UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~JUNE~~SEPTEMBER 30, 2011


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-51104

CommerceFirst Bancorp, Inc.

(Exact Name of Registrant as Specified in its Charter)

Maryland		52-2180744
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)
(State or Other Jurisdiction		(I.R.S. Employer Identification No.)
of Incorporation or Organization)

1804 West Street, Suite 200, Annapolis, MD 21401
(Address of Principal Executive Offices)

410-280-6695

(Registrant’s Telephone Number, Including Area Code)

N/A
(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes oþ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See ~~the~~definition ~~definitions~~ of “large accelerated filer,” , “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. ~~(Check one):~~

Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ ~~(Do not check if a smaller reporting company)~~

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Securities Exchange Act). Yes o No þ

As of ~~August~~November 41, 2011 the number of outstanding shares of registrant’s common stock, par value $0.01 per share was: 1,820,548

CommerceFirst Bancorp, Inc.

FORM 10-Q

INDEX

	Page(s)
PART I — FINANCIAL INFORMATION
Item 1 — Financial Statements
Consolidated Statements of Financial Condition — June 30, 2011 (Unaudited) and December 31, 2010 (Audited)		3
Consolidated Statements of Financial Condition — September 30, 2011 (Unaudited) and December 31, 2010 (Audited)		3
FOR PERIODS ENDED JUNE 30, 2011 and 2010:
FOR PERIODS ENDED SEPTEMBER 30, 2011 and 2010:
Consolidated Statements of Operations — Six and Three months (Unaudited)		4
Consolidated Statements of Operations — Nine and Three months (Unaudited)		4
Consolidated Statements of Stockholders’ Equity — Six and three months (Unaudited)		5
Consolidated Statements of Stockholders’ Equity — Nine months (Unaudited)		5
Consolidated Statements of Cash Flows — Six months (Unaudited)		6
Consolidated Statements of Cash Flows — Nine months (Unaudited)		6
Notes to Consolidated Financial Statements		7-10
Item 2 — Management’s Discussion and Analysis		11-2930
Item 3 — Quantitative and Qualitative Disclosures About Market Risk		30
Item 4 — Controls and Procedures		30
PART II — OTHER INFORMATION
Item 1 — Legal Proceedings		30
Item 1A Risk Factors		30
Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3 — Defaults Upon Senior Securities		30
Item 4 — [Removed and Reserved]		30
Item 5 — Other Information		30
Item 6 — Exhibits		31
SIGNATURES		3231
Exhibit 31(a)
Exhibit 31(b)
Exhibit 32(a)
Exhibit 32(b)
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

CommerceFirst Bancorp, Inc. and Subsidiary

Consolidated Statements of Financial Condition ~~June 30, 2011 and December 31, 2010~~

September 30, 2011 and December 31, 2010

(Dollars in thousands except per share data)

	June 30,			December 31,
	September 30,			December 31,
	2011			2010
	(Unaudited)			(Audited)
ASSETS
Cash and due from banks	$	2,~~072~~158		$	1,437
Interest bearing deposits		2318,~~683~~059			12,289
Cash and cash equivalents		2520,~~755~~217			13,726
Investments in restricted stocks, at cost		527			527
Loans receivable		180,~~620~~748			184,883
Allowance for loan losses		(3,~~371~~038	)		(3,174	)
Net loans receivable		177,~~249~~710			181,709
Premises and equipment, net		~~464~~442			556
Accrued interest receivable		~~721~~754			750
Deferred income taxes		1,~~266~~087			1,133
Other real estate owned		32,~~332~~637			3,324
Other assets		1,~~282~~423			1,399
Total Assets	$	~~210~~204,~~596~~797		$	203,124
LIABILITIES
Non-interest bearing deposits	$	2628,~~474~~059		$	23,760
Interest bearing deposits		~~160~~152,~~164~~208			156,350
Total deposits		~~186~~180,~~638~~267			180,110
Accrued interest payable		9899			106
Other liabilities		~~594~~670			543
Total Liabilities		~~187~~181,~~330~~036			180,759
STOCKHOLDERS’ EQUITY
Common stock — $.01 par value; authorized 4,000,000 shares
Common stock — $.01 par value; authorized 4,000,000 shares. Issued and outstanding: 1,820,548 shares at September 30, 2011 and at December 31, 2010		18			18
Issued and outstanding: 1,820,548 shares at June 30, 2011 and at December 31, 2010		18			18
Additional paid-in capital		17,853			17,853
Retained earnings		5,~~395~~890			4,494
Total Stockholders’ Equity		23,~~266~~761			22,365
Total Liabilities and Stockholders’ Equity	$	~~210~~204,~~596~~797		$	203,124

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

CommerceFirst Bancorp, Inc. and Subsidiary

Consolidated Statements of Operations

For the ~~Six~~Nine and Three Months ended ~~June~~September 30, 2011 and 2010 (Unaudited)

(Dollars in thousands except per share data)

Six Months Ended

Three Months Ended

Nine Months Ended

Three Months Ended

June 30,

September 30,

2011

2010

2011

2010

Interest income:

Interest and fees on loans

69,~~075~~099

69,~~292~~471

3,~~018~~024

3,~~168~~179

Investment in stocks

1421

Interest bearing deposits

2844

2441

1516

1517

Total interest income

69,~~117~~164

69,~~330~~533

3,~~040~~047

3,~~190~~203

Interest expense:

Deposits

1,~~118~~628

12,~~747~~500

~~550~~510

~~861~~753

Total interest expense

1,~~118~~628

12,~~747~~500

~~550~~510

~~861~~753

Net interest income

47,~~999~~536

47,~~583~~033

2,~~490~~537

2,~~329~~450

Less provision for loan losses

1,~~308~~894

1,~~034~~646

~~627~~586

~~587~~612

3,691

3,549

1,863

1,742

5,642

5,387

1,951

1,838

Non-interest income:

Gain on sales of SBA loans

~~343~~366

~~370~~419

~~134~~23

~~145~~49

Gain on sales of other real estate owned

5297

—

945

—

Service charges and other income

~~290~~448

~~246~~361

~~141~~158

~~126~~115

Total non-interest income

~~685~~911

~~616~~780

~~284~~226

~~271~~164

Non-interest expenses:

Compensation and benefits

12,~~543~~328

12,~~464~~220

~~771~~785

~~743~~756

Legal and professional

~~119~~172

~~132~~188

5453

7756

Rent and occupancy

~~282~~429

~~279~~424

~~137~~147

~~140~~145

Marketing and business development

4664

4864

2818

2616

FDIC insurance

~~155~~168

~~156~~239

6613

8083

Data processing

75115

72109

3840

3637

Support services

~~108~~157

~~102~~149

6149

5547

Loan collection

89145

3749

3256

2112

Other real estate owned loss provision

125

—75

50—

—75

Communications

6799

6395

3432

Depreciation and amortization

~~102~~148

~~118~~175

5046

5957

Other

~~208~~322

~~169~~261

98114

9692

Total non-interest expenses

24,~~919~~272

24,~~640~~048

1,~~419~~353

1,~~365~~408

Income before income taxes

12,~~457~~281

12,~~525~~119

~~728~~824

~~648~~594

Income tax expense

~~556~~885

~~609~~847

~~275~~329

~~260~~238

Net income

~~901~~1,396

~~916~~1,272

~~453~~495

~~388~~356

Basic and diluted earnings per share

0.4977

0.5070

0.2527

0.2120

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

CommerceFirst Bancorp, Inc. and Subsidiary

Consolidated Statements of Stockholders’ Equity

For the ~~Six~~Nine Months Ended ~~June~~September 30, 2011 and 2010

(Dollars in thousands) ~~(Unaudited)~~

			Additional
	Common		Paid-in		Retained
	Stock		Capital		Earnings		Total
Balance December 31, 2009	$	18	$	17,853	$	3,071	$	20,942
Net income- June 30, 2010						916		916
Balance June 30, 2010	$	18	$	17,853	$	3,987	$	21,858
Balance December 31, 2010	$	18	$	17,853	$	4,494	$	22,365
Net income- June 30, 2011						901		901
Balance June 30, 2011	$	18	$	17,853	$	5,395	$	23,266

(Unaudited)


			Additional
	Common		Paid-in		Retained
	Stock		Capital		Earnings		Total
Balance December 31, 2009	$	18	$	17,853	$	3,071	$	20,942

Net income- September 30, 2010		—		—		1,272		1,272


Balance September 30, 2010	$	18	$	17,853	$	4,343	$	22,214


Balance December 31, 2010	$	18	$	17,853	$	4,494	$	22,365

Net income- September 30, 2011		—		—		1,396		1,396


Balance September 30, 2011	$	18	$	17,853	$	5,890	$	23,761

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

CommerceFirst Bancorp, Inc. and Subsidiary

Consolidated Statement of Cash Flows

For the ~~Six~~Nine Months Ended ~~June~~September 30, 2011 and 2010

(Dollars in thousands) ~~(Unaudited)~~

	June 30,			June 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	901		$	916
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		102			118
Gain on sales of SBA loans		(343	)		(370	)
Gain on sale of other real estate owned		(52	)		—
Provision for loan losses		1,308			1,034
Provision for losses on unfunded commitments		—			6
Write-downs of other real estate owned		125			—
Deferred income taxes		(133	)		269
Change in assets and liabilities:
Decrease (increase) in accrued interest receivable		29			(124	)
Decrease (increase) in other assets		117			(126	)
Decrease in accrued interest payable		(8	)		(19	)
Increase in other liabilities		51			39
Net cash provided by operating activities		2,097			1,743
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of SBA loans		4,885			5,575
Increase in loans, net		(1,390	)		(6,799	)
Proceeds from sales of other real estate owned		724			—
Increase in other real estate owned		(805	)		—
Purchase of premises and equipment		(10	)		(28	)
Net cash provided (used) by investing activities		3,404			(1,252	)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in non-interest bearing deposits, net		2,714			2,357
Net increase in other deposits		3,814			7,050
Net cash provided by financing activities		6,528			9,407
Net increase in cash and cash equivalents		12,029			9,898
Cash and cash equivalents at beginning of period		13,726			10,488
Cash and cash equivalents at end of period	$	25,755		$	20,386
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid	$	1,126		$	1,766
Income taxes paid	$	950		$	620
Transfer of loans to real estate owned	$	720		$	653

(Unaudited)


	September 30,			September 30,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	1,396		$	1,272
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		148			175
Gain on sales of SBA loans		(366	)		(419	)
Gain on sales of other real estate owned		(97	)		—
Provision for loan losses		1,894			1,646
Provision for losses on unfunded commitments		—			6
Write-downs of other real estate owned		125			75
Deferred income taxes		46			29
Change in assets and liabilities:
Increase in accrued interest receivable		(4	)		(89	)
Increase in other assets		(24	)		(64	)
Decrease in accrued interest payable		(7	)		(25	)
Increase in other liabilities		127			42

Net cash provided by operating activities		3,238			2,648


CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of SBA loans		5,132			6,635
Increase in loans, net		(3,738	)		(6,858	)
Proceeds from sales of other real estate owned		1,736			—
Purchase of premises and equipment		(34	)		(32	)

Net cash provided (used) by investing activities		3,096			(255	)


CASH FLOWS FROM FINANCING ACTIVITIES
Increase in non-interest bearing deposits, net		4,299			4,308
(Decrease) increase in other deposits, net		(4,142	)		13

Net cash provided by financing activities		157			4,321


Net increase in cash and cash equivalents		6,491			6,714
Cash and cash equivalents at beginning of period		13,726			10,488

Cash and cash equivalents at end of period	$	20,217		$	17,202


SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid	$	1,635		$	2,525

Income taxes paid	$	1,275		$	1,140

Transfer of loans to real estate owned	$	1,077		$	—

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. The Company and its Significant Accounting Policies

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

The financial data at December 31, 2010 are derived from audited consolidated financial statements that are included in the Company’s Annual Report for the year ended December 31, 2010. The financial data at ~~June~~September 30, 2011 and 2010 are derived from unaudited consolidated financial statements. Interim results are not necessarily indicative of results for the full year.

The consolidated financial statements include the accounts of CommerceFirst Bancorp, Inc. (the “Company”) and its subsidiary, CommerceFirst Bank (the “Bank”). Inter-company balances and transactions have been eliminated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and cash equivalents in the statement of cash flows include cash on hand, non-interest bearing amounts due from correspondent banks, interest and non-interest bearing deposits due from the Federal Reserve, certificate of deposits with maturities of less than one year and Federal funds sold, if any.

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

Note 2. Fair value

ASC Section 820 — Fair Value Measurements and Disclosure defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Topic 820 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The hierarchy of valuation techniques is based on whether the inputs to those valuation techniques are observable or unobservable. These inputs are summarized in three broad levels as follows:

	*Level 1:*		Quoted prices in active exchange markets for identical assets or liabilities; also includes certain U.S. Treasury and other U.S. government and agency securities actively traded in over-the-counter markets.

	*Level 2:*		Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans held for sale.

	*Level 3:*		Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category generally includes certain private equity investments, retained interests from securitizations, and certain collateralized debt obligations.

The Company’s bond holdings in the investment securities portfolio, if any, are the only asset or liability subject to fair value measurement on a recurring basis. No financial assets or liabilities are valued on a recurring basis under Level ~~1or~~1 or Level 2 inputs at ~~June~~September 30, 2011 or or December 31, 2010. The Company has financial and non-financial assets measured by fair value measurements on a non-recurring basis during 2011. At ~~June~~September 30, 2011, these assets include $65.70 million of non-accrual loans ($53.07 million after specific reserves) and other real estate owned of $32.36 million all of which are valued under Level 3 inputs.

