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 June 30, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________ to _________
Commission File Number 0-50322
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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 June 30, 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 June 30, 2005
(unaudited) and December 31, 2004 3
Condensed Consolidated Statements of Operations - (Unaudited)
for the three and six months ended June 30, 2005
and 2004 4
Condensed Consolidated Statements of Cash Flows - (Unaudited)
for the six months ended June 30, 2005 and 2004 5
CondensedConsolidated Statements of Changes in Stockholders'
Equity - (Unaudited) for the six months ended
June 30, 2005 and 2004 7
Notes to Condensed Consolidated Financial Statements
(Unaudited) 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operation 12
Item 3. Controls and Procedures 18
PART II. OTHER INFORMATION
- -------
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits 20
Signatures 21
COMMUNITY FIRST BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2005 2004
----------- -----------
(Unaudited)
Assets
Cash and cash equivalents:
Cash and due from banks $ 658,078 $ 614,155
Interest-bearing demand deposits 2,408,028 2,179,041
Interest-bearing time deposits 500,000 3,000,000
----------- -----------
Total cash and cash equivalents 3,566,106 5,793,196
Securities, held-to-maturity (market values of
$78,870 and $95,025 at June 30, 2005
and December 31, 2004, respectively) 73,274 88,965
Securities, available-for-sale, at fair value 2,209,537 2,215,285
Loans, net of the allowance for loan loss of
$369,850 and $319,937 at June 30, 2005
and December 31, 2004, respectively 58,850,618 51,931,555
Premises and equipment, net 2,390,674 2,495,324
Foreclosed real estate 25,000 --
Federal Home Loan Bank (FHLB) stock 703,000 687,000
Interest receivable 267,552 227,066
Deferred income taxes 15,381 14,521
Other assets 95,009 50,467
----------- -----------
Total assets $68,196,151 $63,503,379
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Deposits $52,785,887 $46,466,036
FHLB advances 11,500,000 13,000,000
Advances under line of credit 750,000 750,000
Interest payable and other liabilities 241,495 123,848
----------- -----------
Total liabilities 65,277,382 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 June 30, 2005 and
December 31, 2004 2,777 2,777
Additional paid-in capital 2,457,428 2,457,428
Retained earnings - substantially
Restricted 488,421 731,477
Accumulated other comprehensive income
(loss) (29,857) (28,187)
----------- -----------
Total stockholders' equity 2,918,769 3,163,495
----------- -----------
Total liabilities and stockholders' equity
$68,196,151 $63,503,379
=========== ===========
See notes to condensed consolidated financial statements.
3
COMMUNITY FIRST BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended June 30, 2005 and 2004
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Interest and dividend income:
Loans $ 821,115 $ 609,695 $ 1,578,378 $ 1,144,885
Investment securities 20,866 19,887 45,709 50,380
Dividends on FHLB Stock 8,442 6,560 16,767 13,120
----------- ----------- ----------- -----------
Total interest and
dividend income 850,423 636,142 1,640,854 1,208,385
----------- ----------- ----------- -----------
Interest expense:
Deposits 323,778 247,243 613,175 447,770
FHLB advances 80,119 14,743 145,350 32,250
Other borrowings 11,203 -- 11,203 --
----------- ----------- ----------- -----------
Total interest expense 415,100 261,986 769,728 480,020
----------- ----------- ----------- -----------
Net interest income 435,323 374,156 871,126 728,365
Provision for loan losses 22,500 30,000 61,500 69,000
----------- ----------- ----------- -----------
Net interest income
after provision for
loan losses 412,823 344,157 809,626 659,365
----------- ----------- ----------- -----------
Noninterest income:
Service charges and fees 92,986 64,385 171,166 117,239
