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EXCEL - IDEA: XBRL DOCUMENT - COMMERCEFIRST BANCORP INC | Financial_Report.xls |
EX-31.A - EX-31.A - COMMERCEFIRST BANCORP INC | d339767dex31a.htm |
EX-31.B - EX-31.B - COMMERCEFIRST BANCORP INC | d339767dex31b.htm |
EX-32.B - EX-32.B - COMMERCEFIRST BANCORP INC | d339767dex32b.htm |
EX-32.A - EX-32.A - COMMERCEFIRST BANCORP INC | d339767dex32a.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended MARCH 31, 2012
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 000-51104
CommerceFirst Bancorp, Inc.
(Exact Name of Registrant as Specified in its Charter)
Maryland | 52-2180744 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
1804 West Street, Suite 200, Annapolis, MD 21401
(Address of Principal Executive Offices)
410-280-6695
(Registrants Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
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 x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Securities Exchange Act). Yes ¨ No x
As of May 1, 2012 the number of outstanding shares of registrants common stock, par value $0.01 per share was: 1,820,548
Table of Contents
CommerceFirst Bancorp, Inc.
FORM 10-Q
Page(s) | ||||
PART IFINANCIAL INFORMATION |
||||
Item 1Financial Statements |
||||
3 | ||||
FOR PERIODS ENDED MARCH 31, 2012 and 2011: |
||||
Consolidated Statements of OperationsThree months (Unaudited) |
4 | |||
Consolidated Statements of Stockholders EquityThree months (Unaudited) |
5 | |||
Consolidated Statements of Cash FlowsThree months (Unaudited) |
6 | |||
7-11 | ||||
11-28 | ||||
Item 3Quantitative and Qualitative Disclosures About Market Risk |
29 | |||
29 | ||||
29 | ||||
29 | ||||
Item 2Unregistered Sales of Equity Securities and Use of Proceeds |
29 | |||
29 | ||||
29 | ||||
30 | ||||
30 | ||||
31 |
2
Table of Contents
CommerceFirst Bancorp, Inc. and Subsidiary
Consolidated Statements of Financial Condition
March 31, 2012 and December 31, 2011
(Dollars in thousands except per share data)
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
(Unaudited) | (Audited) | |||||||
ASSETS |
||||||||
Cash and due from banks |
$ | 1,852 | $ | 2,161 | ||||
Interest bearing deposits |
18,334 | 15,639 | ||||||
|
|
|
|
|||||
Cash and cash equivalents |
20,186 | 17,800 | ||||||
Investments in restricted stocks, at cost |
509 | 509 | ||||||
Loans receivable |
180,121 | 184,298 | ||||||
Allowance for loan losses |
(3,457 | ) | (3,033 | ) | ||||
|
|
|
|
|||||
Net loans receivable |
176,664 | 181,265 | ||||||
|
|
|
|
|||||
Premises and equipment, net |
376 | 418 | ||||||
Accrued interest receivable |
837 | 767 | ||||||
Deferred income taxes |
1,135 | 843 | ||||||
Other real estate owned |
4,232 | 4,232 | ||||||
Other assets |
1,064 | 1,505 | ||||||
|
|
|
|
|||||
Total Assets |
$ | 205,003 | $ | 207,339 | ||||
|
|
|
|
|||||
LIABILITIES |
||||||||
Non-interest bearing deposits |
$ | 29,145 | $ | 31,586 | ||||
Interest bearing deposits |
150,093 | 151,022 | ||||||
|
|
|
|
|||||
Total deposits |
179,238 | 182,608 | ||||||
Accrued interest payable |
78 | 71 | ||||||
Other liabilities |
1,072 | 480 | ||||||
|
|
|
|
|||||
Total Liabilities |
180,388 | 183,159 | ||||||
|
|
|
|
|||||
STOCKHOLDERS EQUITY |
||||||||
Common stock$.01 par value; authorized 4,000,000 shares |
||||||||
Issued and outstanding: 1,820,548 shares at March 31, 2012 and at December 31, 2011 |
18 | 18 | ||||||
Additional paid-in capital |
17,853 | 17,853 | ||||||
Retained earnings |
6,744 | 6,309 | ||||||
|
|
|
|
|||||
Total Stockholders Equity |
24,615 | 24,180 | ||||||
|
|
|
|
|||||
Total Liabilities and Stockholders Equity |
$ | 205,003 | $ | 207,339 | ||||
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
Table of Contents
CommerceFirst Bancorp, Inc. and Subsidiary
Consolidated Statements of Operations
For the Three Months ended March 31, 2012 and 2011 (Unaudited)
(Dollars in thousands except per share data)
March 31, | March 31, | |||||||
2012 | 2011 | |||||||
Interest income: |
||||||||
Interest and fees on loans |
$ | 2,998 | $ | 3,057 | ||||
Investment in stocks |
7 | 7 | ||||||
Interest bearing deposits |
14 | 13 | ||||||
|
|
|
|
|||||
Total interest income |
3,019 | 3,077 | ||||||
|
|
|
|
|||||
Interest expense: |
||||||||
Deposits |
385 | 568 | ||||||
|
|
|
|
|||||
Total interest expense |
385 | 568 | ||||||
|
|
|
|
|||||
Net interest income |
2,634 | 2,509 | ||||||
Less provision for loan losses |
575 | 681 | ||||||
|
|
|
|
|||||
2,059 | 1,828 | |||||||
|
|
|
|
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Non-interest income: |
||||||||
Gain on sale of SBA loans |
62 | 209 | ||||||
Gain on sale of other real estate owned |
| 43 | ||||||
Service charges and other income |
144 | 149 | ||||||
|
|
|
|
|||||
Total non-interest income |
206 | 401 | ||||||
|
|
|
|
|||||
Non-interest expenses: |
||||||||
Compensation and benefits |
776 | 772 | ||||||
Legal and professional |
193 | 65 | ||||||
Rent and occupancy |
144 | 145 | ||||||
Marketing and business development |
11 | 18 | ||||||
FDIC insurance |
40 | 89 | ||||||
Data processing |
38 | 37 | ||||||
Support services |
61 | 47 | ||||||
Communications |
30 | 33 | ||||||
Loan collections |
54 | 57 | ||||||
Other real estate owned provision |
| 75 | ||||||
Depreciation and amortization |
42 | 52 | ||||||
Other |
137 | 110 | ||||||
|
|
|
|
|||||
Total non-interest expenses |
1,526 | 1,500 | ||||||
|
|
|
|
|||||
Income before income taxes |
739 | 729 | ||||||
Income tax expense |
304 | 281 | ||||||
|
|
|
|
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Net income and total comprehensive income |
$ | 435 | $ | 448 | ||||
|
|
|
|
|||||
Basic and diluted earnings per share |
$ | 0.24 | $ | 0.25 | ||||
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
Table of Contents
CommerceFirst Bancorp, Inc. and Subsidiary
Consolidated Statements of Stockholders Equity
For the Three Months Ended March 31, 2012 and 2011
(Dollars in thousands)
(Unaudited)
Common Stock |
Additional Paid-in Capital |
Retained Earnings |
Total | |||||||||||||
Balance December 31, 2010 |
$ | 18 | $ | 17,853 | $ | 4,494 | $ | 22,365 | ||||||||
Net income- March 31, 2011 |
448 | 448 | ||||||||||||||
|
|
|
|
|
|
|
|
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Balance March 31, 2011 |
$ | 18 | $ | 17,853 | $ | 4,942 | $ | 22,813 | ||||||||
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|
|||||||||
Balance December 31, 2011 |
$ | 18 | $ | 17,853 | $ | 6,309 | $ | 24,180 | ||||||||
Net income- March 31, 2012 |
435 | 435 | ||||||||||||||
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|
|||||||||
Balance March 31, 2012 |
$ | 18 | $ | 17,853 | $ | 6,744 | $ | 24,615 | ||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
5
Table of Contents
CommerceFirst Bancorp, Inc. and Subsidiary
Consolidated Statement of Cash Flows
For the Three Months Ended March 31, 2012 and 2011
(Dollars in thousands)
(Unaudited)
March 31, | March 31, | |||||||
2012 | 2011 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income |
$ | 435 | $ | 448 | ||||
Adjustments to reconcile net income to net cash provided by operations: |
||||||||
Depreciation and amortization |
42 | 52 | ||||||
Gain on sales of SBA loans |
(62 | ) | (209 | ) | ||||
Gain on sales of other real estate owned |
| (43 | ) | |||||
Provision for loan losses |
575 | 681 | ||||||
Provision for losses on other real estate owned |
| 75 | ||||||
Deferred income taxes |
(292 | ) | (280 | ) | ||||
Change in assets and liabilities: |
||||||||
Increase in accrued interest receivable |
(70 | ) | (11 | ) | ||||
Decrease in other assets |
441 | 236 | ||||||
Increase in accrued interest payable |
7 | 11 | ||||||
Increase in other liabilities |
592 | 404 | ||||||
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|
|
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Net cash provided by operating activities |
1,668 | 1,364 | ||||||
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|
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CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Decrease (increase) in loans, net |
3,344 | (5,171 | ) | |||||
Proceeds from sale of SBA loans |
744 | 2,336 | ||||||
Proceeds from sale of other real estate owned |
| 568 | ||||||
Purchase of premises and equipment |
| (3 | ) | |||||
|
|
|
|
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Net cash (used by) provided by investing activities |
4,088 | (2,270 | ) | |||||
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|
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CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
(Decrease) increase in non-interest bearing deposits, net |
(2,441 | ) | 1,682 | |||||
Net (decrease) increase in other deposits |
(929 | ) | 877 | |||||
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|
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Net cash (used by) provided by financing activities |
(3,370 | ) | 2,559 | |||||
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Net increase in cash and cash equivalents |
2,386 | 1,653 | ||||||
Cash and cash equivalents at beginning of period |
17,800 | 13,726 | ||||||
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Cash and cash equivalents at end of period |
$ | 20,186 | $ | 15,379 | ||||
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SUPPLEMENTAL CASH FLOW INFORMATION |
||||||||
Interest paid |
$ | 378 | $ | 557 | ||||
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Income taxes paid |
$ | | $ | | ||||
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|
|
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Transfer of loans to real estate owned |
$ | | $ | | ||||
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company and its Significant Accounting Policies
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
The financial data at December 31, 2011 are derived from audited consolidated financial statements that are included in the Companys SEC Form 10-K for the year ended December 31, 2011. The financial data at March 31, 2012 and 2011 are derived from unaudited consolidated financial statements. Interim results are not necessarily indicative of results for the full year.
