UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2009 Commission File No. 000-29640
COMMUNITY FIRST BANCORPORATION
(Exact name of registrant as specified in its charter)
South Carolina 58-2322486
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
449 Highway 123 Bypass, Seneca, South Carolina 29678
(Address of Principal Executive Offices, Zip Code)
Registrant's Telephone Number, Including Area Code: (864) 886-0206
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (no par value)
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files). Yes [ ] No [ ] (Not yet applicable to
Registrant)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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
definitions of "accelerated filer," "large 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 smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). [ ] Yes [X] No
The aggregate market value of the voting common equity held by non-affiliates on
June 30, 2009, which was the last day of the Registrant's most recently
completed second fiscal quarter, based on the average of the bid and asked price
on the OTC Bulletin Board, was approximately $26,135,989. For purposes of the
foregoing calculation only, all directors and executive officers of the
Registrant have been deemed affiliates.
As of March 12, 2010, there were 3,782,415 shares of the Registrant's Common
Stock, no par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Annual Report to Shareholders for the year
ended December 31, 2009 - Parts I and II
(2) Portions of the Registrant's Proxy Statement for the 2010 Annual Meeting of
Shareholders - Part III
10-K CROSS REFERENCE INDEX
Part I Page
Item 1 Business ....................................................... 2
Item 1A Risk Factors ................................................... 10
Item 1B Unresolved Staff Comments ...................................... 14
Item 2 Properties ..................................................... 14
Item 3 Legal Proceedings .............................................. 15
Item 4 (Removed and Reserved) ......................................... 15
Part II
Item 5 Market for Registrant's Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities ........... 15
Item 6 Selected Financial Data ........................................ 15
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................... 15
Item 7A Quantitative and Qualitative Disclosures about
Market Risk .................................................. 15
Item 8 Financial Statements and Supplementary Data .................... 15
Item 9 Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure ....................... 15
Item 9A(T) Controls and Procedures ...................................... 16
Item 9B Other Information .............................................. 16
Part III
Item 10 Directors, Executive Officers and Corporate Governance ......... 16
Item 11 Executive Compensation ......................................... 16
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters ................................ 17
Item 13 Certain Relationships and Related Transactions, and
Director Independence ........................................ 17
Item 14 Principal Accountant Fees and Services ......................... 17
Item 15 Exhibits, Financial Statement Schedules ........................ 18
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 perceptions by depositors about the safety of their deposits;
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 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 cost and difficulty of implementing changes in technology or products;
o the effects of war or other conflicts, acts of terrorism or other
catastrophic events that may affect general economic conditions and
economic confidence;
o ability to weather the current economic downturn;
o loss of consumer or investor 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.
PART I
Item 1. Business
FORM OF ORGANIZATION
Community First Bancorporation (the "Company") is a South Carolina
corporation and a bank holding company incorporated on May 23, 1997. The Company
commenced operations on October 16, 1997, upon effectiveness of the acquisition
of Community First Bank (the "Bank") as a wholly owned subsidiary. The principal
business of the Company is ownership and operation of the Bank. In 2009, the
Company organized Upstate Resource Management, Inc. as a wholly owned subsidiary
to hold certain troubled assets sold to it by the Bank.
BUSINESS OF BANKING
General
The Bank is a South Carolina state bank which was incorporated in
December, 1988, and commenced operations as a commercial bank in March, 1990.
The Bank operates from its offices in Walhalla, Seneca, Anderson, Westminster
and Williamston, South Carolina. The main office is located at 3685 Blue Ridge
Boulevard, in Walhalla, South Carolina; the Seneca offices are located at 449
Highway 123 Bypass, and 1600 Sandifer Boulevard, in Seneca, South Carolina; the
Anderson offices are located at 4002 Clemson Boulevard, and 2007 East Greenville
Street in Anderson, South Carolina; the Williamston office is located at 208
East Main Street in Williamston, South Carolina; and the Westminster office is
located at 1101 East Main Street, Westminster, South Carolina.
Services and Products Offered
The Bank offers a full array of commercial bank services. Deposit
services include business and personal checking accounts, NOW accounts, savings
accounts, money market accounts, various term certificates of deposit, IRA
accounts, and other deposit services. Most of the Bank's deposits are attracted
from individuals and small businesses. The Bank does not offer trust services,
and does not accept brokered deposits.
The Bank offers secured and unsecured, short-to-intermediate term
loans, with floating and fixed interest rates for commercial and consumer
purposes. Consumer loans include generally car loans, home equity improvement
loans (secured by first and second mortgages), personal expenditure loans,
education loans, and overdraft lines of credit. Commercial loans include
generally short term unsecured loans, short and intermediate term real estate
mortgage loans, loans secured by listed stocks, loans secured by equipment,
inventory, and accounts receivable. Management believes that the credit staff
possesses knowledge of the community and lending skills sufficient to enable the
Bank to maintain a sufficient volume of high quality loans.
Management of the Bank believes that the loan portfolio is adequately
diversified. There are no significant concentrations of loans in any particular
individuals, industries or groups of related individuals or industries and the
Bank has no foreign loans. The loan portfolio is, however, geographically
concentrated because it consists primarily of extensions of credit to businesses
and individuals in its service areas within Oconee and Anderson Counties of
South Carolina. The economy of this area is, nonetheless, diversified and does
not depend on any one industry or group of related industries. Management has
established loan policies and practices that include set limitations on
loan-to-collateral value for different types of collateral, requirements for
appraisals, obtaining and maintaining current credit and financial information
on borrowers, and credit approvals.
Other services offered by the Bank include residential mortgage loan
origination services, safe deposit boxes, night depository service, VISA and
MasterCard credit cards, tax deposits, sale of U.S. Treasury bonds, notes and
bills and other U.S. government securities (through a correspondent), travelers
checks, and twenty-four hour automated teller service. The ATM is part of the
Cirrus network.
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As of December 31, 2009, local governmental deposits comprised
approximately 12.3% of the Bank's total deposits. These deposits are
concentrated among a few local governmental entities and are somewhat volatile.
Management of the Bank has, however, taken steps that it believes are sufficient
to minimize to the greatest extent possible the impact of such volatibility on
the Bank's liquidity position, including maintaining membership in the Federal
Home Loan Bank of Atlanta in order to gain access to its credit programs.
Employees
At December 31, 2009, the Company employed 88 people.
Competition
The banking laws of South Carolina allow statewide branching, and,
therefore, commercial banking in the state is highly competitive. South Carolina
law also permits bank holding companies in other states with reciprocal laws to
acquire depository institutions in South Carolina, and most of the other
financial institutions in the Oconee and Anderson County areas are branch
offices of large, regional banks. Further, the Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 increased the ability of bank holding
companies and banks to operate across state lines.