The changes in the assets subject to fair value measurements ~~are~~on a non-recurring basis are summarized below by Level:

	Level 1
	and
In thousands	Level 2		Level 3
December 31, 2010:
Loans	$	—	$	7,283
Other real estate owned		—		3,324
Total December 31, 2010		—		10,607
Activity:
Loans:
New loans measured at fair value		—		12,~~978~~323
Payments and other loan reductions		—		(~~652~~1,479	)
Foreclosed — to other real estate owned		—		(~~720~~979	)
Loans charged-off		—		(12,~~182~~158	)
Net change in loans		—		(~~576~~2,293	)
Other real estate owned:
Additions to other real estate owned		—		~~806~~1,077
Sales of other real estate owned		—		(~~673~~1,639	)
Provision for valuation reduction		—		(125	)
Net change in other real estate owned		—		8(687	)
June 30, 2011:
September 30, 2011:
Loans		—		64,~~707~~990
Other real estate owned		—		32,~~332~~637
Total June 30, 2011	$	—	$	10,039
Total September 30, 2011	$	—	$	7,627

The estimated fair values of the Company’s financial instruments at ~~June~~September 30, 2011 and December 31, 2010 are summarized below. The fair values of a significant portion of these financial ~~instruments~~ instruments are estimates derived using present value techniques and may not be indicative of the ~~net~~ net realizable or liquidation values. Also, the calculation of estimated fair values is based on ~~market~~ market conditions at a specific point in time and may not reflect current or future fair values.

	June 30, 2011				December 31, 2010
	September 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
In thousands	Amount		Value		Amount		Value
Financial assets:
Cash and due from banks	$	2,~~072~~158	$	2,~~072~~158	$	1,437	$	1,437
Interest bearing deposits		2318,~~683~~059		2318,~~683~~059		12,289		12,289
Investments in restricted stock		527		527		527		527
Loans, net		177,~~249~~710		~~186~~187,~~943~~774		181,709		191,353
Accrued interest receivable		~~721~~754		~~721~~754		750		750
Financial liabilities:
Non-interest bearing deposits	$	2628,~~474~~059	$	2628,~~474~~059	$	23,760	$	23,760
Interest bearing deposits		~~160~~152,~~164~~208		~~161~~153,~~747~~834		156,350		157,228
Accrued interest payable		9899		9899		106		106
Off-balance sheet commitments		—		—		—		—

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

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

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

Note 3. Net Income per Common Share

Basic earnings per share of common stock are computed by dividing net earnings by the weighted average number of common shares outstanding during the period. Diluted earnings per share are calculated by including the average dilutive common equivalents outstanding during the period. Dilutive common equivalent shares consist of stock options and warrants, calculated using the treasury stock method.

	Six Months				Three Months
	Nine Months				Three Months
	Ended June 30,				Ended June 30,
	Ended September 30,				Ended September 30,
	2011		2010		2011		2010
Weighted average shares outstanding		1,820,548		1,820,548		1,820,548		1,820,548
Common stock equivalents		—		—		—		—
Average common shares and equivalents		1,820,548		1,820,548		1,~~822~~820,548		1,~~822~~820,548
Net income	$	~~901~~1,396	$	~~916~~1,272	$	~~453~~495	$	~~388~~356
Basic earnings per share	$	0.4977	$	0.5070	$	0.2527	$	0.2120
Diluted earnings per share	$	0.4977	$	0.5070	$	0.2527	$	0.2120

During 2010, all of the outstanding warrants and options were excluded from the calculation of diluted income per share because they were anti-dilutive. All the warrants and options expired in 2010.

Note 4. Related Party Transactions

The Company paid $4890 thousand during the first ~~six~~nine months of 2011 for legal services to a firm of which a Director of the Company is a principal. The Company also paid $2437 thousand during the ~~six~~nine months ended ~~June~~September 30, 2011 for computer related services to a firm of which a Director is a principal. The above transactions have been consummated on terms equivalent to those that prevail in arms length transactions.

Executive officers, directors and their affiliated interests enter into loan transactions with the Company in the ordinary course of business. These loans are made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with unrelated borrowers. They do not involve more than normal risk of collectability or present other unfavorable terms. At ~~June~~September 30, 2011 the amounts of such loans outstanding were $2.89 million.

Deposit balances of executive officers, directors and their affiliated interests totaled $11.48 million at ~~June~~September 30, 2011.

Note 5. Commitments and contingencies

The Company is a party to financial instruments in the normal course of business to meet the financing needs of its customers. These financial instruments typically include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated financial statements. Outstanding commitments as of June 30, 2011 are as follows:

In millions
Loan commitments	$	6.3
Unused lines of credit	$	34.7
Letters of Credit	$	1.2

Note 5. Commitments and contingencies


In millions
Loan commitments	$	8.2
Unused lines of credit	$	32.8
Letters of Credit	$	1.3

Note 6. Recent Relevant Accounting Pronouncements

In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310), Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The main objective of this ASU is to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. The ASU requires that entities provide additional information to assist financial statement users in assessing their credit risk exposures and evaluating the adequacy of its allowance for credit losses. For the Company, the disclosures as of the end of a reporting period were required for the annual reporting periods ended December 31, 2010. Required disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning January 1, 2011. The adoption of this ASU resulted in additional disclosures in the Company’s financial statements regarding its loan portfolio and related allowance for loan losses but does not change the accounting for loans or the allowance. The Company has complied with the reporting requirements as of ~~June~~September 30, 2011.

In April 2011, the FASB issued ASU No. 2011-02, Receivable (Topic 310), A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. The main objective of the ASU is to clarify a creditor’s evaluation of whether in modifying a loan it has granted a concession in circumstances that qualify the loan as a Troubled Debt Restructured (TDR) loan. These loans are subject to various accounting and disclosure requirements. The ASU is effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. Certain disclosures are required for loans considered as TDR loans resulting from the application of the ASU that were not considered TDR loans under prior guidance. The Company has complied with ASU No. 2011-02 as of ~~June~~September 30, 2011.

In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The main objective of the ASU is to conform the requirements for measuring fair value and the disclosure information under U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS). The amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for the disclosure about fair value measurements. Other amendments clarify existing requirements and change particular principles or requirements for measuring fair value or disclosing information about fair value measurements. The ASU is effective for the first interim or annual period beginning on or after December 15, 2011, early application for public entities is not permitted. The Company will review the requirements of ASU No. 2011-04 and comply with its requirements. The adoption of this ASU is not expected to have a material impact on the Company’s consolidated financial statements.

The FASB has issued several exposure drafts which, if adopted, would significantly alter the Company’s (and all other financial institutions’) method of accounting for, and reporting, its financial assets and some liabilities from a historical cost method to a fair value method of accounting as well as the reported amount of net interest income. Also, the FASB has issued an exposure draft regarding a change in the accounting for leases. Under this exposure draft, the total amount of “lease rights” and total amount of future payments required under all leases would be reflected on the balance sheets of all entities as assets and debt. If the changes under discussion in either of these exposure drafts are adopted, the financial statements of the Company could be materially impacted as to the amounts of recorded assets, liabilities, capital, net interest income, interest expense, depreciation expense, rent expense and net income. The Company has not determined the extent of the possible changes at this time. The exposure drafts are in different stages of review, approval and possible adoption. The FASB is scheduled to complete their deliberations by year end, December 31, 2011.

The FASB has issued several exposure drafts which, if adopted, would significantly alter the Company’s (and all other financial institutions’) method of accounting for, and reporting, its financial assets and some liabilities from a historical cost method to a fair value method of accounting as well as the reported amount of net interest income. Also, the FASB has issued an exposure draft regarding a change in the accounting for leases. Under this exposure draft, the total amount of “lease rights” and total amount of future payments required under all leases would be reflected on the balance sheets of all entities as assets and debt. If the changes under discussion in either of these exposure drafts are adopted, the financial statements of the Company could be materially impacted as to the amounts of recorded assets, liabilities, capital, net interest income, interest expense, depreciation expense, rent expense and net income. The Company has not determined the extent of the possible changes at this time. The exposure drafts are in different stages of review and consideration. The FASB is scheduled to complete their deliberations by year end, December 31, 2011.


ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward-Looking Statements

Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar import. Such forward-looking statements involve known and unknown risks including, but not limited to, changes in general economic and business conditions, interest rate fluctuations, competition within and from outside the banking industry, new products and services in the banking industry, risk inherent in making loans such as repayment risks and fluctuating collateral values, problems with technology utilized by the Company, changing trends in customer profiles and changes in laws, accounting standards and regulations applicable to the Company. Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Readers are cautioned against placing undue reliance on any such forward-looking statements. The Company’s past results are not necessarily indicative of future performance. Please refer to the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, and other periodic reports filed with the Securities and Exchange Commission, for a discussion of various factors which may affect our performance.

General

CommerceFirst Bancorp, Inc. (the “Company”) is the bank holding company for CommerceFirst Bank, a Maryland chartered commercial bank headquartered in Annapolis, Maryland (the “Bank”). The Bank was capitalized, became a wholly owned subsidiary of the Company and commenced operations on June 29, 2000. The Company’s common stock trades on the NASDAQ Capital Market under the symbol “CMFB”. The Company maintains five banking offices in Anne Arundel, Howard and Prince George’s counties in central Maryland. The Company focuses on providing commercial banking services to small and medium sized business in its market areas.

The Company’s assets increased modestly at ~~June~~September 30, 2011 from December 31, 2010 with increases in in cash and cash equivalents offset by a decline in loans receivable. Earnings ~~were~~increased ~~substantially~~9.8% ~~the~~in ~~same as~~ the ~~six~~nine month period ended ~~June~~September 30, ~~2010~~2011 as compared to the ~~increase~~nine months ended September 30, 2010. The improvement in net interest income offset the increases in the provision for loan losses, write-downs on other real estate owned and loan collections expenses ~~offset improvements in net interest income~~. The provision for loan losses continues to be high in recognition of the effect of uncertain economic conditions on the Company’s borrowers and collateral values as well as loan charge-offs. Key measurements and events for the period include the following:

• The Company’s net income was $~~901~~1.4 ~~thousand~~million during the ~~six~~nine months ended ~~June~~September 30, 2011 as compared to net income of $~~916~~1.3 ~~thousand~~million for the ~~six~~nine months ended ~~June~~September 30, 2010. ~~The $15 thousand decline in net income is primarily attributable to increases in the provision for loan losses, the write-downs of other real estate owned and increased loan collection expenses.~~

• Net interest income, the Company’s main source of income, increased by 97.12% from $47.60 million during the ~~six~~nine months ended ~~June~~September 30, 2010 to $57.05 million for the ~~six~~nine months ended ~~June~~September 30, 2011.

• Total assets increased by 3.7% from $203 million at December 31, 2010 to $211 million at June 30, 2011.

• Net loans outstanding decreased by 2.5% from $182 million at December 31, 2010 to $177 million as of June 30, 2011.

• Deposits increased by 3.6% from $180 million at December 31, 2010 to $187 million at June 30, 2011.

• Non-interest income increased by 11.2% from $616 thousand for the six months ended June 30, 2010 to $685 thousand for the six months ended June 30, 2011.

• Non-interest expenses increased by 10.6% from $2.6 million for the six months ended June 30, 2010 to $2.9 million for the six months ended June 30, 2011.

•

Total assets increased by 0.8% from $203 million at December 31, 2010 to $205 million at September 30, 2011.

•

Net loans outstanding decreased by 2.2% from $182 million at December 31, 2010 to $178 million as of September 30, 2011.

•

Deposits increased by 0.1% from $180.1 million at December 31, 2010 to $180.3 million at September 30, 2011.

•

Non-interest income increased by 16.8% from $780 thousand for the nine months ended September 30, 2010 to $911 thousand for the nine months ended September 30, 2011.

•

Non-interest expenses increased by 5.5% from $4.0 million for the nine months ended September 30, 2010 to $4.3 million for the nine months ended September 30, 2011.

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

Critical Accounting Policies

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

The most significant accounting policies followed by CommerceFirst Bancorp, Inc. are presented in Note 1 to the Company’s audited consolidated financial statements incorporated by reference in its Annual Report on Form 10-K for the year ended December 31, 2010. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan losses as the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.

The Company believes it has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. These procedures include identifying and assessing possible impaired loans. The Company’s assessments may be affected in future periods by changes in economic conditions, the impact of regulatory examinations and the discovery of information with respect to borrowers that is not known to management at the time of the issuance of the consolidated financial statements.

RESULTS OF OPERATIONS

General. The Company reported net income of $901 thousand for the six months ended June 30, 2011 as compared to net income of $916 thousand for the six month period ended June 30, 2010. Earnings declined slightly during 2011 as compared to 2010 as the increase in net interest income was largely offset by the increase in the provision for loan losses of $274 thousand, write-downs of other real estate owned of $125 thousand and loan collection expenses of $89 thousand. Net interest margin increased primarily as the result of the reduction in the cost of deposits. The provision for loan losses was $1.3 million during 2011 as compared to $1.0 million in 2010, an increase of $274 thousand, or 26.5%. The Company continues to experience the detrimental effects of the weakened economy on its loan customers which effects are recognized through the Company’s provision for loan losses and loan charge-offs. The amount of non-accrual loans decreased by $576 thousand, or 7.9%, at June 30, 2011 as compared to December 31, 2010.

Net interest income increased by $416 thousand, or 9.1%, in 2011 as compared to 2010. This increase resulted primarily from the reduction in the cost of deposits. During the second half of 2010 and the first half of 2011 a significant amount of high interest rate, longer term certificates of deposit matured and were either re-priced at lower rates or replaced with lower rate accounts resulting in decreases in costs of funds, increases in net interest income, net interest margin and net interest spread. However, the amount of such certificates available to be re-priced in future quarters is minimal.

RESULTS OF OPERATIONS

General. The Company reported net income of $1.4 million for the nine months ended September 30, 2011 as compared to net income of $1.3 million for the nine month period ended September 30, 2010. Earnings increased during 2011 as compared to 2010 because the increase in net interest income exceeded the increase in the provision for loan losses of $248 thousand, the write-downs of other real estate owned of $125 thousand and the increase in loan collection expenses of $96 thousand. Net interest margin increased primarily as the result of the reduction in the cost of deposits. The provision for loan losses was $1.9 million during 2011 as compared to $1.6 million in 2010, an increase of $248 thousand, or 15.1%. The Company continues to experience the detrimental effects of the weakened economy on its loan customers which effects are recognized through the Company’s provision for loan losses and loan charge-offs. The amount of non-accrual loans decreased by $2.3 million, or 31.5%, at September 30, 2011 as compared to December 31, 2010.