The consolidated financial statements include the accounts of CommerceFirst Bancorp, Inc. (the Company) and its subsidiary, CommerceFirst Bank (the Bank). Inter-company balances and transactions have been eliminated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and cash equivalents in the statement of cash flows include cash on hand, non-interest bearing amounts due from correspondent banks, interest and non-interest bearing deposits due from the Federal Reserve, certificate of deposits with maturities of less than one year and Federal funds sold.
Certain prior period amounts have been reclassified to conform to the current periods method of presentation.
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.
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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.
Note 2. Fair value
ASC Section 820Fair Value Measurements and Disclosure defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Topic 820 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. These inputs are summarized in three broad levels as follows:
Level 1: | Quoted prices in active exchange markets for identical assets or liabilities; also includes certain U.S. Treasury and other U.S. government and agency securities actively traded in over-the-counter markets. |
Level 2: | Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans held for sale. |
Level 3: | Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category generally includes certain private equity investments, retained interests from securitizations, and certain collateralized debt obligations. |
The Companys bond holdings in the investment securities portfolio, if any, are the only asset or liability subject to fair value measurement on a recurring basis. No financial assets or liabilities are valued on a recurring basis under Level 1or Level 2 inputs at March 31, 2012 or December 31, 2011. The Company has financial and non-financial assets measured by fair value measurements on a non-recurring basis during 2012. At March 31, 2012, these assets include $3.2 million of non-accrual loans ($1.7 million after specific reserves) and other real estate owned of $4.2 million, 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 Level 2 |
Level 3 | ||||||
December 31, 2011: |
||||||||
Loans |
$ | | $ | 2,668 | ||||
Restricted securities |
| 7 | ||||||
Other real estate owned |
| 4,232 | ||||||
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|
|
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Total December 31, 2011 |
| 6,907 | ||||||
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Activity: |
||||||||
Loans: |
||||||||
New loans measured at fair value |
| 835 | ||||||
Payments and other loan reductions |
| (103 | ) | |||||
Loans charged-off |
| (185 | ) | |||||
|
|
|
|
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Net change in loans |
| 547 | ||||||
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|
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March 31, 2012: |
||||||||
Loans |
| 3,215 | ||||||
Restricted securities |
| 7 | ||||||
Other real estate owned |
| 4,232 | ||||||
|
|
|
|
|||||
Total March 31, 2012 |
$ | | $ | 7,454 | ||||
|
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8
Table of Contents
The estimated fair values of the Companys financial instruments at March 31, 2012 and December 31, 2011 are summarized below. The fair values of a significant portion of these financial instruments are estimates derived using present value techniques and may not be indicative of the net realizable or liquidation values. Also, the calculation of estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values.
March 31, 2012 | December 31, 2011 | |||||||||||||||
In thousands | Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
||||||||||||
Financial assets: |
||||||||||||||||
Cash and due from banks |
$ | 1,852 | $ | 1,852 | $ | 2,161 | $ | 2,161 | ||||||||
Interest bearing deposits |
18,334 | 18,334 | 15,639 | 15,639 | ||||||||||||
Investments in restricted stock |
509 | 509 | 509 | 509 | ||||||||||||
Loans, net |
176,664 | 186,914 | 181,265 | 192,082 | ||||||||||||
Accrued interest receivable |
837 | 837 | 767 | 767 | ||||||||||||
Financial liabilities: |
||||||||||||||||
Non-interest bearing deposits |
$ | 29,145 | $ | 29,145 | $ | 31,586 | $ | 31,586 | ||||||||
Interest bearing deposits |
150,093 | 151,247 | 151,022 | 152,478 | ||||||||||||
Accrued interest payable |
78 | 78 | 71 | 71 | ||||||||||||
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.
9
Table of Contents
Note 3. Net Income per Common Share
Basic earnings per share of common stock are computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per share are calculated by including the average dilutive common equivalents outstanding during the period. There were no dilutive common equivalent shares outstanding at March 31, 2012 or 2011.
Three Months Ended March 31, |
||||||||
In thousands except for per share data | 2012 | 2011 | ||||||
Weighted average shares outstanding |
1,820,548 | 1,820,548 | ||||||
Common stock equivalents |
| | ||||||
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|
|
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Average common shares and equivalents |
1,820,548 | 1,820,548 | ||||||
|
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|
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Net income |
$ | 435 | $ | 448 | ||||
Basic and diluted earnings per share |
$ | 0.24 | $ | 0.25 |
Note 4. Related Party Transactions
The Company paid $139 thousand during the first three months of 2012 for legal services to a firm of which a Director of the Company is a principal. The Company also paid $14 thousand during the three months ended March 31, 2012 for computer related services to firm of which a Director of the Company is a principal. The above transactions have been consummated on terms equivalent to those that prevail in arms length transactions.
Executive officers, directors and their affiliated interests enter into loan transactions with the Company in the ordinary course of business. These loans are made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with unrelated borrowers. They do not involve more than normal risk of collectability or present other unfavorable terms. At March 31, 2012 the amount of such loans outstanding was $2.2 million.
Deposit balances of executive officers, directors and their affiliated interests totaled $11.5 million at March 31, 2012.
Note 5. Commitments and contingencies
The Company is a party to financial instruments in the normal course of business to meet the financing needs of its customers. These financial instruments typically include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated financial statements. Outstanding commitments as of March 31, 2012 are as follows:
In millions | ||||
Loan commitments |
$ | 2.6 | ||
Unused lines of credit |
$ | 34.1 | ||
Letters of Credit |
$ | 1.2 |
Note 6. Recent Relevant Accounting Pronouncements
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.
10
Table of Contents
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 was effective for the first interim or annual period beginning on or after June 15, 2011, and was applied retrospectively to the beginning of the annual period of adoption. Certain disclosures are required for loans considered as TDR loans resulting from the application of the ASU that were not considered TDR under prior guidance. The 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 was effective for the first interim or annual period beginning on or after December 15, 2011, early application for public entities is not permitted. The Companys compliance with ASU No. 2011-04 did not have a material impact on the Companys consolidated financial statements.
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Forward-Looking Statements
Certain information contained in this discussion may include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are generally identified by phrases such as the Company expects, the Company believes or words of similar import. Such forward-looking statements involve known and unknown risks including, but not limited to, changes in general economic and business conditions, interest rate fluctuations, competition within and from outside the banking industry, new products and services in the banking industry, risk inherent in making loans such as repayment risks and fluctuating collateral values, problems with technology utilized by the Company, changing trends in customer profiles and changes in laws, accounting standards and regulations applicable to the Company. Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Readers are cautioned against placing undue reliance on any such forward-looking statements. The Companys past results are not necessarily indicative of future performance. Please refer to the Risk Factors section of the Companys Form 10-K for the year ended December 31, 2011, and other periodic reports filed with the Securities and Exchange Commission, for a discussion of various factors which may affect our performance.
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General
CommerceFirst Bancorp, Inc. (the Company) is the bank holding company for CommerceFirst Bank, a Maryland chartered commercial bank headquartered in Annapolis, Maryland (the Bank). The Bank was capitalized, became a wholly owned subsidiary of the Company and commenced operations on June 29, 2000. The Companys common stock trades on the NASDAQ Capital Market under the symbol CMFB. The Company maintains five banking offices in Anne Arundel, Howard and Prince Georges counties in central Maryland. The Company focuses on providing commercial banking services to small and medium sized business in its market areas.
