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, 2008 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, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Common Stock, no par
or stated value, 3,394,873 Shares Outstanding on November 1, 2008
COMMUNITY FIRST BANCORPORATION
FORM 10-Q
Index
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets .................................................................... 3
Consolidated Statements of Income .............................................................. 4
Consolidated Statements of Changes in Shareholders' Equity ..................................... 5
Consolidated Statements of Cash Flows .......................................................... 6
Notes to Unaudited Consolidated Financial Statements ........................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .......... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..................................... 20
Item 4T. Controls and Procedures ........................................................................ 21
PART II - OTHER INFORMATION
Item 6. Exhibits ....................................................................................... 22
SIGNATURE ................................................................................................ 23
2
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
COMMUNITY FIRST BANCORPORATION
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
2008 2007
----- ----
(Dollars in thousands)
Assets
Cash and due from banks ................................................................... $ 8,675 $ 10,272
Interest bearing balances due from banks .................................................. 282 165
Federal funds sold ........................................................................ 20,087 24,236
--------- ---------
Cash and cash equivalents ............................................................. 29,044 34,673
Securities available-for-sale ............................................................. 110,524 99,026
Securities held-to-maturity (fair value $12,382 for 2008 and $5,625 for 2007) ............. 12,307 5,663
Other investments ......................................................................... 1,220 840
Loans ..................................................................................... 267,075 244,131
Allowance for loan losses ............................................................. (3,503) (2,574)
--------- ---------
Loans - net ........................................................................ 263,572 241,557
Premises and equipment - net .............................................................. 8,691 8,621
Accrued interest receivable ............................................................... 2,557 2,529
Bank-owned life insurance ................................................................. 8,388 7,108
Other assets .............................................................................. 2,062 2,131
--------- ---------
Total assets ....................................................................... $ 438,365 $ 402,148
========= =========
Liabilities
Deposits
Noninterest bearing ................................................................... $ 42,830 $ 42,289
Interest bearing ...................................................................... 340,892 313,578
--------- ---------
Total deposits ..................................................................... 383,722 355,867
Short-term borrowings ..................................................................... 1,500 -
Long-term debt ............................................................................ 9,500 4,500
Accrued interest payable .................................................................. 1,911 3,480
Other liabilities ......................................................................... 942 391
--------- ---------
Total liabilities .................................................................. 397,575 364,238
--------- ---------
Shareholders' equity
Common stock - no par value; 10,000,000 shares authorized; issued and
outstanding - 3,394,873 for 2008 and 3,324,105 for 2007 ............................... 35,374 35,009
Additional paid-in capital ................................................................ 681 681
Retained earnings ......................................................................... 4,654 2,140
Accumulated other comprehensive income .................................................... 81 80
--------- ---------
Total shareholders' equity ......................................................... 40,790 37,910
--------- ---------
Total liabilities and shareholders' equity ......................................... $ 438,365 $ 402,148
========= =========
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
------------ -----------
2008 2007 2008 2007
---- ---- ---- ----
(Dollars in thousands, except per share)
Interest income
Loans, including fees ................................... $ 4,647 $ 4,632 $ 13,902 $ 12,885
Interest bearing balances due from banks ................ 10 3 17 4
Securities
Taxable ............................................... 1,275 975 3,464 2,907
Tax-exempt ............................................ 209 212 623 616
Other investments ....................................... 14 14 39 43
Federal funds sold ...................................... 81 145 584 1,007
-------- -------- -------- --------
Total interest income ............................... 6,236 5,981 18,629 17,462
-------- -------- -------- --------
Interest expense
Time deposits $100M and over ............................ 1,021 1,038 3,231 2,901
Other deposits .......................................... 1,885 2,283 6,323 6,718
Short-term borrowings ................................... 8 - 8 3
Long-term debt .......................................... 92 46 179 155
-------- -------- -------- --------
Total interest expense .............................. 3,006 3,367 9,741 9,777
-------- -------- -------- --------
Net interest income .......................................... 3,230 2,614 8,888 7,685
Provision for loan losses .................................... 965 150 1,375 270
-------- -------- -------- --------
Net interest income after provision .......................... 2,265 2,464 7,513 7,415
-------- -------- -------- --------
Other income
Service charges on deposit accounts ..................... 374 394 1,109 1,071
ATM interchange and other fees .......................... 142 115 412 336
Net losses on sales of securities
available-for-sale .................................. (3) - (3) -
Credit life insurance commissions ....................... 5 8 12 24
Increase in value of bank-owned
life insurance ...................................... 94 33 280 33
Other income ............................................ 22 33 58 107
-------- -------- -------- --------
Total other income .................................. 634 583 1,868 1,571
-------- -------- -------- --------
Other expenses
Salaries and employee benefits .......................... 1,073 1,130 3,218 2,844
Net occupancy expense ................................... 135 116 384 318
Furniture and equipment expense ......................... 110 111 326 321
Amortization of computer software ....................... 85 62 241 179
ATM interchange and related expenses .................... 96 66 301 215
Directors' fees ......................................... 20 20 81 67
Other expense ........................................... 419 396 1,279 1,133
-------- -------- -------- --------
Total other expenses ................................ 1,938 1,901 5,830 5,077
-------- -------- -------- --------
Income before income taxes ................................... 961 1,146 3,551 3,909
Income tax expense ........................................... 252 375 1,037 1,242
-------- -------- -------- --------
Net income ................................................... $ 709 $ 771 $ 2,514 $ 2,667
======== ======== ======== ========
Per share*
Net income .............................................. $ 0.21 $ 0.24 $ 0.74 $ 0.82
Net income, assuming dilution ........................... 0.20 0.21 0.71 0.77
--------
* Per share information has been retroactively adjusted to reflect a 10% stock
dividend effective December 20, 2007.
See accompanying notes to unaudited consolidated financial statements.
