UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2006
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
--------- ---------
Commission File Number 0-50322
COMMUNITY FIRST BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of Small Business Issuer as specified in its Charter)
MARYLAND 36-4526348
- ------------------------------------- -----------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2420 NORTH MAIN STREET, MADISONVILLE, KENTUCKY 42431
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(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 March 31, 2006, there were 292,546 shares of the Registrant's
common stock, par value $.01 per share, outstanding.
Transitional Small Business Issuer Disclosure Format (check one):
Yes No X
----- -----
COMMUNITY FIRST BANCORP, INC.
Madisonville, Kentucky
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
- ------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2006
(Unaudited) and December 31, 2005 3
Condensed Consolidated Statements of Operations - (Unaudited)
for the three months ended March 31, 2006 and 2005 4
Condensed Consolidated Statements of Cash Flows - (Unaudited)
for the three months ended March 31, 2006 and 2005 5
Condensed Consolidated Statements of Changes in Stockholders'
Equity - (Unaudited) for the three months ended
March 31, 2006 and 2005 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 17
PART II. OTHER INFORMATION
- -------
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds 19
Item 6. Exhibits 19
Signatures 20
2
COMMUNITY FIRST BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2006 2005
------------- -------------
(UNAUDITED)
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 662,352 $ 785,814
Interest-bearing demand deposits 1,450,068 1,223,134
------------ ------------
Total cash and cash equivalents 2,112,420 2,008,948
Securities, held-to-maturity (market values of
$65,848 and $69,257 at March 31, 2006
and December 31, 2005, respectively) 63,176 65,522
Securities, available-for-sale, at fair value 1,704,340 1,703,147
Loans, net of the allowance for loan loss of
$386,546 and $387,822 at March 31, 2006
and December 31, 2005, respectively 65,246,541 64,578,288
Premises and equipment, net 2,235,004 2,286,004
Federal Home Loan Bank (FHLB) stock 732,100 721,900
Interest receivable 303,527 288,501
Deferred income taxes 16,014 16,587
Other assets 54,536 59,817
------------ ------------
Total assets $ 72,467,658 $ 71,728,714
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 59,327,452 $ 54,476,673
FHLB advances 8,900,000 13,000,000
Advances under line of credit 850,000 850,000
Loans from directors 390,126 400,000
Interest payable and other liabilities 274,157 282,040
------------ ------------
Total liabilities 69,741,735 69,008,713
------------ ------------
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
292,546 at March 31, 2006 and 277,725 at
December 31, 2005 2,925 2,777
Additional paid-in capital 2,575,848 2,457,428
Retained earnings - substantially
Restricted 178,237 291,993
Accumulated other comprehensive loss (31,087) (32,197)
------------ ------------
Total stockholders' equity 2,725,923 2,720,001
------------ ------------
Total liabilities and stockholders' equity $ 72,467,658 $ 71,728,714
============ ============
See notes to condensed consolidated financial statements.
3
COMMUNITY FIRST BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the three months ended March 31, 2006 and 2005
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2006 2005
----------- -----------
Interest and Dividend Income:
Loans $ 977,212 $ 757,263
Investment securities 14,588 24,843
Dividends on FHLB stock 10,235 8,325
----------- -----------
Total interest and dividend income 1,002,035 790,431
----------- -----------
Interest Expense:
Deposits 418,698 289,397
FHLB advances 125,331 65,231
Other borrowings 26,403 10,188
----------- -----------
Total interest expense 570,432 364,816
----------- -----------
Net Interest Income 431,603 425,615
Provision for loan losses 1,500 39,000
----------- -----------
Net interest income after provision for
loan losses 430,103 386,615
----------- -----------
Noninterest Income
Service charges and fees 95,997 59,067
Foreclosed real estate expense, net (550) (595)
Loss on sale of repossessed vehicles -- (2,760)
Insurance commissions and premiums 949 581
Other income 7,433 25,044
----------- -----------
Total noninterest income 103,829 81,337
----------- -----------
Noninterest Expense
Compensation and benefits 272,145 247,610
Directors fees 10,800 10,800
Occupancy expense 79,038 77,528
Insurance premiums 9,968 5,360
Data processing 64,073 51,415
Advertising 18,881 33,353
Office supplies, telephone and postage 31,610 32,289
Payroll and other taxes 38,333 33,510
Professional fees 34,723 19,046
Other operating expenses 88,117 75,499
----------- -----------
Total noninterest expense 647,688 586,410
----------- -----------
Loss Before Income Taxes (113,756) (118,458)
Provision (Credit) for Income Taxes -- --
----------- -----------
Net loss $ (113,756) $ (118,458)
=========== ===========
Basic loss per share $ (0.41) $ (0.43)
=========== ===========
Diluted loss per share $ (0.41) $ (0.43)
=========== ===========
See notes to condensed consolidated financial statements.
