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, 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 [ ]
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act) Yes [ ] No [X]
As of September 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 September 30, 2005
(unaudited) and December 31, 2004 3
Condensed Consolidated Statements of Operations - (Unaudited) for the
three and nine months ended September 30, 2005
and 2004 4
Condensed Consolidated Statements of Cash Flows - (Unaudited)
for the nine months ended September 30, 2005 and 2004 5
Condensed Consolidated Statements of Changes in Stockholders'
Equity - (Unaudited) for the nine months ended
September 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 19
PART II. OTHER INFORMATION
- -------
Item 6. Exhibits 21
Signatures 22
COMMUNITY FIRST BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2005 2004
-------------- -------------
(Unaudited)
Assets
Cash and cash equivalents:
Cash and due from banks $ 544,171 $ 614,155
Interest-bearing demand deposits 1,891,158 2,179,041
Interest-bearing time deposits -- 3,000,000
------------ ------------
Total cash and cash equivalents 2,435,329 5,793,196
Securities, held-to-maturity (market values of
$73,310 and $95,025 at September 30, 2005
and December 31, 2004, respectively) 70,856 88,965
Securities, available-for-sale, at fair value 2,203,338 2,215,285
Loans, net of the allowance for loan loss of
$378,331 and $319,937 at September 30, 2005
and December 31, 2004, respectively 61,820,884 51,931,555
Premises and equipment, net 2,338,024 2,495,324
Foreclosed real estate -- --
Federal Home Loan Bank (FHLB) stock 711,600 687,000
Interest receivable 281,267 227,066
Deferred income taxes 16,942 14,521
Other assets 104,639 50,467
------------ ------------
Total assets $ 69,982,879 $ 63,503,379
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 53,010,710 $ 46,466,036
FHLB advances 12,500,000 13,000,000
Advances under line of credit 1,250,000 750,000
Interest payable and other liabilities 396,071 123,848
------------ ------------
Total liabilities 67,156,781 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 September 30, 2005 and
December 31, 2004 2,777 2,777
Additional paid-in capital 2,457,428 2,457,428
Retained earnings - substantially
restricted 398,780 731,477
Accumulated other comprehensive income
(loss) (32,887) (28,187)
------------ ------------
Total stockholders' equity 2,826,098 3,163,495
------------ ------------
Total liabilities and stockholders' equity
$ 69,982,879 $ 63,503,379
============ ============
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, 2005 and 2004
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2005 2004 2005 2004
----------- ----------- ----------- -----------
Interest and dividend income:
Loans $ 882,577 $ 674,778 $ 2,460,955 $ 1,840,084
Investment securities 18,973 14,165 64,682 64,545
Dividends on FHLB Stock 8,638 6,624 25,405 19,744
----------- ----------- ----------- -----------
Total interest and
dividend income 910,188 695,567 2,551,042 1,924,373
----------- ----------- ----------- -----------
Interest expense:
Deposits 356,310 241,193 969,485 688,963
FHLB advances 105,237 36,907 250,587 69,157
Other borrowings 12,442 -- 33,832 --
----------- ----------- ----------- -----------
Total interest expense 473,989 278,100 1,253,904 758,120
----------- ----------- ----------- -----------
Net interest income 436,199 417,467 1,297,138 1,166,253
Provision for loan losses 8,000 32,500 69,500 101,500
----------- ----------- ----------- -----------
Net interest income
after provision for
loan losses 428,199 384,967 1,227,638 1,064,753
----------- ----------- ----------- -----------
Noninterest income:
Service charges and fees 101,555 60,627 272,721 155,283
Gain (loss) on sale of
foreclosed assets (2,000) -- (2,000) 404
Foreclosed real estate
expense, net (973) (450) (4,499) (3,215)
Gain (loss) on sale of
repossessed vehicles -- -- (1,965) --
Insurance commissions and
premiums 1,839 665 4,600 2,890
Other income 2,167 1,871 11,626 10,234
----------- ----------- ----------- -----------
Total noninterest income 102,588 62,713 280,483 165,596
----------- ----------- ----------- -----------
Noninterest expense:
Compensation and benefits 254,273 295,504 768,610 814,849
Directors fees 10,800 10,800 32,400 32,400
Occupancy expense 84,787 91,266 243,825 282,285
Insurance premiums 10,015 10,815 21,358 28,732
Data processing 68,808 55,389 177,828 164,926
Advertising 14,590 41,424 73,352 127,023
Office supplies and postage 30,133 32,795 89,647 112,414
Payroll and other taxes 39,477 30,055 111,224 81,557
Professional fees 25,884 5,961 76,581 83,770
Data processor conversion
expenses -- -- 110,834
Other operating expenses 81,661 61,270 245,993 162,427
----------- ----------- ----------- -----------
Total noninterest
expense 620,428 635,279 1,840,818 2,001,217