4
COMMUNITY FIRST BANCORPORATION
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
Common Stock Accumulated
------------ Additional Other
Number of Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income (Loss) Total
------ ------ ------- -------- ------------- -----
(Dollars in thousands)
Balance, January 1, 2007 ................................. 2,958,558 $ 30,061 $ 593 $ 3,285 $ (724) $ 33,215
---------
Comprehensive income:
Net income ........................................... - - - 2,667 - 2,667
---------
Unrealized holding gains and losses
on available-for-sale securities arising
during the period, net of
income taxes of $207 ............................... - - - - 369 369
---------
Total other comprehensive income ................. - - - - - 369
---------
Total comprehensive income ..................... - - - - - 3,036
---------
Exercise of employee stock options ....................... 14,636 83 - - - 83
--------- --------- --------- --------- --------- ---------
Balance, September 30, 2007 .............................. 2,973,194 $ 30,144 $ 593 $ 5,952 $ (355) $ 36,334
========= ========= ========= ========= ========= =========
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
========= ========= ========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
5
COMMUNITY FIRST BANCORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-------------
2008 2007
----- ----
(Dollars in thousands)
Operating activities
Net income ................................................................................ $ 2,514 $ 2,667
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses .......................................................... 1,375 270
Depreciation ....................................................................... 316 298
Amortization of net loan (fees) and costs .......................................... (147) (174)
Securities accretion and premium amortization ...................................... 45 65
Net loss on sales of securities available-for-sale ................................. 3 -
Loss on sale of foreclosed assets .................................................. 6 -
Increase in value of bank-owned life insurance ..................................... (280) (33)
Increase in interest receivable .................................................... (28) (326)
(Decrease) increase in interest payable ............................................ (1,569) 68
Decrease (increase) in prepaid expenses and other assets ........................... 29 (3)
Increase in other accrued expenses ................................................. 551 227
-------- --------
Net cash provided by operating activities ...................................... 2,815 3,059
-------- --------
Investing activities
Purchases of available-for-sale securities ................................................ (55,484) (17,448)
Purchases of securities held-to-maturity .................................................. (7,490) -
Maturities, calls and paydowns of securities available-for-sale ........................... 34,204 19,655
Maturities, calls and paydowns of securities held-to-maturity ............................. 848 736
Proceeds of sales of securities available-for-sale ........................................ 9,732 -
Purchases of other investments ............................................................ (380) -
Proceeds from sales of other investments .................................................. - 140
Net increase in loans made to customers ................................................... (23,242) (33,908)
Purchases of premises and equipment ....................................................... (386) (589)
Proceeds of sale of foreclosed assets ..................................................... 34 15
Proceeds of sale of real estate held for sale ............................................. - 36
Investment in bank-owned life insurance ................................................... (1,000) (7,000)
-------- --------
Net cash used by investing activities .......................................... (43,164) (38,363)
-------- --------
Financing activities
Net decrease in demand deposits, interest
bearing transaction accounts and savings accounts ..................................... (8,289) (8,925)
Net increase in certificates of deposit and other
time deposits ......................................................................... 36,144 38,134
Net increase (decrease) in short-term borrowings .......................................... 1,500 (4,500)
Proceeds from issuing long-term debt ...................................................... 6,000 -
Repayments of long-term debt .............................................................. (1,000) (1,000)
Exercise of employee stock options ........................................................ 365 83
-------- --------
Net cash provided by financing activities ...................................... 34,720 23,792
-------- --------
Decrease in cash and cash equivalents .......................................................... (5,629) (11,512)
Cash and cash equivalents, beginning ........................................................... 34,673 31,145
-------- --------
Cash and cash equivalents, ending .............................................................. $ 29,044 $ 19,633
======== ========
Supplemental Disclosure of Cash Flow Information Cash paid during the year for:
Interest .............................................................................. $ 11,310 $ 9,709
Income taxes .......................................................................... 1,240 1,278
Noncash investing and financing activities:
Other comprehensive income ............................................................ 1 369
See accompanying notes to unaudited consolidated financial statements.
6
COMMUNITY FIRST BANCORPORATION
Notes to Unaudited Consolidated Financial Statements
Accounting Policies - A summary of significant accounting policies is included
in Community First Bancorporation's (the "Company") Annual Report on Form 10-K
for the year ended December 31, 2007 filed with the Securities and Exchange
Commission. Certain amounts in the 2007 financial statements have been
reclassified to conform to the current presentation. Such reclassifications had
no effect on net income or retained earnings for any period.
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 September 30, 2008, there were $4,725,000 in
nonaccrual loans.
Earnings Per Share - Basic earnings per common share is computed by dividing net
income applicable to common shares by the weighted average number of common
shares outstanding. Diluted earnings per share is computed by dividing
applicable net income by the weighted average number of common shares
outstanding and any dilutive potential common shares and dilutive stock options.
It is assumed that all dilutive stock options are exercised at the beginning of
each period and that the proceeds are used to purchase shares of the Company's
common stock at the average market price during the period. All 2007 per share
information has been retroactively adjusted to give effect to a 10% stock
dividend effective December 20, 2007. Net income per share and net income per
share, assuming dilution, were computed as follows:
Unaudited
Period Ended September 30,
--------------------------
Three Months Nine Months
------------ -----------
2008 2007 2008 2007
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
Net income per share, basic
Numerator - net income ............................... $ 709 $ 771 $ 2,514 $ 2,667
========== ========== ========== ==========
Denominator
Weighted average common shares
issued and outstanding ........................... 3,394,873 3,269,841 3,366,596 3,268,635
========== ========== ========== ==========
Net income per share, basic ........................ $ .21 $ .24 $ .75 $ .82
========== ========== ========== ==========
Net income per share, assuming dilution
Numerator - net income ............................... $ 709 $ 771 $ 2,514 $ 2,667
========== ========== ========== ==========
Denominator
Weighted average common shares
issued and outstanding ........................... 3,394,873 3,269,841 3,366,596 3,268,635
Effect of dilutive stock options ................... 124,047 229,477 160,605 215,034
---------- ---------- ---------- ----------
Total shares ............................ 3,518,920 3,499,318 3,527,201 3,483,669
========== ========== ========== ==========
Net income per share, assuming dilution ............ $ .20 $ .22 $ .71 $ .77
========== ========== ========== ==========
Fair Value Measurements - The Company implemented Statement of Financial
Accounting Standards No. 157, "Fair Value Measurements," ("SFAS No. 157") as
required on January 1, 2008. SFAS No. 157 defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an orderly
fashion between market participants at the measurement date, and establishes a
framework for measuring fair value. It also establishes a three-level hierarchy
for fair value measurements based upon the transparency of inputs to the
valuation of an asset or liability as of the measurement date, eliminates the
consideration of large position discounts for financial instruments quoted in
7
active markets, requires consideration of the Company's creditworthiness when
valuing its liabilities, and expands disclosures about instruments measured at
fair value. The following is a summary of the measurement attributes applicable
to financial assets and liabilities that are measured at fair value on a
recurring basis:
(Unaudited)
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, 2008 (Level 1) (Level 2) (Level 3)
------------------ --------- --------- ---------
(Dollars in thousands)
Securities available-for-sale ................................... $ - $110,524 $ -
Pricing for the Company's securities available-for-sale is obtained from an
independent third-party that uses a process that may incorporate current market
prices, benchmark yields, broker/dealer quotes, issuer spreads, two-sided
markets, benchmark securities, bids, offers, other reference data and industry
and economic events that a market participant would be expected to use in
valuing the securities. Not all of the inputs listed apply to each individual
security at each measurement date. The independent third party assigns specific
securities into an "asset class" for the purpose of assigning the applicable
level of the fair value hierarchy used to value the securities. The techniques
used after adoption of SFAS No. 157 are consistent with the methods used
previously.
