U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended June 30, 2005 Commission File No. 000-29640
COMMUNITY FIRST BANCORPORATION
-------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
South Carolina 58-2322486
--------------------------- -------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
3685 Blue Ridge Boulevard
WALHALLA, SOUTH CAROLINA 29691
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(Address of principal executive offices)
(864) 638-2105
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: Common Stock, no par or
stated value, 2,648,605 Shares Outstanding on July 31, 2005.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
1
COMMUNITY FIRST BANCORPORATION
FORM 10-QSB
Index
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet ..................................... 3
Consolidated Statement of Income ............................... 4
Consolidated Statement of Changes in Shareholders' Equity ...... 5
Consolidated Statement of Cash Flows ........................... 6
Notes to Unaudited Consolidated Financial Statements ........... 7-8
Item 2. Management's Discussion and Analysis ........................... 8-11
Item 3. Controls and Procedures ........................................ 11
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders ............ 12
Item 6. Exhibits ....................................................... 12
SIGNATURE ................................................................ 13
2
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
COMMUNITY FIRST BANCORPORATION
Consolidated Balance Sheet
(Unaudited)
June 30, December 31,
2005 2004
---- ----
(Dollars in thousands)
Assets
Cash and due from banks ................................................................... $ 5,705 $ 5,652
Interest bearing deposits due from banks .................................................. 79 36
Federal funds sold ........................................................................ 19,332 34,214
--------- ---------
Cash and cash equivalents ............................................................. 25,116 39,902
Securities available-for-sale ............................................................. 95,054 92,084
Securities held-to-maturity (fair value $8,692 for 2005 and $9,560 for 2004) .............. 8,621 9,369
Other investments ......................................................................... 1,173 1,011
Loans ..................................................................................... 165,596 157,775
Allowance for loan losses ............................................................. (2,337) (2,240)
--------- ---------
Loans - net ........................................................................ 163,259 155,535
Premises and equipment - net .............................................................. 4,675 4,413
Accrued interest receivable ............................................................... 1,420 1,331
Other assets .............................................................................. 1,845 1,703
--------- ---------
Total assets ....................................................................... $ 301,163 $ 305,348
========= =========
Liabilities
Deposits
Noninterest bearing ................................................................... $ 34,089 $ 34,903
Interest bearing ...................................................................... 230,462 233,245
--------- ---------
Total deposits ..................................................................... 264,551 268,148
Accrued interest payable .................................................................. 1,561 1,222
Short-term borrowings ..................................................................... - 2,500
Long-term debt ............................................................................ 7,500 7,500
Other liabilities ......................................................................... 136 41
--------- ---------
Total liabilities .................................................................. 273,748 279,411
--------- ---------
Shareholders' equity
Common stock - no par value; 10,000,000 shares authorized; issued and
outstanding - 2,648,605 for 2005 and
2,648,230 for 2004 .................................................................... 24,218 24,216
Retained earnings ......................................................................... 4,106 2,220
Accumulated other comprehensive income (loss) ............................................. (909) (499)
--------- ---------
Total shareholders' equity ......................................................... 27,415 25,937
--------- ---------
Total liabilities and shareholders' equity ......................................... $ 301,163 $ 305,348
========= =========
See accompanying notes to unaudited consolidated financial statements.
