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, 2008 Commission File No. 000-29640
COMMUNITY FIRST BANCORPORATION
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(Exact name of registrant as specified in its charter)
South Carolina 58-2322486
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(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, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Common Stock, no par
or stated value, 3,394,873 Shares Outstanding on August 1, 2008
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 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4T. Controls and Procedures 19
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits 20
SIGNATURE 21
2
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
COMMUNITY FIRST BANCORPORATION
Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
2008 2007
---- ----
(Dollars in thousands)
Assets
Cash and due from banks ................................................................... $ 9,054 $ 10,272
Interest bearing balances due from banks .................................................. 9,451 165
Federal funds sold ........................................................................ 5,874 24,236
--------- ---------
Cash and cash equivalents ............................................................. 24,379 34,673
Securities available-for-sale ............................................................. 110,729 99,026
Securities held-to-maturity (fair value $12,587 for 2008 and $5,625 for 2007) ............. 12,690 5,663
Other investments ......................................................................... 927 840
Loans ..................................................................................... 256,818 244,131
Allowance for loan losses ............................................................. (2,748) (2,574)
--------- ---------
Loans - net ........................................................................ 254,070 241,557
Premises and equipment - net .............................................................. 8,784 8,621
Accrued interest receivable ............................................................... 2,595 2,529
Bank-owned life insurance ................................................................. 8,294 7,108
Other assets .............................................................................. 2,387 2,131
--------- ---------
Total assets ....................................................................... $ 424,855 $ 402,148
========= =========
Liabilities
Deposits
Noninterest bearing ................................................................... $ 43,106 $ 42,289
Interest bearing ...................................................................... 327,751 313,578
--------- ---------
Total deposits ..................................................................... 370,857 355,867
Accrued interest payable .................................................................. 2,937 3,480
Short-term borrowings ..................................................................... 1,500 -
Long-term debt ............................................................................ 9,500 4,500
Other liabilities ......................................................................... 765 391
--------- ---------
Total liabilities .................................................................. 385,559 364,238
--------- ---------
Shareholders' equity
Common stock - no par value; 10,000,000 shares authorized; issued and
outstanding - 3,394,873 for 2008 and 3,324,105 for 2007 .............................. 35,374 35,009
Additional paid-in capital ................................................................ 681 681
Retained earnings ......................................................................... 3,945 2,140
Accumulated other comprehensive income (loss) ............................................. (704) 80
--------- ---------
Total shareholders' equity ......................................................... 39,296 37,910
--------- ---------
Total liabilities and shareholders' equity ......................................... $ 424,855 $ 402,148
========= =========
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
------------ ----------
2008 2007 2008 2007
---- ---- ---- ----
(Dollars in thousands, except per share)
Interest income
Loans, including fees ..................................... $ 4,523 $ 4,275 $ 9,255 $ 8,253
Interest bearing balances due from banks .................. 5 - 7 1
Securities
Taxable ................................................. 1,172 994 2,189 1,932
Tax-exempt .............................................. 208 217 414 404
Other investments ......................................... 12 14 25 29
Federal funds sold ........................................ 117 320 503 862
------- ------- ------- -------
Total interest income ................................. 6,037 5,820 12,393 11,481
------- ------- ------- -------
Interest expense
Time deposits $100M and over .............................. 1,057 945 2,210 1,863
Other deposits ............................................ 2,042 2,211 4,438 4,435
Short-term borrowings ..................................... - - - 3
Long-term debt ............................................ 48 55 87 109
------- ------- ------- -------
Total interest expense ................................ 3,147 3,211 6,735 6,410
------- ------- ------- -------
Net interest income ............................................ 2,890 2,609 5,658 5,071
Provision for loan losses ...................................... 280 120 410 120
------- ------- ------- -------
Net interest income after provision ............................ 2,610 2,489 5,248 4,951
------- ------- ------- -------
Other income
Service charges on deposit accounts ....................... 375 343 735 677
ATM interchange and other fees ............................ 141 116 270 221
Credit life insurance commissions ......................... 3 9 7 16
Increase in value of bank-owned life insurance ............ 93 - 186 -
Other income .............................................. 13 34 36 74
------- ------- ------- -------
Total other income .................................... 625 502 1,234 988
------- ------- ------- -------
Other expenses
Salaries and employee benefits ............................ 1,108 903 2,145 1,714
Net occupancy expense ..................................... 130 114 249 202
Furniture and equipment expense ........................... 106 108 216 210
Amortization of computer software ......................... 81 58 156 117
ATM interchange and related expenses ...................... 95 79 205 149
Directors' fees ........................................... 34 20 61 47
Other expense ............................................. 451 360 860 737
------- ------- ------- -------
Total other expenses .................................. 2,005 1,642 3,892 3,176
------- ------- ------- -------
Income before income taxes ..................................... 1,230 1,349 2,590 2,763
Income tax expense ............................................. 385 410 785 867
------- ------- ------- -------
Net income ..................................................... $ 845 $ 939 $ 1,805 $ 1,896
======= ======= ======= =======
Per share*
Net income ................................................ $ 0.25 $ 0.29 $ 0.54 $ 0.58
Net income, assuming dilution ............................. 0.24 0.27 0.51 0.54
-------
* Per share information has been retroactively adjusted to reflect a 10% stock
dividend effective December 20, 2007.
