**U.S. SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-K**

 

**x****        Annualreport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934**

 

**For thefiscal year ended December 31, 2008**

 

**o****        Transitionreport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934**

 

**For thetransition period from                                   to                                   **

 

**Commission File No.:  000-51104**

 

**CommerceFirstBancorp, Inc.**

(Name of SmallBusiness Issuer in its Charter)

 

| **Maryland**                             | ** ** | **52-2180744**                       |
|------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction             |       | (I.R.S. Employer Identification No.) |
| of incorporation or organization)        |       |                                 |
|                                     |       |                                 |
| **1804 West Street, Annapolis MD**       | ** ** | **21401**                            |
| (Address of principal executive offices) |       | (Zip Code)                           |

 

Issuer’s TelephoneNumber:  **410-280-6695**

 

Securities registered under Section 12(b) ofthe Act

 

| **Title of Each Class**       | ** ** | **Name of Each Exchange on which Registered** |
|-------------------------------|------------|-----------------------------------------------|
| Common Stock, $0.01 par value |       | The Nasdaq Stock Market                       |

 

Securities registeredunder Section 12(g) of the Act: **None**

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.

Yeso     No x

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act

Yeso    No x

 

Indicate by check mark ifthe registrant: (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the past 12 months(or for such shorter period that the registrant was required to file suchreports; and (2) has been subject to such filing requirements for the past90 days.   Yes x    No o

 

Indicate by checkmark if there is no disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§225.405 of this chapter) is not contained herein and will notbe contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of“large accelerated filer,” “accelerated filer,” and “smaller reporting company”in Rule 12b-2 of the Exchange Act.

 

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yeso     No x

 

The aggregate marketvalue of the outstanding Common Stock held by non-affiliates as of June 30,2008 was approximately $15,475,000.

 

As of March 5, 2009,the number of outstanding shares of the Common Stock, $0.01 par value, of CommerceFirstBancorp, Inc. was 1,820,548.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of thefollowing documents are hereby incorporated by reference in this Form 10-K:  the Company’s Annual Report to Shareholdersfor the Year Ended December 31, 2008  — Part II; the Company’s Proxy Statementfor the Annual Meeting of Shareholders to be held on May 6, 2009 — Part III.

 

 

 

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**PART I**

 

**ITEM1.  Description of Business.**

 

CommerceFirstBancorp, Inc. (the “Company”) was incorporated under the laws of the Stateof Maryland on July 9, 1999, to serve as the bank holding company for anewly formed Maryland chartered commercial bank.  The Company was formed by a group of localbusinessmen and professionals with significant prior experience in communitybanking in the Company’s market area, together with an experienced communitybank senior management team. The Company’s sole subsidiary, CommerceFirst Bank(the “Bank”), a Maryland chartered commercial bank and member of the FederalReserve System, commenced banking operations on June 29, 2000.

 

The Bank operatesfrom its main headquarters in Annapolis, Maryland, and from branch offices inLanham (opened in September 2004), Glen Burnie (opened in June 2006),Columbia (opened in August 2006), and Severna Park (opened in June 2007)Maryland.  The Bank does not anticipateopening any additional branches during 2009. The Bank believes it is wellpositioned to continue to grow assets and increase shareholder value whilemaintaining individualized customer service.

 

The Bank operatesas a community bank alternative to the super-regional financial institutionsthat dominate its primary market area. The cornerstone of the Bank’s philosophyis to provide superior, individualized service to its customers.  The Bank focuses on relationship banking,providing each customer with a number of services, familiarizing itself with,and addressing itself to, customer needs in a proactive, personalized fashion.

 

*Descriptionof Services. *The Bankoffers full commercial banking services to its business and professionalclients. The Bank emphasizes providing commercial banking services to soleproprietorships, small and medium-sized businesses, partnerships, corporations,and non-profit organizations and associations in and near the Bank’s primaryservice areas.  Limited retail bankingservices are offered to accommodate the individual needs of commercialcustomers as well as members of the communities the Bank serves.

 

The Bank’s loanportfolio consists of business and real estate loans. The business loansgenerally have variable rates and/or short maturities where the cash flow ofthe borrower is the principal source of debt service, with a secondary emphasison collateral.  Real estate loans are made generally on commercialproperty and are structured with fixed rates that adjust in three to fiveyears, generally with maturities of five to ten years, or with variable ratestied to various indices and adjusting as the indices change. The Company’sportfolio contains a small amount of acquisition and construction loans(approximately $2.5 million) which are well secured.

 

In general, theBank offers the following credit services:

 

1)                                      Commercialloans for business purposes including working capital, equipment purchases,real estate, lines of credit, and government contract financing.  Assetbased lending and accounts receivable financing are available on a selectivebasis.

2)                                      Realestate loans for business and investment purposes.

3)                                      Commerciallines of credit.

4)                                      Merchantcredit card services are offered through an outside vendor.

 

TheBank has developed an expertise in making loans under the guarantee programs ofthe SBA. The Bank currently expects that it will sell the guaranteed portion ofSBA loans to secondary market investors as soon as possible after funding,while retaining the uninsured portion. The sale of the guaranteed portion ofsuch loans is expected to result in gains, and the Bank expects to receive feesfor servicing the loans.  SBA guaranteedloans are subjected to the same underwriting standards applied to other loans.

 

The Bank’s lendingactivities carry the risk that the borrowers will be unable to perform on theirobligations.  Interest rate policies ofthe Federal Reserve Board as well as national and local economic conditions canhave a significant impact on the Bank’s and the Company’s results ofoperations.  To the extent that economicconditions deteriorate, business and individual borrowers may be less able tomeet their obligations to the Bank in full in a timely 

 

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manner, resulting indecreased earnings or losses to the Bank. To the extent the Bank makes fixed rate loans, general increases ininterest rates will tend to reduce the Bank’s spread as the interest rates theBank must pay for deposits increase while interest income is flat.  Economic conditions and interest rates mayalso adversely affect the value of property pledged as security for loans.

 

Deposit servicesinclude business and personal checking accounts, NOW accounts, savingsaccounts, and a tiered Money Market Account basing the payment of interest onbalances on deposit.  Certificates of deposits are offered with variousmaturities.  The acceptance of brokered deposits is utilized when deemedappropriate by management in order to have available funding sources for loansand investments especially during times when competing local depositinstitutions drive up their rate offering well beyond rates available to theBank in national markets. Brokered deposits include certificates of depositreceived in exchange for the placement of the Bank’s customers’ deposit fundswith other financial institutions under the Certificate of Deposit AccountRegistry Service (CDARS) program.

 

Other services forbusiness accounts include Internet banking services and cash managementservices.

 

Bills have been introduced in prior Congresses thatwould permit banks to pay interest on checking and demand deposit accountsestablished by businesses, a practice which is currently prohibited byregulation. If the legislation effectively permitting the payment of intereston business demand deposits is enacted, of which there can be no assurance, itis likely that the Bank may be required to pay interest on some portion of itsnon-interest bearing deposits in order to compete against other banks.  As a significant portion of its deposits arenon-interest bearing demand deposits established by businesses, payment ofinterest on these deposits could have a significant negative impact on its netincome, net interest income, interest margin, return on assets and equity, andother indices of financial performance. The Bank expects that other banks would be faced with similar negativeimpacts.  The Bank also expects that theprimary focus of competition would continue to be based on other factors, suchas quality of service.

 

*Source ofBusiness. *Managementbelieves that the market segments which the Bank targets, small to medium sizedbusinesses and the professional base of the Bank’s market area, demand theconvenience and personal service that a smaller, independent financialinstitution such as the Bank can offer.  It is these themes of convenienceand personal service that form the basis for the Bank’s business developmentstrategies.  The Bank provides services from its headquarters and mainbranch offices located in Annapolis, Maryland, and from its branch offices inLanham, Glen Burnie, Columbia, and Severna Park, Maryland. It believes theselocations meet the needs of the Bank’s existing and potential customers, andprovide prospects for additional growth and expansion.