3
COMMUNITY FIRST BANCORPORATION
Consolidated Statement of Income
(Unaudited)
Period Ended June 30,
---------------------
Three Months Six Months
------------ ----------
2005 2004 2005 2004
---- ---- ---- ----
(Dollars in thousands, except per share)
Interest income
Loans, including fees ..................................... $2,829 $2,555 $5,555 $5,050
Securities
Taxable ................................................. 876 788 1,819 1,502
Tax-exempt .............................................. 32 19 52 37
Other investments ......................................... 11 6 20 13
Federal funds sold ........................................ 159 44 312 126
------ ------ ------ ------
Total interest income ................................. 3,907 3,412 7,758 6,728
------ ------ ------ ------
Interest expense
Time deposits $100M and over .............................. 453 364 903 738
Other deposits ............................................ 984 857 1,911 1,732
Short-term borrowings ..................................... 14 2 33 2
Long-term debt ............................................ 61 7 124 7
------ ------ ------ ------
Total interest expense ................................ 1,512 1,230 2,971 2,479
------ ------ ------ ------
Net interest income ............................................ 2,395 2,182 4,787 4,249
Provision for loan losses ...................................... 75 55 215 135
------ ------ ------ ------
Net interest income after provision ............................ 2,320 2,127 4,572 4,114
------ ------ ------ ------
Other income
Service charges on deposit accounts ....................... 407 394 758 762
Credit life insurance commissions ......................... 7 13 18 19
Net gains on sales of available-for-sale
securities ............................................ - - - 5
Other income .............................................. 137 136 262 229
------ ------ ------ ------
Total other income .................................... 551 543 1,038 1,015
------ ------ ------ ------
Other expenses
Salaries and employee benefits ............................ 630 701 1,341 1,381
Net occupancy expense ..................................... 61 69 125 140
Furniture and equipment expense ........................... 89 91 177 155
Other expense ............................................. 572 498 1,032 860
------ ------ ------ ------
Total other expenses .................................. 1,352 1,359 2,675 2,536
------ ------ ------ ------
Income before income taxes ..................................... 1,519 1,311 2,935 2,593
Income tax expense ............................................. 542 481 1,049 931
------ ------ ------ ------
Net income ..................................................... $ 977 $ 830 $1,886 $1,662
====== ====== ====== ======
Per share*
Net income ................................................ $ 0.37 $ 0.31 $ 0.71 $ 0.63
Net income, assuming dilution ............................. 0.34 0.29 0.67 0.60
------
* Per share information has been retroactively adjusted to reflect a 10% stock
dividend effective November 30, 2004.
See accompanying notes to unaudited consolidated financial statements.
4
COMMUNITY FIRST BANCORPORATION
Consolidated Statement of Changes in Shareholders' Equity
(Unaudited)
Common Stock
------------ Accumulated
Number of Retained Other Comprehensive
Shares Amount Earnings Income (Loss) Total
------ ------ -------- ------------- -----
(Dollars in thousands)
Balance, January 1, 2004 ................................... 2,362,057 $ 19,620 $ 3,117 $ (200) $ 22,537
---------
Comprehensive income:
Net income ............................................. - - 1,662 - 1,662
---------
Unrealized holding gains and losses
on available-for-sale securities arising
during the period, net of income taxes of $750 ....... - - - (1,339) (1,339)
Reclassification adjustment for losses (gains)
realized in income, net of
income taxes of $2 ................................... - - - (3) (3)
---------
Total other comprehensive income (loss) ................ - - - - (1,342)
---------
Total comprehensive income ............................. - - - - 320
---------
Exercise of employee stock options ......................... 45,226 264 - - 264
--------- --------- --------- --------- ---------
Balance, June 30, 2004 ..................................... 2,407,283 $ 19,884 $ 4,779 $ (1,542) $ 23,121
========= ========= ========= ========= =========
Balance, January 1, 2005 ................................... 2,648,230 $ 24,216 $ 2,220 $ (499) $ 25,937
---------
Comprehensive income:
Net income ............................................. - - 1,886 - 1,886
---------
Unrealized holding gains and losses
on available-for-sale securities arising
during the period, net of income taxes of $229 ....... - - - (410) (410)
---------
Total other comprehensive income (loss) ................ - - - - (410)
---------
Total comprehensive income ........................... - - - - 1,476
---------
Exercise of employee stock options ......................... 375 2 - - 2
--------- --------- --------- --------- ---------
Balance, June 30, 2005 ..................................... 2,648,605 $ 24,218 $ 4,106 $ (909) $ 27,415
========= ========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
5
COMMUNITY FIRST BANCORPORATION
Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended
June 30,
2005 2004
---- ----
(Dollars in thousands)
Operating activities
Net income ................................................................................ $ 1,886 $ 1,662
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses .......................................................... 215 135
Depreciation ....................................................................... 150 142
Amortization of net loan (fees) and costs .......................................... (43) (39)
Securities accretion and premium amortization ...................................... 65 213
Gain on sale of available-for-sale security ........................................ - (5)
(Increase) decrease in interest receivable ......................................... (89) 24
