Filed Pursuant to Rule 424(b)(4)
File No. 333-136417
PROSPECTUS
[CFB LOGO]
750,000 SHARES
COMMUNITY FIRST BANCORP, INC.
COMMON STOCK
We are the holding company for Community First Bank, a federal savings bank
headquartered in Madisonville, Kentucky where we also have another branch.
We are offering 750,000 shares of our common stock at a purchase price of
$7.25 per share in a rights offering to stockholders of record as of the close
of business on December 29, 2006. Each stockholder has the non-transferable
right to purchase 2.286 shares for each share held on that date provided that no
person or persons acting in concert will be permitted thereby to become the
beneficial owner of 10% or more of their outstanding common stock. Subscribers
who exercise their right in full may oversubscribe for additional shares to the
extent shares are available. The rights offering expires at 5:00 p.m., Central
Time, on February 9, 2007 unless extended by us. We reserve the right to extend
the offering until March 9, 2007.
Any shares that are not subscribed for may be offered by us on a best
efforts basis to members of the local community. We reserve the right to
increase the total number being offered by up to 112,500 shares to cover
oversubscriptions and other purchases. We are not required to sell a minimum
number of shares to close this offering. Funds received by us in the offering
will be deposited in a non-interest-bearing escrow account. We expect that
delivery of the shares sold in this offering will be made on or about February
15, 2007 unless the offering is extended.
Our common stock is quoted on the Over-the-Counter Bulletin Board ("OTCBB")
under the symbol "CFBC." The last sale of our common stock reported on the OTCBB
through the date of this prospectus occurred on December 29, 2006 at a price of
$7.75 per share.
_______________________________________
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. YOU SHOULD READ THE "RISK
FACTORS" SECTION BEGINNING ON PAGE 6 OF THIS PROSPECTUS BEFORE BUYING SHARES OF
COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION OR OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THE COMMON
STOCK OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF COMMON STOCK OFFERED ARE NOT DEPOSIT ACCOUNTS AND ARE NOT
INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.
_______________________________________
OFFERING PRICE PROCEEDS TO US (2)
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Per Share............................. $7.25 $7.25
Total (1)............................. $5,437,500 $5,437,500
(1) Assumes sale of all 750,000 shares.
(2) Before deducting expenses of the offering payable by us estimated at
approximately $150,000. See "Use of Proceeds."
The date of this prospectus is December 29, 2006
COMMUNITY FIRST BANCORP, INC.
COMMUNITY FIRST BANK
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PROSPECTUS SUMMARY
This summary highlights information about Community First Bancorp, Inc. and
the offering. You should read the entire prospectus carefully, including the
consolidated financial statements and notes to the consolidated financial
statements. You should also consider carefully the information set forth under
the heading "Risk Factors" before making any investment decision on our common
stock.
COMMUNITY FIRST BANCORP, INC.
Community First Bancorp, Inc. is the holding company for Community First
Bank, a federal savings bank headquartered in Madisonville, Kentucky. Community
First Bank operates from its main office at 2420 North Main Street and a branch
office at 240 South Main Street, both in Madisonville, Kentucky. Community First
Bank's lending activities consist primarily of the origination of loans secured
by residential and commercial properties in our primary market area of
Madisonville. Since we went public in 2003, we have more than doubled our assets
making us one of the fastest growing financial institutions in the Commonwealth
of Kentucky during this period. At September 30, 2006, we had total assets of
approximately $77.3 million, loans of approximately $70.7 million (net of
allowances), deposits of approximately $62.7 million and stockholders equity of
approximately $2.8 million.
We incurred a loss of $306,000 for the nine months ended September 30, 2006
and losses of $439,000 and $1.0 million, respectively, for the years ended
December 31, 2005 and 2004. As of September 30, 2006, we had a federal income
tax net operating loss carryforward of approximately $2.2 million. Our losses
are primarily attributable to the increase in overhead resulting from the
opening of our new main office in March 2004 and expenses related to our data
processor conversion. Although our losses have narrowed, we do not expect to
achieve sustained profitability without substantial additional growth.
In an effort to maintain the capital of Community First Bank, we have
previously borrowed $750,000 from our correspondent bank and approximately
$400,000 from our directors to fund a capital infusion. Our loan agreement with
our correspondent bank requires us to maintain a total risk-based capital ratio
at Community First Bank of at least 10%. We did not comply with this requirement
at September 30, 2006 and do not expect to comply with it at December 31, 2006.