----------- ----------- ----------- -----------
Loss before income
taxes (89,641) (187,599) (332,697) (770,868)
Provision (credit) for income
taxes -- (63,730) -- (262,038)
----------- ----------- ----------- -----------
Net loss $ (89,641) $ (123,869) $ (332,697) $ (508,830)
=========== =========== =========== ===========
Basic loss per share $ (0.32) $ (0.45) $ (1.20) $ (1.83)
=========== =========== =========== ===========
Diluted loss per
share $ (0.32) $ (0.45) $ (1.20) $ (1.83)
=========== =========== =========== ===========
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, 2005 and 2004
(Unaudited)
Nine Months Ended
September 30,
----------------------------
2005 2004
------------ ------------
Operating Activities:
Net loss $ (332,697) $ (508,830)
Adjustments to reconcile net loss to net
cash provided by operating activities:
FHLB stock dividend (24,600) (20,200)
Provision for loan losses 69,500 101,500
Depreciation, amortization and accretion 162,776 142,556
Loss on sale of foreclosed assets 2,000 --
Loss on sale of repossessed vehicles 1,965 --
Deferred income tax benefit -- (262,038)
Change in assets and liabilities:
Other assets (81,137) (30,996)
Accrued interest receivable and other assets (54,201) (75,989)
Accrued interest payable and other liabilities 272,223 55,442
------------ ------------
Net cash provided/(used) by operating
activities 15,829 (598,555)
------------ ------------
Investing Activities:
Net increase in loans (9,958,828) (11,749,615)
Proceeds from maturities/calls of held-to-maturity
securities 18,109 1,323,252
Proceeds from sale of other real estate owned 23,000 --
Purchase of available-for-sale securities -- (252,570)
Purchases of premises and equipment (650) (741,378)
------------ ------------
Net cash used in investing activities (9,918,369) (11,420,311)
------------ ------------
Financing Activities:
Net increase in deposits 6,544,673 8,177,976
Payments on short-term borrowings (9,500,000) (4,000,000)
Proceeds from short-term borrowings 9,500,000 8,500,000
Net costs from issuance of common stock -- (9,000)
------------ ------------
Net cash provided by financing activities 6,544,673 12,668,976
------------ ------------
Net (decrease) increase in cash and cash equivalents (3,357,867) 650,110
Cash and cash equivalents, beginning of period 5,793,196 1,109,062
------------ ------------
Cash and cash equivalents, end of period $ 2,435,329 $ 1,759,172
============ ============
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, 2005 and 2004
(Unaudited)
Nine Months Ended
September 30,
---------------------------
2005 2004
----------- -----------
Supplemental Disclosures:
Cash paid for interest $ 1,220,072 $ 758,120
=========== ===========
Non-cash Transactions:
Federal Home Loan Bank Stock dividend received $ (24,600) $ 20,200
=========== ===========
Loans transferred to foreclosed real estate $ 25,000 $ 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, 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 -- -- -- (508,830) -- (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) (9,000)
------- --------- ------------ ---------- ------------ ------------
Balance, September 30, 2004 277,725 $ 2,777 $ 2,457,428 $1,254,215 $ (21,394) $ 3,693,026
======= ========= =========== ========== ============ ============
Balance, January 1, 2005 277,725 $ 2,777 $ 2,457,428 $ 731,477 $ (28,187) $ 3,163,495
Comprehensive income
Net loss -- -- -- (332,697) -- (332,697) (332,697)
Change in unrealized
depreciation on
available-for-sale
securities, net of taxes -- -- -- -- (4,700) (4,700) (4,700)
----------
Total comprehensive loss $ (337,397)
------- --------- ----------- ---------- ------------ ========== ------------
Balance, September 30, 2005 277,725 $ 2,777 $ 2,457,428 $ 398,780 $ (32,887) $ 2,826,098
======= ========= =========== ========== ============ ============
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 September 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 nine For the three
month period month period
ended ended
September 30, September 30,
2005 2005
---------------------------------
Net loss, as reported $ (332,697) $ (89,641)
Less total stock-based employee
compensation cost determined under
the fair value based method, net of
income taxes 9,718 3,239
------------ ----------
Pro forma net loss $ (342,415) $ (92,880)
============ ==========
Earnings per share:
Basic - as reported $ (1.20) $ (0.32)
============ ==========
Basic - pro forma $ (1.23) $ (0.33)
============ ==========
Diluted - as reported $ (1.20) $ (0.32)
============ ==========
Diluted - pro forma $ (1.23) $ (0.33)
============ ==========
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 September 30, 2005
relating to these shares of restricted stock, but the anticipated
amount to be recorded during the remaining part of 2005 is
approximately $7,500.