Gain on sale of foreclosed
assets -- -- -- 404
Foreclosed real estate
expense, net (2,931) (1,063) (3,526) (2,765)
Gain (loss) on sale of
repossessed vehicles 795 -- (1,965) --
Insurance commissions and
premiums 2,180 (3,756) 2,761 2,225
Other income 3,528 2,206 9,459 6,201
----------- ----------- ----------- -----------
Total noninterest income 96,558 61,772 177,895 123,304
----------- ----------- ----------- -----------
Noninterest expense:
Compensation and benefits 266,727 264,283 514,337 519,345
Directors fees 10,800 10,800 21,600 21,600
Occupancy expense 81,510 78,654 159,038 191,019
Insurance premiums 5,983 9,324 11,343 17,917
Data processing 57,605 29,883 109,020 109,537
Advertising 25,409 41,534 58,762 85,599
Office supplies and postage 27,225 32,595 59,514 79,619
Payroll and other taxes 38,237 26,269 71,747 51,502
Professional fees 31,651 35,184 50,697 77,809
Data processor conversion
expenses -- -- -- 110,834
Other operating expenses 88,832 62,927 174,519 101,159
----------- ----------- ----------- -----------
Total noninterest
expense 633,979 591,453 1,230,577 1,365,940
----------- ----------- ----------- -----------
Loss before income taxes (124,598) (185,526) (243,056) (583,271)
Provision (credit) for income
Taxes -- (63,079) -- (198,308)
Net loss $ (124,598) $ (122,447) $ (243,056) $ (384,963)
=========== =========== =========== ===========
Basic loss per share $ (0.45) $ (0.44) $ (0.88) $ (1.39)
=========== =========== =========== ===========
Diluted loss per share $ (0.45) $ (0.44) $ (0.88) $ (1.39)
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
4
COMMUNITY FIRST BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2005 and 2004
(Unaudited)
Six Months Ended
June 30,
--------------------------
2005 2004
----------- -----------
Operating Activities:
Net loss $ (243,056) $ (384,963)
Adjustments to reconcile net loss to net
cash provided by operating activities:
FHLB stock dividend (16,000) (13,100)
Provision for loan losses 61,500 69,000
Depreciation, amortization and accretion 108,517 94,290
Loss on sale of foreclosed assets -- 404
Loss on sale of repossessed vehicles 1,965 --
Deferred income tax benefit -- (198,309)
Change in assets and liabilities:
Other assets (71,507) (17,322)
Accrued interest receivable and other assets (40,486) (36,649)
Accrued interest payable and other liabilities 117,647 8,278
----------- -----------
Net cash used by operating activities (81,420) (478,371)
----------- -----------
Investing Activities:
Net increase in loans (6,980,563) (7,410,458)
Proceeds from maturities/calls of held-to-maturity
securities 15,692 970,127
Purchases of premises and equipment (650) (487,090)
----------- -----------
Net cash used in investing activities (6,965,521) (6,927,421)
----------- -----------
Financing Activities:
Net increase in deposits 6,319,851 4,953,744
Payments on short-term borrowings (6,000,000) (3,000,000)
Proceeds from short-term borrowings 4,500,000 5,500,000
Net proceeds/(costs) from issuance of common stock -- (9,000)
----------- -----------
Net cash provided by financing activities 4,819,851 7,444,744
----------- -----------
Net (decrease) increase in cash and cash equivalents (2,227,090) 38,952
Cash and cash equivalents, beginning of period 5,793,196 1,109,062
----------- -----------
Cash and cash equivalents, end of period 3,566,106 $ 1,148,014
=========== ===========
See notes to condensed consolidated financial statements.
5
COMMUNITY FIRST BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
For the six months ended June 30, 2005 and 2004
(Unaudited)
Six Months Ended
June 30,
------------------------
2005 2004
-------- --------
Supplemental Disclosures:
Cash paid for interest $758,525 $471,869
======== ========
Non-cash Transactions:
Federal Home Loan Bank Stock dividend received $ 16,000 $ 13,100
======== ========
Loans transferred to foreclosed real estate $ 25,000 $ --
======== ========
See notes to condensed consolidated financial statements.
