U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 2005 Commission File No. 000-29640
COMMUNITY FIRST BANCORPORATION
-------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
South Carolina 58-2322486
--------------------------- -------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3685 Blue Ridge Boulevard
WALHALLA, SOUTH CAROLINA 29691
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(Address of principal executive offices)
(864) 638-2105
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [ X ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: Common Stock, no par or
stated value, 2,653.105 Shares Outstanding on October 31, 2005.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [ X ]
1
COMMUNITY FIRST BANCORPORATION
FORM 10-QSB
Index
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet
3
Consolidated Statement of Income ............................. 4
Consolidated Statement of Changes in Shareholders' Equity .... 5
Consolidated Statement of Cash Flows ......................... 6
Notes to Unaudited Consolidated Financial Statements ......... 7-8
Item 2. Management's Discussion and Analysis ......................... 9-12
Item 3. Controls and Procedures ...................................... 12
PART II - OTHER INFORMATION
Item 6. Exhibits ..................................................... 13
SIGNATURE ................................................................ 14
2
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
COMMUNITY FIRST BANCORPORATION
Consolidated Balance Sheet
(Unaudited)
September 30, December 31,
2005 2004
---- ----
(Dollars in thousands)
Assets
Cash and due from banks ................................................................... $ 5,931 $ 5,652
Interest bearing deposits due from banks .................................................. 246 36
Federal funds sold ........................................................................ 16,937 34,214
--------- ---------
Cash and cash equivalents ............................................................. 23,114 39,902
Securities available-for-sale ............................................................. 95,035 92,084
Securities held-to-maturity (fair value $8,197 for 2005 and $9,560 for 2004) .............. 8,143 9,369
Other investments ......................................................................... 948 1,011
Loans ..................................................................................... 167,934 157,775
Allowance for loan losses ............................................................. (2,299) (2,240)
--------- ---------
Loans - net ........................................................................ 165,635 155,535
Premises and equipment - net .............................................................. 6,272 4,413
Accrued interest receivable ............................................................... 1,442 1,331
Other assets .............................................................................. 1,824 1,703
--------- ---------
Total assets ....................................................................... $ 302,413 $ 305,348
========= =========
Liabilities
Deposits
Noninterest bearing ................................................................... $ 37,008 $ 34,903
Interest bearing ...................................................................... 227,774 233,245
--------- ---------
Total deposits ..................................................................... 264,782 268,148
Accrued interest payable .................................................................. 1,635 1,222
Short-term borrowings ..................................................................... - 2,500
Long-term debt ............................................................................ 7,500 7,500
Other liabilities ......................................................................... 159 41
--------- ---------
Total liabilities .................................................................. 274,076 279,411
--------- ---------
Shareholders' equity
Common stock - no par value; 10,000,000 shares authorized; issued and
outstanding - 2,653,105 for 2005 and
2,648,230 for 2004 .................................................................... 24,246 24,216
Retained earnings ......................................................................... 5,036 2,220
Accumulated other comprehensive income (loss) ............................................. (945) (499)
--------- ---------
Total shareholders' equity ......................................................... 28,337 25,937
--------- ---------
Total liabilities and shareholders' equity ......................................... $ 302,413 $ 305,348
========= =========
See accompanying notes to unaudited consolidated financial statements.
