UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended March 31, 2006 Commission File No. 000-29640
COMMUNITY FIRST BANCORPORATION
------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
South Carolina 58-2322486
-------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
449 HIGHWAY 123 BYPASS
SENECA, SOUTH CAROLINA 29678
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(Address of principal executive offices, zip code)
(864) 886-0206
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Common Stock, no par
or stated value, 2,798,409 Shares Outstanding on April 30, 2006
COMMUNITY FIRST BANCORPORATION
FORM 10-Q
Index
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets ..................................... 3
Consolidated Statements of Income ............................... 4
Consolidated Statements of Changes in Shareholders' Equity ...... 5
Consolidated Statements of Cash Flows ........................... 6
Notes to Unaudited Consolidated Financial Statements............. 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations .............. 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk ...... 14
Item 4. Controls and Procedures ......................................... 14
PART II - OTHER INFORMATION
Item 6. Exhibits ........................................................ 15
SIGNATURE ................................................................. 16
2
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
COMMUNITY FIRST BANCORPORATION
Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
2006 2005
----- ----
(Dollars in thousands)
Assets
Cash and due from banks ................................................................... $ 9,226 $ 10,063
Interest bearing deposits due from banks .................................................. 132 182
Federal funds sold ........................................................................ 34,193 22,205
--------- ---------
Cash and cash equivalents ............................................................. 43,551 32,450
Securities available-for-sale ............................................................. 104,274 102,070
Securities held-to-maturity (fair value $7,353 for 2006 and $7,671 for 2005) .............. 7,475 7,751
Other investments ......................................................................... 948 948
Loans ..................................................................................... 171,415 169,318
Allowance for loan losses ............................................................. (2,272) (2,266)
--------- ---------
Loans - net ........................................................................ 169,143 167,052
Premises and equipment - net .............................................................. 7,101 6,805
Accrued interest receivable ............................................................... 1,731 1,629
Other assets .............................................................................. 1,937 2,007
--------- ---------
Total assets ....................................................................... $ 336,160 $ 320,712
========= =========
Liabilities
Deposits
Noninterest bearing ................................................................... $ 38,724 $ 38,061
Interest bearing ...................................................................... 258,601 241,932
--------- ---------
Total deposits ..................................................................... 297,325 279,993
Accrued interest payable .................................................................. 2,156 1,817
Short-term borrowings ..................................................................... - 3,500
Long-term debt ............................................................................ 6,500 6,500
Other liabilities ......................................................................... 522 47
--------- ---------
Total liabilities .................................................................. 306,503 291,857
--------- ---------
Shareholders' equity
Common stock - no par value; 10,000,000 shares authorized; issued and
outstanding - 2,798,409 for 2006 and 2,798,409 for 2005 ............................... 26,956 26,956
Additional paid-in capital ................................................................ 45 -
Retained earnings ......................................................................... 4,207 3,296
Accumulated other comprehensive income (loss) ............................................. (1,551) (1,397)
--------- ---------
Total shareholders' equity ......................................................... 29,657 28,855
--------- ---------
Total liabilities and shareholders' equity ......................................... $ 336,160 $ 320,712
========= =========
See accompanying notes to unaudited consolidated financial statements.
3
COMMUNITY FIRST BANCORPORATION
Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
2006 2005
---- ----
(Dollars in thousands,
except per share)
Interest income
Loans, including fees ............................. $3,090 $2,726
Interest bearing balances due from banks .......... 2 -
Securities
Taxable ......................................... 931 943
Tax-exempt ...................................... 120 20
Other investments ................................. 11 9
Federal funds sold ................................ 493 153
------ ------
Total interest income ......................... 4,647 3,851
------ ------
Interest expense
Time deposits $100M and over ...................... 732 450
Other deposits .................................... 1,534 927
Short-term borrowings ............................. 2 12
Long-term debt .................................... 62 70
------ ------
Total interest expense ........................ 2,330 1,459
------ ------
Net interest income .................................... 2,317 2,392
Provision for loan losses .............................. 25 140
------ ------
Net interest income after provision .................... 2,292 2,252
------ ------
Other income
Service charges on deposit accounts ............... 364 351
Credit-related deposit fees ....................... 70 52
Credit life insurance commissions ................. 10 11
Other income ...................................... 95 73
------ ------
Total other income ............................ 539 487
------ ------
Other expenses
Salaries and employee benefits .................... 729 711
Net occupancy expense ............................. 69 64
Furniture and equipment expense ................... 104 88
Amortization of computer software ................. 60 58
ATM interchange and related expenses .............. 78 46
Other expense ..................................... 396 356
------ ------
Total other expenses .......................... 1,436 1,323
------ ------
Income before income taxes ............................. 1,395 1,416
Income tax expense ..................................... 484 507
------ ------
Net income ............................................. $ 911 $ 909
====== ======
Per share*
Net income ........................................ $ 0.33 $ 0.33
Net income, assuming dilution ..................... 0.31 0.31
------
* Per share information has been retroactively adjusted to reflect a 5% stock
dividend effective November 30, 2005.
