Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For Quarterly Period Ended March 31, 2011
Commission File No. 000-29640


COMMUNITY FIRST BANCORPORATION
 (Exact name of registrant as specified in its charter)


South Carolina
 
58-2322486
(State or other jurisdiction of
 
(IRS Employer Identification No.)
incorporation or organization)
   


449 HIGHWAY 123 BYPASS
SENECA, SOUTH CAROLINA  29678
 (Address of principal executive offices, zip code)


(864) 886-0206
 (Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [   ]  No [   ]  (Not yet applicable to Registrant)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.   (Check one):

Large accelerated filer                                         [   ]
Accelerated filer                                                     [   ]
   
Non-accelerated filer                                           [   ]
Smaller reporting company                                   [X]
(Do not check if a smaller reporting company)
 

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

Yes [    ]  No [ X ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  Common Stock, no par or stated value, 3,972,976 Shares Outstanding on May 9, 2011.

 
 

 
COMMUNITY FIRST BANCORPORATION

FORM 10-Q

Index

PART I –                 FINANCIAL INFORMATION

 
Page
PART I –                 FINANCIAL INFORMATION
 
   
Item 1.                      Financial Statements
 
   
  Consolidated Balance Sheets
3
  Consolidated Statements of Income
4
  Consolidated Statements of Changes in Shareholders’ Equity
5
  Consolidated Statements of Cash Flows
6
  Notes to Unaudited Consolidated Financial Statements
8
   
Item 2.                      Management’s Discussion and Analysis of Financial Condition and Results of Operations
21
Item 4.                      Controls and Procedures
28
   
PART II -                OTHER INFORMATION
 
   
Item 6.                      Exhibits
28
   
SIGNATURE
29




 
2

 
 
 
PART I – FINANCIAL INFORMATION
 
Item 1. – Financial Statements

COMMUNITY FIRST BANCORPORATION
           
Consolidated Balance Sheets
           
   
(Unaudited)
       
   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
(Dollars in thousands)
 
Assets
           
   Cash and due from banks
  $ 1,991     $ 1,711  
 Interest bearing deposits due from banks
    30,797       39,171  
Cash and cash equivalents
    32,788       40,882  
 Securities available-for-sale
    170,953       169,369  
  Securities held-to-maturity (fair value $6,144 for 2011
               
and $6,817 for 2010)
    5,746       6,389  
   Other investments
    1,363       1,363  
      Loans
    247,640       256,834  
      Allowance for loan losses
    (5,839 )     (5,756 )
Loans - net
    241,801       251,078  
 Premises and equipment - net
    8,082       8,170  
 Accrued interest receivable
    2,393       2,491  
 Bank-owned life insurance
    9,755       9,666  
   Foreclosed assets
    11,505       11,395  
   Other assets
    4,785       4,956  
                 
Total assets
  $ 489,171     $ 505,759  
                 
Liabilities
               
Deposits
               
Noninterest bearing
  $ 47,780     $ 46,844  
Interest bearing
    386,244       398,466  
Total deposits
    434,024       445,310  
Accrued interest payable
    1,172       1,698  
Short-term borrowings
    -       5,000  
Long-term debt
    6,500       6,500  
Other liabilities
    2,182       1,939  
Total liabilities
    443,878       460,447  
                 
Shareholders' equity
               
  Preferred stock - Series A - non-voting 5% cumulative - $1,000 per share
         
    liquidation preference; 5,000 shares authorized;
               
issued and outstanding - 3,150 shares
    3,126       3,126  
Preferred stock - no par value; 9,995,000 shares authorized;
               
None issued and outstanding
    -       -  
Common stock - no par value; 10,000,000 shares authorized;
               
   issued and outstanding - 3,972,976 for 2011 and
               
     3,972,976 for 2010
    39,931       39,931  
 Additional paid-in capital
    748       748  
 Retained earnings
    1,532       1,396  
Accumulated other comprehensive (loss) income
    (44 )     111  
Total shareholders' equity
    45,293       45,312  
                 
Total liabilities and shareholders' equity
  $ 489,171     $ 505,759  
                 
See accompanying notes to unaudited consolidated financial statements.
               
 
 
3

 
 
COMMUNITY FIRST BANCORPORATION
           
Consolidated Statements of Income
         
   
(Unaudited)
 
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
   
(Dollars in thousands,
except per share)
 
Interest income
           
 Loans, including fees
  $ 3,623     $ 4,004  
    Interest bearing deposits due from banks
    28       38  
 Securities
               
            Taxable
    1,124       1,285  
      Tax-exempt
    177       199  
 Other investments
    2       -  
Total interest income
    4,954       5,526  
Interest expense
               
 Time deposits $100M and over
    562       733  
    Other deposits
    870       1,419  
    Long-term debt
    64       76  
Total interest expense
    1,496       2,228  
Net interest income
    3,458       3,298  
Provision for loan losses
    1,250       1,125  
Net interest income after provision
    2,208       2,173  
Other income
               
Service charges on deposit accounts
    260       301  
   Debit card transaction fees
    183       136  
Credit life insurance commissions
    1       4  
Increase in value of bank-owned life insurance
    89       92  
   Other income
    55       3  
Total other income
    588       536  
Other expenses
               
Salaries and employee benefits
    1,220       1,119  
   Net occupancy expense
    139       145  
Furniture and equipment expense
    79       90  
Amortization of computer software
    97       112  
   FDIC insurance expense
    232       398  
Debit card transaction expenses
    116       100  
  Other expense
    704       521  
Total other expenses
    2,587       2,485  
Income before income taxes
    209       224  
Income tax expense
    34       17  
Net income
    175       207  
Deductions for amounts not available to common shareholders:
               
Dividends declared or accumulated on preferred stock
    (59 )     (59 )
Net income available to common shareholders
  $ 116     $ 148  
                 
Per common share*
               
Net income
  $ 0.03     $ 0.04  
Net income, assuming dilution
    0.03       0.04  
__________________
               
* Per share information has been retroactively adjusted to reflect a 5% stock dividend effective December 16, 2010.
         
 
               
 See accompanying notes to unaudited consolidated financial statements.                
 
 
 
4

 
 
COMMUNITY FIRST BANCORPORATION
Consolidated Statements of Changes in Shareholders' Equity
                                           
                                       
                                           
           (Unaudited)                          
                                 
Accumulated
       
   
Shares of
               
Additional
         
Other
       
   
Common
   
Preferred
   
Common
   
Paid-in
   
Retained
   
Comprehensive
       
   
Stock
   
Stock
   
Stock
   
Capital
   
Earnings
   
Income (Loss)
   
Total
 
           (Dollars in thousands)            
                                           
Balance, January 1, 2010
    3,782,415     $ 3,126     $ 38,923     $ 748     $ 1,434     $ 587     $ 44,818  
Comprehensive income:
                                                       
Net income
    -       -       -       -       207       -       207  
Unrealized holding gains and losses
                                                       
   on available-for-sale securities
                                                       
   arising during the period, net of
    .                                                  
   income taxes of $487
    -       -       -       -       -       871       871  
     Total other comprehensive
        income
                                                    871  
        Total comprehensive income
                                                    1,078  
Dividends paid on preferred stock
    -       -       -       -       (39 )     -       (39 )
Exercise of employee stock options
    1,744       -       17       -       -       -       17  
Balance, March 31, 2010
    3,784,159     $ 3,126     $ 38,940     $ 748     $ 1,602     $ 1,458     $ 45,874  
                                                         
                                                         
Balance, January 1, 2011
    3,972,976     $ 3,126     $ 39,931     $ 748     $ 1,396     $ 111     $ 45,312  
Comprehensive income:
                                                       
Net income
    -       -       -       -       175       -       175  
Unrealized holding gains and losses
                                                       
  on available-for-sale securities
                                                       
  arising during the period, net of
    .                                                  
  income taxes of $87
    -       -       -       -       -       (155 )     (155 )
      Total other comprehensive
         income
                                                    (155 )
          Total comprehensive income
                                                    20  
Dividends paid on preferred stock
    -       -       -       -       (39 )     -       (39 )
Balance, March 31, 2011
    3,972,976     $ 3,126     $ 39,931     $ 748     $ 1,532     $ (44 )   $ 45,293  
                                                         
                                           
 
See accompanying notes to unaudited consolidated financial statements.
 
