UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 2009 Commission File No. 000-29640
COMMUNITY FIRST BANCORPORATION
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(Exact name of registrant as specified in its charter)
South Carolina 58-2322486
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
449 HIGHWAY 123 BYPASS
SENECA, SOUTH CAROLINA 29678
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(Address of principal executive offices, zip code)
(864) 886-0206
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant 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 whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Common Stock, no par
or stated value, 3,609,811 Shares Outstanding on November 1, 2009
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 .............. 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk ......................................... 25
Item 4T. Controls and Procedures ............................................................................ 26
PART II - OTHER INFORMATION
Item 6. Exhibits ........................................................................................... 26
SIGNATURE 27
2
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
COMMUNITY FIRST BANCORPORATION
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
2009 2008
---- ----
(Dollars in thousands, except per share)
Assets
Cash and due from banks ........................................................... $ 1,918 $ 9,204
Interest bearing balances due from banks .......................................... 23,661 12,969
Federal funds sold ................................................................ - 18,793
--------- ---------
Cash and cash equivalents ..................................................... 25,579 40,966
Securities available-for-sale ..................................................... 148,065 126,636
Securities held-to-maturity (fair value $10,070 for 2009
and $12,238 for 2008) ...................................................... 9,590 11,910
Other investments ................................................................. 1,307 1,220
Loans ............................................................................. 269,725 270,413
Allowance for loan losses ..................................................... (5,408) (5,475)
--------- ---------
Loans - net ................................................................ 264,317 264,938
Premises and equipment - net ...................................................... 8,539 8,655
Accrued interest receivable ....................................................... 2,742 2,776
Bank-owned life insurance ......................................................... 9,195 8,483
Foreclosed assets ................................................................. 3,862 706
Other assets ...................................................................... 2,327 3,183
--------- ---------
Total assets ............................................................... $ 475,523 $ 469,473
========= =========
Liabilities
Deposits
Noninterest bearing ........................................................... $ 44,451 $ 41,962
Interest bearing .............................................................. 373,343 374,153
--------- ---------
Total deposits ............................................................. 417,794 416,115
Short-term borrowings ............................................................. 1,710 -
Long-term debt .................................................................... 9,500 9,500
Accrued interest payable .......................................................... 2,322 3,045
Other liabilities ................................................................. 1,492 885
--------- ---------
Total liabilities .......................................................... 432,818 429,545
--------- ---------
Shareholders' equity
Preferred stock, Class A - non-voting, 5% cumulative - $1,000 per share
liquidation preference; 5,000 shares authorized;
None issued and outstanding ................................................... - -
Preferred stock - no par value; 9,995,000 shares authorized;
None issued and outstanding ................................................... - -
Common stock - no par value; 10,000,000 shares authorized;
issued and outstanding - 3,609,811 for 2009 and 3,564,279 for 2008 ............ 37,570 37,084
Additional paid-in capital ........................................................ 748 748
Retained earnings ................................................................. 2,992 1,769
Accumulated other comprehensive income (loss) ..................................... 1,395 327
--------- ---------
Total shareholders' equity ................................................. 42,705 39,928
--------- ---------
Total liabilities and shareholders' equity ................................. $ 475,523 $ 469,473
========= =========
See accompanying notes to unaudited consolidated financial statements.
3
COMMUNITY FIRST BANCORPORATION
Consolidated Statements of Income
(Unaudited)
Period Ended September 30,
Three Months Nine Months
------------ -----------
2009 2008 2009 2008
---- ---- ---- ----
(Dollars in thousands, except per share)
Interest income
Loans, including fees ................................... $ 4,214 $ 4,647 $ 12,460 $ 13,902
Interest bearing balances due from banks ................ 14 10 36 17
Securities
Taxable ............................................... 1,298 1,275 4,260 3,464
Tax-exempt ............................................ 201 209 612 623
Other investments ....................................... 3 14 3 39
Federal funds sold ...................................... - 81 3 584
-------- -------- -------- --------
Total interest income ............................... 5,730 6,236 17,374 18,629
-------- -------- -------- --------
Interest expense
Time deposits $100M and over ............................ 904 1,021 2,987 3,231
Other deposits .......................................... 1,709 1,885 5,282 6,323
Short-term borrowings ................................... - 8 - 8
Long-term debt .......................................... 93 92 275 179
-------- -------- -------- --------
Total interest expense .............................. 2,706 3,006 8,544 9,741
-------- -------- -------- --------
Net interest income .......................................... 3,024 3,230 8,830 8,888
Provision for loan losses .................................... 1,010 965 2,460 1,375
-------- -------- -------- --------
Net interest income after provision .......................... 2,014 2,265 6,370 7,513
-------- -------- -------- --------
Other income
Service charges on deposit accounts ..................... 377 374 1,048 1,109
ATM interchange and other fees .......................... 154 142 450 412
Net gains (losses) on sales of securities
available-for-sale .................................. - (3) 90 (3)
Credit life insurance commissions ....................... 3 5 12 12
Increase in value of bank-owned
life insurance ...................................... 91 94 274 280
Other income ............................................ 79 22 153 58
-------- -------- -------- --------
Total other income .................................. 704 634 2,027 1,868
-------- -------- -------- --------
Other expenses
Salaries and employee benefits .......................... 1,206 1,073 3,631 3,218
Net occupancy expense ................................... 132 135 401 384
Furniture and equipment expense ......................... 94 110 287 326
Amortization of computer software ....................... 112 85 319 241
ATM interchange and related expenses .................... 101 96 315 301
Directors' fees ......................................... 28 20 85 81
FDIC insurance assessment ............................... 165 58 535 128
Other expense ........................................... 459 361 1,247 1,151
-------- -------- -------- --------
Total other expenses ................................ 2,297 1,938 6,820 5,830
-------- -------- -------- --------
Income before income taxes ................................... 421 961 1,577 3,551
Income tax expense ........................................... 101 252 354 1,037
-------- -------- -------- --------
Net income ................................................... $ 320 $ 709 $ 1,223 $ 2,514
======== ======== ======== ========
Per share*
Net income .............................................. $ 0.09 $ 0.20 $ 0.34 $ 0.71
Net income, assuming dilution ........................... 0.09 0.19 0.34 0.68
--------
* Per share information has been retroactively adjusted to reflect a 5% stock
dividend effective December 20, 2008.
