ITEM 1. Business
ITEM 1A.
ITEM 1A. Risk Factors
ITEM 1B.
ITEM 1B. Unresolved Staff Comments
ITEM 2.
ITEM 2. Properties
ITEM 3.
ITEM 3. Legal Proceedings
ITEM 4.
ITEM 4. Mine Safety Disclosures
PART II
ITEM 5.
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
(a) Market for Common Stock and Dividends.
The Company’s Common Stock is listed for trading on the NASDAQ Capital Market under the symbol “CFMB.” The following table sets forth the high and low sales prices for the Common Stock during each calendar quarter of 2011 and 2010. These quotations do not necessarily reflect the intrinsic or market values of the Common Stock. As of December 31, 2011, there were 1,820,548 shares of Common Stock outstanding, held by approximately 300 shareholders of record.
From its organization through December 31, 2011 the Company has not paid any dividends. The payment of dividends by the Company may depend largely upon the ability of the Bank, its sole operating business, to declare and pay dividends to the Company. Regulations of the Federal Reserve Board and Maryland law place limits on the amount of dividends the Bank may pay to the Company without prior approval. Prior regulatory approval is required to pay dividends which exceed the Bank’s net profits for the current year plus its retained net profits for the preceding two calendar years, less required transfers to surplus. Additionally, without prior approval, the Bank may pay dividends only out of its undivided profits. Even if the Bank and the Company have earnings in an amount sufficient to pay dividends, the Board of Directors may determine to retain earnings for the purpose of funding the growth of the Company and the Bank.
Recent Sales of Unregistered Shares. None.
(b) Use of Proceeds: Not applicable
(c) Issuer Repurchases of Securities during the Fourth Quarter of 2011. None.
ITEM 6.
ITEM 6.
Selected Financial Data.
The following table shows selected historical Company consolidated financial data and should be read in conjunction with the historical consolidated financial information contained in the Consolidated Financial Statements for the year ended December 31, 2011 included in Item 8. Data for all periods are derived from the respective audited consolidated financial statements.
SELECTED CONSOLIDATED FINANCIAL DATA
ITEM 7.
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
MANAGEMENT’S DISCUSSION AND ANALYSIS
Forward - Looking Statements. Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are generally identified by words such as “may,” “anticipates,” “believes,” “expects,” “plans,” “estimates,” “potential,” “continue,” “should,” and similar words or phrases. Such forward-looking statements involve known and unknown risks including, but not limited to, changes in general economic and business conditions, interest rate fluctuations, competition within and from outside the banking industry, new products and services in the banking industry, risk inherent in making loans such as repayment risks and fluctuating collateral values, problems with technology utilized by the Company, changing trends in customer profiles and changes in laws and regulations applicable to the Company or the banking industry as a whole. Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Readers are cautioned against placing undue reliance on any such forward-looking statements. The Company does not undertake to update any forward-looking statements to reflect occurrences or events that may not have been anticipated as of the date of such statements.
This discussion and analysis provides an overview of the financial condition and results of operations of CommerceFirst Bancorp, Inc. (the “Company”) and CommerceFirst Bank (the “Bank”) for the years 2011 and 2010. It is intended that this discussion and analysis help the readers in their analysis of the accompanying audited Consolidated Financial Statements. You should read this discussion in conjunction with the Consolidated Financial Statements and Notes thereto provided elsewhere in this report.
General
CommerceFirst Bancorp, Inc. is the bank holding company for CommerceFirst Bank, a Maryland chartered commercial bank headquartered in Annapolis, Maryland. The Bank was capitalized, became a wholly owned subsidiary of the Company and commenced operations on June 29, 2000. The Company maintains five banking offices in Anne Arundel, Howard and Prince George’s counties in central Maryland. The Company focuses on providing commercial banking services to small and medium sized businesses in its market areas.
Proposed Merger
On December 20, 2011, the Company entered into an Agreement and Plan of Merger (Merger Agreement) with Sandy Spring Bancorp, Inc. (Sandy Spring), whereby Sandy Spring will acquire the Company by way of a merger of the Company with and into Sandy Spring. The Merger Agreement also provides for the merger of CommerceFirst Bank with and into Sandy Spring Bank, a Maryland bank and trust company, a wholly owned subsidiary of Sandy Spring. Pursuant to the Merger Agreement, at the effective time of the merger, each outstanding share of the Company’s common stock will be converted into the right to receive either (i) $13.60 in cash (Cash Consideration), or (ii) 0.8043 of a share of Sandy Spring’s common stock, subject to adjustment in accordance with the provisions of the Merger Agreement. The Merger Agreement provides that 50% of the outstanding shares of Company common stock will be converted into Stock Consideration and 50% of the outstanding shares of Company common stock will be converted into Cash Consideration. Each stockholder of the Company will be entitled to elect the number of shares of Company common stock held by such stockholder that will exchanged for the Stock Consideration or the Cash Consideration subject to proration in the event that a selected form of consideration is over-elected. The merger is intended to be a tax-free reorganization as to the portion of the merger consideration received as Sandy Spring common stock.
The Merger Agreement contains customary representations, warranties and covenants from both the Company and Sandy Spring. Among other covenants, the Company has agreed: (i) to convene and hold a meeting of its shareholders to consider and vote upon the Merger, (ii) that, subject to certain exceptions, the board of directors of the Company will recommend the adoption and approval of the Merger and the Merger Agreement by its shareholders, and (iii) not to (A) solicit alternative third-party acquisition proposals or, (B) subject to certain exceptions, conduct discussions concerning or provided confidential information in connection with any alternative third-party acquisition proposal.
Completion of the Merger is subject to various customary conditions, including, among others: (i) approval of the Merger and the Merger Agreement by the shareholders of the Company, (ii) receipt of required regulatory approvals, (iii) the absence of legal impediments to the Merger and (iv) the absence of certain material adverse changes or events. The Merger Agreement contains certain termination rights for the Company and Sandy Spring, as the case may be. The Merger Agreement further provides that, upon termination of the Merger Agreement under certain circumstances, the Company will be required to pay to Sandy Spring a termination fee of $1,000,000.
The representations and warranties contained in the Merger Agreement are not intended do, and do not, modify the statements and information about the Company contained in its periodic reports on Forms 10-K, 10-Q and 8-K, or the information contained in other documents filed with the Securities and Exchange Commission or their respective banking regulators. Representations and warranties in agreements such as the Merger Agreement are not intended as statements of fact, but rather are negotiated provisions which allocate risks related to the subject matter of the statements between the parties to the agreement. Additionally, the representations and warranties are modified in the Agreement by materiality standards and conditions, and clarifications, exclusions and exceptions set forth on schedules and exhibits which are not public documents. As such, readers should not place reliance on the representations and warranties as accurate statements of the current condition of any party to the agreement, their respective subsidiaries, operations, assets or liabilities.
General
The financial industry continues to experience significant volatility and stress as economic conditions remain generally stagnant, unemployment levels are high and asset values remain depressed. While the Company did not have direct exposure to the upheaval in the residential mortgage loan market, declines in housing construction that started in 2008 and the related impact on contractors and other small and medium sized businesses have had an adverse impact on the Company’s business. This impact included increased levels of non-performing assets, loan charge-offs and increased loan loss provisions. While the Company believes that it has taken adequate reserves for the problem assets in its loan portfolio at December 31, 2011, there can be no assurance that the Company will not be required to take additional charge-offs or make additional provisions for nonperforming loans, or that currently performing loans will continue to perform. Additionally, there can be no assurance that the steps taken to stimulate the economy and stabilize the financial system will prove successful, or that they will improve the financial condition of the Company’s customers or the Company.
Overview
The Company’s assets increased modestly at December 31, 2011 from December 31, 2010, primarily reflecting an increase in cash and cash equivalents as the Company increased its liquidity position. Earnings improved as the result of the reduction of the cost of deposits particularly the reduction in the cost of certificates of deposits due to re-pricing of these deposits to lower current market interest rates. Despite a decline from 2010, the provision for loan losses continues to remain relatively high in recognition of the effect of uncertain economic conditions on the Company’s borrowers and collateral values as well as loan charge-offs. Key measurements and events for the period include the following:
A detailed discussion of the factors leading to these changes can be found in the discussion below.
Further asset and loan growth by the Company may be limited by its levels of regulatory capital. Increases in the loan portfolio need to be funded by increases in deposits as the Company has limited amounts of on-balance sheet assets deployable into loans. Growth will depend upon Company earnings and/or the raising of additional capital.
Critical Accounting Policies
The Company’s Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States and follow general practices within the industries in which it operates. Application of these principles requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write-down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available.
The most significant accounting policies followed by the Company are presented in Note 1 to the Consolidated Financial Statements. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions and estimates underlying those amounts, management has identified the determination of the allowance for loan losses as the accounting area that requires the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.
The Company believes it has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Company’s assessments may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations and the discovery of information with respect to borrowers which is not known to management at the time of the issuance of the Consolidated Financial Statements. For additional discussion concerning the allowance for loan losses and related matters, see “Provision for Loan Losses” below and Note 1 to the Consolidated Financial Statements.
Financial Condition
The Company’s assets at December 31, 2011 were $207.3 million, an increase of $4.2 million or 2.1%, from December 31, 2010. The increase is primarily the result of the increase in cash and cash equivalents of $4.1 million offset by the decrease in net loans of $0.4 million. Increases in deposits during 2011 were primarily maintained in interest bearing cash deposit accounts at other financial institutions.
Loan Portfolio
At December 31, 2011, net loans totaled $181.3 million as compared to $181.7 million at December 31, 2010. The loan portfolio is comprised of commercial loans and real estate loans. The net decrease in loans is attributable to the $1.2 million decline, or 2.3%, in commercial and industrial loans, the increase of $0.6 million in real estate loans, or 0.5%, as well as a $0.1 million decrease, or 4.4%, in the allowance for loan losses. During 2011, the Company continued its efforts to originate real estate loans, where the Company has tangible collateral securing the loans. Real estate retains a value even in down markets unlike other collateral such as accounts receivable and business assets, which are more susceptible to significant declines in value. The real estate portfolio is largely composed of loans secured by commercial real estate. The Company has only approximately $1 million in acquisition and development loans secured by residential building lots. The Company’s residential loans consist of loans to investors in residential property for rental, and are primarily secured by one to four family properties.
The loan portfolio is the largest component of earning assets and accounts for the greatest portion of total interest income. At December 31, 2011, gross loans were $184.3 million, a 0.3% decline from the $184.9 million in gross loans outstanding at December 31, 2010. Loans consist of internally generated loans and participation loans purchased from other local community banks. Lending activity is confined to the Bank’s market area. The Company continues to seek quality credits. There has been no dilution of credit underwriting standards. The Company does not engage in foreign lending activities.
The following table sets forth information on the composition of the loan portfolio by type at December 31:
Note:
The loan amounts and percentages for December 31, 2010 above reflect the effect of reclassifying approximately $9.5 million of commercial and industrial loans to real estate loans during the second quarter of 2010. The reclassification resulted from a review by the Company of the risk profile of the loan portfolio. The majority of the reclassified loans were to entities whose cash flow were directly or indirectly significantly dependent upon the sale, refinance, or management of real estate assets or collections of the entities’ financing of real estate. Without the reclassification, the commercial and industrial loans would have comprised approximately 33.4% of the total loans at December 31, 2010.
Non owner occupied real estate loans include loans secured by residential property in the amount of $26.5 million, $24.3 million, $22.1 million, $19.0 million in 2011, 2010, 2009 and 2008, respectively. Delineation as to residential versus commercial property for 2007 is not available.
The tables below set forth the maturity and re-pricing distributions of the loan receivable portfolio as of December 31, 2011.
Allowance for Loan Losses
The allowance for loan losses was $3.0 million, or 1.65% of loans, at December 31, 2011 as compared to $3.2 million, or 1.72% of loans, at December 31, 2010. At December 31, 2011, non-accrual loans totaled $2.7 million as compared to $7.3 million at December 31, 2010. The decrease is primarily attributable to decreases in non-accrual real estate loans. The majority of the non-accrual loans are commercial real estate loans: $0.4 million in loans to businesses occupying the real estate collateral to conduct the borrowers’ primary business operations and $1.3 million in loans on real estate for investment purposes. The long period of reduced economic activity has negatively impacted businesses resulting in the reduction of resources to make required loan payments. Loans charged-off in 2011 totaled $2.8 million as compared to $2.0 million during 2010. Recoveries on charged-off loans were $138 thousand during 2011 and $51 thousand during 2010.
Of the balance in the allowance account at December 31, 2011, “specific” reserves were $1.4 million, or 0.77% of gross loans outstanding, and “general” reserves were $1.6 million, or 0.88% of gross loans outstanding at December 31, 2011. Specific reserves are used to individually allocate an allowance for loans identified as impaired, or which otherwise exhibit adverse characteristics that suggest a heightened risk of non-collection. General reserves are those made with respect to unclassified loans in our portfolio based upon the methodology discussed below in order to maintain the allowance at a level which reflects our best estimate of the losses inherent in the portfolio with respect to such loans. Whether specific or general, amounts in the allowance for credit losses are available to absorb losses with respect to any loan. At December 31, 2010, the allowance for credit losses stood at $3.2 million, or 1.72% of outstanding gross loans. Of this amount, specific reserves were $1.6 million and general reserves were $1.6 million.
The allowance for loan losses is determined based upon various loss ratios applied to categories of loans except for loans rated substandard, doubtful or loss, which are evaluated separately and assigned specific reserve amounts, if necessary, based upon the evaluation. Loss ratios are applied to each category of loan to determine estimated loss amounts. Categories of loans are identified as commercial term or revolving loans, SBA loans, owner occupied real estate loans and non owner occupied real estate loans. Additional loss ratios are also applied for risks factors identified beyond individual loan risks, such as economic conditions, underwriting exceptions and loan concentrations based upon management’s estimations of loss exposure. Loss ratios are determined based upon the Bank’s loan loss history adjusted for estimated losses for the effect of current economic conditions (currently stressed), any industry concentration or identified weakness in an industry, and credit management and underwriting policies changes, if any.