Although our correspondent bank waived compliance with this covenant at
September 30, 2006, it has not done so as of December 31, 2006. We intend to use
the net proceeds from this offering to pay down this debt and to bolster the
capital of Community First Bank so that we can continue to grow our business to
the scale we believe is needed to support our cost structure.
MANAGEMENT STRATEGY
Founded in 1923 as the Madisonville Building & Loan Association, Community
First Bank historically operated as a traditional thrift from its South Main
Street location, offering long-term mortgages and small consumer loans to local
residents. As the profitability of this business came under increasing pressure
during the 1990s, Community First Bank suffered continuing losses, which
severely eroded its capital base.
In late 2001, the Board of Directors brought in Mr. William M. Tandy, who
had extensive prior experience in bank turn-arounds, to take over management of
Community First Bank. Prior to joining Community First Bank, Mr. Tandy had been
brought in to serve as President of Hacienda Bank, a troubled bank in Santa
Maria, California in 1993. Mr. Tandy restored Hacienda Bank to profitability and
grew it from a low of $17.5 million in assets to $60 million in assets. Prior to
Hacienda Bank, Mr. Tandy had been brought in to serve as the President of First
National Bank of Pottsboro, Texas, another troubled bank, which he also returned
to profitability and sold to American Bank in Sherman, Texas in 1992.
Under Mr. Tandy's leadership, Community First Bank has executed a
multi-pronged strategy to re-invigorate its franchise and enable it to compete
more effectively. The principal elements of this strategy have included:
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GROWING AND DIVERSIFYING THE LOAN PORTFOLIO. In order to increase the
profitability of Community First Bank, management has grown the loan
portfolio and diversified it into more profitable lines of business than
the one- to four-family lending which historically dominated the portfolio.
With the capital from our 2003 conversion to stock form, we significantly
increased our commercial and commercial mortgage lending. As the result of
our conversion to a new computer system in 2004, we also gained the
capability of offering commercial loans and lines of credit and other forms
of lending on which higher rates may be charged as well as the ancillary
services these customers require. The additional capital from this offering
will increase our lending limits and allow us to further grow and diversify
the portfolio.
DEVELOPMENT OF NON-INTEREST INCOME SOURCES. Like most thrift
institutions, Community First Bank traditionally relied on net interest
income (i.e., the difference between the interest earned on its loan and
securities portfolios and interest paid on its deposits and borrowings) to
cover its operating expenses (salaries, occupancy, data processing, etc.).
In order to diversify our income sources and create income streams that are
less affected by changes in interest rates, we have developed various
additional types of non-interest income including fees for various loan and
deposit services and commission income. Our new computer system expanded
the array of services we offer, including on-line banking and internet
bill-pay, which have created new fee opportunities.
MAINTAINING STRONG ASSET QUALITY. We have maintained our asset quality
while growing Community First Bank. Our ratio of non-performing assets to
total assets has been consistently 0.61% or less since 2003. We believe
that our low level of non-performing assets reflects a strong credit
culture and disciplined underwriting and we intend to continue operating
Community First Bank in this manner.
MODERNIZATION OF FACILITIES. In 2004, Community First Bank relocated
its main office to a modern building in a faster-growing part of
Madisonville. The new main office has drive-up facilities and more
convenient hours. We had previously extensively remodeled our South Main
Street office to make it more convenient and appealing to customers. These
more modern facilities enabled us to attract new customers and better serve
existing customers.
IMPROVE MARKET AWARENESS. In 2002, Community First Bank adopted its
current name to better reflect its community focus and the products it
offers. The name change was accompanied by a marketing campaign to help
establish our new identity and create greater market awareness of Community
First Bank. Community First Bank has continued to be actively involved in
the community and believes that these efforts have helped build further
customer identification and loyalty.
CONVERSION TO STOCK FORM. In 2003, Community First Bank completed a
successful conversion to stock form selling 277,725 shares of newly issued
stock to its depositors in accordance with Office of Thrift Supervision
regulations. The conversion to stock form not only provided Community First
Bank with the capital needed to grow but further increased our visibility
in the market.
As a result of the foregoing strategies, we have successfully grown our
assets and our interest income and other income over the past several years.