 
5

 
 
COMMUNITY FIRST BANCORPORATION
           
Consolidated Statements of Cash Flows
           
   
(Unaudited)
 
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
   
(Dollars in thousands)
 
Operating activities
           
Net income
  $ 175     $ 207  
Adjustments to reconcile net income to net
               
cash provided by operating activities
               
Provision for loan losses
    1,250       1,125  
Depreciation
    93       97  
Amortization of net loan fees and costs
    17       (13 )
Securities accretion and premium amortization
    268       294  
Writedowns of foreclosed assets
    45       -  
Loss (gain) on sale of foreclosed assets
    29       (2 )
Increase in cash surrender value of bank-owned life insurance
    (89 )     (92 )
Decrease (increase) in interest receivable
    98       (628 )
(Decrease) increase in interest payable
    (526 )     553  
Decrease in prepaid expenses and other assets
    258       482  
Increase in other accrued expenses
    243       173  
Net cash provided by operating activities
    1,861       2,196  
                 
Investing activities
               
Purchases of available-for-sale securities
    (23,965 )     (47,927 )
Maturities, calls and paydowns of securities available-for-sale
    21,871       26,289  
Maturities, calls and paydowns of securities held-to-maturity
    643       678  
Net decrease (increase) in loans made to customers
    7,502       (1,491 )
Purchases of premises and equipment
    (5 )     (15 )
Additional investment in foreclosed assets
    -       (29 )
Proceeds of sale of foreclosed assets
    324       177  
Net cash provided (used) by investing activities
    6,370       (22,318 )
                 
Financing activities
               
Net increase in demand deposits, interest
               
bearing transaction accounts and savings accounts
    6,516       1,629  
Net (decrease) increase in certificates of deposit and other
               
time deposits
    (17,802 )     31,494  
Decrease in short-term borrowings
    (5,000 )     -  
Cash dividends paid on preferred stock
    (39 )     (39 )
Exercise of employee stock options
    -       17  
Net cash (used) provided by financing activities
    (16,325 )     33,101  
(Decrease) increase in cash and cash equivalents
    (8,094 )     12,979  
Cash and cash equivalents, beginning
    40,882       47,483  
Cash and cash equivalents, ending
  $ 32,788     $ 60,462  
                 
                 
                 
See accompanying notes to unaudited consolidated financial statements.
               
 
 
 
6

 
 
COMMUNITY FIRST BANCORPORATION
           
Consolidated Statements of Cash Flows - continued
           
   
(Unaudited)
 
   
Three Months Ended
 
   
March 31,
 
   
2011
   
2010
 
   
(Dollars in thousands)
 
Supplemental Disclosure of Cash Flow Information
           
Cash paid during the period for
           
      Interest
  $ 2,022     $ 1,675  
Income taxes
    -       -  
Net transfers from loans to foreclosed assets
    508       255  
Noncash investing and financing activities:
               
Other comprehensive income (loss)
    (155 )     871  
 
 
 
 
 
 
 

 
 
7

 
 
COMMUNITY FIRST BANCORPORATION

Notes to Unaudited Consolidated Financial Statements
(Dollar amounts in thousands, except per share)

Accounting Policies – A summary of significant accounting policies is included in Community First Bancorporation’s (the “Company,” “our,” “we,” “us,” and similar references) Annual Report on Form 10-K for the year ended December 31, 2010 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.

Investment Securities – The following table presents information about amortized cost, unrealized gains, unrealized losses, and estimated fair values of securities:

           
March 31, 2011
                 
December 31, 2010
       
         
Gross
   
Gross
               
Gross
   
Gross
       
         
Unrealized
   
Unrealized
   
Estimated
         
Unrealized
   
Unrealized
   
Estimated
 
   
Amortized
   
Holding
   
Holding
   
Fair
   
Amortized
   
Holding
   
Holding
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
   
Cost
   
Gains
   
Losses
   
Value
 
             (Dollars in thousands)                
Available-for-sale
                                               
Mortgage-backed
   securities
                                               
 issued by US 
 Government
                                               
agencies
  $ 1,061     $ 59     $ -     $ 1,120     $ 1,128     $ 52     $ -     $ 1,180  
Government sponsored
                                                               
enterprises (GSEs)
    126,692       654       1,684       125,662       130,492       863       1,495       129,860  
Mortgage-backed
   securities
                                                               
   issued by GSEs
    26,139       944       18       27,065       20,145       983       -       21,128  
State, county and
                                                               
municipal
    17,130       217       241       17,106       17,432       130       361       17,201  
Total
  $ 171,022     $ 1,874     $ 1,943     $ 170,953     $ 169,197     $ 2,028     $ 1,856     $ 169,369  
                                                                 
Held-to-maturity
                                                               
Mortgage-backed
  securities
                                                               
issued by US Government
                                                               
agencies
  $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
Government sponsored
                                                               
enterprises
    -       -       -       -       -       -       -       -  
Mortgage-backed 
   securities
                                                               
   issued by GSEs
    5,746       398       -       6,144       6,389       428       -       6,817  
State, county and
                                                               
municipal
    -       -       -       -       -       -       -       -  
Total
  $ 5,746     $ 398     $ -     $ 6,144     $ 6,389     $ 428     $ -     $ 6,817  


 
8

 
The amortized cost and estimated fair value of securities by contractual maturity are shown below:

          March 31, 2011              
Available-for-sale at fair value
 
Due within one year
   
Due after one through five years
   
Due after five through ten years
   
Due after ten years
   
Total
 
   
(Dollars in thousands)
     
Non-mortgage-backed securities issued by GSEs
  $ -     $ 34,919     $ 50,546     $ 40,197     $ 125,662  
State, county and municpal issuers
    -       533       3,990       12,583       17,106  
      -       35,452       54,536       52,780       142,768  
Mortgage-backed securities issued by:
                                       
US Government agencies
                                    1,120  
   GSEs
                                    27,065  
Total available-for-sale
                                  $ 170,953  
                                         
Held-to-maturity at amortized cost
                                       
Mortgage-backed securities issued by:
                                       
GSEs
                                  $ 5,746  
Total held-to-maturity
                                  $ 5,746  

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
9

 
The estimated fair values and gross unrealized losses of all of the Company’s investment securities whose fair values were less than amortized cost as of March 31, 2011 which had not been determined to be other-than-temporarily impaired are presented below.  The Company evaluates all available-for-sale securities and all held-to-maturity securities for impairment as of each balance sheet date.  The securities have been segregated in the table by investment category and the length of time that individual securities have been in a continuous unrealized loss position.

