**Exhibit13**

 
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# ***Raising Bankingto the Power of Business®***

# ** **

### **Annual Report**

### ** **

**2007**

 

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

 
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March 14,2008

 

To our FellowShareholders:

 

We had a very busy yearduring 2007 as we made strategic adjustments to our operations to increaseefficiencies and create the structure for the future growth of the bank. Wesubstantially upgraded our core data processing and internet banking platforms,re-configured our main operations facilities as well as opened our fifth branchin June 2007. In spite of these time consuming internal changes, asset andloan growth has continued during 2007. This growth has resulted in increasedrevenues as compared to prior periods. The Company continues to experiencestrong loan demand for commercial loans and commercial real estate loans. TheCompany had no loans to consumers at December 31, 2007. Key measurementsand events for the year ended December 31, 2007 include the following:

 

·      Net loans outstanding increased by 31.1% to $125million as of December 31, 2007 from $95 million as of December 31,2006.

 

·      Total assets as of December 31, 2007 increased by5.3% to $149 million as compared to $141 million as of December 31, 2006.

 

·      Deposits as of December 31, 2007 were $123million, an increase of $11 million or 10.0% from December 31, 2006.

 

·      The Company’s net income decreased to $1.088 million,or 15.2%, for the year ended December 31, 2007 as compared to net incomeof $1.282 million for the year ended December 31, 2006.

 

Earnings were adverselyinfluenced by a decline in the Company’s net interest margin and increasedexpenses related to the implementation of the aforementioned strategicoperational changes and the effect of changes in market interest rates. Withthese changes accomplished, we believe that the Company is in a position toefficiently manage its planned growth in the upcoming years.

 

As always we appreciateyour continued support of our bank through your referrals and patronagethroughout 2007.

 

 

Very truly yours,

 

 
| Milton D. Jernigan II | Richard J. Morgan |
|-----------------------|-------------------|
| Chairman of the Board | President and CEO |

 

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**SELECTED CONSOLIDATED FINANCIAL DATA**

 

Thefollowing table shows selected historical consolidated financial data for CommerceFirstBancorp, Inc. You should read it in conjunction with the historicalconsolidated financial information contained in the Consolidated FinancialStatements for the year ended December 31, 2007 included in this AnnualReport. Data for the years ended December 31, 2007, 2006, 2005, 2004 and2003 are derived from the audited consolidated financial statements.

 
| ** **                                                                       | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **(Dollars in thousands, except per share data.)** | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Operation  Statement Data:**                                                   |       |                                       |       |   |   |   |   |   |   |   |   |
| Net interest  income                                                             |       | $                                          | 5,956      |   | $ | 5,301 |   | $ | 4,200 |   | $ | 2,412 |   | $ | 1,958 |   |
| Provision for  loan losses                                                       |       | $                                          | 45         |   | $ | 225 |   | $ | 360 |   | $ | 590 |   | $ | 270 |   |
| Noninterest  income                                                              |       | $                                          | 620        |   | $ | 633 |   | $ | 625 |   | $ | 584 |   | $ | 327 |   |
| Noninterest  expense                                                             |       | $                                          | 4,749      |   | $ | 3,652 |   | $ | 2,773 |   | $ | 2,179 |   | $ | 1,873 |   |
| Federal and  state income tax (expense) benefit                                  |       | $                                          | (694       | ) | $ | (774 | ) | $ | (658 | ) | $ | 862 |   | $ | — |   |
| **Net  income**                                                                  |       | $                                          | 1,088      |   | $ | 1,283 |   | $ | 1,033 |   | $ | 1,090 |   | $ | 143 |   |
|                                                                             |       |                                       |       |   |   |   |   |   |   |   |   |
| **Per  share data and shares outstanding:**                                      |       |                                       |       |   |   |   |   |   |   |   |   |
| Net income per  share, basic                                                     |       | $                                          | 0.60       |   | $ | 0.71 |   | $ | 0.63 |   | $ | 1.33 |   | $ | 0.17 |   |
| Net income per  share, diluted                                                   |       | $                                          | 0.59       |   | $ | 0.69 |   | $ | 0.62 |   | $ | 1.33 |   | $ | 0.17 |   |
| Book value at  period end                                                        |       | $                                          | 11.02      |   | $ | 10.36 |   | $ | 9.63 |   | $ | 8.24 |   | $ | 6.99 |   |
| Average common  shares outstanding during year                                   |       | 1,816,504                                  |       | 1,803,583 |   | 1,647,645 |   | 822,250 |   | 822,250 |   |
| Diluted average  common shares outstanding during year                           |       | 1,848,195                                  |       | 1,846,462 |   | 1,672,928 |   | 822,250 |   | 822,250 |   |
| Shares  outstanding at period end                                                |       | 1,820,548                                  |       | 1,803,583 |   | 1,803,583 |   | 822,250 |   | 822,250 |   |
|                                                                             |       |                                       |       |   |   |   |   |   |   |   |   |
| **Financial  Condition data:**                                                   |       |                                       |       |   |   |   |   |   |   |   |   |
| Total assets                                                                     |       | $                                          | 148,811    |   | $ | 141,270 |   | $ | 112,545 |   | $ | 75,953 |   | $ | 51,295 |   |
| Loans receivable  (net)                                                          |       | $                                          | 124,670    |   | $ | 95,081 |   | $ | 75,044 |   | $ | 51,776 |   | $ | 32,688 |   |
| Allowance for  loan losses                                                       |       | $                                          | 1,665      |   | $ | 1,614 |   | $ | 1,615 |   | $ | 1,154 |   | $ | 604 |   |
| Other  interest-earning assets                                                   |       | $                                          | 18,358     |   | $ | 40,121 |   | $ | 31,985 |   | $ | 19,180 |   | $ | 15,865 |   |
| Total deposits                                                                   |       | $                                          | 123,408    |   | $ | 112,205 |   | $ | 88,167 |   | $ | 65,729 |   | $ | 40,613 |   |
| Borrowings                                                                       |       | $                                          | 4,306      |   | $ | 9,579 |   | $ | 6,010 |   | $ | 3,086 |   | $ | 4,694 |   |
| Stockholders’  equity                                                       |       | $                                          | 20,056     |   | $ | 18,687 |   | $ | 17,363 |   | $ | 6,774 |   | $ | 5,751 |   |
|                                                                             |       |                                       |       |   |   |   |   |   |   |   |   |
| **Selected  performance ratios:**                                                |       |                                       |       |   |   |   |   |   |   |   |   |
| Return on  average earning assets                                                |       | 1.07                                       | %          | 1.23 | % | 1.19 | % | 2.05 | % | 0.33 | % |
| Return on  average equity                                                        |       | 7.47                                       | %          | 7.16 | % | 6.76 | % | 18.02 | % | 2.48 | % |
| Net interest  margin(1)                                                          |       | 4.38                                       | %          | 5.06 | % | 4.86 | % | 4.58 | % | 4.52 | % |
| Net interest  spread(2)                                                          |       | 3.10                                       | %          | 3.83 | % | 4.01 | % | 4.11 | % | 4.11 | % |
| Efficiency  ratio(3)                                                             |       | 72.21                                      | %          | 61.56 | % | 57.47 | % | 60.79 | % | 81.97 | % |
|                                                                             |       |                                       |       |   |   |   |   |   |   |   |   |
| **Asset  quality ratios:**                                                       |       |                                       |       |   |   |   |   |   |   |   |   |
| Nonperforming  loans to gross loans                                              |       | 0.89                                       | %          | 0.65 | % | 0.77 | % | 2.00 | % | 1.18 | % |
| Allowance for  loan losses to loans                                              |       | 1.32                                       | %          | 1.67 | % | 2.10 | % | 2.18 | % | 1.81 | % |
| Allowance for  loan losses to nonperforming loans                                |       | 1.48                                       | x          | 2.57 | x | 2.73 | x | 1.09 | x | 1.54 | x |
| Nonperforming  assets to loans and other real estate                             |       | 0.89                                       | %          | 0.65 | % | 0.77 | % | 2.00 | % | 1.18 | % |
| Net loan  charge-offs (recoveries) to average loans                              |       | 0.00                                       | %          | 0.26 | % | (0.15 | )% | 0.10 | % | 0.97 | % |
|                                                                             |       |                                       |       |   |   |   |   |   |   |   |   |
| **Capital  ratios:**                                                             |       |                                       |       |   |   |   |   |   |   |   |   |
| Total risk-based  capital ratio                                                  |       | 16.48                                      | %          | 19.10 | % | 22.50 | % | 13.52 | % | 18.59 | % |
| Tier I  risk-based capital ratio                                                 |       | 15.23                                      | %          | 17.84 | % | 21.20 | % | 12.26 | % | 17.34 | % |
| Leverage ratio                                                                   |       | 13.91                                      | %          | 15.10 | % | 17.30 | % | 10.58 | % | 12.70 | % |
| Average equity  to average assets                                                |       | 13.93                                      | %          | 16.63 | % | 17.05 | % | 10.97 | % | 12.73 | % |

 

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(1)           Net interestmargin is net interest income divided by average earning assets.

(2)           Net interestspread is the difference between the average yield on interest earning assetsand the average cost of interest bearing liabilities.

(3)           Efficiency ratiois noninterest expense divided by the sum of net interest income andnoninterest income.

 

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**MANAGEMENT’SDISCUSSION AND ANALYSIS**

 

Forward LookingStatements. Certain information contained in this discussion may include “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. These forward-looking statements are generally identified byphrases such as “the Company expects,” “the Company believes” or words ofsimilar import.  Such forward-lookingstatements involve known and unknown risks including, but not limited 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.

 

Thisdiscussion and analysis provides an overview of the financial condition andresults of operations of CommerceFirst Bancorp, Inc. (the “Company”) andCommerceFirst Bank (the “Bank”) for the years 2007 and 2006.  It is intended that this discussion andanalysis help the readers in their analysis of the accompanying auditedConsolidated Financial Statements. You should read this discussion inconjunction with the Consolidated Financial Statements and Notes theretoprovided elsewhere in this report.

 

##### **General**

##### ** **

CommerceFirst Bancorp, Inc.is the bank holding company for CommerceFirst Bank, a Maryland charteredcommercial bank headquartered in Annapolis, Maryland. The Bank was capitalized,became a wholly owned subsidiary of the Company and commenced operations on June 29,2000.

 

Duringthe first quarter of 2005 the Company sold an aggregate of 981,333 additionalshares of common stock. Of the shares sold, 175,000 were sold on a rightsoffering basis to shareholders of record as of December 9, 2004 at a priceof $10.50 per share, and 806,333 shares were sold in a public offering also ata price of $10.50 per share.  Theofferings, which closed on February 28, 2005, raised an aggregate ofapproximately $9.6 million, net of expenses of the offering, financial advisoryfees and underwriter’s commission.  In March 2005,the Company contributed $6,000,000 to the capital of the Bank. The remainingproceeds of the offerings are available for general corporate purposes,including further contribution to the Bank for use in its lending andinvestment activities and other operations.

 

On March 1,2005 trading in the Company’s common stock commenced on the NASDAQ CapitalMarket under the symbol “CMFB”.

 

In June 2006, the Bank opened a new branch office, its thirdbanking office, in leased space in the BWI Airport Business District onCromwell Park Drive, Glen Burnie, Maryland. In August  2006, the Bank opened a new branch office, its fourbanking office, in leased space in the Liberty Place office park on Old DobbinLane, Columbia, Maryland. In June 2007, the Bank opened its fifth bankinglocation in leased facilities in the Severna Park Market Center in SevernaPark, Maryland.

 

**Overview**

 

TheCompany continued a pattern of growth during the year ended December 31,2007. This growth has resulted in increased revenues as compared to priorperiods. Key measurements and events for the year ended December 31, 2007include the following:

 

·      Total assets asof December 31, 2007 increased by 5.3% to $148.8 million as compared to$141 million as of December 31, 2006.

 

·      Net loansoutstanding increased by $29.6 million, or 31.1% to $124.7 million as of December 31,2007 from $95.1 million as of December 31, 2006.

 

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·      Deposits as of December 31,2007 were $123.4 million, an increase of $11.2 million or 10.0% from December 31,2006.

 

·      The Company’snet income decreased to $1.088 million, or 15.2%, for the year ended December 31,2007 as compared to net income of $1.282 million for the year ended December 31,2006.

 

·      Net interestincome, the Company’s main source of income, was $6.0 million during the yearended December 31, 2007 compared to $5.3 million for the same period in2006. This represents an increase of 12.4% for the year December 31, 2007as compared to 2006.

 

·      Non-interestexpenses increased by $1.096 million, or 30.0%, for the year ended December 31,2007, as compared to 2006 as the result of changing the Bank’s core dataprocesser, its internet service provider, changes to its communication systemand costs of additional branches.

 

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

 

## **CriticalAccounting Policies**

## ** **

TheCompany’s consolidated financial statements are prepared in accordance withaccounting principles generally accepted in the United States and followgeneral practices within the industries in which it operates.  Application of these principles requiresmanagement to make estimates, assumptions and judgments that affect the amountsreported in the financial statements and accompanying notes.  These estimates, assumptions and judgments arebased on information available as of the date of the financial statements;accordingly, as this information changes, the financial statements couldreflect different estimates, assumptions and judgments.  Certain policies inherently have a greaterreliance on the use of estimates, assumptions and judgments and as such have agreater possibility of producing results that could be materially differentthan originally reported.  Estimates,assumptions and judgments are necessary when assets and liabilities arerequired to be recorded at fair value, when a decline in the value of an assetnot carried on the financial statements at fair value warrants an impairmentwrite-down or valuation reserve to be established, or when an asset orliability needs to be recorded contingent upon a future event.  Carrying assets and liabilities at fair valueinherently results in more financial statement volatility.  The fair values and the information used torecord valuation adjustments for certain assets and liabilities are basedeither on quoted market prices or are provided by other third-party sources,when available.

 

Themost significant accounting policies followed by the Company are presented inNote 1 to the consolidated financial statements. These policies, along with thedisclosures presented in the other financial statement notes and in thisdiscussion, provide information on how significant assets and liabilities arevalued in the financial statements and how those values are determined.  Based on the valuation techniques used andthe sensitivity of financial statement amounts to the methods, assumptions andestimates underlying those amounts, management has identified the determinationof the allowance for loan losses as the accounting area that requires the mostsubjective or complex judgments, and as such could be most subject to revisionas new information becomes available.

 

The Company believes ithas developed appropriate policies and procedures for assessing the adequacy ofthe allowance for loan losses, recognizing that this process requires a numberof assumptions and estimates with respect to its loan portfolio.  The Company’s assessments may be impacted infuture periods by changes in economic conditions, the impact of regulatoryexaminations and the discovery of information with respect to borrowers whichis not known to management at the time of the issuance of the consolidatedfinancial statements.  For additionaldiscussion concerning the allowance for loan losses and related matters, see “Allowanceand *Provision for Loan Losses*”below and Note 1 to the consolidated financial statements.

 

**Financial Condition**

 

The Company’s assets at December 31,2007 were $148.8 million, an increase of $7.5 million or 5.3%, from December 31,2006. The increase is primarily the result in the increase in loans of $29.6million offset by the decrease in cash and cash equivalents of $20.6 million.The Company used its excess liquidity to fund the loan increases during 2007.

 

At December 31,2007, loans totaled $124.7 million as compared to loans of $95.1 million at December 31,2006. The loan portfolio is comprised of commercial loans and real estateloans. The majority of the increase in loans was in the real estate portfoliowhich increased $21.5 million (42.0%) while commercial loans increased $8.1million (17.8%). During 2007, the Company increased efforts to originate realestate loans for asset quality purposes. The real estate portfolio is 

 

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composed almostentirely of loans secured by commercial real estate. The Company has little inacquisition and development loans secured by residential building lots(approximately $1 million).