See accompanying notes to unaudited consolidated financial statements.
4
COMMUNITY FIRST BANCORPORATION
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
Common Stock Accumulated
------------ Additional Other
Number of Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income (Loss) Total
------ ------ ------- -------- ------------- -----
(Dollars in thousands)
Balance, January 1, 2005 .......................... 2,648,230 $ 24,216 $ - $ 2,220 $ (499) $ 25,937
----------
Comprehensive income:
Net income .................................... - - - 909 - 909
----------
Unrealized holding gains and losses
on available-for-sale securities
arising during the period, net of
income taxes of $393 .......................... - - - - (701) (701)
----------
Total other comprehensive income .......... (701)
----------
Total comprehensive income ............ 208
----------
Exercise of employee stock options ................ 75 - - - - -
---------- ---------- ---------- ---------- ---------- ----------
Balance, March 31, 2005 ........................... 2,648,305 $ 24,216 $ - $ 3,129 $ (1,200) $ 26,145
========== ========== ========== ========== ========== ==========
Balance, January 1, 2006 .......................... 2,798,409 $ 26,956 $ - $ 3,296 $ (1,397) $ 28,855
----------
Comprehensive income:
Net income .................................... - - - 911 - 911
----------
Unrealized holding gains and losses
on available-for-sale securities
arising during the period, net of
income taxes of $87 ........................... - - - - (154) (154)
----------
Total other comprehensive income .......... (154)
----------
Total comprehensive income ............ 757
----------
Share-based compensation .......................... - - 45 - - 45
---------- ---------- ---------- ---------- ---------- ----------
Balance, March 31, 2006 ........................... 2,798,409 $ 26,956 $ 45 $ 4,207 $ (1,551) $ 29,657
========== ========== ========== ========== ========== ==========
See accompanying notes to unaudited consolidated financial statements.
5
COMMUNITY FIRST BANCORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
2006 2005
---- ----
(Dollars in thousands)
Operating activities
Net income ............................................................................ $ 911 $ 909
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses ...................................................... 25 140
Depreciation ................................................................... 76 74
Amortization of net loan fees and costs ........................................ (30) (19)
Securities accretion and premium amortization .................................. 46 8
Gain on sale of foreclosed assets .............................................. (31) -
Increase in interest receivable ................................................ (102) (90)
Increase in interest payable ................................................... 339 214
Decrease in prepaid expenses and other assets .................................. 20 57
Increase in other accrued expenses ............................................. 475 557
Share-based compensation ....................................................... 45 -
-------- --------
Net cash provided by operating activities .................................. 1,774 1,850
-------- --------
Investing activities
Purchases of available-for-sale securities ............................................ (10,259) (33,678)
Maturities, calls and paydowns of securities available-for-sale ....................... 7,767 22,428
Maturities, calls and paydowns of securities held-to-maturity ......................... 277 372
Purchases of other investments ........................................................ - (50)
Net increase in loans made to customers ............................................... (2,086) (2,701)
Purchases of premises and equipment ................................................... (372) (75)
Proceeds of sale of foreclosed assets ................................................. 168 -
-------- --------
Net cash used by investing activities ...................................... (4,505) (13,704)
-------- --------
Financing activities
Net increase in demand deposits, interest
bearing transaction accounts and savings accounts ................................. 11,997 5,548
Net increase (decrease) in certificates of deposit and other
time deposits ..................................................................... 5,335 (3,019)
Decrease in short-term borrowings ..................................................... (3,500) (500)
Repayments of long-term debt .......................................................... - (1,000)
-------- --------
Net cash provided by financing activities .................................. 13,832 1,029
-------- --------
Increase (decrease) in cash and cash equivalents ........................................... 11,101 (10,825)
Cash and cash equivalents, beginning ....................................................... 32,450 39,902
-------- --------
Cash and cash equivalents, ending .......................................................... $ 43,551 $ 29,077
======== ========
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for
Interest, net of $15 capitalized during construction .............................. $ 1,991 $ 1,245
Income taxes ...................................................................... - 3
Noncash investing and financing activities:
Other comprehensive income (loss) ................................................. (154) (701)
See accompanying notes to unaudited consolidated financial statements.