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, 2007 .......................... 2,958,558 $ 30,061 $ 593 $ 3,285 $ (724) $ 33,215
----------
Comprehensive income:
Net income .................................... - - - 1,896 - 1,896
----------
Unrealized holding gains and losses
on available-for-sale securities
arising during the period, net of
income taxes of $374 ........................ - - - - (668) (668)
----------
Total other comprehensive income .......... (668)
----------
Total comprehensive income .............. 1,228
----------
Exercise of employee stock options ................ 14,005 76 - - - 76
---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 2007 ............................ 2,972,563 $ 30,137 $ 593 $ 5,181 $ (1,392) $ 34,519
========== ========== ========== ========== ========== ==========
Balance, January 1, 2008 .......................... 3,324,105 $ 35,009 $ 681 $ 2,140 $ 80 $ 37,910
----------
Comprehensive income:
Net income .................................... - - - 1,805 - 1,805
----------
Unrealized holding gains and losses
on available-for-sale securities
arising during the period, net of
income taxes of $439 ........................ - - - - (784) (784)
----------
Total other comprehensive income .......... (784)
----------
Total comprehensive income .............. 1,021
----------
Exercise of employee stock options ................ 70,768 365 - - - 365
---------- ---------- ---------- ---------- ---------- ----------
Balance, June 30, 2008 ............................ 3,394,873 $ 35,374 $ 681 $ 3,945 $ (704) $ 39,296
========== ========== ========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements.
5
COMMUNITY FIRST BANCORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
--------
2008 2007
---- ----
(Dollars in thousands)
Operating activities
Net income ............................................................................ $ 1,805 $ 1,896
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses ...................................................... 410 120
Depreciation ................................................................... 219 200
Amortization of net loan fees and costs ........................................ (85) (92)
Securities accretion and premium amortization .................................. (1) 47
Loss on sale of foreclosed assets .............................................. 6 -
Increase in value of bank-owned life insurance ................................. (186) -
Increase in interest receivable ................................................ (66) (218)
(Decrease) increase in interest payable ........................................ (543) 194
Decrease (increase) in prepaid expenses and other assets ....................... 143 (84)
Increase in other accrued expenses ............................................. 374 33
-------- --------
Net cash provided by operating activities .................................. 2,076 2,096
-------- --------
Investing activities
Purchases of available-for-sale securities ............................................ (41,708) (17,448)
Purchase of securities held-to-maturity ............................................... (7,490) -
Maturities, calls and paydowns of securities available-for-sale ....................... 28,780 14,183
Maturities, calls and paydowns of securities held-to-maturity ......................... 466 500
Proceeds from sales of other investments .............................................. - 95
Purchases of other investments ........................................................ (87) -
Net increase in loans made to customers ............................................... (12,838) (22,996)
Purchases of premises and equipment ................................................... (382) (329)
Proceeds of sale of foreclosed assets ................................................. 34 -
Investment in bank-owned life insurance ............................................... (1,000) -
-------- --------
Net cash used by investing activities ...................................... (34,225) (25,995)
-------- --------
Financing activities
Net increase (decrease) in demand deposits, interest
bearing transaction accounts and savings accounts ................................. 4,154 (5,377)
Net increase in certificates of deposit and other
time deposits ..................................................................... 10,836 25,605
Net increase (decrease) in short-term borrowings ...................................... 1,500 (4,500)
Proceeds of issuing long-term debt .................................................... 6,000 -
Repayments of long-term debt .......................................................... (1,000) (1,000)
Exercise of employee stock options .................................................... 365 76
-------- --------
Net cash provided by financing activities .................................. 21,855 14,804
-------- --------
Decrease in cash and cash equivalents ...................................................... (10,294) (9,095)
Cash and cash equivalents, beginning ....................................................... 34,673 31,145
-------- --------
Cash and cash equivalents, ending .......................................................... $ 24,379 $ 22,050
======== ========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for
Interest .......................................................................... $ 7,278 $ 6,216
Income taxes ...................................................................... 900 898
Noncash investing and financing activities:
Other comprehensive income (loss) ................................................. (784) (668)
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, 2007 filed with the Securities and Exchange
Commission. Certain amounts in the 2007 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, 2008, there were $1,880,000 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 2007 per share
information has been retroactively adjusted to give effect to a 10% stock
dividend effective December 20, 2007. Net income per share and net income per
share, assuming dilution, were computed as follows:
(Unaudited)
Period Ended June 30,
---------------------
Three Months Six Months
------------ ----------
2008 2007 2008 2007
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
Net income per share, basic
Numerator - net income ............................... $ 845 $ 939 $ 1,805 $ 1,896
========== ========== ========== ==========
Denominator
Weighted average common shares
issued and outstanding ........................... 3,360,218 3,269,767 3,352,301 3,268,022
========== ========== ========== ==========
Net income per share, basic ...................... $ .25 $ .29 $ .54 $ .58
