UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM _________ TO _________
Commission File Number 0-50322
COMMUNITY FIRST BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of Small Business Issuer as specified in its Charter)
MARYLAND 36-4526348
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2420 NORTH MAIN STREET, MADISONVILLE, KENTUCKY 42431
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(270) 326-3500
- --------------------------------------------------------------------------------
(Issuer's telephone number)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
As of September 30, 2004, there were 277,725 shares of the Registrant's
common stock, par value $.01 per share, outstanding.
Transitional Small Business Issuer Disclosure Format (check one):
Yes No X
--- ---
COMMUNITY FIRST BANCORP, INC.
MADISONVILLE, KENTUCKY
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2004
(unaudited) and December 31, 2003 3
CondensedConsolidated Statements of Operations - (Unaudited)
for the three and nine months ended September 30, 2004
and 2003 4
Condensed Consolidated Statements of Cash Flows - (Unaudited)
for the nine months ended September 30, 2004 and 2003 5
CondensedConsolidated Statements of Changes in Stockholders'
Equity for the nine months ended September 30, 2004
and 2003 7
Notes to Condensed Consolidated Financial Statements
(Unaudited) 8
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
Item 3. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 6. Exhibits 18
Signatures 19
2
COMMUNITY FIRST BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2004 2003
----------- -----------
(UNAUDITED)
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 437,368 $ 1,068,146
Interest-bearing demand deposits 1,321,804 15,916
Interest-bearing time deposits -- 25,000
----------- -----------
Total cash and cash equivalents 1,759,172 1,109,062
Securities, held-to-maturity (market values of
$107,806 and $1,535,160 at September 30,
2004 and December 31, 2003, respectively) 100,815 1,424,067
Securities, available-for-sale, at fair value 2,227,188 1,975,718
Loans, net of the allowance for loan loss of
$270,081 and $180,955 at September 30, 2004
and December 31, 2003, respectively 46,714,257 35,066,142
Premises and equipment, net 2,555,638 1,952,549
Foreclosed real estate 15,000 --
Federal Home Loan Bank (FHLB) stock 679,800 659,600
Interest receivable 235,139 159,150
Deferred income taxes 388,638 127,677
Other assets 83,495 67,499
----------- -----------
Total assets $54,759,142 $42,541,464
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $41,349,502 $33,171,526
FHLB advances 9,500,000 5,000,000
Interest payable and other liabilities 216,613 161,171
----------- -----------
Total liabilities 51,066,115 38,332,697
----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value;
authorized 1,000,000 shares -- --
Common stock, $.01 par value: authorized,
5,000,000 shares; issued and outstanding
277,725 at September 30, 2004 and
December 31, 2003 2,777 2,777
Additional paid-in capital 2,457,429 2,466,428
Retained earnings - substantially
restricted 1,254,215 1,763,045
Accumulated other comprehensive income (21,394) (23,483)
----------- -----------
Total stockholders' equity 3,693,027 4,208,767
----------- -----------
Total liabilities and stockholders' equity
$54,759,142 $42,541,464
=========== ===========
See notes to condensed consolidated financial statements.
