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, 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 September 30, 2006, there were 328,088 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, 2006
(Unaudited) and December 31, 2005 3
Condensed Consolidated Statements of Operations - (Unaudited)
for the three and nine months ended September 30, 2006
and 2005 4
Condensed Consolidated Statements of Cash Flows - (Unaudited)
for the nine months ended September 30, 2006 and 2005 5
Condensed Consolidated Statements of Changes in Stockholders'
Equity - (Unaudited) for the nine months ended
September 30, 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 6. Exhibits 19
Signatures 20
2
COMMUNITY FIRST BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2006 2005
----------- ------------
(UNAUDITED)
ASSETS
Cash and cash equivalents:
Cash and due from banks $ 644,907 $ 785,814
Interest-bearing demand deposits 1,231,097 1,223,134
----------- -----------
Total cash and cash equivalents 1,876,004 2,008,948
Securities, held-to-maturity (market values of
$60,085 and $69,257 at September 30, 2006
and December 31, 2005, respectively) 57,304 65,522
Securities, available-for-sale, at fair value 1,221,755 1,703,147
Loans, net of the allowance for loan loss of
$370,879 and $387,822 at September 30, 2006
and December 31, 2005, respectively 70,695,998 64,578,288
Premises and equipment, net 2,139,182 2,286,004
Foreclosed real estate 52,716 --
Federal Home Loan Bank (FHLB) stock 753,200 721,900
Interest receivable 371,710 288,501
Deferred income taxes 9,887 16,587
Other assets 89,099 59,817
----------- -----------
Total assets $77,266,855 $71,728,714
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $62,695,625 $54,476,673
FHLB advances 10,275,000 13,000,000
Advances under line of credit 750,000 850,000
Loans from directors 390,126 400,000
Interest payable and other liabilities 355,594 282,040
----------- -----------
Total liabilities 74,466,345 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
328,088 at September 30, 2006 and 277,725
at December 31, 2005 3,280 2,777
Additional paid-in capital 2,829,943 2,457,428
Retained earnings - substantially
restricted (13,518) 291,993
Accumulated other comprehensive loss (19,195) (32,197)
----------- -----------
Total stockholders' equity 2,800,510 2,720,001
----------- -----------
Total liabilities and stockholders' equity
$77,266,855 $71,728,714
=========== ===========
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, 2006 AND 2005
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------------
2006 2005 2006 2005
---------- --------- ---------- ----------
Interest and dividend income:
Loans $1,081,771 $ 882,577 $3,074,640 $2,460,955
Investment securities 10,665 18,973 37,584 64,682
Dividends on FHLB Stock 10,761 8,638 31,491 25,405
---------- --------- ---------- ----------
Total interest and
dividend income 1,103,197 910,188 3,143,715 2,551,042
---------- --------- ---------- ----------
Interest expense:
Deposits 533,874 356,310 1,443,233 969,485
FHLB advances 132,141 105,237 367,642 250,587
Other borrowings 23,881 12,442 73,854 33,832
---------- --------- ---------- ----------
Total interest expense 689,896 473,989 1,884,729 1,253,904
---------- --------- ---------- ----------
Net interest income 413,301 436,199 1,258,986 1,297,138
Provision for loan losses 16,000 8,000 17,500 69,500
---------- --------- ---------- ----------
Net interest income
after provision for
loan losses 397,301 428,199 1,241,486 1,227,638
---------- --------- ---------- ----------
Noninterest income:
Service charges and fees 128,398 101,555 345,827 272,721
Gain (loss) on sale of
foreclosed assets -- (2,000) (2,000)
Foreclosed real estate
expense, net (376) (973) (926) (4,499)
Gain (loss) on sale of
repossessed vehicles -- -- -- (1,965)
Gain (loss) on sale of
fixed assets -- -- 3,000
Insurance commissions and
premiums 2,080 1,839 4,633 4,600
Other income 5,440 2,167 22,709 11,626
---------- --------- ---------- ----------
Total noninterest income 135,542 102,588 375,243 280,483
---------- --------- ---------- ----------
Noninterest expense:
Compensation and benefits 248,745 254,273 782,659 768,610