      March 31, 2011  
     
Continuously in Unrealized Loss Position for a Period of
 
     
Less than 12 Months
   
12 Months or more
   
Total
 
     
Estimated
Fair Value
   
Unrealized Loss
   
Estimated
Fair Value
   
Unrealized Loss
   
Estimated
Fair Value
   
Unrealized Loss
 
     
(Dollars in thousands)
Available-for-sale
                                     
    Government-sponsored
                                     
      enterprises (GSEs)
    $ 75,384     $ 1,684     $ -     $ -     $ 75,384     $ 1,684  
    Mortgage-backed securities
                                               
      issued by GSEs
      3,971       18       -       -       3,971       18  
    State, county and
                                                 
      municipal securities
      6,469       188       457       53       6,926       241  
        Total     $ 85,824     $ 1,890     $ 457     $ 53     $ 86,281     $ 1,943  
                                                   
Held-to-maturity
                                                 
    GSEs
    $ -     $ -     $ -     $ -     $ -     $ -  
        Total     $ -     $ -     $ -     $ -     $ -     $ -  
                                                   
                                                   
      December 31, 2010  
     
Continuously in Unrealized Loss Position for a Period of
 
     
Less than 12 Months
   
12 Months or more
   
Total
 
     
Estimated
Fair Value
   
Unrealized Loss
   
Estimated
Fair Value
   
Unrealized Loss
   
Estimated
Fair Value
   
Unrealized Loss
 
     
(Dollars in thousands)
Available-for-sale
                                                 
    GSEs
    $ 60,543     $ 1,495     $ -     $ -     $ 60,543     $ 1,495  
    Mortgage-backed securities
                                               
      issued by GSEs
      -       -       -       -       -       -  
    State, county and
                                                 
      municipal securities
      9,648       306       455       55       10,103       361  
        Total     $ 70,191     $ 1,801     $ 455     $ 55     $ 70,646     $ 1,856  
                                                   
Held-to-maturity
                                                 
    GSEs
    $ -     $ -     $ -     $ -     $ -     $ -  
      $ -     $ -     $ -     $ -     $ -     $ -  


As of March 31, 2011, 78 securities had been continuously in an unrealized loss position for less than 12 months and one security had been continuously in an unrealized loss position for 12 months or more.  We do not consider these investments to be other-than-temporarily impaired because the unrealized losses involve primarily issuances of government-sponsored enterprises and state, county and municipal government issuers.  We also believe that the impairments resulted from current credit market conditions.  There have been no defaults or failures by any of the issuers to remit periodic interest payments as required, nor are we aware that any such issuer has given notice that it expects it will be unable to make any such future payment according to the terms of its bond agreement.  Although we classify a majority of our investment securities as available-for-sale, management has not determined that any specific securities will be disposed of prior to maturity and believes that we have both the ability and the intent to hold those investments until a recovery of fair value, including until maturity.  Furthermore, we do not believe that we will be required to sell any such securities prior to recovery of the unrealized losses.  Substantially all of the state, county and municipal securities were rated at least “investment grade” by either S&P or Moody’s, or both, as of March 31, 2011.

 
10

 
Our subsidiary bank is a member of the Federal Home Loan Bank of Atlanta (“FHLB”) and, accordingly, is required to own restricted stock in that institution in amounts that may vary from time to time.  These securities are carried in the “other investments” category in the Consolidated Balance Sheets.  Because of the restrictions imposed, the stock may not be sold to other parties, but is redeemable by the FHLB at the same price as that at which it was acquired by the Company’s subsidiary.  We evaluate this security for impairment based on the probability of ultimate recovery of the acquisition cost.  No impairment has been recognized based on this evaluation.

During the first three months of 2011, we did not sell any securities, nor were there any transfers of available-for-sale securities to other categories.

Loans – Loans consisted of the following:

   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
(Dollars in thousands)
 
Commercial, financial and industrial
  $ 19,714     $ 20,474  
Real estate- construction
    21,315       23,730  
Real estate - mortgage
    183,796       187,940  
Consumer installment
    22,815       24,690  
Total
    247,640       256,834  
Allowance for loan losses
    (5,839 )     (5,756 )
Loans - net
  $ 241,801     $ 251,078  

The following table provides information about the payment status of loans:
 
   
30-59 Days Past Due
   
60-89 Days Past Due
   
90 Days or More Past Due
   
Total Past Due
   
Current
   
Total Loans
 
As of March 31, 2011
 
(Dollars in thousands)
 
Commercial, financial and
                                   
industrial
  $ 80     $ 24     $ 1,117     $ 1,221     $ 18,493     $ 19,714  
Real estate- construction
    224       32       7,176       7,432       13,883       21,315  
Real estate - mortgage
    778       214       11,908       12,900       170,896       183,796  
Consumer installment
    187       69       387       643       22,172       22,815  
Total
  $ 1,269     $ 339     $ 20,588     $ 22,196     $ 225,444     $ 247,640  
                                                 
                                                 
   
30-59 Days Past Due
   
60-89 Days Past Due
   
90 Days or More Past Due
   
Total Past Due
   
Current
   
Total Loans
 
As of December 31, 2010
 
(Dollars in thousands)
 
Commercial, financial and
                                               
industrial
  $ 254     $ 214     $ 855     $ 1,323     $ 19,151     $ 20,474  
Real estate- construction
    485       662       6,082       7,229       16,501       23,730  
Real estate - mortgage
    1,834       2,093       8,974       12,901       175,039       187,940  
Consumer installment
    294       256       433       983       23,707       24,690  
Total
  $ 2,867     $ 3,225     $ 16,344     $ 22,436     $ 234,398     $ 256,834  

 
11

 

Nonaccrual loans totaled $20,588 and $16,344 as of March 31, 2011 and December 31, 2010, respectively.  Troubled debt restructurings not including such loans that are included in nonaccrual loans, totaled $12,506 as of March 31, 2011 and $5,547 as of December 31, 2010.  As of March 31, 2011 and December 31, 2010, we had no loans past due 90 days or more and still accruing interest.

Loans that we grade Management Attention and Special Mention are not believed to represent more than a minimal likelihood of loss.  Those grades indicate that a change in the borrowers’ circumstances, or some other event, has occurred such that an elevated level of monitoring is warranted.  Such loans are generally evaluated collectively for purposes of estimating the allowance for loan losses.  Loans graded Substandard are believed to present a moderate likelihood of loss due the presence of well-defined weakness in the borrowers’ financial condition such as a change in their demonstrated repayment history, the effects of lower collateral values combined with other financial difficulties the borrowers may be experiencing, or deterioration of other indicators of the borrowers’ ability to service the loan as agreed.  Loans graded Doubtful are believed to present a high likelihood of loss due to severe deterioration of a borrowers’ financial condition, severe past due status and/or substantial deterioration of collateral value, or other factors.  Loans graded Substandard and Doubtful are evaluated individually for impairment.  Management updates the internal risk grading system no less often than monthly.  The following table provides information about how we grade loans internally.

   
Internally Assigned Risk Grade
       
   
Management
 Attention
   
Special Mention
   
Substandard
   
Doubtful
   
Total
 
As of March 31, 2011
 
(Dollars in thousands)
 
 Commercial, financial and
    industrial
  $ 3,301     $ 2,717     $ 1,585     $ -     $ 7,603  
 Real estate- construction
    3,894       251       11,372       -       15,517  
 Real estate - mortgage
    26,093       7,957       22,312       -       56,362  
 Consumer installment
    1,398       706       1,062       -       3,166  
    $ 34,686     $ 11,631     $ 36,331     $ -     $ 82,648  
                                         
                                         
   
Internally Assigned Risk Grade
         
   
Management Attention
   
Special Mention
   
Substandard
   
Doubtful
   
Total
 
As of December 31, 2010
 
(Dollars in thousands)
 
 Commercial, financial and
    industrial
  $ 524     $ 577     $ 1,385     $ -     $ 2,486  
 Real estate- construction
    1,953       2,980       7,953       -       12,886  
 Real estate - mortgage
    12,628       8,326       12,795       237       33,986  
 Consumer installment
    1,177       684       806       -       2,667  
    $ 16,282     $ 12,567     $ 22,939     $ 237     $ 52,025  


Impaired loans generally are nonaccrual loans, loans that are 90 days or more delinquent as to principal or interest payments, and other loans where, based on current information and events, it is probable that we will be unable to collect principal and interest payments according to the contractual terms of the loan agreements, including loans whose terms have been modified in a troubled debt restructuring.  A loan is not considered to be impaired, however, if any periods of delay or shortfalls of amounts expected to be collected are insignificant or if we expect that we will be able to collect all amounts due including interest accrued at the contractual interest rate during the period of delay.