The Company assets decreased modestly at March 31, 2012 from December 31, 2011 with increases in cash and cash equivalents offset by the decrease in loans receivable. Earnings for the three months ended March 31, 2012 approximated earnings during the three months ended March 31, 2011. While lower during the first quarter of 2012 as compared to 2011, the provision for loan losses continues to remain relatively high primarily as the result of specific reserves being established on identified loans. Key measurements and events for the period include the following:
| The Companys net income was $435 thousand during the three months ended March 31, 2012 as compared to net income of $448 thousand for the three months ended March 31, 2011. The increase in net interest income and decline in the provision for loan losses was more than offset by the decline in gains on sales of SBA loans and other real estate owned as well as merger professional expenses of $140 thousand during 2012 resulting in a small decrease in net income. |
| Net interest income, the Companys main source of income, increased by 5.0% from $2.5 million during the three months ended March 31, 2011 to $2.6 million for the three months ended March 31, 2012. |
| Total assets decreased by 1.1% from $207 million at December 31, 2011 to $205 million at March 31, 2012. |
| Net loans outstanding decreased by 2.5% from $181 million at December 31, 2011 to $177 million as of March 31, 2012. |
| Deposits decreased by 1.9% from $183 million at December 31, 2011 to $179 million at March 31, 2012. |
| Non-interest income decreased by 48.6% from $401 thousand for the three months ended March 31, 2011 to $206 thousand for the three months ended March 31, 2012. |
| Non-interest expenses increased by 1.7% from $1.50 million for the three months ended March 31, 2011 to $1.53 million for the three months ended March 31, 2012. |
A discussion of the factors leading to these changes can be found in the discussion below.
Critical Accounting Policies
The Companys consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and follow general practices within the industry in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available.
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The most significant accounting policies followed by CommerceFirst Bancorp, Inc. are presented in Note 1 to the Companys audited consolidated financial statements incorporated by reference in its Form 10-K for the year ended December 31, 2011. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan losses as the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.
The Company believes it has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. These procedures include identifying and assessing possible impaired loans. The Companys assessments may be affected in future periods by changes in economic conditions, the impact of regulatory examinations and the discovery of information with respect to borrowers that is not known to management at the time of the issuance of the consolidated financial statements.
RESULTS OF OPERATIONS
General. The Company reported net income of $435 thousand for the three months ended March 31, 2012 as compared to net income of $448 thousand for the three month period ended March 31, 2011. Net earnings declined slightly during 2012 as compared to 2011 because of a variety of factors. Net income increased during 2012 because of the increase in net interest income of $125 thousand, the decline in the provision for loan losses of $106 thousand, the decline in FDIC insurance costs of $49 thousand and the decline in the provision for other real estate owned losses offset by the decline in the gain from the sale of SBA loans of $147 thousand, the decline in the sale of other real estate owned of $43 thousand, merger related professional fees of $140 thousand, other expenses increase of $27 thousand and increased income tax expense of $23 thousand. Net interest margin increased primarily as the result of the reduction in the cost of deposits. The provision for loan losses declined because of the decrease in loans outstanding as well as the more stable economic conditions in 2012 as compared to 2011.
Net interest income increased in 2012 as compared to 2011 by $125 thousand, or 5.0%. This increase resulted primarily from the reduction in the cost of deposits as well as the decline in average deposits in 2012 as compared to 2011. Maturing certificates of deposit were either re-priced at lower rates or replaced with lower rate deposits in 2012 as general market interest rates for deposits declined.
Return on Average Assets and Average Equity. The following table shows the return on average assets and average equity for the period shown.
Three Months Ended March 31, |
Year ended December 31, |
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2012 | 2011 | 2011 | ||||||||||
Return on Average Equity |
7.07 | % | 7.87 | % | 7.74 | % | ||||||
Return on Average Earning Assets |
0.87 | % | 0.91 | % | 0.90 | % | ||||||
Ratio of Average Equity to Average Assets |
11.96 | % | 11.19 | % | 11.32 | % |
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Net Interest Income and Net Interest Margin. Net interest income is the amount by which interest earned on assets exceeds the interest paid on interest-bearing liabilities. The Companys principal interest earning assets are loans to businesses. Interest-bearing liabilities consist primarily of savings accounts, money market accounts and certificates of deposit. Generally, changes in net interest income are measured by net interest rate spread and net interest margin. Net interest rate spread is equal to the difference between the average rate earned on interest earning assets and the average rate incurred on interest-bearing liabilities. Net interest margin represents the difference between interest income (including net loan fees earned) and interest expense calculated as a percentage of average earning assets.
Total interest income decreased by $58 thousand or 1.9% for the three month period ended March 31, 2012 as compared to the same period in 2011. This decrease in interest income was primarily attributable to the decline in the yield of the average earning assets from 6.31% in 2011 to 6.15% in 2012. The earnings rate decline was partially offset by the increase in earning assets of $1.2 million.
Interest expense decreased by $183 thousand or 32.2% to $385 thousand for the three months ended March 31, 2012 as compared to $568 thousand during the same three months of 2011. This decrease was attributable to the 45 basis point decrease in the cost of funds from 1.48% during the first three months of 2011 to 1.03% during the first three months of 2012 as well as the decrease of $4.4 million in average interest bearing liabilities during 2012 as compared to 2011.
The net interest income for the three month period ended March 31, 2012 was $2.6 million as compared to $2.5 million for the same period in 2011. Net interest income increased primarily because of the reduced cost of funds during the three months ended March 31, 2012 as compared to the three months ended March 31, 2011.
The following table shows the average balances and average rates earned or paid on of the various categories of the Companys assets and liabilities for the three month period ended March 31 of each year. Nonperforming loans are included in average loan balances in the following table:
THREE MONTHS | 2012 | 2011 | 2010 | |||||||||||||||||||||||||||||||||
In thousands | Average Balance |
Interest | Yields/ Rates |
Average Balance |
Interest | Yields/ Rates |
Average Balance |
Interest | Yields/ Rates |
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Assets |
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Securities (1) |
$ | 509 | $ | 7 | 5.58 | % | $ | 527 | $ | 7 | 5.39 | % | $ | 527 | $ | 7 | 5.39 | % | ||||||||||||||||||
Loans, net of unearned income (2) |
181,220 | 2,998 | 6.71 | % | 186,284 | 3,057 | 6.66 | % | 184,219 | 3,124 | 6.88 | % | ||||||||||||||||||||||||
Interest-bearing deposits in other banks |
17,300 | 14 | 0.33 | % | 11,036 | 13 | 0.48 | % | 14,927 | 9 | 0.24 | % | ||||||||||||||||||||||||
Federal funds sold |
| | | | | | 129 | | 0.19 | % | ||||||||||||||||||||||||||
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Total interest-earning assets |
199,029 | 3,019 | 6.15 | % | 197,847 | 3,077 | 6.31 | % | 199,802 | 3,140 | 6.37 | % | ||||||||||||||||||||||||
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Less allowance for loan losses |
(3,233 | ) | (3,319 | ) | (2,428 | ) | ||||||||||||||||||||||||||||||
Non interest earning assets |
9,931 | 9,127 | 8,631 | |||||||||||||||||||||||||||||||||
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Total assets |
$ | 205,727 | $ | 203,655 | $ | 206,005 | ||||||||||||||||||||||||||||||
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Liabilities & Stockholders Equity |
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Interest-bearing deposits |
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Interest bearing demand deposits |
$ | 416 | $ | | 0.05 | % | $ | 766 | $ | | 0.05 | % | $ | 712 | $ | | 0.05 | % | ||||||||||||||||||
Money market deposit accounts |
7,569 | 5 | 0.27 | % | 8,628 | 8 | 0.38 | % | 8,453 | 9 | 0.43 | % | ||||||||||||||||||||||||
Savings accounts |
28,724 | 46 | 0.65 | % | 23,780 | 67 | 1.14 | % | 12,036 | 44 | 1.48 | % | ||||||||||||||||||||||||
Certificates of deposit |
114,752 | 334 | 1.18 | % | 122,695 | 493 | 1.63 | % | 142,729 | 833 | 2.37 | % | ||||||||||||||||||||||||
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Total interest-bearing liabilities |
151,461 | 385 | 1.03 | % | 155,869 | 568 | 1.48 | % | 163,930 | 886 | 2.19 | % | ||||||||||||||||||||||||
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THREE MONTHS | 2012 | 2011 | 2010 | |||||||||||||||||||||||||||||||||
In thousands | Average Balance |
Interest | Yields/ Rates |
Average Balance |
Interest | Yields/ Rates |
Average Balance |
Interest | Yields/ Rates |
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Demand deposits and other liabilities |
29,659 | 25,005 | 20,727 | |||||||||||||||||||||||||||||||||
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Total liabilities |
181,120 | 180,874 | 184,657 | |||||||||||||||||||||||||||||||||
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Stockholders equity |
24,607 | 22,781 | 21,348 | |||||||||||||||||||||||||||||||||
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Total liabilities and stockholders equity |
$ | 205,727 | $ | 203,655 | $ | 206,005 | ||||||||||||||||||||||||||||||
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Interest rate spread |
5.12 | % | 4.83 | % | 4.18 | % | ||||||||||||||||||||||||||||||
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Net interest income and margin |
$ | 2,634 | 5.37 | % | $ | 2,509 | 5.14 | % | $ | 2,254 | 4.58 | % | ||||||||||||||||||||||||
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(1) | Yields on securities are calculated based on amortized cost. |
(2) | Loan balances include loans on nonaccrual. |
Net interest margin was 5.37% in the first three months of 2012, as compared to 5.14% in the comparable period in 2011. Interest spread was 5.12% in the first three months of 2012, as compared to the 4.83% in the first three months of 2011 reflecting the greater reduction in the cost of interest bearing funds as compared to the reduction of the earnings rates of interest earning assets. Absent a reduction in market interest rates, the Company does not anticipate continuing significant reductions in the cost of its interest bearing funds as a majority of the higher costing funds have been re-priced to lower levels.