6
COMMUNITY FIRST BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the six months ended June 30, 2005 and 2004
(Unaudited)
Accumulated
Common Stock Additional Other
----------------------- Paid-in Retained Comprehensive 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 -- -- -- (384,963) -- $ (384,963) (384,963)
Change in unrealized
depreciation on
available-for-sale
securities, net of taxes -- -- -- -- (13,624) (13,624) (13,624)
----------- -----------
Total comprehensive loss $ (398,587) --
===========
Costs of stock issuance (9,000) (9,000)
------- ---------- ----------- ----------- ----------- -----------
Balance, June 30, 2004 277,725 $ 2,777 $ 2,457,428 $ 1,378,082 $ (37,107) $ 3,801,180
======= ========== =========== =========== =========== ===========
Balance, January 1, 2005 277,725 $ 2,777 $ 2,457,428 $ 731,477 $ (28,187) -- $ 3,163,495
Comprehensive income
Net loss (243,056) (243,056) (243,056)
Change in unrealized
depreciation on
available-for-sale
securities, net of
taxes $ (1,670) $ (1,670) (1,670)
-----------
Total comprehensive loss $ (244,726)
------- ---------- ---------- ---------- ---------- =========== -----------
Balance, June 30, 2005 277,725 $ 2,777 $2,457,428 $ 488,421 $ (29,857) $ 2,918,769
======= ========== ========== ========== ========== ===========
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 balance sheets, 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 results 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-BASED EMPLOYEE COMPENSATION PLAN
At June 30, 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 six month For the three month
period ended June 30, period ended June 30,
2005 2005
--------------------------------------------
Net loss, as reported $ (243,056) $ (124,598)
Less total stock-based employee
compensation cost determined under the
fair value based method, net of income taxes 6,478 3,239
---------- ----------
Pro forma net loss $ (249,534) $ (127,837)
=========== ===========
Earnings per share:
Basic - as reported $ (0.88) $ (0.45)
========== ===========
Basic - pro forma $ (0.90) $ (0.46)
========== ===========
Diluted - as reported $ (0.88) $ (0.45)
========== ===========
Diluted - pro forma $ (0.90) $ (0.46)
========== ===========
Restricted Stock Plan
The Company has a Restricted Stock Plan, covering 8,331 shares of
common stock, whose purpose is to reward and to retain personnel of
experience and ability in key positions of responsibility with the
Bank and any subsidiaries with an increased equity interest in the
Company as compensation for their prior and anticipated future
professional contributions and service to the Bank and any
subsidiaries. Shares awarded under the plan entitle the shareholder to
all rights of common stock ownership except that the shares may not be
sold, transferred, pledged, exchanged, or otherwise disposed of until
the shares are earned and non-forfeitable. The shares awarded under
the Restricted
9
Stock Plan shall be earned and non-forfeitable at the rate of
one-fifth per year over five years from the grant date. During May
2005 the Company granted 5,197 shares with a restriction period of
five years at a market price of $11.50. No deferred compensation
liability or expense has been recorded as of and for the period ended
June 30, 2005 relating to these shares of restricted stock, but the
anticipated amount to be recorded during the remaining part of 2005 is
approximately $6,300.
4. OTHER COMPREHENSIVE LOSS
Other comprehensive loss components and related taxes were as follows:
For the six For the six
month period month period
ended June 30, ended June 30,
2005 2004
-------- --------
Unrealized loss on available-
for-sale securities before
tax effect $ 2,531 $ 20,643
Tax benefit (861) (7,019)
-------- --------
Other comprehensive loss $ 1,670 $ 13,624
======== ========
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. Securities authorized in connection with the Company's
stock-based compensation plans could dilute earnings per share in the
future, but were not included in the current period's because of their
anti-dilutive effect, so basic and diluted earnings per share are the
same.
The following data show the amounts used in computing earnings per share
(EPS).
