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 March 31, 2005
[ ] 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 March 31, 2005, 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 March 31, 2005
(unaudited) and December 31, 2004 3
Condensed Consolidated Statements of Operations - (Unaudited)
for the three months ended March 31, 2005 and 2004 4
Condensed Consolidated Statements of Cash Flows - (Unaudited)
for the three months ended March 31, 2005 and 2004 5
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the three months ended March 31, 2005 and 2004 7
Notes to Condensed Consolidated Financial Statements
(Unaudited) 8
Item 2. Management's Discussion and Analysis of Financial 12
Condition and Results of Operations
Item 3. Controls and Procedures 18
PART II. OTHER INFORMATION
- -------
Item 6. Exhibits 19
Signatures 20
COMMUNITY FIRST BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2005 2004
------------ ------------
(Unaudited)
Assets
Cash and cash equivalents:
Cash and due from banks $ 665,719 $ 614,155
Interest-bearing demand deposits 1,643,342 2,179,041
Interest-bearing time deposits 1,000,000 3,000,000
------------ ------------
Total cash and cash equivalents 3,309,061 5,793,196
Securities, held-to-maturity (market values of
$90,090 and $95,025 at March 31, 2005
and December 31, 2004, respectively) 85,880 88,965
Securities, available-for-sale, at fair value 2,192,532 2,215,285
Loans, net of the allowance for loan loss of
$353,978 and $319,937 at March 31, 2005
and December 31, 2004, respectively 55,883,360 51,931,555
Premises and equipment, net 2,443,324 2,495,324
Federal Home Loan Bank (FHLB) stock 694,600 687,000
Interest receivable 249,473 227,066
Deferred income taxes 21,710 14,521
Other assets 51,074 50,467
------------ ------------
Total assets $ 64,931,014 $ 63,503,379
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 50,900,800 $ 46,466,036
FHLB advances 10,000,000 13,000,000
Advances under line of credit 750,000 750,000
Interest payable and other liabilities 249,132 123,848
------------ ------------
Total liabilities 61,899,932 60,339,884
------------ ------------
Commitments and contingencies - -
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 March 31, 2005 and
December 31, 2004 2,777 2,777
Additional paid-in capital 2,457,428 2,457,428
Retained earnings - substantially
restricted 613,019 731,477
Accumulated other comprehensive loss (42,142) (28,187)
------------ ------------
Total stockholders' equity 3,031,082 3,163,495
------------ ------------
Total liabilities and stockholders' equity
$ 64,931,014 $ 63,503,379
============ ============
See notes to condensed consolidated financial statements.
3
COMMUNITY FIRST BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 2005 and 2004
(Unaudited)
Three Months Ended
March 31,
-----------------------------
2005 2004
--------- ---------
Interest and Dividend Income:
Loans $ 757,263 $ 546,222
Investment securities 24,843 30,493
Dividends on FHLB stock 8,325 6,560
--------- ---------
Total interest and dividend income 790,431 583,275
--------- ---------
Interest Expense:
Deposits 289,397 200,527
FHLB advances 65,231 17,507
Other borrowings 10,188 -
--------- ---------
Total interest expense 364,816 218,034
--------- ---------
Net Interest Income 425,615 365,241
Provision for loan losses 39,000 39,000
--------- ---------
Net interest income after provision for
loan losses 386,615 326,241
--------- ---------
Noninterest Income
Service charges and fees 59,067 39,730
Loss on sale of other real estate - 404
Foreclosed real estate expense, net (595) (1,702)
Loss on sale of repossessed vehicles (2,760) -
Insurance commissions and premiums 581 5,981
Other income 25,044 6,088
--------- ---------
Total noninterest income 81,337 50,501
--------- ---------
Noninterest Expense
Compensation and benefits 247,610 255,062
Directors fees 10,800 10,800
Occupancy expense 77,528 112,365
Insurance premiums 5,360 8,593
Data processing 51,415 79,654
Advertising 33,353 44,065
Office supplies, telephone and postage 32,289 47,024
Payroll and other taxes 33,510 25,233
Professional fees 19,046 42,625
Data processor conversion expenses - 110,834
Other operating expenses 75,499 38,232
--------- ---------
Total noninterest expense 586,410 774,487
--------- ---------
Loss Before Income Taxes (118,458) (397,745)
Provision (Credit) for Income Taxes - (135,229)
--------- ---------
Net loss $(118,458) $(262,516)
========= =========
Basic earnings (loss) per share $ (0.43) $ (0.95)
========= =========
Diluted earnings (loss) per share $ (0.43) $ (0.95)
========= =========
See notes to condensed consolidated financial statements.
