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 June 30, 2006 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 is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
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, 2,798,409 Shares Outstanding on July 30, 2006
COMMUNITY FIRST BANCORPORATION
FORM 10-Q
Index
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............................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ............. 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........................................ 16
Item 4. Controls and Procedures ........................................................................... 17
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................................................ 17
Item 6. Exhibits .......................................................................................... 17
SIGNATURE ........................................................................................................... 18
2
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
COMMUNITY FIRST BANCORPORATION
Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
2006 2005
----- ----
(Dollars in thousands)
Assets
Cash and due from banks ................................................................... $ 7,278 $ 10,063
Interest bearing balances due from banks .................................................. 49 182
Federal funds sold ........................................................................ 20,795 22,205
--------- ---------
Cash and cash equivalents ............................................................. 28,122 32,450
Securities available-for-sale ............................................................. 106,318 102,070
Securities held-to-maturity (fair value $7,181 for 2006 and $7,671 for 2005) .............. 7,181 7,751
Other investments ......................................................................... 980 948
Loans ..................................................................................... 186,050 169,318
Allowance for loan losses ............................................................. (2,269) (2,266)
--------- ---------
Loans - net ........................................................................ 183,781 167,052
Premises and equipment - net .............................................................. 7,779 6,805
Accrued interest receivable ............................................................... 1,885 1,629
Other assets .............................................................................. 2,217 2,007
--------- ---------
Total assets ....................................................................... $ 338,263 $ 320,712
========= =========
Liabilities
Deposits
Noninterest bearing ................................................................... $ 38,986 $ 38,061
Interest bearing ...................................................................... 261,420 241,932
--------- ---------
Total deposits ..................................................................... 300,406 279,993
Accrued interest payable .................................................................. 2,153 1,817
Short-term borrowings ..................................................................... - 3,500
Long-term debt ............................................................................ 5,500 6,500
Other liabilities ......................................................................... 51 47
--------- ---------
Total liabilities .................................................................. 308,110 291,857
--------- ---------
Shareholders' equity
Common stock - no par value; 10,000,000 shares authorized; issued and
outstanding - 2,798,409 for 2006 and 2,798,409 for 2005 ............................... 26,956 26,956
Additional paid-in capital ................................................................ 100 -
Retained earnings ......................................................................... 4,949 3,296
Accumulated other comprehensive income (loss) ............................................. (1,852) (1,397)
--------- ---------
Total shareholders' equity ......................................................... 30,153 28,855
--------- ---------
Total liabilities and shareholders' equity ......................................... $ 338,263 $ 320,712
========= =========
See accompanying notes to unaudited consolidated financial statements.
3
COMMUNITY FIRST BANCORPORATION
Consolidated Statements of Income
(Unaudited)
Period Ended June 30,
---------------------
Three Months Six Months
------------ ----------
2006 2005 2006 2005
---- ---- ---- ----
(Dollars in thousands, except per share)
Interest income
Loans, including fees ..................................... $3,343 $2,829 $6,433 $5,555
Interest bearing balances due from banks .................. 2 - 4 -
Securities
Taxable ................................................. 957 876 1,888 1,819
Tax-exempt .............................................. 158 32 278 52
Other investments ......................................... 13 11 24 20
Federal funds sold ........................................ 330 159 823 312
------ ------ ------ ------
Total interest income ................................. 4,803 3,907 9,450 7,758
------ ------ ------ ------
Interest expense
Time deposits $100M and over .............................. 733 453 1,465 903
Other deposits ............................................ 1,757 984 3,291 1,911
Short-term borrowings ..................................... - 5 2 17
Long-term debt ............................................ 61 70 123 140
------ ------ ------ ------
Total interest expense ................................ 2,551 1,512 4,881 2,971
------ ------ ------ ------
Net interest income ............................................ 2,252 2,395 4,569 4,787
Provision for loan losses ...................................... 25 75 50 215
------ ------ ------ ------
Net interest income after provision ............................ 2,227 2,320 4,519 4,572
------ ------ ------ ------
Other income
Service charges on deposit accounts ....................... 382 407 746 758
Credit related deposit fees ............................... 76 58 146 110
Credit life insurance commissions ......................... 12 7 22 18
Other income .............................................. 69 79 164 152
------ ------ ------ ------
Total other income .................................... 539 551 1,078 1,038
------ ------ ------ ------
Other expenses
Salaries and employee benefits ............................ 919 630 1,648 1,341
Net occupancy expense ..................................... 79 61 148 125
Furniture and equipment expense ........................... 100 89 204 177
Amortization of computer software ......................... 73 52 133 110
ATM interchange and related expenses ...................... 64 53 142 99
Directors' fees ........................................... 65 27 124 54
Other expense ............................................. 376 440 713 769
------ ------ ------ ------
Total other expenses .................................. 1,676 1,352 3,112 2,675
------ ------ ------ ------
Income before income taxes ..................................... 1,090 1,519 2,485 2,935
Income tax expense ............................................. 348 542 832 1,049
------ ------ ------ ------
Net income ..................................................... $ 742 $ 977 $1,653 $1,886
====== ====== ====== ======
Per share*
Net income ................................................ $ 0.27 $ 0.35 $ 0.59 $ 0.68
Net income, assuming dilution ............................. 0.25 0.33 0.55 0.63
-----------------------------
* Per share information has been retroactively adjusted to reflect a 5% stock
dividend effective November 30, 2005.