Banks generally compete with other financial institutions through the
banking services and products offered, the pricing of services, the level of
service provided, the convenience and availability of services, and the degree
of expertise and personal concern with which services are offered. The Bank
encounters strong competition from most of the financial institutions in the
Bank's market areas, which generally encompass Oconee County and the immediately
surrounding area and Anderson County and the immediately surrounding area. As of
June 30, 2009, the most recent date for which information is available, there
were 14 banks and savings and loan associations, including the Bank, in Oconee
County, with 27 branch locations. Total deposits in the county were $1.14
billion, of which the Bank had a 25.20% market share. As of June 30, 2009 there
were 21 banks and savings and loan associations, including the Bank, in Anderson
County, with 65 branch locations. Total deposits in Anderson County were $2.5
billion, of which the Bank had a 5.20% market share. Additionally, in the
conduct of certain banking business, the Bank also competes with consumer
finance companies, insurance companies, money market mutual funds, and other
financial institutions, some of which are not subject to the same degree of
regulation and restrictions imposed upon the Bank.
Many of the Bank's competitors have substantially greater resources and
lending limits than the Bank and offer certain services, such as international
banking and trust services, that the Bank does not provide. The Bank believes,
however, that its relatively small size permits it to offer more personalized
services than many of its competitors. The Bank attempts to compensate for its
lower lending limits by participating larger loans with other institutions.
EFFECT OF GOVERNMENT REGULATION
The Company and the Bank operate in a highly regulated environment, and
their business activities are governed by statute, regulation, and
administrative policies. Relevant information about the regulatory framework
that applies to the Company and the Bank is provided below. This regulatory
framework is intended primarily for the benefit and protection of the Bank's
depositors and the Depository Insurance Fund, and not for the protection of the
Company's shareholders or creditors.
Financial institutions are being subjected to increased scrutiny and
enforcement activity by state and federal banking agencies, the United States
Department of Justice, the Securities and Exchange Commission, and other state
and federal regulatory agencies. This increased scrutiny and enforcement
activity entails significant potential increases in compliance requirements and
associated costs.
To the extent that the following information describes statutory and
regulatory provisions, it is qualified in its entirety by reference to such
statutes and regulations. Any change in applicable law or regulation may have a
material effect on the business of the Holding Company and the Bank.
General
As a bank holding company registered under the Bank Holding Company Act
("BHCA"), the Company is subject to supervision, and to regular inspection by
the Federal Reserve. The Bank is a state bank subject to regulation by the South
Carolina State Board of Financial Institutions ("State Board") and the FDIC. The
Company is also subject to regulation by the State Board. The following
discussion summarizes certain aspects of those laws and regulations that affect
the Company and the Bank. Proposals to change the laws and regulations governing
the banking industry are frequently raised in Congress, the state legislature
and before the various bank regulatory agencies, and such proposals have
increased in the wake of the recent financial crisis. The likelihood and timing
of any changes and the impact such changes might have on the Company and the
Bank are difficult to determine.
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As discussed below under the caption "Gramm-Leach-Bliley Act", Congress
has adopted extensive changes in the laws governing the financial services
industry. Among the changes adopted are creation of the financial holding
company, a type of bank holding company with powers that greatly exceed those of
standard holding companies, and creation of the financial subsidiary, a
subsidiary that can be used by national banks to engage in many, though not all,
of the same activities in which a financial holding company may engage. The
legislation also establishes the concept of functional regulation whereby the
various financial activities in which financial institutions engage are overseen
by the regulator with the relevant regulatory experience.
Under the BHCA, the Company's activities and those of its subsidiaries
are limited to banking, managing or controlling banks, furnishing services to or
performing services for its subsidiaries or engaging in any other activity which
the Federal Reserve determines to be so closely related to banking or managing
or controlling banks as to be a proper incident thereto. The BHCA prohibits the
Company from acquiring direct or indirect control of more than 5% of the
outstanding voting stock or substantially all of the assets of any bank or from
merging or consolidating with another bank holding company without prior
approval of the Federal Reserve. In making such determinations, the Federal
Reserve is required to consider whether the performance of such activities by a
bank holding company or its subsidiaries can reasonably be expected to produce
benefits to the public such as greater convenience, increased competition or
gains in efficiency that outweigh possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices.
Additionally, the BHCA prohibits the Company from engaging in, or from
acquiring ownership or control of more than 5% of the outstanding voting stock
of any company engaged in, a non-banking business unless such business is
determined by the Federal Reserve to be so closely related to banking as to be
properly incident thereto.
In addition to regulation by the Federal Reserve under the BHCA, the
Company is also subject to supervision and regulation by the State Board. The
Company must provide the State Board with information with respect to its
financial condition, operations, management, and inter-company relationships of
the Company and its subsidiaries. The State Board may also require such other
information as is necessary to keep itself informed about whether the provisions
of South Carolina law and the regulations and orders issued thereunder by the
State Board have been complied with, and the State Board may make examinations
of the Company and its subsidiaries.
Obligations of the Company to its Subsidiary Bank
A number of obligations and restrictions are imposed on bank holding
companies and their depository institution subsidiaries by Federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution is in danger of becoming insolvent or is
insolvent. For example, under the policy of the Federal Reserve with respect to
bank holding company operations, a bank holding company is required to serve as
a source of financial strength to its subsidiary depository institutions and to
commit resources to support such institutions in circumstances where it might
not do so absent such policy. In addition, the "cross-guarantee" provisions of
the Federal Deposit Insurance Act, as amended ("FDIA"), require insured
depository institutions under common control to reimburse the FDIC for any loss
suffered or reasonably anticipated by the Deposit Insurance Fund of the FDIC as
4
a result of the default of a commonly controlled insured depository institution
or for any assistance provided by the FDIC to a commonly controlled insured
depository institution in danger of default. The FDIC may decline to enforce the
cross-guarantee provisions if it determines that a waiver is in the best
interest of the Deposit Insurance Fund. The FDIC's claim for damages is superior
to claims of stockholders of the insured depository institution or its holding
company but is subordinate to claims of depositors, secured creditors and
holders of subordinated debt (other than affiliates) of the commonly controlled
insured depository institutions.
The FDIA also provides that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or stockholder. This
provision gives depositors a preference over general and subordinated creditors
and stockholders in the event a receiver is appointed to distribute the assets
of the Bank.
Any capital loans by a bank holding company to any of its subsidiary
banks are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Capital Adequacy Guidelines for Bank Holding Companies and State Banks
The various federal bank regulators, including the Federal Reserve and
the FDIC, have adopted risk-based capital requirements for assessing bank
holding company and bank capital adequacy. These standards define what qualifies
as capital and establish minimum capital standards in relation to assets and
off-balance sheet exposures, as adjusted for credit risks.
The Company's and the Bank's December 31, 2009 ratios are set forth in
the Annual Report to Shareholders for the year ended December 31, 2009 under the
caption "Management's Discussion and Analysis -- Capital Resources."
Failure to meet capital guidelines could subject the Bank to a variety
of enforcement remedies, ranging from, for example, a prohibition on the taking
of brokered deposits to the termination of deposit insurance by the FDIC or the
appointment of a receiver for the Bank.
The risk-based capital standards of both the Federal Reserve Board and
the FDIC explicitly identify concentrations of credit risk and the risk arising
from non-traditional activities, as well as an institution's ability to manage
these risks, as important factors to be taken into account by the agency in
assessing an institution's overall capital adequacy. The capital guidelines also
provide that an institution's exposure to a decline in the economic value of its
capital due to changes in interest rates be considered by the agency as a factor
in evaluating a bank's capital adequacy. The Federal Reserve Board also has
issued additional capital guidelines for bank holding companies that engage in
certain trading activities.