 

The allowance for loanlosses was $1.7 million (1.32% of loans) at December 31, 2007.  The allowance was $1.6 million (1.67% of loans)at December 31, 2006.  At December 31,2007, non-accrual loans totaled $1.1 million as compared to $.6 million at December 31,2006.  The increase is predominatelyattributable to a number of smaller commercial loans that the Company placed onnon-accrual status during 2007. Loans charged off in 2007 totaled $72 thousandas compared to $226 thousand during 2006. Recoveries on charged off loans were$75 thousand during 2007 while there were no recoveries in 2006.

 

The investment securitiesportfolio at December 31, 2007 amounted to $9.2 million, a decrease of$1.8 million (16.8%) from the amount at December 31, 2006. Funds obtainedfrom securities repayments were invested in loans and other assets during2007.  All of the investments securitiesare classified as “available for sale” and are reflected in the statement offinancial condition at their fair value. The carrying value of the securitiesincludes net unrealized gains of $142 thousand at December 31, 2007 andnet unrealized losses of $37 thousand at December 31, 2006. These netunrealized gains and losses are reflected in stockholders equity, net ofdeferred taxes. Unrealized gains and losses are the result of interest ratelevels differing from those existing at the time of the acquisition of thesecurities. These unrealized gains and losses are considered temporary as theyreflect fair values on December 31, 2007 and 2006 and are subject tochange daily as interest rates fluctuate. The Company has the intent and theability to hold the securities to the maturity of the securities or the timerequired for the value of the securities to equal or exceed their cost.

 

Deposits are the majorsource of funds for lending and investment activities. At December 31,2007, deposits totaled $123.4 million as compared to $112.2 million at December 31,2006. Most of the $11.2 million increase is attributable to the increase of$10.1 million in certificates of deposit during 2007. There were $22.5 millionand $19.8 million of brokered certificates of deposit at December 31, 2007and 2006, respectively. Included in deposits are deposits of officers anddirectors (and their affiliated entities) of $19.0 million.

 

Total stockholders’equity was $20.1million at December 31, 2007 representing an increase of$1.4 million from December 31, 2006. The increase from December 31, 2006 was attributable to theproceeds from the exercise of warrants of $169 thousand, earnings of $1.1million plus an increase in unrealized gains on available for sale investmentsecurities of $112 thousand.

 

At December 31,2007, we continued to exceed all regulatory capital requirements to beconsidered a “well capitalized” financial institution under federalregulations.

 

**Results of Operations**

 

Net income for the yearended December 31, 2007 was $1.1 million ($0.60 per share; $0.59 per sharediluted), a decrease of $274 thousand, or 15.2%, from the net income of $1.3million ($0.71 per share; $0.69 per share diluted) during 2006.  Net income decreased in 2007 as compared to2006 because increases in net interest income and non-interest income were lessthan increases in operating expenses. In 2007, net interest income increased by12.4%, the provision for loan losses decreased by $179 thousand whilenon-interest expenses increased by $1.1 million as compared to 2006. Theincrease in non-interest expense reflects additional costs incurred in openinga new branch in 2007, the full year’s expenses for two  branch opened in 2006, the cost of convertingto a different core processing servicer and different internet banking serviceras well as costs to upgrade the Bank’s communication system and administrativeoffice.

 

The Company reported anet profit of $1.3 million for the year ended December 31, 2006 ascompared to a net profit of $1.0 million for the year ended December 31,2005, an increase of 24%. Net interest margin increased by $1.1 million whilenon-interest expenses increased by $0.9 million as the Bank opened a branch andexperienced increased costs relating to its growth.

 

During the years ended December 31,2007, 2006 and 2005, the Company had return on equity, return on assets andequity to asset ratios as follows:

 

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**RETURN ON AVERAGE ASSETS AND AVERAGE EQUITY**

**YearEnded December 31,**

 
| ** **                                 | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                       |       |     |       |     |       |     |       |
| Return on  Average Equity                  |       | 7.47     | %          | 7.16     | %          | 6.76     | %          |
|                                       |       |     |       |     |       |     |       |
| Return on  Average Earning Assets          |       | 1.07     | %          | 1.23     | %          | 1.19     | %          |
|                                       |       |     |       |     |       |     |       |
| Ratio of Average  Equity to Average Assets |       | 13.93    | %          | 16.63    | %          | 17.05    | %          |

 

**NetInterest Income and Net Interest Margin**

 

Net interest income isthe difference between income on assets and the cost of funds supporting thoseassets. Earning assets are composed primarily of loans and investments; theexpense associated with interest bearing deposits and customer repurchaseagreements and other borrowings is the cost of funds. Non-interest bearingdeposits and capital are other components representing funding sources. Changesin the volume and mix of assets and funding sources, along with the changes inyields earned and rates paid, determine changes in net interest income.

 

Total interest incomeincreased by $2.2 million or 30.0% to $9.7 million for the year ended December 31,2007 as compared to 2006 and increased $2.5 million or 50.6% for the year endedDecember 31, 2006 as compared to 2005. These increases are primarily attributable to the increases in volume ofinterest bearing assets during 2007 and 2006, and to a lesser extent increasesin market interest rates during the periods. Average interest earning assets increasedby $31.2 million and by $18.2 million in 2007 and 2006, respectively. The yieldon earning assets increased each year to 7.96% in 2007, 7.81% in 2006 and 6.52%in 2005.

 

Interest expenseincreased by $2.0 million or 67.5% to $4.9 million for the year ended December 31,2007 as compared to 2006 and increased $1.5 million or 102.0% for the yearended December 31, 2006 as compared to 2005.  These increases are primarily attributable tothe increases in market interest rates and the increases in interest bearingliabilities during 2007 and 2006. Average interest bearing liabilitiesincreased by $27.6 million and by $15.12 million in 2007 and 2006,respectively. The cost of these funds increased each year to 4.86% in 2007,4.01% in 2006 and 2.51% in 2005.

 

Net interest income was$6.0 million in 2007, a $0.7 million, or 12.4% increase over the $5.3 millionrecorded in 2006. The net interest income in 2006 was a $1.1 million increaseover the $4.2 million recorded in 2005. Theincrease in net interest income results primarily from the increased balancesof earning assets over interest bearing liabilities during the periods.

 

The following tableprovides 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.

 

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** **

**AVERAGE BALANCES, RATES AND INTERESTINCOME AND EXPENSE**

**Years Ended**

 
| ** **                                     | ** ** | **2007**    | ** ** | **2006**     | ** ** | **2005**   | ** ** |
|------------------------------------------------|------------|-------------|------------|--------------|------------|------------|------------|
| ** **                                     | ** ** | **Average** | ** ** | ** **   | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** | **Average** | ** ** | ** ** | ** ** | **Yield/** | ** ** |
| **(In thousands)**                        | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate**   | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| **Assets:**                                    |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest Earning Assets:                       |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans receivable                               |       | $           | 111,385    |         | $          | 9,680      |       | 8.69 | % | $ | 87,301 |   | $ | 7,452 |   | 8.45 | % | $ | 64,234 |   | $ | 4,950 |   | 7.71 | % |
| Investment securities                          |       | 10,750      |       | 460          |       | 4.28       | %          | 7,850 |   | 276 |   | 3.52 | % | 9,733 |   | 296 |   | 3.04 | % |
| Federal funds sold                             |       | 13,810      |       | 683          |       | 4.95       | %          | 9,549 |   | 478 |   | 5.00 | % | 12,523 |   | 393 |   | 3.14 | % |
| Total Interest Earning Assets                  |       | 135,945     |       | 10,823       |       | 7.96       | %          | 104,700 |   | 8,206 |   | 7.84 | % | 86,490 |   | 5,639 |   | 6.52 | % |
|                                           |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Less allowance for loan losses                 |       | (1,705      | )          |         |       |       |       | (1,759 | ) |   |   |   |   | (822 | ) |   |   |   |   |
| Non-Interest Earning Assets                    |       | 5,236       |       |         |       |       |       | 4,796 |   |   |   |   |   | 4,540 |   |   |   |   |   |
| Total Assets                                   |       | $           | 139,476    |         |       |       |       |   | $ | 107,737 |   |   |   |   |   | $ | 89,615 |   |   |   |   |   |
| ** **                                     |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Liabilities and Stockholders’ Equity:** |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest -Bearing Liabilities:                 |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest bearing demand deposits               |       | $           | 2,333      |         | $          | 32         |       | 1.37 | % | $ | 1,834 |   | $ | 27 |   | 1.46 | % | $ | 2,422 |   | $ | 16 |   | 0.67 | % |
| Money market deposit accounts                  |       | 18,466      |       | 715          |       | 3.87       | %          | 18,063 |   | 607 |   | 3.36 | % | 16,129 |   | 272 |   | 1.68 | % |
| Savings accounts                               |       | 141         |       | 1            |       | 0.71       | %          | 360 |   | 4 |   | 1.00 | % | 448 |   | 2 |   | 0.50 | % |
| Certificates of deposit                        |       | 75,651      |       | 4,027        |       | 5.32       | %          | 47,179 |   | 2,135 |   | 4.53 | % | 35,361 |   | 1,113 |   | 3.15 | % |
| Securities sold under agreements               |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| to repurchase                                  |       | 3,495       |       | 92           |       | 2.63       | %          | 4,994 |   | 128 |   | 2.56 | % | 3,003 |   | 36 |   | 1.20 | % |
| Other borrowed funds                           |       |        |       |         |       |       |       | 73 |   | 4 |   | 5.31 | % |   |   |   |   |   |   |
| Total Interest Bearing Liabilities             |       | 100,086     |       | 4,867        |       | 4.86       | %          | 72,503 |   | 2,905 |   | 4.01 | % | 57,364 |   | 1,439 |   | 2.51 | % |
|                                           |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-Interest Bearing Liabilities:              |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                |       | 18,884      |       |         |       |       |       | 16,484 |   |   |   |   |   | 16,489 |   |   |   |   |   |
| Other                                          |       | 1,075       |       |         |       |       |       | 828 |   |   |   |   |   | 484 |   |   |   |   |   |
| Total Liabilities                              |       | 120,045     |       |         |       |       |       | 89,815 |   |   |   |   |   | 74,337 |   |   |   |   |   |
| Stockholders’ Equity                      |       | 19,431      |       |         |       |       |       | 17,922 |   |   |   |   |   | 15,278 |   |   |   |   |   |
| Total Liabilities and Equity                   |       | $           | 139,476    |         |       |       |       |   | $ | 107,737 |   |   |   |   |   | $ | 89,615 |   |   |   |   |   |
| Net Interest Income                            |       |        |       | $            | 5,956      |       |       |   |   |   | $ | 5,301 |   |   |   |   |   | $ | 4,200 |   |   |   |
|                                           |       |        |       |         |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net Interest Spread                            |       |        |       |         |       | 3.10       | %          |   |   |   |   | 3.83 | % |   |   |   |   | 4.01 | % |
| Net Interest Margin                            |       |        |       |         |       | 4.38       | %          |   |   |   |   | 5.06 | % |   |   |   |   | 4.86 | % |

 

*Yields onsecurities are calculated based on amortized cost.*

 

Net interest margin was4.38% in 2007 as compared to 5.06% in 2006 and 4.86% in 2005. The net interestspread was 3.10% in 2007 as compared to 3.83% in 2006 and 4.01% in 2005. Thedecrease in net interest margin and net interest spread in 2007 as compared to2006 results from the increased percentage of deposits comprised ofcertificates of deposit in 2007 as compared to prior years, and the increasedrates required to attract these deposits reflecting changes in market interestrates. The increase in net interest margin in 2006 from 2005 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 net interest spread from 2005 to 2006 is largelyattributable to rising interest rates paid during the year to attractcertificates of deposit.

 

**Rate/Volume Analysis of NetInterest Income**

 

The following table setsforth certain information regarding changes in interest income and interestexpense of the Company for the years indicated. For each category of interest-earning assets and interest-bearingliabilities, information is provided on changes attributable to: (i) changesin volume (change in volume of the asset multiplied by the prior year’s rate)and (ii) changes in rates (change in rate multiplied by the current year’svolume).

 

6

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**RATE/VOLUME ANALYSIS**

 
| ** **                                     | ** ** | **2007 vs. 2006**  | ** ** | **2006 vs. 2005**  | ** ** |
|------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                     | ** ** | **Increase (Decrease)** | ** ** | **Increase (Decrease)** | ** ** |
| **In thousands)**                         | ** ** | **Volume**                   | ** ** | **Rate**                     | ** ** | **Total** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Total** | ** ** |
| **Interest-Earning Assets:**                   |       |                         |       |                         |       |   |   |   |   |   |   |   |   |
| Federal funds sold                             |       | $                            | 213        |                         | $          | (8 | ) | $ | 205 |   | $ | (94 | ) | $ | 178 |   | $ | 84 |   |
| Investment portfolio                           |       | 102                          |       | 82                           |       | 184 |   | (57 | ) | 38 |   | (19 | ) |
| Loans receivable                               |       | 2,056                        |       | 172                          |       | 2,228 |   | 1,777 |   | 725 |   | 2,502 |   |
| **Net Change in Interest Income**              |       | 2,371                        |       | 246                          |       | 2,617 |   | 1,626 |   | 941 |   | 2,567 |   |
|                                           |       |                         |       |                         |       |   |   |   |   |   |   |   |   |
| **Interest Bearing Liabilities:**              |       |                         |       |                         |       |   |   |   |   |   |   |   |   |
| Interest bearing deposits                      |       | 1,199                        |       | 802                          |       | 2,001 |   | 400 |   | 970 |   | 1,370 |   |
| Other borrowed funds                           |       | (4                           | )          | —                       |       | (4 | ) | 4 |   | — |   | 4 |   |
| Securities sold under agreements to repurchase |       | (38                          | )          | 2                            |       | (36 | ) | 24 |   | 68 |   | 92 |   |
| **Net Change in Interest Expense**             |       | 1,157                        |       | 804                          |       | 1,961 |   | 428 |   | 1,038 |   | 1,466 |   |
|                                           |       |                         |       |                         |       |   |   |   |   |   |   |   |   |
| **Change in Net Interest Income**              |       | $                            | 1,214      |                         | $          | (558 | ) | $ | 656 |   | $ | 1,198 |   | $ | (97 | ) | $ | 1,101 |   |

 

**Allowanceand Provision for Loan Losses**

 

The provision for loanlosses represents the expense recognized to fund the allowance for loan losses.At December 31, 2007, the allowance for loan losses stood at $1.7 million,or 1.32% of outstanding gross loans. Of this amount, “specific” reserves were$693 thousand and “general” reserves were $972 thousand. Specific reserves areused to individually allocate an allowance for loans identified as impaired, orwhich otherwise exhibit adverse characteristics that suggest a heightened riskof non-collection.  General reserves arethose made with respect to unclassified loans in our portfolio based upon themethodology discussed below in order to maintain the allowance at a level whichreflects our best estimate of the losses inherent in the portfolio with respectto such loans.  Whether specific orgeneral, amounts in the allowance for credit losses are available to absorblosses with respect to any loan. At December 31, 2006, the allowance forcredit losses stood at $1.6 million, or 1.67% of outstanding gross loans. Ofthis amount, “specific” reserves were $642 thousand and “general” reserves were$972 thousand. At December 31, 2005, the allowance for credit losses stoodat $1.6 million, or 2.1% of outstanding gross loans. Of this amount, “specific”reserves were $784 thousand and “general” reserves were $831 thousand.

 

The loan loss expense of$45 thousand for the year ended December 31, 2007 reflected a decrease of$180 thousand from the provision of $225 thousand for the year ended December 31,2006. This decrease is reflective of the declining losses during 2007 despiteincreasing loan balances. Satisfactory performance of the loan portfolio, thelarger portion of real estate secured loans, the aging of the loan portfoliowith minimal net charge-offs as well as a net recovery of $6 thousand during2007 permitted the reduction in the provision notwithstanding the substantiallygreater increase in loans in 2007 as compared to 2006. The loan loss expense of$225 thousand for the year ended December 31, 2006 reflected a decrease of$135 thousand from the provision expense of $360 thousand for the year ended December 31,2005 and substantially equaled the loan charge-offs during 2006.