See accompanying notes to unaudited consolidated financial statements.
4
COMMUNITY FIRST BANCORPORATION
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
Common Stock Accumulated
------------ Additional Other
Number of Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income (Loss) Total
------ ------ ------- -------- ------------- -----
(Dollars in thousands)
Balance, January 1, 2005 .......................... 2,648,230 $ 24,216 $ - $ 2,220 $ (499) $ 25,937
----------
Comprehensive income:
Net income .................................... - - - 1,886 - 1,886
----------
Unrealized holding gains and losses
on available-for-sale securities
arising during the period, net of
income taxes of $229 ........................ - - - - (410) (410)
----------
Total other comprehensive income .............. (410)
----------
Total comprehensive income .................. 1,476
----------
Exercise of employee stock options ................ 375 2 - - - 2
---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 2005 ............................ 2,648,605 $ 24,218 $ - $ 4,106 $ (909) $ 27,415
========== ========== ========== ========== ========== ==========
Balance, January 1, 2006 .......................... 2,798,409 $ 26,956 $ - $ 3,296 $ (1,397) $ 28,855
----------
Comprehensive income:
Net income .................................... - - - 1,653 - 1,653
----------
Unrealized holding gains and losses
on available-for-sale securities
arising during the period, net of
income taxes of $255 ........................ - - - - (455) (455)
----------
Total other comprehensive income .............. (455)
----------
Total comprehensive income .................. 1,198
----------
Share-based compensation, net of income
taxes of $23 .................................. - - 100 - - 100
---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 2006 ............................ 2,798,409 $ 26,956 $ 100 $ 4,949 $ (1,852) $ 30,153
========== ========== ========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements.
5
COMMUNITY FIRST BANCORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
--------
2006 2005
---- ----
(Dollars in thousands)
Operating activities
Net income .............................................................................. $ 1,653 $ 1,886
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses ........................................................ 50 215
Depreciation ..................................................................... 172 150
Amortization of net loan fees and costs .......................................... (80) (43)
Securities accretion and premium amortization .................................... 77 65
Gain on sale of foreclosed assets ................................................ (31) -
Increase in interest receivable .................................................. (256) (89)
Increase in interest payable ..................................................... 336 339
(Increase) decrease in prepaid expenses and other assets ......................... (91) 62
Increase in other accrued expenses ............................................... 3 95
Writedowns of foreclosed assets .................................................. - 25
Share-based compensation ......................................................... 100 -
-------- --------
Net cash provided by operating activities .................................... 1,933 2,705
-------- --------
Investing activities
Purchases of available-for-sale securities .............................................. (16,100) (42,337)
Maturities, calls and paydowns of securities available-for-sale ......................... 11,061 38,659
Maturities, calls and paydowns of securities held-to-maturity ........................... 574 752
Purchases of other investments .......................................................... (32) (162)
Net increase in loans made to customers ................................................. (16,699) (7,896)
Purchases of premises and equipment ..................................................... (1,146) (412)
Proceeds of sale of foreclosed assets ................................................... 168 -
-------- --------
Net cash used by investing activities ........................................ (22,174) (11,396)
-------- --------
Financing activities
Net increase (decrease) in demand deposits, interest
bearing transaction accounts and savings accounts ................................... 14,160 (3,109)
Net increase (decrease) in certificates of deposit and other
time deposits ....................................................................... 6,253 (488)
Decrease in short-term borrowings ....................................................... (3,500) (2,500)
Repayments of long-term debt ............................................................ (1,000) -
Exercise of employee stock options ...................................................... - 2
-------- --------
Net cash provided (used) by financing activities ............................. 15,913 (6,095)
-------- --------
Decrease in cash and cash equivalents ........................................................ (4,328) (14,786)
Cash and cash equivalents, beginning ......................................................... 32,450 39,902
-------- --------
Cash and cash equivalents, ending ............................................................ $ 28,122 $ 25,116
======== ========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for
Interest, net of $18 capitalized during construction during 2006 .................... $ 4,545 $ 2,632
Income taxes ........................................................................ 895 956
Noncash investing and financing activities:
Other comprehensive income (loss) ................................................... (455) (410)
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 on Form 10-K
for the year ended December 31, 2005 filed with the Securities and Exchange
Commission. Certain amounts in the 2005 financial statements have been
reclassified to conform to the current presentation.