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, 2008 ................................. 3,324,105 $ 35,009 $ 681 $ 2,140 $ 80 $ 37,910
---------
Comprehensive income:
Net income ........................................... - - - 2,514 - 2,514
---------
Unrealized holding gains and (losses)
on available-for-sale securities arising
during the period, net of income taxes of $1 ....... - - - - (1) (1)
Reclassification adjustment for losses (gains)
realized in income, net of income taxes of $1 ...... - - - - 2 2
---------
Total other comprehensive income (loss) .......... 1
---------
Total comprehensive income ..................... - - - - - 2,515
---------
Exercise of employee stock options ....................... 70,768 365 - - - 365
--------- --------- --------- --------- --------- ---------
Balance, September 30, 2008 .............................. 3,394,873 $ 35,374 $ 681 $ 4,654 $ 81 $ 40,790
========= ========= ========= ========= ========= =========
Balance, January 1, 2009 ................................. 3,564,279 $ 37,084 $ 748 $ 1,769 $ 327 $ 39,928
---------
Comprehensive income:
Net income ........................................... - - - 1,223 - 1,223
---------
Unrealized holding gains and (losses)
on available-for-sale securities arising
during the period, net of income taxes of $630 ..... - - - - 1,126 1,126
Reclassification adjustment for losses (gains)
realized in income, net of income taxes of $32 ..... - - - - (58) (58)
---------
Total other comprehensive income (loss) .......... 1,068
---------
Total comprehensive income ..................... - - - - - 2,291
---------
Exercise of employee stock options ....................... 45,532 486 - - - 486
--------- --------- --------- --------- --------- ---------
Balance, September 30, 2009 .............................. 3,609,811 $ 37,570 $ 748 $ 2,992 $ 1,395 $ 42,705
========= ========= ========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
5
COMMUNITY FIRST BANCORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-------------
2009 2008
---- ----
(Dollars in thousands)
Operating activities
Net income ............................................................................ $ 1,223 $ 2,514
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses ...................................................... 2,460 1,375
Depreciation ................................................................... 293 316
Amortization of net loan (fees) and costs ...................................... (105) (147)
Securities accretion and premium amortization .................................. 576 45
Net (gains) losses on sales of securities available-for-sale ................... (90) 3
Net (gains) losses on sales of foreclosed assets ............................... (4) 6
Increase in value of bank-owned life insurance ................................. (274) (280)
Decrease (increase) in interest receivable ..................................... 34 (28)
Decrease in interest payable ................................................... (723) (1,569)
Decrease in prepaid expenses and other assets .................................. 258 29
Increase in other accrued expenses ............................................. 610 551
--------- ---------
Net cash provided by operating activities .................................. 4,258 2,815
--------- ---------
Investing activities
Purchases of available-for-sale securities ............................................ (121,643) (55,484)
Purchases of securities held-to-maturity .............................................. - (7,490)
Maturities, calls and paydowns of securities available-for-sale ....................... 95,545 34,204
Maturities, calls and paydowns of securities held-to-maturity ......................... 2,316 848
Proceeds of sales of securities available-for-sale .................................... 5,853 9,732
Purchases of other investments ........................................................ (125) (380)
Proceeds from sales of other investments .............................................. 38 -
Net increase in loans made to customers ............................................... (5,105) (23,242)
Purchases of premises and equipment ................................................... (177) (386)
Proceeds of sale of foreclosed assets ................................................. 463 34
Additional investments in foreclosed assets ........................................... (244) -
Proceeds of redemption of bank-owned life insurance ................................... 1,062 -
Investment in bank-owned life insurance ............................................... (1,500) (1,000)
--------- ---------
Net cash used by investing activities ...................................... (23,517) (43,164)
--------- ---------
Financing activities
Net decrease in demand deposits, interest
bearing transaction accounts and savings accounts ................................. (14,506) (8,289)
Net increase in certificates of deposit and other
time deposits ..................................................................... 16,185 36,144
Net increase in short-term borrowings ................................................. 1,710 1,500
Proceeds from issuing long-term debt .................................................. - 6,000
Repayments of long-term debt .......................................................... - (1,000)
Cash paid in lieu of issuing fractional shares ........................................ (3) -
Exercise of employee stock options .................................................... 486 365
--------- ---------
Net cash provided by financing activities .................................. 3,872 34,720
--------- ---------
Decrease in cash and cash equivalents ...................................................... (15,387) (5,629)
Cash and cash equivalents, beginning ....................................................... 40,966 34,673
--------- ---------
Cash and cash equivalents, ending .......................................................... $ 25,579 $ 29,044
========= =========
See accompanying notes to unaudited consolidated financial statements.
6
COMMUNITY FIRST BANCORPORATION
Consolidated Statements of Cash Flows - continued
(Unaudited)
Nine Months Ended
September 30,
-------------
2009 2008
---- ----
(Dollars in thousands)
Supplemental Disclosure of
Cash Flow Information Cash paid during the year for:
Interest ...................................................................... $ 9,267 $11,310
Income taxes .................................................................. 27 1,240
Net transfers from loans to foreclosed assets ..................................... 3,371 -
Noncash investing and financing activities:
Other comprehensive income .................................................... 1,068 1
See accompanying notes to unaudited consolidated financial statements.
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, 2008 filed with the Securities and Exchange
Commission. Certain amounts in the 2008 financial statements have been
reclassified to conform to the current presentation. Such reclassifications had
no effect on net income or retained earnings for any period. All dollar amounts
are stated in thousands, except per share.
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.
Investment Securities - The following table presents information about amortized
cost, unrealized gains, unrealized losses and estimated fair values of
securities:
7
September 30, 2009
------------------
Gross Gross
Unrealized Unrealized Estimated
Amortized Holding Holding Fair
Cost Gains Losses Value
---- ----- ------ -----
(Dollars in thousands)
Available-for-sale
Mortgage-backed securities
issued by US Government agencies .............. $ 1,520 $ 53 $ - $ 1,573
Government sponsored
enterprises (GSEs) ............................ 89,310 908 406 89,812
Mortgage-backed securities
issued by GSEs ................................ 35,532 1,111 2 36,641
State, county and municipal ........................ 19,527 597 85 20,039
-------- -------- -------- --------
Total ................................... $145,889 $ 2,669 $ 493 $148,065
======== ======== ======== ========
Held-to-maturity
Mortgage-backed securities
issued by US Government agencies .............. $ - $ - $ - $ -
Government sponsored enterprises ................... - - - -
Mortgage-backed securities
issued by GSEs ................................ 9,590 480 - 10,070
State, county and municipal ........................ - - - -
-------- -------- -------- --------
Total ................................... $ 9,590 $ 480 $ - $ 10,070
======== ======== ======== ========
The amortized cost and estimated fair value of securities by contractual
maturity are shown below:
September 30, 2009
------------------
Available-for-sale Held-to-maturity
------------------ ----------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
(Dollars in thousands)
Due within one year .................................... $ 2,506 $ 2,542 $ - $ -
Due after one through five years ....................... 11,321 11,421 - -
Due after five through ten years ....................... 41,584 41,759 - -
Due after ten years .................................... 53,426 54,129 - -
-------- -------- -------- --------
108,837 109,851 - -
Mortgage-backed securities issued by:
US Government agencies .............................. 1,520 1,573 - -
GSEs ................................................ 35,532 36,641 9,590 10,070
-------- -------- -------- --------
Total ............................................... $145,889 $148,065 $ 9,590 $ 10,070
======== ======== ======== ========
The estimated fair values and gross unrealized losses of all of the Company's
investment securities whose estimated fair values were less than amortized cost
as of September 30, 2009 which had not been determined to be
other-than-temporarily impaired are presented below. The Company evaluates all
available-for-sale securities and all held-to-maturity securities for impairment
as of each balance sheet date. The securities have been segregated in the table
by investment category and the length of time that individual securities have
been in a continuous unrealized loss position.
8
September 30, 2009
------------------
Continuously in Unrealized Loss Position for a Period of
--------------------------------------------------------
Less than 12 Months 12 Months or more Total
------------------- ----------------- -----
Estimated Unrealized Estimated Unrealized Estimated Unrealized
Fair Value Loss Fair Value Loss Fair Value Loss
---------- ---- ---------- ---- ---------- ----
(Dollars in thousands)
Available-for-sale
US Government agencies ................... $ - $ - $ - $ - $ - $ -
Government-sponsored
enterprises (GSEs) ..................... 20,928 406 - - 20,928 406
Mortgage-backed securities
issued by GSEs ......................... 3,047 2 - - 3,047 2
State, county and
municipal securities ................... 1,329 85 - - 1,329 85
------- ------- ------ ------ ------- -------
Total .................... $25,304 $ 493 $ - $ - $25,304 $ 493
======= ======= ====== ====== ======= =======
Held-to-maturity
GSEs ..................................... $ - $ - $ - $ - $ - $ -
------- ------- ------ ------ ------- -------
Total .................... $ - $ - $ - $ - $ - $ -
======= ======= ====== ====== ======= =======
As of September 30, 2009, 22 securities had been continuously in an unrealized
loss position for less than 12 months and no securities had been continuously in
an unrealized loss position for 12 months or more. The Company does not consider
these investments to be other-than-temporarily impaired because the unrealized
losses involve primarily issuances of government-sponsored enterprises and
state, county and municipal government issuers. The Company also believes that
the impairments resulted from current credit market disruptions, and notes that
there have been no failures by the issuers to remit periodic interest payments
as required nor is the Company aware that any such issuer has given notice that
it expects that it will be unable to make any such future payment according to
the terms of the bond indenture. Although the Company classifies a majority of
its investment securities as available-for-sale, management has not determined
that any specific securities will be disposed of prior to maturity and believes
that the Company has both the ability and the intent to hold those investments
until a recovery of fair value, including until maturity. Furthermore, the
Company does not believe that it will be required to sell any such securities
prior to recovery of the unrealized losses. Substantially all of the state,
county and municipal securities were rated at least "investment grade" by either
S&P or Moody's, or both, as of September 30, 2009.