Following is a summary of our impaired loans, by class:

 
12

 

     
 
 Recorded Investment
   
 
Unpaid Principal Balance
   
 
Related Allowance
   
Year-to-Date Average Recorded Investment
   
Year-to-Date Interest Income Recognized
 
As of March 31, 2011
 
(Dollars in thousands)
 
With no related allowance recorded:
                             
 
Commercial, financial and industrial
  $ 586     $ 586     $ -     $ 377     $ 3  
 
Real estate- construction
    15,511       16,027       -       9,201       122  
 
Real estate - mortgage
    12,934       13,801       -       11,475       23  
 
Consumer installment
    294       294       -       314       4  
                                           
With an allowance recorded:
                                       
 
Commercial, financial and industrial
  $ 793     $ 793     $ 592     $ 780     $ -  
 
Real estate- construction
    743       922       284       795       -  
 
Real estate - mortgage
    2,000       2,270       859       3,680       1  
 
Consumer installment
    233       233       135       200       -  
                                           
Total:
                                         
 
Commercial, financial and industrial
  $ 1,379     $ 1,379     $ 592     $ 1,157     $ 3  
 
Real estate - construction and mortgage
    31,188       33,020       1,143       25,151       146  
 
Consumer installment
    527       527       135       514       4  
 
Total
  $ 33,094     $ 34,926     $ 1,870     $ 26,822     $ 153  
                                           
                                           
     
 
Recorded Investment
   
 
Unpaid Principal Balance
   
 
Related Allowance
   
Year-to-Date Average Recorded Investment
   
Year-to-Date Interest Income Recognized
 
As of December 31, 2010
 
(Dollars in thousands)
 
With no related allowance recorded:
                                       
 
Commercial, financial and industrial
  $ 167     $ 167     $ -     $ 73     $ -  
 
Real estate- construction
    2,890       3,462       -       2,569       13  
 
Real estate - mortgage
    9,989       10,638       -       7,761       118  
 
Consumer installment
    334       334       -       262       -  
                                           
With an allowance recorded:
                                       
 
Commercial, financial and industrial
  $ 767     $ 767     $ 515     $ 455     $ -  
 
Real estate- construction
    846       874       45       1,523       41  
 
Real estate - mortgage
    5,360       5,529       1,632       6,465       -  
 
Consumer installment
    166       166       66       273       -  
                                           
Total:
                                         
 
Commercial, financial and industrial
  $ 934     $ 934     $ 515     $ 528     $ -  
 
Real estate - construction and mortgage
    19,085       20,503       1,677       18,318       172  
 
Consumer installment
    500       500       66       535       -  
 
Total
  $ 20,519     $ 21,937     $ 2,258     $ 19,381     $ 172  
 
13

 

The following table provides information about how we evaluated loans for impairment, the amount of the allowance for loan losses estimated for loans subjected to each type of evaluation, and the related total amounts, by portfolio segment as of each date indicated:

   
Secured by
             
   
Real Estate
   
Other
   
Total
 
As of March 31, 2011
 
(Dollars in thousands)
 
Allowance for credit losses
                 
Ending balance
  $ 4,124     $ 1,715     $ 5,839  
Ending balance - individually
                       
evaluated for impairment
  $ 1,143     $ 727     $ 1,870  
Ending balance - collectively
                       
evaluated for impairment
  $ 2,981     $ 988     $ 3,969  
                         
Loans
                       
Ending balance
  $ 205,111     $ 42,529     $ 247,640  
Ending balance - individually
                       
evaluated for impairment
  $ 31,188     $ 1,906     $ 33,094  
Ending balance - collectively
                       
evaluated for impairment
  $ 173,923     $ 40,623     $ 214,546  
                         
                         
   
Secured by
                 
   
Real Estate
   
Other
   
Total
 
As of December 31, 2010
 
(Dollars in thousands)
 
Allowance for credit losses
                       
Ending balance
  $ 3,753     $ 2,003     $ 5,756  
Ending balance - individually
                       
evaluated for impairment
  $ 1,504     $ 754     $ 2,258  
Ending balance - collectively
                       
evaluated for impairment
  $ 2,249     $ 1,249     $ 3,498  
                         
Loans
                       
Ending balance
  $ 211,520     $ 45,314     $ 256,834  
Ending balance - individually
                       
evaluated for impairment
  $ 18,425     $ 2,094     $ 20,519  
Ending balance - collectively
                       
evaluated for impairment
  $ 193,095     $ 43,220     $ 236,315  


During the three months ended March 31, 2011, we continued to experience higher than normal (pre-recession) amounts of net charge-offs, and relatively high levels of past due and nonaccrual loans.  These and other measures of credit quality, as well as continuing weakness in real estate prices, relatively low levels of activity in the real estate market and the continuing high unemployment in our market areas, indicate that our loan customers and collateral values remain under stress.  Accordingly, we have recorded higher than normal provision and allowance for loan losses to recognize those conditions.   We have not changed our accounting policy or the methodology used to estimate the allowance for loan losses since December 31, 2010.  The following table provides information about activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2011:

 
14

 
   
Secured by
             
   
Real Estate
   
Other
   
Total
 
For the three months ended March 31, 2011
 
(Dollars in thousands)
 
Allowance for credit losses
                 
Balance, January 1, 2011
  $ 3,753     $ 2,003     $ 5,756  
Provision charged to expense
    1,436       (186 )     1,250  
Recoveries
    -       49       49  
Charge-offs
    (1,065 )     (151 )     (1,216 )
Balance at March 31, 2011
  $ 4,124     $ 1,715     $ 5,839  


Earnings Per Common 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 common 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.  All 2010 per share information has been retroactively adjusted to give effect to a 5% stock dividend effective December 16, 2010.  Net income per common share and net income per common share, assuming dilution, were computed as follows:

     
Three Months Ended
 
     
March 31,
 
     
2011
   
2010
 
     
(Dollars in thousands,
 
     
except per share amounts)
 
               
Net income per common share, basic
           
    Numerator - net income available to common shareholders
  $ 116     $ 148  
    Denominator
                 
      Weighted average common shares issued and outstanding
    3,972,976       3,972,451  
 
Net income per common share, basic
  $ .03     $ .04  
                   
Net income per common share, assuming dilution
               
    Numerator - net income available to common shareholders
  $ 116     $ 148  
    Denominator
                 
        Weighted average common shares issued and outstanding
    3,972,976       3,972,451  
        Effect of dilutive stock options
    -       -  
 
Total shares
    3,972,976       3,972,451  
 
Net income per common share, assuming dilution
  $ .03     $ .04  

Stock-Based Compensation – Our 1998 stock option plan terminated on March 19, 2008 and no further options may be issued under the plan.  A total of 271,581 unexpired and non-forfeited options outstanding under the plan remain exercisable until their expiration dates.

Income Taxes – Net deferred tax assets totaled $2,330 as of March 31, 2011.  Based on available carrybacks and our projections of future federal taxable income, we believe it is more likely than not that we will be able to realize the related tax benefits.  Approximately $554 of these net deferred tax assets is supported by available carrybacks and $1,776 is dependent upon projected future taxable income.  Consequently, no valuation allowance for net deferred tax assets was recorded as of March 31, 2011 or December 31, 2010.

Fair Value Measurements – Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date.  A three-level hierarchy is used for fair value measurements based upon the transparency of the inputs to the valuation of an asset or liability as of the measurement date.  In developing estimates of the fair values of assets and liabilities, no consideration of large position discounts for financial instruments quoted in active markets is allowed.  However, an entity is required to consider its own creditworthiness when valuing its liabilities.  For disclosure purposes, fair values for assets and liabilities are shown in the level of the hierarchy that correlates with the lowest level input that is significant to the fair value measurement in its entirety.

 
15

 
The three levels of the fair value input hierarchy are described as follows:

Level 1 inputs reflect quoted prices in active markets for identical assets or liabilities.

Level 2 inputs reflect observable inputs that may consist of quoted market prices for similar assets or liabilities, quoted prices that are not in an active market, or other inputs that are observable in the market and can be corroborated by observable market data for substantially the full term of the assets or liabilities being valued.

Level 3 inputs reflect the use of pricing models and/or discounted cash flow methodologies using other than contractual interest rates or methodologies that incorporate a significant amount of management judgment, use of the entity’s own data, or other forms of unobservable data.