3
COMMUNITY FIRST BANCORPORATION
Consolidated Statement of Income
(Unaudited)
Period Ended September 30,
--------------------------
Three Months Nine Months
------------ -----------
2005 2004 2005 2004
---- ---- ---- ----
(Dollars in thousands, except per share)
Interest income
Loans, including fees ........................................... $ 2,930 $ 2,588 $ 8,485 $ 7,638
Securities
Taxable ......................................................... 843 955 2,662 2,457
Tax-exempt ...................................................... 40 18 92 55
Other investments ............................................... 11 8 31 21
Federal funds sold .............................................. 185 51 497 177
Interest bearing deposits due from banks ........................ 2 - 2 -
-------- -------- -------- --------
Total interest income ....................................... 4,011 3,620 11,769 10,348
-------- -------- -------- --------
Interest expense
Time deposits $100M and over .................................... 589 347 1,492 1,085
Other deposits .................................................. 1,091 818 3,002 2,550
Short-term borrowings ........................................... - 11 18 13
Long-term debt .................................................. 72 72 211 79
-------- -------- -------- --------
Total interest expense ...................................... 1,752 1,248 4,723 3,727
-------- -------- -------- --------
Net interest income .................................................. 2,259 2,372 7,046 6,621
Provision for loan losses ............................................ - 180 215 315
-------- -------- -------- --------
Net interest income after provision .................................. 2,259 2,192 6,831 6,306
-------- -------- -------- --------
Other income
Service charges on deposit accounts ............................. 402 393 1,160 1,155
Credit life insurance commissions ............................... 9 7 27 26
Net gains (losses) on sales of available-for-sale
securities .................................................. - (14) - (9)
Other income .................................................... 132 138 394 367
-------- -------- -------- --------
Total other income .......................................... 543 524 1,581 1,539
-------- -------- -------- --------
Other expenses
Salaries and employee benefits .................................. 791 708 2,132 2,089
Net occupancy expense ........................................... 65 69 190 209
Furniture and equipment expense ................................. 89 75 266 230
Other expense ................................................... 438 451 1,470 1,311
-------- -------- -------- --------
Total other expenses ........................................ 1,383 1,303 4,058 3,839
-------- -------- -------- --------
Income before income taxes ........................................... 1,419 1,413 4,354 4,006
Income tax expense ................................................... 489 509 1,538 1,440
-------- -------- -------- --------
Net income ........................................................... $ 930 $ 904 $ 2,816 $ 2,566
======== ======== ======== ========
Per share*
Net income ...................................................... $ 0.35 $ 0.34 $ 1.06 $ 0.97
Net income, assuming dilution ................................... 0.32 0.32 0.99 0.92
--------
* Per share information has been retroactively adjusted to reflect a 10% stock
dividend effective November 30, 2004.
See accompanying notes to unaudited consolidated financial statements.
4
COMMUNITY FIRST BANCORPORATION
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
Common Stock Accumulated
------------ Other
Number of Retained Comprehensive
Shares Amount Earnings Income (Loss) Total
------ ------ -------- ------------- -----
(Dollars in thousands)
Balance, January 1, 2004 ................................... 2,362,057 $ 19,620 $ 3,117 $ (200) $ 22,537
---------
Comprehensive income:
Net income ............................................. - - 2,566 - 2,566
---------
Unrealized holding gains and losses
on available-for-sale securities arising
during the period, net of income taxes of $55 ........ - - - (97) (97)
Reclassification adjustment for losses (gains)
realized in income, net of income taxes of $3 ........ - - - 6 6
---------
Total other comprehensive income (loss) ................ - - - - (91)
---------
Total comprehensive income ............................. - - - - 2,475
---------
Exercise of employee stock options ......................... 45,821 268 - - 268
--------- --------- --------- --------- ---------
Balance, September 30, 2004 ................................ 2,407,878 $ 19,888 $ 5,683 $ (291) $ 25,280
========= ========= ========= ========= =========
Balance, January 1, 2005 ................................... 2,648,230 $ 24,216 $ 2,220 $ (499) $ 25,937
---------
Comprehensive income:
Net income ............................................. - - 2,816 - 2,816
---------
Unrealized holding gains and losses
on available-for-sale securities arising
during the period, net of income taxes of $249 ....... - - - (446) (446)
---------
Total other comprehensive income (loss) ................ - - - - (446)
---------
Total comprehensive income ............................. - - - - 2,370
---------
Exercise of employee stock options ......................... 4,875 30 - - 30
--------- --------- --------- --------- ---------
Balance, September 30, 2005 ................................ 2,653,105 $ 24,246 $ 5,036 $ (945) $ 28,337
========= ========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