 

The Bank hascapitalized upon the extensive business and personal contacts and relationshipsof its Directors and Executive Officers to establish the Bank’s initialcustomer base.  To introduce newcustomers to the Bank, reliance is placed on aggressive officer-originatedcalling programs and director, customer and shareholder referrals.

 

The risk ofnonpayment (or deferred payment) of loans is inherent in commercialbanking.  The Bank’s marketing focus on small to medium sized businessesmay result in the assumption by the Bank of certain lending risks that aredifferent from those attendant to loans to larger companies.  Managementof the Bank carefully evaluates all loan applications and attempts to minimizeits credit risk exposure by use of thorough loan application, approval andmonitoring procedures; however, there can be no assurance that such procedurescan significantly reduce such lending risks.

 

*Economic Conditions and Concentrations.*  Wehave a substantial amount of loans secured by real estate in the Annapolis,Maryland/suburban Washington D.C. metropolitan areas as collateral, andsubstantially all of our loans are to borrowers in that area and contiguousmarkets in Maryland.  At December 31,2008, 61.6% of our loans were commercial real estate loans (including loans toinvestors in residential property for rental purposes primarily secured by oneto four family properties). An additional 38.4% were commercial and industrialloans which are not primarily secured by real estate. These concentrationsexpose us to the risk that adverse developments in the real estate market, orin the general economic conditions in our market area, could increase thelevels of nonperforming loans and charge-offs, and reduce loan demand anddeposit growth. In that event, we would likely experience lower earnings orlosses. Additionally, if economic conditions in the area deteriorate, or thereis significant volatility or weakness in the economy or any significant sectorof the area’s economy, our ability to develop our business relationships may bediminished, the

 

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quality andcollectability of our loans may be adversely affected, the value of collateralmay decline and loan demand may be reduced.

 

During2008, the financial industry encountered significant volatility and stress aseconomic conditions worsened, unemployment increased and the effects of the “mortgagecrisis” became more widespread.  Whilethe Company did not have direct exposure to the subprime mortgage issues inthat it did not make residential mortgage loans to retail customers, and didnot invest in mortgage backed securities or the preferred stock of Freddie Macand Fannie Mae, the slowing economy, declines and housing construction and therelated impact on contractors and other small and medium sized businesses, hashad an adverse impact on the Company’s business. Additionally, there can be noassurance that the steps taken to stimulate the economy and stabilize thefinancial system will prove successful, or that they will improve the financialcondition of the Company’s customers or the Company.

 

**Employees**

 

At December 31,2008 the Bank had 38 full time equivalent employees, two of whom are executiveofficers. The Chairman of the Board, an attorney in private practice, devotesconsiderable time each month to the advancement of the Bank, principally inbusiness development activities. The Company (as distinguished from the Bank)does not have any employees or officers who are not employees or officers ofthe Bank.  None of the Bank’s employeesare represented by any collective bargaining group, and the Bank believes thatits employee relations are good.  TheBank provides a benefit program that includes health and dental insurance, a401(k) plan, and life and long-term disability insurance for substantiallyall full time employees.

 

**MarketArea and Competition**

 

*Locationand Market Area. *Themain office and the headquarters are located at 1804 West Street, Annapolis,Maryland 21401.  The second office islocated at 4451 Parliament Place, Lanham, Maryland 20706, and opened in thethird quarter of 2004. The third office is located at 910 Cromwell Park Drive,Glen Burnie, Maryland 21061 and opened late in the second quarter of 2006. Thefourth office is located at 6230 Old Dobbin Lane, Columbia, Maryland and openedin the third quarter of 2006. The Bank opened its fifth branch office locatedat 487 Ritchie Highway, Severna Park, Maryland, in June 2007.

 

The Company is located inone of the most dynamic regions in the United States. The Federal Governmenthas a major direct and indirect influence on the economies, infrastructure andland use management of Washington, D.C. and the Maryland and Virginia countiessurrounding Washington.  According to theState of Maryland’s Department of Business and Economic Development (the “Department”),the region is the nation’s 4th largest market –with a population of 6.9 million and a workforce of 3.4 million – and is thehome to three major airports, the nation’s capital and a highly educatedworkforce. The regional economy is usually strong and diverse, boastsconsistently high job growth and low unemployment and is increasingly servicesector and small business oriented. Information technology, the medical industry and tourism are all majorgrowth industries for the region.  Theseindustries are characterized by small niche oriented enterprises that thrive ontheir ability to tap the highly educated workforce and abundant access to theregion’s substantial communications infrastructure. Current economic conditionshave negatively impacted business activities in the region but at a lesserdegree than other areas.

 

TheBank’s market strategy is to grow within the Central Maryland corridor, whichconsists of Anne Arundel, Prince George’s, Montgomery and Howard counties,areas which it believes have significant growth opportunities. The Bank doesnot have a branch in Montgomery county at this time and does not have near termplans to open a branch in the county.

 

*Anne Arundel County.*The county**is located in central Maryland on the western shore of theChesapeake Bay and lies wholly in the Atlantic Coastal Plain, east of theAppalachian mountain chain. The County is centered within theBaltimore-Washington corridor with its County Seat, The City of Annapolis, just24 miles from Baltimore City and 33 miles from Washington, D.C. The land areais 416 square miles or 266,078 acres, making Anne Arundel the tenth in sizeamong Maryland Counties. The county evolved from a bedroom community toBaltimore to be more heavily influenced by Washington growth factors.  The county has developed its own unique anddiverse economy

 

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due to growth opportunities presented byBaltimore/Washington International (BWI) Airport, which has long beenconsidered one of the State of Maryland’s prime economic engines.  Anne Arundel County’s economy has diversifiedin the last 25 years from having nearly half of its employment in government(48.8% in 1970) to less than 30% today. Government still dominates because AnneArundel County contains the State Capital of Maryland, the United States NavalAcademy, the National Security Agency (NSA) headquarters and numerous otherFederal, State, County and City of Annapolis jobs. The largest private sectoremployer in the county is Northrop Grumman. The local economy is dominated bysmall and mid-sized service sector enterprises. Anne Arundel County is home to over 14 thousand businesses, 97% of whichhave fewer than 100 employees. The county’s businesses include internet basedservices; high-technology telecommunications; product distribution, a result ofproximity of goods arriving to the Port of Baltimore and BWI Airport; andtechnical support services.  Once home tolarge Maryland-based regional banks, financial services are now primarilyprovided by larger super-regional institutions such as Bank of America,SunTrust, Wachovia (now Wells Fargo), M & T Bank and BB&T, all ofwhich expanded into this highly attractive banking market over the past decadeby acquisition. Based on data from the 2000 Census and in projected figures bythe County’s Economic Development Corporation, Anne Arundel County has apopulation in excess of 600 thousand and provides 285 thousand civilian laborforce jobs, 70% of which are in the service sector.  The mean household income of $76 thousandcompares very favorably to the national average.

 

*PrinceGeorge’s County*. In Prince George’s County, 15,300 businessesemploy over 230,000 workers; an estimated 475 of these businesses have 100 ormore employees. Almost 900 technology companies employ 33,600 highly-trainedworkers — the second highest number of high-tech companies, as well as defenseand aerospace companies, of any jurisdiction in the state.  Major employers include the Computer SciencesCorporation, the University of Maryland at College Park, the BeltsvilleAgricultural Research Center, Safeway, SGT, and Verizon. Additionally, AndrewsAir Force Base in Camp Springs is a large military facility that providestransportation for the President and other high-ranking government officialsand foreign dignitaries. New technology companies are nurtured in severalbusiness incubators in the county.

 

Relocating and expandingbusinesses have been increasingly attracted to Prince George’s County due toits competitively priced land and buildings, an integrated transportationsystem, proximity to Washington, D.C., and attractive business incentives. Thecounty closely mirrors Anne Arundel County with respect to small businessenterprises, with 97% of the over 15 thousand employers having fewer than 100workers, according to published data.  Government is a significant influence, with 75 thousand Federal, stateand county employees. Similar to Anne Arundel County, large super-regionalbanking institutions have obtained additional market share in the suburbanWashington market from the acquisition of many of the community banks that onceexisted in this area. Prince George’s County has a population of 805 thousand.