4
COMMUNITY FIRST BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2005 and 2004
(Unaudited)
Three Months Ended
March 31,
--------------------------
2005 2004
----------- -----------
Operating Activities:
Net loss $ (118,458) $ (262,516)
Adjustments to reconcile net loss to net
cash provided by operating activities:
FHLB stock dividend (7,600) (6,500)
Provision for loan losses 39,000 39,000
Depreciation, amortization and accretion 56,427 54,761
Loss on sale of foreclosed assets - 404
Deferred income tax benefit - (135,230)
Change in assets and liabilities:
Other assets (606) 9,423
Accrued interest receivable and other assets (22,407) (39,935)
Accrued interest payable and other liabilities 125,284 (55,214)
----------- -----------
Net cash provided/(used) by
operating activities 71,640 (395,807)
----------- -----------
Investing Activities:
Net increase in loans (3,990,805) (3,195,299)
Proceeds from maturities/calls of held-to-maturity
securities 3,085 361,773
Purchases of premises and equipment (2,819) (457,996)
----------- -----------
Net cash used in investing activities (3,990,539) (3,291,522)
----------- -----------
Financing Activities:
Net increase in deposits 4,434,764 4,058,497
Payments on short-term borrowings (5,000,000) (1,000,000)
Proceeds from short-term borrowings 2,000,000 2,000,000
----------- -----------
Net cash provided by financing activities 1,434,764 5,058,497
----------- -----------
Net (decrease) increase in cash and cash equivalents (2,484,135) 1,371,168
Cash and cash equivalents, beginning of period 5,793,196 1,109,062
----------- -----------
Cash and cash equivalents, end of period $ 3,309,061 $ 2,480,230
=========== ===========
See notes to condensed consolidated financial statements.
5
COMMUNITY FIRST BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
For the three months ended March 31, 2005 and 2004
(Unaudited)
Three Months Ended
March 31,
---------------------
2005 2004
--------- ---------
Supplemental Disclosures:
Cash paid for interest $354,628 $213,645
======== ========
Non-cash Transactions:
Federal Home Loan Bank Stock dividend received $ 7,600 $ 6,500
======== ========
Loans transferred to foreclosed real estate $ -- $ 27,600
======== ========
Loans to facilitate the sale of foreclosed real estate $ -- $ 29,000
======== ========
See notes to condensed consolidated financial statements.