The following table sets forth certain information regarding changes in interest income and interest expense of the Company. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (i) changes in volume (change in volume of the asset multiplied by the prior years rate) and (ii) changes in rates (change in rate multiplied by the current years volume).
March 31, 2012 vs. 2011 | March 31, 2011 vs. 2010 | |||||||||||||||||||||||
Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||
In thousands | Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||
Interest-Earning Assets: |
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Interest bearing deposits |
$ | 7 | $ | (6 | ) | $ | 1 | $ | (2 | ) | $ | 6 | $ | 4 | ||||||||||
Investment portfolio |
| | | | | | ||||||||||||||||||
Loans receivable |
(84 | ) | 25 | (59 | ) | 35 | (102 | ) | (67 | ) | ||||||||||||||
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Net Change in Interest Income |
(77 | ) | 19 | (58 | ) | 33 | (96 | ) | (63 | ) | ||||||||||||||
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Interest Bearing Liabilities: |
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Interest bearing deposits |
(16 | ) | (167 | ) | (183 | ) | (44 | ) | (274 | ) | (318 | ) | ||||||||||||
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Net Change in Interest Expense |
(16 | ) | (167 | ) | (183 | ) | (44 | ) | (274 | ) | (318 | ) | ||||||||||||
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Change in Net Interest Income |
$ | (61 | ) | $ | 186 | $ | 125 | $ | 77 | $ | 178 | $ | 255 | |||||||||||
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Provision for Loan Losses. The provision for loan losses represents the amount charged against earnings to increase the allowance for loan losses to the level deemed appropriate by management. The provision for loan losses and the allowance for loan losses are based on managements ongoing assessment of the Companys credit exposure and consideration of certain other relevant factors. The provision for loan losses was $575 thousand the three months ended March 31, 2012 as compared to $681 thousand for the three months ended March 31, 2011. The decrease is the result of the lower amount of outstanding loans at March 31, 2012 as compared to outstanding loans receivable at March 31, 2011. The allowance is comprised of specific and general allowance amounts.
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Non-Interest Income. Non-interest income principally consists of gains from the sale of the guaranteed portion of Small Business Administration loans and from deposit account services charges. For the three months ended March 31, 2012, gains on sales of the guaranteed portion of SBA loans were $62 thousand whereas gains on sales of SBA loans amounted to $209 thousand during the first three months of 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. Deposit account service charges and other income amounted to $144 thousand during the three months ended March 31, 2012 as compared to $149 thousand for the same period in 2011. Included in this decrease was the decrease in net rental income from the rental of other real estate owned properties of $11 thousand. Several properties that were being rented were sold after the first quarter of 2011.
Non-Interest Expense. Total non-interest expenses increased by $26 thousand during the three month period ended March 31, 2012 as compared to the same period in 2011, a 1.7% increase. The 2012 expenses include approximately $140 thousand of expenses related to the proposed merger of the Company with Sandy Spring. There were no such expenses during the first three months of 2011. The 2011 expenses reflect $75 thousand of provision for declining value of other real estate owned; no such provision was expensed in 2012. FDIC insurance expense was $40 thousand in 2012 as compared to $89 thousand in 2011 reflecting the change in the premium computation by the FDIC as well as the reduced amount of Company assets.
Income Tax Expense. During the three months ended March 31, 2012, the Company recorded an income tax expense of $304 thousand as compared to a $281 thousand expense during the same period in 2011. The income taxes in 2011 were reduced by approximately $10 thousand to correct for prior years recorded taxes. The income tax expense was 41.1% of income before taxes in 2012 and 38.6% of income before taxes in 2011.
FINANCIAL CONDITION.
General. The Companys assets at March 31, 2012 were $205.0 million, a decrease of $2.3 million or 1.1%, from December 31, 2011. The gross loans totaled $180.1 million at March 31, 2012 and are comprised of real estate loans of $130.7 million, a decrease of $2.5 million, or 1.9%, from December 31, 2011 and commercial loans of $49.4 million, a decrease of $1.7 million, or 3.3%, from December 31, 2011. At March 31, 2012, deposits totaled $179.2 million, a decrease of $2.3 million, or 1.1%, from December 31, 2011. Deposits at March 31, 2012 are comprised of certificates of deposit of $113.6 million, NOW and Money Market accounts of $7.8 million, savings accounts of $28.7 million and noninterest bearing deposits of $29.1 million.
Loan Portfolio. The loan portfolio is the largest component of earning assets and accounts for the greatest portion of total interest income. At March 31, 2012, net loans were $176.7 million, a 2.5% decrease from the $181.3 million in loans outstanding at December 31, 2011. Generally, loans are internally generated but the Company does periodically purchase loan participations from other local community banks. Lending activity is generally confined to the Companys immediate market areas. The Company is continuing its efforts to attract quality credits with no dilution of credit underwriting standards. The decline in loans during the first quarter of 2012 reflects normal seasonal loan pay-downs as well the current economic conditions which has reduced the number of loan requests as well as the number of applicants that meet the Companys underwriting standards.
The composition of loans has not changed during the first quarter of 2012 with real estate loans comprising approximately 72% of the total loans at March 31, 2012, March 31, 2011 and December 31, 2011. The majority of these loans are secured by real property that is occupied by the borrowers businesses. The Company has approximately $1.3 million of acquisition and construction loans secured by residential building lots. The Company does not engage in foreign lending activities. Loans secured by residential real estate are loans to investors for commercial purposes. The Bank does not lend funds to consumers. The following table presents the composition of the loan portfolio by type of loan at the dates indicated.
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Loans receivable, net is comprised of the following:
March 31, 2012 | March 31, 2011 | December 31, 2011 | ||||||||||||||||||||||
Percentage | Percentage | Percentage | ||||||||||||||||||||||
(In thousands) | Balance | of Loans | Balance | of Loans | Balance | of Loans | ||||||||||||||||||
Commercial and Industrial loans |
$ | 40,746 | 22.6 | % | $ | 45,956 | 24.5 | % | $ | 43,051 | 23.3 | % | ||||||||||||
SBA loans |
8,644 | 4.8 | % | 7,071 | 3.8 | % | 8,049 | 4.4 | % | |||||||||||||||
Real estate loans: |
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Owner occupied |
77,669 | 43.1 | % | 85,296 | 45.4 | % | 77,288 | 41.9 | % | |||||||||||||||
Non owner occupied |
53,144 | 29.5 | % | 49,449 | 26.3 | % | 55,999 | 30.4 | % | |||||||||||||||
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Total real estate loans |
130,813 | 72.6 | % | 134,745 | 71.7 | % | 133,287 | 72.3 | % | |||||||||||||||
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180,203 | 100.0 | % | 187,772 | 100.0 | % | 184,387 | 100.0 | % | ||||||||||||||||
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Unearned loan fees, net |
(82 | ) | (111 | ) | (89 | ) | ||||||||||||||||||
Allowance for loan losses |
(3,457 | ) | (3,589 | ) | (3,033 | ) | ||||||||||||||||||
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$ | 176,664 | $ | 184,072 | $ | 181,265 | |||||||||||||||||||
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Real estate loans are secured by residential and commercial properties as follows:
(In thousands) | March 31, 2012 | March 31, 2011 | December 31, 2011 | |||||||||
Real estate loans secured by: |
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Residential real estate |
$ | 26,131 | $ | 24,908 | $ | 26,520 | ||||||
Commercial real estate |
104,682 | 109,837 | 106,767 | |||||||||
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Total real estate loans |
$ | 130,813 | $ | 134,745 | $ | 133,287 | ||||||
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None of the loans secured by residential real estate are owner occupied properties.
The following table shows the interest rate sensitivity of the loan portfolio at March 31, 2012. Demand loans, loans without a stated maturity and overdrafts are reported as re-pricing in one year or less. Floating rate loans are reported to reflect the period until re-pricing.
Loan Re-pricing as of March 31, 2012 | ||||||||||||||||
In thousands | 1 year or less |
1-5 years | After 5 years |
Total | ||||||||||||
Loans with: |
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Fixed interest rates |
$ | 13,361 | $ | 33,882 | $ | 1,020 | $ | 48,263 | ||||||||
Floating and adjustable interest rates |
71,523 | 60,417 | | 131,940 | ||||||||||||
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Total loans receivable |
$ | 84,884 | $ | 94,299 | $ | 1,020 | $ | 180,203 | ||||||||
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Table of Contents
Allowance for loan losses. The adequacy of the allowance for loan losses is evaluated based upon loan categories except for loans rated substandard, doubtful or loss, which are evaluated separately and assigned loss amounts based upon the evaluation. Loss ratios are applied to each category of loan to determine estimated loss amounts. Categories of loans are identified as commercial, SBA and mortgage loans. Loss ratios are determined based upon historical losses incurred adjusted for the effect of current economic conditions, any industry concentration or identified weakness in an industry, credit management and underwriting policy changes and secured versus unsecured nature of the loan category. At March 31, 2012, the range of the loss ratios used to determine estimated losses by loan category were: commercial loans 1.4%; SBA loans (unguaranteed portion) 5.0% and real estate loans- 0.3% to 0.5%. These loss ratios are approximately the same as those ratios applied at December 31, 2011. Additional losses are estimated resulting from additional identified risks factors, such as loans with underwriting exceptions, the level and direction of payment delinquencies and the level of large loans. Not all of these additional loss estimates are allocated to the separate loan categories.