Net interest income increased by $503 thousand, or 7.2%, in 2011 as compared to 2010. This increase resulted primarily from the reduction in the cost of deposits. During the second half of 2010 and the first half of 2011 a significant amount of high interest rate, longer term certificates of deposit matured and were either re-priced at lower rates or replaced with lower rate accounts resulting in decreases in costs of funds, increases in net interest income, net interest margin and net interest spread. However, the amount of such high interest rate certificates available to be re-priced in future quarters is minimal.

Return on Average Assets and Average Equity. The following table shows the return on average assets and average equity for the period shown.

	Six Months Ended						Year ended
	Nine Months Ended						Year ended
	June 30,						December 31,
	September 30,						December 31,
	2011			2010			2010
Return on Average Equity		78.9003	%		87.5580	%		8.61	%
Return on Average Earning Assets		0.9193	%		0.9184	%		0.94	%
Ratio of Average Equity to Average Assets		11.1827	%		10.3645	%		10.62	%

~~Six~~Nine months ended ~~June~~September 30, 2011

Net Interest Income and Net Interest Margin. Net interest income is the amount by which interest earned on assets exceeds the interest paid on interest-bearing liabilities. The Company’s principal interest earning assets are loans to businesses. Interest-bearing liabilities consist primarily of savings accounts, money market accounts and certificates of deposit. Generally, changes in net interest income are measured by net interest rate spread and net interest margin. Net interest rate spread is equal to the difference between the average rate earned on interest earning assets and the average rate incurred on interest-bearing liabilities. Net interest margin represents the difference between interest income (including net loan fees earned) and interest expense calculated as a percentage of average earning assets.

Total interest income decreased by $~~213~~369 thousand or 3.49% to $69.12 million for the ~~six~~nine month period ended ~~June~~September 30, 2011 as compared to the same period in 2010. This decrease in interest income ~~was~~ was primarily attributable to the decline in the yield on ~~the~~ loans from 6.3186% in 2010 to 6.1663% in 2011.

Interest expense decreased by $~~629~~872 thousand or 3634.09% to $1.16 million for the ~~six~~nine months ended ~~June~~ September 30, 2011 as compared to $12.75 million during the same ~~six~~nine months of 2010. This decrease ~~was~~ was primarily attributable to the 7065 basis point decrease in the cost of funds from 2.1404% during ~~the~~ the first ~~six~~nine months of 2010 to 1.4439% during the first ~~six~~nine months of 2011. Also contributing to ~~the~~ the reduction in the cost of funds was a $87.25 million decrease in average interest bearing ~~liabilities~~ liabilities during 2011 as compared to 2010.

The net interest income for the six month period ended June 30, 2011 was $5.0 million as compared to $4.6 million for the same period in 2010. Net interest income increased primarily because of the reduced cost of funds during the six months ended June 30, 2011 as compared to the six months ended June 30, 2010.

The ~~following~~net ~~table~~interest ~~shows~~income for the ~~average~~nine ~~balances~~month ~~and~~period ~~average~~ended ~~rates~~September 30, ~~earned~~2011 orwas ~~paid~~$7.5 million onas compared ofto ~~the~~$7.0 million ~~various categories~~for of the ~~Company’s~~same ~~assets~~period ~~and~~in ~~liabilities~~2010. ~~for~~Net ~~the~~interest ~~six~~income ~~month~~increased ~~period~~primarily because ~~ended~~of ~~June 30~~the reduced cost of ~~each year.~~funds ~~Nonperforming~~during ~~loans~~the ~~are~~nine ~~included~~months inended ~~average~~September 30, ~~loan~~2011 ~~balances~~as incompared to the ~~following~~nine ~~table:~~months ended September 30, 2010.

	2011								2010								2009
SIX MONTHS	Average					Yields/			Average					Yields/			Average					Yields/
In thousands	Balance			Interest		Rates			Balance			Interest		Rates			Balance			Interest		Rates
Assets
Securities (1)	$	527		$	14		5.36	%	$	527		$	14		5.36	%	$	3,539		$	79		4.52	%
Loans, net of unearned income (2)		185,485			6,075		6.60	%		184,116			6,292		6.89	%		150,151			5,586		7.03	%
Interest-bearing deposits in other banks		14,304			28		0.39	%		17,748			24		0.27	%		6,163			8		0.26	%
Federal funds sold		—			—		—			64			—		0.19	%		1,726			2		0.23	%
Total interest-earning assets		200,316			6,117		6.16	%		202,455			6,330		6.31	%		171,563			5,675		6.67	%
Less allowance for loan losses		(3,538	)							(2,391	)							(2,126	)
Non interest earning assets		8,996								8,565								5,571
Total assets	$	205,774							$	208,629							$	175,008
Liabilities & Stockholders’ Equity
Interest-bearing deposits
Interest bearing demand deposits	$	712		$	—		0.05	%	$	724		$	—		0.05	%	$	2,190		$	1		0.09	%
Money market deposit accounts		8,640			16		0.37	%		8,022			20		0.50	%		13,539			36		0.54	%
Savings accounts		23,848			137		1.16	%		13,496			101		1.51	%		560			4		1.44	%
Certificates of deposit		123,425			965		1.58	%		142,589			1,626		2.30	%		115,811			2,302		4.01	%
Total interest-bearing liabilities		156,625			1,118		1.44	%		164,831			1,747		2.14	%		132,100			2,343		3.58	%
Demand deposits and other liabilities		26,141								22,192								22,542
Total liabilities		182,766								187,023								154,642
Stockholders’ equity		23,008								21,606								20,366
Total liabilities and stockholders’ equity	$	205,774							$	208,629							$	175,008
Interest rate spread							4.72	%							4.17	%							3.09	%
Net interest income and margin				$	4,999		5.03	%				$	4,583		4.56	%				$	3,332		3.92	%

The following table shows the average balances and average rates earned or paid on of the various categories of the Company’s assets and liabilities for the nine month period ended September 30 of each year. Nonperforming loans are included in average loan balances in the following table:


NINE MONTHS	2011								2010								2009
	Average					Yields/			Average					Yields/			Average					Yields/
In thousands	Balance			Interest		Rates			Balance			Interest		Rates			Balance			Interest		Rates
Assets
Loans, net of unearned income (2)	$	183,500		$	9,099		6.63	%	$	184,680		$	9,471		6.86	%	$	165,615		$	8,606		6.95	%
Interest-bearing deposits in other banks		16,603			44		0.35	%		17,330			41		0.32	%		8,984			17		0.25	%
Securities (1)		527			21		5.33	%		527			21		5.33	%		3,018			101		4.47	%
Federal funds sold		—			—		—			43			—		0.19	%		1,211			2		0.22	%

Total interest-earning assets		200,630			9,164		6.10	%		202,580			9,533		6.29	%		178,828			8,726		6.52	%


Less allowance for loan losses		(3,492	)							(2,326	)							(2,133	)
Non interest earning assets		9,108								8,454								5,693

Total assets	$	206,246							$	208,708							$	182,388

Liabilities & Stockholders’ Equity
Interest-bearing deposits
Interest bearing demand deposits	$	645		$	—		0.04	%	$	714		$	—		0.04	%	$	1,965		$	1		0.07	%
Money market deposit accounts		8,536			24		0.38	%		7,911			28		0.47	%		12,335			49		0.53	%
Savings accounts		24,547			207		1.13	%		15,563			164		1.41	%		2,183			31		1.90	%
Certificates of deposit		122,434			1,397		1.53	%		139,435			2,308		2.21	%		123,267			3,466		3.76	%

Total interest-bearing liabilities		156,162			1,628		1.39	%		163,623			2,500		2.04	%		139,750			3,547		3.39	%

Demand deposits and other liabilities		26,850								23,275								22,130

Total liabilities		183,012								186,898								161,880

Stockholders’ equity		23,234								21,810								20,508

Total liabilities and stockholders’ equity	$	206,246							$	208,708							$	182,388

Interest rate spread							4.71	%							4.25	%							3.13	%

Net interest income and margin				$	7,536		5.02	%				$	7,033		4.64	%				$	5,179		3.87	%


(1)		Yields on securities are calculated based on amortized cost.

(2)		Loan balances include loans on nonaccrual

Net interest margin was 5.0302% in the first ~~six~~nine months of 2011, as compared to 4.5664% in the comparable period in 2010. Interest spread was 4.7271% in the first ~~six~~nine months of 2011, as compared to the 4.1725% in the first ~~six~~nine months of 2010 reflecting the larger reduction in the cost of interest bearing funds as compared to the reduction of the earnings rates of interest earning assets. Absent a reduction in market interest rates, the Company does not anticipate continuing significant reductions in the cost of its interest bearing funds as substantially all of the significantly higher costing funds have been re-priced to lower levels.

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

	June 30, 2011 vs. 2010									June 30, 2010 vs. 2009
	September 30, 2011 vs.									September 30, 2010 vs.
	2010									2009
	Increase (Decrease)									Increase (Decrease)
In thousand	Volume			Rate			Total			Volume			Rate			Total
Interest-Earning Assets:
Loans receivable	$	47(61	)	$	(~~264~~311	)	$	(~~217~~372	)	$	~~836~~991		$	(~~130~~126	)	$	~~706~~865
Interest bearing deposits		(52	)		95			43			1416			28			1624
Investment portfolio		—			—			—			(84	)		4			(80	)
Federal funds sold		—			—			—			(2	)		—			(2	)
Net Change in Interest Income		42(63	)		(~~255~~306	)		(~~213~~369	)		~~781~~921			(~~126~~114	)		~~655~~807
Interest Bearing Liabilities:
Interest bearing deposits		(72113	)		(~~557~~759	)		(~~629~~872	)		~~511~~528			(1,~~107~~575	)		(~~596~~1,047	)
Net Change in Interest Expense		(72113	)		(~~557~~759	)		(~~629~~872	)		~~511~~528			(1,~~107~~575	)		(~~596~~1,047	)
Change in Net Interest Income	$	~~114~~50		$	~~302~~453		$	~~416~~503		$	~~270~~393		$	~~981~~1,461		$	1,~~251~~854

Provision for Loan Losses. The provision for loan losses represents the amount charged against earnings to increase the allowance for loan losses to the level deemed appropriate by management. The provision for loan losses and the allowance for loan losses are based on management’s ongoing assessment of the Company’s credit exposure and consideration of certain other relevant factors. The provision for loan losses was $1.39 million the ~~six~~nine months ended ~~June~~September 30, 2011 as compared to to $1.06 million for the ~~six~~nine months ended ~~June~~September 30, 2010. The Company has increased its provision for loan losses to address identified loan concerns and in recognition of the detrimental effect of the weakened economy. The allowance is comprised of specific and general allowance amounts.

Non-Interest Income. Non-interest income principally consists of gains from the sale of the guaranteed portion of Small Business Administration loans and sales of other real estate owned as well as from deposit account services charges. For the ~~six~~nine months ended ~~June~~September 30, 2011, gains on on sales of the guaranteed portion of SBA loans were $~~343~~366 thousand whereas gains on sales of SBA ~~loans~~ loans amounted to $~~370~~419 thousand during the first ~~six~~nine months of 2010. Generally, the Company desires to sell the guaranteed portion of most additional SBA loans resulting in a continuing stream of income that may vary significantly from quarter to quarter, depending in part upon the volume of loans actually sold. The volume of SBA loans origination has been declining and the Company expects continued reduced gains on these loan sales. The Company had gains from the sales of other real estate owned of $5297 thousand in the first ~~six~~nine months of 2011. There were no sales of other real estate owned in 2010. Deposit account service charges and other income amounted to $~~290~~ 448 thousand during the ~~six~~nine months ended ~~June~~ September 30, 2011 as compared to $~~246~~361 thousand for the same period in 2010, reflecting an increase in the number of accounts and activity subject to service charges on such deposit accounts.

Non-Interest Expense. Total non-interest expenses increased by $~~279~~224 thousand during the ~~six~~nine month period ended ~~June~~September 30, 2011 as compared to the same period in 2010, a 105.65% increase. The 2011 expenses reflect $125 thousand of write-downs of other real estate owned reflecting declining market values; noas ~~such~~compared ~~provision~~to ~~was~~$75 ~~expensed~~thousand inof write-downs during 2010. Loan collection expenses increased by $52 96 thousand from $3749 thousand during 2010 to $89145 thousand in 2011 resulting from increased loan collection efforts.

Income Tax Expense. During the ~~six~~nine months ended ~~June~~September 30, 2011, the Company recorded an income ~~tax~~ tax expense of $~~556~~885 thousand as compared to aan $~~609~~847 thousand expense during the same period in 2010. The income tax expense was 38.28% of income before taxes in 2011 and 3940.90% of income before taxes in 2010.

Three months ended ~~June~~September 30, 2011

Net Interest Income and Net Interest Margin. Total interest income decreased by $~~150~~156 thousand or 4.79% to $3.0 million for the three month period ended ~~June~~September 30, 2011 as compared to the same ~~period~~ period in 2010. This decrease in interest income was primarily attributable to the decline in the ~~yield~~ yield on ~~the~~ loans from 6.9079% in 2010 to 6.5567% in 2011.. Interest income was adversely affected by the 23 23 basis point decline in the yield of the average earning assets from 6.2426% in 2010 to 6.0100% in 2011.

Interest expense decreased by $~~311~~243 thousand or 3632.13% to $~~550~~510 thousand for the three months ended ~~June~~September 30, 2011 as compared to $~~861~~753 thousand during the same three months of 2010. This decrease was ~~primarily~~ attributable to the 68decline in interest bearing deposits and the 55 basis point decrease in the cost of funds from 21.0885% during the ~~first~~ ~~three~~third ~~months~~quarter of 2010 to 1.43% during the ~~first~~third ~~three~~quarter ~~months~~ of 2011. Also contributing to the reduction in the cost of funds was $86.30 million ~~decrease~~ decrease in average interest bearing liabilities during 2011 as compared to 2010.