6
COMMUNITY FIRST BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the three months ended March 31, 2005 and 2004
(Unaudited)
Accumulated
Common Stock Additional Other
------------------ Paid-in Retained Comprehenstive Comprehensive
Shares Amount Capital Earnings Income (Loss) Income (Loss) Total
----------------------------------------------------------------------------------------------
Balance, January 1, 2004 277,725 $2,777 $2,466,428 $1,763,045 $(23,483) -- $4,208,767
Comprehensive income
Net loss -- -- -- (262,516) -- $(262,516) (262,516)
Change in unrealized
depreciation on
available-for-sale
securities, net of taxes -- -- -- -- 18,303 18,303 18,303
---------
Total comprehensive loss $(244,213) --
------- ------ ---------- ---------- -------- ========= ----------
Balance, March 31, 2004 277,725 $2,777 $2,466,428 $1,500,529 $ (5,180) $3,964,554
======== ====== ========== ========== ======== ==========
Balance, January 1, 2005 277,725 $2,777 $2,457,428 $ 731,477 $(28,187) -- $3,163,495
Comprehensive income
Net loss -- -- -- (118,458) -- $(118,458) (118,458)
Change in unrealized
depreciation on
available-for-sale
securities, net of
taxes -- -- -- -- $(13,955) $ (13,955) $ (13,955)
---------
Total comprehensive loss $(132,413)
------- ------ ---------- ---------- -------- ========= ----------
Balance, March 31, 2005 277,725 $2,777 $2,457,428 $ 613,019 $(42,142) $3,031,082
======= ====== ========== ========== ======== ==========
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,
statement of cash flows and statement of changes in stockholders'
equity 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, 2004 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 2004 filed with the Securities
and Exchange Commission. The statements of operations for periods
8
presented are not necessarily indicative of the results which may be
expected for the entire year.
The unaudited condensed consolidated financial statements include the
accounts of the Company and the Bank for the periods presented. All
material intercompany balances and transactions have been eliminated in
consolidation.
3. Stock Options
At March 31, 2005, the Company has a stock-based employee compensation
plan, which is described more fully in the notes to the Company's
December 31, 2004 audited financial statements contained in the
Company's Annual Report on Form 10-KSB. The Company accounts for this
plan under the recognition and measurement principles of APB Opinion
No. 25, Accounting for Stock Issued to Employees, and related
Interpretations. No stock-based employee compensation cost is reflected
in net income, as all options granted under this plan had an exercise
price equal to the market value of the underlying common stock on the
grant date. The following table illustrates the effect on net income
and earnings per share if the Company had applied the fair value
provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.
For the Three
month period
ended March 31
2005
---------------
Net loss, as reported $ (118,458)
Less total stock-based employee
compensation cost determined
under the fair value based method, net of
income taxes 3,239
------------
Pro forma net loss $ (121,697)
============
Earnings per share:
Basic - as reported $ (0.43)
============
Basic - pro forma $ (0.44)
============
Diluted - as reported $ (0.43)
============
Diluted - pro forma $ (0.44)
============
9
4. OTHER COMPREHENSIVE LOSS
Other comprehensive loss components and related taxes were as follows:
2005 2004
--------- ---------
Unrealized loss on available-
for-sale securities before
tax effect $ 21,144 $ 27,732
Tax benefit 7,189 9,429
--------- ---------
Other comprehensive loss $ 13,955 $ 18,303
========= =========
5. 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. Since there
are no dilutive securities, basic and diluted earnings per share are
the same.
The following data show the amounts used in computing earnings per
share (EPS).
2005 2004
--------- ---------
Three Months ended March 31,
Net loss $(118,458) $(262,516)
Weighted average number of
common shares 277,272 277,272
--------- ---------
Basic and dilutive loss
per share $ (0.43) $ (0.95)
========= =========
10
6. REGULATORY CAPITAL
The Bank's actual capital and its statutory required capital levels are
as follows (dollars in thousands):
March 31, 2005
---------------------------------------------------
To be Well
Capitalized
Under
Prompt
For Capital Corrective
Adequacy Action
Purposes Provisions
---------------- --------------- --------------
Actual Required Required
---------------- --------------- --------------
Amount % Amount % Amount %
---------------- --------------- --------------
Tier 1 core capital $3,743 5.76% $2,600 4.00% $3,899 5.00%
Tangible equity capital 3,743 5.76% 2,600 1.50% n/a n/a
Total Risk based capital 4,097 10.98% 2,985 8.00% 3,731 10.00%
Tier 1 Risk based capital 3,743 10.03% n/a n/a 3,250 6.00%
11
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.
12
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 $353,978 was adequate, but not excessive, to absorb estimated credit
losses associated with the loan portfolio at March 31, 2005.