The Company monitors its loan portfolio for indications of weaknesses through the review of borrowers financial condition, cash flows, loan payment delinquencies, economic factors occurring in borrowers business sectors and other information which may come to the Company through its contacts in the market place. The determination of the effect of the weaknesses noted on the repayment of the loans is an ongoing process as to each borrower. The Company may set aside specific loss reserves during this process in amounts determined on subjective bases until such time as the collectability of the loan from the borrowers primary repayment source(s) is in doubt. During this time, secondary and tertiary repayment sources, including liquidation of collateral, are evaluated which may result in additional specific loss reserves being established. Independent or internal appraisals and evaluations are performed to determine potential recovery amounts, or range of amounts, from the loan collateral and other payment sources. Collateral values are subject to change depending on market factors, collateral condition and method and timing of liquidation efforts. Loans, or portions of loans, for which the Company does not expect to obtain repayment are charged-off. In most cases, the Company has established specific reserves for the amount of the loans loss prior to the point of charge-off.
The adequacy of the allowance for loan losses is also reviewed at least quarterly using risk ratings applied to the loans based upon rating criteria consistent with regulatory definitions. The risk rating is adjusted, as necessary, if loans become delinquent, if significant adverse information is discovered regarding the underlying credit and, in the case of commercial loans and commercial real estate loans, the normal periodic review of the underlying credit indicates that a change in risk rating is appropriate. An estimated low and high loss percentage is applied to loans in each risk rating. These loss percentages increase as the loan risk rating increases. Loans rated as substandard, doubtful or loss are evaluated separately and assigned loss amounts based upon the separate evaluation. Risks factors identified beyond individual loan risks, such as economic conditions, underwriting exceptions and loan concentrations are quantified based upon managements estimations of loss exposure. Loss percentages used are generally based upon managements best estimates considering losses incurred. Estimated low and high allowance for loan loss amounts are derived by accumulating the estimated losses using the low and high loss percentages for each risk rating and adding losses based upon separate loan evaluations and identified other risks. The actual allowance for loan losses is compared to this range to ascertain that it is reasonably situated within the range. In addition, on at least a quarterly basis, the recorded allowance for loan losses (as a percent of loans) is compared to peer group levels to ascertain the reasonableness of the estimate. At March 31, 2012, the actual allowance for loan losses of 1.92% was between the high allowance amount of 1.96% and the low range percent of 1.69%.
The allowance for loan losses represents 1.92% and 1.65% of loans receivable at March 31, 2012 and December 31, 2011, respectively. The increase in the allowance for loan losses as a percent of loans at March 31, 2012 as compared to December 31, 2011 resulted from increased specific reserves on loans. There was no change in the methodology of determining the allowance for loan losses at March 31, 2012 as compared to December 31, 2011 apart from changes to loss factors based on managements perception of economic environmental factors and trends. Management believes that the allowance for loan losses is adequate for each period presented.
18
Table of Contents
The activity in the allowance for loan losses is shown in the following table.
Three Months Ended |
||||||||||||||||||||||||
March 31, | Year Ended December 31, | |||||||||||||||||||||||
(In thousands) | 2012 | 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||
Allowance for loan losses: |
||||||||||||||||||||||||
Beginning balance |
$ | 3,033 | $ | 3,174 | $ | 2,380 | $ | 1,860 | $ | 1,665 | $ | 1,614 | ||||||||||||
Charge-offsCommercial and Industrial loans |
(185 | ) | (1,043 | ) | (1,140 | ) | (500 | ) | (179 | ) | (72 | ) | ||||||||||||
Charge-offsSBA loans |
| (284 | ) | (447 | ) | (463 | ) | (318 | ) | | ||||||||||||||
Real estate loans: |
||||||||||||||||||||||||
Charge-offsOwner occupied |
| (765 | ) | | (138 | ) | | | ||||||||||||||||
Charge-offsNon owner occupied |
| (720 | ) | (386 | ) | | | | ||||||||||||||||
RecoveriesCommercial and Industrial loans |
1 | 101 | 26 | | 45 | 78 | ||||||||||||||||||
RecoveriesSBA loans |
32 | 35 | 25 | 5 | | | ||||||||||||||||||
RecoveriesNon owner occupied real estate loans |
1 | 2 | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net recoveries (charge-offs) |
(151 | ) | (2,674 | ) | (1,922 | ) | (1,096 | ) | (452 | ) | 6 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Provision for loan losses |
575 | 2,533 | 2,716 | 1,616 | 647 | 45 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Ending balance |
$ | 3,457 | $ | 3,033 | $ | 3,174 | $ | 2,380 | $ | 1,860 | $ | 1,665 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net recoveries (charge-offs) to average loans |
(0.08 | %) | (1.46 | %) | (1.04 | %) | (0.65 | %) | (0.33 | %) | 0.00 | %) |
During 2012, loans to three borrowers and related entities totaling $185 thousand were determined to be uncollectible and were charged-off.
The activity in the allowance for loan losses by category during the three months ended March 31, 2012 is shown in the following table.
Real Estate Loans | ||||||||||||||||||||||||
In thousands | Commercial and Industrial |
SBA Loans |
Owner Occupied |
Non- Owner Occupied |
Unallocated | Total | ||||||||||||||||||
Balance at December 31, 2011 |
$ | 921 | $ | 458 | $ | 535 | $ | 969 | $ | 150 | $ | 3,033 | ||||||||||||
Less loan charge offs |
185 | | | | | 185 | ||||||||||||||||||
Loss recoveries |
1 | 32 | | 1 | | 34 | ||||||||||||||||||
Provision for loan losses |
486 | (26 | ) | 72 | 43 | | 575 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at March 31, 2012 |
$ | 1,223 | $ | 464 | $ | 607 | $ | 1,013 | $ | 150 | $ | 3,457 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Allowance for loans individually evaluated for impairment |
$ | 678 | $ | 157 | $ | 201 | $ | 867 | $ | | $ | 1,903 | ||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|||||||||||||
Amount of loans individually evaluated for impairment |
$ | 1,480 | $ | 360 | $ | 4,133 | $ | 4,171 | $ | | $ | 9,480 | ||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
The activity in the allowance for loan losses by category during the three months ended March 31, 2011 is shown in the following table.
19
Table of Contents
Real Estate Loans | ||||||||||||||||||||||||
In thousands | Commercial and Industrial |
SBA Loans |
Owner Occupied |
Non-Owner Occupied |
Unallocated | Total | ||||||||||||||||||
Balance at December 31, 2010 |
$ | 1,023 | $ | 627 | $ | 682 | $ | 715 | $ | 127 | $ | 3,174 | ||||||||||||
Less loan charge offs |
85 | 143 | 47 | | | 275 | ||||||||||||||||||
Loss recoveries |
6 | 3 | | | | 9 | ||||||||||||||||||
Provision for loan losses |
367 | 11 | 229 | 63 | 11 | 681 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at March 31, 2011 |
$ | 1,311 | $ | 498 | $ | 864 | $ | 778 | $ | 138 | $ | 3,589 | ||||||||||||
|
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|
|
|
|
|
|
|
|
|
|||||||||||||
Allowance for loans individually evaluated for impairment |
$ | 822 | $ | 119 | $ | 646 | $ | 426 | $ | | $ | 2,013 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Amount of loans individually evaluated for impairment |
$ | 1,445 | $ | 319 | $ | 8,673 | $ | 3,234 | $ | | $ | 13,671 | ||||||||||||
|
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|
|
|
|
|
|
|
|
|
Additionally, the Company has established a reserve for unfunded commitments that is recorded by a provision charged to other expenses. At March 31, 2012 the balance of this reserve was $60 thousand. The reserve, based on evaluations of the collectability of loans, is an amount that management believes will be adequate over time to absorb possible losses on unfunded commitments (off-balance sheet financial instruments) that may become uncollectible in the future.
Asset Quality. In its lending activities, the Company seeks to develop sound loans with customers who will grow with the Company. There has not been an effort to rapidly build the portfolio and earnings at the sacrifice of asset quality. At the same time, the extension of credit inevitably carries some risk of non-payment.