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 June 30, 2006, there were $497,000 in 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. All 2005 per share
information has been retroactively adjusted to give effect to a 5% stock
dividend effective November 30, 2005. Net income per share and net income per
share, assuming dilution, were computed as follows:
(Unaudited)
Period Ended June 30,
---------------------
Three Months Six Months
------------ ----------
2006 2005 2006 2005
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
Net income per share, basic
Numerator - net income ............................... $ 742 $ 977 $ 1,653 $ 1,886
========== ========== ========== ==========
Denominator
Weighted average common shares
issued and outstanding ........................... 2,798,409 2,780,824 2,798,409 2,780,763
========== ========== ========== ==========
Net income per share, basic ...................... $ .27 $ .35 $ .59 $ .68
========== ========== ========== ==========
Net income per share, assuming dilution
Numerator - net income ............................... $ 742 $ 977 $ 1,653 $ 1,886
========== ========== ========== ==========
Denominator
Weighted average common shares
issued and outstanding ............................. 2,798,409 2,780,824 2,798,409 2,780,763
Effect of dilutive stock options ..................... 206,287 193,383 197,916 195,054
---------- ---------- ---------- ----------
Total shares ............................ 3,004,696 2,974,207 2,996,325 2,975,817
========== ========== ========== ==========
Net income per share, assuming dilution .......... $ .25 $ .33 $ .55 $ .63
========== ========== ========== ==========
Stock-Based Compensation - As of June 30, 2006, the Company has two stock-based
compensation plans. Effective January 1, 2006, the Company began accounting for
compensation expenses related to stock options granted to employees and
non-officer directors under the recognition and measurement principles of
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payment"("SFAS 123(R)) using the modified prospective application method. Total
share-based compensation expenses included in salaries and employee benefits and
directors fees were $40,000 and $38,000, respectively, for the three month
period, and $60,000 and $63,000, respectively, for the six month period ended
June 30, 2006.
7
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
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. The Company undertakes no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
Changes in Financial Condition
During the three months ended June 30, 2006, loans grew by $14,635,000,
or 8.5%. This growth was funded primarily by reducing the amount of federal
funds sold by $13,398,000 during the quarter. Interest-bearing deposits
increased by $2,819,000 during the 2006 second quarter. Average interest bearing
transaction accounts in the second quarter of 2006 were approximately $9,000,000
more than the 2006 first quarter average amount, primarily due to promotional
interest rates offered in conjunction with the opening of the Company's new
office in Seneca, SC. Average savings deposits were approximately $16,000,000
less in the second quarter of 2006 than in the first quarter.
During the first six months of 2006, interest bearing deposits
increased by $19,488,000, or 8.1%. These funds were used to repay short-term
borrowings of $3,500,000 and long-term debt of $1,000,000, to fund growth in
loans, and to purchase securities. Loans increased by $16,732,000 or 9.9% and
securities available-for-sale increased by $4,248,000 or 4.2%.
The Company believes that it continues to have sufficient flexibility
to fund loan requests or make investments in securities at attractive yields,
and to meet normal demands for deposit withdrawals by its customers, while
maintaining its exposure to any further increases in interest rates at an
acceptable level.
Results of Operations
Three Months Ended June 30, 2006 and 2005
The Company recorded consolidated net income of $742,000 or $.27 per
share for the second quarter of 2006. These results are less than earnings per
share of $.35 for the second quarter of 2005. Net income per share, assuming
dilution was $.25 for the 2006 quarter and $.33 for the 2005 period. Net income
per share amounts for 2005 have been retroactively adjusted to reflect a five
percent stock dividend effective November 30, 2005.
Early in the 2006 second quarter, the Company moved its corporate
offices into, and opened a new retail banking office in, a newly constructed
building in Seneca, SC. In conjunction with the opening of this new office, the
Company offered promotional interest rates on certain deposit accounts, and
incurred other promotional expenses. Loans outstanding increased during the 2006
second quarter largely as a result of the opening of the new banking office.