5
COMMUNITY FIRST BANCORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-------------
2005 2004
---- ----
(Dollars in thousands)
Operating activities
Net income ................................................................................ $ 2,816 $ 2,566
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses .......................................................... 215 315
Writedowns of other real estate owned .............................................. 25 125
Depreciation ....................................................................... 225 213
Amortization of net loan (fees) and costs .......................................... (70) (67)
Securities accretion and premium amortization ...................................... 202 664
Net losses on available-for-sale securities ........................................ - 9
Loss on sale of other real estate .................................................. 9 -
Increase in interest receivable .................................................... (111) (118)
Increase (decrease) in interest payable ............................................ 413 (240)
Decrease in prepaid expenses and other assets ...................................... 36 183
Increase in other accrued expenses ................................................. 118 283
-------- --------
Net cash provided by operating activities ...................................... 3,878 3,933
-------- --------
Investing activities
Purchases of available-for-sale securities ................................................ (46,988) (52,381)
Purchases of held-to-maturity securities .................................................. - (9,949)
Maturities, calls and paydowns of securities available-for-sale ........................... 43,134 34,973
Maturities, calls and paydowns of securities held-to-maturity ............................. 1,232 -
Proceeds of sales of available-for-sale securities ........................................ - 5,273
Purchases of other investments ............................................................ (162) (147)
Proceeds of sales of other investments .................................................... 225 -
Net increase in loans made to customers ................................................... (10,245) (8,101)
Purchases of premises and equipment ....................................................... (2,084) (48)
Proceeds of sale of real estate held for sale ............................................. - 212
Proceeds of sale of other real estate ..................................................... 58 389
-------- --------
Net cash used by investing activities .......................................... (14,830) (29,779)
-------- --------
Financing activities
Net decrease in demand deposits, interest
bearing transaction accounts and savings accounts ..................................... (10,095) (1,116)
Net increase in certificates of deposit and other
time deposits ......................................................................... 6,729 (2,078)
Net (decrease) increase in short-term borrowings .......................................... (2,500) 2,500
Proceeds of issuing long-term debt ........................................................ - 7,500
Exercise of employee stock options ........................................................ 30 268
-------- --------
Net cash (used) provided by financing activities ............................... (5,836) 7,074
-------- --------
Decrease in cash and cash equivalents .......................................................... (16,788) (18,772)
Cash and cash equivalents, beginning ........................................................... 39,902 39,505
-------- --------
Cash and cash equivalents, ending .............................................................. $ 23,114 $ 20,733
======== ========
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Interest .............................................................................. $ 4,310 $ 3,967
Income taxes .......................................................................... 1,431 1,136
Noncash investing and financing activities:
Transfer of loans to other real estate ................................................ - 141
Other comprehensive income (loss) ..................................................... (446) (91)
See accompanying notes to unaudited consolidated financial statements.
6
COMMUNITY FIRST BANCORPORATION
Notes to Unaudited Consolidated Financial Statements
Accounting Policies - A summary of significant accounting policies is included
in Community First Bancorporation's (the "Company") Annual Report for the year
ended December 31, 2004 on Form 10-KSB filed with the Securities and Exchange
Commission.
Management Opinion - In the opinion of management, the accompanying unaudited
consolidated financial statements of Community First Bancorporation reflect all
adjustments necessary for a fair presentation of the results of the periods
presented. Such adjustments were of a normal, recurring nature.
Nonperforming Loans - As of September 30, 2005, there were $969,000 of
nonaccrual loans and no loans 90 days or more past due and still accruing
interest.
Earnings Per Share - Basic earnings per common share is computed by dividing net
income applicable to common shares by the weighted average number of common
shares outstanding. Diluted earnings per share is computed by dividing
applicable net income by the weighted average number of common shares
outstanding and any dilutive potential common shares and dilutive stock options.
