31, 2009 |
$ | 18 | $ | 17,853 | $ | 3,071 | $ | 20,942 | ||||||||
Net income in 2010 |
1,423 | 1,423 | ||||||||||||||
Balance December 31, 2010 |
18 | 17,853 | 4,494 | 22,365 | ||||||||||||
Net income in 2011 |
1,815 | 1,815 | ||||||||||||||
Balance December 31, 2011 |
$ | 18 | $ | 17,853 | $ | 6,309 | $ | 24,180 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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CommerceFirst Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2011 and 2010
(Dollars in thousands)
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2011 and 2010
(Dollars in thousands)
December 31, | December 31, | |||||||
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income |
$ | 1,815 | $ | 1,423 | ||||
Adjustments to reconcile net income to net cash
provided by operations: |
||||||||
Depreciation and amortization |
192 | 231 | ||||||
Gain on sales of SBA loans |
(450 | ) | (615 | ) | ||||
Gain on sales of other real estate owned |
(97 | ) | | |||||
Provision for loan losses |
2,533 | 2,716 | ||||||
Provision for losses on unfunded commitments |
| 6 | ||||||
Provision for losses on other real estate owned |
125 | 153 | ||||||
Loss on impairment of stock investment |
18 | | ||||||
Deferred income taxes |
290 | (214 | ) | |||||
Change in assets and liabilities: |
||||||||
Increase in accrued interest receivable |
(17 | ) | (69 | ) | ||||
(Increase) decrease in other assets |
(106 | ) | 54 | |||||
Decrease in accrued interest payable |
(35 | ) | (78 | ) | ||||
Decrease in other liabilities |
(63 | ) | (63 | ) | ||||
Net cash provided by operating activities |
4,205 | 3,544 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Increase in loans, net |
(10,508 | ) | (10,465 | ) | ||||
Proceeds from sales of SBA loans |
6,197 | 8,742 | ||||||
Proceeds from sales of other real estate owned |
1,736 | | ||||||
Purchase of premises and equipment |
(54 | ) | (48 | ) | ||||
Net cash used by investing activities |
(2,629 | ) | (1,771 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Increase in non-interest bearing deposits, net |
7,826 | 2,736 | ||||||
Net decrease in other deposits |
(5,328 | ) | (1,271 | ) | ||||
Net cash provided by financing activities |
2,498 | 1,465 | ||||||
Net increase in cash and cash equivalents |
4,074 | 3,238 | ||||||
Cash and cash equivalents at beginning of period |
13,726 | 10,488 | ||||||
Cash and cash equivalents at end of period |
$ | 17,800 | $ | 13,726 | ||||
SUPPLEMENTAL CASH FLOW INFORMATION |
||||||||
Interest paid |
$ | 2,121 | $ | 3,052 | ||||
Income taxes paid |
$ | 1,275 | $ | 1,490 | ||||
Transfers to other real estate owned |
$ | 2,672 | $ | 1,015 | ||||
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
CommerceFirst Bancorp, Inc. (the Company), through its wholly owned subsidiary,
CommerceFirst Bank (the Bank) provides financial services to individuals and corporate customers
located primarily in Anne Arundel County, Howard County and Prince Georges County, Maryland, and
is subject to competition from other financial institutions. The Company and the Bank are also
subject to the regulations of certain Federal and State of Maryland agencies and undergoes periodic
examinations by those regulatory authorities. The accounting policies of the Company conform to
accounting principles generally accepted in the United States of America and to general practices
within the banking industry.
Merger Agreement
On December 20, 2011, the Company entered into an Agreement and Plan of Merger (Merger Agreement)
with Sandy Spring Bancorp, Inc. (Sandy Spring), whereby Sandy Spring will acquire the Company by
way of a merger of the Company with and into Sandy Spring. The Merger Agreement also provides for
the merger of CommerceFirst Bank with and into Sandy Spring Bank, a Maryland bank and trust
company, a wholly owned subsidiary of Sandy Spring. Pursuant to the Merger Agreement, at the
effective time of the merger, each outstanding share of the Companys common stock will be
converted into the right to receive either (i) $13.60 in cash (Cash Consideration), or (ii) 0.8043
of a share of Sandy Springs common stock (Stock Consideration), subject to adjustment in
accordance with the provisions of the Merger Agreement. The Merger Agreement provides that 50% of
the outstanding shares of Company common stock will be converted into Stock Consideration and 50%
of the outstanding shares of Company common stock will be converted into Cash Consideration. Each
stockholder of the Company will be entitled to elect the number of shares of Company common stock
held by such stockholder that will exchanged for the Stock Consideration or the Cash Consideration
subject to proration in the event that a selected form of consideration is over-elected. The merger
is intended to be a tax-free reorganization as to the portion of the merger consideration received
as Sandy Spring common stock.
The Merger Agreement contains customary representations, warranties and covenants from both the
Company and Sandy Spring. Among other covenants, the Company has agreed: (i) to convene and hold a
meeting of its shareholders to consider and vote upon the Merger, (ii) that, subject to certain
exceptions, the board of directors of the Company will recommend the adoption and approval of the
Merger and the Merger Agreement by its shareholders, and (iii) not to (A) solicit alternative
third-party acquisition proposals or, (B) subject to certain exceptions, conduct discussions
concerning or provided confidential information in connection with any alternative third-party
acquisition proposal.
Completion of the Merger is subject to various customary conditions, including, among others: (i)
approval of the Merger and the Merger Agreement by the shareholders of the Company, (ii) receipt of
required regulatory approvals, (iii) the absence of legal impediments to the Merger and (iv) the
absence of certain material adverse changes or events. The Merger Agreement contains certain
termination rights for the Company and Sandy Spring, as the case may be. The Merger Agreement
further provides that, upon termination of the Merger Agreement under certain circumstances, the
Company will be required to pay to Sandy Spring a termination fee of $1,000,000.
Principles of Consolidation
The consolidated financial statements include the accounts of CommerceFirst Bancorp, Inc. and its
subsidiary, CommerceFirst Bank. Intercompany balances and transactions have been eliminated. The
Parent Company financial statements (see Note 15) of the Company reflect the accounting for the
subsidiary using the equity method of accounting.
Use of Estimates
The consolidated financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America. The preparation of the consolidated financial
statements requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of
revenue and expenses during the reporting periods. Actual results could differ significantly
from those estimates. Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses. See below for a
discussion of the determination of that estimate.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company and its Significant Accounting Policies (continued)
Investment Securities
Available-for-sale securities consist of bonds and notes not classified as trading securities or as
held-to-maturity securities. These securities are reported at their fair value with the unrealized
holding gains and losses, net of tax, reported as a net amount in a separate component of
stockholders equity until realized. Gains and losses on the sale of available-for-sale securities
are determined using the specific identification method. Premiums and discounts are recognized in
interest income using the interest method over the period to maturity. The Company has no trading
or available-for-sale securities as of December 31, 2011 and 2010.
Securities for which the Company has the positive intent and ability to hold to maturity are
reported at cost, adjusted for premiums and discounts that are recognized in interest income using
the interest method over the period to maturity. A charge to operations would occur if the fair
value of the securities declines below cost and the Companys intention or ability to hold the
securities to maturity changes. The Company has no investment securities classified as
held-to-maturity as of December 31, 2011 and 2010.
Declines in the fair value of individual held-to-maturity and available-for-sale securities below
their cost that are other than temporary would result in write-downs of the individual securities
to their fair value. In estimating other-then-temporary impairment losses, management considers (1)
the length of time and the extent to which the fair value has been less than cost, (2) the
financial condition and near-term prospects of the issuer, and (3) the intent and ability of the
Company to retain its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in the fair value. The related charge-offs would be recorded as realized
losses in the income statement as to credit related amounts and accumulated other comprehensive
income as to non-credit related amounts.
Restricted Securities
As a member of the Federal Reserve Bank of Richmond (Federal Reserve), the Company is required to
acquire and hold stock in this entity. Ownership of this stock is restricted to members and can
only be sold to and acquired from the Federal Reserve at par. The Company also owns stock in
Atlantic Central Bankers Bank (ACBB) and Maryland Financial Bank (MFB), banks that generally offers
product and services only to other banks. Ownership of the ACBB shares is restricted to banks, and
there is no active market for the ACBB or the MFB shares. As there is no readily determinable fair
value for these securities, they are carried at cost less any other-than-temporary-value-impairment
(OTTI).
Loans and Allowance for Loan Losses
Loans receivable that management has the intent and ability to hold for the foreseeable future or
until maturity or early repayment are reported at their outstanding principal balance adjusted for
any charge-offs, the allowance for loan losses and any unamortized deferred fees, costs, premiums
and discounts. Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan.
The accrual of interest on loans is discontinued when, in managements opinion, the full collection
of principal or interest is in doubt or a scheduled loan payment has become over ninety days past
due. Interest received on non-accrual loans is applied against the loan principal amount.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company and its Significant Accounting Policies (continued)
The Company determines and recognizes impairment of loans in accordance with the provisions of
Section 310- Receivables of The FASB Accounting Standards Codification (ASC). A loan is determined
to be impaired when, based on current information and events, it is probable that the Company will
be unable to collect all amounts due according to the contractual terms of the loan agreement. A
loan is not considered impaired during the period of
delay in payment if the Company expects to collect all amounts due, including past-due
interest. An impaired loan is measured at the present value of its expected future cash flows
discounted at the loans effective interest rate or at the loans observable market price or the
fair value of the collateral if the loan is collateral dependent. ASC Section 310 is generally
applicable to all loans except large groups of smaller balance homogeneous loans that are evaluated
collectively for impairment unless such loans are subject to a restructuring agreement. Interest
payments received are applied to the loan principal balance unless the collection of all amounts
due, both principal and interest, on the loan is considered probable, in which case the interest
payments would be recognized as interest income.
The allowance for loan losses is increased by charges to expense and decreased by charge-offs (net
of recoveries). Managements periodic determination and evaluation of the adequacy of the
allowance assesses various factors including inherent losses in all significant loans; known
deterioration in concentrations of credit, certain classes of loans or collateral; historical loss
experiences; results of independent reviews of loan quality and the allowance for
loan losses; trends in portfolio quality, maturity and composition; volumes and trends in
delinquencies and non-accrual loans, risk management policies and practices; lending policies and
procedures; economic conditions and downturns in specific local industries; loss history; and the
experience and quality of lending management and staff. Estimated losses in the portfolio are
determined by applying loss ratios to loan categories, other than impaired loans and loans
considered substandard or doubtful, which are evaluated separately to determine loss estimates. The
loss experiences during the current and prior year are weighted heavily in the determination of the
allowance for loan losses for all loan types. The determination of the allowance for loan losses
involves the use of various subjective estimates by management and may result in over or under
estimations of the amount of inherent losses in the loan portfolio.
Unearned Discounts and Servicing Rights of Small Business Administration (SBA) Loans Sold
The Company generally sells the SBA-guaranteed portions of its SBA loans in the secondary market.
In connection with such sales, the Company receives a cash premium related to the guaranteed
portion being sold. A portion of the cash premium received from the sale of the guaranteed portion
of the SBA loan is deferred as a discount on retained premiums based on the relative fair value of
the guaranteed and unguaranteed portions to the total loan and the remainder is recognized as a
gain on the sale. The resulting unearned discount is recognized in interest income using an
adjustable interest method.
SBA loan servicing rights are initially valued by allocating the total cost between the loan and
the servicing right based on their relative fair values. Since sales of SBA loans tend to occur in
private transactions and the precise terms and conditions of the sales are typically not readily
available, there is a limited market to refer to in determining the fair value of these servicing
rights. As such, the Company relies primarily on a discounted cash flow model to estimate the fair
value of its servicing rights. This model calculates estimated fair value of these servicing
rights by utilizing certain key characteristics such as interest rates, type of product (fixed vs.
variable), age (new, seasoned, moderate), and other factors. Management believes that the
assumptions used in the model are comparable to those used by brokers and other service providers.
The Company also compares its estimates of fair value and assumptions to recent market activity and
against its own experience. The resulting servicing rights are recognized as a reduction in
interest income using an adjustable interest method.