The Company's subsidiary bank is a member of the Federal Home Loan Bank of
Atlanta ("FHLB") and, accordingly, is required to own restricted stock in that
institution in amounts that may vary from time to time. Because of the
restrictions imposed, the stock may not be sold to other parties, but is
redeemable by the FHLB at the same price as that at which it was acquired by the
Company's subsidiary. The Company evaluates this security for impairment based
on the probability of ultimate recoverability of the par value of the
investment. No impairment has been recognized based on this evaluation.
During the first nine months of 2009, the Company sold 3 available-for-sale
securities for gross sales proceeds of $5,853. Gross realized gains resulting
from these sales totaled $90. There were no transfers of available-for-sale
securities to other categories in the 2009 nine-month period.
Nonperforming Loans - As of September 30, 2009, there were $14,884 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. Outstanding stock
options were not dilutive for either the three month or nine month periods
ending September 30, 2009. All 2008 per share information has been retroactively
adjusted to give effect to a 5% stock dividend effective December 20, 2008. Net
income per share and net income per share, assuming dilution, were computed as
follows:
9
(Unaudited)
Period Ended September 30,
--------------------------
Three Months Nine Months
------------ -----------
2009 2008 2009 2008
----- ----- ----- ----
(Dollars in thousands, except per share amounts)
Net income per share, basic
Numerator - net income ..................................... $ 320 $ 709 $ 1,223 $ 2,514
========= ========== ========= ==========
Denominator
Weighted average common shares
issued and outstanding ................................. 3,609,811 3,564,617 3,601,515 3,534,926
========= ========== ========= ==========
Net income per share, basic ............................ $ .09 $ .20 $ .34 $ .71
========= ========== ========= ==========
Net income per share, assuming dilution
Numerator - net income ..................................... $ 320 $ 709 $ 1,223 $ 2,514
========= ========== ========= ==========
Denominator
Weighted average common shares
issued and outstanding ................................. 3,609,811 3,564,617 3,601,515 3,534,926
Effect of dilutive stock options ......................... - 130,249 - 168,635
--------- ---------- --------- ----------
Total shares .................................. 3,609,811 3,694,866 3,601,515 3,703,561
========= ========== ========= ==========
Net income per share, assuming dilution ................ $ .09 $ .19 $ .34 $ .68
========= ========== ========= ==========
Shareholders' Equity
On April 28, 2009, the Corporation's Board of Directors adopted an amendment to
the Corporation's Articles of Incorporation for which shareholder approval was
not required. As a result of this amendment, a "Series A" of the Corporation's
Preferred Stock with a liquidation amount of $1,000 per share was created.
Series A consists of 5,000 shares of fixed rate cumulative perpetual preferred
stock which shares, except in certain very limited circumstances, have no voting
rights. Upon issuance, such preferred stock would accrue dividends at a rate of
5.00% per annum. Cumulative dividends would be payable on each February 15, May
15, August 15 and November 15, if declared by the Corporation's Board of
Directors. No dividends may be declared and paid on other stock issuances, nor
may the Company effect any plan to purchase, redeem or otherwise acquire any
issue of stock that is subordinate to the Series A Preferred Stock, including
the Company's outstanding Common Stock, unless all cumulative dividends due on
the Series A Preferred Stock have been paid in their entirety.
Unless previously called for redemption, each outstanding share of Series A
Preferred Stock would be convertible into 100 shares of the Company's Common
Stock after June 17, 2019. If the Corporation calls the Series A Preferred Stock
for redemption prior to that date, each outstanding share would be convertible
into 100 shares of the Corporation's common stock until the second business day
preceding the redemption date. The conversion ratio would be adjusted for any
stock dividends declared and payable on the Corporation's Common Stock and for
any stock splits or reverse stock splits applicable thereto.
No shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A are
issued and outstanding as of September 30, 2009; however, the Company has
received cash deposits totaling $1,710 which the depositors intend to be applied
toward the Company's issuance of $3,000 of the Series A preferred stock. The
Company is accumulating deposits and paying interest at the rate of 5.00% per
annum until all of the investors who committed to purchase such preferred stock
have submitted funds sufficient to purchase the number of shares they committed
to purchase. Once all funds are received, the Company will immediately issue the
preferred stock. If the investors fail to deposit an aggregate of $3,000 by
December 31, 2009, the entire amount of the accumulated deposits and the related
interest will be returned to the depositors.
Fair Value Measurements - Fair value is defined as the price that would be
received to sell an asset or paid to transfer a liability in an orderly fashion
between market participants at the measurement date. A three-level hierarchy is
used for fair value measurements based upon the transparency of inputs to the
valuation of an asset or liability as of the measurement date. In developing
estimates of the fair values of assets and liabilities, no consideration of
10
large position discounts for financial instruments quoted in active markets is
allowed. However, an entity is required to consider its own creditworthiness
when valuing its liabilities. For disclosure purposes, fair values for assets
and liabilities are shown in the level of the hierarchy that correlates with the
lowest level input that is significant to the fair value measurement in its
entirety.
The three levels of the fair value input hierarchy are described as follows:
Level 1 inputs reflect quoted prices in active markets for identical assets or
liabilities.
Level 2 inputs reflect observable inputs that may consist of quoted market
prices for similar assets or liabilities, quoted prices that are not in an
active market, or other inputs that are observable in the market and can be
corroborated by observable market data for substantially the full term of the
assets or liabilities being valued.
Level 3 inputs reflect the use of pricing models and/or discounted cash flow
methodologies using other than contractual interest rates or methodologies that
incorporate a significant amount of management judgment, use of the entity's own
data, or other forms of unobservable data.
The following is a summary of the measurement attributes applicable to financial
assets and liabilities that are measured at fair value on a recurring basis:
Fair Value Measurement at Reporting Date Using
----------------------------------------------
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
Description September 30, 2009 (Level 1) (Level 2) (Level 3)
----------- ------------------ --------- --------- ---------
(Dollars in thousands)
Securities available-for-sale ............ $ 4,000 $ 144,065 $ -
Pricing for the Company's securities available-for-sale is obtained from an
independent third-party that uses a process that may incorporate current market
prices, benchmark yields, broker/dealer quotes, issuer spreads, two-sided
markets, benchmark securities, bids, offers, other reference data and industry
and economic events that a market participant would be expected to use in
valuing the securities. Not all of the inputs listed apply to each individual
security at each measurement date. The independent third party assigns specific
securities into an "asset class" for the purpose of assigning the applicable
level of the fair value hierarchy used to value the securities.
Available-for-sale securities continue to be measured at fair value with
unrealized gains and losses, net of income taxes, recorded in other
comprehensive income.
In February 2008, the Financial Accounting Standards Board Staff issued FASB
Staff Position No. FAS 157-2 (now codified as FASB Accounting Standards
Codification ("FASB ASC") 820-10-15-1a) which delayed for one year the effective
date of the application of disclosure requirements of nonfinancial assets and
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually). Accordingly,
the Company has not provided the fair value disclosure requirements of FASB ASC
820-10-50-5 in periods ending prior to March 31, 2009.
The following is a summary of the measurement attributes applicable to assets
and liabilities that were measured at fair value on a non-recurring basis during
the periods indicated and that remained outstanding at the end of the period:
11
Fair Value Measurement at Reporting Date Using
----------------------------------------------
Quoted Prices
in Active Significant
Markets for Other Significant Total Gains (Losses)
Identical Observable Unobservable --------------------
Assets Inputs Inputs Three Nine
Description September 30, 2009 (Level 1) (Level 2) (Level 3) Months Months
----------- ------------------ --------- --------- --------- ------ ------
(Dollars in thousands)
Collateral-dependent impaired loans $ - $ 1,644 $ - $ (542) $(1,074)
U. S. Generally Accepted Accounting Principles require disclosure of the
estimated fair value of certain on-balance sheet and off-balance sheet financial
instruments and the methods and assumptions used to estimate their fair values.
A financial instrument is defined as cash, evidence of an ownership interest in
an entity or a contract that creates a contractual obligation or right to
deliver or receive cash or another financial instrument from a second entity on
potentially favorable or unfavorable terms. Financial instruments that are not
carried at fair value on the Consolidated Balance Sheets are discussed below.