3
COMMUNITY FIRST BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Interest and dividend income:
Loans $ 674,778 $ 524,321 $ 1,840,084 $ 1,513,665
Investment securities 14,165 31,517 64,545 85,757
Dividend on FHLB Stock 6,624 6,519 19,744 19,159
----------- ----------- ----------- -----------
Total interest and
dividend income 695,567 562,357 1,924,373 1,618,581
----------- ----------- ----------- -----------
Interest expense:
Deposits 241,193 206,717 688,963 614,939
FHLB advances 36,907 2,943 69,157 7,673
----------- ----------- ----------- -----------
Total interest expense 278,100 209,660 758,120 622,612
----------- ----------- ----------- -----------
Net interest income 417,467 352,697 1,166,253 995,969
Provision for loan losses 32,500 18,000 101,500 50,000
----------- ----------- ----------- -----------
Net interest income
after provision for
loan losses 384,967 334,697 1,064,753 945,969
----------- ----------- ----------- -----------
Noninterest income:
Service charges and fees 60,627 37,865 155,283 100,243
Loss on sale of foreclosed
assets -- -- 404 --
Foreclosed real estate
expense, net (450) -- (3,215) --
Insurance commissions and
premiums 665 940 2,890 3,584
Other income 1,871 3,332 10,234 14,083
----------- ----------- ----------- -----------
Total noninterest income 62,713 42,137 165,596 117,910
----------- ----------- ----------- -----------
Other expenses:
Compensation and benefits 295,504 144,363 814,849 398,013
Directors fees 10,800 10,800 32,400 32,400
Occupancy expense 91,266 50,483 282,285 121,042
Insurance premiums 10,815 8,422 28,732 20,341
Data processing 55,389 45,989 164,926 135,230
Advertising 41,424 23,258 127,023 60,656
Office supplies and postage 32,795 21,518 112,414 50,740
Payroll and other taxes 30,055 18,112 81,557 53,696
Professional fees 5,961 11,572 83,770 29,027
Expenses related to conversion
of data processor -- -- 110,834 --
Other operating expenses 61,270 26,596 162,427 75,567
----------- ----------- ----------- -----------
Total noninterest expense 635,279 361,113 2,001,217 976,712
----------- ----------- ----------- -----------
Income (loss) before income
taxes (187,599) 15,721 (770,868) 87,167
Income tax expense (benefit) (63,730) 5,933 (262,038) (49,435)
----------- ----------- ----------- -----------
Net income (loss) $ (123,869) $ 9,788 $ (508,830) $ 136,602
=========== =========== =========== ===========
Basic earnings (loss) per share $ (0.45) $ 0.04 $ (1.83) $ 0.49
=========== =========== =========== ===========
Weighted average common shares
outstanding during the period 277,725 277,725 277,725 277,725
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
4
COMMUNITY FIRST BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
----------------------------
2004 2003
------------ ------------
Operating Activities:
Net income (loss) $ (508,830) $ 136,602
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
FHLB stock dividend (20,200) (19,000)
Provision for loan losses 101,500 50,000
Depreciation, amortization and accretion 142,556 63,036
Loss on sale of foreclosed assets -- --
Deferred income tax benefit (262,038) (50,140)
Change in assets and liabilities:
Other assets (30,996) --
Accrued interest receivable and other assets (75,989) (101,552)
Accrued interest payable and other liabilities 55,442 150,172
Net cash (used)/provided by
operating activities (598,555) 229,118
------------ ------------
Investing Activities:
Net increase in loans (11,749,615) (6,604,585)
Proceeds from maturities/calls of held-to-maturity
securities 1,323,252 439,914
Purchases of available-for-sale securities (252,570) (2,014,098)
Purchases of premises and equipment (741,378) (772,584)
------------ ------------
Net cash used in investing
activities (11,420,311) (8,951,353)
------------ ------------
Financing Activities:
Net increase in deposits 8,177,976 4,227,953
Payments on short-term borrowings (4,000,000) --
Proceeds from short-term borrowings 8,500,000 2,000,000
Net proceeds/(costs) from issuance of common stock (9,000) 2,469,205
------------ ------------
Net cash provided by financing activities 12,668,976 8,697,158
------------ ------------
Net increase (decrease) in cash and cash equivalents 650,110 (25,077)
Cash and cash equivalents, beginning of period 1,109,062 758,126
------------ ------------
Cash and cash equivalents, end of period $ 1,759,172 $ 733,049
============ ============
See notes to condensed consolidated financial statements.
5
COMMUNITY FIRST BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30
--------------------------
2004 2003
------------ ----------
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $758,120 $622,612
======== ========
NON-CASH TRANSACTIONS:
Loans transferred to foreclosed real estate $ 15,000 $ --
======== ========
See notes to condensed consolidated financial statements.