4
COMMUNITY FIRST BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2006 and 2005
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2006 2005
------------ ------------
Operating Activities:
Net loss $ (113,756) $ (118,458)
Adjustments to reconcile net loss to net
Cash provided/(used) by operating activities:
FHLB stock dividend (10,200) (7,600)
Provision for loan losses 1,500 39,000
Deferred compensation for Restricted Stock Plan 2,988 --
Depreciation, amortization and accretion 51,491 56,427
Deferred income tax benefit (1) --
Change in assets and liabilities:
Other assets 5,281 (606)
Accrued interest receivable and other assets (15,026) (22,407)
Accrued interest payable and other liabilities (244,050) 125,284
----------- -----------
Net cash provided/(used) by
operating activities (321,773) 71,640
----------- -----------
Investing Activities:
Net increase in loans (669,753) (3,990,805)
Proceeds from maturities/calls of held-to-maturity
securities 2,346 3,085
Purchases of premises and equipment -- (2,819)
----------- -----------
Net cash used in investing activities (667,407) (3,990,539)
----------- -----------
Financing Activities:
Net increase in deposits 5,083,958 4,434,764
Payments on short-term borrowings (7,100,000) (5,000,000)
Proceeds from short-term borrowings 3,000,000 2,000,000
Proceeds from issuance of stock 108,694 --
----------- -----------
Net cash provided by financing activities 1,092,652 1,434,764
----------- -----------
Net (decrease) increase in cash and cash equivalents 103,472 (2,484,135)
Cash and cash equivalents, beginning of period 2,008,948 5,793,196
----------- -----------
Cash and cash equivalents, end of period $ 2,112,420 $ 3,309,061
=========== ===========
See notes to condensed consolidated financial statements.
5
COMMUNITY FIRST BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
For the three months ended March 31, 2006 and 2005
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
-----------------------
2006 2005
-------- --------
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $544,029 $354,628
======== ========
NON-CASH TRANSACTIONS:
Federal Home Loan Bank Stock dividend received $ 10,200 $ 7,600
======== ========
Notes converted to stock $ 9,874 $ --
======== ========
See notes to condensed consolidated financial statements.
6
COMMUNITY FIRST BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the three months ended March 31, 2006 and 2005
(Unaudited)
COMMON STOCK ADDITIONAL
---------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
----------------------------------------------------------------
BALANCE, JANUARY 1, 2005 277,725 $ 2,777 $ 2,457,428 $ 731,477
Comprehensive income
Net loss -- -- -- (118,458)
Change in unrealized depreciation on
available-for-sale securities, net of
taxes -- -- -- --
Total comprehensive loss
------- -------- ----------- ----------
Balance, March 31, 2005 277,725 $ 2,777 $ 2,457,428 $ 613,019
======= ======== =========== ==========
Balance, January 1, 2006 277,725 $ 2,777 $ 2,457,428 $ 291,993
Comprehensive income
Net loss -- -- -- (113,756)
Change in unrealized depreciation on
available-for-sale securities, net of
taxes -- -- -- --
Total comprehensive loss
Issuance of stock 14,821 148 118,420 --
------- -------- ----------- ----------
Balance, March 31, 2006 292,546 $ 2,925 $ 2,575,848 $ 178,237
======= ======== =========== ==========
ACCUMULATED
OTHER
COMPREHENSIVE COMPREHENSIVE
INCOME (LOSS) INCOME (LOSS) TOTAL
--------------------------------------------------------
BALANCE, JANUARY 1, 2005 $ (28,187) -- $ 3,163,495
Comprehensive income
Net loss -- $(118,458) (118,458)
Change in unrealized depreciation on
available-for-sale securities, net of
taxes (13,955) (13,955) (13,955)
---------
Total comprehensive loss $(132,413)
---------- ========= -----------
Balance, March 31, 2005 $ (42,142) $ 3,031,082
========== ===========
Balance, January 1, 2006 $ (32,197) $ 2,720,001
Comprehensive income
Net loss -- $(113,756) (113,756)
Change in unrealized depreciation on
available-for-sale securities, net of
taxes 1,110 1,110 1,110
---------
Total comprehensive loss $(112,646)
=========
Issuance of stock -- 118,568
---------- -----------
Balance, March 31, 2006 $ (31,087) $ 2,725,923
========== ===========
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, 2005 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 2005 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 March 31, 2006, the Company has a stock-based employee compensation
plan, which is described more fully in the notes to the Company's December
31, 2005 audited financial statements contained in the Company's Annual
Report on Form 10-KSB. The Company accounts for this plan under the
recognition and measurement principles of APB Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations. No stock-based
employee compensation cost is reflected in net income, as all options
granted under this plan had an exercise price equal to the market value of
the underlying common stock on the grant date. The following table
illustrates the effect on net income and earnings per share if the Company
had applied the fair value provisions of FASB Statement No. 123, Accounting
for Stock-Based Compensation, to stock-based employee compensation.