Despite our success in growing Community First Bank, we have incurred losses as
our income growth has not been sufficient to offset the increased expenses
resulting from our new main office. During 2004, we also experienced significant
non-recurring charges related to the conversion of our data processor. In
addition, we believe that our profitability has been negatively affected by the
recent flattening of the yield curve, which began in June 2004 when the Federal
Reserve Board initiated a series of interest rate increases. The Federal
Reserve's actions have triggered an increase in short-term rates which has
primarily affected the rates we pay on our deposits and borrowings while the
long-term rates which determine the pricing of our loans have remained fairly
constant.
While we have undertaken various cost-cutting initiatives, management
believes that the best strategy for achieving profitability is to continue to
emphasize growth. Management believes that its success in growing the loan
portfolio demonstrates that loan demand in its market area is sufficient to
support further growth. At its current capital levels, however, we cannot grow
to the size needed for profitability. The additional capital from this offering
will increase our legal lending limits and allow us to serve a broader range of
customers. In addition, the capital-based regulatory limits on our
non-residential real estate lending will be increased.
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Our executive offices are located at 2420 North Main Street, Madisonville,
Kentucky and our main telephone number is (270) 326-3500. We also maintain a
website at www.cfbky.com. Information on our website should not be treated as
part of this prospectus.
LOCATION AND MARKET AREA
We consider our primary market area to be the City of Madisonville and
surrounding Hopkins County, Kentucky. Located in the Western Coalfield Region of
Kentucky, Hopkins County had a population of approximately 46,161 in 2005.
Madisonville is located on US-41 (which will be part of the future Interstate 69
- - designed to run North-South through the United States connecting Canada and
Mexico) and just seven miles from the junction with the Western Kentucky Parkway
which connects the Lexington/Louisville area to the western part of the state
and Interstate 24. Madisonville is 49 miles south of Evansville, Indiana, 104
miles northwest of Nashville, Tennessee, and 153 miles southwest of Louisville,
Kentucky. It is one half hour from Interstate 24. Commercial airline service is
available at the Evansville Regional Airport in Evansville Indiana and
Owensboro-Daviess County Regional Airport (both are within 50 miles of the
city.) Madisonville is the county seat and largest city in Hopkins County and is
home to one of the major healthcare facilities in the Commonwealth of Kentucky.
The city is 35 miles from Kentucky's Lake Region, a popular recreation area
consisting of two of Kentucky's largest lakes - Kentucky Lake and Lake Barkley.
The largest employers in Madisonville and the surrounding communities
include the Trover Regional Medical Center, General Electric Aircraft Engine,
Carhartt, Inc. and Lear Corporation. By industry, the largest sectors of the
Madisonville economy are healthcare and manufacturing. Land O' Frost, Inc., a
packaged lunch meat producer, is in the process of completing a $49 million,
175,000 square foot industrial facility that will bring 500 new jobs to the
area. Additionally, Fort Knox National recently established a new call center
that will eventually add approximately 200 new jobs and Jennmar Corporation, a
manufacturer of mining support products, announced it will build a 45,000 square
foot plant which will generate over 40 new jobs.
The 2005 unemployment rate for Hopkins County was 6.1%, the same rate as
the state-wide rate. The median household income of $36,780 in 2005 for Hopkins
County was below the median for Kentucky as a whole of $41,175 and for the
United States of $49,747. Projections for median household income growth through
2010 for Hopkins County exceed the projections for growth in the United States
as a whole. While the population of Madisonville grew by approximately 19% from
1990 to 2000, Hopkins County as a whole grew less than 1.0%. By comparison, the
population of Kentucky grew by 9.6%.
THE OFFERING
Securities Offered.........We are offering 750,000 shares of our common stock in
a rights offering to our shareholders of record as of
the close of business on December 29, 2006, on the
basis of 2.286 shares for each share then owned. To
the extent that any of the rights offering shares are
not purchased by shareholders upon the exercise of
their rights, shareholders that have fully exercised
their rights may oversubscribe for additional shares.
Any shares not subscribed for in the rights offering
may be offered by us to certain local investors. We
reserve the right to increase the total number of
shares offered by not more than 112,500 shares to
cover oversubscriptions and other purchases. There is
no requirement in either offering to sell any minimum
number or dollar amount of shares. See "The Rights
Offering."
