**Exhibit13**

**CommerceFirstBancorp, Inc.**

**AnnualReport to Shareholders**

**for theYear Ended**

**December31, 2006**

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# ***Raising Banking to the Power of Business******â***

### **AnnualReport**

**2006**

#### **1804 West StreetAnnapolis, MD 21401**www.commerce1st.com

 

 

 

 

 

 

 

 

 
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March19, 2007

Toour Fellow Shareholders:

We are pleased to report that 2006 was an excellent year for yourCompany. We are proud to present the following report of accomplishments:

·                  Totalassets increased to over $141 million by December 31, 2006, an increase of$28.8 million or 25.5% over December 31, 2005.

·                  Netloans outstanding grew almost 26.7%, to $95.1 million.

·                  Depositsgrew by 27.2% to $112 million.

·                  TheCompany recorded its fourth consecutive profitable year, with net earnings $1.3million.

·                  Weopened two branch locations, at 910 Cromwell Park Drive, Glen Burnie, Marylandand at 6230 Old Dobbin Lane, Columbia, Maryland during 2006.

·                  InDecember 2006, we filed for regulatory permission to open our fifth branchlocation, in Severna Park, Maryland. In January 2007, we received both Federaland state regulatory permission and expect to open that office in the secondquarter of this year.

As always we appreciate your support in terms of referrals andpatronage.  We look forward to sharingour successes as we focus on implementing our 2007 Strategic Plan.
| Very truly yours,      |   |              |   |
|------------------------|--------|-------------------|--------|
|                   |   |              |   |
|                   |   |              |   |
|                   |   |              |   |
| Milton D.  Jernigan II |   | Richard J. Morgan |   |
| Chairman of the  Board |   | President and CEO |   |

 

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**MANAGEMENT’SDISCUSSION AND ANALYSIS**

ForwardLooking Statements. Certain information contained in this discussion mayinclude “forward-looking statements” within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities ExchangeAct of 1934, as amended. These forward-looking statements are generallyidentified by phrases such as “the Company expects,” “the Company believes” orwords of similar import.  Suchforward-looking statements involve known and unknown risks including, but notlimited to, changes in general economic and business conditions, interest ratefluctuations, competition within and from outside the banking industry, newproducts and services in the banking industry, risk inherent in making loanssuch as repayment risks and fluctuating collateral values, problems withtechnology utilized by the Company, changing trends in customer profiles andchanges in laws and regulations applicable to the Company.  Although the Company believes that itsexpectations with respect to the forward-looking statements are based uponreliable assumptions within the bounds of its knowledge of its business andoperations, there can be no assurance that actual results, performance orachievements of the Company will not differ materially from any future results,performance or achievements expressed or implied by such forward-lookingstatements.  Readers are cautionedagainst placing undue reliance on any such forward-looking statements. TheCompany does not undertake to update any forward-looking statements to reflectoccurrences or events that may not have been anticipated as of the date of suchstatements.

This discussion andanalysis provides an overview of the financial condition and results ofoperations of CommerceFirst Bancorp, Inc. (the “Company”) and CommerceFirstBank (the “Bank”) for the years 2006 and 2005. It is intended that this discussion and analysis help the readers intheir analysis of the accompanying audited Consolidated FinancialStatements.   You should read thisdiscussion in conjunction with the Consolidated Financial Statements and Notesthereto provided elsewhere in this report.

##### **General**

CommerceFirstBancorp, Inc. is the bank holding company for CommerceFirst Bank, a Marylandchartered commercial bank headquartered in Annapolis, Maryland. The Bank wascapitalized, became a wholly owned subsidiary of the Company and commencedoperations on June 29, 2000.

During the first quarterof 2005 the Company sold an aggregate of 981,333 additional shares of commonstock. Of the shares sold, 175,000 were sold on a rights offering basis toshareholders of record as of December 9, 2004 at a price of $10.50 per share,and 806,333 shares were sold in a public offering also at a price of $10.50 pershare.  The offerings, which closed onFebruary 28, 2005, raised an aggregate of approximately $9.6 million, net ofexpenses of the offering, financial advisory fees and underwriter’scommission.  In March 2005, the Companycontributed $6,000,000 to the capital of the Bank. The remaining proceeds ofthe offerings are available for general corporate purposes, including furthercontribution to the Bank for use in its lending and investment activities andother operations.

On March 1, 2005 tradingin the Company’s common stock commenced on the NASDAQ Capital Market under thesymbol “CMFB”.

InJune 2006, the Bank opened a new branch office, its third banking office, inleased space in the BWI Airport Business District on Cromwell Park Drive, GlenBurnie, Maryland.

InAugust  2006, the Bank opened a newbranch office, its four banking office, in leased space in the Liberty Placeoffice park on Old Dobbin Lane, Columbia, Maryland.

InJanuary 2007, Federal and State regulatory approval to open a new branchoffice, its fifth banking office, in leased space in the Severna Park MarketCenter in Severna Park, Maryland, was received. The branch office is expectedto open in the second quarter of 2007.

**Overview**

The Company’sassets at December 31, 2006 were $141.3 million, an increase of $28.8 millionor 25.6%, from December 31, 2005. The increase has two principal components.First, during the fourth quarter of 2006, the Bank increased its Certificate ofDeposit rates and attracted approximately $20 million in anticipation offunding needs for loan commitments issued during the second half of 2006.Second, the essentially flat level in total assets during the first threequarters of 2006 principally relates to the absorption of the expectedwithdrawal of funds by a deposit concentration 

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relationship as more fully described in the Company’s Annual Report for2005 and to the subsequent replacement of those funds without incurring aconcentration exposure, and to seasonal fluctuations in several largerelationships.

The Company’sassets at December 31, 2005 were $112.5 million, an increase of $36.6 millionor 48.2%, from December 31, 2004, principally due to increases in the loanportfolio, funded by increases in the core funding program and by increases inthe capital position as the result of the successful common stock offering concludedduring the first quarter of 2005. That offering raised about $9.6 million, netof expenses of the offering, financial advisory fees and underwriter’scommission.

At December 31,2006, gross loans totaled $96.8 million, exclusively commercial term loans andlines of credit ($45.3 million) and real estate secured term loans ($51.5million). By comparison, at December 31, 2005, gross loans totaled $77.1million (including loans held for sale of $323 thousand), exclusivelycommercial term loans and lines of credit ($38.6 million) and real estatesecured term loans ($38.5 million). At December 31, 2004, gross loans totaled$53.0 million, exclusively commercial term loans and lines of credit ($30.7million) and real estate secured term loans ($22.3 million).

At December 31,2006, deposits totaled $112.2 million, principally certificates of deposit($75.4 million), demand deposits ($19.0 million) and money market depositaccounts ($14.7 million). By comparison, at December 31, 2005, deposits totaled$88.2 million, principally certificates of deposit ($46.2 million), demanddeposits ($17.9 million) and money market deposit accounts ($17.2million).  At December 31, 2004, depositstotaled $65.7 million, principally certificates of deposit ($28.8 million),demand deposits ($20.7 million) and money market deposit accounts ($13.6million). A significant additional funding source is provided by the securitiessold under agreement to repurchase program. At December 31, 2006, balances inthis program totaled $9.6 million. By comparison, at December 31, 2005,balances in this program totaled $6.0 million. At December 31, 2004, balances in this program totaled $3.1 million.

AtDecember 31, 2006 nonperforming assets of approximately $628 thousand were innon-accrual status. By comparison, at December 31, 2005 nonperforming assets ofapproximately $592 thousand were in non-accrual status. At December 31, 2004,nonperforming assets of approximately $1.1 million were in non-accrual status.

**RESULTSOF OPERATIONS**

TheCompany reported a net profit of $1.3 million for the year ended December 31,2006 after recording a provision for income tax expense of $774 thousand, ascompared to a net profit of $1.0 million for the year ended December 31, 2005after recording a provision for income tax expense of $658 thousand and to anet profit of $1.1 million for the year ended December 31, 2004, afterrecording an income tax benefit of $862 thousand. The results ofoperations for the years ended December 31, 2006 and 2005 are entirely attributableto the operations of the Company’s sole subsidiary, CommerceFirst Bank. Asubstantial portion in the earnings for the year ended December 31, 2004 isattributable to the recognition of the net deferred tax benefit and to theresults of operations of the Bank. At September 30, 2004, in compliance withSFAS No. 109, *Accounting for Income Taxes*, theBank eliminated the valuation allowance for the deferred tax asset, therebyrecognizing $944 thousand in income tax benefits in income. See Note 2 to theConsolidated Financial Statements appearing elsewhere in this report foradditional information. The Company is currently recognizing income tax expensebased upon earnings in each period.

On aper share basis, the Company had earnings of $0.71 per basic and $0.69 perdiluted share for the year ended December 31, 2006, as compared to earnings of$0.63 per basic and $0.62 per diluted share for the year ended December 31,2005, and to earnings per basic and diluted share of $1.33 for the year endedDecember 31, 2004. However, the average number of basic shares outstanding in2006 was 1,803,583, as compared to 1,647,645 and 822,250 outstanding in 2005and 2004 respectively. The average number of diluted shares outstanding in 2006was 1,846,462, as compared to 1,672,928 and 822,250 outstanding in 2005 and2004 respectively. The increase in number of basic shares outstanding isattributable, and the increase in diluted shares is primarily attributable, tothe results of the stock offering discussed above.

Duringthe years ended December 31, 2006, 2005 and 2004, the Company had return onequity, return on assets and equity to asset ratios as follows:

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|                                   | ** ** | **Return on average assets and average equity** | ** ** |
|-----------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | ** **                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | ** **                                                                    | ** ** | **Years ended** | ** ** | ** ** | ** ** |
| **(Dollars in thousands)**        | ** ** | ** **                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **December 31, 2006**                                                         | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|                              | ** ** | ** **                                                                    |       |   |   |   |   |
| Return on Average Equity          | ** ** | **7.16**                                                                      | **%**      | 6.76 | % | 18.02 | % |
| Return on Average  Earning Assets | ** ** | **1.23**                                                                      | **%**      | 1.19 | % | 2.05 | % |
| Ratio of Average Equity           |       |                                                                          |       |   |   |   |   |
| to Average Assets                 | ** ** | **16.63**                                                                     | **%**      | 17.05 | % | 10.97 | % |

 

**NetInterest Income and Net Interest Margin**

Net interestincome is the difference between income on assets and the cost of fundssupporting those assets. Earning assets are composed primarily of loans andinvestments; the expense associated with interest bearing deposits and customerrepurchase agreements and other borrowings is the cost of funds. Non-interestbearing deposits and capital are other components representing funding sources.Changes in the volume and mix of assets and funding sources, along with thechanges in yields earned and rates paid, determine changes in net interestincome.

Net interestincome was $5.3 million in 2006, a 26.2% increase over the $4.2 millionrecorded in 2005; the net interest income in 2005 was a $1.8 million increaseover the $2.4 million recorded in 2004. Totalinterest income for the year ended December 31, 2006 was $8.2 million, a 45.5%increase over the $5.6 million in 2005; the total interest income in 2005 was a$2.6 million increase over the $3.0 recorded in 2004. Total interest expensesfor the years ended December 31, 2006, 2005 and 2004 were $2.9 million, $1.4million and $588 thousand, respectively. The increase in total interest income is primarily the result ofincreased balances of earning assets and secondarily the increased rates earnedon those assets. The increase in net interest income is jointly the result ofincreased balances of earning assets and increased rates earned, which offset increasesin rates paid to attract the necessary funding volume to support those assets.

The followingtable provides information for the designated periods with respect to averagebalances, income and expense and annualized yields and costs associated withvarious categories of interest earning assets and interest bearing liabilitiesfor the past three years. Non-accrual loans have been included in thepreparation of the table. The table includes a measurement of spread andmargin. Interest spread is the mathematical difference between the averageinterest yield on interest earning assets and average interest paid on interestbearing liabilities. Interest margin is the net interest yield on interestearning assets and is derived by dividing net interest income by averageinterest earning assets. Management believes that the interest margin is abetter indicator of asset earning results when compared to peer groups orindustry standards, particularly in a mature financial institution.

** **

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| ** **                                       | ** ** | **Consolidated Average Balances, Yields and Rates** | ** **  |
|--------------------------------------------------|------------|------------------------------------------------------------------------------|-------------|
| **(Dollars in thousands)**             | ** ** | ** **                                                                   | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **December 31, 2006**                                              | ** **  | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
| ** **                                       | ** ** | **Average**                                                                  | ** **  | ** ** | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| ** **                                       | ** ** | **Balance**                                                                  | ** **  | **Interest** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| ASSETS                                           |       |                                                                         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total loans(1)                                   | ** ** | **$**                                                                        | **87,301**  | ** ** | **$** | **7,452** | ** ** | **8.54** | **%** | **$** | **64,234** | ** ** | **$** | **4,950** | ** ** | **7.71** | **%** | $ | 40,569 |   | $ | 2,754 |   | 6.79 | % |
| Investment securities(2)                         | ** ** | **7,850**                                                                    | ** **  | **276** | ** ** | **3.52** | **%** | **9,733** | ** ** | **296** | ** ** | **3.04** | **%** | 6,931 |   | 180 |   | 2.59 | % |
| Federal funds sold                               | ** ** | **9,549**                                                                    | ** **  | **478** | ** ** | **5.00** | **%** | **12,523** | ** ** | **393** | ** ** | **3.14** | **%** | 5,541 |   | 66 |   | 1.19 | % |
| TOTAL INTEREST- EARNING  ASSETS                  |       | **104,700**                                                                  |        | **8,206** |   | **7.84** | **%** | **86,490** |   | **5,639** |   | **6.52** | **%** | 53,041 |   | 3,000 |   | 5.66 | % |
|                                             |       |                                                                         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Less allowance for  credit losses                | ** ** | **(1,759**                                                                   | **)**       | ** ** | ** ** | ** ** | ** ** | **(1,416** | **)** | ** ** | ** ** | ** ** |   | (822 | ) |   |   |   |   |
| Cash and due from banks                          | ** ** | **2,965**                                                                    | ** **  | ** ** | ** ** | ** ** | ** ** | **3,210** | ** ** | ** ** | ** ** | ** ** |   | 2,184 |   |   |   |   |   |
| Premises and equipment,  net                     | ** ** | **345**                                                                      | ** **  | ** ** | ** ** | ** ** | ** ** | **164** | ** ** | ** ** | ** ** | ** ** |   | 120 |   |   |   |   |   |
| Other assets                                     | ** ** | **1,486**                                                                    | ** **  | ** ** | ** ** | ** ** | ** ** | **1,166** | ** ** | ** ** | ** ** | ** ** |   | 633 |   |   |   |   |   |
| TOTAL ASSETS                                     | ** ** | **$**                                                                        | **107,737** | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | **89,615** | ** ** | ** ** | ** ** | ** ** |   | $ | 55,156 |   |   |   |   |   |
|                                             |       |                                                                         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| LIABILITIES AND STOCKHOLDERS’  EQUITY       |       |                                                                         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing demand  deposits                | ** ** | **$**                                                                        | **1,834**   | ** ** | **$** | **27** | ** ** | **1.46** | **%** | **$** | **2,422** | ** ** | **$** | **16** | ** ** | **0.67** | **%** | $ | 1,824 |   | $ | 4 |   | 0.24 | % |
| Money market deposit  accounts                   | ** ** | **18,063**                                                                   | ** **  | **607** | ** ** | **3.36** | **%** | **16,129** | ** ** | **272** | ** ** | **1.68** | **%** | 14,084 |   | 100 |   | 0.71 | % |
| Savings                                          | ** ** | **360**                                                                      | ** **  | **4** | ** ** | **1.00** | **%** | **448** | ** ** | **2** | ** ** | **0.50** | **%** | 223 |   | 1 |   | 0.25 | % |
| Certificates of deposit                          | ** ** | **47,179**                                                                   | ** **  | **2,135** | ** ** | **4.53** | **%** | **35,361** | ** ** | **1,113** | ** ** | **3.15** | **%** | 17,593 |   | 464 |   | 2.64 | % |
| Repurchase agreements                            | ** ** | **4,994**                                                                    | ** **  | **128** | ** ** | **2.56** | **%** | **3,003** | ** ** | **36** | ** ** | **1.20** | **%** | 4,160 |   | 18 |   | 0.44 | % |
| Other borrowed funds                             | ** ** | **73**                                                                       | ** **  | **4** | ** ** | **5.31** | **%** | **—** | ** ** | **—** | ** ** | **0.00** | **%** | 38 |   | 1 |   | 2.08 | % |
| TOTAL INTEREST-BEARING  LIABILITIES              | ** ** | **72,503**                                                                   | ** **  | **2,905** | ** ** | **4.01** | **%** | **57,364** | ** ** | **1,439** | ** ** | **2.51** | **%** | 37,922 |   | 588 |   | 1.55 | % |
|                                             |       |                                                                         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-interest-bearing demand  deposits            | ** ** | **16,484**                                                                   | ** **  | ** ** | ** ** | ** ** | ** ** | **16,489** | ** ** | ** ** | ** ** | ** ** |   | 10,889 |   |   |   |   |   |
| Other liabilities                                | ** ** | **828**                                                                      | ** **  | ** ** | ** ** | ** ** | ** ** | **484** | ** ** | ** ** | ** ** | ** ** |   | 297 |   |   |   |   |   |
| Stockholders’ equity                        | ** ** | **17,922**                                                                   | ** **  | ** ** | ** ** | ** ** | ** ** | **15,278** | ** ** | ** ** | ** ** | ** ** |   | 6,049 |   |   |   |   |   |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY | ** ** | **$**                                                                        | **107,737** | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | **89,615** | ** ** | ** ** | ** ** | ** ** |   | $ | 55,156 |   |   |   |   |   |
|                                             |       |                                                                         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income                              | ** ** | ** **                                                                   | ** **  | **$** | **5,301** | ** ** | ** ** | ** ** | ** ** | ** ** | **$** | **4,200** | ** ** | ** ** | ** ** | ** ** |   | $ | 2,412 |   |   |   |
|                                             |       |                                                                         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest spread                              | ** ** | ** **                                                                   | ** **  | ** ** | ** ** | **3.83** | **%** | ** ** | ** ** | ** ** | ** ** | **4.01** | **%** | ** ** | ** ** | ** ** |   | 4.11 | % |
|                                             |       |                                                                         |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest margin                              | ** ** | ** **                                                                   | ** **  | ** ** | ** ** | **5.06** | **%** | ** ** | ** ** | ** ** | ** ** | **4.86** | **%** | ** ** | ** ** | ** ** |   | 4.55 | % |

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(1) Interest income on loans includes net fees of $107 thousand in 2006,$126 thousand in 2005 and $70 thousand in 2004.

(2) Yields on securitiesavailable for sale have been calculated on the basis of historical cost and donot give effect to changes in fair value of such securities, which arereflected as a component of stockholders’ equity.