The Company monitors its loan portfolio for indications of weaknesses through the review of borrowers’ financial condition, cash flows, loan payment delinquencies, economic factors occurring in borrowers’ business sectors and other information which may come to the Company through its contacts in the market place. The determination of the effect of the weaknesses noted on the repayment of the loans is an ongoing process as to each borrower. The Company may set aside specific loss reserves during this process in amounts determined on subjective bases until such time as the collectability of the loan from the borrowers’ primary repayment source(s) is in doubt. During this time, secondary and tertiary repayment sources, including liquidation of collateral, are evaluated which may result in additional specific loss reserves being established. Independent or internal appraisals and evaluations are performed to determine potential recovery amounts, or range of amounts, from the loan collateral and other payment sources. Collateral values are subject to change depending on market factors, collateral condition and method and timing of liquidation efforts. Loans, or portions of loans, for which the Company does not expect to obtain repayment are charged-off. In most cases, the Company has established specific reserves for the amount of the loans’ losses prior to the point of charge-off.
At December 31, 2011, the range of the loss ratios used to determine estimated losses by loan category were: commercial loans - 1.31%; SBA loans - 6.29%; owner occupied mortgage loans - 0.40% and non owner occupied mortgage loans - 0.25% to 0.47%. Additional losses are estimated based on additional identified risks factors, such as loans with underwriting exceptions, the level and direction of payment delinquencies and the level of unsecured credit. These additional loss estimates are not allocated to the separate loan categories.
The computed allowance for loan losses is tested through the use of the Company’s loan risk rating process. Loans are assigned a risk rating at their origination based upon rating criteria consistent with regulatory definitions. The risk ratings are adjusted, as necessary, if loans become delinquent, if significant adverse information is discovered regarding the underlying credit and, in the case of commercial loans and commercial real estate loans, the normal periodic review (usually annually) of the underlying credit indicates that a change in risk rating is appropriate. An estimated “low” and “high” loss percentage is applied to loans in each risk rating. These loss percentages increase as the loan risk rating increases. Estimated losses and reserves for loans rated as substandard, doubtful or loss are derived from the determination of the allowance for loan losses as discussed above as well as estimated losses resulting from risk factors identified beyond individual loan risks, such as economic conditions, underwriting exceptions and loan concentrations. Loss percentages used are generally based upon management’s best estimates considering losses incurred. Estimated “low” and “high” allowance for loan loss amounts are derived by accumulating the estimated losses using the “low” and “high” loss percentages for each risk rating and adding losses based upon separate loan evaluations and identified other risks. The actual allowance for loan losses is compared to this range to ascertain that it is situated within the range. At December 31, 2011, the “low” and “high” allowance determination resulted in a “low” allowance of 1.39% of loans and a “high” allowance of 1.66% of loans. The actual allowance for loan losses was 1.65% of loans.
The allowance for loan losses represents 1.65% and 1.72% of loans receivable at December 31, 2011 and December 31, 2010, respectively. The decrease in the allowance for loan losses as a percent of loans at December 31, 2011 as compared to December 31, 2010 resulted from the increase in loan charge-offs, decline in loan balances and increase in foreclosure activities. During 2011, there were no significant changes made in the estimation methods or assumptions used in the determination of the allowance for loan losses at December 31, 2011 as compared to December 31, 2010 apart from changes to loss factors based on management’s perception of economic environmental factors and trends. In addition, on at least a quarterly basis, the recorded allowance for loan losses (as a percent of loans) is compared to peer group levels to ascertain the reasonableness of the estimate. Management believes that the allowance for loan losses is adequate at December 31, 2011.
The activity in the allowance for credit losses for the years ended December 31 is shown in the following table:
During 2011, loans to twenty one borrowers and related entities totaling $2.1 million were determined to be uncollectible and were charged-off. The foreclosure of three commercial real estate loan resulted in a charge-off of $736 thousand in 2011. During 2010, loans to twelve borrowers and related entities totaling $2.0 million were determined to be uncollectible and were charged-off.
The following table shows the allocation of the allowance for credit losses at the dates indicated. The allocation of portions of the allowance to specific categories of loans is not intended to be indicative of future losses, and does not restrict the use of the allowance to absorb losses in any category of loans. The amount column in the table below represents the dollar amount allocated; the percentage column represents the percentage of loans in each category to total loans.
The Company has also established a reserve for unfunded commitments that is recorded by a provision charged to other expenses. At December 31, 2011 the balance of this reserve was $60 thousand. The reserve, based on evaluations of the collectability of loans, is an amount that management believes will be adequate over time to absorb possible losses on unfunded commitments (off-balance sheet financial instruments) that may become uncollectible in the future.
Loan Quality
In its lending activities, the Company seeks to develop sound credits with customers who will grow with the Company. There has not been an effort to rapidly build the portfolio and earnings at the expense of asset quality. At the same time, the extension of credit inevitably carries some risk of non-payment. Loans on which the accrual of interest has been discontinued amounted to $2.7 million and $7.3 million at December 31, 2011 and 2010, respectively. Interest that would have been accrued under the terms of these loans totaled $391 thousand and $324 thousand for the years ended December 31, 2011 and 2010, respectively. No interest was included in income in respect to such loans after being placed in non-accrual status as prior uncollected interest was reversed from income. The Company has no commitments to loan additional funds to the borrowers of impaired or non-accrual loans. The accrual of interest on loans is discontinued when a scheduled loan payment has become over ninety days past due.
Non-accrual loan activity is summarized as follows for the years ended December 31:
Non-accrual loans with specific reserves at December 31, 2011 are comprised of $895 thousand of commercial loans, $103 thousand of SBA loans, $404 thousand of owner occupied real estate loans and $1.3 million of non owner occupied real estate loans. All of these loans are in various stages of collection.
The following table shows the amounts of non-performing assets on the dates indicated:
Management has not identified any other loans which it has serious doubts as to the ability of the borrower to comply with the present repayment terms.
Real estate acquired through or in the process of foreclosure is recorded at fair value less estimated disposal costs. The Company periodically evaluates the recoverability of the carrying value of the real estate acquired through foreclosure using current estimates of fair value when it has reason to believe that real estate values have declined for the particular type and location of the real estate owned. In the event of a subsequent decline, an allowance would be provided to reduce real estate acquired through foreclosure to fair value less estimated disposal cost.
Further information regarding the Company’s other real estate owned and loan portfolio, including non accrual loans and Troubled Debt Restructured loans, is contained in Note 4 - Loans and Allowance for Loan Losses in the accompanying Consolidated Financial Statements.
Investments
The Company does not maintain an investment securities portfolio as the portfolio was reduced to zero in December 2009 as the sole security in the portfolio was redeemed. The Company is maintaining its liquid assets in its account at the Federal Reserve and fully FDIC insured certificates of deposits in other financial institutions for safety and liquidity purposes. The Company will make additional securities investments when interest rates have increased and the Company has sufficient excess liquidity
All investments securities, if any are held, are classified as “available for sale” and are reflected in the statement of financial condition at their fair value.
The restricted stocks do not have maturity dates and are carried at cost on the Company’s books less any other-than-temporary-value-impairment. The Company received a semi-annual cash dividend on the Federal Reserve Bank stock that it owns at a 6% annual rate. Earnings on the other restricted stock are immaterial.
At December 31, 2011, there were no issuers whose securities owned by the Company have a book or market value exceeding ten percent of the Company’s stockholders’ equity.
Deposits and Liquidity Management
The Company currently has no business other than that of the Bank and does not currently have any material funding commitments unrelated to that business. The 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 and Federal funds sold, if any. The levels of such assets are dependent on the Bank’s lending, investment and operating activities at any given time. The variations in levels of liquid assets are influenced by deposit flows and loan demand, both current and anticipated.
The Company’s deposits consist of demand deposits, NOW accounts, money market accounts, savings accounts and certificates of deposit. These accounts provide the Company with a relatively stable source of funds. The Company generally targets larger deposit relationships by offering competitive interest rates on certificates of deposit of $75 thousand or more in our local markets. Deposits from the local market areas are supplemented with out-of-area deposits comprised of funds obtained through the use of deposit listing services (national market certificates of deposit), deposits obtained through the use of brokers and through the Certificates of Deposit Account Registry Service (CDARS) program. As a result, a substantial portion of our deposits, 19.5% at December 31, 2011 and 24.5% at December 31, 2010, are comprised of certificate of deposit accounts of $100 thousand or more. Total certificates of deposit represent 62.7% of deposits at December 31, 2011 and 68.5% of deposits at December 31, 2010.
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 December 31, 2011, deposits totaled $182.6 million as compared to $180.1 million at December 31, 2010. The $2.5 million increase in deposits resulted from the $7.8 million increase in noninterest bearing deposits, the $5.8 million increase in savings accounts balance, the decline of $8.7 million in the amount of certificates of deposit and the decrease of $2.4 million in other deposit accounts. The decline in the amount of certificates of deposit results from several factors including customers’ desire to avoid long term, fixed rate deposit commitments during a period of low interest rates as well as the Company’s efforts to reduce interest expense and manage liquidity needs. The decline in the amount of certificates of deposit was accompanied by the increase in savings deposits as some customers moved their funds to more liquid deposit accounts while waiting for market interest rates, and/or the return on alternative investments to increase. The increase in noninterest deposits results from the increase in commercial demand accounts as the slowed business activity reduces commercial investments in times of uncertainty. There were $35.2 million and $33.1 million of brokered certificates of deposit at December 31, 2011 and December 31, 2010, respectively. Included in these brokered deposits at December 31, 2011 are $7.6 million of certificates of deposits received in exchange for the placement of the Company’s customers’ deposit funds with other financial institutions under the CDARS program. Included in deposits are deposits of officers and directors (and their affiliated entities) of $11.8 million at December 31, 2011.
As a result of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, banks are no longer prohibited from paying interest on demand deposit accounts, including those from businesses, effective in July 2011. The Company does not currently pay interest on business owned demand deposit accounts. If the Company starts to pay interest on these accounts, its net interest margin would decline. It is not clear what effect the elimination of this prohibition will have on the Company’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.
Under a temporary deposit insurance program, all non-interest bearing demand deposit accounts, regardless of amount, are fully insured by the FDIC. This program extends to December 31, 2012 at which time normal deposit insurance limits will apply to non-interest bearing demand deposits. The Company does not know what effect this change will have on the amount of its non-bearing deposits but anticipates some customer withdrawals to reduce their deposit balances to the normal insurance limit of $250,000.
Deposits are summarized below as of dates indicated:
The table below shows the maturities of certificates of deposit:
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 December 31, 2011:
CDARS program funding is reflected in the above schedule as “Customers’ funds” and “Proprietary funding”. The Company, acting as agent for its customers, places customer funds in other financial institutions under the program up to the FDIC insurance limit. Under the CDARS program, other financial institutions place deposits in the Company for the same amount of the customers’ funds. “Customers’ funds” are comprised of deposits from these customer transactions. The Company can obtain funding under the CDARS program by bidding for deposit funds without customers’ involvement. This “proprietary funding” results in traditional brokered deposits.
The Company’s short term liquid assets of cash and cash equivalents were $17.8 million, or 8.6% of assets at December 31, 2011 and $13.7 million, or 6.8% of assets, at December 31, 2010. Continued growth in deposits will be required to fund any loan growth. Accordingly, the Company intends to maintain a competitive posture in its deposit interest rate offerings. While adequate liquidity is imperative, excess liquidity has the effect of a lower interest margin, as funds not invested in loans are placed in short-term investments that earn significantly lower yields.
The Bank has available unsecured credit facilities for short-term liquidity needs from financial institutions of $8,500,000 at December 31, 2011 and 2010. There were no borrowings outstanding under these credit arrangements at December 31, 2011 and 2010.
The Company believes its levels of liquidity are adequate to conduct the business of the Company and Bank.
Stockholders’ Equity
Total stockholders’ equity was $24.2 million at December 31, 2011 representing an increase of $1.8 million from December 31, 2010. The increase from December 31, 2010 was attributable to the net income of the Company of $1.8 million.
At December 31, 2011, the Company and the Bank continued to exceed all regulatory capital requirements to be considered “well capitalized” under federal regulations. The Company believes its level of capital is adequate to conduct the business of the Company and Bank.
RESULTS OF OPERATIONS
Net income for the year ended December 31, 2011 was $1.8 million ($1.00 basic and diluted earnings per share), an increase of $0.4 million, or 27.6%, from the net income of $1.4 million ($0.78 basic earnings and diluted earnings per share) during 2010. Net income increased in 2011 as compared to 2010 primarily because of the increase in net interest income of $0.7 million and the decrease in the provision for loan losses of $0.2 million. This increase was partially offset by the increase in non-interest expenses of $0.4 million (all amounts are before tax effects).
Return on equity, return on assets and ratio of equity to assets are as follows:
Year Ended December 31,
Net Interest Income and Net Interest Margin
Net interest income is the difference between income on assets and the cost of funds supporting those assets. Earning assets are composed primarily of loans and investments; the expense associated with interest bearing deposits and customer repurchase agreements and other borrowings is the cost of funds. Non-interest bearing deposits and capital are other components representing funding sources. Changes in the volume and mix of assets and funding sources, along with the changes in yields earned and rates paid, determine changes in net interest income.
Total interest income decreased by $0.3 million or 2.5% to $12.2 million for the year ended December 31, 2011 as compared to $12.6 million in 2010. This decrease was primarily attributable to the reduction of the yield on average earning assets. Average interest earning assets increased by $0.4 million or 0.2% during 2011 as compared to 2010; however, the yield on earning assets decreased to 6.07% in 2011 from 6.24% in 2010, primarily as a result of a 15 basis point decline in yields on loans.