In February 2008, the Financial Accounting Standards Board Staff issued FASB
Staff Position No. FAS 157-2 ("FSP 157-2") which delays for one year the
effective date of the application of Statement of Financial Accounting Standards
No. 157 "Fair Value Measurements" ("SFAS No. 157") to nonfinancial assets and
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually). In accordance
with FSP 157-2, the Company has only partially applied SFAS No. 157. There are
currently no major categories of assets or liabilities disclosed at fair value
in the financial statements for which the Company has not applied the provisions
of SFAS No. 157.
No cumulative effect adjustments were required upon initial application of SFAS
No. 157. Available-for-sale securities continue to be measured at fair value
with unrealized gains and losses, net of income taxes, recorded in other
comprehensive income.
The Security and Exchange Commission's ("SEC") Office of the Chief Accountant
and the staff of the Financial Accounting Standards Board ("FASB") issued press
release 2008-234 on September 30, 2008 ("Press Release") to provide
clarifications on fair value accounting. The Press Release includes guidance on
the use of management's internal assumptions and the use of "market" quotes. The
Press Release also reiterates the factors included in SEC Staff Accounting
Bulletin Topic 5M which should be considered when determining
other-than-temporary impairment; i.e., the length of time and extent to which
the market value has been less than cost, financial condition and near-term
prospects of the issuer, and the intent and ability of the holder to retain its
investment for a period of time sufficient to allow for any anticipated recovery
in market value.
On October 10, 2008, the FASB issued FASB Staff Position SFAS 157-3 "Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active". This FSP clarifies the application of SFAS No. 157 "Fair Value
Measurements" in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial
instrument when the market for that asset is not active. The FSP is effective
upon issuance, including prior periods for which financial statements have not
been issued. For the Company, this FSP is effective for the quarter ended
September 30, 2008.
The Company considered the guidance in the Press Release and in FSP SFAS 157-3
when conducting its review of other-than-temporary impairment as of September
30, 2008 and determined that it did not result in a change to its impairment
estimation techniques.
New Accounting Pronouncements - In February 2008, the FASB issued FASB Staff
Position No. 140-3, "Accounting for Transfers of Financial Assets and Repurchase
Financing Transactions" ("FSP 140-3"). This FSP provides guidance on accounting
for a transfer of a financial asset and the transferor's repurchase financing of
the asset. This FSP presumes that an initial transfer of a financial asset and a
8
repurchase financing are considered part of the same arrangement (linked
transaction) under SFAS No. 140. However, if certain criteria are met, the
initial transfer and repurchase financing are not evaluated as a linked
transaction and are evaluated separately under Statement 140. FSP 140-3 will be
effective for financial statements issued for fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years and earlier
application is not permitted. Accordingly, this FSP is effective for the Company
on January 1, 2009. The Company is currently evaluating the impact, if any, that
the adoption of FSP 140-3 will have on its financial position, results of
operations and cash flows.
In May, 2008, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 162, "The Hierarchy of Generally
Accepted Accounting Principles," ("SFAS No. 162"). SFAS No. 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles (GAAP)
in the United States (the GAAP hierarchy). SFAS No. 162 is effective November
15, 2008. The FASB has stated that it does not expect SFAS No. 162 will result
in a change in current practice. The application of SFAS No. 162 will have no
effect on the Company's financial position, results of operations or cash flows.
In June, 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, "Determining
Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities," ("FSP EITF 03-6-1"). The Staff Position provides that
unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents are participating securities and must be
included in the earnings per share computation. FSP EITF 03-6-1 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those years. All prior-period earnings per share data
presented must be adjusted retrospectively. Early application is not permitted.
The adoption of this Staff Position will have no effect on the Company's
financial position, results of operations or cash flows.
FSP SFAS 133-1 and FIN 45-4, "Disclosures about Credit Derivatives and Certain
Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No.
45; and Clarification of the Effective Date of FASB Statement No. 161," ("FSP
SFAS 133-1 and FIN 45-4") was issued September 2008, effective for reporting
periods (annual or interim) ending after November 15, 2008. FSP SFAS 133-1 and
FIN 45-4 amends SFAS 133 to require a seller of credit derivatives to disclose
the nature of the credit derivative, the maximum potential amount of future
payments, fair value of the derivative, and the nature of any recourse
provisions. Disclosures must be made for entire hybrid instruments that have
embedded credit derivatives.
The staff position also amends FIN 45 to require disclosure of the current
status of the payment/performance risk of the credit derivative guarantee. If an
entity utilizes internal groupings as a basis for the risk, how the groupings
are determined must be disclosed as well as how the risk is managed.
The staff position encourages that the amendments be applied in periods earlier
than the effective date to facilitate comparisons at initial adoption. After
initial adoption, comparative disclosures are required only for subsequent
periods.
FSP SFAS 133-1 and FIN 45-4 clarifies the effective date of SFAS 161 such that
required disclosures should be provided for any reporting period (annual or
quarterly interim) beginning after November 15, 2008. The adoption of this Staff
Position will have no material 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
forwarding-looking statements.
All statements that are not historical facts are statements that could
be "forward-looking statements." You can identify these forward-looking
statements through the use of words such as "may," "will," "should," "could,"
"would," "expect," "anticipate," "assume," "indicate," "contemplate," "seek,"
"plan," "predict," "target," "potential," "believe," "intend," "estimate,"
"project," "continue," or other similar words. Forward-looking statements
include, but are not limited to, statements regarding the Company's future
business prospects, revenues, working capital, liquidity, capital needs,
interest costs, income, business operations and proposed services.