The following is a summary of the measurement attributes applicable to assets and liabilities that are measured at fair value on a recurring basis:

     
Fair Value Measurement at Reporting Date Using
 
     
Quoted Prices
             
     
in Active
   
Significant
       
     
Markets for
   
Other
   
Significant
 
     
Identical
   
Observable
   
Unobservable
 
     
Assets
   
Inputs
   
Inputs
 
Description
March 31, 2011
 
(Level 1)
   
(Level 2)
   
(Level 3)
 
     
(Dollars in thousands)
 
Securities available-for-sale
    $ -     $ 170,953     $ -  
                           
                           
     
Fair Value Measurement at Reporting Date Using
 
     
Quoted Prices
                 
     
in Active
   
Significant
         
     
Markets for
   
Other
   
Significant
 
     
Identical
   
Observable
   
Unobservable
 
     
Assets
   
Inputs
   
Inputs
 
Description
December 31, 2010
 
(Level 1)
   
(Level 2)
   
(Level 3)
 
     
(Dollars in thousands)
 
Securities available-for-sale
    $ -     $ 169,369     $ -  

Level 2 inputs for our securities available-for-sale are obtained from an independent third-party that uses a process that may incorporate current market prices, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, other reference data and industry and economic events that a market participant would be expected to use in valuing the securities.  Not all of the inputs listed apply to each individual security at each measurement date.  The independent third party assigns specific securities into an “asset class” for the purpose of assigning the applicable level of the fair value hierarchy used to value the securities.  At March 31, 2011 and December 31, 2010, all securities were valued using Level 2 inputs, as described above.

The following is a summary of the measurement attributes applicable to assets and liabilities measured at fair value on a non-recurring basis during the three month period ended March 31, 2011 and the twelve month period ended December 31, 2010 and which remained outstanding at the end of each period:


 
16

 

     
Fair Value Measurement at Reporting Date Using
 
     
Quoted Prices
             
     
in Active
   
Significant
       
     
Markets for
   
Other
   
Significant
 
     
Identical
   
Observable
   
Unobservable
 
     
Assets
   
Inputs
   
Inputs
 
 
March 31, 2011
 
(Level 1)
   
(Level 2)
   
(Level 3)
 
Description
   
(Dollars in thousands)
 
Collateral-dependent impaired loans
    $ -     $ 20,274     $ -  
Land held for sale
      -       139       -  
Foreclosed assets
              5,903          
 
     
Fair Value Measurement at Reporting Date Using
 
     
Quoted Prices
             
     
in Active
   
Significant
       
     
Markets for
   
Other
   
Significant
 
     
Identical
   
Observable
   
Unobservable
 
     
Assets
   
Inputs
   
Inputs
 
 
December 31, 2010
 
(Level 1)
   
(Level 2)
   
(Level 3)
 
Description
   
(Dollars in thousands)
 
Collateral-dependent impaired loans
    $ -     $ 20,312     $ -  
Land held for sale
      -       139       -  
Foreclosed assets
              11,395          

The fair value measurements shown above were made to reduce cost-based measurements to fair value measurements at initial recognition, or to adjust fair value based measurements subsequent to initial recognition, due to changes in the circumstances of individual assets during the period.  For collateral-dependent impaired loans, the measurements reflect our belief that we will receive repayment solely from the liquidation of the underlying collateral.  As a practical expedient, such loans may be valued by comparing the fair value of the collateral securing the loan with the loan’s carrying value.  If the carrying value exceeds the fair value of the collateral, the excess is charged to the allowance for loan losses.  If the fair value of the collateral exceeds the loan’s carrying amount, no adjustment is made, the loan continues to be carried at historical cost, and the loan is not included in the table.

The value of other real estate obtained through loan foreclosure is adjusted, if needed, upon the acquisition of each property to the lower of the recorded investment in the loan or the fair value of the property as determined by a recently performed independent appraisal less the estimated costs to sell.  Similarly, the fair value of repossessions is measured by reference to dealers’ quotes or other market information believed to reliably reflect the value of the specific property held.  Immaterial adjustments may be made by management to reflect property-specific factors such as age or condition.  Losses recognized when loans are initially transferred to or otherwise included in any of the categories shown above are reported as loan losses.  Subsequent to initial recognition, changes in fair value measurements of other real estate and repossessions are included in other income or other expenses, as applicable.

Accounting standards require disclosure of the estimated fair value of certain on-balance sheet and off-balance sheet financial instruments and the methods and assumptions used to estimate their fair values.  A financial instrument is defined as cash, evidence of an ownership interest in an entity or a contract that creates a contractual obligation or right to deliver or receive cash or another financial instrument from a second entity on potentially favorable or unfavorable terms.  Affected financial instruments that are not carried at fair value on the Consolidated Balance Sheets are discussed below.  Accordingly, these fair value disclosures provide only a partial estimate of the Company’s fair value.

For cash and due from banks, interest bearing deposits due from banks and federal funds sold, the carrying amount approximates fair value because these instruments generally mature in 90 days or less.  The carrying amounts of accrued interest receivable or payable approximate fair values.

The fair value of held-to-maturity mortgage-backed securities issued by Government sponsored enterprises is estimated based on dealers’ quotes for the same or similar securities.

 
17

 
The fair value of FHLB stock is estimated at its cost.  The FHLB historically has redeemed its outstanding stock at that value.

Fair values are estimated for loans using discounted cash flow analyses, using interest rates currently offered for loans with similar terms and credit quality.  We do not engage in originating, holding, guaranteeing, servicing or investing in loans where the terms of the loan product give rise to a concentration of credit risk.

The fair value of deposits with no stated maturity (noninterest bearing demand, interest bearing transaction accounts and savings) is estimated as the amount payable on demand, or carrying amount, as required by the ASC.  The fair value of time deposits is estimated using a discounted cash flow calculation that applies rates currently offered to aggregate expected maturities.

The fair values of short-term borrowings, if any, approximate their carrying amounts.

The fair values of fixed rate long-term debt instruments are estimated using discounted cash flow analyses, based on the borrowing rates currently in effect for similar borrowings.  The fair values of variable rate long-term debt instruments are estimated at the carrying amount.

The following table presents the carrying amounts and fair values of our financial instruments:


   
March 31, 2011
   
December 31, 2010
 
   
Carrying
   
Estimated
   
Carrying
   
Estimated
 
   
Amount
   
Fair Value
   
Amount
   
Fair Value
 
   
(Dollars in thousands)
 
Financial assets
                       
    Cash and due from banks
  $ 1,991     $ 1,991     $ 1,711     $ 1,711  
    Interest bearing deposits due from banks
    30,797       30,797       39,171       39,171  
    Securities available-for-sale
    170,953       170,953       169,369       169,369  
    Securities held-to-maturity
    5,746       6,144       6,389       6,817  
    Federal Home Loan Bank stock
    1,363       1,363       1,363       1,363  
    Loans - net
    241,801       242,604       251,079       252,385  
    Accrued interest receivable
    2,393       2,393       2,491       2,491  
Financial liabilities
                               
    Deposits
    434,024       434,889       445,310       446,763  
    Accrued interest payable
    1,172       1,172       1,698       1,698  
    Short-term borrowings
    -       -       5,000       5,000  
    Long-term debt
    6,500       6,529       6,500       6,528  
 
The estimated fair values of off-balance-sheet financial instruments such as loan commitments and standby letters of credit are generally based upon fees charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ creditworthiness.  The vast majority of the banking subsidiary’s loan commitments do not involve the charging of a fee, and fees associated with outstanding standby letters of credit are not material.  For loan commitments and standby letters of credit, the committed interest rates are either variable or approximate current interest rates offered for similar commitments.  Therefore, the estimated fair values of these off-balance-sheet financial instruments are nominal.

