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 September 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
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(Address of principal executive offices, zip code)
(864) 886-0206
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(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, 2,817,988 Shares Outstanding on November 1, 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 ..... 17
Item 4. Controls and Procedures ........................................ 18
PART II - OTHER INFORMATION
Item 6. Exhibits ....................................................... 18
SIGNATURE .................................................................. 19
2
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
COMMUNITY FIRST BANCORPORATION
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
2006 2005
---- ----
(Dollars in thousands)
Assets
Cash and due from banks ................................................................... $ 7,928 $ 10,063
Interest bearing balances due from banks .................................................. 8 182
Federal funds sold ........................................................................ 5,891 22,205
--------- ---------
Cash and cash equivalents ............................................................. 13,827 32,450
Securities available-for-sale ............................................................. 110,691 102,070
Securities held-to-maturity (fair value $6,730 for 2006 and $7,671 for 2005) .............. 6,863 7,751
Other investments ......................................................................... 980 948
Loans ..................................................................................... 193,935 169,318
Allowance for loan losses ............................................................. (2,259) (2,266)
--------- ---------
Loans - net ........................................................................ 191,676 167,052
Premises and equipment - net .............................................................. 7,997 6,805
Accrued interest receivable ............................................................... 2,060 1,629
Other assets .............................................................................. 1,804 2,007
--------- ---------
Total assets ....................................................................... $ 335,898 $ 320,712
========= =========
Liabilities
Deposits
Noninterest bearing ................................................................... $ 37,919 $ 38,061
Interest bearing ...................................................................... 258,350 241,932
--------- ---------
Total deposits ..................................................................... 296,269 279,993
Accrued interest payable .................................................................. 2,147 1,817
Short-term borrowings ..................................................................... - 3,500
Long-term debt ............................................................................ 5,500 6,500
Other liabilities ......................................................................... 26 47
--------- ---------
Total liabilities .................................................................. 303,942 291,857
--------- ---------
Shareholders' equity
Common stock - no par value; 10,000,000 shares authorized; issued and
outstanding - 2,817,988 for 2006 and
2,798,409 for 2005 .................................................................... 27,039 26,956
Additional paid-in capital ................................................................ 178 -
Retained earnings ......................................................................... 5,853 3,296
Accumulated other comprehensive income (loss) ............................................. (1,114) (1,397)
--------- ---------
Total shareholders' equity ......................................................... 31,956 28,855
--------- ---------
Total liabilities and shareholders' equity ......................................... $ 335,898 $ 320,712
========= =========
See accompanying notes to unaudited consolidated financial statements.
3
COMMUNITY FIRST BANCORPORATION
Consolidated Statements of Income
(Unaudited)
Period Ended September 30,
--------------------------
Three Months Nine Months
------------ -----------
2006 2005 2006 2005
---- ---- ---- ----
(Dollars in thousands, except per share)
Interest income
Loans, including fees ..................................... $ 3,567 $ 2,930 $10,000 $ 8,485
Interest bearing balances due from banks .................. - 2 4 2
Securities
Taxable ................................................. 995 843 2,883 2,662
Tax-exempt .............................................. 178 40 456 92
Other investments ......................................... 14 11 38 31
Federal funds sold ........................................ 188 185 1,011 497
------- ------- ------- -------
Total interest income ................................. 4,942 4,011 14,392 11,769
------- ------- ------- -------
Interest expense
Time deposits $100M and over .............................. 808 589 2,273 1,492
Other deposits ............................................ 1,809 1,091 5,100 3,002
Short-term borrowings ..................................... - - 2 18
Long-term debt ............................................ 55 72 178 211
------- ------- ------- -------
Total interest expense ................................ 2,672 1,752 7,553 4,723
------- ------- ------- -------
Net interest income ............................................ 2,270 2,259 6,839 7,046