The net interest income for the three month ~~period~~periods ended ~~June~~September 30, 2011 and 2010 was $2.5 ~~million as compared~~ ~~to $2.3~~ million ~~for the same period in 2010~~. ~~Net interest income increased primarily because of~~ ~~the reduced cost of funds during the three months ended June 30, 2011 as compared to the three months ended June 30, 2010.~~

The following table shows the average balances and average rates earned or paid on of the various categories of the Company’s assets and liabilities for the three month period ended ~~June~~September 30 of ~~each~~ each year. Nonperforming loans are included in average loan balances in the following table:

	2011								2010								2009
THREE MONTHS	2011								2010								2009
THREE MONTHS	Average					Yields/			Average					Yields/			Average					Yields/
	Average					Yields/			Average					Yields/			Average					Yields/
In thousands	Balance			Interest		Rates			Balance			Interest		Rates			Balance			Interest		Rates
Assets
Securities (1)	$	527		$	7		5.33	%	$	527		$	7		5.33	%	$	3,508		$	39		4.46	%
Loans, net of unearned income (2)	$	179,745		$	3,024		6.67	%	$	185,858		$	3,179		6.79	%	$	176,419		$	3,019		6.87	%
Loans, net of unearned income (2)		184,767			3,018		6.55	%		184,079			3,168		6.90	%		163,937			2,876		7.04	%
Interest-bearing deposits in other banks		21,070			16		0.30	%		16,466			17		0.41	%		14,510			9		0.25	%
Interest-bearing deposits in other banks		17,516			15		0.34	%		20,520			15		0.29	%		8,807			6		0.27	%
Securities (1)		527			7		5.27	%		527			7		5.27	%		1,540			23		5.99	%
Federal funds sold		—			—		—			—			—		—			~~191~~198			0		0.00	%
Total interest-earning assets		~~202~~201,~~810~~342			3,~~040~~047		6.0100	%		~~205~~202,~~126~~851			3,~~190~~203		6.2426	%		~~176~~192,~~443~~667			23,~~921~~051		6.7635	%
Less allowance for loan losses		(3,~~754~~403	)							(2,~~355~~197	)							(2,~~120~~096	)
Non interest earning assets		89,~~819~~221								8,~~456~~211								56,~~645~~317
Total assets	$	207,~~875~~160							$	~~211~~208,~~227~~865							$	~~179~~196,~~968~~888
Liabilities & Stockholders’ Equity
Interest-bearing deposits
Interest bearing demand deposits	$	~~660~~512		$	—		0.0502	%	$	~~737~~692		$	—		0.0506	%	$	21,~~535~~522		$	1—		0.1600	%
Money market deposit accounts		8,~~673~~331			8		0.3738	%		7,~~591~~695			118		0.5841	%		128,~~201~~930			1013		0.3358	%
Savings accounts		2325,~~915~~922			70		1.1707	%		1419,~~941~~630			5763		1.5327	%		~~941~~5,375			427		12.7001	%
Certificates of deposit		~~124~~120,~~126~~485			~~472~~432		1.5342	%		~~142~~133,~~449~~226			~~793~~682		2.2303	%		~~121~~137,~~651~~938			1,164		3.8438	%
Total interest-bearing liabilities		~~157~~155,~~374~~250			~~550~~510		1.4030	%		~~165~~161,~~718~~243			~~861~~753		21.0885	%		~~137~~153,~~328~~765			1,~~179~~204		3.4414	%
Demand deposits and other liabilities		2728,~~248~~231								2325,~~646~~407								21,~~990~~303
Total liabilities		~~184~~183,~~622~~481								~~189~~186,~~364~~650								~~159~~175,~~318~~068
Stockholders’ equity		23,~~253~~679								2122,~~863~~215								2021,~~650~~820
Total liabilities and stockholders’ equity	$	207,~~875~~160							$	~~211~~208,~~227~~865							$	~~179~~196,~~968~~888
Interest rate spread							4.6170	%							4.1541	%							3.2021	%
Net interest income and margin				$	2,~~490~~537		45.9200	%				$	2,~~329~~450		4.5579	%				$	1,~~742~~847		3.9685	%


(1)		Yields on securities are calculated based on amortized cost.

(2)		Loan balances include loans on nonaccrual

Net interest margin was 45.9200% in the ~~second~~third quarter of 2011, as compared to 4.5579% in the comparable period in 2010. Interest spread was 4.6170% in the ~~second~~third quarter of 2011, as compared to the 4.1541% in the ~~second~~third quarter of 2010 reflecting the greater reduction in the cost of interest bearing funds as compared to the reduction of the earnings rates of interest earning assets. Absent a reduction in market interest rates, the Company does not anticipate continuing significant reductions in the cost of its interest bearing funds as substantially all of the higher costing funds have been re-priced to lower levels.

Provision for Loan Losses. The provision for loan losses represents the amount charged against earnings to increase the allowance for loan losses to the level deemed appropriate by management. The provision for loan losses and the allowance for loan losses are based on management’s ongoing assessment of the Company’s credit exposure and consideration of certain other relevant factors. The provision for loan losses was $~~627~~586 thousand the three months ended ~~June~~September 30, 2011 as compared to $~~587~~612 thousand for the three months ended ~~June~~September 30, 2010. The ~~Company~~decline ~~has~~in ~~increased~~the ~~its~~ provision for ~~loan~~ ~~losses~~the tothree ~~address~~months ~~identified~~ended ~~loan~~September 30, ~~concerns~~2011 ~~and~~as compared to the same period in ~~recognition~~2010 ofprimarily ~~the~~results ~~detrimental~~from ~~effect~~lower amount of ~~the weakened~~loans ~~economy~~outstanding. The allowance is comprised of specific and general allowance amounts.

Non-Interest Income. Non-interest income principally consists of gains from the sale of the guaranteed portion of Small Business Administration loans and from deposit account services charges. For the three months ended ~~June~~September 30, 2011, gains on sales of the guaranteed portion of ~~SBA~~ SBA loans was $~~134~~23 thousand whereas gains on sales of SBA loans amounted to $~~145~~49 thousand during the same period in 2010. The Company had gains from the sales of other real estate owned of $45 thousand during the quarter ended September 30, 2011. There were no sales of other real estate owned in 2010. Deposit account service charges and other income amounted to $~~141~~158 thousand ~~during~~ during the three months ended ~~June~~September 30, 2011 as compared to $~~126~~115 thousand for the same period in 2010, reflecting an increase in the number of accounts subject to service charges on such deposit accounts.

Non-Interest Expense. Total non-interest expenses ~~increased~~decreased by $5455 thousand during the three month period ended ~~June~~September 30, 2011 as compared to the same period in 2010, a 43.09% ~~increase~~decrease. The ~~2011~~2010 expenses include $5075 thousand of write-downs of other real estate owned reflecting declining values; no such provision was expensed in ~~2010~~2011. Loan collection expenses increased by $1144 thousand from expenses of $2112 thousand during 2010 to expenses of $3256 thousand in 2011 resulting from increased loan collection efforts. These expense increases were offset by the reduction in FDIC insurance costs of $70 thousand for the third quarter of 2011 as compared to the same quarter in 2010 reflecting the changes made by the FDIC in the method of computation of insurance premiums.

Income Tax Expense. During the three months ended ~~June~~September 30, 2011, the Company recorded an income tax expense of $~~275~~329 thousand as compared to a $~~260~~238 thousand expense during the same period in 2010. The income tax expense was 3739.89% of income before taxes in 2011 and 40.20% of income before taxes in 2010.

FINANCIAL CONDITION.

General. The Company’s assets at ~~June~~September 30, 2011 were $~~211~~205 million, an increase of $71.57 million or 3or 0.78%, from December 31, 2010. The gross loans totaled $181 million at ~~June~~September 30, 2011 and ~~are~~ are comprised of real estate loans of $129 million, a decrease of $43.3 million, or 32.15%, from ~~December~~ December 31, 2010 and commercial loans, including SBA loans, of $52 million, a decrease of $0.2 8 million, or 0 1.46% from December 31, 2010. At ~~June~~September 30, 2011, ~~deposits~~and ~~totaled $187~~December ~~million~~31, an2010, ~~increase~~deposits totaled of $~~6.5~~ 180 million~~, or 3~~.~~6%,~~ ~~from December 31, 2010.~~ Deposits at ~~June~~September 30, 2011 are comprised primarily of certificates of deposit of $~~126~~117 million, NOW and Money Market accounts of $108 million, savings accounts of $25 27 million and noninterest bearing deposits of $2628 million.

Loan Portfolio. The loan portfolio is the largest component of earning assets and accounts for the greatest portion of total interest income. At ~~June~~September 30, 2011, net loans were $~~177~~178 million, a 2.52% decrease from the $182 million in the net loans at December 31, 2010. Generally, loans are internally generated but the Company does periodically purchase loan participations from other local community banks. Lending activity is generally confined to the Company’s immediate market areas. The $4 million decrease in loans is net of the sales of SBA guaranteed portions of loans in the amount of $5 million during ~~the first half of~~ 2011. Without these sales, loan balances would have increased by $1 million. The Company is continuing its efforts to attract quality credits with no dilution of credit underwriting standards. The current economic conditions have reduced the number of loan requests as well as the number of applicants that meet the Company’s underwriting standards.

The loan portfolio includes a significant amount of commercial real estate loans. The majority of these loans are secured by real property that is occupied by the borrowers’ businesses. The Company has approximately $0.8 million of acquisition and construction loans secured by residential building lots. The Company does not engage in foreign lending activities. Loans secured by residential real estate are loans to investors for commercial purposes. The Bank does not lend funds to consumers. The following table presents the composition of the loan portfolio by type of loan at the dates indicated.

~~Loans~~The ~~receivable,~~loan ~~net~~portfolio isincludes ~~comprised~~a significant amount of commercial real estate loans. The majority of these loans are secured by real property that is occupied by the borrowers’ businesses. The Company has approximately $0.8 million of acquisition and construction loans secured by residential building lots. The Company does not engage in foreign lending activities. Loans secured by residential real estate are loans to investors for commercial purposes. The Bank does not lend funds to consumers. The following: table presents the composition of the loan portfolio by type of loan at the dates indicated.

	June 30, 2011						June 30, 2010						December 31, 2010
	September 30, 2011						September 30, 2010						December 31, 2010
				Percentage						Percentage						Percentage
(In thousands)	Balance			of Loans			Balance			of Loans			Balance			of Loans
Commercial and Industrial loans	$	4443,~~446~~708			24.62	%	$	4847,~~831~~331			2625.36	%	$	44,582			24.1	%
SBA loans		7,~~742~~831			4.3	%		5,~~566~~880			3.02	%		7,742			4.2	%
Real estate loans:
Owner occupied		8079,~~373~~730			44.51	%		83,~~217~~712			4445.83	%		85,633			46.3	%
Non owner occupied		4849,~~159~~560			2627.64	%		4847,~~160~~822			25.9	%		47,040			25.4	%
Total real estate loans		~~128~~129,~~532~~290			71.15	%		131,~~377~~534			7071.72	%		132,673			71.7	%
		180,720			100.0	%		184,774			100.0	%		184,997			100.0	%
		180,829			100.0	%		184,745			100.0	%		184,997			100.0	%
Unearned loan fees, net		(~~100~~81	)					(~~112~~114	)					(114	)
Allowance for loan losses		(3,~~371~~038	)					(2,~~000~~533	)					(3,174	)
	$	177,~~249~~710					$	182,~~473~~098					$	181,709

Real estate loans are secured by residential and commercial properties as follows:

(In thousands)	June 30, 2011		June 30, 2010		December 31, 2010
	September 30,		September 30,		December 31,
(In thousands)	2011		2010		2010
Real estate loans secured by:
Residential real estate	$	2426,~~687~~204	$	26,~~649~~510	$	24,307
Commercial real estate		103,~~845~~086		~~104~~105,~~728~~024		108,366
Total real estate loans	$	~~128~~129,~~532~~290	$	131,~~377~~534	$	132,673

~~None~~The following table shows the interest rate sensitivity of the loan portfolio at September 30, 2011. Demand loans, ~~secured~~loans bywithout ~~residential~~a ~~real~~stated ~~estate~~maturity and overdrafts are ~~owner~~reported ~~occupied~~as ~~properties~~re-pricing in one year or less. Floating rate loans are reported to reflect the period until re-pricing.

The following table shows the interest rate sensitivity of the loan portfolio at June 30, 2011. Demand loans, loans without a stated maturity and overdrafts are reported as re-pricing in one year or less. Floating rate loans are reported to reflect the period until re-pricing.


	Loan Re-pricing as of September 30, 2011
	1 year		Over 1 to		After
In thousands	or less		5 years		5 years		Total
Loans with:
Fixed interest rates	$	12,303	$	33,969	$	1,338	$	47,610
Floating and adjustable interest rates		66,549		66,670		—		133,219

Total loans receivable	$	78,852	$	100,639	$	1,338	$	180,829

	Loan Re-pricing as of June 30, 2011
	1 year				After
In thousands	or less		1-5 years		5 years		Total
Loans with:
Fixed interest rates	$	11,658	$	36,452	$	1,297	$	49,407
Floating and adjustable interest rates		62,377		68,936		—		131,313
Total loans receivable	$	74,035	$	105,388	$	1,297	$	180,720

Allowance for loan losses. The adequacy of the allowance for loan losses is evaluated based upon loan categories except for loans rated substandard, doubtful or loss, which are evaluated separately and assigned loss amounts based upon the evaluation. Loss ratios are applied to each category of loan to determine estimated loss amounts. Categories of loans are identified as commercial, SBA and mortgage loans. Loss ratios are determined based upon historical losses incurred adjusted for the effect of current economic conditions, any industry concentration or identified weakness in an industry, credit management and underwriting policy changes and secured versus unsecured nature of the loan category. At September 30, 2011, the range of the loss ratios used to determine estimated losses by loan category were: commercial loans — 1.3%; SBA loans (unguaranteed portion) — 6.7% and real estate loans- 0.2% to 0.9%. These loss ratios approximate those ratios applied at December 31, 2010. Additional losses are estimated resulting from additional identified risks factors, such as loans with underwriting exceptions, the level and direction of payment delinquencies and the level of large loans. Not all of these additional loss estimates are allocated to the separate loan categories.