Expiration Date............The rights offering will expire at 5:00 p.m. Central
Time on February 9, 2007 subject to extension by us.
We reserve the right to extend the rights offering
until March 9, 2007.
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Beneficial Ownership
Limit....................No person or persons acting in concert may exercise
rights or oversubscription privileges to become the
beneficial owner of 10% or more of the outstanding
common stock following the offering. Subscriptions in
excess of this amount will be refunded.
Determination of Offering
Price....................The rights offering price is $7.25 per share. It was
determined by us based upon various factors including
the trading history of our common stock, the book
value per share of our common stock as of September
30, 2006, our operating history and our prospects for
future earnings, our current performance and the
prices of equity securities of comparable companies.
Common Stock Outstanding...As of the date of this prospectus, we had 328,088
shares of common stock outstanding. Assuming the sale
of all 750,000 shares in the offering (excluding up
to 112,500 additional shares that we may offer), we
would have 1,078,088 shares of common stock issued
and outstanding.
Use of Proceeds............We intend to use up to approximately $1.15 million of
the net proceeds to repay existing indebtedness,
including approximately $400,000 in indebtedness to
directors. This indebtedness was used to finance a
capital infusion into Community First Bank. We intend
to invest the remainder of the net offering proceeds
in Community First Bank as additional capital to
support our loan growth and business expansion
activities. Our management will have broad discretion
in determining the specific timing and use of the
offering proceeds invested in Community First Bank.
See "Use of Proceeds."
Current Ownership by Our
Management...............Our directors and executive officers currently
beneficially own approximately 56,362 shares of our
common stock or 17.2% of our outstanding common
stock. See "Security Ownership of Certain Beneficial
Owners and Management." Some of our directors and
executive officers may purchase additional shares of
common stock in the offering.
Market for Our
Common Stock.............Our common stock is currently quoted for trading on
the Over-the-Counter Bulletin Board ("OTCBB") under
the symbol "CFBC".
Risk Factors...............You should carefully read the "Risk Factors" section
in this prospectus before making any investment
decision or purchasing any shares of common stock.
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SUMMARY FINANCIAL DATA
The following selected consolidated financial data at and for the nine
months ended September 30, 2006 and 2005 is derived from our unaudited financial
statements for the nine months then ended and reflect all adjustments necessary,
in the opinion of management, for a fair presentation. Our results of operations
for the nine months ended September 30, 2006 do not necessarily reflect the
results that may be expected for the full year. The following selected
consolidated financial data at and for the fiscal years ended December 31, 2005,
2004 and 2003 is derived from our audited consolidated financial statements for
the fiscal years then ended and should be read in conjunction with the
consolidated financial statements and notes thereto.
AT OR FOR THE
NINE MONTHS ENDED AT OR FOR THE
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- -------------------------------------
2006 2005 2005 2004 2003
-------- -------- -------- -------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED FINANCIAL CONDITION DATA:
Assets................................................. $ 77,267 $ 69,983 $ 71,729 $ 63,503 $ 42,541
Loans receivable, net.................................. 70,696 61,821 64,578 51,932 35,066
Cash and cash equivalents.............................. 1,876 2,435 2,009 5,793 1,109
Investment securities:
Available-for-sale................................. 1,222 2,203 1,703 2,215 1,976
Held-to-maturity................................... 57 71 66 89 1,424
Deposits............................................... 62,696 53,011 54,477 46,466 33,172
Advances from Federal Home Loan Bank................... 10,275 12,500 13,000 13,000 5,000
Stockholders' equity................................... 2,801 2,826 2,720 3,164 4,209
SELECTED OPERATIONS DATA:
Interest income........................................ $ 3,144 $ 2551 3,556 $ 2,692 $ 2,182
Interest expense....................................... 1,885 1,254 1,783 1,079 833
--------- -------- ---------- --------- ---------
Net interest income................................ 1,259 1,297 1,773 1,613 1,349