Directors fees 1,200 10,800 13,200 32,400
Occupancy expense 78,227 84,787 239,441 243,825
Insurance premiums 10,671 10,015 30,669 21,358
Data processing 69,152 68,808 200,877 177,828
Advertising 18,389 14,590 71,569 73,352
Office supplies and postage 27,889 30,133 90,288 89,647
Payroll and other taxes 37,399 39,477 114,629 111,224
Professional fees 28,246 25,884 104,179 76,581
Other operating expenses 96,089 81,661 274,729 245,993
---------- --------- ---------- ----------
Total noninterest
expense 616,007 620,428 1,922,240 1,840,818
---------- --------- ---------- ----------
Loss before income taxes (83,164) (89,641) (305,511) (332,697)
Provision (credit) for income
taxes -- -- -- --
Net loss $ (83,164) $ (89,641) $ (305,511) $ (332,697)
========== ========= ========== ==========
Basic loss per share $ (0.25) $ (0.32) $ (0.99) $ (1.20)
========== ========= ========== ==========
Diluted loss per share $ (0.25) $ (0.32) $ (0.99) $ (1.20)
========== ========= ========== ==========
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, 2006 AND 2005
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2006 2005
------------ ------------
Operating Activities:
Net loss $ (305,511) $ (332,697)
Adjustments to reconcile net loss to net
Cash provided by/(used in) operating activities:
FHLB stock dividend (31,300) (24,600)
Provision for loan losses 17,500 69,500
Depreciation, amortization and accretion 154,602 162,776
Loss on sale of foreclosed assets -- 2,000
Loss on sale of repossessed vehicles -- 1,965
Deferred compensation for Restricted Stock Plan .. (4,976) --
Change in assets and liabilities:
Other assets (81,998) (81,137)
Accrued interest receivable and other assets . (83,209) (54,201)
Accrued interest payable and other liabilities (154,649) 272,223
------------ ------------
Net cash provided by/(used in)
operating activities (489,541) 15,829
------------ ------------
Investing Activities:
Net increase in loans (6,135,210) (9,958,828)
Proceeds from maturities/calls of available-for-sale
securities 500,000 --
Proceeds from maturities/calls of held-to-maturity
securities 8,215 18,109
Proceeds from sale of other real estate owned -- 23,000
Purchases of premises and equipment (6,683) (650)
------------ ------------
Net cash used in investing activities (5,633,678) (9,918,369)
------------ ------------
Financing Activities:
Net increase in deposits 8,452,131 6,544,673
Payments on short-term borrowings (18,925,000) (9,500,000)
Proceeds from short-term borrowings 16,100,000 9,500,000
Proceeds from issuance of stock 363,144 --
------------ ------------
Net cash provided by financing activities 5,990,275 6,544,673
------------ ------------
Net decrease in cash and cash equivalents (132,944) (3,357,867)
Cash and cash equivalents, beginning of period 2,008,948 5,793,196
------------ ------------
Cash and cash equivalents, end of period $ 1,876,004 $ 2,435,329
============ ============
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, 2006 AND 2005
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2006 2005
---------- -----------
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $1,810,875 $1,220,072
========== ==========
NON-CASH TRANSACTIONS:
Federal Home Loan Bank Stock dividend received $ 31,300 $ 24,600
========== ==========
Loans transferred to real estate $ -- $ 25,000
========== ==========
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 NINE MONTHS ENDED SEPTEMBER 30, 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 loss
Net loss -- -- -- (332,697)
Change in unrealized loss on
available-for-sale securities, net of
taxes -- -- -- --
Total comprehensive loss
------------ --------- ------------- ------------
BALANCE, SEPTEMBER 30, 2005 277,725 $ 2,777 $ 2,457,428 $ 398,780
============ ========= ============= ============
BALANCE, JANUARY 1, 2006 277,725 $ 2,777 $ 2,457,428 $ 291,993
Comprehensive loss
Net loss (305,511)
Change in unrealized loss on
available-for-sale securities, net of
taxes
Total comprehensive loss
Issuance of stock 50,363 503 372,515
------------ --------- ------------- ------------
BALANCE, SEPTEMBER 30, 2006 328,088 $ 3,280 $ 2,829,943 $ (13,518)
============ ========= ============= ============