Other real estate owned (OREO)
OREO is comprised of real estate properties acquired in partial or total satisfaction of problem
loans. The properties are recorded at the fair value (generally the appraised value less estimated
disposal costs) at the date acquired. Losses occurring at the time of acquisition of such
properties are charged against the allowance for loan losses. Subsequent write-downs that may be
required are included in non-interest expenses. Gains and losses realized from the sale of OREO as
well as any net income or loss from the operations of the properties are included in non-interest
income or non-interest expenses, as appropriate.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company and its Significant Accounting Policies (continued)
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. The provision for
depreciation is computed using the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are depreciated over the lesser of the terms of the leases or their
estimated useful lives. Expenditures for improvements that extend the life of an asset are
capitalized and depreciated over the assets remaining useful life. Any gains or losses realized on
the disposition of premises and equipment are reflected in the consolidated statements of
operations. Expenditures for repairs and maintenance are charged to other expenses as incurred.
Computer software is recorded at cost and amortized over three years.
Long-Lived Assets
The carrying value of long-lived assets and identifiable intangibles is reviewed by the Company for
impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable as prescribed in ASC Section 360 Property, Plant and Equipment. At
December 31, 2011 and 2010, management considered certain restricted investments and loans to be
impaired (see Notes 3 and 4).
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been
surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have
been isolated from the Company, (2) the transferee obtains the right (free of conditions that
constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and
(3) the Company does not maintain effective control over the transferred assets through an
agreement to repurchase them before their maturity.
Deferred Income Taxes
Deferred income taxes are recognized for temporary differences between the financial reporting
basis and the income tax basis of assets and liabilities. Deferred tax assets are recognized only
to the extent that it is more likely than not that recorded amounts of the assets will be realized
based on consideration of available evidence. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the enactment date. No
valuation allowance for deferred tax assets was recorded at December 31, 2011 and 2010 as
management believes it is more likely than not that all of the deferred tax assets will be realized
because they were supported by recoverable taxes paid in prior years.
Concentration of Credit Risk
The Company grants loans to customers primarily in its market area in Maryland. The debtors
ability to honor their contracts, including borrowing agreements, may be influenced by the economic
conditions in the Companys lending area.
The Company maintains deposits with other banking institutions in amounts which can, at times,
exceed insurance limits of the Federal Deposit Insurance Corporation (FDIC). Such institutions
include the Federal Reserve Bank of Richmond and bankers banks. Further, the Company periodically
sells federal funds, which are not insured by the FDIC, to three banking entities.
Comprehensive Income or Loss
Unrealized gains and losses on available for sale securities, net of tax, if any, are reported as a
separate component of the equity section in the consolidated statement of financial condition.
Changes in the net unrealized gains and losses are components of comprehensive income or loss and
are not included in reported net income or loss. The Company did not have unrealized gains or
losses on available for sale securities in 2011 or 2010; therefore, the consolidated financial
statements do not include statements of comprehensive income for 2011 or 2010.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company and its Significant Accounting Policies (continued)
Statement of Cash Flows
Cash and cash equivalents in the statement of cash flows include cash on hand, non-interest bearing
amounts due from correspondent banks, both interest bearing and non-interest bearing balances
maintained at the Federal Reserve, certificates of deposits owned with maturities of less than one
year and Federal funds sold.
Earnings Per Share
Basic earnings per share (EPS) is computed based upon income available to common shareholders and
the weighted average number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common stock that would
share in the earnings of the Company, using the treasury stock method, unless they are
anti-dilutive. The Company uses the average market price of the common shares during the year in
the determination of the amount of common stock equivalents arising from the warrants and options
issued.
The weighted average number of common shares and dilutive securities (comprised of warrants and
options) and resultant per share computations are as follows:
In thousands except per share data | 2011 | 2010 | ||||||
Weighted average shares outstanding |
1,820,548 | 1,820,548 | ||||||
Common stock equivalents |
| | ||||||
Average common shares and equivalents |
1,820,548 | 1,820,548 | ||||||
Net income |
$ | 1,815 | $ | 1,423 | ||||
Basic and diluted earnings per share |
$ | 1.00 | $ | 0.78 |
All outstanding warrants and options were excluded from the calculation of diluted income per share
in 2010 because they were anti-dilutive. All of the warrants and options expired during 2010.
Stock Options
The Company accounts and reports for stock-based compensation plans, if any, in accordance with ASC
Section 718 Stock Compensation which requires that the fair value at grant date be used for
measuring compensation expense for stock-based plans to be recognized in the statement of
operations. The Company did not record any compensation expense under Section 718 during 2011 or
2010 as no new options were granted during the periods and all outstanding options were previously
fully vested.
Reclassification
Certain prior year amounts have been reclassified to conform to the current years method of
presentation.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Fair Value
ASC Section 820 Fair Value Measurements and Disclosure defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value measurements. Topic 820
establishes a fair value hierarchy that prioritizes the information used to develop those
assumptions. The hierarchy of valuation techniques based on whether the inputs to those valuation
techniques are observable or unobservable. These inputs are summarized in three broad levels as
follows:
Level 1: | Quoted prices in active exchange markets for identical assets or liabilities; also includes certain U.S. Treasury and other U.S. government and agency securities actively traded in over-the-counter markets. | |||
Level 2: | Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans held for sale. | |||
Level 3: | Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category generally includes certain private equity investments, retained interests from securitizations, and certain collateralized debt obligations. |
The Companys bond holdings in the investment securities portfolio, if any, are the only asset or
liability subject to fair value measurement on a recurring basis. No assets are valued under Level
1 or 2 inputs at December 31, 2011 or December 31, 2010. The Company has assets measured by fair
value measurements on a non-recurring basis during 2011 and 2010. At December 31, 2011, these
assets include $2.7 million of non-accrual loans ($1.6 million after specific reserves), other real
estate owned of $4.2 million and restricted stock of $7 thousand, all of which are valued under
Level 3 inputs. The changes in the assets subject to fair value measurements are summarized below
by Level:
In thousands | Level 1 and 2 | Level 3 | ||||||
December 31, 2010: |
||||||||
Loans |
$ | | $ | 7,283 | ||||
Restricted securities |
| 25 | ||||||
Other real estate owned |
| 3,324 | ||||||
Total December 31, 2010 |
| 10,632 | ||||||
Activity: |
||||||||
Restricted securities OTTI |
| (18 | ) | |||||
Loans: |
||||||||
New loans measured at fair value |
| 2,694 | ||||||
Payments and other loan reductions |
| (1,968 | ) | |||||
Loans charged-off |
| (2,812 | ) | |||||
Additions to other real estate owned |
(2,529 | ) | ||||||
Net change loans |
| (4,615 | ) | |||||
Other real estate owned: |
||||||||
Value of properties at foreclosures |
| 2,672 | ||||||
Sales of properties |
| (1,639 | ) | |||||
Provision for valuation reduction |
| (125 | ) | |||||
Net change other real estate owned |
| 908 | ||||||
December 31, 2011: |
||||||||
Loans |
| 2,668 | ||||||
Restricted securities |
| 7 | ||||||
Other real estate owned |
| 4,232 | ||||||
Total December 31, 2011 |
$ | | $ | 6,907 | ||||
50
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Fair Value (continued)
The estimated fair values of the Companys financial instruments at December 31, 2011 and
December 31, 2010 are summarized below. The fair values of a significant portion of these financial
instruments are estimates derived using present value techniques and may not be indicative of the
net realizable or liquidation values. Also, the calculation of estimated fair values is based on
market conditions at a specific point in time and may not reflect current or future fair values.
December 31, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
In thousands | Amount | Value | Amount | Value | ||||||||||||
Financial assets: |
||||||||||||||||
Cash and due from banks |
$ | 2,161 | $ | 2,161 | $ | 1,437 | $ | 1,437 | ||||||||
Interest bearing deposits |
15,639 | 15,639 | 12,289 | 12,289 | ||||||||||||
Investments in restricted stock |
509 | 509 | 527 | 527 | ||||||||||||
Loans, net |
181,265 | 192,082 | 181,709 | 191,353 | ||||||||||||
Accrued interest receivable |
767 | 767 | 750 | 750 | ||||||||||||
Financial liabilities: |
||||||||||||||||
Non-interest bearing deposits |
$ | 31,586 | $ | 31,586 | $ | 23,760 | $ | 23,760 | ||||||||
Interest bearing deposits |
151,022 | 152,478 | 156,350 | 157,228 | ||||||||||||
Accrued interest payable |
71 | 71 | 106 | 106 | ||||||||||||
Off-balance sheet commitments |
| | | |
Fair values are based on quoted market prices for similar instruments or estimated using discounted
cash flows. The discounts used are estimated using comparable market rates for similar types of
instruments adjusted to be commensurate with the credit risk, overhead costs and optionality of
such instruments.
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. Investment in Restricted Stocks
Restricted securities are comprised of common stock in the following entities at cost less
impairment:
December 31, | ||||||||
In thousands | 2011 | 2010 | ||||||
Federal Reserve Bank of Richmond |
$ | 465 | $ | 465 | ||||
Atlantic Central Bankers Bank |
37 | 37 | ||||||
Maryland Financial Bank |
7 | 25 | ||||||
$ | 509 | $ | 527 | |||||
The stocks in the two bankers banks are not readily marketable. The Maryland Financial Bank
stock was written down by $18 thousand in 2011 due to the price of a new stock offering, which
price was a discount to par.
51
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Loans and Allowance for Loan Losses
The Bank grants commercial loans to customers primarily in Anne Arundel County, Prince
Georges County, Howard County and surrounding areas of central Maryland. The principal categories
of the loan portfolio are as follows:
December 31, 2011 | December 31, 2010 | |||||||||||||||
Percentage | Percentage | |||||||||||||||
(In thousands) | Balance | of Loans | Balance | of Loans | ||||||||||||
Commercial and Industrial loans |
$ | 43,051 | 23.3 | % | $ | 44,582 | 24.1 | % | ||||||||
SBA loans |
8,049 | 4.4 | % | 7,742 | 4.2 | % | ||||||||||
Real estate loans: |
||||||||||||||||
Owner occupied |
77,288 | 41.9 | % | 85,633 | 46.3 | % | ||||||||||
Non owner occupied |
55,999 | 30.4 | % | 47,040 | 25.4 | % | ||||||||||
Total real estate loans |
133,287 | 72.3 | % | 132,673 | 71.7 | % | ||||||||||
184,387 | 100.0 | % | 184,997 | 100.0 | % | |||||||||||
Unearned loan fees, net |
(89 | ) | (114 | ) | ||||||||||||
Allowance for loan losses |
(3,033 | ) | (3,174 | ) | ||||||||||||
$ | 181,265 | $ | 181,709 | |||||||||||||
Real estate loans are secured by residential and commercial properties as follows at December 31:
(In thousands) | 2011 | 2010 | ||||||
Real estate loans secured by: |
||||||||
Residential real estate |
$ | 26,520 | $ | 24,307 | ||||
Commercial real estate |
106,767 | 108,366 | ||||||
Total real estate loans |
$ | 133,287 | $ | 132,673 | ||||
Loans secured by residential real estate are loans to investors for commercial purposes. The Bank
does not lend funds to consumers.
The loan portfolio is comprised of $47.0 million of loans with fixed interest rates and $137.0
million of loans with adjustable interest rates at December 31, 2011.
The activity in the allowance for loan losses for the years ended December 31 is shown in the
following table.
(In thousands) | 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 |
(1,043 | ) | (1,140 | ) | (500 | ) | (179 | ) | (72 | ) | |||||||||||
Charge-offs SBA loans |
(284 | ) | (447 | ) | (463 | ) | (318 | ) | | ||||||||||||
Real estate loans: |
|||||||||||||||||||||
Charge-offs Owner occupied |
(765 | ) | | (138 | ) | | | ||||||||||||||
Charge-offs Non owner occupied |
(720 | ) | (386 | ) | | | | ||||||||||||||
Recoveries Commercial and Industrial loans |
101 | 26 | | 45 | 78 | ||||||||||||||||
Recoveries SBA loans |
35 | 25 | 5 | | | ||||||||||||||||
Recoveries Non owner occupied real estate loans |
2 | | | | | ||||||||||||||||
Net (charge-offs) recoveries |
(2,674 | ) | (1,922 | ) | (1,096 | ) | (452 | ) | 6 | ||||||||||||
Provision for loan losses |
2,533 | 2,716 | 1,616 | 647 | 45 | ||||||||||||||||
Ending balance |
$ | 3,033 | $ | 3,174 | $ | 2,380 | $ | 1,860 | $ | 1,665 | |||||||||||
Net (charge-offs) recoveries to average loans |
(1.46 | %) | (1.04 | %) | (0.65 | %) | (0.33 | %) | 0.00 | % |
52
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Loans and Allowance for Loan Losses (continued)
The activity in the allowance for loan losses by category during 2011 is shown in the
following table.