9
These forward-looking statements are based on current expectations,
estimates and projections about the banking industry, management's beliefs, and
assumptions made by management. Such information includes, without limitation,
discussions as to estimates, expectations, beliefs, plans, strategies, and
objectives concerning future financial and operating performance. These
statements are not guarantees of future performance and are subject to risks,
uncertainties and assumptions that are difficult to predict. Therefore, actual
results may differ materially from those expressed or forecasted in such
forward-looking statements. The risks and uncertainties include, but are not
limited to:
o future economic and business conditions;
o lack of sustained growth in the economies of the Company's market
areas;
o government monetary and fiscal policies;
o the effects of changes in interest rates on the levels,
composition and costs of deposits, loan demand, and the values of
loan collateral, securities, and interest sensitive assets and
liabilities;
o the effects of competition from a wide variety of local,
regional, national and other providers of financial, investment,
and insurance services, as well as competitors that offer banking
products and services by mail, telephone, computer and/or the
Internet;
o credit risks;
o higher than anticipated levels of defaults on loans;
o perceptions by depositors about the safety of their deposits;
o 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;
o changes in laws and regulations, including tax, banking and
securities laws and regulations;
o changes in accounting policies, rules and practices;
o changes in technology or products may be more difficult or
costly, or less effective, than anticipated;
o the effects of war or other conflicts, acts of terrorism or other
catastrophic events that may affect general economic conditions
and economic confidence; and
o other factors and information described in this report and in any
of the other reports that we file with the Securities and
Exchange Commission under the Securities Exchange Act of 1934.
All forward-looking statements are expressly qualified in their
entirety by this cautionary notice. The Company has no obligation, and does not
undertake, to update, revise or correct any of the forward-looking statements
after the date of this report. The Company has expressed its expectations,
beliefs and projections in good faith and believes they have a reasonable basis.
However, there is no assurance that these expectations, beliefs or projections
will result or be achieved or accomplished.
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Changes in Financial Condition
The Company has been affected by the recent events in the financial and
credit markets primarily in the following ways: depositors who previously left
funds in excess of federal deposit insurance limits in a single bank have been
less prone to do so; and pricing anomalies have arisen in the securities
marketplace and, we believe, have provided opportunities for those with
sufficient financial mettle to realize outsized returns stemming from the
pessimism of others. We experienced both deposit inflows and outflows due to
customers seeking to maximize deposit insurance coverage for their accounts.
Because there are other larger banks in our market area, we were a net recipient
of funds from this source. In early October 2008 the Federal Deposit Insurance
Corporation ("FDIC") temporarily increased deposit insurance coverage to
$250,000 per account. The temporary increase is currently set to expire on
December 31, 2009. The Company expects that its expenses for deposit insurance
coverage will increase significantly during the period of higher deposit
insurance limits. The unwillingness or inability of others to lend to those we
believe to be creditworthy allowed us to increase loans during the 2008 third
quarter while adhering to our normal, conservative underwriting standards. We
repositioned our portfolio of available-for-sale investment securities to
capture higher yields that were available primarily on mortgage-backed
securities issued by the Federal National Mortgage Association and the Federal
Home Loan Mortgage Corporation.
10
Furthermore, we eliminated from our portfolio any adjustable rate
mortgage-backed securities. At the end of the third quarter of 2008, the yield
of the Company's mortgage-backed securities investments was 4.71%, compared with
4.49% as of June 30, 2008 and 4.07% as of December 31, 2007.
Nonaccrual and past due loans increased by $2,853,000, or 151.8%,
during the third quarter of 2008. Approximately $3,093,000 of the $3,493,000
newly added to the nonaccrual category during the third quarter of 2008 were
loans secured by real estate with approximately $1,523,000 representing
construction and development loans. Of the total $4,725,000 in nonaccrual loans
as of September 30, 2008, approximately $2,083,000 were construction and
development loans. Real estate activity in the Company's market area recently
has begun to exhibit the weaknesses that have plagued other markets for more
than a year. These developments have resulted in the higher amounts of
distressed assets reflected above.
During the first nine months of 2008, loans increased by $22,944,000,
or 9.4%, securities available-for-sale increased by $11,498,000, or 11.6% and
securities held-to-maturity increased by $6,644,000. Federal funds sold
decreased by $4,149,000, or 17.1%. Interest bearing deposits increased by
$27,314,000, or 8.7%. Approximately $22,646,000 of that increase was in the form
of certificates of deposits of $100,000 or more. Also during the period,
short-term borrowings increased by $1,500,000 and long-term debt increased by
$5,000,000.
The Company believes that its liquidity position continues to provide
it with sufficient flexibility to fund loan requests or make investments in
securities at attractive yields, and to meet normal demands for deposit
withdrawals by its customers. Management also believes that the current balance
sheet position maintains the Company's exposures to changes in interest rates at
acceptable levels.
Results of Operations
Three Months Ended September 30, 2008 and 2007
The Company recorded consolidated net income of $709,000 or $.21 per
share for the third quarter of 2008 compared with net income of $771,000 and
earnings per share of $.24 for the third quarter of 2007. Net income per share,
assuming dilution was $.20 for the 2008 quarter and $.21 for the 2007 period.
Net income per share amounts for 2007 have been retroactively adjusted to
reflect a ten percent stock dividend effective December 20, 2007.
Interest income for the third quarter of 2008 increased by $255,000
over the same period of 2007 due to higher rates earned on taxable investment
securities and, to a lesser degree, an increase in the average amount of such
instruments held. Interest expenses for the third quarter of 2008 were $361,000
lower than for the same prior year period due to lower rates paid. During the
2008 three month period, depositors were extremely concerned about maximizing
the deposit insurance coverage for their funds. As a result, diversification of
those funds among federally-insured financial institutions to ensure safety of
principal was more important than the interest return that could be realized
from investing those funds.
The Company increased the provision for loan losses to $965,000 for the
third quarter of 2008 from $150,000 for the same period of 2007. Factors that
management considered when determining the amount to be provided for loan losses
included higher volumes of nonaccrual and past due loans, increased charge-offs
taken during the quarter, signs of deterioration in the local economy,
especially conditions in the local real estate markets, and recent disruption of
the flow of and sharply higher prices charged for automotive fuels resulting
from the effects of Hurricanes Gustav and Ike on the Gulf Coast refineries that
supply fuel to the Company's market area.
11
Summary Income Statement
(Dollars in thousands)
For the Three Months Ended September 30, 2008 2007 Dollar Change Percentage Change
---- ---- ------------- -----------------
Interest income .......................................... $6,236 $5,981 $ 255 4.3%
Interest expense ......................................... 3,006 3,367 (361) -10.7%
------ ------ ------
Net interest income ...................................... 3,230 2,614 616 23.6%
Provision for loan losses ................................ 965 150 815 543.3%
Noninterest income ....................................... 634 583 51 8.7%
Noninterest expenses ..................................... 1,938 1,901 37 1.9%
Income tax expense ....................................... 252 375 (123) -32.8%
------ ------ ------
Net income ............................................... $ 709 $ 771 $ (62) -8.0%
====== ====== ======
Nine Months Ended September 30, 2008 and 2007
The Company recorded consolidated net income of $2,514,000 or $.74 per
share for the first nine months of 2008 compared with net income of $2,667,000
and earnings per share of $.82 for the same period of 2007. Net income per
share, assuming dilution was $.71 for the 2008 nine months and $.77 for the same
period of 2007. Net income per share amounts for 2007 have been retroactively
adjusted to reflect a ten percent stock dividend effective December 20, 2007.