6
COMMUNITY FIRST BANCORPORATION
Notes to Unaudited Consolidated Financial Statements
Accounting Policies - A summary of significant accounting policies is included
in Community First Bancorporation's (the "Company") Annual Report on Form 10-K
for the year ended December 31, 2005 filed with the Securities and Exchange
Commission. Certain amounts in the 2005 financial statements have been
reclassified to conform to the current presentation.
Management Opinion - In the opinion of management, the accompanying unaudited
consolidated financial statements of Community First Bancorporation reflect all
adjustments necessary for a fair presentation of the results of the periods
presented. Such adjustments were of a normal, recurring nature.
Nonperforming Loans - As of March 31, 2006, there were $579,000 in nonaccrual
loans and no loans 90 days or more past due and still accruing interest.
Earnings Per Share - Basic earnings per common share is computed by dividing net
income applicable to common shares by the weighted average number of common
shares outstanding. Diluted earnings per share is computed by dividing
applicable net income by the weighted average number of common shares
outstanding and any dilutive potential common shares and dilutive stock options.
It is assumed that all dilutive stock options are exercised at the beginning of
each period and that the proceeds are used to purchase shares of the Company's
common stock at the average market price during the period. All 2005 per share
information has been retroactively adjusted to give effect to a 5% stock
dividend effective November 30, 2005. Net income per share and net income per
share, assuming dilution, were computed as follows:
(Unaudited)
Three Months Ended
March 31,
2006 2005
---- ----
(Dollars in thousands,
except per share amounts)
Net income per share, basic
Numerator - net income ........................................................... $ 911 $ 909
========== ==========
Denominator
Weighted average common shares issued and outstanding .......................... 2,798,409 2,780,845
========== ==========
Net income per share, basic ......................................... $ .33 $ .33
========== ==========
Net income per share, assuming dilution
Numerator - net income ........................................................... $ 911 $ 909
========== ==========
Denominator
Weighted average common shares issued and outstanding .......................... 2,798,409 2,780,845
Effect of dilutive stock options ............................................... 177,499 148,984
---------- ----------
Total shares ........................................................ 2,975,908 2,929,829
========== ==========
Net income per share, assuming dilution ............................. $ .31 $ .31
========== ==========
Stock-Based Compensation - As of March 31, 2006, the Company has two stock-based
compensation plans. Effective January 1, 2006, the Company began accounting for
compensation expenses related to stock options granted to employees and
non-officer directors under the recognition and measurement principles of
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payment"("SFAS 123(R)) using the modified prospective application method.
7
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
Statements included in this report which are not historical in nature
are intended to be, and are hereby identified as "forward looking statements"
for purposes of the safe harbor provided by Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements which are other than statements
of historical facts. Such forward-looking statements may be identified, without
limitation, by the use of the words "anticipates," "believes," "estimates,"
"expects," "intends," "plans," "predicts," "projects," and similar expressions.