The following is a summary of the notional or contractual amounts and estimated fair values of our off-balance-sheet financial instruments:
 

 
 
18

 
 
   
March 31, 2011
   
December 31, 2010
 
   
Notional/
   
Estimated
   
Notional/
   
Estimated
 
   
Contract
   
Fair
   
Contract
   
Fair
 
   
Amount
   
Value
   
Amount
   
Value
 
   
(Dollars in thousands)
 
Off-balance sheet commitments
                       
Loan commitments
  $ 23,197     $ -     $ 26,834     $ -  
Standby letters of credit
    869       -       869       -  
 
Other Expenses – Other expenses consisted of the following:

   
Three Months Ended March 31,
 
   
2011
   
2010
 
   
(Dollars in thousands)
 
             
Salaries and employee benefits
  $ 1,220     $ 1,119  
Net occupancy expense
    139       145  
Furniture and equipment expense
    79       90  
Amortization of computer software
    97       112  
FDIC insurance expense
    232       398  
Debit card transaction expenses
    116       100  
Other expense
               
    Stationery, printing and postage
    89       87  
 Telephone
    62       45  
    Advertising and promotion
    43       24  
    Professional services
    75       122  
    Directors' compensation
    48       35  
     Foreclosed assets costs and expenses, net
    201       55  
    Data processing expenses
    97       113  
 Other
    89       40  
Total
  $ 2,587     $ 2,485  
 
Pending Transaction – On April 25, 2011, our wholly-owned subsidiary bank, Community First Bank, entered into a definitive agreement to acquire Bank of Westminster, Westminster, South Carolina, in an all cash transaction.  Bank of Westminster is privately held and has one office with $30,000 in deposits and $34,000 in total assets as of December 31, 2010.  The transaction, which is subject to approval by Bank of Westminster shareholders as well as state and federal regulators, is expected to close before the fourth quarter of 2011.

New Accounting Pronouncements – In January 2011, the Financial Accounting Standards Board (“FASB”) updated Accounting Standards Codification (“ASC”) Topic 310, “Receivables,” to temporarily delay the effective date of the disclosures about troubled debt restructurings (“TDRs”) contained in Update 2010-20 for public entities.  This delay is intended to allow the FASB time to complete is deliberations on what constitutes a TDR.  The effective dates for the new disclosures about TDRs and the guidance for what constitutes a TDR will then be coordinated.  The new guidance will be effective for annual and interim periods ending after June 15, 2011 and will be applied retrospectively to the beginning of 2011.

In April 2011, FASB updated ASC Topic 310, “Receivables,” to provide guidance to help creditors in determining whether they have granted a concession and whether a debtor is experiencing financial difficulties for purposes of determining whether a restructuring constitutes a troubled debt restructuring.  We will be required to apply this guidance in the third quarter of 2011.  The effects of the guidance will be applied retrospectively to January 1, 2011.  Early adoption is permitted.  If, in applying these amendments retrospectively, we identify receivables that are newly considered impaired because of the guidance, we will apply the amendments prospectively for those receivables and will be required to disclose certain information about those receivables at that time.  We have not yet determined whether we will adopt the provisions of this guidance early, nor have we determined the effect that implementing this guidance will have on our financial condition or results of operations.

 
19

 

CAUTIONARY NOTICE WITH RESPECT TO FORWARD-LOOKING STATEMENTS

This report contains "forward-looking statements" within the meaning of the securities laws.  The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements.  In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements.

All statements that are not historical facts are statements that could be "forward-looking statements." You can identify these forward-looking statements through the use of words such as "may," "will," "should," "could," "would," "expect," "anticipate," "assume," indicate," "contemplate," "seek," "plan," "predict," "target," "potential," "believe," "intend," "estimate," "project," "continue," or other similar words.  Forward-looking statements include, but are not limited to, statements regarding the Company's future business prospects, revenues, working capital, liquidity, capital needs, interest costs, income, business operations and proposed services.

These forward-looking statements are based on current expectations, estimates and projections about the banking industry, management's beliefs, and assumptions made by management.  Such information includes, without limitation, discussions as to estimates, expectations, beliefs, plans, strategies, and objectives concerning future financial and operating performance.  These statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict.  Therefore, actual results may differ materially from those expressed or forecasted in such forward-looking statements.  The risks and uncertainties include, but are not limited to:

·  
future economic and business conditions;
·  
lack of sustained growth and disruptions in the economies of the Company's market areas;
·  
government monetary and fiscal policies;
·  
the effects of changes in interest rates on the levels, composition and costs of deposits, loan demand, and the values of loan collateral, securities, and interest sensitive assets and liabilities;
·  
the effects of competition from a wide variety of local, regional, national and other providers of financial, investment, and insurance services, as well as competitors that offer banking products and services by mail, telephone, computer and/or the Internet;
·  
credit risks;
·  
higher than anticipated levels of defaults on loans;
·  
perceptions by depositors about the safety of their deposits;
·  
capital adequacy;
·  
the failure of assumptions underlying the establishment of the allowance for loan losses and other estimates, including the value of collateral securing loans;
·  
ability to continue to weather the current economic downturn;
·  
loss of consumer or investor confidence;
·  
availability of liquidity sources;
·  
the risks of opening new offices, including, without limitation, the related costs and time of building customer relationships and integrating operations as part of these endeavors and the failure to achieve expected gains, revenue growth and/or expense savings from such endeavors;
·  
the risks related to acquiring other financial institutions;
·  
changes in laws and regulations, including tax, banking and securities laws and regulations;
·  
changes in the requirements of regulatory authorities;
·  
changes in accounting policies, rules and practices;
·  
cost and difficulty of implementing changes in technology and products;
·  
the effects of war or other conflicts, acts of terrorism or other catastrophic events that may affect general economic conditions and economic confidence; and
·  
other factors and information described in this report and in any of  the other reports that we file with the Securities and Exchange Commission under the Securities Exchange Act of 1934.

All forward-looking statements are expressly qualified in their entirety by this cautionary notice.  We have no obligation, and do not undertake, to update, revise or correct any of the forward-looking statements after the date of this report.  We have expressed our expectations, beliefs and projections in good faith and believe they have a reasonable basis.  However, there is no assurance that these expectations, beliefs or projections will result or be achieved or accomplished.

 
20

 

Item 2. – Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Dollar amounts, except per share data, are in thousands)

Changes in Financial Condition

During the first three months of 2011, cash and cash equivalents decreased by $8,094 and loans decreased by $9,194.  Funding sources decreased as interest bearing deposits declined by $12,222 and short-term borrowings decreased by $5,000.  Currently, we are focused on identifying and managing problems in our existing loan portfolio.  To that end, we monitor for changes in our borrowers’ payment behavior and look for other indicators that they might be facing increasing difficulty in meeting their obligations, including staying abreast of developments in the local real estate and job markets.

We are also more actively marketing for sale the properties that we have acquired through foreclosure and repossession.  The amount of such properties we hold currently is almost two times the amount we held as of March 31, 2010.   The proceeds we will receive from selling these properties may be used to fund new loans, to acquire securities, or to reduce deposits or other sources of funds.  Continuing to hold the properties is expensive due to the need to provide for property taxes and other amounts that may be assessed against the properties and to keep the properties in marketable condition.  Selling these properties may cause us to realize losses in addition to those already recognized through writedowns that may have been taken against the loan for which the property served as collateral or which may have been provided for since the property was acquired.  During the first three months of 2011, we sold four such properties for proceeds of $324 and realized net losses of $29 on those sales.  We also acquired properties totaling $508 and provided $45 for estimated valuation allowances during that period.

On April 25, 2011, our wholly-owned subsidiary bank, Community First Bank, entered into a definitive agreement to acquire Bank of Westminster, Westminster, South Carolina, in an all cash transaction.  Bank of Westminster is privately held and has one office with approximately $30,000 in deposits and $34,000 in total assets as of December 31, 2010.  The transaction is subject to approval by Bank of Westminster shareholders and federal and state regulators.  We expect to close this transaction before the fourth quarter of 2011.

Results of Operations

We recorded consolidated net income of $175 for the first three months of 2011 compared with $207 for the same period of 2010.  After deducting $59 in each period applicable to preferred stock dividends and not available to common shareholders, net income per common share was $.03 for the first three months of 2011 compared with $.04 per common share for the first quarter of 2010.  Net income per common share, assuming dilution was $.03 for the 2011 three months and $.04 for the 2010 period.  Net income per common share amounts for 2010 have been retroactively adjusted to reflect a five percent stock dividend effective December 16, 2010.