Increases in interest income and net interest income for the 2008 nine
month period reflect primarily the effects of growth of earning assets and
higher rates earned on taxable securities. Interest expense for the 2008 nine
month period is not much changed from the prior year amount as the effects of
increased amounts of deposits and borrowed funds were offset by reductions in
the rates paid for deposits and borrowings due to the factors stated previously.
Noninterest income for the 2008 nine month period was $297,000 more
than for the same period of 2007 primarily due to the recognition of increases
in the value of life insurance assets totaling $280,000.
Salaries and employee benefits for the 2008 nine month period were
$374,000 more than for the same prior year period primarily due to higher
amounts of deferred compensation expenses. Increases in other categories of
other expenses reflect higher volumes of transactions, increased numbers of
accounts, and higher depreciation and other expenses associated with the
Company's banking offices.
Summary Income Statement
------------------------
(Dollars in thousands)
For the Nine Months Ended September 30, 2008 2007 Dollar Change Percentage Change
---- ---- ------------- -----------------
Interest income .................................. $18,629 $17,462 $ 1,167 6.7%
Interest expense ................................. 9,741 9,777 (36) -0.4%
------- ------- -------
Net interest income .............................. 8,888 7,685 1,203 15.7%
Provision for loan losses ........................ 1,375 270 1,105 409.3%
Noninterest income ............................... 1,868 1,571 297 18.9%
Noninterest expenses ............................. 5,830 5,077 753 14.8%
Income tax expense ............................... 1,037 1,242 (205) -16.5%
------- ------- -------
Net income ....................................... $ 2,514 $ 2,667 $ (153) -5.7%
======= ======= =======
Net Interest Income
Net interest income, the principal source of the Company's earnings,
was higher in both the 2008 three month and nine month periods. During much of
the third quarter of 2008, financial and credit markets nationwide have been
stressed. 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.
12
Primarily because of constrained demand, some developers and builders are
finding it difficult or impossible to satisfy their obligations except by
surrendering the properties that were pledged to secure their loans either
voluntarily or involuntarily through foreclosure. As a consequence, property
values have fallen due to conditions such as oversupply of unsold housing units
and physical deterioration of those units during prolonged sales periods, or
because some homes and, indeed entire development projects, may be only
partially completed when the builders and developers are overwhelmed by negative
events and simply walk away, leaving completion of the project in the hands of
lenders.
Furthermore, the recent reluctance of large financial institutions to
lend either to long-standing customers or even to other financial institutions
is beginning to be exhibited at the community bank level. This reluctance stems
from the recent failures of several banks and other financial institutions and
reflects an aversion to the liquidity risk that a lending institution would
encounter if a counterparty, including another financial institution, was unable
to repay borrowed funds as agreed.
As a consequence of these events, the level of uncertainty in any
financing transaction increased dramatically during the 2008 third quarter.
Attempts by government agencies to intervene initially were largely ineffective
to alleviate fears or provide needed liquidity and order to the credit markets.
Interest rates in this environment have been, and are expected to continue to
be, very volatile. The structure of interest rates will probably continue to be
erratic and depart from historic relationships. For the foreseeable future,
management believes that short-term market interest rates, especially rates
related to most of its funding sources, will fluctuate significantly. However,
because depositors are currently more concerned with safety of principal than
return on investment, deposit costs are not expected to change significantly in
the near future. If the Company obtains additional funding from non-deposit
sources, the costs of such borrowing would be expected to be more closely
correlated to fluctuations in the broader credit markets.
In a further effort to encourage inter-bank lending and to reduce the
effect that the failure of a financial institution might have on the viability
of other financial institutions and other market participants, on October 14,
2008, the FDIC initiated coverage of newly issued senior unsecured debt
(including federal funds purchased), subject to certain limits, of FDIC-insured
depository institutions, U.S. bank holding companies, including financial
holding companies, and certain U.S. savings and loan holding companies and began
to provide a temporary and unlimited guarantee of funds in non-interest bearing
transaction accounts at FDIC-insured institutions under a newly created
Temporary Liquidity Guarantee Program. Coverage under this program was provided
without cost for the first thirty days of coverage. Institutions have the option
to continue coverage after the initial period and be assessed fees for such
coverage by the FDIC, or may opt out of one or both components of the program.
The FDIC will maintain on its website a list of eligible institutions that
choose to opt out of either component after the initial coverage period ends.
Management expects that it will elect to continue coverage under both components
of this program.
Three Months Ended September 30, 2008 and 2007
For the third quarter of 2008, net interest income totaled $3,230,000,
an increase of $616,000 over the $2,614,000 for the same period of 2007. The
Company's interest rate spread for the third quarter of 2008 was 2.68%, an
increase of 53 basis points over the 2.15% interest rate spread for the third
quarter of 2007. Net yield on earning assets for the 2008 third quarter was
3.18%, an increase of 27 basis points over the 2007 third quarter net yield of
2.91%. The yield on taxable investment securities for the third quarter of 2008
was 4.98% compared with 4.16% for the same period of 2007. As discussed
previously, the Company acted during the third quarter of 2008 to revamp its
portfolio of mortgage-backed securities. The average amount of taxable
securities in the 2008 period was $8,802,000 more than in the 2007 period.
Consequently, income on such securities in the 2008 period was $300,000 more
than in the 2007 period. The average amount of the Company's loan category for
the third quarter of 2008 was 13.6% more than for the third quarter of 2007, but
the interest rates associated with those loans in the 2008 period were 91 basis
points lower than in the 2007 period. The Company adjusted for approximately
$90,000 of accrued interest on loans included in nonaccrual loans for the first
time during the third quarter of 2008. As a result, interest income on loans was
only $15,000 higher in the 2008 three month period.
Rates paid for interest bearing liabilities were significantly reduced
from the prior year level. Rates paid for all types of deposits fell
dramatically and rates paid for borrowings fell more modestly. Average amounts
of time deposits outstanding for the 2008 period increased by $43,575,000, or
20.2%, over the amount for the 2007 period.