It is assumed that all dilutive stock options are exercised at the beginning of
each period and that the proceeds are used to purchase shares of the Company's
common stock at the average market price during the period. Per share
information for 2004 has been retroactively adjusted to give effect to a 10%
stock dividend effective November 30, 2004. Net income per share and net income
per share, assuming dilution, were computed as follows:
(Unaudited)
Period Ended September 30,
--------------------------
Three Months Nine Months
------------ -----------
2005 2004 2005 2004
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
Net income per share, basic
Numerator - net income ............................... $ 930 $ 904 $ 2,816 $ 2,566
========== ========== ========== ==========
Denominator
Weighted average common shares
issued and outstanding ........................... 2,651,779 2,648,168 2,649,503 2,637,351
========== ========== ========== ==========
Net income per share, basic ................... $ .35 $ .34 $ 1.06 $ .97
========== ========== ========== ==========
Net income per share, assuming dilution
Numerator - net income ............................. $ 930 $ 904 $ 2,816 $ 2,566
========== ========== ========== ==========
Denominator
Weighted average common shares
issued and outstanding ......................... 2,651,779 2,648,168 2,649,503 2,637,351
Effect of dilutive stock options ................. 192,685 149,186 187,507 139,409
---------- ---------- ---------- ----------
Total shares ............................ 2,844,464 2,797,354 2,837,010 2,776,760
========== ========== ========== ==========
Net income per share, assuming dilution ....... $ .32 $ .32 $ .99 $ .92
========== ========== ========== ==========
Stock-Based Compensation - As of September 30, 2005, the Company has two
stock-based compensation plans that are accounted for under the recognition and
measurement principles of Accounting Standards Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. No stock-based
compensation is recognized in net income, as all options granted under those
plans had exercise prices equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on net
income and net income per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards (`SFAS")
123 to stock-based employee compensation. Per share amounts have been adjusted
to reflect the effect of a 10% stock dividend effective November 30, 2004.
7
(Unaudited)
Period Ended September 30,
--------------------------
Three Months Nine Months
------------ -----------
2005 2004 2005 2004
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
Net income, as reported ........................................ $ 930 $ 904 $ 2,816 $ 2,566
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of any related tax effects ............................ 65 60 194 179
------- ------- --------- ---------
Pro forma net income ........................................... $ 865 $ 844 $ 2,622 $ 2,387
======= ======= ========= =========
Net income per share, basic
As reported ............................................... $ 0.35 $ 0.34 $ 1.06 $ 0.97
Pro forma ................................................. 0.33 0.32 0.99 0.91
Net income per share, assuming dilution
As reported ............................................... $ 0.32 $ 0.32 $ 0.99 $ 0.92
Pro forma ................................................. 0.31 0.30 0.92 0.86
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123
(R), which requires that the costs resulting from all share based payments be
recognized in the financial statements. SFAS 123 (R) replaces SFAS 123 and
supersedes APB No. 25, as well as several other related pronouncements. SFAS 123
(R) is effective for the Company beginning January 1, 2006. Various transition
methods are available for the restatement of prior period information, but the
Company has not yet determined which method will be used. Accordingly, the
effect of the implementation of this statement on the Company's financial
position and results of operations has not been determined for any period.
8
Item 2. - Management's Discussion and Analysis
Forward Looking Statements
Statements included in this report which are not historical in nature
are intended to be, and are hereby identified as "forward looking statements"
for purposes of the safe harbor provided by Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements which are other than statements
of historical facts. Such forward-looking statements may be identified, without
limitation, by the use of the words "anticipates," "believes," "estimates,"
"expects," "intends," "plans," "predicts," "projects," and similar expressions.
The Company's expectations, beliefs and projections are expressed in good faith
and are believed by the Company to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's beliefs, expectations or
projections will result or be achieved or accomplished. The Company cautions
readers that forward-looking statements, including without limitation, those
relating to the Company's recent and continuing expansion, its future business
prospects, revenues, working capital, liquidity, capital needs, interest costs,
income, and adequacy of the allowance for loan losses, are subject to risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward-looking statements, due to several important factors
herein identified, among others, and other risks and factors identified from
time to time in the Company's reports filed with the Securities and Exchange
Commission.