Below is a summary of the Companys impaired loans at March 31, 2012 and December 31, 2011:
Recorded Investment | Related Allowance for Losses | |||||||||||||||
March 31, | December 31, | March 31, | December 31, | |||||||||||||
In thousands | 2012 | 2011 | 2012 | 2011 | ||||||||||||
LOANS WITH SPECIFIC RESERVES: |
||||||||||||||||
Non-accrual loans: |
||||||||||||||||
Commercial and Industrial loans |
$ | 1,284 | $ | 895 | $ | 600 | $ | 247 | ||||||||
SBA loans |
319 | 103 | 157 | 103 | ||||||||||||
Real EstateOwner Occupied |
396 | 404 | 201 | 206 | ||||||||||||
Real EstateNon Owner Occupied |
1,216 | 1,266 | 589 | 588 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Non-accrual loans |
3,215 | 2,668 | 1,547 | 1,144 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
TDR** loans: |
||||||||||||||||
Real EstateNon Owner Occupied |
1,722 | 1,733 | 278 | 191 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total TDR loans |
1,722 | 1,733 | 278 | 191 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Number of loans |
7 | 7 | ||||||||||||||
Other Impaired loans: |
||||||||||||||||
Commercial and Industrial loans |
103 | 80 | 78 | 80 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Other Impaired loans |
103 | 80 | 78 | 80 | ||||||||||||
|
|
|
|
|
|
|
|
20
Table of Contents
Recorded Investment | Related Allowance for Losses | |||||||||||||||
March 31, | December 31, | March 31, | December 31, | |||||||||||||
In thousands | 2012 | 2011 | 2012 | 2011 | ||||||||||||
LOANS WITHOUT SPECIFIC RESERVES: |
||||||||||||||||
TDR** loans: |
||||||||||||||||
Commercial and Industrial loans |
| 45 | | | ||||||||||||
Real EstateOwner Occupied |
1,494 | 1,494 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total TDR loans |
1,494 | 1,539 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Number of loans |
1 | 2 | ||||||||||||||
Total Impaired Loans: |
||||||||||||||||
Commercial and Industrial loans |
1,387 | 1,020 | $ | 678 | $ | 327 | ||||||||||
SBA loans |
319 | 103 | 157 | 103 | ||||||||||||
Real EstateOwner Occupied |
1,890 | 1,898 | 201 | 206 | ||||||||||||
Real EstateNon Owner Occupied |
2,938 | 2,999 | 867 | 779 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Impaired loans |
$ | 6,534 | $ | 6,020 | $ | 1,903 | $ | 1,415 | ||||||||
|
|
|
|
|
|
|
|
** | Troubled Debt Restructured |
Below is a summary of the average recorded investment amount and recognized interest income related to the Companys impaired loans during the three month periods ended at March 31:
Average Recorded Amount For Periods Ended March 31: |
Income Recorded For Periods Ended March 31: |
|||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
LOANS WITH SPECIFIC RESERVES: |
||||||||||||||||
Non-accrual loans: |
||||||||||||||||
Commercial and Industrial loans |
$ | 1,158 | $ | 985 | $ | | $ | | ||||||||
SBA loans |
221 | 325 | | | ||||||||||||
Real EstateOwner Occupied |
400 | 3,179 | | | ||||||||||||
Real EstateNon Owner Occupied |
1,235 | 1,966 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Non-accrual loans |
3,014 | 6,455 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
TDR** loans: |
||||||||||||||||
Real EstateOwner Occupied |
| 2,051 | | 60 | ||||||||||||
Real EstateNon Owner Occupied |
1,722 | 1,777 | 13 | 19 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total TDR loans |
1,722 | 3,828 | 13 | 79 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other Impaired loans: |
||||||||||||||||
Commercial and Industrial loans |
85 | 125 | 1 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Other Impaired loans |
85 | 125 | 1 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
LOANS WITHOUT SPECIFIC RESERVES: |
||||||||||||||||
Non-accrual loans: |
||||||||||||||||
SBA loans |
| 29 | | | ||||||||||||
Real EstateOwner Occupied |
| 613 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Non-accrual loans |
| 642 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
TDR** loans: |
||||||||||||||||
Commercial and Industrial loans |
45 | 150 | | 1 | ||||||||||||
Real EstateOwner Occupied |
1,494 | | 26 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total TDR loans |
1,539 | 327 | 26 | 1 | ||||||||||||
|
|
|
|
|
|
|
|
21
Table of Contents
Total Impaired Loans:
Average Recorded Amount | Income Recorded | |||||||||||||||
For Periods Ended | For Periods Ended | |||||||||||||||
March 31: | March 31: | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Commercial and Industrial loans |
$ | 1,288 | $ | 1,260 | $ | 1 | $ | 1 | ||||||||
SBA loans |
221 | 354 | | | ||||||||||||
Real EstateOwner Occupied |
1,894 | 5,843 | 26 | 60 | ||||||||||||
Real EstateNon Owner Occupied |
2,957 | 3,743 | 13 | 19 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Impaired loans |
$ | 6,360 | $ | 11,200 | $ | 40 | $ | 80 | ||||||||
|
|
|
|
|
|
|
|
Non-accrual loan activity is summarized as follows:
Three March 31, |
Year Ended December 31, | |||||||||||||||||||||||
In thousands | 2012 | 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||
Balance at the beginning of the period |
$ | 2,668 | $ | 7,283 | $ | 2,734 | $ | 5,819 | $ | 1,125 | $ | 628 | ||||||||||||
New loans placed on non-accrual |
835 | 2,693 | 7,846 | 2,427 | 5,046 | 569 | ||||||||||||||||||
Less: |
||||||||||||||||||||||||
Loan restored to interest earning status |
| | | 1,266 | | | ||||||||||||||||||
Paid-off: sold in foreclosure |
| | | 576 | | | ||||||||||||||||||
Other real estate owned additions |
| 2,529 | 945 | 2,462 | | | ||||||||||||||||||
Charge offs |
185 | 2,812 | 1,973 | 1,101 | 236 | 72 | ||||||||||||||||||
Other including payments received |
103 | 1,967 | 379 | 107 | 116 | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance at the end of the period |
$ | 3,215 | $ | 2,668 | $ | 7,283 | $ | 2,734 | $ | 5,819 | $ | 1,125 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Non-accrual loan activity by category during the three month period ended March 31, 2012 is summarized as follows:
Commercial | Real Estate | Real Estate | ||||||||||||||||||
In thousands | Total | and Industrial |
SBA | Owner Occupied |
Non Owner Occupied |
|||||||||||||||
Balance at the beginning of the period |
$ | 2,668 | $ | 895 | $ | 103 | $ | 404 | $ | 1,266 | ||||||||||
New loans placed on non-accrual |
835 | 616 | 219 | | | |||||||||||||||
Less: |
||||||||||||||||||||
Charge offs |
185 | 185 | | | | |||||||||||||||
Other including payments received |
103 | 42 | 3 | 8 | 50 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at the end of the period |
$ | 3,215 | $ | 1,284 | $ | 319 | $ | 396 | $ | 1,216 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Non-accrual loan activity by category during the three month period ended March 31, 2011 is summarized as follows:
Commercial | Real Estate | Real Estate | ||||||||||||||||||
In thousands | Total | and Industrial |
SBA | Owner Occupied |
Non Owner Occupied |
|||||||||||||||
Balance at the beginning of the period |
$ | 7,283 | $ | 963 | $ | 388 | $ | 3,956 | $ | 1,976 | ||||||||||
New loans placed on non-accrual |
753 | 404 | 70 | 279 | | |||||||||||||||
Less: |
||||||||||||||||||||
Charge offs |
275 | 85 | 143 | 47 | | |||||||||||||||
Other including payments received |
618 | 96 | 40 | 441 | 41 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at the end of the period |
$ | 7,143 | $ | 1,186 | $ | 275 | $ | 3,747 | $ | 1,935 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Non-accrual loans with specific reserves at March 31, 2012 are comprised of:
22
Table of Contents
Commercial loanseight loans to six borrowers totaling $1.3 million with $0.6 million of specific reserves established.
SBA loansseven loans to five borrowers totaling $319 thousand with $157 thousand of specific reserves established.
Owner-occupied Real Estate loanstwo loans secured by commercial property in the amount of $396 thousand with specific reserves established for these loans in the amount of $201 thousand.
Non-owner Occupied Real Estate loansthree loans, secured by the residential and commercial property, in the amount of $1.2 million with specific reserves of $589 thousand established for the loans. The borrowers of two of the above loans are controlled by the same individual.
All of these loans are in various stages of collection.
At March 31, 2012, the Company has eight loans totaling $3.2 million which have been modified in a manner qualifying the loans as Troubled Debt Restructuring (TDR). These loans are included in the schedule above of accruing impaired loans. These borrowers are in compliance with the modified terms and are accruing interest. Changes made to the loans included the reduction of loan payments from principal and interest payments to interest only payments for specific time periods, the decrease in interest rates charged on a loan and the extension of the maturity of a loan. Specific reserves were established on the loans as appropriate. The majority of these loans were modified in the third quarter of 2010 as the adverse economic conditions hampered borrowers current cash flows.
Accruing TDR loan activity for the three months ended March 31, 2012 is shown in the following table.
Real Estate Loans | ||||||||||||||||||||
In thousands | Commercial and Industrial |
SBA Loans | Owner Occupied |
Non Owner Occupied |
Total | |||||||||||||||
Balance at December 31, 2011 |
$ | 45 | $ | | $ | 1,494 | $ | 1,733 | $ | 3,272 | ||||||||||
New TDR loans |
| | | | | |||||||||||||||
Principal payments received |
| | | (11 | ) | (11 | ) | |||||||||||||
Loans moved to non-accrual* |
(45 | ) | | | | (45 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance at March 31, 2012 |
$ | | $ | | $ | 1,494 | $ | 1,722 | $ | 3,216 | ||||||||||
|
|
|
|
|
|
|
|
|
|
* | Accrued income reversed upon move to non-accrual |
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 | |||||||||||||||
March 31, | December 31, | March 31, | December 31, | |||||||||||||
In thousands | 2012 | 2011 | 2012 | 2011 | ||||||||||||
TDRs with specific reserves: |
||||||||||||||||
Commercial and Industrial loans |
$ | | $ | | $ | | $ | | ||||||||
SBA loans |
| | | | ||||||||||||
Real EstateOwner Occupied: |
102 | 103 | 102 | 103 | ||||||||||||
Real EstateNon Owner Occupied: |
692 | 742 | 266 | 266 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total non-accruing loans |
$ | 794 | $ | 845 | $ | 368 | $ | 369 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Number of loans |
3 | 3 |
At March 31, 2012, there were $3.6 million of performing loans considered potential problem loans, defined as loans which are not included in the 90 day past due, not reported as troubled debt restructures or as nonaccrual loans, but for which known information about possible credit problems causes the Company to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms which may in the future result in disclosure in the past due, nonaccrual or restructured loans. The Company closely monitors the financial status of these borrowers.