2005 2004
--------- ---------
Six Months ended June 30,
Net loss $(243,056) $(384,963)
Weighted average number of
common shares 277,725 277,725
--------- ---------
Basic and dilutive
loss per share $ (0.88) $ (1.39)
========= =========
2005 2004
--------- ---------
Three Months ended June 30,
Net loss $(124,598) $(122,447)
Weighted average number of
common shares 277,725 277,725
--------- ---------
Basic and dilutive
loss per share $ (0.45) $ (0.44)
========= =========
10
6. REGULATORY CAPITAL
The Bank's actual capital and its statutory required capital levels are
as follows (dollars in thousands):
June 30, 2005
---------------------------------------------------------------------------------
To be Well
Capitalized Under
For Capital Prompt Corrective
Adequacy Purposes Action Provisions
------------------------- ------------------------- --------------------------
Actual Required Required
------------------------- ------------------------- --------------------------
Amount % Amount % Amount %
------------------------- ------------------------- --------------------------
Tier 1 core capital $3,635 5.33% $2,729 4.00% $3,412 5.00%
Tangible equity capital 3,635 5.33% 1,024 1.50% n/a n/a
Total Risk based capital 4,005 10.23% 3,132 8.00% 3,915 10.00%
Tier 1 Risk based capital 3,635 9.29% n/a n/a 4,094 6.00%
December 31, 2004
---------------------------------------------------------------------------------
To be Well
Capitalized Under
For Capital Prompt Corrective
Adequacy Purposes Action Provisions
------------------------- ------------------------- --------------------------
Actual Required Required
------------------------- ------------------------- --------------------------
Amount % Amount % Amount %
------------------------- ------------------------- --------------------------
Tier 1 core capital $3,842 6.05% $2,542 4.00% $3,177 5.00%
Tangible equity capital 3,842 6.05% 953 1.50% 953 1.50%
Total Risk based capital 4,161 11.78% 2,826 8.00% 3,533 10.00%
Tier 1 Risk based capital 3,842 10.88% 1,413 4.00% 2,120 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, 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 $369,850 was adequate, but not excessive, to absorb estimated credit
losses associated with the loan portfolio at June 30, 2005.
Deferred Income Taxes. We have recorded a net deferred tax asset of $15,400 as
of June 30, 2005, relating to the unrealized losses on AFS securities. We
evaluate this asset on a quarterly basis. We have recorded a valuation allowance
on our remaining deferred tax asset, as we can not determine that it is more
likely than not that it will be utilized. At June 30, 2005, the valuation
allowance is $501,200.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTH PERIODS
ENDED JUNE 30, 2005 AND 2004
Net Income/Loss. Net loss for the three months ended June 30, 2005 was
$(124,600) ($(0.45) per share) compared to a net loss of $(122,000) ($(0.44) per
share) for the three months ended June 30, 2004. Net loss for the six months
ended June 30, 2005 was $(243,000) ($(0.88) per share) compared to a net loss of
$(385,000) ($(1.39) per share) for the six months ended June 30,
13
2004. The Company's results of operations for the 2004 periods benefited from
the recognition of certain tax benefits, which were not utilized in 2005 because
of the valuation allowance we established for our deferred tax assets. Loss
before income taxes improved to $(125,000) for the quarter ended June 30, 2005
from $(186,000) for the quarter ended June 30, 2004 and improved to $(243,000)
for the six months ended June 30, 2005 from $(583,000) for the six months ended
June 30, 2004. The improvement in loss before income taxes for the 2005 periods
reflected increases in net interest income and non-interest income and a lower
provision for loan losses, which offset an increase in other expenses for the
quarter. The Company's results of operations for the six months ended June 30,
2005 also benefited from a decrease in other expense. Net Interest Income. Net
interest income increased $61,100 or 16.3% to $435,300 for the three months
ended June 30, 2005 compared to $374,200 for the three months ended June 30,
2004. Year-to-date net interest income was $871,100 compared to $728,400 for the
six months ended June 30, 2004, an increase of $142,700 or 19.6%. The increase
in net interest income during the 2005 periods was attributable to a higher
volume of loans. Interest income for the three and six months ended June 30,
2005 was $850,400 and $1.64 million, respectively, an increase of $214,300 and
$432,500 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. For the six months ended June 30, 2005, net loans
averaged $55.3 million as compared to $38.3 million for the first six months of
fiscal year 2004, an increase of $17.0 million or 44.4%. The increased income
from loans helped offset increases in interest expense of $153,100 or 58.4% and
$289,700 or 60.4% for the three and six months ended June 30, 2005,
respectively. The increases in interest expense reflect both a higher volume of
deposits and increases in short-term rates as the result of the Federal
Reserve's nine increases in the targeted Federal Funds rate over the past year.