13
Average Balances, Yields and Rates
Three Months Ended September 30,
--------------------------------
2008 2007
---- ----
Interest Interest
Average Income/ Yields/ Average Income/ Yields/
Balances Expense Rates (1) Balances Expense Rates (1)
-------- ------- --------- -------- ------- ---------
(Dollars in thousands)
Assets
Interest-bearing balances due from banks .......... $ 1,533 $ 10 2.60% $ 227 $ 3 5.24%
Securities
Taxable ..................................... 101,802 1,275 4.98% 93,000 975 4.16%
Tax exempt (2) .............................. 20,998 209 3.96% 19,574 212 4.30%
---------- ------- --------- -------
Total investment securities ............ 122,800 1,484 4.81% 112,574 1,187 4.18%
Other investments ................................. 1,216 14 4.58% 845 14 6.57%
Federal funds sold ................................ 15,844 81 2.03% 11,770 145 4.89%
Loans (2) (3) (4) ................................. 262,977 4,647 7.03% 231,452 4,632 7.94%
---------- ------- --------- -------
Total interest earning assets .......... 404,370 6,236 6.14% 356,868 5,981 6.65%
Cash and due from banks ........................... 8,122 8,698
Allowance for loan losses ......................... (2,956) (2,302)
Valuation allowance - Available-for-
sale securities ............................. (596) (1,602)
Premises and equipment ............................ 8,768 8,227
Other assets ...................................... 12,572 6,560
---------- ---------
Total assets ........................... $ 430,280 $ 376,449
========== =========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts ....... $56,370 $ 250 1.76% $57,297 $ 457 3.16%
Savings ..................................... 18,700 46 0.98% 19,068 92 1.91%
Time deposits $100M and over ................ 113,755 1,021 3.57% 85,990 1,038 4.79%
Other time deposits ......................... 145,886 1,589 4.33% 130,076 1,734 5.29%
---------- ------- --------- -------
Total interest bearing
deposits ............................. 334,711 2,906 3.45% 292,431 3,321 4.51%
Short-term borrowings ............................. 1,500 8 2.12% - - 0.00%
Long-term debt .................................... 9,500 92 3.85% 4,500 46 4.06%
---------- ------- --------- -------
Total interest bearing
liabilities .......................... 345,711 3,006 3.46% 296,931 3,367 4.50%
Noninterest bearing demand deposits ............... 41,637 41,084
Other liabilities ................................. 2,907 3,061
Shareholders' equity .............................. 40,025 35,373
--------- ---------
Total liabilities and shareholders'
equity ............................... $ 430,280 $ 376,449
========== =========
Interest rate spread .............................. 2.68% 2.15%
Net interest income and net yield
on earning assets ........................... $ 3,230 3.18% $ 2,614 2.91%
Interest free funds supporting earning assets .... $58,659 $ 59,937
-----------------------------------------
(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.
14
Nine Months Ended September 30, 2007 and 2006
For the first nine months of 2008, net interest income totaled
$8,888,000, an increase of $1,203,000, or 15.7%, over the $7,685,000 amount for
the same period of 2007. The Company's interest rate spread for the 2008 nine
month period was 2.41%, an increase of 28 basis points over the 2.13% spread for
the 2007 period. The yield on interest earning assets decreased to 6.17% for the
2008 period, compared with 6.54% for the 2007 period, due to lower rates earned
on loans and federal funds sold. A significant portion of the Company's loans
are variable rate instruments that are repriced in response to changes in the
"prime rate." Actions taken by the Federal Reserve in the third quarter of 2008
generally were intended to reduce market rates of interest. Those efforts were
only partially successful due to the increased influence on interest rates of
other uncertainties that were evident.
Rates paid for interest bearing liabilities during the 2008 nine month
period were 65 basis points lower than for the 2007 period. Rates paid for time
deposits $100,000 and over were 73 basis points lower during the 2008 period
than in the 2007 period and rates paid for other time deposits decreased by 33
basis points compared with the same 2007 period. The average amounts of time
deposits outstanding during the 2008 period were $46,525,000, or 22.6%, more
than in the 2007 period. Rates paid for interest bearing transaction accounts
for the 2008 nine month period were 126 basis points less than for the same
period of 2007 and the average amount of such accounts in the 2008 period was
only $729,000, or 1.3%, more than for the 2007 period.
The Company continues to pursue a strategy to increase its market share
in its local market areas in Anderson and Oconee Counties of South Carolina.
Oconee County is served from four offices, which are located in Seneca, Walhalla
and Westminster. The Anderson County market is served from three offices in
Anderson and Williamston, including an office on Highway 81 in Anderson County
opened early in the fourth quarter of 2007.
15
Average Balances, Yields and Rates
Nine Months Ended September 30,
-------------------------------
2008 2007
---- ----
Interest Interest
Average Income/ Yields/ Average Income/ Yields/
Balances Expense Rates (1) Balances Expense Rates (1)
-------- ------- --------- -------- ------- ---------
(Dollars in thousands)
Assets
Interest-bearing balances due from banks ........... $ 1,251 $ 17 1.82% $ 141 $ 4 3.79%
Securities
Taxable ...................................... 95,782 3,464 4.83% 91,100 2,907 4.27%
Tax exempt (2) ............................... 20,683 623 4.02% 19,588 616 4.20%
---------- ------- --------- -------
Total investment securities ............. 116,465 4,087 4.69% 110,688 3,523 4.26%
Other investments .................................. 997 39 5.23% 904 43 6.36%
Federal funds sold ................................. 28,624 584 2.73% 25,733 1,007 5.23%
Loans (2) (3) (4) .................................. 255,866 13,902 7.26% 219,261 12,885 7.86%
---------- ------- --------- -------
Total interest earning assets ........... 403,203 18,629 6.17% 356,727 17,462 6.54%
Cash and due from banks ............................ 7,916 8,256
Allowance for loan losses .......................... (2,725) (2,253)
Valuation allowance - Available-for-
sale securities .............................. 347 (1,282)
Premises and equipment ............................. 8,812 8,048
Other assets ....................................... 12,355 4,673
---------- ---------
Total assets ............................ $ 429,908 $ 374,169
========== =========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts ........ $58,022 $ 843 1.94% $57,293 $ 1,373 3.20%
Savings ...................................... 28,523 323 1.51% 28,282 616 2.91%
Time deposits $100M and over ................. 108,347 3,231 3.98% 82,312 2,901 4.71%
Other time deposits .......................... 143,881 5,157 4.79% 123,391 4,729 5.12%
---------- ------- --------- -------
Total interest bearing
deposits .............................. 338,773 9,554 3.77% 291,278 9,619 4.42%
Short-term borrowings .............................. 504 8 2.12% 17 3 23.59%
Long-term debt ..................................... 6,321 179 3.78% 5,119 155 4.05%
---------- ------- --------- -------
Total interest bearing
liabilities ........................... 345,598 9,741 3.76% 296,414 9,777 4.41%
Noninterest bearing demand deposits ................ 40,910 40,028
Other liabilities .................................. 3,787 3,139
Shareholders' equity ............................... 39,613 34,588
---------- ---------
Total liabilities and shareholders'
equity ................................ $ 429,908 $ 374,169
========== =========
Interest rate spread ............................... 2.41% 2.13%
Net interest income and net yield
on earning assets ............................ $ 8,888 2.94% $ 7,685 2.88%
Interest free funds supporting earning assets ...... $57,605 $ 60,313
-----------------------------------------
(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.