Increase in interest payable ....................................................... 339 106
Decrease in prepaid expenses and other assets ...................................... 62 248
Increase in other accrued expenses ................................................. 95 221
Writedowns of other real estate owned .............................................. 25 90
-------- --------
Net cash provided by operating activities ...................................... 2,705 2,797
-------- --------
Investing activities
Purchases of available-for-sale securities ................................................ (42,337) (48,539)
Purchases of held-to-maturity securities .................................................. - (9,949)
Maturities, calls and paydowns of securities available-for-sale ........................... 38,659 22,509
Maturities, calls and paydowns of securities held- to-maturity ............................ 752 -
Proceeds of sale of available-for-sale security ........................................... - 3,826
Purchases of other investments ............................................................ (162) (147)
Net increase in loans made to customers ................................................... (7,896) (2,065)
Purchases of premises and equipment ....................................................... (412) (41)
Proceeds of sale of real estate held for sale ............................................. - 212
-------- --------
Net cash used by investing activities .......................................... (11,396) (34,194)
-------- --------
Financing activities
Net (decrease) increase in demand deposits, interest
bearing transaction accounts and savings accounts ..................................... (3,109) 2,053
Net (decrease) increase in certificates of deposit and other
time deposits ......................................................................... (488) 1,638
Net (decrease) increase in short-term borrowings .......................................... (2,500) 2,500
Proceeds of issuing long-term debt ........................................................ - 7,500
Exercise of employee stock options ........................................................ 2 264
-------- --------
Net cash (used) provided by financing activities ............................... (6,095) 13,955
-------- --------
Decrease in cash and cash equivalents .......................................................... (14,786) (17,442)
Cash and cash equivalents, beginning ........................................................... 39,902 39,505
-------- --------
Cash and cash equivalents, ending .............................................................. $ 25,116 $ 22,063
======== ========
Supplemental Disclosure of Cash Flow Information Cash paid during the year for:
Interest .............................................................................. $ 2,632 $ 2,373
Income taxes .......................................................................... 956 612
Noncash investing and financing activities:
Other comprehensive income (loss) ..................................................... (410) (1,342)
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 the Company's Annual Report on Form 10-KSB for the year ended December 31,
2004 filed with the Securities and Exchange Commission.
Management Opinion - In the opinion of management, the accompanying unaudited
consolidated financial statements of Community First Bancorporation reflect all
adjustments necessary for a fair presentation of the results of the periods
presented. Such adjustments were of a normal, recurring nature.
Nonperforming Loans - As of June 30, 2005, there were $1,158,000 in nonaccrual
loans and no loans 90 days or more past due and still accruing.
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 per share
information has been retroactively adjusted to give effect to a 10% stock
dividend effective November 30, 2004. Net income per share and net income per
share, assuming dilution, were computed as follows:
(Unaudited)
Period Ended June 30,
---------------------
Three Months Six Months
------------ ----------
2005 2004 2005 2004
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
Net income per share, basic
Numerator - net income ............................... $ 977 $ 830 $ 1,886 $ 1,662
========== ========== ========== ==========
Denominator
Weighted average common shares
issued and outstanding ........................... 2,648,404 2,638,314 2,648,346 2,631,844
========== ========== ========== ==========
Net income per share, basic ...................... $ .37 $ .31 $ .71 $ .63
========== ========== ========== ==========
Net income per share, assuming dilution
Numerator - net income ............................... $ 977 $ 830 $ 1,886 $ 1,662
========== ========== ========== ==========
Denominator
Weighted average common shares
issued and outstanding ........................... 2,648,404 2,638,314 2,648,346 2,631,844
Effect of dilutive stock options ................... 184,174 176,331 185,766 118,374
---------- ---------- ---------- ----------
Total shares ............................ 2,832,578 2,814,645 2,834,112 2,750,218
========== ========== ========== ==========
Net income per share, assuming dilution .......... $ .34 $ .29 $ .67 $ .60
========== ========== ========== ==========
Stock-Based Compensation - As of June 30, 2005, the Company has two stock-based
compensation plans that are accounted for under the recognition and measurement
principles of Accounting Standards Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. No stock-based compensation
is reflected in net income, as all options granted under those plans had
exercise prices equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and net
income per share if the Company had applied the fair value recognition
provisions of SFAS 123, "Accounting for Stock Based Compensation," as amended,
to stock-based employee compensation. Per share amounts have been adjusted to
reflect the effect of a 10% stock dividend effective November 30, 2004.