Interest expense has also increased due to the Bank's greater use of FHLB
borrowings to fund loan growth, as well as the Company's use of a revolving line
of credit with The Banker's Bank to provide additional capital for the Bank.
Reflecting the recent increases in short-term interest rates, which have not
been accompanied by increased long-term rates, the Bank's interest rate spread
decreased to 2.57% for the six months ended June 30, 2005 compared to 3.28% for
the six months ended June 30, 2004. Net interest margin decreased to 2.80% for
the 2005 period compared to 3.61% for the 2004 period.
Provision for Loan Losses. The provision for loan losses was $22,500 and $61,500
for the three and six months ended June 30, 2005, respectively, compared to
$30,000 and $69,000 for the three and six months ended June 30, 2004,
respectively. The Bank makes provisions for loan losses in amounts deemed
necessary to maintain the adequacy of the allowance for loan losses. At June 30,
2005, the Bank's allowance for loan losses was $369,900 or 0.62% of the gross
loan portfolio.
Noninterest Income. Noninterest income was $96,600 and $177,900 for the three
and six months ended June 30, 2005, respectively, compared to $61,800 and
$123,300 for the three and six months ended June 30, 2004, respectively. The
increase for the most recent periods is due primarily to increases in
deposit-related fees including non-sufficient funds fees and overdraft fees
which management attributes to a larger deposit base and management's efforts to
enhance this type of fee income, which is generally less volatile than loan fee
income.
14
Noninterest Expense. Noninterest expense was $634,000 and $591,500 for the three
months ended June 30, 2005 and 2004, respectively, and $1,230,600 and $1,365,900
for the six months ended June 30, 2005 and 2004, respectively. The decrease in
noninterest expense for the six-month period of $135,300 or 9.9% was due
primarily to the absence of the data processor conversion related expenses
incurred during 2004. During the six months ended June 30, 2004, expenses
related to the conversion of the data processor totaled $110,800 compared to no
such expenses during the current year. The increases in noninterest expense for
the three-month period of $42,500 or 7.2% were due to a variety of other
factors.
Computer and data processing expense increased by $27,700 or 92.6% to $57,600
for the three months ended June 30, 2005 compared to $29,900 for the three
months ended June 30, 2004 and decreased by $500 or 0.5% to $109,000 for the six
months ended June 30, 2005 and compared to $109,500 for the six months ended
June 30, 2004.
Compensation and benefits expense increased by $2,400 or 0.9% to $266,700 for
the three months ended June 30, 2005 compared to $264,300 for the three months
ended June 30, 2004 and decreased by $5,000 or 1.0% to $514,300 for the six
months ended June 30, 2005 compared to $519,300 for the six months ended June
30, 2004. The FASB No. 91 accounting entry for the three and six months ended
June 30, 2005 resulted in a deferred salaries expense reduction of $22,500 and
$43,100, respectively. No such entry was made during the three and six months
ended June 30, 2004 as the Company implemented this accounting standard in 2005.
Employee education expense decreased by $8,000 or 70.2% to $3,400 for the
quarter and by $22,100, or 79.8% to $5,600 for the year to date as extensive
employee training for the data processor conversion was not incurred during the
quarter and six months ended June 30, 2005 as it was during the quarter and six
months ended June 30, 2004.