 

Management has devisedand refined a comprehensive review methodology to assess the adequacy of theallowance. This methodology permits several different assessments to be made.Currently, principal consideration is accorded the assessment based upon therisk 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 codes.  The methodologyhas the flexibility to permit additional evaluation criteria if so desired.Risk ratings are assigned to all credits at inception. Consideration is givento many 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 peer group,the results of examinations and evaluations of the overall portfolio byregulatory examiners and by external auditors, and the local, state andnational economic outlook.

 

7

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In addition to the aboveadequacy review, management also considers some bulk measures of adequacy.Specifically, an analysis is made of the entire portfolio, less the governmentguaranteed portion of SBA loans and those loans secured by cash deposits withinthe Bank. An additional measure compares the gross loan total withoutconsideration of guarantees and/or collateral to the allowance. Each quarter,management formally recommends to the Board of the Bank the proposed amount tobe allocated monthly to the allowance and accordingly charged to theappropriate expense account.

 

Based on the abovefactors and on current economic conditions and perceived loan quality, theallowance is believed to be adequate as of December 31, 2007.

 

The activity in theallowance for credit losses is shown in the following table. All charge-offsand recoveries relate to commercial loans.

 
| ** **                                    | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| **(In thousands)**                       | ** ** | **2007**                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Allowance for loan losses:                    |       |                                       |       |   |   |   |   |
| Beginning balance                             |       | $                                          | 1,614      |   | $ | 1,615 |   | $ | 1,154 |   |
| Charge-offs- commercial loans                 |       | (72                                        | )          | (226 | ) | (15 | ) |
| Recoveries- commercial loans                  |       | 78                                         |       | — |   | 116 |   |
| Net recoveries (charge-offs)                  |       | 6                                          |       | (226 | ) | 101 |   |
| Provision for loan losses                     |       | 45                                         |       | 225 |   | 360 |   |
| Ending balance                                |       | $                                          | 1,665      |   | $ | 1,614 |   | $ | 1,615 |   |
|                                          |       |                                       |       |   |   |   |   |
| Net recoveries (charge-offs) to average loans |       | 0.00                                       | %          | (0.26 | )% | 0.15 | % |

 

During 2007, fourcommercial loans totaling $72 thousand were determined to be uncollectible andwere charged off. Recovery of $78 thousand from one loan previously charged-offwas realized during 2007.

 

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

 

Additionally, the Bankhas established a reserve for unfunded commitments that is recorded by a provisioncharged to other expenses.  The balanceof this reserve was $42 thousand, $36 thousand and $30 thousand at December 31,2007, 2006 and 2005, respectively. The reserve is an amount that managementbelieves will be adequate over time to absorb possible losses on unfundedcommitments (off-balance sheet financial instruments) that may becomeuncollectible in the future.

 

**AssetQuality**

 

In its lendingactivities, the Bank seeks to develop sound credits with customers who willgrow with the Bank. There has not been an effort to rapidly build the portfolioand earnings at the expense of asset quality. At the same time, the extension of credit inevitably carries some riskof non-payment.

 

The following table showsan analysis of nonperforming assets at the dates indicated:

 

8

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**NON-PERFORMING LOANS**

 
| **(In thousands)**                   | ** ** | **December 31,  2007** | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
|                                      |       |                        |       |                        |       |                        |       |
| Non-accrual loans - commercial            |       | $                           | 1,125      |                        | $          | 628                         |       | $ | 592 |   |
| Accruing loans past due 90 days or longer |       | —                      |       | —                      |       | —                      |       |
| Real estate owned                         |       | —                      |       | —                      |       | —                      |       |
| Troubled debt restructurings              |       | —                      |       | —                      |       | —                      |       |
| Total non-performing loans                |       | $                           | 1,125      |                        | $          | 628                         |       | $ | 592 |   |

 

The amount of interestthat would have been recorded during 2007 on the $1.125 million of non-accrualloans if they had been current in accordance with their terms is $77 thousand.Approximately $24 thousand of interest was recognized on these loans during2007.  No interest was actually includedin net income in respect of such loans after they were placed on non-accrualstatus.  The accrual of interest on loansis discontinued when, in management’s opinion, the full collection of principalor interest is in doubt, or a scheduled loan payment has become over ninetydays past due, unless the obligation is well secured and in the process ofcollection

 

At December 31, 2007, the Bank had nine loans totaling $1.125million in non-accrual status as compared to three loans totaling $628 thousandin non-accrual status at December 31, 2006.

 

·      One loan in the amount of $583 thousandis the remaining balance of a relationship totaling $958 thousand recognized asimpaired in September 2004 and placed in non-accrual status at that time.This loan is secured by real estate and by assignment of life insuranceproceeds. The loan is also secured by all remaining business assets but theBank does not expect to realize significant amounts from those business assets.The specific reserves allocated to this loan are $426 thousand and collectionproceedings and a borrower countersuit continue.

 

·      The second loan in the amount of $175thousand is a delinquent loan partially secured by residential real estateowned by the guarantors of the loan. The Bank has a first lien on theresidential property in the amount of $100 thousand but is a third lienposition as to the remaining portion of the loan. Collection proceedings havestarted and the Bank has established specific reserves of $44 thousand for theloan.

 

·      The remaining seven loans in non-accrualstatus total $367 thousand; the balance of each of the loans is less than $100thousand. These loans are partially secured by business and other assets of theborrower and/or guarantors. Specific reserves totaling $224 thousand have beenestablished for these loans which are in various stages of collection.

 

At December 31, 2006, the Bank had three loans totaling $628thousand to two unrelated entities in non-accrual status as compared to twounrelated loans totaling $592 thousand in non-accrual status at December 31,2005.

 

·      One loan in the amount of $583 thousandis the remaining balance of a relationship totaling $958 thousand recognized asimpaired in September 2004 and placed in non-accrual status at that time.This loan is described above as it is still outstanding at December 31,2007.

 

·      The second relationship has two loanstotaling $45 thousand. One loan in the amount of $20 thousand is theunguaranteed portion of a Small Business Administration loan originally in theamount of $150 thousand, the guaranteed portion of which was sold in 2005.  The second loan is in the amount of $25thousand. Both loans are secured by assignment of certain business assets andby personal guarantees of the principals. Collection proceedings were startedand the Bank had established specific reserves of $45 thousand for these twoloans.

 

At December 31,2005, the Bank had two loans totaling $592 thousand in non-accrual statuscomprised of the $583 thousand loan mentioned above and another, smaller loan.

 

Management has notidentified any other loans which it has serious doubts as to the ability of theborrower to comply with the present repayment terms.

 

9

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The following table showsthe allocation of the allowance for credit losses at the dates indicated.  The allocation of portions of the allowanceto specific categories of loans is not intended to be indicative of futurelosses, and does not restrict the use of the allowance to absorb losses in any categoryof loans.

 

**ALLOWANCE FOR LOAN LOSSES BY CATEGORY**

 
| ** **               | ** ** | **December 31, 2007**  | ** ** | **December 31, 2006**                                                            | ** ** | **December 31, 2005**  | ** ** |
|--------------------------|------------|----------------------------------|------------|--------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **(In thousands)**       | ** ** | **Allocated  Allowance  Amount** | ** ** | **% of Loans in  each Category  to Total Loans  Receivable** | ** ** | **Allocated  Allowance  Amount** | ** ** | **% of Loans in  each Category to  Total Loans  Receivable** | ** ** | **Allocated  Allowance  Amount** | ** ** | **% of Loans in  each Category  to Total Loans  Receivable** | ** ** |
| ** **               | ** ** | ** **                       | ** ** | ** **                                                                                 | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Commercial loans         |       | 1,284                            |       | 42.3                                                                                       | %          | 642                              |       | 46.8 | % | 784 |   | 50.0 | % |
| Real estate loans        |       | 273                              |       | 57.7                                                                                       | %          | —                           |       | 53.2 | % | — |   | 50.0 | % |
| Unallocated to loan type |       | 108                              |       | —                                                                                     |       | 972                              |       | — |   | 831 |   | — |   |
|                     |       | $                                | 1,665      |                                                                                       | 100.0      | %                                | $          | 1,614 |   | 100.0 | % | $ | 1,615 |   | 100.0 | % |
|                          |            |                                  |            |                                                                                            |            |                                  |            |  |  |  |  |  |  |  |  |  |

 

The loan portfolio is thelargest component of earning assets and accounts for the greatest portion oftotal interest income. At December 31, 2007, gross loans were $126.4 million,a 30.6% increase from the amount at December 31, 2006. At December 31,2006, gross loans including 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. Ingeneral, loans consist of internally generated loans and participation loanspurchased from other local community banks. Lending activity is confined to the Bank’s market area. The stronggrowth is attributable to the satisfactory culmination of efforts to attractquality credits; there has been no dilution of credit underwriting standards.The Bank does not engage in foreign lending activities.

 

The following table setsforth information on the composition of the loan portfolio by type (includingloans held for sale):

 

**LOANS AS OF:**

 
| ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | **December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------|------------|------------|------------|-----------------------|------------|------------|------------|------------|------------|------------|------------|
| **(In thousands)**             | ** ** | **2007**   | ** ** | **%**      | ** ** | **2006**              | ** ** | **%**      | ** ** | **2005**   | ** ** | **%**      | ** ** |
| ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Commercial loans                    |       | $          | 53,437     |       | 42.3       | %                     | $          | 45,350     |       | 46.8       | %          | $          | 38,555     |   | 50.0 | % |
| Real estate loans                   |       | 72,933     |       | 57.7       | %          | 51,461                |       | 53.2       | %          | 38,516     |       | 50.0       | %          |
|                                |       | 126,370    |       | 100        | %          | 96,811                |       | 100        | %          | 77,071     |       | 100        | %          |
|                                |       |       |       |       |       |                  |       |       |       |       |       |       |       |
| Unearned loan fees and costs, net   |       | (35        | )          |       |       | (116                  | )          |       |       | (89        | )          |       |       |
| Allowance for loan and lease losses |       | (1,665     | )          |       |       | (1,614                | )          |       |       | (1,615     | )          |       |       |
|                                |       | $          | 124,670    |       |       |                  | $          | 95,081     |       |       |       | $          | 75,367     |   |   |   |

 

The table belowsets forth the maturity distributions of the loan receivable portfolio as of December 31,2007. The table does not reflect loan re-pricing dates.

 

**LOAN MATURITIES AS OF DECEMBER 31, 2007**

 
| **(In thousands)**           | ** ** | **1 year  or less** | ** ** | **1-5 years** | ** ** | **After  5 years** | ** ** | **Total**  | ** ** |
|-----------------------------------|------------|-------------------------------|------------|--------------------|------------|-------------------------|------------|------------|------------|
| ** **                        | ** ** | ** **                    | ** ** | ** **         | ** ** | ** **              | ** ** | ** ** | ** ** |
| **Maturity of Loans Receivable:** |       |                          |       |               |       |                    |       |       |       |
| Commercial loans                  |       | $                             | 38,072     |               | $          | 7,657                   |       | $          | 7,708      |   | $ | 53,437 |   |
| Real estate loans                 |       | 26,060                        |       | 10,657             |       | 36,216                  |       | 72,933     |       |
| Total loans receivable            |       | $                             | 64,132     |               | $          | 18,314                  |       | $          | 43,924     |   | $ | 126,370 |   |

 

10

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**LOANMATURITIES AS OF DECEMBER 31, 2007**

 
| **(In thousands)**                | ** ** | **1 year  or less** | ** ** | **1-5 years** | ** ** | **After  5 years** | ** ** | **Total**  | ** ** |
|----------------------------------------|------------|-------------------------------|------------|--------------------|------------|--------------------|------------|------------|------------|
| ** **                             | ** ** | ** **                    | ** ** | ** **         | ** ** | ** **         | ** ** | ** ** | ** ** |
| Fixed interest rates                   |       | $                             | 12,308     |               | $          | 15,318             |       | $          | 35,725     |   | $ | 63,351 |   |
| Floating and adjustable interest rates |       | 51,824                        |       | 2,996              |       | 8,199              |       | 63,019     |       |
| Total loans receivable                 |       | $                             | 64,132     |               | $          | 18,314             |       | $          | 43,924     |   | $ | 126,370 |   |

 

**Investments**

 

The table below presentsthe composition and carrying amounts of securities in the investment securitiesportfolio, all of which are classified as available-for-sale and thus recordedat fair value, and investments in restricted stock, recorded at cost, as of December 31,2007, 2006 and 2005.

 
| **(In thousands)** | ** ** | **December 31,  2007** | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | ** **                  | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Investment securities:  |       |                        |       |                        |       |                        |       |
| U.S Treasuries          |       | $                           | 9,168      |                        | $          | 11,013                      |       | $ | 10,874 |   |
| Restricted stock:       |       |                        |       |                        |       |                        |       |
| Federal reserve stock   |       | 405                         |       | 405                         |       | 402                         |       |
| Corporate equities      |       | 62                          |       | 62                          |       | 62                          |       |
| Total securities        |       | $                           | 9,635      |                        | $          | 11,480                      |       | $ | 11,338 |   |

 

The tables below show thematurities and average weighted yields for the securities portfolio at December 31,2007.

 
| ** **              | ** ** | **After one but within** | ** ** |
|-------------------------|------------|-----------------------------------------|------------|
| ** **              | ** ** | **Within one year**           | ** ** | **five years** | ** ** | **No Maturity** | ** ** |
| **(In thousands)** | ** ** | **Amount**                              | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** | **Amount** | ** ** | **Yield** | ** ** |
|                    |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Amortized cost basis:   |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Treasuries         |       | $                                       | 3,005      |   | 4.45 | % | $ | 6,021 |   | 4.47 | % | $ | — |   |   |   |
| Restricted stock        |       | —                                  |       | — |   | — |   |   |   | 467 |   | 5.39 | % |
| Total securities        |       | $                                       | 3,005      |   | 4.45 | % | $ | 6,021 |   | 4.47 | % | $ | 467 |   | 5.39 | % |
|                    |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Carrying Value:         |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| U.S. Treasuries         |       | $                                       | 3,039      |   |   |   | $ | 6,129 |   |   |   | $ | — |   |   |   |
| Restricted stock        |       | —                                  |       |   |   | — |   |   |   | 467 |   |   |   |
| Total securities        |       | $                                       | 3,039      |   |   |   | $ | 6,129 |   |   |   | $ | 467 |   |   |   |

 

AtDecember 31, 2007, 2006 and 2005, there were no issuers, other than theU.S. Government, whose securities owned by the Company have a book or marketvalue exceeding ten percent of the Company’s stockholders’ equity.

 

**Non-interestIncome**

 

Non-interest income principally consists of gainsfrom the sale of the guaranteed portion of Small Business Administration loansand from deposit account services charges.

 

For the years ended December 31, 2007, 2006and 2005, gains from the sales of SBA loans amounted to $344 thousand, $300thousand and $330 thousand, respectively. The guaranteed portion of most SBA loans is usuallysold to 

 

11

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others resulting in gains on the sales. The volume of loan sales andresultant gains will vary depending of the volume of originations of loans withSBA guarantees and the pricing of the sales of the loans.

 

For the year ended December 31, 2007, depositaccount services charges amounted to $276 thousand as compared to $332 thousandand $295 thousand for the years ended December 31, 2006 and 2005,respectively. The decline in 2007 is primarily attributable to fewer customerchecks presented against accounts with insufficient funds to pay the checks andreduced service charges to accounts resulting from issues relating to the dataprocessing conversion.

 

##### **Non-interest Expense**

##### ** **

Non-interestexpense totaled $4.7 million for the year ended December 31, 2007 ascompared to $3.6 million in 2006 and $2.8 million in 2005. In each period,salary and benefit expense was the largest component: $2.6 million, $2.2million and $1.7 million in 2007, 2006 and 2005, respectively. The expenseincreases are attributable to additional personnel required by the Bank’sbranch expansion (the Bank has opened three branches since June of 2006) andnormal salary increases. The increase in the non-interest expenses were theresult of the growth of the Bank’s loan portfolio, and expenses associated withconversion to a new internet banking platform and the conversion to theMetavante Bankway core processing system in 2007.