 

*HowardCounty*. Expansion into neighboring Howard County is a naturalextension of the Bank’s strategic growth plan. Howard County is situated in theheart of the corridor between Washington, D.C. and Baltimore. Howard County’spopulation is projected to grow to 321,050 by 2030, according to the HowardCounty Department of Planning and Zoning. Currently the county’s citizens areamong the wealthiest in Maryland with a median household incomeof $82,900. Howard County’s geographic location has resulted in thesubstantial growth of a wide variety of industries, including high-tech andlife science businesses, in addition to transportation and education relatedactivities. Accessible to I-95 and I-70, the county is located within a20-minute drive of Baltimore/Washington International Airport and the Port ofBaltimore, and serves as a bedroom community for both Baltimore and WashingtonDC area employers. Additionally, Dulles International and Washington NationalAirports are within an hour’s drive. Howard County has a strong economic baseof its own with over 7,000 Howard County businesses employing more than 122,000people, including 725 high-tech businesses with a workforce of nearly 24,000workers. Like the other counties in which the Company operates, the populationand workforce of Howard County is highly educated, and income levels arefavorably high.

 

*Competition. *Deregulation of financialinstitutions and holding company acquisitions of banks across state lines hasresulted in widespread, fundamental changes in the financial servicesindustry.  This transformation, although occurring nationwide, isparticularly intense in the greater Baltimore/Washington, DC area.  In Anne Arundel, Prince George’s and HowardCounties, competition is exceptionally keen from large banking institutionsheadquartered outside of Maryland.  In addition, the Bank competes withother community banks, savings and loan associations, credit unions,

 

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mortgage companies,finance companies and others providing financial services.  Among theadvantages that many of these institutions have over the Bank are theirabilities to finance extensive advertising campaigns, maintain extensive branchnetworks and technology investments, and to directly offer certain services,such as international banking and trust services, which the Bank does notdirectly offer.  Further, the greater capitalization of the larger institutionsallows for substantially higher lending limits than the Bank.  Certain of these competitors have otheradvantages, such as tax exemption in the case of credit unions, and lesserregulation in the case of mortgage companies and finance companies.

 

**Regulation**

 

The followingsummaries of statutes and regulations affecting bank holding companies do notpurport to be complete discussions of all aspects of such statutes andregulations and are qualified in their entirety by reference to the full textthereof.

 

*TheCompany. *The Companyis a bank holding company registered under the Bank Holding Company Act of1956, as amended, (the “Act”) and is subject to supervision by the FederalReserve Board.  As a bank holding company, the Company is required to filewith the Federal Reserve Board an annual report and such other additionalinformation as the Federal Reserve Board may require pursuant to the Act. The Federal Reserve Board may also make examinations of the Company and each ofits subsidiaries.

 

The Act requiresapproval of the Federal Reserve Board for, among other things, the acquisitionby a proposed bank holding company of control of more than five percent (5%) ofthe voting shares, or substantially all the assets, of any bank or the mergeror consolidation by a bank holding company with another bank holdingcompany.  The Act also generally permits the acquisition by a bank holdingcompany of control or substantially all the assets of any bank located in astate other than the home state of the bank holding company, except where thebank has not been in existence for the minimum period of time required by statelaw, but if the bank is at least 5 years old, the Federal Reserve Board mayapprove the acquisition.

 

With certainlimited exceptions, a bank holding company is prohibited from acquiring controlof any voting shares of any company which is not a bank or bank holding companyand from engaging directly or indirectly in any activity other than banking ormanaging or controlling banks or furnishing services to or performing servicefor its authorized subsidiaries.  A bank holding company may, however,engage in or acquire an interest in, a company that engages in activities whichthe Federal Reserve Board has determined by order or regulation to be soclosely related to banking or managing or controlling banks as to be properlyincident thereto.  In making such a determination, the Federal ReserveBoard is required to consider whether the performance of such activities canreasonably be expected to produce benefits to the public, such as convenience,increased competition or gains in efficiency, which outweigh possible adverseeffects, such as undue concentration of resources, decreased or unfaircompetition, conflicts of interest or unsound banking practices.  TheFederal Reserve Board is also empowered to differentiate between activitiescommenced *de novo* and activities commenced by theacquisition, in whole or in part, of a going concern.  Some of theactivities that the Federal Reserve Board has determined by regulation to beclosely related to banking include making or servicing loans, performingcertain data processing services, acting as a fiduciary or investment orfinancial advisor, and making investments in corporations or projects designedprimarily to promote community welfare.

 

Subsidiary banksof a bank holding company are subject to certain restrictions imposed by theFederal Reserve Act on any extensions of credit to the bank holding company orany of its subsidiaries, or investments in the stock or other securitiesthereof, and on the taking of such stock or securities as collateral for loansto any borrower.  Further, a holding company and any subsidiary bank areprohibited from engaging in certain tie-in arrangements in connection with theextension of credit.  A subsidiary bank may not extend credit, lease orsell property, or furnish any services, or fix or vary the consideration forany of the foregoing on the condition that: (i) the customer obtainor provide some additional credit, property or services from or to such bankother than a loan, discount, deposit or trust service; (ii) the customerobtain or provide some additional credit, property or service from or to theCompany or any other subsidiary of the Company; or (iii) the customer notobtain some other credit, property or service from competitors, except forreasonable requirements to assure the soundness of credit extended.

 

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The Gramm-Leach-Bliley Act of 1999 (the “GLB Act”)allows a bank holding company or other company to certify status as a financialholding company, which allows such company to engage in activities that arefinancial in nature, that are incidental to such activities, or arecomplementary to such activities. The GLB Act enumerates certain activitiesthat are deemed financial in nature, such as underwriting insurance or actingas an insurance principal, agent or broker, underwriting, dealing in or makingmarkets in securities, and engaging in merchant banking under certainrestrictions.  It also authorizes theFederal Reserve Board to determine by regulation what other activities arefinancial in nature, or incidental or complementary thereto. The GLB Act allowsa wider array of companies to own banks, which could result in companies withresources substantially in excess of the Company’s entering into competitionwith the Company and the Bank.

 

The GLB Act madesubstantial changes in the historic restrictions on non-bank activities of bankholding companies, and allows affiliations between types of companies that werepreviously prohibited.  The GLB Act alsoallows banks to engage in a wider array of non-banking activities through “financialsubsidiaries.”

 

*TheBank. *The Bank, as aMaryland chartered commercial bank which is a member of the Federal ReserveSystem (a “state member bank”) and whose accounts are insured by the DepositInsurance Fund of the Federal Deposit Insurance Corporation (the “FDIC”) up tothe maximum legal limits of the FDIC, is subject to regulation, supervision andregular examination by the Maryland Department of Financial Institutions andthe Federal Reserve Board.  Theregulations of these various agencies govern most aspects of the Bank’sbusiness, including required reserves against deposits, loans, investments,mergers and acquisitions, borrowing, dividends and location and number ofbranch offices. The laws and regulations governing the Bank generally have beenpromulgated to protect depositors and the Deposit Insurance Fund, and not forthe purpose of protecting stockholders.

 

Competition amongcommercial banks, savings and loan associations, and credit unions hasincreased following enactment of legislation that greatly expanded the abilityof banks and bank holding companies to engage in interstate banking oracquisition activities.  As a result offederal and state legislation, banks in the Washington D.C./Maryland/Virginiaarea can, subject to limited restrictions, acquire or merge with a bank inanother of the jurisdictions, and can branch *de novo*in any of the jurisdictions. Additionally, legislation has been proposed which may result innon-banking companies being authorized to own banks, which could result incompanies with resources substantially in excess of the Company’s entering intocompetition with the Company and the Bank.

 

Banking is abusiness that depends on interest rate differentials.  In general, thedifferences between the interest paid by a bank on its deposits and its otherborrowings and the interest received by a bank on loans extended to itscustomers and securities held in its investment portfolio constitute the majorportion of the bank’s earnings.  Thus, the earnings and growth of the Bankwill be subject to the influence of economic conditions generally, bothdomestic and foreign, and also to the monetary and fiscal policies of theUnited States and its agencies, particularly the Federal Reserve Board, whichregulates the supply of money through various means including open marketdealings in United States government securities.  The nature and timing ofchanges in such policies and their impact on the Bank cannot be predicted.