Additional personnel were hired to staff the new retail office and occupancy and
other fixed assets expenses also increased. Salaries and employee benefits and
directors' fees for the 2006 three month period also include approximately
$78,000 which represents the effect of the adoption of SFAS 123(R) using the
modified prospective method.
8
Summary Income Statement
------------------------
(Dollars in thousands)
Dollar Percentage
For the Three Months Ended June 30, 2006 2005 Change Change
---- ---- ------ ------
Interest income .................................... $ 4,803 $ 3,907 $ 896 22.9%
Interest expense ................................... 2,551 1,512 1,039 68.7%
------- ------- -------
Net interest income ................................ 2,252 2,395 (143) -6.0%
Provision for loan losses .......................... 25 75 (50) -66.7%
Noninterest income ................................. 539 551 (12) -2.2%
Noninterest expenses ............................... 1,676 1,352 324 24.0%
Income tax expense ................................. 348 542 (194) -35.8%
------- ------- -------
Net income ......................................... $ 742 $ 977 $ (235) -24.1%
======= ======= =======
Six Months Ended June 30, 2006 and 2005
The Company recorded consolidated net income of $1,653,000 or $.59 per
share for the first half of 2006. These results are less than earnings per share
of $.68 for the same period of 2005. Net income per share, assuming dilution was
$.55 for the 2006 six months and $.63 for the same period of 2005. Net income
per share amounts for 2005 have been retroactively adjusted to reflect a five
percent stock dividend effective November 30, 2005.
The results for the 2006 six-month period reflect the promotional and
other expenses of the new Seneca office building referred to above and the
effects of adopting SFAS 123(R). Salaries and employee benefits and directors'
fees for the 2006 six month period include approximately $123,000 representing
the effect of the adoption of SFAS 123(R) using the modified prospective method.
Summary Income Statement
------------------------
(Dollars in thousands)
Dollar Percentage
For the Six Months Ended June 30, 2006 2005 Change Change
---- ---- ------ ------
Interest income ..................................... $ 9,450 $ 7,758 $ 1,692 21.8%
Interest expense .................................... 4,881 2,971 1,910 64.3%
------- ------- -------
Net interest income ................................. 4,569 4,787 (218) -4.6%
Provision for loan losses ........................... 50 215 (165) -76.7%
Noninterest income .................................. 1,078 1,038 40 3.9%
Noninterest expenses ................................ 3,112 2,675 437 16.3%
Income tax expense .................................. 832 1,049 (217) -20.7%
------- ------- -------
Net income .......................................... $ 1,653 $ 1,886 $ (233) -12.4%
======= ======= =======
Net Interest Income
Net interest income is the principal source of the Company's earnings.
During the second quarter of 2006, the Company offered above-market promotional
interest rates on certain deposit products in conjunction with the opening of a
new retail banking office in Seneca, SC. These promotional rates significantly
increased the Company's interest expense. Management expects that the Company's
net interest income and the related metrics, such as the rates paid on interest
bearing transaction accounts and savings deposits, rates paid on interest
bearing liabilities, and interest rate spread and net yield on earning assets,
will return to more normal levels throughout the remainder of 2006.
Three Months Ended June 30, 2006 and 2005
For the second quarter of 2006, net interest income totaled $2,252,000,
a decrease of $143,000 or 6.0% from the amount for the same period of 2005. The
average yield on interest earning assets increased to 6.01% for the 2006 period,
compared with 5.39% for the 2005 period, due to higher rates earned on all
categories of earning assets. However, largely in response to special
promotional rates, the average rate paid for interest-bearing liabilities
increased to 3.89% for the 2006 quarter, compared with 2.56%, for the 2005
quarter. Accordingly, the average interest rate spread for the 2006 period was
71 basis points lower than for the 2005 period.