Payment of Dividends
The Company is a legal entity separate and distinct from its bank
subsidiary. Most of the revenues of the Company are expected to result from
dividends paid to the Company by the Bank. There are statutory and regulatory
requirements applicable to the payment of dividends by subsidiary banks as well
as by the Company to its stockholders. It is not anticipated that the Company
will pay cash dividends in the near future.
Certain Transactions by the Company with its Affiliates
Federal law regulates transactions between the Company and its
affiliates, including the amount of the Bank's loans to or investments in
5
nonbank affiliates and the amount of advances to third parties collateralized by
securities of an affiliate. Further, a bank holding company and its subsidiaries
are prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit, lease or sale of property or furnishing of services.
FDIC Insurance Assessments
The FDIC merged the Bank Insurance Fund and the Savings Association
Insurance Fund to form the Deposit Insurance Fund ("DIF") on March 31, 2006 in
accordance with the Federal Deposit Insurance Reform Act of 2005. The FDIC
maintains the DIF by assessing depository institutions an insurance premium. The
amount each institution is assessed is based upon statutory factors that include
the balance of insured deposits as well as the degree of risk the institution
poses to the insurance fund. The FDIC uses a risk-based premium system that
assesses higher rates on those institutions that pose greater risks to the DIF.
Since January 1, 2007, the FDIC has placed each institution in one of four risk
categories using a two-step process based first on capital ratios (the capital
group assignment) and then on other relevant information (the supervisory group
assignment).
As a result of recent bank failures and in order to increase the amount
in the DIF to reflect the increased risk of additional bank failures and
insurance claims, the FDIC raised its assessments on banks for 2009, and
collected a special assessment. The Bank's portion of the special assessment
totaled $215,000, and was paid in September, 2009 based on deposits at June 30,
2009. The FDIC also required insured institutions to pay three years of deposit
insurance premiums in advance. On December 30, 2009 the FDIC collected
$2,822,265 from the Company for deposit insurance premiums. Of that amount,
$177,658 related to the regular quarterly assessment, and $2,644,607 related to
the prepayment of premiums for the years 2010, 2011 and 2012. In 2010 and the
following two years, on a quarterly basis, the FDIC will continue to calculate
the assessment amount with then current financial information, and will deduct
the quarterly assessment amount from the prepaid balance. The Bank will expense
the current portion as calculated by the FDIC.
Regulation of the Bank
The Bank is also subject to regulation and examination by the South
Carolina state bank examiners. In addition, the Bank is subject to various other
state and federal laws and regulations, including state usury laws, laws
relating to fiduciaries, consumer credit laws and laws relating to branch
banking. The Bank's loan operations are also subject to certain federal consumer
credit laws and regulations promulgated thereunder, including, but not limited
to: the federal Truth-In-Lending Act, governing disclosures of credit terms to
consumer borrowers; the Home Mortgage Disclosure Act, requiring financial
institutions to provide certain information concerning their mortgage lending;
the Equal Credit Opportunity Act and the Fair Housing Act, prohibiting
discrimination on the basis of certain prohibited factors in extending credit;
and the Fair Debt Collection Act, governing the manner in which consumer debts
may be collected by collection agencies. The deposit operations of the Bank are
also subject to the Truth in Savings Act, requiring certain disclosures about
rates paid on savings accounts; the Expedited Funds Availability Act, which
deals with disclosure of the availability of funds deposited in accounts and the
collection and return of checks by banks; the Right to Financial Privacy Act,
which imposes a duty to maintain certain confidentiality of consumer financial
records and the Electronic Funds Transfer Act and regulations promulgated
thereunder, which govern automatic deposits to and withdrawals from deposit
accounts and customers' rights and liabilities arising from the use of automated
teller machines and other electronic banking services. The Bank is also subject
to the Bank Secrecy Act, dealing with, among other things, the reporting of
certain currency transactions; the Fair Credit Reporting Act, governing the use
and provision of information to credit reporting agencies; and the USA Patriot
Act, dealing with, among other things, requiring the establishment of anti-money
laundering programs, including standards for verifying customer information at
account opening.
The Bank is also subject to the requirements of the Community
Reinvestment Act (the "CRA"). The CRA imposes on financial institutions an
affirmative and ongoing obligation to meet the credit needs of their local
communities, including low- and moderate-income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial institution's
actual performance in meeting community credit needs is evaluated as part of the
examination process, and also is considered in evaluating mergers, acquisitions
and applications to open a branch or facility.
Other Safety and Soundness Regulations
Prompt Corrective Action. The federal banking agencies have broad
powers under current federal law to take prompt corrective action to resolve
problems of insured depository institutions. The extent of these powers depends
6
upon whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized."
A bank that is "undercapitalized" becomes subject to the "prompt
corrective action" provisions of the FDIA restricting payment of capital
distributions and management fees; requiring FDIC to monitor the condition of
the bank; requiring submission by the bank of a capital restoration plan;
prohibiting the acceptance of employee benefit plan deposits; restricting the
growth of the bank's assets and requiring prior approval of certain expansion
proposals. A bank that is "significantly undercapitalized" is additionally
subject to restrictions on compensation paid to senior management of the bank,
and a bank that is "critically undercapitalized" is further subject to
restrictions on the activities of the bank and restrictions on payments of
subordinated debt of the bank. The purpose of these provisions is to require
banks with less than adequate capital to act quickly to restore their capital
and to have the FDIC move promptly to take over banks that are unwilling or
unable to take such steps.
Brokered Deposits. Under current FDIC regulations, "well capitalized"
banks may accept brokered deposits without restriction, "adequately capitalized"
banks may accept brokered deposits with a waiver from the FDIC (subject to
certain restrictions on payment of rates), while "undercapitalized" banks may
not accept brokered deposits. The regulations provide that the definitions of
"well capitalized", "adequately capitalized" and "undercapitalized" are the same
as the definitions adopted by the agencies to implement the prompt corrective
action provisions described in the previous paragraph.
Interstate Banking
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 the Company and any other adequately capitalized bank holding company
located in South Carolina can acquire a bank located in any other state, and a
bank holding company located outside South Carolina can acquire any South
Carolina-based bank, in either case subject to certain deposit percentage and
other restrictions. The legislation also provides that, in any state that has
not previously elected to prohibit out-of-state banks from operating interstate
branches within its territory, adequately capitalized and managed bank holding
companies can consolidate their multistate bank operations into a single bank
subsidiary and branch interstate through acquisitions. De novo branching by an
out-of-state bank is permitted only if it is expressly permitted by the laws of
the host state. The authority of a bank to establish and operate branches within
a state will continue to be subject to applicable state branching laws. South
Carolina law permits such interstate branching but not de novo branching by an
out-of-state bank.
The Riegle-Neal Act, together with legislation adopted in South
Carolina, resulted in a number of South Carolina banks being acquired by large
out-of-state bank holding companies. Size gives the larger banks certain
advantages in competing for business from larger corporations. These advantages
include higher lending limits and the ability to offer services in other areas
of South Carolina and the region. As a result, the Company does not generally
attempt to compete for the banking relationships of large corporations, but
concentrates its efforts on small to medium-sized businesses and on individuals.