Deferred Income Taxes. We have a recorded deferred tax asset of $21,700 as of
March 31, 2005. 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 March 31, 2005, the valuation allowance is $458,800.
13
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2005 AND 2004
Net Income. Net loss for the quarter ended March 31, 2005 improved to $(118,500)
($(0.43) per share) compared to a net loss of $(262,500) ($(0.95) per share) for
the same period last year. The Company's net loss for the three months ended
March 31, 2005 reflects increased interest expenses, particularly relating to
interest paid for Federal Home Loan Bank advances. The Bank continues to
experience a reduction in its net interest margin. Also contributing to the net
loss were continued high, but falling, levels of non-interest expense.
Net Interest Income. Net interest income increased $60,400 or 16.5% to $425,600
for the three months ended March 31, 2005 compared to $365,200 for the three
months ended March 31, 2004. This increase reflects a shift in interest-earning
assets into higher-yielding loans. During the three months ended March 31, 2005,
net loans averaged $54.7 million for the period as compared to $36.3 million
during the first three months of fiscal year 2004. With interest rates
increasing during this period, interest income increased by $207,200 primarily
due to higher outstanding loan balances. Net interest income also benefited from
reduced deposit costs as higher costing certificates of deposit matured and were
replaced with lower-costing certificates of deposit. With increased deposits of
$13.7 million, interest expense increased by $146,800. The Bank's interest rate
spread decreased to 2.67% for the three months ended March 31, 2005 compared to
3.22% for the three months ended March 31, 2004. Net interest margin decreased
to 2.84% for the 2005 period compared to 3.19% for the 2004 period.
Provision for Loan Losses. The provision for loan losses was $39,000 for the
quarters ended March 31, 2005 and 2004. The Bank makes provisions for loan
losses in amounts deemed necessary to maintain the adequacy of the allowance for
loan losses. At March 31, 2005, the Bank's allowance for loan losses was
approximately $354,000 or 0.63% of the gross loan portfolio.
Noninterest Income. Noninterest income was $81,300 and $50,500 for the quarters
ended March 31, 2005 and 2004, respectively. The increase for the most recent
quarter of $30,800 or 61.0% is reflective of management's ongoing efforts to
enhance fee income. The increase in noninterest income included a $19,000
increase in service charges and fees which the Company attributes to a larger
deposit base and a $19,000 increase in other income which includes $9,000 on ATM
fees.
Noninterest Expense. For the quarter ended March 31, 2005, noninterest expense
was $586,400 compared to $774,500 for the quarter ended March 31, 2004. The
decrease in noninterest expense for the quarter of $188,100 or 22.3% was due
primarily to the absence of the data processor conversion related expenses
incurred during 2004. During the quarter ended March 31, 2004 expenses related
to the conversion of the data processor totaled $110,834 compared to no such
expenses during the current quarter. Data processor conversion expenses for the
three months ended March 31, 2004 included billed items from our previous data
processor of $22,700 for data test tapes and $30,700 for online deconversion
services. 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 decreased by $28,300 or 35.5% to $51,400 for the three months
ended March 31, 2005 compared to $79,700 for the three months ended March 31,
2004. Compensation
14
and benefits expense decreased by $7,500 or 2.9% to $247,600 for the three
months ended March 31, 2005 compared to $255,100 for the three months ended
March 31, 2004. The reduction can be attributed primarily to FASB No. 91
Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases. The FASB No. 91 accounting
entry for the quarter ended March 31, 2005 resulted in a deferred salaries
expense reduction of $20,600. No such entry was made during the quarter ended
March 31, 2004. Additionally, employee education expense decreased by $14,100 or
86.3% to $2,200 as extensive employee training for the data processor conversion
was not incurred during the quarter ended March 31, 2005 as it was during the
quarter ended March 31, 2004. Salaries for officers increased by $9,800 or 9.3%
to $114,300 for the three months ended March 31, 2005 compared to $104,600 for
the three months ended March 31, 2004 due to the addition of four new loan
officers, two of who also serve as branch managers for our two locations.