 

**IncomeTaxes**

 

The Company uses theliability method of accounting for income taxes as required by SFAS No.109,*Accounting for Income Taxes*.  Under the liability method, deferred taxassets and liabilities are determined based on differences between thefinancial statement carrying amounts and the enacted rates that will be ineffect when these differences reverse. Income tax expense for 2007 was $694 thousand (39.0% of pretax income),$774 thousand (37.6% of pretax income) in 2006 and $658 thousand (38.9% ofpretax income) in 2005.

 

**Deposits and LiquidityManagement**

** **

Liquidity is a measure ofthe Company’s ability to meet the demands required for the funding of loans andto meet depositors’ requirements for use of their funds. The Company’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.

 

At December 31,2007, management considers the Company’s liquidity position to be satisfactory.At December 31, 2007, the Company’s principal sources of liquidity, asdefined, approximated $14.9 million and represented 10.0% of total Companyassets. Continued strong growth in deposits will be required to fund loangrowth. Accordingly, the Company intends to maintain a competitive posture inits 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 Company’sprincipal sources of funds are deposits, consisting of demand deposits, NOWaccounts, money market accounts, savings accounts and certificates of depositfrom the local market area,.  Theseaccounts provide the Company with a relatively stable source of funds. Wegenerally target larger deposit relationships by offering competitive interestrates on certificates of deposit of $100,000 or more in our local markets. Wesupplement our local deposits with out-of-area deposits obtained through theuse of brokers. As a result, a substantial portion of our deposits, 71.1% at December 31,2007, are comprised of deposit accounts of $100 thousand or more. The bank’suse of larger denomination certificates of deposit, including brokered funds,facilitates funding the rapid growth in the loan portfolio. The Bank has usedsuch certificates of deposits as a funding source since its inception. Whilesometimes requiring higher interest rates, such funds carry lower acquisitioncosts (marketing, overhead costs) and can be obtained when required at thematurity dates desired. Most of these deposits are fully insured by the FDIC.This insurance and the strong capital position of the Bank reduce thelikelihood of large deposit withdrawals for reasons other than interest ratecompetition. Interest rates on these deposits can be higher than other depositsproducts. There is, however, a risk that some deposits would be lost if rateswere to increase and the Bank elected not to remain competitive with its owndeposit rates. Under those conditions, the Bank believes that it is positionedto use other sources of funds, such as borrowing on its unsecured creditfacilities with other banks or the sale of investment securities or borrowingusing the securities as collateral, to offset a decline in deposits in theshort run.

 

12

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Interest bearing depositsare summarized below as of December 31:

 
| **(In thousands)** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|----------|------------|
|                    |       |     |       |     |       |     |       |
| NOW accounts            |       | $        | 2,440      |     | $          | 3,069    |       | $ | 6,331 |   |
| Money market  accounts  |       | 16,268   |       | 14,687   |       | 17,248   |       |
| Savings accounts        |       | 36       |       | 89       |       | 402      |       |
| Time deposit  accounts: |       |     |       |     |       |     |       |
| Less than  $100,000     |       | 11,383   |       | 9,369    |       | 5,559    |       |
| $100,000 or more        |       | 74,035   |       | 65,977   |       | 40,697   |       |
|                    |       | $        | 104,162    |     | $          | 93,190   |       | $ | 70,237 |   |

 

The time deposit accountsmature and/or re-price as follows: within one year - $39 million; one to threeyears - $46 million; over three years $198 thousand.

 

The table below shows thematurities and amounts of time certificates in amounts of $100,000 or more at December 31,2007 and 2006.

 
| ** **                             | ** ** | **December 31,** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| **(In thousands)**                | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                                   |       |                  |       |   |   |
| Three months or less                   |       | $                     | 11,933     |   | $ | 16,273 |   |
| Over three but within twelve months    |       | 20,686                |       | 12,381 |   |
| Over twelve months through three years |       | 41,416                |       | 37,323 |   |
| Total                                  |       | $                     | 74,035     |   | $ | 65,977 |   |

 

Also, the Bank entersinto sales of securities under agreements to repurchase the same securities,which mature the next business day, with several commercial customers. Althoughthe funds derived from these sales are not deposit liabilities, they arenonetheless an ongoing source of core funding and contribute to the Bank’sliquidity management.

 

Information concerningsecurities sold under agreements to repurchase at and during the year ended December 31,2007 and 2006 is summarized as follows:

 
| ** **                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Total  outstanding at year-end         |       | $        | 4,305,936  |     | $          | 9,579,116 |   |
| Average rate at  year end              | * *   | *2.40*   | *%*        | *2.65*   | *%*        |
| Average balance  during the year       |       | $        | 3,494,779  |     | $          | 4,994,048 |   |
| Average interest  rate during the year | * *   | *2.62*   | *%*        | *2.56*   | *%*        |
| Maximum amount  at any month end       |       | $        | 9,492,000  |     | $          | 10,349,000 |   |

 

The Bank has receivedapproval of unsecured credit facilities for short-term liquidity needs fromfinancial   institutions of $8,500,000 at December 31, 2007and 2006.  There were no borrowingsoutstanding under these credit arrangements at December 31, 2007 and 2006.

 

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

 

**Off-Balance Sheet Arrangements**

** **

With the exception of theBank’s obligations in connection with its irrevocable letters of credit andloan commitments, the Bank has no off-balance sheet arrangements that have orare reasonably likely to have a current or future effect on the Bank’sfinancial condition, changes in financial condition, revenues or expenses,results of operations, liquidity, capital expenditures, or capital resources,that is material to investors. For additional information on off-balance sheetarrangements, please see the notes to the Consolidated Financial Statements.

 

13

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**Interest Rate Risk Management**

 

Banks and other financialinstitutions are dependent upon net interest income, the difference betweeninterest earned on interest earning assets and interest paid on interestbearing liabilities. Changes in interest rates inevitably have an impact oninterest income. GAP, a measure of the difference in volume between interestbearing assets and interest bearing liabilities, is a means of monitoring thesensitivity of a financial institution to changes in interest rates. The chartbelow provides an indicator of the rate sensitivity of the Company.  A positive GAP indicates the degree to whichthe volume of repriceable assets exceeds repriceable liabilities in particulartime periods.  The Company has a positiveGAP, an asset sensitive position, during for a one year period which wouldgenerally indicate increased net interest income in a rising rate environmentand 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 or liabilitywill occur. The Company will be addressing the current positive GAP level forthe purpose of reducing its exposure to interest rate changes.

 

**RATE SENSITIVITY ANALYSIS (Static GAP)**

 
| ** **                       | ** ** | **December 31, 2007** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------|------------|---------------------------------|------------|------------|------------|------------|------------|
| ** **                       | ** ** | **0-3**                         | ** ** | **4-12**   | ** ** | **1-3**    | ** ** | **>3<5** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(In thousands)**          | ** ** | **Months**                      | ** ** | **Months** | ** ** | **Years**  | ** ** | **Years** | ** ** | **5 YRS +** | ** ** | **Total** | ** ** |
| **Interest earning assets**      |       |                            |       |       |       |       |       |   |   |   |   |   |   |
| Federal funds sold               |       | $                               | 8,723      |       | $          | —     |       | $ | — |   | $ | — |   | $ | — |   | $ | 8,723 |   |
| Securities, at cost              |       | —                          |       | 3,005      |       | 6,021      |       | — |   | — |   | 9,026 |   |
| Loans*                           |       | 64,577                          |       | 5,346      |       | 18,286     |       | 29,207 |   | 7,830 |   | 125,246 |   |
| Total                            |       | 73,300                          |       | 8,351      |       | 24,307     |       | 29,207 |   | 7,830 |   | 142,995 |   |
| **Interest bearing liabilities** |       |                            |       |       |       |       |       |   |   |   |   |   |   |
| Savings/Money                    |       |                            |       |       |       |       |       |   |   |   |   |   |   |
| Market/NOW                       |       | 18,744                          |       | —     |       | —     |       | — |   | — |   | 18,744 |   |
| Certificates of deposit          |       | 13,631                          |       | 25,440     |       | 46,148     |       | 200 |   | — |   | 85,419 |   |
| Repurchase agreements            |       | 4,306                           |       | —     |       | —     |       | — |   | — |   | 4,306 |   |
| Total                            |       | 36,681                          |       | 25,440     |       | 46,148     |       | 200 |   | — |   | 108,469 |   |
|                             |       |                            |       |       |       |       |       |   |   |   |   |   |   |
| **GAP:**                         |       |                            |       |       |       |       |       |   |   |   |   |   |   |
| Period                           |       | $                               | 36,619     |       | (17,089    | )          | (21,841    | ) | 29,007 |   | 7,830 |   | $ | 34,526 |   |
| Cumulative                       |       |                            |       | $          | 19,530     |       | $          | (2,311 | ) | $ | 26,696 |   | $ | 34,526 |   |   |   |

 

----

**Loan amounts above exclude loans on non-interest accrual of $1,125thousand and deferred fees of $36 thousand.*

 

**Capital Resources and Adequacy**

 

The assessment of capitaladequacy depends on a number of factors such as asset quality, liquidity,earnings performance, and changing competitive conditions and economicforces.  The adequacy of the Company’scapital 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.

 

Under recent guidance bythe federal banking regulators, banks which have concentrations inconstruction, land development or commercial real estate loans (other thanloans for majority owner occupied properties) would be expected 

 

14

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to maintain higher levelsof risk management and, potentially, higher levels of capital.  It is possible that we may be required tomaintain higher levels of capital than we would otherwise be expected tomaintain as a result of our levels of construction, development and commercialreal estate loans, which may require us to obtain additional capital.

 

The capital positions ofthe Company and the Bank continue to meet and exceed regulatory requirements.Details of these requirements are shown in the notes to the ConsolidatedFinancial Statements.

 

**Market for Common Stock and Dividends**

 

Since March 1, 2005, the Company’s Common Stock has been listed fortrading on the NASDAQ Capital Market (formerly known as The NASDAQ Small CapMarket) under the symbol “CFMB.”  Priorto that date, the Company’s Common Stock was not traded on any organizedexchange, including The NASDAQ Stock Market. The following table sets forth thehigh and low sales prices for the Common Stock during each calendar quartersince the second quarter of 2005, the first full quarter during which theCommon Stock was listed on the Nasdaq Capital Market.  For prior periods, high and low bid pricesare shown. These quotations reflect inter-dealer prices, without retail markup,markdown or commission, and may not represent actual transactions. Thesequotations do not necessarily reflect the intrinsic or market values of theCommon Stock.  As of December 31,2007, there were 1,820,548 shares of Common Stock outstanding, held byapproximately 275 shareholders of record.

 
| ** **     | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------|------------|----------|------------|----------|------------|----------|------------|
| ** **     | ** ** | **High** | ** ** | **Low**  | ** ** | **High** | ** ** | **Low** | ** ** | **High** | ** ** | **Low** | ** ** |
| First Quarter  |       | $        | 14.25      |     | $          | 13.16    |       | $ | 15.00 |   | $ | 13.14 |   | $ | 13.50 |   | $ | 11.50 |   |
| Second Quarter |       | 16.00    |       | 13.38    |       | 14.95    |       | 14.25 |   | 11.90 |   | 11.00 |   |
| Third Quarter  |       | 13.75    |       | 12.50    |       | 15.00    |       | 13.50 |   | 12.70 |   | 11.41 |   |
| Fourth Quarter |       | 13.75    |       | 11.00    |       | 14.58    |       | 13.20 |   | 14.00 |   | 12.25 |   |
|                |            |          |            |          |            |          |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The Company hasnot paid dividends through December 31, 2007. The payment of dividends by the Company will depend largely upon theability of the Bank, its sole operating business, to declare and pay dividendsto the Company.  Regulations of theFederal Reserve Board and Maryland law place limits on the amount of dividendsthe Bank may pay to the Company without prior approval.  Prior regulatory approval is required to paydividends which exceed the Bank’s net profits for the current year plus itsretained net profits for the preceding two calendar years, less requiredtransfers to surplus.  Additionally,without prior approval, the Bank may pay dividends only out of its undividedprofits. Even if the Bank and the Company have earnings in an amount sufficientto pay dividends, the Board of Directors may determine to retain earnings forthe purpose of funding the growth of the Company and the Bank.

 

### **Financial Statements**

### ** **

The audited financial statements for the Company as of December 31,2007 and 2006 and for each of the years in the three-year period ended December 31,2007 are included herewith.

 

15

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****

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM

 

The Board ofDirectors

CommerceFirstBancorp, Inc. and Subsidiary

Annapolis, Maryland

 

We have auditedthe accompanying consolidated statement of financial condition of CommerceFirstBancorp, Inc. and subsidiary as of December 31,2007 and 2006, and the related consolidated statement of operations,comprehensive income, changes in stockholders’ equity and cash flows for eachof the years in the three-year period ended December 31, 2007. CommerceFirst Bancorp, Inc. and subsidiary’s management isresponsible for these consolidated financial statements.  Our responsibility is to express an opinionon these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether theconsolidated financial statements are free of material misstatement.  The Company is not required to have, nor werewe engaged to perform, an audit of its internal control over financialreporting.  Our audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the consolidated financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of CommerceFirst Bancorp, Inc.and subsidiary as of December 31,2007 and 2006, and the consolidated results of their operations andtheir consolidated cash flows for each of the years in the three-year periodended December 31, 2007 inconformity with accounting principles generally accepted in the United Statesof America.

 

/s/ Trice Geary &Myers LLC

 

Salisbury, Maryland

March 3, 2008

 

16

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**CommerceFirst Bancorp, Inc.and Subsidiary**

**Consolidated Statements of Financial Condition**

**December 31, 2007 and December 31, 2006**

** **
| ** **                                                                                                                                                                | ** ** | **December 31,  2007** | ** **  | **December 31,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                |       |                        |        |                        |       |
|                                                                                                                                                                      |       |                        |        |                        |       |
| Cash and due  from banks                                                                                                                                                  |       | $                           | 3,001,573   |                        | $          | 3,689,487 |   |
| Federal funds  sold                                                                                                                                                       |       | 8,723,315                   |        | 28,665,993                  |       |
| Cash and cash  equivalents                                                                                                                                                |       | 11,724,888                  |        | 32,355,480                  |       |
| Investment  securities – available-for-sale, at fair value                                                                                                           |       | 9,167,700                   |        | 11,012,774                  |       |
| Investments in  restricted stocks, at cost                                                                                                                                |       | 467,000                     |        | 467,000                     |       |
| Loans  receivable, net of allowance for loan losses of $1,665,000 at  December 31, 2007 and $1,613,693 at December 31, 2006                                     |       | 124,669,790                 |        | 95,080,787                  |       |
| Premises and  equipment, net                                                                                                                                              |       | 1,097,927                   |        | 578,024                     |       |
| Accrued interest  receivable                                                                                                                                              |       | 742,766                     |        | 654,044                     |       |
| Deferred income  taxes                                                                                                                                                    |       | 551,882                     |        | 549,021                     |       |
| Other assets                                                                                                                                                              |       | 388,630                     |        | 572,641                     |       |
| Total Assets                                                                                                                                                              |       | $                           | 148,810,583 |                        | $          | 141,269,771 |   |
|                                                                                                                                                                      |       |                        |        |                        |       |
| **LIABILITIES**                                                                                                                                                           |       |                        |        |                        |       |
|                                                                                                                                                                      |       |                        |        |                        |       |
| Non-interest  bearing deposits                                                                                                                                            |       | $                           | 19,245,887  |                        | $          | 19,014,612 |   |
| Interest bearing  deposits                                                                                                                                                |       | 104,161,959                 |        | 93,190,128                  |       |
| Total deposits                                                                                                                                                            |       | 123,407,846                 |        | 112,204,740                 |       |
|                                                                                                                                                                      |       |                        |        |                        |       |
| Securities sold  under agreements to repurchase                                                                                                                           |       | 4,305,936                   |        | 9,579,116                   |       |
| Accrued interest  payable                                                                                                                                                 |       | 201,253                     |        | 175,839                     |       |
| Other  liabilities                                                                                                                                                        |       | 839,187                     |        | 623,091                     |       |
| Total Liabilities                                                                                                                                                         |       | 128,754,222                 |        | 122,582,786                 |       |
|                                                                                                                                                                      |       |                        |        |                        |       |
| **STOCKHOLDERS’  EQUITY**                                                                                                                                            |       |                        |        |                        |       |
| Common stock -  $.01 par value; authorized 4,000,000 shares. Issued and outstanding:  1,820,548 shares at December 31, 2007 and 1,803,583 at December 31,  2006 |       | 18,205                      |        | 18,036                      |       |
| Additional  paid-in capital                                                                                                                                               |       | 17,852,931                  |        | 17,683,450                  |       |
| Retained  earnings                                                                                                                                                        |       | 2,097,967                   |        | 1,010,153                   |       |
| Accumulated  other comprehensive income (loss):                                                                                                                           |       |                        |        |                        |       |
| Net unrealized  gain (loss) on securities available-for-sale                                                                                                              |       | 87,258                      |        | (24,654                     | )          |
| Total  Stockholders’ Equity                                                                                                                                          |       | 20,056,361                  |        | 18,686,985                  |       |
| Total  Liabilities and Stockholders’ Equity                                                                                                                          |       | $                           | 148,810,583 |                        | $          | 141,269,771 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