========== ========== ========== ==========
Net income per share, assuming dilution
Numerator - net income ............................... $ 845 $ 939 $ 1,805 $ 1,896
========== ========== ========== ==========
Denominator
Weighted average common shares
issued and outstanding ........................... 3,360,218 3,269,767 3,352,301 3,268,022
Effect of dilutive stock options ................... 134,315 224,881 158,873 230,138
---------- ---------- ---------- ----------
Total shares ............................ 3,494,533 3,494,648 3,511,174 3,498,160
========== ========== ========== ==========
Net income per share, assuming dilution .......... $ .24 $ .27 $ .51 $ .54
========== ========== ========== ==========
Fair Value Measurements - The Company implemented Statement of Financial
Accounting Standards No. 157, "Fair Value Measurements," ("SFAS No. 157") as
required on January 1, 2008. SFAS No. 157 defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an orderly
fashion between market participants at the measurement date, and establishes a
framework for measuring fair value. It also establishes a three-level hierarchy
for fair value measurements based upon the transparency of inputs to the
valuation of an asset or liability as of the measurement date, eliminates the
consideration of large position discounts for financial instruments quoted in
active markets, requires consideration of the Company's creditworthiness when
valuing its liabilities, and expands disclosures about instruments measured at
fair value. The following is a summary of the measurement attributes applicable
7
to financial assets and liabilities that are measured at fair value on a
recurring basis:
Fair Value Measurement at Reporting Date Using
----------------------------------------------
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
Description June 30, 2008 (Level 1) (Level 2) (Level 3)
----------- ------------- --------- --------- ---------
(Dollars in thousands)
Securities available-for-sale .................................. $ - $110,729 $ -
Pricing for the Company's securities available-for-sale is obtained from an
independent third-party that uses a process that may incorporate current market
prices, benchmark yields, broker/dealer quotes, issuer spreads, two-sided
markets, benchmark securities, bids, offers, other reference data and industry
and economic events that a market participant would be expected to use in
valuing the securities. Not all of the inputs listed apply to each individual
security at each measurement date. The independent third party assigns specific
securities into an "asset class" for the purpose of assigning the applicable
level of the fair value hierarchy used to value the securities. The techniques
used after adoption of SFAS No. 157 are consistent with the methods used
previously.
In February 2008, the Financial Accounting Standards Board Staff issued FASB
Staff Position No. FAS 157-2 ("FSP 157-2") which delays for one year the
effective date of the application of Statement of Financial Accounting Standards
No. 157 "Fair Value Measurements" ("SFAS No. 157") to nonfinancial assets and
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually). In accordance
with FSP 157-2, the Company has only partially applied SFAS No. 157. There are
currently no major categories of assets or liabilities disclosed at fair value
in the financial statements for which the Company has not applied the provisions
of SFAS No. 157.
No cumulative effect adjustments were required upon initial application of SFAS
No. 157. Available-for-sale securities continue to be measured at fair value
with unrealized gains and losses, net of income taxes, recorded in other
comprehensive income.
New Accounting Pronouncements - In December 2007, the FASB issued Statement of
Financial Accounting Standards No. 160 "Noncontrolling Interests in Consolidated
Financial Statements, an amendment of ARB No. 51" ("SFAS No. 160"). SFAS No. 160
is effective for years beginning after December 31, 2008, and is to be applied
prospectively with retrospective presentation and disclosure requirements for
comparative financial statements. Early adoption is prohibited. SFAS No. 160
seeks to improve the relevance, comparability and transparency of financial
information that a reporting entity provides in its consolidated financial
statements by separately identifying and reporting several financial statement
components into amounts that are attributable to the reporting entity or that
are attributable to noncontrolling interests. SFAS No. 160 also specifies the
conditions under which an entity is required to deconsolidate its interest in a
subsidiary. The Company currently has no consolidated subsidiaries that are not
wholly owned nor are any transactions contemplated that would result in such a
condition. Therefore, it is expected that the adoption of SFAS No. 160 in
January 2009 will have no effect on the Company's consolidated financial
statements.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities" ("SFAS 161"). SFAS 161 requires enhanced
disclosures about an entity's derivative and hedging activities, thereby
improving the transparency of financial reporting. It is intended to enhance the
current disclosure framework in SFAS 133 by requiring that objectives for using
derivative instruments be disclosed in terms of underlying risk and accounting
designation. This disclosure better conveys the purpose of derivative use in
terms of the risks that the entity is intending to manage. SFAS 161 is effective
for the Company on January 1, 2009. This pronouncement does not impact
accounting measurements but will result in additional disclosures if the Company
is involved in material derivative and hedging activities at that time.
In February 2008, the FASB issued FASB Staff Position No. 140-3, "Accounting for
Transfers of Financial Assets and Repurchase Financing Transactions" ("FSP
140-3"). This FSP provides guidance on accounting for a transfer of a financial
asset and the transferor's repurchase financing of the asset. This FSP presumes
that an initial transfer of a financial asset and a repurchase financing are
considered part of the same arrangement (linked transaction) under SFAS No. 140.
However, if certain criteria are met, the initial transfer and repurchase
financing are not evaluated as a linked transaction and are evaluated separately
under Statement 140. FSP 140-3 will be effective for financial statements issued
for fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years. Earlier application is not permitted. Accordingly, this FSP
8
is effective for the Company on January 1, 2009. The Company is currently
evaluating the impact, if any, the adoption of FSP 140-3 will have on its
financial position, results of operations and cash flows.