Netinterest margin was 5.06 in 2006 as compared to 4.86% in 2005 and 4.55% in2004. Interest spread was 3.83% in 2006 as compared to 4.01% in 2005 and to4.11% in 2004. The increase in margin in 2006 from 2005 and 2004 reflects theredeployment of assets from relatively low yielding short-term investments tohigher yielding loans, and to the investment of the proceeds from the capitaloffering. The decrease in spread is largely attributable to rising interestrates paid during the year to attract certificates of deposit.  Although the net interest margin increased by20 basis points for 2006 over 2005, the Company’s net interest margin peaked ona quarterly basis during the 2nd quarter; the Company has experiencedcompression beginning in the fourth quarter of 2006, and expects that margincompression may continue in 2007, as a result of continued competition fordeposits and relative flat yield curve.

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**Rate/Volume Analysis of NetInterest Income**

The followingtable sets forth certain information regarding changes in interest income andinterest expense of the Company for the periods indicated.  For each category of interest-earning assetsand interest-bearing liabilities, information is provided on changesattributable to: (i) changes in volume (change in volume of the asset multipliedby the prior period’s rate) and (ii) changes in rates (change in ratemultiplied by the current period’s volume).

 
| ** **                       | ** ** | **Effect of rate and volume changes on Net Interest Income** | ** ** |
|----------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| ** **                       | ** ** | **Year ended December 31,**                                                                | ** ** | **Year ended December 31,** | ** ** |
| ** **                       | ** ** | **2006 vs 2005**                                                                                | ** ** | **2005 vs 2004** | ** ** |
| ** **                       | ** ** | **Increase**                                                                                              | ** ** | **Due to Change** | ** ** | **Increase** | ** ** | **Due to Change** | ** ** |
| ** **                       | ** ** | **or**                                                                                                    | ** ** | **in Average:** | ** ** | **or** | ** ** | **in Average:** | ** ** |
| **(Dollars in  thousands)**      | ** ** | ** **                                                                                                | ** ** | **(Decrease)** | ** ** | **Rate** | ** ** | **Volume** | ** ** | **(Decrease)** | ** ** | **Rate** | ** ** | **Volume** | ** ** |
| Interest earning  assets         |       |                                                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Loans                            | ** ** | **$**                                                                                                     | **2,502**  | ** ** | **$** | **725** | ** ** | **$** | **1,777** | ** ** | $ | 2,195 |   | $ | 588 |   | $ | 1,607 |   |
| Investment portfolio             | ** ** | **(20**                                                                                                   | **)**      | **38** | ** ** | **(57** | **)** | 117 |   | 44 |   | 73 |   |
| Federal funds sold               | ** ** | **85**                                                                                                    | ** ** | **178** | ** ** | **(94** | **)** | 327 |   | 244 |   | 83 |   |
| Total interest income            | ** ** | **$**                                                                                                     | **2,567**  | ** ** | **$** | **941** | ** ** | **$** | **1,626** |   | $ | 2,639 |   | $ | 876 |   | $ | 1,763 |   |
|                             |       |                                                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing  liabilities:   |       |                                                                                                      |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing demand deposits |       | **$**                                                                                                     | **11**     |   | **$** | **14** |   | **$** | **(3** | **)** | $ | 12 |   | $ | 11 |   | $ | 1 |   |
| Money market deposit accounts    | ** ** | **335**                                                                                                   | ** ** | **303** | ** ** | **32** |   | 172 |   | 158 |   | 14 |   |
| Savings deposits                 | ** ** | **2**                                                                                                     | ** ** | **2** | ** ** | **—** |   | 2 |   | 1 |   | 1 |   |
| Certificates of deposit          | ** ** | **1,022**                                                                                                 | ** ** | **651** | ** ** | **371** |   | 648 |   | 179 |   | 469 |   |
| Repurchase agreements            | ** ** | **92**                                                                                                    | ** ** | **68** | ** ** | **24** |   | 18 |   | 23 |   | (5 | ) |
| Other borrowed funds             | ** ** | **4**                                                                                                     | ** ** | **—** | ** ** | **4** |   | (1 | ) | (0 | ) | (1 | ) |
| Total interest expense           | ** ** | **$**                                                                                                     | **1,466**  | ** ** | **$** | **1,038** | ** ** | **$** | **428** |   | $ | 851 |   | $ | 371 |   | $ | 480 |   |
| Net interest  income             | ** ** | **$**                                                                                                     | **1,101**  | ** ** | **$** | **(97** | **)** | **$** | **1,198** |   | $ | 1,788 |   | $ | 505 |   | $ | 1,283 |   |
|                                  |            |                                                                                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Allowanceand Provision for Credit Losses**

The provision forcredit losses represents the expense recognized to fund the allowance forcredit losses. At December 31, 2006, the allowance for credit losses stood at$1.6 million, or 1.67% of outstanding gross loans. Of this amount, “specific”reserves were $642 thousand and “general” reserves were $972 thousand. Specificreserves are used to individually allocate an allowance for loans identified asimpaired, or which otherwise exhibit adverse characteristics that suggest aheightened risk of non-collection. General reserves are those made with respect to other classified andunclassified loans in our portfolio based upon the methodology discussed belowin order to maintain the allowance at a level which reflects our best estimateof the losses inherent in the portfolio with respect to such loans.  Whether specific or general, amounts in theallowance for credit losses are available to absorb losses with respect to anyloan. At December 31, 2005, the allowance for credit losses stood at $1.6million, or 2.1% of outstanding gross loans. Of this amount, “specific”reserves were $784 thousand and “general” reserves were $831 thousand. AtDecember 31, 2004, the allowance for credit losses stood at $1.15 million, or2.2% of outstanding gross loans. Of this amount, “specific” reserves were $580thousand and “general” reserves were $574 thousand. The provision expense of$225 thousand for the year ended December 31, 2006 reflected a decrease of $135thousand from the provision expense of $360 thousand for the year endedDecember 31, 2005.  The 2005 provisionexpense of $360 thousand reflected a decrease of $230 thousand from theprovision expense of $590 thousand for the year ended December 31, 2004.

Management hasdevised and refined a comprehensive review methodology to assess the adequacyof the allowance. This methodology permits several different assessments to bemade. Currently, principal consideration is accorded the assessment based uponthe risk rating assigned to individual credits. Other assessments may be made by general categories of credits and byindustry groups (at a number of levels) based upon Standard IndustrialClassification 

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codes.  The methodology has theflexibility to permit additional evaluation criteria if so desired. Riskratings are assigned to all credits at inception. Consideration is given tomany different factors: past credit record, capacity to repay, character ofborrower, value of collateral, industry standards and overall economicconditions. Management considers, in addition to the above, the growth andcomposition of the portfolio, the loss experience of other banks in our peergroup, the results of examinations and evaluations of the overall portfolio byregulatory examiners and by external auditors, and the local, state andnational economic outlook.

In addition to theabove adequacy review, management also considers some bulk measures ofadequacy. Specifically, an analysis is made of the entire portfolio, less thegovernment guaranteed portion of SBA loans and those loans secured by cashdeposits within the Bank. An additional measure compares the gross loan totalwithout consideration of guarantees and/or collateral to the allowance. Eachquarter, management formally recommends to the Board of the Bank the proposedamount to be allocated monthly to the allowance and accordingly charged to theappropriate expense account.

Based principallyon the above factors and on current economic conditions and perceived loanquality, the allowance is believed to be adequate as of December 31, 2006.

The activity inthe allowance for credit losses is shown in the following table. Allcharge-offs and recoveries relate to commercial loans. 
| ** **                                              | ** ** | **Allowance for credit losses** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------|------------|
| **(Dollars in thousands)**                    | ** ** | **December 31**                           | ** ** | **December 31** | ** ** | **December 31** | ** ** |
| ** **                                              | ** ** | **2006**                                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Balance at  beginning of year                           | ** ** | **$**                                          | **1,615**  |   | $ | 1,154 |   | $ | 604 |   |
| Provision for  credit losses                            | ** ** | **225**                                        |       | 360 |   | 590 |   |
| Loans (charged  off) (commercial)                       | ** ** | **(226**                                       | **)**      | (15 | ) | (73 | ) |
| Recoveries  (commercial)                                | ** ** | **—**                                     |       | 116 |   | 33 |   |
| Net  (charge-offs)/recoveries                           | ** ** | **(226**                                       | **)**      | 101 |   | (40 | ) |
| Balance at end  of year                                 | ** ** | **$**                                          | **1,614**  |   | $ | 1,615 |   | $ | 1,154 |   |
|                                                    |       |                                           |       |   |   |   |   |
| Ratio of net  (chargeoffs)/ recoveries to average loans | ** ** | **(0.26**                                      | **%)**     | 0.15 | % | (0.10 | %) |

 

During 2006, twocommercial loans totaling $226 thousand to one borrower were determined to beuncollectible and were charged off. No recoveries were recorded in 2006.

During 2005, onecommercial loan totaling $15 thousand was determined to be uncollectible andwas charged off. Also during 2005, the Bank recorded recoveries of $116thousand, all of which is related to a commercial loan charged off in 2003.

During 2004, threeunrelated commercial loans totaling $73 thousand were determined to beuncollectible and were charged off. Recoveries of $32 thousand were recorded in2004.

Additionally, theBank has established a reserve for unfunded commitments that is recorded by aprovision charged to other expenses. At December 31, 2006, the balance of thisreserve was $36 thousand, as compared to $30 thousand and $24 thousand atDecember 31, 2005 and 2004, respectively. The reserve is an amount thatmanagement believes will be adequate over time to absorb possible losses onunfunded commitments (off-balance sheet financial instruments) that may becomeuncollectible in the future.

**ASSET QUALITY**

In its lending activities,the Bank seeks to develop sound credits with customers who will grow with theBank. There has not been an effort to rapidly build the portfolio and earningsat the expense of asset quality.  At thesame time, the extension of credit inevitably carries some risk of non-payment.

7

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The followingtable shows an analysis of nonperforming assets at the dates indicated:

 
| ** **                                   | ** ** | **Analysis of nonperforming assets** | ** ** |
|----------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Dollars in thousands)**         | ** ** | **December 31**                                | ** ** | **December 31** | ** ** | **December 31** | ** ** |
| ** **                                   | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Nonaccrual loans                             | ** ** | ** **                                          |       |   |   |   |   |
| Commercial                                   | ** ** | **$**                                               | **628**    |   | $ | 592 |   | $ | 1,057 |   |
| Accrual loans—Past  due 90 days or more | ** ** | **—**                                          |       | — |   | — |   |
| Real estate  owned                           | ** ** | **—**                                          |       | — |   | — |   |
| Total nonperforming  assets                  | ** ** | **$**                                               | **628**    |   | $ | 592 |   | $ | 1,057 |   |

 

At December 31, 2006, the Bank had three loanstotaling $628 thousand to two unrelated entities in non-accrual status ascompared to two unrelated loans totaling $592 thousand in non-accrual status atDecember 31, 2005.

·                  One loan in theamount of $583 thousand is the remaining balance of a relationship totaling$958 thousand recognized as impaired in September 2004 and placed innon-accrual status at that time. This loan is secured by real estate and byassignment of life insurance proceeds. The loan is also secured by allremaining business assets but the Bank does not expect to realize significantamounts from those business assets. The specific reserves allocated to thisloan are $426 thousand and collection proceedings continue.

·                  The secondrelationship has two loans totaling $45 thousand. One loan in the amount of $20thousand is the unguaranteed portion of a Small Business Administration loanoriginally in the amount of $150 thousand, the guaranteed portion of which wassold in 2005.  The second loan is in theamount of $25 thousand. Both loans are secured by assignment of certainbusiness assets and by personal guarantees of the principals. Collectionproceedings have started and the Bank has established specific reserves of $45thousand for these two loans.

At December 31,2006, there were five commercial loans to three (two related) entities totaling$381 thousand considered to be potential problem loans.

·                  The firstrelationship has two loans totaling $261 thousand. One of these loans in theamount of $102 thousand carries a 75% Small Business Administration guaranteeand is secured by real estate and by assignment of all business assets. Theother loan, in the amount of $159 thousand, is secured by assignment of allbusiness assets. Both of these loans are current and are in accrual status.Specific reserves of $110 thousand have been allocated for these two loans.

·                  The secondrelationship has three loans totaling $120 thousand.  All three loans are secured by assignment ofall business assets and by personal guarantees of the principals. All threeloans are current and are in accrual status. Specific reserves of $60 thousandhave been allocated for these three loans. One of the principals alsoguarantees the second relationship noted above in the non-accrual narrative.

AtDecember 31, 2006, there was one commercial loan totaling $15 thousand which isnot considered a potential problem loan and is well secured by collateral, butwhich exhibits characteristics that warrant closer scrutiny and attention thanwould otherwise be appropriate. For these purposes, a “potential problem loan”is defined as a loan which is not included in the past due, non-accrual orrestructured categories but for which known information about possible creditproblems causes management to have serious doubts as to the ability of theborrower to comply with the present repayment terms.

**AtDecember 31, 2006 there was one additional accrual loan totaling $22 thousandpast due sixty days or more. Generally, the accrual of interest is discontinuedwhen a loan is specifically determined to be impaired or when principal orinterest is delinquent for ninety days or more**. During 2006, there were no amounts included in grossinterest income attributable to loans in non-accrual status. There was no realestate owned at any time during 2006.

At December 31,2005, the Bank had two loans totaling $592 thousand in non-accrual status ascompared to three loans totaling $1.1 million at December 31, 2004. Thereduction in the amount of non-accrual loans from December 31, 2004 isattributable to the receipt of $433 thousand on August 1, 2005 in partialpayment of two loans and an overdraft outstanding at December 31, 2004, and tothe receipt of $152 thousand from the Small Business Administration in payment

8

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of a claim (and a portion of related expenses) of $149 thousand outstandingat December 31, 2004. During 2005, there were no amounts included in grossinterest income attributable to loans in non-accruals status.

At December 31,2004, two of the three loans in non-accrual status, totaling $908 thousand tothe same borrower, were recognized as impaired on September 1, 2004 and placedon non-accrual status at that time; in addition, there was an overdraft of $53thousand on this borrower’s checking account occasioned by a draw against aLetter of Credit issued on behalf of the borrower. There was a third loan inthe amount of $149 thousand in non-accrual status at December 31, 2004.

Thefollowing table shows the allocation of the allowance for credit losses at thedates indicated.  The allocation ofportions of the allowance to specific categories of loans is not intended to beindicative of future losses, and does not restrict the use of the allowance toabsorb losses in any category of loans.

** **
| ** **                            | ** ** | **Loan Loss Reserve Proportional Allocation** | ** ** |
|---------------------------------------|------------|-------------------------------------------------------------------|------------|
| **(Dollars in thousands)**  | ** ** | ** **                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                            | ** ** | **December 31, 2006**                                   | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
| ** **                            | ** ** | ** **                                                        | ** ** | **Percentage** | ** ** | ** ** | ** ** | **Percentage** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                            | ** ** | **Balance**                                                       | ** ** | **of total loans** | ** ** | **Balance** | ** ** | **of total loans** | ** ** | **Balance** | ** ** | **of total loans** | ** ** |
| Commercial                            | ** ** | **$**                                                             | **642**    | ** ** | **46.84** | **%** | $ | 784 |   | 50.03 | % | $ | 580 |   | 57.93 | % |
| Real estate—commercial  mortgage | ** ** | **—**                                                        |       | — |   | — |   | — |   | — |   | — |   |
| Unallocated                           | ** ** | **972**                                                           | ** ** | **53.16** | **%** | 831 |   | 49.97 | % | 574 |   | 42.07 | % |
| Balance, end of period                | ** ** | **$**                                                             | **1,614**  | ** ** | **100.00** | **%** | $ | 1,615 |   | 100.00 | % | $ | 1,154 |   | 100.00 | % |

 

Theloan portfolio is the largest component of earning assets and accounts for thegreatest portion of total interest income. At December 31, 2006, gross loansincluding loans held for sale were $96.8 million, a 25.5% increase from the$77.1 million in gross loans outstanding at December 31, 2005. At December 31,2004, gross loans outstanding were $53.0 million. In general, loans consist ofinternally generated loans and participation loans purchased from other localcommunity banks.  Lending activity isconfined to the Bank’s market area. The strong growth is attributable to thesatisfactory culmination of efforts to attract quality credits; there has beenno dilution of credit underwriting standards. The Bank does not engage inforeign lending activities.

The followingtable sets forth information on the composition of the loan portfolio by type(including loans held for sale): 
| ** **                            | ** ** | **Composition of loan portfolio** | ** ** |
|---------------------------------------|------------|--------------------------------------------------|------------|
| **(Dollars in thousands)**  | ** ** | **December 31, 2006**                  | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
| ** **                            | ** ** | ** **                                       | ** ** | **Percentage** | ** ** | ** ** | ** ** | **Percentage** | ** ** | ** ** | ** ** | **Percentage** | ** ** |
| ** **                            | ** ** | **Balance**                                      | ** ** | **total loans** | ** ** | **Balance** | ** ** | **total loans** | ** ** | **Balance** | ** ** | **total loans** | ** ** |
| Commercial                            | ** ** | **$**                                            | **45,350** | ** ** | **46.84** | **%** | $ | 38,555 |   | 50.03 | % | $ | 30,704 |   | 57.93 | % |
| Real estate—commercial  mortgage | ** ** | **51,461**                                       | ** ** | **53.16** | **%** | 38,516 |   | 49.97 | % | 22,301 |   | 42.07 | % |
| Gross loans                           | ** ** | **96,811**                                       | ** ** | **100.00** | **%** | 77,071 |   | 100.00 | % | 53,005 |   | 100.00 | % |
| Less allowance  for credit losses     | ** ** | **(1,614**                                       | **)**      |   |   | (1,615 | ) |   |   | (1,154 | ) |   |   |
| Less unearned  fees                   | ** ** | **(116**                                         | **)**      |   |   | (89 | ) |   |   | (75 | ) |   |   |
| Loans, net                            | ** ** | **$**                                            | **95,081** |   |   |   | $ | 75,367 |   |   |   | $ | 51,776 |   |   |   |

 

Thefollowing table shows the interest rate sensitivity of the loan portfolio atDecember 31, 2006.  Demand loans, loanswithout a stated maturity and overdrafts are reported as due in one year orless. Floating rate loans are reported to reflect the period until repricing.At December 31, 2006, the total amount of loans due after one year with fixedrates of interest was approximately $44.6 million.