Interest expense decreased by $1.0 million, or 33.4% to $2.1 million for the year ended December 31, 2011 as compared to $3.1 million in 2010. This decrease was attributable to the reduction in average interest bearing liabilities of $5.8 million or 3.6% in 2011 as compared to 2010, and the decrease in the cost of deposits during 2011 to 1.34% from 1.94% in 2010. This interest rate decrease resulted primarily from the re-pricing or replacement of higher rate certificates of deposit as they matured during 2011.
Net interest income was $10.2 million in 2011, a $0.8 million increase from the $9.4 million net interest income in 2010, a 7.7% increase. The increase in net interest income results primarily from the reduction of deposit interest expense in 2011.
The following table provides information for the designated periods with respect to average balances, income and expense and annualized yields and costs associated with various categories of interest earning assets and interest bearing liabilities for the past three years. Non-accrual loans have been included in loans receivable in the table. The table includes a measurement of spread and margin. Interest spread is the mathematical difference between the average interest yield on interest earning assets and average interest paid on interest bearing liabilities. Interest margin is the net interest yield on interest earning assets and is derived by dividing net interest income by average interest earning assets.
Yields on securities are calculated based on amortized cost. Loans receivable include non-accrual loans.
The increase in net interest margin and net interest spread in 2011 as compared to 2010 primarily results from the Bank’s reduction in average interest bearing deposits as well as a reduction in the cost of deposits because of the re-pricing or replacing higher rate certificates of deposit as they matured during 2011.
Rate/Volume Analysis of Net Interest Income
The following table sets forth certain information regarding changes in interest income and interest expense of the Company for the years indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (i) changes in volume (change in volume of the asset multiplied by the prior year’s rate) and (ii) changes in rates (change in rate multiplied by the current year’s volume).
RATE/VOLUME ANALYSIS
Provision for Loan Losses
The provision for loan losses represents the expense recognized to fund the allowance for loan losses. The loan loss expense of $2.5 million for the year ended December 31, 2011 reflected a slight decrease of $0.2 million from the provision of $2.7 million for the year ended December 31, 2010 reflecting in part the reduced amount of average loans during 2011 as compared to 2010.
Additionally, the Bank has established a reserve for unfunded commitments that is recorded by a provision charged to other expenses. The balance of this reserve was $60 thousand at December 31, 2011 and 2010. The reserve is an amount that management believes will be adequate over time to absorb possible losses on unfunded commitments (off-balance sheet financial instruments) that may become uncollectible in the future.
Non-interest Income
Non-interest income principally consists of gains from the sale of the guaranteed portion of Small Business Administration (SBA) loans, net rental income and gains on sales of other real estate owned and from deposit account services charges. For the year ended December 31, 2011, gains on sales of the guaranteed portion of SBA loans was $450 thousand as compared to $615 thousand during 2010 reflecting reduced SBA loan sales during 2011. Generally, the Company desires to sell the guaranteed portion of most additional SBA loans resulting in a continuing stream of income that may vary significantly from quarter to quarter, depending in part upon the volume of loans actually sold. Gains on sales of other real estate owned were $97 thousand during 2011. There were no such sales in 2010. Net rental income was $32 thousand during 2011 as compared to $3 thousand during 2010. Substantially all of the properties which produced the net rental income were sold during 2011. Deposit account service charges and other income amounted to $567 thousand during the year ended December 31, 2011 as compared to $476 thousand in 2010, reflecting an increase in the number of accounts subject to service charges.
Non-interest Expense
Total non-interest expenses increased by $350 thousand during the 2011 as compared to those in 2010, a 6.44% increase. The 2011 expenses included $228 thousand of a loan collection expenses as compared to $66 thousand in 2010. Employee compensation and benefit expense increased by $157 thousand, or 5.3% during 2011 as compared to 2010. In each year, salary and benefit expense was the largest component of non-interest expenses: $3.1 million in 2011 and $3.0 million in 2010.
Income Taxes
The Company uses the liability method of accounting for income taxes as required by ASC 740, Accounting for Income Taxes. Under the liability method, deferred tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the enacted rates that will be in effect when these differences reverse. Income tax expense for 2011 was $1.2 million, 39.2% of pretax income, and $951 thousand, 40.0% of pretax income, in 2010.
Off-Balance Sheet Arrangements
With the exception of the Bank’s obligations in connection with its irrevocable letters of credit and loan commitments, the Bank has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Bank’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, that is material to investors. For additional information on off-balance sheet arrangements, please see Note 9 to the Consolidated Financial Statements.
Interest Rate Risk Management
Banks and other financial institutions are dependent upon net interest income, the difference between interest earned on interest earning assets and interest paid on interest bearing liabilities. Changes in interest rates inevitably have an impact on interest income. GAP, a measure of the difference in volume between interest bearing assets and interest bearing liabilities, is a means of monitoring the sensitivity of a financial institution to changes in interest rates. The chart below provides an indicator of the rate sensitivity of the Company. A positive GAP indicates the degree to which the volume of repriceable assets exceeds repriceable liabilities in particular time periods. The Company has a negative GAP, a liability sensitive position, for a one year period which would generally indicate decreased net interest income in a rising rate environment and increased net interest income in a declining rate environment. However, this measurement of interest rate risk sensitivity represents a static position as of a single day and is not necessarily indicative of the interest rate risk position at any other point in time, does not take into account the sensitivity of yields and costs of specific assets and liabilities to changes in market rates, and does not take into account the specific timing of, or the extent to which, changes to a specific asset or liability will occur. Further this measurement does not take into account the effect of competitive factors on interest rates, and the effect of changes in interest rates on the capacity of customers to meet their obligations. The Company will be addressing the current negative GAP level for the purpose of reducing its exposure to interest rate changes, although there can be no assurance that the Company’s efforts will be successful in reducing its exposure to interest rate changes, or that it will correctly predict the timing and magnitude of changes in interest rates.
RATE SENSITIVITY ANALYSIS (Static GAP)
December 31, 2011
*
Loan amounts above exclude $2.7 million of loans on non-interest accrual and deferred fees
Capital Resources and Adequacy
The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance, and changing competitive conditions and economic forces. The adequacy of the 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. To the extent the Company is successful it may need to acquire additional capital through the sale of additional common stock, other qualifying equity instruments, such as trust preferred securities, or subordinated debt. There can be no assurance that additional capital will be available to the Company on a timely basis or on attractive terms.
Under guidance from the federal banking regulators, banks which have concentrations in construction, land development or commercial real estate loans (other than loans for majority owner occupied properties) would be expected to maintain higher levels of risk management and, potentially, higher levels of capital. It is possible that we may be required to maintain higher levels of capital than we would otherwise be expected to maintain as a result of our levels of construction, development and commercial real estate loans, which may require us to obtain additional capital.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company will be subject to the capital guidelines when its assets exceed $500 million, it engages in certain highly leveraged activities or it has publicly issued debt. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. At December 31, 2011, the Company and the Bank were in full compliance with these guidelines, as follows:
Significant further growth of the Company may be limited because the current level of capital will not support rapid short term growth while maintaining regulatory capital expectations. Loan portfolio growth will need to be funded by increases in deposits as the Company has limited amounts of on-balance sheet assets deployable into loans. Growth will depend upon Company earnings and/or the raising of additional capital.
ITEM 7A.
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk.
As the Company is a smaller reporting company, this item is not applicable.
ITEM 8.
ITEM 8.
Financial Statements and Supplementary Data
TGM GROUP LLC LETTERHEAD
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
CommerceFirst Bancorp, Inc. and Subsidiary
Annapolis, Maryland
We have audited the accompanying consolidated statements of financial condition of CommerceFirst Bancorp, Inc. and subsidiary as of December 31, 2011 and 2010, and the related consolidated statement of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2011. CommerceFirst Bancorp, Inc. and subsidiary’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of CommerceFirst Bancorp, Inc. and subsidiary as of December 31, 2011 and 2010, and the consolidated results of their operations and their consolidated cash flows for each of the years in the two-year period ended December 31, 2011 in conformity with accounting principles generally accepted in the United States of America.
Salisbury, Maryland
February 16, 2012
CommerceFirst Bancorp, Inc. and Subsidiary
Consolidated Statements of Financial Condition
December 31, 2011 and December 31, 2010
(Dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
CommerceFirst Bancorp, Inc. and Subsidiary
Consolidated Statements of Operations
For the Years Ended December 31, 2011 and 2010
(Dollars in thousands except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
CommerceFirst Bancorp, Inc. and Subsidiary
Consolidated Statements of Stockholders’ Equity
For the Years Ended December 31, 2011 and 2010
(Dollars in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
CommerceFirst Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2011 and 2010
(Dollars in thousands)
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
CommerceFirst Bancorp, Inc. (the “Company”), through its wholly owned subsidiary, CommerceFirst Bank (the “Bank”) provides financial services to individuals and corporate customers located primarily in Anne Arundel County, Howard County and Prince George’s County, Maryland, and is subject to competition from other financial institutions. The Company and the Bank are also subject to the regulations of certain Federal and State of Maryland agencies and undergoes periodic examinations by those regulatory authorities. The accounting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry.
Merger Agreement
On December 20, 2011, the Company entered into an Agreement and Plan of Merger (Merger Agreement) with Sandy Spring Bancorp, Inc. (Sandy Spring), whereby Sandy Spring will acquire the Company by way of a merger of the Company with and into Sandy Spring. The Merger Agreement also provides for the merger of CommerceFirst Bank with and into Sandy Spring Bank, a Maryland bank and trust company, a wholly owned subsidiary of Sandy Spring. Pursuant to the Merger Agreement, at the effective time of the merger, each outstanding share of the Company’s common stock will be converted into the right to receive either (i) $13.60 in cash (Cash Consideration), or (ii) 0.8043 of a share of Sandy Spring’s common stock (Stock Consideration), subject to adjustment in accordance with the provisions of the Merger Agreement. The Merger Agreement provides that 50% of the outstanding shares of Company common stock will be converted into Stock Consideration and 50% of the outstanding shares of Company common stock will be converted into Cash Consideration. Each stockholder of the Company will be entitled to elect the number of shares of Company common stock held by such stockholder that will exchanged for the Stock Consideration or the Cash Consideration subject to proration in the event that a selected form of consideration is over-elected. The merger is intended to be a tax-free reorganization as to the portion of the merger consideration received as Sandy Spring common stock.
The Merger Agreement contains customary representations, warranties and covenants from both the Company and Sandy Spring. Among other covenants, the Company has agreed: (i) to convene and hold a meeting of its shareholders to consider and vote upon the Merger, (ii) that, subject to certain exceptions, the board of directors of the Company will recommend the adoption and approval of the Merger and the Merger Agreement by its shareholders, and (iii) not to (A) solicit alternative third-party acquisition proposals or, (B) subject to certain exceptions, conduct discussions concerning or provided confidential information in connection with any alternative third-party acquisition proposal.
Completion of the Merger is subject to various customary conditions, including, among others: (i) approval of the Merger and the Merger Agreement by the shareholders of the Company, (ii) receipt of required regulatory approvals, (iii) the absence of legal impediments to the Merger and (iv) the absence of certain material adverse changes or events. The Merger Agreement contains certain termination rights for the Company and Sandy Spring, as the case may be. The Merger Agreement further provides that, upon termination of the Merger Agreement under certain circumstances, the Company will be required to pay to Sandy Spring a termination fee of $1,000,000.
Principles of Consolidation
The consolidated financial statements include the accounts of CommerceFirst Bancorp, Inc. and its subsidiary, CommerceFirst Bank. Intercompany balances and transactions have been eliminated. The Parent Company financial statements (see Note 15) of the Company reflect the accounting for the subsidiary using the equity method of accounting.
Use of Estimates
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses. See below for a discussion of the determination of that estimate.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company and its Significant Accounting Policies (continued)
Investment Securities
Available-for-sale securities consist of bonds and notes not classified as trading securities or as held-to-maturity securities. These securities are reported at their fair value with the unrealized holding gains and losses, net of tax, reported as a net amount in a separate component of stockholders’ equity until realized. Gains and losses on the sale of available-for-sale securities are determined using the specific identification method. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. The Company has no trading or available-for-sale securities as of December 31, 2011 and 2010.
Securities for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity. A charge to operations would occur if the fair value of the securities declines below cost and the Company’s intention or ability to hold the securities to maturity changes. The Company has no investment securities classified as held-to-maturity as of December 31, 2011 and 2010.
Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are other than temporary would result in write-downs of the individual securities to their fair value. In estimating other-then-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in the fair value. The related charge-offs would be recorded as realized losses in the income statement as to credit related amounts and accumulated other comprehensive income as to non-credit related amounts.
Restricted Securities
As a member of the Federal Reserve Bank of Richmond (Federal Reserve), the Company is required to acquire and hold stock in this entity. Ownership of this stock is restricted to members and can only be sold to and acquired from the Federal Reserve at par. The Company also owns stock in Atlantic Central Bankers Bank (ACBB) and Maryland Financial Bank (MFB), banks that generally offers product and services only to other banks. Ownership of the ACBB shares is restricted to banks, and there is no active market for the ACBB or the MFB shares. As there is no readily determinable fair value for these securities, they are carried at cost less any other-than-temporary-value-impairment (OTTI).
Loans and Allowance for Loan Losses
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or early repayment are reported at their outstanding principal balance adjusted for any charge-offs, the allowance for loan losses and any unamortized deferred fees, costs, premiums and discounts. Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan.
The accrual of interest on loans is discontinued when, in management’s opinion, the full collection of principal or interest is in doubt or a scheduled loan payment has become over ninety days past due. Interest received on non-accrual loans is applied against the loan principal amount.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company and its Significant Accounting Policies (continued)
The Company determines and recognizes impairment of loans in accordance with the provisions of Section 310- Receivables of The FASB Accounting Standards Codification (ASC). A loan is determined to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. A loan is not considered impaired during the period of delay in payment if the Company expects to collect all amounts due, including past-due interest. An impaired loan is measured at the present value of its expected future cash flows discounted at the loan’s effective interest rate or at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. ASC Section 310 is generally applicable to all loans except large groups of smaller balance homogeneous loans that are evaluated collectively for impairment unless such loans are subject to a restructuring agreement. Interest payments received are applied to the loan principal balance unless the collection of all amounts due, both principal and interest, on the loan is considered probable, in which case the interest payments would be recognized as interest income.