Real Estate Loans | ||||||||||||||||||||||||
Non | ||||||||||||||||||||||||
Commercial | SBA | Owner | Owner | Not | ||||||||||||||||||||
In thousands | and Industrial | Loans | Occupied | Occupied | Allocated | Total | ||||||||||||||||||
Balance at December 31, 2010 |
$ | 1,023 | $ | 627 | $ | 682 | $ | 715 | $ | 127 | $ | 3,174 | ||||||||||||
Less loan charge-offs |
(1,043 | ) | (284 | ) | (765 | ) | (720 | ) | | (2,812 | ) | |||||||||||||
Loss recoveries |
101 | 35 | | 2 | | 138 | ||||||||||||||||||
Provision for loan losses |
840 | 80 | 618 | 972 | 23 | 2,533 | ||||||||||||||||||
Balance at December 31, 2011 |
$ | 921 | $ | 458 | $ | 535 | $ | 969 | $ | 150 | $ | 3,033 | ||||||||||||
Allowance for loans individually |
||||||||||||||||||||||||
evaluated for impairment |
$ | 326 | $ | 103 | $ | 206 | $ | 780 | $ | 1,415 | ||||||||||||||
Amount of loans individually
evaluated for impairment |
$ | 1,261 | $ | 183 | $ | 5,644 | $ | 4,281 | $ | 11,369 | ||||||||||||||
Balance of loans at December 31, 2011 |
$ | 43,051 | $ | 8,049 | $ | 77,288 | $ | 55,999 | $ | 184,387 | ||||||||||||||
The activity in the allowance for loan losses by category during 2010 is shown in the following
table.
Real Estate Loans | ||||||||||||||||||||||||
Non | ||||||||||||||||||||||||
Commercial | SBA | Owner | Owner | Not | ||||||||||||||||||||
In thousands | and Industrial | Loans | Occupied | Occupied | Allocated | Total | ||||||||||||||||||
Balance at December 31, 2009 |
$ | 1,290 | $ | 576 | $ | 168 | $ | 242 | $ | 104 | $ | 2,380 | ||||||||||||
Loan charge-offs |
1,140 | 447 | | 386 | | 1,973 | ||||||||||||||||||
Loss recoveries |
26 | 25 | | | | 51 | ||||||||||||||||||
Provision for loan losses |
847 | 473 | 514 | 859 | 23 | 2,716 | ||||||||||||||||||
Balance at December 31, 2010 |
$ | 1,023 | $ | 627 | $ | 682 | $ | 715 | $ | 127 | $ | 3,174 | ||||||||||||
Allowance for loans individually
evaluated for impairment |
$ | 570 | $ | 194 | $ | 497 | $ | 410 | $ | 1,671 | ||||||||||||||
Amount of loans individually |
||||||||||||||||||||||||
evaluated for impairment |
$ | 1,622 | $ | 432 | $ | 9,946 | $ | 3,756 | $ | 15,756 | ||||||||||||||
Balance of loans at December
31, 2010 |
$ | 44,645 | $ | 7,742 | $ | 85,570 | $ | 47,040 | $ | 184,997 | ||||||||||||||
Additionally, the Company has established a reserve for unfunded commitments that is recorded by a
provision charged to other expenses. At December 31, 2011 the balance of this reserve was $60
thousand. The reserve, based on evaluations of the collectability of loans, is an amount that
management believes will be adequate over time to absorb possible losses on unfunded commitments
(off-balance sheet financial instruments) that may become uncollectible in the future.
53
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Loans and Allowance for Loan Losses (continued)
Below is a summary of the Companys impaired loans at December 31, 2011 and 2010.
Recorded Investment | Related Allowance for Losses | |||||||||||||||
December 31, | December 31, | December 31, | December 31, | |||||||||||||
In thousands | 2011 | 2010 | 2011 | 2010 | ||||||||||||
LOANS WITH SPECIFIC RESERVES: |
||||||||||||||||
Non-accrual loans: |
||||||||||||||||
Commercial and Industrial loans |
$ | 895 | $ | 667 | $ | 247 | $ | 149 | ||||||||
SBA loans |
103 | 359 | 103 | 194 | ||||||||||||
Real Estate Owner Occupied |
404 | 3,140 | 206 | 484 | ||||||||||||
Real Estate Non Owner Occupied |
1,266 | 2,272 | 588 | 695 | ||||||||||||
Total Non-accrual loans |
2,668 | 6,438 | 1,144 | 1,522 | ||||||||||||
TDR** loans: |
||||||||||||||||
Real Estate Owner Occupied |
| 2,051 | | 13 | ||||||||||||
Real Estate Non Owner Occupied |
1,560 | 1,603 | 191 | 11 | ||||||||||||
Total TDR loans |
1,560 | 3,654 | 191 | 24 | ||||||||||||
Number of loans |
6 | 7 | ||||||||||||||
Other Impaired loans: |
||||||||||||||||
Commercial and Industrial loans |
80 | 250 | 80 | 125 | ||||||||||||
Total Other Impaired loans |
80 | 250 | 80 | 125 | ||||||||||||
LOANS WITHOUT SPECIFIC RESERVES: |
||||||||||||||||
Non-accrual loans: |
||||||||||||||||
SBA loans |
| 29 | | | ||||||||||||
Real Estate Owner Occupied |
| 816 | | | ||||||||||||
Total Non-accrual loans |
| 845 | | | ||||||||||||
TDR** loans: |
||||||||||||||||
Commercial and Industrial loans |
45 | 154 | | | ||||||||||||
Real Estate Owner Occupied |
1,494 | | | | ||||||||||||
Real Estate Non Owner Occupied |
173 | 177 | | | ||||||||||||
Total TDR loans |
1,712 | 331 | | | ||||||||||||
Number of loans |
3 | 2 | ||||||||||||||
Total Impaired Loans: |
||||||||||||||||
Commercial and Industrial loans |
1,020 | $ | 1,071 | $ | 327 | $ | 274 | |||||||||
SBA loans |
103 | 388 | 103 | 194 | ||||||||||||
Real Estate Owner Occupied |
1,898 | 6,007 | 206 | 497 | ||||||||||||
Real Estate Non Owner Occupied |
2,999 | 4,052 | 779 | 706 | ||||||||||||
Total Impaired loans |
$ | 6,020 | $ | 11,518 | $ | 1,415 | $ | 1,671 | ||||||||
** | Troubled Debt Restructured |
54
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Below is a summary of the average recorded investment amount and recognized interest income
related to the Companys impaired loans during 2011:
Note 4. Loans and Allowance for Loan Losses (continued)
Average Recorded | Income Recorded | |||||||
Loan Amount | For Year | |||||||
2011 | 2011 | |||||||
LOANS WITH SPECIFIC RESERVES: |
||||||||
Non-accrual loans: |
||||||||
Commercial and Industrial loans |
$ | 1,062 | $ | 22 | ||||
SBA loans |
233 | | ||||||
Real Estate Owner Occupied |
2,293 | 9 | ||||||
Real Estate Non Owner Occupied |
1,948 | 4 | ||||||
Total Non-accrual loans |
5,536 | 35 | ||||||
TDR** loans: |
||||||||
Real Estate Owner Occupied |
789 | 47 | ||||||
Real Estate Non Owner Occupied |
1,583 | 50 | ||||||
Total TDR loans |
2,372 | 97 | ||||||
Other Impaired loans: |
||||||||
Commercial and Industrial loans |
125 | 6 | ||||||
Total Other Impaired loans |
125 | 6 | ||||||
LOANS WITHOUT SPECIFIC RESERVES: |
||||||||
Non-accrual loans: |
||||||||
SBA loans |
13 | | ||||||
Real Estate Owner Occupied |
482 | | ||||||
Total Non-accrual loans |
495 | | ||||||
TDR** loans: |
||||||||
Commercial and Industrial loans |
81 | 4 | ||||||
Real Estate Owner Occupied |
920 | 40 | ||||||
Real Estate Non Owner Occupied |
174 | 11 | ||||||
Total TDR loans |
1,175 | 55 | ||||||
Total Impaired Loans: |
||||||||
Commercial and Industrial loans |
$ | 1,268 | $ | 32 | ||||
SBA loans |
246 | | ||||||
Real Estate Owner Occupied |
4,484 | 96 | ||||||
Real Estate Non Owner Occupied |
3,705 | 65 | ||||||
Total Impaired loans |
$ | 9,703 | $ | 193 | ||||
Non-accrual loan activity is summarized as follows:
Year Ended December 31, | ||||||||||||||||||||
In thousands | 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 |
2,693 | 7,846 | 2,427 | 5,046 | 569 | |||||||||||||||
Less: |
||||||||||||||||||||
Loan restored to interest earning status |
| | 1,266 | | | |||||||||||||||
Other real estate owned additions |
2,529 | 945 | 2,462 | | | |||||||||||||||
Charge-offs |
2,812 | 1,973 | 1,101 | 236 | 72 | |||||||||||||||
Other including payments received |
1,967 | 379 | 683 | 116 | | |||||||||||||||
Balance at the end of the period |
$ | 2,668 | $ | 7,283 | $ | 2,734 | $ | 5,819 | $ | 1,125 | ||||||||||
55
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Loans and Allowance for Loan Losses (continued)
Non-accrual loan activity by category during the year ended December 31, 2011 is summarized as
follows:
Commercial | Real Estate | Real Estate | ||||||||||||||||||
and | Owner | Non Owner | ||||||||||||||||||
In thousands | Total | Industrial | SBA | Occupied | Occupied | |||||||||||||||
Balance at the beginning of the period |
$ | 7,283 | $ | 667 | $ | 388 | $ | 3,956 | $ | 2,272 | ||||||||||
New loans placed on non-accrual |
2,693 | 1,460 | 128 | 581 | 524 | |||||||||||||||
Less: |
||||||||||||||||||||
Other real estate owned additions |
2,529 | | | 2,271 | 258 | |||||||||||||||
Charge-offs |
2,812 | 1,043 | 284 | 765 | 720 | |||||||||||||||
Other including payments received |
1,967 | 189 | 129 | 1,097 | 552 | |||||||||||||||
Balance at the end of the period |
$ | 2,668 | $ | 895 | $ | 103 | $ | 404 | $ | 1,266 | ||||||||||
Non-accrual loan activity by category during the year ended December 31, 2010 is summarized as
follows:
Commercial | Real Estate | Real Estate | ||||||||||||||||||
and | Owner | Non Owner | ||||||||||||||||||
In thousands | Total | Industrial | SBA | Occupied | Occupied | |||||||||||||||
Balance at the beginning of the period |
$ | 2,734 | $ | 2,280 | $ | 454 | $ | | $ | | ||||||||||
New loans placed on non-accrual |
7,846 | 630 | 548 | 3,956 | 2,712 | |||||||||||||||
Less: |
||||||||||||||||||||
Other real estate owned additions |
945 | 945 | | | | |||||||||||||||
Charge-offs |
1,973 | 1,139 | 447 | | 387 | |||||||||||||||
Other including payments received |
379 | 159 | 167 | | 53 | |||||||||||||||
Balance at the end of the period |
$ | 7,283 | $ | 667 | $ | 388 | $ | 3,956 | $ | 2,272 | ||||||||||
Interest that would have been accrued under the terms of all non-accrual loans during the year
totaled $391 thousand and $324 thousand for the years ended December 31, 2011 and 2010,
respectively. The Bank has no commitments to loan additional funds to the borrowers of impaired or
non-accrual loans.