The Company's expectations, beliefs and projections are expressed in good faith
and are believed by the Company to have a reasonable basis, including without
limitation, management's examination of historical operating trends, data
contained in the Company's records and other data available from third parties,
but there can be no assurance that management's beliefs, expectations or
projections will result or be achieved or accomplished. The Company cautions
readers that forward-looking statements, including without limitation, those
relating to the Company's recent and continuing expansion, its future business
prospects, revenues, working capital, liquidity, capital needs, interest costs,
income, and adequacy of the allowance for loan losses, are subject to risks and
uncertainties that could cause actual results to differ materially from those
indicated in the forward-looking statements, due to several important factors
herein identified, among others, and other risks and factors identified from
time to time in the Company's reports filed with the Securities and Exchange
Commission.
Changes in Financial Condition
During the first three months of 2006, interest bearing deposits
increased by $16,669,000, or 6.9%. These funds were used primarily to repay
short-term borrowings of $3,500,000 and to fund growth in loans and federal
funds sold and to purchase securities. During the 2006 period, loans increased
by $2,097,000 or 1.2% and federal funds sold increased by $11,988,000 or 54.0%.
The Company believes its higher federal funds sold position gives it increased
flexibility to fund loan requests or make investments in securities at
attractive yields, and to meet normal demands for deposit withdrawals by its
customers, all while maintaining its exposure to further increases in interest
rates at an acceptable level.
Results of Operations
The Company recorded consolidated net income of $911,000 or $.33 per
share for the first quarter of 2006. These results are substantially the same as
for the first quarter of 2005. Net income per share, assuming dilution was $.31
for both the 2006 and the 2005 periods. Net income per share amounts for 2005
have been retroactively adjusted to reflect a five percent stock dividend
effective November 30, 2005.
Summary Income Statement
-------------------------------------------------------------------
(Dollars in thousands)
Dollar Percentage
For the Three Months Ended March 31, 2006 2005 Change Change
---- ---- ------ ------
Interest income .................................... $4,647 $3,851 $ 796 20.7%
Interest expense ................................... 2,330 1,459 871 59.7%
------ ------ ----
Net interest income ................................ 2,317 2,392 (75) -3.1%
Provision for loan losses .......................... 25 140 (115) -82.1%
Noninterest income ................................. 539 487 52 10.7%
Noninterest expenses ............................... 1,436 1,323 113 8.5%
Income tax expense ................................. 484 507 (23) -4.5%
------ ------ -----
Net income ......................................... $ 911 $ 909 $ 2 0.2%
====== ====== =====
Net Interest Income
Net interest income is the principal source of the Company's earnings.
For the first quarter of 2006, net interest income totaled $2,317,000, a
decrease of $75,000 or 3.1% from the amount for the same period of 2005. The
yield on interest earning assets increased to 5.69% for the 2006 period,
compared with 5.11% for the 2005 period and the average rates paid for interest
bearing liabilities were 3.42% and 2.34%, respectively. Accordingly, the average
interest rate spread for the 2006 period was 50 basis points lower than for the
2005 period.
8
Market interest rates during the 2006 period were slightly higher than
in the first quarter of 2005. The Federal Reserve Board began slowly increasing
certain key interest rates in 2004, and has continued to do so. These increases
have resulted, however, primarily in increased rates for instruments with
shorter-term maturities. Rates associated with instruments with maturities
longer than about five years had been largely unaffected until recently. As a
result, interest rates paid by banks for deposits and other short-term funding
sources, and the rates earned on loans and other interest earning assets,
increased during those same periods. In the 2006 period, the rates paid by the
Company increased more than the rates that it received from its loans and other
invested funds. The following table provides an analysis of the average amounts
of the Company's assets and liabilities and the effective yields and rates on
the various categories of its interest earning assets and interest bearing
liabilities for the first quarter of 2006 and 2005.