In April 2008, the FASB issued FASB Staff Position No. 142-3, "Determination of
the Useful Life of Intangible Assets" ("FSP 142-3"). This FSP amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
"Goodwill and Other Intangible Assets." The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under SFAS
No. 142 and the period of expected cash flows used to measure the fair value of
the asset under SFAS No. 141(R), "Business Combinations," and other U.S.
generally accepted accounting principles. This FSP is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years and early adoption is prohibited.
Accordingly, this FSP is effective for the Company on January 1, 2009. The
Company does not believe the adoption of FSP 142-3 will have a material impact
on its financial position, results of operations or cash flows.
In May, 2008, the FASB issued Statement of Financial Accounting Standards No.
162, "The Hierarchy of Generally Accepted Accounting Principals" ("SFAS No.
162"). SFAS No. 162 identifies the sources of accounting principles and the
framework for selecting the principles used in the preparation of financial
statements of nongovernmental entities that are presented in conformity with
generally accepted accounting principles ("GAAP") in the United States (the GAAP
hierarchy). SFAS No. 162 will be effective 60 days following the Securities and
Exchange Commission's approval of the Public Company Accounting Oversight
Board's amendments to AU Section 411, "The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles." The application of
the statement will have no effect on the Company's financial position, results
of operations or cash flows.
FASB Staff Position No. APB 14-1, "Accounting for Convertible Debt Instruments
That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)"
("FSP No. APB 14-1"), specifies that issuers of convertible debt instruments
that may be settled in cash upon conversion should separately account for the
liability and equity components in a manner that will reflect the entity's
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. FSP No. APB 14-1 provides guidance for initial and
subsequent measurement as well as derecognition provisions and is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those years. Early adoption is not permitted, but the
provisions of FSP APB No. 14-1 will be applied retrospectively for all periods
even if the instrument has matured, has been converted, or otherwise has been
extinguished. The adoption of FSP No. APB 14-1 will have no effect on the
Company's financial position, results of operations or cash flows.
In June, 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, "Determining
Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities" ("FSP EITF No. 03-6-1"). This Staff Position provides
that unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents are participating securities and must be
included in the computation of earnings per share. FSP EITF 03-6-1 is effective
for financial statements issued for years beginning after December 15, 2008, and
interim periods within those years. All prior-periods earnings per share data
presented must be adjusted retrospectively. Early application is not permitted.
The adoption of the Staff Position will have no effect on the Company's
financial position, results of operation or cash flows.
9
CAUTIONARY NOTICE WITH RESPECT TO FORWARD-LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of
the securities laws. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to comply with
the terms of the safe harbor, the Company notes that a variety of factors could
cause the Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forwarding-looking statements.
All statements that are not historical facts are statements that could
be "forward-looking statements." You can identify these forward-looking
statements through the use of words such as "may," "will," "should," "could,"
"would," "expect," "anticipate," "assume," "indicate," "contemplate," "seek,"
"plan," "predict," "target," "potential," "believe," "intend," "estimate,"
"project," "continue," or other similar words. Forward-looking statements
include, but are not limited to, statements regarding the Company's future
business prospects, revenues, working capital, liquidity, capital needs,
interest costs, income, business operations and proposed services.
These forward-looking statements are based on current expectations,
estimates and projections about the banking industry, management's beliefs, and
assumptions made by management. Such information includes, without limitation,
discussions as to estimates, expectations, beliefs, plans, strategies, and
objectives concerning future financial and operating performance. These
statements are not guarantees of future performance and are subject to risks,
uncertainties and assumptions that are difficult to predict. Therefore, actual
results may differ materially from those expressed or forecasted in such
forward-looking statements. The risks and uncertainties include, but are not
limited to:
o future economic and business conditions;
o lack of sustained growth in the economies of the Company's market
areas;
o government monetary and fiscal policies;
o the effects of changes in interest rates on the levels,
composition and costs of deposits, loan demand, and the values of
loan collateral, securities, and interest sensitive assets and
liabilities;
o the effects of competition from a wide variety of local,
regional, national and other providers of financial, investment,
and insurance services, as well as competitors that offer banking
products and services by mail, telephone, computer and/or the
Internet;
o credit risks;
o higher than anticipated levels of defaults on loans;
o misperceptions by depositors about the safety of their deposits;
o capital adequacy;
o the failure of assumptions underlying the establishment of the
allowance for loan losses and other estimates, including the
value of collateral securing loans;
o availability of liquidity sources;
o the risks of opening new offices, including, without limitation,
the related costs and time of building customer relationships and
integrating operations as part of these endeavors and the failure
to achieve expected gains, revenue growth and/or expense savings
from such endeavors;
o changes in laws and regulations, including tax, banking and
securities laws and regulations;
o changes in accounting policies, rules and practices;
o changes in technology or products may be more difficult or
costly, or less effective, than anticipated;
o the effects of war or other conflicts, acts of terrorism or other
catastrophic events that may affect general economic conditions
and economic confidence; and
o other factors and information described in this report and in any
of the other reports that we file with the Securities and
Exchange Commission under the Securities Exchange Act of 1934.