At December 31, 2011, the Company had modified nine loans in amounts totaling $3.2 million which
modifications qualify the loans as Troubled Debt Restructurings (TDR). The borrowers are in
compliance with the modified loan terms. 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 and fourth quarters of 2010 as the adverse economic conditions hampered
borrowers current cash flows. The non-accrual loans at December 31, 2010 include seven loans
totaling $4 million that were previously TDR loans but the borrowers failed to meet the new terms
under the restructuring.
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 | |||||||||||||||
December 31, | December 31, | December 31, | December 31, | |||||||||||||
In thousands | 2011 | 2010 | 2011 | 2010 | ||||||||||||
TDRs with specific reserves: |
||||||||||||||||
Commercial and Industrial loans |
$ | | $ | | $ | | $ | | ||||||||
SBA loans |
| 50 | | 40 | ||||||||||||
Real Estate Owner Occupied: |
103 | 3,140 | 103 | 483 | ||||||||||||
Real Estate Non Owner Occupied: |
742 | 819 | 266 | 223 | ||||||||||||
Total non-accruing loans |
$ | 845 | $ | 4,009 | $ | 369 | $ | 746 | ||||||||
Number of loans |
3 | 7 |
56
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Loans and Allowance for Loan Losses (continued)
Accruing TDR loan activity for the year ended December 31, 2011 is shown in the following
table.
Real Estate Loans | ||||||||||||||||||||
Commercial | Owner | Non Owner | ||||||||||||||||||
In thousands | and Industrial | SBA Loans | Occupied | Occupied | Total | |||||||||||||||
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 | ) | (47 | ) | (2,098 | ) | ||||||||||||
Loans moved to non-accrual* |
(154 | ) | | | | (154 | ) | |||||||||||||
Balance at December 31, 2011 |
$ | 45 | $ | | $ | 1,494 | $ | 1,733 | $ | 3,272 | ||||||||||
* | Accrued income reversed upon move to non-accrual |
At December 31, 2011, there were $3.9 million of performing loans considered potential problem
loans, defined as loans which are not included in the 90 day past due, not reported as TDR or as
non-accrual loans, but for which known information about possible credit problems causes the
Company to be concerned as to the ability of the borrowers to comply with the present loan
repayment terms which may in the future result in past due, non-accrual or restructured loans. The
Company closely monitors the financial status of these borrowers.
Generally, the accrual of interest is discontinued when a loan is specifically determined to be
impaired or when principal or interest is delinquent for ninety days or more. During 2011, there
were no amounts included in gross interest income attributable to loans in non-accrual status.
The following table shows the amounts of non-performing assets at December 31:
In thousands | 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
Non-accrual loans: |
|||||||||||||||||||||
Commercial and Industrial |
$ | 895 | $ | 667 | $ | 2,280 | $ | 1,676 | $ | 868 | |||||||||||
SBA |
103 | 388 | 454 | 542 | 257 | ||||||||||||||||
Real estate owner occupied |
404 | 3,956 | | 3,601 | | ||||||||||||||||
Real estate non owner occupied |
1,266 | 2,272 | | | | ||||||||||||||||
Accrual loans past due 90 days and over |
| | | | | ||||||||||||||||
Total non-performing loans |
2,668 | 7,283 | 2,734 | 5,819 | 1,125 | ||||||||||||||||
Other real estate owned |
4,232 | 3,324 | 2,462 | | | ||||||||||||||||
Total non-performing assets |
$ | 6,900 | $ | 10,607 | $ | 5,196 | $ | 5,819 | $ | 1,125 | |||||||||||
Accruing Troubled Debt Restructured loans |
$ | 3,272 | $ | 3,985 | $ | 1,263 | | | |||||||||||||
Allowance for loan losses/total non-performing loans |
113.7 | % | 43.6 | % | 87.1 | % | 32.0 | % | 148.0 | % | |||||||||||
Non-performing loans to total loans |
1.45 | % | 3.94 | % | 1.47 | % | 3.80 | % | 0.89 | % | |||||||||||
Non-performing assets to total assets |
3.33 | % | 5.22 | % | 2.59 | % | 3.49 | % | 0.76 | % |
The payment status of loans receivable at December 31, 2011 is as follows:
Commercial | Real Estate | Real Estate | ||||||||||||||||||
and | Owner | Non Owner | ||||||||||||||||||
In thousands | Total | Industrial | SBA | Occupied | Occupied | |||||||||||||||
Current accrual loans |
$ | 180,327 | $ | 41,811 | $ | 7,719 | $ | 76,481 | $ | 54,316 | ||||||||||
Past due loans: |
||||||||||||||||||||
30 to 89 days past due |
1,392 | 345 | 227 | 403 | 417 | |||||||||||||||
90 days plus past due and accruing |
| | | | | |||||||||||||||
Non-accrual loans, non-current |
2,668 | 895 | 103 | 404 | 1,266 | |||||||||||||||
Total past due loans |
4,060 | 1,082 | 330 | 807 | 1,683 | |||||||||||||||
Total loans at the end of the period |
$ | 184,387 | $ | 43,051 | $ | 8,049 | $ | 77,288 | $ | 55,999 | ||||||||||
57
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Loans and Allowance for Loan Losses (continued)
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 December 31, 2011 follows:
Commercial | Real Estate | Real Estate | ||||||||||||||||||
and | Owner | Non Owner | ||||||||||||||||||
In thousands | Total | Industrial | SBA | Occupied | Occupied | |||||||||||||||
Risk rated pass |
$ | 175,225 | $ | 41,835 | $ | 7,866 | $ | 73,139 | $ | 52,385 | ||||||||||
Risk rated special mention (loan
weaknesses noted which could lead
to loan loss) |
4,920 | 241 | 80 | 2,251 | 2,348 | |||||||||||||||
Risk rated substandard or doubtful
(loans with significant weaknesses
that could, or has, result in loan
losses) |
4,242 | 975 | 103 | 1,898 | 1,266 | |||||||||||||||
Total loans at the end of the period |
$ | 184,387 | $ | 43,051 | $ | 8,049 | $ | 77,288 | $ | 55,999 | ||||||||||
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 year ended December 31, 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 |
2,672 | 1,563 | 1,109 | |||||||||
Valuation reductions |
(125 | ) | (85 | ) | (40 | ) | ||||||
Sales |
(1,639 | ) | (762 | ) | (877 | ) | ||||||
Balance at December 31, 2011 |
$ | 4,232 | $ | 3,025 | $ | 1,207 | ||||||
Number of properties |
5 | 3 | 2 | |||||||||
At December 31, 2011 and 2010, the balance of commercial and real estate loans serviced by the
Company for others under loan participation agreements was $34.6 million and $34.1 million,
respectively. The related servicing rights are not material and are included in other assets.
Note 5. Premises and Equipment
Property, equipment and leasehold improvements are as follows at December 31:
Useful | ||||||||||
In thousands | Lives | 2011 | 2010 | |||||||
Equipment |
3-10 years | $ | 529 | $ | 540 | |||||
Furniture and fixtures |
3-5 years | 558 | 538 | |||||||
Leasehold improvements |
4-10 years | 347 | 344 | |||||||
Software |
3 years | 23 | 20 | |||||||
1,457 | 1,442 | |||||||||
Accumulated depreciation
and amortization |
1,039 | 886 | ||||||||
Net |
$ | 418 | $ | 556 | ||||||
58
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Deposits
Deposits are summarized below at December 31:
In thousands | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Non-interest bearing deposits |
$ | 31,586 | $ | 23,760 | $ | 21,024 | $ | 23,599 | $ | 19,246 | ||||||||||
Interest bearing deposits: |
||||||||||||||||||||
NOW accounts |
411 | 1,279 | 309 | 1,247 | 2,440 | |||||||||||||||
Money Market accounts |
7,350 | 8,824 | 7,841 | 13,049 | 16,268 | |||||||||||||||
Savings accounts |
28,714 | 22,962 | 10,379 | 148 | 36 | |||||||||||||||
Certificates of deposit accounts: |
||||||||||||||||||||
Less than $100,000 |
78,965 | 79,209 | 71,593 | 37,539 | 11,383 | |||||||||||||||
$100,000 or more |
35,582 | 44,076 | 67,499 | 69,659 | 74,035 | |||||||||||||||
Total interest bearing deposits |
151,022 | 156,350 | 157,621 | 121,642 | 104,162 | |||||||||||||||
Total deposits |
$ | 182,608 | $ | 180,110 | $ | 178,645 | $ | 145,241 | $ | 123,408 | ||||||||||
The certificate of deposit accounts mature as follows, in thousands: within one year $71.7
million; one through three years $38.2 million; three years and beyond $4.6 million.
Deposits of executive officers and directors and their affiliated interests totaled approximately
$11.8 million and $13 million at December 31, 2011 and 2010, respectively.
Included in certificates of deposits are $35.2 million and $33.1 million of brokered certificates
at December 31, 2011 and 2010, respectively. Included in these brokered certificates of deposits at
December 31, 2011 are $8.0 million of certificates of deposits received in exchange for the
placement of the Banks customers deposit funds in the same amounts with other financial
institutions under the Certificate of Deposit Account Registry Service (CDARS) program. Brokered
certificates of deposits in the amount of $16.5 million mature on or before December 31, 2012.
Interest expense on interest bearing deposits is as follows:
In thousands | 2011 | 2010 | ||||||
NOW accounts |
$ | | $ | 1 | ||||
Money Market accounts |
31 | 35 | ||||||
Savings accounts |
268 | 222 | ||||||
Certificates of deposit, $100,000 or more |
552 | 1,217 | ||||||
Certificates of deposit, less than $100,00 |
1,235 | 1,655 | ||||||
$ | 2,086 | $ | 3,130 | |||||
Note 7. Short-term borrowings
The Company has unsecured credit facilities for short-term liquidity needs from financial
institutions of $8.5 million at December 31, 2011 and 2010. There were no borrowings outstanding
under these credit arrangements at December 31, 2011 and 2010.
59
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Income Taxes
The income tax expense consists of the following for the years ended December 31, 2011 and
2010:
In thousands | 2011 | 2010 | ||||||
Current: |
||||||||
Federal |
$ | 680 | $ | 914 | ||||
State |
199 | 251 | ||||||
879 | 1,165 | |||||||
Deferred: |
||||||||
Federal |
228 | (171 | ) | |||||
State |
62 | (43 | ) | |||||
290 | (214 | ) | ||||||
$ | 1,169 | $ | 951 | |||||
The reasons for the differences between the statutory federal income tax rates and actual rates are
summarized as follows:
In thousands | 2011 | 2010 | ||||||
Federal tax at statutory rates |
$ | 1,015 | $ | 807 | ||||
State income taxes net of
federal tax benefit |
(90 | ) | (70 | ) | ||||
Other |
(17 | ) | 6 | |||||
$ | 908 | $ | 743 | |||||
The deferred income tax account is comprised of the following at December 31:
In thousands | 2011 | 2010 | ||||||
Deferred tax assets: |
||||||||
Allowance for loan losses |
$ | 691 | $ | 921 | ||||
Deferred unpaid leave |
10 | 80 | ||||||
Non-accrued interest income |
85 | 89 | ||||||
Valuation allowance for ORE |
37 | 60 | ||||||
Other |
41 | 24 | ||||||
864 | 1,174 | |||||||
Deferred tax liabilities: |
||||||||
Accumulated depreciation |
21 | 41 | ||||||
21 | 41 | |||||||
Net deferred tax assets |
$ | 843 | $ | 1,133 | ||||
The Companys federal income tax returns for 2008, 2009 and 2010 are subject to examination by the
Internal Revenue Service, generally for three years after they were filed. In addition, the
Companys state tax returns for the same years are subject to examination by state tax authorities
for similar time periods. At December 31, 2011 and 2010, management believes that there are no
uncertain tax positions under ASC Topic 740 Income Taxes.