Salaries for officers increased by $24,400 or 24.7% to $123,000 for the three
months ended June 30, 2005 and increased by $34,200 or 16.8% to $237,400 for the
six months ended June 30, 2005 compared to $98,600 and $203,200 for the three
and six months ended June 30, 2004 due to the addition of four new loan
officers, two of who also serve as branch managers for our two locations.
Salaries for other employees decreased by $1,500 or 1.5% to $99,400 for the
three months ended June 30, 2004 and increased by $18,800 or 10.7% to $195,300
for the six months ended June 30, 2005 compared to $100,900 and $176,500 for the
three and six months ended June 30, 2004 due to the addition of six new
employees hired to staff the new main office. Compensation and benefits expense
experienced a reduction for the six months ended June 30, 2005 in spite of
increases in salaries for officers and other employees. This 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 entries for the six months ended June 30, 2005 resulted in a
deferred salaries expense reduction of $43,100. No such entries were made during
the six months ended June 30, 2004. Additionally, employee education expense
decreased by $22,200 or 79.9% to $5,600 as extensive employee training for the
data processor conversion was not incurred during the six months ended June 30,
2005 as it was during the six months ended June 30, 2004. Further, retirement
fund expense decreased by $7,900 or 22.3% to $27,600 during the six months ended
June 30, 2005.
15
Advertising expenses decreased $16,100 or 38.8% to $25,400 for the three months
ended June 30, 2004 and decreased $26,800, or 31.3% to $58,800 for the six
months ended June 30, 2005 compared to $41,500 and $85,600 for the three and six
months ended June 30, 2004. The reduction was due primarily to no longer 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 $5,400 or 16.6% to $27,200 for
the three months ended June 30, 2005 and decreased $20,100, or 25.3% to $59,500
for the six months ended June 30, 2005 compared to $32,600 and $79,600 for the
three and six months ended June 30, 2004. The reduction was due primarily to not
having the startup expenses associated with opening the new location experienced
during the 2004 periods.
Professional fees decreased $3,500 or 9.9% to $31,700 for the three months ended
June 30, 2005 and decreased $27,100, or 34.8% to $50,700 for the six months
ended June 30, 2005 compared to $35,200 and $77,800 for the three and six months
ended June 30, 2004. Monthly accruals are now being used for audit and
accounting expenses to more evenly distribute these costs throughout the year,
rather than expensing as 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
Company 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 June 30, 2005 is $501,200. The increases in the valuation
allowance for the six months ended June 30, 2005 of $82,700 relates to the net
losses incurred in 2005.
COMPARISON OF BALANCE SHEETS AT JUNE 30, 2005 AND DECEMBER 31, 2004
The Company's total assets as of June 30, 2005 were $68.2 million, an
increase of $4.7 million or 7.4% 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 which
increased $4.4 million, or 11.2%. Net loans receivable increased by $7.0
million, or 13.5%, which reflected our continued marketing efforts. Commercial
loans increased $1.36 million or 19.5% and increased to 14.2% of the loan
portfolio at June 30, 2005 from 10.2% at December 31, 2004. The Company's
investment securities decreased by $21,500, or 0.9%, to $2.28 million at June
30, 2005 from $2.30 million at December 31, 2004 due to maturities of
securities. Premises and equipment decreased $104,600, or 4.2%, due to current
year depreciation. The Company's cash and cash equivalents as of June 30, 2005
were $3.6 million, a decrease of $2.2 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 June 30, 2005.
16
Liabilities increased by $4.9 million, or 8.2%, to $65.3 million due
primarily to a $6.3 million, or 13.6%, 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 $1.5 million or 11.5% to $11.5 million
at June 30, 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 June 30, 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 6.25% on June 30, 2005.
Interest is payable monthly and principal is due at maturity.
Stockholders' equity decreased to $2.9 million at June 30, 2005 from
$3.2 million at December 31, 2004. The decrease in stockholders' equity
principally reflects $243,100 in losses during the period.
ASSET QUALITY
The following table sets forth information regarding the Bank's nonperforming
assets at the dates indicated.