   
Summary Income Statement
 
   
(Dollars in thousands)
 
For the Three Months Ended March 31,
 
2011
   
2010
   
Dollar Change
   
Percentage Change
Interest income
  $ 4,954     $ 5,526     $ (572 )     -10.4 %
Interest expense
    1,496       2,228       (732 )     -32.9 %
Net interest income
    3,458       3,298       160       4.9 %
Provision for loan losses
    1,250       1,125       125       11.1 %
Noninterest income
    588       536       52       9.7 %
Noninterest expenses
    2,587       2,485       102       4.1 %
Income tax expense
    34       17       17       100.0 %
Net income
    175       207       (32 )     -15.5 %
Preferred stock dividends paid or accumulated
    (59 )     (59 )     -       0.0 %
Net income available to common shareholders
  $ 116     $ 148     $ (32 )     -21.6 %
 
 
21

 
Net Interest Income

Net interest income is the principal source of our earnings.  For the first quarter of 2011, net interest income totaled $3,458, an increase of $160 or 4.9% over the amount for the same period of 2010.  The yield on interest earning assets decreased to 4.17% for the 2011 period, compared with 4.51% for the 2010 period, and the average rates paid for interest bearing liabilities were 1.45% and 2.09%, respectively.  Most significantly, we reduced the average cost of interest bearing time deposits in the 2011 three-month period to 1.81% compared with 2.49% for the same period of 2010.  The average interest rate spread for the 2011 period was 30 basis points higher than for the 2010 period and net yield on earning assets increased to 2.91% in the 2011 period from 2.69% for the 2010 period.

Average loans in the 2011 period were $252,187, a decrease of $14,138, or 5.3%, from the amount for the same period of 2010.  The effect of this volume decrease, coupled with a 27 basis point decrease in the yield earned on loans, led to a $381 decrease in interest and fees on loans for the 2011 period from $4,004 for the 2010 period.  Management estimates that approximately $163 of previously accrued interest income related to nonaccrual loans was reversed against income during the 2011 period compared with $220 during the 2010 period.

Average taxable securities for the 2011 quarter were $19,246 more than for the same period of 2010.  The yield earned on such securities in the 2011 period was 84 basis points lower than the yield during the same 2010 period and led to a $161 reduction in income from such securities during the 2011 period.

Interest rates paid for interest-bearing deposits decreased to 1.41% for the 2011 period, compared with 2.06% for the 2010 period due to our response to prevailing lower rates generally.  The majority of our time deposit accounts are issued with original maturities of 12 months or less.  Consequently, the rates we pay for such deposits generally follow the trends of overall market rates.  Recently, due to low demand for loans and because other earning assets are not priced attractively, we have not sought to retain maturing time deposits.  Some of those deposits have been retained as interest bearing transaction accounts at a much lower interest rate.
 
 
 
 
 
 

 
 
22

 
 
   
Average Balances, Yields and Rates
 
   
Three Months Ended March 31,
 
   
2011
   
2010
 
    Interest     Interest  
   
Average
   
Income/
   
Yields/
   
Average
   
Income/
   
Yields/
 
   
Balances
   
Expense
   
Rates (1)
   
Balances
   
Expense
   
Rates (1)
 
   
(Dollars in thousands)
 
Assets
                                   
Interest-bearing deposits due from banks
  $ 50,011     $ 28       0.23 %   $ 68,712     $ 38       0.22 %
Securities
                                               
Taxable
    160,766       1,124       2.84 %     141,520       1,285       3.68 %
Tax exempt (2)
    17,327       177       4.14 %     19,514       199       4.14 %
Total investment securities
    178,093       1,301       2.96 %     161,034       1,484       3.74 %
Other investments
    1,363       2       0.60 %     1,307       -       0.00 %
Loans (2) (3) (4)
    252,187       3,623       5.83 %     266,325       4,004       6.10 %
Total interest earning assets
    481,654       4,954       4.17 %     497,378       5,526       4.51 %
Cash and due from banks
    2,305                       1,987                  
Allowance for loan losses
    (5,767 )                     (5,969 )                
Unrealized securities gains (losses)
    (115 )                     1,610                  
Premises and equipment
    8,124                       8,563                  
Other assets
    28,723                       23,418                  
Total assets
  $ 514,924                     $ 526,987                  
                                                 
Liabilities and shareholders' equity
                                 
Interest bearing deposits
                                               
Interest bearing transaction accounts
  $ 74,568     $ 87       0.47 %   $ 56,450     $ 84       0.60 %
Savings
    41,713       31       0.30 %     36,235       27       0.30 %
Time deposits $100M and over
    126,334       562       1.80 %     141,530       733       2.10 %
Other time deposits
    168,015       752       1.82 %     189,113       1,308       2.81 %
Total interest bearing
                                               
  deposits
    410,630       1,432       1.41 %     423,328       2,152       2.06 %
Long-term debt
    6,500       64       3.99 %     8,000       76       3.85 %
Total interest bearing
                                               
  liabilities
    417,130       1,496       1.45 %     431,328       2,228       2.09 %
Noninterest bearing demand deposits
    49,152                       46,419                  
Other liabilities
    3,427                       4,036                  
Shareholders' equity
    45,215                       45,204                  
Total liabilities and shareholders'
                                         
equity
  $ 514,924                     $ 526,987                  
Interest rate spread
                    2.72 %                     2.42 %
Net interest income and net yield
                                 
on earning assets
          $ 3,458       2.91 %           $ 3,298       2.69 %
Interest free funds supporting earning
                                 
assets
  $ 64,524                     $ 66,050                  
_________________________________________
                 
(1) Yields and rates are annualized.
                                 
(2) Yields on tax exempt instruments have not been adjusted to a tax-equivalent basis.
 
(3) Nonaccruing loans are included in the loan balance and income from such loans is recognized on a cash basis.
 
(4) Includes immaterial amounts of loan fees.
                         
 
 
23

 
We continue to pursue strategies that we believe will increase our market share in our local market areas in Anderson and Oconee Counties of South Carolina.  We serve Oconee County from four offices which are located in Seneca, Walhalla and Westminster and the Anderson County market is served from offices in Anderson and Williamston.


Provision and Allowance for Loan Losses

We provided $1,250 and $1,125 for loan losses in the first quarters of 2011 and 2010, respectively.  As of March 31, 2011, the allowance for loan losses was 2.36% of loans compared with 2.24% of loans at December 31, 2010 and 2.31% as of March 31, 2010.  During the 2011 three month period, net charge-offs totaled $1,167, compared with $993 in net charge offs during the same period of 2010.  As of March 31, 2011, nonaccrual loans totaled $20,588 and there were no loans 90 days or more past due and still accruing interest.  Approximately 93% of those nonaccrual loans were secured by real estate.  As of March 31, 2010, nonaccrual loans totaled $16,445 and there were no loans 90 days or more past due and still accruing interest.  The activity in the allowance for loan losses is summarized in the table below:

   
Three Months
         
Three Months
 
   
Ended
   
Year Ended
   
Ended
 
   
March 31,
   
December 31,
   
March 31,
 
   
2011
   
2010
   
2010
 
   
(Dollars in thousands)
Allowance at beginning of period
  $ 5,756     $ 6,052     $ 6,052  
Provision for loan losses
    1,250       4,525       1,125  
Net charge-offs
    (1,167 )     (4,821 )     (993 )
Allowance at end of period
  $ 5,839     $ 5,756     $ 6,184  
Allowance as a percentage of loans outstanding
                       
    at period end
    2.36 %     2.24 %     2.31 %
Loans at end of period
  $ 247,640     $ 256,834     $ 267,504  

 
 
 

 
 
24

 
Impaired and Potential Problem Loans

The following table provides information about the amounts of and changes in impaired loans during the periods indicated.