~~Allowance~~The ~~for~~Company monitors its loan ~~losses.~~portfolio ~~The~~for ~~adequacy~~indications of weaknesses through the ~~allowance~~review ~~for~~of borrowers’ financial condition, cash flows, loan ~~losses~~payment isdelinquencies, ~~evaluated~~economic ~~based~~factors ~~upon~~occurring ~~loan~~in ~~categories~~borrowers’ ~~except~~business ~~for~~sectors ~~loans~~and ~~rated~~other ~~substandard,~~information ~~doubtful~~which ormay ~~loss,~~come ~~which~~to ~~are~~the ~~evaluated~~Company through its ~~separately~~contacts ~~and~~in ~~assigned~~the ~~loss~~market ~~amounts~~place. ~~based~~The ~~upon~~determination of the ~~evaluation.~~effect ~~Loss~~of ~~ratios~~the ~~are~~weaknesses ~~applied~~noted toon ~~each~~the ~~category~~repayment of ~~loan~~the toloans ~~determine~~is ~~estimated~~an ~~loss~~ongoing ~~amounts.~~process ~~Categories~~as ofto ~~loans~~each ~~are~~borrower. ~~identified~~The asCompany may set aside ~~commercial,~~specific ~~SBA~~loss ~~and~~reserves ~~mortgage~~during ~~loans.~~this ~~Loss~~process ~~ratios~~in ~~are~~amounts determined ~~based~~on ~~upon~~subjective ~~historical~~bases ~~losses~~until such ~~incurred~~time ~~adjusted~~as ~~for~~ the ~~effect~~collectability of ~~current~~the ~~economic~~loan ~~conditions,~~from ~~any~~the ~~industry~~borrowers’ ~~concentration~~primary ~~or identified~~repayment ~~weakness~~source(s) is in andoubt. During ~~industry~~this time, ~~credit~~secondary ~~management~~ and ~~underwriting~~tertiary ~~policy~~repayment ~~changes~~sources, ~~and~~including ~~secured~~liquidation of collateral, ~~versus~~are ~~unsecured~~evaluated ~~nature~~which ofmay ~~the~~result ~~loan~~in ~~category.~~additional Atspecific ~~June 30,~~loss ~~2011,~~reserves ~~the~~being ~~range~~established. ofIndependent or ~~the~~internal ~~loss~~appraisals ~~ratios~~and ~~used~~evaluations are performed to determine ~~estimated~~potential ~~losses~~recovery byamounts, ~~loan~~or ~~category~~range ~~were:~~of ~~commercial~~amounts, ~~loans~~from —the ~~1.3%;~~loan ~~SBA~~collateral ~~loans~~and other ~~(unguaranteed~~payment ~~portion) — 6~~sources.7% ~~and~~Collateral ~~real~~values ~~estate~~are ~~loans-~~subject ~~0.2%~~ to ~~0.9%.~~change ~~These~~depending ~~loss~~on ~~ratios~~market ~~approximate~~factors, collateral ~~those~~condition ~~ratios~~and ~~applied~~method atand ~~December 31,~~timing ~~2010~~of liquidation efforts. ~~Additional~~Loans, ~~losses~~or ~~are~~portions ~~estimated~~of ~~resulting~~loans, ~~from~~for which the ~~additional~~Company ~~identified~~does ~~risks~~not ~~factors,~~expect ~~such~~to asobtain ~~loans~~repayment ~~with~~are ~~underwriting~~charged-off. ~~exceptions~~In most cases, the ~~level~~Company ~~and~~has ~~direction~~established ofspecific ~~payment~~reserves ~~delinquencies~~for ~~and~~ the ~~level~~amount of ~~large~~the ~~loans.~~loan’s ~~Not all of these additional~~ loss ~~estimates~~ ~~are~~prior ~~allocated~~ to the ~~separate~~point ~~loan~~of ~~categories~~charge-off.

The ~~Company~~adequacy ~~monitors~~of ~~its~~the allowance for loan ~~portfolio~~losses ~~for~~is ~~indications~~also ofreviewed ~~weaknesses~~at ~~through~~least ~~the~~quarterly ~~review~~using ofrisk ~~borrowers’~~ratings ~~financial~~applied ~~condition,~~to ~~cash~~the ~~flows,~~loans ~~loan~~based ~~payment~~upon ~~delinquencies,~~rating ~~economic~~criteria ~~factors~~consistent ~~occurring~~with regulatory definitions. inThe ~~borrowers’~~risk ~~business~~rating ~~sectors~~is ~~and~~adjusted, ~~other~~as ~~information~~necessary, ~~which~~if ~~may~~loans ~~come~~become todelinquent, if significant adverse information is discovered regarding the ~~Company~~underlying ~~through~~credit ~~its contacts~~and, in the ~~market~~case ~~place.~~of ~~The~~commercial ~~determination~~loans ofand commercial real estate loans, the ~~effect~~normal periodic review of the ~~weaknesses~~underlying ~~noted~~credit onindicates ~~the~~that a ~~repayment~~change ofin ~~the~~risk ~~loans~~rating is anappropriate. ~~ongoing~~An ~~process~~estimated as“low” and “high” loss percentage is applied to loans in each ~~borrower~~risk rating. ~~The~~These ~~Company~~loss ~~may~~percentages ~~set~~increase ~~aside specific~~as ~~loss~~the ~~reserves~~loan ~~during~~risk ~~this~~rating ~~process~~increases. Loans inrated ~~amounts~~as ~~determined~~substandard, ondoubtful ~~subjective~~or ~~bases~~loss ~~until~~are ~~such time~~evaluated asseparately ~~the~~and ~~collectability~~assigned ofloss amounts based upon the ~~loan~~separate ~~from~~evaluation. ~~the~~Risks ~~borrowers’~~factors ~~primary~~identified ~~repayment~~beyond ~~source(s)~~individual isloan inrisks, ~~doubt.~~such as ~~During~~economic ~~this time~~conditions, ~~secondary~~underwriting exceptions and ~~tertiary~~loan ~~repayment~~concentrations ~~sources,~~are ~~including~~quantified ~~liquidation~~based upon management’s estimations of ~~collateral, are~~loss ~~evaluated~~exposure. ~~which~~Loss ~~may~~percentages ~~result~~used inare generally based upon ~~additional~~management’s ~~specific~~best ~~loss~~estimates ~~reserves~~considering ~~being~~losses ~~established~~incurred. ~~Independent~~Estimated or“low” ~~internal~~and ~~appraisals~~“high” ~~and~~allowance for ~~evaluations~~loan loss amounts are ~~performed~~derived toby ~~determine~~accumulating ~~potential~~the ~~recovery~~estimated ~~amounts,~~losses orusing ~~range~~the of“low” ~~amounts,~~and ~~from~~“high” ~~the~~loss percentages for each risk rating and adding losses based upon separate loan ~~collateral~~evaluations and identified other ~~payment sources~~risks. ~~Collateral~~The ~~values~~actual ~~are~~allowance ~~subject~~for toloan ~~change~~losses ~~depending~~is ~~on market~~compared ~~factors,~~to ~~collateral~~this ~~condition~~range ~~and~~to ascertain ~~method~~that ~~and~~it ~~timing~~is ofreasonably ~~liquidation~~situated ~~efforts~~within the range. ~~Loans~~In addition, ~~or portions~~on ofat ~~loans~~least a quarterly basis, the recorded allowance for ~~which~~loan ~~the~~losses ~~Company~~(as ~~does~~a ~~not~~percent ~~expect~~of loans) is compared to ~~obtain~~peer ~~repayment~~group levels ~~are~~to ~~charged-off~~ascertain the reasonableness of the estimate. ~~In most~~At ~~cases~~September 30, 2011, the ~~Company~~actual ~~has~~allowance for ~~established~~loan ~~specific~~losses ~~reserves~~of ~~for~~1.68% of loans was between the “high” allowance amount of ~~the~~1.69% ~~loan’s~~and ~~loss~~the ~~prior~~low torange ~~the~~percent ~~point~~ of ~~charge-off~~1.43%.

The ~~adequacy of the~~ allowance for loan losses isrepresents ~~also~~1.68% ~~reviewed~~and at1.72% ~~least~~of ~~quarterly using risk ratings applied to the~~ loans ~~based~~receivable ~~upon~~at ~~rating~~September 30, ~~criteria consistent with regulatory definitions.~~2011 ~~The~~and ~~risk rating is adjusted~~December 31, ~~as necessary~~2010, ifrespectively. ~~loans~~The ~~become~~decrease ~~delinquent,~~in ~~if significant adverse information is discovered regarding~~ the ~~underlying~~allowance ~~credit~~for ~~and,~~loan inlosses ~~the~~as ~~case~~a ofpercent ~~commercial~~ of loans ~~and commercial~~at ~~real estate loans~~September 30, ~~the~~2011 ~~normal~~as ~~periodic~~compared ~~review~~to ofDecember 31, ~~the~~2010 ~~underlying~~resulted ~~credit~~from ~~indicates~~$2 million ~~that a change~~ in ~~risk~~net ~~rating~~loan charge-offs istaken ~~appropriate~~during 2011. AnThere ~~estimated~~was ~~“low”~~no ~~and~~change ~~“high” loss percentage is applied to loans~~ in ~~each~~the ~~risk~~methodology ~~rating.~~of ~~These~~determining ~~loss percentages increase as~~ the allowance for loan ~~risk~~losses ~~rating~~at ~~increases. Loans~~September 30, ~~rated~~2011 as ~~substandard,~~compared ~~doubtful~~to orDecember 31, ~~loss~~2010 ~~are~~apart ~~evaluated~~from ~~separately~~changes ~~and~~to ~~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~~ on management’s ~~estimations~~perception of ~~loss~~economic ~~exposure.~~environmental ~~Loss~~factors ~~percentages~~and ~~used are generally based upon management’s best estimates considering losses incurred~~trends. ~~Estimated “low” and “high” allowance for~~Management ~~loan~~believes ~~loss~~that ~~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~~adequate tofor ~~this~~each ~~range~~period ~~to ascertain that it is reasonably situated within the range~~presented. InThe ~~addition,~~activity ~~on at least a quarterly~~in ~~basis,~~ the ~~recorded~~ allowance for loan losses ~~(as a percent of loans)~~ is ~~compared~~shown toin ~~peer group levels to ascertain~~ the ~~reasonableness~~following ~~of the estimate~~table. ~~At June 30, 2011, the actual allowance for~~ ~~loan losses of 1.87% of loans was between the “high” allowance amount of 1.88% and the low range percent of 1.62%.~~

The allowance for loan losses represents 1.87% and 1.72% of loans receivable at June 30, 2011 and December 31, 2010, respectively. The increase in the allowance for loan losses as a percent of loans at June 30, 2011 as compared to December 31, 2010 results from increased specific reserves as well as general reserves reflecting the effect of the current economic conditions. There was no change in the methodology of determining the allowance for loan losses at June 30, 2011 as compared to December 31, 2010 apart from changes to loss factors based on management’s perception of economic environmental factors and trends. Management believes that the allowance for loan losses is adequate for each period presented. The activity in the allowance for loan losses is shown in the following table.


	Nine Months Ended			Year Ended December 31,
(In thousands)	September 30, 2011			2010			2009			2008			2007
Allowance for loan losses:
Beginning balance	$	3,174		$	2,380		$	1,860		$	1,665		$	1,614
Charge-offs — Commercial and Industrial loans		(806	)		(1,140	)		(500	)		(179	)		(72	)
Charge-offs — SBA loans		(285	)		(447	)		(463	)		(318	)		—
Real estate loans:
Charge-offs — Owner occupied		(535	)		—			(138	)		—			—
Charge-offs — Non owner occupied		(532	)		(386	)		—			—			—
Recoveries — Commercial and Industrial loans		100			26			—			45			78
Recoveries — SBA loans		28			25			5			—			—

Net recoveries (charge-offs)		(2,030	)		(1,922	)		(1,096	)		(452	)		6

Provision for loan losses		1,894			2,716			1,616			647			45

Ending balance	$	3,038		$	3,174		$	2,380		$	1,860		$	1,665


Net recoveries (charge-offs) to average loans		(1.11	%)		(1.04	%)		(0.65	%)		(0.33	%)		0.00	%

	Six Months
	Ended			Year Ended December 31,
(In thousands)	June 30, 2011			2010			2009			2008			2007
Allowance for loan losses:
Beginning balance	$	3,174		$	2,380		$	1,860		$	1,665		$	1,614
Charge-offs — Commercial and Industrial loans		(407	)		(1,140	)		(500	)		(179	)		(72	)
Charge-offs — SBA loans		(143	)		(447	)		(463	)		(318	)		—
Real estate loans:
Charge-offs — Owner occupied		(535	)		—			(138	)		—			—
Charge-offs — Non owner occupied		(96	)		(386	)		—			—			—
Recoveries — Commercial and Industrial loans		48			26			—			45			78
Recoveries — SBA loans		22			25			5			—			—
Net recoveries (charge-offs)		(1,111	)		(1,922	)		(1,096	)		(452	)		6
Provision for loan losses		1,308			2,716			1,616			647			45
Ending balance	$	3,371		$	3,174		$	2,380		$	1,860		$	1,665
Net recoveries (charge-offs) to average loans		(0.60	%)		(1.04	%)		(0.65	%)		(0.33	%)		0.00	%

During 2011, loans to twenty one borrowers and related entities totaling $2.2 million were determined to be uncollectible and were charged-off.