Provision for loan losses ...................................... 15 - 65 215
------- ------- ------- -------
Net interest income after provision ............................ 2,255 2,259 6,774 6,831
------- ------- ------- -------
Other income
Service charges on deposit accounts ....................... 404 402 1,150 1,160
ATM interchange and other fees ............................ 96 75 279 215
Credit life insurance commissions ......................... 15 9 37 27
Other income .............................................. 44 57 171 179
------- ------- ------- -------
Total other income .................................... 559 543 1,637 1,581
------- ------- ------- -------
Other expenses
Salaries and employee benefits ............................ 804 791 2,452 2,132
Net occupancy expense ..................................... 89 65 237 190
Furniture and equipment expense ........................... 113 89 317 266
Amortization of computer software ......................... 69 60 202 170
ATM interchange and related expenses ...................... 66 56 208 155
Directors' fees ........................................... 38 20 162 74
Other expense ............................................. 290 302 1,003 1,071
------- ------- ------- -------
Total other expenses .................................. 1,469 1,383 4,581 4,058
------- ------- ------- -------
Income before income taxes ..................................... 1,345 1,419 3,830 4,354
Income tax expense ............................................. 441 489 1,273 1,538
------- ------- ------- -------
Net income ..................................................... $ 904 $ 930 $ 2,557 $ 2,816
======= ======= ======= =======
Per share*
Net income ................................................ $ 0.32 $ 0.33 $ 0.91 $ 1.01
Net income, assuming dilution ............................. 0.30 0.31 0.86 0.95
* 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
------------ Additional Accumulated
Number of Paid-in Retained Other 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 ..................................... - - - 2,816 - 2,816
---------
Unrealized holding gains and losses
on available-for-sale securities arising
during the period, net of
income taxes of $249 ......................... - - - - (446) (446)
---------
Total other comprehensive income (loss) .... - - - - - (446)
---------
Total comprehensive income ............... - - - - - 2,370
---------
Exercise of employee stock options ................. 4,875 30 - - - 30
--------- --------- --------- --------- --------- ---------
Balance, September 30, 2005 ........................ 2,653,105 $ 24,246 $ - $ 5,036 $ (945) $ 28,337
========= ========= ========= ========= ========= =========
Balance, January 1, 2006 ........................... 2,798,409 $ 26,956 $ - $ 3,296 $ (1,397) $ 28,855
---------
Comprehensive income:
Net income ..................................... - - - 2,557 - 2,557
---------
Unrealized holding gains and losses
on available-for-sale securities arising
during the period, net of
income taxes of $159 ......................... - - - - 283 283
---------
Total other comprehensive income ........... - - - - - 283
---------
Total comprehensive income ............... - - - - - 2,840
---------
Share-based compensation ........................... - - 178 - - 178
Exercise of employee stock options ................. 19,579 83 - - - 83
--------- --------- --------- --------- --------- ---------
Balance, September 30, 2006 ........................ 2,817,988 $ 27,039 $ 178 $ 5,853 $ (1,114) $ 31,956
========= ========= ========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
5
COMMUNITY FIRST BANCORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-------------
2006 2005
---- ----
(Dollars in thousands)
Operating activities
Net income ................................................................................ $ 2,557 $ 2,816
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses .......................................................... 65 215
Writedowns of foreclosed assets .................................................... - 25
Depreciation ....................................................................... 273 225
Amortization of net loan (fees) and costs .......................................... (143) (70)
Securities accretion and premium amortization ...................................... 116 202
Net (gain) or loss on sale of other real estate .................................... (31) 9
Increase in interest receivable .................................................... (431) (111)
Increase in interest payable ....................................................... 330 413
(Increase) decrease in prepaid expenses and other assets ........................... (52) 36
(Decrease) increase in other accrued expenses ...................................... (21) 118
Share-based compensation ........................................................... 178 -
-------- --------
Net cash provided by operating activities ...................................... 2,841 3,878
-------- --------
Investing activities
Purchases of available-for-sale securities ................................................ (24,763) (46,988)
Maturities, calls and paydowns of securities available-for-sale ........................... 16,463 43,134
Maturities, calls and paydowns of securities held-to-maturity ............................. 893 1,232
Purchases of other investments ............................................................ (32) (162)
Proceeds of sales of other investments .................................................... - 225