 

*Branchingand Interstate Banking.* The federal banking agencies are authorized to approve interstate bankmerger transactions without regard to whether such transaction is prohibited bythe law of any state, unless the home state of one of the banks has opted outof the interstate bank merger provisions of the Riegle-Neal Interstate Bankingand Branching Efficiency Act of 1994 (the “Riegle-Neal Act”) by adopting a lawafter the date of enactment of the Riegle-Neal Act and prior to June 1,1997 which applies equally to all out-of-state banks and expressly prohibitsmerger transactions involving out-of-state banks.  Interstate acquisitions of branches arepermitted only if the law of the state in which the branch is located permitssuch acquisitions.  Such interstate bankmergers and branch acquisitions are also subject to the nationwide and statewideinsured deposit concentration limitations described in the Riegle-Neal Act.

 

The Riegle-Neal Act authorizes the federal bankingagencies to approve interstate branching *de novo*bynational and state banks in states that specifically allow for suchbranching.  The District of Columbia,Maryland and Virginia have all enacted laws that permit interstate acquisitionsof banks and bank branches and permit out-of-state banks to establish *de novo*branches.

 

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*Transactionwith Affiliates.*The Bank is subject to the provisions of Section 23Aand 23B of the Federal Reserve Act and Federal Reserve Regulation W of theFederal Reserve Bank which place limits on the amount of loans or extensions ofcredit to affiliates (as defined in the Federal Reserve Act), investments in orcertain other transactions with affiliates and on the amount of advances tothird parties collateralized by the securities or obligations ofaffiliates.  The law and regulation limitthe aggregate amount of transactions with any individual affiliate to tenpercent (10%) of the capital and surplus of the Bank and also limit theaggregate amount of transactions with all affiliates to twenty percent (20%) ofcapital and surplus.  Loans and certainother extensions of credit to affiliates are required to be secured bycollateral in an amount and of a type described in the regulation, and thepurchase of low quality assets from affiliates is generally prohibited. The lawand Regulation W also, among other things, prohibit an institution from engagingin certain transactions with certain affiliates (as defined in the FederalReserve Act) unless the transactions are on terms substantially the same, or atleast as favorable to such institution and/or its subsidiaries, as thoseprevailing at the time for comparable transactions with non-affiliatedentities.  In the absence of comparabletransactions, such transactions may only occur under terms and circumstances,including credit standards that in good faith would be offered to or wouldapply to non-affiliated companies.

 

The Bank is subject tothe restrictions contained in Section 22(h) of the Federal ReserveAct and the Federal Reserve Board’s Regulation O thereunder on loans toexecutive officers, directors and principal stockholders.  Under Section 22(h), loans to adirector, an executive officer or a greater-than-10% stockholder of a bank aswell as certain affiliated interests of any of the foregoing may not exceed,together with all other outstanding loans to such person and affiliated interests,the loans-to-one-borrower limit applicable to national banks (generally 15% ofthe institution’s unimpaired capital and surplus), and all loans to all suchpersons in the aggregate may not exceed the institution’s unimpaired capitaland unimpaired surplus.  Regulation Oalso prohibits the making of loans in an amount greater than $25,000 or 5% ofcapital and surplus but in any event not over $500,000, to directors, executiveofficers and greater-than-10% stockholders of a bank, and their respective affiliates,unless such loans are approved in advance by a majority of the board ofdirectors of the bank with any “interested” director not participating in thevoting.  Furthermore, Regulation Orequires that loans to directors, executive officers and principal stockholdersof a bank be made on terms substantially the same as those that are offered incomparable transactions to unrelated third parties unless the loans are madepursuant to a benefit or compensation program that is widely available to allemployees of the bank and does not give preference to insiders over otheremployees.  Regulation O also prohibits adepository institution from paying overdrafts over $1,000 of any of itsexecutive officers or directors unless they are paid pursuant to written pre-authorizedextension of credit or transfer of funds plans.

 

All of the Bank’s loansto its and the Company’s executive officers, directors and greater-than-10%stockholders, and affiliated interests of such persons, comply with therequirements of Regulation W and Section 22(h) of the Federal ReserveAct and Regulation O.

 

*CommunityReinvestment Act.*The Community Reinvestment Act (“CRA”)requires that, in connection with examinations of financial institutions withintheir respective jurisdictions, the Federal Reserve Board, the Federal DepositInsurance Corporation, the Office of the Comptroller of the Currency or theOffice of Thrift Supervision shall evaluate the record of the financialinstitutions in meeting the credit needs of their local communities, includinglow and moderate income neighborhoods, consistent with the safe and soundoperation of those institutions.  The CRAdoes not establish specific lending requirements or programs for financialinstitutions nor does it limit an institution’s discretion to develop the typesof products and services that it believes are best suited to its particularcommunity, consistent with the CRA.  Aninstitution’s CRA activities are considered in, among other things, evaluatingmergers, acquisitions and applications to open a branch or facility, as well asdetermining whether the institution will be permitted to exercise certain ofthe powers allowed by the GLB Act.  TheCRA also requires all institutions to make public disclosure of their CRAratings. The Bank was last examined for CRA compliance as of October 2005and received a CRA rating of “satisfactory.”

 

*USAPatriot Act.*  Under theUniting and Strengthening America by Providing Appropriate Tools Required toIntercept and Obstruct Terrorism Act, commonly referred to as the “USA PatriotAct” or the “Patriot Act”, financial institutions are subject to prohibitionsagainst specified financial transactions and account relationships, as well as 

 

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enhanced due diligencestandards intended to detect, and prevent, the use of the United Statesfinancial system for money laundering and terrorist financing activities.  The Patriot Act requires financialinstitutions, including banks, to establish anti-money laundering programs,including employee training and independent audit requirements, meet minimumstandards specified by the act, follow minimum standards for customeridentification and maintenance of customer identification records, andregularly compare customer lists against lists of suspected terrorists,terrorist organizations and money launderers. The costs or other effects of the compliance burdens imposed by thePatriot Act or future anti-terrorist, homeland security or anti-moneylaundering legislation or regulations cannot be predicted with certainty.

 

*CapitalAdequacy Guidelines.* The Federal Reserve Board and the FDIC have adopted risk based capitaladequacy guidelines pursuant to which they assess the adequacy of capital inexamining and supervising banks and bank holding companies and in analyzingbank regulatory applications.  Risk-basedcapital requirements determine the adequacy of capital based on the riskinherent in various classes of assets and off-balance sheet items.

 

State member banksare expected to meet a minimum ratio of total qualifying capital (the sum ofcore capital (Tier 1) and supplementary capital (Tier 2)) to risk weightedassets of 8%.  At least half of thisamount (4%) should be in the form of core capital.  These requirements apply to the Bank and willapply to the Company (a bank holding company) once its total assets equal$500,000,000 or more, it engages in certain highly leveraged activities or ithas publicly held debt securities.

 

Tier 1 Capitalgenerally consists of the sum of common stockholders’ equity and perpetualpreferred stock (subject in the case of the latter to limitations on the kindand amount of such stock which may be included as Tier 1 Capital), lessgoodwill, without adjustment for changes in the market value of securitiesclassified as “available for sale” in accordance with FAS 115.  Tier 2 Capital consists of the following:hybrid capital instruments; perpetual preferred stock which is not otherwiseeligible to be included as Tier 1 Capital; term subordinated debt andintermediate-term preferred stock; and, subject to limitations, generalallowances for loan losses.  Assets areadjusted under the risk-based guidelines to take into account different riskcharacteristics, with the categories ranging from 0% (requiring no risk-basedcapital) for assets such as cash, to 100% for the bulk of assets which aretypically held by a bank holding company, including certain multi-familyresidential and commercial real estate loans, commercial business loans andconsumer loans.  Residential firstmortgage loans on one to four family residential real estate and certainseasoned multi-family residential real estate loans, which are not 90 days ormore past-due or non-performing and which have been made in accordance withprudent underwriting standards are assigned a 50% level in the risk-weighingsystem, as are certain privately-issued mortgage-backed securities representingindirect ownership of such loans. Off-balance sheet items also are adjusted to take into account certainrisk characteristics.