17

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**CommerceFirst Bancorp, Inc. and Subsidiary**

**ConsolidatedStatements of Operations**

**For theYears Ended December 31, 2007, 2006 and 2005**

 
| ** **                                           | ** ** | **December 31,  2007** | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Interest income:                                     |       |                        |       |                        |       |                        |       |
| Interest and  fees on loans                          |       | $                           | 9,680,244  |                        | $          | 7,451,852                   |       | $ | 4,949,541 |   |
| U.S. Treasury  securities                            |       | 434,685                     |       | 251,378                     |       | 275,168                     |       |
| Investment in  stocks                                |       | 25,153                      |       | 25,087                      |       | 20,923                      |       |
| Federal funds  sold                                  |       | 682,783                     |       | 477,785                     |       | 393,253                     |       |
| Total interest  income                               |       | 10,822,865                  |       | 8,206,102                   |       | 5,638,885                   |       |
| Interest expense:                                    |       |                        |       |                        |       |                        |       |
| Deposits                                             |       | 4,775,274                   |       | 2,773,737                   |       | 1,402,736                   |       |
| Repurchase  agreements                               |       | 91,605                      |       | 127,863                     |       | 35,993                      |       |
| Federal funds  purchased                             |       | —                      |       | 3,876                       |       | —                      |       |
| Total interest  expense                              |       | 4,866,879                   |       | 2,905,476                   |       | 1,438,729                   |       |
| Net interest  income                                 |       | 5,955,986                   |       | 5,300,626                   |       | 4,200,155                   |       |
|                                                 |       |                        |       |                        |       |                        |       |
| Provision for  loan losses                           |       | 45,383                      |       | 225,000                     |       | 360,000                     |       |
| Net interest  income after provision for loan losses |       | 5,910,603                   |       | 5,075,626                   |       | 3,840,155                   |       |
|                                                 |       |                        |       |                        |       |                        |       |
| Non-interest  income:                                |       |                        |       |                        |       |                        |       |
| Gain on sale of  SBA loans                           |       | 344,421                     |       | 300,443                     |       | 329,887                     |       |
| Service charges  and other income                    |       | 276,433                     |       | 332,443                     |       | 294,634                     |       |
| Total  non-interest income                           |       | 620,854                     |       | 632,886                     |       | 624,521                     |       |
|                                                 |       |                        |       |                        |       |                        |       |
| Non-interest  expenses:                              |       |                        |       |                        |       |                        |       |
| Compensation and  benefits                           |       | 2,646,492                   |       | 2,210,744                   |       | 1,732,805                   |       |
| Legal and  professional                              |       | 221,479                     |       | 174,990                     |       | 111,576                     |       |
| Rent and  occupancy                                  |       | 500,911                     |       | 329,989                     |       | 254,199                     |       |
| Marketing and  business development                  |       | 107,617                     |       | 111,850                     |       | 53,196                      |       |
| Core processing  conversion                          |       | 117,227                     |       | —                      |       | —                      |       |
| Insurance                                            |       | 42,433                      |       | 41,858                      |       | 33,953                      |       |
| Data processing                                      |       | 112,287                     |       | 83,230                      |       | 72,161                      |       |
| Support services                                     |       | 132,546                     |       | 154,161                     |       | 164,403                     |       |
| Communications                                       |       | 106,260                     |       | 33,523                      |       | 13,053                      |       |
| Office supplies                                      |       | 101,406                     |       | 90,470                      |       | 42,810                      |       |
| SBA interest  strip amortization                     |       | 61,413                      |       | 79,835                      |       | 24,457                      |       |
| Depreciation and  amortization                       |       | 233,681                     |       | 119,565                     |       | 83,331                      |       |
| Other                                                |       | 365,386                     |       | 221,970                     |       | 187,158                     |       |
| Total  non-interest expenses                         |       | 4,749,138                   |       | 3,652,185                   |       | 2,773,102                   |       |
| Income before  income taxes                          |       | 1,782,319                   |       | 2,056,327                   |       | 1,691,575                   |       |
| Income tax  expense                                  |       | 694,505                     |       | 773,799                     |       | 658,155                     |       |
| Net income                                           |       | $                           | 1,087,814  |                        | $          | 1,282,528                   |       | $ | 1,033,420 |   |
| Basic earnings  per share                            |       | $                           | 0.60       |                        | $          | 0.71                        |       | $ | 0.63 |   |
| Diluted earnings  per share                          |       | $                           | 0.59       |                        | $          | 0.69                        |       | $ | 0.62 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

18

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**CommerceFirst Bancorp, Inc. and Subsidiary**

**ConsolidatedStatements of Comprehensive Income**

**For theYears Ended December 31, 2007, 2006 and 2005**

** **
| ** **                                                                            | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                            | ** ** | **2007**              | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| Net income                                                                            |       | $                     | 1,087,814  |                  | $          | 1,282,528             |       | $ | 1,033,420 |   |
|                                                                                  |       |                  |       |                  |       |                  |       |
| Change in  unrealized gains and (losses) on securities available-for-sale, net of tax |       | 111,912               |       | 41,383                |       | (38,698               | )          |
| Total  comprehensive income                                                           |       | $                     | 1,199,726  |                  | $          | 1,323,911             |       | $ | 994,722 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

19

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**CommerceFirst Bancorp, Inc. and Subsidiary**

**ConsolidatedStatements of Stockholders’ Equity**

**For theYears Ended December 31, 2007, 2006 and 2005**

** **
| ** **                                                                    | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **(Deficit)/  Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total**  | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------------------|------------|-----------------------------------------------------------|------------|------------|------------|
|                                                                          |       |              |       |                             |       |                               |       |                                                      |       |       |       |
| Balance  December 31, 2004                                               |       | $                 | 8,223      |                             | $          | 8,099,012                          |       | $                                                         | (1,305,795 | )          | $          | (27,339 | ) | $ | 6,774,101 |   |
|                                                                          |       |              |       |                             |       |                               |       |                                                      |       |       |       |
| Net income in  2005                                                           |       |              |       |                             |       | 1,033,420                          |       |                                                      |       | 1,033,420  |       |
|                                                                          |       |              |       |                             |       |                               |       |                                                      |       |       |       |
| Net change in  unrealized gains and (losses) on securities available-for-sale |       |              |       |                             |       |                               |       | (38,698                                                   | )          | (38,698    | )          |
|                                                                          |       |              |       |                             |       |                               |       |                                                      |       |       |       |
| Issuance of  common stock, net of costs                                       |       | 9,813             |       | 9,584,438                        |       |                               |       |                                                      |       | 9,594,251  |       |
| Balance  December 31, 2005                                               |       | 18,036            |       | 17,683,450                       |       | (272,375                           | )          | (66,037                                                   | )          | 17,363,074 |       |
|                                                                          |       |              |       |                             |       |                               |       |                                                      |       |       |       |
| Net income in  2006                                                           |       |              |       |                             |       | 1,282,528                          |       |                                                      |       | 1,282,528  |       |
|                                                                          |       |              |       |                             |       |                               |       |                                                      |       |       |       |
| Net change in  unrealized gains and (losses) on securities available-for-sale |       |              |       |                             |       |                               |       | 41,383                                                    |       | 41,383     |       |
| Balance  December 31, 2006                                               |       | 18,036            |       | 17,683,450                       |       | 1,010,153                          |       | (24,654                                                   | )          | 18,686,985 |       |
|                                                                          |       |              |       |                             |       |                               |       |                                                      |       |       |       |
| Net income in  2007                                                           |       |              |       |                             |       | 1,087,814                          |       |                                                      |       | 1,087,814  |       |
|                                                                          |       |              |       |                             |       |                               |       |                                                      |       |       |       |
| Net change in  unrealized gains and (losses) on securities available-for-sale |       |              |       |                             |       |                               |       | 111,912                                                   |       | 111,912    |       |
|                                                                          |       |              |       |                             |       |                               |       |                                                      |       |       |       |
| Proceeds from  warrant exercises                                              |       | 169               |       | 169,481                          |       |                               |       |                                                      |       | 169,650    |       |
| Balance  December 31, 2007                                               |       | $                 | 18,205     |                             | $          | 17,852,931                         |       | $                                                         | 2,097,967  |       | $          | 87,258 |   | $ | 20,056,361 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

20

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**CommerceFirst Bancorp, Inc. and Subsidiary**

**ConsolidatedStatement of Cash Flows**

**For theYears Ended December 31, 2007, 2006 and 2005**

 
| ** **                                                                               | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                               | ** ** | **2007**              | ** ** | **2006**              | ** ** | **2005**              | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES                                                    |       |                  |       |                  |       |                  |       |
| Net income                                                                               |       | $                     | 1,087,814  |                  | $          | 1,282,528             |       | $ | 1,033,420 |   |
| Adjustments to  reconcile net income to net cash                                         |       |                  |       |                  |       |                  |       |
| provided by  operations:                                                                 |       |                  |       |                  |       |                  |       |
| Depreciation and  amortization                                                           |       | 233,681               |       | 89,915                |       | 20,411                |       |
| Provision for  loan losses                                                               |       | 45,383                |       | 225,000               |       | 360,000               |       |
| Provision for  losses on unfunded commitments                                            |       | 6,000                 |       | 6,000                 |       | 6,000                 |       |
| Deferred income  taxes                                                                   |       | (70,463               | )          | 81,497                |       | 244,182               |       |
| Change in assets  and liabilities:                                                       |       |                  |       |                  |       |                  |       |
| Increase in  accrued interest receivable                                                 |       | (88,722               | )          | (247,190              | )          | (172,908              | )          |
| Decrease in loans held for sale                                                          |       | —                |       | 323,066               |       | 435,990               |       |
| Decrease  (increase) in other assets                                                     |       | 184,011               |       | (252,947              | )          | (73,402               | )          |
| Increase in accrued interest payable                                                     |       | 25,414                |       | 116,927               |       | 22,500                |       |
| Increase  (decrease) in other liabilities                                                |       | 210,096               |       | (328,303              | )          | 612,777               |       |
| Other                                                                                    |       | 21,776                |       | —                |       | —                |       |
| Net cash  provided by operating activities                                               |       | 1,654,990             |       | 1,296,493             |       | 2,488,970             |       |
|                                                                                     |       |                  |       |                  |       |                  |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                                    |       |                  |       |                  |       |                  |       |
| Investment in  securities – available for sale                                      |       | (2,997,188            | )          | (6,046,875            | )          | (11,891,160           | )          |
| Maturities of  investment securities                                                     |       | 5,000,000             |       | 6,000,000             |       | 6,000,000             |       |
| Investment in  stocks- FRB stock                                                         |       | —                |       | (2,550                | )          | (206,550              | )          |
| Increase in  loans, net                                                                  |       | (29,634,386           | )          | (20,262,216           | )          | (24,386,152           | )          |
| Purchase of  premises and equipment                                                      |       | (753,584              | )          | (533,205              | )          | (62,884               | )          |
| Net cash used by  investing activities                                                   |       | (28,385,158           | )          | (20,844,846           | )          | (30,546,746           | )          |
|                                                                                     |       |                  |       |                  |       |                  |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES                                                    |       |                  |       |                  |       |                  |       |
| Increase (decrease) in non-interest bearing deposits, net                                |       | 231,275               |       | 1,083,765             |       | (2,760,468            | )          |
| Net increase in other deposits                                                           |       | 10,971,831            |       | 22,953,628            |       | 25,198,865            |       |
| Net increase  (decrease) in securities sold under agreements to repurchase               |       | (5,273,180            | )          | 3,568,894             |       | 2,923,772             |       |
| Issuance of  common stock, net of costs of $709,746                                      |       | —                |       | —                |       | 9,594,251             |       |
| Exercise of  warrants to purchase common stock                                           |       | 169,650               |       | —                |       | —                |       |
| Net cash  provided by financing activities                                               |       | 6,099,576             |       | 27,606,287            |       | 34,956,420            |       |
|                                                                                     |       |                  |       |                  |       |                  |       |
| Net increase  (decrease) in cash and cash equivalents                                    |       | (20,630,592           | )          | 8,057,934             |       | 6,898,644             |       |
| Cash and cash equivalents at beginning of period                                         |       | 32,355,480            |       | 24,297,546            |       | 17,398,902            |       |
| Cash and cash  equivalents at end of period                                              |       | $                     | 11,724,888 |                  | $          | 32,355,480            |       | $ | 24,297,546 |   |
|                                                                                     |       |                  |       |                  |       |                  |       |
| SUPPLEMENTAL  CASH FLOW INFORMATION                                                      |       |                  |       |                  |       |                  |       |
| Interest paid                                                                            |       | $                     | 4,841,465  |                  | $          | 2,788,549             |       | $ | 1,416,229 |   |
| Total increase  (decrease) in unrealized gains (losses) on available for sale securities |       |                  |       |                  |       |                  |       |
|                                                                                     |       | $                     | 179,514    |                  | $          | 62,702                |       | $ | (58,633 | ) |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

21

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**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**Note 1.  TheCompany and its Significant Accounting Policies**

 

CommerceFirstBancorp, Inc. (the “Company”), through its wholly owned subsidiary,CommerceFirst Bank (the “Bank”) provides financial services to individuals andcorporate customers located in Anne Arundel County and surrounding areas ofCentral Maryland, and is subject to competition from other financialinstitutions.  The Company and the Bankare also subject to the regulations of certain Federal and State of Marylandagencies and undergoes periodic examinations by those regulatory authorities.  The accounting policies of the Companyconform to accounting principles generally accepted in the United States ofAmerica and to general practices within the banking industry.

 

Principles ofConsolidation

 

The consolidatedfinancial statements include the accounts of CommerceFirst Bancorp, Inc.and its subsidiary, CommerceFirst Bank. Intercompany balances and transactions have been eliminated.  The Parent Only financial statements (seeNote 15) of the Company account for the subsidiary using the equity method ofaccounting.

 

Use of Estimates

 

The financialstatements have been prepared in conformity with accounting principlesgenerally accepted in the United States of America. The preparation of thefinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosures ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenue and expenses during the reporting periods.Actual results could differ significantly from those estimates. Materialestimates that are particularly susceptible to significant change in thenear-term relate to the determination of the allowance for loan losses. Seebelow for a discussion of the determination of that estimate.

 

InvestmentSecurities

 

Available-for-salesecurities consist of bonds and notes not classified as trading securities oras held-to-maturity securities. These securities are reported at their fairvalue with the unrealized holding gains and losses, net of tax, reported as anet amount in a separate component of stockholders’ equity until realized.Gains and losses on the sale of available-for-sale securities are determinedusing the specific identification method. Premiums and discounts are recognizedin interest income using the interest method over the period to maturity.