The Company believes it has competed effectively in this market segment by
offering quality, personal service.
Gramm-Leach-Bliley Act
The Gramm-Leach-Bliley Act makes it easier for affiliations between
banks, securities firms and insurance companies to take place, removed
Depression-era barriers that had separated banks and securities firms, and seeks
to protect the privacy of consumers' financial information.
Under provisions of the legislation and regulations adopted by the
appropriate regulators, banks, securities firms and insurance companies are able
to structure new affiliations through a holding company structure or through a
7
financial subsidiary. The legislation creates a type of bank holding company
called a "financial holding company" which has powers much more extensive than
those of standard holding companies. These expanded powers include authority to
engage in "financial activities," which are activities that are (1) financial in
nature; (2) incidental to activities that are financial in nature; or (3)
complementary to a financial activity and that do not impose a safety and
soundness risk. Significantly, the permitted financial activities for financial
holding companies include authority to engage in merchant banking and insurance
activities, including insurance portfolio investing. A bank holding company can
qualify as a financial holding company and expand the services it offers only if
all of its subsidiary depository institutions are well-managed, well-capitalized
and have received a rating of "satisfactory" on their last Community
Reinvestment Act examination.
The legislation also creates another type of entity called a "financial
subsidiary." A financial subsidiary may be used by a national bank or a group of
national banks to engage in many of the same activities permitted for a
financial holding company, though several of these activities, including real
estate development or investment, insurance or annuity underwriting, insurance
portfolio investing and merchant banking, are reserved for financial holding
companies. A bank's investment in a financial subsidiary affects the way in
which the bank calculates its regulatory capital, and the assets and liabilities
of financial subsidiaries may not be consolidated with those of the bank. The
bank must also be certain that its risk management procedures are adequate to
protect it from financial and operational risks created both by itself and by
any financial subsidiary. Further, the bank must establish policies to maintain
the separate corporate identities of the bank and its financial subsidiary and
to prevent each from becoming liable for the obligations of the other.
The Act also establishes the concept of "functional supervision,"
meaning that similar activities should be regulated by the same regulator.
Accordingly, the Act spells out the regulatory authority of the bank regulatory
agencies, the Securities and Exchange Commission and state insurance regulators
so that each type of activity is supervised by a regulator with corresponding
expertise. The Federal Reserve Board is intended to be an umbrella supervisor
with the authority to require a bank holding company or financial holding
company or any subsidiary of either to file reports as to its financial
condition, risk management systems, transactions with depository institution
subsidiaries and affiliates, and compliance with any federal law that it has
authority to enforce.
Although the Act reaffirms that states are the regulators for insurance
activities of all persons, including federally-chartered banks, the Act
prohibits states from preventing depository institutions and their affiliates
from conducting insurance activities.
The Act also establishes a minimum federal standard of privacy to
protect the confidentiality of a consumer's personal financial information and
gives the consumer the power to choose how personal financial information may be
used by financial institutions. The regulations govern the consumer's right to
opt-out of further disclosure of nonpublic personal financial information and
require the Bank to provide initial and annual privacy notices. The Bank is also
required to develop a comprehensive plan for the safeguarding of customer
information which encompasses all aspects of the Bank's technological
environment, business practices, and Bank facilities.
The Act and the regulations adopted pursuant to the Act create
opportunities for the Company to offer expanded services to customers in the
future, though the Company has not yet determined what the nature of the
expanded services might be or when the Company might find it feasible to offer
them. The Act has increased competition from larger financial institutions that
are currently more capable than the Company of taking advantage of the
opportunity to provide a broader range of services. However, the Company
continues to believe that its commitment to providing high quality, personalized
service to customers will permit it to remain competitive in its market area.
8
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act became effective in 2002, and mandated extensive
reforms and requirements for public companies. The SEC has adopted extensive
regulations pursuant to the requirements of the Sarbanes-Oxley Act. The
Sarbanes-Oxley Act and the SEC's regulations have increased the Company's cost
of doing business, particularly its fees for internal and external audit
services and legal services, and the law and regulations are expected to
continue to do so. However, the Company does not believe that it will be
affected by Sarbanes-Oxley and the regulations in ways that are materially
different or more onerous than those of other public companies of similar size
and in similar businesses.
Legislative Proposals
Proposed legislation which could significantly affect the business of
banking is introduced in Congress and the General Assembly of South Carolina
from time to time. For example, numerous bills are pending in Congress and the
South Carolina Legislature to provide various forms of relief to homeowners from
foreclosure of mortgages as a result of publicity surrounding economic problems
resulting from subprime mortgage lending and the economic adjustments in
national real estate markets. Broader problems in the financial sector of the
economy, which became apparent in 2008, have led to numerous calls for, and
legislative and regulatory proposals relating to, restructuring of the regulaton
of financial institutions. Management of the Company cannot predict the future
course of such legislative proposals or their impact on the Company and the Bank
should they be adopted.
Fiscal and Monetary Policy
Banking is a business which depends to a large extent on interest rate
differentials. In general, the difference between the interest paid by a bank on
its deposits and its other borrowings and the interest received by a bank on its
loans and securities holdings constitutes the major portion of a bank's
earnings. Thus, the earnings and growth of the Company and the Bank are subject
to the influence of economic conditions generally, both domestic and foreign,
and also to the monetary and fiscal policies of the United States and its
agencies, particularly the Federal Reserve. The Federal Reserve regulates the
supply of money through various means, including open-market dealings in United
States government securities, the discount rate at which banks may borrow from
the Federal Reserve, and the reserve requirements on deposits. The nature and
timing of any changes in such policies and their impact on the Company and the
Bank cannot be predicted.
Governmental Response to 2008 Financial Crisis
During the fourth quarter of 2008 and continuing into 2009 the FDIC,
the Federal Reserve, the Department of the Treasury and Congress took a number
of actions designed to alleviate or correct mounting problems in the financial
services industry. A number of these initiatives were directly applicable to
community banks.
Congress enacted the Emergency Economic Stabilization Act of 2008
which, among other things, temporarily increased the maximum amount of FDIC
deposit insurance from $100,000 to $250,000 and created a Troubled Assets Relief
Program ("TARP") administered by Treasury. In October, 2008, Treasury announced
a Capital Purchase Program ("CPP") under TARP to increase the capital of healthy
banks. Under the CPP, Treasury would purchase preferred stock with warrants from
qualified banks and bank holding companies in an amount up to 3% of the seller's
risk-weighed assets as of September 30, 2008. Institutions wishing to
participate in the CPP were required to file an application with their principal
federal regulators. The Company filed such an application and received
preliminary approval to sell preferred stock to the Treasury, but ultimately
elected not to participate in the CPP because of (i) the cost of the preferred
stock, (ii) the open-ended administrative burdens associated with the preferred
stock, including having to agree to allow Treasury to amend unilaterally the
stock purchase agreement to comply with subsequent changes in applicable federal
statutes, (iii) the fact that the Company and the Bank were already well
capitalized under regulatory guidelines and expected to continue to be so, and
(iv) management's belief that other sources of capital were, and would continue
to be, available should additional capital be needed.