For the three month
period ended
March 31,
2005
-------------------
Net loss, as reported $ (118,458)
Less total stock-based employee
compensation cost determined under
the fair value based method, net of
income taxes 3,239
--------------
Pro forma net loss $ (121,697)
==============
Earnings per share:
Basic - as reported $ (0.43)
==============
Basic - pro forma $ (0.44)
==============
Diluted - as reported $ (0.43)
==============
Diluted - pro forma $ (0.44)
==============
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. Deferred compensation expenses recorded for the three
months ended March 31, 2006 relating to these shares of restricted stock
was approximately $3,000.
4. OTHER COMPREHENSIVE LOSS
Other comprehensive loss components and related taxes were as follows:
2006 2005
---- ----
Unrealized loss on available-
for-sale securities before
tax effect $(1,684) $21,144
Tax benefit 574 7,189
------- -------
Other comprehensive loss $ 1,110 $13,955
======= =======
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).
2006 2005
---- ----
Three Months ended March 31,
Net loss $(113,756) $(118,458)
Weighted average number of
common shares 277,890 277,725
--------- ---------
Basic and dilutive loss
per share $ (0.41) $ (0.43)
========= =========
10
6. REGULATORY CAPITAL
The Bank's actual capital and its statutory required capital levels are as
follows (dollars in thousands):
March 31, 2006
----------------------------------------------------------------------------
To be Well
Capitalized Under
For Capital Prompt Corrective
Adequacy Purposes Action Provisions
-------------------- -------------------- ---------------------
Actual Required Required
-------------------- -------------------- ---------------------
Amount % Amount % Amount %
-------------------- -------------------- ---------------------
Tier 1 core capital $3,952 5.45% $2,901 4.00% $3,626 5.00%
Tangible equity capital 3,952 5.45% 1,088 1.50% n/a n/a
Total Risk based capital 4,338 10.28% 3,377 8.00% 4,221 10.00%
Tier 1 Risk based capital 3,952 9.36% 1,689 4.00% 4,351 6.00%
December 31, 2005
----------------------------------------------------------------------------
To be Well
Capitalized Under
For Capital Prompt Corrective
Adequacy Purposes Action Provisions
-------------------- -------------------- ---------------------
Actual Required Required
-------------------- -------------------- ---------------------
Amount % Amount % Amount %
-------------------- -------------------- ---------------------
Tier 1 core capital $3,923 5.47% $2,871 4.00% $3,589 5.00%
Tangible equity capital 3,923 5.47% 1,077 1.50% 1,077 1.50%
Total Risk based capital 4,311 10.22% 3,373 8.00% 4,217 10.00%
Tier 1 Risk based capital 3,923 9.30% 1,687 4.00% 2,530 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 Company 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 $386,546 was adequate, but not excessive, to absorb estimated credit
losses associated with the loan portfolio at March 31, 2006.
DEFERRED INCOME TAXES. We have recorded a net deferred tax asset of $16,000 as
of March 31, 2006, relating to the unrealized losses on available-for-sale
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 March 31, 2006, the
valuation allowance is $605,500.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED
MARCH 31, 2006 AND 2005
NET INCOME. Net loss for the quarter ended March 31, 2006 improved to $(113,800)
($(0.41) per share) compared to a net loss of $(118,500) ($(0.43) per share) for
the same period last year. The improvement in net loss reflects increases in net
interest income and non-interest income, and a lower provision for loan losses.