 

In addition to therisk-based capital requirements, the Federal Reserve Board has established aminimum 3.0% Leverage Capital Ratio (Tier 1 Capital to total adjusted assets)requirement for the most highly-rated banks, with an additional cushion of atleast 100 to 200 basis points for all other banks, which effectively increasesthe minimum Leverage Capital Ratio for such other banks to 4.0% - 5.0% ormore.  The highest-rated banks are those thatare not anticipating or experiencing significant growth and have welldiversified risk, including no undue interest rate risk exposure, excellentasset quality, high liquidity, good earnings and, in general, those which areconsidered a strong banking organization. A bank having less than the minimum Leverage Capital Ratio requirementshall, within 60 days of the date as of which it fails to comply with suchrequirement, submit a reasonable plan describing the means and timing by whichthe bank shall achieve its minimum Leverage Capital Ratio requirement.  A bank which fails to file such plan isdeemed to be operating in an unsafe and unsound manner, and could subject thebank to a cease-and-desist order. Any insured depository institution with aLeverage Capital Ratio that is less than 2.0% is deemed to be operating in anunsafe or unsound condition pursuant to Section 8(a) of the FederalDeposit Insurance Act (the “FDIA”) and is subject to potential termination ofdeposit insurance.  However, such aninstitution will not be subject to an enforcement proceeding solely on accountof its capital ratios, if it has entered into and is in compliance with awritten agreement to increase its Leverage Capital Ratio and to take such otheraction as may be necessary for the institution to be operated in a safe andsound manner.  The capital regulationsalso provide, among other things, for the issuance of a capital directive,which is a final order issued to a bank that fails to maintain minimum capitalor to restore its capital to the minimum capital requirement within a specifiedtime period.  Such directive isenforceable in the same manner as a final cease-and-desist order.

 

9

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Under guidance from the federal bankingregulators, banks which have concentrations in construction, land developmentor commercial real estate loans (other than loans for majority owner occupiedproperties) 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 ofcapital than we would otherwise be expected to maintain as a result of ourlevels of construction, development and commercial real estate loans, which mayrequire us to obtain additional capital.

 

*Prompt Corrective Action.*  Under Section 38 of the FDIA, eachfederal banking agency is required to implement a system of prompt correctiveaction for institutions that it regulates. The federal banking agencies have promulgated substantially similarregulations to implement the system of prompt corrective action established by Section 38of the FDIA.  Under the regulations, abank shall be deemed to be: (i) “well capitalized” if it has a Total RiskBased Capital Ratio of 10.0% or more, a Tier 1 Risk Based Capital Ratio of 6.0%or more, a Leverage Capital Ratio of 5.0% or more and is not subject to anywritten capital order or directive; (ii) “adequately capitalized” if ithas a Total Risk Based Capital Ratio of 8.0% or more, a Tier 1 Risk BasedCapital Ratio of 4.0% or more and a Tier 1 Leverage Capital Ratio of 4.0% ormore (3.0% under certain circumstances) and does not meet the definition of“well capitalized;” (iii) “undercapitalized” if it has a Total Risk BasedCapital Ratio that is less than 8.0%, a Tier 1 Risk based Capital Ratio that isless than 4.0% or a Leverage Capital Ratio that is less than 4.0% (3.0% undercertain circumstances); (iv) “significantly undercapitalized” if it has aTotal Risk Based Capital Ratio that is less than 6.0%, a Tier 1 Risk BasedCapital Ratio that is less than 3.0% or a Leverage Capital Ratio that is lessthan 3.0%; and (v) “critically undercapitalized” if it has a ratio oftangible equity to total assets that is equal to or less than 2.0%.

 

An institution generally must file a writtencapital restoration plan which meets specified requirements with an appropriatefederal banking agency within 45 days of the date the institution receivesnotice or is deemed to have notice that it is undercapitalized, significantlyundercapitalized or critically undercapitalized.  A federal banking agency must provide theinstitution with written notice of approval or disapproval within 60 days afterreceiving a capital restoration plan, subject to extensions by the applicableagency.

 

An institution that is required to submit acapital restoration plan must concurrently submit a performance guaranty byeach company that controls the institution. Such guaranty shall be limited to the lesser of (i) an amount equalto 5.0% of the institution’s total assets at the time the institution wasnotified or deemed to have notice that it was undercapitalized or (ii) theamount necessary at such time to restore the relevant capital measures of theinstitution to the levels required for the institution to be classified asadequately capitalized.  Such a guarantyshall expire after the federal banking agency notifies the institution that ithas remained adequately capitalized for each of four consecutive calendarquarters.  An institution which fails tosubmit a written capital restoration plan within the requisite period,including any required performance guaranty, or fails in any material respectto implement a capital restoration plan, shall be subject to the restrictionsin Section 38 of the FDIA which are applicable to significantlyundercapitalized institutions.

 

A “critically undercapitalized institution”is to be placed in conservatorship or receivership within 90 days unless theFDIC formally determines that forbearance from such action would better protectthe deposit insurance fund.  Unless theFDIC or other appropriate federal banking regulatory agency makes specificfurther findings and certifies that the institution is viable and is notexpected to fail, an institution that remains critically undercapitalized onaverage during the fourth calendar quarter after the date it becomes criticallyundercapitalized must be placed in receivership.  The general rule is that the FDIC willbe appointed as receiver within 90 days after a bank becomes criticallyundercapitalized unless extremely good cause is shown and the federalregulators agree to an extension.  Ingeneral, good cause is defined as capital that has been raised and is imminentlyavailable for infusion into the Bank except for certain technical requirementsthat may delay the infusion for a period of time beyond the 90 day time period.

 

Immediately upon becoming undercapitalized,an institution shall become subject to the provisions of Section 38 of theFDIA, which (i) restrict payment of capital distributions and managementfees; (ii) require that the appropriate federal banking agency monitor thecondition of the institution and its efforts to restore its capital; (iii) requiresubmission of a capital restoration plan; (iv) restrict the growth of theinstitution’s assets; and (v) require prior approval of certain expansionproposals.  The appropriate federalbanking agency for an undercapitalized institution also may take any number ofdiscretionary supervisory actions if the agency determines that any of theseactions is necessary to resolve 

 

10

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the problems of the institution at the least possible long-term cost tothe deposit insurance fund, subject in certain cases to specifiedprocedures.  These discretionarysupervisory actions include: requiring the institution to raise additionalcapital; restricting transactions with affiliates; requiring divestiture of theinstitution or the sale of the institution to a willing purchaser; and anyother supervisory action that the agency deems appropriate.  These and additional mandatory and permissivesupervisory actions may be taken with respect to significantly undercapitalizedand critically undercapitalized institutions.

 

Additionally, under Section 11(c)(5) ofthe FDIA, a conservator or receiver may be appointed for an institutionwhere:  (i) an institution’sobligations exceed its assets;  (ii) thereis substantial dissipation of the institution’s assets or earnings as a resultof any violation of law or any unsafe or unsound practice;  (iii) the institution is in an unsafe orunsound condition;  (iv) there is awillful violation of a cease-and-desist order; (v) the institution is unable to pay its obligations in theordinary course of business;  (vi) lossesor threatened losses deplete all or substantially all of an institution’scapital, and there is no reasonable prospect of becoming “adequatelycapitalized” without assistance;  (vii) thereis any violation of law or unsafe or unsound practice or condition that islikely to cause insolvency or substantial dissipation of assets or earnings,weaken the institution’s condition, or otherwise seriously prejudice theinterests of depositors or the insurance fund; (viii) an institution ceases to be insured;  (ix) the institution is undercapitalizedand has no reasonable prospect that it will become adequately capitalized,fails to become adequately capitalized when required to do so, or fails tosubmit or materially implement a capital restoration plan; or (x) theinstitution is critically undercapitalized or otherwise has substantiallyinsufficient capital.