Salaries for employees increased by $20,300 or 26.9% to $95,900 for the three
months ended March 31, 2005 compared to $75,600 for the three months ended March
31, 2004 due to the addition of six new employees hired to help with staffing of
the new main office. These increases were offset by declines in benefits expense
including insurance and retirement expense. Advertising expenses decreased
$10,700 or 24.3% to $33,400 for the first three months ended March 31, 2005
compared to $44,100 for the quarter ended March 31, 2004. The reduction was due
primarily to not having the need to market the new main office and the
activities associated with its grand opening on March 5, 2004, as well as
marketing efforts to explain our computer conversion and its effects to our
customers. Office supplies and postage expenses decreased $14,700 or 31.3% to
$32,300 for the first three months ended March 31, 2005 compared to $47,000 for
the quarter ended March 31, 2004. The reduction was due primarily to not having
the startup expenses associated with opening the new location experienced during
the first quarter of 2004. Professional fees decreased $23,600 or 55.3% to
$19,000 for the quarter ended March 31, 2005 compared to $42,600 for the first
three months ended March 31, 2004. Monthly accruals are now being used for Audit
and Accounting expenses to more evenly distribute these costs, rather than
paying for these services from an expense account as they are incurred.
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 its current earnings, its future projected earnings, and other factors, the
Bank determined in 2004 that it was appropriate to establish a valuation
allowance of $418,500 for its net deferred tax assets. The balance of the
valuation allowance at March 31, 2005 is $458,800.
COMPARISON OF BALANCE SHEETS AT MARCH 31, 2005 AND DECEMBER 31, 2004
The Company's total assets as of March 31, 2005 were $64.9 million, an
increase of $1.4 million or 2.2% from December 31, 2004's level of $63.5
million. The increase was due primarily to growth in the loan portfolio, more
specifically an increase in one-to-four family first mortgage loans. Net loans
receivable increased by $4.0 million, or 7.6%, which reflected our continued
marketing efforts. Commercial loans increased $929,000 or 13.3% and increased to
14.2% of the loan portfolio at March 31, 2005 from 10.2% at
15
December 31, 2004. The Company's investment securities decreased by $25,800, or
1.1%, to $2.28 million at March 31, 2005 from $2.30 million at December 31, 2004
due to maturities of securities. Premises and equipment decreased $52,000, or
2.1%, primarily due to the disposal of old and outdated fixed assets. The
Company's cash and cash equivalents as of March 31, 2005 were $3.3 million, a
decrease of $2.5 million from December 31, 2004's level of $5.8 million. This
decrease is due primarily to the maturity of $2.0 million in Federal Home Loan
Bank certificates of deposit that served as pledged collateral for deposits of
property tax receipts by the Hopkins County Sheriff's Department. The
certificates of deposits were allowed to mature due to a lower level of such
deposits at March 31, 2005.
Liabilities increased by $1.6 million, or 2.6%, to $61.9 million due
primarily to a $4.4 million, or 9.5%, 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 decreased $3.0 million or 23.1% to $10.0 million at March 31, 2005
from $13.0 million at December 31, 2004. The Bank has used proceeds from the
increase in deposits to help pay down the advances. The Company has a $750,000
revolving line of credit, which expires on September 10, 2005. At March 31,
2005, $750,000 was advanced against this line. The line is collateralized by all
of the Company's stock in the Bank. Interest varies monthly and is based on the
prime rate, which was 5.75% on March 31, 2005. Interest is payable monthly and
principal is due at maturity.
Stockholders' equity decreased to $3.0 million at March 31, 2005 from
$3.2 million at December 31, 2004. The decrease in stockholders' equity
principally reflects $118,500 in losses during the period.
ASSET QUALITY
The following table sets forth information regarding the Bank's nonperforming
assets at the dates indicated.