 

Securities forwhich the Company has the positive intent and ability to hold to maturity arereported at cost, adjusted for premiums and discounts that are recognized ininterest income using the interest method over the period to maturity. A chargeto operations would occur if the fair value of the securities declines belowcost and the Company’s intention or ability to hold the securities to maturitychanges.  The Company has no investmentsecurities classified as held to maturity as of December 31, 2007 and 2006.

 

Declines in thefair value of individual held-to-maturity and available-for-sale securitiesbelow their cost that are other than temporary would result in write-downs ofthe individual securities to their fair value. In estimatingother-then-temporary impairment losses, management considers (1) thelength of time and the extent to which the fair value has been less than cost, (2) thefinancial condition and near-term prospects of the issuer, and (3) theintent and ability of the Company to retain its investment in the issuer for aperiod of time sufficient to allow for any anticipated recovery in the fairvalue. The related write-downs would be included in earnings as realizedlosses.

 

22

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**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

** **

**Note1.  The Company and its SignificantAccounting Policies (continued)**

 

RestrictedSecurities

 

As a member of theFederal Reserve Bank of Richmond (Federal Reserve), the Company is required toacquire and hold stock in this entity. Ownership of this stock is restricted to members and can only be sold toand acquired from the respective entity at par. The Company also owns stock in Atlantic Central Bankers Bank (ACBB) andMaryland Financial Bank (MFB), banks that generally offers product and servicesonly to other banks.  Ownership of theACBB shares is restricted to banks, and there is no active market for the ACBBor the MFB shares.  As there is noreadily determinable fair value for these securities, they are carried at cost.

 

Loans andAllowance for Loan Losses

 

Loans receivablethat management has the intent and ability to hold for the foreseeable futureor until maturity or pay-off are reported at their outstanding principalbalance adjusted for any charge-offs, the allowance for loan losses and anyunamortized deferred fees, costs, premiums and discounts. Loan origination feesand certain direct origination costs are capitalized and recognized as anadjustment of the yield of the related loan.

 

The accrual ofinterest on loans is discontinued when, in management’s opinion, the fullcollection of principal or interest is in doubt, or a scheduled loan paymenthas become over ninety days past due, unless the obligation is well secured andin the process of collection.  Interestreceived on non-accrual loans generally is either applied against principal orreported as interest income, according to management’s judgment as to thecollectability of principal.

 

The Companydetermines and recognizes impairment of loans in accordance with the provisionsof Statement of Financial Accounting Standards No. 114, Accounting byCreditors for Impairment of a Loan as amended by Statement 118, Accounting byCreditors for Impairment of a Loan - Income Recognition and Disclosures. A loanis determined to be impaired when, based on current information and events, itis probable that the Company will be unable to collect all amounts due accordingto the contractual terms of the loan agreement. A loan is not consideredimpaired during the period of delay in payment if the Company expects tocollect all amounts due, including past-due interest. An impaired loan ismeasured at the present value of its expected future cash flows discounted atthe loan’s effective interest rate or at the loan’s observable market price orthe fair value of the collateral if the loan is collateral dependent. StatementNo. 114 is generally applicable to all loans except large groups ofsmaller - balance homogeneous loans that are evaluated collectively forimpairment unless such loans are subject to a restructuring agreement. Interestpayments received are recognized as interest income or, if ultimatecollectability of principal is in doubt, are applied to principal.

 

The allowance forloan losses is increased by charges to expense and decreased by charge-offs(net of recoveries).  Management’speriodic determination and evaluation of the adequacy of the allowance assessesvarious factors including inherent losses in all significant loans; knowndeterioration in concentrations of credit, certain classes of loans orcollateral; historical loss experiences; results of independent reviews of loanquality and the allowance for loan losses; trends in portfolio quality,maturity and composition; volumes and trends in delinquencies and non-accrualloans, risk management policies and practices; lending policies and procedures;economic conditions and downturns in specific local industries; loss history;and the experience and quality of lending management and staff.  Estimated losses in the portfolio aredetermined by applying loss ratios to loan categories, other than impairedloans and loans considered substandard or doubtful, which are evaluatedseparately, to determine loss estimates.

 

The determinationof the allowance for loan losses involves the use of various subjectiveestimates by management and may result in over or under estimations of theamount of inherent losses in the loan portfolio.

 

23

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**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**Note1.  The Company and its SignificantAccounting Policies (continued)**

 

Unearned Discountsand Servicing Rights of SBA Loans Sold

 

The Companygenerally sells the SBA-guaranteed portions of its SBA loans in the secondarymarket.  In connection with such sales,the Company receives a cash premium related to the guaranteed portion beingsold.  A portion of the cash premiumreceived from the sale of the guaranteed portion of the SBA loan is deferred asa discount on retained premiums based on the relative fair value of theguaranteed and unguaranteed portions to the total loan and the remainder isrecognized as a gain at the time of the sale. The resulting unearned discount is recognized in interest income usingan adjustable interest method.

 

SBA loan servicingrights are initially valued by allocating the total cost between the loan andthe servicing right based on their relative fair values.  Since sales of SBA loans tend to occur inprivate transactions and the precise terms and conditions of the sales aretypically not readily available, there is a limited market to refer to indetermining the fair value of these servicing rights.  As such, the Company 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. Management believes that the assumptions used in the model arecomparable to those used by brokers and other service providers.  The Company also compares its estimates offair value and 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 forunfunded commitments is established through a provision for unfundedcommitments charged to other expenses. The reserve is calculated by utilizing the same methodology and factorsas the allowance for loan losses.  Thereserve, based on evaluations of the collectability of loans and prior loanloss experience, is an amount that management believes will be adequate overtime to absorb possible losses on unfunded commitments (off-balance sheetfinancial instruments) that may become uncollectible in the future.

 

Premises andEquipment

 

Premises andequipment are stated at cost less accumulated depreciation.  The provision for depreciation is computedusing the straight-line method over the estimated useful lives of the assets.  Leasehold improvements are depreciated overthe lesser of the terms of the leases or their estimated useful lives.  Expenditures for improvements that extend thelife of an asset are capitalized and depreciated over the asset’s remaininguseful life.  Any gains or lossesrealized on the disposition of premises and equipment are reflected in theconsolidated statements of operations. Expenditures for repairs and maintenance are charged to other expensesas incurred.  Computer software isrecorded at cost and amortized over three years.

 

Transfers ofFinancial Assets

 

Transfers offinancial assets are accounted for as sales when control over the assets hasbeen surrendered. Control over transferred assets is deemed to be surrenderedwhen (1) the assets have been isolated from the Company, (2) the transfereeobtains the right (free of conditions that constrain it from taking advantageof that right) to pledge or exchange the transferred assets, and (3) theCompany does not maintain effective control over the transferred assets throughan agreement to repurchase them before their maturity.

 

24

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**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**Note 1.  TheCompany and its Significant Accounting Policies (continued)**

 

Deferred IncomeTaxes

 

Deferred incometaxes are recognized for temporary differences between the financial reportingbasis and the income tax basis of assets and liabilities. Deferred tax assetsare recognized only to the extent that it is more likely than not that suchamounts will be realized based on consideration of available evidence. Theeffect on deferred tax assets and liabilities of a change in tax rates isrecognized in income in the period that includes the enactment date.

 

Securities Soldunder Agreements to Repurchase

 

Securities soldunder agreements to repurchase are accounted for as borrowings and recorded asa liability at the amount of the repurchase obligation. These transactionsmature the next business day. The Company’s repurchase obligations are securedby Company owned securities with market values exceeding the obligations. Thesesecurities are segregated from other, non-pledged securities.

 

Concentration ofCredit Risk

 

The Company grantsloans to customers primarily in its market area in Maryland. The debtors’ability to honor their contracts, including borrowing agreements, may beinfluenced by the economic conditions in the Company’s lending area.

 

The Companymaintains deposits with other banking institutions in amounts which can, attimes, exceed insurance limits of the Federal Deposit Insurance Corporation(FDIC). Such institutions include the Federal Reserve Bank of Richmond andbankers’ banks. Further, the Company sells federal funds, which are not insuredby the FDIC to three banking entities.

 

ComprehensiveIncome or Loss

 

Unrealized gainsand losses on available for sale securities, net of tax, are reported as aseparate component of the equity section in the consolidated statement offinancial condition. Changes in the net unrealized gains and losses arecomponents of comprehensive income or loss and are not included in reported netincome or loss.

 

Statement of CashFlows

 

Cash and cashequivalents in the statement of cash flows include cash on hand, non-interestbearing amounts due from correspondent banks and the Federal Reserve andFederal funds sold.

 

Earnings Per Share

 

Basic EPS iscomputed based upon income available to common shareholders and the weightedaverage number of common shares outstanding for the period. Diluted EPSreflects the potential dilution that could occur if securities or othercontracts to issue common stock were exercised or converted into common stockor resulted in the issuance of common stock that would share in the earnings ofthe Company, using the treasury stock method, unless they are anti-dilutive.   The determination of the amount of commonstock equivalents arising from warrants and options issued by the Companyrequires the use of the average market price of the common shares during theyear. The Company’s uses the last quoted per share price at the end of eachmonth to determine dilutive shares during 2007, 2006 and 2005.

 

25

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**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**Note 1.  TheCompany and its Significant Accounting Policies (continued)**

 

Earnings Per Share(continued)

 

The weightedaverage number of common shares and dilutive securities (comprised of warrantsand options) and resultant per share computations are as follows:

 
| ** **                            | ** ** | **2007**  | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|---------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| Weighted average  shares outstanding  |       | 1,816,504 |       | 1,803,583 |       | 1,647,645 |       |
| Common stock  equivalents             |       | 31,691    |       | 42,879    |       | 25,283    |       |
| Average common shares and equivalents |       | 1,848,195 |       | 1,846,462 |       | 1,672,928 |       |
| Net income                            |       | $         | 1,087,814  |      | $          | 1,282,528 |       | $ | 1,033,420 |   |
| Basic earnings  per share             |       | $         | 0.60       |      | $          | 0.71      |       | $ | 0.63 |   |
| Diluted earnings  per share           |       | $         | 0.59       |      | $          | 0.69      |       | $ | 0.62 |   |

 

No warrants oroptions were excluded as anti-dilutive from the calculation of diluted incomeper share.

 

Stock Options

 

On January 1,2006, the Company adopted SFAS No. 123R, *Share-BasedPayments*, for accounting and reporting for stock-based compensationplans.  SFAS No. 123R defines a fairvalue at grant date based method of accounting for measuring compensationexpense for stock-based plans to be recognized in the statement of operations.  The Company did not record any compensationexpense under SFAS No. 123R during 2007 or 2006, as no new options weregranted during the periods and all options under the existing plans werepreviously fully vested.  For 2005 theCompany applied Accounting Principles Board Opinion (APB) No. 25 andrelated Interpretations for accounting and reporting for these plans.

 

Reclassification

 

Certain prioryears’ amounts have been reclassified to conform to the current year’s methodof presentation.

 

**Note 2.Investment Securities**

 

All investmentsecurities are classified as available-for-sale securities and are summarizedas follows:

 
| ** **                                   | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | **Estimated** | ** ** |
|----------------------------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                                   | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Fair**      | ** ** |
| ** **                                   | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Value**     | ** ** |
| December 31,  2007:                     |       |          |       |           |       |           |       |          |       |
| U.S. Treasury  (due within one year)         |       | $             | 3,004,529  |           | $          | 34,171         |       | $             | —     |   | $ | 3,038,700 |   |
| U.S. Treasury  (due over one to three years) |       | 6,021,011     |       | 107,989        |       | —         |       | 6,129,000     |       |
|                                         |       | $             | 9,025,540  |           | $          | 142,160        |       | $             | —     |   | $ | 9,167,700 |   |
| December 31,  2006:                     |       |          |       |           |       |           |       |          |       |
| 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 |   |

 

Unrealized losses(and unrealized gains) are the result of interest rate levels differing fromthose existing at the time of securities’ acquisition. These unrealized lossesare considered temporary as they reflect fair values on December 31, 2006which are subject to change daily as interest rates fluctuate. The Company hasthe intent and the ability to hold the securities to the maturity of thesecurities or the time required for

 

26

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**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**Note 2.Investment Securities (continued)**

 

the value of thesecurities to equal or exceed their cost. The two securities with unrealizedlosses at December 31, 2006 had continuous unrealized losses for thetwelve months of 2006.

 

Restrictedsecurities are comprised of common stock in the following entities at cost:

 
| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|-----------------------|------------|
| ** **                        | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Federal Reserve  Bank of Richmond |       | $                     | 405,000    |   | $ | 405,000 |   |
|                              |       |                  |       |   |   |
| Atlantic Central  Bankers Bank    |       | 37,000                |       | 37,000 |   |
|                              |       |                  |       |   |   |
| Maryland  Financial Bank          |       | 25,000                |       | 25,000 |   |
|                              |       | $                     | 467,000    |   | $ | 467,000 |   |

 

**Note 3.Loans**

 

The Bank grantscommercial and consumer loans to customers primarily in Anne Arundel County,Prince Georges County, Howard County and surrounding areas of central Maryland.The principal categories of the loan portfolio are as follows:

 
| ** **                               | ** ** | **December 31,** | ** **  |
|------------------------------------------|------------|-----------------------|-------------|
| ** **                               | ** ** | **2007**              | ** **  | **2006** | ** ** |
| Commercial  mortgage loans               |       | $                     | 72,933,394  |   | $ | 51,461,223 |   |
| Commercial loans                         |       | 53,437,061            |        | 45,350,193 |   |
|                                     |       | 126,370,455           |        | 96,811,416 |   |
| Unearned income  and deferred costs, net |       | (35,665               | )           | (116,936 | ) |
| Total                                    |       | 126,334,790           |        | 96,694,480 |   |
| Allowance for  loan losses               |       | (1,665,000            | )           | (1,613,693 | ) |
|                                     |       | $                     | 124,669,790 |   | $ | 95,080,787 |   |

 

The allowance forloan losses activity for the years ended December 31, 2007, 2006 and 2005is as follows:

 
| ** **                      | ** ** | **2007** | ** ** | **2006** | ** ** | **2005**  | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| Balance at beginning  of period |       | $        | 1,613,693  |     | $          | 1,615,108 |       | $ | 1,153,874 |   |
| Provision for  loan losses      |       | 45,383   |       | 225,000  |       | 360,000   |       |
|                            |       |     |       |     |       |      |       |
| Commercial loans  charged off   |       | (72,345  | )          | (226,415 | )          | (14,766   | )          |
| Commercial loans  recovery      |       | 78,269   |       | —   |       | 116,000   |       |
| Net recovery  (charge off)      |       | 5,924    |       | (226,415 | )          | 101,234   |       |
| Balance at end  of period       |       | $        | 1,665,000  |     | $          | 1,613,693 |       | $ | 1,615,108 |   |

 

Certain officersand directors (and companies in which they have a 10% or more beneficialownership) have loans with the Bank. These loans are made on the same terms,including interest rates and collateral, as those prevailing at the time forcomparable loans with unrelated borrowers. They do not involve more than normal risk of collectability or presentother unfavorable terms. The activity of these loans during 2007 and 2006 is asfollows:

 
| ** **                             | ** ** | **2007**   | ** ** | **2006** | ** ** |
|----------------------------------------|------------|------------|------------|----------|------------|
| Total loans at  beginning of year      |       | $          | 5,837,347  |     | $          | 5,662,565 |   |
| New loans and  funding during the year |       | 1,466,787  |       | 597,623  |       |
| Repayments  during the year            |       | (2,682,637 | )          | (422,841 | )          |
| Total loans at  end of year            |       | $          | 4,621,497  |     | $          | 5,837,347 |   |

 

27

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**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**Note 3.Loans (continued)**

 

Loans on which the accrual of interest has been discontinued amounted to $1,124,951, $627,833 and $591,885 at December 31, 2007, 2006 and 2005, respectively.  Interest that would have been accrued underthe terms of these loans totaled $77,591, $61,269 and $68,593 for the years ended December 31, 2007, 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 as impaired follows:

 
| ** **                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------------------|------------|----------|------------|----------|------------|
| Loans classified  as impaired with valuation allowances |       | $        | 1,365,713  |     | $          | 627,833 |   |
| Allowance for  loan losses on impaired loans            |       | 693,321  |       | 470,333  |       |
| Average balance  of impaired loans during year          |       | 740,000  |       | 610,000  |       |
|                                                         |            |          |            |          |            |  |  |

 

One of the classifiedloans above at December 31, 2007 and 2006 in the amount of $583 thousandis the remaining balance of a relationship totaling $958 thousand recognizedprior to 2006 and placed in non-accrual status at that time. This loan ispartially secured by real estate and by assignment of life insuranceproceeds.  The specific reservesallocated to this loan are $426 thousand and collection proceedings continue.The remaining classified amount is comprised of eleven loans in various stagesof collection. The Bank has no troubleddebt restructurings as of December 31, 2007 and 2006.