 

*Regulatory Enforcement Authority*.  Federal banking law grants substantial enforcementpowers to federal banking regulators. This enforcement authority includes, among other things, the ability toassess civil money penalties, to issue cease-and-desist or removal orders andto initiate injunctive actions against banking organizations andinstitution-affiliated parties.  Ingeneral, these enforcement actions may be initiated for violations of laws andregulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action,including misleading or untimely reports filed with regulatory authorities.

 

A result of the volatility and instability inthe financial system during 2008, the Congress, the bank regulatory authoritiesand other government agencies have called for or proposed additional regulationand restrictions on the activities, practices and operations of banks and theirholding companies.  While many of theseproposals relate to institutions that have accepted investments from, or soldtroubled assets to, the Department of the Treasury or other governmentinstrumentalities, or otherwise participate in government programs intended topromote financial stabilization, the Congress and the federal banking agencieshave broad authority to require all banks and holding companies to adhere tomore rigorous or costly operating procedures , corporate governance procedures,or to engage in activities or practices which they would not otherwiseelect.  Any such requirement couldadversely affect the Company’s and Bank’s business and results ofoperations.  The Company did not acceptan investment by the Treasury Department in its preferred stock or warrants topurchase common stock, and except for the temporary increases in depositinsurance for customer accounts, has not participated in any of the programsadopted by the Treasury Department FDIC or Federal Reserve.

 

*Deposit Insurance Premiums.*  The FDIC maintains a risk based assessmentsystem for determining deposit insurance premiums. Four risk categories (I-IV),each subject to different premium rates, are established, based upon aninstitution’s status as well capitalized, adequately capitalized orundercapitalized, and the institution’s supervisory rating.  During 2008, all insured depository institutionspaid deposit insurance premiums ranging between 5 and 7 basis points on aninstitution’s assessment base for institutions in risk category I (wellcapitalized institutions perceived as posing the least risk to the insurancefund), and 10, 28 and 40 basis points for institutions in risk categories II, IIIand IV.  The levels of rates are subjectto periodic adjustment by the FDIC. Depository institutions will also pay premiums for the increasedcoverage provided by the FDIC.

 

Commencing in 2009, the premium rates increased by 7 basis points ineach category for the first quarter of 2009. For the second quarter of 2009 and beyond, the FDIC has issued a final rule providingfor further changes in rates, which introduces three adjustments that could bemade to an institution’s initial base assessment rate: (1) a potentialdecrease for long-term unsecured debt, including senior and subordinated debtand, for small institutions, a portion of Tier 1 capital; (2) a potentialincrease for secured liabilities above a threshold amount; and (3) for non-Risk

 

11

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Category I institutions, a potential increase for brokered depositsabove a threshold amount other than those received through a deposit placementnetwork on a reciprocal basis.  Theschedule for base assessment rates and potential adjustment is set forth in thefollowing table.

 
| ** **                   | ** ** | **Risk  Category I** | ** ** | **Risk  Category II** | ** ** | **Risk  Category III** | ** ** | **Risk  Category IV** | ** ** |
|------------------------------|------------|---------------------------|------------|----------------------------|------------|-----------------------------|------------|----------------------------|------------|
| Initial Base Assessment Rate |       | 12-16                     |       | 22                         |       | 32                          |       | 45                         |       |
| Unsecured Debt Adjustment    |       | (5) - 0              |       | (5) - 0               |       | (5) - 0                |       | (5) - 0               |       |
| Secured Liability Adjustment |       | 0 - 8                     |       | 0 - 11                     |       | 0 - 16                      |       | 0 - 22.5                   |       |
| Brokered Deposit Adjustment  |       | N/A                       |       | 0 - 10                     |       | 0 - 10                      |       | 0 - 10                     |       |
| Total Base Assessment Rate   |       | 7 - 24                    |       | 17 - 43                    |       | 27 - 58                     |       | 40 - 77.5                  |       |

 

Additionally, the Bank has elected toparticipate in the FDIC program whereby noninterest bearing transaction accountdeposits will be insured without limitation through December 31,2009.  The bank is required to pay anadditional premium to the FDIC of 10 basis point on the amount of balances innoninterest bearing transaction accounts that exceed the existing depositinsurance limit of $250,000.

 

Further, in late February 2009, the FDICadopted an interim rule imposing a 20 basis point emergency specialassessment on all banks on June 30, 2009. The assessment is to becollected on September 30, 2009. The interim rule would also permitthe FDIC to impose an emergency special assessment after June 30, 2009, ofup to 10 basis points, if necessary to maintain public confidence in federal depositinsurance.  As a result of competitivepressures for deposits, the Company may not be able to adjust deposit rates tooffset the cost of increased deposit insurance premiums.  In any event, the Company will have to absorbthe cost of the increased premiums until such time as it is able to reprice itstime deposits.

 

**ITEM 1A. Risk Factors.**

 

As the Company is a smaller reportingcompany, this item is not applicable.

 

**ITEM 1B. Unresolved Staff Comment**

 

None.

 

**ITEM 2. Properties.**

 

The main branch office and the executiveoffices of the Bank and the Company are located at 1804 West Street, Annapolis,Maryland, in a brick and masonry structure. The Company leases 8,100 squarefeet in the building under a five-year lease, which commenced in April 2000.Rent expense was $216,198 and $211,553 for the years ended December 31,2008 and 2007, respectively.   TheCompany has exercised the first of three five-year renewal options.

 

The second office of the Bank is located at4451 Parliament Place, Lanham, Maryland in a masonry structure. The Bank leases2,100 square feet in the building under a ten-year lease (with an exit optionat the end of five years) which commenced in June 2004. Rent expense was$35,793 and $33,109 for the years ended December 31, 2008 and 2007,respectively.

 

The third office of the Bank is located at910 Cromwell Park Drive, Glen Burnie, Maryland in a masonry structure. The Bankleases 2,600 square feet in the building under a five-year lease (with onefive-year renewal option) which commenced in June 2006.  Rent expense was $75,452 and $80,675 for theyears ended   December 31, 2008 and2007, respectively.

 

The fourth office of the Bank is located at6230 Old Dobbin Lane, Columbia, Maryland in a masonry structure. The Bankleases 2,400 square feet in the building under a ten-year lease (with onefive-year renewal option) which 

 

12

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commenced in August 2006. Rent expense was $74,457 and $70,006 for the years ended December 31,2008 and 2007, respectively.

 

The fifth office of the Bank is located at485 Ritchie Highway, Severna Park, Maryland in a masonry structure. The Bankleases approximately 1,500 square feet in the building under a five-year lease(with two five-year renewal options) which commenced in June 2007. Rentexpense was $52,333 in 2008 and $26,761during 2007.

 

Management believes adequate insurancecoverage is in force on all of its properties.

 

**ITEM 3. Legal Proceedings.**

 

From time to time the Company isa participant in various legal proceedings incidental to its business.  In the opinion of management, the liabilities(if any) resulting from such legal proceeding will not have a material effecton the financial position of the Company

 

**ITEM 4. Submission of Matters to a Vote of Security Holders.**

 

No matters were submitted to a vote ofsecurity holders during the fourth quarter of the year ended December 31,2008.

 

**PART II**

 

**ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters andIssuer Purchase of Equity Securities.**

 

*(a) Market for Common Stock andDividends.*****Theinformation regarding the market for the Company’s Common Stock, the number ofholders of the common stock and dividend history required under Item 5(a) ishereby incorporated herein by reference from the material under the caption“Market for Common Stock and Dividends” in the Company’s Annual Report for thefiscal year ended December 31, 2008. See Item 11 of this annual report for Equity Compensation PlanInformation.

 

*Recent Sales of Unregistered Shares. * None.

 

*(b) Use of Proceeds:*Not applicable

 

(c) *Issuer Repurchases of Securities**during theFourth Quarter of 2008.*  None.