9

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| ** **                 | ** ** | **Interest rate sensitivity of loan portfolio** | ** ** |
|----------------------------|------------|--------------------------------------------------------------------------|------------|
| **(Dollars in thousands)** | ** ** | ** **                                                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                 | ** ** | **One Year  or Less**                                                    | ** ** | **After One Year  through Five Years** | ** ** | **After Five  Years** | ** ** | **Total** | ** ** |
| Fixed (commercial)         |       | $                                                                        | 4,680      |   | $ | 10,887 |   | $ | 400 |   | $ | 15,967 |   |
| Fixed (real estate)        |       | 6,642                                                                    |       | 32,556 |   | 770 |   | 39,968 |   |
|                       |       |                                                                     |       |   |   |   |   |   |   |
| Floating (commercial)      |       | 29,384                                                                   |       | — |   | — |   | 29,384 |   |
| Floating (real estate)     |       | 11,492                                                                   |       | — |   | — |   | 11,492 |   |
|                       |       | $                                                                        | 52,198     |   | $ | 43,443 |   | $ | 1,170 |   | $ | 96,811 |   |

 

**Investmentsecurities portfolio**

At December 31,2006, the carrying value of the investment securities portfolio wasapproximately $11.0 million as compared to carrying value of $10.9 million atDecember 31, 2005. The Bank elected to utilize $6 million in Treasurysecurities maturing in the first half of 2006 to fund loan commitments and tosupplement liquidity. During the fourth quarter, the Bank purchased $6 millionin Treasury securities maturing in equal amounts in 2008 and 2009, principallyto support the securities sold under agreement to repurchase program.

At December 31,2005, the carrying value of the investment securities portfolio wasapproximately $10.9 million as compared to carrying value of $5.0 million atDecember 31, 2004. During the second quarter of 2005, the Bank increased itssecurities portfolio, purchasing $3 million in U.S. Treasury Bills due inAugust 2005 and $3 million in U.S. Treasury Notes due in March 2007. In August2005, the maturing Treasury Bills were reinvested into a like amount ofTreasury Bills due in December 2005; in December 2005, the maturing TreasuryBills were reinvested into a like amount of Treasury Bills due in April 2006.

AtDecember 31, 2004, the carrying value of the investment securities portfoliowas approximately $5.0 million.

TheBank currently classifies its entire securities portfolio as available forsale. Increases in the portfolio will occur whenever deposit growth outpacesloan demand and the forecast for growth is such that the investment of excessliquidity in investment securities (as opposed to short term investments suchas Federal Funds) is warranted. In general, the Bank’s investment policy is toacquire direct U.S. Treasury securities and fully guaranteed U.S. governmentagency issues with a remaining maturity of four years or less. As the Bankdevelops its loan portfolio, it anticipates that it will maintain the averagematurity of the securities portfolio at two years or less. In addition, theBank has purchased Federal Reserve stock in accordance with regulation andexpects to maintain small equity positions in stock in two banker’s banks tofacilitate loan participations.

Thefollowing table provides information regarding the composition of the Bank’sinvestment securities portfolio at the dates indicated. See Note 2 to theConsolidated Financial Statements for additional information regarding theinvestment securities portfolio.
| ** **                                           | ** ** | **Composition of the investment portfolio** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| **(Dollars in thousands)**                 | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                           | ** ** | **December 31, 2006**                                 | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|                                                 | ** ** | ** **                                                      |       |   |   |   |   |   |   |   |   |   |   |
| **Available for  Sale  (at Estimated Market Value)** | ** ** | **Balance**                                                     | ** ** | **Percent  of Total** | ** ** | **Balance** | ** ** | **Percent  of Total** | ** ** | **Balance** | ** ** | **Percent  of Total** | ** ** |
| U.S. Treasuries                                      | ** ** | **$**                                                           | **11,013** | ** ** | **95.93** | **%** | $ | 10,874 |   | 95.90 | % | $ | 4,978 |   | 95.08 | % |
| Federal Reserve  Stock                               | ** ** | **405**                                                         | ** ** | **3.53** | **%** | 402 |   | 3.55 | % | 196 |   | 3.74 | % |
| Corporate  equities                                  | ** ** | **62**                                                          | ** ** | **0.54** | **%** | 62 |   | 0.55 | % | 62 |   | 1.18 | % |
| Total                                                | ** ** | **$**                                                           | **11,480** | ** ** | **100.00** | **%** | $ | 11,338 |   | 100.00 | % | $ | 5,236 |   | 100.00 | % |

 

The followingtable sets forth the contractual maturities of the U.S. Treasury securitiescomponent of the investment securities portfolio as of December 31, 2006 andthe average yields:

10

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** **
| ** **                           | ** ** | **Projected maturities of the investment securities portfolio** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|
| **(Dollars in thousands)** | ** ** | ** **                                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **One Year  or Less**                                                               | ** ** | **After One Year  Through Five Years** | ** ** | **Total** | ** ** |
| ** **                           | ** ** | **Carrying  Value**                                                                           | ** ** | **Average  Yield** | ** ** | **Carrying  Value** | ** ** | **Average  Yield** | ** ** | **Carrying  Value** | ** ** | **Average  Yield** | ** ** |
|                                 |       |                                                                                          |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Treasuries                      |       | $                                                                                             | 4,966      |   | 3.40 | % | $ | 6,047 |   | 4.42 | % | $ | 11,013 |   | 3.95 | % |
|                                      |            |                                                                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

At December 31, 2006, there were no issuers, otherthan the U.S. Government, whose securities owned by the Company or the Bank hada book or market value exceeding ten percent of the Company’s stockholders’equity.

**Non-interestIncome**

Non-interest income principallyconsists of gains from the sale of the guaranteed portion of Small BusinessAdministration loans and from deposit account services charges.

For the year ended December 31,2006, the gains from the sales of SBA loans amounted to $300 thousand. For theyears ended December 31, 2005 and 2004, respectively, the gains from the salesof SBA loans amounted to $330 thousand and $273 thousand. Prior to 2004, therewas no revenue from this source during any period. The Bank currentlyintends to sell the guaranteed portion of most additional SBA loans, resultingin a continuing stream of income that will vary from quarter to quarter,depending in part upon the amounts actually sold.

For the year ended December 31,2006, deposit account services charges amounted to $332 thousand as compared to$295 thousand and $311 thousand for the years ended December 31, 2005 and 2004,respectively.

As the Bank continues to develop these and additionalsources of income, it is expected that non-interest income will continue to bea significant contributor to the overall profitability of the Company, althoughthere can be no assurance of this.

##### **Non-interestExpense**

Non-interestexpenses of $3.7 million were incurred in 2006 as compared to $2.8 million in2005 and $2.2 million in 2004. The most significant non-interest expense itemwas salaries and benefits at $2.2 million in 2006; the comparable amounts in2005 and 2004 were $1.7 million and $1.3 million, respectively. The increases in salaries and benefits areattributable to additional personnel related to the Bank’s branch expansion andto salary increases.  Theseamounts are in line with projections and are deemed necessary to attract andretain qualified personnel essential to the growth and continued profitabilityof the Bank and the Company. A breakdown of other non-interest expenses is inthe income statement and Note 8 to the Consolidated Financial Statements.

**Incometaxes**

TheCompany uses the liability method of accounting for income taxes as required bySFAS No.109,*Accounting for Income Taxes*.  Under the liability method, deferred taxassets and liabilities are determined based on differences between the financialstatement carrying amounts and the enacted rates that will be in effect whenthese differences reverse. During 2006, the Company recorded an income taxexpense of $774 thousand as compared to an income tax expense of $658 thousandand an income tax benefit of $862 thousand recorded in 2005 and 2004,respectively. At September 30, 2004, in compliance with SFAS No. 109, *Accounting for Income Taxes*, the Bank eliminated thevaluation allowance for the deferred tax asset, thereby recognizing $944thousand in income tax benefits in income during that quarter.  Since that date, the Company has recognizedincome tax expense based upon earnings in each period.

**Deposits and Liquidity Management**

Liquidityis a measure of the Bank’s ability to meet the demands required for the fundingof loans and to meet depositors’ requirements for use of their funds. The Bank’sprincipal sources of liquidity are cash balances, due from banks, Federal fundssold and available-for-sale securities not pledged to the securities sold underagreement to repurchase program.

11

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AtDecember 31, 2006, management considers the liquidity position of the Companyand Bank to be satisfactory. At December 31, 2006, the Bank’s principal sourcesof liquidity (as defined above) totaled $32.4 million and represented 22.9% oftotal Company assets. Continued strong growth in deposits will be required tofund loan growth. Accordingly, the Bank intends to maintain a competitiveposture in its deposit interest rate offerings. While adequate liquidity is imperative,excess liquidity has the effect of a lower interest margin, as funds notinvested in loans are placed in short-term investments that generally carry alower yield.

The Bank’s principal sources of funds are coredeposits, consisting of demand deposits, NOW accounts, money market accounts,savings accounts and certificates of deposit from the local market area.  These accounts provide the Bank with arelatively stable source of funds and a source of fee income. Consistent withour focus on business banking, we do not seek significant numbers of smallerretail consumer deposit relationships, choosing instead to target largerdeposit relationships by offering interest rates on certificates of deposit of$100,000 or more which are near the top of the local market, and by providingsignificant cash management capabilities to our commercial customers.  As a result, a substantial portion of ourdeposits, 78.5% as of December 31, 2006, relate to account relationshipsaggregating over $100,000.

At December 31, 2006, deposits totaled $112.2 million,principally certificates of deposit ($75.3 million), demand deposits ($19.0million) and money market deposit accounts ($14.7 million). By comparison, atDecember 31, 2005, deposits totaled $88.2 million, principally certificates ofdeposit ($46.2 million), demand deposits ($17.9 million) and money marketdeposit accounts ($17.2 million); at December 31, 2004, deposits totaled $65.7million, principally certificates of deposit ($28.8 million), demand deposits($20.7 million), and money market deposit accounts ($13.6 million). The Bank has accepted approximately $19.8 millionin brokered Certificates of Deposit, including approximately $6 millionaccepted in the fourth quarter of 2006 in anticipation of significant loanfunding requirements. Approximately $4 million of these certificates mature in2007, with approximately $7.1 million and $8.6 million maturing in 2008 and2009 respectively. The interest rates paid to attract these deposits were equalto or below the rates paid to attract local deposits.  The Bank may consider acceptance ofadditional brokered Certificates of Deposit in anticipation of significant loanfunding requirements; current policy limits acceptance of brokered deposits toan amount not to exceed 20% of deposits.

The following table reflects average deposits andaverage rates paid, by category, for the periods indicated:
| ** **                                   | ** ** | **Average Deposits and Average Rates Paid** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **(Dollars in thousands)**         | ** ** | **Year Ended December 31,**                           | ** ** |
| ** **                                   | ** ** | **2006**                                                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                         |       |                                                                 |       |   |   |   |   |   |   |   |   |   |   |
| Noninterest  bearing demand                  | ** ** | **$**                                                                | **16,484** | ** ** | **0.00** | **%** | $ | 19,563 |   | 0.00 | % | $ | 10,889 |   | 0.00 | % |
| Interest bearing  demand                     | ** ** | **1,834**                                                            | ** ** | **1.46** | **%** | 2,422 |   | 0.67 | % | 1,824 |   | 0.24 | % |
| Money market                                 | ** ** | **18,063**                                                           | ** ** | **3.36** | **%** | 16,129 |   | 1.68 | % | 14,084 |   | 0.71 | % |
| Savings                                      | ** ** | **360**                                                              | ** ** | **1.00** | **%** | 448 |   | 0.50 | % | 223 |   | 0.25 | % |
| Certificates of  deposit of $100,000 or more | ** ** | **38,778**                                                           | ** ** | **4.53** | **%** | 29,426 |   | 3.10 | % | 15,534 |   | 2.58 | % |
| Other time  deposits                         | ** ** | **8,401**                                                            | ** ** | **4.54** | **%** | 5,936 |   | 3.39 | % | 2,059 |   | 3.07 | % |
| Balance, end of period                       | ** ** | **$**                                                                | **83,920** | ** ** | **3.31** | **%** | $ | 73,924 |   | 1.90 | % | $ | 44,613 |   | 1.04 | % |

 

The following table indicates the amount of the Bank’scertificates of deposit of $100,000 or more by time remaining to maturity as ofDecember 31, 2006.
| **Certificate of Deposit ($100,000 or >) maturity schedule at December 31, 2006** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| **(Dollars in thousands)**                                                                                                        | ** ** | ** ** | ** ** |
| ** **                                                                                                                                  | ** ** | ** ** | ** ** |
| Due in:**   3 mont  hs or less**                                                                                             | ** ** | **$**      | **16,273** | ** ** |
| **Over 3 months through 6 months**                                                                                                          | ** ** | **4,800**  | ** ** |
| **Over 6 months through 12 months**                                                                                                         | ** ** | **7,581**  | ** ** |
| **Over 12 months**                                                                                                                          | ** ** | **37,323** | ** ** |
|                                                                                                                                        | ** ** | **$**      | **65,977** | ** ** |

 

In addition, the Bankoffers Securities Sold under Repurchase Agreement/Sweep accounts to itscommercial clientele. Although these funds are technically not depositliabilities, they are nonetheless an ongoing source of core funding andcontribute significantly to the Bank’s liquidity management. At December 31,2006, the Bank had $9.6 million in such funding; by comparison, the December31, 2005 and 2004 totals were $6.0 million and $3.1 million respectively.

12

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The followingtable provides information regarding the Company’s short-term borrowings forthe periods indicated.  See Note 7 to theConsolidated Financial Statements for additional information regarding theCompany’s borrowings.
| ** **                           | ** ** | **Short-term borrowings (**1)                                | ** ** |
|--------------------------------------|------------|-------------------------------------------------------------------|------------|
| **(Dollars in thousands)** | ** ** | **Maximum  Amount  Outstanding at  Any Month End** | ** ** | **Average  Balance** | ** ** | **Average  Rate** | ** ** | **Ending  Balance** | ** ** | **Ending  Average  Rate** | ** ** |
|                                 |       |                                                              |       |   |   |   |   |   |   |   |   |
| Year ended  December 31, 2006        |       | $                                                                 | 10,349     |   | $ | 5,067 |   | 2.60 | % | $ | 9,579 |   | 2.65 | % |
| Year ended  December 31, 2005        |       | $                                                                 | 6,010      |   | $ | 3,003 |   | 1.20 | % | $ | 6,010 |   | 2.09 | % |
| Year ended December 31,  2004        |       | $                                                                 | 7,284      |   | $ | 4,198 |   | 0.60 | % | $ | 3,086 |   | 0.41 | % |

----

(1) Short-termborrowings consist of customer repurchase agreements, federal funds purchasedand Treasury

Tax and Loan balances.

The Bank may draw upon $8.5 million Federal funds borrowing facilitiesfrom other financial institutions. At December 31, 2006, no amounts wereoutstanding under these facilities.  TheCompany believes its levels of liquidity and capital are adequate to conductthe business of the Company and Bank.

**Off-BalanceSheet Arrangements**

Withthe exception of the Bank’s obligations in connection with its irrevocableletters of credit, and loan commitments, the Bank has no off-balance sheetarrangements that have or are reasonably likely to have a current or futureeffect 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 informationon off-balance sheet arrangements, please see “Note 10 - Commitment andContingencies” of the Notes to the Consolidated Financial Statements.

**INTERESTRATE RISK MANAGEMENT**

Banksand other financial institutions are dependent upon net interest income, thedifference between interest earned on interest earning assets and interest paidon interest bearing liabilities. Changes in interest rates inevitably have animpact on interest income. GAP, a measure of the difference in volume betweeninterest bearing assets and interest bearing liabilities, is a means ofmonitoring the sensitivity of a financial institution to changes in interestrates. The chart below provides an indicator of the rate sensitivity of theCompany.  A positive GAP indicates thedegree to which the volume of repriceable assets exceeds repriceableliabilities in particular time periods. The Company has a positive GAP of 44.7% out to three months and acumulative positive GAP of 30.4% out to 12 months, an asset sensitive position,which would generally indicate increased net interest income in a rising rateenvironment and a decreased net interest income in a declining rate environment.  However, this measurement of interest raterisk sensitivity represents a static position as of a single day and is notnecessarily indicative of the interest rate risk position at any other point intime, does not take into account the sensitivity of yields and costs ofspecific assets and liabilities to changes in market rates, and does not takeinto account the specific timing of when changes to a specific asset orliability will occur.

Management has carefully considered its strategy tomaximize interest income by reviewing interest rate levels and economicindicators. The positive GAP positions out three and twelve months noted aboveexceed the policy limits established as part of the Asset/Liability Policy;however, the relevant factors justifying the exception have been thoroughlydiscussed with the Board of Directors and management believes that existingstrategies are appropriate to current economic and interest rate trends.

13

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| ** **                                             | ** ** | **GAP Analysis** | ** ** |
|--------------------------------------------------------|------------|-----------------------|------------|
| **(Dollars in thousands)**                   | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                             | ** ** | **0-3  Months**       | ** ** | **4-12  Months** | ** ** | **1-3  Years** | ** ** | **3-5  Years** | ** ** | **Over  5 Years** | ** ** | **Total** | ** ** |
| Interest-earning  assets:                              |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Federal funds sold                                     |       | $                     | 28,666     |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 28,666 |   |
| Investment securities                                  |       | 3,000                 |       | 2,000 |   | 6,000 |   | — |   | — |   | 11,000 |   |
| Loans                                                  |       | 47,814                |       | 3,775 |   | 18,116 |   | 25,285 |   | 1,170 |   | 96,160 |   |
| Total  interest-earning assets                         |       | 79,480                |       | 5,775 |   | 24,116 |   | 25,285 |   | 1,170 |   | 135,826 |   |
|                                                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                         |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| Money market deposit accounts                          |       | 14,685                |       | — |   | — |   | — |   | — |   | 14,685 |   |
| NOW accounts                                           |       | 3,069                 |       | — |   | — |   | — |   | — |   | 3,069 |   |
| Savings                                                |       | 89                    |       | — |   | — |   | — |   | — |   | 89 |   |
| Certificates of deposit                                |       | 16,273                |       | 12,381 |   | 37,323 |   | — |   | — |   | 65,977 |   |
| Other time deposits                                    |       | 264                   |       | 2,964 |   | 5,942 |   | 198 |   | — |   | 9,368 |   |
| Repurchase agreements                                  |       | 9,579                 |       | — |   | — |   | — |   | — |   | 9,579 |   |
| Total  interest-bearing liabilities                    |       | 43,959                |       | 15,345 |   | 43,265 |   | 198 |   | — |   | $ | 102,767 |   |
|                                                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| GAP                                                    |       | 35,521                |       | (9,570 | ) | (19,149 | ) | 25,087 |   | 1,170 |   |   |   |
|                                                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| CUMULATIVE GAP                                         |       | $                     | 35,521     |   | $ | 25,951 |   | $ | 6,802 |   | $ | 31,889 |   | $ | 33,059 |   |   |   |
|                                                   |       |                  |       |   |   |   |   |   |   |   |   |   |   |
| CUMULATIVE GAP TO  CUMULATIVE  INTEREST-EARNING ASSETS |       | 44.69                 | %          | 30.44 | % | 6.22 | % | 23.68 | % | 24.34 | % |   |   |

 

**CAPITALRESOURCES AND ADEQUACY**

Theassessment of capital adequacy depends on a number of factors such as assetquality, liquidity, earnings performance, and changing competitive conditionsand economic forces.  The adequacy of theCompany’s capital is reviewed by management on an ongoing basis.  Management seeks to maintain a capitalstructure that will assure an adequate level of capital to support anticipatedasset growth and to absorb potential losses. The ability of the Company to grow is dependent on the availability ofcapital with which to meet regulatory capital requirements, discussedbelow.  To the extent the Company issuccessful it may need to acquire additional capital through the sale ofadditional common stock, other qualifying equity instruments, such as trustpreferred securities, or subordinated debt. There can be no assurance that additional capital will be available tothe Company on a timely basis or on attractive terms.