ACCUMULATED
OTHER
COMPREHENSIVE COMPREHENSIVE
INCOME (LOSS) INCOME (LOSS) TOTAL
--------------------------------------------------------
BALANCE, JANUARY 1, 2005 $ (28,187) -- $ 3,163,495
Comprehensive loss
Net loss -- $ (332,697) (332,697)
Change in unrealized loss on
available-for-sale securities, net of
taxes (4,700) (4,700) (4,700)
-------------
Total comprehensive loss $ (337,397)
-------------- ============= ------------
BALANCE, SEPTEMBER 30, 2005 $ (32,887) $ 2,826,098
============== ============
BALANCE, JANUARY 1, 2006 $ (32,197) $ 2,720,001
Comprehensive loss
Net loss (305,511) (305,511)
Change in unrealized loss on
available-for-sale securities, net of
taxes 13,002 13,002 13,002
-------------
Total comprehensive loss $ (292,509)
=============
Issuance of stock 373,018
-------------- ------------
BALANCE, SEPTEMBER 30, 2006 $ (19,195) $ 2,800,510
============== ============
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
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
8
material intercompany balances and transactions have been eliminated in
consolidation.
3. STOCK-BASED EMPLOYEE COMPENSATION PLAN
Stock Option Plan
At September 30, 2006, the Company has a stock option 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. Through December 31, 2005, the Company accounted 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 for 2005, 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 MONTH PERIOD FOR THE THREE MONTH PERIOD
ENDED SEPTEMBER 30, ENDED 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)
======== =========
On December 8, 2005 the optionees agreed to the cancellation of all the
outstanding stock options, which totaled 16,442 as of that date.
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
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
9
the three and nine months ended September 30, 2006 relating to these
shares of restricted stock was approximately $3,000 and $6,000,
respectively.
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 SEPTEMBER 30 ENDED SEPTEMBER 30,
2006 2005
---- ----
Unrealized loss on available-
for-sale securities before
tax effect $(19,705) $ 7,121
Tax benefit 6,700 (2,421)
-------- -------
Other comprehensive
income (loss) $(13,005) $(4,700)
========= =======
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
---- ----
Nine Months ended September 30,
Net loss $(305,511) $(332,697)
Weighted average number of
common shares 310,121 277,725
--------- ---------
Basic and dilutive
loss per share $ (0.99) $ (1.20)
========= =========
2006 2005
---- ----
Three Months ended September 30,
Net loss $(83,164) $ (89,641)
Weighted average number of
common shares 328,088 277,725
-------- ---------
Basic and dilutive
loss per share $ (0.25) $ (0.32)
======== =========
10
6. REGULATORY CAPITAL
The Bank's actual capital and its statutory required capital levels are
as follows (dollars in thousands):
SEPTEMBER 30, 2006
------------------------------------------------------------------------------
TO BE WELL
CAPITALIZED
UNDER
PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
PURPOSES PROVISIONS
------------------------- ------------------------ -----------------------
ACTUAL REQUIRED REQUIRED
------------------------- ------------------------- -----------------------
AMOUNT % AMOUNT % AMOUNT %
------------------------- ------------------------- -----------------------
Tier 1 core capital $3,911 5.06% $3,092 4.00% $3,865 5.00%
Tangible equity capital 3,911 5.06 1,159 1.50% n/a n/a
Total Risk-based capital 4,282 9.45 3,626 8.00% 4,533 10.00%
Tier 1 Risk-based capital 3,911 8.63 1,813 4.00% 2,720 6.00%
DECEMBER 31, 2005
------------------------------------------------------------------------------
TO BE WELL
CAPITALIZED
UNDER
PROMPT
FOR CAPITAL CORRECTIVE
ADEQUACY ACTION
PURPOSES PROVISIONS
------------------------- ------------------------ -----------------------
ACTUAL REQUIRED REQUIRED
------------------------- ------------------------- -----------------------
AMOUNT % AMOUNT % AMOUNT %
------------------------- ------------------------- -----------------------
Tier 1 core capital $3,923 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.