The FDIC also implemented in October, 2008 a Temporary Liquidity
Guarantee Program consisting of a deposit insurance component pursuant to which
it undertook to provide deposit insurance in an unlimited amount for
non-interest bearing transaction accounts, and a debt guarantee component
pursuant to which it undertook to fully guarantee senior, unsecured debt issued
by banks or bank holding companies. Coverage of both components was automatic
until December 5, 2008, at which time covered institutions could opt out of one
or both of the components. Institutions not opting out would be charged fees for
their participation in the components. The Bank did not opt out of either
component.
9
An unfortunate consequence of the difficulties that have beset the
banking industry in the last two years has been a large increase in bank
failures, which has led to substantial claims being made against the FDIC's
Deposit Insurance Fund. In order to increase the amount in the Deposit Insurance
Fund to reflect the increased risk of additional bank failures and insurance
claims, the FDIC raised its assessments on banks for 2009 and also made a
special one-time assessment of 5 cents per $100 of assessable deposits at June
30, 2009, which was payable September 30, 2009. Under the new methodology,
assessments will range between 7 and 77.5 cents per $100 in assessable deposits.
In November of 2009 the FDIC adopted a final rule amending the assessment
regulation to require insured depository institutions to prepay their quarterly
risk-based assessments for the fourth quarter of 2009, and for all of 2010,
2011, and 2012 on December 30, 2009, along with each institution's risk-based
assessment for the third quarter of 2009. See also "-- FDIC Insurance
Assessments."
Additional governmental efforts to ameliorate the problems afflicting
the banking industry have been adopted or proposed, or are being considered by
Congress and various governmental entities. The Company is presently unable to
predict the impact of any such changes, although it appears that they are likely
to increase operating expenses in the near term without creating completely
offsetting benefits.
Further Information
Further information about the business of the Company and the Bank is
set forth in this Form 10-K under Item 7 -"Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Item 1A. Risk Factors
RISK FACTORS
Risks Related to Our Business
There can be no assurance that recent government actions will help
stabilize the U.S. financial system.
In response to the financial crises affecting the banking system and
financial markets and going concern threats to investment banks and other
financial institutions, various branches and agencies of the U.S. government
have put in place laws, regulations and programs to address capital and
liquidity issues in the banking system. There can be no assurance, however, as
to the actual impact that such laws, regulations and programs will have on the
financial markets, including the extreme levels of volatility, liquidity and
confidence issues, and limited credit availability currently being experienced.
The failure of such laws, regulations and programs to help stabilize the
financial markets and a continuation or worsening of current financial market
conditions could materially and adversely affect our business, financial
condition, results of operations, access to credit or the trading price of our
common stock.
Recent levels of market volatility are unprecedented.
The volatility and disruption of financial and credit markets has
reached unprecedented levels for recent times. In some cases, the markets have
produced downward pressure on stock prices and credit availability for certain
issuers without regard to those issuers' underlying financial strength. If
recent levels of market disruption and volatility continue or worsen, there can
be no assurance that we will not experience an adverse effect, which may be
material, on our ability to access capital and on our business, financial
condition and results of operations.
10
The soundness of other financial institutions could adversely affect
us.
Financial services institutions are interrelated as a result of
trading, clearing, counterparty, or other relationships. We have exposure to
many different industries and counterparties, and we routinely execute
transactions with counterparties in the financial services industry, including
brokers, dealers, commercial banks, investment banks, and government sponsored
enterprises. Many of these transactions expose us to credit risk in the event of
default of our counterparty. In addition, our credit risk may be exacerbated
when the collateral we hold cannot be realized or is liquidated at prices not
sufficient to recover the full amount of the loan or other obligation due us.
There is no assurance that any such losses would not materially and adversely
affect our results of operations or earnings.
Our primary source of funding for our operations is deposits from
customers in our local market. Should other banks in or near our market areas
fail, it could cause our deposit customers to lose confidence in banks and cause
them to withdraw or substantially restrict their deposits with us. If such
activity reached a high enough level, it could substantially disrupt our
business. There is no assurance that such disruptions, were they to occur, would
not materially and adversely affect our results of operations or earnings.
Current market developments may adversely affect our industry, business
and results of operations.
Dramatic declines in the housing market during the prior two years,
with falling home prices and increasing foreclosures and unemployment, have
resulted in significant write-downs of asset values by financial institutions,
including government-sponsored entities and major commercial and investment
banks. These write-downs, initially of mortgage-backed securities but spreading
to credit default swaps, other derivative securities, and mortgage loans have
caused many financial institutions to seek additional capital, to merge with
larger and stronger institutions and, in some cases, to fail. Reflecting concern
about the stability of the financial markets generally and the strength of
counterparties, many lenders and institutional investors have reduced, and in
some cases, ceased to provide funding to borrowers, including other financial
institutions. The resulting lack of available credit, lack of confidence in the
financial sector, increased volatility in the financial markets and reduced
business activity could materially and adversely, directly or indirectly, affect
our business, financial condition and results of operations.
Our growth strategy or regulatory requirements could require future
increases in capital that we may not be able to accomplish.
We are required by banking regulators to maintain various ratios of
capital to assets. As our assets grow we expect our capital ratios to decline
unless we can increase our earnings or raise sufficient new capital to keep pace
with asset growth. Our ability to raise additional capital, if needed, will
depend, among other things, on conditions in the capital markets at that time,
which are outside our control, and on our financial condition and performance.
If we are unable to limit a capital ratio decline by increasing our capital, we
will have to restrict our asset growth as we approach the minimum required
capital to asset ratios.
We may be unable to successfully manage our future growth.
Our future profitability will depend in part on our ability to manage
growth successfully. Our ability to manage growth successfully will depend on
our ability to maintain cost controls and asset quality while attracting
additional loans and deposits, as well as on factors beyond our control, such as
economic conditions and interest rate trends. If we grow too quickly and are not
able to control costs and maintain asset quality, growth could materially
adversely affect our financial performance.
We depend on the services of a number of key personnel, and a loss of
any of those personnel could disrupt our operations and result in reduced
revenues.
11
We are a relationship-driven organization. Our growth and development
to date have depended in large part on the efforts of our senior management
team. These senior officers have primary contact with our customers and are
extremely important in maintaining personalized relationships with our customer
base, which are key aspects of our business strategy, and in increasing our
market presence. The unexpected loss of services of one or more of these key
employees could have a material adverse effect on our operations and possibly
result in reduced revenues if we were unable to find suitable replacements
promptly.
If our loan customers do not pay us as they have contracted to, we may
experience losses.
Our principal revenue producing business is making loans. When our
customers do not repay loans, we suffer losses. Even though we maintain an
allowance for loan losses, the amount of the allowance may not be adequate to
cover the losses we experience. We attempt to mitigate this risk by a thorough
review of the creditworthiness of loan customers. Nevertheless, there is risk
that our credit evaluations will prove to be inaccurate due to changed
circumstances or otherwise.
Our business is concentrated in the Upstate area of South Carolina,
and, as has been the case over the prior two years, a downturn in the economy of
the area, a decline in area real estate values or, other events in our market
area may adversely affect our business.