6
COMMUNITY FIRST BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
COMMON STOCK ADDITIONAL
---------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
------------------------------------------------------------
BALANCE, JANUARY 1, 2003 0 $0 $0 $1,748,866
Comprehensive income
Net income -- -- -- $136,603
Change in unrealized depreciation on
available-for-sale
Total securities, net of taxes
Total comprehensive income
Issuance of stock 277,725 2,777 2,446,428
------- ------ ---------- ------------
BALANCE, SEPTEMBER 30, 2003 277,725 $2,777 2,466,428 $1,885,469
======= ====== ========== ============
BALANCE, JANUARY 1, 2004 277,725 $2,777 $2,466,428 $1,763,045
Comprehensive income
Net loss -- -- -- $(508,830)
Change in unrealized depreciation on
available-for-sale securities, net of
taxes -- -- -- --
Total comprehensive loss
Costs of stock issuance (9,000)
------- ------ ---------- ----------
BALANCE, SEPTEMBER 30, 2004 277,725 $2,777 $2,457,428 $1,254,215
======= ====== ========== ==========
ACCUMULATED
OTHER
COMPREHENSIVE COMPREHENSIVE
INCOME (LOSS) INCOME (LOSS) TOTAL
---------------------------------------------------------
BALANCE, JANUARY 1, 2003 $0 $1,748,866
Comprehensive income $136,603
Net income $ 136,603
Change in unrealized depreciation on
available-for-sale
Total securities, net of taxes $(18,177) $ (18,177) $(18,177)
---------
Total comprehensive income $ 118,426
=========
Issuance of stock 2,468,205
----------
BALANCE, SEPTEMBER 30, 2003 $(18,177) $4,336,497
======== ==========
BALANCE, JANUARY 1, 2004 $(23,483) $4,208,767
Comprehensive income
Net loss -- $(508,830) $ (508,830)
Change in unrealized depreciation on
available-for-sale securities, net of
taxes 2,089 2,089 2,089
---------
Total comprehensive loss $(506,741) --
=========
Costs of stock issuance (9,000)
-------- ----------
BALANCE, SEPTEMBER 30, 2004 $(21,394) $3,693,026
======== ==========
See notes to condensed consolidated financial statements.
7
COMMUNITY FIRST BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. COMMUNITY FIRST BANCORP, INC.
In March 2003, Community First Bancorp, Inc. (the "Company") was
incorporated to facilitate the conversion of Community First Bank (the
"Bank") from a mutual savings bank to a stock savings bank (the
"Conversion"). In connection with the Conversion, the Company offered its
common stock to the depositors and borrowers of the Bank as of specified
dates. The Conversion was consummated on June 26, 2003, at which time the
Company became the holding company for the Bank and issued shares of its
stock to the general public.
The Company filed a Form SB-2 with the Securities and Exchange Commission
("SEC") on April 1, 2003, which as amended, was declared effective by the
SEC on May 14, 2003. The Bank filed a Form AC with the Office of Thrift
Supervision (the "OTS") on April 2, 2003, which as amended, along with
related offering and proxy materials, was conditionally approved by the OTS
on May 14, 2003. The Company also filed an Application H-(e)1-S with the
OTS on April 2, 2003, which was conditionally approved by the OTS on May
14, 2003. The members of the Bank approved the Plan of Conversion at a
special meeting held on June 23, 2003, and the subscription offering closed
on June 17, 2003.
On June 26, 2003, the Company became the holding company for the Bank upon
the consummation of the Conversion. The Conversion was accomplished through
the sale and issuance by the Company of 277,725 shares of common stock at
$10 per share. Net proceeds from the sale of common stock were $2,460,205.
Costs associated with the Conversion were deducted from the proceeds from
the sale of the common stock and totaled $317,045.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements were
prepared in accordance with instructions for Form 10-QSB and therefore, do
not include all disclosures necessary for a complete presentation of the
statements of condition, statements of operations and statement of cash
flows in conformity with accounting principles generally accepted in the
United States of America. However, all adjustments (all of which are of a
normal recurring nature), which are, in the opinion of management,
necessary for the fair presentation of the interim financial statements
have been included. The condensed consolidated balance sheet of the Company
as of December 31, 2003 has been derived from the audited condensed
consolidated balance sheet of the company as of that date. Certain
information and note disclosures normally included in the Company's annual
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. These condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-KSB annual report for 2003 filed with the
Securities and Exchange Commission. The statements of operations for
periods presented are not necessarily indicative of the results which may
be expected for the entire year.
8
The unaudited condensed consolidated financial statements include the
accounts of the Company and the Bank for the periods presented in 2004 and
the accounts of the Bank for the periods presented in 2003. All material
intercompany balances and transactions have been eliminated in
consolidation.