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
12
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 $370,879 was adequate, but not excessive, to absorb estimated credit
losses associated with the loan portfolio at September 30, 2006.
DEFERRED INCOME TAXES. We have recorded a net deferred tax asset of $9,900 as of
September 30, 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 September 30, 2006,
the valuation allowance is $670,700.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS
ENDED SEPTEMBER 30, 2006 AND 2005
NET INCOME/LOSS. Net loss for the three months ended September 30, 2006 was
$83,200 ($0.25 per share) compared to a net loss of $89,600 ($0.32 per share)
for the three months ended September 30, 2005. Net loss for the nine months
ended September 30, 2006 was $305,500 ($0.99 per share) compared to a net loss
of $332,700 ($1.20 per share) for the nine months ended September 30, 2005. The
improvement in net loss for the 2006 periods reflected increases in non-interest
income and, for the nine-month period, a lower provision for loan losses, which
offset a decrease in net interest income and an increase in other expenses for
the periods.
NET INTEREST INCOME. Net interest income decreased $22,900, or 5.2%, to $413,300
for the three months ended September 30, 2006 compared to $436,200 for the three
months ended September 30, 2005. Year-to-date net interest
13
income was $1,259,000 compared to $1,297,100 for the nine months ended September
30, 2005, a decrease of $38,100, or 2.9%. The decrease in net interest income
during the 2006 periods was attributable to an increase in interest expense for
deposits and Federal Home Loan Bank and other borrowings, which offset an
increase in interest income. Interest income for the three and nine months ended
September 30, 2006 was $1.1 million and $3.1 million, respectively, an increase
of $193,000 and $592,700 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, 2006, net loans averaged $66.7 million as compared to $57.0
million for the first nine months of fiscal year 2005, an increase of $9.7
million, or 17.0%. The increased income from loans helped offset increases in
interest expense of $215,900, or 45.5%, and $630,800, or 50.3%, for the three
and nine months ended September 30, 2006, 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 four increases in the
targeted Federal Funds rate over the past year. Interest expense increased due
to higher rates and 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 1.99%
for the nine months ended September 30, 2006 compared to 2.47% for the nine
months ended September 30, 2005. Net interest margin decreased to 2.36% for the
2006 period compared to 2.71% for the 2005 period.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $16,000 and $17,500
for the three and nine months ended September 30, 2006, respectively, compared
to $8,000 and $69,500 for the three and nine months ended September 30, 2005,
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, 2006, the Bank's allowance for loan losses was $370,879, or 0.52%,
of the gross loan portfolio.
NONINTEREST INCOME. Noninterest income was $135,500 and $375,200 for the three
and nine months ended September 30, 2006, respectively, compared to $102,600 and
$280,500 for the three and nine months ended September 30, 2005, respectively.
The increase in nonintnerest income included an increase in service charges and
fees which the Company attributes to a larger deposit base. Included in service
charges and fees for the three and nine months ended September 30, 2006 were
$27,200 and $79,300 in ATM fees, an increase of $6,900 and $22,300 over 2005
when such fees were categorized as other income.