7
(Unaudited)
Period Ended June 30,
---------------------
Three Months Six Months
------------ ----------
2005 2004 2005 2004
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
Net income, as reported ........................................ $ 977 $ 830 $ 1,886 $ 1,662
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of any related tax effects ............................ 56 50 111 100
------- ------- --------- ---------
Pro forma net income ........................................... $ 921 $ 780 $ 1,775 $ 1,562
======= ======= ========= =========
Net income per share, basic
As reported ............................................... $ 0.37 $ 0.31 $ 0.71 $ 0.63
Pro forma ................................................. 0.35 0.30 0.67 0.59
Net income per share, assuming dilution
As reported ............................................... $ 0.34 $ 0.29 $ 0.67 $ 0.60
Pro forma ................................................. 0.33 0.28 0.63 0.57
Item 2. - Management's Discussion and Analysis
Forward Looking Statements
Statements included in this report which are not historical in nature
are intended to be, and are hereby identified as "forward looking statements"
for purposes of the safe harbor provided by Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements which are other than statements
of historical facts. Such forward-looking statements may be identified, without
limitation, by the use of the words "anticipates," "believes," "estimates,"
"expects," "intends," "plans," "predicts," "projects," and similar expressions.
The Company's expectations, beliefs and projections are expressed in good faith
and are believed by the Company to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's beliefs, expectations or
projections will result or be achieved or accomplished. The Company cautions
readers that forward-looking statements, including without limitation, those
relating to the Company's recent and continuing expansion, its future business
prospects, revenues, working capital, liquidity, capital needs, interest costs,
income, and adequacy of the allowance for loan losses, are subject to risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward-looking statements, due to several important factors
herein identified, among others, and other risks and factors identified from
time to time in the Company's reports filed with the Securities and Exchange
Commission.
Changes in Financial Condition
For the six months ended June 30, 2005, total assets of Community First
Bancorporation (the "Company") decreased slightly from the amounts reported as
of December 31, 2004. This decrease resulted from a reduction in deposit
liabilities of $3,597,000 and repayment of short-term borrowings totaling
$2,500,000. During the 2005 six month period, loans increased by $7,821,000 and
investment securities increased by $2,222,000. As a result of these changes, the
Company's cash and cash equivalents at June 30, 2005 were $14,786,000 less than
the amount as of December 31, 2004.
Results of Operations
The Company recorded consolidated net income of $977,000, or $.37 per
share, for the second quarter, and $1,886,000, or $.71 per share, for the first
six months of 2005. During 2004, the Company recorded net income of $830,000 or
$.31 per share for the second quarter, and $1,662,000, or $.63 per share, for
the first six months. Net income per share, assuming dilution, for the three and
six month periods ended June 30, 2005 was $.34 and $.67, respectively. For the
comparable 2004 periods, net income per share, assuming dilution, was $.29 and
$.60, respectively. Net income per share amounts for 2004 have been
retroactively adjusted to reflect a 10% stock dividend effective November 30,
2004.
8
Net Interest Income
Net interest income is the amount of interest income earned on interest
earning assets (loans, securities, interest bearing deposits in other banks,
federal funds sold and other investments), less the interest expense incurred on
interest bearing liabilities (interest bearing deposits, short-term borrowings
and long-term debt), and is the principal source of the Company's earnings. Net
interest income is affected by the level of interest rates, volume and mix of
interest earning assets and interest bearing liabilities and the relative
funding of these assets.