3. OTHER COMPREHENSIVE LOSS
Other comprehensive loss components and related taxes were as follows:
2004 2003
---- ----
Unrealized loss on available-
for-sale securities before
tax effect $(3,167) $ --
Tax benefit 1,077 --
------- -----
Other comprehensive loss $(2,090) $ --
======= =====
4. EARNINGS PER SHARE
Earnings per share has been determined in accordance with Statements of
Financial Accounting Standards No. 128, "Earnings per Share." Earnings per
common share were computed by dividing net income by the number of shares
of common stock issued in the Bank's conversion to stock form as if such
shares had been outstanding for the entire period. Diluted earnings per
share is not presented since the Company did not have any outstanding
common stock equivalents.
The following data show the amounts used in computing earnings per share
(EPS).
2004 2003
---- ----
Nine Months ended September 30,
Net income (loss) $(508,830) $ 136,602
Weighted average number of
common shares 277,725 277,725
--------- ---------
Basic Earnings (Loss)
per share $ (1.83) $ 0.49
========= =========
2004 2003
---- ----
Three Months ended September 30,
Net income (loss) $(123,869) $ 9,788
Weighted average number of
common shares 277,725 277,725
--------- ---------
Basic Earnings (Loss)
per share $ (0.45) $ 0.04
========= =========
9
5. REGULATORY CAPITAL
The Bank's actual capital and its statutory required capital levels are as
follows (in thousands):
SEPTEMBER 30, 2004
-------------------------------------------------------------------------------
FOR CAPITAL TO BE WELL
ADEQUACY PURPOSES CAPITALIZED UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
------------------------- ------------------------- ------------------------
ACTUAL REQUIRED REQUIRED
------------------------- ------------------------- ------------------------
AMOUNT % AMOUNT % AMOUNT %
------------------------- ------------------------- ------------------------
Core capital $3,612 6.59% $2,191 4.00% $3,287 6.00%
Tangible capital 3,612 6.59% 2,191 4.00% n/a n/a
Total Risk based capital 3,882 12.29% 2,527 8.00% 3,159 10.00%
Tier 1 Risk based capital 3,612 11.44% n/a n/a 2,739 5.00%
10
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion and analysis is intended to assist in understanding the
financial condition and results of operations of the Company.
FORWARD-LOOKING STATEMENTS
When used in this discussion and elsewhere in this Quarterly Report on Form
10-QSB, the words or phrases "will likely result," "are expected to," will
continue," "is anticipated," "estimate," "project," or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The Bank cautions readers not
to place undue reliance on any such forward-looking statements, which speak only
as of the date made, and advises readers that various factors, including
regional and national economic conditions, substantial changes in level of
market interest rates, credit and other risks of lending and investment
activities, expenses related to the opening of the new office and competitive
and regulatory factors could affect the Company's financial performance and
could cause the Bank's actual results for future periods to differ materially
from those anticipated or projected. The Company does not undertake and
specifically disclaims any obligation to update any forward-looking statements
to reflect occurrence of anticipated or unanticipated events or circumstances
after the date of such statements.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
ALLOWANCE FOR LOAN LOSSES. The Company's condensed consolidated financial
statements are prepared in accordance with accounting principles generally
accepted in the United States and follow general practices within the financial
services industry. The most significant accounting policies followed by the
Company are presented in Note 1 to the consolidated financial statements in the
Company's Annual Report on Form 10-KSB filed with the Securities and Exchange
Commission. These policies, along with the disclosures presented in the other
financial statement notes and in this financial review, provide information on
how significant assets and liabilities are valued in the financial statements
and how those values are determined. Based on the valuation techniques used and
the sensitivity of financial statement amounts to the methods, assumptions, and
estimates underlying those amounts, management has identified the determination
of the allowance for loan losses to be the accounting area that requires the
most subjective or complex judgments, and as such could be most subject to
revision as new information becomes available.
The allowance for loan losses represents management's estimate of probable
credit losses inherent in the loan portfolio. Determining the amount of the
allowance for loan losses is considered a critical accounting estimate because
it requires significant judgment and the use of estimates related to the amount
and timing of expected future cash flows on impaired loans, estimated losses on
loans based on historical loss experience, and consideration of current economic
trends and conditions, all of which may be susceptible to significant change.