4. OTHER COMPREHENSIVE LOSS
Other comprehensive loss components and related taxes were as follows:
For the nine For the nine
month period month period
ended ended
September 30, September 30,
2005 2004
---- ----
Unrealized loss on available-
for-sale securities before
tax effect $ 7,121 $ 3,167
Tax benefit (2,421) (1,078)
------- -------
Other comprehensive income
(loss) $(4,700) $ 2,089
======= =======
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
--------- ---------
Nine Months ended September 30,
Net loss $(332,697) $(508,830)
Weighted average number of
common shares 277,725 277,725
--------- ---------
Basic and dilutive
loss per share $ (1.20) $ (1.83)
========= =========
2005 2004
--------- ---------
Three Months ended September 30,
Net loss $ (89,641) $(123,869)
Weighted average number of
common shares 277,725 277,725
--------- ---------
Basic and dilutive
loss per share $ (0.32) $ (0.45)
========= =========
10
6. REGULATORY CAPITAL
The Bank's actual capital and its statutory required capital levels are
as follows (dollars in thousands):
September 30, 2005
------------------------------------------------------------------------------
To be Well
Capitalized
Under
Prompt
For Capital Corrective
Adequacy Action
Purposes Provisions
------------------------- ------------------------- -----------------------
Actual Required Required
------------------------- ------------------------- -----------------------
Amount % Amount % Amount %
------------------------- ------------------------- -----------------------
Tier 1 core capital $4,004 5.72% $2,801 4.00% $3,501 5.00%
Tangible equity capital 4,004 5.72 1,050 1.50% n/a n/a
Total Risk based capital 4,382 10.79 3,248 8.00% 4,059 10.00%
Tier 1 Risk based capital 4,004 9.86 n/a n/a 4,202 6.00%
December 31, 2004
------------------------------------------------------------------------------
To be Well
Capitalized
Under
Prompt
For Capital Corrective
Adequacy Action
Purposes 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% n/a n/a
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 $378,331 was adequate, but not excessive, to absorb estimated credit
losses associated with the loan portfolio at September 30, 2005.
Deferred Income Taxes. We have recorded a net deferred tax asset of $16,900 as
of September 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 September 30, 2005, the valuation
allowance is $531,700.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 2005 AND 2004
Net Income/Loss. Net loss for the three months ended September 30, 2005 was
$(89,600) ($(0.32) per share) compared to a net loss of $(123,900) ($(0.45) per
share) for the three months ended September 30, 2004. Net loss for the nine
13
months ended September 30, 2005 was $(332,700) ($1.20 per share) compared to a
net loss of $508,800 ($(1.83) per share) for the nine months ended September 30,
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 $(89,600) for the quarter ended September 30,
2005 from $(187,600) for the quarter ended September 30, 2004 and improved to
$(332,700) for the nine months ended September 30, 2005 from $(770,900) for the
nine months ended September 30, 2004. The improvement in loss before income
taxes for the 2005 periods reflected increases in net interest income and
non-interest income, a lower provision for loan losses, and a decrease in
non-interest expense.
Net Interest Income. Net interest income increased $18,700 or 4.5% to $436,200
for the three months ended September 30, 2005 compared to $417,500 for the three
months ended September 30, 2004. Year-to-date net interest income was $1,297,100
compared to $1,166,300 for the nine months ended September 30, 2004, an increase
of $130,800 or 11.2%. The increase in net interest income during the 2005
periods was attributable to a higher volume of loans. Interest income for the
three and nine months ended September 30, 2005 was $910,200 and $2.6 million,
respectively, an increase of $214,600 and $626,700 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 nine
months ended September 30, 2005, net loans averaged $57.0 million as compared to
$40.6 million for the first nine months of fiscal year 2004, an increase of
$16.4 million or 40.4%. The increased income from loans helped offset increases
in interest expense of $195,900 or 70.4% and $495,800 or 65.4% for the three and
nine months ended September 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 eleven increases in the targeted
Federal Funds rate since June 30, 2004. 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 2.47% for the nine months ended
September 30, 2005 compared to 3.23% for the nine months ended September 30,
2004. Net interest margin decreased to 2.71% for the 2005 period compared to
3.43% for the 2004 period.