Certain financial instruments and all nonfinancial instruments are excluded from
the scope of these disclosure requirements. Accordingly, these fair value
disclosures do not provide a complete estimate of the Company's fair value.
For cash and due from banks, interest bearing deposits due from banks and
federal funds sold, the carrying amount approximates fair value because these
instruments generally mature in 90 days or less. The carrying amounts of accrued
interest receivable or payable approximate fair values.
The fair value of held-to-maturity mortgage-backed securities issued by
Government sponsored enterprises is estimated based on dealers' quotes for the
same or similar securities.
The fair value of FHLB stock is estimated at its cost because the FHLB
historically has redeemed its outstanding stock at that value.
Fair values are estimated for loans using discounted cash flow analyses, using
interest rates currently offered for loans with similar terms and credit
quality. The Company does not engage in originating, holding, guaranteeing,
servicing or investing in loans where the terms of the loan product give rise to
a concentration of credit risk.
The fair value of deposits with no stated maturity (noninterest bearing demand,
interest bearing transaction accounts and savings) is estimated as the amount
payable on demand, or carrying amount, as required by SFAS No. 157. The fair
value of time deposits is estimated using a discounted cash flow calculation
that applies rates currently offered to aggregate expected maturities.
The fair values of the Company's short-term borrowings, if any, approximate
their carrying amounts.
The fair values of fixed rate long-term debt instruments are estimated using
discounted cash flow analyses, based on the borrowing rates currently in effect
for similar borrowings. The fair values of variable rate long-term debt
instruments are estimated at the carrying amount.
The estimated fair values of off-balance-sheet financial instruments such as
loan commitments and standby letters of credit are generally based upon fees
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the counterparties' creditworthiness. The vast
majority of the banking subsidiary's loan commitments do not involve the
charging of a fee, and fees associated with outstanding standby letters of
credit are not material. For loan commitments and standby letters of credit, the
committed interest rates are either variable or approximate current interest
rates offered for similar commitments. Therefore, the estimated fair values of
these off-balance-sheet financial instruments are nominal.
The following is a summary of the carrying amounts and estimated fair values of
the Company's financial assets and liabilities:
12
September 30, 2009
------------------
Carrying Estimated
Amount Fair Value
------ ----------
(Dollars in thousands)
Financial assets
Cash and due from banks ......................... $ 1,918 $ 1,918
Interest bearing deposits due from banks ........ 23,661 23,661
Securities available-for-sale ................... 148,065 148,065
Securities held-to-maturity ..................... 9,590 10,070
Federal Home Loan Bank stock .................... 1,307 1,307
Loans - net ..................................... 264,317 262,851
Accrued interest receivable ..................... 2,742 2,742
Financial liabilities
Deposits ........................................ 417,794 417,807
Accrued interest payable ........................ 2,322 2,322
Short-term borrowing ............................ 1,710 1,710
Long-term debt .................................. 9,500 9,516
The following is a summary of the notional or contractual amounts and estimated
fair values of the Company's off-balance sheet financial instruments:
September 30, 2009
------------------
Notional/ Estimated
Contract Fair
Amount Value
------ -----
(Dollars in thousands)
Off-balance sheet commitments
Loan commitments ................................. $19,373 $ -
Standby letters of credit ........................ 1,268 -
Subsequent Events - The Company has evaluated events subsequent to the balance
sheet date through November __, 2009, which is the date that the financial
statements were issued.
Subsequent events may either provide additional evidence about conditions that
existed at the balance sheet date, including estimates inherent in the process
of preparing financial statements (recognized subsequent events), or provide
evidence about conditions that did not exist at the balance sheet date but arose
after the balance sheet date but before the financial statements were issued
(nonrecognized subsequent events). The effects of recognized subsequent events,
if any, have been included in the financial statements. If the effects of
nonrecognized subsequent events, if any, are of a nature that they must be
disclosed to keep the financial statements from being misleading, the Company
would disclose both the nature of the event, an estimate of its financial effect
or would state that an estimate of the financial effect cannot be made. As of
September 30, 2009, there were no nonrecognized subsequent events that required
disclosure.
New Accounting Pronouncements - Accounting principles generally accepted in the
United States recently have been reorganized into a consistent framework, the
"Financial Accounting Standards Board Accounting Standards Codification," or
"FASB ASC," which is now the source of authoritative accounting literature.
References to accounting standards will now be based on a structure of Topic -
Subtopic - Section - Paragraph. In the future, the FASB will issue Accounting
Standards Updates ("ASU"s) which will not be authoritative in their own right,
but will serve only to update the Codification, provide background information
about the guidance, and provide the reasons that the FASB has made the changes.
In December 2008 the FASB issued FASB Staff Position ("FSP") SFAS 132(R)-1 (FASB
ASC 715-20-65), "Employers' Disclosures about Postretirement Benefit Plan
Assets," ("FSP SFAS 132(R)-1"). This FSP provides guidance on an employer's
disclosures about plan assets of a defined benefit pension or other
postretirement plan. The objective of the FSP is to provide the users of
financial statements with an understanding of: (a) how investment allocation
decisions are made, including the factors that are pertinent to an understanding
of investment policies and strategies; (b) the major categories of plan assets;
(c) the inputs and valuation techniques used to
13
measure the fair value of plan assets; (d) the effect of fair value measurements
using significant unobservable inputs (Level 3) on changes in plan assets for
the period; and (e) significant concentrations of risk within plan assets. The
FSP also requires a nonpublic entity, as defined in Statement of Financial
Accounting Standard ("SFAS") 132, to disclose net periodic benefit cost for each
period for which a statement of income is presented. FSP SFAS 132(R)-1 is
effective for fiscal years ending after December 15, 2009. The Staff Position
will require the Company to provide additional disclosures related to its
benefit plans.
In August, 2009, ASU 2009-5 "Measuring Liabilities at Fair Value" was issued.
This ASU amends FASB ASC Topic 820 "Fair Value Measurement and Disclosures" and
is intended to reduce ambiguity when measuring the fair value of liabilities
which will lead to improved understanding of how such fair values were measured
and improve consistency in the application of Topic 820. The Company is required
to apply this Update for reporting periods beginning after September 30, 2009.
The requirements of the Update relate to disclosure items only and will have no
effect on the Company's financial position, results of operations or cash flows.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies are not expected to have a material impact on the
Company's financial position, results of operations or cash flows.
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
forward-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 and disruptions 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 capital adequacy;
o the failure of assumptions underlying the establishment of the
allowance for loan losses and other estimates, including the
value of collateral securing loans;
o ability to weather the current economic downturn;
o loss of consumer or investor confidence;
o availability of liquidity sources;
o the risks of opening new offices, including, without limitation,
the related costs and time of building customer relationships and
integrating operations as part of these endeavors and the failure
to achieve expected gains, revenue growth and/or expense savings
from such endeavors;
14
o changes in laws and regulations, including tax, banking and
securities laws and regulations;
o changes in accounting policies, rules and practices;
o changes in technology or products may be more difficult or
costly, or less effective, than anticipated;
o the effects of war or other conflicts, acts of terrorism or other
catastrophic events that may affect general economic conditions
and economic confidence; and
o other factors and information described in this report and in any
of the other reports that we file with the Securities and
Exchange Commission under the Securities Exchange Act of 1934.
All forward-looking statements are expressly qualified in their
entirety by this cautionary notice. The Company has no obligation, and does not
undertake, to update, revise or correct any of the forward-looking statements
after the date of this report. The Company has expressed its expectations,
beliefs and projections in good faith and believes they have a reasonable basis.
However, there is no assurance that these expectations, beliefs or projections
will result or be achieved or accomplished.