Net increase in loans made to customers ................................................... (24,587) (10,245)
Purchases of premises and equipment ....................................................... (1,465) (2,084)
Proceeds of sale of other real estate ..................................................... 168 58
-------- --------
Net cash used by investing activities .......................................... (33,323) (14,830)
-------- --------
Financing activities
Net increase (decrease) in demand deposits, interest
bearing transaction accounts and savings accounts ..................................... 10,323 (10,095)
Net increase in certificates of deposit and other
time deposits ......................................................................... 5,953 6,729
Net (decrease) in short-term borrowings ................................................... (3,500) (2,500)
Repayment of long-term debt ............................................................... (1,000) -
Exercise of employee stock options ........................................................ 83 30
-------- --------
Net cash provided (used) by financing activities ............................... 11,859 (5,836)
-------- --------
Decrease in cash and cash equivalents .......................................................... (18,623) (16,788)
Cash and cash equivalents, beginning ........................................................... 32,450 39,902
-------- --------
Cash and cash equivalents, ending .............................................................. $ 13,827 $ 23,114
======== ========
Supplemental Disclosure of Cash Flow Information
Cash paid during the year for:
Interest, net of $18 capitalized during construction in 2006 .......................... $ 7,223 $ 4,310
Income taxes .......................................................................... 1,347 1,431
Noncash investing and financing activities:
Transfer of loans to other real estate ................................................ 41 -
Other comprehensive income (loss) ..................................................... 283 (446)
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. Such reclassifications had
no effect on net income or retained earnings for any period.
Management Opinion - In the opinion of management, the accompanying unaudited
consolidated financial statements of Community First Bancorporation reflect all
adjustments necessary for a fair presentation of the results of the periods
presented. Such adjustments were of a normal, recurring nature.
Nonperforming Loans - As of September 30, 2006, there were $481,000 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 September 30,
--------------------------
Three Months Nine Months
------------ -----------
2006 2005 2006 2005
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
Net income per share, basic
Numerator - net income ....................................... $ 904 $ 930 $ 2,557 $ 2,816
========== ========== ========== ==========
Denominator
Weighted average common shares issued and outstanding ...... 2,811,893 2,784,368 2,802,953 2,781,978
========== ========== ========== ==========
Net income per share, basic ............................ $ .32 $ .33 $ .91 $ 1.01
========== ========== ========== ==========
Net income per share, assuming dilution
Numerator - net income ....................................... $ 904 $ 930 $ 2,557 $ 2,816
========== ========== ========== ==========
Denominator
Weighted average common shares issued and outstanding ...... 2,811,893 2,784,368 2,802,953 2,781,978
Effect of dilutive stock options ........................... 189,896 202,319 186,040 196,882
---------- ---------- ---------- ----------
Total shares .................................... 3,001,789 2,986,687 2,988,993 2,978,860
========== ========== ========== ==========
Net income per share, assuming dilution ................ $ .30 $ .31 $ .86 $ .95
========== ========== ========== ==========
Share-Based Compensation - As of September 30, 2006, the Company has two
share-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
7
and employee benefits and directors fees were $38,000 and $17,000, respectively,
for the three month period, and $98,000 and $80,000, respectively, for the nine
month period ended September 30, 2006.
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 September 30, 2006, loans grew by
$7,885,000, or 4.2%, and securities available-for-sale increased by $4,373,000,
or 4.1%. Total deposits decreased by $4,137,000, or 1.4%, during the third
quarter, primarily as a result of normal seasonal withdrawals of public
deposits. These uses of cash were funded primarily by reducing the amount of
federal funds sold by $14,904,000 during the quarter. During the 2006 third
quarter, the Company discontinued paying special promotional rates on interest
bearing transaction accounts which were offered earlier in the year in
conjunction with the opening of a new office in Seneca, SC.
During the first nine months of 2006, interest bearing deposits
increased by $16,418,000, or 6.8%, due in part to the promotional rates
mentioned above. 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 $24,617,000 or 14.5% and securities
available-for-sale increased by $8,621,000 or 8.4%.
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 September 30, 2006 and 2005
The Company recorded consolidated net income of $904,000 or $.32 per
share for the third quarter of 2006. These results are slightly less than net
income of $930,000 and earnings per share of $.33 for the third quarter of 2005.
Net income per share, assuming dilution was $.30 for the 2006 quarter and $.31
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.