11
The loan portfolio also represents the largest asset type on the condensed
consolidated balance sheet. Note 1 to the consolidated financial statements in
the Company's Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission describes the methodology used to determine the allowance
for loan losses, and a discussion of the factors driving changes in the amount
of the allowance for loan losses is included under Asset Quality below.
Loans that exhibit probable or observed credit weaknesses are subject to
individual review. Where appropriate, reserves are allocated to individual loans
based on management's estimate of the borrower's ability to repay the loan given
the availability of collateral, other sources of cash flow and legal options
available to the Company. Included in the review of individual loans are those
that are impaired as provided in SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan." The Company evaluates the collectibility of both
principal and interest when assessing the need for a loss accrual. Historical or
industry loss rates are applied to other loans not subject to reserve
allocations. These historical or industry loss rates may be adjusted for
significant factors that, in management's judgment, reflect the impact of any
current conditions on loss recognition. Factors which management considers in
the analysis include the effects of the national and local economies, trends in
the nature and volume of loans (delinquencies, charge-offs and nonaccrual
loans), changes in mix, asset quality trends, risk management and loan
administration, changes in internal lending policies and credit standards, and
examination results from bank regulatory agencies and our internal credit
examiners.
An unallocated reserve is maintained to recognize the imprecision in estimating
and measuring loss when evaluating reserves for individual loans or pools of
loans. Reserves on individual loans and historical or industry loss rates are
reviewed quarterly and adjusted as necessary based on changing borrower and/or
collateral conditions and actual collection and charge-off experience.
The Company has not substantively changed any aspect of its overall approach in
the determination of the allowance for loan losses. There have been no material
changes in assumptions or estimation techniques as compared to prior periods
that impacted the determination of the current period allowance.
Based on the procedures discussed above, management is of the opinion that the
reserve of $270,081 was adequate, but not excessive, to absorb estimated credit
losses associated with the loan portfolio at September 30, 2004.
DEFERRED INCOME TAXES. We have a recorded deferred tax asset of $388,638 as of
December 31, 2004. We evaluate this asset on a quarterly basis. To the extent we
believe it is more likely than not that it will not be utilized, we establish a
valuation allowance to reduce its carrying amount to the amount we expect to be
realized. At September 30, 2004, there is no valuation allowance established.
The deferred tax asset will be utilized as we become profitable. Prior to the
expenses incurred with our computer conversion and the opening of our new main
office, we had three consecutive profitable quarters from January 2003 through
September 2003.
12
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 2004 AND 2003
NET INCOME/LOSS. Net loss for the three months ended September 30, 2004 was
$123,900 compared to net income of $9,800 for the three months ended September
30, 2003. Net loss for the nine months ended September 30, 2004 was $508,832
compared to net income of $136,600 for the nine months ended September 30, 2003.
The Company's net loss for the three and nine months ended September 30, 2004
reflects expenses incurred as a result of opening a new main office, as well as
expenses associated with a computer conversion which offset improvements in net
interest income and noninterest income.