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations (Dollar amounts, except per share data, are in
thousands)
Changes in Financial Condition
During the first nine months of 2009, the Company focused its efforts on
monitoring the performance of its portfolio of loans outstanding and maintaining
contact with its loan and deposit customers. For the 2009 nine month period,
loans decreased by $688, or .3%, securities available-for-sale increased by
$21,429, or 16.9%, and securities held-to-maturity decreased by $2,320. Federal
funds sold decreased by $18,793, or 100.0%. The potential for growth in loans
outstanding during the first nine months of 2009 was constrained by several
factors. Economic conditions in the Company's market area deteriorated
significantly, primarily as a result of ongoing reductions in real estate values
both locally and nation-wide. Those lower values have resulted, and are
continuing to result, in a significant contraction in the amount of "lendable
margin" available to potential borrowers. When collateral is required to be
provided as a condition to the Company engaging in a loan transaction with a
borrower, the borrower generally is expected to have or establish an equity
interest in the collateral. The extent of the bank's interest in the collateral,
or "lendable margin," may vary depending on the other terms and conditions of
the loan, the borrower's financial condition and other factors. However, the
Company has generally established certain percentage levels of the collateral
value at the time the loan is made as the amount of the required "lendable
margin." Recently, as the value of real estate has generally fallen in the
Company's market area, collateral values have fallen to levels that may be less
than the amount owed on the loans. Furthermore, lower real estate values
decrease the amounts that potential borrowers will be able to borrow currently,
based on those decreased values. This diminished ability to borrow against real
estate collateral has contributed to lower consumption of goods and services in
the Company's market areas. Commercial customers, despite the slower current
business environment, are obligated to continue making payments on debts
contracted for during better economic periods. Because of the resulting
"squeeze," a growing number of commercial customers are finding it impossible to
remain in business. This potentially affects the Company on at least two levels
- the business and some of its displaced workers may stop making payments on
their loans. Accordingly, the Company has experienced increasing numbers and
amounts of non-performing loans, has taken possession of several real properties
and some personal property, and has experienced a significant increase in net
charge-offs. The Company expects that it will continue to experience higher than
normal levels of non-performing loans, increasing amounts of foreclosed assets,
and higher net charge-offs for at least the remainder of 2009 and probably into
the second or third quarter of 2010. Management anticipates, however, that the
rate of increase in each of these areas will decrease as time progresses.
Deposits increased by $1,679 during the first nine months of 2009. The
Company opted out of the recently extended Federal Deposit Insurance
Corporation's Transaction Account Guarantee program under which unlimited
insurance coverage for certain transaction account deposits would have been
provided until June 30, 2010. Such deposits will revert to the $250,000
insurance limit after December 31, 2009. Nevertheless, the Company believes that
its liquidity position continues to provide it with sufficient flexibility to
fund good quality loan requests or make investments in securities at attractive
yields, and to meet normal demands for deposit withdrawals by its customers.
Management also believes that the current balance sheet position maintains the
Company's exposures to changes in interest rates at acceptable levels.
Results of Operations
Three Months Ended September 30, 2009 and 2008
15
The Company recorded consolidated net income of $320 or $.09 per share
for the third quarter of 2009 compared with net income of $709 and earnings per
share of $.20 for the third quarter of 2008. Net income per share, assuming
dilution was $.09 for the 2009 quarter and $.19 for the 2008 period. Net income
per share amounts for 2008 have been retroactively adjusted to reflect a five
percent stock dividend effective December 20, 2008.
Interest income for the third quarter of 2009 decreased by $506 from
the same period of 2008 primarily due to lower rates earned on loans and taxable
investment securities. Interest rates associated with loans are lower in the
2009 period due to two factors: (1) the effects of the Federal Reserve's
monetary policy which is keeping interest rates at historically low levels and
(2) higher amounts of non-accrual loans. When a loan is placed on nonaccrual
status, all income earned but not collected is reversed against income in the
current period and no further income is recognized unless and until certain
strict conditions are achieved. During the third quarter of 2009, approximately
$201 of previously recorded income was reversed at the time loans were placed in
nonaccrual status.
The continuing low interest rate environment also is responsible, to a
significant degree, for continuing calls and prepayments of investment
securities because it is often advantageous for the issuer of securities to
retire a bond issue and replace it with an issue that bears interest at a lower
rate. To mitigate the effects of these actions on its investment yields, the
Company must either extend the maturity of the bonds it holds, invest in
lower-quality bonds (which generally carry higher interest rates), or both.
However, regulatory constraints do not allow the Company to fully utilize these
methods.
No interest was earned on federal funds sold during the 2009
three-month period because no such amounts were outstanding. The Company
recorded $81 of interest income on federal funds sold during the third quarter
of 2008. The Company currently maintains its excess cash reserves on deposit at
the Federal Reserve Bank, which pays only a nominal interest rate on such
deposits.
Interest expense for the third quarter of 2009 was $300 lower than for
the same prior year period due primarily to lower rates paid. A systemic problem
became apparent in the third quarter of 2008 whereby some depositors, who were
extremely concerned about maximizing the deposit insurance coverage for their
funds, diversified those funds among several federally-insured financial
institutions to ensure safety of principal. To mitigate those depositors' risks
and to reduce the associated costs, the FDIC implemented its Transaction Account
Guarantee program which provides unlimited deposit insurance coverage for
transaction deposit accounts that meet certain criteria. As a result of its
participation in this program, the Company is limited in the interest rates that
it can pay with respect to transaction accounts. Other companies that
participate in the program are similarly limited. The Company does not intend to
increase the rates it pays on the deposits that are currently covered by this
program when its participation ends.
The Company increased the provision for loan losses to $1,010 for the
third quarter of 2009 from $965 for the same period of 2008. Factors that
management considered when determining the amount to be provided for loan losses
included high volumes of nonaccrual, past due and potential problem loans,
higher charge-offs taken during the quarter, and lower property values in the
local real estate markets.
Noninterest income for the third quarter of 2009 increased by $70 over
the same 2008 period primarily due to higher fees earned on mortgage loans
originated for another financial institution and higher amounts of card-related
transaction fees earned.
Noninterest expenses for the 2009 period increased primarily due to
higher salaries and wages expenses, higher professional services expenses,
higher expenses associated with foreclosed assets, and higher expenses for FDIC
insurance. Income tax expense is lower for 2009 due to lower amounts of taxable
income.
16
Summary Income Statement
------------------------
(Dollars in thousands)
For the Three Months Ended September 30, 2009 2008 Dollar Change Percentage Change
---- ---- ------------- -----------------
Interest income ................................... $5,730 $6,236 $ (506) -8.1%
Interest expense .................................. 2,706 3,006 (300) -10.0%
------ ------ ------
Net interest income ............................... 3,024 3,230 (206) -6.4%
Provision for loan losses ......................... 1,010 965 45 4.7%
Noninterest income ................................ 704 634 70 11.0%
Noninterest expenses .............................. 2,297 1,938 359 18.5%
Income tax expense ................................ 101 252 (151) -59.9%
------ ------ ------
Net income ........................................ $ 320 $ 709 $ (389) -54.9%
====== ====== ======
Nine Months Ended September 30, 2009 and 2008
The Company recorded consolidated net income of $1,223 or $.34 per
share for the first nine months of 2009 compared with net income of $2,514 and
earnings per share of $.71 for the same period of 2008. Net income per share,
assuming dilution was $.34 for the 2009 nine months and $.68 for the same period
of 2008. Net income per share amounts for 2008 have been retroactively adjusted
to reflect a five percent stock dividend effective December 20, 2008.
Lower amounts of interest income and interest expense for the 2009
period primarily reflect the lower interest rate environment currently
prevailing. The average rate earned on loans in the 2009 period is 116 basis
points lower than the rate earned in the 2008 year-to-date period. In addition
to the lower interest rates related to general economic conditions, interest
income from loans is negatively affected by the higher levels of nonaccrual
loans in the 2009 period. The Company's investment securities on average earned
54 basis points less in the 2009 nine-month period than they did the 2008
period.
The Company increased the provision for loan losses significantly
during the 2009 nine-month period in response to deteriorating general economic
conditions and because of specific problems related to individual borrowers and
groups of borrowers. The well-publicized problems in the residential housing
markets are contributing factors affecting the Company's loan customers.
Noninterest income for the 2009 nine month period was $159 more than
for the same period of 2008 primarily due to $90 of net gains on the sales of
investment securities in the 2009 period compared with net losses on such sales
of $3 in the 2008 period, and an increase of $100 in the amount of fees received
to originate mortgage loans for another financial institution.