In the 2006 third quarter, the Company continued to incur higher
expenses associated with moving its corporate offices into, and opening a new
retail banking office in, a newly constructed building in Seneca, SC during the
2006 second quarter. In conjunction with the opening of this new office, the
Company offered promotional interest rates on certain deposit accounts, and
incurred other promotional expenses during the 2006 second and third quarters.
Loans outstanding increased significantly during the 2006 second and third
quarters, 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 have also increased. Salaries and employee benefits
and directors' fees for the 2006 three month period also include approximately
$55,000 which represents the effect of adoption of SFAS 123(R) using the
modified prospective method.
8
Summary Income Statement
------------------------
(Dollars in thousands)
Dollar Percentage
For the Three Months Ended September 30, 2006 2005 Change Change
---- ---- ------ ------
Interest income .................................... $4,942 $4,011 $ 931 23.2%
Interest expense ................................... 2,672 1,752 920 52.5%
------ ------ ------
Net interest income ................................ 2,270 2,259 11 0.5%
Provision for loan losses .......................... 15 - 15 NA
Noninterest income ................................. 559 543 16 2.9%
Noninterest expenses ............................... 1,469 1,383 86 6.2%
Income tax expense ................................. 441 489 (48) -9.8%
------ ------ ------
Net income ......................................... $ 904 $ 930 $ (26) -2.8%
====== ====== ======
Nine Months Ended September 30, 2006 and 2005
The Company recorded consolidated net income of $2,557,000 or $.91 per
share for the first nine months of 2006. These results are less than net income
of $2,816,000 and earnings per share of $1.01 for the same period of 2005. Net
income per share, assuming dilution was $.86 for the 2006 nine months and $.95
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 nine-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 nine month period include approximately $178,000 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 Nine Months Ended September 30, 2006 2005 Change Change
---- ---- ------ ------
Interest income ..................................... $14,392 $11,769 $ 2,623 22.3%
Interest expense .................................... 7,553 4,723 2,830 59.9%
------- ------- -------
Net interest income ................................. 6,839 7,046 (207) -2.9%
Provision for loan losses ........................... 65 215 (150) -69.8%
Noninterest income .................................. 1,637 1,581 56 3.5%
Noninterest expenses ................................ 4,581 4,058 523 12.9%
Income tax expense .................................. 1,273 1,538 (265) -17.2%
------- ------- -------
Net income .......................................... $ 2,557 $ 2,816 $ (259) -9.2%
======= ======= =======
9
Net Interest Income
Net interest income is the principal source of the Company's earnings.
During the second and third quarters 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. The Company discontinued
paying the promotional rates approximately mid-way through the third quarter of
2006. Management expects that the Company's net interest income and the related
metrics will return to more normal levels throughout the remainder of 2006.
Three Months Ended September 30, 2006 and 2005
For the third quarter of 2006, net interest income totaled $2,270,000,
an increase of $11,000 over the amount for the same period of 2005. The average
yield on interest earning assets increased to 6.08% for the 2006 period,
compared with 5.41% for the 2005 period, due to higher rates earned on all
significant categories of earning assets. However, largely as a result of
special promotional rates, the average rate paid for interest-bearing
liabilities increased to 4.01% for the 2006 quarter, compared with 2.90%, for
the 2005 quarter. Accordingly, the average interest rate spread for the 2006
period was 45 basis points lower than for the 2005 period.