NET INTEREST INCOME. Net interest income increased $64,800 or 18.4% to $417,500
for the three months ended September 30, 2004 compared to $352,700 for the three
months ended September 30, 2003. Year-to-date net interest income was $1,166,300
compared to $996,000 for the nine months ended September 30, 2003, an increase
of $170,300 or 17.1%. The increase in net interest income during the 2004
periods was attributable to a higher volume of loans. Interest income for the
three and nine months ended September 30, 2004 was $695,600 and $1,924,400,
respectively, an increase of $133,200 and $305,800 over the prior year. The
increase in interest income reflects a higher volume of interest-earning assets
and a shift in interest-earning assets into higher-yielding loans. During the
nine months ended September 30, 2004, net loans averaged $40.6 million for the
period as compared to $29.1 million during the first nine months of fiscal year
2003, an increase of $11.5 million or 39.5%. While interest rates decreased
during this period, interest income increased by $305,800 primarily due to
higher outstanding loan balances. Net interest income also benefited from
reduced deposit costs in the lower interest rate environment as higher costing
certificates of deposit matured. With increased deposits of $9.0 million,
interest expense increased by $68,400 and $135,500 for the three and nine months
ended September 30, 2004. The Bank's interest rate spread decreased to 3.23% for
the nine months ended September 30, 2004 compared to 3.48% for the nine months
ended September 30, 2003 The narrowing of the spread was primarily attributable
to two short-term certificate of deposit promotions conducted in connection with
the opening of the new office which attracted approximately $2.1 million in new
deposits. Net interest margin decreased to 3.43% for the 2004 period compared to
3.64% for the 2003 period.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $32,500 and
$101,500 for the three and nine months ended September 30, 2004, respectively,
compared to $18,000 and $50,000 for the three and nine months ended September
30, 2003, respectively. The Bank makes provisions for loan losses in amounts
deemed necessary to maintain the adequacy of the allowance for loan losses. At
September 30, 2004, the Bank's allowance for loan losses was $270,081 or 0.57%
of the gross loan portfolio, compared to $180,955 or 0.51% of the gross loan
portfolio as of December 31, 2003. The increase in allowance for loan losses can
be attributed to the increase in commercial and consumer lending during the nine
months ended September 30, 2004.
NONINTEREST INCOME. Noninterest income was $62,700 and $165,600 for the three
and nine months ended September 30, 2004, respectively, compared to $42,100 and
$117,900 for the three and nine months ended September 30, 2003, respectively.
The increase for the most recent periods is due primarily to increases in the
volume of non-sufficient funds fees and overdraft fees.
13
NONINTEREST EXPENSE. Noninterest expense was $635,300 and $361,100 for the three
months ended September 30, 2004 and 2003, respectively, and $2,001,200 and
$976,700 for the nine months ended September 30, 2004 and 2003, respectively.
The increases for the three months of $274,200 or 76.0% and for the nine months
of $1,024,500 or 104.9% were due primarily to the addition of a new main office
and expenses incurred in the conversion of data processors. The opening of the
new main office and its related renovations and improvements created increased
occupancy expenses of $40,800 or 80.8% to $91,300 for the three months ended
September 30, 2004 compared to $50,500 for the three months ended September 30,
2003. For the nine-month period, occupancy expense increased $161,200 or 133.2%
to $282,300. The data processor conversion expenses totaling $110,800 for the
nine months ended September 30, 2004 included billed items from our previous
data processor of $22,700 for data test tapes and $30,700 for online
deconversion services. During the three months ended June 30, 2004 our previous
data processor refunded us $8,300 for overpayment of deconversion expenses. Also
included were items from our new data processor such as data mapping and
converting, parameter setup, item processing setup, data communication
installation fees, and software license fees. Computer and data processing
expense increased by $9,400 or 20.4% to $55,400 for the three months ended
September 30, 2004 compared to $46,000 for the three months ended September 30,
2003 and increased by $29,700 or 22.0% to $164,900 for the nine months ended
September 30, 2004 and compared to $135,200 for the nine months ended September
30, 2003. The increase in data-processing costs is related to the growth of the
Bank and the increase in the number of customers since the opening of the new
office. Compensation and benefits expense increased by $151,100 or 104.7% to
$295,400 for the three months ended September 30, 2004 compared to $144,400 for
the three months ended September 30, 2003 and increased by $416,800 or 104.7% to
$814,800 for the nine months ended September 30, 2004 compared to $398,000 for
the nine months ended September 30, 2003. Salaries for officers increased by
$81,800 or 168.6% to $130,300 for the three months ended September 30, 2004 and
increased by $189,400 or 131.6% to $333,400 for the nine months ended September
30, 2004 compared to $48,500 and $144,000 for the three and nine months ended
September 30, 2003. The increase was due to the addition of four new loan
officers, two of whom also serve as branch managers for our two locations.
Salaries for employees increased by $41,800 or 60.5% to $111,000 for the three
months ended September 30, 2004 and increased by $119,000 or 70.6% to $287,400
for the nine months ended September 30, 2004 compared to $69,100 and $168,500
for the three and nine months ended September 30, 2003 due to the addition of
five to six new employees hired to help with staffing of the new main office.