The allowance for loan losses is increased by charges to expense and decreased by charge-offs (net of recoveries). Management’s periodic determination and evaluation of the adequacy of the allowance assesses various factors including inherent losses in all significant loans; known deterioration in concentrations of credit, certain classes of loans or collateral; historical loss experiences; results of independent reviews of loan quality and the allowance for loan losses; trends in portfolio quality, maturity and composition; volumes and trends in delinquencies and non-accrual loans, risk management policies and practices; lending policies and procedures; economic conditions and downturns in specific local industries; loss history; and the experience and quality of lending management and staff. Estimated losses in the portfolio are determined by applying loss ratios to loan categories, other than impaired loans and loans considered substandard or doubtful, which are evaluated separately to determine loss estimates. The loss experiences during the current and prior year are weighted heavily in the determination of the allowance for loan losses for all loan types. The determination of the allowance for loan losses involves the use of various subjective estimates by management and may result in over or under estimations of the amount of inherent losses in the loan portfolio.
Unearned Discounts and Servicing Rights of Small Business Administration (SBA) Loans Sold
The Company generally sells the SBA-guaranteed portions of its SBA loans in the secondary market. In connection with such sales, the Company receives a cash premium related to the guaranteed portion being sold. A portion of the cash premium received from the sale of the guaranteed portion of the SBA loan is deferred as a discount on retained premiums based on the relative fair value of the guaranteed and unguaranteed portions to the total loan and the remainder is recognized as a gain on the sale. The resulting unearned discount is recognized in interest income using an adjustable interest method.
SBA loan servicing rights are initially valued by allocating the total cost between the loan and the servicing right based on their relative fair values. Since sales of SBA loans tend to occur in private transactions and the precise terms and conditions of the sales are typically not readily available, there is a limited market to refer to in determining the fair value of these servicing rights. As such, the Company relies primarily on a discounted cash flow model to estimate the fair value of its servicing rights. This model calculates estimated fair value of these servicing rights by utilizing certain key characteristics such as interest rates, type of product (fixed vs. variable), age (new, seasoned, moderate), and other factors. Management believes that the assumptions used in the model are comparable to those used by brokers and other service providers. The Company also compares its estimates of fair value and assumptions to recent market activity and against its own experience. The resulting servicing rights are recognized as a reduction in interest income using an adjustable interest method.
Other real estate owned (OREO)
OREO is comprised of real estate properties acquired in partial or total satisfaction of problem loans. The properties are recorded at the fair value (generally the appraised value less estimated disposal costs) at the date acquired. Losses occurring at the time of acquisition of such properties are charged against the allowance for loan losses. Subsequent write-downs that may be required are included in non-interest expenses. Gains and losses realized from the sale of OREO as well as any net income or loss from the operations of the properties are included in non-interest income or non-interest expenses, as appropriate.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company and its Significant Accounting Policies (continued)
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation. The provision for depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are depreciated over the lesser of the terms of the leases or their estimated useful lives. Expenditures for improvements that extend the life of an asset are capitalized and depreciated over the asset’s remaining useful life. Any gains or losses realized on the disposition of premises and equipment are reflected in the consolidated statements of operations. Expenditures for repairs and maintenance are charged to other expenses as incurred. Computer software is recorded at cost and amortized over three years.
Long-Lived Assets
The carrying value of long-lived assets and identifiable intangibles is reviewed by the Company for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable as prescribed in ASC Section 360 - Property, Plant and Equipment. At December 31, 2011 and 2010, management considered certain restricted investments and loans to be impaired (see Notes 3 and 4).
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Deferred Income Taxes
Deferred income taxes are recognized for temporary differences between the financial reporting basis and the income tax basis of assets and liabilities. Deferred tax assets are recognized only to the extent that it is more likely than not that recorded amounts of the assets will be realized based on consideration of available evidence. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. No valuation allowance for deferred tax assets was recorded at December 31, 2011 and 2010 as management believes it is more likely than not that all of the deferred tax assets will be realized because they were supported by recoverable taxes paid in prior years.
Concentration of Credit Risk
The Company grants loans to customers primarily in its market area in Maryland. The debtors’ ability to honor their contracts, including borrowing agreements, may be influenced by the economic conditions in the Company’s lending area.
The Company maintains deposits with other banking institutions in amounts which can, at times, exceed insurance limits of the Federal Deposit Insurance Corporation (FDIC). Such institutions include the Federal Reserve Bank of Richmond and bankers’ banks. Further, the Company periodically sells federal funds, which are not insured by the FDIC, to three banking entities.
Comprehensive Income or Loss
Unrealized gains and losses on available for sale securities, net of tax, if any, are reported as a separate component of the equity section in the consolidated statement of financial condition. Changes in the net unrealized gains and losses are components of comprehensive income or loss and are not included in reported net income or loss. The Company did not have unrealized gains or losses on available for sale securities in 2011 or 2010; therefore, the consolidated financial statements do not include statements of comprehensive income for 2011 or 2010.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The Company and its Significant Accounting Policies (continued)
Statement of Cash Flows
Cash and cash equivalents in the statement of cash flows include cash on hand, non-interest bearing amounts due from correspondent banks, both interest bearing and non-interest bearing balances maintained at the Federal Reserve, certificates of deposits owned with maturities of less than one year and Federal funds sold.
Earnings Per Share
Basic earnings per share (EPS) is computed based upon income available to common shareholders and the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that would share in the earnings of the Company, using the treasury stock method, unless they are anti-dilutive. The Company uses the average market price of the common shares during the year in the determination of the amount of common stock equivalents arising from the warrants and options issued.
The weighted average number of common shares and dilutive securities (comprised of warrants and options) and resultant per share computations are as follows:
All outstanding warrants and options were excluded from the calculation of diluted income per share in 2010 because they were anti-dilutive. All of the warrants and options expired during 2010.
Stock Options
The Company accounts and reports for stock-based compensation plans, if any, in accordance with ASC Section 718 - Stock Compensation which requires that the fair value at grant date be used for measuring compensation expense for stock-based plans to be recognized in the statement of operations. The Company did not record any compensation expense under Section 718 during 2011 or 2010 as no new options were granted during the periods and all outstanding options were previously fully vested.
Reclassification
Certain prior year amounts have been reclassified to conform to the current year’s method of presentation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Fair Value
ASC Section 820 - Fair Value Measurements and Disclosure defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Topic 820 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. These inputs are summarized in three broad levels as follows:
Level 1:
Quoted prices in active exchange markets for identical assets or liabilities; also includes certain U.S. Treasury and other U.S. government and agency securities actively traded in over-the-counter markets.
Level 2:
Observable inputs other than Level 1 including quoted prices for similar assets or liabilities, quoted prices in less active markets, or other observable inputs that can be corroborated by observable market data; also includes derivative contracts whose value is determined using a pricing model with observable market inputs or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. government and agency securities, corporate debt securities, derivative instruments, and residential mortgage loans held for sale.
Level 3:
Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs for single dealer nonbinding quotes not corroborated by observable market data. This category generally includes certain private equity investments, retained interests from securitizations, and certain collateralized debt obligations.
The 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 assets are valued under Level 1 or 2 inputs at December 31, 2011 or December 31, 2010. The Company has assets measured by fair value measurements on a non-recurring basis during 2011 and 2010. At December 31, 2011, these assets include $2.7 million of non-accrual loans ($1.6 million after specific reserves), other real estate owned of $4.2 million and restricted stock of $7 thousand, all of which are valued under Level 3 inputs. The changes in the assets subject to fair value measurements are summarized below by Level:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Fair Value (continued)
The estimated fair values of the Company’s financial instruments at December 31, 2011 and December 31, 2010 are summarized below. The fair values of a significant portion of these financial instruments are estimates derived using present value techniques and may not be indicative of the net realizable or liquidation values. Also, the calculation of estimated fair values is based on market conditions at a specific point in time and may not reflect current or future fair values.
Fair values are based on quoted market prices for similar instruments or estimated using discounted cash flows. The discounts used are estimated using comparable market rates for similar types of instruments adjusted to be commensurate with the credit risk, overhead costs and optionality of such instruments.
The fair value of cash and due from banks, interest bearing deposits, federal funds sold, investments in restricted stocks and accrued interest receivable are equal to the carrying amounts. The fair values of investment securities are determined using market quotations. The fair value of loans receivable is estimated using discounted cash flow analysis.
The fair value of non-interest bearing deposits, interest-bearing checking, savings, and money market deposit accounts, securities sold under agreements to repurchase, and accrued interest payable are equal to the carrying amounts. The fair value of fixed maturity time deposits is estimated using discounted cash flow analysis.
Note 3. Investment in Restricted Stocks
Restricted securities are comprised of common stock in the following entities at cost less impairment:
The stocks in the two “bankers’ banks” are not readily marketable. The Maryland Financial Bank stock was written down by $18 thousand in 2011 due to the price of a new stock offering, which price was a discount to par.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Loans and Allowance for Loan Losses
The Bank grants commercial loans to customers primarily in Anne Arundel County, Prince George’s County, Howard County and surrounding areas of central Maryland. The principal categories of the loan portfolio are as follows:
Real estate loans are secured by residential and commercial properties as follows at December 31:
Loans secured by residential real estate are loans to investors for commercial purposes. The Bank does not lend funds to consumers.
The loan portfolio is comprised of $47.0 million of loans with fixed interest rates and $137.0 million of loans with adjustable interest rates at December 31, 2011.
The activity in the allowance for loan losses for the years ended December 31 is shown in the following table.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Loans and Allowance for Loan Losses (continued)
The activity in the allowance for loan losses by category during 2011 is shown in the following table.
The activity in the allowance for loan losses by category during 2010 is shown in the following table.
Additionally, the Company has established a reserve for unfunded commitments that is recorded by a provision charged to other expenses. At December 31, 2011 the balance of this reserve was $60 thousand. The reserve, based on evaluations of the collectability of loans, is an amount that management believes will be adequate over time to absorb possible losses on unfunded commitments (off-balance sheet financial instruments) that may become uncollectible in the future.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Loans and Allowance for Loan Losses (continued)
Below is a summary of the Company’s impaired loans at December 31, 2011 and 2010.
**
Troubled Debt Restructured
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Below is a summary of the average recorded investment amount and recognized interest income related to the Company’s impaired loans during 2011:
Note 4. Loans and Allowance for Loan Losses (continued)
Non-accrual loan activity is summarized as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Loans and Allowance for Loan Losses (continued)
Non-accrual loan activity by category during the year ended December 31, 2011 is summarized as follows:
Non-accrual loan activity by category during the year ended December 31, 2010 is summarized as follows:
Interest that would have been accrued under the terms of all non-accrual loans during the year totaled $391 thousand and $324 thousand for the years ended December 31, 2011 and 2010, respectively. The Bank has no commitments to loan additional funds to the borrowers of impaired or non-accrual loans.
At December 31, 2011, the Company had modified nine loans in amounts totaling $3.2 million which modifications qualify the loans as Troubled Debt Restructurings (TDR). The borrowers are in compliance with the modified loan terms. Changes made to the loans included the reduction of loan payments from principal and interest payments to interest only payments for specific time periods, the decrease in interest rates charged on a loan and the extension of the maturity of a loan. Specific reserves were established on the loans as appropriate. The majority of these loans were modified in the third and fourth quarters of 2010 as the adverse economic conditions hampered borrowers’ current cash flows. The non-accrual loans at December 31, 2010 include seven loans totaling $4 million that were previously TDR loans but the borrowers failed to meet the new terms under the restructuring.
TDRs included in non-accruing loans are summarized below. Generally the borrowers have not shown sustained compliance with the modified loan terms.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Loans and Allowance for Loan Losses (continued)
Accruing TDR loan activity for the year ended December 31, 2011 is shown in the following table.
*
Accrued income reversed upon move to non-accrual
At December 31, 2011, there were $3.9 million of performing loans considered potential problem loans, defined as loans which are not included in the 90 day past due, not reported as TDR or as non-accrual loans, but for which known information about possible credit problems causes the Company to be concerned as to the ability of the borrowers to comply with the present loan repayment terms which may in the future result in past due, non-accrual or restructured loans. The Company closely monitors the financial status of these borrowers.
Generally, the accrual of interest is discontinued when a loan is specifically determined to be impaired or when principal or interest is delinquent for ninety days or more. During 2011, there were no amounts included in gross interest income attributable to loans in non-accrual status.
The following table shows the amounts of non-performing assets at December 31:
The payment status of loans receivable at December 31, 2011 is as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Loans and Allowance for Loan Losses (continued)
The Company applies risk ratings to the loans based upon rating criteria consistent with regulatory definitions. The risk ratings are adjusted, as necessary, if loans become delinquent, if significant adverse information is discovered regarding the underlying credit and the normal periodic reviews of the underlying credits indicate that a change in risk rating is appropriate. A summary of the risk rating of loans receivable at December 31, 2011 follows:
Real estate acquired through or in the process of foreclosure is recorded at fair value less estimated disposal costs. The Company periodically evaluates the recoverability of the carrying value of the real estate acquired through foreclosure using current estimates of fair value when it has reason to believe that real estate values have declined for the particular type and location of the real estate owned. In the event of a subsequent decline, an allowance would be provided to reduce real estate acquired through foreclosure to fair value less estimated disposal cost.
Other Real Estate owned (ORE) activity for the year ended December 31, 2011 is summarized below:
At December 31, 2011 and 2010, the balance of commercial and real estate loans serviced by the Company for others under loan participation agreements was $34.6 million and $34.1 million, respectively. The related servicing rights are not material and are included in other assets.
Note 5. Premises and Equipment
Property, equipment and leasehold improvements are as follows at December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Deposits
Deposits are summarized below at December 31:
The certificate of deposit accounts mature as follows, in thousands: within one year - $71.7 million; one through three years - $38.2 million; three years and beyond - $4.6 million.