For the second quarter of 2005, net interest income was $2,395,000, an
increase of $213,000 or 9.8% over the comparable 2004 period. For the first six
months of 2005, net interest income was $4,787,000, an increase of $538,000 or
12.7% over the first six months of 2004. The increases in net interest income
for the 2005 six month period resulted primarily from larger average volumes of
interest earning assets, especially in the higher-yielding investment securities
and loan categories. Also, the yield earned on average federal funds sold in the
2005 period was 2.59%, an increase of 169 basis points over the yield earned in
the same period of 2004. Interest expense for the 2005 six-month period was
$2,971,000, an increase of $492,000, or 19.8%, over the amount for the same
period of 2004. The average rate paid for all interest-bearing funding sources
was 33 basis points higher in the 2005 six-month period than in the same 2004
period. The average amounts of interest-bearing funding sources increased to
$246,938,000 for the 2005 period, an increase of $9,302,000 or 3.9% more than
the 2004 period.
Average interest earning assets during the 2005 six-month period were
$299,744,000, an increase of $18,091,000 or 6.4% over the comparable period of
2004. Average loans for the 2005 six-month period were $160,931,000, an increase
of $10,371,000 or 6.9% over the average amount for the same period of 2004.
Average investment securities for the 2005 period were $113,430,000, an increase
of $11,542,000 or 11.3% over the average for the 2004 period. The average yields
on loans and investments increased by 20 and 28 basis points, respectively, in
the 2005 six month period compared with the same period of 2004.
Average interest bearing deposit liabilities were not much changed in
the 2005 six month period as compared with the same period of 2004. The average
interest rate associated with such deposits increased by 28 basis points to
2.38% for the 2005 six-month period. In addition, the average amounts of, and
interest rate associated with, non-deposit borrowings both increased
significantly in the 2005 period. The average amounts of such liabilities in the
2005 period exceeded the amounts in the 2004 period by $8,176,000, an increase
of 963.2%. The average rate of those borrowings was 3.51% for the 2005 period
and 2.34% for the 2004 period.
The average interest rate spread (average yield on interest earning
assets less the average rate paid on interest bearing liabilities) for the first
six months of 2005 was 2.79%, an increase of 7 basis points from 2.72% for the
same period of 2004. Net yield on earning assets (net interest income divided by
average interest earning assets) was 3.22% for the first six months of 2005, an
increase of 18 basis points from 3.04% for the first six months of 2004.
Late in the second quarter of 2004, the Company borrowed approximately
$10,000,000 from the FHLB and invested the proceeds in several mortgage-backed
securities issues with a combined yield-to-maturity of 5.10%. The average
expected life of these securities was approximately 6.0 years as of the purchase
date. The borrowed funds consisted of a combination of both short-term and
long-term debt with an average life of approximately 4.6 years at the date
incurred and an average cost of 3.27%.
Other increases in interest earning assets and interest bearing
liabilities resulted from the Company's continuing strategies to increase its
market share in its local service areas in Anderson and Oconee Counties of South
Carolina. Oconee County is served from three offices located in Seneca,
Westminster and Walhalla. The Westminster office was opened in temporary
quarters during the second quarter of 2003. There are currently no plans to
construct another facility for this office.
Provision and Allowance for Loan Losses
The provision for loan losses charged to expense was $75,000 for the
second quarter of 2005 compared with $55,000 for the second quarter of 2004, and
totaled $215,000 for the first six months of 2005 compared with $135,000 for the
comparable period of 2004. At June 30, 2005, the allowance for loan losses was
1.41% of loans, compared with 1.42% of loans at December 31, 2004. During the
2005 six-month period, net charge-offs totaled $118,000, compared with $92,000
charged off during the same period of 2004. As of June 30, 2005, there were
$1,158,000 in nonaccrual loans and no loans over 90 days past due and still
accruing interest, collectively referred to as impaired loans. The amount of
nonaccrual loans at June 30, 2005 was $266,000 more than the amount at June 30,
2004 and $307,000 less than the amount of nonaccrual loans as of December 31,
2004. The majority of the nonaccrual loans are secured by real estate,
commercial equipment and vehicles. When the estimated realizable value of
9
collateral associated with nonperforming loans is believed to be insufficient to
satisfy the debt, management generally charges off the excess amount of the
debt.