NONINTEREST EXPENSE. Noninterest expense was $616,000 and $620,400 for the three
months ended September 30, 2006 and 2005, respectively, and $1,922,200 and
$1,840,800 for the nine months ended September 30, 2006 and 2005, respectively.
Compensation and benefits expense decreased by $5,600, or 2.2%, to $248,700 for
the three months ended September 30, 2006 compared to $254,300 for the three
months ended September 30, 2005 and increased by $14,100, or 1.8%, to $782,700
for the nine months ended September 30, 2006 compared to $768,600 for the nine
months ended September 30, 2005. The increase in compensation and benefits
expense was primarily due to an increase in the cost of funding the Bank's
defined benefit pension plan in the current low rate environment. Pension
expense increased $15,500, or 117.4%, to $28,700 for the quarter and $45,100, or
110.3%, to $86,000 for the nine-months ended September 30, 2006. Salaries
decreased by $21,300, or 9.5%, to $201,900 for the three months ended September
30, 2006 compared to $223,200 for the three months ended September 30, 2005 and
decreased by $25,500, or 3.9%, to $630,400 for the
14
nine months ended September 30, 2006 compared to $655,900 for the nine months
ended September 30, 2005. Director fees declined $9,600, or 88.9%, to $1,200 for
the three months ended September 30, 2006 and $19,200, or 59.3% to $13,200 for
the nine months ended September 30, 2006 from $10,800 and $32,400 for the three
and nine months ended September 30, 2005 as certain directors have agreed to
waive their fees indefinitely.
Professional fees increased $2,300, or 8.9%, to $28,200 for the three months
ended September 30, 2006 and increased $27,600, or 36.0%, to $104,200 for the
nine months ended September 30, 2006 compared to $25,900 and $76,600 for the
three and nine months ended September 30, 2005 due to higher accruals for legal
and accounting fees.
Computer and data processing expense increased by $400, or 0.6%, to $69,200 for
the three months ended September 30, 2006 compared to $68,800 for the three
months ended September 30, 2005 and increased by $23,100, or 13.0%, to $200,900
for the nine months ended September 30, 2006 and compared to $177,800 for the
nine months ended September 30, 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.
Advertising expenses increased $3,800, or 26.0%, to $18,400 for the three months
ended September 30, 2006 and decreased $1,800, or 2.5%, to $71,600 for the nine
months ended September 30, 2006 compared to $14,600 and $73,400 for the three
and nine months ended September 30, 2005. The increase during the quarter ending
September 30, 2006 reflects increased radio and advertising costs.
Office supplies and postage expenses decreased $2,200, or 7.3%, to $27,900 for
the three months ended September 30, 2006 and increased $700, or 0.8%, to
$90,300 for the nine months ended September 30, 2006 compared to $30,100 and
$89,600 for the three and nine months ended September 30, 2005. The increase
during the nine months ended September 30, 2006 was due primarily to rising
postage expenses and increased mailings due to the larger customer base.
Other operating expenses increased $14,400, or 17.6%, to $96,100 for the quarter
and increased $28,700, or 11.7%, to $274,700 year-to-date due in part to an
increase in regulatory assessments of $1,000, or 10.1%, to $10,900 for the three
months ended September 30, 2006 and of $10,900, or 51.2%, to $32,200 for the
nine months ended September 30, 2006. ATM-related fees increased by $9,900, or
35.5%, to $37,800 for the three months ended September 30, 2006 and increased by
$26,200, or 33.2%, to $105,100 for the nine months ended September 30, 2006.
Additionally, service charges on the Federal Home Loan Bank correspondent
checking account increased by $1,100, or 8.3%, to $14,400 for the three months
ended September 30, 2006 and by $4,600, or 13.1%, to $39,700 for the nine months
ended September 30, 2006.