Deposits of executive officers and directors and their affiliated interests totaled approximately $11.8 million and $13 million at December 31, 2011 and 2010, respectively.
Included in certificates of deposits are $35.2 million and $33.1 million of brokered certificates at December 31, 2011 and 2010, respectively. Included in these brokered certificates of deposits at December 31, 2011 are $8.0 million of certificates of deposits received in exchange for the placement of the Bank’s customers’ deposit funds in the same amounts with other financial institutions under the Certificate of Deposit Account Registry Service (CDARS) program. Brokered certificates of deposits in the amount of $16.5 million mature on or before December 31, 2012.
Interest expense on interest bearing deposits is as follows:
Note 7. Short-term borrowings
The Company has unsecured credit facilities for short-term liquidity needs from financial institutions of $8.5 million at December 31, 2011 and 2010. There were no borrowings outstanding under these credit arrangements at December 31, 2011 and 2010.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Income Taxes
The income tax expense consists of the following for the years ended December 31, 2011 and 2010:
The reasons for the differences between the statutory federal income tax rates and actual rates are summarized as follows:
The deferred income tax account is comprised of the following at December 31:
The Company’s federal income tax returns for 2008, 2009 and 2010 are subject to examination by the Internal Revenue Service, generally for three years after they were filed. In addition, the Company’s state tax returns for the same years are subject to examination by state tax authorities for similar time periods. At December 31, 2011 and 2010, management believes that there are no uncertain tax positions under ASC Topic 740 Income Taxes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Commitments and Contingencies
The Company is a party to financial instruments in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit, which involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated financial statements. Outstanding loan commitments, un-advanced loan funds and standby letters of credit are approximately as follows at December 31, 2011:
Loan commitments and un-advanced loan funds are agreements to lend funds to customers under loan commitment contracts and loan agreements as long as the borrowers are in compliance with the loan commitment contracts and loan agreements. Loan commitments generally have interest rates reflecting current market conditions, fixed expiration dates, and may require payment of a fee. Fundings under loans with un-advanced loan funds generally have variable interest rates. Some of the loan commitments and un-advanced loan funds are expected to expire or not be used without being drawn upon; accordingly, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral or other security obtained, if deemed necessary by the Company upon extension of credit, is based on the Company’s credit evaluation.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to guarantee the installation of real property improvements and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds collateral and obtains personal guarantees supporting those commitments as it deems necessary.
The Company’s exposure to credit loss in the event of nonperformance by the customer is the contractual amount of the commitment. Loan commitments and standby letters of credit are made on the same terms, including collateral, as outstanding loans. As of December 31, 2011 and 2010 the Bank has accrued $60 thousand for unfunded commitments related to these financial instruments with off balance sheet risk, which is included in other liabilities.
The Bank has entered into leases for its branches and office space, most of which contain renewal options and expense sharing provisions. The minimum net non-cancelable future rental commitments at December 31, 2011 are as follows:
The related net rent expense was $485 thousand and $476 thousand in 2011 and 2010, respectively.
Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company will be subject to the capital guidelines when its assets exceed $500 million, it engages in certain highly leveraged activities or it has publicly issued debt. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. The Company and the Bank must maintain minimum capital and other requirements of regulatory authorities when declaring and paying dividends. The Company and the Bank are in compliance with such capital requirements. Banking regulations limit the amount of dividends that may be paid to the Company without prior approval of the Bank’s regulatory agencies. Regulatory approval is required to pay dividends that exceed the Bank’s net profits for the current year plus its retained net profits for the preceding two years.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulation) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). Management believes, as of December 31, 2011, that the Company and the Bank meet capital adequacy requirements to which they are subject. As of December 31, 2011, the most recent notification from the regulators categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must meet minimum total risk-based, Tier I risk-based and Tier I leverage ratios. There are no conditions or events since that notification that management believes have changed the Company’s and the Bank’s category.
Actual capital amounts and ratios are presented in the table below:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Employee Benefit Plans
The Company has employee benefit programs that include health and dental insurance, life and long-term and short-term disability insurance and a 401(k) retirement plan. Under the 401(k) plan during 2011 and 2010, the Company matched eligible employee contributions up to 3% of base salary plus 50% of employee contributions over 3% of base salary; however, total Company matching funds could not exceed 4% of an employee’s base salary. The Bank’s contributions to the plan included in compensation and benefits, totaled $95 thousand and $82 thousand for the years ended December 31, 2011 and 2010, respectively.
Note 12. Related Party Transactions
The Company paid $50 thousand during the years ended December 31, 2011 and 2010 to a computer services firm of which a Director is also a principal. Expenditures included computer hardware, software, installation, training, compliance and real-time support. The Company paid $173 thousand during 2011 and $22 thousand in 2010 to a law firm of which a Director is a partner for various legal services provided including loan collection efforts. Expenditures totaling less than $25,000 were paid to several entities in which directors were principals during 2011 and 2010. These transactions have been consummated on terms equivalent to those that prevail in arms length transactions.
Certain officers and directors (and companies in which they have a 10% or more beneficial ownership) have loans with the Bank. These loans are made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with unrelated borrowers. They do not involve more than normal risk of collectability or present other unfavorable terms. The activity of these loans during 2011 and 2010 is as follows:
Note 13. Recently Issued Accounting Pronouncements
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures amending Topic 820. The ASU provides for additional disclosures of transfers between assets and liabilities valued under Level 1 and 2 inputs as well as additional disclosures regarding those assets and liabilities valued under Level 3 inputs. The new disclosures are effective for interim and annual reporting periods beginning after December 15, 2009 except for those provisions addressing Level 3 fair value measurements which provisions are effective for fiscal years, and interim periods therein, beginning after December 15, 2010. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
In July 2010, the FASB issued ASU No. 2010-20, Receivables (Topic 310), Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The main objective of this ASU is to provide financial statement users with greater transparency about an 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 are required for the annual reporting periods ending on December 31, 2010. Required disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning January 1, 2011. The Company’s compliance with this ASU resulted in additional disclosures in the Company’s consolidated financial statements regarding its loan portfolio and related allowance for loan losses but did not change the accounting for loans or the allowance.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13. Recently Issued Accounting Pronouncements (continued)
In April 2011, the FASB issued ASU No. 2011-02, Receivable (Topic 310), A 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’s compliance with ASU No. 2011-02 did not have a material impact on the Company’s consolidated financial statements.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The main objective of the ASU is to conform the requirements for measuring fair value and the disclosure information under U.S. generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS). The amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for the disclosure about fair value measurements. Other amendments clarify existing requirements and change particular principles or requirements for measuring fair value or disclosing information about fair value measurements. The ASU is effective for the first interim or annual period beginning on or after December 15, 2011, early application for public entities is not permitted. The Company will review the requirements of ASU No. 2011-04 and comply with its requirements. The adoption of this ASU is not expected to have a material impact on the 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.
Note 14. Litigation
In the normal course of its business, the Company is involved in litigation arising from banking, financial, and other activities it conducts. Management, after consultation with legal counsel, does not anticipate that the ultimate liability, if any, arising out of these matters will have a material effect on the Company’s financial condition, operating results or liquidity.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15. Parent Company Financial Information
Information as to the financial position of CommerceFirst Bancorp, Inc. as of December 31, 2011 and 2010 and results of operations and cash flows for the years then ended follows:
ITEM 9.
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Disclosure 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 15d-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.
Management’s Report on Internal Control Over Financial Reporting
The management of CommerceFirst Bancorp, Inc. is responsible for the preparation, integrity and fair presentation of the Consolidated Financial Statements incorporated by reference in this Annual Report. The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and reflect management’s judgments and estimates concerning the effects of events and transactions that are accounted for or disclosed.
Management is also responsible for establishing and maintaining an effective internal control over financial reporting. The Company’s internal control over financial reporting includes those policies and procedures that pertain to the Company’s ability to record, process, summarize and report reliable financial data. The internal control system contains monitoring mechanisms, and appropriate actions are taken to correct identified deficiencies. Management believes that internal controls over financial reporting, which are subject to scrutiny by management and the Company’s internal auditors, support the integrity and reliability of the financial statements. Management recognizes that there are inherent limitations in the effectiveness of any internal control system, including the possibility of human error and the circumvention or overriding of internal controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. In addition, because of changes in conditions and circumstances, the effectiveness of internal control over financial reporting may vary over time.
Management assessed the Company’s system of internal control over financial reporting as of December 31, 2011. This assessment was conducted based on the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission “Internal Control - Integrated Framework.” Based on this assessment, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2011. Management’s assessment concluded that there were no material weaknesses within the Company’s internal control structure. The 2011 end of year consolidated financial statements have been audited by the independent accounting firm of TGM Group LLC (“TGM”). Personnel from TGM were given unrestricted access to all financial records and related data, including minutes of all meetings of the Board of Directors and Committees thereof. Management believes that all representations made to the independent auditors were valid and appropriate. The resulting report from TGM accompanies the financial statements.
The Board of Directors of the Company, acting through its Audit Committee (the “Committee”), is responsible for the oversight of the Company’s accounting policies, financial reporting and internal control. The Audit Committee of the Board of Directors is comprised entirely of outside directors who are independent of management. The Audit Committee is responsible for the appointment and compensation of the independent auditors and approves decisions regarding the appointment or removal of members of the internal audit function. The Committee meets periodically with management, the independent auditors, and the internal auditors to insure that they are carrying out their responsibilities. The Committee is also responsible for performing an oversight role by reviewing and monitoring the financial, accounting, and auditing procedures of the Company in addition to reviewing the Company’s financial reports. The independent auditors and the internal auditors have full and unlimited access to the Audit Committee, with or without the presence of the management of the Company, to discuss the adequacy of internal control over financial reporting, and any other matters which they believe should be brought to the attention of the Audit Committee.
There were no changes in the Company’s internal control over financial reporting during the year ended December 31, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report.
None.
Part III
ITEM 10.
Directors, Executive Officers and Corporate Governance.
Set forth below is certain information concerning the directors of the Company. Except as otherwise indicated, the occupation listed has been such person’s principal occupation for at least the last five years. Each of the directors of the Company has served as a director of the Bank since its organization.
Edward B. Howlin, Jr. Mr. Howlin, 75, is the Chairman and Chief Executive Officer of Howlin Realty Management, Inc., a real estate holding, management and development firm, and of Edward B. Howlin, Inc., a management and holding company, and of its subsidiary companies, Dunkirk Supply, Inc. and Howlin Concrete, Inc. In addition to real estate management and development, the Howlin companies construct residential subdivisions and design, manufacture and sell construction components, systems and supplies to various commercial, residential and government projects, primarily in Southern Maryland. Mr. Howlin is a resident of Anne Arundel County. Mr. Howlin has been a director of the Company since its organization. Mr. Howlin provides the Company with, among other things, knowledge of the local real estate market conditions, introductions to potential customers, his experience in managing medium size companies as well as his experience as a director of the Company. Mr. Howlin’s current term expires in 2013.
Milton D. Jernigan, II. Mr. Jernigan, 57, is an attorney engaged in private practice since 1982, is a co-founder and co-managing principal of the law firm of McNamee, Hosea, Jernigan, Kim, Greenan & Lynch, P.A. He is the Resident Principal-in-Charge of the firm’s Annapolis office where his practice concentrates on business, real estate, tax and other matters including work with federal and state bank regulatory agencies. Mr. Jernigan was one of the founding organizers and a member of the Board of Directors of the former Commerce Bank in College Park, Maryland where he served as General Counsel from its organization in 1989 until its acquisition by Main Street Bank Group (now a part of BB&T Corporation) in December 1997. Mr. Jernigan is a resident of Annapolis, Maryland and is active in local bar associations, chambers of commerce, service and civic organizations. Mr. Jernigan was one of the founding organizers of CommerceFirst Bank in 2000 and has been a director of the Company since its organization. Mr. Jernigan’s current term expires in 2014.
Charles L. Hurtt, Jr., CPA. Mr. Hurtt, 65, is the founder and President of Charles L. Hurtt, Jr., P.A., a certified public accounting firm located in Pasadena, Maryland. Mr. Hurtt has been involved in several charitable and civic organizations, including organizations involved in youth programs in Prince George’s County. Mr. Hurtt has also been active in several professional associations, including memberships in the Maryland Society of Accountants, the National Society of Accountants and the Maryland Association of Certified Public Accountants. Mr. Hurtt is a resident of Anne Arundel County. Mr. Hurtt has been a director of the Company since October 2003. Mr. Hurtt brings his financial expertise to the Company and as such serves as the Audit Committee Chairman. Mr. Hurtt’s current term expires in 2013.
Robert R. Mitchell. Mr. Mitchell, 69, is currently retired. He was the President of Mitchell Business Equipment, Inc., with which he served for over 20 years until its sale in 1988. Mr. Mitchell was one of the original organizers and directors of Commerce Bank. Mr. Mitchell is active in local service and civic organizations, including membership in Rotary International and service on the Prince George’s Salvation Army Local Board. Mr. Mitchell is a resident of Anne Arundel County. Mr. Mitchell has been a director of the Company since October 2003. Mr. Mitchell provides the Company with knowledge of community affairs, local business conditions as well experience in managing small to medium size companies including the Company. Mr. Mitchell’s current term expires in 2012.