Provision for Loan Losses. The provision for loan losses was $8,000 and $69,500
for the three and nine months ended September 30, 2005, respectively, compared
to $32,500 and $101,500 for the three and nine months ended September 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
September 30, 2005, the Bank's allowance for loan losses was $378,300 or 0.61%
of the gross loan portfolio.
Noninterest Income. Noninterest income was $102,600 and $280,500 for the three
and nine months ended September 30, 2005, respectively, compared to $62,700 and
$165,600 for the three and nine months ended September 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.
14
Noninterest Expense. Noninterest expense was $620,400 and $635,300 for the three
months ended September 30, 2005 and 2004, respectively, and $1,840,800 and
$2,001,200 for the nine months ended September 30, 2005 and 2004, respectively.
The decrease in noninterest expense for the nine-month period of $160,400 or
8.0% was due primarily to the absence of the data processor conversion related
expenses incurred during 2004. During the nine months ended September 30, 2004,
expenses related to the conversion of the data processor totaled $110,800
compared to no such expenses during the current year. The decrease in
noninterest expense for the three-month period of $14,900 or 2.4% was primarily
due to lower compensation and benefits expense.
Compensation and benefits expense increased decreased by $41,200 or 13.9% to
$254,300 for the three months ended September 30, 2005 compared to $295,400
$295,500 for the three months ended September 30, 2004 and decreased by $46,300
or 5.7% to $768,600 for the nine months ended September 30, 2005 compared to
$814,900 for the nine months ended September 30, 2004. The FASB No. 91
accounting entry for the three and nine months ended September 30, 2005 resulted
in a deferred salaries expense reduction of $24,200 and $67,300, respectively.
No such entry was made during the three and nine months ended September 30, 2004
as the Company implemented this accounting standard in 2005. Additionally,
employee education expense decreased by $27,200 or 81.4% to $6,200 as extensive
employee training for the data processor conversion was not incurred during the
nine months ended September 30, 2005 as it was during the nine months ended
September 30, 2004. Further, retirement fund expense decreased by $1,100 or 2.6%
to $40,900 during the nine months ended September 30, 2005.
Advertising expenses decreased $26,800 or 64.7% to $14,600 for the three months
ended September 30, 2005 and decreased $53,600, or 42.2% to $73,400 for the nine
months ended September 30, 2005 compared to $41,400 and $127,000 for the three
and nine months ended September 30, 2004. The reduction was due primarily to no
longer having the need to market the new main office and the
15
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 $2,700 or 8.2% to $30,100 for the
three months ended September 30, 2005 and decreased $22,800, or 20.3% to $89,600
for the nine months ended September 30, 2005 compared to $32,800 and $112,400
for the three and nine months ended September 30, 2004. The reduction was due
primarily to not having the startup expenses associated with opening the new
location experienced during the 2004 periods.
Computer and data processing expense increased by $13,400 or 24.2% to $68,800
for the three months ended September 30, 2005 compared to $55,400 for the three
months ended September 30, 2004 increased by $12,900 or 7.8% to $177,800 for the
nine months ended September 30, 2005 and compared to $164,900 for the nine
months ended September 30, 2004. The increase reflects additional technical
assistance during the period, the receipt of certain introductory discounts
during the prior year and bank growth.
Professional fees increased $19,900 or 331.7% to $25,900 for the three months
ended September 30, 2005 and decreased $7,200, or 8.6% to $76,600 for the nine
months ended September 30, 2005 compared to $6,000 and $83,800 for the three and
nine months ended September 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 September 30, 2005 is $531,700. The increases in the
valuation allowance for the nine months ended September 30, 2005 of $113,200
relates to the net losses incurred in 2005.
COMPARISON OF BALANCE SHEETS AT SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
The Company's total assets as of September 30, 2005 were $70.0 million,
an increase of $6.5 million or 10.2% 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 which
increased $6.7 million, or 17.0%. Net loans receivable increased by $9.9
million, or 19.1%, which reflected our continued marketing efforts. Commercial
loans increased $1.6 million or 23.1% and increased to 13.9% of the loan
portfolio at September 30, 2005 from 10.2% at December 31, 2004. The Company's
investment securities decreased by $30,100, or 1.3%, to $2.27 million at
September 30, 2005 from $2.30 million at December 31, 2004 due to maturities of
securities. Premises and equipment decreased $157,300, or 6.3%, due to current
year depreciation. The Company's cash and cash equivalents as of September 30,
2005 were $2.4 million, a decrease of $3.4 million from December 31, 2004's
level of $5.8 million. This decrease is due primarily to the maturity of $3.0
million in Federal Home Loan Bank
16
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 September 30, 2005.