60
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. 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 include commitments to extend credit
and standby letters of credit, which involve, to varying degrees, elements of credit and interest
rate risk in excess of the amounts recognized in the consolidated financial statements. Outstanding
loan commitments, un-advanced loan funds and standby letters of credit are approximately as follows
at December 31, 2011:
In thousands | 2011 | |||
Loan commitments: |
||||
Commercial |
$ | 1,250 | ||
Commercial real estate |
| |||
$ | 1,250 | |||
Un-advanced loan funds: |
||||
Commercial |
$ | 23,434 | ||
Commercial real estate |
9,914 | |||
$ | 33,348 | |||
Standby letters of credit |
$ | 1,130 | ||
Loan commitments and un-advanced loan funds are agreements to lend funds to customers under loan
commitment contracts and loan agreements as long as the borrowers are in compliance with the loan
commitment contracts and loan agreements. Loan commitments generally have interest rates reflecting
current market conditions, fixed expiration dates, and may require payment of a fee. Fundings under
loans with un-advanced loan funds generally have variable interest rates. Some of the loan
commitments and un-advanced loan funds are expected to expire or not be used without being drawn
upon; accordingly, the total commitment amounts do not necessarily represent future cash
requirements. The Company evaluates each customers creditworthiness on a case-by-case basis. The
amount of collateral or other security obtained, if deemed necessary by the Company upon extension
of credit, is based on the Companys credit evaluation.
Standby letters of credit are conditional commitments issued by the Company to guarantee the
performance of a customer to a third party. Those guarantees are primarily issued to guarantee the
installation of real property improvements and similar transactions. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending loan facilities to
customers. The Company holds collateral and obtains personal guarantees supporting those
commitments as it deems necessary.
The Companys exposure to credit loss in the event of nonperformance by the customer is the
contractual amount of the commitment. Loan commitments and standby letters of credit are made on
the same terms, including collateral, as outstanding loans. As of December 31, 2011 and 2010 the
Bank has accrued $60 thousand for unfunded commitments related to these financial instruments with
off balance sheet risk, which is included in other liabilities.
The Bank has entered into leases for its branches and office space, most of which contain renewal
options and expense sharing provisions. The minimum net non-cancelable future rental commitments at
December 31, 2011 are as follows:
In thousands | ||||
December 31, | ||||
2012 |
$ | 436 | ||
2013 |
446 | |||
2014 |
449 | |||
2015 |
267 | |||
2016 |
161 | |||
2017 |
5 |
The related net rent expense was $485 thousand and $476 thousand in 2011 and 2010, respectively.
Companys financial statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative
measures of assets,
61
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company will be subject to the capital
guidelines when its assets exceed $500 million, it engages in certain highly leveraged activities
or it has publicly issued debt. The Companys and the Banks capital amounts and classification are
also subject to qualitative judgments by the regulators about components, risk weightings and other
factors. The Company and the Bank must maintain minimum capital and other requirements of
regulatory authorities when declaring and paying dividends. The Company and the Bank are in
compliance with such capital requirements. Banking regulations limit the amount of dividends that
may be paid to the Company without prior approval of the Banks regulatory agencies. Regulatory
approval is required to pay dividends that exceed the Banks net profits for the current year plus
its retained net profits for the preceding two years.
Quantitative measures established by regulation to ensure capital adequacy require the Company and
the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I
capital (as defined in the regulation) to risk-weighted assets (as defined), and of Tier I capital
to average assets (as defined). Management believes, as of December 31, 2011, that the Company and
the Bank meet capital adequacy requirements to which they are subject. As of December 31, 2011, the
most recent notification from the regulators categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank
must meet minimum total risk-based, Tier I risk-based and Tier I leverage ratios. There are no
conditions or events since that notification that management believes have changed the Companys
and the Banks category.
Actual capital amounts and ratios are presented in the table below:
For Capital | To be Well Capitalized | |||||||||||||||||||||||||||||||
Adequacy | For Purposes of Prompt | |||||||||||||||||||||||||||||||
In thousands | Actual | Purposes | Corrective Action | |||||||||||||||||||||||||||||
December 31, 2011 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||
Total Capital (1): |
||||||||||||||||||||||||||||||||
Company |
$ | 26,560 | 14.0 | % | $ | 15,178 | > | 8.0 | % | N/A | ||||||||||||||||||||||
Bank |
25,297 | 13.3 | % | 15,178 | > | 8.0 | % | $ | 18,973 | > | 10.0 | % | ||||||||||||||||||||
Tier I Capital (1): |
||||||||||||||||||||||||||||||||
Company |
24,180 | 12.7 | % | 7,589 | > | 4.0 | % | N/A | ||||||||||||||||||||||||
Bank |
22,917 | 12.1 | % | 7,589 | > | 4.0 | % | 11,384 | > | 6.0 | % | |||||||||||||||||||||
Tier I Capital (2): |
||||||||||||||||||||||||||||||||
Company |
24,180 | 11.5 | % | 8,402 | > | 4.0 | % | N/A | ||||||||||||||||||||||||
Bank |
22,917 | 10.9 | % | 8,401 | > | 4.0 | % | 10,501 | > | 5.0 | % | |||||||||||||||||||||
December 31, 2010 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||
Total Capital (1): |
||||||||||||||||||||||||||||||||
Company |
$ | 24,745 | 13.1 | % | $ | 15,162 | > | 8.0 | % | N/A | ||||||||||||||||||||||
Bank |
23,337 | 12.3 | % | 15,162 | > | 8.0 | % | $ | 18,952 | > | 10.0 | % | ||||||||||||||||||||
Tier I Capital (1): |
||||||||||||||||||||||||||||||||
Company |
22,365 | 11.8 | % | 7,581 | > | 4.0 | % | N/A | ||||||||||||||||||||||||
Bank |
20,957 | 11.1 | % | 7,581 | > | 4.0 | % | 11,371 | > | 6.0 | % | |||||||||||||||||||||
Tier I Capital (2): |
||||||||||||||||||||||||||||||||
Company |
22,365 | 11.0 | % | 8,110 | > | 4.0 | % | N/A | ||||||||||||||||||||||||
Bank |
20,957 | 10.3 | % | 8,110 | > | 4.0 | % | 10,138 | > | 5.0 | % |
(1) | to risk weighted assets |
|
(2) | to average assets |
62
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Employee Benefit Plans
The Company has employee benefit programs that include health and dental insurance, life and
long-term and short-term disability insurance and a 401(k) retirement plan. Under the 401(k) plan
during 2011 and 2010, the Company matched eligible employee contributions up to 3% of base salary
plus 50% of employee contributions over 3% of base salary; however, total Company matching funds
could not exceed 4% of an employees base salary. The Banks contributions to the plan included in
compensation and benefits, totaled $95 thousand and $82 thousand for the years ended December 31,
2011 and 2010, respectively.
Note 12. Related Party Transactions
The Company paid $50 thousand during the years ended December 31, 2011 and 2010 to a computer
services firm of which a Director is also a principal. Expenditures included computer hardware,
software, installation, training, compliance and real-time support. The Company paid $173 thousand
during 2011 and $22 thousand in 2010 to a law firm of which a Director is a partner for various
legal services provided including loan collection efforts. Expenditures totaling less than $25,000
were paid to several entities in which directors were principals during 2011 and 2010. These
transactions have been consummated on terms equivalent to those that prevail in arms length
transactions.
Certain officers and directors (and companies in which they have a 10% or more beneficial
ownership) have loans with the Bank. These loans are made on the same terms, including interest
rates and collateral, as those prevailing at the time for comparable loans with unrelated
borrowers. They do not involve more than normal risk of collectability or present other
unfavorable terms. The activity of these loans during 2011 and 2010 is as follows:
In thousands | 2011 | 2010 | ||||||
Total loans at beginning of year |
$ | 2,653 | $ | 3,594 | ||||
New loans and funding during the year |
368 | 492 | ||||||
Director status change to non-Director |
(348 | ) | (1,182 | ) | ||||
Repayments during the year |
(327 | ) | (251 | ) | ||||
Total loans at end of year |
$ | 2,346 | $ | 2,653 | ||||
Note 13. Recently Issued Accounting Pronouncements
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures
amending Topic 820. The ASU provides for additional disclosures of transfers between assets and
liabilities valued under Level 1 and 2 inputs as well as additional disclosures regarding those
assets and liabilities valued under Level 3 inputs. The new disclosures are effective for interim
and annual reporting periods beginning after December 15, 2009 except for those provisions
addressing Level 3 fair value measurements which provisions are effective for fiscal years, and
interim periods therein, beginning after December 15, 2010. The adoption of this ASU did not have a
material impact on the Companys consolidated financial statements.
In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310), Disclosures about the
Credit Quality of Financing Receivables and the Allowance for Credit Losses. The main objective of
this ASU is to provide financial statement users with greater transparency about an entitys
allowance for credit losses and the credit quality of its financing receivables. The ASU requires
that entities provide additional information to assist financial statement users in assessing their
credit risk exposures and evaluating the adequacy of its allowance for credit losses. For the
Company, the disclosures as of the end of a reporting period are required for the annual reporting
periods ending on 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 Companys compliance with this ASU resulted in additional disclosures in the Companys
consolidated financial statements regarding its loan portfolio and related allowance for loan
losses but did not change the accounting for loans or the allowance.
63
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Recently Issued Accounting Pronouncements (continued)
In April 2011, the FASB issued ASU No. 2011-02, Receivable (Topic 310), A Creditors
Determination of Whether a Restructuring is a Troubled Debt Restructuring. The main objective of
the ASU is to clarify a creditors evaluation of whether in modifying a loan it has granted a
concession in circumstances that qualify the loan as a Troubled Debt Restructured (TDR) loan. These
loans are subject to various accounting and disclosure requirements. The ASU is effective for the
first interim or annual period beginning on or after June 15, 2011, and should be applied
retrospectively to the beginning of the annual period of adoption. Certain disclosures are required
for loans considered as TDR loans resulting from the application of the ASU that were not
considered TDR loans under prior guidance. The Companys compliance with ASU No. 2011-02 did not
have a material impact on the Companys consolidated financial statements.
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 Companys consolidated financial statements
The FASB has issued several exposure drafts which, if adopted, would significantly alter the
Companys (and all other financial institutions) method of accounting for, and reporting, its
financial assets and some liabilities from a historical cost method to a fair value method of
accounting as well as the reported amount of net interest income. Also, the FASB has issued an
exposure draft regarding a change in the accounting for leases. Under this exposure draft, the
total amount of lease rights and total amount of future payments required under all leases would
be reflected on the balance sheets of all entities as assets and debt. If the changes under
discussion in either of these exposure drafts are adopted, the financial statements of the Company
could be materially impacted as to the amounts of recorded assets, liabilities, capital, net
interest income, interest expense, depreciation expense, rent expense and net income. The Company
has not determined the extent of the possible changes at this time. The exposure drafts are in
different stages of review, approval and possible adoption.
Note 14. Litigation
In the normal course of its business, the Company is involved in litigation arising from
banking, financial, and other activities it conducts. Management, after consultation with legal
counsel, does not anticipate that the ultimate liability, if any, arising out of these matters will
have a material effect on the Companys financial condition, operating results or liquidity.