Results of Operations
Community First Bancorporation recorded consolidated net income of
$930,000, or $.35 per share, for the third quarter, and $2,816,000, or $1.06 per
share, for the first nine months of 2005. During 2004, the Company recorded net
income of $904,000, or $.34 per share, for the third quarter, and $2,566,000, or
$.97 per share, for the first nine months. Net income per share, assuming
dilution, for the three and nine month periods ended September 30, 2005 was $.32
and $.99, respectively. For the comparable 2004 periods, net income per share,
assuming dilution, was $.32 and $.92, respectively. Net income per share amounts
for 2004 have been retroactively adjusted to reflect a 10% stock dividend
effective November 30, 2004.
Net Interest Income
Net interest income is the amount of interest income earned on interest
earning assets (loans, securities, interest bearing deposits in other banks,
federal funds sold and other investments), less the interest expense incurred on
interest bearing liabilities (interest bearing deposits and other borrowings),
and is the principal source of the Company's earnings. Net interest income is
affected by the level of interest rates and by the volume and mix of interest
earning assets and interest bearing liabilities.
For the first nine months of 2005, net interest income was $7,046,000,
an increase of $425,000 or 6.4% from the first nine months of 2004. The increase
in net interest income for the 2005 period resulted primarily from the effects
of larger volumes of average interest earning assets.
Average interest earning assets in the 2005 nine month period were
$297,911,000 compared with $282,288,000 in the same period of 2004, representing
an increase of $15,623,000 or 5.5%. Average loans outstanding were $162,555,000
in the 2005 nine month period compared with $151,287,000 in the 2004 nine month
period, representing an increase of $11,268,000 or 7.4%. Average loans were
54.6% and 53.6% of average interest earning assets for the 2005 and 2004
nine-month periods, respectively. Average investment securities for the 2005
nine month period were $110,841,000, an increase of $4,615,000 or 4.3% over the
2004 amount. Average federal funds sold for the 2005 nine-month period were
$23,352,000, a decrease of $544,000 or 2.3% from the same period of 2004.
Average interest bearing liabilities during the 2005 nine-month period were
$244,054,000, representing an increase of $7,576,000 or 3.2% over the amount for
the same period of 2004. Average time deposits of $100,000 and over increased to
$63,854,000 for the 2005 nine-month period from $60,066,000 in the same prior
year period, an increase of $3,788,000 or 6.3%. Average time deposits less than
$100,000 increased to $104,588,000 for the 2005 nine-month period from
$103,806,000 in the same period of 2004, representing an increase of $782,000 or
.8%. Average interest bearing transaction and savings accounts decreased to
$67,154,000 for the 2005 nine-month period, a decrease of $1,584,000 or 2.3%
from the same period of 2004.
The yields and rates associated with the subsidiary bank's financial
assets and liabilities are affected primarily by short-term interest rates.
During the twelve-month period ended September 30, 2005, the Federal Reserve
Bank's Open Market Committee gradually increased certain key short-term rates by
a total of 200 basis points. Consequently, the prime rate, a key determinant of
9
rates charged to the Company's most creditworthy customers and a factor
considered in the Company's loan-pricing decisions rose steadily throughout the
period. Likewise, rates paid by the Company for interest bearing deposits and
other funding sources also increased.
The average rate earned on interest earning assets increased by 38
basis points to 5.28% for the first nine months of 2005 as compared with the
same period of 2004. The average rate paid for interest bearing liabilities
during the 2005 nine month period was 2.59%, an increase of 48 basis points from
the same 2004 period. The average interest rate spread (average yield on
interest earning assets less the average rate paid on interest bearing
liabilities) for the first nine months of 2005 was 2.69%. The comparable figure
for the first nine months of 2004 was 2.79%. Net yield on earning assets (net
interest income divided by average interest earning assets) was 3.16% for the
first nine months of 2005, an increase of 3 basis points from the 3.13% net
yield for the first nine months of 2004.
As of September 30, 2005, approximately $57,025,000, or 34.0%, of the
Company's loan portfolio was composed of variable rate loans directly indexed to
movements in the prime rate. The average rate earned on loans during the first
nine months of 2005 was 6.98%, compared with 6.74% for the same period of 2004.