Thecapital positions of the Company and the Bank continue to meet regulatoryrequirements.  The primary indicatorsrelied on by bank regulators in measuring the capital position are the Tier Irisk-based capital, total risk-based capital, and leverage ratios. For theCompany and the Bank, Tier I capital consists of common stockholders’ equity;total risk-based capital consists of Tier I capital and a portion of theallowance for loan losses.  Risk-basedcapital ratios are calculated with reference to risk-weighted assets.  The leverage ratio compares Tier I capital tototal average assets.  All of theseratios are well in excess of the mandated minimum requirement of 4.00%, 8.00%,and 3-5%, respectively. Detail of these ratios is shown in Note 11 to the ConsolidatedFinancial Statements.

During the first quarterof 2005 the Company sold an aggregate of 981,333 additional shares of commonstock. Of the shares sold, 175,000 were sold on a rights offering basis toshareholders of record as of December 9, 2004 at a price of $10.50 per share,and 806,333 shares were sold in a public offering also at a price of $10.50 pershare.  The offerings raised an aggregateof approximately $9.6 million, net of expenses of the offering, financialadvisory fees and underwriter’s commission, of which approximately $6 millionhas been contributed to the Bank or used to pay operating expenses of theCompany.  The remaining proceeds of theofferings, approximately $3.6 million are available for contribution to theBank for use in its lending and investment activities and other operations, andfor general corporate purposes.

**MARKET FOR COMMON STOCK AND DIVIDENDS**

Since March 1, 2005, the Company’sCommon Stock has been listed for trading on the NASDAQ Capital Market (formerlyknown as The NASDAQ Small Cap Market) under the symbol “CFMB.”  Prior to that date, the Company’s CommonStock was not traded on any organized exchange, including The NASDAQ StockMarket. The following table sets

14

----

 

forth the high and low salesprices for the Common Stock during each calendar quarter since the secondquarter of 2005, the first full quarter during which the Common Stock waslisted on the Nasdaq Capital Market.  Forprior periods, high and low bid prices are shown. These quotations reflectinter-dealer prices, without retail markup, markdown or commission, and may notrepresent actual transactions. These quotations do not necessarily reflect theintrinsic or market values of the Common Stock. As of December 31, 2006, there were 1,803,583 shares of Common Stockoutstanding, held by approximately 307 shareholders of record.
| ** **     | ** ** | **Stock price table** | ** ** |
|----------------|------------|---------------------------------|------------|
| ** **     | ** ** | **2006**                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **     | ** ** | **High**                        | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  |       | $                               | 15.00      |   | $ | 13.14 |   | $ | 13.50 |   | $ | 11.50 |   | $ | 9.25 |   | $ | 9.00 |   |
|           |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Second Quarter |       | $                               | 14.95      |   | $ | 14.25 |   | $ | 11.90 |   | $ | 11.00 |   | $ | 9.50 |   | $ | 9.25 |   |
|           |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Third Quarter  |       | $                               | 15.00      |   | $ | 13.50 |   | $ | 12.70 |   | $ | 11.41 |   | $ | 9.50 |   | $ | 9.13 |   |
|           |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Fourth Quarter |       | $                               | 14.58      |   | $ | 13.20 |   | $ | 14.00 |   | $ | 12.25 |   | $ | 13.00 |   | $ | 9.65 |   |

 

The Company has not paid any dividends to date. The payment of dividends by the Company willdepend largely upon the ability of the Bank, its sole operating business, todeclare and pay dividends to the Company. Regulations of the Federal Reserve Board and Maryland law place limitson the amount of dividends the Bank may pay to the Company without priorapproval.  Prior regulatory approval isrequired to pay dividends which exceed the Bank’s net profits for the currentyear plus its retained net profits for the preceding two calendar years, lessrequired transfers to surplus. Additionally, without prior approval, the Bank may pay dividends onlyout of its undivided profits. Even if the Bank and the Company have earnings inan amount sufficient to pay dividends, the Board of Directors may determine toretain earnings for the purpose of funding the growth of the Company and theBank.

### **FINANCIAL STATEMENTS**

The audited financial statementsfor the Company as of December 31, 2006 and 2005 and for each of the years inthe three-year period ended December 31, 2006 are included herewith.

15

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

CommerceFirst Bancorp, Inc. and Subsidiary

Annapolis, Maryland

We have audited theaccompanying consolidated balance sheets of CommerceFirst Bancorp, Inc. andsubsidiary as of December 31, 2006 and2005, and the related consolidated statements of income, changes instockholders’ equity and comprehensive income, and cash flows for each of theyears in the three-year period ended December31, 2006.  These consolidatedfinancial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the consolidated financial statements are free of materialmisstatement.  The Company is notrequired to have, nor were we engaged to perform, an audit of its internalcontrol over financial reporting.  Ouraudit included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the consolidatedfinancial statements, assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of CommerceFirstBancorp, Inc. and subsidiary as of December31, 2006 and 2005, and the consolidated results of their operations andtheir consolidated cash flows for each of the years in the three-year periodended December 31, 2006 inconformity with accounting principles generally accepted in the United Statesof America.

Salisbury, Maryland

February 23, 2007

16

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**CommerceFirstBancorp, Inc. and Subsidiary**

**ConsolidatedBalance Sheets**

**December31, 2006 and  2005**
| ** **                                                                                           | ** ** | **December 31,** | ** **      |
|------------------------------------------------------------------------------------------------------|------------|-----------------------|-----------------|
| ** **                                                                                           | ** ** | **2006**              | ** **      | **2005** | ** ** |
| ** **                                                                                           | ** ** | **(Audited)**         | ** **      | **(Audited)** | ** ** |
| **Assets**                                                                                           | ** ** | ** **            |            |   |   |
|                                                                                                 | ** ** | ** **            |            |   |   |
| Cash and due from banks                                                                              | ** ** | **$**                 | **3,689,487**   |   | $ | 3,625,647 |   |
| Federal funds sold                                                                                   | ** ** | **28,665,993**        |            | 20,671,899 |   |
| Cash and cash  equivalents                                                                           | ** ** | **32,355,480**        |            | 24,297,546 |   |
| Investment securities  available-for-sale, at fair value                                             | ** ** | **11,012,774**        |            | 10,873,547 |   |
| Federal Reserve Bank  stock, at cost                                                                 | ** ** | **405,000**           |            | 402,450 |   |
| Atlantic Central  Bankers Bank stock, at cost                                                        | ** ** | **37,000**            |            | 37,000 |   |
| Maryland Financial Bank  stock, at cost                                                              | ** ** | **25,000**            |            | 25,000 |   |
| Loans,  less allowance for credit losses  of $1,613,693 (2006) and $1,615,108 (2005)                 | ** ** | **95,080,787**        |            | 75,043,570 |   |
| Loans held for sale                                                                                  | ** ** | **—**            |            | 323,066 |   |
| Premises  and equipment, at cost, less  accumulated depreciation                                     | ** ** | **578,024**           |            | 164,385 |   |
| Accrued interest  receivable                                                                         | ** ** | **654,044**           |            | 406,854 |   |
| Deferred tax asset                                                                                   | ** ** | **549,021**           |            | 651,837 |   |
| Other assets                                                                                         | ** ** | **572,641**           |            | 319,694 |   |
| **Total  Assets**                                                                                    | ** ** | **$**                 | **141,269,771** |   | $ | 112,544,949 |   |
|                                                                                                 | ** ** | ** **            |            |   |   |
| **Liabilities and Stockholders’  Equity**                                                       | ** ** | ** **            |            |   |   |
| Liabilities:                                                                                         | ** ** | ** **            |            |   |   |
| Deposits:                                                                                            |       |                  |            |   |   |
| Noninterest-bearing  demand                                                                          | ** ** | **$**                 | **19,014,612**  |   | $ | 17,930,847 |   |
| Interest-bearing                                                                                     | ** ** | **93,190,128**        |            | 70,236,500 |   |
| Total deposits                                                                                       | ** ** | **112,204,740**       |            | 88,167,347 |   |
| Securities sold under  agreements to repurchase                                                      | ** ** | **9,579,116**         |            | 6,010,222 |   |
| Accrued interest  payable on deposits                                                                | ** ** | **175,839**           |            | 58,912 |   |
| Other liabilities                                                                                    | ** ** | **623,091**           |            | 945,394 |   |
| **Total  Liabilities**                                                                               | ** ** | **122,582,786**       |            | 95,181,875 |   |
| ** **                                                                                           |       |                  | ** **      | ** ** | ** ** |
| **Commitments and contingencies**                                                                    |       |                  | ** **      | ** ** | ** ** |
|                                                                                                 |       |                  | ** **      | ** ** | ** ** |
| **Stockholders’ Equity**                                                                        |       |                  | ** **      | ** ** | ** ** |
| Common  stock, par value $.01, authorized 4,000,000  shares; issued and outstanding 1,803,583 shares |       | **18,036**            | ** **      | **18,036** | ** ** |
| Surplus                                                                                              | ** ** | **17,683,450**        | ** **      | **17,683,450** | ** ** |
| Undivided  profits/(Accumulated deficit)                                                             | ** ** | **1,010,153**         | ** **      | **(272,375** | **)** |
| Accumulated other  comprehensive loss                                                                | ** ** | **(24,654**           | **)**           | **(66,037** | **)** |
| **Total  Stockholders’ Equity**                                                                 | ** ** | **18,686,985**        | ** **      | **17,363,074** | ** ** |
| **Total Liabilities and  Stockholders’ Equity**                                                 | ** ** | **$ **           | **141,269,771** | ** ** | **$ ** | **112,544,949** | ** ** |

 

17

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**CommerceFirstBancorp, Inc. and Subsidiary**

**ConsolidatedStatements of Income**

**YearsEnded December 31, 2006, 2005 and 2004**

 
| ** **                                                  | ** ** | **2006**      | ** **    | **2005**  | ** ** | **2004**   | ** ** |
|-------------------------------------------------------------|------------|---------------|---------------|-----------|------------|------------|------------|
| **Interest income on:**                                     | ** ** | ** **    |          |      |       |       |       |
| Loans, including  fees                                      | ** ** | **$**         | **7,451,852** |      | $          | 4,949,541  |       | $ | 2,754,729 |   |
| U.S. Treasury  securities                                   | ** ** | **251,378**   |          | 275,168   |       | 169,304    |       |
| Other  investments                                          | ** ** | **25,087**    |          | 20,923    |       | 10,242     |       |
| Federal funds  sold                                         | ** ** | **477,785**   |          | 393,253   |       | 66,103     |       |
| Total interest  income                                      | ** ** | **8,206,102** |          | 5,638,885 |       | 3,000,378  |       |
|                                                        | ** ** | ** **    |          |      |       |       |       |
| **Interest expense on:**                                    | ** ** | ** **    |          |      |       |       |       |
| Deposits                                                    | ** ** | **2,773,737** |          | 1,402,736 |       | 568,954    |       |
| Securities sold  under agreements to repurchase             | ** ** | **127,863**   |          | 35,993    |       | 18,141     |       |
| Short-term  borrowings                                      | ** ** | **3,876**     |          | —    |       | 790        |       |
| Total interest  expense                                     | ** ** | **2,905,476** |          | 1,438,729 |       | 587,885    |       |
|                                                        | ** ** | ** **    |          |      |       |       |       |
| **Net  interest income**                                    | ** ** | **5,300,626** |          | 4,200,155 |       | 2,412,493  |       |
|                                                        | ** ** | ** **    |          |      |       |       |       |
| **Provision for credit losses**                             | ** ** | **225,000**   |          | 360,000   |       | 590,000    |       |
|                                                        | ** ** | ** **    |          |      |       |       |       |
| **Net  interest income after  provision for credit losses** | ** ** | **5,075,626** |          | 3,840,155 |       | 1,822,493  |       |
|                                                        | ** ** | ** **    |          |      |       |       |       |
| **Other income:**                                           | ** ** | ** **    |          |      |       |       |       |
| Service charges                                             | ** ** | **332,443**   |          | 294,634   |       | 310,896    |       |
| Gains on sales  of SBA loans                                | ** ** | **300,443**   |          | 329,887   |       | 273,497    |       |
| Total other  income                                         | ** ** | **632,886**   |          | 624,521   |       | 584,393    |       |
|                                                        | ** ** | ** **    |          |      |       |       |       |
| **Other expenses:**                                         | ** ** | ** **    |          |      |       |       |       |
| Salaries and  benefits                                      | ** ** | **2,210,744** |          | 1,732,805 |       | 1,321,179  |       |
| Legal and  professional                                     | ** ** | **174,990**   |          | 111,576   |       | 64,754     |       |
| Loan collection  expenses                                   | ** ** | **19,017**    |          | 27,974    |       | 28,713     |       |
| Rent and  occupancy                                         | ** ** | **329,989**   |          | 254,199   |       | 223,892    |       |
| Marketing and  business development                         | ** ** | **111,850**   |          | 53,196    |       | 44,112     |       |
| Insurance                                                   | ** ** | **41,858**    |          | 33,953    |       | 33,820     |       |
| Data processing                                             | ** ** | **83,230**    |          | 72,161    |       | 56,468     |       |
| Support services                                            | ** ** | **154,161**   |          | 164,403   |       | 131,906    |       |
| Correspondent  services charges                             | ** ** | **25,838**    |          | 36,019    |       | 28,414     |       |
| Office supplies                                             | ** ** | **90,470**    |          | 42,810    |       | 38,289     |       |
| SBA interest  strip amortization                            | ** ** | **79,835**    |          | 24,457    |       | 7,507      |       |
| Depreciation and  amortization                              | ** ** | **119,565**   |          | 83,331    |       | 79,793     |       |
| Other expenses                                              | ** ** | **210,638**   |          | 136,218   |       | 120,246    |       |
| Total other  expenses                                       | ** ** | **3,652,185** |          | 2,773,102 |       | 2,179,091  |       |
|                                                        | ** ** | ** **    |          |      |       |       |       |
| **Income before income tax**                                | ** ** | **2,056,327** |          | 1,691,575 |       | 227,795    |       |
| **Federal and state income tax  (expense) benefit**         | ** ** | **(773,799**  | **)**         | (658,155  | )          | 862,000    |       |
| **Net income**                                              | ** ** | **$**         | **1,282,528** |      | $          | 1,033,420  |       | $ | 1,089,795 |   |
|                                                        | ** ** | ** **    |          |      |       |       |       |
| **Basic earnings per share of  common stock**               | ** ** | **$**         | **0.71**      |      | $          | 0.63       |       | $ | 1.33 |   |
|                                                        | ** ** | ** **    |          |      | ** ** | ** ** | ** ** |
| **Diluted earnings per share of  common stock**             | ** ** | **$**         | **0.69**      |      | $          | 0.62       |       | $ | 1.33 |   |
|                                                        | ** ** | ** **    |          |      | ** ** | ** ** | ** ** |
| **Basic average common shares  outstanding**                | ** ** | **1,803,583** |          | 1,647,645 |       | 822,250    |       |
| **Diluted average common shares outstanding**               | ** ** | **1,846,462** |          | 1,672,928 |       | 822,250    |       |

*The Notes to Consolidated Financial Statements are anintegral part of these consolidated financial statements.*

18

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** **

**CommerceFirstBancorp, Inc. and SubsidiaryConsolidated Statements of Changes in Stockholders’ Equityand Comprehensive Income**