13
NET INTEREST INCOME. Net interest income increased $6,000 or 1.4% to $431,600
for the three months ended March 31, 2006 compared to $425,600 for the three
months ended March 31, 2005. This increase reflects a shift in interest-earning
assets into higher-yielding loans. During the three months ended March 31, 2006,
net loans averaged $64.9 million for the period as compared to $53.3 million
during the first three months of fiscal year 2005. Interest income increased by
$211,600 primarily due to higher outstanding loan balances. The increase in
interest income offset an increase in interest expense reflecting both an
increase in deposits and an increase in short-term rates. With increased
deposits of $4.9 million, interest expense increased by $205,600. The Bank's
interest rate spread decreased to 2.13% for the three months ended March 31,
2006 compared to 2.67% for the three months ended March 31, 2005. Net interest
margin decreased to 2.48% for the 2006 period compared to 2.84% for the 2005
period.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $1,500 and $39,000
for the quarters ended March 31, 2006 and 2005, respectively. The Bank makes
provisions for loan losses in amounts deemed necessary to maintain the adequacy
of the allowance for loan losses. Net charge-offs were $2,800 during the current
quarter compared to $5,000 in the comparable prior-year period. At March 31,
2006, the Bank's allowance for loan losses was approximately $386,500 or 0.59%
of the gross loan portfolio.
NONINTEREST INCOME. Noninterest income was $103,800 and $81,300 for the quarters
ended March 31, 2006 and 2005, respectively. The increase for the most recent
quarter of $22,500 or 27.7% is reflective of management's ongoing efforts to
enhance fee income. The increase in noninterest income included a $36,900
increase in service charges and fees which the Company attributes to a larger
deposit base. Included in service charges and fees were $24,400 in ATM fees, an
$8,300 increase over 2005 when such fees were categorized as other income.
NONINTEREST EXPENSE. For the quarter ended March 31, 2006, noninterest expense
was $647,700 compared to $586,400 for the quarter ended March 31, 2005.
Compensation and benefits expense increased by $24,500 or 9.9% to $272,100 for
the three months ended March 31, 2006 compared to $247,600 for the three months
ended March 31, 2005. The increase in compensation and benefits expense was
primarily due to a $14,300, or 99%, increase in the cost of funding the Bank's
defined benefit pension plan in the current low rate environment. Also
contributing to the increase in compensation and benefits expense were a $3,600
decrease in the amount of compensation deferred under FASB 91 and $3,000 in
additional deferred compensation expense related to the Restricted Stock Plan.
Salaries increased by $2,400 or 1.1% to $212,600 for the three months ended
March 31, 2006 compared to $210,200 for the three months ended March 31, 2005.
Professional fees increased $15,700 or 82.6% to $34,700 for the quarter ended
March 31, 2006 compared to $19,000 for the first three months ended March 31,
2005 primarily due to higher accruals for legal and accounting fees. Computer
and data processing expense increased by $12,700 or 24.7% to $64,100 for the
three months ended March 31, 2006 compared to $51,400 for the three months ended
March 31, 2005. The increase in computer and data processing expense reflects
the decision to begin offering free internet banking and bill pay in response to
competitive considerations as well as increases in charges by our core data
processor. Other operating expenses increased $12,600, or 16.7%, to $88,100 due
in part to an increase in regulatory assessments for the three months ended
March 31, 2006 of $5,000 or 87.7% at $10,700 compared to $5,700 for the three
months
14
ended March 31, 2005. ATM-related fees increased by $7,600 or 31.9% to $31,400
for the three months ended March 31, 2006 compared to $23,800 for the three
months ended March 31, 2005. Additionally, service charges on the Federal Home
Loan Bank correspondent checking account increased by $2,800 or 27.7% to $12,900
for the three months ended March 31, 2006 compared to $10,100 for the three
months ended March 31, 2005. Advertising expenses decreased $14,500 or 43.4% to
$18,900 for the first three months ended March 31, 2006 compared to $33,400 for
the quarter ended March 31, 2005. Advertising expense for the most recent
quarter, however, does not reflect $10,900 in disputed invoices, which were paid
after the end of the quarter.
The Company is exploring a variety of strategies to reduce noninterest expenses.
It is currently the Company's intention to de-register with the SEC at the end
of June when it will be permitted to do so under the OTS Conversion Regulations.