16
Provision and Allowance for Loan Losses
The provision for loan losses was $965,000 for the third quarter of
2008 compared with $150,000 for the third quarter of 2007. For the first nine
months of 2008, the provision for loan losses was $1,375,000, compared with
$270,000 for the first nine months of 2007. At September 30, 2008, the allowance
for loan losses was 1.31% of loans, compared with 1.05% at December 31, 2007.
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
ability of customers to perform in accordance with the terms of their loans due
to weaknesses in the broader economic situation.
For the first nine months of 2008, net charge-offs totaled $446,000,
compared with $141,000 in net charge offs during the same period of 2007. As of
September 30, 2008, nonaccrual loans totaled $4,725,000. As of September 30,
2007, there were $481,000 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:
Nine Months Nine Months
Ended Year Ended Ended
September 30, December 31, September 30,
2008 2007 2007
---- ---- ----
(Dollars in thousands)
Allowance at beginning of period ................................. $ 2,574 $ 2,242 $ 2,242
Provision for loan losses ........................................ 1,375 594 270
Net charge-offs .................................................. (446) (262) (141)
--------- --------- ---------
Allowance at end of period ....................................... $ 3,503 $ 2,574 $ 2,371
========= ========= =========
Allowance as a percentage of loans outstanding
at period end ................................................. 1.31% 1.05% 1.00%
Loans at end of period ........................................... $ 267,075 $ 244,131 $ 236,907
========= ========= =========
17
Non-Performing and Potential Problem Loans
90 Days or
More Past Due Total Non- Percentage Percentage
Nonaccrual and Still performing of Total Potential of Total
Loans Accruing Loans Loans Problem Loans Loans
----- -------- ----- ----- ------------- -----
(Dollars in thousands)
January 1, 2007 ................... $ 50 $ - $ 50 0.02% $ 3,176 1.56%
Net change ........................ 143 - 143 (151)
------- ------- ------- -------
March 31, 2007 .................... 193 - 193 0.09% 3,025 1.43%
Net change ........................ 219 - 219 97
------- ------- ------- -------
June 30, 2007 ..................... 412 - 412 0.18% 3,122 1.38%
Net change ........................ 14 - 14 106
------- ------- ------- -------
September 30, 2007 ................ 426 - 426 0.18% 3,228 1.36%
Net change ........................ 199 - 199 (140)
------- ------- ------- -------
December 31, 2007 ................. 625 - 625 0.26% 3,088 1.26%
Net change ........................ (181) - (181) 962
------- ------- ------- -------
March 31, 2008 .................... 444 - 444 0.18% 4,050 1.61%
Net change ........................ 1,436 - 1,436 1,338
------- ------- ------- -------
June 30, 2008 ..................... 1,880 - 1,880 0.73% 5,388 2.10%
Net change ........................ 2,845 - 2,853 1,194
------- ------- ------- -------
September 30, 2008 ................ $ 4,725 $ - $ 4,733 1.77% $ 6,582 2.46%
======= ======= ======= =======
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 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, 2008,
approximately 75% of the Company's potential problem loans were included in the
Company's least severe risk-rating grade. Approximately 90% 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.
Noninterest Income
Noninterest income totaled $634,000 for the third quarter of 2008,
compared with $583,000 for the 2007 quarter. Service charges on deposit accounts
in the 2008 quarter were $374,000 representing a decrease of $20,000 from the
prior year period. Increases in the value of bank-owned life insurance during
the third quarter of 2008 totaled $94,000 compared with $33,000 during the same
period of 2007. Sales of securities in the 2008 third quarter were undertaken to
take advantage of attractive yields for fixed rate mortgage backed securities
and to eliminate adjustable rate mortgage backed securities from the Company's
portfolio. Those sales resulted in net losses of $3,000. There were no sales of
securities in the 2007 period.
For the nine months ended September 30, 2008, noninterest income
totaled $1,868,000, compared with $1,571,000 for the same period of 2007.
Service charges on deposit accounts in the 2008 period were $1,109,000
representing an increase of $38,000 from the prior year period's $1,071,000.
During the 2008 and 2007 nine month periods, increases in the value of life
insurance assets totaling $280,000 and $33,000 were recognized, respectively.
Noninterest Expenses
Noninterest expenses totaled $1,938,000 for the third quarter of 2008
compared with $1,901,000 for the same period of 2007, representing an increase
of $37,000 or 1.9%. Salaries and employee benefits decreased by $57,000, or
5.0%, to 1,073,000 due to lower rates paid for employee life and disability
insurance coverage.
Occupancy and furniture and equipment expenses for the third quarter of
2008 increased by $18,000 compared with 2007 primarily due to higher
depreciation and operating costs of the Company's offices. Higher expenses were
incurred in 2008 for stationery, postage, supplies and promotional expenses
resulting from the opening of the new corporate offices and additional banking
offices and increased numbers of deposit accounts. The cost of deposit insurance
18
was $58,000 for the third quarter of 2008, compared with $10,000 for the third
quarter of 2007. Further increases in these expenses are expected to occur due
to costs expected to be incurred to continue coverage of certain debt and
non-interest bearing transaction accounts under the Temporary Liquidity
Guarantee Program.
For the nine months ended September 30, 2008, salaries and employee
benefits increased by $374,000, or 13.2%, over the amount for 2007. The increase
in salaries and benefits for 2008 is attributable to an increase in the number
of employees for the new Seneca and Anderson offices, and normal salary
increases. Net occupancy and furniture and equipment expenses increased by an
aggregate of $101,000, or 15.8%, due to expansion of the Company's network of
banking offices and higher costs of utilities, maintenance, and other recurring
expenses.
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 $20,000,000
of credit availability under its FHLB lines of credit and additional amounts are
available under federal funds purchased facilities. Provided the Company
continues to participate in the Temporary Liquidity Guarantee Program, any newly
issued senior unsecured debt issued before July 1, 2009 would be fully
guaranteed by the FDIC until its maturity not later than June 30, 2012.
Management believes that continuing to participate in that program would
significantly increase the Company's ability to secure financing as needed up to
the limits imposed by the program.