Provision for loan losses.............................. 18 69 79 164 82
--------- -------- ---------- --------- ---------
Net interest income after provision for loan
losses........................................... 1,241 1,228 1,694 1,449 1,267
Non-interest income.................................... 375 280 346 216 195
Non-interest expenses.................................. 1,922 1,841 2,479 2,581 1,564
--------- -------- ---------- --------- ---------
Income (loss) before federal income tax expense
(benefit)............................................ (306) (333) (439) (916) (102)
Federal income tax expense (benefit)................... -- -- -- 116 (116)
--------- -------- ---------- --------- ---------
Net income (loss).................................. $ (306) $ (333) $ (439) $ (1,032) $ 14
========= ======== ========== ========= =========
PER SHARE DATA:
Earnings per share - Basic............................ $ (0.99) $ (1.20) $ (1.58) $ (3.71) $ 0.05
Earnings per share - Diluted.......................... (0.99) (1.20) (1.58) (3.71) 0.05
Book value per share.................................. 8.54 10.18 9.79 11.40 15.15
PERFORMANCE RATIOS:
Return on average assets (1).......................... (0.55)% (0.67)% (0.65)% (2.00)% 0.03%
Return on average equity (1).......................... (14.92) (15.38) (14.98) (27.85) 0.33
Interest rate spread (1).............................. 2.16 2.70 2.70 3.41 3.20
Net interest margin (1)............................... 2.43 2.84 2.85 3.48 3.43
Ratio of average interest-earning assets to average
interest-bearing liabilities....................... 107.53 105.12 105.18 103.09 110.83
Ratio of noninterest expense to average total
assets (1).......................................... 3.47 3.72 3.69 5.00 3.78
ASSET QUALITY RATIOS:
Nonperforming assets to total assets at end of period. 0.61% 0.29% 0.43% 0.46% 0.11%
Nonperforming loans to total loans at end of period... 0.59 0.33 0.47 0.57 0.13
Allowance for loan losses to total loans at end
of period........................................... 0.52 0.61 0.60 0.61 0.51
Allowance for loan losses to nonperforming loans
at end of period................................... 88.69 183.64 126.80 108.09 376.99
Net charge-offs to average loans outstanding (1)...... 0.05 0.02 0.02 0.05 0.02
CAPITAL RATIOS:
Equity to total assets at end of period............... 3.63% 4.04% 3.79% 4.95% 9.89%
Average equity to average assets...................... 3.70 4.38 4.36 7.18 10.03
Tier 1/core capital to adjusted total assets (2)...... 5.06 5.72 5.47 6.05 9.73
Tier 1 capital to risk-based assets (2)............... 8.63 9.86 9.30 10.88 18.12
Total capital to risk-based assets (2)................ 9.45 10.79 10.22 11.78 18.91
<FN>
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(1) Ratios for the nine-month periods have been annualized.
(2) Community First Bank only.
</FN>
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RISK FACTORS
An investment in our common stock involves risk, and you should not invest
in our common stock unless you can afford to lose some or all of your
investment. You should carefully read the risks described below, together with
all of the other information included in this prospectus, before you decide to
buy any of our common stock. Our business, prospects, financial condition and
results of operations could be harmed by any of the following risks.
RISKS RELATED TO OUR BUSINESS
WE HAVE HAD OPERATING LOSSES AND HAVE NOT BEEN PROFITABLE FOR THE PAST TWO
FISCAL YEARS, AND THERE CAN BE NO ASSURANCE WE WILL CONSISTENTLY RETURN TO
PROFITABILITY AFTER THE OFFERING.
For the nine months ended September 30, 2006, we had a loss of $306,000
($0.99 per diluted share). We do not anticipate that we will be profitable in
the fourth quarter of fiscal year 2006. For the year ended December 31, 2005, we
had a net loss of $439,000 ($1.58 per diluted share) and for the year ended
December 31, 2004, we had a net loss of $1.0 million ($3.71 per diluted share).
Our losses are attributable to the increase in operating expenses resulting from
the opening of our new main office and certain expenses attributable to our 2004
change in data processors. In order to become profitable, we believe that we
must increase our net interest income by growing our loan portfolio. We cannot
give any assurances as to how long it will take for us to grow Community First
Bank sufficiently to offset our current expenses. Nor can we give assurances
that we will not incur substantial losses in the meantime. If we are unable to
consistently return to profitability, the value of our common stock may decrease
significantly, and you could lose the entire amount of your investment in our
common stock.
IF WE DO NOT RAISE SUFFICIENT CAPITAL IN THIS OFFERING, WE MAY NOT BE ABLE TO
COMPLY WITH OUR LOAN COVENANTS.