23
Table of Contents
Generally, the accrual of interest is discontinued when a loan is specifically determined to be impaired or when principal or interest is delinquent for ninety days or more. Interest may accrue on TDRs if the borrowers are consistently in compliance with the modified loan terms.
The following table shows the amounts of non-performing assets on the dates indicated:
March 31, | December 31: | |||||||||||||||||||||||
In thousands | 2012 | 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||||
Nonaccrual loans: |
||||||||||||||||||||||||
Commercial and Industrial |
$ | 1,284 | $ | 895 | $ | 963 | $ | 2,280 | $ | 1,676 | $ | 868 | ||||||||||||
SBA |
319 | 103 | 388 | 454 | 542 | 257 | ||||||||||||||||||
Real estateowner occupied |
396 | 404 | 3,956 | | 3,601 | | ||||||||||||||||||
Real estatenon owner occupied |
1,216 | 1,266 | 1,976 | | | | ||||||||||||||||||
Accrual loanspast due 90 days and over |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total non-performing loans |
3,215 | 2,668 | 7,283 | 2,734 | 5,819 | 1,125 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Other real estate owned |
4,232 | 4,232 | 3,324 | 2,462 | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total non-performing assets |
$ | 7,447 | $ | 6,900 | $ | 10,607 | $ | 5,196 | $ | 5,819 | $ | 1,125 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Accruing Troubled Debt Restructured loans |
$ | 3,216 | $ | 3,272 | $ | 3,985 | $ | 1,263 | | | ||||||||||||||
Allowance for loan losses to total non-performing loans |
107.5 | % | 113.7 | % | 43.6 | % | 87.1 | % | 32.0 | % | 148.0 | % | ||||||||||||
Non-performing loans to total loans |
1.78 | % | 1.45 | % | 3.94 | % | 1.47 | % | 3.80 | % | 0.89 | % | ||||||||||||
Non-performing assets to total assets |
3.63 | % | 3.33 | % | 5.22 | % | 2.59 | % | 3.49 | % | 0.76 | % |
The payment status of loans receivable at March 31, 2012 is as follows:
Commercial | Real Estate | Real Estate | ||||||||||||||||||
In thousands | Total | and Industrial |
SBA | Owner Occupied |
Non Owner Occupied |
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Current accruing loans |
$ | 173,857 | $ | 38,087 | $ | 7,799 | $ | 76,214 | $ | 51,757 | ||||||||||
Past due loans: |
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30 to 89 days past due |
3,131 | 1,375 | 526 | 1,059 | 171 | |||||||||||||||
90 days plus past due and accruing |
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Non-accrual loans, non current |
3,215 | 1,284 | 319 | 396 | 1,216 | |||||||||||||||
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Total past due loans |
6,346 | 2,503 | 845 | 1,455 | 1,387 | |||||||||||||||
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Total loans at the end of the period |
$ | 180,203 | $ | 40,746 | $ | 8,644 | $ | 77,669 | $ | 53,144 | ||||||||||
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The Company applies risk ratings to the loans based upon rating criteria consistent with regulatory definitions. The risk ratings are adjusted, as necessary, if loans become delinquent, if significant adverse information is discovered regarding the underlying credit and the normal periodic reviews of the underlying credits indicate that a change in risk rating is appropriate. A summary of the risk rating of loans receivable at March 31, 2012 follows:
Commercial | Real Estate | Real Estate | ||||||||||||||||||
In thousands | Total | and Industrial |
SBA | Owner Occupied |
Non Owner Occupied |
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Risk ratedpass |
$ | 170,723 | $ | 39,266 | $ | 8,284 | $ | 73,536 | $ | 49,637 | ||||||||||
Risk ratedspecial mention (loan weaknesses noted which could lead to loan loss) |
4,668 | 93 | 41 | 2,243 | 2,291 | |||||||||||||||
Risk ratedsubstandard or doubtful (loans with significant weaknesses that could, or has, result in loan losses) |
4,812 | 1,387 | 319 | 1,890 | 1,216 | |||||||||||||||
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Total loans at the end of the period |
$ | 180,203 | $ | 40,746 | $ | 8,644 | $ | 77,669 | $ | 53,144 | ||||||||||
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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.
There was no activity regarding Other Real Estate owned (ORE) for the three months ended March 31, 2012.
In thousands | Total | Commercial Property |
Residential Property |
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Balance March 31, 2012 |
$ | 4,232 | $ | 3,020 | $ | 1,212 | ||||||
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Number of properties |
5 | 3 | 2 | |||||||||
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Investment Portfolio. At March 31, 2012, December 31, 2011 and March 31, 2011, the Company had no investments in securities other than investments in Federal Reserve Bank stock as required by regulation and stock in two bankers banks, which are restricted stocks The Company is maintaining its liquid assets in its account at the Federal Reserve and fully FDIC insured certificates of deposits in other financial institutions for safety and liquidity purposes. The Company will make additional investments when interest rates have increased and the Company has sufficient excess liquidity. The following table provides information regarding the composition of the Companys investment securities portfolio at the dates indicated.
Investment in Stocks | ||||||||||||||||
March 31, 2012 | December 31, 2011 | |||||||||||||||
In thousands | Amount | Percent | Amount | Percent | ||||||||||||
Investments in stocks, at cost; |
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Federal Reserve Stock |
$ | 465 | 91.36 | % | $ | 465 | 91.36 | % | ||||||||
Corporate equities |
44 | 8.64 | % | 44 | 8.64 | % | ||||||||||
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Total stocks |
$ | 509 | 100.00 | % | $ | 509 | 100.00 | % | ||||||||
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As there is no readily determinable fair value for these securities, they are carried at cost less any other-than-temporary-value-impairment (OTTI).
Deposits and Liquidity. The Company currently has no business other than that of the Bank and does not currently have any material funding commitments unrelated to that business. The Banks principal sources of funds for loans, investments and general operations are deposits from its primary market area and the national CD market, principal and interest payments on loans, and proceeds from maturing investment securities. Its principal funding commitments are for the origination or purchase of loans, 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 comprised of cash on hand and amounts due from other financial institutions including the Federal Reserve. 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 March 31, 2012 and at December 31, 2011 and 23.1.2% at March 31, 2011, are comprised of certificate of deposit accounts of $100 thousand or more. Total certificates of deposit represent 63.4% of deposits at March 31, 2012 and 62.7% of deposits at December 31, 2011 and 68.2% of deposits at March 31, 2011.
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The Companys reliance on certificates of deposit, including the use of larger denomination certificates of deposit and brokered deposits, facilitates funding the growth in the loan portfolio. The Company has relied on certificates of deposit as a primary funding source and has used larger certificates of deposits as a funding source since its inception. While sometimes requiring higher interest rates, such funds carry lower acquisition costs (marketing, overhead costs) and can be obtained when required at the maturity dates desired. Substantially all of the deposit accounts over $100 thousand are fully insured by the FDIC through differing ownership and trustee arrangements and the insured deposit limit of $250 thousand. All of the brokered deposits and national market deposits are fully insured by the FDIC. This insurance and the strong capital position of the Company reduce the likelihood of large deposit withdrawals for reasons other than interest rate competition. Interest rates on these deposits can be, but are not always, higher than other deposits products. There is, however, a risk that some deposits would be lost if rates were to increase and the Company elected not to remain competitive with its own deposit rates. Under those conditions, the Company believes that it is positioned to use other sources of funds, such as borrowing on its unsecured credit facilities with other banks or the sale of loans.
At March 31, 2012, deposits totaled $179.2 million as compared to $182.6 million at December 31, 2011. The $3.4 million decrease in deposits resulted from the $2.4 million decrease in noninterest bearing deposits, the decrease of $0.9 million in the amount of certificates of deposit and the $0.1 million decrease in other deposits. There were $34.9 million and $35.2 million of brokered certificates of deposit at March 31, 2012 and December 31, 2011, respectively. Included in these brokered deposits at March 31, 2012 are $8.1 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 $11.5 million at March 31, 2012.
As a result of the enactment of the Dodd-Frank Act, banks are no longer prohibited from paying interest on demand deposit accounts, including those from businesses, effective in July 2011. If the Company starts to pay interest on these accounts, its net interest margin would decline. It is not clear what affect the elimination of this prohibition will have on the Banks interest expense, allocation of deposits, deposit pricing, loan pricing, net interest margin, ability to compete, ability to establish and maintain customer relationships, or profitability.