Noninterest expenses for the 2009 period increased by $990 over the
prior year amount. Salaries and employee benefits for the 2009 nine month period
were $413 more than for the same prior year period primarily due to an increase
of $322 in salaries and wages. Professional services expenses increased by $79
primarily reflecting higher legal expenses incurred in connection with
initiatives expected to bolster the Company's capital position. The Company's
FDIC insurance expense for the 2009 period increased by $407, or 318%, over the
amount for the 2008 year-to-date period due to higher assessment rates imposed
by the FDIC and due to the Company's participation in the FDIC's Transaction
Account Guarantee Program. The FDIC has voted to require that insured depository
institutions prepay their estimated assessments for each of the years 2010 -
2012. The Company will recognize the related expenses ratably over the
three-year period. Higher expenses related to larger volumes of foreclosed
assets were also recorded in the 2009 period.
17
Summary Income Statement
------------------------
(Dollars in thousands)
For the Nine Months Ended September 30, 2009 2008 Dollar Change Percentage Change
---- ---- ------------- -----------------
Interest income ................................... $ 17,374 $ 18,629 $ (1,255) -6.7%
Interest expense .................................. 8,544 9,741 (1,197) -12.3%
------------- ------------- ------------
Net interest income ............................... 8,830 8,888 (58) -0.7%
Provision for loan losses ......................... 2,460 1,375 1,085 78.9%
Noninterest income ................................ 2,027 1,868 159 8.5%
Noninterest expenses .............................. 6,820 5,830 990 17.0%
Income tax expense ................................ 354 1,037 (683) -65.9%
------------- ------------- -------------
Net income ........................................ $ 1,223 $ 2,514 $ (1,291) -51.4%
============= ============= =============
Net Interest Income
Net interest income, the principal source of the Company's earnings,
was lower in both the 2009 three month and nine month periods. The deterioration
of real estate markets that began in other areas of the country more than one
year ago is now evident within the Company's market. Primarily because of
constrained demand for residential properties, some developers and builders are
finding it difficult or impossible to satisfy their obligations except by
surrendering, either voluntarily or involuntarily through foreclosure, the
properties that were pledged to secure their loans. As a consequence, property
values have fallen due to related conditions such as oversupply of unsold
housing units and the physical deterioration that sometimes occurs during
prolonged sales periods. In some cases, individual homes or entire development
projects have been only partially completed when the builders or developers
suspended work and left completion of the project in the hands of lenders.
Recently, governmental economic policy makers including Congress, the
Federal Reserve and the Department of the Treasury have endeavored to enact
legislation, promulgate regulations and implement strategies intended to provide
stimulus to the economy by creating jobs, maintaining interest rates at low
levels and through the provision of other incentives, such as tax credits for
first-time home buyers or for the purchase and installation of energy-efficient
residential heating and cooling systems and other energy efficient and
alternative energy projects. To date, the observable effects of these measures
on the broad economy have been minimal.
Three Months Ended September 30, 2009 and 2008
For the third quarter of 2009, net interest income totaled $3,024, a
decrease of $206 from $3,230 for the same period of 2008. The Company's interest
rate spread for the third quarter of 2009 was 2.28%, a decrease of 40 basis
points from the 2.68% interest rate spread for the third quarter of 2008. Net
yield on earning assets for the 2009 third quarter was 2.68%, a decrease of 50
basis points from the 2008 third quarter net yield of 3.18%. The yield on
taxable investment securities for the third quarter of 2009 was 3.86% compared
with 4.98% for the same period of 2008. The average yield on the Company's loans
outstanding was 6.15% for the third quarter of 2009 compared with 7.03% for the
same period of 2008. The average amount of the Company's loan category for the
third quarter of 2009 was 3.3% more than for the third quarter of 2008. The
Company derecognized approximately $201 of accrued interest on loans that were
initially included in nonaccrual loans during the third quarter of 2009. As a
result of all of these factors, interest income on loans was $433 lower in the
2009 three month period.
Interest expense for the 2009 three-month period was $300 lower than
for the same period of 2008 primarily due to lower rates paid, which were 67
basis points lower than the prior year level. Rates paid for all types of
deposits in the 2009 quarter were 69 basis points lower and rates paid for time
deposits were 74 basis points lower in the 2009 quarter than for the same period
of 2008. Average amounts of time deposits outstanding for the 2009 period
increased by $45,640, or 17.6%, over the amount for the 2008 period.
18
Average Balances, Yields and Rates
Three Months Ended September 30,
--------------------------------
2009 2008
---- ----
Interest Interest
Average Income/ Yields/ Average Income/ Yields/
Balances Expense Rates (1) Balances Expense Rates (1)
-------- ------- --------- -------- ------- ---------
(Dollars in thousands)
Assets
Interest-bearing balances due from banks .......... $ 22,205 $ 14 0.25% $ 1,533 $ 10 2.60%
Securities
Taxable ..................................... 133,282 1,298 3.86% 101,802 1,275 4.98%
Tax exempt (2) .............................. 19,780 201 4.03% 20,998 209 3.96%
--------- ------- --------- -------
Total investment securities ............ 153,062 1,499 3.89% 122,800 1,484 4.81%
Other investments ................................. 1,307 3 0.91% 1,216 14 4.58%
Federal funds sold ................................ - - 0.00% 15,844 81 2.03%
Loans (2) (3) (4) ................................. 271,751 4,214 6.15% 262,977 4,647 7.03%
--------- ------- --------- -------
Total interest earning assets .......... 448,325 5,730 5.07% 404,370 6,236 6.14%
Cash and due from banks ........................... 5,249 8,122
Allowance for loan losses ......................... (5,373) (2,956)
Valuation allowance - Available-for-
sale securities ............................. 828 (596)
Premises and equipment ............................ 8,565 8,768
Other assets ...................................... 18,715 12,572
--------- ---------
Total assets ........................... $ 476,309 $ 430,280
========= =========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts ....... $ 52,724 $ 93 0.70% $ 56,370 $ 250 1.76%
Savings ..................................... 17,663 20 0.45% 18,700 46 0.98%
Time deposits $100M and over ................ 131,673 904 2.72% 113,755 1,021 3.57%
Other time deposits ......................... 173,608 1,596 3.65% 145,886 1,589 4.33%
--------- ------- --------- -------
Total interest bearing
deposits ............................. 375,668 2,613 2.76% 334,711 2,906 3.45%
Short-term borrowings ............................. 19 - 0.00% 1,500 8 2.12%
Long-term debt .................................... 9,500 93 3.88% 9,500 92 3.85%
--------- ------- --------- -------
Total interest bearing
liabilities .......................... 385,187 2,706 2.79% 345,711 3,006 3.46%
Noninterest bearing demand deposits ............... 43,500 41,637
Other liabilities ................................. 6,119 2,907
Shareholders' equity .............................. 41,503 40,025
--------- ---------
Total liabilities and shareholders'
equity ................................. $ 476,309 $ 430,280
========= =========
Interest rate spread .............................. 2.28% 2.68%
Net interest income and net yield
on earning assets ........................... $ 3,024 2.68% $ 3,230 3.18%
Interest free funds supporting earning
assets ...................................... $ 63,138 $ 58,659
-----------------------------------------
(1) Yields and rates are annualized.
(2) Yields on tax exempt instruments have not been adjusted to a tax-equivalent
basis.
(3) Nonaccrual loans are included in the average loan balances and income on
such loans is recognized on a cash basis.
(4) Includes immaterial amounts of loan fees.
19
Nine Months Ended September 30, 2009 and 2008
For the first nine months of 2009, net interest income totaled $8,830,
a decrease of $58, or 0.7%, from the $8,888 amount for the same period of 2008.
The Company's interest rate spread for the 2009 nine month period was 2.19%, a
decrease of 22 basis points over the 2.41% spread for the 2008 period. The yield
on interest earning assets decreased to 5.12% for the 2009 period, compared with
6.17% for the 2008 period, primarily due to lower rates earned on loans. A
significant portion of the Company's loans are variable rate instruments that
are repriced in response to changes in the "prime rate" which is currently
3.25%, a very low level. The Company recently implemented a change in its
pricing policy with respect to variable rate loans by utilizing "floor" rates
for all newly made and renewed variable rate loans. The yield on loans is also
negatively impacted when loans are placed into nonaccrual status. As discussed
later, the Company has seen a significant increase in the number and dollar
amount of nonperforming and nonaccrual loans in 2009. Higher average volumes of
investment securities held in the 2009 period more than offset the effects of
lower rates earned on those instruments. Federal funds sold by the Company
during the 2009 period were significantly reduced from the amounts sold during
the same period of 2008. Excess cash reserves are currently maintained on
deposit with the Federal Reserve Bank, which is paying a nominal amount of
interest on those deposits. Actions taken by the Federal Reserve since the third
quarter of 2008 generally were intended initially to reduce market rates of
interest and, more recently, to maintain those rates at lower levels.