64
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Parent Company Financial Information
Information as to the financial position of CommerceFirst Bancorp, Inc. as of December 31, 2011 and
2010 and results of operations and cash flows for the years then ended follows:
In thousands | December 31, | December 31, | ||||||
Statements of Financial Condition | 2011 | 2010 | ||||||
Assets |
||||||||
Cash in CommerceFirst Bank |
$ | 1,202 | $ | 1,448 | ||||
Investment in subsidiary |
22,917 | 20,957 | ||||||
Other assets |
152 | | ||||||
$ | 24,271 | $ | 22,405 | |||||
Liabilities and
Stockholders Equity |
||||||||
Accrued expenses |
$ | 91 | $ | 40 | ||||
Stockholders equity |
24,180 | 22,365 | ||||||
$ | 24,271 | $ | 22,405 | |||||
Year ended | Year ended | |||||||
In thousands | December 31, | December 31, | ||||||
Statements of Operations | 2011 | 2010 | ||||||
Interest income from deposit in CommerceFirst Bank |
$ | 6 | $ | 9 | ||||
Administrative expenses |
226 | 145 | ||||||
Loss before equity in undistributed net income
of bank subsidiary and income tax benefit |
(220 | ) | (136 | ) | ||||
Income tax benefit |
75 | 46 | ||||||
Loss before equity in undistributed net income
of bank subsidiary |
(145 | ) | (90 | ) | ||||
Equity in undistributed net income of bank subsidiary |
1,960 | 1,513 | ||||||
Net income |
$ | 1,815 | $ | 1,423 | ||||
Year ended | Year ended | |||||||
In thousands | December 31, | December 31, | ||||||
Statements of Cash Flows | 2011 | 2010 | ||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 1,815 | $ | 1,423 | ||||
Equity in undistributed earnings of bank subsidiary |
(1,960 | ) | (1,513 | ) | ||||
Increase in other assets |
(152 | ) | | |||||
Increase in payables |
51 | 2 | ||||||
Net cash used in operating activities |
(246 | ) | (88 | ) | ||||
(Decrease) in cash and cash equivalents |
(246 | ) | (88 | ) | ||||
Cash and cash equivalents at beginning of period |
1,448 | 1,536 | ||||||
Cash and cash equivalents at end of period |
$ | 1,202 | $ | 1,448 | ||||
65
Table of Contents
ITEM 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
ITEM 9A | Controls and Procedures |
Disclosure Controls and Procedures. The Companys management, under the supervision and with
the participation of the Chief Executive Officer and Chief Financial Officer, evaluated, as of the
last day of the period covered by this report, the effectiveness of the design and operation of the
Companys disclosure controls and procedures, as defined in Rule 15d-15 under the Securities
Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Companys disclosure controls and procedures were effective.
Managements Report on Internal Control Over Financial Reporting
The management of CommerceFirst Bancorp, Inc. is responsible for the preparation, integrity
and fair presentation of the Consolidated Financial Statements incorporated by reference in this
Annual Report. The financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America and reflect managements judgments and estimates
concerning the effects of events and transactions that are accounted for or disclosed.
Management is also responsible for establishing and maintaining an effective internal control
over financial reporting. The Companys internal control over financial reporting includes those
policies and procedures that pertain to the Companys ability to record, process, summarize and
report reliable financial data. The internal control system contains monitoring mechanisms, and
appropriate actions are taken to correct identified deficiencies. Management believes that internal
controls over financial reporting, which are subject to scrutiny by management and the Companys
internal auditors, support the integrity and reliability of the financial statements. Management
recognizes that there are inherent limitations in the effectiveness of any internal control system,
including the possibility of human error and the circumvention or overriding of internal controls.
Accordingly, even effective internal control over financial reporting can provide only reasonable
assurance with respect to financial statement preparation. In addition, because of changes in
conditions and circumstances, the effectiveness of internal control over financial reporting may
vary over time.
Management assessed the Companys system of internal control over financial reporting as of
December 31, 2011. This assessment was conducted based on the Committee of Sponsoring Organizations
(COSO) of the Treadway Commission Internal Control Integrated Framework. Based on this
assessment, management believes that the Company maintained effective internal control over
financial reporting as of December 31, 2011. Managements assessment concluded that there were no
material weaknesses within the Companys internal control structure. The 2011 end of year
consolidated financial statements have been audited by the independent accounting firm of TGM Group
LLC (TGM). Personnel from TGM were given unrestricted access to all financial records and related
data, including minutes of all meetings of the Board of Directors and Committees thereof.
Management believes that all representations made to the independent auditors were valid and
appropriate. The resulting report from TGM accompanies the financial statements.
The Board of Directors of the Company, acting through its Audit Committee (the Committee),
is responsible for the oversight of the Companys accounting policies, financial reporting and
internal control. The Audit Committee of the Board of Directors is comprised entirely of outside
directors who are independent of management. The Audit Committee is responsible for the appointment
and compensation of the independent auditors and approves decisions regarding the appointment or
removal of members of the internal audit function. The Committee meets periodically with
management, the independent auditors, and the internal auditors to insure that they are carrying
out their responsibilities. The Committee is also responsible for performing an oversight role by
reviewing and monitoring the financial, accounting, and auditing procedures of the Company in
addition to reviewing the Companys financial reports. The independent auditors and the internal
auditors have full and unlimited access to the Audit Committee, with or without the presence of the
management of the Company, to discuss the adequacy of internal control over financial reporting,
and any other matters which they believe should be brought to the attention of the Audit Committee.
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There were no changes in the Companys internal control over financial reporting during the
year ended December 31, 2011 that has materially affected, or is reasonably likely to materially
affect, the Companys internal control over financial reporting.
The annual report does not include an attestation report of the Companys registered public
accounting firm regarding internal control over financial reporting. Managements report was not
subject to attestation by the Companys registered public accounting firm pursuant to rules of the
Securities and Exchange Commission that permit the company to provide only managements report in
this annual report.
ITEM 9B. | Other Information. |
None.
Part III
ITEM 10. | Directors, Executive Officers and Corporate Governance. |
Set forth below is certain information concerning the directors of the Company. Except as
otherwise indicated, the occupation listed has been such persons principal occupation for at least
the last five years. Each of the directors of the Company has served as a director of the Bank
since its organization.
Edward B. Howlin, Jr. Mr. Howlin, 75, is the Chairman and Chief Executive Officer of Howlin
Realty Management, Inc., a real estate holding, management and development firm, and of Edward B.
Howlin, Inc., a management and holding company, and of its subsidiary companies, Dunkirk Supply,
Inc. and Howlin Concrete, Inc. In addition to real estate management and development, the Howlin
companies construct residential subdivisions and design, manufacture and sell construction
components, systems and supplies to various commercial, residential and government projects,
primarily in Southern Maryland. Mr. Howlin is a resident of Anne Arundel County. Mr. Howlin has
been a director of the Company since its organization. Mr. Howlin provides the Company with, among
other things, knowledge of the local real estate market conditions, introductions to potential
customers, his experience in managing medium size companies as well as his experience as a director
of the Company. Mr. Howlins current term expires in 2013.
Milton D. Jernigan, II. Mr. Jernigan, 57, is an attorney engaged in private practice since
1982, is a co-founder and co-managing principal of the law firm of McNamee, Hosea, Jernigan, Kim,
Greenan & Lynch, P.A. He is the Resident Principal-in-Charge of the firms Annapolis office where
his practice concentrates on business, real estate, tax and other matters including work with
federal and state bank regulatory agencies. Mr. Jernigan was one of the founding organizers and a
member of the Board of Directors of the former Commerce Bank in College Park, Maryland where he
served as General Counsel from its organization in 1989 until its acquisition by Main Street Bank
Group (now a part of BB&T Corporation) in December 1997. Mr. Jernigan is a resident of Annapolis,
Maryland and is active in local bar associations, chambers of commerce, service and civic
organizations. Mr. Jernigan was one of the founding organizers of CommerceFirst Bank in 2000 and
has been a director of the Company since its organization. Mr. Jernigans current term expires in
2014.
Charles L. Hurtt, Jr., CPA. Mr. Hurtt, 65, is the founder and President of Charles L. Hurtt,
Jr., P.A., a certified public accounting firm located in Pasadena, Maryland. Mr. Hurtt has been
involved in several charitable and civic organizations, including organizations involved in youth
programs in Prince Georges County. Mr. Hurtt has also been active in several professional
associations, including memberships in the Maryland Society of Accountants, the National Society of
Accountants and the Maryland Association of Certified Public Accountants. Mr. Hurtt is a resident
of Anne Arundel County. Mr. Hurtt has been a director of the Company since October 2003. Mr. Hurtt
brings his financial expertise to the Company and as such serves as the Audit Committee Chairman.
Mr. Hurtts current term expires in 2013.
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Robert R. Mitchell. Mr. Mitchell, 69, is currently retired. He was the President of Mitchell
Business Equipment, Inc., with which he served for over 20 years until its sale in 1988. Mr.
Mitchell was one of the original organizers and directors of Commerce Bank. Mr. Mitchell is active
in local service and civic organizations, including membership in Rotary International and service
on the Prince Georges Salvation Army Local Board. Mr. Mitchell is
a resident of Anne Arundel County. Mr. Mitchell has been a director of the Company since
October 2003. Mr. Mitchell provides the Company with knowledge of community affairs, local business
conditions as well experience in managing small to medium size companies including the Company. Mr.
Mitchells current term expires in 2012.
Richard J. Morgan. Mr. Morgan, 64, is President and Chief Executive Officer of the Bank and
the Company. From 1997 until July 1999, he was a cabinet level advisor to the Anne Arundel County
Executive on issues relating to the economy and economic development, and was President and Chief
Executive Officer of Anne Arundel Economic Development Corporation. From 1990 to 1997, Mr. Morgan
served as President and Chief Executive Officer of Annapolis National Bank. He has over 42 years
of banking and financial management experience. He held leadership roles in commercial lending at
Marine Midland Bank (now HSBC) from 1970 through 1977 and with Maryland National Bank (now Bank of
America) from 1977 to 1982. He has served on numerous community boards, commissions and community
service groups, including as Board member and Assistant Treasurer of the Anne Arundel Medical
Center; Board member and past Chair of United Way of Anne Arundel County; Board and Executive
Committee as well as 2004 and 2005 Chair of the Annapolis and Anne Arundel Chamber of Commerce;
Chair of the Chambers Economic Development Committee; Treasurer and member of the Executive
Committee of the Maryland Economic Development Association; Board and Executive Committee member of
Leadership Anne Arundel and Chair for the Executive Leadership Program; and is currently the Chair
of Atlantic Central Bankers Bank. Mr. Morgan is a resident of Anne Arundel County. Mr. Morgan was
elected for a term of three years to be a member of the Board of Directors of the Federal Reserve
Bank of Richmond, effective in January 2010. Mr. Morgan has been a director of the Company since
its organization. Mr. Morgans current term expires in 2012.
John A. Richardson, Sr. Mr. Richardson, 68, until his retirement in April 2000 was President
of Branch Electric Supply Company, a position he had held since 1968. Mr. Richardson is also the
President of Crofton Bowling Center, is a partner in numerous real estate investment partnerships
located throughout Anne Arundel and Prince Georges Counties, continues to work as a consultant,
and manages real estate. Mr. Richardson is a member of the National Bowling Proprietors
Association. Mr. Richardson is a resident of Anne Arundel County. Mr. Richardson has been a
director of the Company since October 2003. Mr. Richardson provides the Company with knowledge of
local business conditions as well experience in managing small to medium size companies. Mr.
Richardsons current term expires in 2014.
George C. Shenk, Jr. Mr. Shenk, 59, is the President of Whitmore Group, a communications
company headquartered in Annapolis, Maryland. Mr. Shenk is a resident of Anne Arundel County and
has been a director of the Company since 2006. Mr. Shenk provides the Company with knowledge of
local business conditions, local businessmen/women contacts as well experience in managing small to
medium size companies. Mr. Shenks current term expires in 2012.
Lamont Thomas. Mr. Thomas, 71, was the Executive Vice President and Chief Operating Officer of
the Bank and Company until his retirement as of December 31, 2007 and was Chief Financial Officer
until September 10, 2007. Mr. Thomas was one of the founding organizers and members of the Board
of Directors of the former Commerce Bank in College Park, Maryland from its organization in 1989
until its acquisition by Main Street Bank Group (now a part of BB&T Corporation) in December 1997,
serving as Executive Vice President and Treasurer (chief operating and financial officer) of
Commerce Bank. Mr. Thomas is a resident of Howard County. Mr. Thomas has been a director of the
Company since its organization. Mr. Thomas experience as the former Executive Vice President,
Chief Operating Officer and Chief Financial Officer of the Company, prior banking experience and
experience as a director of the Company and Bank since inception, provides the Company with
detailed knowledge of the Companys operations. Mr. Thomas current term expires in 2013.
Jerome A. Watts. Mr. Watts, 69, until his retirement in 2006 was the owner of Plan
Management, a supplier of insurance and employee benefits plans. Mr. Watts was appointed to the
Board of Directors of the Company in September 2005 to fill a vacancy in the class of 2008 and was
confirmed at the 2006 Annual Meeting of Shareholders. Mr. Watts was one of the original organizers
and directors of Commerce Bank. Mr. Watts is a resident of Wicomico Church, VA. Mr. Watts was one
of the founding organizers and member of the Board of Directors of the former Commerce Bank in
College Park, Maryland from its organization in 1989 until its acquisition by Main Street Bank
Group (now a part of BB&T Corporation) in December 1997. Mr. Watts provides insurance expertise to
the Company. Mr. Watts current term expires in 2014.