June 30, December 31,
2005 2004
-------- ---------
Non-accrual loans $ 87,300 $131,000
Accruing loans past due 90 days or more 0 165,000
-------- --------
Total non-performing loans 87,300 296,000
Foreclosed assets 25,000 0
-------- --------
Total non-performing assets $112,300 $296,000
======== ========
Non-accrual loans at June 30, 2005 consisted of 3 loans. There were no accruing
loans past due 90 days or more at June 30, 2005.
At June 30, 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.
An analysis of the changes in the allowance for loan losses is as follows:
Six Months Ended
June 30,
----------------------------------
2005 2004
--------- ---------
Balance, beginning of period $ 319,937 $ 180,955
Loans charged off (16,192) (3,819)
Loan recoveries 4,605 517
--------- ---------
Net charge-offs (11,587) (3,302)
Provision for loan losses 61,500 69,000
--------- ---------
Balance, end of period $ 369,850 $ 246,653
========= =========
The increase in net charge-offs during the 2005 period reflects write-downs in
connection with a foreclosure and charge-offs of consumer loans.
17
LIQUIDITY AND CAPITAL RESOURCES
The Company currently has no operating business and does not have material
ongoing funding needs other than debt service on its line of credit. 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 June 30, 2005, totaled $3.6 million
compared to $5.8 million at December 31, 2004. The Bank's cash flows were
provided mainly by financing activities, including $6.3 million from net deposit
increases. Operating activities used $81,400 in cash for the six months ended
June 30, 2005 compared to $478,400 used in cash for the six months ended June
30, 2004. The Bank used cash flows of $7.0 million for its investing activities
primarily to fund an increase in gross loans of $7.0 million.
At June 30, 2005, the Bank had outstanding commitments to originate loans
totaling $2.3 million, excluding $575,400 in unused home equity lines of credit
and $26,000 in other lines of credit. Additionally, the Bank had undisbursed
commitments on construction loans closed totaling $1.1 million. 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 June 30, 2005, totaled $25.1 million. Management
believes that a significant percentage of such deposits will remain with the
Bank.
The Company has a $750,000 revolving line of credit with The Banker's Bank of
Tennessee to provide additional capital for the bank. 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 June 30, 2005, the $750,000 line of credit
was fully drawn. The current interest rate on this line is 6.25%. 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.
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 6% and ratios of Tier I Core and
Total Risk-based Capital to risk-weighted assets of at least 5% and 10%
respectively. At June 30, 2005, the Bank satisfied the capital requirements
under OTS regulations with leverage ratio of 5.33% and Tier 1 and Total
Risk-Based Capital ratios of 9.29% and 10.23%, respectively. The Bank's capital
ratios have declined in recent periods due to a combination of strong asset
growth and recent losses. It is management's intention to maintain the
18
Bank's status as well-capitalized while continuing to grow assets. In order to
do so, the Company may be required to raise additional capital.
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.
19
Part II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
On May 19, 2005, the Company held its annual meeting of stockholders at which
the following items were voted on.
(1) Election of Directors
Nominee For Withheld
- ------------------------------------------ -------------- --------------
Michael D. Wortham 223,490 36,553
Ralph T. Teague 223,415 36,628
Charles G. Ramsey 223,465 36,578
There were no abstentions or broker non-votes in the election of Directors.
(2) 2005 Restricted Stock Plan
Broker
For Against Abstain Non-Vote
--- ------- ------- --------
124,583 76,705 1,000 57,755
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 **
10.3 Community First Bank 2005 Restricted Stock 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).
*** Incorporated by reference from Registrant's Registration
Statement on Form S-8 (File No. 333-125769).
20
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: August 15, 2005 /s/William M. Tandy
--------------------------------------------
William M. Tandy, President
(Duly Authorized Representative)
Date: August 15, 2005 /s/Michael D. Wortham
--------------------------------------------
Michael D. Wortham, Vice President
(Chief Financial Officer)