March 31, December 31,
2005 2004
--------- ---------
Non-accrual loans $174,000 $131,000
Accruing loans past due 90 days or more 1,000 165,000
-------- --------
Total non-performing loans 175,000 296,000
Foreclosed assets 0 0
-------- --------
Total non-performing assets $175,000 $296,000
======== ========
Non-accrual loans at March 31, 2005 consisted of 6 loans. Accruing loans past
due 90 days or more at March 31, 2005 consisted of 1 loan.
At March 31, 2005, 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.
16
An analysis of the changes in the allowance for loan losses is as follows:
Three Months Ended
March 31,
------------------------------
2005 2004
--------- ---------
Balance, beginning of period $ 319,937 $ 180,955
Loans charged off (7,199) 0
Loan recoveries 2,240 216
--------- ---------
Net charge-offs (4,959) 216
Provision for loan losses 39,000 39,000
--------- ---------
Balance, end of period $ 353,978 $ 220,171
========= =========
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has no operating business and does not have material
ongoing 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 March 31, 2005, totaled $3.3 million
compared to $5.8 million at December 31, 2004. The Bank's cash flows were
provided mainly by financing activities, including $4.4 million from net deposit
increases. Operating activities provided $71,600 in cash for the three months
ended March 31, 2005 compared to $395,800 used in cash for the three months
ended March 31, 2004. The Bank used cash flows of $4.0 million for its investing
activities primarily to fund an increase in gross loans of $4.0 million.
At March 31, 2005, the Bank had outstanding commitments to originate loans
totaling $2.5 million, excluding $497,500 in unused home equity lines of credit
and $38,800 in other lines of credit. Additionally, the Bank had undisbursed
commitments on construction loans closed totaling $430,400. 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 March 31, 2005, totaled $23.8 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
17
Tier I Risk-based Capital to average assets of at least 6% and ratios of Tier I
Core and Total Risk-based Capital to risk-weighted assets of at least 5% and 10%
respectively. At March 31, 2005, the Bank satisfied the capital requirements
under OTS regulations.
The Company has a $750,000 revolving 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 which adjusts monthly at the prime rate and is secured by
the Company's stock in the Bank. Interest is payable monthly and principal is
due at maturity. As of March 31, 2005, the $750,000 line of credit was fully
drawn. The current interest rate on this line is 5.75%. The line of credit
matures on September 10, 2005. The Company currently anticipates that it will be
able to renew the line of credit at that time.
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, except as noted below, 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.
In connection with their audit of our financial statements for the year ended
December 31, 2004, our independent registered public accounting firm, BKD, LLP,
identified certain material weaknesses, as defined in Public Company Accounting
Oversight Board Standard No. 2, in our internal control over financial
reporting. Specifically, BKD LLP noted a failure to timely perform various
account reconciliations, to adequately prepare GAAP basis financial statements,
and to segregate certain reconciliation duties. Management believes that these
weaknesses are primarily attributable to human resource limitations within our
accounting and financial reporting function and has reallocated reconciliation
responsibilities within the function and instituted a schedule for accomplishing
these tasks. In addition, BKD LLP noted the absence of processes to compute
deferred loan fees and costs and calculate deferred tax assets and liabilities.
In response, management has adopted additional procedures for reviewing
financial statement calculations and disclosures, implemented additional
controls with respect to payroll and ATM reconciliations, adopted systems for
updating borrowers' financial information and deferral of loan fees and costs,
instituted procedures for timely reconciliation of correspondent accounts, loan
and deposit sub-ledgers, prepaid and other assets and accrued liabilities and
adopted additional controls with regard to journal entries.
Other than as described above, 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.
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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).
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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: May 16, 2005 /s/William M. Tandy
------------------------------------
William M. Tandy, President
(Duly Authorized Representative)
Date: May 16, 2005 /s/Michael D. Wortham
------------------------------------
Michael D. Wortham, Vice President
(Chief Financial Officer)
20