The FDIC has adopted a new risk-based deposit insurance assessment system that
will require all FDIC-insured institutions to pay quarterly premiums beginning
in 2007. Annual premiums will range from 5 and 7 basis points for
well-capitalized banks with the highest examination ratings to up to 43 basis
points for undercapitalized institutions. The Bank will be able to offset the
premium with an estimated assessment credit of $41,000 for premiums paid prior
to 1996.
INCOME TAX EXPENSE. The Company provides for both the current and deferred tax
effects of the transactions reported in its financial statements and has
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
15
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, 2006 is $670,700. The
increases in the valuation allowance for the nine months ended September 30,
2006 of $103,900 relates to the net losses incurred in 2006.
As of September 30, 2006, we had approximately $2.2 million in net operating
loss carrryforwards created by our losses in prior years. These loss
carryforwards are available to offset our taxable income in future periods.
Under Section 382 of the Internal Revenue Code, the availability of loss
carryforwards is limited if we undergo an ownership change for tax purposes. An
ownership change occurs when the percentage stock ownership of one or more 5%
stockholders increase by more than 50 percentage points over the lowest
percentage owned by these stockholders at any time during any three-year period.
For purposes of this test, any new group of owners will be treated as a single
5% stockholder. Following an ownership change, the amount of taxable income
which may be offset during any year by pre-change net operating loss
carryforwards is limited to an amount equal to (i) the fair market value of the
company immediately before the "ownership change," multiplied by (ii) the
applicable long-term tax-exempt interest rate published by the Internal Revenue
Service. To the extent the annual limitation in a year exceeds the taxable
income for that year, the excess limitation may be carried forward to increase
the following year's limitation.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2006 AND DECEMBER 31, 2005
The Company's total assets as of September 30, 2006 were $77.3 million, an
increase of $5.6 million, or 7.8%, 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 $6.3 million, or 13.2%. Net loans receivable increased by $6.1
million, or 9.4%, which reflected our continued marketing efforts. Commercial
mortgage loans decreased $293,800, or 3.8%, and decreased to 10.4% of the loan
portfolio at September 30, 2006 from 11.3% at December 31, 2005. The Company's
investment securities decreased by $489,600, or 27.7%, to $1.3 million at
September 30, 2006 due to maturities of securities. Premises and equipment
decreased $146,800, or 6.4%, due to current year depreciation. The Company's
cash and cash equivalents as of September 30, 2006 were $1.9 million, a decrease
of $100,000 from December 31, 2005's level of $2.0 million.
Liabilities increased by $5.5 million, or 7.9%, to $74.5 million due primarily
to a $8.2 million, or 15.1%, 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 $2.7 million, or 21.0%, to $10.3 million at September
30, 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. Advances under our
line of credit from our correspondent bank decreased to $750,000 at September
30, 2006 from $850,000 at December 31, 2005 as we used a portion of the proceeds
from the private placement of our common stock to pay down the line.
Stockholders' equity increased to $2.8 million at September 30, 2006 from $2.7
million at December 31, 2005. The small increase in stockholders' equity
principally reflects $394,600 in proceeds from the issue of 50,363 shares of
Common Stock during the period and was partially offset by $305,500 in losses
during the period.
16
ASSET QUALITY
The following table sets forth information regarding the Bank's nonperforming
assets at the dates indicated.
SEPTEMBER 30, DECEMBER 31,
2006 2005
------------ ------------
Non-accrual loans $ 90,000 $263,000
Accruing loans past due 90 days or more 328,200 44,000
-------- --------
Total non-performing loans 418,200 307,000
Foreclosed assets 52,700 --
-------- --------
Total non-performing assets $470,900 $307,000
======== ========
Non-accrual loans at September 30, 2006 consisted of 2 loans. There were 10
accruing loans past due 90 days or more at September 30, 2006.