We have previously borrowed $750,000 from our correspondent bank to fund a
capital infusion into Community First Bank. This loan is secured by all of the
stock we own in Community First Bank. Under the terms of our loan agreement, we
are required to maintain the total risk-based capital ratio of Community First
Bank at a minimum of 10%. If we do not comply with this covenant, our
correspondent bank may, at its option, declare our loan in default and exercise
its remedies, which include liquidating the collateral for the loan. As of
September 30, 2006, Community First Bank's total risk-based capital ratio was
9.45%. We do not expect that Community First Bank will be well capitalized as of
December 31, 2006 but as of the date of this prospectus have not determined what
the capital ratios of Community First Bank were at that date. Our correspondent
bank has waived compliance with this covenant as September 30, 2006. If we do
not raise sufficient capital in this offering to either pay off our loan or
restore the well-capitalized status of Community First Bank, there can be no
assurance that our correspondent bank will not declare a default.
WE MAY NOT HAVE ADEQUATELY ADDRESSED OUR AUDITORS' CONCERNS REGARDING THE
WEAKNESSES IN OUR INTERNAL CONTROLS.
In connection with the audit of our financial statements for the fiscal
year ended December 31, 2005, our auditors identified the following material
weaknesses in our internal controls:
o failure to reconcile certain correspondent bank accounts;
o failure to reconcile certain suspense and clearing accounts; and
o inadequate segregation of the duties of certain employees.
Management has taken a number of steps intended to address these concerns.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Internal Controls." No assurance can be given that these measures
will be sufficient to mitigate the risks from weaknesses in our internal
controls. If we do not adequately address the weaknesses in our internal
controls, investors may not be able to rely on the accuracy of our financial
statements and our auditors may qualify their reports on our financial
statements. If we are unable to adequately reconcile our accounts, we may be
required to charge off amounts that we cannot substantiate. There can be no
assurance that we will not incur additional expense in addressing weaknesses in
our internal controls.
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OUR ABILITY TO USE OUR NET OPERATING LOSS CARRYFORWARDS MAY BE LIMITED AS A
RESULT OF THE OFFERING.
At September 30, 2006, we had net operating loss carryforwards of
approximately $2.2 million available to offset future taxable income. Under the
Internal Revenue Code, the right to this benefit becomes limited if, at any time
within a three-year period, holders of more than 5% of our capital stock, in the
aggregate, increase their ownership of our common stock by more than 50% of our
outstanding capital stock in the aggregate. For purposes of this test, any new
group of owners will be treated as a single 5% stockholder. Accordingly, if
persons other than our current stockholders collectively acquire more than 50%
of our stock in this offering, our ability to utilize our loss carryforwards
will be limited. The amount of the limitation will depend on the fair market
value of our outstanding common stock immediately prior to the ownership change
and the applicable Internal Revenue Service long-term tax-exempt interest rate
in effect at the time. Based on the recent trading prices for the common stock
and the applicable rate, we estimate that we would only be able to use $98,476
annually in loss carryforwards to offset taxable income if we undergo an
ownership change as a result of this offering. Any loss carryforwards not
utilized before they expire in 20 years will be lost.
THE LOSS OF OUR CHIEF EXECUTIVE OFFICER WOULD HURT OUR OPERATIONS.
We rely heavily on our President and Chief Executive Officer, William M.
Tandy. The loss of his services would adversely affect us because, as a small
community bank, Mr. Tandy has more responsibility than would be typical in a
larger institution with more employees. In addition, as a small community bank,
we have fewer management level personnel who would be able to succeed Mr. Tandy
and assume his duties. We have attempted to provide for his continued employment
with us by entering into an employment agreement with Mr. Tandy. Mr. Tandy,
however, could terminate his employment at any time. We maintain key man life
insurance on Mr. Tandy.
IF WE HAVE NOT PROPERLY ASSESSED THE CREDITWORTHINESS OF OUR BORROWERS, MANY OF
WHOM ARE NEW CUSTOMERS, OUR ASSET QUALITY COULD DECLINE AND WE COULD SUSTAIN
ADDITIONAL LOSSES.