 

**ITEM 6. Selected Financial Data**

 

The information required under Item 6 ishereby incorporated herein by reference to the material appearing under thecaption “Selected Consolidated Financial Data” in the Company’s Annual Reportto Shareholders for the fiscal year ended December 31, 2008.

 

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**ITEM 7. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations.**

 

The information required by this item isincorporated by reference to the material appearing under the caption“Management Discussion and Analysis” in the Company’s Annual Report toShareholders for the year ended December 31, 2008.

 

**ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.**

 

As the Company is a smaller reportingcompany, this item is not applicable.

 

**ITEM 8. Financial Statements andSupplementary Data**

 

The information required by this item isincorporated by reference to the Consolidated Financial****Statementsand Notes thereto contained in the****Company’sAnnual Report to Shareholders for the year ended December 31, 2008.

 

**ITEM 9. Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure.**

 

None.

 

**ITEM 9A Controls and Procedures**

 

*Disclosure Controls and Procedures.*The Company’s management, under the supervision and with the participation ofthe Chief Executive Officer and Chief Financial Officer, evaluated, as of thelast day of the period covered by this report, the effectiveness of the designand operation of the Company’s disclosure controls and procedures, as definedin Rule 15d-15 under the Securities Exchange Act of 1934. Based on that evaluation,the Chief Executive Officer and Chief Financial Officer concluded that theCompany’s disclosure controls and procedures were effective.

 

*Management’s Report on Internal Control OverFinancial Reporting*

 

The management of CommerceFirst Bancorp, Inc. (the “Company”) isresponsible for the preparation, integrity and fair presentation of theconsolidated financial statements included in this Annual Report. The financialstatements have been prepared in conformity with accounting principlesgenerally accepted in the United States of America and reflect management’sjudgments and estimates concerning the effects of events and transactions thatare accounted for or disclosed.

 

Management is also responsible for establishing and maintaining aneffective internal control over financial reporting.  The Company’s internal control over financialreporting includes those policies and procedures that pertain to the Company’sability to record, process, summarize and report reliable financial data. Theinternal control system contains monitoring mechanisms, and appropriate actionsare taken to correct identified deficiencies. Management believes that internalcontrols over financial reporting, which are subject to scrutiny by managementand the Company’s internal auditors, support the integrity and reliability ofthe financial statements. Management recognizes that there are inherentlimitations in the effectiveness of any internal control system, including thepossibility of human error and the circumvention or overriding of internalcontrols. Accordingly, even effective internal control over financial reportingcan provide only reasonable assurance with respect to financial statementpreparation. In addition, because of changes in conditions and circumstances,the effectiveness of internal control over financial reporting may vary overtime.

 

Management assessed the Company’s system of internal control overfinancial reporting as of December 31, 2008. This assessment was conductedbased on the Committee of Sponsoring Organizations (“COSO”) of the TreadwayCommission “Internal Control - Integrated Framework”. Based on this assessment,management believes that the Company maintained effective internal control overfinancial reporting as of December 31, 2008. Management’s assessmentconcluded that there were no material weaknesses within the Company’s internalcontrol 

 

14

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structure.  The 2008 end of yearconsolidated financial statements have been audited by the independentaccounting firm of Trice Geary & Myers LLC (“TGM”). Personnel from TGMwere given unrestricted access to all financial records and related data,including minutes of all meetings of the Board of Directors and Committeesthereof.  Management believes that allrepresentations 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 AuditCommittee (the “Committee”), is responsible for the oversight of the Company’saccounting policies, financial reporting and internal control. The AuditCommittee of the Board of Directors is comprised entirely of outside directorswho are independent of management. The Audit Committee is responsible for theappointment and compensation of the independent auditors and approves decisionsregarding the appointment or removal of members of the internal audit function.The Committee meets periodically with management, the independent auditors, andthe internal auditors to insure that they are carrying out theirresponsibilities. The Committee is also responsible for performing an oversightrole by reviewing and monitoring the financial, accounting, and auditingprocedures of the Company in addition to reviewing the Company’s financialreports. The independent auditors and the internal auditors have full andunlimited access to the Audit Committee, with or without the presence of themanagement of the Company, to discuss the adequacy of internal control overfinancial reporting, and any other matters which they believe should be broughtto the attention of the Audit Committee.

 

There were no changes in the Bank’s internal control over financialreporting  during the quarter ended December 31,2008 that has materially affected, or is reasonably likely to materiallyaffect, the Bank’s internal control over financial reporting.

 

The annual report does not include an attestation report of theCompany’s registered public accounting firm regarding internal control overfinancial reporting.  Management’s reportwas not subject to attestation by the Company’s registered public accountingfirm pursuant to temporary rules of the Securities and Exchange Commissionthat permit the company to provide only management’s report in this annualreport.

 

**ITEM 9B. Other Information.**

 

None.

 

**Part III**

 

**ITEM 10. Directors, Executive Officers and Corporate Governance.**

 

The information required under Item 10 ishereby incorporated herein by reference from the material under the captions“Election of Directors” and “Compliance with Section 16(a) of theSecurities Exchange Act of 1934” in the Company’s Proxy Statement for theAnnual Meeting of Stockholders to be held on May 6, 2009.

 

*Code ofEthics.*  TheCompany has adopted a Code of Ethics that applies to all Directors, officersand employees of the Company and the Bank. The Company will provide a copy of the Code of Ethics without chargeupon written request directed to Candace M. Springmann, Corporate Secretary,CommerceFirst Bancorp, Inc, 1804 West Street, Annapolis, Maryland 21401.

 

There havebeen no material changes in the procedures by which shareholders may recommendnominees to the Company’s Board of Directors since the proxy statement for the2008 annual meeting of shareholders.

 

**ITEM 11.Executive Compensation**

 

The information required by Item 11 is hereby incorporated herein byreference to the material under the captions “Election of Directors - ExecutiveCompensation,” and “Directors’ Compensation” in the Company’s Proxy Statementfor the Annual Meeting of Stockholders to be held on May 6, 2009.

 

15

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**ITEM 12. Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters.**

 

*Securities Authorized for Issuance underEquity Compensation Plans*The following table sets forth information regarding outstanding optionsand other rights to purchase common stock under the Company’s compensationplans.

 

**EquityCompensation Plan Information**

 
| **Plan category**                                      | ** ** | **Number of securities to be issued  upon exercise of outstanding  options, warrants and rights** | ** ** | **Weighted average exercise price of  outstanding options, warrants and  rights** | ** ** | **Number of securities  remaining available for  future issuance under equity  compensation plans  (excluding securities  reflected in column (a)** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                        |       | **(a)**                                                                                                                                                  | ** ** | **(b)**                                                                                                              | ** ** | **(c****)**                                                                                                                                                                                                     | ** ** |
| Equity compensation plans approved by  security holders (1) |       | 0                                                                                                                                                        |       | N/A                                                                                                                  |       | 0                                                                                                                                                                                                               |       |
| Equity compensation plans not approved by  security holders |       | 126,372                                                                                                                                                  | (1)        | $                                                                                                                    | 10.00      |                                                                                                                                                                                                            | 0          |   |
| Total                                                       |       | 126,372                                                                                                                                                  |       | $                                                                                                                    | 10.00      |                                                                                                                                                                                                            | 0          |   |

 

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(1) Column (a) reflects 106,372shares of common stock subject to issuance upon the exercise of warrants issuedto organizers of the Company and Bank under the Organizer’s Agreement andrelated Warrant Plan, as amended and restated, which provided for the issuanceto organizers of warrants to purchase an aggregate of 15% of the number ofshares sold in the Company’s initial registered offering of shares of itscommon stock. The warrants are fully vested, and have a term ending inAugust 2010. The warrants are subject to call by the Company upon theoccurrence of certain events, and are subject to mandatory exercise orforfeiture upon certain regulatory events. Column (a) also includesoptions to purchase 20,000 shares of common stock at an exercise price of$10.00 per share issuable to certain officers of the Company under theCompany’s 2004 Non-qualified Stock Option Plan. No additional options may beissued under the Non-qualified Stock Option Plan.