Interest bearing deposit liabilities typically mature within thirty six months
from the date of issuance and generally provide for penalties in the Company's
favor in the event of early withdrawal.
During the first nine months of 2004, the Company increased investment
securities by $21,268,000, or 24.7%. This increase was funded by both decreasing
the Company's investment in federal funds sold and incurring other liabilities.
Late in the second quarter of 2004, the Company borrowed approximately
$10,000,000 from the FHLB and invested the proceeds in several mortgage-backed
securities issues with a combined yield-to-maturity of 5.10%. These securities
were designated and are accounted for as held-to-maturity securities. The
average expected life of these securities was approximately 6.0 years as of the
purchase date. The borrowed funds consisted of a combination of short- and
long-term debt with an average life of approximately 4.6 years and an average
cost of 3.27% at the date incurred. Also contributing to the Company's
investment activities in the first nine months of 2004 were the responses of
securities issuers to the Federal Reserve's interest rate actions. Many
securities issuers have for the past several quarters redeemed callable
securities that were issued at rates higher than current rates. The Company
generally replaced the called securities with new securities that generally were
issued at lower rates.
Provision and Allowance for Loan Losses, Non-performing and Potential Problem
Loans
No provision for loan losses was charged to expense during the third
quarter of 2005 compared with $180,000 for the third quarter of 2004, primarily
due to lower amounts of net charge-offs in the 2005 three month period and
reductions in nonaccrual and potential problem loans during the 2005 third
quarter. For the first nine months of 2005, the provision for loan losses
totaled $215,000 compared with $315,000 for the comparable period of 2004. At
September 30, 2005 and December 30, 2004, the allowance for loan losses was
1.37% and 1.42% of loans, respectively.
During the 2005 nine-month period, net charge-offs totaled $156,000,
compared with $194,000 during the same period of 2004. Net charge-offs during
the 2005 third quarter were $38,000, a decrease of $64,000, or 62.7% from the
$102,000 in net charge-offs during the third quarter of 2004. As of September
30, 2005, there were $969,000 in nonaccrual loans and no loans over 90 days past
due and still accruing interest. The amount of nonaccrual loans at September 30,
2005 is $189,000 less than the comparable amount as of June 30, 2005 and
$496,000 less than the amount of nonaccrual loans as of December 31, 2004. As of
September 30, 2005, the majority of nonaccrual loans are secured by vehicles or
real estate. When the estimated net realizable value of collateral associated
with nonperforming loans is believed to be insufficient to satisfy the debt,
management generally charges-off the excess amount of the debt.
Potential problem loans include loans, other than non-performing loans,
that management has identified as having possible credit problems sufficient to
cast doubt upon the abilities of the borrowers to comply with the current
repayment terms. As of September 30, 2005, the Company's potential problem loans
totaled $2,873,000, an increase of $1,470,000 from the amount of such loans as
of December 31, 2004. However, this amount is $578,000 less than the amount
reported as of June 30, 2005. The increase in potential problem loans since
December 31, 2004 is attributable primarily to cash flow difficulties
experienced by unrelated borrowers on four real estate secured loans totaling
$1,343,000, and one commercial loan of $421,000. Management believes that the
value of the real estate loans' collateral and a governmental agency guarantee
covering a portion of the commercial loan are sufficient to protect the Company
from loss. Management does not believe that the problems associated with these
loans indicate the beginning of a trend or reflect any large-scale changes in
the Company's trade area. Rather, the problems are believed to reflect
conditions peculiar to the borrowers themselves. The majority of other potential
problem loans are secured by real estate mortgages or liens on equipment,
inventories, receivables, automobiles and other forms of collateral.
10
Noninterest Income
Noninterest income totaled $543,000 for the third quarter of 2005,
compared with $524,000 for the 2004 quarter. Noninterest income was $1,581,000
for the first nine months of 2005 and $1,539,000 for the same 2004 period.
Income from mortgage brokerage activities for the 2005 nine month period was
$22,000 less than for the same period of 2004. No securities gains or losses
were realized in the 2005 year-to-date period. There were $9,000 in net realized
losses on sales of available-for-sale securities in the comparable period of
2004.