Our earnings are significantly affected by our ability to properly
originate, underwrite and service loans. We could sustain losses if we
incorrectly assess the creditworthiness of our borrowers or fail to detect or
respond to deterioration in asset quality in a timely manner. Problems with
asset quality could cause our interest income and net interest margin to
decrease and our provision for loan losses to increase, which could adversely
affect our results of operations and financial condition. While we have not had
asset quality issues in recent years, the majority of the loans in our portfolio
have only recently been originated. Accordingly, there may be credit quality
issues, which have not yet become apparent as it generally takes some time
before loans become non-performing. In addition, our recent loan originations
have taken place during a period of favorable economic conditions, including low
interest rates. There can be no assurance that our loan customers will not
experience payment difficulties if economic conditions change.
OUR SUCCESS WILL DEPEND UPON OUR ABILITY TO EFFECTIVELY MANAGE OUR FUTURE
GROWTH.
We believe that we have in place the management and systems to support
continued growth. However, our continued growth and profitability depend on the
ability of our officers and key employees to manage such growth effectively, to
attract and retain skilled employees, to maintain effective internal controls
and a strong credit culture and to execute our strategic plan. If we cannot
manage these and other similar factors, our future growth will be adversely
affected. Accordingly, there can be no assurance that we will be successful in
managing our growth, and the failure to do so would adversely affect our
financial condition and results of operations.
WE INTEND TO INCREASE OUR ORIGINATIONS OF COMMERCIAL LOANS, WHICH HAVE A HIGHER
DEGREE OF RISK THAN OTHER TYPES OF LOANS.
Commercial loans are often larger and may involve greater risks than other
types of lending. Because payments on such loans are often dependent on the
successful operation of the property or business involved, repayment of such
loans may be more sensitive than other types of loans to adverse conditions in
the real estate market or the economy. Unlike residential mortgage loans, which
generally are made on the basis of the borrower's ability to make repayment from
his or her employment and other income and which are secured by real property
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whose value tends to be more easily ascertainable, commercial loans typically
are made on the basis of the borrower's ability to make repayment from the cash
flow of the borrower's business. As a result, the availability of funds for the
repayment of commercial loans may be substantially dependent on the success of
the business itself and the general economic environment. If the cash flow from
business operations is reduced, the borrower's ability to repay the loan may be
impaired. As we grow our commercial loan portfolio, we expect that we will have
to increase the allowance for loan losses to reflect the risks inherent in this
type of lending. Since the provisions for these loans must be made at the time
of their origination, we could be required to make substantial additional loan
loss provisions well before the additional income from these loans is reflected
in our financial statements.
OUR ABILITY TO GROW OUR COMMERCIAL AND COMMERCIAL REAL ESTATE LOAN PORTFOLIOS
COULD BE LIMITED BY OUR CHARTER.
As a federal savings bank, commercial loans may not exceed 20% of Community
First Bank's assets and any commercial loans in excess of 10% of assets must be
made to small businesses as defined in Office of Thrift Supervision regulations.
In addition, loans secured by liens on non-residential real property may not
exceed 400% of total regulatory capital. Our commercial loan portfolio is
currently less than 1.0% of assets and our non-residential real estate loans are
approximately 160% of total regulatory capital. There can be no assurance that
the regulatory limitations on commercial and non-residential real estate lending
by federal savings banks will not limit our ability to grow and diversify our
loan portfolio.
IF WE EXPERIENCE GREATER LOAN LOSSES THAN WE HAVE PROVIDED FOR, IT WILL HAVE AN
ADVERSE EFFECT ON OUR ABILITY TO OPERATE PROFITABLY.
The risk of credit losses on loans varies with, among other things, general
economic conditions, the type of loan being made, the creditworthiness of the
borrower over the term of the loan and, in the case of a collateralized loan,
the value and marketability of the collateral for the loan. Management maintains
an allowance for loan losses based upon, among other things, historical loan
loss experience, an evaluation of economic conditions and regular reviews of
delinquencies and loan portfolio quality. Based upon such factors, management
makes various assumptions and judgments about the ultimate collectibility of the
loan portfolio and provides an allowance for loan losses based upon a percentage
of the outstanding balances and for specific loans when their ultimate
collectibility is considered questionable. If management's assumptions and
judgments prove to be incorrect and the allowance for loan losses is inadequate
to absorb future losses, or if the bank regulatory authorities require us to
increase the allowance for loan losses as a part of their examination process,
our earnings and capital could be significantly and adversely affected.