~~During~~The ~~2011,~~activity ~~loans~~in tothe ~~twelve~~allowance ~~borrowers~~for ~~and~~loan ~~related~~losses ~~entities~~by ~~totaling~~category ~~$1.2 million~~during ~~were~~the ~~determined~~nine months ended September to30, be2011 ~~uncollectible~~is ~~and~~shown ~~were~~in ~~charged-off~~the following table.

The activity in the allowance for loan losses by category during the six months ended June 30, 2011 is shown in the following table.


							Real Estate Loans
	Commercial									Non-
	and			SBA			Owner			Owner
In thousands	Industrial			Loans			Occupied			Occupied			Unallocated		Total

Balance at December 31, 2010	$	1,023		$	627		$	682		$	715		$	127	$	3,174
Less loan charge offs		(806	)		(285	)		(535	)		(532	)		—		(2,158	)
Loss recoveries		100			28			—			—			—		128
Provision for loan losses		650			136			355			730			23		1,894

Balance at September 30, 2011	$	967		$	506		$	502		$	913		$	150	$	3,038

Allowance for loans individually evaluated for impairment	$	417		$	103		$	364		$	579				$	1,463

Amount of loans individually evaluated for impairment	$	1,030		$	1,641		$	7,685		$	4,292				$	14,648

							Real Estate Loans
	Commercial									Non-
	and			SBA			Owner			Owner
In thousands	Industrial			Loans			Occupied			Occupied			Unallocated		Total
Balance at December 31, 2010	$	1,023		$	627		$	682		$	715		$	127	$	3,174
Less loan charge offs		(407	)		(143	)		(535	)		(96	)				(1,181	)
Loss recoveries		48			22			—			—					70
Provision for loan losses		771			111			230			182			14		1,308
Balance at June 30, 2011	$	1,435		$	617		$	377		$	801		$	141	$	3,371
Allowance for loans individually evaluated for impairment	$	886		$	225		$	237		$	473				$	1,821
Amount of loans individually evaluated for impairment	$	1,704		$	319		$	8,171		$	6,462				$	16,656

The activity in the allowance for loan losses by category during the nine months ended September 30, 2010 is shown in the following table.

The activity in the allowance for loan losses by category during the six months ended June 30, 2010 is shown in the following table.


					Real Estate Loans
	Commercial						Non-
	and		SBA		Owner		Owner
In thousands	Industrial		Loans		Occupied		Occupied		Unallocated		Total

Balance at December 31, 2009	$	1,290	$	576	$	168	$	242	$	104	$	2,380
Loan charge offs		1,005		424		—		106		—		1,535
Loss recoveries		23		19		—		—		—		42
Provision for loan losses		401		247		306		629		63		1,646

Balance at September 30, 2010	$	709	$	418	$	474	$	765	$	167	$	2,533

Allowance for loans individually evaluated for impairment	$	264	$	35	$	262	$	433	$	—	$	994

Amount of loans individually evaluated for impairment	$	2,127	$	317	$	8,714	$	2,317	$	—	$	13,475

					Real Estate Loans
	Commercial						Non-
	and		SBA		Owner		Owner
In thousands	Industrial		Loans		Occupied		Occupied		Unallocated		Total
Balance at December 31, 2009	$	1,290	$	576	$	168	$	242	$	104	$	2,380
Loan charge offs		930		407		—		106		—		1,443
Loss recoveries		22		7		—		—		—		29
Provision for loan losses		295		192		275		214		58		1,034
Balance at June 30, 2010	$	677	$	368	$	443	$	350	$	162	$	2,000
Allowance for loans individually evaluated for impairment	$	251	$	23	$	—	$	14	$	—	$	288
Amount of loans individually evaluated for impairment	$	2,851	$	256	$	3,094	$	7,994	$	—	$	14,195

Additionally, the Company has established a reserve for unfunded commitments that is recorded by a provision charged to other expenses. At September 30, 2011 the balance of this reserve was $60 thousand. The reserve, based on evaluations of the collectability of loans, is an amount that management believes will be adequate over time to absorb possible losses on unfunded commitments (off-balance sheet financial instruments) that may become uncollectible in the future.

Additionally, the Company has established a reserve for unfunded commitments that is recorded by a provision charged to other expenses. At June 30, 2011 the balance of this reserve was $60 thousand. The reserve, based on evaluations of the collectability of loans, is an amount that management believes will be adequate over time to absorb possible losses on unfunded commitments (off-balance sheet financial instruments) that may become uncollectible in the future.

Asset Quality. In its lending activities, the Company seeks to develop sound loans with customers who will grow with the Company. The Company has not, and does not intend to, rapidly build the portfolio and earnings at the sacrifice of asset quality. At the same time, the extension of credit inevitably carries some risk of non-payment.

~~Below~~Asset isQuality. aIn ~~summary~~its oflending activities, the ~~recorded~~Company ~~investment~~seeks ~~amount~~to ~~and~~develop ~~related~~sound ~~allowance~~loans ~~for~~with ~~losses~~customers who ofwill grow with the Company’s. ~~impaired~~The ~~loans~~Company athas ~~June 30~~not, ~~2011~~and does not intend to, rapidly build the portfolio and ~~December 31~~earnings at the sacrifice of asset quality. At the same time, ~~2010:~~the extension of credit inevitably carries some risk of non-payment.

					Related Allowance for
	Recorded Investment				Losses
	June 30,		December 31,		June 30,		December 31,
	2011		2010		2011		2010
LOANS WITH SPECIFIC RESERVES:
Non-accrual loans:
Commercial and Industrial loans	$	1,515	$	963	$	830	$	445
SBA loans		277		359		225		194
Real Estate — Owner Occupied		2,021		3,140		237		483
Real Estate — Non Owner Occupied		2,350		1,976		430		399
Total Non-accrual loans		6,163		6,438		1,722		1,521
TDR** loans:
Real Estate — Owner Occupied		—		2,051		—		13
Real Estate — Non Owner Occupied		1,753		1,603		43		11
Total TDR loans		1,753		3,654		43		24
Number of loans		7		7
Other Impaired loans:
Commercial and Industrial loans		84		250		56		125
Total Other Impaired loans		84		250		56		125
LOANS WITHOUT SPECIFIC RESERVES:
Non-accrual loans:
SBA loans		—		29		—		—
Real Estate — Owner Occupied		544		816		—		—
Total Non-accrual loans		544		845		—		—
TDR** loans:
Commercial and Industrial loans		45		154		—		—
Real Estate — Owner Occupied		1,494		—		—		—
Real Estate — Non Owner Occupied		—		177		—		—
Total TDR loans		1,539		331		—		—
Number of loans		2		2
Total Impaired Loans:
Commercial and Industrial loans	$	1,644	$	1,367	$	886	$	570
SBA loans		277		388		225		194
Real Estate — Owner Occupied		4,059		6,007		237		496
Real Estate — Non Owner Occupied		4,103		3,756		473		410
Total Impaired loans		10,083	$	11,518	$	1,821	$	1,670
**Troubled Debt Restructured

Below is a summary of the recorded investment amount and related allowance for losses of the Company’s impaired loans at September 30, 2011 and December 31, 2010:


	Recorded Investment				Related Allowance for Losses
	September 30,		December 31,		September 30,		December 31,
	2011		2010		2011		2010
LOANS WITH SPECIFIC RESERVES:
Non-accrual loans:
Commercial and Industrial loans	$	758	$	963	$	335	$	445
SBA loans		106		359		103		194
Real Estate — Owner Occupied		1,643		3,140		364		483
Real Estate — Non Owner Occupied		1,939		1,976		477		399

Total Non-accrual loans		4,446		6,438		1,279		1,521

TDR loans:**
Real Estate — Owner Occupied		—		2,051		—		13
Real Estate — Non Owner Occupied		1,742		1,603		102		11

Total TDR loans		1,742		3,654		102		24

Number of loans		7		7
Other Impaired loans:
Commercial and Industrial loans		82		250		82		125

Total Other Impaired loans		82		250		82		125


LOANS WITHOUT SPECIFIC RESERVES:
Non-accrual loans:
SBA loans		—		29		—		—
Real Estate — Owner Occupied		544		816		—		—

Total Non-accrual loans		544		845		—		—

TDR loans:**
Commercial and Industrial loans		45		154		—		—
Real Estate — Owner Occupied		1,494		—		—		—
Real Estate — Non Owner Occupied		—		177		—		—

Total TDR loans		1,539		331		—		—

Number of loans		2		2

Total Impaired Loans:
Commercial and Industrial loans	$	885	$	1,367	$	417	$	570
SBA loans		106		388		103		194
Real Estate — Owner Occupied		3,681		6,007		364		496
Real Estate — Non Owner Occupied		3,681		3,756		579		410

Total Impaired loans		8,353	$	11,518	$	1,463	$	1,670


**		Troubled Debt Restructured

Below is a summary of the average recorded investment amount and recognized interest income related to the Company’s impaired loans during the ~~six~~nine month and three month periods ended at ~~June~~ September 30, 2011:

Average Recorded Amount

Income Recorded

For Periods Ended

June 30, 2011

September 30, 2011

Six Months

Three months

Six Months

Three Months

Nine Months

Three months

Nine Months

Three Months

LOANS WITH SPECIFIC RESERVES:

Non-accrual loans:

Commercial and Industrial loans

1,~~118~~149

1,~~218~~220

—

SBA loans

~~297~~271

~~276~~210

—

Real Estate — Owner Occupied

32,~~017~~613

21,~~896~~668

—

Real Estate — Non Owner Occupied

2,~~010~~019

2,~~043~~041

—

Total Non-accrual loans

6,~~442~~052

65,~~433~~139

—

TDR** loans:

Real Estate — Owner Occupied

~~1,465~~—

~~684~~—

52—

21—

Real Estate — Non Owner Occupied

1,~~773~~764

1,~~766~~745

3548

1713

Total TDR loans

31,~~238~~764

21,~~450~~745

8748

3813

Other Impaired loans:

Commercial and Industrial loans

~~149~~132

~~104~~92

Total Other Impaired loans

~~149~~132

~~104~~92

LOANS WITHOUT SPECIFIC RESERVES:

Non-accrual loans:

SBA loans

2417

21—

—

Real Estate — Owner Occupied

~~583~~572

~~562~~545

—

Total Non-accrual loans

~~607~~589

~~583~~545

—

TDR** loans:

Commercial and Industrial loans

~~105~~87

Real Estate — Owner Occupied

~~1,892~~747

1,~~680~~494

5379

2627

Total TDR loans

~~1,997~~834

1,~~725~~539

5582

2728

Total Impaired Loans:

Commercial and Industrial loans

1,~~372~~368

1,~~367~~357

1112

SBA loans

~~321~~288

~~297~~210

—

Real Estate — Owner Occupied

63,~~957~~932

53,~~822~~707

~~105~~79

4727

Real Estate — Non Owner Occupied

3,783

3,~~809~~786

3548

1713

Total Impaired loans

129,~~433~~371

119,~~295~~060

~~151~~139

6642

Non-accrual loan activity is summarized as follows:

	Six Months
	Nine Months
	Ended		Year Ended December 31,
In thousands	~~June~~September 30, 2011		2010		2009		2008		2007
Balance at the beginning of the period	$	7,283	$	2,734	$	5,819	$	1,125	$	628
New loans placed on non-accrual		12,~~977~~322		7,846		2,427		5,046		569
Less:
Loan restored to interest earning status		—		—		1,266		—		—
Other real estate owned additions		~~720~~979		945		2,462		—		—
Charge offs		12,~~181~~158		1,973		1,101		236		72
Other including payments received		~~652~~1,478		379		683		116		—
Balance at the end of the period	$	64,~~707~~990	$	7,283	$	2,734	$	5,819	$	1,125

Non-accrual loan activity by category during the ~~six~~nine month period ended ~~June~~September 30, 2011 is summarized as follows:

			Commercial				Real Estate		Real Estate
			and				Owner		Non Owner
In thousands	Total		Industrial		SBA		Occupied		Occupied
Balance at the beginning of the period	$	7,283	$	~~963~~667	$	388	$	3,956	$	12,~~976~~272
New loans placed on non-accrual		12,~~977~~322		1,~~063~~089		~~111~~129		~~279~~581		~~524~~523
Less:
Charge offs		1,181		407		143		535		96
Other real estate owned additions		979		—		—		720		259
Other including payments received		1,372		105		79		1,134		54
Charge offs		2,158		806		285		535		532
Balance at the end of the period	$	6,707	$	1,514	$	277	$	2,566	$	2,350
Other including payments received		1,478		192		126		1,095		65
Balance at the end of the period	$	4,990	$	758	$	106	$	2,187	$	1,939

Non-accrual loan activity by category during the ~~six~~nine month period ended ~~June~~September 30, 2010 is summarized as follows:

			Commercial				Real Estate		Real Estate
			and				Owner		Non Owner
In thousands	Total		Industrial		SBA		Occupied		Occupied
Balance at the beginning of the period	$	2,734	$	2,280	$	454	$	—	$	—
New loans placed on non-accrual		12,~~650~~109		~~215~~346		~~271~~505		—		1,~~164~~258
Less:
Charge offs		1,~~443~~535		~~930~~855		~~407~~574		—		106
Other including payments received		~~208~~312		53148		~~155~~164		—		—
Balance at the end of the period	$	2,~~733~~996	$	1,~~512~~623	$	~~163~~221	$	—	$	1,~~058~~152

Non-accrual loans with specific reserves at ~~June~~September 30, 2011 are comprised of:

Commercial loans — ~~ten~~six loans to ~~nine~~five borrowers totaling $~~1.5 million~~758 thousand with $~~830~~335 thousand of specific reserves established.

SBA loans — ~~seven~~three loans ~~to six borrowers~~ totaling $~~277~~106 thousand with $~~225~~103 thousand of specific reserves established.

Owner-occupied Real Estate loans — three loans secured by commercial property in the amount of $21.6 million with specific reserves established for these loans in the amount of $~~237~~364 thousand.