9
Average Balances, Yields and Rates
Three Months Ended March 31,
----------------------------
2006 2005
---- ----
Interest Interest
Average Income/ Yields/ Average Income/ Yields/
Balances Expense Rates (1) Balances Expense Rates (1)
-------- ------- --------- -------- ------- ---------
(Dollars in thousands)
Assets
Interest-bearing deposits due from banks ............ $ 172 $ 2 4.72% $ 81 $ - 0.00%
Securities
Taxable ........................................ 101,412 931 3.72% 116,992 943 3.27%
Tax exempt (2) ................................. 12,242 120 3.98% 2,322 20 3.49%
--------- ------- --------- -------
Total investment securities ................ 113,654 1,051 3.75% 119,314 963 3.27%
Other investments ................................... 948 11 4.71% 1,013 9 3.60%
Federal funds sold .................................. 45,260 493 4.42% 26,429 153 2.35%
Loans (2) ........................................... 170,931 3,090 7.33% 158,810 2,726 6.96%
--------- ------- --------- -------
Total interest earning assets .............. 330,965 4,647 5.69% 305,647 3,851 5.11%
Cash and due from banks ............................. 6,817 4,620
Allowance for loan losses ........................... (2,264) (2,280)
Valuation allowance - AFS securities ................ (2,224) (1,049)
Premises and equipment .............................. 7,022 4,411
Other assets ........................................ 3,878 3,098
--------- ---------
Total assets ............................... $ 344,194 $ 314,447
========= =========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts .......... $ 35,743 $ 141 1.60% $ 35,962 $ 70 0.79%
Savings ........................................ 44,214 314 2.88% 38,042 114 1.22%
Time deposits $100M and over ................... 76,493 732 3.88% 64,880 450 2.81%
Other time deposits ............................ 112,943 1,079 3.87% 104,780 743 2.88%
--------- ------- --------- -------
Total interest bearing
deposits ................................. 269,393 2,266 3.41% 243,664 1,377 2.29%
Short-term borrowings ............................... 78 2 10.40% 2,017 12 2.41%
Long-term debt ...................................... 6,500 62 3.87% 7,500 70 3.79%
--------- ------- --------- -------
Total interest bearing
liabilities .............................. 275,971 2,330 3.42% 253,181 1,459 2.34%
Noninterest bearing demand deposits ................. 36,406 33,435
Other liabilities ................................... 2,503 1,567
Shareholders' equity ................................ 29,314 26,264
--------- ---------
Total liabilities and shareholders' equity .......... $ 344,194 $ 314,447
========= =========
Interest rate spread ................................ 2.27% 2.77%
Net interest income and net yield
on earning assets .............................. $ 2,317 2.84% $ 2,392 3.17%
Interest free funds supporting earning
assets ......................................... $ 54,994 $ 52,466
-----------------------------------------
(1) Yields and rates are annualized
(2) Yields on tax exempt instruments have not been adjusted to a tax-equivalent
basis.
When interest rates rise sufficiently, depositors often seek to
maximize the present and future earning potential of their funds by moving their
funds into longer-term fixed rate time deposits. Accordingly, the average
amounts of, and rates paid for, time deposits increased in the 2006 period
compared with the 2005 period. The Company can reduce the effects that the
higher rates paid for those longer-term deposits have on net interest income
without becoming subject to an inordinate level of interest rate risk by
increasing the relative amounts of funds invested in the higher-yielding
10
categories of earning assets, principally loans, and adhering to its policy of
not lending funds at fixed rates for periods longer than five years. The average
amounts of loans held by the Company in the 2006 and 2005 first quarters were
$170,931,000 and $158,810,000, respectively.
In addition, because the interest rate increases since 2004 have been
most pronounced in the shortest-maturity instruments, the rate earned by the
Company for investments in overnight federal funds sold increased significantly
in 2006. The rate earned for federal funds sold was 4.42% in the 2006 period
compared with 2.35% for the 2005 period. The average amounts of the Company's
investments in those instruments totaled $45,260,000 for 2006 compared with
$26,429,000 in the 2005 quarter.
Throughout 2005, the Company added to its holdings of tax-exempt state,
county and municipal securities significantly and the yields on those
investments increased, as well. As a result, the Company's 2006 first quarter
income includes $120,000 earned on those investments, compared with $20,000 in
the same period of 2005.
The Company continues to pursue a strategy to increase its market share
in its local market areas in Anderson and Oconee Counties of South Carolina.
Oconee County is served from four offices which are located in Seneca, Walhalla
and Westminster. The Company currently is using a temporary facility at the
Westminster location. There presently are no firm plans, timetables or budgets
for constructing a permanent facility for this office. The Anderson County
market is served from offices in Anderson and Williamston. The Company is
planning to open an additional office on Highway 81 in Anderson County.