 

The other information required by Item 12 is hereby incorporated hereinby reference to the material under the caption “Voting Securities and PrincipalShareholders” in the Company’s Proxy Statement for the Annual Meeting ofStockholders to be held on May 6, 2009.

 

**ITEM 13. Certain Relationships and Related Transactions, and DirectorIndependence.**

 

The information required by Item 13 is hereby incorporated herein byreference to the material under the caption “Election of Directors” in  the Company’s Proxy Statement for the AnnualMeeting of Stockholders to be held on May 6, 2009.

 

**ITEM 14                PrincipalAccountant Fees and Services**

 

The information required by Item 14 is hereby incorporated herein byreference to the material under the caption “Independent Registered PublicAccounting Firm” in the Company’s Proxy Statement for the Annual Meeting ofStockholders to be held on May 6, 2009.

 

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The following financial statements are incorporated in this reportunder Item 8:

 
| Reports of Independent Registered Public Accounting Firm                                                  |
|-----------------------------------------------------------------------------------------------------------|
| Consolidated Statements of Financial Condition at December 31,  2008 and 2007                        |
| Consolidated Statements of Operations for the years ended  December 31, 2008 and 2007                |
| Consolidated Statements of Comprehensive Income for the years ended  December 31, 2008 and 2007      |
| Consolidated Statements of Shareholders’ Equity for the years ended  December 31, 2008 and 2007 |
| Consolidated Statements of Cash Flows for the years ended  December 31, 2008 and 2007                |
| Notes to Consolidated Financial Statements                                                                |

 

**ITEM 15. Exhibits, Financial Statement Schedules**

 
| **Exhibit No.**                                                                                | ** ** | **Description of Exhibits**                                                                                                                       |
|-----------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                |       |                                                                                                                                              |
| 3(a)                                                                                                |       | Certificate of Incorporation of the Company, as amended (1)                                                                                       |
| 3(b)                                                                                                |       | Bylaws of the Company (1)                                                                                                                         |
| 10(a)                                                                                               |       | Employment Agreement between Richard J. Morgan and the Company (2)                                                                                |
| 10(b)                                                                                               |       | Employment Agreement between Lamont Thomas and the Company (3)                                                                                    |
| 10(c)                                                                                               |       | 2004 Non Incentive Option Plan (4)                                                                                                                |
| 10(d)                                                                                               |       | First Amendment to Employment Agreement between Lamont Thomas and the  Company (5)                                                                |
| 10(e)                                                                                               |       | Employment Agreement between Michael T. Storm and CommerceFirst Bank  (6)                                                                         |
| 10(f)                                                                                               |       | Extension of Employment Agreement between Richard J. Morgan and the  Company (7)                                                                  |
| 11                                                                                                  |       | Statement regarding Computation of Per Share Income – Refer to Note 1  to the Consolidated Financial Statements included in Exhibit 13. |
| 13                                                                                                  |       | Annual Report to Shareholders                                                                                                                     |
| 21                                                                                                  |       | Subsidiaries of the Registrant                                                                                                                    |
|                                                                                                |       |                                                                                                                                              |
| The sole subsidiary of the Registrant is CommerceFirst Bank, a  Maryland chartered commercial bank. |
|                                                                                                |       |                                                                                                                                              |
| 23                                                                                                  |       | Consent of Trice Geary & Myers, LLC                                                                                                      |
| 31(a)                                                                                               |       | Certification of Richard J. Morgan, President and CEO                                                                                             |
| 31(b)                                                                                               |       | Certification of Michael T. Storm, Executive Vice President and Chief  Financial Officer                                                          |
| 32(a)                                                                                               |       | Certification of Richard J. Morgan, President and Chief Executive  Officer                                                                        |
| 32(b)                                                                                               |       | Certification of Michael T. Storm, Executive Vice President and Chief  Financial Officer                                                          |
| 99(a)                                                                                               |       | Amended and Restated Organizers Agreement (8)                                                                                                     |

 

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| (1) | Incorporated by reference to exhibit of the same number filed with  the Company’s Registration Statement on Form SB-2, as amended, (File No. 333-91817)                                                                                                          |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Incorporated by reference to exhibit 10(b) to the Company’s to  Registration Statement on Form SB-2, as amended) (File  No. 333-91817)                                                                                                                      |
| (3) | Incorporated by reference to exhibits 10(c) to the Company’s to  Registration Statement on Form SB-2, as amended) (File  No. 333-91817)                                                                                                                     |
| (4) | Incorporated by reference to Exhibit 4 to the Company’s  Registration Statement on Form S-8 (File  No. 333-119988).Incorporated by reference to Exhibit 4 to the  Company’s to Registration Statement on Form S-8 (File No. 333-109138) |
| (5) | Incorporated by reference to Exhibit 10(d) to the Company’s  Quarterly Report on Form 10-QSB for the period ended March 31,  2007.                                                                                                                     |
| (6) | Incorporated by reference to Exhibit 10(e) to the Company’s  Quarterly Report on Form 10-QSB for the period ended September 30,  2007.                                                                                                                 |
| (7) | Incorporated by reference to Exhibit 99 to the Company’s Current  Report on Form 8-K filed on January 30, 2009.                                                                                                                                             |
| (8) | Incorporated by reference to exhibit s 99(b) and 99(d) to  the Company’s Registration Statement on Form SB-2, as amended (File  No. 333-91817)                                                                                                         |

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|               | COMMERCEFIRST BANCORP, INC |
|--------------------|----------------------------|
|               |                       |
|               |                       |
| March 5, 2009 | By:                        | /s/ Richard J. Morgan, |
|               |                       | Richard J. Morgan, President and CEO |

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

 
| **Name**                           | ** ** | **Position**                                              | ** ** | **Date**            |
|------------------------------------|------------|-----------------------------------------------------------|------------|---------------------|
| ** **                         | ** ** | ** **                                                | ** ** | ** **          |
| s/ Milton D. Jernigan II           |       | Chairman of the Board of Directors of the Company and the |       | March  5, 2009 |
| Milton D. Jernigan II              |       | Bank                                                      |       |                |
|                               |       |                                                      |       |                |
| s/ Richard J. Morgan               |       | Director, President and CEO of the Company and the Bank   |       | March  5, 2009 |
| Richard J. Morgan                  |       | (Principal Executive Officer)                             |       |                |
|                               |       |                                                      |       |                |
| s/ Edward B. Howlin, Jr.      |       | Director of the Company and the Bank                      |       | March  5, 2009 |
| Edward B. Howlin, Jr.         |       |                                                      |       |                |
|                               |       |                                                      |       |                |
| s/ Charles L. Hurtt, Jr., CPA |       | Director of the Company and the Bank                      |       | March  5, 2009 |
| Charles L. Hurtt, Jr., CPA    |       |                                                      |       |                |
|                               |       |                                                      |       |                |
| s/ Lamont Thomas                   |       | Director of Company and the Bank                          |       | March  5, 2009 |
| Lamont Thomas                      |       |                                                      |       |                |
|                               |       |                                                      |       |                |
| s/ Robert R. Mitchell              |       | Director of the Company and the Bank                      |       | March  5, 2009 |
| Robert R. Mitchell                 |       |                                                      |       |                |
|                               |       |                                                      |       |                |
| s/ John A. Richardson, Sr.    |       | Director of the Company and the Bank                      |       | March  5, 2009 |
| John A. Richardson, Sr.       |       |                                                      |       |                |
|                               |       |                                                      |       |                |
| s/ George C. Shenk, Jr.       |       | Director of the Company and the Bank                      |       | March  5, 2009 |
| George C. Shenk, Jr.          |       |                                                      |       |                |
|                               |       |                                                      |       |                |
|                               |       | Director of the Company and the Bank                      |       |                |
| Jerome A. Watts                    |       |                                                      |       |                |
|                               |       |                                                      |       |                |
| s/ Michael T. Storm                |       | Executive Vice President/Chief Financial Officer of the   |       | March  5, 2009 |
| Michael T. Storm                   |       | Company and the Bank (Principal Financial and Accounting  |       |                |
|                               |       | Officer)                                                  |       |                |

 

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