Rates paid for interest bearing liabilities during the 2009 nine month
period were 83 basis points lower than for the 2008 period. Rates paid for time
deposits $100 and over were 95 basis points lower during the 2009 period than in
the 2008 period and rates paid for other time deposits decreased by 93 basis
points compared with the same 2008 period. The average amounts of time deposits
outstanding during the 2009 period were $50,553, or 20.0%, more than in the 2008
period. Rates paid for interest bearing transaction accounts for the 2009 nine
month period were 126 basis points less than for the same period of 2008 and the
average amount of such accounts in the 2009 period was $2,915, or 5.0%, less
than for the 2008 period.
20
Average Balances, Yields and Rates
Nine Months Ended September 30,
-------------------------------
2009 2008
---- ----
Interest Interest
Average Income/ Yields/ Average Income/ Yields/
Balances Expense Rates (1) Balances Expense Rates (1)
-------- ------- --------- -------- ------- ---------
(Dollars in thousands)
Assets
Interest-bearing balances due from banks ....... $ 19,291 $ 36 0.25% $ 1,251 $ 17 1.82%
Securities
Taxable .................................. 137,055 4,260 4.16% 95,782 3,464 4.83%
Tax exempt (2) ........................... 20,043 612 4.08% 20,683 623 4.02%
--------- ------- --------- -------
Total investment securities ......... 157,098 4,872 4.15% 116,465 4,087 4.69%
Other investments .............................. 1,283 3 0.31% 997 39 5.23%
Federal funds sold ............................. 2,649 3 0.15% 28,624 584 2.73%
Loans (2) (3) (4) .............................. 273,201 12,460 6.10% 255,866 13,902 7.26%
--------- ------- --------- -------
Total interest earning assets ....... 453,522 17,374 5.12% 403,203 18,629 6.17%
Cash and due from banks ........................ 6,953 7,916
Allowance for loan losses ...................... (5,439) (2,725)
Valuation allowance - Available-for-
sale securities .......................... 1,178 347
Premises and equipment ......................... 8,611 8,812
Other assets ................................... 15,975 12,355
--------- ---------
Total assets ........................ $ 480,800 $ 429,908
========= =========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts .... $ 55,107 $ 281 0.68% $ 58,022 $ 843 1.94%
Savings .................................. 22,607 63 0.37% 28,523 323 1.51%
Time deposits $100M and over ............. 131,612 2,987 3.03% 108,347 3,231 3.98%
Other time deposits ...................... 171,169 4,938 3.86% 143,881 5,157 4.79%
--------- ------- --------- -------
Total interest bearing
deposits .......................... 380,495 8,269 2.91% 338,773 9,554 3.77%
Short-term borrowings .......................... 14 - 0.00% 504 8 2.12%
Long-term debt ................................. 9,500 275 3.87% 6,321 179 3.78%
--------- ------- --------- -------
Total interest bearing
liabilities ....................... 390,009 8,544 2.93% 345,598 9,741 3.76%
Noninterest bearing demand deposits ............ 44,567 40,910
Other liabilities .............................. 4,998 3,787
Shareholders' equity ........................... 41,226 39,613
--------- ---------
Total liabilities and shareholders'
equity .............................. $ 480,800 $ 429,908
========= =========
Interest rate spread ........................... 2.19% 2.41%
Net interest income and net yield
on earning assets ........................ $ 8,830 2.60% $ 8,888 2.94%
Interest free funds supporting earning
assets ................................... $ 63,513 $ 57,605
-----------------------------------------
(1) Yields and rates are annualized.
(2) Yields on tax exempt instruments have not been adjusted to a tax-equivalent
basis.
(3) Nonaccrual loans are included in the average loan balances and income on
such loans is recognized on a cash basis.
(4) Includes immaterial amounts of loan fees.
21
Provision and Allowance for Loan Losses
The provision for loan losses was $1,010 for the third quarter of 2009
compared with $965 for the third quarter of 2008. For the first nine months of
2009, the provision for loan losses was $2,460, compared with $1,375 for the
first nine months of 2008. At September 30, 2009, the allowance for loan losses
was 2.01% of loans, compared with 2.02% at December 31, 2008 and 1.31% as of
September 30, 2008. The increase in the provision and allowance was made as a
result of significant increases in the amounts of nonaccrual and potential
problem loans, increased net charge-offs, higher volumes of loans and heightened
concerns about the state of the local economy and the resultant ability of the
Company's customers to perform in accordance with the terms of their loans.
For the first nine months of 2009, net charge-offs totaled $2,527,
compared with $446 in net charge offs during the same period of 2008. As of
September 30, 2009, nonaccrual loans totaled $14,884 and there were no loans 90
days or more past due and still accruing interest. As of September 30, 2008,
nonaccrual loans totaled $4,725. The activity in the allowance for loan losses
is summarized in the table below:
Nine Months Nine Months
Ended Year Ended Ended
September 30, December 31, September 30,
2009 2008 2008
---- ---- ----
(Dollars in thousands)
Allowance at beginning of period ................................. $ 5,475 $ 2,574 $ 2,574
Provision for loan losses ........................................ 2,460 4,550 1,375
Net charge-offs .................................................. (2,527) (1,649) (446)
--------- --------- ---------
Allowance at end of period ....................................... $ 5,408 $ 5,475 $ 3,503
========= ========= =========
Allowance as a percentage of loans outstanding
at period end .................................................. 2.01% 2.02% 1.31%
Loans at end of period ........................................... $ 269,725 $ 270,413 $ 267,075
========= ========= =========
22
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, 2008 ................. $ 625 $ - $ 625 0.26% $ 3,088 1.26%
Net change ...................... (181) - (181) 962
-------- ------- -------- --------
March 31, 2008 .................. 444 - 444 0.18% 4,050 1.61%
Net change ...................... 1,436 - 1,436 1,338
-------- ------- -------- --------
June 30, 2008 ................... 1,880 - 1,880 0.73% 5,388 2.10%
Net change ...................... 2,845 - 2,845 1,194
-------- ------- -------- --------
September 30, 2008 .............. 4,725 - 4,725 1.77% 6,582 2.46%
Net change ...................... 7,074 - 7,074 328
-------- ------- -------- --------
December 31, 2008 ............... 11,799 - 11,799 4.36% 6,910 2.56%
Net change ...................... 2,835 - 2,835 2,367
-------- ------- -------- --------
March 31, 2009 .................. 14,634 - 14,634 5.31% 9,277 3.37%
Net change ...................... 2,882 - 2,882 (1,511)
-------- ------- -------- --------
June 30, 2009 ................... 17,516 - 17,516 6.41% 7,766 2.84%
Net change ...................... (2,632) - (2,632) 3,490
-------- ------- -------- --------
September 30, 2009 .............. $ 14,884 $ - $ 14,884 5.52% $ 11,256 4.17%
======== ======= ======== ========
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. Such loans are assigned to one of several below-average
risk-rating grades depending on factors such as past due status, collateral
values, and other factors affecting the customers' ability to repay. As of
September 30, 2009, approximately 66% of the Company's potential problem loans
were included in the Company's least severe below-average risk-rating grade.
Approximately 92% of potential problem loans were secured by real estate.
Management expects that further deterioration of economic conditions within the
Company's market areas is likely in the short-term, especially with respect to
real estate related activities and real property values. Consequently, it is
expected that increased provisions for loan losses will be needed in the future.
The statewide unemployment rate for South Carolina was 11.6%
(seasonally adjusted) as of September 30, 2009, compared with 8.8% as of
December 31, 2008 and 7.5% as of September 30, 2008. The unemployment rates (not
seasonally adjusted) in Oconee and Anderson Counties, South Carolina were 14.2%
and 12.5%, respectively, as of September 30, 2009 compared with 10.6% and 9.6%,
respectively, as of December 31, 2008 and 8.0% and 7.2%, respectively, as of
September 30, 2008.