9
Average Balances, Yields and Rates
Three Months Ended June 30,
---------------------------
2006 2005
---- ----
Interest Interest
Average Income/ Yields/ Average Income/ Yields/
Balances Expense Rates(1) Balances Expense Rates(1)
-------- ------- -------- -------- ------- --------
(Dollars in thousands)
Assets
Interest-bearing balances due from banks ...................... $ 92 $ 2 8.82% $ 82 $ - 0.00%
Securities
Taxable .................................................. 99,894 957 3.89% 103,935 876 3.42%
Tax exempt (2) ........................................... 16,283 158 3.94% 3,677 32 3.53%
--------- ------- --------- ------
Total investment securities .......................... 116,177 1,115 3.89% 107,612 908 3.42%
Other investments ............................................. 980 13 5.38% 1,073 11 4.16%
Federal funds sold ............................................ 27,163 330 4.93% 22,109 159 2.92%
Loans (2) (3) (4) ............................................. 179,896 3,343 7.54% 163,029 2,829 7.04%
--------- ------- --------- ------
Total interest earning assets ........................ 324,308 4,803 6.01% 293,905 3,907 5.39%
Cash and due from banks ....................................... 6,615 4,678
Allowance for loan losses ..................................... (2,266) (2,330)
Valuation allowance - Available-for-
sale securities .......................................... (2,891) (1,596)
Premises and equipment ........................................ 7,507 4,424
Other assets .................................................. 3,988 3,245
--------- ---------
Total assets ......................................... $ 337,261 $ 302,326
========= =========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts .................... $ 44,578 $ 356 3.24% $ 36,320 $ 78 0.87%
Savings .................................................. 28,053 185 2.67% 30,598 103 1.37%
Time deposits $100M and over ............................. 73,060 733 4.07% 61,130 453 3.01%
Other time deposits ...................................... 114,273 1,216 4.32% 102,769 803 3.17%
--------- ------- --------- ------
Total interest bearing deposits ...................... 259,964 2,490 3.88% 230,817 1,437 2.52%
Short-term borrowings ......................................... - - 0.00% 879 5 2.31%
Long-term debt ................................................ 6,335 61 3.91% 7,500 70 3.79%
--------- ------- --------- ------
Total interest bearing liabilities ................... 266,299 2,551 3.89% 239,196 1,512 2.56%
Noninterest bearing demand deposits ........................... 38,705 34,378
Other liabilities ............................................. 2,546 1,918
Shareholders' equity .......................................... 29,711 26,834
--------- ---------
Total liabilities and shareholders' equity ........... $ 337,261 $ 302,326
========= =========
Interest rate spread .......................................... 2.12% 2.83%
Net interest income and net yield
on earning assets ........................................ $ 2,252 2.82% $2,395 3.30%
Interest free funds supporting earning assets ................. $ 58,009 $ 54,709
(1) Yields and rates are annualized
(2) Yields on tax exempt instruments have not been adjusted to a tax-equivalent
basis.
(3) Nonaccrual loans are included in the average loan balances and income on
such loans is recognized on a cash basis.
(4) Includes immaterial amounts of loan fees.
10
The Company continues to pursue a strategy to increase its market share
in its local market areas in Anderson and Oconee Counties of South Carolina.
Oconee County is served from four offices which are located in Seneca, Walhalla
and Westminster. The Company currently is using its temporary facility at the
Westminster location. There presently are no firm plans, timetables or budgets
for constructing a permanent facility for this office. The Anderson County
market is served from offices in Anderson and Williamston. The Company is
planning to open an additional office on Highway 81 in Anderson County.
Construction is expected to begin during the fourth quarter of 2006.
Six Months Ended June 30, 2006 and 2005
For the first half of 2006, net interest income totaled $4,569,000, a
decrease of $218,000 or 4.6% from the amount for the same period of 2005. The
yield on interest earning assets increased to 5.82% for the 2006 period,
compared with 5.22% for the 2005 period, due to higher rates earned on all
categories of earning assets, but especially as related to loans. A significant
portion of the Company's loans are variable rate instruments that are repriced
in response to changes in the "prime rate." Also, for loans with original
anticipated maturities of more than five years, the Company generally includes a
provision that allows it to adjust the interest rate on each loan at least every
five years.
Largely in response to special promotional rates offered beginning in
the second quarter of 2006, the average rate paid for interest-bearing
liabilities increased to 3.63% for the 2006 six-month period, compared with
2.43%, for the same period of 2005. Accordingly, the average interest rate
spread for the 2006 period was 60 basis points lower than for the 2005 period.