Liabilities increased by $6.8 million, or 11.3%, to $67.2 million due
primarily to a $6.5 million, or 14.1%, 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 $500,000 or 3.9% to $12.5 million at
September 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. During the
quarter ended September 30, 2005, the Company drew an additional $500,000 on its
line of credit from The Bankers' Bank to infuse additional capital into the
Bank. Total outstandings on this line are now $1.25 million. At September 30,
2005, the line was collateralized by marketable securities with a market value
of $1.7 million and due at maturity on March 31, 2006. On November 18, 2005, the
line was restructured to be secured by all of the Bank's outstanding stock and
to release the marketable securities from pledge and to revise the maturity date
to November 30, 2005. The interest rate on this borrowing is equal to the prime
rate plus 0.25%. Interest is payable monthly and principal is due at maturity on
November 30, 2005.
Stockholders' equity decreased to $2.8 million at September 30, 2005
from $3.2 million at December 31, 2004. The decrease in stockholders' equity
principally reflects $332,700 in losses during the period.
ASSET QUALITY
The following table sets forth information regarding the Bank's nonperforming
assets at the dates indicated.
September 30, December 31,
2005 2004
-------- --------
Non-accrual loans $ 87,600 $131,000
Accruing loans past due 90 days or more 118,400 165,000
-------- --------
Total non-performing loans 206,000 296,000
Foreclosed assets 0 0
-------- --------
Total non-performing assets $206,000 $296,000
======== ========
Non-accrual loans at September 30, 2005 consisted of 3 loans. There were two
accruing loans past due 90 days or more at September 30, 2005.
At September 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.
17
An analysis of the changes in the allowance for loan losses is as follows:
Nine Months Ended
September 30,
-------------------------------
2005 2004
--------- ---------
Balance, beginning of period $ 319,937 $ 180,955
Loans charged off (16,192) (13,091)
Loan recoveries 5,086 717
--------- ---------
Net charge-offs (11,106) (12,374)
Provision for loan losses 69,500 101,500
--------- ---------
Balance, end of period $ 378,331 $ 270,081
========= =========
The increase in net charge-offs during the 2005 period reflects write-downs in
connection with a foreclosure and charge-offs of consumer loans.
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. The Company
currently has $102,000 in cash and marketable securities at the holding company
level. 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 which currently
preclude the payment of dividends without prior OTS approval.
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, 2005, totaled $2.4 million
compared to $5.8 million at December 31, 2004. The Bank's cash flows were
provided mainly by financing activities, including $6.5 million from net deposit
increases. Operating activities used provided $15,800 in cash for the nine
months ended September 30, 2005 compared to $598,600 used in cash for the nine
months ended September 30, 2004. The Bank used cash flows of $9.9 million for
its investing activities primarily to fund an increase in gross loans of $10.0
million.
At September 30, 2005, the Bank had outstanding commitments to originate loans
totaling $2.1 million, excluding $1.4 million in unused home equity lines of
credit and $53,300 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 September 30, 2005, totaled
18
$25.6 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 6% and ratios of Tier I Core and
Total Risk-based Capital to risk-weighted assets of at least 5% and 10%
respectively. At September 30, 2005, the Bank satisfied the capital requirements
under OTS regulations with leverage ratio of 5.72% and Tier 1 and Total
Risk-Based Capital ratios of 9.86% and 10.79%, 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 Bank's status as well-capitalized while continuing to grow assets.
The Company has previously borrowed on a line of credit from The Banker's Bank
to fund a capital injection into the Bank. In September 2005, the Company
increased the amount borrowed on this line to $1.25 million, substantially all
of which has been used to increase Bank capital. This borrowing currently comes
due on November 30, 2005. The lender has advised the Company that it will only
renew this line if the Company provides additional collateral or guarantees. It
is the Company's intent to seek a renewal of the line until it can raise
sufficient new equity capital to pay off the line and provide the capital
required for additional growth although the form and method of such
capital-raising has not been definitively determined at this date. In the event
the Company is unable to raise equity capital, it may seek another extension of
the line, secure a substitute borrowing or raise equity capital in a smaller
amount.
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
19
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.
20
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 **
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).
21
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 18, 2005 /s/William M. Tandy
--------------------------------------------
William M. Tandy, President
(Duly Authorized Representative)
Date: November 18, 2005 /s/Michael D. Wortham
--------------------------------------------
Michael D. Wortham, Vice President
(Chief Financial Officer)
22