10
Average Balances, Yields and Rates
Three Months Ended September 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 ................ $ 46 $ - 0.00% $ 275 $ 2 2.89%
Securities
Taxable ........................................... 101,222 995 3.90% 100,780 843 3.32%
Tax exempt (2) .................................... 18,346 178 3.85% 4,967 40 3.20%
--------- -------- --------- ---------
Total investment securities .................. 119,568 1,173 3.89% 105,747 883 3.31%
Other investments ....................................... 980 14 5.67% 963 11 4.53%
Federal funds sold ...................................... 14,246 188 5.24% 21,570 185 3.40%
Loans (2) (3) (4) ....................................... 187,669 3,567 7.54% 165,751 2,930 7.01%
--------- -------- --------- ---------
Total interest earning assets ................ 322,509 4,942 6.08% 294,306 4,011 5.41%
Cash and due from banks ................................. 6,331 4,710
Allowance for loan losses ............................... (2,268) (2,317)
Valuation allowance - Available-for-sale securities ..... (2,701) (1,623)
Premises and equipment .................................. 7,815 5,682
Other assets ............................................ 4,051 3,343
--------- ---------
Total assets ................................. $ 335,737 $ 304,101
========= =========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts ............. $ 51,698 $ 406 3.12% $ 36,695 $ 112 1.21%
Savings ........................................... 20,826 118 2.25% 23,993 82 1.36%
Time deposits $100M and over ...................... 72,426 808 4.43% 65,545 589 3.57%
Other time deposits ............................... 114,100 1,285 4.47% 106,199 897 3.35%
--------- -------- --------- ---------
Total interest bearing
deposits ................................... 259,050 2,617 4.01% 232,432 1,680 2.87%
Long-term debt .......................................... 5,500 55 3.97% 7,500 72 3.81%
--------- -------- --------- ---------
Total interest bearing
liabilities ................................ 264,550 2,672 4.01% 239,932 1,752 2.90%
Noninterest bearing demand deposits ..................... 38,053 34,449
Other liabilities ....................................... 2,398 1,979
Shareholders' equity .................................... 30,736 27,741
--------- ---------
Total liabilities and shareholders' equity ... $ 335,737 $ 304,101
========= =========
Interest rate spread .................................... 2.07% 2.51%
Net interest income and net yield on earning assets ..... $ 2,270 2.79% $ 2,259 3.05%
Interest free funds supporting earning assets ........... $ 57,959 $ 54,374
(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.
11
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 and 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 on this office, which is estimated to cost approximately $900,000,
is expected to begin during the fourth quarter of 2006.
Nine Months Ended June 30, 2006 and 2005
For the first nine months of 2006, net interest income totaled
$6,839,000, a decrease of $207,000 or 2.9% from the amount for the same period
of 2005. The yield on interest earning assets increased to 5.90% for the 2006
period, compared with 5.28% 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 all 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 as a result of special promotional rates offered beginning in
the second quarter and continuing until approximately mid-way though the third
quarter of 2006, the average rate paid for interest-bearing liabilities
increased to 3.76% for the 2006 nine-month period, compared with 2.59%, for the
same period of 2005. Accordingly, the average interest rate spread for the 2006
period was 55 basis points lower than for the 2005 period.
12
Average Balances, Yields and Rates
Nine Months Ended September 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 ............... $ 103 $ 4 5.19% $ 147 $ 2 1.82%
Securities
Taxable ........................................... 100,842 2,883 3.82% 107,176 2,662 3.32%
Tax exempt (2) .................................... 15,646 456 3.90% 3,665 92 3.36%
-------- --------- --------- ---------
Total investment securities ................... 116,488 3,339 3.83% 110,841 2,754 3.32%
Other investments ...................................... 969 38 5.24% 1,016 31 4.08%
Federal funds sold ..................................... 28,776 1,011 4.70% 23,352 497 2.85%
Loans (2) (3) (4) ...................................... 179,560 10,000 7.45% 162,555 8,485 6.98%
-------- --------- --------- ---------
Total interest earning assets ................. 325,896 14,392 5.90% 297,911 11,769 5.28%
Cash and due from banks ................................ 6,586 4,670
Allowance for loan losses .............................. (2,266) (2,309)
Valuation allowance - Available-for-sale securities .... (2,607) (1,425)
Premises and equipment ................................. 7,451 4,844
Other assets ........................................... 3,973 3,229
--------- ---------
Total assets .................................. $ 339,033 $ 306,920
========= =========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts ............. $ 44,065 $ 903 2.74% $ 36,328 $ 260 0.96%
Savings ........................................... 30,946 617 2.67% 30,826 299 1.30%
Time deposits $100M and over ...................... 73,978 2,273 4.11% 63,854 1,492 3.12%
Other time deposits ............................... 113,776 3,580 4.21% 104,588 2,443 3.12%
--------- --------- --------- ---------
Total interest bearing deposits ............... 262,765 7,373 3.75% 235,596 4,494 2.55%
Short-term borrowings .................................. 26 2 10.28% 958 18 2.51%
Long-term debt ......................................... 6,108 178 3.90% 7,500 211 3.76%
--------- --------- --------- ---------
Total interest bearing liabilities ............ 268,899 7,553 3.76% 244,054 4,723 2.59%
Noninterest bearing demand deposits .................... 37,727 34,091
Other liabilities ...................................... 2,482 1,823
Shareholders' equity ................................... 29,925 26,952
--------- ---------
Total liabilities and shareholders' equity .... $ 339,033 $ 306,920
========= =========
Interest rate spread ................................... 2.14% 2.69%
Net interest income and net yield on earning assets .... $ 6,839 2.81% $ 7,046 3.16%
Interest free funds supporting earning assets .......... $ 56,997 $ 53,857
------------------
(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.