**YearsEnded December 31, 2006, 2005 and 2004**

 
| ** **                                   | ** ** | ** **           | ** ** | ** **     | ** ** | **Accumulated** | ** ** | **Accumulated**   | ** **    | ** **             | ** ** |
|----------------------------------------------|------------|----------------------|------------|----------------|------------|-----------------|------------|-------------------|---------------|------------------------|------------|
| ** **                                   | ** ** | **Common**           | ** ** | ** **     | ** ** | **Deficit/**    | ** ** | **Other**         | ** **    | **Total**              | ** ** |
| ** **                                   | ** ** | **Stock**            | ** ** | ** **     | ** ** | **Undivided**   | ** ** | **Comprehensive** | ** **    | **Stockholders’** | ** ** |
| ** **                                   | ** ** | **(Par Value)** | ** ** | **Surplus**    | ** ** | **Profits**     | ** ** | **Income(Loss)**  | ** **    | **Equity**             | ** ** |
| ** **                                   | ** ** | ** **           | ** ** | ** **     | ** ** | ** **      | ** ** | ** **        | ** **    | ** **             | ** ** |
| Balances, December 31,  2003                 |       | $                    | 8,223      |           | $          | 8,099,012       |       | $                 | (2,395,590    | )                      | $          | 39,425 |   | $ | 5,751,070 |   |
|                                         |       |                 |       |           |       |            |       |              |          |                   |       |
| Comprehensive income:                        |       |                 |       |           |       |            |       |              |          |                   |       |
| Net income                                   |       | —               |       | —         |       | 1,089,795       |       | —            |          | 1,089,795              |       |
| Other  comprehensive income, net of tax:     |       |                 |       |           |       |            |       |              |          |                   |       |
| Unrealized  holding losses on                |       |                 |       |           |       |            |       |              |          |                   |       |
| securities  available for sale               |       |                 |       |           |       |            |       |              |          |                   |       |
| arising during  the period                   |       | —               |       | —         |       |            |       | (66,764           | )             | (66,764                | )          |
| Total comprehensive  income                  |       |                 |       |           |       |            |       |              |          | 1,023,031              |       |
| ** **                                   | ** ** | ** **           | ** ** | ** **     | ** ** | ** **      | ** ** | ** **        | ** **    | ** **             | ** ** |
| Balances, December 31,  2004                 |       | 8,223                |       | 8,099,012      |       | (1,305,795      | )          | (27,339           | )             | 6,774,101              |       |
| ** **                                   | ** ** | ** **           | ** ** | ** **     | ** ** | ** **      | ** ** | ** **        | ** **    | ** **             | ** ** |
| Comprehensive income:                        |       |                 |       |           |       |            |       |              |          |                   |       |
| Net income                                   |       | —               |       | —         |       | 1,033,420       |       | —            |          | 1,033,420              |       |
| Other  comprehensive income, net of tax:     |       |                 |       |           |       |            |       |              |          |                   |       |
| Unrealized  holding losses on                |       |                 |       |           |       |            |       |              |          |                   |       |
| securities  available for sale               |       |                 |       |           |       |            |       |              |          |                   |       |
| arising during  the period                   |       | —               |       | —         |       |            |       | (38,698           | )             | (38,698                | )          |
| Total comprehensive  income                  |       |                 |       |           |       |            |       |              |          | 994,722                |       |
| Issuance of  common stock                    |       | 9,813                |       | 10,294,184     |       | —          |       | —            |          | 10,303,997             |       |
| Cost of raising  capital                     |       | —               |       | (709,746       | )          | —          |       | —            |          | (709,746               | )          |
|                                         |       |                 |       |           |       |            |       |              |          |                   |       |
| **Balances, December 31, 2005**              | ** ** | **18,036**           | ** ** | **17,683,450** | ** ** | **(272,375**    | **)**      | **(66,037**       | **)**         | **17,363,074**         | ** ** |
| ** **                                   | ** ** | ** **           | ** ** | ** **     | ** ** | ** **      | ** ** | ** **        | ** **    | ** **             | ** ** |
| **Comprehensive income:**                    | ** ** | ** **           | ** ** | ** **     | ** ** | ** **      | ** ** | ** **        | ** **    | ** **             | ** ** |
| **Net  income**                              | ** ** | **—**           | ** ** | **—**     | ** ** | **1,282,528**   | ** ** | **—**        | ** **    | **1,282,528**          | ** ** |
| **Other  comprehensive income, net of tax:** | ** ** | ** **           | ** ** | ** **     | ** ** | ** **      | ** ** | ** **        | ** **    | ** **             | ** ** |
| **Unrealized  holding losses on**            | ** ** | ** **           | ** ** | ** **     | ** ** | ** **      | ** ** | ** **        | ** **    | ** **             | ** ** |
| **securities  available for sale**           | ** ** | ** **           | ** ** | ** **     | ** ** | ** **      | ** ** | ** **        | ** **    | ** **             | ** ** |
| **arising  during the period**               | ** ** | **—**           | ** ** | **—**     | ** ** | ** **      | ** ** | **41,383**        | ** **    | **41,383**             | ** ** |
| **Total comprehensive income**               | ** ** | ** **           | ** ** | ** **     | ** ** | ** **      | ** ** | ** **        | ** **    | **1,323,911**          | ** ** |
| ** **                                   | ** ** | ** **           | ** ** | ** **     | ** ** | ** **      | ** ** | ** **        | ** **    | ** **             | ** ** |
| **Balances, December 31, 2006**              | ** ** | **$**                | **18,036** | ** **     | **$**      | **17,683,450**  | ** ** | **$**             | **1,010,153** | ** **             | **$**      | **(24,654** | **)** | **$** | **18,686,985** | ** ** |

 

*The Notesto Consolidated Financial Statements are an integral part of these consolidatedfinancial statements.*

19

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**CommerceFirstBancorp, Inc. and SubsidiaryConsolidated Statements of Cash FlowsYears Ended December 31, 2006, 2005 and 2004**

 
| ** **                                                                                              | ** ** | **2006**        | ** **     | **2005**    | ** ** | **2004**    | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-----------------|----------------|-------------|------------|-------------|------------|
| **Cash flows from operating  activities:**                                                              | ** ** | ** **      | ** **     | ** **  | ** ** | ** **  | ** ** |
| Net income                                                                                              | ** ** | **$**           | **1,282,528**  |        | $          | 1,033,420   |       | $ | 1,089,795 |   |
| Adjustments to  reconcile net loss to net cash                                                          |       |            |           |        |       |        |       |
| used by  operating activities:                                                                          |       |            |           |        |       |        |       |
| Depreciation,  amortization and accretion                                                               | ** ** | **89,915**      |           | 20,411      |       | 88,976      |       |
| Deferred income  tax expense (benefit)                                                                  | ** ** | **81,497**      |           | 244,182     |       | (862,000    | )          |
| Provision for  credit losses                                                                            | ** ** | **225,000**     |           | 360,000     |       | 590,000     |       |
| Provision for  losses on unfunded commitments                                                           | ** ** | **6,000**       |           | 6,000       |       | 6,000       |       |
| Change in assets  and liabilities:                                                                      |       |            |           |        |       |        |       |
| Increase in  accrued interest receivable                                                                | ** ** | **(247,190**    | **)**          | (172,908    | )          | (61,135     | )          |
| Increase in SBA  loans held for sale, net                                                               | ** ** | **323,066**     |           | 435,990     |       | (759,056    | )          |
| Increase in  other assets                                                                               | ** ** | **(252,947**    | **)**          | (73,402     | )          | (121,276    | )          |
| Increase in  accrued interest payable                                                                   | ** ** | **116,927**     |           | 22,500      |       | 18,703      |       |
| (Decrease)  increase in other liabilities                                                               | ** ** | **(328,303**    | **)**          | 612,777     |       | 101,541     |       |
|                                                                                                    |       |            |           |        |       |        |       |
| Net cash  provided/(used) by operating activities                                                       | ** ** | **1,296,493**   |           | 2,488,970   |       | 91,548      |       |
|                                                                                                    |       |            |           |        |       |        |       |
| **Cash flows from investing  activities:**                                                              | ** ** | ** **      | ** **     | ** **  | ** ** | ** **  | ** ** |
| Purchases of  available for sale securities                                                             | ** ** | **(6,046,875**  | **)**          | (11,891,160 | )          | (3,001,250  | )          |
| Maturities of  available for sale securities                                                            | ** ** | **6,000,000**   |           | 6,000,000   |       | 5,000,000   |       |
| Purchases of  Federal Reserve Bank stock                                                                | ** ** | **(2,550**      | **)**          | (206,550    | )          | (63,450     | )          |
| Increase in  loans, net                                                                                 | ** ** | **(20,262,216** | **)**          | (24,386,152 | )          | (18,919,524 | )          |
| Purchases of  premises and equipment                                                                    | ** ** | **(533,205**    | **)**          | (62,884     | )          | (174,001    | )          |
|                                                                                                    |       |            |           |        |       |        |       |
| Net cash used by  financing activities                                                                  | ** ** | **(20,844,846** | **)**          | (30,546,746 | )          | (17,158,225 | )          |
|                                                                                                    |       |            |           |        |       |        |       |
| **Cash flows from financing  activities:**                                                              | ** ** | ** **      | ** **     | ** **  | ** ** | ** **  | ** ** |
| Increase(decrease)  in noninterest-bearing deposits, net                                                | ** ** | **1,083,765**   |           | (2,760,468  | )          | 11,304,085  |       |
| Increase in time  deposits, net                                                                         | ** ** | **22,953,628**  |           | 25,198,865  |       | 13,811,525  |       |
| Increase(decrease)  in securities sold under                                                            |       |            |           |        |       |        |       |
| agreements to  repurchase, net                                                                          | ** ** | **3,568,894**   |           | 2,923,772   |       | (1,607,429  | )          |
| Issuance of  common stock                                                                               | ** ** | **—**      |           | 10,303,997  |       | —      |       |
| Costs of raising  capital                                                                               | ** ** | **—**      |           | (709,746    | )          | —      |       |
|                                                                                                    |       |            |           |        |       |        |       |
| Net cash  provided by financing activities                                                              | ** ** | **27,606,287**  |           | 34,956,420  |       | 23,508,181  |       |
|                                                                                                    |       |            |           |        |       |        |       |
| **(Decrease)increase in cash and  cash equivalents**                                                    | ** ** | **8,057,934**   |           | 6,898,644   |       | 6,441,504   |       |
|                                                                                                    |       |            |           |        |       |        |       |
| **Cash and cash equivalents,  beginning of period**                                                     | ** ** | **24,297,546**  |           | 17,398,902  |       | 10,957,398  |       |
|                                                                                                    |       |            |           |        |       |        |       |
| **Cash and cash equivalents, end  of year**                                                             | ** ** | **$**           | **32,355,480** |        | $          | 24,297,546  |       | $ | 17,398,902 |   |
|                                                                                                    |       |            |           |        |       |        |       |
| **Supplemental Cash Flows  Information:**                                                               | ** ** | ** **      | ** **     | ** **  | ** ** | ** **  | ** ** |
| Interest paid                                                                                           | ** ** | **$**           | **2,788,549**  |        | $          | 1,416,229   |       | $ | 569,182 |   |
| Total  increase/(decrease) in unrealized appreciation/ (depreciation) on available  for sale securities |       | **$ **     | **62,702**     |        | $     | (58,633     | )          | $  | (101,158 | ) |

 

*The Notes to Consolidated Financial Statements are anintegral part of these consolidated financial statements.*

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**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**Note 1. Summary of SignificantAccounting Policies**

CommerceFirst Bank (the “Bank”) provides financial services toindividuals and corporate customers located in Anne Arundel County andsurrounding areas of Central Maryland, and is subject to competition from otherfinancial institutions.  The Bank is alsosubject to the regulations of certain Federal and State of Maryland (the “State”)agencies and undergoes periodic examinations by those regulatoryauthorities.  The accounting policies ofthe Bank conform to accounting principles generally accepted in the UnitedStates of America and to general practices within the banking industry.

Significant accounting policies not disclosed elsewhere in theconsolidated financial statements are as follows:

Principles ofConsolidation:

The consolidated financial statements include the accounts ofCommerceFirst Bancorp, Inc. (the “Company”) and its subsidiary, CommerceFirstBank.  Intercompany balances andtransactions have been eliminated.  TheParent Only financial statements (see Note 18) of the Company account for thesubsidiary using the equity method of accounting.

Use of Estimates:

The preparation of consolidated financial statements in conformity withaccounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the dates of the consolidated financial statements and thereported amounts of revenues and expenses during the reporting periods.  Actual results could differ from thoseestimates.

Securities Held toMaturity:

Bonds, notes and debentures for which the Bank has the positive intentand ability to hold to maturity are reported at cost, adjusted for premiums anddiscounts that are recognized in interest income using the effective interestrate method over the period to maturity. Securities transferred into held to maturity from the available for saleportfolio are recorded at fair value at time of transfer with unrealized gainsor losses reflected in equity and amortized over the remaining life of thesecurity.  The Bank has no investmentsecurities classified as held to maturity as of December 31, 2006 and 2005.

SecuritiesAvailable for Sale:

Marketable debt securities not classified as held to maturity areclassified as available for sale. Securities available for sale may be sold in response to changes ininterest rates, loan demand, changes in prepayment risk, and otherfactors.  Changes in unrealizedappreciation (depreciation) on securities available for sale are reported inother comprehensive income (loss).  Realizedgains (losses) on securities available for sale are included in other income(expense) and, when applicable, are reported as a reclassification adjustment,net of tax, in other comprehensive income (loss).  The gains and losses on securities sold aredetermined by the specific identification method.  Premiums and discounts are recognized ininterest income using the effective interest rate method over the period tomaturity.

Other Securities:

Federal Reserve Bank (“FRB”), Atlantic Central Bankers Bank (“ACBB”)and Maryland Financial Bank (“MFB”) stocks are equity interests that do notnecessarily have readily determinable fair values for purposes of Statement ofFinancial Accounting Standard (“SFAS”) No. 115, *Accountingfor Certain Investments in Debt and Equity Securities*, because theirownership is restricted and they lack a market.

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Loans andAllowance for Credit Losses:

Loans are generally carried at the amount of unpaid principal, adjustedfor deferred loan fees, which are amortized over the term of the loan using theeffective interest rate method.  Intereston loans is accrued based on the principal amounts outstanding.  It is the Bank’s policy to discontinue theaccrual of interest when a loan is specifically determined to be impaired orwhen principal or interest is delinquent for ninety days or more.  When a loan is placed on nonaccrual status,all interest previously accrued but not collected is reversed against currentperiod interest income.  Interest incomegenerally is not recognized on specific impaired loans unless the likelihood offurther loss is remote.  Cash collectionson such loans are applied as reductions of the loan principal balance and nointerest income is recognized on those loans until the principal balance hasbeen collected.  Interest income on othernonaccrual loans is recognized only to the extent of interest paymentsreceived.  The carrying value of impairedloans is based on the present value of the loan’s expected future cash flowsor, alternatively, the observable market price of the loan or the fair value ofthe collateral.

The allowance for credit losses is established through a provision forcredit losses charged to expense.  Loansare charged against the allowance for credit losses when management believesthat the collectibility of the principal is unlikely.  The allowance, based on evaluations of thecollectibility of loans and prior loan loss experience, is an amount thatmanagement believes will be adequate to absorb possible losses on existingloans that may become uncollectible.  Theevaluations take into consideration such factors as changes in the nature andvolume of the loan portfolio, overall portfolio quality, review of specificproblem loans, and current economic conditions and trends that may affect theborrower’s ability to pay.

While management believes it has established the allowance for creditlosses in accordance with accounting principles generally accepted in theUnited States of America and has taken into account the views of its regulatorsand the current economic environment, there can be no assurance that in thefuture the Bank’s regulators or its economic environment will not requirefurther increases in the allowance.

Loans for which the Bank has the positive intent to sell are reportedat lower of cost or market, as determined on a specific identification basis.

Unearned Discountsand Servicing Rights of SBA Loans Sold:

The Bank generally sells the SBA-guaranteed portions of its SBA loansin the secondary market.  In connectionwith such sales, the Bank receives a cash premium related to the guaranteedportion being sold.  A portion of thecash premium received from the sale of the guaranteed portion of the SBA loanis deferred as a discount on retained premiums based on the relative fair valueof the guaranteed and unguaranteed portions to the total loan and the remainderis recognized as a gain at the time of the sale.  The resulting unearned discount is recognizedin interest income using an adjustable interest method.

SBA loan servicing rights are initially valued by allocating the totalcost between the loan and the servicing right based on their relative fairvalues.  Since sales of SBA loans tend tooccur in private transactions and the precise terms and conditions of the salesare typically not readily available, there is a limited market to refer to indetermining the fair value of these servicing rights.  As such, the Bank relies primarily on adiscounted cash flow model to estimate the fair value of its servicingrights.  This model calculates estimatedfair value of these servicing rights by utilizing certain key characteristicssuch as interest rates, type of product (fixed vs. variable), age (new,seasoned, moderate), and other factors. The Bank uses assumptions in the model that it believes are comparableto those used by brokers and other service providers.  The Bank also compares its estimates of fairvalue and

22

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assumptions to recent market activity and against its ownexperience.  The resulting servicingrights are recognized in other non-interest expense using an adjustableinterest method.

Reserve for Unfunded Commitments:

The reserve for unfundedcommitments is established through a provision for unfunded commitments chargedto other expenses.  The reserve iscalculated by utilizing the same methodology and factors as the allowance forcredit losses.  The reserve, based onevaluations of the collectibility of loans and prior loan loss experience, isan amount that management believes will be adequate over time to absorbpossible losses on unfunded commitments (off-balance sheet financialinstruments) that may become uncollectible in the future.

Bank Premises andEquipment:

Bank premises and equipment are stated at cost less accumulateddepreciation.  The provision fordepreciation is computed using the straight-line method over the estimateduseful lives of the assets.  Leaseholdimprovements are depreciated over the lesser of the terms of the leases ortheir estimated useful lives. Expenditures for improvements that extend the life of an asset arecapitalized and depreciated over the asset’s remaining useful life.  Any gains or losses realized on thedisposition of premises and equipment are reflected in the consolidatedstatements of operations.  Expendituresfor repairs and maintenance are charged to other expenses as incurred.  Computer software is recorded at cost andamortized over three years.

Long-Lived Assets:

The carrying value of long-lived assets and certain identifiableintangibles is reviewed by the Bank for impairment whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable, as prescribed in SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets*.  As of December31, 2006 and 2005, certain loans existed in which management consideredimpaired (see Note 3).

Income Taxes:

The provision for Federal and State income taxes is based upon theresults of operations, adjusted for tax-exempt income.  Deferred income taxes are provided byapplying enacted statutory tax rates to temporary differences between financialand taxable bases.

Temporary differences, which give rise to deferred tax assets, relateprincipally to the allowance for credit losses and unrealized losses onsecurities available for sale.

Temporary differences, which give rise to deferred tax liabilities,relate principally to accumulated depreciation.

Securities Sold Under Agreements to Repurchase:

Securities sold under agreements to repurchase are comprised ofcustomer deposit agreements with daily maturities.  These obligations are not federally insured,but are collateralized by a security interest in various investmentsecurities.  These pledged securities aresegregated and maintained by a third-party institution.  The amortized cost of these securities at December 31, 2006 and 2005 was **$11,050,129** and $7,973,603,respectively.  The fair value of thesesecurities at December 31, 2006 and2005 was **$11,012,774** and$7,899,348, respectively.  The securitiessold under agreements to repurchase were fully collateralized as of December 31, 2006 and 2005.

23

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Credit Risk and Restrictions on Cash and Cash Equivalents:

The Bank has deposits in other financial institutions in excess ofamounts insured by the Federal Deposit Insurance Corporation (“FDIC”).  The Bank had deposits and Federal funds soldof approximately **$31,991,000** and$23,654,000 with four financial institutions as of December 31, 2006 and 2005, respectively.

The Federal Reserve requires the Bank to maintain noninterest-bearingcash reserves against certain categories of average deposit liabilities.  Such reserves averaged approximately **$790,000**and $707,000 during the years ended December 31,2006 and 2005, respectively.

Cash and Cash Equivalents:

The Bank has included cash and due from banks and Federal funds sold ascash and cash equivalents for the purpose of reporting cash flows.

Earnings per common share:

Basic earnings per common share is determined by dividing net income bythe weighted average number of shares of common stock outstanding.  Diluted earnings per share is calculatedincluding the average dilutive common stock equivalents outstanding during theperiod, using the treasury stock method, unless they are anti-dilutive.  Dilutive common equivalent shares consist ofstock options and warrants.

Financial Statement Presentation:

Certain amounts in the prior years’ consolidated financial statementshave been reclassified to conform to the current year’s presentation.