11
Average Balances, Yields and Rates
Six Months Ended June 30,
-------------------------
2006 2005
---- ----
Interest Interest
Average Income/ Yields/ Average Income/ Yields/
Balances Expense Rates(1) Balances Expense Rates(1)
-------- ------- -------- -------- ------- --------
(Dollars in thousands)
Assets
Interest-bearing balances due from banks ..................... $ 132 $ 4 6.11% $ 82 $ - 0.00%
Securities
Taxable ................................................. 100,649 1,888 3.78% 110,427 1,819 3.32%
Tax exempt (2) .......................................... 14,274 278 3.93% 3,003 52 3.49%
--------- ------- --------- -------
Total investment securities ......................... 114,923 2,166 3.80% 113,430 1,871 3.33%
Other investments ............................................ 964 24 5.02% 1,044 20 3.86%
Federal funds sold ........................................... 36,162 823 4.59% 24,257 312 2.59%
Loans (2) (3) (4) ............................................ 175,438 6,433 7.39% 160,931 5,555 6.96%
--------- ------- --------- -------
Total interest earning assets ....................... 327,619 9,450 5.82% 299,744 7,758 5.22%
Cash and due from banks ...................................... 6,715 4,649
Allowance for loan losses .................................... (2,265) (2,305)
Valuation allowance - Available-for-
sale securities ......................................... (2,560) (1,324)
Premises and equipment ....................................... 7,266 4,418
Other assets ................................................. 3,933 3,171
--------- ---------
Total assets ........................................ $ 340,708 $ 308,353
========= =========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts ................... $ 40,185 $ 497 2.49% $ 36,930 $ 148 0.81%
Savings ................................................. 36,089 499 2.79% 34,299 217 1.28%
Time deposits $100M and over ............................ 74,767 1,465 3.95% 62,995 903 2.89%
Other time deposits ..................................... 113,612 2,295 4.07% 103,769 1,546 3.00%
--------- ------- --------- -------
Total interest bearing deposits ..................... 264,653 4,756 3.62% 237,993 2,814 2.38%
Short-term borrowings ........................................ 38 2 10.61% 2,506 17 1.37%
Long-term debt ............................................... 6,417 123 3.87% 6,439 140 4.38%
--------- ------- --------- -------
Total interest bearing liabilities .................. 271,108 4,881 3.63% 246,938 2,971 2.43%
Noninterest bearing demand deposits .......................... 37,562 34,173
Other liabilities ............................................ 2,525 1,750
Shareholders' equity ......................................... 29,513 25,492
--------- ---------
Total liabilities and shareholders' equity .......... $ 340,708 $ 308,353
========= =========
Interest rate spread ......................................... 2.19% 2.79%
Net interest income and net yield
on earning assets ....................................... $ 4,569 2.81% $ 4,787 3.22%
Interest free funds supporting earning assets ................ $ 56,511 $ 52,806
--------------------------------------
(1) Yields and rates are annualized
(2) Yields on tax exempt instruments have not been adjusted to a tax-equivalent
basis.
(3) Nonaccrual loans are included in the average loan balances and income on
such loans is recognized on a cash basis.
(4) Includes immaterial amounts of loan fees.
12
Provision and Allowance for Loan Losses
The provision for loan losses was $25,000 for the second quarter of
2006, compared with $75,000 for the comparable period of 2005. For the first
half of 2006, the provision for loan losses was $50,000, a decrease of $165,000
from the $215,000 recorded for the first half of 2005. At June 30, 2006, the
allowance for loan losses was 1.22% of loans, down slightly from 1.34% at
December 31, 2005.
For the first six months of 2006, net charge-offs totaled $47,000,
compared with $118,000 in net charge offs during the same period of 2005. As of
June 30, 2006, there were $497,000 in nonaccrual loans and no loans 90 days or
more past due and still accruing interest. As of June 30, 2005, there were
$1,158,000 in nonaccrual loans and 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:
Six Months Year Ended Six Months
Ended December 31, Ended
June 30, 2006 2005 June 30, 2005
------------- ---- -------------
(Dollars in thousands)
Allowance at beginning of period ................................. $ 2,266 $ 2,240 $ 2,240
Provision for loan losses ........................................ 50 250 215
Net charge-offs .................................................. (47) (224) (118)
--------- --------- ---------
Allowance at end of period ....................................... $ 2,269 $ 2,266 $ 2,337
========= ========= =========
Allowance as a percentage of loans outstanding
at period end .................................................. 1.22% 1.34% 1.41%
Loans at end of period ........................................... $ 186,050 $ 169,318 $ 165,596
========= ========= =========
13
Non-Performing and Potential Problem Loans
90 Days or
More Past Due Total Percentage Percentage
Nonaccrual and Still Nonperforming of Total Potential of Total
Loans Accruing Loans Loans Problem Loans Loans
----- -------- ----- ----- ------------- -----
(Dollars in thousands)
January 1, 2005 .................. $ 1,465 $ 9 $ 1,474 0.93% $ 1,403 0.89%
Net change ....................... (288) (9) (297) 1,133
------- ------- ------- --------
March 31, 2005 ................... 1,177 - 1,177 0.73% 2,536 1.58%
Net change ....................... (19) - (19) 915
------- ------- ------- --------
June 30, 2005 .................... 1,158 - 1,158 0.70% 3,451 2.08%
Net change ....................... (189) - (189) (578)
------- ------- ------- --------
September 30, 2005 ............... 969 - 969 0.58% 2,873 1.71%
Net change ....................... (69) 5 (64) (725)
------- ------- ------- --------
December 31, 2005 ................ 900 5 905 0.53% 2,148 1.27%
Net change ....................... (321) (5) (326) 615
------- ------- ------- --------
March 31, 2006 ................... 579 - 579 0.34% 2,763 1.61%
Net change ....................... (82) - (82) 1,047
------- ------- ------- --------
June 30, 2006 .................... $ 497 $ - $ 497 0.27% $ 3,810 2.05%
======= ======= ======= ========
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. Since March 31, 2006, loans totaling $1,390,000 moved into
potential problem loans, of which $1,328,000 are collateralized by real estate
mortgages. Potential problem loans that totaled $454,000 as of March 31, 2006
were no longer included in potential problem loans as of June 30, 2006,
including loans totaling $68,000 as of March 31, 2006 that were charged off
during the second quarter of 2006. Other changes, including payments received
and increases to, also occurred during the. Management believes that the
increase in potential problem loans in the first half of 2006 reflects
circumstances unique to each individual borrower.