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Certain Committees, Meetings and Procedures of the Board of Directors
Audit Committee. The Board of Directors has a standing Audit Committee. The Audit Committee is
responsible for the selection, review and oversight of the Companys independent accountants, the
approval of all audit, review and attest services provided by the independent accountants, the
integrity of the Companys reporting practices and the evaluation of the Companys internal
controls and accounting procedures. It also periodically reviews audit reports with the Companys
independent auditors. During 2011 the Audit Committee was comprised of Mr. Hurtt (Chairman) and
Messrs. Mitchell and Richardson. Mr. Thomas joined the Audit Committee in 2012 as an additional
member. Each of the members of the Audit Committee is independent, as determined under the
definition of independence adopted by the NASDAQ for audit committee members in Rule 5605(c(2)(A).
The Board of Directors has adopted a written charter for the Audit Committee. During 2011, the
Audit Committee met five (5) times. The Board of Directors has determined that Mr. Hurtt is an
audit committee financial expert as defined under regulations of the Securities and Exchange
Commission.
Compensation. The Company maintains a standing Compensation Committee of the Board of
Directors. The Compensation Committee is currently comprised of Mr. Shenk (Chairman) and Messrs.
Howlin, Mitchell, Richardson and Watts. Each of the members of the Committee is independent, as
determined under the definition of independence adopted by the NASDAQ for board members in Rule
5605(a) (2). The Committee determines all incentive compensation payments as well as the
compensation levels of executive officers. According to the charter, the committees determinations
are reported to the Board of Directors. The Board of Directors has adopted a charter for the
Committee. To date, no compensation consultant has been engaged to assist the Committee or the
Board of Directors in connection with establishing executive compensation. The President and Chief
Executive Officer has no role in the determination of his compensation but may make recommendations
as to other senior officers compensation.
Executive Officers who are not Directors. Set forth below is certain information
regarding the only person who is an executive officer of the Company or the Bank and who is not a
director of the Company or the Bank.
Michael T. Storm. Mr. Storm, 61, has served as Executive Vice President, Chief Operating
Officer and Chief Financial Officer of the Company and Bank since January 1, 2008, and served as
Chief Financial Officer of the Company and Bank since September 12, 2007. Mr. Storm previously
served as Senior Vice President and Chief Financial Officer of CN Bancorp, Inc. and County National
Bank from 1998 until the acquisition of CN Bancorp by Sandy Spring Bancorp, Inc. in May 2007. He
had served in that capacity since 1998. He previously served as Executive Vice President and Chief
Financial Officer of Annapolis National Bank from 1990 to 1997.
Compliance with section 16(a) of the Securities Exchange Act of 1934. Section 16(a)
of the Securities Exchange Act of 1934 requires the Companys directors and executive officers, and
persons who own more than ten percent of the common stock, to file reports of ownership and changes
in ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission, and to provide the
Company with copies of all Forms 3, 4 and 5 they file.
Based solely upon the Companys review of the copies of the forms which it has received and
written representations from the Companys directors, executive officers and ten percent
shareholders, the Company is not aware of any failure of any such person to comply with the
requirements of Section 16(a), except that a report, reporting one transaction for Mr. Morgan was
not filed in a timely fashion.
Code of Ethics. The Company has adopted a Code of Ethics that applies to all Directors,
officers and employees of the Company and the Bank. The Company will provide a copy of the Code of
Ethics without charge upon written request directed to Candace M. Springmann, Corporate Secretary,
CommerceFirst Bancorp, Inc, 1804 West Street, Annapolis, Maryland 21401.
Shareholder Nomination Procedures. There have been no material changes in the procedures by
which shareholders may recommend nominees to the Companys Board of Directors since the proxy
statement for the 2011 annual meeting of shareholders.
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ITEM 11. | Executive Compensation |
Executive Compensation
The following table sets forth a comprehensive overview of the compensation for Mr.
Morgan, the President and Chief Executive Officer of the Company and each other executive officer
who received total compensation of $100,000 or more during the fiscal year ended December 31, 2011.
SUMMARY COMPENSATION TABLE
All Other | ||||||||||||||||||||
Name and Position | Year | Salary | Bonus | Compensation | Total | |||||||||||||||
Richard J. Morgan |
2011 | $ | 210,000 | $ | 6,300 | $ | 77,441 | (1) | $ | 293,741 | ||||||||||
President and CEO |
2010 | $ | 199,992 | $ | 10,000 | $ | 19,642 | (1) | $ | 229,634 | ||||||||||
Michael T. Storm |
2011 | $ | 150,200 | $ | 4,500 | $ | 20,047 | (2) | $ | 174,747 | ||||||||||
Executive Vice President, |
2010 | $ | 144,206 | $ | 6,000 | $ | 18,221 | (2) | $ | 168,427 | ||||||||||
COO and CFO |
(1) | For 2011, amount represent $50,737 payment for vested, unpaid sick time under the
Companys former sick leave policy which was discontinued in 2008 and paid out in 2011,
automobile allowance of $6,000, Company 401(k) match of $10,127, life insurance premiums of
$716 and $9,831 of payment of unused leave time under the Companys current leave policy.
For 2010, amount represent automobile allowance of $6,000, Company 401(k) match of $8,007,
life insurance premiums of $716 and $4,919 of payment of unused leave time under the
Companys leave policy. |
|
(2) | For 2011, amount represents automobile allowance of $6,000, Company 401(k) match of
$6,641, life insurance premiums of $1,453 and $5,953 of payment of unused leave time. For
2010, amount represents automobile allowance of $6,000, Company 401(k) match of $5,776,
life insurance premiums of $1,141 and $5,304 of payment of unused leave time. |
The Company does not currently maintain any plans pursuant to which stock options or
other equity based compensation awards may be granted to the named executive officers. The Company
does not maintain any non-equity incentive plans or compensation programs (other than discretionary
bonuses), and does not maintain any defined benefit retirement plans, or deferred compensation
plans or arrangements.
Employment Agreements. Mr. Morgan has an employment agreement with the Company
pursuant to which he serves as President and Chief Executive Officer of the Bank. The employment
agreement, as amended in January 2009, expires in August 2014 unless terminated sooner. Under his
employment agreement, Mr. Morgan is entitled to receive a 2012 base salary of $216,300 and a term
life insurance policy in the amount of $300,000. Mr. Morgan is also entitled to receive bonuses
and grants of options as determined by the Board of Directors, and to participate in all other
health, welfare, benefit, stock, option and bonus plans, if any, generally available to officers or
employees of the Company. Mr. Morgan is also entitled to the use of a leased vehicle or a
comparable vehicle allowance. If the employment agreement is terminated by the Company without
cause, the Company will continue to pay Mr. Morgan his annual compensation and benefits as
severance compensation for a period of 12 months, i.e. $216,300 plus cost of benefits approximating
$12,000. In the event of any change in control (as defined) of the Company, Mr. Morgan may continue
his employment, execute a new employment agreement on mutually agreeable terms or resign his
employment. In the event that Mr. Morgan resigns or is terminated within 12 months of the change
in control, Mr. Morgan will be entitled to the sum of twice the base salary and bonuses paid to him
during the 12 months immediately preceding the change in control. If Mr. Morgan were entitled to
receive this payment as of December 31, 2011, he would have been entitled to receive six equal
monthly payments totaling approximately $432,600. For a period of one year after termination of his
employment, Mr. Morgan has agreed that he will not accept employment by or on behalf of any bank
headquartered in Anne Arundel County, Maryland, or in such capacity request or advise any present
or future investors, depositors or customers of the Company or the Bank to curtail or discontinue
their business with the Company or the Bank, or induce, or attempt to induce, any employee of the
Company or the Bank to terminate his employment with the Company or the Bank. Mr. Morgan would
also be subject to non-disparagement and nondisclosure obligations during this period.
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Mr. Storm has an employment agreement under which he serves as Executive Vice President and
Chief Operating Officer and Chief Financial Officer of the Company. Under his employment agreement,
Mr. Storm is entitled to receive a 2012 base salary of $154,500 per year and a term life insurance
policy in the amount of $300,000. Mr. Storm is also entitled to receive bonuses and to participate
in all health, welfare, benefit, stock, option and bonus plans, if any, generally available to
officers or employees of the Company. Mr. Storm is also entitled to a vehicle allowance of $500 per
month. The term of Mr. Storms employment agreement expires on September 9, 2012 unless sooner
terminated. If the agreement is terminated by the Company without cause, the Company will continue
to pay Mr. Storm his annual compensation rate and benefits as severance compensation for a period
of six (6) months, i.e. $77,250 plus cost of benefits approximating $8,000, if he were entitled to
receive such payment at December 31, 2011. In the event of any change in control (as defined) of
the Company, Mr. Storm may continue his employment, execute a new employment agreement on mutually
agreeable terms or resign his employment. In the event that Mr. Storm resigns or is terminated
within 12 months of the change in control, then Mr. Storm will be entitled to twice his base
salary, paid over a period of 12 months (the change in control payment), provided that if the
change in control occurred at December 31, 2011, he would have been entitled to 60% of the change
in control payment i.e. $180,240; if it occurs during 2012, he will be entitled to 80% of the
change in control payment; and if it occurs in 2013 or beyond, he will be entitled to the entire
change in control payment. For a period on one year after termination of his employment, Mr. Storm
has agreed that he would be subject to non-disparagement and nondisclosure obligations.
Employee Benefit Plans. The Bank provides a benefit program that includes health and dental
insurance, life and long term and short-term disability insurance and a 401(k) plan. The Company
adopted safe harbor provisions for the 401(k) plan as of January 1, 2010. Under these provisions,
the Company will match 100% of employee contributions up to 3% of salary and match 50% of the
contributions in excess of the 3% employee contributions but not more than 6% of base salary. The
total match cannot exceed 4% of base salary, as defined.
Outstanding Options and Option Exercises. The Company has never maintained any plan for the
award of equity based compensation other than stock options or warrants. No options or warrants
were exercised by any named executive officer in 2011, no options held by such officers vested
during 2011, and no options were granted to such officers during 2011. All outstanding options and
warrants previously held by executive officers expired in August 2010 without having been
exercised.
Directors Compensation
Fees earned | ||||||||||||
or Paid in | All Other | |||||||||||
Name | Cash | Compensation | Total | |||||||||
Milton D. Jernigan, II |
$ | 45,000 | $ | 2,713 | (1) | $ | 47,713 | |||||
Edward B. Howlin, Jr. |
$ | 6,000 | | $ | 6,000 | |||||||
Charles L. Hurtt, Jr.,
CPA |
$ | 15,000 | | $ | 15,000 | |||||||
Robert R. Mitchell |
$ | 7,750 | | $ | 7,750 | |||||||
John A. Richardson, Sr. |
$ | 11,000 | | $ | 11,100 | |||||||
George C. Shenk, Jr. |
$ | 11,250 | | $ | 11,250 | |||||||
Lamont Thomas |
| $ | 52,000 | (2) | $ | 52,000 | ||||||
Jerome A. Watts |
$ | 4,750 | | $ | 4,750 |
(1) | Represents 2011 bonus of $2,500 and life insurance premium of $213. |
|
(2) | Represents payment under his consulting agreement discussed below. |
Directors of the Company and Bank received compensation for membership on the Board or
attendance at Board or committee meetings in 2011. Directors of the Company and the Bank (excluding
Messrs. Jernigan, II, Morgan and Thomas) were paid $250 per meeting attended, except for Mr. Hurtt,
the Chairman of the Audit Committee, who received $3,000 per quarter during 2011 while serving in
that capacity. The Company does not currently maintain any plans pursuant to which stock options,
restricted stock or other equity based plans may be awarded to directors. The Company does not
maintain any pension, retirement or deferred compensation plans in which directors may participate.