**Note 2. Investment Securities**

Investment securities aresummarized as follows:

|                                                | ** ** | ** **    | ** **     | **Gross**      | ** ** | **Gross**      | ** ** | ** **    | ** **  |
|------------------------------------------------|------------|---------------|----------------|----------------|------------|----------------|------------|---------------|-------------|
| ** **                                     | ** ** | **Amortized** | ** **     | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**      | ** **  |
| ** **                                     | ** ** | **Cost**      | ** **     | **Gains**      | ** ** | **Losses**     | ** ** | **Value**     | ** **  |
| **December  31, 2006**                         |       |          |           |           |       |           |       |          |        |
|                                           |       |          |           |           |       |           |       |          |        |
| ***Available  for sale:***                     |       |          |           |           |       |           |       |          |        |
| **U.S. Treasury (due within one year)**        |       | **$**         | **5,004,612**  | ** **     | **$**      | **—**     | ** ** | **$**         | **(38,712** | **)** | **$** | **4,965,900** |   |
| **U.S. Treasury (due over one to four years)** |       | **6,045,517** | ** **     | **1,357**      | ** ** | **—**     | ** ** | **6,046,874** |        |
|                                           |       | **$**         | **11,050,129** | ** **     | **$**      | **1,357**      | ** ** | **$**         | **(38,712** | **)** | **$** | **11,012,774** |   |
| December 31,  2005                             |       |          |           |           |       |           |       |          |        |
|                                           |       |          |           |           |       |           |       |          |        |
| *Available  for sale:*                         |       |          |           |           |       |           |       |          |        |
| U.S. Treasury (due within one year)            |       | $             | 5,961,682      |           | $          | —         |       | $             | (25,735     | ) | $ | 5,935,947 |   |
| U.S. Treasury (due over one to four years)     |       | 5,011,921     |           | —         |       | (74,321        | )          | 4,937,600     |        |
|                                           |       | $             | 10,973,603     |           | $          | —         |       | $             | (100,056    | ) | $ | 10,873,547 |   |

 

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The gross unrealized losses and fair value, aggregated by investmentcategory and length of time that individual securities have been in a continuousunrealized loss position, at December31, 2006 are as follows:

|               | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total**       | ** ** |
|---------------|------------|----------------------------------------|------------|--------------------------------------|------------|-----------------|------------|
| ** **    | ** ** | **Fair  Value**                        | ** ** | **Unrealized  Loss**                 | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** | ** ** | **Fair  Value** | ** ** | **Unrealized  Loss** | ** ** |
| U.S. Treasury |       | $                                      | —     |                                 | $          | —          |       | $ | 4,965,900 |   | $ | 38,712 |   | $ | 4,965,900 |   | $ | 38,712 |   |
|               |            |                                        |            |                                      |            |                 |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

For individual securities classified as either available for sale orheld to maturity, the Bank must determine whether a decline in fair value belowthe amortized cost basis is other than temporary.  If the decline in fair value is considered tobe other than temporary, the cost basis of the individual security shall bewritten down to fair value as a new cost basis and the amount of the write-downshall be included in earnings (that is, accounted for as a realized loss).  On December31, 2006, the Bank held two investment securities having continuousunrealized loss positions for more than 12 months.  Management has determined that all unrealizedloss positions as of December 31, 2006are temporary unrealized losses relating to changes in interest rates.  The Bank has the ability and intent to holdthese securities for the time necessary to recover the amortized costs.

Management’s evaluation of the securities portfolio indicates thatsecurities in an unrealized loss position for more than twelve months is notrelated to any credit risk concerning the securities but relates to actualyields on these investments versus current market returns.

**Note 3.Loans**

Major categories of loans are as follows: 

 

|                              | ** ** | **2006**       | ** **     | **2005**   | ** ** |
|------------------------------|------------|----------------|----------------|------------|------------|
| Commercial  mortgages        |       | **$**          | **51,461,223** |       | $          | 38,516,360 |   |
| Commercial  demand and time  |       | **45,350,193** |           | 38,231,773 |       |
|                         |       | **96,811,416** |           | 76,748,133 |       |
| Unearned income  on loans    |       | **(116,936**   | )              | (89,455    | )          |
|                         |       | **96,694,480** |           | 76,658,678 |       |
| Allowance for  credit losses |       | **(1,613,693** | )              | (1,615,108 | )          |
|                         |       | ** **     |           |       |       |
|                         |       | **$**          | **95,080,787** |       | $          | 75,043,570 |   |

 

The Bank makes business loans to customers located primarily in AnneArundel County and surrounding areas of Central Maryland.  Although the loan portfolio is diversified,its performance will be influenced by the economy of the region.

Executive officers, directors, and their affiliated interests enterinto business loan transactions with the Bank in the ordinary course ofbusiness.  These loans are made on thesame terms, including interest rates and collateral, as those prevailing at thetime for comparable loans with unrelated borrowers.  They do not involve more than normal risk ofcollectibility or present other unfavorable terms.  At December31, 2006 and 2005, such loans outstanding totaled **$5,837,347** and $5,662,565, respectively. During 2006 and 2005,loan additions were **$597,623** and$855,643, respectively.  During 2006 and 2005, loan repayments were **$422,841** and $1,509,106, respectively.

25

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The allowance for credit losses is as follows:

 

|                              | ** ** | **2006**      | ** **    | **2005**   | ** ** | **2004**  | ** ** |
|------------------------------|------------|---------------|---------------|------------|------------|-----------|------------|
| Balance,  beginning of year  |       | **1,615,108** | ** **    | $          | 1,153,874  |      | $          | 604,100 |   |
| Provision for  credit losses |       | **225,000**   | ** **    | 360,000    |       | 590,000   |       |
| Recoveries                   |       | **—**    | ** **    | 116,000    |       | 32,458    |       |
| Loans charged  off           |       | **(226,415**  | **)**         | (14,766    | )          | (72,684   | )          |
|                         |       | ** **    | ** **    |       |       |      |       |
| Balance, end of year         |       | **$**         | **1,613,693** | ** ** | $          | 1,615,108 |       | $ | 1,153,874 |   |
|                              |            |               |               |            |            |           |            |  |  |  |

 

Loans on which the accrual of interest hasbeen discontinued amounted to **$627,833**and$591,885 at December 31, 2006and 2005, respectively.  Interest that would have been accrued underthe terms of these loans totaled **$61,269** and $68,593 for the years ended December31, 2006 and 2005, respectively.  The Bank has no commitments to loanadditional funds to the borrowers of impaired or non-accrual loans.

Information regarding loans classified by the Bank as impaired issummarized as follows:

 

|                                                           | ** ** | **2006**    | ** **  | **2005** | ** ** |
|-----------------------------------------------------------|------------|-------------|-------------|----------|------------|
|                                                      |       |        |        |     |       |
| Loans classified  as impaired, with a valuation allowance |       | **$**       | **627,833** |     | $          | 591,885 |   |
| Allowance for  credit losses on impaired loans            |       | **470,333** |        | 434,385  |       |
| Average balance of  impaired loans during year            |       | **609,859** |        | 620,942  |       |
|                                                           |            |             |             |          |            |  |  |

 

According to management, the Bank has noinvestments in troubled debt restructurings as of December 31, 2006 and2005.

### **Note 4.Premises and Equipment**

A summary of premises and equipment is as follows:

 

|                                            | ** ** | **Useful lives** | ** ** | **2006**      | ** **  | **2005**   | ** ** |
|--------------------------------------------|------------|-----------------------|------------|---------------|-------------|------------|------------|
| Equipment                                  |       | 3-5  years            |       | **$**         | **498,286** | ** ** | $          | 323,104 |   |
| Furniture and  fixtures                    |       | 5  years              |       | **186,140**   | ** **  | 125,419    |       |
| Leasehold  improvements                    |       | 4-10  years           |       | **406,010**   | ** **  | 122,609    |       |
| Software                                   |       | 3  years              |       | **187,792**   | ** **  | 173,892    |       |
|                                       |       |                  |       | **1,278,228** | ** **  | 745,024    |       |
| Accumulated  depreciation and amortization |       |                  |       | **(700,204**  | **)**       | (580,639   | )          |
|                                       |       |                  |       | ** **    | ** **  |       |       |
|                                       |       |                  |       | **$**         | **578,024** | ** ** | $          | 164,385 |   |

 

Depreciation expense was **$110,446**,$75,418****and$66,779 for the years ended December 31, 2006, 2005 and 2004, respectively.  Amortization of software was **$9,119,**$7,913, and $13,014 for the years ended December 31, 2006, 2005and 2004, respectively.

26

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The Company leases the facility that serves as the executive officesfor the Company and as the main banking office for the Bank.  The facility, which is approximately 8,100square feet and located in Annapolis, Maryland, is leased by the Companythrough April 2010, with two remaining five year renewal options, with annualincreases of 3%.  The Company leasesanother facility to serve as a branch banking office.  The facility, which is approximately 2,100square feet and located in Lanham, Maryland, is leased by the Company throughAugust 2014, with a five year early termination option, with annual increasesof 3%.  The Company leases anotherfacility to serve as an additional branch banking office.  The facility, which is approximately 2,600square feet and located in Glen Burnie, Maryland, is leased by the Companythrough July 2011, with annual increases of 3%. In 2006, the Company entered into a lease agreement for a facility toserve as an additional branch banking office. The facility, which is approximately 2,400 square feet and located inColumbia, Maryland, is leased by the Bank through February 2016, with oneremaining five year renewal option, with annual increases of 3%.  Total rent expense, including pro-rataportions of property taxes and maintenance expenses, relating to theseagreements, was**$285,444,**$223,222, and $199,113 for the years ended December 31, 2006, 2005and 2004, respectively.

### **Note 5. SBALoan Servicing Rights**

Information regarding changes in SBA loanservicing rights, included in other assets, is summarized as follows: 

 

|                                        | ** ** | **2006**    | ** ** | **2005**   | ** ** |
|----------------------------------------|------------|-------------|------------|------------|------------|
| ** **                             | ** ** | ** **  | ** ** | ** ** | ** ** |
| Balance, beginning of  year            |       | **$**       | **88,541** | ** ** | $          | 41,273 |   |
| Addition of SBA loan  servicing rights |       | **72,216**  | ** ** | 59,900     |       |
| Amortization                           |       | **(49,869** | **)**      | (12,632    | )          |
| Paydowns                               |       | **(29,966** | **)**      | —     |       |
|                                   |       | ** **  | ** ** |       |       |
| Balance, end of year                   |       | **$**       | **80,922** | ** ** | $          | 88,541 |   |

 

The total balance of loans being serviced by the Bank was **$6,800,821**and $5,332,829 at December 31, 2006 and 2005,respectively.

At December 31, 2006, management did not deem it necessary to establisha valuation allowance for loan servicing rights.

**Note 6.****Deposits**

Major classifications of interest-bearing deposits are as follows:

 

|                                             | ** ** | **2006**       | ** **     | **2005**   | ** ** |
|---------------------------------------------|------------|----------------|----------------|------------|------------|
|                                        |       |           |           |       |       |
| NOW                                         |       | **$**          | **3,068,900**  |       | $          | 6,331,349 |   |
| Money Market                                |       | **14,685,443** |           | 17,247,770 |       |
| Savings                                     |       | **89,419**     |           | 401,661    |       |
| Certificates of  Deposit, $100, 000 or more |       | **65,977,199** |           | 40,696,865 |       |
| Other time deposits                         |       | **9,369,167**  |           | 5,558,855  |       |
|                                        |       | ** **     |           |       |       |
|                                        |       | **$**          | **93,190,128** |       | $          | 70,236,500 |   |

 

27

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Interest expense on interest-bearingdeposits, by category, is as follows: 

|                                            | ** ** | **2006**      | ** **    | **2005** | ** ** | **2004**  | ** ** |
|--------------------------------------------|------------|---------------|---------------|----------|------------|-----------|------------|
| **NOW**                                    |       | **26,742**    | ** **    | $        | 16,165     |      | $          | 4,294 | ** ** |
| Money Market                               |       | **607,214**   |          | 271,701  |       | 99,648    |       |
| Savings                                    |       | **3,599**     |          | 2,238    |       | 556       |       |
| Certificates of  Deposit, $100,000 or more |       | **1,755,423** |          | 911,692  |       | 401,172   |       |
| Other time deposits                        |       | **380,759**   |          | 200,940  |       | 63,284    |       |
|                                       |       | **$**         | **2,773,737** |     | $          | 1,402,736 |       | $ | 568,954 |   |
|                                            |            |               |               |          |            |           |            |  |  |  |

 

At December 31, 2006, the scheduled maturities of time depositsare approximately as follows:

 

|        | ** ** | **2006**       | ** **     |
|--------|------------|----------------|----------------|
| 2007   |       | **$**          | **31,882,557** |   |
| 2008   |       | **12,949,675** |           |
| 2009   |       | **30,316,134** |           |
| 2010   |       | **198,000**    |           |
|   |       | **$**          | **75,346,366** |   |

 

Deposit and repurchase agreement balances of executive officers anddirectors and their affiliated interests totaled approximately **$13,393,000** and $9,965,000 at December 31, 2006 and 2005, respectively.

Included in Certificates of Deposit, $100,000 or moreand other time deposits are **$19,825,933**and $6,437,000 of brokered certificates with weighted average interest rates of**5.37%** and 4.04% at December 31, 2006 and 2005,respectively.

**Note 7. Short-term borrowings**

The Bank has received approval of unsecured credit facilities forshort-term liquidity needs from financial institutions of **$8,500,000** and $3,700,000 at December 31, 2006 and 2005,respectively.  There were no borrowingsoutstanding under these credit arrangements at December 31, 2006 and 2005.

28

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**Note 8. Other Operating Expenses**

Other operating expensesinclude the following:

|                                               | ** ** | **2006**   | ** **  | **2005**   | ** ** | **2004**   | ** ** |
|-----------------------------------------------|------------|------------|-------------|------------|------------|------------|------------|
| ** **                                    | ** ** | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** |
| Courier                                       |       | **$**      | **14,718**  |       | $          | 12,355     |       | $ | 4,515 |   |
| Internet charges                              |       | **10,112** |        | 9,888      |       | 9,580      |       |
| Loan fees - SBA                               |       | **8,281**  |        | 10,764     |       | 14,347     |       |
| Director fees                                 |       | **32,500** |        | —     |       | —     |       |
| Postage                                       |       | **20,150** |        | 19,515     |       | 16,409     |       |
| Repairs and maintenance                       |       | **22,263** |        | 6,896      |       | 8,622      |       |
| Provision for losses on  unfunded commitments |       | **6,000**  |        | 6,000      |       | 6,000      |       |
| Telephone                                     |       | **33,523** |        | 13,053     |       | 11,053     |       |
| Other                                         |       | **63,091** |        | 57,747     |       | 49,720     |       |
|                                          |       | ** ** |        |       |       |       |       |
|                                          |       | **$**      | **210,638** |       | $          | 136,218    |       | $ | 120,246 |   |

 

**Note 9. Income Taxes**

Income tax expense (benefit) components are as follows:

** **

|                                    | ** ** | **2006**    | ** **  | **2005** | ** ** | **2004** | ** ** |
|------------------------------------|------------|-------------|-------------|----------|------------|----------|------------|
| Current:                           |       |        |        |     |       |     |       |
| Federal                            |       | **$**       | **570,819** |     | $          | 350,888  |       | $ | — |   |
| State                              |       | **121,482** |        | 63,085   |       | —   |       |
| Total current                      |       | **692,301** |        | 413,973  |       | —   |       |
| Deferred income taxes  (benefits): |       | ** **  |        |     |       |     |       |
| Federal                            |       | **66,922**  |        | 198,139  |       | 67,181   |       |
| State                              |       | **14,576**  |        | 46,043   |       | 14,873   |       |
| Decrease in  valuation allowance   |       | —      |        | —   |       | (944,054 | )          |
| Total deferred                     |       | **81,498**  |        | 244,182  |       | (862,000 | )          |
|                               |       | ** **  |        |     |       |     |       |
| Income tax  expense (benefit)      |       | **$**       | **773,799** |     | $          | 658,155  |       | $ | (862,000 | ) |

 

A reconciliation of income tax expense (benefit) computed at thestatutory rate of 34% to the

actual income tax expense (benefit) is as follows:

 

|                                             | ** ** | **2006**    | ** **    | **2005**   | ** ** | **2004**  | ** ** |
|---------------------------------------------|------------|-------------|---------------|------------|------------|-----------|------------|
| Income before income  tax expense (benefit) |       | **$**       | **2,056,327** | ** ** | $          | 1,691,575 |       | $ | 227,795 |   |
|                                        |       | ** **  | ** **    |       |       |      |       |
| Tax computed at Federal  income tax rate    |       | **$**       | **699,151**   | ** ** | $          | 575,136   |       | $ | 77,450 |   |
| Increase (decrease)  resulting from:        |       | ** **  | ** **    |       |       |      |       |
| State income  taxes, net of Federal benefit |       | **89,775**  | ** **    | 41,636     |       | 25,073    |       |
| Benefit of NOL                              |       | —      | ** **    | —     | ** ** | (944,054  | )          |
| Other                                       |       | **(15,127** | **)**         | 41,383     |       | (20,469   | )          |
|                                        |       | ** **  | ** **    |       |       |      |       |
| Income tax  expense (benefit)               |       | **$**       | **773,799**   | ** ** | $          | 658,155   |       | $ | (862,000 | ) |

 

29

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The components of the net deferred tax assets are as follows: 

 

|                                                         | ** ** | **2006**    | ** **  | **2005** | ** ** |
|---------------------------------------------------------|------------|-------------|-------------|----------|------------|
| Deferred tax assets:                                    |       |        |        |     |       |
| Allowance for  credit losses                            |       | **$**       | **623,208** |     | $          | 623,755 |   |
| Net unrealized  losses on securities available for sale |       | **12,701**  |        | 34,019   |       |
| Reserve for  unfunded commitments                       |       | **13,903**  |        | 11,586   |       |
|                                                    |       | **649,812** |        | 669,360  |       |
|                                                    |       | ** **  |        |     |       |
| Deferred tax  liabilities:                              |       | ** **  |        |     |       |
| Accumulated  depreciation                               |       | **100,791** |        | 17,523   |       |
|                                                    |       | ** **  |        |     |       |
| Net deferred tax asset                                  |       | **$**       | **549,021** |     | $          | 651,837 |   |

 

During the third quarter 2004, management removed the valuationallowance established in 2003 for net deferred tax assets relating to allamounts other than unrealized gains/losses on securities available for sale, asit was more likely than not that the net deferred tax assets would be fullyrealizable in future years.  Operatinglosses of approximately **$1,136,000**were used in 2005 to offset taxable income.

**Note 10. Commitments andContingencies**

 Financial instruments:

The Bank is a party to financial instruments in the normal course ofbusiness to meet the financing needs of its customers.  These financial instruments include commitmentsto extend credit and standby letters of credit, which involve, to varyingdegrees, elements of credit and interest rate risk in excess of the amountsrecognized in the consolidated financial statements.