Noninterest Income
Noninterest income totaled $539,000 for the second quarter of 2006,
compared with $551,000 for the 2005 quarter. Service charges on deposit accounts
in the 2006 second quarter were $382,000 representing a decrease of $25,000 from
the prior year quarter and fees from an overdraft privilege product were $18,000
more in the 2006 second quarter than in the 2005 quarter. Mortgage brokerage
income in the second quarter of 2006 was approximately $14,000 less than in the
2005 quarter. There were no sales of any securities in either the 2006 or 2005
second quarter.
For the six months ended June 30, 2006, noninterest income totaled
$1,078,000, compared with $1,038,000 for the same period of 2005. Service
charges on deposit accounts in the 2006 six months period were $746,000
representing a decrease of $12,000 from the prior year period. Fees from an
overdraft privilege product were $36,000 more in the 2006 six months period than
in the 2005 period. Mortgage brokerage income in the 2006 six months period was
approximately $14,000 less than in the 2005 period. There were no sales of any
securities in either the 2006 or 2005 six months period. A gain of $31,000 from
the sale of foreclosed assets was recognized in the 2006 period, but there was
no comparable activity in the 2005 period.
Noninterest Expenses
Noninterest expenses totaled $1,676,000 for the second quarter of 2006
compared with $1,352,000 for the same quarter of 2005, representing an increase
of $324,000 or 24.0%. Salaries and employee benefits increased by $289,000, or
45.9%, to $919,000. This increase resulted primarily from normal salary
increases, which are granted from time to time, increases in the number of
employees associated with staffing for Company's new Seneca office and higher
costs of providing health insurance benefits. Also, for the 2006 six months
period, this category includes $40,000 of share-based compensation expenses that
resulted from the adoption of SFAS 123(R). Partially offsetting these increases
was an $85,000 decrease in estimated employee incentive bonuses in the 2006 six
months period compared with the 2005 period.
14
Occupancy and furniture and equipment expenses for the second quarter
of 2006 increased by $29,000 compared with the same quarter of 2005 primarily
due to the Company's occupancy of new corporate offices and the opening of a new
full-service banking office as well as higher maintenance expenses associated
with the Company's equipment. Directors' fees for the 2006 three month period
include $38,000 of share-based compensation expenses that resulted from the
adoption of SFAS 123(R). In addition, higher expenses were noted in the 2006
second quarter for stationery, supplies and promotional expenses resulting from
the opening of the new corporate offices and an additional banking office. Some
expense decreases were experienced in the 2006 three month period for expenses
related to foreclosed assets.
For the six months ended June 30, 2006, salaries and employee benefits
increased by $307,000, or 22.9%, over the amount for the 2005 period. Salaries
and employee benefits for the 2006 six months period includes share-based
compensation expense of $60,000 resulting from the implementation of SFAS
123(R). Net occupancy and furniture and equipment expenses increased by an
aggregate of $50,000, or 16.6%. During the first six months of 2006, the Company
moved its corporate offices into a newly constructed office building in Seneca,
SC that also houses a new full-service banking office. The increases in salaries
and benefits and occupancy and furniture and fixtures expenses resulted
primarily from those events. Directors' fees for the 2006 six-month period
included $63,000 of share-based compensation expenses that resulted from the
adoption of SFAS 123(R).
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
market conditions. Individual and commercial deposits are the Company's primary
source of funds for credit activities. The Company has significant amounts of
credit availability under its FHLB lines of credit and federal funds purchased
facilities.