Richard J. Morgan. Mr. Morgan, 64, is President and Chief Executive Officer of the Bank and the Company. From 1997 until July 1999, he was a cabinet level advisor to the Anne Arundel County Executive on issues relating to the economy and economic development, and was President and Chief Executive Officer of Anne Arundel Economic Development Corporation. From 1990 to 1997, Mr. Morgan served as President and Chief Executive Officer of Annapolis National Bank. He has over 42 years of banking and financial management experience. He held leadership roles in commercial lending at Marine Midland Bank (now HSBC) from 1970 through 1977 and with Maryland National Bank (now Bank of America) from 1977 to 1982. He has served on numerous community boards, commissions and community service groups, including as Board member and Assistant Treasurer of the Anne Arundel Medical Center; Board member and past Chair of United Way of Anne Arundel County; Board and Executive Committee as well as 2004 and 2005 Chair of the Annapolis and Anne Arundel Chamber of Commerce; Chair of the Chamber’s Economic Development Committee; Treasurer and member of the Executive Committee of the Maryland Economic Development Association; Board and Executive Committee member of Leadership Anne Arundel and Chair for the Executive Leadership Program; and is currently the Chair of Atlantic Central Bankers Bank. Mr. Morgan is a resident of Anne Arundel County. Mr. Morgan was elected for a term of three years to be a member of the Board of Directors of the Federal Reserve Bank of Richmond, effective in January 2010. Mr. Morgan has been a director of the Company since its organization. Mr. Morgan’s current term expires in 2012.
John A. Richardson, Sr. Mr. Richardson, 68, until his retirement in April 2000 was President of Branch Electric Supply Company, a position he had held since 1968. Mr. Richardson is also the President of Crofton Bowling Center, is a partner in numerous real estate investment partnerships located throughout Anne Arundel and Prince George’s Counties, continues to work as a consultant, and manages real estate. Mr. Richardson is a member of the National Bowling Proprietors Association. Mr. Richardson is a resident of Anne Arundel County. Mr. Richardson has been a director of the Company since October 2003. Mr. Richardson provides the Company with knowledge of local business conditions as well experience in managing small to medium size companies. Mr. Richardson’s current term expires in 2014.
George C. Shenk, Jr. Mr. Shenk, 59, is the President of Whitmore Group, a communications company headquartered in Annapolis, Maryland. Mr. Shenk is a resident of Anne Arundel County and has been a director of the Company since 2006. Mr. Shenk provides the Company with knowledge of local business conditions, local businessmen/women contacts as well experience in managing small to medium size companies. Mr. Shenk’s current term expires in 2012.
Lamont Thomas. Mr. Thomas, 71, was the Executive Vice President and Chief Operating Officer of the Bank and Company until his retirement as of December 31, 2007 and was Chief Financial Officer until September 10, 2007. Mr. Thomas was one of the founding organizers and members of the Board of Directors of the former Commerce Bank in College Park, Maryland from its organization in 1989 until its acquisition by Main Street Bank Group (now a part of BB&T Corporation) in December 1997, serving as Executive Vice President and Treasurer (chief operating and financial officer) of Commerce Bank. Mr. Thomas is a resident of Howard County. Mr. Thomas has been a director of the Company since its organization. Mr. Thomas’ experience as the former Executive Vice President, Chief Operating Officer and Chief Financial Officer of the Company, prior banking experience and experience as a director of the Company and Bank since inception, provides the Company with detailed knowledge of the Company’s operations. Mr. Thomas’ current term expires in 2013.
Jerome A. Watts. Mr. Watts, 69, until his retirement in 2006 was the owner of Plan Management, a supplier of insurance and employee benefits plans. Mr. Watts was appointed to the Board of Directors of the Company in September 2005 to fill a vacancy in the class of 2008 and was confirmed at the 2006 Annual Meeting of Shareholders. Mr. Watts was one of the original organizers and directors of Commerce Bank. Mr. Watts is a resident of Wicomico Church, VA. Mr. Watts was one of the founding organizers and member of the Board of Directors of the former Commerce Bank in College Park, Maryland from its organization in 1989 until its acquisition by Main Street Bank Group (now a part of BB&T Corporation) in December 1997. Mr. Watts provides insurance expertise to the Company. Mr. Watts’ current term expires in 2014.
Certain Committees, Meetings and Procedures of the Board of Directors
Audit Committee. The Board of Directors has a standing Audit Committee. The Audit Committee is responsible for the selection, review and oversight of the Company’s independent accountants, the approval of all audit, review and attest services provided by the independent accountants, the integrity of the Company’s reporting practices and the evaluation of the Company’s internal controls and accounting procedures. It also periodically reviews audit reports with the Company’s independent auditors. During 2011 the Audit Committee was comprised of Mr. Hurtt (Chairman) and Messrs. Mitchell and Richardson. Mr. Thomas joined the Audit Committee in 2012 as an additional member. Each of the members of the Audit Committee is independent, as determined under the definition of independence adopted by the NASDAQ for audit committee members in Rule 5605(c(2)(A). The Board of Directors has adopted a written charter for the Audit Committee. During 2011, the Audit Committee met five (5) times. The Board of Directors has determined that Mr. Hurtt is an “audit committee financial expert” as defined under regulations of the Securities and Exchange Commission.
Compensation. The Company maintains a standing Compensation Committee of the Board of Directors. The Compensation Committee is currently comprised of Mr. Shenk (Chairman) and Messrs. Howlin, Mitchell, Richardson and Watts. Each of the members of the Committee is independent, as determined under the definition of independence adopted by the NASDAQ for board members in Rule 5605(a) (2). The Committee determines all incentive compensation payments as well as the compensation levels of executive officers. According to the charter, the committee’s determinations are reported to the Board of Directors. The Board of Directors has adopted a charter for the Committee. To date, no compensation consultant has been engaged to assist the Committee or the Board of Directors in connection with establishing executive compensation. The President and Chief Executive Officer has no role in the determination of his compensation but may make recommendations as to other senior officers’ compensation.
Executive Officers who are not Directors. Set forth below is certain information regarding the only person who is an executive officer of the Company or the Bank and who is not a director of the Company or the Bank.
Michael T. Storm. Mr. Storm, 61, has served as Executive Vice President, Chief Operating Officer and Chief Financial Officer of the Company and Bank since January 1, 2008, and served as Chief Financial Officer of the Company and Bank since September 12, 2007. Mr. Storm previously served as Senior Vice President and Chief Financial Officer of CN Bancorp, Inc. and County National Bank from 1998 until the acquisition of CN Bancorp by Sandy Spring Bancorp, Inc. in May 2007. He had served in that capacity since 1998. He previously served as Executive Vice President and Chief Financial Officer of Annapolis National Bank from 1990 to 1997.
Compliance with section 16(a) of the Securities Exchange Act of 1934. Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers, and persons who own more than ten percent of the common stock, to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission, and to provide the Company with copies of all Forms 3, 4 and 5 they file.
Based solely upon the Company’s review of the copies of the forms which it has received and written representations from the Company’s directors, executive officers and ten percent shareholders, the Company is not aware of any failure of any such person to comply with the requirements of Section 16(a), except that a report, reporting one transaction for Mr. Morgan was not filed in a timely fashion.
Code of Ethics. The Company has adopted a Code of Ethics that applies to all Directors, officers and employees of the Company and the Bank. The Company will provide a copy of the Code of Ethics without charge upon written request directed to Candace M. Springmann, Corporate Secretary, CommerceFirst Bancorp, Inc, 1804 West Street, Annapolis, Maryland 21401.
Shareholder Nomination Procedures. There have been no material changes in the procedures by which shareholders may recommend nominees to the Company’s Board of Directors since the proxy statement for the 2011 annual meeting of shareholders.
Executive Compensation
The following table sets forth a comprehensive overview of the compensation for Mr. Morgan, the President and Chief Executive Officer of the Company and each other executive officer who received total compensation of $100,000 or more during the fiscal year ended December 31, 2011.
SUMMARY COMPENSATION TABLE
The Company does not currently maintain any plans pursuant to which stock options or other equity based compensation awards may be granted to the named executive officers. The Company does not maintain any non-equity incentive plans or compensation programs (other than discretionary bonuses), and does not maintain any defined benefit retirement plans, or deferred compensation plans or arrangements.
Employment Agreements. Mr. Morgan has an employment agreement with the Company pursuant to which he serves as President and Chief Executive Officer of the Bank. The employment agreement, as amended in January 2009, expires in August 2014 unless terminated sooner. Under his employment agreement, Mr. Morgan is entitled to receive a 2012 base salary of $216,300 and a term life insurance policy in the amount of $300,000. Mr. Morgan is also entitled to receive bonuses and grants of options as determined by the Board of Directors, and to participate in all other health, welfare, benefit, stock, option and bonus plans, if any, generally available to officers or employees of the Company. Mr. Morgan is also entitled to the use of a leased vehicle or a comparable vehicle allowance. If the employment agreement is terminated by the Company without cause, the Company will continue to pay Mr. Morgan his annual compensation and benefits as severance compensation for a period of 12 months, i.e. $216,300 plus cost of benefits approximating $12,000. In the event of any change in control (as defined) of the Company, Mr. Morgan may continue his employment, execute a new employment agreement on mutually agreeable terms or resign his employment. In the event that Mr. Morgan resigns or is terminated within 12 months of the change in control, Mr. Morgan will be entitled to the sum of twice the base salary and bonuses paid to him during the 12 months immediately preceding the change in control. If Mr. Morgan were entitled to receive this payment as of December 31, 2011, he would have been entitled to receive six equal monthly payments totaling approximately $432,600. For a period of one year after termination of his employment, Mr. Morgan has agreed that he will not accept employment by or on behalf of any bank headquartered in Anne Arundel County, Maryland, or in such capacity request or advise any present or future investors, depositors or customers of the Company or the Bank to curtail or discontinue their business with the Company or the Bank, or induce, or attempt to induce, any employee of the Company or the Bank to terminate his employment with the Company or the Bank. Mr. Morgan would also be subject to non-disparagement and nondisclosure obligations during this period.
Mr. Storm has an employment agreement under which he serves as Executive Vice President and Chief Operating Officer and Chief Financial Officer of the Company. Under his employment agreement, Mr. Storm is entitled to receive a 2012 base salary of $154,500 per year and a term life insurance policy in the amount of $300,000. Mr. Storm is also entitled to receive bonuses and to participate in all health, welfare, benefit, stock, option and bonus plans, if any, generally available to officers or employees of the Company. Mr. Storm is also entitled to a vehicle allowance of $500 per month. The term of Mr. Storm’s employment agreement expires on September 9, 2012 unless sooner terminated. If the agreement is terminated by the Company without cause, the Company will continue to pay Mr. Storm his annual compensation rate and benefits as severance compensation for a period of six (6) months, i.e. $77,250 plus cost of benefits approximating $8,000, if he were entitled to receive such payment at December 31, 2011. In the event of any change in control (as defined) of the Company, Mr. Storm may continue his employment, execute a new employment agreement on mutually agreeable terms or resign his employment. In the event that Mr. Storm resigns or is terminated within 12 months of the change in control, then Mr. Storm will be entitled to twice his base salary, paid over a period of 12 months (the “change in control payment”), provided that if the change in control occurred at December 31, 2011, he would have been entitled to 60% of the change in control payment i.e. $180,240; if it occurs during 2012, he will be entitled to 80% of the change in control payment; and if it occurs in 2013 or beyond, he will be entitled to the entire change in control payment. For a period on one year after termination of his employment, Mr. Storm has agreed that he would be subject to non-disparagement and nondisclosure obligations.
Employee Benefit Plans. The Bank provides a benefit program that includes health and dental insurance, life and long term and short-term disability insurance and a 401(k) plan. The Company adopted “safe harbor” provisions for the 401(k) plan as of January 1, 2010. Under these provisions, the Company will match 100% of employee contributions up to 3% of salary and match 50% of the contributions in excess of the 3% employee contributions but not more than 6% of base salary. The total match cannot exceed 4% of base salary, as defined.
Outstanding Options and Option Exercises. The Company has never maintained any plan for the award of equity based compensation other than stock options or warrants. No options or warrants were exercised by any named executive officer in 2011, no options held by such officers vested during 2011, and no options were granted to such officers during 2011. All outstanding options and warrants previously held by executive officers expired in August 2010 without having been exercised.
Directors’ Compensation
Directors of the Company and Bank received compensation for membership on the Board or attendance at Board or committee meetings in 2011. Directors of the Company and the Bank (excluding Messrs. Jernigan, II, Morgan and Thomas) were paid $250 per meeting attended, except for Mr. Hurtt, the Chairman of the Audit Committee, who received $3,000 per quarter during 2011 while serving in that capacity. The Company does not currently maintain any plans pursuant to which stock options, restricted stock or other equity based plans may be awarded to directors. The Company does not maintain any pension, retirement or deferred compensation plans in which directors may participate.
Under his employment agreement with the Company, Mr. Jernigan, II received $45,000 in salary and a $2,500 bonus in 2011 and will receive a 2012 base salary of $50,000 and a term life insurance policy in the amount of $100,000 for service as Chairman of the Boards of Directors of the Company and the Bank. He is also entitled to receive cash bonuses and grants of options as determined by the Board of Directors. The term of Mr. Jernigan’s employment agreement expires on August 15, 2014. If the agreement is terminated by the Company without cause, the Company will continue to pay his annual compensation and benefits as severance compensation for a period of 12 months; i.e. $50,000 plus life insurance coverage as described above. In the event of any change in control (as defined) of the Company, Mr. Jernigan, II may continue his employment, execute a new employment agreement on mutually agreeable terms or resign his employment. In the event that Mr. Jernigan, II resigns or is terminated within 12 months of the change in control, Mr. Jernigan, II will be entitled to the sum of twice the base salary and bonuses, if any, paid to him during the 12 months immediately preceding the change in control. If Mr. Jernigan, II were entitled to receive this payment as of December 31, 2011 he would have been entitled to receive six equal monthly payments totaling approximately $95,000. For a period on one year after termination of his employment, Mr. Jernigan, II has agreed that he will not accept employment by or on behalf of any bank headquartered in Anne Arundel County, Maryland, or in such capacity request or advise any present or future investors, depositors or customers of the Company or the Bank to curtail or discontinue their business with the Company or the Bank, or induce, or attempt to induce, any employee of the Company or the Bank to terminate his employment with the Company or the Bank. Mr. Jernigan, II would also be subject to non-disparagement and nondisclosure obligations during this period.