All forward-looking statements are expressly qualified in their
entirety by this cautionary notice. The Company has no obligation, and does not
undertake, to update, revise or correct any of the forward-looking statements
after the date of this report. The Company has expressed its expectations,
beliefs and projections in good faith and believes they have a reasonable basis.
However, there is no assurance that these expectations, beliefs or projections
will result or be achieved or accomplished.
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Changes in Financial Condition
10
During the first six months of 2008, loans increased by $12,687,000, or
5.2%, securities available-for-sale increased by $11,703,000, or 11.8%,
securities held-to-maturity increased by $7,027,000, or 124.1%, and interest
bearing balances due from banks increased by $9,286,000. Federal funds sold
decreased by $18,362,000, or 75.8%. Interest bearing deposits increased by
$14,173,000, or 4.5%. Approximately $10,637,000 of that increase was in the form
of certificates of deposits of $100,000 or more. Also during the period,
short-term borrowings increased by $1,500,000 and long-term debt increased by
$5,000,000.
The Company believes that its liquidity position continues to provide
it with 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. Management also believes that the current balance
sheet positions maintain the Company's exposures to changes in interest rates at
acceptable levels.
Results of Operations
Three Months Ended June 30, 2008 and 2007
The Company recorded consolidated net income of $845,000 or $.25 per
share for the second quarter of 2008. These results are lower than net income of
$939,000 and earnings per share of $.29 for the second quarter of 2007. Net
income per share, assuming dilution was $.24 for the 2008 quarter and $.27 for
the 2007 period. Net income per share amounts for 2007 have been retroactively
adjusted to reflect a ten percent stock dividend effective December 20, 2007.
Net interest income for the 2008 second quarter was $281,000, or 10.8%,
more than for the 2007 second quarter. Interest income for the 2008 second
quarter increased primarily because of higher average amounts of loans and
securities held. Interest expense for the 2008 quarter was slightly lower than
for the same period of 2007 due to lower interest rates paid for deposits.
The provision for loan losses for the second quarter of 2008 increased
by $160,000 over the amount for the same period of 2007 due to higher levels of
nonaccrual and potential problem loans. Some borrowers recently have exhibited
increased difficulty in servicing their loans due to a general slowing in
economic conditions, especially with respect to residential real estate. If
those conditions continue or deteriorate further, it is possible that increased
provisions for loan losses may be needed in the future.
Noninterest income for the second quarter of 2008 increased by
$123,000, or 24.5%, primarily due to a $93,000 increase in the value of life
insurance and higher amounts of service charges on deposit accounts and ATM
interchange and other fees. Noninterest expense for the 2008 second quarter
increased from the amount recorded for the same 2007 period, primarily as a
result of higher salaries and employee benefits and higher expenses for deposit
insurance.
Summary Income Statement
------------------------------------------------------------------------
(Dollars in thousands)
For the Three Months Ended June 30, 2008 2007 Dollar Change Percentage Change
---- ---- ------------- -----------------
Interest income ................................... $6,037 $5,820 $ 217 3.7%
Interest expense .................................. 3,147 3,211 (64) -2.0%
------ ------ ------
Net interest income ............................... 2,890 2,609 281 10.8%
Provision for loan losses ......................... 280 120 160 133.3%
Noninterest income ................................ 625 502 123 24.5%
Noninterest expenses .............................. 2,005 1,642 363 22.1%
Income tax expense ................................ 385 410 (25) -6.1%
------ ------ ------
Net income ........................................ $ 845 $ 939 $ (94) -10.0%
====== ====== ======
Six Months Ended June 30, 2008 and 2007
The Company recorded consolidated net income of $1,805,000 or $.54 per
share, for the first half of 2008, compared with $1,896,000, or earnings per
share of $.58, for the same period of 2007. Net income per share, assuming
dilution was $.51 for the 2008 six months and $.54 for the same period of 2007.
Net income per share amounts for 2007 have been retroactively adjusted to
reflect a ten percent stock dividend effective December 20, 2007.
11
Net interest income for the first six months of 2008 increased by
$587,000, or 11.6%, over the amount recorded for the same period of 2007.
Increases in the amounts of loans outstanding more than offset lower yields
realized on most categories of earning assets and resulted in interest income
increasing more than interest expenses. Increases in interest expense primarily
were caused by higher average amounts of interest bearing time deposits.
Noninterest income for the first six months of 2008 increased by
$246,000 as a result of higher amounts of service charges on deposit accounts
and a $186,000 increase in the value of life insurance.
Noninterest expenses for the 2008 six-month period increased by
$716,000, or 22.5%, over the 2007 amounts. Salaries and employee benefits
increased by $431,000, or 25.1%, primarily reflecting the effects of certain
deferred compensation arrangements that originated in the third quarter of 2007
and normal periodic increases in employees' compensation.