13
Provision and Allowance for Loan Losses
The provision for loan losses was $15,000 for the third quarter of
2006. No provision for loan losses was recognized for the 2005 third quarter.
For the first nine months of 2006, the provision for loan losses was $65,000, a
decrease of $150,000 from the $215,000 recorded for the first nine months of
2005. At September 30, 2006, the allowance for loan losses was 1.16% of loans,
compared with 1.34% at December 31, 2005. The decreases in the provision and
allowance were made as a result of significant decreases in net-charge-offs and
lower levels of nonaccrual loans.
For the first nine months of 2006, net charge-offs totaled $72,000,
compared with $156,000 in net charge offs during the same period of 2005. As of
September 30, 2006, there were $481,000 in nonaccrual loans and no loans 90 days
or more past due and still accruing interest. As of September 30, 2005, there
were $969,000 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:
Nine Months Nine Months
Ended Ended
September 30, December 31, September 30,
2006 2005 2005
---- ---- ----
(Dollars in thousands)
Allowance at beginning of period .......................................... $ 2,266 $ 2,240 $ 2,240
Provision for loan losses ................................................. 65 250 215
Net charge-offs ........................................................... (72) (224) (156)
--------- --------- ---------
Allowance at end of period ................................................ $ 2,259 $ 2,266 $ 2,299
========= ========= =========
Allowance as a percentage of loans outstanding at period end .............. 1.16% 1.34% 1.37%
Loans at end of period .................................................... $ 193,935 $ 169,318 $ 167,934
========= ========= =========
14
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%
Net change ....................... (16) - (16) (151)
------- -------- ------- -------
September 30, 2006 ............... $ 481 $ - $ 481 0.25% $ 3,659 1.89%
======= ======== ======= =======
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 June 30, 2006, loans totaling $282,000 moved into
potential problem loans, of which $135,000 are collateralized by real estate
mortgages. Potential problem loans that totaled $426,000 as of June 30, 2006
were no longer included in potential problem loans as of September 30, 2006,
including loans totaling $14,000 as of June 30, 2006 that were charged off
during the third quarter of 2006. Management believes that the increase in
potential problem loans in the first nine months of 2006 reflects circumstances
unique to each individual borrower.
Noninterest Income
Noninterest income totaled $559,000 for the third quarter of 2006,
compared with $543,000 for the 2005 quarter. Service charges on deposit accounts
in the 2006 quarter were $404,000 representing an increase of $2,000 from the
prior year period and fees from an overdraft privilege product were $16,000 more
in the 2006 period than in the 2005 period. Mortgage brokerage income in 2006
was approximately $13,000 less than in the 2005 period. There were no sales of
any securities in either the 2006 or 2005 period.
For the nine months ended September 30, 2006, noninterest income
totaled $1,637,000, compared with $1,581,000 for the same period of 2005.
Service charges on deposit accounts in the 2006 period were $1,150,000
representing a decrease of $10,000 from the prior year period. Fees from an
overdraft privilege product were $52,000 more in the 2006 period than in the
2005 period. Mortgage brokerage income in 2006 was approximately $32,000 less
than in the 2005 period. There were no sales of any securities in either the
2006 or 2005 period. A gain of $31,000 from the sale of foreclosed assets was
recognized in the 2006 period compared with a loss of $9,000 on such sales in
the 2005 period.