         
90 Days or
                   
         
More Past Due
   
Troubled
   
Total
   
Percentage
   
Nonaccrual
   
and Still
   
Debt
   
Impaired
   
of Total
   
Loans
   
Accruing
   
Restructurings
   
Loans
   
Loans
   
(Dollars in thousands)
January 1, 2009
  $ 11,799     $ -     $ -     $ 11,799       4.36 %
Net change
    2,835       -       -       2,835          
March 31, 2009
    14,634       -       -       14,634       5.31 %
Net change
    2,882       -       -       2,882          
June 30, 2009
    17,516       -       -       17,516       6.41 %
Net change
    (2,632 )     -       -       (2,632 )        
September 30, 2009
    14,884       -       -       14,884       5.52 %
Net change
    (1,014 )     -       -       (1,014 )        
December 31, 2009
    13,870       -       -       13,870       5.19 %
Net change
    2,575       -       -       2,575          
March 31, 2010
    16,445       -       -       16,445       6.15 %
Net change
    (603 )     -       -       (603 )        
June 30, 2010
    15,842       -       -       15,842       5.97 %
Net change
    (880 )     -       2,988       2,108          
September 30, 2010
    14,962       -       2,988       17,950       6.85 %
Net change
    1,382       -       2,469       3,851          
December 31, 2010
    16,344       -       5,457       21,801       8.49 %
Net change
    4,244       -       7,049       11,293          
March 31, 2011
  $ 20,588     $ -     $ 12,506     $ 33,094       13.36 %

As of March 31, 2011, we had troubled debt restructurings (“TDRs”) totaling $12,506 that are not included in the amounts of nonaccrual loans or loans 90 days past due and still accruing in the table above.  Approximately 98% of the amount of those TDRs have collateral consisting of real estate.  TDRs are considered to be impaired loans.

Potential problem loans include loans, other than impaired 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.  Such loans are generally included in the amounts of Management Attention and Special Mention loans included in the table captioned “Internally Assigned Risk Grade” included in the section captioned “Loans” in the Notes to Consolidated Financial Statements.

South Carolina’s 9.9% unemployment rate was the tenth highest rate of unemployment of the 50 states as of March 2011.  The state’s unemployment rate was 12.2% for March 2010.  The unemployment rates for Oconee and Anderson Counties were 9.7% and 9.0%, respectively, for March 2011 compared with 13% each for March 2010.  Worsening of this condition or a continuation of the existing prolonged period of elevated levels, significant increases in prices for fuel and food, continuing declines in the values of homes and other real properties, declining demand for products manufactured locally, and other events could continue to have adverse effects on those areas and potentially lead to further deterioration of the abilities of our loan customers to repay their debts.  These events could lead to higher amounts of nonaccrual, past due and potential problem loans and higher loan losses, all of which could result in higher provisions for loan losses.

Noninterest Income

Noninterest income was $588 for the first quarter of 2011, compared with $536 for the first quarter of 2010.  Service charges on deposit accounts in the 2011 period were $260 representing a decrease of $41 from the prior year period as a result of lower volumes of chargeable account activity by our customers.  Debit card transaction fees for the 2011 period increased by $47 from the 2010 amount.  Other income for the 2011 period was $52 more than for the 2010 period.

 
25

 
Noninterest Expenses

Noninterest expenses were $2,587 for the first quarter of 2011, compared with $2,485 for the first quarter of 2010, representing an increase of $102 or 4.1%.  Salaries and employee benefits increased by $101, or 9.0%, to $1,220.

FDIC insurance expense decreased to $232 for the 2011 period from $398 for the 2010 period due to lower amounts subject to the FDIC’s assessment base, primarily deposits.  Expenses related to FDIC insurance have increased in recent periods due to a higher assessment base, increases in the assessment rate, and special assessments imposed by the Federal Deposit Insurance Corporation.  We believe that future deposit insurance expenses will continue to be higher than we experienced historically.

Expenses associated with foreclosed properties were $201 for the three months ended March 31, 2011, compared with $55 for the same period of 2010.  The amount for 2011 includes net realized losses of $29 and $45 provided for valuation allowances.  Property tax accruals for the 2011 period were $41 compared with $10 for the 2010 period.  Miscellaneous expenses for foreclosed assets, primarily repairs and maintenance, were $72 and $38 for the three months ended March 31, 2011 and March 31, 2010, respectively

Income Taxes

Income tax expense for the first quarter of 2011 increased by $17 from the amount for the same period of 2010 due to lower net income before income taxes and proportionally lower amounts of tax-exempt investment income.  Tax-exempt interest income was 84.7% of income before income taxes in the 2011 period compared with 88.8% of income before income taxes for the 2010 period.

As of March 31, 2011, we have net deferred tax assets of $2,330.  Approximately $554 is realizable from available carrybacks to prior years’ taxable income.  Realization of the remaining $1,776 is dependent primarily on our ability to generate future taxable income.  Based on our previous operating history and our current earnings forecasts for the next four years, we believe that it is more likely than not that we will generate taxable income in amounts sufficient to recover those assets.  Consequently, we have not provided a valuation allowance for these assets.  However, forecasting necessarily requires that we make assumptions and judgments about uncertain future events.  As more empirical evidence becomes available, or as other events occur that might cause us to revise our assumptions and judgments, it is possible that our forecasts could change and it might then be necessary for us to provide a valuation allowance by a charge to income tax expense to reduce the net deferred tax assets to an amount that we believe is more likely than not to be realized..

For purposes of calculating its regulatory capital ratios as of March 31, 2011, the Bank was required to exclude from capital $1,355 of net deferred tax assets.  Generally, the Bank is required to exclude from Tier 1 and Total capital the lesser of 10% of the Bank’s total assets or the amount of deferred tax assets that exceeds the amount realizable from carryback years plus the amount realizable from federal taxable income for the next twelve months.

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.  We manage both assets and liabilities to achieve appropriate levels of liquidity.  Cash and short-term investments are our 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 provide our principal source of secondary asset liquidity.  However, the availability of this source is influenced by market conditions to a significant extent.  Individual and commercial deposits are the primary sources of funds for our credit activities.  We also have significant amounts of credit availability under our FHLB lines of credit.

As of March 31, 2011, the ratio of loans to total deposits was 57.1%, compared with 57.7% as of December 31, 2010.  Total deposits as of March 31, 2011 were $434,024, a decrease of $11,286 or 2.5% from the amount as of December 31, 2010.  Management believes that we have liquidity sources sufficient to meet our operating needs.

Capital Resources

Our capital base decreased by $19 since December 31, 2010 as the result of net income of $175 for the first three months of 2010, minus a $155 decrease in net unrealized gains on available-for-sale securities, net of deferred income tax effects, and minus $39 cash dividends paid on our preferred stock.

 
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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 March 31, 2011 risk based capital ratios for the Company and the Bank are presented in the following table, compared with the “well capitalized” (Bank only) and minimum ratios under the regulatory definitions and guidelines:
 
           
Total
   
       
Tier 1
 
Capital
 
Leverage
Community First Bancorporation
 
15.0%
 
16.3%
 
8.8%
Community First Bank
   
13.1%
 
14.4%
 
7.7%
Minimum "well-capitalized" requirement
 
  6.0%
 
10.0%
 
5.0%
Minimum requirement
   
  4.0%
 
   8.0%
 
4.0%

Off-Balance-Sheet Arrangements

In the normal course of business, the Bank is a 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 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:

   
March 31, 2011
 
   
(Dollars in
 
   
thousands)
 
Loan commitments
  $ 23,197  
Standby letters of credit
    869  

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.  Many letters of credit will expire without being drawn upon and do not necessarily represent future cash requirements.  The Bank receives fees for loan commitments and standby letters of credit.  The amount of such fees was not material for the three months ended March 31, 2011.

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.  Neither the Company nor the Bank is 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 4. – 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 issuer’s disclosure controls and procedures (as defined in 17 C.F.R. Sections 240.13a-15(e) and 240.15d-15(e)), the issuer’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

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

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
   
 
COMMUNITY FIRST BANCORPORATION
   
May 13, 2011
/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


 
 

 
 
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