Summary Income Statement
--------------------------------------------------------------------------
(Dollars in thousands)
For the Six Months Ended June 30, 2008 2007 Dollar Change Percentage Change
---- ---- ------------- -----------------
Interest income .................................... $12,393 $11,481 $ 912 7.9%
Interest expense ................................... 6,735 6,410 325 5.1%
------- ------- -------
Net interest income ................................ 5,658 5,071 587 11.6%
Provision for loan losses .......................... 410 120 290 241.7%
Noninterest income ................................. 1,234 988 246 24.9%
Noninterest expenses ............................... 3,892 3,176 716 22.5%
Income tax expense ................................. 785 867 (82) -9.5%
------- ------- -------
Net income ......................................... $ 1,805 $ 1,896 $ (91) -4.8%
======= ======= =======
Net Interest Income
Three Months Ended June 30, 2008 and 2007
The average yield on interest earning assets decreased to 6.12% for the
2008 three-month period, compared with 6.59% for the 2007 period. Yields on most
significant categories of earning assets were lower in the 2008 period. The
exception was that the yield on taxable investment securities increased to 4.84%
for the 2008 period from 4.34% for the 2007 period. This resulted primarily from
higher amounts of mortgage-backed securities issued by government-sponsored
entities held in the 2008 period. Similarly, interest rates paid for deposits
and borrowings were lower in the 2008 period. The average rate paid for
interest-bearing liabilities during the 2008 three-month period was 3.74%,
compared with 4.39% in the same period of 2007. Accordingly, the average
interest rate spread for the 2008 period was 18 basis points higher than for the
2007 period.
12
Average Balances, Yields and Rates
Three Months Ended June 30,
---------------------------
2008 2007
---- ----
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 .................. $ 1,802 $ 5 1.12% $ 130 $ - 0.00%
Securities
Taxable ............................................. 97,408 1,172 4.84% 91,844 994 4.34%
Tax exempt (2) ...................................... 20,434 208 4.09% 19,499 217 4.46%
--------- --------- --------- -------
Total investment securities .................... 117,842 1,380 4.71% 111,343 1,211 4.36%
Other investments ......................................... 927 12 5.21% 890 14 6.31%
Federal funds sold ........................................ 22,117 117 2.13% 23,533 320 5.45%
Loans (2) (3) (4) ......................................... 254,287 4,523 7.15% 218,074 4,275 7.86%
--------- --------- --------- -------
Total interest earning assets .................. 396,975 6,037 6.12% 353,970 5,820 6.59%
Cash and due from banks ................................... 7,373 8,374
Allowance for loan losses ................................. (2,636) (2,228)
Valuation allowance - available-for-sale securities ....... 869 (1,023)
Premises and equipment .................................... 8,828 8,007
Other assets .............................................. 12,296 3,640
--------- ---------
Total assets ................................... $ 423,705 $ 370,740
========= =========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts ............... $ 57,967 $ 258 1.79% $ 59,327 $ 483 3.27%
Savings ............................................. 24,752 68 1.10% 25,715 170 2.65%
Time deposits $100M and over ........................ 108,182 1,057 3.93% 80,644 945 4.70%
Other time deposits ................................. 142,437 1,716 4.85% 122,491 1,558 5.10%
--------- --------- --------- -------
Total interest bearing
deposits ..................................... 333,338 3,099 3.74% 288,177 3,156 4.39%
Long-term debt ............................................ 4,929 48 3.92% 5,368 55 4.11%
--------- --------- --------- -------
Total interest bearing
liabilities .................................. 338,267 3,147 3.74% 293,545 3,211 4.39%
Noninterest bearing demand deposits ....................... 41,307 39,295
Other liabilities ......................................... 4,138 3,181
Shareholders' equity ...................................... 39,993 34,719
--------- ---------
Total liabilities and shareholders' equity ..... $ 423,705 $ 370,740
========= =========
Interest rate spread ...................................... 2.38% 2.20%
Net interest income and net yield
on earning assets ................................... $ 2,890 2.93% $ 2,609 2.96%
Interest free funds supporting earning assets ............. $ 58,708 $ 60,425
-----------------------------
(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
Six Months Ended June 30, 2008 and 2007
For the first half of 2008, the average yield on interest earning
assets was 6.19%, compared with 6.49% for the 2007 period. Yields were lower on
substantially all types of earning assets in the 2008 period. Loan yields
decreased because a significant portion of the Company's loan portfolio consists
of variable rate instruments. Such loans, as offered by the Company, do not
normally subject the borrower to the risk of negative amortization, nor do the
loans involve the use of "teaser" rates or impose onerous fees or other terms
that would discourage borrowers from refinancing to a lower cost product or one
with a fixed rate. Yields earned on securities increased due to changes in the
composition of the securities portfolio brought about by reinvesting the
proceeds obtained from maturities, calls and paydowns of securities and the
investment of other funds, principally deposits, obtained currently.
Average rates paid on interest-bearing liabilities were lower in the
2008 period as well, at 3.92% compared with 4.36% in the 2007 six-month period.