Substantially all of our business is located in the Upstate area of
South Carolina. As a result, our financial condition and results of operations
are affected by changes in the Upstate economy. As has been the case over the
prior two years, a prolonged period of economic recession, a general decline in
real estate values in our market area or other adverse economic conditions in
the Upstate and South Carolina may result in decreases in demand for our
services, increases in nonpayment of loans and decreases in the value of
collateral securing loans, which could have a material adverse effect on our
business, future prospects, financial condition or results of operations. The
longer such adverse economic conditions persist, the greater the adverse impact
on us will be.
We face strong competition from larger, more established competitors
which may adversely affect our ability to operate profitably.
We encounter strong competition from financial institutions operating
in the Upstate area of South Carolina. In the conduct of our business, we also
compete with credit unions, insurance companies, money market mutual funds and
other financial institutions, some of which are not subject to the same degree
of regulation as we are. Many of these competitors have substantially greater
resources and lending abilities than we have and offer services, such as
investment banking, trust and international banking services that we do not
provide. We believe that we have been able to, and will continue to be able to,
compete effectively with these institutions because of our experienced bankers
and personalized service, as well as through loan participations and other
strategies and techniques. However, we cannot promise that we are correct in our
belief. If we are wrong, our ability to operate profitably may be negatively
affected.
Technological changes affect our business, and we may have fewer
resources than many of our competitors to invest in technological improvements.
The financial services industry continues to undergo rapid
technological changes with frequent introductions of new technology-driven
products and services. In addition to enabling financial institutions to serve
clients better, the effective use of technology may increase efficiency and may
enable financial institutions to reduce costs. Our future success may depend, in
part, upon our ability to use technology to provide products and services that
provide convenience to customers and to create additional efficiencies in our
operations. We may need to make significant additional capital investments in
technology in the future, and we may not be able to effectively implement new
technology-driven products and services. Many of our competitors have
substantially greater resources to invest in technological improvements.
Our profitability and liquidity are affected by changes in interest
rates and economic conditions.
Our profitability depends upon our net interest income, which is the
difference between interest earned on our interest earning assets, such as loans
and investment securities, and interest expense on interest bearing liabilities,
such as deposits and borrowings. Our net interest income is adversely affected
when market interest rates change such that the interest we pay on deposits and
borrowings increases faster than the interest earned on loans and investments,
or, conversely, when the interest earned on loans and investments decreases
faster than the interest we pay on deposits and borrowings. Interest
12
rates, and consequently our results of operations, are affected by general
economic conditions (domestic and foreign) and fiscal and monetary policies.
Monetary and fiscal policies may materially affect the level and direction of
interest rates. Beginning in June 2004 through June 2006, the Federal Reserve
raised rates 17 times for a total increase of 4.25%. Increases in interest rates
generally decrease the market values of interest earning investments and loans
held and therefore may adversely affect our liquidity and earnings. Increased
interest rates also generally affect the volume of mortgage loan originations,
the resale value of mortgage loans originated for resale, and the ability of
borrowers to perform under existing loans of all types. Since September 18,
2007, the Federal Reserve has decreased interest rates significantly to near
zero percent in 2009. Decreases in interest rates generally have the opposite
effect on market values of interest-bearing assets, the volume of mortgage loan
originations, the resale value of mortgage loans originated for resale, and the
ability of borrowers to perform under existing loans of all types from the
effect of increases in interests rates.
Risks Related to Our Common Stock
Our common stock has a limited trading market, which may make the
prompt execution of sale transactions difficult.
Although our common stock may be traded from time to time on an
individual basis or on the OTCBB, no active trading market has developed and
none may develop in the foreseeable future. Our common stock is not traded on
any exchange. Accordingly, if you wish to sell shares you may experience a delay
or have to sell them at a lower price in order to sell them promptly, if at all.
We may issue additional securities, which could affect the market price
of our common stock and dilute your ownership.
We may issue additional securities to raise additional capital, to
support growth, or to make acquisitions. Sales of a substantial number of shares
of our common stock, or the perception by the market that those sales could
occur, could cause the market price of our common stock to decline or could make
it more difficult for us to raise capital through the sale of common stock or to
use our common stock in future acquisitions.
We do not plan to pay cash dividends in the foreseeable future.
We have never paid cash dividends and do not plan to pay cash dividends
in the foreseeable future. We plan to use the funds that might otherwise be
available to pay dividends to expand our business and increase our capital.
Declaration and payment of dividends are within the discretion of our
board of directors. Our bank will be our most likely source of funds with which
to pay cash dividends. Our bank's declaration and payment of future dividends to
us are within the discretion of the bank's board of directors, and are dependent
upon its earnings, financial condition, its need to retain earnings for use in
the business and any other pertinent factors. The bank's payment of dividends is
also subject to various regulatory requirements.
Provisions in our articles of incorporation and South Carolina law may
discourage or prevent takeover attempts, and these provisions may have the
effect of reducing the market price for our stock.
Our articles of incorporation include several provisions that may have
the effect of discouraging or preventing hostile takeover attempts, and
therefore of making the removal of incumbent management difficult. The
provisions include staggered terms for our board of directors and requirements
that make it difficult to remove our directors. In addition, South Carolina law
contains several provisions that may make it more difficult for a third party to
acquire control of us without the approval of our board of directors, and may
make it more difficult or expensive for a third party to acquire a majority of
our outstanding common stock. To the extent that these provisions are effective
in discouraging or preventing takeover attempts, they may tend to reduce the
market price for our stock.
Our directors have significant voting power.
Our present directors beneficially own over 40% of our stock. Because
they own over 33 1/3%, if they vote together, they will be able to prevent any
merger, consolidation, share exchange, sale of substantial assets, dissolution,
removal of directors or amendment to the articles of incorporation they do not
want.
Our common stock is not insured, so you could lose your total
investment.
Our common stock is not a deposit or savings account, and is not
insured by the Federal Deposit Insurance Corporation or any other government
agency. Should our business fail you could lose your total investment.
13
Risks Related to Our Industry
We are subject to governmental regulation which could change and
increase our cost of doing business or have an adverse affect on our business.
We operate in a highly regulated industry and are subject to
examination, supervision and comprehensive regulation by various federal and
state agencies. Our compliance with the requirements of these agencies is costly
and may limit our growth and restrict certain of our activities, including
payment of dividends, mergers and acquisitions, investments, loans and interest
rates charged, and locations of offices. We are also subject to capitalization
guidelines established by federal authorities and our failure to meet those
guidelines could result, in an extreme case, in our bank's being placed in
receivership. We are also subject to some of the extensive and expensive
requirements imposed on public companies by the Sarbanes-Oxley Act of 2002 and
related regulations.
Various laws, including the Federal Deposit Insurance Act and the
Emergency Economic Stability Act of 2008 ("EESA"), and related regulations are
structured to spread the governmental costs of problems in the financial
industry broadly over the financial industry in order to prevent the taxpayers
from having to pay such costs. As a result, assessments by the FDIC to pay for
deposit insurance have increased, and will likely continue to increase,
substantially, and the total our bank will be required to pay could increase
enough to materially affect our income and our ability to operate profitably.