Deposits are summarized below as of dates indicated:
March 31, | % | December 31: | ||||||||||||||||||
In thousands | 2012 | Change | 2011 | 2010 | 2009 | |||||||||||||||
Non-interest bearing deposits |
$ | 29,145 | (7.7 | %) | $ | 31,586 | $ | 23,760 | $ | 21,024 | ||||||||||
Interest bearing deposits: |
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NOW accounts |
389 | (5.4 | %) | 411 | 1,279 | $ | 309 | |||||||||||||
Money Market accounts |
7,413 | 0.9 | % | 7,350 | 8,824 | 7,841 | ||||||||||||||
Savings accounts |
28,690 | (0.1 | %) | 28,714 | 22,962 | 10,379 | ||||||||||||||
Certificates of deposit accounts: |
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Less than $100,000 |
78,654 | (0.4 | %) | 78,965 | 79,209 | 71,593 | ||||||||||||||
$100,000 or more |
34,947 | (1.8 | %) | 35,582 | 44,076 | 67,499 | ||||||||||||||
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Total interest bearing deposits |
150,093 | (0.6 | %) | 151,022 | 156,350 | 157,621 | ||||||||||||||
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Total deposits |
$ | 179,238 | (1.9 | %) | $ | 182,608 | $ | 180,110 | $ | 178,645 | ||||||||||
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The table below shows the maturities of certificates of deposit:
March 31, 2012 | December 31, 2011 | |||||||||||||||
In thousands | CDs of $100,000 or more |
All CDs | CDs of $100,000 or more |
All CDs | ||||||||||||
Three months or less |
$ | 12,387 | $ | 27,638 | $ | 4,543 | $ | 19,164 | ||||||||
Over three months to six months |
6,198 | 20,276 | 10,580 | 22,960 | ||||||||||||
Over six months to twelve months |
7,855 | 28,882 | 9,372 | 29,623 | ||||||||||||
Over twelve months through three years |
8,255 | 32,169 | 10,945 | 38,165 | ||||||||||||
Over three years |
252 | 4,636 | 142 | 4,635 | ||||||||||||
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Total |
$ | 34,947 | $ | 113,601 | $ | 35,582 | $ | 114,547 | ||||||||
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The table below shows the source of the Companys certificate of deposits as well as the amount equal to or greater than $100,000 at March 31, 2012:
In thousands | CDs with balances of less than $100,000 |
CDs with balances of $100,000 or greater |
Total | |||||||||
Source |
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Local markets |
$ | 5,253 | $ | 19,501 | $ | 24,754 | ||||||
National market |
53,949 | | 53,949 | |||||||||
CDARS program: |
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Customers funds |
231 | 7,802 | 8,033 | |||||||||
Proprietary funding |
1,700 | 7,644 | 9,344 | |||||||||
Other brokered funds |
17,521 | | 17,521 | |||||||||
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Total |
$ | 78,654 | $ | 34,947 | $ | 113,601 | ||||||
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CDARS program funding is reflected in the above schedule as Customers funds and Proprietary funding. The Company, acting as agent for its customers, places customer funds in other financial institutions under the program up to the FDIC insurance limit of $250,000. Under the CDARS program, other financial institutions place deposits in the Company for the same amount of the customers funds. Customers funds are comprised of deposits from these customer transactions. The Company can obtain funding under the CDARS program by bidding for deposit funds without customers involvement. This Proprietary funding results in traditional brokered deposits.
The Companys short term liquid assets of cash and cash equivalents were $20.2 million, or 9.9% of assets, and $17.8 million, or 8.6%, of assets at March 31, 2012 and December 31, 2011, respectively. Growth in deposits will be required to fund any loan growth. Accordingly, the Company intends to maintain a competitive posture in its deposit interest rate offerings. While adequate liquidity is imperative, excess liquidity has the effect of a lower interest margin, as funds not invested in loans are placed in short-term investments that earn significantly lower yields.
The Company has available unsecured credit facilities for short-term liquidity needs from financial institutions of $8.5 million at March 31, 2012 and December 31, 2011. There were no borrowings outstanding under these credit arrangements at during 2012 or 2011.
The Company believes its levels of liquidity are adequate to conduct the business of the Company and Bank.
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OFF-BALANCE SHEET ARRANGEMENTS
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds collateral supporting those commitments for which collateral is deemed necessary. The Company has not been required to perform on any financial guarantees and has not recorded or incurred any losses on its commitments. The issuance of letters of credit is not a significant activity of the Company. Outstanding letters of credit at March 31, 2012 and December 31, 2011 totaled $1.1 million.
Commitments to extend credit are agreements to lend funds to customers as long as there are no violations of any condition established in the loan contracts. These commitments include commitments to lend funds as well as un-advanced loan funds. These commitments at March 31, 2012 totaled $36.7 million and $34.6 million at December 31, 2011. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.
With the exception of these off-balance sheet arrangements, the Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Companys financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, that is material to investors.
CAPITAL ADEQUACY
The Federal Reserve Board and the FDIC have established guidelines with respect to the maintenance of appropriate levels of capital by bank holding companies and state non-member banks, respectively. The regulations impose two sets of capital adequacy requirements: minimum leverage rules, which require bank holding companies and banks to maintain a specified minimum ratio of capital to total assets, and risk-based capital rules, which require the maintenance of specified minimum ratios of capital to risk-weighted assets. At March 31, 2012, the Company and the Bank were in full compliance with these guidelines, as follows:
Minimum Ratios | ||||||||||||||||
March 31, 2012 |
December 31, 2011 |
To be Adequately Capitalized |
To be Well Capitalized |
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Total capital: |
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Company |
14.6 | % | 14.0 | % | 8.0 | % | N/A | |||||||||
Bank |
14.0 | % | 13.3 | % | 8.0 | % | 10.0 | % | ||||||||
Tier I: |
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Company |
13.3 | % | 12.7 | % | 4.0 | % | N/A | |||||||||
Bank |
12.7 | % | 12.1 | % | 4.0 | % | 6.0 | % | ||||||||
Leverage Total: |
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Company |
12.0 | % | 11.5 | % | 4.0 | % | N/A | |||||||||
Bank |
11.4 | % | 10.9 | % | 4.0 | % | 5.0 | % |
The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, and changing competitive conditions and economic forces. The adequacy of the Companys capital is reviewed by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses. The ability of the Company to grow is dependent on the availability of capital with which to meet regulatory capital requirements, discussed below. To the extent the Company is successful it may need to acquire additional capital through the sale of additional common stock, other qualifying equity instruments, such as preferred stock (which the Company is not currently authorized to issue), or subordinated debt. There can be no assurance that additional capital will be available to the Company on a timely basis or on attractive terms.
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Under guidance by the federal banking regulators, banks which have concentrations in construction, land development or commercial real estate loans (other than loans for majority owner occupied properties) would be expected to maintain higher levels of risk management and, potentially, higher levels of capital. It is possible that the Company may be required to maintain higher levels of capital than it would otherwise be expected to maintain as a result of its levels of construction, development and commercial real estate loans, which may require us to obtain additional capital.
Significant future 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 3QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
ITEM 4CONTROLS AND PROCEDURES
The Companys management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated, as of the last day of the period covered by this report, the effectiveness of the design and operation of the Companys disclosure controls and procedures, as defined in Rule 13a-15 under the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective. There were no changes in the Companys internal control over financial reporting (as defined in Rule 13a-15 under the Securities Act of 1934) during the quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.
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.
Not applicable
Item 2Unregistered Sale of Equity Securities and Use of Proceeds
(a) | Sales of Unregistered Securities. None |
(b) | Use of Proceeds. Not applicable. |
(c) | Issuer Purchases of Securities. None |
Item 3. Defaults Upon Senior Securities. None
Item 4Mine Safety Disclosures
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(a) | Information Required to be Reported on Form 8-K. None |
(b) | Changes in Security Holder Nomination Procedures. None |
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) | |
3(a) | Certificate of Incorporation of the Company, as amended (2) | |
3(b) | Bylaws of the Company (3) | |
10(a) | Employment Agreement between Richard J. Morgan and the Company (4) | |
10(b) | Employment Agreement between Michael T. Storm and CommerceFirst Bank (5) | |
10(c) | Extension of Employment Agreement between Richard J. Morgan and the Company (6) | |
11 | Statement regarding Computation of Per Share Income See Notes to Financial Statements. | |
21 | Subsidiaries of the Registrant -The sole subsidiary of the Registrant is CommerceFirst Bank, a Maryland chartered commercial bank. | |
31(a) | Certification of Richard J. Morgan, President and CEO | |
31(b) | Certification of Michael T. Storm, Executive Vice President and Chief Financial Officer | |
32(a) | Certification of Richard J. Morgan, President and Chief Executive Officer | |
32(b) | Certification of Michael T. Storm, Executive Vice President and Chief Financial Officer | |
101 | Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Financial Position at March 31, 2012 and December 31, 2011, (ii) the Consolidated Statements of Income for the three month periods ended March 31, 2012 and 2011 (iii) the Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011 and (iv) the Notes to the Consolidated Financial Statements |
(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 exhibits 10(c) to the Companys to Registration Statement on Form SB-2, as amended) (File No. 333-91817) |
(5) | Incorporated by reference to Exhibit 10(e) to the Companys Quarterly Report on Form 10-QSB for the period ended September 30, 2007. |
(6) | Incorporated by reference to Exhibit 99 to the Companys Current Report on Form 8-K filed on January 30, 2009. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
COMMERCEFIRST BANCORP, INC. | ||||||
Date: May 1, 2012 | By: | /s/ Richard J. Morgan | ||||
Richard J. Morgan, President and Chief Executive Officer | ||||||
Date: May 1, 2012 | By: | /s/ Michael T. Storm | ||||
Michael T. Storm, Executive Vice President and Chief Financial Officer |
31