Outstanding loan commitments, unused lines of credit and letters ofcredit are approximately as follows:

|                         | ** ** | **2006**   | ** **     | **2005** | ** ** |
|-------------------------|------------|------------|----------------|----------|------------|
| Loan commitments:       |       |       |           |     |       |
| Commercial              |       | **$**      | **21,968,000** |     | $          | 17,324,000 |   |
|                    |       | ** ** |           |     |       |
| Unused lines of credit: |       | ** ** |           |     |       |
| Commercial lines        |       | **$**      | **28,068,000** |     | $          | 20,152,000 |   |
|                    |       | ** ** |           |     |       |
| Letters of credit:      |       | **$**      | **910,000**    |     | $          | 702,000 |   |

 

Loan commitments and lines of credit are agreements to lend tocustomers as long as there is no violation of any conditions of thecontracts.  Loan commitments generallyhave interest rates reflecting current market conditions, fixed expirationdates, and may require payment of a fee. Lines of credit generally have variable interest rates.  Some of the loan commitments and lines of creditare expected to expire without being drawn upon; accordingly, the total commitmentamounts do not necessarily represent future cash requirements.  The Bank evaluates each customer’screditworthiness on a case-by-case basis. The amount of collateral or other security obtained, if deemed necessaryby the Bank upon extension of credit, is based on the Bank’s creditevaluation.  Collateral held varies butmay include

30

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deposits held in financial institutions, U.S. Treasury securities,other marketable securities, accounts receivable, inventory, property andequipment, personal residences, income-producing commercial properties, andland under development.  Personalguarantees are normally obtained to provide added security for certaincommitments.

Letters of credit are conditional commitments issued by the Bank toguarantee the performance of a customer to a third party.  Those guarantees are primarily issued toguarantee the installation of real property improvements and similartransactions.  The credit risk involvedin issuing letters of credit is essentially the same as that involved inextending loan facilities to customers. The Bank holds collateral and obtains personal guarantees supportingthose commitments for which collateral or other securities is deemed necessary.

The Bank’s exposure to credit loss in the event of nonperformance bythe customer is the contractual amount of the commitment.  Loan commitments and lines of credit are madeon the same terms, including collateral, as outstanding loans.  As of December31, 2006 and 2005, the Bank has accrued **$36,000** and $30,000, respectively, for unfunded commitmentsrelated to these financial instruments with off balance sheet risk, which isincluded in other liabilities

Employment agreements:

The Company has employment agreements with the Chairman of the Board ofDirectors, President, and Executive Vice President, which expire in 2009, andwith a Senior Vice President, which expires in 2007.

**Note 11. Stockholders’ Equity**

Restrictions on dividends:

Banking regulations limit the amount of dividends that may be paidwithout prior approval of the Bank’s regulatory agencies.  Regulatory approval is required to paydividends that exceed the Bank’s net profits for the current year plus itsretained net profits for the preceding two years.

Regulatory capitalrequirements:

The Company and Bank are subject to various regulatory capitalrequirements administered by Federal and State banking agencies.  Failure to meet minimum capital requirementscan initiate certain mandatory, and possibly additional discretionary actionsby regulators that, if undertaken, could have a direct material effect on theCompany’s financial statements.  TheCompany and Bank must meet specific capital guidelines that involvequantitative measures of the Company’s and Bank’s assets, liabilities, andcertain off-balance sheet items as calculated under regulatory accountingprinciples.  The Company’s and Bank’scapital amounts and classification are also subject to qualitative judgments bythe regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capitaladequacy require the Company and Bank to maintain minimum amounts and ratios(as defined in the regulations) of total and Tier I capital to risk-weightedassets and of Tier I capital to average assets.  Management believes, as of December 31, 2006 and 2005 the Companyand Bank meet all capital adequacy requirements to which it is subject.

As of December 31, 2006,the most recent notification from the FDIC categorized the Bank as wellcapitalized under the regulatory framework for prompt corrective action.  To be categorized as well

31

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capitalized the Bank must maintain minimum total risk-based, Tier Irisk-based, and Tier I leverage ratios. There are no conditions or events since that notification thatmanagement believes have changed the Bank’s category.

A comparison of capital as of December 31,2006 and 2005 with minimum requirements is approximately as follows: 

 
| ** **                                      | ** ** | **Actual**     | ** **     | **For Capital  Adequacy Purposes** | ** ** | **To Be Well Capitalized  Under Prompt  Corrective Action  Provisions** | ** ** |
|-------------------------------------------------|------------|----------------|----------------|----------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **Amount**     | ** **     | **Ratio**                                    | ** ** | **Amount**                                                                                       | ** ** | **Ratio** | ** ** | **Amount** | ** ** | **Ratio** | ** ** |
| **As of December 31, 2006** | ** ** | ** **     | ** **     | ** **                                   | ** ** | ** **                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Total  Capital**                              | ** ** | ** **     | ** **     | ** **                                   | ** ** | ** **                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(to Risk  Weighted Assets)**                  | ** ** | ** **     | ** **     | ** **                                   | ** ** | ** **                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Company**                                     | ** ** | **$**          | **20,026,656** | ** **                                   | **19.1**   | **%**                                                                                            | **$**      | **8,390,000** | ** ** | **8.0** | **%** | **N/A** | ** ** | ** ** | ** ** |
| **Bank**                                        | ** ** | **16,419,738** | ** **     | **15.7**                                     | **%**      | **8,389,000**                                                                                    | ** ** | **8.0** | **%** | **$** | **10,488,000** | ** ** | **10.0** | **%** |
| ** **                                      | ** ** | ** **     | ** **     | ** **                                   | ** ** | ** **                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Tier I  Capital**                             | ** ** | ** **     | ** **     | ** **                                   | ** ** | ** **                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(to Risk  Weighted Assets)**                  | ** ** | ** **     | ** **     | ** **                                   | ** ** | ** **                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Company**                                     | ** ** | **18,711,639** | ** **     | **17.8**                                     | **%**      | **4,195,000**                                                                                    | ** ** | **4.0** | **%** | **N/A** | ** ** | ** ** | ** ** |
| **Bank**                                        | ** ** | **15,104,721** | ** **     | **14.4**                                     | **%**      | **4,195,000**                                                                                    | ** ** | **4.0** | **%** | **6,292,000** | ** ** | **6.0** | **%** |
| ** **                                      | ** ** | ** **     | ** **     | ** **                                   | ** ** | ** **                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Tier I  Capital**                             | ** ** | ** **     | ** **     | ** **                                   | ** ** | ** **                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(to  Average Assets)**                        | ** ** | ** **     | ** **     | ** **                                   | ** ** | ** **                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Company**                                     | ** ** | **18,711,639** | ** **     | **15.1**                                     | **%**      | **4,956,000**                                                                                    | ** ** | **4.0** | **%** | **N/A** | ** ** | ** ** | ** ** |
| **Bank**                                        | ** ** | **15,104,721** | ** **     | **12.2**                                     | **%**      | **4,956,000**                                                                                    | ** ** | **4.0** | **%** | **6,195,000** | ** ** | **5.0** | **%** |
|                                            |       |           |           |                                         |       |                                                                                             |       |   |   |   |   |   |   |
| As of December 31, 2005                         |       |           |           |                                         |       |                                                                                             |       |   |   |   |   |   |   |
| Total Capital                                   |       |           |           |                                         |       |                                                                                             |       |   |   |   |   |   |   |
| (to Risk Weighted  Assets)                      |       |           |           |                                         |       |                                                                                             |       |   |   |   |   |   |   |
| Company                                         |       | $              | 18,463,186     |                                         | 22.5       | %                                                                                                | $          | 6,539,000 |   | 8.0 | % | N/A |   |   |   |
| Bank                                            |       | 14,813,613     |           | 18.0                                         | %          | 6,537,000                                                                                        |       | 8.0 | % | $ | 8,171,000 |   | 10.0 | % |
|                                            |       |           |           |                                         |       |                                                                                             |       |   |   |   |   |   |   |
| Tier I Capital                                  |       |           |           |                                         |       |                                                                                             |       |   |   |   |   |   |   |
| (to Risk Weighted  Assets)                      |       |           |           |                                         |       |                                                                                             |       |   |   |   |   |   |   |
| Company                                         |       | 17,429,111     |           | 21.2                                         | %          | 3,269,000                                                                                        |       | 4.0 | % | N/A |   |   |   |
| Bank                                            |       | 13,779,538     |           | 16.8                                         | %          | 3,268,000                                                                                        |       | 4.0 | % | 4,902,000 |   | 6.0 | % |
|                                            |       |           |           |                                         |       |                                                                                             |       |   |   |   |   |   |   |
| Tier I Capital                                  |       |           |           |                                         |       |                                                                                             |       |   |   |   |   |   |   |
| (to Average  Assets)                            |       |           |           |                                         |       |                                                                                             |       |   |   |   |   |   |   |
| Company                                         |       | 17,429,111     |           | 17.3                                         | %          | 4,022,000                                                                                        |       | 4.0 | % | N/A |   |   |   |
| Bank                                            |       | 13,779,538     |           | 13.7                                         | %          | 4,021,000                                                                                        |       | 4.0 | % | 5,028,000 |   | 5.0 | % |

 

During the first quarterof 2005 the Company sold an aggregate of 981,333 additional shares of commonstock. Of the shares sold, 175,000 were sold on a rights offering basis toshareholders of record as of December 9, 2004 at a price of $10.50 per share,and 806,333 shares were sold in a public offering also at a price of $10.50 pershare.  The offerings, which closed onFebruary 28, 2005, raised an aggregate of approximately $9.6 million, net ofexpenses of the offering, financial advisory fees and underwriter’scommission.  In March 2005, the Companycontributed $6,000,000 to the capital of the Bank. The remaining proceeds ofthe offerings are available for general corporate purposes, including furthercontribution to the Bank for use in its lending and investment activities andother operations.

32

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**Note 12.Warrant and Option Plans**

At December 31, 2006,outstanding and fully vested warrants totaled **123,337,**of which no warrants had been exercised. The exercise price of each warrant is $10 per share and must beexercised, unless earlier called by the Company, not later than 10 years fromAugust 18, 2000.  Generally, vestedwarrants also expire 90 days following the date that the organizer ceases to bea director of the Bank.  Warrants may becalled by the Company in the event that a merger, sale, acquisition, shareexchange or other similar extraordinary event is approved by the Board ofDirectors of the Company.  Upon call bythe Company, warrant holders have 90 days in which to exercise their warrants.  If they are not exercised, the Company willpay the warrant holder the difference between the exercise price of the warrantand the fair market value of the stock of the Company at the time of theclosing of the transaction.  In the eventthat an applicable Federal or state regulatory authority determine that theBank’s capital fails to meet minimum capital requirements, such regulatoryauthority may direct the Company to call all outstanding warrants.  Any warrants not exercised will be thereafterforfeited.

The Board ofDirectors of the Company also adopted a stock option plan as a performanceincentive for the Bank’s officers and key employees.  The employment contracts, signed by theChairman of the Board, President, and Executive Vice President, obligated theCompany to issue non-transferable stock options in the amount of 2,500, 10,000,and 7,500, respectively, at an exercise price of $10 per share.  At December31, 2006, all stock options had been issued by the Company and werefully vested, of which no options had been exercised.

On January 1, 2006, the Company adopted SFAS No. 123R, *Share-Based Payments*, for accounting andreporting for stock-based compensation plans. SFAS No. 123R defines a fair value at grant date based method ofaccounting for measuring compensation expense for stock-based plans to berecognized in the statement of income. Compensation expense under SFAS No. 123R was **$0**,for the year ended December 31, 2006, as no new options were granted during theperiod and all existing plans had vested. For 2005 and 2004, the Company applied Accounting Principles BoardOpinion (APB) No. 25 and related Interpretations for accounting and reportingfor these plans.  If compensation costfor these periods had been determined based on the fair value at the grant datefor awards under this plan consistent with the methods outlined in SFAS No.123R, there would be no change in reported net income for the years endingDecember 31, 2005 and 2004.

**Note 13. Employee Benefit Plans**

The Bank has employeebenefit programs that include health and dental insurance, life and long-termand short-term disability insurance and a 401(k) retirement plan.  Under the 401(k) plan, the Bank made a 50%match of eligible employee contributions up to 6% of base salary in 2006, and 2005 and 2004.  TheBank’s contributions to the plan, included in salaries and employee benefits,totaled **$33,064,** $24,054 and$23,171, for the years ended December31, 2006, and 2005 and2004, respectively.

**Note 14. Income Per Common Share**

Income per common share are calculated as follows:

|                                           | ** ** | **2006**      | ** **    | **2005**  | ** ** | **2004**  | ** ** |
|-------------------------------------------|------------|---------------|---------------|-----------|------------|-----------|------------|
| Basic:                                    |       |          |          |      |       |      |       |
| Net income                                |       | **$**         | **1,282,528** |      | $          | 1,033,420 |       | $ | 1,089,795 |   |
| Basic average common shares outstanding   |       | **1,803,583** |          | 1,647,645 |       | 822,250   |       |
| Basic net income per share                |       | **$**         | **0.71**      |      | $          | 0.63      |       | $ | 1.33 |   |
| Diluted:                                  |       | ** **    |          |      |       |      |       |
| Diluted average common shares outstanding |       | **1,846,462** |          | 1,672,928 |       | 822,250   |       |
| Diluted net  income per share             |       | **$**         | **0.69**      |      | $          | 0.62      |       | $ | 1.33 |   |

 

33

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**Note 15. Related PartyTransactions**

The Bank paid **$66,473**,$48,467, and $57,403 during the years ended December 31, 2006, 2005 and 2004respectively, to a computer consulting firm of which a Director is also aprincipal.  Expenditures includedcomputer hardware, software, installation, training, and support services.

The Bank paid **$176,549**,$122,949, and $176,549 during the years ended December 31, 2006, 2005 and 2004respectively, for various group insurance benefits for which a Director willultimately receive commission compensation.

The Bank paid **$8,384,**$8,121,and $2,851 during the years ended December 31, 2006, 2005 and 2004 respectively,for office supplies to a company of which a Director is also a principal.

Expenses of approximately **$7,430,**$3,668, and $6,313 were paid for legal services with a law firm, of which theChairman of the Board of the Company is a principal, for the years endedDecember 31, 2006, 2005 and 2004, respectively.

All of the above transactions appear to have been consummated on termsequivalent to those that prevail in arms length transactions.

**Note 16.  Fair Values of Financial Instruments**

In accordance with the disclosurerequirements of SFAS No. 107, the estimated fair value and the related carryingvalues of the Company’s financial instruments are as follows:
| ** **                                               | ** ** | **2006**             | ** **    | **2005**        | ** ** |
|----------------------------------------------------------|------------|----------------------|---------------|-----------------|------------|
| ** **                                               | ** ** | **Carrying  Amount** | ** **    | **Fair  Value** | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| **Financial  Assets**                                    |       |                 |          |            |       |   |   |   |   |
| Cash and due from banks                                  |       | **$**                | **3,689,487** | ** **      | **$**      | **3,689,487** |   | $ | 3,625,647 |   | $ | 3,625,647 |   |
| Federal funds sold                                       |       | **28,665,993**       | ** **    | **28,665,993**  |       | 20,671,899 |   | 20,671,899 |   |
| Investment securities available for sale, at fair  value |       | **11,012,774**       | ** **    | **11,012,774**  |       | 10,873,547 |   | 10,873,547 |   |
| FRB stock, at cost                                       |       | **405,000**          | ** **    | **405,000**     |       | 402,450 |   | 402,450 |   |
| Other equity investments, at cost                        |       | **62,000**           | ** **    | **62,000**      |       | 62,000 |   | 62,000 |   |
| Loans, less allowance for credit losses                  |       | **95,080,787**       | ** **    | **97,218,000**  |       | 75,043,570 |   | 75,043,570 |   |
| Loans held for sale, at fair value                       |       | **—**           | ** **    | **—**      |       | 323,066 |   | 323,066 |   |
| Accrued interest receivable                              |       | **654,044**          | ** **    | **654,044**     |       | 406,854 |   | 406,854 |   |
|                                                     |       | ** **           | ** **    | ** **      |       |   |   |   |   |
| **Financial  Liabilities**                               |       | ** **           | ** **    | ** **      |       |   |   |   |   |
| Noninterest-bearing demand                               |       | **19,014,612**       | ** **    | **19,014,612**  |       | 17,930,847 |   | 17,930,847 |   |
| Interest-bearing                                         |       | **93,190,128**       | ** **    | **93,910,000**  |       | 70,236,500 |   | 70,236,500 |   |
| Securities sold under agreements to repurchase           |       | **9,579,116**        | ** **    | **9,579,116**   |       | 6,010,222 |   | 6,010,222 |   |
| Accrued interest  payable on deposits                    |       | **175,839**          | ** **    | **175,839**     |       | 58,912 |   | 58,912 |   |
|                                                          |            |                      |               |                 |            |  |  |  |  |  |  |  |  |

 

For purposes of the disclosures of estimated fair value, thefollowing assumptions were used.

Loans:

The estimated fair value for loans is determined by discounting futurecash flows using current rates at which similar loans would be made toborrowers with similar credit ratings and for the same remaining maturities.

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Investment securities:

Estimated fair values are based on quoted market prices.

Deposits:

The estimated fair value of deposits with no stated maturity, such asnoninterest-bearing demand deposits, savings, NOW accounts and money marketaccounts, is equal to the amount payable on demand at the reporting date (thatis, their carrying amounts).  The fairvalue of certificates of deposit is based on the rates currently offered fordeposits of similar maturities.  The fairvalue estimates do not include the benefit that results from the low-costfunding provided by the deposit liabilities compared to the cost of borrowingfunds in the market.

Other assets and liabilities:

The estimated fair values for cash and due from banks, Federal fundssold and accrued interest receivable and payable are considered to approximatecost because of their short-term nature.

Other assets and liabilities of the Bank that are not defined asfinancial instruments are not included in the above disclosures, such asproperty and equipment.  In addition,non-financial instruments typically not recognized in the financial statementsnevertheless may have value but are not included in the above disclosures.  These include, among other items, theestimated earnings power of core deposit accounts, the trained work force,customer goodwill, and similar items.

## **Note 17.Recently Issued Accounting Pronouncements**

In February 2006, the FASB issued Statement No. 155 (SFAS 155), *Accounting for Certain Hybrid Financial Instruments -an amendment of FASB Statements No. 133 and 140*. SFASNo. 155 simplifies accounting for certain hybrid instruments currentlygoverned by SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities*, by allowing fairvalue remeasurement of hybrid instruments that contain an embedded derivativethat otherwise would require bifurcation. SFAS No. 155 also eliminates theguidance in SFAS No. 133 Implementation Issue No. D1, *Application of Statement 133 to Beneficial Interestsin Securitized Financial Assets*, which provides such beneficialinterests are not subject to SFAS No. 133. SFAS No. 155 amends SFASNo. 140, *Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities - aReplacement of FASB Statement No. 125*, by eliminating the restrictionon passive derivative instruments that a qualifying special-purpose entity mayhold. SFAS No. 155 is effective for all financial instruments acquired orissued after the beginning of an entity’s first fiscal year that begins afterSeptember 15, 2006.  The Companyfeels that this pronouncement will not have a significant impact on thefinancial statements.