Decreases in interest rates paid resulted from the Company's responses to
actions taken early in 2008 by the Federal Reserve to lower certain interest
rates within its purview
14
Average Balances, Yields and Rates
Six Months Ended June 30,
-------------------------
2008 2007
---- ----
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 ................. $ 1,108 $ 7 1.27% $ 98 $ 1 2.06%
Securities
Taxable ............................................ 92,739 2,189 4.75% 90,135 1,932 4.32%
Tax exempt (2) ..................................... 20,524 414 4.06% 19,595 404 4.16%
--------- --------- --------- ---------
Total investment securities ................... 113,263 2,603 4.62% 109,730 2,336 4.29%
Other investments ........................................ 886 25 5.67% 935 29 6.25%
Federal funds sold ....................................... 35,084 503 2.88% 32,830 862 5.29%
Loans (2) (3) (4) ........................................ 252,271 9,255 7.38% 213,064 8,253 7.81%
--------- --------- --------- ---------
Total interest earning assets ................. 402,612 12,393 6.19% 356,657 11,481 6.49%
Cash and due from banks .................................. 7,811 8,031
Allowance for loan losses ................................ (2,609) (2,228)
Valuation allowance - available-for-sale securities ...... 823 (1,119)
Premises and equipment ................................... 8,835 7,957
Other assets ............................................. 12,247 3,713
--------- ---------
Total assets .................................. $ 429,719 $ 373,011
========= =========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts .............. $ 58,856 $ 593 2.03% $ 57,291 $ 916 3.22%
Savings ............................................ 33,489 277 1.66% 32,966 523 3.20%
Time deposits $100M and over ....................... 105,614 2,210 4.21% 80,442 1,863 4.67%
Other time deposits ................................ 142,867 3,568 5.02% 119,992 2,996 5.04%
--------- --------- --------- ---------
Total interest bearing deposits ............... 340,826 6,648 3.92% 290,691 6,298 4.37%
Short-term borrowings .................................... - - 0.00% 25 3 24.20%
Long-term debt ........................................... 4,714 87 3.71% 5,434 109 4.05%
--------- --------- --------- ---------
Total interest bearing
liabilities ................................. 345,540 6,735 3.92% 296,150 6,410 4.36%
Noninterest bearing demand deposits ...................... 40,542 39,492
Other liabilities ........................................ 4,233 3,180
Shareholders' equity ..................................... 39,404 34,189
--------- ---------
Total liabilities and shareholders' equity .... $ 429,719 $ 373,011
========= =========
Interest rate spread ..................................... 2.27% 2.13%
Net interest income and net yield on earning assets ...... $ 5,658 2.83% $ 5,071 2.87%
Interest free funds supporting earning assets ............ $ 57,072 $ 60,507
----------------------------------------
(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.
15
Provision and Allowance for Loan Losses
The provision for loan losses was $280,000 for the second quarter of
2008, compared with $120,000 for the comparable period of 2007. For the first
half of 2008, the provision for loan losses was $410,000, compared with $120,000
recorded for the first half of 2007. At June 30, 2008, the allowance for loan
losses was 1.07% of loans, a slight increase over 1.05% at December 31, 2007.
For the first six months of 2008, net charge-offs totaled $236,000,
compared with $83,000 in net charge offs during the same period of 2007. The
higher levels of charge-offs in 2008 reflect a general deterioration of local
economic conditions. No particular industries or groups of borrowers are
disproportionately represented among the loans charged off. If local economic
conditions do not improve, it is likely that the Company will continue to
experience elevated levels of both net charge-offs and provisions for loan
losses. The activity in the allowance for loan losses is summarized in the table
below:
Six Months Year Ended Six Months
Ended Ended Ended
June 30, 2008 December 31, 2007 June 30, 2007
------------- ----------------- -------------
(Dollars in thousands)
Allowance at beginning of period ................................. $ 2,574 $ 2,242 $ 2,242
Provision for loan losses ........................................ 410 594 120
Net charge-offs .................................................. (236) (262) (83)
--------- --------- ---------
Allowance at end of period ....................................... $ 2,748 $ 2,574 $ 2,279
========= ========= =========
Allowance as a percentage of loans outstanding
at period end .................................................. 1.07% 1.05% 1.01%
Loans at end of period ........................................... $ 256,818 $ 244,131 $ 225,971
========= ========= =========
16
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, 2007 .................... $ 50 $ - $ 50 0.02% $ 3,176 1.56%
Net change ......................... 143 - 143 (151)
------- ------ ------- -------
March 31, 2007 ..................... 193 - 193 0.09% 3,025 1.43%
Net change ......................... 219 - 219 97
------- ------ ------- -------
June 30, 2007 ...................... 412 - 412 0.18% 3,122 1.38%
Net change ......................... 14 - 14 106
------- ------ ------- -------
September 30, 2007 ................. 426 - 426 0.18% 3,228 1.36%
Net change ......................... 199 - 199 (140)
------- ------ ------- -------
December 31, 2007 .................. 625 - 625 0.26% 3,088 1.26%
Net change ......................... (181) - (181) 962
------- ------ ------- -------
March 31, 2008 ..................... 444 - 444 0.18% 4,050 1.61%
Net change ......................... 1,436 - 1,436 1,338
------- ------ ------- -------
June 30, 2008 ...................... $ 1,880 $ - $ 1,880 0.73% $ 5,388 2.10%
======= ====== ======= =======
Potential problem loans include loans, other than non-performing loans,
that management has identified as having possible credit problems sufficient to
cast doubt upon the abilities of the borrowers to comply with the current
repayment terms. As of June 30, 2008, approximately 92% of the Company's
potential problem loans were included in the Company's least severe category of
potential problem loans. Approximately 86% of potential problem loans were
secured by real estate. Management expects that further deterioration of
economic conditions within the Company's market areas is likely in the
short-term, especially with respect to real estate activities and real property
values. Consequently, management believes that the amounts of potential problem
and nonaccrual loans are likely to increase for at least the next six months. If
current conditions in the Company's local real estate markets continue or if
those conditions deteriorate further, it is possible that increased provisions
for loan losses may be needed in the future.