This action is expected to reduce professional fees and other expenses by
approximately $14,000 per quarter. Non-employee directors have agreed to forego
Board fees until September which will save another $9,600 per quarter. Savings
from other strategies are anticipated to reduce expenses by $12,000 per quarter
when fully implemented.
INCOME TAX EXPENSE. There was no provision for income taxes in either quarter
due to the Company's losses. The Company provides for both the current and
deferred tax effects of the transactions reported in its financial statements
and established deferred tax assets and liabilities for the temporary
differences between the financial reporting and tax bases of its assets and
liabilities. The Company establishes valuation allowances for its net deferred
tax assets unless it is more likely than not that these net deferred tax assets
will be realized. Based on its current earnings, its future projected earnings,
and other factors, the Bank determined in 2004 that it was appropriate to
establish a valuation allowance of $418,500 for its net deferred tax assets. The
balance of the valuation allowance at March 31, 2006 was $605,500.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2006 AND DECEMBER 31, 2005
The Company's total assets as of March 31, 2006 were $72.5 million, an
increase of $80,000 or 1.1% from December 31, 2005's level of $71.7 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 $1.7
million, or 3.6%. Net loans receivable increased by $668,000, or 1.0%, which
reflected our continued marketing efforts. Commercial loans decreased $600,000
or 7.6% and decreased to 10.8% of the loan portfolio at March 31, 2006 from
11.3% at December 31, 2005. The Company's investment securities decreased by
$1,200, or 0.1%, to $1.8 million at March 31, 2006 due to maturities of
securities. Premises and equipment decreased $51,000, or 2.2%, due to current
year depreciation. The Company's cash and cash equivalents as of March 31, 2006
were $2.1 million, an increase of $103,500 from December 31, 2005's level of
$2.0 million.
Liabilities increased by $733,000, or 1.1%, to $69.7 million due primarily
to a $4.9 million, or 8.9%, 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 $4.1 million or 31.5% to $8.9 million at March 31, 2006
from $13.0 million at December 31, 2005. The Bank has used proceeds from the
increase in deposits to help pay down the advances.
15
Stockholders' equity increased to $5,900 at March 31, 2006 from $2.7
million at December 31, 2005. The small increase in stockholders' equity
principally reflects $113,800 in losses during the period and was partially
offset by $118,600 in proceeds from the private placement sale of 14,821 shares
of Common Stock during the quarter.
ASSET QUALITY
The following table sets forth information regarding the Bank's nonperforming
assets at the dates indicated.
MARCH 31, DECEMBER 31,
2006 2005
----------- ------------
Non-accrual loans $266,000 $263,000
Accruing loans past due 90 days or more 75,000 44,000
-------- --------
Total non-performing loans 341,000 307,000
Foreclosed assets -- --
-------- --------
Total non-performing assets $341,000 $307,000
======== ========
Non-accrual loans at March 31, 2006 consisted of eight loans. There were four
accruing loans past due 90 days or more at March 31, 2006.
At March 31, 2006, 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:
THREE MONTHS ENDED
MARCH 31,
---------------------------
2006 2005
----------- ----------
Balance, beginning of period $ 387,822 $ 319,937
Loans charged off (3,197) (7,199)
Loan recoveries 421 2,240
--------- ---------
Net charge-offs (2,776) (4,959)
1,500 39,000
Provision for loan losses
--------- ---------
Balance, end of period $ 386,546 $ 353,978
========= =========
The increase in net charge-offs during the 2006 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 other than that of the Bank and
does not have material funding needs other than servicing its outstanding debt.
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.
16
The Bank's primary sources of funds are deposits, repayment of loans and
mortgage-backed securities, maturities of investments and interest-bearing
deposits and funds provided from operations. The Bank is also able to obtain
advances from the FHLB of Cincinnati, although historically the Bank has done
this rarely. While scheduled repayments of loans and mortgage-backed securities
and maturities of investment securities are relatively predictable sources of
funds, deposit flows and loan prepayments are greatly influenced by the general
level of interest rates, economic conditions and competition. The Bank uses its
liquidity resources principally to fund existing and future loan commitments, to
fund maturing time certificates and demand deposit withdrawals, to invest in
other interest-earning assets, to maintain liquidity, and to meet operating
expenses.
Liquidity may be adversely affected by unexpected deposit outflows, higher
interest rates paid by competitors, adverse publicity relating to the savings
and loan industry, and similar matters. Management monitors projected liquidity
needs and determines the level desirable, based in part on our commitments to
make loans and management's assessment of our ability to generate funds.