Noninterest Income
Noninterest income totaled $704 for the third quarter of 2009, compared
with $634 for the 2008 quarter. Fees associated with originating mortgage loans
for another financial institution totaled $48 in the third quarter of 2009
compared with $6 for the same period of 2008. Fees associated with card-based
services were $154 in the 2009 quarter compared with $142 in the prior year
period.
For the nine months ended September 30, 2009, noninterest income
totaled $2,027, compared with $1,868 for the same period of 2008. Service
charges on deposit accounts in the 2009 period were $1,048 representing a
decrease of $61 from the prior year period's $1,109. Net gains on sales of
investment securities totaled $90 for the 2009 year-to-date period compared with
net losses on such sales of $3 for the same 2008 period. Fees associated with
card-based services were $450 for the 2009 period and $412 for the 2008 period.
During the 2009 and 2008 nine month periods, increases in the value of life
insurance assets totaling $274 and $280 were recognized, respectively. Fees from
originating mortgage loans were $119 for the 2009 year period compared with $19
for the same period of 2008.
23
Noninterest Expenses
Noninterest expenses totaled $2,297 for the third quarter of 2009
compared with $1,938 for the same period of 2008, representing an increase of
$359 or 18.5%. Salaries and employee benefits increased by $133, or 12.4%, to
$1,206. Higher deferred compensation expenses, decreased deferrals of current
compensation expenses under applicable accounting standards resulting from lower
loan origination activity in 2009, and the hiring in 2009 of a special assets
officer to fill a newly created position contributed to the increased salaries
and benefits.
The cost of deposit insurance was $165 for the third quarter of 2009,
compared with $58 for the third quarter of 2008. Further increases in these
expenses are expected to occur due to the imposition of higher assessment rates
on the banking industry generally. Expenses for professional services increased
to $130 for the 2009 three month period from $51 for the same period of 2008 due
to legal fees incurred in the 2009 period with respect to foreclosure and
repossession actions and in connection with the Company's proposed issuance of
preferred stock. Expenses associated with holding foreclosed assets totaled $53
in the 2009 three month period compared with no such expenses in the 2008
period.
Noninterest expenses for the nine months ended September 30, 2009
totaled $6,820, an increase of $990, or 17.0%, over the amount for the same
period of 2008. Salaries and employee benefits increased by $413, or 12.8%, over
the amount for 2008 for the reasons discussed previously. Net occupancy and
furniture and equipment expenses decreased by an aggregate of $22, or 3.1%,
primarily because of lower depreciation expenses. Amounts assessed for FDIC
insurance increased by $407 due to the special assessment in the second quarter
of 2009 and other factors discussed previously. Expenses associated with
foreclosed assets increased by $71 in the 2009 period. Expenses for professional
services increased by $101 for the 2009 period due to the factors discussed
previously as well as higher fees related to recurring independent loan reviews,
internal audits and other accounting and compliance assistance.
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 two offices in Seneca, and one office in each of
Walhalla and Westminster. The Anderson County market is served from two offices
in Anderson and one office in Williamston.
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 approximately $42,180 of
credit availability under its FHLB lines of credit and additional amounts are
available under federal funds purchased facilities.
As of September 30, 2009, the ratio of loans to total deposits was
64.6%, compared with 65.0% as of December 31, 2008. Deposits as of September 30,
2009 were $417,794, an increase of $1,679 or .4% over the amount as of December
31, 2008. Management believes that the Company's liquidity sources are adequate
to meet its operating needs.
Capital Resources
The Company's capital base increased by $2,777 since December 31, 2008
as the result of net income of $1,223 for the first nine months of 2009, an
increase of $486 from the exercise of stock options, plus a $1,068 change in
unrealized gains and losses on available-for-sale securities, net of deferred
income tax effects.
The Company and its banking subsidiary (the "Bank") are subject to
regulatory risk-based capital adequacy standards. Under these standards, bank
holding companies and banks are required to maintain certain minimum ratios of
capital to risk-weighted assets and average total assets. Under the provisions
of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA),
federal bank regulatory authorities are required to implement prescribed "prompt
corrective actions" upon the deterioration of the capital position of a bank. If
the capital position of an affected institution were to fall below certain
levels, increasingly stringent regulatory corrective actions are mandated.
The September 30, 2009 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:
24
Total
Tier 1 Capital Leverage
------ ------- --------
Community First Bancorporation ............... 13.4% 14.7% 8.7%
Community First Bank ......................... 12.7% 13.9% 8.2%
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.
Following are the off-balance-sheet financial instruments whose
contract amounts represent credit risk:
September 30, 2009
------------------
(Dollars in thousands)
Loan commitments .................... $ 19,373
Standby letters of credit ........... 1,268
Loan commitments involve agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and some
involve payment of a fee. Many of the commitments are expected to expire without
being fully drawn; therefore, the total amount of loan commitments does not
necessarily represent future cash requirements. Each customer's creditworthiness
is evaluated on a case-by-case basis. The amount of collateral obtained, if any,
upon extension of credit is based on management's credit evaluation of the
borrower. Collateral held varies but may include commercial and residential real
properties, accounts receivable, inventory and equipment.
Standby letters of credit are conditional commitments to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
standby letters of credit is the same as that involved in making loan
commitments to customers. Many letters of credit will expire without being drawn
upon and do not necessarily represent future cash requirements. The Bank
receives fees for loan commitments and standby letters of credit. The amount of
such fees was not material for either the nine months or three months ended
September 30, 2009.
As described under "Liquidity," management believes that its various
sources of liquidity provide the resources necessary for the Bank to fund the
loan commitments and to perform under standby letters of credit, if the need
arises. Neither the Company nor the Bank are involved in other off-balance sheet
contractual relationships or transactions that could result in liquidity needs
or other commitments or significantly impact earnings.
Item 3. - Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk is primarily related to the risk
of loss from adverse changes in market prices and rates. This risk arises
principally from interest rate risk inherent in the Company's lending, deposit
gathering and borrowing activities. Management actively monitors and manages its
interest rate risk exposure. Although the Company manages other risks, such as
credit quality and liquidity risk in the normal course of business, management
considers interest rate risk to be its most significant market risk and this
risk could potentially have the largest material effect on the Company's
financial condition and results of operations. Other types of market risk, such
as commodity price risk and foreign currency exchange risk, do not arise in the
normal course of the Company's community banking operations.
The Company uses a simulation model to assist in achieving consistent
growth in net interest income while managing interest rate risk. As of September
30 2009, the model indicates that net interest income would decrease $58 and net
income would decrease $37 in the next twelve months if interest rates rose by
100 basis points. Conversely, net interest income would increase $39 and net
income would increase $25 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
25
on a number of assumptions, including the relative levels of market interest
rates and prepayment assumptions affecting loans, and should not be relied on as
indicative of actual future results. The prospective effects also do not
contemplate potential actions that the Company, its customers and the issuers of
its investment securities could undertake in response to changes in interest
rates.
As of September 30, 2009, there was no significant change from the
interest rate sensitivity analysis for the various changes in interest rates
calculated as of December 31, 2008. 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
2008 Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
Item 4T. - Controls and Procedures
Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or
240.15d-15(b) of the issuer's disclosure controls and procedures (as defined in
17 C.F.R. Sections 240.13a-15(e) and 240.15d-15(e)), the issuer's chief
executive officer and chief financial officer concluded such controls and
procedures, as of the end of the period covered by this report, were effective.
There has been no change in the Company's internal control over financial
reporting during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II - OTHER INFORMATION
Item 6. - Exhibits
Exhibits
31. Rule 13a-14(a)/15d-14(a) Certifications
32. Certifications Pursuant to 18 U.S.C. Section 1350
26
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMMUNITY FIRST BANCORPORATION
November 13, 2009 /s/ Frederick D. Shepherd, Jr.
----------------- ---------------------------------------
Date Frederick D. Shepherd, Jr., Chief
Executive Officer and
Chief Financial Officer
27
EXHIBIT INDEX
31. Rule 13a-14(a)/15d-14(a) Certifications
32. Certifications Pursuant to 18 U.S.C. Section 1350
28