Non-owner Occupied Real Estate loans- ~~six~~— five loans to ~~five~~four borrowers in the amount of $1.9 million, secured by the residential and commercial property ~~in the amount of $2.3 million,~~ after partial charge-off of $~~200~~246 thousand and with specific reserves of $~~430~~477 thousand established for the loans. The borrowers on four of the above loans are controlled by the same individual.

All of these loans are in various stages of collection.

~~All~~At September 30, 2011, the Company has modified nine loans in amounts totaling $3.3 million which modifications qualify the loans as Troubled Debt Restructuring (TDR). These borrowers are in compliance with the modified terms and are accruing interest. Changes made to the loans included the reduction of loan payments from principal and interest payments to interest only payments for specific time periods, the decrease in interest rates charged on a loan and the extension of the maturity of a loan. Specific reserves were established on the loans as appropriate. The majority of these loans ~~are~~were modified in ~~various~~the ~~stages~~third quarter of ~~collection~~2010 as the adverse economic conditions hampered borrowers’ current cash flows.

At June 30, 2011, the Company has modified nine loans in amounts totaling $3.3 million which modifications qualify the loans as Troubled Debt Restructuring (TDR). These loans are included in the schedule above of accruing impaired loans. These borrowers are in compliance with the modified terms and are accruing interest. Changes made to the loans included the reduction of loan payments from principal and interest payments to interest only payments for specific time periods, the decrease in interest rates charged on a loan and the extension of the maturity of a loan. Specific reserves were established on the loans as appropriate. The majority of these loans were modified in the third quarter of 2010 as the adverse economic conditions hampered borrowers’ current cash flows.

TDRs included in non-accruing loans are summarized below. Generally the borrowers have not shown sustained compliance with the modified loan terms.

	Recorded Investment				Related Allowance for Losses
	June 30,		December 31,		June 30,		December 31,
	September 30,		December 31,		September 30,		December 31,
In thousands	2011		2010		2011		2010
TDRs with specific reserves:
Commercial and Industrial loans	$	~~151~~—	$	—	$	~~121~~—	$	—
SBA loans		—		50		—		40
Real Estate — Owner Occupied:		21,~~021~~340		3,140		~~237~~285		483
Real Estate — Non Owner Occupied:		~~794~~782		819		~~244~~255		223
Total non-accruing loans	$	2,~~966~~122	$	4,009	$	~~602~~540	$	746
Number of loans		5		7

Accruing TDR loan activity for the three and ~~six~~nine months ended ~~June~~September 30, 2011 is shown in the following table.

						Real Estate Loans
	Commercial								Non-
	and			SBA		Owner			Owner
In thousands	Industrial			Loans		Occupied			Occupied			Total
Three Months
TDR loans at March 31, 2011	$	45		$	—	$	2,051		$	1,773		$	3,869
TDR loans at June 30, 2011	$	45		$	—	$	1,494		$	1,753		$	3,292
New TDR loans		—			—		~~1,494~~—			—			~~1,494~~—
Principal payments received		—			—		~~(2,051~~—	)		(2011	)		(~~2,071~~11	)
Balance at June 30, 2011	$	45		$	—	$	1,494		$	1,753		$	3,292
Balance at September 30, 2011	$	45		$	—	$	1,494		$	1,742		$	3,281
Six Months
Nine Months
TDR loans at December 31, 2010	$	154		$	—	$	2,051		$	1,780		$	3,985
New TDR loans		45			—		1,494			—			1,539
Principal payments received		—			—		(2,051	)		(2738	)		(2,~~078~~089	)
Loans moved to non-accrual*		(154	)		—		—			—			(154	)
Balance at June 30, 2011	$	45		$	—	$	1,494		$	1,753		$	3,292
Balance at September 30, 2011	$	45		$	—	$	1,494		$	1,742		$	3,281


*		Accrued income reversed upon move to non-accrual

At ~~June~~September 30, 2011, there were $23.78 million of performing loans considered potential ~~problem~~ problem loans, defined as loans which are not included in the 90 day past due, not reported as ~~troubled~~ troubled debt restructures or as nonaccrual loans, but for which known information about possible ~~credit~~ credit problems causes the Company to be uncertain as to the ability of the borrowers to comply with the present loan repayment terms which may in the future result in disclosure in the past due, nonaccrual or restructured loans. The Company closely monitors the financial status of these borrowers.

Generally, the accrual of interest is discontinued when a loan is specifically determined to be impaired or when principal or interest is delinquent for ninety days or more. Interest may accrue on TDRs if the borrowers are consistently in compliance with the modified loan terms.

The following table shows the amounts of non-performing assets on the dates indicated:

	June 30,			December 31:
	September 30,			December 31:
In thousands	2011			2010			2009			2008			2007
Nonaccrual loans:
Commercial and Industrial	$	~~1,514~~758		$	963		$	2,280		$	1,676		$	868
SBA		~~277~~106			388			454			542			257
Real estate — owner occupied		2,~~566~~187			3,956			—			3,601			—
Real estate — non owner occupied		21,~~350~~939			1,976			—			—			—
Accrual loans —past due 90 days and over		—			—			—			—			—
Total non-performing loans		64,~~707~~990			7,283			2,734			5,819			1,125
Other real estate owned		32,~~332~~637			3,324			2,462			—			—
Total non-performing assets	$	107,~~039~~627		$	10,607		$	5,196		$	5,819		$	1,125
Accruing Troubled Debt Restructured loans	$	3,~~292~~281		$	3,985		$	1,263			—			—
Allowance for loan losses to total non-performing loans		33.6	%		43.6	%		87.1	%		32.0	%		148.0	%
Allowance for loan losses/total non-performing loans		60.9	%		43.6	%		87.1	%		32.0	%		148.0	%
Non-performing loans to total loans		32.7176	%		3.94	%		1.47	%		3.80	%		0.89	%
Non-performing assets to total assets		43.7772	%		5.22	%		2.59	%		3.49	%		0.76	%

The payment status of loans receivable at ~~June~~September 30, 2011 is as follows:

Commercial

Real Estate

and

Owner

Non Owner

In thousands

Total

Industrial

SBA

Occupied

Current accruing loans

~~171~~173,~~308~~303

42,~~465~~469

7,~~263~~488

75,~~771~~923

4547,~~809~~423

Current non-accruing loans

~~165~~778

~~165~~254

—

—524

Past due loans:

30 to 89 days past due

2,~~705~~536

~~467~~481

~~202~~237

21,~~036~~620

—198

90 days plus past due and accruing

—

Non-accrual loans, non current

64,~~542~~212

~~1,349~~504

~~277~~106

2,~~566~~187

21,~~350~~415

Total past due loans

96,~~247~~748

~~1,816~~985

~~479~~343

43,~~602~~807

21,~~350~~613

Total loans at the end of the period

180,~~720~~829

4443,~~446~~708

7,~~742~~831

8079,~~373~~730

4849,~~159~~560

Above amounts exclude deferred fees

The Company applies risk ratings to the loans based upon rating criteria consistent with regulatory definitions. The risk ratings are adjusted, as necessary, if loans become delinquent, if significant adverse information is discovered regarding the underlying credit and the normal periodic reviews of the underlying credits indicate that a change in risk rating is appropriate. A summary of the risk rating of loans receivable at ~~June~~September 30, 2011 follows:

Commercial

Real Estate

and

Owner

Non Owner

In thousands

Total

Industrial

SBA

Occupied

Risk rated — pass

~~167~~170,~~359~~707

42,~~789~~724

7,~~424~~684

73,~~697~~786

4346,~~449~~513

Risk rated — special mention (loan weaknesses noted which could lead to loan loss)

42,~~112~~859

59144

1,~~652~~603

21,~~360~~071

Risk rated- substandard or doubtful (loans with significant weaknesses that could, or has, result in loan losses)

97,~~249~~263

~~1,598~~840

~~277~~106

54,~~024~~341

21,~~350~~976

Total loans

180,~~720~~829

4443,~~446~~708

7,~~742~~831

8079,~~373~~730

4849,~~159~~560

Above amounts exclude deferred fees

~~Real~~Above ~~estate~~amounts ~~acquired~~exclude ~~through~~deferred ~~or in the process of foreclosure is recorded at fair value less~~fees estimated disposal costs. The Company periodically evaluates the recoverability of the carrying value of the real estate acquired through foreclosure using current estimates of fair value when it has reason to believe that real estate values have declined for the particular type and location of the real estate owned. In the event of a subsequent decline, an allowance would be provided to reduce real estate acquired through foreclosure to fair value less estimated disposal cost. The Company acquired through foreclosure a commercial building with a fair value of approximately $653 thousand in March 2009. Because of the decline in real estate values in this building’s area, the Company has reduced the carrying value of this owned building by $153 thousand during 2010 and $125 thousand in 2011 offsetting these reductions as increases in non-interest expenses. The Company acquired another commercial building by foreclosure in November 2009 with a fair value of approximately $1.8 million. The Company also acquired through foreclosure five residential properties, comprised of four condominium units and one single family residence, during the fourth quarter of 2010. The house and two of the condominiums were sold in 2011. The fair value of these properties, and the recorded amount of the other real estate owned was $392 thousand at June 30, 2011. In 2011 the Company acquired another commercial building through foreclosure with a fair value of $720 thousand. The Company is leasing two of the commercial properties to others under short term leases as it offers them for sale. Net income from the operations of the properties was $28 thousand during the six months ended June 30, 2011 and $4 thousand during the first six months of 2010. The Company capitalized $86 thousand of costs to update and improve two of the residential properties, one of which has been sold. The Company did not finance any of the property sales.

~~Investment~~Real ~~Portfolio.~~estate Atacquired ~~June 30,~~through ~~2011,~~or ~~December 31,~~in ~~2010 and June 30, 2010,~~ the ~~Company~~process ~~had~~of ~~no investments~~foreclosure inis ~~securities~~recorded ~~other~~at ~~than~~fair ~~investments~~value ~~in Federal Reserve Bank stock as required by~~less ~~regulation~~estimated ~~and~~disposal ~~stock in two banker’s banks~~costs. The Company isperiodically ~~maintaining~~evaluates ~~its~~the ~~liquid~~recoverability ~~assets~~of inthe ~~its~~carrying ~~account~~value atof the ~~Federal~~real ~~Reserve~~estate ~~and~~acquired ~~fully~~through ~~FDIC~~foreclosure ~~insured~~using ~~certificates~~current estimates of ~~deposits~~fair invalue ~~other~~when ~~financial~~it ~~institutions~~has ~~for~~reason ~~safety~~to ~~and~~believe ~~liquidity~~that ~~purposes.~~real ~~The~~estate ~~Company~~values ~~will~~have ~~make~~declined ~~additional~~for ~~investments~~the ~~when~~particular type and location of ~~interest~~the ~~rates~~real ~~have~~estate ~~increased~~owned. ~~and~~In the ~~Company~~event ~~has~~of ~~sufficient~~a ~~excess~~subsequent ~~liquidity.~~decline, ~~The~~an ~~following~~allowance ~~table provides~~would ~~information~~be ~~regarding~~provided ~~the~~to reduce ~~composition~~real ofestate ~~the~~acquired ~~Company’s~~through ~~investment~~foreclosure ~~securities~~to ~~portfolio~~fair ~~at the~~value ~~dates~~less ~~indicated~~estimated disposal cost.

	Investment in Stocks
	June 30, 2011					December 31, 2010
In thousands	Amount		Percent			Amount		Percent
Investments in stocks, at cost;
Federal Reserve Stock	$	465		88.24	%	$	465		88.24	%
Corporate equities		62		11.76	%		62		11.76	%
Total stocks	$	527		100.00	%	$	527		100.00	%

Other Real Estate owned (ORE) activity for the nine months ended September 30, 2011 is summarized below:


				Commercial			Residential
In thousands	Total			Property			Property
Balance December 31, 2010	$	3,324		$	2,309		$	1,015
New ORE properties and improvements		1,077			730			347
Valuation reductions		(125	)		(85	)		(40	)
Sales		(1,639	)		(490	)		(1,149	)

Balance at September 30, 2011	$	2,637		$	2,464		$	173

Number of properties		3			2			1

Investment Portfolio. At September 30, 2011, December 31, 2010 and September 30, 2010, the Company had no investments in securities other than investments in Federal Reserve Bank stock as required by regulation and stock in two banker’s banks. The Company is maintaining its liquid assets in its account at the Federal Reserve and fully FDIC insured certificates of deposits in other financial institutions for safety and liquidity purposes. The Company will make additional investments when interest rates have increased and the Company has sufficient excess liquidity. The following table provides information regarding the composition of the Company’s investment securities portfolio at the dates indicated.


	Investment in Stocks
	September 30, 2011					December 31, 2010
In thousands	Amount		Percent			Amount		Percent
Investments in stocks, at cost;
Federal Reserve Stock	$	465		88.24	%	$	465		88.24	%
Corporate equities		62		11.76	%		62		11.76	%

Total stocks	$	527		100.00	%	$	527		100.00	%

These stock holdings are recorded at cost as they are not readily marketable.

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

The Company’s deposits consist of demand deposits, NOW accounts, money market accounts, savings accounts and certificates of deposit. These accounts provide the Company with a relatively stable source of funds. The Company generally targets larger deposit relationships by offering competitive interest rates on certificates of deposit of $75 thousand or more in our local markets. Deposits from the local market areas are supplemented with out-of-area deposits comprised of funds obtained through the use of deposit listing services (national market certificates of deposit), deposits obtained through the use of brokers and through the Certificates of Deposit Account Registry Service (CDARS) program. As a result, a substantial portion of our deposits, 2019.36% at ~~June~~September 30, ~~2011~~ 2011 and 24.5% at December 31, 2010 and 3228.94% at ~~June~~September 30, 2010, are comprised of certificate of deposit accounts of $100 thousand or more. Total certificates of deposit represent 6764.29% of deposits at ~~June~~ September 30, 2011 and 68.5% of deposits at December 31, 2010 and 7479.47% at ~~June~~ September 30, 2010.