Provision and Allowance for Loan Losses
The provision for loan losses was $25,000 for the first three months of
2006, compared with $140,000 for the comparable period of 2005. At March 31,
2006, the allowance for loan losses was 1.33% of loans, down slightly from 1.34%
at December 31, 2005. During the 2006 three month period, net charge-offs
totaled $19,000, compared with $34,000 in net charge offs during the same period
of 2005. As of March 31, 2006, there were $579,000 in nonaccrual loans and no
loans 90 days or more past due and still accruing interest. As of March 31,
2005, there were $1,177,000 in nonaccrual loans and no loans 90 days or more
past due and still accruing interest. The activity in the allowance for loan
losses is summarized in the table below:
Three Months Three Months
Ended Year Ended Ended
March 31, December 31, March 31,
2006 2005 2005
---- ---- ----
(Dollars in thousands)
Allowance at beginning of period ................................. $ 2,266 $ 2,240 $ 2,240
Provision for loan losses ........................................ 25 250 140
Net charge-offs .................................................. (19) (224) (34)
--------- --------- ---------
Allowance at end of period ....................................... $ 2,272 $ 2,266 $ 2,346
========= ========= =========
Allowance as a percentage of loans outstanding
at period end .................................................... 1.33% 1.34% 1.46%
Loans at end of period ........................................... $ 171,415 $ 169,318 $ 160,461
========= ========= =========
11
Non-Performing and Potential Problem Loans
90 Days or
More Past Due Total Percentage Percentage
Nonaccrual and Still Nonperforming of Total Potential of Total
Loans Accruing Loans Loans Problem Loans Loans
----- -------- ----- ----- ------------- -----
(Dollars in thousands)
January 1, 2005 .................. $ 1,465 $ 9 $ 1,474 0.93% $ 1,403 0.89%
Net change ....................... (288) (9) (297) 1,133
------- ------- ------- -------
March 31, 2005 ................... 1,177 - 1,177 0.73% 2,536 1.58%
Net change ....................... (19) - (19) 915
------- ------- ------- -------
June 30, 2005 .................... 1,158 - 1,158 0.70% 3,451 2.08%
Net change ....................... (189) - (189) (578)
------- ------- ------- -------
September 30, 2005 ............... 969 - 969 0.58% 2,873 1.71%
Net change ....................... (69) 5 (64) (725)
------- ------- ------- -------
December 31, 2005 ................ 900 5 905 0.53% 2,148 1.27%
Net change ....................... (321) (5) (326) 615
------- ------- ------- -------
March 31, 2006 ................... $ 579 $ - $ 579 0.34% $ 2,763 1.61%
======= ======= ======= =======
Potential problem loans include loans, other than non-performing loans,
that management has identified as having possible credit problems sufficient to
cast doubt upon the abilities of the borrowers to comply with the current
repayment terms. Since December 31, 2005, loans totaling $878,000 have been
classified as potential problem loans, of which $712,000 are collateralized by
real estate mortgages. $31,000 classified as potential problem loans as of
December 31, 2005 were classified as nonaccrual loans during the first quarter
of 2006. Other potential problem loans totaling $206,000 as of December 31, 2005
were no longer included in non-performing and potential problem loans as of
March 31, 2006. Of that amount, $19,000 was charged off. Payments on loans that
were included in potential problem loans at both December 31, 2005 and March 31,
2006 totaled $26,000 during the 2006 period. Management believes that the
increase in potential problem loans in the first quarter of 2006 is not
indicative of a trend in local economic conditions, but reflects circumstances
unique to each individual borrower.
Noninterest Income
Noninterest income totaled $539,000 for the first quarter of 2006,
compared with $487,000 for the 2005 quarter. Service charges on deposit accounts
in the 2006 period were $364,000 representing an increase of $13,000 over the
prior year period and fees from an overdraft privilege product were $18,000 more
in the 2006 period than in the 2005 period. Mortgage brokerage income in 2006
was approximately $7,000 less than in the 2005 period. There were no sales of
any securities in either the 2006 or 2005 period. A gain of $31,000 from the
sale of foreclosed assets was recognized in the 2006 period. There was no
comparable activity in the 2005 period.