Noninterest Expenses
Noninterest expenses totaled $1,469,000 for the third quarter of 2006
compared with $1,383,000 for the same period of 2005, representing an increase
of $86,000 or 6.2%. Salaries and employee benefits increased by $13,000, or
1.6%, to $804,000. This increase resulted primarily from the recognition of
share-based compensation of $38,000 in the 2006 period due to the adoption of
SFAS 123(R). During the 2006 three-month period, employee bonuses were $13,000
less than in the same period of 2005.
Occupancy and furniture and equipment expenses for the third quarter of
2006 increased by $48,000 compared with 2005 primarily due to the Company's
15
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 $17,000 of
share-based compensation expenses that resulted from the adoption of SFAS
123(R). In addition, higher expenses were noted in 2006 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 nine months ended September 30, 2006, salaries and employee
benefits increased by $320,000, or 15.0%, over the amount for 2005. Salaries and
employee benefits for 2006 include share-based compensation expense of $98,000
resulting from the implementation of SFAS 123(R). The remainder of the increase
in salaries and benefits is attributable primarily to an increase in the number
of employees for the new Seneca office, higher costs of providing health
insurance benefits, and normal salary increases. Net occupancy and furniture and
equipment expenses increased by an aggregate of $98,000, or 21.5%. Early in the
second quarter 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 nine-month period included $80,000 of share-based expenses
resulting from 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 September 30, 2006, the ratio of loans to total deposits was
65.5%, compared with 60.5% as of December 31, 2005. Deposits as of September 30,
2006 were $296,269,000, an increase of $16,276,000 or 5.8% 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 $3,101,000 since December 31,
2005 as the result of net income of $2,557,000 for the first nine months of
2006, $178,000 of additional paid-in capital offsetting the charge made to
earnings as a result of share-based compensation expenses recognized during the
period pursuant to SFAS 123(R), $83,000 added from the exercise of employee
stock options, plus a $283,000 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 September 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 .......... 15.3% 16.3% 9.8%
Community First Bank .................... 14.7% 15.8% 9.4%
Minimum "well-capitalized" requirement .. 6.0% 10.0% 6.0%
Minimum requirement ..................... 4.0% 8.0% 5.0%
16
Off-Balance-Sheet Arrangements
In the normal course of business, the Bank is party to financial
instruments with off-balance-sheet risk including commitments to extend credit
and standby letters of credit. Such instruments have elements of credit risk in
excess of the amount recognized in the balance sheet. The exposure to credit
loss in the event of nonperformance by the other parties to the financial
instruments for commitments to extend credit and standby letters of credit is
represented by the contractual notional amount of those instruments. Generally,
the same credit policies used for on-balance-sheet instruments, such as loans,
are used in extending loan commitments and standby letters of credit.
Following are the off-balance-sheet financial instruments whose
contract amounts represent credit risk:
September 30, 2006
------------------
(Dollars in thousands)
Loan commitments ......................... $32,054
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 either the nine months or three months ended
September 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 September
30 2006, the model indicates that net interest income would increase $101,000
and net income would increase $68,000 in the next twelve months if interest
rates rose by 100 basis points. Conversely, net interest income would decrease
$82,000 and net income would decrease $55,000 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 September 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.
17
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 Company's disclosure controls and procedures (as defined in
17 C.F.R. Sections 240.13a-15(e) and 240.15d-15(e)), the Company's chief
executive officer and chief financial officer concluded such controls and
procedures, as of the end of the period covered by this report, were effective.
There has been no change in the Company's internal control over
financial reporting during the most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II - OTHER INFORMATION
Item 6. - Exhibits
Exhibits 31. Rule 13a-14(a)/15d-14(a) Certifications
32. Certifications Pursuant to 18 U.S.C. Section 1350
18
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
November 9, 2006 /s/ Frederick D. Shepherd, Jr.
----------------- --------------------------------------------
Date Frederick D. Shepherd, Jr., Chief Executive
Officer and Chief Financial Officer
19
EXHIBIT INDEX
31. Rule 13a-14(a)/15d-14(a) Certifications
32. Certifications Pursuant to 18 U.S.C. Section 1350
20