Noninterest Expenses
Noninterest expenses totaled $1,383,000 for the third quarter of 2005,
compared with $1,303,000 for the 2004 period, representing an increase of
$80,000 or 6.1%. Noninterest expenses were $4,058,000 for the first nine months
of 2005 compared with $3,839,000 for the same period of 2004. Salaries and
employee benefits for the 2005 quarter totaled $791,000, an increase of $83,000
over the 2004 three month period. For the first nine months of 2005, salaries
and employee benefits totaled $2,132,000 representing an increase of $43,000 or
2.1% over the same period of 2004. This increase resulted primarily from normal
increases in salaries and wages granted from time to time.
Occupancy and furniture and equipment expenses for the third quarter of
2005 totaled $154,000, an increase of $10,000, or 6.9% from the amount for the
same period of 2004. Such expenses increased $17,000 during the first nine
months of 2005 and totaled $456,000 for the 2005 nine-month period. Other
expenses for the third quarter of 2005 were $438,000, a decrease of $13,000 or
2.9% from the comparable period of 2004. Such expenses for the nine-month period
of 2005 were $1,470,000, an increase of $159,000 or 12.1% over the amount for
the same period of 2004. These expenses increased primarily because of expenses
associated with preparing the Company to comply with the requirements of Section
404 of the Sarbanes-Oxley Act of 2002, increased amortization expenses of core
data processing costs, and expenses incurred in 2005 for the Company's biennial
strategic planning process.
Management anticipates that higher amounts of noninterest expenses will
continue during the remainder of 2005.
Liquidity
Liquidity is the ability to meet current and future obligations through
the liquidation or maturity of existing assets or the acquisition of additional
liabilities. The Company manages both assets and liabilities to achieve
appropriate levels of liquidity. Cash and short-term investments are the
Company's primary sources of asset liquidity. These funds provide a cushion
against short-term fluctuations in cash flow from both deposits and loans.
Securities available-for-sale are the Company's principal source of secondary
asset liquidity. However, the availability of this source is influenced by legal
requirements that the Bank pledge investment securities as collateral for any
local governmental deposits not covered by FDIC insurance and by market
conditions. Individual and commercial deposits are the Company's primary source
of funds for credit activities.
As of September 30, 2005, the ratio of loans to total deposits was
63.4%, compared with 58.8% as of December 31, 2004 and 61.4% as of September 30,
2004. The increase in the loan-to-deposit ratio for 2005 is generally the result
of diversification of funding sources to include non-deposit borrowings and
increased loan volumes.
Deposits as of September 30, 2005 decreased by $3,366,000 or 1.3% from
the amount at December 31, 2004 and were $11,425,000 or 4.5% greater than their
levels of September 30, 2004. Typically, the Company's deposit totals as of
December 31 are temporarily increased because of year-end property tax receipts
deposited into accounts of Oconee County, South Carolina held with the Bank.
Subsequently, those accounts are redistributed to other entities, including many
that maintain deposit accounts with other financial institutions.
In addition, the composition of accounts maintained with the Bank by
its deposit customers changed during the 2005 nine month period. Certificates of
deposit issued in denominations of less than $100,000 increased by approximately
$10,703,000, or 11.0%, above the amount as of December 31, 2005. Other, more
liquid types of interest bearing deposit accounts, such as interest bearing
checking accounts and savings accounts, decreased by $10,095,000 as depositors
responded to increased rates the Bank offered for time deposit accounts.
Management believes that the Company's liquidity sources are adequate
to meet its operating needs.
Capital Resources
The Company's equity capital increased by $2,400,000 since December 31,
2004 as the result of net income of $2,816,000 for the first nine months of
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2005, $30,000 added from the exercise of employee stock options, less $446,000
from changes in items of comprehensive income, primarily unrealized losses on
available-for-sale investment securities, net of deferred taxes.