Noninterest Expenses
Noninterest expenses totaled $1,436,000 for the first quarter of 2006
compared with $1,323,000 for the first quarter of 2005, representing an increase
of $113,000 or 8.5%. Salaries and employee benefits increased by $18,000, or
2.5%, to $729,000. This increase resulted primarily from normal salary
increases, increases in the number of employees associated with the Company's
growth, and higher costs of providing health insurance benefits. Also, for 2006,
this category includes $20,000 of share-based compensation expenses that
resulted from the adoption of SFAS 123(R). Partially offsetting these increases
was an $85,000 decrease in estimated employee incentive bonuses in 2006 compared
with 2005.
Occupancy and furniture and equipment expenses for 2006 increased by
$21,000 compared with 2005 primarily due to higher maintenance expenses
associated with the Company's equipment. Other expenses for the 2006 period were
$74,000 greater than in 2005 due to an increase of $32,000 in expenses for ATM
interchange fees and related expenses, an increase of $30,000 in other ATM
related expenses, and an increase of $32,000 in directors fees, including
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$25,000 of share-based compensation expenses for non-employee directors' stock
options that resulted from the adoption of SFAS 123(R). In addition, higher
expenses were noted in 2006 for stationery and supplies resulting from the
opening of the new executive offices and an additional banking office, and
contributions and donations. Some expense decreases were experienced in 2006 for
FDIC insurance and expenses related to foreclosed assets.
Liquidity
Liquidity is the ability to meet current and future obligations through
the liquidation or maturity of existing assets or the acquisition of additional
liabilities. The Company manages both assets and liabilities to achieve
appropriate levels of liquidity. Cash and short-term investments are the
Company's primary sources of asset liquidity. These funds provide a cushion
against short-term fluctuations in cash flow from both deposits and loans.
Securities available-for-sale are the Company's principal source of secondary
asset liquidity. However, the availability of this source is influenced by
market conditions. Individual and commercial deposits are the Company's primary
source of funds for credit activities. The Company has significant amounts of
credit availability under its FHLB lines of credit and federal funds purchased
facilities.
As of March 31, 2006, the ratio of loans to total deposits was 57.7%,
compared with 60.5% as of December 31, 2005. Deposits as of March 31, 2006 were
$297,325,000, an increase of $17,332,000 or 6.2% over the amount as of December
31, 2005. Management believes that the Company's liquidity sources are adequate
to meet its operating needs.
Capital Resources
The Company's capital base increased by $802,000 since December 31,
2005 as the result of net income of $911,000 for the first three months of 2006,
$45,000 added pursuant to share-based compensation expenses recognized during
the period, less a $154,000 change in unrealized gains and losses on
available-for-sale securities, net of deferred income tax effects.
The Company and its banking subsidiary (the "Bank") are subject to
regulatory risk-based capital adequacy standards. Under these standards, bank
holding companies and banks are required to maintain certain minimum ratios of
capital to risk-weighted assets and average total assets. Under the provisions
of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA),
federal bank regulatory authorities are required to implement prescribed "prompt
corrective actions" upon the deterioration of the capital position of a bank. If
the capital position of an affected institution were to fall below certain
levels, increasingly stringent regulatory corrective actions are mandated.
The March 31, 2006 risk based capital ratios for the Company and the
Bank are presented in the following table, compared with the "well capitalized"
and minimum ratios under the regulatory definitions and guidelines:
Total
Tier 1 Capital Leverage
------ ------- --------
Community First Bancorporation ................. 15.4% 16.5% 9.0%
Community First Bank ........................... 14.9% 16.0% 8.7%
Minimum "well-capitalized" requirement ......... 6.0% 10.0% 6.0%
Minimum requirement ............................ 4.0% 8.0% 5.0%
Off-Balance-Sheet Arrangements
In the normal course of business, the Bank is party to financial instruments
with off-balance-sheet risk including commitments to extend credit and standby
letters of credit. Such instruments have elements of credit risk in excess of
the amount recognized in the balance sheet. The exposure to credit loss in the
event of nonperformance by the other parties to the financial instruments for
commitments to extend credit and standby letters of credit is represented by the
contractual notional amount of those instruments. Generally, the same credit
policies used for on-balance-sheet instruments, such as loans, are used in
extending loan commitments and standby letters of credit.