 

At December 31,2007, 2006 and 2005, the balance of commercial and real estate loans servicedby the Company for others under loan participation agreements was$21,538,205,$17,414,868 and $12,194,439, respectively.  The related servicing rights are not materialand are included in other assets.

 

**Note 4.Premises and Equipment**

 

Property,equipment and leasehold improvements are as follows at December 31:

 
| ** **                                 | ** ** | **Useful** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                 | ** ** | **Lives**  | ** ** | **2007**   | ** ** | **2006**   | ** ** |
| Equipment                                  |       | 3-7 years  |       | $          | 504,455    |       | $          | 498,286 |   |
| Furniture and  fixtures                    |       | 5 years    |       | 226,670    |       | 186,140    |       |
| Leasehold  improvements                    |       | 4-10 years |       | 756,292    |       | 406,010    |       |
| Software                                   |       | 3 years    |       | 25,215     |       | 187,792    |       |
|                                       |       |       |       | 1,512,632  |       | 1,278,228  |       |
| Accumulated  depreciation and amortization |       |       |       | 414,705    |       | 700,204    |       |
| Net                                        |       |       |       | $          | 1,097,927  |       | $          | 578,024 |   |

 

**Note 5.****Deposits**

 

Interest bearingdeposits are summarized below as of December 31:

 
| ** **                         | ** ** | **2007**   | ** **  | **2006**   | ** ** |
|------------------------------------|------------|------------|-------------|------------|------------|
|                               |       |       |        |       |       |
| NOW accounts                       |       | $          | 2,440,058   |       | $          | 3,068,900 |   |
| Money Market  accounts             |       | 16,267,872 |        | 14,685,443 |       |
| Savings accounts                   |       | 35,873     |        | 89,419     |       |
| Certificates of  deposit accounts: |       |       |        |       |       |
| Less than  $100,000                |       | 11,382,566 |        | 9,369,167  |       |
| $ 100,000 or  more            |       | 74,035,590 |        | 65,977,199 |       |
|                               |       | $          | 104,161,959 |       | $          | 93,190,128 |   |

 

28

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 5.****Deposits (continued)**

 

The time depositaccounts mature and/or re-price as follows: 2008- $39,072,126; 2009-$35,815,657; 2010- $10,332,373; and 2011- $198,000.

 

Interest expenseon interest bearing deposits is as follows:

 
| ** **                                 | ** ** | **2007**  | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|--------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
|                                       |       |      |       |      |       |      |       |
| NOW accounts                               |       | $         | 32,047     |      | $          | 26,742    |       | $ | 16,165 |   |
| Money Market  accounts                     |       | 715,438   |       | 607,214   |       | 271,701   |       |
| Savings accounts                           |       | 1,399     |       | 3,599     |       | 2,238     |       |
| Certificates of  deposit, $100,000 or more |       | 3,539,967 |       | 1,755,423 |       | 911,692   |       |
| Other  certificates of deposit             |       | 486,423   |       | 380,759   |       | 200,940   |       |
|                                       |       | $         | 4,775,274  |      | $          | 2,773,737 |       | $ | 1,402,736 |   |

 

Deposit andrepurchase agreement balances of executive officers and directors and theiraffiliated interests totaled approximately $19,006,000 and $13,393,000 at December 31, 2007 and 2006,respectively.

 

Included in certificates of deposits are $22,543,783 and $19,825,933 ofbrokered certificates with weighted average interest rates of 5.57% and 5.37% at December 31, 2007 and 2006,respectively.

 

**Note 6.Short-term borrowings**

 

The Bank entersinto sales of securities under agreements to repurchase the same securitieswith commercial customers, which mature the next business day.  The amortized cost of these pledgedsecurities at December 31, 2007and 2006 was $6,027,301and $11,050,129, respectively.  The fairvalue of these securities at December 31,2007 and 2006 was $6,122,100and $11,012,774, respectively.

 

Informationconcerning securities sold under agreements to repurchase at and during theyear ended December 31, 2007 and 2006 is summarized as follows:

 
| ** **                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Total  outstanding at year-end         |       | $        | 4,305,936  |     | $          | 9,579,116 |   |
| Average balance  during the year       |       | $        | 3,494,779  |     | $          | 4,994,048 |   |
| Average interest  rate during the year |       | 2.62     | %          | 2.56     | %          |

 

The Bank hasreceived approval of unsecured credit facilities for short-term liquidity needsfrom financial   institutions of $8,500,000 at December 31, 2007 and 2006. There were no borrowings outstanding under these credit arrangements at December 31, 2007 and 2006.

 

**Note 7.Income Taxes**

 

The income taxexpense consists of the following for the years ended December 31, 2007,2006 and 2005:

 
| ** ** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Current:   |       |     |       |     |       |     |       |
| Federal    |       | $        | 642,299    |     | $          | 570,819  |       | $ | 350,888 |   |
| State      |       | 122,669  |       | 121,482  |       | 63,085   |       |
|       |       | 764,968  |       | 692,301  |       | 413,973  |       |
| Deferred:  |       |     |       |     |       |     |       |
| Federal    |       | (19,073  | )          | 66,922   |       | 198,139  |       |
| State      |       | (51,390  | )          | 14,576   |       | 46,043   |       |
|       |       | (70,463  | )          | 81,498   |       | 244,182  |       |
|       |       | $        | 694,505    |     | $          | 773,799  |       | $ | 685,155 |   |

 

29

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 7.Income Taxes (continued)**

 

The reasons forthe differences between the statutory federal income tax rates are summarizedas follows:

 
| ** **                                    | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal tax at  statutory rates               |       | $        | 605,988    |     | $          | 699,151  |       | $ | 575,136 |   |
| State income taxes net of federal tax benefit |       | 68,374   |       | 89,775   |       | 41,636   |       |
| Other                                         |       | 20,143   |       | (15,127  | )          | 41,383   |       |
|                                          |       | $        | 694,505    |     | $          | 773,799  |       | $ | 658,155 |   |

 

The deferredincome tax account is comprised of the following at December 31, 2007,2006 and 2005:

 
| ** **                            | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Deferred tax  assets:                 |       |     |       |     |       |     |       |
| Allowance for  loan losses            |       | $        | 639,103    |     | $          | 623,208  |       | $ | 623,755 |   |
| Unrealized  losses on securities, net |       | —   |       | 12,701   |       | 34,019   |       |
| Deferred  compensation accrual        |       | 39,469   |       | —   |       | —   |       |
| Other                                 |       | 16,221   |       | 13,903   |       | 11,586   |       |
|                                  |       | 694,793  |       | 649,812  |       | 669,360  |       |
| Deferred tax  liabilities:            |       |     |       |     |       |     |       |
| Accumulated  depreciation             |       | 88,009   |       | 100,791  |       | 17,523   |       |
| Unrealized gain  on securities, net   |       | 54,902   |       | —   |       | —   |       |
|                                  |       | 142,911  |       | 100,791  |       | 17,523   |       |
| Net deferred tax  assets              |       | $        | 551,882    |     | $          | 549,021  |       | $ | 651,837 |   |

 

**Note 8.Commitments and Contingencies**

 

The Bank is aparty to financial instruments in the normal course of business to meet thefinancing needs of its customers.  Thesefinancial instruments include commitments to extend credit and standby lettersof credit, which involve, to varying degrees, elements of credit and interestrate risk in excess of the amounts recognized in the consolidated financialstatements.

 

Outstanding loancommitments, un-advanced loan funds and standby letters of credit areapproximately as follows:

 
| ** **                 | ** ** | **2007**   | ** ** |
|----------------------------|------------|------------|------------|
| Loan  commitments:         |       |       |       |
| Commercial                 |       | $          | 3,094,000  |   |
| Commercial real  estate    |       | 13,763,000 |       |
|                       |       | $          | 16,857,000 |   |
|                       |       |       |       |
| Un-advanced loan  funds:   |       |       |       |
| Commercial                 |       | $          | 32,792,000 |   |
| Commercial real  estate    |       | 8,708,000  |       |
|                       |       | $          | 41,500,000 |   |
|                       |       |       |       |
| Standby letters  of credit |       | $          | 1,970,000  |   |

 

At December 31,2006, loan commitments, un-advanced loan funds and standby letters of credittotaled $21,968,000, $28,068,000 and $910,000, respectively.

 

30

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 8.Commitments and Contingencies (continued)**

 

Loan commitmentsand un-advanced loan funds are agreements to lend funds to customers under loancommitment contracts and loan agreements as long as the borrowers are incompliance with the loan commitment contracts and loan agreements.  Loan commitments generally have interestrates reflecting current market conditions, fixed expiration dates, and mayrequire payment of a fee.  Funding underloans with un-advanced loan funds generally have variable interest rates.  Some of the loan commitments and un-advancedloan funds are expected to expire or not be used without being drawn upon;accordingly, the total commitment amounts do not necessarily represent futurecash requirements.  The Bank evaluateseach customer’s creditworthiness on a case-by-case basis.  The amount of collateral or other securityobtained, if deemed necessary by the Bank upon extension of credit, is based onthe Bank’s credit evaluation.

 

Standby letters ofcredit are conditional commitments issued by the Bank to guarantee theperformance of a customer to a third party. Those guarantees are primarily issued to guarantee the installation ofreal property improvements and similar transactions.  The credit risk involved in issuing lettersof credit is essentially the same as that involved in extending loan facilitiesto customers.  The Bank holds collateraland obtains personal guarantees supporting those commitments for whichcollateral or other securities is deemed necessary.

 

The Bank’sexposure to credit loss in the event of nonperformance by the customer is thecontractual amount of the commitment. Loan commitments and standby letters of credit are made on the sameterms, including collateral, as outstanding loans.  As of December 31,2007 and 2006, the Bank has accrued $42,000 and $36,000, respectively, for unfunded commitmentsrelated to these financial instruments with off balance sheet risk, which isincluded in other liabilities

 

The Bank hasentered into leases for its branches and office space, most of which containrenewal options and expense sharing provisions. The minimum net non-cancelablefuture rental commitments at December 31, 2007 are as follows:

 

| **Year Ending**  | ** ** | ** ** | ** ** |
|-----------------------|------------|------------|------------|
| **December 31,** |       |       |       |
| 2008                  |       | $          | 396,874    |   |
| 2009                  |       | 408,781    |       |
| 2010                  |       | 266,227    |       |
| 2011                  |       | 191,943    |       |
| 2012                  |       | 106,438    |       |
| 2013                  |       | 105,283    |       |
| Beyond                |       | 202,294    |       |
|                       |            |            |            |  |

 

The related netrent expense was $429,740, $285,444 and $223,222 in 2007, 2006 and 2005,respectively.

 

In the ordinary course of itsbusiness, the Company may become involved in routine legal proceedings.  At December 31, 2007, the Company is aparty to a lawsuit filed by a loan customer alleging, primarily, the lack ofcommercially reasonable efforts to collect loan repayments from collateralliquidation by the Company. The plaintiffs are seeking release of remainingdebts in the amount of $583 thousand, release of remaining collateral relatedthereto and certain damages approximating $3 million. The Company believes thatthe allegations are without merit and will vigorously defend itself against thelawsuit.

 

**Note9.  Regulatory Matters**

 

The Company andthe Bank are subject to various regulatory capital requirements administered bythe federal banking agencies. Failure to meet minimum capital requirements caninitiate certain mandatory - and possibly additional discretionary - actions byregulators that, if undertaken, could have a direct material effect on theCompany’s financial statements. Under capital adequacy guidelines and theregulatory framework for prompt corrective action, the Bank must meet specificcapital guidelines that involve quantitative measures of assets, liabilitiesand certain off-balance-sheet items as calculated under regulatory accountingpractices. The Company will be subject to the capital guidelines when itsassets

 

31

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note9.  Regulatory Matters (continued)**

 

exceed $500million, it engages in certain highly leveraged activities or it has publiclyissued debt. The Company’s and the Bank’s capital amounts and classificationare also subject to qualitative judgments by the regulators about components,risk weightings and other factors.

 

The Company andthe Bank must maintain minimum capital and other requirements of regulatoryauthorities when declaring and paying dividends. The Company and the Bank arein compliance with such capital requirements. Banking regulations limit theamount of dividends that may be paid to the Company without prior approval ofthe Bank’s regulatory agencies. Regulatory approval is required to pay dividends that exceed the Bank’snet profits for the current year plus its retained net profits for thepreceding two years.

 

Quantitativemeasures established by regulation to ensure capital adequacy require theCompany and the Bank to maintain minimum amounts and ratios (set forth in thetable below) of total and Tier I capital (as defined in the regulation) torisk-weighted assets (as defined), and of Tier I capital to average assets (asdefined). Management believes, as of December 31, 2007, that the Companyand the Bank meet capital adequacy requirements to which they are subject.

 

As of December 31,2007, the most recent notification from the regulators categorized the Bank aswell capitalized under the regulatory framework for prompt corrective action.To be categorized as well capitalized the Bank must meet minimum totalrisk-based, Tier I risk-based and Tier I leverage ratios. There are noconditions or events since that notification that management believes havechanged the Company’s and the Bank’s category.

 

Actual capitalamounts and ratios are presented in the table below:

 
| ** **                                 | ** ** | ** ** | ** ** | ** **   | ** ** | **For Capital**       | ** ** | **To be “Well Capitalized** | ** ** |
|--------------------------------------------|------------|------------|------------|--------------|------------|----------------------------|------------|-------------------------------------------------|------------|
| ** **                                 | ** ** | ** ** | ** ** | ** **   | ** ** | **Adequacy**               | ** ** | **For Purposes of Prompt**       | ** ** |
| ** **                                 | ** ** | **Actual** | ** ** | **Purposes** | ** ** | **Corrective Action** | ** ** |
| **December 31, 2007**                      | ** ** | **Amount** | ** ** | **Ratio**    | ** ** | **Amount**                 | ** ** | ** **                                      | ** ** | **Ratio** | ** ** | **Amount** | ** ** | ** ** | ** ** | **Ratio** | ** ** |
| Total Capital  (to risk weighted assets):  |       |       |       |         |       |                       |       |                                            |       |   |   |   |   |   |   |   |   |
| Company                                    |       | $          | 21,619,110 |         | 16.5       | %                          | $          | 7,619,946                                       |       | >  |   | 8.0 | % | N/A |   |   |   |   |   |
| Bank                                       |       | 17,923,724 |       | 13.7         | %          | 10,491,488                 |       | >                                       |       | 8.0 | % | $ | 13,114,360 |   | >  |   | 10.0 | % |
| Tier I Capital  (to risk weighted assets): |       |       |       |         |       |                       |       |                                            |       |   |   |   |   |   |   |   |   |
| Company                                    |       | 19,969,103 |       | 15.2         | %          | 5,245,948                  |       | >                                       |       | 4.0 | % | N/A |   |   |   |   |   |
| Bank                                       |       | 16,273,717 |       | 12.4         | %          | 5,245,744                  |       | >                                       |       | 4.0 | % | 7,868,616 |   | >  |   | 6.0 | % |
| Tier I Capital  (to average assets):       |       |       |       |         |       |                       |       |                                            |       |   |   |   |   |   |   |   |   |
| Company                                    |       | 19,969,103 |       | 13.9         | %          | 5,741,363                  |       | >                                       |       | 4.0 | % | N/A |   |   |   |   |   |
| Bank                                       |       | 16,273,717 |       | 11.3         | %          | 5,741,162                  |       | >                                       |       | 4.0 | % | 7,176,452 |   | >  |   | 5.0 | % |
|                                       |       |       |       |         |       |                       |       |                                            |       |   |   |   |   |   |   |   |   |
| 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 | % |
|                                            |            |            |            |              |            |                            |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 10. Warrant and Option Plans**

 

At December 31, 2007, there were106,372 fully vested warrants outstanding. During 2007, 16,965 warrants were exercisedat $10 per share. No warrants were exercised in 2006 or in priorperiods. The exercise price of each warrant is $10 per share and must beexercised, unless earlier called by the Company, not later than 10 years from August 18,2000.  Generally, vested warrants alsoexpire 90 days following the date that the warrant holder ceases to be adirector 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

 

32

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 10. Warrant and Option Plans (continued)**

 

Board of Directorsof the Company.  Upon call by theCompany, 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 three of the Bank’s officers and key employees.  The employment contracts obligated theCompany to issue 20,000 non-transferable stock options at an exercise price of$10 per share.  At December 31, 2007, all stockoptions had been issued by the Company and were fully vested, of which no optionshad been exercised.