Advertising expenses increased $18,200 or 78.1% to $41,400 for the three months
ended September 30, 2004 and increased $66,400, or 109.4% to $127,000 for the
nine months ended September 30, 2004 compared to $23,300 and $60,700 for the
three and nine months ended September 30, 2003. The change was due primarily to
increased overall marketing expenses, marketing the new main office and the
activities associated with its grand opening on March 5, 2004, as well as
marketing efforts to explain our data processor conversion and its effects to
our customers. Office supplies and postage expenses increased $11,300 or 52.4%
to $32,800 for the three months ended September 30, 2004 and increased $61,700,
or 121.6% to $112,400 for the nine months ended September 30, 2004 compared to
$21,500 and $50,700 for the three and nine months ended September 30, 2003. The
increases are due primarily to the greater need for paper and supplies with the
bank's new second location. Professional fees decreased $5,600 or 48.5% to
$6,000 for the three months ended September 30, 2004 and increased $54,700, or
188.6% to $83,800 for the nine months ended September
14
30, 2004 compared to $11,600 and $29,000 for the three and nine months ended
September 30, 2003. The change was due primarily to additional legal and
accounting fees incurred in connection with SEC reporting requirements.
INCOME TAX EXPENSE. The Company provides for both the current and deferred tax
effects of the transactions reported in its financial statements and established
deferred tax assets and liabilities for the temporary differences between the
financial reporting and tax bases of its assets and liabilities. The Company
establishes valuation allowances for its net deferred tax assets unless it is
more likely than not that these net deferred tax assets will be realized. Based
on future projected earnings, and other factors, the Bank has not established a
valuation allowance for its net deferred tax assets.
COMPARISON OF BALANCE SHEETS AT SEPTEMBER 30, 2004 AND DECEMBER 31, 2003
The Company's total assets as of September 30, 2004 were $54.8 million, an
increase of $12.3 million or 28.9% from December 31, 2003's level of $42.5
million. The increase was due primarily to growth in the loan portfolio, more
specifically an increase in commercial real estate loans. Net loans receivable
increased by $11.6 million, or 33.2%, which reflected our continued marketing
efforts. The Company's investment securities decreased by $1.1 million, or
31.5%, to $2.3 million at September 30, 2004 due to maturities of securities.
Premises and equipment increased $603,000, or 30.9%, primarily due to the
opening of a new main office and the purchase of equipment for the new office.
The Company's cash and cash equivalents as of September 30, 2004 were $1.8
million, an increase of $700,000 from December 31, 2003's level of $1.1 million.
Liabilities increased by $12.7 million, or 33.2%, to $51.1 million due primarily
to a $8.2 million, or 24.7%, increase in deposits as the Bank continued to
attract deposits locally at favorable rates. The increase in deposits came
primarily from checking accounts and certificates of deposit. Federal Home Loan
Bank advances increased $4.5 million or 90.0% to $9.5 million at September 30,
2004 from $5.0 million at December 31, 2003. The Bank has used proceeds from the
advances to help meet loan demand.
Stockholders' equity decreased to $3.7 million at September 30, 2004 from $4.2
million at December 31, 2003. The decrease in stockholders' equity principally
reflects $509,000 in losses during the period.
At September 30, 2004, the Bank was in compliance with all applicable regulatory
capital requirements with tangible and core capital equal to 6.59% of adjusted
total assets and total risk-based capital equal to 12.29% of risk-weighted
assets.
ASSET QUALITY
The following table sets forth information regarding the Bank's nonperforming
assets at the dates indicated.
SEPTEMBER 30, DECEMBER 31,
2004 2003
------- -------
Non-accrual loans $ 1,000 $28,000
Accruing loans past due 90 days or more 70,000 20,000
------- -------
Total non-performing loans 71,000 48,000
Foreclosed assets 15,000 --
------- -------
Total non-performing assets $86,000 $48,000
======= =======
15
Non-accrual loans at September 30, 2004 consisted of one loan. Accruing loans
past due 90 days or more at September 30, 2004 consisted of eight loans.
At September 30, 2004, there were no loans outstanding not reflected in the
above table as to which known information about possible credit problems of
borrowers caused management to have serious doubts as to the ability of such
borrowers to comply with present loan repayment terms.