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Following are the off-balance-sheet financial instruments whose contract amounts
represent credit risk:
March 31, 2006
--------------
(Dollars in
thousands)
Loan commitments .......................................... $26,559
Standby letters of credit ................................. 974
Loan commitments involve agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and some involve
payment of a fee. Many of the commitments are expected to expire without being
fully drawn; therefore, the total amount of loan commitments does not
necessarily represent future cash requirements. Each customer's creditworthiness
is evaluated on a case-by-case basis. The amount of collateral obtained, if any,
upon extension of credit is based on management's credit evaluation of the
borrower. Collateral held varies but may include commercial and residential real
properties, accounts receivable, inventory and equipment.
Standby letters of credit are conditional commitments to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
standby letters of credit is the same as that involved in making loan
commitments to customers. Many letters of credit will expire without being drawn
upon and do not necessarily represent future cash requirements. The Bank
receives fees for loan commitments and standby letters of credit. The amount of
such fees was not material for the three months ended March 31, 2006.
As described under "Liquidity," management believes that its various sources of
liquidity provide the resources necessary for the Bank to fund the loan
commitments and to perform under standby letters of credit, if the need arises.
Neither the Company nor the Bank is involved in other off-balance sheet
contractual relationships or transactions that could result in liquidity needs
or other commitments or significantly impact earnings.
Item 3. - Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk is primarily related to the risk of loss
from adverse changes in market prices and rates. This risk arises principally
from interest rate risk inherent in the Company's lending, deposit gathering and
borrowing activities. Management actively monitors and manages its interest rate
risk exposure. Although the Company manages other risks, such as credit quality
and liquidity risk in the normal course of business, management considers
interest rate risk to be its most significant market risk and this risk could
potentially have the largest material effect on the Company's financial
condition and results of operations. Other types of market risk, such as
commodity price risk and foreign currency exchange risk, do not arise in the
normal course of the Company's community banking operations.
The Company uses a simulation model to assist in achieving consistent growth in
net interest income while managing interest rate risk. As of March 31, 2006, the
model indicates that net interest income would increase $67,000 and net income
would increase $41,000 in the next twelve months if interest rates rose by 100
basis points. Conversely, net interest income would decrease $67,000 and net
income would decrease $41,000 in the next twelve months if interest rates
declined by 100 basis points. In the current interest rate environment, it
appears unlikely that there will be any large changes in interest rates in the
immediate future. The prospective effects of hypothetical interest rate changes
are based on a number of assumptions, including the relative levels of market
interest rates and prepayment assumptions affecting loans, and should not be
relied on as indicative of actual future results. The prospective effects also
do not contemplate potential actions that the Company, its customers and the
issuers of its investment securities could undertake in response to changes in
interest rates.
As of March 31, 2006, there was no significant change from the interest rate
sensitivity analysis for the various changes in interest rates calculated as of
December 31, 2005. The foregoing disclosures related to the Company's market
risk should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations included in the 2005 Annual Report
on Form 10-K filed with the Securities and Exchange Commission.
Item 4. - Controls and Procedures
Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or
240.15d-15(b) of the issuer's disclosure controls and procedures (as defined in
17 C.F.R. Sections 240.13a-15(e) and 240.15d-15(e)), the issuer's chief
executive officer and chief financial officer concluded such controls and
procedures, as of the end of the period covered by this report, were effective.
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There has been no change in the Company's internal control over financial
reporting during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II - OTHER INFORMATION
Item 6. - Exhibits
Exhibits 31. Rule 13a-14(a)/15d-14(a) Certifications
32. Certifications Pursuant to 18 U.S.C. Section 1350
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMMUNITY FIRST BANCORPORATION
May 12, 2006 /s/ Frederick D. Shepherd, Jr.
----------------- --------------------------------------------
Date Frederick D. Shepherd, Jr., Chief Executive
Officer and Chief Financial Officer
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Exhibit Index
31. Rule 13a-14(a)/15d-14(a) Certifications
32. Certifications Pursuant to 18 U.S.C. Section 1350
17