 

**Note 11.Employee Benefit Plans**

 

The Bank hasemployee benefit programs that include health and dental insurance, life andlong-term and short-term disability insurance and a 401(k) retirementplan.  Under the 401(k) plan, theBank made a 50% match of eligible employee contributions up to 6% of basesalary in 2007, 2006 and 2005.  The Bank’s contributions to the plan includedin compensation and benefits, totaled $43,776,$33,064 and $24,054, for the years ended December 31, 2007, 2006 and 2005, respectively.

 

**Note 12.Related Party Transactions**

 

The Bank paid $208,380, $176,549, and $122,949during the years ended December 31, 2007, 2006 and 2005 respectively, forvarious group insurance benefits for which a Director will ultimately receivecompensation.

 

The Bank paid $43,913, $66,473, and $48,467 duringthe years ended December 31, 2007, 2006 and 2005 respectively, to acomputer consulting firm of which a Director is also a principal.  Expenditures included computer hardware,software, installation, training, and support services.

 

Expenditurestotaling less than $25,000 were paid to several entities in which directorswere principals during 2007, 2006 and 2005.

 

All of the abovetransactions have been consummated on terms equivalent to those that prevail inarms length transactions.

 

**Note13.  Fair Values of Financial Instruments**

 

The estimated fairvalues of the Company’s financial instruments at December 31, 2006 and2005 are summarized below. The fair values of a significant portion of thesefinancial instruments are estimates derived using present value techniques andmay not be indicative of the net realizable or liquidation values. Also, thecalculation of estimated fair values is based on market conditions at aspecific point in time and may not reflect current or future fair values.

 

33

----

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 13. Fair Values of Financial Instruments (continued)**

 
| ** **                                      | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|-------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| **(In thousands)**                         | ** ** | **Carrying   Amount**      | ** ** | **Fair   Value**           | ** ** | **Carrying   Amount** | ** ** | **Fair   Value** | ** ** |
| Financial  assets:                              |       |                            |       |                            |       |   |   |   |   |
| Cash and due  from banks                        |       | $                               | 3,002      |                            | $          | 3,002 |   | $ | 3,689 |   | $ | 3,689 |   |
| Federal funds  sold                             |       | 8,723                           |       | 8,723                           |       | 28,666 |   | 28,666 |   |
| Investment  securities                          |       | 9,168                           |       | 9,168                           |       | 11,013 |   | 11,013 |   |
| Investments in  restricted stock                |       | 467                             |       | 467                             |       | 467 |   | 467 |   |
| Loans, net                                      |       | 124,670                         |       | 130,277                         |       | 95,081 |   | 97,218 |   |
| Accrued interest  receivable                    |       | 743                             |       | 743                             |       | 654 |   | 654 |   |
|                                            |       |                            |       |                            |       |   |   |   |   |
| Financial  liabilities:                         |       |                            |       |                            |       |   |   |   |   |
| Non-interest  bearing deposits                  |       | $                               | 19,246     |                            | $          | 19,246 |   | $ | 19,015 |   | $ | 19,015 |   |
| Interest bearing  deposits                      |       | 104,162                         |       | 106,580                         |       | 93,190 |   | 93,910 |   |
| Securities sold  under agreements to repurchase |       | 4,306                           |       | 4,306                           |       | 9,579 |   | 9,579 |   |
| Accrued interest  payable                       |       | 201                             |       | 201                             |       | 176 |   | 176 |   |
|                                            |       |                            |       |                            |       |   |   |   |   |
| Off-balance  sheet commitments                  |       | —                          |       | —                          |       | — |   | — |   |

 

The fair value ofcash and due from banks, federal funds sold, investments in restricted stocksand accrued interest receivable are equal to the carrying amounts. The fairvalues of investment securities are determined using market quotations. Thefair value of loans receivable is estimated using discounted cash flowanalysis. The discount rates used are estimates using comparable market ratesfor similar types of loans adjusted for credit risk and optionality.

 

The fair value ofnon-interest bearing deposits, interest-bearing checking, savings, and moneymarket deposit accounts, securities sold under agreements to repurchase, andaccrued interest payable are equal to the carrying amounts. The fair value offixed-maturity time deposits is estimated using discounted cash flow analysis.The discount rates used are estimates using comparable market rates for similartypes of time deposits adjusted for optionality.

 

**Note 14. Recently IssuedAccounting Pronouncements**

 

In February 2007,the FASB issued SFAS No. 159, *The Fair Value Option forFinancial Assets and Financial Liabilities-including an amendment of FASBStatement No. 115*which is effective as of the beginning of thefirst fiscal year that begins after November 15, 2007. Management willcontinue to evaluate the impact of adopting this Statement on the Company’sfinancial statements for future periods.

 

In June 2006,the FASB issued FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes* (“FIN 48”).FIN 48 clarifies when tax benefits should be recorded in financialstatements, requires certain disclosures of uncertain tax matters and indicateshow any tax reserves should be classified in a balance sheet. On January 1,2007, the Company adopted FIN 48. The Company has determined that adoptionof FIN 48 did not have any impact on its financial condition or results ofoperations. It is the Company’s policy to recognize interest and penaltiesrelated to unrecognized tax liabilities within income tax expense in theconsolidated statements of income.

 

In September 2006,the FASB issued Statement No. 157 (SFAS 157), *Fair Value Measurements*. SFAS 157 defines fair value,establishes a framework for measuring fair value and expands disclosures aboutfair value measurements. SFAS 157 applies whenever other standards require (orpermit) assets or liabilities to be measured at fair value but does not expandthe use of fair value in any new circumstances. In this standard, the FASB clarifiesthe principle that fair value should be based on the assumptions marketparticipants would use when pricing the asset or liability. In support of thisprinciple, SFAS 157 establishes a fair value hierarchy that prioritizes theinformation used to develop those assumptions. The provisions of SFAS 157 areeffective for financial statements issued for fiscal years beginning after November 15,2007

 

34

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 14.Recently Issued Accounting Pronouncements (continued)**

 

and interimperiods within those fiscal years. The provisions should be appliedprospectively, except for certain specifically identified financialinstruments.  Management will continue toevaluate the impact of adopting this Statement on the Company’s financialstatements for future periods.

 

In December 2007,the FASB issued SFAS 141, Revised 2007 (SFAS 141R), *BusinessCombinations.*  SFAS 141R’sobjective is to improve the relevance, representational faithfulness, andcomparability of the information that a reporting entity provides in itsfinancial reports about a business combination and its effects.  SFAS 141R applies prospectively to businesscombinations for which the acquisition date is on or after December 31,2008.  The Company does not expect theimplementation of SFAS 141R to have a material impact on its consolidatedfinancial statements.

 

In December 2007,the FASB issued SFAS 160, *Noncontrolling Interestsin Consolidated Financial Statements.*  SFAS 160’s objective is to improve therelevance, comparability, and transparency of the financial information that areporting entity provides in its consolidated financial statements byestablishing accounting and reporting standards for the noncontrolling interestin a subsidiary and for the deconsolidation of a subsidiary.  SFAS 160 shall be effective for fiscal yearsand interim periods within those fiscal years, beginning on or after December 15,2008.  The Company does not expect theimplementation of SFAS 160 to have a material impact on its consolidatedfinancial statements.

 

**Note 15. Parent Company FinancialInformation**

 

Information as tothe financial position of CommerceFirst Bancorp, Inc. as of December 31,2007 and 2006 and results of operations and cash flows for the years ended December 31,2007, 2006 and 2005 follows:

 
| ** **                                           | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| **Statements of Financial Condition** | ** ** | **2007**              | ** ** | **2006**              | ** ** |
| **Assets**                                           |       |                  |       |                  |       |
| Cash in  CommerceFirst Bank                          |       | $                     | 3,700,274  |                  | $          | 3,606,918 |   |
| Investment in  subsidiary                            |       | 16,360,975            |       | 15,080,067            |       |
| Other assets                                         |       | 5,112                 |       | —                |       |
|                                                 |       | $                     | 20,066,361 |                  | $          | 18,686,985 |   |
| **Liabilities and Stockholders’ Equity**        |       |                  |       |                  |       |
| Accrued expenses                                     |       | $                     | 10,000     |                  | $          | — |   |
|                                                 |       |                  |       |                  |       |
| Stockholders’  equity                           |       | 20,056,361            |       | 18,686,985            |       |
|                                                 |       | $                     | 20,066,361 |                  | $          | 18,686,985 |   |

 
| ** **                                                                                | ** ** | **Year ended**               | ** ** | **Year ended**               | ** ** | **Year ended**               | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| **Statements of Operations**                                                    | ** ** | **December 31,   2007** | ** ** | **December 31,   2006** | ** ** | **December 31,   2005** | ** ** |
| Administrative  expenses                                                                  |       | $                                 | 123,003    |                              | $          | 103,816                           |       | $ | 76,070 |   |
| Loss before  equity in undistributed net income of bank subsidiary and income tax benefit |       | (123,003                          | )          | (103,816                          | )          | (76,070                           | )          |
| Income tax benefit                                                                        |       | 41,821                            |       | 61,161                            |       | —                            |       |
| Loss before  equity in undistributed net income of  bank subsidiary                       |       | (81,182                           | )          | (42,655                           | )          | (76,070                           | )          |
| Equity in  undistributed net income of bank subsidiary                                    |       | 1,168,996                         |       | 1,325,183                         |       | 1,109,490                         |       |
| Net income                                                                                |       | $                                 | 1,087,814  |                              | $          | 1,282,528                         |       | $ | 1,033,420 |   |

 

35

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 15. Parent Company FinancialInformation (continued)**

 
| ** **                                           | ** ** | **Year ended**               | ** ** | **Year ended**               | ** ** | **Year ended**               | ** ** |
|------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| **Statements of Cash Flows**          | ** ** | **December 31,   2007** | ** ** | **December 31,   2006** | ** ** | **December 31,   2005** | ** ** |
| Cash flows from  operating activities:               |       |                              |       |                              |       |                              |       |
| Net income                                           |       | $                                 | 1,087,814  |                              | $          | 1,282,528                         |       | $ | 1,033,420 |   |
| Equity in  undistributed earnings of bank subsidiary |       | (1,168,996                        | )          | (1,325,183                        | )          | (1,109,490                        | )          |
| Decrease  (increase) in other assets                 |       | (5,112                            | )          | —                            |       | 55,780                            |       |
| Increase in  payables                                |       | 10,000                            |       | —                            |       | —                            |       |
| Net cash used in  operating activities               |       | (76,294                           | )          | (42,655                           | )          | (20,290                           | )          |
|                                                 |       |                              |       |                              |       |                              |       |
| Cash flows from investing  activities:               |       |                              |       |                              |       |                              |       |
| Investment in  subsidiary                            |       | —                            |       | —                            |       | (6,000,000                        | )          |
| Net cash used in investing activities                |       | —                            |       | —                            |       | (6,000,000                        | )          |
|                                                 |       |                              |       |                              |       |                              |       |
| Cash flows from  financing activities:               |       |                              |       |                              |       |                              |       |
| Sales of common  stock, net of expenses of $709,746  |       | —                            |       | —                            |       | 9,594,251                         |       |
| Proceeds from  warrant exercises                     |       | 169,650                           |       | —                            |       | —                            |       |
| Net cash  provided by financing activities           |       | 169,650                           |       | —                            |       | 9,594,251                         |       |
|                                                 |       |                              |       |                              |       |                              |       |
| Increase  (decrease) in cash and cash equivalents    |       | 93,356                            |       | (42,655                           | )          | 3,573,961                         |       |
| Cash and cash  equivalents at beginning of period    |       | 3,606,918                         |       | 3,649,573                         |       | 75,612                            |       |
| Cash and cash  equivalents at end of period          |       | $                                 | 3,700,274  |                              | $          | 3,606,918                         |       | $ | 3,649,573 |   |

 

36

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**Directors &Officers**

**of**

**CommerceFirst Bancorp, Inc. andCommerceFirst Bank**

 

**Milton D. Jernigan II, Esquire***

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

 

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*** Directorof CommerceFirst Bancorp, Inc.**

**++Retired as Officer on December 31, 2007**

 

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**Officersof**

**CommerceFirst Bank**

** **

| **Michael  T. Storm ******Executive Vice President &****Chief Operating Officer and  Chief Financial Officer** | ** ** | **Thomas  L. Bolander****Senior Vice President**                             |
|-------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|
| ** **                                                                                                              | ** ** | ** **                                                                   |
| **Penny  L. Cantwell****Senior Vice President**                                                                         | ** ** | **W.  Craig Engelhaupt****Senior Vice President**                            |
| ** **                                                                                                              | ** ** | ** **                                                                   |
| **George  Kapusta****Senior Vice President**                                                                            | ** ** | **Candace  M. Springmann****Vice President & Corporate  Secretary** |
| ** **                                                                                                              | ** ** | ** **                                                                   |
| **Jean  J. Barnes****Vice President**                                                                                   | ** ** | **Melonee  Fleming, CCE****Vice President**                                  |
| ** **                                                                                                              | ** ** | ** **                                                                   |
| **David  Steinhoff****Vice President**                                                                                  | ** ** | **Irma  Russell****Assistant Vice President**                                |
| ** **                                                                                                              | ** ** | ** **                                                                   |
| **Robert  W. Smith IV****Loan Officer**                                                                                 | ** ** | ** **                                                                   |

 

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**** Effectiveas of January 1, 2008**

 

Locationsof

**CommerceFirst Bank**

** **
| **Annapolis  1804 West Street, Suite 200****Annapolis MD  21401** | ** ** | **Lanham****4451 Parliament Place****Lanham MD 20706**             |
|------------------------------------------------------------------------|------------|--------------------------------------------------------------------|
| ** **                                                             | ** ** | ** **                                                         |
| **BWI****910 Cromwell Park  Drive****Glen Burnie MD  21061**           | ** ** | **Old  Dobbin Lane****6230 Old Dobbin  Lane****Columbia MD 21045** |
| ** **                                                             | ** ** | ** **                                                         |
| **Severna  Park****485  Ritchie Highway****Severna  Park, MD 21146**   | ** ** | ** **                                                         |

 

**TheCompany will provide, without charge, to any shareholder of record or anybeneficial owner of Common Stock, a copy of its 2007 Annual Report on Form 10-KSBfiled with the Securities and Exchange Commission, upon the written request.Requests should be directed to Candace M. Springmann, Corporate Secretary, atthe Company’s executive offices at 1804 West Street, Suite 200, AnnapolisMD 21401.**

 

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