As of June 30, 2006, the ratio of loans to total deposits was 61.9%,
compared with 60.5% as of December 31, 2005. Deposits as of June 30, 2006 were
$300,406,000, an increase of $20,413,000 or 7.3% over the amount as of December
31, 2005. Management believes that the Company's liquidity sources are adequate
to meet its operating needs.
Capital Resources
The Company's capital base increased by $1,298,000 since December 31,
2005 as the result of net income of $1,653,000 for the first six months of 2006,
$100,000 added pursuant to share-based compensation expenses recognized during
the period, net of income tax effects, less a $455,000 change in unrealized
gains and losses on available-for-sale securities, net of deferred income tax
effects.
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 June 30, 2006 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 ............. 15.0% 16.0% 9.4%
Community First Bank ....................... 14.4% 15.5% 9.1%
Minimum "well-capitalized" requirement ..... 6.0% 10.0% 6.0%
Minimum requirement ........................ 4.0% 8.0% 5.0%
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
15
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:
June 30, 2006
-------------
(Dollars in
thousands)
Loan commitments .............................. $ 28,828
Standby letters of credit ..................... 1,384
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 or six months ended June 30,
2006.
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 are involved in other off-balance sheet
contractual relationships or transactions that could result in liquidity needs
or other commitments or significantly impact earnings.
Item 3. - Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk is primarily related to the risk of loss
from adverse changes in market prices and rates. This risk arises principally
from interest rate risk inherent in the Company's lending, deposit gathering and
borrowing activities. Management actively monitors and manages its interest rate
risk exposure. Although the Company manages other risks, such as credit quality
and liquidity risk in the normal course of business, management considers
interest rate risk to be its most significant market risk and this risk could
potentially have the largest material effect on the Company's financial
condition and results of operations. Other types of market risk, such as
commodity price risk and foreign currency exchange risk, do not arise in the
normal course of the Company's community banking operations.
The Company uses a simulation model to assist in achieving consistent growth in
net interest income while managing interest rate risk. As of June 30 2006, the
model indicates that net interest income would increase $78,000 and net income
would increase $50,000 in the next twelve months if interest rates rose by 100
basis points. Conversely, net interest income would decrease $195,000 and net
income would decrease $125,000 in the next twelve months if interest rates
declined by 100 basis points. In the current interest rate environment, it
appears unlikely that there will be any large changes in interest rates in the
immediate future. The prospective effects of hypothetical interest rate changes
are based on a number of assumptions, including the relative levels of market
interest rates and prepayment assumptions affecting loans, and should not be
relied on as indicative of actual future results. The prospective effects also
do not contemplate potential actions that the Company, its customers and the
issuers of its investment securities could undertake in response to changes in
interest rates.
As of June 30, 2006, there was no significant change from the interest rate
sensitivity analysis for the various changes in interest rates calculated as of
December 31, 2005. The foregoing disclosures related to the Company's market
risk should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations included in the 2005 Annual Report
on Form 10-K filed with the Securities and Exchange Commission.
16
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 4. - Submission of Matters to a Vote of Security Holders.
On Tuesday, April 25, 2006, the shareholders of Community First
Bancorporation held their regular annual meeting. At the meeting, one matter was
submitted to a vote with results as follows:
1. Election of three directors to hold office for three-year terms:
SHARES VOTED
------------
AUTHORITY BROKER
DIRECTORS FOR WITHHELD NON-VOTES
--- -------- ---------
Larry S. Bowman, MD 1,748,850 0 87,375
William M. Brown 1,748,850 0 87,375
John R. Hamrick 1,748,850 0 87,375
Frederick D Shepherd, Jr. 1,748,428 422 87,375
The following directors continue to serve until the expiration of their
terms at the annual meetings to be held in the years indicated and were not
voted on at the 2006 annual meeting: Robert H Edwards - 2007, Blake L. Griffith
- 2007, Gary V. Thrift - 2007, James E. McCoy - 2008, James E. Turner - 2008 and
Charles L. Winchester - 2008.
Item 6. - Exhibits
Exhibits 31. Rule 13a-14(a)/15d-14(a) Certifications
32. Certifications Pursuant to 18 U.S.C. Section 1350
17
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
August 11, 2006 /s/ Frederick D. Shepherd, Jr.
----------------- --------------------------------------
Date Frederick D. Shepherd, Jr., Chief
Executive Officer and Chief
Financial Officer
18
EXHIBIT INDEX
31. Rule 13a-14(a)/15d-14(a) Certifications
32. Certifications Pursuant to 18 U.S.C. Section 1350
19