Noninterest Income
Noninterest income totaled $625,000 for the second quarter of 2008,
compared with $502,000 for the 2007 quarter. Increases in the value of life
insurance were $93,000 in the 2008 quarter, with no such activity in the same
2007 period. Service charges on deposit accounts in the 2008 second quarter
increased by $32,000 over the prior year quarter. There were no sales of any
securities in either the 2008 or 2007 second quarter.
For the six months ended June 30, 2008, noninterest income totaled
$1,234,000, compared with $988,000 for the same period of 2007. Increases in the
value of life insurance were $186,000 in the 2008 period with no such activity
in the first six months of 2007. Service charges on deposit accounts in the 2008
six months period were $735,000 representing an increase of $58,000 over the
prior year period. No gains or losses on sales of securities were recognized in
either the 2008 or 2007 six months period.
Noninterest Expenses
Noninterest expenses totaled $2,005,000 for the second quarter of 2008
compared with $1,642,000 for the same quarter of 2007, representing an increase
of $363,000. Compared with the 2007 period, salaries and employee benefits for
the 2008 three-month period increased by $205,000 primarily as a result of
deferred compensation benefits and the opening of the new Highway 81 office.
Occupancy expenses increased for the 2008 three-month period and included higher
utility expenses and increases in depreciation and other expenses related to the
new office. Deposit insurance assessments increased by $46,000 over the amount
for the second quarter of 2007.
For the six months ended June 30, 2008, salaries and employee benefits
increased by $431,000 over the amount for the 2007 period primarily as a result
17
of recognition of deferred compensation expenses. Net occupancy and furniture
and equipment expenses increased by an aggregate of $53,000. Deposit insurance
assessments for the 2008 six months period were $52,000 more than for the same
period of 2007.
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 Anderson County market is served from three offices in
Anderson and Williamston, including an office on Highway 81 in Anderson County
that opened for business during the fourth quarter of 2007.
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 also has significant amounts
of credit availability under its FHLB lines of credit and federal funds
purchased facilities.
As of June 30, 2008, the ratio of loans to total deposits was 69.2%,
compared with 68.6% as of December 31, 2007. Deposits as of June 30, 2008
totaled $370,857,000, an increase of $14,990,000 or 4.2% over the amount as of
December 31, 2007. Management believes that the Company's liquidity sources are
adequate to meet its operating needs.
Capital Resources
The Company's capital base increased by $1,386,000 since December 31,
2007 as the result of net income of $1,805,000 for the first six months of 2008,
less a $784,000 change in unrealized gains and losses on available-for-sale
securities, net of deferred income tax effects and $365,000 received from the
exercise of employee stock options. Unrealized losses on available-for-sale
securities are not considered to be other than temporary. The Company's
available-for-sale securities primarily consist of debt issuances of
government-sponsored enterprises. While not directly guaranteed by the U. S.
Government, these issues are generally considered to be of high quality and
default risk is believed to be remote. Therefore, the changes in market values
are believed to be the result only of changes in market interest rates. In
addition, the Company currently has both the intent and the ability to hold such
securities until the market value recovers, including until maturity.
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, 2008 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 ................. 13.9% 14.8% 9.5%
Community First Bank ........................... 13.2% 14.2% 9.0%
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
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
18
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, 2008
-------------
(Dollars in
thousands)
Loan commitments ............ $ 47,893
Standby letters of credit ... 1,114
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,
2008.
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 2008, the
model indicates that net interest income would increase $125,000 and net income
would increase $77,000 in the next twelve months if interest rates rose by 100
basis points. Conversely, net interest income would decrease $81,000 and net
income would decrease $53,000 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, 2008, there was no significant change from the interest rate
sensitivity analysis for the various changes in interest rates calculated as of
December 31, 2007. 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 2007 Annual Report
on Form 10-K filed with the Securities and Exchange Commission.
Item 4T. - 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
19
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 29, 2008, 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
--------- --- -------- ---------
James E. McCoy .................... 2,070,818 0 221,828
James E. Turner ................... 2,070,818 0 221,828
Charles L. Winchester ............. 2,070,818 0 221,828
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 2008 annual meeting: Larry S. Bowman, MD - 2009, William M.
Brown - 2009, John R. Hamrick - 2009, Frederick D. Shepherd, Jr. - 2009, Robert
H. Edwards - 2010; Blake L. Griffith - 2010 and Gary W. Thrift - 2010.
Item 6. - Exhibits
Exhibits 31. Rule 13a-14(a)/15d-14(a) Certifications
32. Certifications Pursuant to 18 U.S.C. Section 1350
20
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 12, 2008 /s/ Frederick D. Shepherd, Jr.
----------------- ------------------------------------
Date Frederick D. Shepherd, Jr., Chief
Executive Officer and Chief
Financial Officer
EXHIBIT INDEX
31. Rule 13a-14(a)/15d-14(a) Certifications
32. Certifications Pursuant to 18 U.S.C. Section 1350
21