As of September 30, 2008, the ratio of loans to total deposits was
69.6%, compared with 68.6% as of December 31, 2007. Deposits as of September 30,
2008 were $383,722,000, an increase of $27,855,000 or 7.8% over the amount as of
December 31, 2007. Management believes that the Company's liquidity sources are
adequate to meet its operating needs.
Capital Resources
The Company's capital base increased by $2,880,000 since December 31,
2007 as the result of net income of $2,514,000 for the first nine months of
2008, $365,000 from the exercise of employee stock options, plus a $1,000 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 September 30, 2008 risk based capital ratios for the Company and
the Bank are presented in the following table, compared with the "well
capitalized" and minimum ratios under the regulatory definitions and guidelines:
Total
Tier 1 Capital Leverage
------ ------- --------
Community First Bancorporation 13.8% 15.0% 9.5%
Community First Bank 13.1% 14.3% 9.0%
Minimum "well-capitalized" requirement 6.0% 10.0% 6.0%
Minimum requirement 4.0% 8.0% 5.0%
19
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, 2008
(Dollars in thousands)
Loan commitments ..................... $ 43,081
Standby letters of credit ............ 889
Loan commitments involve agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and some
involve payment of a fee. Many of the commitments are expected to expire without
being fully drawn; therefore, the total amount of loan commitments does not
necessarily represent future cash requirements. Each customer's creditworthiness
is evaluated on a case-by-case basis. The amount of collateral obtained, if any,
upon extension of credit is based on management's credit evaluation of the
borrower. Collateral held varies but may include commercial and residential real
properties, accounts receivable, inventory and equipment.
Standby letters of credit are conditional commitments to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
standby letters of credit is the same as that involved in making loan
commitments to customers. 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, 2008.
As described under "Liquidity," management believes that its various
sources of liquidity provide the resources necessary for the Bank to fund the
loan commitments and to perform under standby letters of credit, if the need
arises. Neither the Company nor the Bank are involved in other off-balance sheet
contractual relationships or transactions that could result in liquidity needs
or other commitments or significantly impact earnings.
Item 3. - Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk is primarily related to the risk
of loss from adverse changes in market prices and rates. This risk arises
principally from interest rate risk inherent in the Company's lending, deposit
gathering and borrowing activities. Management actively monitors and manages its
interest rate risk exposure. Although the Company manages other risks, such as
credit quality and liquidity risk in the normal course of business, management
considers interest rate risk to be its most significant market risk and this
risk could potentially have the largest material effect on the Company's
financial condition and results of operations. Other types of market risk, such
as commodity price risk and foreign currency exchange risk, do not arise in the
normal course of the Company's community banking operations.
The Company uses a simulation model to assist in achieving consistent
growth in net interest income while managing interest rate risk. As of September
30 2008, the model indicates that net interest income would increase $103,000
and net income would increase $64,000 in the next twelve months if interest
rates rose by 100 basis points. Conversely, net interest income would decrease
$52,000 and net income would decrease $32,000 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 September 30, 2008, there was no significant change from the
interest rate sensitivity analysis for the various changes in interest rates
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calculated as of December 31, 2007. The foregoing disclosures related to the
Company's market risk should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations included in the
2007 Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
Item 4T. - Controls and Procedures
Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or
240.15d-15(b) of the issuer's disclosure controls and procedures (as defined in
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 1A. Risk Factors
The following are additional risk factors for the Company, to be read in
conjunction with Item 1A, "Risk Factors - Risks Related to Our Industry" in the
Company's Form 10-K for the year ended December 31, 2007.
1. There can be no assurance that recent government actions will help
stabilize the U.S. financial system.
In response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, various branches and agencies of the U.S. government have put in
place laws, regulations and programs to address capital and liquidity issues in
the banking system. There can be no assurance, however, as to the actual impact
that such laws, regulations and programs will have on the financial markets,
including the extreme levels of volatility, liquidity and confidence issues and
limited credit availability currently being experienced. The failure of such
laws, regulations and programs to help stabilize the financial markets and a
continuation or worsening of current financial market conditions could
materially and adversely affect our business, financial condition, results of
operations, access to credit or the trading price of our common stock.
2. Current levels of market volatility are unprecedented.
Although many markets have been experiencing volatility and disruption for
months, in the past few weeks, the volatility and disruption of financial and
credit markets has reached unprecedented levels for recent times. In some cases,
the markets have produced downward pressure on stock prices and credit
availability for certain issuers without regard to those issuers' underlying
financial strength. If current levels of market disruption and volatility
continue or worsen, there can be no assurance that we will not experience an
adverse effect, which may be material, on our ability to access capital and on
our business, financial condition and results of operations.
3. The soundness of other financial institutions could adversely affect us.
Financial services institutions are interrelated as a result of trading,
clearing, counterparty, or other relationships. We have exposure to many
different industries and counterparties, and we routinely execute transactions
with counterparties in the financial services industry, including brokers,
dealers, commercial banks, investment banks, and government sponsored
enterprises. Many of these transactions expose us to credit risk in the event of
default of our counterparty. In addition, our credit risk may be exacerbated
when the collateral held by us cannot be realized or is liquidated at prices not
sufficient to recover the full amount of the loan or other obligation due us.
There is no assurance that any such losses would not materially and adversely
affect our results of operations or earnings.
4. Current market developments may adversely affect our industry, business and
results of operations.
Dramatic declines in the housing market during the prior year, with falling home
prices and increasing foreclosures and unemployment, have resulted in
significant write-downs of asset values by financial institutions, including
government-sponsored entities and major commercial and investment banks. These
write-downs, initially of mortgage-backed securities but spreading to credit
default swaps and other derivative securities have caused many financial
institutions to seek additional capital, to merge with larger and stronger
institutions and, in some cases, to fail. Reflecting concern about the stability
of the financial markets generally and the strength of counterparties, many
lenders and institutional investors have reduced, and in some cases, ceased to
provide funding to borrowers, including other financial institutions. The
resulting lack of available credit, lack of confidence in the financial sector,
increased volatility in the financial markets and reduced business activity
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could materially and adversely, directly or indirectly, affect our business,
financial condition and results of operations.
Item 6. - Exhibits
Exhibits
31. Rule 13a-14(a)/15d-14(a) Certifications
32. Certifications Pursuant to 18 U.S.C. Section 1350
22
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 14, 2008 /s/ Frederick D. Shepherd, Jr.
----------------- ----------------------------------------------
Date Frederick D. Shepherd, Jr., Chief Executive
Officer and Chief Financial Officer
23
EXHIBIT INDEX
31. Rule 13a-14(a)/15d-14(a) Certifications
32. Certifications Pursuant to 18 U.S.C. Section 1350
24