The Company’s reliance on certificates of deposit, including the use of larger denomination certificates of deposit and brokered deposits, facilitates funding the growth in the loan portfolio. The Company has relied on certificates of deposit as a primary funding source and has used larger certificates of deposits as a funding source since its inception. While sometimes requiring higher interest rates, such funds carry lower acquisition costs (marketing, overhead costs) and can be obtained when required at the maturity dates desired. Substantially all of the deposit accounts over $100 thousand are fully insured by the FDIC through differing ownership and trustee arrangements and the insured deposit limit of $250 thousand. All of the brokered deposits and national market deposits are fully insured by the FDIC. This insurance and the strong capital position of the Company reduce the likelihood of large deposit withdrawals for reasons other than interest rate competition. Interest rates on these deposits can be, but are not always, higher than other deposits products. There is, however, a risk that some deposits would be lost if rates were to increase and the Company elected not to remain competitive with its own deposit rates. Under those conditions, the Company believes that it is positioned to use other sources of funds, such as borrowing on its unsecured credit facilities with other banks or the sale of loans.

At ~~June~~September 30, 2011, deposits totaled $~~186~~180.63 million as compared to $180.1 million at December 31, 2010. ~~The~~While ~~$6.5 million~~the ~~increase~~total inof deposits ~~resulted~~remained ~~from~~level, the ~~$2.7 million~~composition ~~increase~~of inthe ~~noninterest~~deposits changed as noninterest bearing deposits, ~~the~~increased by $24.13 million, ~~increase in~~ savings ~~accounts~~deposits ~~balance,~~increased ~~the increase of~~ $24.1 million ~~in the amount of~~ , certificates of deposit ~~and~~decreased ~~the~~by ~~decrease of~~ $06.43 million, inMoney ~~interest bearing~~Market ~~demand~~and ~~deposits~~Now ~~and~~accounts ~~money~~decreased ~~market~~by ~~accounts~~$1.9 million. There were $3635.60 million and $33.1 million of brokered certificates of deposit at ~~June~~ September 30, 2011 and December 31, 2010, respectively. Included in these brokered deposits at ~~June~~ September 30, 2011 are $7.62 million of certificates of deposits received in exchange for the placement of the Company’s customers’ deposit funds with other financial institutions under the CDARS program. Included in deposits are deposits of officers and directors (and their affiliated entities) of $11.48 million at ~~June~~September 30, 2011.

As a result of the enactment of the Dodd-Frank Act, banks are no longer prohibited from paying interest on demand deposit accounts, including those from businesses, effective in July 2011. If the Company starts to pay interest on these accounts, its net interest margin would decline. It is not clear what affect the elimination of this prohibition will have on the Bank’s interest expense, allocation of deposits, deposit pricing, loan pricing, net interest margin, ability to compete, ability to establish and maintain customer relationships, or profitability. The Company has decided not to offer interest on demand deposit accounts at this time.

Deposits are summarized below as of dates indicated:

	June 30,		%			December 31:
	September 30,		%			December 31:
In thousands	2011		Change			2010		2009		2008
Non-interest bearing deposits	$	2628,~~474~~059		1118.41	%	$	23,760	$	21,024	$	23,599
Interest bearing deposits:
NOW accounts		~~885~~432		(3065.82	%)		1,279	$	309	$	1,247
Money Market accounts		87,~~828~~729		0(12.04	%)		8,824		7,841		13,049
Savings accounts		2527,~~104~~014		917.36	%		22,962		10,379		148
Certificates of deposit accounts:
Less than $100,000		8781,~~462~~630		103.41	%		79,209		71,593		37,539
$100,000 or more		3735,~~885~~403		(1419.17	%)		44,076		67,499		69,659
Total interest bearing deposits		~~160~~152,~~164~~208		(2.46	%)		156,350		157,621		121,642
Total deposits	$	~~186~~180,~~638~~267		30.61	%	$	180,110	$	178,645	$	145,241

The table below shows the maturities of certificates of deposit:

	June 30, 2011				December 31, 2010
	September 30, 2011				December 31, 2010
	CDs of $100,000				CDs of $100,000
In thousands	or more		All CDs		or more		All CDs
Three months or less	$	67,~~894~~507	$	1823,~~811~~138	$	9,228	$	21,682
Over three months to six months		6,~~766~~254		2120,~~757~~051		15,492		28,124
Over six months to twelve months		97,~~136~~651		3226,~~428~~970		7,486		29,325
Over twelve months through three years		1213,~~964~~610		4341,~~368~~785		9,058		36,497
Over three years		~~2,125~~381		85,~~983~~089		2,812		7,657
Total	$	3735,~~885~~403	$	~~125~~117,~~347~~033	$	44,076	$	123,285

The table below shows the source of the Company’s certificate of deposits as well as the amount equal to or greater than $100,000 at ~~June~~September 30, 2011:

CDs with

CDs with balances

balances of less

of $100,000 or

In thousands

than $100,000

greater

Total

Source

Local markets

5,~~888~~446

2422,~~540~~419

3027,~~428~~865

National market

5854,~~277~~192

—

5854,~~277~~192

CDARS program:

Customers’ funds

—

7,~~554~~153

Proprietary funding

4,~~268~~192

5,~~791~~831

10,~~059~~023

Other brokered funds

1917,~~029~~800

—

1917,~~029~~800

Total

8781,~~462~~630

3735,~~885~~403

~~125~~117,~~347~~033

CDARS program funding is reflected in the above schedule as “Customers’ funds” and “Proprietary funding”. The Company, acting as agent for its customers, places customer funds in other financial institutions under the program up to the FDIC insurance limit of $250,000. Under the CDARS program, other financial institutions place deposits in the Company for the same amount of the customers’ funds. “Customers’ funds” are comprised of deposits from these customer transactions. The Company can obtain funding under the CDARS program by bidding for deposit funds without customers’ involvement. This “Proprietary funding” results in traditional brokered deposits.

The Company’s short term liquid assets of cash and cash equivalents were $2520.82 million, or 129.29% of assets, and $13.7 million, or 6.8% of assets at ~~June~~September 30, 2011 and December 31, 2010, respectively. Continued growth in deposits will be required to fund any loan growth. Accordingly, the Company intends to maintain a competitive posture in its deposit interest rate offerings. While ~~adequate~~ 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 ~~June~~September 30, 2011 and December 31, 2010. There were no borrowings outstanding under these credit arrangements at during 2011 or 2010.

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

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 June 30, 2011 and December 31, 2010 totaled $1.2 million and $1.3 million, respectively.

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 unOFF-~~advanced~~BALANCE ~~loan~~SHEET ~~funds. These commitments at June 30, 2011~~ARRANGEMENTS totaled $41.0 million and $41.6 million at December 31, 2010. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds collateral supporting those commitments for which collateral is deemed necessary. The Company has not been required to perform on any financial guarantees and has not recorded or incurred any losses on its commitments. The issuance of letters of credit is not a significant activity of the Company. Outstanding letters of credit totaled $1.3 million at September 30, 2011 and December 31, 2010.

Commitments to extend credit are agreements to lend funds to customers as long as there are no violations of any condition established in the loan contracts. These commitments include commitments to lend funds as well as un-advanced loan funds. These commitments at September 30, 2011 totaled $40.9 million and $41.6 million at December 31, 2010. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

With the exception of these off-balance sheet arrangements, the Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, that is material to investors.

CAPITAL ADEQUACY

The Federal Reserve Board and the FDIC have established guidelines with respect to the maintenance of appropriate levels of capital by bank holding companies and state non-member banks, respectively. The regulations impose two sets of capital adequacy requirements: minimum leverage rules, which require bank holding companies and banks to maintain a specified minimum ratio of capital to total assets, and risk-based capital rules, which require the maintenance of specified minimum ratios of capital to “risk-weighted” assets. At ~~June~~September 30, 2011, the Company and the ~~Bank~~ Bank were in full compliance with these guidelines, as follows:

							Minimum Ratios
	June 30,			December 31,			To be “Adequately			To be “Well
	September 30,			December 31,			To be “Adequately			To be “Well
	2011			2010			Capitalized”			Capitalized”
Total capital:
Company		1314.81	%		13.1	%		8.0	%		N/A
Bank		13.14	%		12.3	%		8.0	%		10.0	%
Tier I:
Company		12.68	%		11.8	%		4.0	%		N/A
Bank		1112.81	%		11.1	%		4.0	%		6.0	%
Leverage Total:
Company		11.25	%		11.0	%		4.0	%		N/A
Bank		10.58	%		10.3	%		4.0	%		5.0	%

The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, and changing competitive conditions and economic forces. The adequacy of the Company’s capital is reviewed by management on an ongoing basis. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses. The ability of the Company to grow is dependent on the availability of capital with which to meet regulatory capital requirements, discussed below. To the extent the Company is successful it may need to acquire additional capital through the sale of additional common stock, other qualifying equity instruments, such as preferred stock (which the Company is not currently authorized to issue), or subordinated debt. There can be no assurance that additional capital will be available to the Company on a timely basis or on attractive terms.

Under guidance by the federal banking regulators, banks which have concentrations in construction, land development or commercial real estate loans (other than loans for majority owner occupied properties) would be expected to maintain higher levels of risk management and, potentially, higher levels of capital. It is possible that the Company may be required to maintain higher levels of capital than it would otherwise be expected to maintain as a result of its levels of construction, development and commercial real estate loans, which may require us to obtain additional capital. Significant further growth of the Company may be limited because the current level of capital will not support rapid short term growth while maintaining regulatory capital expectations. Loan portfolio growth will need to be funded by increases in deposits as the Company has limited amounts of on-balance sheet assets deployable into loans. Growth will depend upon Company earnings and/or the raising of additional capital.

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


ITEM 3		— QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable


ITEM 4		— CONTROLS AND PROCEDURES

The Company’s management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated, as of the last day of the period covered by this report, the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15 under the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective. There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15 under the Securities Act of 1934) during the quarter ended ~~June~~September 30, 2011 that has materially affected, or is reasonably likely to to materially affect, the Company’s internal control over financial reporting.

PART II — OTHER INFORMATION


Item 1		— Legal Proceedings

In the normal course of its business, the Company is involved in litigation arising from banking, financial, and other activities it conducts. Management, after consultation with legal counsel, does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on the Company’s financial condition, operating results or liquidity.


Item 1A		— Risk Factors

Not applicable


Item 2		— Unregistered Sale of Equity Securities and Use of Proceeds

(a) Sales of Unregistered Securities. None ~~(b) Use of Proceeds. Not applicable. (c) Issuer Purchases of Securities. None~~

(b) Use of Proceeds.Not applicable.


Item 3.		— Defaults Upon Senior Securities. None


Item 4		— [Removed and Reserved]


Item 5		— Other Information

	(a)		Information Required to be Reported on Form 8-K. None
	(b)		Changes in Security Holder Nomination Procedures. None

(a) Information Required to be Reported on Form 8-K. None

(b) Changes in Security Holder Nomination Procedures. None


Item 6		— Exhibits

Exhibit No.			Description of Exhibits
	3	(a)	Certificate of Incorporation of the Company, as amended (1)
	3	(b)	Bylaws of the Company (1)
	10	(a)	Employment Agreement between Richard J. Morgan and the Company (2)
	10	(b)	Employment Agreement between Lamont Thomas and the Company (3)
	10	(c)	First Amendment to Employment Agreement between Lamont Thomas and the Company (4)
	10	(d)	Employment Agreement between Michael T. Storm and CommerceFirst Bank (5)
	10	(e)	Extension of Employment Agreement between Richard J. Morgan and the Company (6)
	11		Statement regarding Computation of Per Share Income — See Notes to Financial Statements.
	21		Subsidiaries of the Registrant -The sole subsidiary of the Registrant is CommerceFirst Bank, a Maryland chartered commercial bank.
	31	(a)	Certification of Richard J. Morgan, President and CEO
	31	(b)	Certification of Michael T. Storm, Executive Vice President and Chief Financial Officer
	32	(a)	Certification of Richard J. Morgan, President and Chief Executive Officer
	32	(b)	Certification of Michael T. Storm, Executive Vice President and Chief Financial Officer
	101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statement of Financial Position at ~~June~~September 30, 2011 and December 31, 2010 (ii) the Consolidated Statement of Earnings for the ~~six~~nine and three month periods ended ~~June~~September 30, 2011 and 2010, (iii) the Consolidated Statement of Cash Flows for the ~~six~~nine months ended ~~June~~September 30, 2011 and 2010 and (iv) the Notes to the Consolidated Financial Statements.


(1)		Incorporated by reference to exhibit of the same number filed with the Company’s Registration Statement on Form SB-2, as amended, (File No. 333-91817)

(2)		Incorporated by reference to exhibit 10(b) to the Company’s to Registration Statement on Form SB-2, as amended) (File No. 333-91817)

(3)		Incorporated by reference to exhibits 10(c) to the Company’s to Registration Statement on Form SB-2, as amended) (File No. 333-91817)

(4)		Incorporated by reference to Exhibit 10(d) to the Company’s Quarterly Report on Form 10-QSB for the period ended March 31, 2007.

(5)		Incorporated by reference to Exhibit 10(e) to the Company’s Quarterly Report on Form 10-QSB for the period ended September 30, 2007.

(6)		Incorporated by reference to Exhibit 99 to the Company’s Current Report on Form 8-K filed on January 30, 2009.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	COMMERCEFIRST BANCORP, INC.
Date: August 4, 2011	By:	/s/ Richard J. Morgan
Date: November 1, 2011	By:	/s/ Richard J. Morgan
		Richard J. Morgan, President and Chief Executive Officer
Date: August 4, 2011	By:	/s/ Michael T. Storm
Date: November 1, 2011	By:	/s/ Michael T. Storm
		Michael T. Storm, Executive Vice President and Chief Financial Officer

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Filing Compare · COMMERCEFIRST BANCORP INC