An analysis of the changes in the allowance for loan losses is as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
2004 2003
--------- ---------
Balance, beginning of period $ 180,955 $ 105,868
Loans charged off (13,091) (6,052)
Loan recoveries 717 1,461
--------- ---------
Net charge-offs (12,374) (4,591)
Provision for loan losses 101,500 50,000
--------- ---------
Balance, end of period $ 270,081 $ 151,277
========= =========
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has no operating business and does not have material
funding needs. In the future, the Company may require funds for dividends and
tax payments for which it will rely on dividends and other distributions from
the Bank. The Bank is subject to various regulatory restrictions on the payment
of dividends.
The Bank's sources of funds for lending activities and operations are deposits
from its primary market area, advances from the FHLB of Cincinnati, principal
and interest payments on loans, interest received on other investments and
proceeds from maturing investment securities. Its principal funding commitments
are for the origination of loans, the payment of maturing deposits, and
principal and interest payments on advances from the FHLB. Deposits are
considered a primary source of funds supporting the Bank's lending and
investment activities.
Cash and cash equivalents (cash, due from banks, interest-bearing deposits with
banks, and federal funds sold), as of September 30, 2004, totaled $1.76 million
compared to $1.11 million at December 31, 2003. The Bank's cash flows were
provided mainly by financing activities, including $8.2 million from net deposit
increases and $4.5 million net increase in FHLB borrowings. Operating activities
used $598,600 in cash for the nine months ended September 30, 2004 compared to
$229,100 provided in cash for the nine months ended September 30, 2003. The Bank
used cash flows of $11.4 million for its investing activities primarily to fund
an increase in gross loans of $11.7 million.
16
At September 30, 2004, the Bank had outstanding commitments to originate loans
totaling $1.9 million, excluding $459,300 in unused home equity lines of credit
and $33,000 in other lines of credit. Additionally, the Bank had undisbursed
commitments on construction loans closed totaling $790,000. Management believes
that the Bank's sources of funds are sufficient to fund all of its outstanding
commitments. Certificates of deposit, which are scheduled to mature in one year
or less from September 30, 2004, totaled $15.9 million. Management believes that
a significant percentage of such deposits will remain with the Bank.
As a federal savings bank, the Bank is subject to regulatory capital
requirements of Office of Thrift Supervision ("OTS"). In order to be well
capitalized under OTS regulations, the Bank must maintain a leverage ratio of
Tier I Capital to average assets of at least 5% and ratios of Tier I and total
capital to risk-weighted assets of at least 6% and 10% respectively. At
September 30, 2004, the Bank satisfied the capital requirements for
classification as well capitalized under OTS regulations.
During the quarter ended September 30, 2004, the Company opened a $750,000 line
of credit with The Banker's Bank of Tennessee to provide additional liquidity at
the holding company level and for future capital contributions for the Bank if
needed. The line of credit provides for an interest rate at the prime rate and
is secured by the Company's stock in the Bank. No amounts have been drawn on
this line.
ITEM 3. CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, the effectiveness of the
Company's disclosure controls and procedures, as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms.
There were no changes in the Company's internal control over financial reporting
that occurred during the Company's last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
17
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS
The following exhibits are either being filed with or incorporated by
reference in this quarterly report on Form 10-QSB:
NUMBER DESCRIPTION
------ -----------
3.1 Articles of Incorporation *
3.2 Bylaws *
4 Form of Common Stock Certificate *
10.1 Employment Agreement with William M. Tandy *
10.2 2004 Stock Option Plan **
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
32 Section 1350 Certification
_______________
* Incorporated by reference from the Registrant's Registration
Statement on Form SB-2 (File No. 333-104226).
** Incorporated by reference from Registrant's Registration
Statement on Form S-8 (File No. 333-116450).
18
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
COMMUNITY FIRST BANCORP, INC.
Date: November 15, 2004 /s/ William M. Tandy
------------------------------------
William M. Tandy, President
(Duly Authorized Representative)
Date: November 15, 2004 /s/ Michael D. Wortham
------------------------------------
Michael D. Wortham, Vice President
(Chief Financial Officer)