In March 2007, the Company and Mr. Thomas amended his employment agreement in recognition of Mr. Thomas’ retirement from the Company and the desire to provide transition to a new COO/CFO. Following Mr. Thomas’ retirement on December 31, 2007, Mr. Thomas provided consulting services to the Company for a four year term ending December 31, 2011. Mr. Thomas’s compensation for these services was $52,000 per year. He continues to serve on the Company’s Board of Directors (subject to expected shareholder approval at appropriate annual meetings), the Bank’s Board of Directors and its executive committee for the duration of the agreement, but did not receive fees for Board service during the term of the consulting agreement. He will receive such fees starting in January 2012 as the consulting agreement has expired.
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth certain information concerning the number and percentage of whole shares of the Company’s common stock beneficially owned by its directors, executive officers whose compensation is disclosed, and by its directors and all executive officers as a group, as of February 16, 2012, as well as information regarding each other person known by the Company to own in excess of five percent of the outstanding common stock. Except as set forth below, the Company knows of no other person or persons who beneficially own in excess of five percent of the Company’s common stock. Further, the Company is not aware of any arrangement which at a subsequent date may result in a change of control of the Company. Except as otherwise indicated with respect to directors and executive officers, all shares are owned directly, the named person possesses sole voting and sole investment power with respect to all such shares, and none of such shares are pledged as security.
Securities Authorized for Issuance under Equity Compensation Plans
None.
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence.
The Bank has had, and expects to have in the future, banking transactions in the ordinary course of business with some of the Company’s directors, officers, and employees and other related parties. In the past, all of such transactions have been on substantially the same terms, including interest rates, maturities and collateral requirements as those prevailing at the time for comparable transactions with non-affiliated persons and did not involve more than the normal risk of collectability or present other unfavorable features.
The activity of loans to the Company’s directors, officers, and employees and other related parties during 2011 and 2010 is as follows:
The Company paid $50 thousand during the each year ended December 31, 2011 and 2010 to a computer services firm of which a Director is also a principal. Expenditures included computer hardware, software, installation, training, compliance and real-time support. The Company incurred fees and expenses of $173 thousand during 2011 and $22 thousand in 2010 to a law firm of which a Director is a partner for various legal services provided. The increase in the fees in 2011 is primarily the result of increased legal efforts regarding the Company’s debt collections. Expenditures totaling less than $25,000 were paid to several entities in which directors were principals during 2011 and 2010.
All of the above transactions have been consummated on terms equivalent to those that prevail in arms- length transactions. The Audit Committee of the Company reviews related party transactions in the course of its review of 10Q and 10K filings.
ITEM 14
Principal Accountant Fees and Services
Fees Paid to Independent Accounting Firm
Set forth below is a schedule of fees billed, or to be billed, to the Company by TGM Group LLC during 2011 and 2010 by category of service.
The Audit Committee is responsible for the pre-approval of all non-audit services provided by its independent auditors. Non-audit services are only provided by the Company’s auditors to the extent permitted by law. Pre-approval is required unless a “de minimus” exception is met. To qualify for the “de minimus” exception, the aggregate amount of all such non-audit services provided to the Company must constitute not more than five percent of the total amount of revenues paid by the Company to its independent auditors during the fiscal year in which the non-audit services are provided; such services were not recognized by the Company at the time of the engagement to be non-audit services; and the non-audit services are promptly brought to the attention of the committee and approved prior to the completion of the audit by the committee or by one or more members of the committee to whom authority to grant such approval has been delegated by the committee.
All services from the independent accountants during 2011 and 2010 were pre-authorized and requested by the Audit Committee of the Company prior to the services being performed
ITEM 15.
Exhibits, Financial Statement Schedules
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
ITEM 10.
Directors, Executive Officers and Corporate Governance.
Set forth below is certain information concerning the directors of the Company. Except as otherwise indicated, the occupation listed has been such person’s principal occupation for at least the last five years. Each of the directors of the Company has served as a director of the Bank since its organization.
Edward B. Howlin, Jr. Mr. Howlin, 75, is the Chairman and Chief Executive Officer of Howlin Realty Management, Inc., a real estate holding, management and development firm, and of Edward B. Howlin, Inc., a management and holding company, and of its subsidiary companies, Dunkirk Supply, Inc. and Howlin Concrete, Inc. In addition to real estate management and development, the Howlin companies construct residential subdivisions and design, manufacture and sell construction components, systems and supplies to various commercial, residential and government projects, primarily in Southern Maryland. Mr. Howlin is a resident of Anne Arundel County. Mr. Howlin has been a director of the Company since its organization. Mr. Howlin provides the Company with, among other things, knowledge of the local real estate market conditions, introductions to potential customers, his experience in managing medium size companies as well as his experience as a director of the Company. Mr. Howlin’s current term expires in 2013.
Milton D. Jernigan, II. Mr. Jernigan, 57, is an attorney engaged in private practice since 1982, is a co-founder and co-managing principal of the law firm of McNamee, Hosea, Jernigan, Kim, Greenan & Lynch, P.A. He is the Resident Principal-in-Charge of the firm’s Annapolis office where his practice concentrates on business, real estate, tax and other matters including work with federal and state bank regulatory agencies. Mr. Jernigan was one of the founding organizers and a member of the Board of Directors of the former Commerce Bank in College Park, Maryland where he served as General Counsel from its organization in 1989 until its acquisition by Main Street Bank Group (now a part of BB&T Corporation) in December 1997. Mr. Jernigan is a resident of Annapolis, Maryland and is active in local bar associations, chambers of commerce, service and civic organizations. Mr. Jernigan was one of the founding organizers of CommerceFirst Bank in 2000 and has been a director of the Company since its organization. Mr. Jernigan’s current term expires in 2014.
Charles L. Hurtt, Jr., CPA. Mr. Hurtt, 65, is the founder and President of Charles L. Hurtt, Jr., P.A., a certified public accounting firm located in Pasadena, Maryland. Mr. Hurtt has been involved in several charitable and civic organizations, including organizations involved in youth programs in Prince George’s County. Mr. Hurtt has also been active in several professional associations, including memberships in the Maryland Society of Accountants, the National Society of Accountants and the Maryland Association of Certified Public Accountants. Mr. Hurtt is a resident of Anne Arundel County. Mr. Hurtt has been a director of the Company since October 2003. Mr. Hurtt brings his financial expertise to the Company and as such serves as the Audit Committee Chairman. Mr. Hurtt’s current term expires in 2013.
Robert R. Mitchell. Mr. Mitchell, 69, is currently retired. He was the President of Mitchell Business Equipment, Inc., with which he served for over 20 years until its sale in 1988. Mr. Mitchell was one of the original organizers and directors of Commerce Bank. Mr. Mitchell is active in local service and civic organizations, including membership in Rotary International and service on the Prince George’s Salvation Army Local Board. Mr. Mitchell is a resident of Anne Arundel County. Mr. Mitchell has been a director of the Company since October 2003. Mr. Mitchell provides the Company with knowledge of community affairs, local business conditions as well experience in managing small to medium size companies including the Company. Mr. Mitchell’s current term expires in 2012.
Richard J. Morgan. Mr. Morgan, 64, is President and Chief Executive Officer of the Bank and the Company. From 1997 until July 1999, he was a cabinet level advisor to the Anne Arundel County Executive on issues relating to the economy and economic development, and was President and Chief Executive Officer of Anne Arundel Economic Development Corporation. From 1990 to 1997, Mr. Morgan served as President and Chief Executive Officer of Annapolis National Bank. He has over 42 years of banking and financial management experience. He held leadership roles in commercial lending at Marine Midland Bank (now HSBC) from 1970 through 1977 and with Maryland National Bank (now Bank of America) from 1977 to 1982. He has served on numerous community boards, commissions and community service groups, including as Board member and Assistant Treasurer of the Anne Arundel Medical Center; Board member and past Chair of United Way of Anne Arundel County; Board and Executive Committee as well as 2004 and 2005 Chair of the Annapolis and Anne Arundel Chamber of Commerce; Chair of the Chamber’s Economic Development Committee; Treasurer and member of the Executive Committee of the Maryland Economic Development Association; Board and Executive Committee member of Leadership Anne Arundel and Chair for the Executive Leadership Program; and is currently the Chair of Atlantic Central Bankers Bank. Mr. Morgan is a resident of Anne Arundel County. Mr. Morgan was elected for a term of three years to be a member of the Board of Directors of the Federal Reserve Bank of Richmond, effective in January 2010. Mr. Morgan has been a director of the Company since its organization. Mr. Morgan’s current term expires in 2012.
John A. Richardson, Sr. Mr. Richardson, 68, until his retirement in April 2000 was President of Branch Electric Supply Company, a position he had held since 1968. Mr. Richardson is also the President of Crofton Bowling Center, is a partner in numerous real estate investment partnerships located throughout Anne Arundel and Prince George’s Counties, continues to work as a consultant, and manages real estate. Mr. Richardson is a member of the National Bowling Proprietors Association. Mr. Richardson is a resident of Anne Arundel County. Mr. Richardson has been a director of the Company since October 2003. Mr. Richardson provides the Company with knowledge of local business conditions as well experience in managing small to medium size companies. Mr. Richardson’s current term expires in 2014.
George C. Shenk, Jr. Mr. Shenk, 59, is the President of Whitmore Group, a communications company headquartered in Annapolis, Maryland. Mr. Shenk is a resident of Anne Arundel County and has been a director of the Company since 2006. Mr. Shenk provides the Company with knowledge of local business conditions, local businessmen/women contacts as well experience in managing small to medium size companies. Mr. Shenk’s current term expires in 2012.
Lamont Thomas. Mr. Thomas, 71, was the Executive Vice President and Chief Operating Officer of the Bank and Company until his retirement as of December 31, 2007 and was Chief Financial Officer until September 10, 2007. Mr. Thomas was one of the founding organizers and members of the Board of Directors of the former Commerce Bank in College Park, Maryland from its organization in 1989 until its acquisition by Main Street Bank Group (now a part of BB&T Corporation) in December 1997, serving as Executive Vice President and Treasurer (chief operating and financial officer) of Commerce Bank. Mr. Thomas is a resident of Howard County. Mr. Thomas has been a director of the Company since its organization. Mr. Thomas’ experience as the former Executive Vice President, Chief Operating Officer and Chief Financial Officer of the Company, prior banking experience and experience as a director of the Company and Bank since inception, provides the Company with detailed knowledge of the Company’s operations. Mr. Thomas’ current term expires in 2013.
Jerome A. Watts. Mr. Watts, 69, until his retirement in 2006 was the owner of Plan Management, a supplier of insurance and employee benefits plans. Mr. Watts was appointed to the Board of Directors of the Company in September 2005 to fill a vacancy in the class of 2008 and was confirmed at the 2006 Annual Meeting of Shareholders. Mr. Watts was one of the original organizers and directors of Commerce Bank. Mr. Watts is a resident of Wicomico Church, VA. Mr. Watts was one of the founding organizers and member of the Board of Directors of the former Commerce Bank in College Park, Maryland from its organization in 1989 until its acquisition by Main Street Bank Group (now a part of BB&T Corporation) in December 1997. Mr. Watts provides insurance expertise to the Company. Mr. Watts’ current term expires in 2014.
Certain Committees, Meetings and Procedures of the Board of Directors
Audit Committee. The Board of Directors has a standing Audit Committee. The Audit Committee is responsible for the selection, review and oversight of the Company’s independent accountants, the approval of all audit, review and attest services provided by the independent accountants, the integrity of the Company’s reporting practices and the evaluation of the Company’s internal controls and accounting procedures. It also periodically reviews audit reports with the Company’s independent auditors. During 2011 the Audit Committee was comprised of Mr. Hurtt (Chairman) and Messrs. Mitchell and Richardson. Mr. Thomas joined the Audit Committee in 2012 as an additional member. Each of the members of the Audit Committee is independent, as determined under the definition of independence adopted by the NASDAQ for audit committee members in Rule 5605(c(2)(A). The Board of Directors has adopted a written charter for the Audit Committee. During 2011, the Audit Committee met five (5) times. The Board of Directors has determined that Mr. Hurtt is an “audit committee financial expert” as defined under regulations of the Securities and Exchange Commission.
Compensation. The Company maintains a standing Compensation Committee of the Board of Directors. The Compensation Committee is currently comprised of Mr. Shenk (Chairman) and Messrs. Howlin, Mitchell, Richardson and Watts. Each of the members of the Committee is independent, as determined under the definition of independence adopted by the NASDAQ for board members in Rule 5605(a) (2). The Committee determines all incentive compensation payments as well as the compensation levels of executive officers. According to the charter, the committee’s determinations are reported to the Board of Directors. The Board of Directors has adopted a charter for the Committee. To date, no compensation consultant has been engaged to assist the Committee or the Board of Directors in connection with establishing executive compensation. The President and Chief Executive Officer has no role in the determination of his compensation but may make recommendations as to other senior officers’ compensation.
Executive Officers who are not Directors. Set forth below is certain information regarding the only person who is an executive officer of the Company or the Bank and who is not a director of the Company or the Bank.
Michael T. Storm. Mr. Storm, 61, has served as Executive Vice President, Chief Operating Officer and Chief Financial Officer of the Company and Bank since January 1, 2008, and served as Chief Financial Officer of the Company and Bank since September 12, 2007. Mr. Storm previously served as Senior Vice President and Chief Financial Officer of CN Bancorp, Inc. and County National Bank from 1998 until the acquisition of CN Bancorp by Sandy Spring Bancorp, Inc. in May 2007. He had served in that capacity since 1998. He previously served as Executive Vice President and Chief Financial Officer of Annapolis National Bank from 1990 to 1997.
Compliance with section 16(a) of the Securities Exchange Act of 1934. Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s directors and executive officers, and persons who own more than ten percent of the common stock, to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the Securities and Exchange Commission, and to provide the Company with copies of all Forms 3, 4 and 5 they file.
Based solely upon the Company’s review of the copies of the forms which it has received and written representations from the Company’s directors, executive officers and ten percent shareholders, the Company is not aware of any failure of any such person to comply with the requirements of Section 16(a), except that a report, reporting one transaction for Mr. Morgan was not filed in a timely fashion.