As of June 30, 2005, the Company's potential problem loans totaled
$3,451,000, an increase of $2,048,000 over the amount of such loans as of
December 31, 2004. Potential problem loans include loans, other than impaired
loans, that management has identified as having possible credit problems
sufficient to cast doubt upon the abilities of the borrowers to comply with the
current repayment terms. The increase in potential problem loans since December
31, 2004 is believed to reflect circumstances unique to each of the borrowers
and not to any systemic problems in the local market area. Real estate mortgages
or liens on equipment, inventories, receivables, automobiles and other forms of
collateral have been obtained for the majority of loans classified as potential
problem loans.
Noninterest Income
Noninterest income totaled $551,000 for the second quarter of 2005,
compared with $543,000 for the 2004 quarter. Noninterest income was $1,038,000
for the first six months of 2005 and $1,015,000 for the same 2004 period. A
significant proportion of the Company's noninterest income is derived from a
program that allows customers to avoid payee-imposed charges on checks and
similar items returned for insufficient funds. A per item fee is charged by the
Company for this increasingly popular service. The Company realized a $5,000
gain on the sale of an available-for-sale security in the 2004 six-month period.
No such gains were recognized in the 2005 period.
Noninterest Expenses
Noninterest expenses totaled $1,352,000 for the second quarter of 2005,
compared with $1,359,000 for the 2004 period, representing a decrease of $7,000.
Noninterest expenses were $2,675,000 for the first six months of 2005 compared
with $2,536,000 for the first half of 2004. Salaries and employee benefits for
the 2005 quarter totaled $630,000, a decrease of $71,000 from the 2004 three
month period. For the first six months of 2005, salaries and employee benefits
totaled $1,341,000 representing a decrease of $40,000 from the same period of
2004. This decrease resulted from lower employee bonuses and profit sharing
expenses in the 2005 six month period.
Occupancy and furniture and equipment expenses for the second quarter
of 2005 totaled $150,000, representing a decrease of $10,000 from the same
period of 2004. Such expenses increased $7,000 during the first half of 2005 as
compared to the same period of 2004. Other expenses for the 2005 three-month
period totaled $572,000 and were $74,000 more than in 2004. For the 2005
six-month period, other expenses increased by $172,000, or 20.0%, over the 2004
amount. These expenses increased in part due to increased expenses for
professional expenses associated with the beginning of work on the Company's
internal control review mandated by the Sarbanes-Oxley Act of 2002, higher
amortization expenses of core data processing software costs, costs incurred in
2005 for the Company's biennial strategic planning process, and higher costs for
corporate license fees and stock transfer services.
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 Federal Home Loan Bank lines of credit.
As of June 30, 2005, the ratio of loans to total deposits was 62.6%,
compared with 58.8% as of December 31, 2004 and 57.5% as of June 30, 2004.
Deposits as of June 30, 2005 decreased by $3,597,000 or 1.3% from the
amount at December 31, 2004 and were $4,309,000 or 1.7% greater than their level
of June 30, 2004. Typically, deposit totals as of December 31 are temporarily
increased because of year-end property tax receipts deposited in the accounts of
Oconee County, South Carolina. Those deposits accounts are subsequently
redistributed to other entities, including many that maintain deposit accounts
with other financial institutions.
Management believes that the Company's liquidity sources are adequate
to meet its operating needs.