At September 30, 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:
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
2006 2005
--------- ---------
Balance, beginning of period $387,822 $ 319,937
Loans charged off (35,454) (16,192)
Loan recoveries 1,011 5,086
--------- ---------
Net charge-offs (34,443) (11,106)
Provision for loan losses 17,500 69,500
--------- ---------
Balance, end of period $370,879 $ 378,331
========= =========
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.
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. 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.
17
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 September 30, 2006, cash and cash
equivalents totaled $1.9 million.
The Bank's primary investing activities is the origination of loans. During the
nine months ended September 30, 2006 and 2005, loan originations totaled $21.9
million and $25.7 million, respectively. These originations were funded in part
by proceeds from repayments of loans, maturities and calls of investment and
mortgage-backed securities and an increase in deposits and FHLB borrowings.
At September 30, 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 $40.4 million at
September 30, 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
September 30, 2006, the Bank had $22.0 million in unused borrowing capacity at
the FHLB of Cincinnati.
The Bank is subject to minimum capital requirements under OTS regulations. Under
these regulations, banks 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." To be adequately capitalized a bank must maintain a Tier 1
Ratio of 4.0%, a Tier 1 Risk-Based Ratio of 4.0% and a Total Risk-Based Capital
Ratio of 8.0%. At September 30, 2006, the Bank's Tier 1/Core Capital ratio was
5.06%, its Tier 1 risk-based capital ratio was 8.63% and its total risk-based
capital ratio was 9.45%.
The Company has previously borrowed $750,000 on a line of credit from a
correspondent bank and $390,100 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%
(currently 8.50%) 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 November 15, 2006. Under the terms of the renewal of our
loan from the correspondent bank, we are required to maintain an interest
reserve of approximately $53,000, which is pledged as additional collateral, and
Community First Bank is required to maintain a total risk-based capital ratio of
at least 10% (Bank's ratio at September 30, 2006 was 9.45%), a Tier 1 leverage
ratio of a least 5.25% and a minimum equity capital of at least $3.0 million.
Criticized loans may not exceed 5.0% of assets. Although Community First Bank is
not currently in compliance with the regulatory capital requirements in the loan
agreement, the lender has not declared a default. The Company currently
anticipates that it will be able to renew these borrowings on similar terms but
does not have any
18
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 public offering or private placement or pursue a combination of these
strategies. The Company has a registration statement on file with the SEC for
the sale of up to 862,500 shares of common stock. 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.
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, due to the material weaknesses
described below, the Company's disclosure controls and procedures were not
effective to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Securities Exchange Act of 1934
is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms. There
were no changes in the Company's internal control over financial reporting that
occurred during the Company's last fiscal quarter that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
In connection with their audit of our financial statements for the year ended
December 31, 2005, our independent registered public accounting firm, King +
Company, PSC, identified material weaknesses, as defined in Public Company
Accounting Oversight Board Standard No. 2, in our internal control over
financial reporting. Specifically, King + Company PSC noted a failure to timely
perform various account reconciliations. In addition, King + Company, PSC noted
a lack of segregation of duties among the personnel responsible for reconciling
various accounts. Management believes that these weaknesses are primarily
attributable to human resource limitations within our accounting and financial
reporting function and has instituted a schedule for accomplishing
reconciliations as well as additional reviews of entries made by employees. The
Company has hired additional personnel with internal audit experience. Daily
reconciliations of the larger accounts and timely reconciliations of the other
accounts are now being performed. We have allocated $75,000 of our allowance for
loan loses to accommodate losses that we may incur in connection with
uncollected overdrafts and other charges carried in our Due From Bank account.
Actual losses will be recorded as they are identified during the reconciliation
process. All entries made by personnel in the reconciliation function are now
reviewed daily by a member of management.
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 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).
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 14, 2006 /s/ William M. Tandy
--------------------------------------------
William M. Tandy, President
(Duly Authorized Representative)
Date: November 14, 2006 /s/ Michael D. Wortham
--------------------------------------------
Michael D. Wortham, Vice President
(Chief Financial Officer)
20