Code of Ethics. The Company has adopted a Code of Ethics that applies to all Directors, officers and employees of the Company and the Bank. The Company will provide a copy of the Code of Ethics without charge upon written request directed to Candace M. Springmann, Corporate Secretary, CommerceFirst Bancorp, Inc, 1804 West Street, Annapolis, Maryland 21401.
Shareholder Nomination Procedures. There have been no material changes in the procedures by which shareholders may recommend nominees to the Company’s Board of Directors since the proxy statement for the 2011 annual meeting of shareholders.
Executive Compensation
The following table sets forth a comprehensive overview of the compensation for Mr. Morgan, the President and Chief Executive Officer of the Company and each other executive officer who received total compensation of $100,000 or more during the fiscal year ended December 31, 2011.
SUMMARY COMPENSATION TABLE
The Company does not currently maintain any plans pursuant to which stock options or other equity based compensation awards may be granted to the named executive officers. The Company does not maintain any non-equity incentive plans or compensation programs (other than discretionary bonuses), and does not maintain any defined benefit retirement plans, or deferred compensation plans or arrangements.
Employment Agreements. Mr. Morgan has an employment agreement with the Company pursuant to which he serves as President and Chief Executive Officer of the Bank. The employment agreement, as amended in January 2009, expires in August 2014 unless terminated sooner. Under his employment agreement, Mr. Morgan is entitled to receive a 2012 base salary of $216,300 and a term life insurance policy in the amount of $300,000. Mr. Morgan is also entitled to receive bonuses and grants of options as determined by the Board of Directors, and to participate in all other health, welfare, benefit, stock, option and bonus plans, if any, generally available to officers or employees of the Company. Mr. Morgan is also entitled to the use of a leased vehicle or a comparable vehicle allowance. If the employment agreement is terminated by the Company without cause, the Company will continue to pay Mr. Morgan his annual compensation and benefits as severance compensation for a period of 12 months, i.e. $216,300 plus cost of benefits approximating $12,000. In the event of any change in control (as defined) of the Company, Mr. Morgan may continue his employment, execute a new employment agreement on mutually agreeable terms or resign his employment. In the event that Mr. Morgan resigns or is terminated within 12 months of the change in control, Mr. Morgan will be entitled to the sum of twice the base salary and bonuses paid to him during the 12 months immediately preceding the change in control. If Mr. Morgan were entitled to receive this payment as of December 31, 2011, he would have been entitled to receive six equal monthly payments totaling approximately $432,600. For a period of one year after termination of his employment, Mr. Morgan has agreed that he will not accept employment by or on behalf of any bank headquartered in Anne Arundel County, Maryland, or in such capacity request or advise any present or future investors, depositors or customers of the Company or the Bank to curtail or discontinue their business with the Company or the Bank, or induce, or attempt to induce, any employee of the Company or the Bank to terminate his employment with the Company or the Bank. Mr. Morgan would also be subject to non-disparagement and nondisclosure obligations during this period.
Mr. Storm has an employment agreement under which he serves as Executive Vice President and Chief Operating Officer and Chief Financial Officer of the Company. Under his employment agreement, Mr. Storm is entitled to receive a 2012 base salary of $154,500 per year and a term life insurance policy in the amount of $300,000. Mr. Storm is also entitled to receive bonuses and to participate in all health, welfare, benefit, stock, option and bonus plans, if any, generally available to officers or employees of the Company. Mr. Storm is also entitled to a vehicle allowance of $500 per month. The term of Mr. Storm’s employment agreement expires on September 9, 2012 unless sooner terminated. If the agreement is terminated by the Company without cause, the Company will continue to pay Mr. Storm his annual compensation rate and benefits as severance compensation for a period of six (6) months, i.e. $77,250 plus cost of benefits approximating $8,000, if he were entitled to receive such payment at December 31, 2011. In the event of any change in control (as defined) of the Company, Mr. Storm may continue his employment, execute a new employment agreement on mutually agreeable terms or resign his employment. In the event that Mr. Storm resigns or is terminated within 12 months of the change in control, then Mr. Storm will be entitled to twice his base salary, paid over a period of 12 months (the “change in control payment”), provided that if the change in control occurred at December 31, 2011, he would have been entitled to 60% of the change in control payment i.e. $180,240; if it occurs during 2012, he will be entitled to 80% of the change in control payment; and if it occurs in 2013 or beyond, he will be entitled to the entire change in control payment. For a period on one year after termination of his employment, Mr. Storm has agreed that he would be subject to non-disparagement and nondisclosure obligations.
Employee Benefit Plans. The Bank provides a benefit program that includes health and dental insurance, life and long term and short-term disability insurance and a 401(k) plan. The Company adopted “safe harbor” provisions for the 401(k) plan as of January 1, 2010. Under these provisions, the Company will match 100% of employee contributions up to 3% of salary and match 50% of the contributions in excess of the 3% employee contributions but not more than 6% of base salary. The total match cannot exceed 4% of base salary, as defined.
Outstanding Options and Option Exercises. The Company has never maintained any plan for the award of equity based compensation other than stock options or warrants. No options or warrants were exercised by any named executive officer in 2011, no options held by such officers vested during 2011, and no options were granted to such officers during 2011. All outstanding options and warrants previously held by executive officers expired in August 2010 without having been exercised.
Directors’ Compensation
Directors of the Company and Bank received compensation for membership on the Board or attendance at Board or committee meetings in 2011. Directors of the Company and the Bank (excluding Messrs. Jernigan, II, Morgan and Thomas) were paid $250 per meeting attended, except for Mr. Hurtt, the Chairman of the Audit Committee, who received $3,000 per quarter during 2011 while serving in that capacity. The Company does not currently maintain any plans pursuant to which stock options, restricted stock or other equity based plans may be awarded to directors. The Company does not maintain any pension, retirement or deferred compensation plans in which directors may participate.
Under his employment agreement with the Company, Mr. Jernigan, II received $45,000 in salary and a $2,500 bonus in 2011 and will receive a 2012 base salary of $50,000 and a term life insurance policy in the amount of $100,000 for service as Chairman of the Boards of Directors of the Company and the Bank. He is also entitled to receive cash bonuses and grants of options as determined by the Board of Directors. The term of Mr. Jernigan’s employment agreement expires on August 15, 2014. If the agreement is terminated by the Company without cause, the Company will continue to pay his annual compensation and benefits as severance compensation for a period of 12 months; i.e. $50,000 plus life insurance coverage as described above. In the event of any change in control (as defined) of the Company, Mr. Jernigan, II may continue his employment, execute a new employment agreement on mutually agreeable terms or resign his employment. In the event that Mr. Jernigan, II resigns or is terminated within 12 months of the change in control, Mr. Jernigan, II will be entitled to the sum of twice the base salary and bonuses, if any, paid to him during the 12 months immediately preceding the change in control. If Mr. Jernigan, II were entitled to receive this payment as of December 31, 2011 he would have been entitled to receive six equal monthly payments totaling approximately $95,000. For a period on one year after termination of his employment, Mr. Jernigan, II has agreed that he will not accept employment by or on behalf of any bank headquartered in Anne Arundel County, Maryland, or in such capacity request or advise any present or future investors, depositors or customers of the Company or the Bank to curtail or discontinue their business with the Company or the Bank, or induce, or attempt to induce, any employee of the Company or the Bank to terminate his employment with the Company or the Bank. Mr. Jernigan, II would also be subject to non-disparagement and nondisclosure obligations during this period.
In March 2007, the Company and Mr. Thomas amended his employment agreement in recognition of Mr. Thomas’ retirement from the Company and the desire to provide transition to a new COO/CFO. Following Mr. Thomas’ retirement on December 31, 2007, Mr. Thomas provided consulting services to the Company for a four year term ending December 31, 2011. Mr. Thomas’s compensation for these services was $52,000 per year. He continues to serve on the Company’s Board of Directors (subject to expected shareholder approval at appropriate annual meetings), the Bank’s Board of Directors and its executive committee for the duration of the agreement, but did not receive fees for Board service during the term of the consulting agreement. He will receive such fees starting in January 2012 as the consulting agreement has expired.
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth certain information concerning the number and percentage of whole shares of the Company’s common stock beneficially owned by its directors, executive officers whose compensation is disclosed, and by its directors and all executive officers as a group, as of February 16, 2012, as well as information regarding each other person known by the Company to own in excess of five percent of the outstanding common stock. Except as set forth below, the Company knows of no other person or persons who beneficially own in excess of five percent of the Company’s common stock. Further, the Company is not aware of any arrangement which at a subsequent date may result in a change of control of the Company. Except as otherwise indicated with respect to directors and executive officers, all shares are owned directly, the named person possesses sole voting and sole investment power with respect to all such shares, and none of such shares are pledged as security.
Securities Authorized for Issuance under Equity Compensation Plans
None.
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence.
The Bank has had, and expects to have in the future, banking transactions in the ordinary course of business with some of the Company’s directors, officers, and employees and other related parties. In the past, all of such transactions have been on substantially the same terms, including interest rates, maturities and collateral requirements as those prevailing at the time for comparable transactions with non-affiliated persons and did not involve more than the normal risk of collectability or present other unfavorable features.
The activity of loans to the Company’s directors, officers, and employees and other related parties during 2011 and 2010 is as follows:
The Company paid $50 thousand during the each year ended December 31, 2011 and 2010 to a computer services firm of which a Director is also a principal. Expenditures included computer hardware, software, installation, training, compliance and real-time support. The Company incurred fees and expenses of $173 thousand during 2011 and $22 thousand in 2010 to a law firm of which a Director is a partner for various legal services provided. The increase in the fees in 2011 is primarily the result of increased legal efforts regarding the Company’s debt collections. Expenditures totaling less than $25,000 were paid to several entities in which directors were principals during 2011 and 2010.
All of the above transactions have been consummated on terms equivalent to those that prevail in arms- length transactions. The Audit Committee of the Company reviews related party transactions in the course of its review of 10Q and 10K filings.
ITEM 14
Principal Accountant Fees and Services
Fees Paid to Independent Accounting Firm
Set forth below is a schedule of fees billed, or to be billed, to the Company by TGM Group LLC during 2011 and 2010 by category of service.
The Audit Committee is responsible for the pre-approval of all non-audit services provided by its independent auditors. Non-audit services are only provided by the Company’s auditors to the extent permitted by law. Pre-approval is required unless a “de minimus” exception is met. To qualify for the “de minimus” exception, the aggregate amount of all such non-audit services provided to the Company must constitute not more than five percent of the total amount of revenues paid by the Company to its independent auditors during the fiscal year in which the non-audit services are provided; such services were not recognized by the Company at the time of the engagement to be non-audit services; and the non-audit services are promptly brought to the attention of the committee and approved prior to the completion of the audit by the committee or by one or more members of the committee to whom authority to grant such approval has been delegated by the committee.
All services from the independent accountants during 2011 and 2010 were pre-authorized and requested by the Audit Committee of the Company prior to the services being performed
ITEM 15.
Exhibits, Financial Statement Schedules
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The following table sets forth certain information concerning the number and percentage of whole shares of the Company’s common stock beneficially owned by its directors, executive officers whose compensation is disclosed, and by its directors and all executive officers as a group, as of February 16, 2012, as well as information regarding each other person known by the Company to own in excess of five percent of the outstanding common stock. Except as set forth below, the Company knows of no other person or persons who beneficially own in excess of five percent of the Company’s common stock. Further, the Company is not aware of any arrangement which at a subsequent date may result in a change of control of the Company. Except as otherwise indicated with respect to directors and executive officers, all shares are owned directly, the named person possesses sole voting and sole investment power with respect to all such shares, and none of such shares are pledged as security.
Securities Authorized for Issuance under Equity Compensation Plans
None.
ITEM 13.
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence.
The Bank has had, and expects to have in the future, banking transactions in the ordinary course of business with some of the Company’s directors, officers, and employees and other related parties. In the past, all of such transactions have been on substantially the same terms, including interest rates, maturities and collateral requirements as those prevailing at the time for comparable transactions with non-affiliated persons and did not involve more than the normal risk of collectability or present other unfavorable features.
The activity of loans to the Company’s directors, officers, and employees and other related parties during 2011 and 2010 is as follows:
The Company paid $50 thousand during the each year ended December 31, 2011 and 2010 to a computer services firm of which a Director is also a principal. Expenditures included computer hardware, software, installation, training, compliance and real-time support. The Company incurred fees and expenses of $173 thousand during 2011 and $22 thousand in 2010 to a law firm of which a Director is a partner for various legal services provided. The increase in the fees in 2011 is primarily the result of increased legal efforts regarding the Company’s debt collections. Expenditures totaling less than $25,000 were paid to several entities in which directors were principals during 2011 and 2010.
All of the above transactions have been consummated on terms equivalent to those that prevail in arms- length transactions. The Audit Committee of the Company reviews related party transactions in the course of its review of 10Q and 10K filings.
ITEM 14
ITEM 14
Principal Accountant Fees and Services
Fees Paid to Independent Accounting Firm
Set forth below is a schedule of fees billed, or to be billed, to the Company by TGM Group LLC during 2011 and 2010 by category of service.
The Audit Committee is responsible for the pre-approval of all non-audit services provided by its independent auditors. Non-audit services are only provided by the Company’s auditors to the extent permitted by law. Pre-approval is required unless a “de minimus” exception is met. To qualify for the “de minimus” exception, the aggregate amount of all such non-audit services provided to the Company must constitute not more than five percent of the total amount of revenues paid by the Company to its independent auditors during the fiscal year in which the non-audit services are provided; such services were not recognized by the Company at the time of the engagement to be non-audit services; and the non-audit services are promptly brought to the attention of the committee and approved prior to the completion of the audit by the committee or by one or more members of the committee to whom authority to grant such approval has been delegated by the committee.
All services from the independent accountants during 2011 and 2010 were pre-authorized and requested by the Audit Committee of the Company prior to the services being performed
ITEM 15.
ITEM 15.
Exhibits, Financial Statement Schedules
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.