Additionally, EESA contains a provision for the financial industry to be
required to absorb, in an as yet undetermined fashion, any losses suffered by
the government on account of its acquiring troubled assets under the Troubled
Assets Relief Program of EESA.
The laws and regulations applicable to the banking industry could
change at any time, and we cannot predict the impact of these changes on our
business or profitability. Because government regulation greatly affects the
business and financial results of all commercial banks and bank holding
companies, our cost of compliance could adversely affect our ability to operate
profitably.
We are susceptible to changes in monetary policy and other economic
factors which may adversely affect our ability to operate profitably.
Changes in governmental, economic and monetary policies may affect the
ability of our bank to attract deposits and make loans. The rates of interest
payable on deposits and chargeable on loans are affected by governmental
regulation and fiscal policy as well as by national, state and local economic
conditions. All of these matters are outside of our control and affect our
ability to operate profitably.
Item 1B. Unresolved Staff Comments.
Not Applicable.
Item 2. Properties
The Bank owns in fee simple with no major encumbrances, the real
property where its corporate offices and banking offices are located at 3685
Blue Ridge Boulevard, Walhalla, South Carolina; 449 Highway 123 Bypass in
Seneca, South Carolina; 1600 Sandifer Boulevard in Seneca, South Carolina; 4002
Clemson Boulevard in Anderson, South Carolina; 2007 East Greenville Street in
Anderson, South Carolina; 208 East Main Street in Williamston, South Carolina;
and 1101 East Main Street in Westminster, South Carolina. The Westminster branch
is currently operating in a modular facility. Management of the Bank believes
the Bank's facilities are suitable and adequate for the Company's needs.
The Company also holds 15 properties acquired through foreclosure or in
settlement of loans. All of the properties are being marketed for sale.
14
In 2007, the Company purchased real property near Powdersville, South
Carolina, to be used for future expansion. The Company has not established a
budget or a schedule for construction on the property.
Item 3. Legal Proceedings
The Bank is from time to time a party to various legal proceedings
arising in the ordinary course of business, but management of the Bank is not
aware of any pending or threatened litigation or unasserted claims or
assessments that are expected to result in losses, if any, that would be
material to the Bank's business and operations.
Item 4. (Removed and Reserved)
PART II
The portions of the 2009 Annual Report to Shareholders incorporated by
reference into this Form 10-K are set forth in Exhibit 13 hereto.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
The information set forth under the caption "Market for Common Stock
and Dividends" and in Note I to the Company's Consolidated Financial Statements
under the caption "Restrictions on Subsidiary Dividends, Loans or Advances" in
the Company's Annual Report to Shareholders for the year ended December 31, 2009
(the "2009 Annual Report") is incorporated herein by reference. The information
set forth in Part I, Item 1 of this Form 10-K under the caption "Effect of
Government Regulation -- Payment of Dividends" is also incorporated herein by
reference.
The information required by Item 201(d) of Regulation S-K is set forth
in Item 12 of this Form 10-K.
The Company did not sell any equity securities during the period
covered by this report that were not registered under the Securities Act of
1933.
Issuer Purchases of Equity Securities
(a) Total Number (b) Average (c) Total Number of Maximum Number
of Shares Price Paid Shares Purchased as of Shares that May yet be
Period Purchased Per Share Part of Publicly Announced Purchased Under the
Plans or Programs Plans or Programs
10/1/09-10/31/09 ..................... 7,490 (1) $10.68 - -
11/1/09-11/30/09 ..................... - - - -
12/1/09-12/31/09 ..................... - - - -
----- -----
Total ....................... 7,490 10.68 - -
(1) 7,490 shares were purchased from employees of the Company who had exercised
options in the previous month for the exercise price.
Item 6. Selected Financial Data
The information set forth under the caption "Financial Summary" in the
2009 Annual Report is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information set forth under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operatons" in the 2009 Annual
Report is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not Applicable
Item 8. Financial Statements and Supplementary Data
The Consolidated Financial Statements, including Notes thereto, and
Report of Independent Registered Public Accounting Firm thereon, set forth in
the 2009 Annual Report are incorporated herein by reference.
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A(T). Controls and Procedures.
15
Effectiveness of Disclosure Controls and Procedures
Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or
240.15d-15(b) of the Company's disclosure controls and procedures (as defined in
17 C.F.R. Sections 240.13a-15(e) or 240.15d-15(e)), the Company's chief
executive officer and chief financial officer concluded that such controls and
procedures, as of the end of the period covered by this annual report, were
effective.
Management's Report on Internal Control Over Financial Reporting
The report set forth under the caption "Management's Report on Internal
Control Over Financial Reporting" set forth in the 2009 Annual Report is
incorporated herein by reference.
Changes in Internal Control Over Financial Reporting
The Company is continually seeking to improve the efficiency and
effectiveness of its operations and of its internal controls. This results in
modifications to its processes throughout the Company. However, 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.
Item 9B. Other Information.
No information was required to be disclosed in a Form 8-K during the
fourth quarter of 2009 that was not so disclosed.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information set forth under the captions "Management of the
Company" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Proxy Statement to be used in conjunction with the 2010 Annual Meeting of
Shareholders (the "Proxy Statement"), which will be filed within 120 days of the
Corporation's fiscal year end, is incorporated herein by reference.
Code of Ethics
The Company has adopted a code of ethics (as defined by 17 C.F.R.
229.406) that applies to its principal executive officer and principal financial
officer. The Company will provide a copy of the code of ethics, free of charge,
to any person upon written request to Benjamin L. Hiott, Senior Vice President,
Community First Bancorporation, 449 Highway 123 Bypass, Seneca, South Carolina
29678.
Audit Committee
The Company has an Audit Committee established in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The Audit Committee
is responsible for seeing that audits of the Company's financial statements are
conducted annually. An independent registered public accounting firm is employed
for that purpose by the Board of Directors upon recommendation of the Audit
Committee. Reports on these audits are reviewed by the Committee upon receipt
and a report thereon is made to the Board at its next meeting. The Audit
Committee is comprised of Messrs. Edwards, Hamrick, Thrift and Winchester, each
of whom is independent as defined in the Nasdaq Rules. The Audit Committee does
not have a written charter.
Audit Committee Financial Expert
The Company's board of directors has determined that the Company does
not have an "audit committee financial expert," as that term is defined by Item
407(d)(5) of Regulation S-K promulgated by the Securities and Exchange
Commission, serving on its audit committee. The Company's audit committee is a
committee of directors who are independent of the Company and its management.
After reviewing the experience and training of all of the Company's independent
directors, the board of directors has concluded that no independent director
meets the SEC's very demanding definition. Therefore, it would be necessary to
find a qualified individual willing to serve as both a director and member of
the audit committee and have that person elected by the shareholders in order to
have an "audit committee financial expert" serving on the Company's audit
committee. The Company's audit committee is, however, authorized to use
consultants to provide financial accounting expertise in any instance where
members of the committee believe such assistance would be useful. Accordingly,
the Company does not believe that it needs to have an "audit committee financial
expert" on its audit committee.
Item 11. Executive Compensation
The information set forth under the captions "Management Compensation"
and "Compensation of Directors" in the Proxy Statement is incorporated herein by
referenced.