In March 2006, the FASB issued Statement No. 156 (SFAS 156), *Accounting for Servicing of Financial Assets- anamendment of FASB Statement No. 140*. SFAS No. 156 requiresan entity to recognize a servicing asset or servicing liability each time itundertakes an obligation to service a financial asset by entering into aservicing contract in specific situations. Additionally, the servicing asset orservicing liability shall be initially measured at fair value; however, anentity may elect the “amortization method” or “fair value method” forsubsequent balance sheet reporting periods. SFAS No. 156 is effective asof an entity’s first fiscal year beginning January 1, 2007. Early adoptionis permitted as of the beginning of an entity’s fiscal year, provided theentity has not yet issued financial statements, including interim financialstatements, for any period of that fiscal year. The Company feels that they are currently in compliance with this newpronouncement.

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In September 2006, the FASB issued Statement No. 157 (SFAS157), *Fair Value Measurements*.SFAS 157 defines fair value, establishes a framework for measuring fair valueand expands disclosures about fair value measurements. SFAS 157 applieswhenever other standards require (or permit) assets or liabilities to bemeasured at fair value but does not expand the use of fair value in any newcircumstances. In this standard, the FASB clarifies the principle that fairvalue should be based on the assumptions market participants would use whenpricing the asset or liability. In support of this principle, SFAS 157establishes a fair value hierarchy that prioritizes the information used todevelop those assumptions. The provisions of SFAS 157 are effective forfinancial statements issued for fiscal years beginning after November 15,2007 and interim periods within those fiscal years. The provisions should beapplied prospectively, except for certain specifically identified financialinstruments.  The Company is currentlyreviewing this pronouncement.

In July 2006, the FASB issued Financial Accounting StandardsInterpretation No. 48 (FIN 48), *Accountingfor Uncertainty in Income Taxes*. FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB Statement No. 109, *Accounting for Income Taxes.*FIN 48 prescribes a recognitionthreshold and measurement attributable for the financial statement recognitionand measurement of a tax position taken or expected to be taken in a taxreturn. FIN 48 also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosures andtransitions. FIN 48 is effective for fiscal years beginning afterDecember 15, 2006.  The Companyfeels that this pronouncement will not have a significant impact on thefinancial statements.

In 2006, the Office of the Comptroller of the Currency, the Office ofThrift Supervision, the Board of Governors of the Federal Reserve System, theFederal Deposit Insurance Corporation, and the National Credit UnionAdministration (collectively, the agencies), have issued an interagency policystatement on the ALLL and supplemental FAQs. This issuance revises the 1993policy statement on the ALLL previously issued by the Office of the Comptrollerof the Currency, the Board of Governors of the Federal Reserve System, theFederal Deposit Insurance Corporation, and the Office of Thrift Supervision.The National Credit Union Administration has also joined in issuing the revisedguidance.

The agencies believe an assessment of theappropriateness of the ALLL is critical to the safety and soundness of afinancial institution. In light of ALLL-related developments since the policystatement was first adopted in 1993, the agencies have revised the previouspolicy to ensure consistency with generally accepted accounting principles(GAAP) and more recent supervisory guidance. The 1993 policy statement wasoriginally issued to describe the responsibilities of the boards of directors,management and examiners of banks and savings associations regarding the ALLL;factors to be considered in the estimation of the ALLL; and the objectives andelements of an effective loan review system, including a sound credit gradingsystem. The revised policy statement updates this guidance and also extends itto credit unions and their examiners.

This revision reiterates key concepts and requirementsincluded in existing ALLL supervisory guidance and GAAP. Because the ALLLrepresents one of the most significant estimates in an institution’s financialstatements and regulatory reports, the agencies remind those institutions oftheir responsibility for developing, maintaining, and documenting acomprehensive, systematic, and consistently applied process for determining theamounts of the ALLL and the provision for loan and lease losses. To fulfillthis responsibility, each institution should ensure that controls are in placeto determine consistently the ALLL in accordance with GAAP, the institution’sstated policies and procedures, management’s best judgment and relevantsupervisory guidance.

Consistent with longstanding supervisory guidance,institutions must maintain an ALLL at a level that is appropriate to coverestimated credit losses on individually evaluated loans determined to beimpaired as well as estimated credit losses inherent in the remainder of theloan and lease portfolio. Estimates of credit losses should reflectconsideration of all significant factors that affect the collectibility of theportfolio as of the evaluation date. Arriving at an appropriate allowanceinvolves a high degree of

36

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management judgment and results in a range of estimated losses. Accordingly,prudent, conservative, but not excessive, loan loss allowances that representmanagement’s best estimate from within an acceptable range of estimated lossesare appropriate.

Although the revised policy statement reiterates key concepts andrequirements in GAAP and existing supervisory guidance on the ALLL, theagencies recognize that institutions may not have sufficient time to completeany enhancements needed to bring their ALLL processes and documentation intofull compliance with the revised guidance for year-end 2006 reporting purposes.Nevertheless, these enhancements should be completed in the near term.  The Company is currently reviewing thispronouncement and feels that they will be in compliance in the future.

## **Note 18.Parent Company Financial Information**

The Balance Sheets, Statements of Income and Statements of Cash Flowsfor CommerceFirst Bancorp, Inc. (Parent Only) are presented below:

**Balance Sheets**
| **December 31,**                 | ** ** | ** **     | ** **     | **2006**   | ** ** | **2005**   | ** ** |
|---------------------------------------|------------|----------------|----------------|------------|------------|------------|------------|
| **Assets**                            |       |           |           |       |       |
| Cash                                  |       | **3,606,918**  |           | $          | 3,649,573  |       |
| Investment in CommerceFirst  Bank     |       | **15,080,067** |           | 13,713,501 |       |
| **Total assets**                      |       | **18,686,985** |           | $          | 17,363,074 |       |
|                                  |       | ** **     |           |       |       |
| **Stockholders’ Equity**         |       | ** **     |           |       |       |
|                                  |       | ** **     |           |       |       |
| Common stock                          |       | **$**          | **18,036**     |       | $          | 18,036     |       |
| Surplus                               |       | **17,683,450** |           | 17,683,450 |       |
| Retained  earnings (deficit)          |       | **1,010,153**  |           | (272,375   | )          |
| Accumulated  other comprehensive loss |       | **(24,654**    | )              | (66,037    | )          |
|                                  |       | ** **     |           |       |       |
| **Total  stockholders’ equity**  |       | **$**          | **18,686,985** |       | $          | 17,363,074 |       |

** **

**Statementsof Income**

**YearsEnded December 31, 2006, 2005 and 2004**

** **

|                                             | ** ** | **2006**      | ** **    | **2005**   | ** ** | **2004**  | ** ** |
|---------------------------------------------|------------|---------------|---------------|------------|------------|-----------|------------|
| Income tax  benefit                         |       | **$**         | **61,161**    | ** ** | $          | —    |       | $ | — |   |
| Expenses                                    |       | **(103,816**  | **)**         | (76,070    | )          | (52,259   | )          |
| Loss before  equity in income of subsidiary |       | **(42,655**   | **)**         | (76,070    | )          | (52,259   | )          |
| Net income of  subsidiary                   |       | **1,325,183** | ** **    | 1,109,490  |       | 1,142,054 |       |
| **Net  income**                             |       | **$**         | **1,282,528** | ** ** | $          | 1,033,420 |       | $ | 1,089,795 |   |

** **

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**Statements of CashFlows**

**YearsEnded December 31, 2006, 2005 and 2004**
| ** **                                                                     | ** ** | **2006**       | ** **    | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------------------------------------|------------|----------------|---------------|------------|------------|------------|------------|
| **Cash flows from operating  activities:**                                     |       |           |          |       |       |       |       |
| Net income                                                                     |       | **1,282,528**  | ** **    | $          | 1,033,420  |       | $          | 1,089,795 |   |
| Adjustments to  reconcile net income to net cash used by operating activities: |       | ** **     | ** **    |       |       |       |       |
| Decrease  (increase) in other assets                                           |       | **—**     | ** **    | 55,780     |       | (50,780    | )          |
| Net income of  subsidiary                                                      |       | **(1,325,183** | **)**         | (1,109,490 | )          | (1,142,054 | )          |
|                                                                           |       | ** **     | ** **    |       |       |       |       |
| Net cash used by  operating activities                                         |       | **(42,655**    | **)**         | (20,290    | )          | (103,039   | )          |
|                                                                           |       | ** **     | ** **    |       |       |       |       |
| **Cash flows from investing  activities:**                                     |       | ** **     | ** **    |       |       |       |       |
| Investment in  subsidiary                                                      |       | **—**     | ** **    | (6,000,000 | )          | (1,000,000 | )          |
|                                                                           |       | ** **     | ** **    |       |       |       |       |
| **Cash flows from financing  activities:**                                     |       | ** **     | ** **    |       |       |       |       |
| Issuance of  common stock, net                                                 |       | **—**     | ** **    | 10,303,997 |       | **—** |       |
| Costs of raising  capital                                                      |       | **—**     | ** **    | (709,746   | )          | **—** |       |
|                                                                           |       | ** **     | ** **    |       |       |       |       |
| Net cash provided  by financing activities                                     |       | **—**     | ** **    | 9,594,251  |       | **—** |       |
|                                                                           |       | ** **     | ** **    |       |       |       |       |
| **(Decrease) increase in cash**                                                |       | **(42,655**    | **)**         | 3,573,961  |       | (1,103,039 | )          |
| ** **                                                                     |       | ** **     | ** **    |       |       |       |       |
| **Cash, beginning of year**                                                    |       | **3,649,573**  | ** **    | 75,612     |       | 1,178,651  |       |
| **Cash, end of year**                                                          |       | **$**          | **3,606,918** | ** ** | $          | 3,649,573  |       | $ | 75,612 |   |
|                                                                                |            |                |               |            |            |            |            |  |  |  |

 

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**Note 19. Quarterly Results ofOperations (Unaudited)**

The following is a summary of theConsolidated unaudited quarterly results of operations

| 2006                                                                           | ** ** | **Three months ended,** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **(Dollars in thousands,  except per share amounts)** | ** ** | **December 31**              | ** ** | **September 30** | ** ** | **June 30** | ** ** | **March 31** | ** ** |
| **Interest income**                                                            | ** ** | **$**                             | **2,397**  | ** ** | **$** | **2,097** | ** ** | **$** | **1,913** | ** ** | **$** | **1,799** |   |
| **Interest  expense**                                                          | ** ** | **996**                           | ** ** | **739** | ** ** | **626** | ** ** | **544** |   |
| **Net interest income**                                                        | ** ** | **1,401**                         | ** ** | **1,358** | ** ** | **1,287** | ** ** | **1,255** |   |
| **Provision for credit losses**                                                | ** ** | **—**                        | ** ** | **45** | ** ** | **90** | ** ** | **90** |   |
| **Net income before income tax**                                               | ** ** | **535**                           | ** ** | **599** | ** ** | **486** | ** ** | **436** |   |
| **Federal and state income tax  expense**                                      | ** ** | **218**                           | ** ** | **228** | ** ** | **184** | ** ** | **144** |   |
| **Net income**                                                                 | ** ** | **317**                           | ** ** | **371** | ** ** | **302** | ** ** | **292** |   |
| **Net income per share (basic)**                                               | ** ** | **$**                             | **0.18**   | ** ** | **$** | **0.20** | ** ** | **$** | **0.17** | ** ** | **$** | **0.16** |   |
| **Net income per share (diluted)**                                             | ** ** | **$**                             | **0.18**   | ** ** | **$** | **0.19** | ** ** | **$** | **0.16** | ** ** | **$** | **0.16** |   |

 

| 2005                                                                          | ** ** | **Three months ended,** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **(Dollars in thousands,  except per share amounts** | ** ** | **December 31**              | ** ** | **September 30** | ** ** | **June 30** | ** ** | **March 31** | ** ** |
| Interest income                                                               |       | $                                 | 1,700      |   | $ | 1,492 |   | $ | 1,297 |   | $ | 1,150 |   |
| Interest  expense                                                             |       | 482                               |       | 387 |   | 311 |   | 259 |   |
| Net interest income                                                           |       | 1,218                             |       | 1,105 |   | 986 |   | 891 |   |
| Provision for credit  losses                                                  |       | 90                                |       | 90 |   | 90 |   | 90 |   |
| Net income before  income tax                                                 |       | 462                               |       | 584 |   | 352 |   | 293 |   |
| Federal and state  income tax expense                                         |       | 166                               |       | 234 |   | 145 |   | 113 |   |
| Net income                                                                    |       | 296                               |       | 350 |   | 207 |   | 180 |   |
| Net income per share  (basic)                                                 |       | $                                 | 0.17       |   | $ | 0.20 |   | $ | 0.11 |   | $ | 0.15 |   |
| Net income per share (diluted)                                                |       | $                                 | 0.16       |   | $ | 0.20 |   | $ | 0.11 |   | $ | 0.15 |   |

 

| 2004                                                                           | ** ** | **Three months ended,** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **(Dollars in thousands,  except per share amounts)** | ** ** | **December 31**              | ** ** | **September 30** | ** ** | **June 30** | ** ** | **March 31** | ** ** |
| Interest income                                                                |       | $                                 | 939        |   | $ | 759 |   | $ | 680 |   | $ | 623 |   |
| Interest  expense                                                              |       | 205                               |       | 133 |   | 131 |   | 119 |   |
| Net interest income                                                            |       | 734                               |       | 626 |   | 549 |   | 503 |   |
| Provision for credit  losses                                                   |       | 90                                |       | 410 |   | 45 |   | 45 |   |
| Net income                                                                     |       | 134                               |       | 758 |   | 124 |   | 74 |   |
| Net income per share (basic and diluted)                                       |       | $                                 | 0.17       |   | $ | 0.92 |   | $ | 0.15 |   | $ | 0.09 |   |

** **

**Note 20.Subsequent Event**

In January 2007, the Company entered into a lease agreement for afacility to serve as an additional branch banking office.  The facility, which is approximately 1,500square feet and located in Severna Park, Maryland, is leased by the Bankthrough January 2012 at an initial rent of approximately $45,000, with annualincreases of 3%.

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** **

**Directors & Officers**

**of**

**CommerceFirstBancorp, Inc. and CommerceFirst Bank**

**MiltonD. Jernigan II, Esquire***

**Chairmanof the Board**

### **Managing Partner**

**McNamee,Hosea, Jernigan, Kim, Greenan & Walker, P.A.**
|            | ** ** | **Richard J. Morgan* President &  Chief Executive Officer**                                                                          |   |   |   | **Lamont Thomas* Executive Vice President &  Chief Operating Officer**                                           |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|----------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** |                                                                                                                                     |   |   |   |                                                                                                                 |
| ** ** | ** ** | **Wilfred T. Azar, III  President  Empire Management Services**                                                                          |   |   |   | **Nicholas J. Marino  President  Marino Transportation Services, LLC**                                               |
| ** ** | ** ** | ** **                                                                                                                               |   |   |   |                                                                                                                 |   |   |
| ** ** | ** ** | **William F. Chesley  President  W. F. Chesley Real Estate, Inc.**                                                                       |   |   |   | **Michael J. Miller  Vice President  Concrete General, Inc. & Tri M Leasing Corp**                               |
| ** ** | ** ** | ** **                                                                                                                               |   |   |   |                                                                                                                 |   |   |
| ** ** | ** ** | **Charles F. Delavan, Esquire  Principal  Blumenthal, Delavan & Williams, P.A.**                                                     |   |   |   | **Robert R. Mitchell*  Private Investor and Former President,  Mitchell Business Equipment, Inc.**                   |
| ** ** | ** ** | ** **                                                                                                                               |   |   |   |                                                                                                                 |   |   |
| ** ** | ** ** | **Gregory A. Gray  President  Eastern Waterproofing &  Restoration Co., Inc.**                                                       |   |   |   | **John A. Richardson, Sr.*  President, Crofton Bowling Center  Former President, Branch Electric  Supply Co., Inc.** |
| ** ** | ** ** | ** **                                                                                                                               |   |   |   |                                                                                                                 |   |   |
| ** ** | ** ** | **Edward B. Howlin, Jr.*  President  Howlin Realty Management, Inc.**                                                                    |   |   |   | **Don E. Riddle, Jr.  Chairman & Chief Executive Officer  Homestead Gardens, Inc.**                              |
| ** ** | ** ** | ** **                                                                                                                               |   |   |   |                                                                                                                 |   |   |
| ** ** | ** ** | **Charles L. Hurtt, Jr., CPA*  President  Charles L. Hurtt, Jr., PA**                                                                    |   |   |   | **George C. Shenk, Jr.*  President  Whitmore Group, Inc.**                                                           |
| ** ** | ** ** | ** **                                                                                                                               |   |   |   |                                                                                                                 |   |   |
| ** ** | ** ** | **Milton D. Jernigan, Sr.  Private Investor and Retired Former Founder,  Chairman and President  AAA Rentals, Inc. and AAA Tools, Inc.** |   |   |   | **Dale R. Watson  President  Alpha Engineering Associates, Inc.**                                                    |
| ** ** | ** ** | ** **                                                                                                                               |   |   |   |                                                                                                                 |   |   |
| ** ** | ** ** | **Jerome A. Watts*  Private Investor and Former Owner  Plan Management**                                                                 |   |   |   | **J. Scott Wimbrow  Senior Vice President  MacKenzie Commercial Real Estate  Services LLC**                          |

----

*Director of CommerceFirst Bancorp, Inc.

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# **Officers**

**of****CommerceFirst Bank**

**ThomasL. Bolander****Senior Vice President**

**PennyL. Cantwell****Senior Vice President**

**W.Craig Engelhaupt****Senior Vice President**

**GeorgeKapusta****Senior Vice President**

**CandaceM. Springmann****Vice President & Corporate Secretary**

**JeanJ. Barnes****Vice President**

**MeloneeFleming, CCE****Vice President**

**DavidSteinhoff****Vice President**

**IrmaRussell****Assistant Vice President**

**RobertW. Smith IV****Loan Officer**

**AnnBrundige****Community Development Officer**

# **LocationsofCommerceFirst Bank**

**1804West Street, Suite 200****Annapolis MD 2104**
| **Lanham**                 | ** ** | **BWI**                      | ** ** | **Old  Dobbin Lane**      |
|----------------------------|------------|------------------------------|------------|---------------------------|
| **4451  Parliament Place** | ** ** | **910  Cromwell Park Drive** |       | **6230  Old Dobbin Lane** |
| **Lanham  MD 20706**       | ** ** | **Glen  Burnie MD21061**     | ** ** | **Columbia  MD 21045**    |

 

**The Company will provide,without charge, to any shareholder of record or any beneficial owner of CommonStock, a copy of its 2006 Annual Report on Form 10-KSB filed with theSecurities and Exchange Commission, upon the written request. Requests shouldbe directed to Candace M. Springmann, Corporate Secretary, at the Company’sexecutive offices at 1804 West Street, Suite 200, Annapolis MD 21401.**

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