10
Capital Resources
The Company's shareholders' equity increased by $1,478,000 since
December 31, 2004 as the result of net income of $1,886,000 for the first six
months of 2005, $2,000 added from the exercise of stock options, less $410,000
in other comprehensive income, consisting of unrealized losses arising during
the period on available-for-sale securities. Such unrealized losses on
available-for-sale securities are not considered to be other than temporary, as
the Company has the ability to hold and generally does not sell such investments
prior to 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, 2005 risk based capital ratios for the Company and the
Bank are presented in the following table, compared with the "well capitalized"
and minimum ratios under the regulatory definitions and guidelines:
Total
Tier 1 Capital Leverage
------ ------- --------
Community First Bancorporation ............. 15.7% 16.9% 9.3%
Community First Bank ....................... 15.1% 16.3% 9.0%
Minimum "well-capitalized" requirement ..... 6.0% 10.0% 6.0%
Minimum requirement ........................ 4.0% 8.0% 4.0%
Off Balance Sheet Arrangements
In the normal course of business, the Bank is party to financial instruments
with off-balance-sheet risk including commitments to extend credit and standby
letters of credit. Such instruments have elements of credit risk in excess of
the amount recognized in the balance sheet. The exposure to credit loss in the
event of nonperformance by the other parties to the financial instruments for
commitments to extend credit and standby letters of credit is represented by the
contractual notional amount of those instruments. Generally, the same credit
policies used for on-balance-sheet instruments, such as loans, are used in
extending loan commitments and standby letters of credit.
Following are the off-balance-sheet financial instruments whose contract amounts
represent credit risk:
June 30, 2005
-------------
(Dollars in thousands)
Loan commitments .............................. $ 17,929
Standby letters of credit ..................... 889
Loan commitments involve agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and some involve
payment of a fee. Many of the commitments are expected to expire without being
fully drawn; therefore, the total amount of loan commitments does not
necessarily represent future cash requirements. Each customer's creditworthiness
is evaluated on a case-by-case basis. The amount of collateral obtained, if any,
upon extension of credit is based on management's credit evaluation of the
borrower. Collateral held varies but may include commercial and residential real
properties, accounts receivable, inventory and equipment.
Standby letters of credit are conditional commitments to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
standby letters of credit is the same as that involved in making loan
commitments to customers.
As described under "Liquidity," management believes that its various sources of
liquidity provide the resources necessary for the Bank to fund the loan
commitments and to perform under standby letters of credit, if the need arises.
The Bank has contracted for the construction of a new headquarters building
which is to be located in Seneca, South Carolina. Cost of this structure, which
will house an additional banking office, the mortgage lending staff, and the
Company's executive officers, is expected to approximate $1,700,000 with
occupancy anticipated in the second quarter of 2006.
Neither the Company nor the Bank is involved in other off-balance sheet
contractual relationships or transactions that could result in liquidity needs
or other commitments or significantly impact earnings.
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Item 3. - Controls and Procedures
Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or
240.15d-15(b) of the issuer's disclosure controls and procedures (as defined in
17 C.F.R. Sections 240.13a-15(e) and 240.15d-15(e)), the issuer's chief
executive officer and chief financial officer concluded such controls and
procedures, as of the end of the period covered by this report, were effective.
There has been no change in the Company's internal control over financial
reporting during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II - OTHER INFORMATION
Item 4. - Submission of Matters to a Vote of Security Holders.
On Tuesday, April 26, 2005, 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 1,621,464 0 468,968
James E. Turner 1,621,464 0 468,968
Charles L. Winchester 1,621,464 0 468,968
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 2005 annual meeting: Larry S. Bowman, M.D. - 2006; William M.
Brown - 2006; John R. Hamrick - 2006 and Frederick D. Shepherd, Jr. - 2006;
Robert H Edwards - 2007, Blake L. Griffith - 2007, Gary V. Thrift - 2007.
Item 6. - Exhibits
(a) Exhibits. 10. Construction Contract, dated April 27, 2005, between the
Company and Trehel Corporation (incorporated by reference to
Form 8-K filed August 12, 2005)
31. Rule 13a-14(a)/15d-14(a) Certifications
32. Certifications Pursuant to 18 U.S.C. Section 1350
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SIGNATURE
In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
COMMUNITY FIRST BANCORPORATION
August 15, 2005 /s/ Frederick D. Shepherd, Jr.
--------------- ----------------------------------------------
Date Frederick D. Shepherd, Jr., Chief Executive
Officer and Chief Financial Officer
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EXHIBIT INDEX
10. Construction Contract, dated April 27, 2005, between
the Company and Trehel Corporation (incorporated by
reference to Form 8-K filed August 12, 2005)
31. Rule 13a-14(a)/15d-14(a) Certifications
32. Certifications Pursuant to 18 U.S.C. Section 1350
14