The Company and its banking subsidiary (the "Bank") are subject to
regulatory risk-based capital adequacy standards. Under these standards, bank
holding companies and banks are required to maintain certain minimum ratios of
capital to risk-weighted assets and average total assets. Under the provisions
of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA),
federal bank regulatory authorities are required to implement prescribed "prompt
corrective actions" upon the deterioration of the capital position of a bank. If
the capital position of an affected institution were to fall below certain
levels, increasingly stringent regulatory corrective actions are mandated.
The September 30, 2005 risk based capital ratios for the Company and
the Bank are presented in the following table, compared with the "well
capitalized" and minimum ratios under the regulatory definitions and guidelines:
Total
Tier 1 Capital Leverage
------ ------- --------
Community First Bancorporation .............. 15.9% 17.2% 9.6%
Community First Bank ........................ 15.3% 16.6% 9.2%
Minimum "well-capitalized" requirement ...... 6.0% 10.0% 6.0%
Minimum requirement ......................... 4.0% 8.0% 4.0%
Off Balance Sheet Arrangements
In the normal course of business, the Bank is party to financial instruments
with off-balance-sheet risk including commitments to extend credit and standby
letters of credit. Such instruments have elements of credit risk in excess of
the amount recognized in the balance sheet. The exposure to credit loss in the
event of nonperformance by the other parties to the financial instruments for
commitments to extend credit and standby letters of credit is represented by the
contractual or notional amount of those instruments. Generally, the same credit
policies used for on-balance-sheet instruments, such as loans, are used in
extending loan commitments and standby letters of credit.
Following are the off-balance-sheet financial instruments whose contract amounts
represent credit risk:
September 30, 2005
------------------
(Dollars in thousands)
Loan commitments ....................... $ 23,684
Standby letters of credit .............. 889
Loan commitments involve agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and some involve
payment of a fee. Many of the commitments are expected to expire without being
fully drawn; therefore, the total amount of loan commitments does not
necessarily represent future cash requirements. Each customer's creditworthiness
is evaluated on a case-by-case basis. The amount of collateral obtained, if any,
upon extension of credit is based on management's credit evaluation of the
borrower. Collateral held varies but may include commercial and residential real
properties, accounts receivable, inventory and equipment.
Standby letters of credit are conditional commitments to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
standby letters of credit is the same as that involved in making loan
commitments to customers.
As described under "Liquidity," management believes that its various sources of
liquidity provide the resources necessary for the Bank to fund the loan
commitments and to perform under standby letters of credit, if the need arises.
The Bank contracted for the construction of a new headquarters building which is
currently under construction in Seneca, South Carolina. The contract price for
this building is approximately $1,700,000. Upon completion, which is currently
expected to occur in the second quarter of 2006, the building will house an
additional banking office, the mortgage lending staff, and the Company's
executive officers. Through September 30, 2005, the Company has made
expenditures totaling approximately $307,000 under this arrangement. Neither the
Company nor the Bank are involved in other off-balance sheet contractual
relationships or transactions that could result in liquidity needs or other
commitments or significantly impact earnings.
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Item 3. - Controls and Procedures
Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or
240.15d-15(b) of the Company's disclosure controls and procedures (as defined in
17 C.F.R. Sections 240.13a-15(e) and 240.15d-15(e)), the Company's chief
executive officer and chief financial officer concluded such controls and
procedures, as of the end of the period covered by this report, were effective.
There has been no change in the Company's internal control over financial
reporting during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II - OTHER INFORMATION
Item 6. - Exhibits
(a) Exhibits 31. Rule 13a-14(a)/15d-14(a) Certifications
32. Certifications Pursuant to 18 U.S.C. Section 1350
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SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
COMMUNITY FIRST BANCORPORATION
November 10, 2005 /s/ Frederick D. Shepherd, Jr.
----------------- -------------------------------------------
Date Frederick D. Shepherd, Jr., Chief
Executive Officer and Chief Financial Officer
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EXHIBIT INDEX
31. Rule 13a-14(a)/15d-14(a) Certifications
32. Certifications Pursuant to 18 U.S.C. Section 1350
15