16
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
The information set forth under the caption "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement is incorporated
herein by reference.
Equity Compensation Plan Information
The following table sets forth aggregated information as of December
31, 2009 about all of the Company's compensation plans (including individual
compensation arrangements) under which equity securities of the Company are
authorized for issuance:
Plan category Number of securities Weighted-average Number of securities
to be issued upon exercise price of remaining available
exercise of outstanding options, for future issuance
outstanding options, warrants and rights under equity
warrants and rights compensation plans
(excluding securities
reflected in column(a))
(a)(1) (b) (c)(2)
------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation
plans approved by
security holders 364,011 11.82 -0-
Equity compensation
plans not approved
by security holders -0- -0- -0-
Total
(1) These include shares that may be issued upon exercise of options
outstanding at December 31, 2009 under the 1998 Stock Option Plan (see note
2 below). The Company's 1989 Stock Option Plan previously expired, and all
remaining options thereunder expired in 2009. No further options may be
issued or exercised under the 1989 Plan.
(2) The 1998 Plan terminated March 19, 2008 according to its terms, and no
further options may be issued pursuant to the 1998 Plan. Options
outstanding under the 1998 Plan may continue to be exercised until the
earlier of their termination dates (as set forth in individual grant
agreements) or ten years from the date of grant.
Item 13. Certain Relationships and Related Transactions, and Director
Independence
The information set forth under the captions "Certain Relationships and
Related Transactions" and "Governance Matters -- Director Independence" in the
Proxy Statement is incorporated herein by reference. The members of our Audit
and Compensation Committees are all independent as defined in the Nasdaq Stock
Market, Inc. Marketplace Rules. Our entire Board of Directors serves as our
Nominating Committee. Frederick D. Shepherd, Jr., our President and Chief
Executive Officer, is the only member of our Board of Directors who is not
independent as defined by such rules.
PART IV
Item 14. Principal Accountant Fees and Services
The information set forth under the caption "Independent Registered
Public Accounting Firm" in the Proxy Statement is incorporated herein by
reference.
17
Item 15. Exhibits, Financial Statement Schedules
(a)(1) and (2) Financial Statements and Financial Schedules
- Report of Independent Registered Public Accounting Firm.
- Consolidated Balance Sheets - December 31, 2009 and 2008
- Consolidated Statements of Income - Years ended December 31, 2009,
2008 and 2007
- Consolidated Statements of Changes in Shareholders' Equity - Years
ended December 31, 2009, 2008 and 2007
- Consolidated Statements of Cash Flows - Years ended December 31, 2009,
2008 and 2007
- Notes to Consolidated Financial Statements
(3) Exhibit No.(from Description
item 601 of
Regulation S-K)
3.1 Articles of Incorporation, as amended
(Incorporated by reference to the Annual
Report on Form 10-KSB for the year ended
December 31, 1998, and Current Report on Form
8-K, filed February 9, 2009.)
3.2 By-laws (Incorporated by reference to the
Annual Report on Form 10-KSB for the year
ended December 31, 1997 (the "1997 10-KSB"))
4 Specimen Stock certificate (Incorporated by
reference to the 1997 10-KSB)
10.1 Community First Bank 1989 Incentive
Stock Option Plan (Incorporated by reference
to the 1997 10-KSB)
10.2 Community First Bank Incentive Stock
Agreement with Frederick D.Shepherd, Jr.
(Incorporated by reference to the 1997 10-KSB)
10.3 Community First Bancorporation 1998 Stock
Option Plan (Incorporated by reference to
Proxy Statement filed in connection with the
1998 Annual Meeting of Shareholders)
10.4 Employment Agreement between the Company,
Community First Bank and Frederick D.
Shepherd, Jr., dated July 31, 2007
(Incorporated by reference to Report on Form
8-K filed August 6, 2007)
10.5 Salary Continuation Agreement between the
Company and Frederick D. Shepherd, Jr., dated
July 31, 2007 (Incorporated by reference to
Report on Form 8-K filed August 6, 2007)
13 Portions of the Annual Report to Shareholders
for the Year Ended December 31, 2009
21 Subsidiaries of the registrant
23 Consent of J. W. Hunt & Company, L.L.P.
31 Rule 13a-14(a)/15d-14(a) Certifications
32 18 U.S.C. Section 1350 Certifications
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
s/Frederick D. Shepherd, Jr.
Date: March 30, 2010 By:-------------------------------------------
Frederick D. Shepherd, Jr.
Its President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
------------------------------- Vice Chairman and Director March __, 2010
(Larry S. Bowman)
------------------------------- Director and Secretary March __, 2010
(William M. Brown)
s/Robert H. Edwards
------------------------------- Director March 30, 2010
(Robert H. Edwards)
s/Blake L. Griffith
------------------------------- Director March 30, 2010
(Blake L. Griffith)
s/John R. Hamrick
------------------------------- Director March 30, 2010
(John R. Hamrick)
------------------------------- Chairman and Director March __, 2010
(James E. McCoy)
s/Frederick D. Shepherd, Jr.
------------------------------- Director, President, Chief March 30, 2010
(Frederick D. Shepherd, Jr.) Executive Officer, Treasurer and
Principal Financial Officer
s/Gary V. Thrift
------------------------------- Director March 30, 2010
(Gary V. Thrift)
s/James E. Turner
------------------------------- Director March 30, 2010
(James E. Turner)
s/Charles L. Winchester
------------------------------- Director March 30, 2010
(Charles L. Winchester)
19
EXHIBIT INDEX
3.1 Articles of Incorporation, as amended
(Incorporated by reference to the Annual
Report on Form 10-KSB for the year ended
December 31, 1998, and Current Report on Form
8-K, filed February 9, 2009.)
3.2 By-laws (Incorporated by reference to the
Annual Report on Form 10-KSB for the year
ended December 31, 1997 (the "1997 10-KSB"))
4 Specimen Stock certificate (Incorporated by
reference to the 1997 10-KSB)
10.1 Community First Bank 1989 Incentive
Stock Option Plan (Incorporated by reference
to the 1997 10-KSB)
10.2 Community First Bank Incentive Stock
Agreement with Frederick D.Shepherd, Jr.
(Incorporated by reference to the 1997 10-KSB)
10.3 Community First Bancorporation 1998 Stock
Option Plan (Incorporated by reference to
Proxy Statement filed in connection with the
1998 Annual Meeting of Shareholders)
10.4 Employment Agreement between the Company,
Community First Bank and Frederick D.
Shepherd, Jr., dated July 31, 2007
(Incorporated by reference to Report on Form
8-K filed August 6, 2007)
10.5 Salary Continuation Agreement between the
Company and Frederick D. Shepherd, Jr., dated
July 31, 2007 (Incorporated by reference to
Report on Form 8-K filed August 6, 2007)
13 Portions of the Annual Report to Shareholders
for the Year Ended December 31, 2009
21 Subsidiaries of the registrant
23 Consent of J. W. Hunt & Company, L.L.P.
31 Rule 13a-14(a)/15d-14(a) Certifications
32 18 U.S.C. Section 1350 Certifications
20