A major portion of our liquidity consists of cash and cash equivalents, which
include cash and interest-bearing deposits in other banks. The level of these
assets is dependent upon our operating, investing, lending and financing
activities during any given period. At March 31, 2006, cash and cash equivalents
totaled $2.1 million.
The Bank's primary investing activities include origination of loans and
purchases of investment and mortgage-backed securities. During the three months
ended March 31, 2006 and 2005, while loan originations totaled $6.5 million and
$7.6 million, respectively. These investments were funded in part by proceeds
from repayments of loans, maturities and calls of investment and mortgage-backed
securities and an increase in deposits.
At March 31, 2006, the Bank had $2.7 million in outstanding commitments to
originate loans. The Bank anticipates that it will have sufficient funds
available to meet its current loan origination commitments. Time certificates,
which are scheduled to mature in one year or less, totaled $24.6 million at
March 31, 2006. Based on historical experience, management believes that a
significant portion of such deposits will remain with the Bank, although there
can be no assurance that it will do so. In the event the Bank is unable to
retain these deposits, it may seek replacement funding through the FHLB of
Cincinnati or other sources.
The Bank relies primarily on local deposits for its funding needs. In order to
finance loan growth, the Bank may also borrow from the FHLB of Cincinnati. At
March 31, 2006, the Bank had $22.3 million in unused borrowing capacity at the
FHLB of Cincinnati.
The Bank is subject to minimum capital requirements under OTS regulations. Under
these regulations, the Bank must maintain a Tier 1 or Core Capital ratio of
5.0%, a Tier 1 Risk-Based Ratio of 6.0% and a total risk-based ratio of 10.0% to
be "well capitalized." At March 31, 2006, the Bank's Tier 1/Core Capital ratio
was 5.45%, its Tier 1 risk-based capital ratio was 9.36% and its total
risk-based capital ratio was 10.28%. In order to maintain the Bank's
well-capitalized" status, however, the Company was required to raise capital at
quarter end in a private placement of common stock to directors. Subsequent to
the end of the quarter, the Company raised an additional
17
$276,000 from the sale of common stock. Estimated offering expenses were
approximately $35,000. No assurance can be given that the Company will not be
required to raise additional capital to maintain the Bank's well-capitalized
status or that the Bank's well-capitalized status will be maintained.
The Company has previously borrowed $850,000 on a line of credit from a
correspondent bank and $400,000 from directors to provide additional liquidity
at the holding company level and for capital contributions for the Bank. The
line of credit provides for an interest rate at the prime rate plus 0.25% and is
secured by the Company's stock in the Bank. Interest on the borrowing from
directors is at 7.50% per annum. Both of these borrowings are scheduled to
mature on May 17, 2006. The Company currently anticipates that it will be able
to renew these borrowings on similar terms but does not have any assurances in
this regard. In the event that the Company is unable to renew its third-party
borrowing on acceptable terms, it would not have currently sufficient resources
to repay the indebtedness and would seek to replace the borrowing with financing
from another source or raise additional equity capital in a private placement or
pursue a combination of these strategies. There can be no assurance, however,
that the Company would be able to successfully replace its current funding if it
is not available on acceptable terms or that it could avoid default.
18
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, 2005, the Company's independent registered public accounting firm,
King + Company, PSC, identified a material weakness, as defined in Public
Company Accounting Oversight Board Standard No. 2, in the Company's internal
control over financial reporting. Specifically, King + Company PSC noted a
failure to timely perform various account reconciliations. Management believes
that this weakness is primarily attributable to human resource limitations
within our accounting and financial reporting function and has instituted a
schedule for accomplishing this task.
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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
-----------------------------------------------------------
(a) During the quarter ended March 31, 2006, the Registrant sold a
total of 14,821 shares of common stock, $.01 par value, in a private placement
under Rule 506 to directors of the Registrant. The total offering price of the
common stock was $118,568 (including the cancellation of $9,874 in
indebtedness). The Registrant did not use an underwriter or placement agent for
this offering.
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: May 15, 2006 /s/ William M. Tandy
--------------------------------------------
William M. Tandy, President
(Duly Authorized Representative)
Date: May 15, 2006 /s/ Michael D. Wortham
--------------------------------------------
Michael D. Wortham, Vice President
(Chief Financial Officer)
21