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Under his employment agreement with the Company, Mr. Jernigan, II received $45,000 in salary
and a $2,500 bonus in 2011 and will receive a 2012 base salary of $50,000 and a term life insurance
policy in the amount of $100,000 for service as Chairman of the Boards of Directors of the Company
and the Bank. He is also entitled to receive cash bonuses and grants of options as determined by
the Board of Directors. The term of Mr. Jernigans employment agreement expires on August 15,
2014. If the agreement is terminated by the Company without cause, the Company will continue to pay
his annual compensation and benefits as severance compensation for a period of 12 months; i.e.
$50,000 plus life insurance coverage as described above. In the event of any change in control (as
defined) of the Company, Mr. Jernigan, II may continue his employment, execute a new employment
agreement on mutually agreeable terms or resign his employment. In the event that Mr. Jernigan, II
resigns or is terminated within 12 months of the change in control, Mr. Jernigan, II will be
entitled to the sum of twice the base salary and bonuses, if any, paid to him during the 12 months
immediately preceding the change in control. If Mr. Jernigan, II were entitled to receive this
payment as of December 31, 2011 he would have been entitled to receive six equal monthly payments
totaling approximately $95,000. For a period on one year after termination of his employment, Mr.
Jernigan, II has agreed that he will not accept employment by or on behalf of any bank
headquartered in Anne Arundel County, Maryland, or in such capacity request or advise any present
or future investors, depositors or customers of the Company or the Bank to curtail or discontinue
their business with the Company or the Bank, or induce, or attempt to induce, any employee of the
Company or the Bank to terminate his employment with the Company or the Bank. Mr. Jernigan, II
would also be subject to non-disparagement and nondisclosure obligations during this period.
In March 2007, the Company and Mr. Thomas amended his employment agreement in recognition of
Mr. Thomas retirement from the Company and the desire to provide transition to a new COO/CFO.
Following Mr. Thomas retirement on December 31, 2007, Mr. Thomas provided consulting services to
the Company for a four year term ending December 31, 2011. Mr. Thomass compensation for these
services was $52,000 per year. He continues to serve on the Companys Board of Directors (subject
to expected shareholder approval at appropriate annual meetings), the Banks Board of Directors and
its executive committee for the duration of the agreement, but did not receive fees for Board
service during the term of the consulting agreement. He will receive such fees starting in January
2012 as the consulting agreement has expired.
ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
The following table sets forth certain information concerning the number and percentage of
whole shares of the Companys common stock beneficially owned by its directors, executive officers
whose compensation is disclosed, and by its directors and all executive officers as a group, as of
February 16, 2012, as well as information regarding each other person known by the Company to own
in excess of five percent of the outstanding common stock. Except as set forth below, the Company
knows of no other person or persons who beneficially own in excess of five percent of the Companys
common stock. Further, the Company is not aware of any arrangement which at a subsequent date may
result in a change of control of the Company. Except as otherwise indicated with respect to
directors and executive officers, all shares are owned directly, the named person possesses sole
voting and sole investment power with respect to all such shares, and none of such shares are
pledged as security.
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Total Number of | ||||||||
Shares of Common | Percentage | |||||||
Stock | of | |||||||
Name | Beneficially Owned | Ownership | ||||||
Edward B. Howlin, Jr (1) 2880 Dunkirk Way Dunkirk, MD 20754 |
203,666 | 11.19 | % | |||||
Charles L. Hurtt, Jr. |
20,076 | 1.10 | % | |||||
Milton D. Jernigan, II (2) |
35,950 | 1.97 | % | |||||
Robert R. Mitchell |
24,800 | 1.36 | % | |||||
Richard J. Morgan |
11,643 | 0.64 | % | |||||
John A. Richardson, Sr. |
40,000 | 2.20 | % | |||||
George C. Shenk, Jr. |
14,200 | 0.78 | % | |||||
Michael T. Storm (3) |
400 | 0.02 | % | |||||
Lamont Thomas |
23,000 | 1.26 | % | |||||
Jerome A. Watts |
24,266 | 1.33 | % | |||||
Directors, Officers as a Group (10 people) |
398,001 | 21.86 | % | |||||
Estate of Alvin Maier c/o Ellis J. Koch, Esq., 5904 Hubbard Drive, Rockville, MD 20852 |
101,892 | 5.60 | % |
(1) | Includes 151,160 shares held individually, 49,306 shares held jointly with spouse and
3,200 shares held in a family partnership. |
|
(2) | Includes 25,950 shares held in IRA accounts and 10,000 shares held jointly with spouse. |
|
(3) | Shares held jointly with spouse. |
Securities Authorized for Issuance under Equity Compensation Plans
None.
ITEM 13. | Certain Relationships and Related Transactions, and Director Independence. |
The Bank has had, and expects to have in the future, banking transactions in the ordinary
course of business with some of the Companys directors, officers, and employees and other related
parties. In the past, all of such transactions have been on substantially the same terms,
including interest rates, maturities and collateral requirements as those prevailing at the time
for comparable transactions with non-affiliated persons and did not involve more than the normal
risk of collectability or present other unfavorable features.
The activity of loans to the Companys directors, officers, and employees and other related parties
during 2011 and 2010 is as follows:
In thousands | 2011 | 2010 | ||||||
Total loans at beginning of year |
$ | 2,653 | $ | 3,594 | ||||
New loans and funding during the year |
368 | 492 | ||||||
Director status change to non-Director |
(348 | ) | (1,182 | ) | ||||
Repayments during the year |
(327 | ) | (251 | ) | ||||
Total loans at end of year |
$ | 2,346 | $ | 2,653 | ||||
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The Company paid $50 thousand during the each year ended December 31, 2011 and 2010 to a
computer services firm of which a Director is also a principal. Expenditures included computer
hardware, software, installation, training, compliance and real-time support. The Company incurred
fees and expenses of $173 thousand during 2011 and $22 thousand in 2010 to a law firm of which a
Director is a partner for various legal services provided. The increase in the fees in 2011 is
primarily the result of increased legal efforts regarding the Companys
debt collections. Expenditures totaling less than $25,000 were paid to several entities in
which directors were principals during 2011 and 2010.
All of the above transactions have been consummated on terms equivalent to those that prevail
in arms- length transactions. The Audit Committee of the Company reviews related party transactions
in the course of its review of 10Q and 10K filings.
ITEM 14 | Principal Accountant Fees and Services |
Fees Paid to Independent Accounting Firm
Set forth below is a schedule of fees billed, or to be billed, to the Company by TGM Group LLC
during 2011 and 2010 by category of service.
2011 | 2010 | Comments | ||||||||
Audit fees |
$ | 49,500 | $ | 49,000 | Audit services, reviews of SEC filings | |||||
Tax fees |
2,000 | 2,000 | Preparation of income and related tax returns | |||||||
All Other fees |
| | ||||||||
$ | 51,500 | $ | 51,000 | |||||||
The Audit Committee is responsible for the pre-approval of all non-audit services provided by
its independent auditors. Non-audit services are only provided by the Companys auditors to the
extent permitted by law. Pre-approval is required unless a de minimus exception is met. To
qualify for the de minimus exception, the aggregate amount of all such non-audit services
provided to the Company must constitute not more than five percent of the total amount of revenues
paid by the Company to its independent auditors during the fiscal year in which the non-audit
services are provided; such services were not recognized by the Company at the time of the
engagement to be non-audit services; and the non-audit services are promptly brought to the
attention of the committee and approved prior to the completion of the audit by the committee or by
one or more members of the committee to whom authority to grant such approval has been delegated by
the committee.
All services from the independent accountants during 2011 and 2010 were pre-authorized and
requested by the Audit Committee of the Company prior to the services being performed
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ITEM 15. | Exhibits, Financial Statement Schedules |
Exhibit No. | Description of Exhibits | |||
2 | Agreement and Plan of Merger, dated as of December 20, 2011, by and between the Company
and Sandy Spring Bancorp, Inc. (1) |
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3 | (a) | Certificate of Incorporation of the Company, as amended (2) |
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3 | (b) | Bylaws of the Company (3) |
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10 | (a) | Employment Agreement between Richard J. Morgan and the Company (4) |
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10 | (b) | Employment Agreement between Lamont Thomas and the Company (5) |
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10 | (c) | First Amendment to Employment Agreement between Lamont Thomas and the Company (6) |
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10 | (d) | Employment Agreement between Michael T. Storm and CommerceFirst Bank (7) |
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10 | (e) | Extension of Employment Agreement between Richard J. Morgan and the Company (6) |
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11 | Statement regarding Computation of Per Share Income Refer to Note 1 to the Consolidated
Financial Statements included in Item 8. |
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21 | Subsidiaries of the Registrant |
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The sole subsidiary of the Registrant is CommerceFirst Bank, a Maryland chartered commercial bank. |
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31 | (a) | Certification of Richard J. Morgan, President and CEO |
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31 | (b) | Certification of Michael T. Storm, Executive Vice President and Chief Financial Officer |
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32 | (a) | Certification of Richard J. Morgan, President and Chief Executive Officer |
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32 | (b) | Certification of Michael T. Storm, Executive Vice President and Chief Financial Officer |
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EX-101 | INSTANCE DOCUMENT |
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EX-101 | SCHEMA DOCUMENT |
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EX-101 | CALCULATION LINKBASE DOCUMENT |
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EX-101 | LABELS LINKBASE DOCUMENT |
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EX-101 | PRESENTATION LINKBASE DOCUMENT |
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EX-101 | DEFINITION LINKBASE DOCUMENT |
(1) | Incorporated by Reference to exhibit 2.1 to Companys Current Report on Form 8-K filed on
December 21, 2011. |
|
(2) | Incorporated by reference to exhibit of the same number filed with the Companys
Registration Statement on Form SB-2, as amended, (File No. 333-91817). |
|
(3) | Incorporated by Reference to exhibit 3.2 to Companys Current Report on Form 8-K filed on
December 21, 2011. |
|
(4) | Incorporated by reference to exhibit 10(b) to the Companys to Registration Statement on
Form SB-2, as amended) (File No. 333-91817) |
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(5) | Incorporated by reference to exhibits 10(c) to the Companys to Registration Statement on
Form SB-2, as amended) (File No. 333-91817) |
|
(6) | Incorporated by reference to Exhibit 10(d) to the Companys Quarterly Report on Form 10-QSB
for the period ended March 31, 2007. |
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(7) | Incorporated by reference to Exhibit 10(e) to the Companys Quarterly Report on Form 10-QSB
for the period ended September 30, 2007. |
|
(8) | Incorporated by reference to Exhibit 99 to the Companys Current Report on Form 8-K filed on
January 30, 2009. |
75
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
COMMERCEFIRST BANCORP, INC |
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February 16, 2012 | By: | /s/ Richard J. Morgan, | ||
Richard J. Morgan, President and CEO |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Name | Position | Date | ||
/s/ Milton D. Jernigan II
|
Chairman of the Board of Directors | February 16, 2012 | ||
Milton D. Jernigan II
|
of the Company and the Bank | |||
/s/ Richard J. Morgan
|
Director, President and CEO of the | February 16, 2012 | ||
Richard J. Morgan
|
Company and the Bank |
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(Principal Executive Officer) | ||||
/s/ Edward B. Howlin, Jr.
|
Director of the Company and the Bank | February 16, 2012 | ||
Edward B. Howlin, Jr. |
||||
/s/ Charles L. Hurtt, Jr.
|
Director of the Company and the Bank | February 16, 2012 | ||
Charles L. Hurtt, Jr. |
||||
/s/ Lamont Thomas
|
Director of Company and the Bank | February 16, 2012 | ||
Lamont Thomas |
||||
/s/ Robert R. Mitchell
|
Director of the Company and the Bank | February 16, 2012 | ||
Robert R. Mitchell |
||||
/s/ John A. Richardson, Sr.
|
Director of the Company and the Bank | February 16, 2012 | ||
John A. Richardson, Sr. |
||||
/s/ George C. Shenk, Jr.
|
Director of the Company and the Bank | February 16, 2012 | ||
George C. Shenk, Jr. |
||||
Director of the Company and the Bank | ||||
Jerome A. Watts |
||||
/s/ Michael T. Storm
|
Executive Vice President/Chief Financial | February 16, 2012 | ||
Michael T. Storm
|
Officer of the Company and the Bank | |||
(Principal Financial and Accounting Officer) |
76