As of September 30, 2006, our allowance for loan losses was $371,000 which
represented 0.52% of outstanding loans. At such date, we had two loans totaling
$90,000 on non-accrual status and $328,000 in accruing loans past due 90 days or
more. We actively manage our non-accruing loans in an effort to minimize credit
losses. Although management believes that our allowance for loan losses is
adequate, there can be no assurance that the allowance will prove sufficient to
cover future loan losses. Further, although management uses the best information
available to make determinations with respect to the allowance for loan losses,
future adjustments may be necessary if economic conditions differ substantially
from the assumptions used or adverse developments arise with respect to our
non-performing or performing loans. Material additions to our allowance for loan
losses would result in a decrease in our net income and capital, and could have
a material adverse effect on our financial condition and results of operations.
LIQUIDITY NEEDS COULD ADVERSELY AFFECT OUR ABILITY TO GROW.
Our primary sources of funds are customer deposits and loan repayments.
While scheduled loan repayments are a relatively stable source of funds, they
are subject to the borrowers' ability to repay the loans. The ability of
borrowers to repay loans can be adversely affected by a number of factors,
including changes in economic conditions, adverse trends or events affecting
business industry groups, reductions in real estate values or markets, business
closings or lay-offs, inclement weather, natural disasters and international
instability. Additionally, deposit levels may be affected by a number of
factors, including rates paid by competitors, general interest rate levels,
returns available to customers on alternative investments and general economic
conditions. Accordingly, we may be required from time to time to rely on
secondary sources of liquidity to meet withdrawal demands or otherwise fund
8
operations. Such sources include advances from the Federal Home Loan Bank of
Cincinnati, brokered deposits and lines of credit from correspondent banks.
While we believe that these sources are currently adequate, there can be no
assurance they will be sufficient to meet future liquidity demands, particularly
if we continue to grow and experience increasing loan demand. We may be required
to slow or discontinue loan growth, capital expenditures or other investments or
liquidate assets should such sources not be adequate.
MOST OF OUR LOANS ARE SECURED, IN WHOLE OR IN PART, WITH REAL ESTATE COLLATERAL
WHICH IS SUBJECT TO DECLINES IN VALUE.
In addition to the financial strength and cash flow characteristics of the
borrower in each case, we generally secure our loans with real estate
collateral. As of September 30, 2006, approximately 94% of our loans had real
estate as a primary, secondary or tertiary component of collateral. Real estate
values and real estate markets are generally affected by, among other things,
changes in national, regional or local economic conditions, fluctuations in
interest rates and the availability of loans to potential purchasers, changes in
tax laws and other governmental statutes, regulations and policies, and acts of
nature. The real estate collateral in each case provides an alternate source of
repayment in the event of default by the borrower. If real estate prices in our
markets decline, the value of the real estate collateral securing our loans
could be reduced. If we are required to liquidate the collateral securing a loan
during a period of reduced real estate values to satisfy the debt, our earnings
and capital could be adversely affected.
OUR LEGAL LENDING LIMITS ARE RELATIVELY LOW AND RESTRICT OUR ABILITY TO COMPETE
FOR LARGER CUSTOMERS.
At September 30, 2006, our lending limit per borrower was approximately
$642,000, or 15% of our capital. Accordingly, the size of loans that we can
offer to potential borrowers is less than the size of loans that many of our
competitors with larger capitalizations are able to offer. We may engage in loan
participations with other banks for loans in excess of our legal lending limits.
However, there can be no assurance that such participations will be available at
all or on terms which are favorable to us and our customers. Although we expect
our legal lending limit to increase as the result of the offering, our limit
will still be lower than many of our competitors.
OUR FUTURE GROWTH AND PROFITABILITY MAY BE LIMITED BY COMPETITION AND ECONOMIC
CONDITIONS IN OUR MARKET AREA.
Our primary market area consists of Madisonville and surrounding areas of
Hopkins County, Kentucky. While the City of Madisonville has experienced steady
population growth, population growth in Hopkins County has historically been
below that of the Commonwealth of Kentucky and the United States. Our ability to
make new loans in our market area may be limited to the extent that the rate of
population growth is flat or declines. Further, the Hopkins County unemployment
rate has been higher and median household income lower historically than for
Kentucky as a whole and the United States. Within our market area, we compete
for loans and deposits with several other financial institutions. Most competing
institutions have financial resources substantially greater than ours and may
therefore be able to offer a greater variety of loan and deposit accounts, which
could give them a competitive advantage over us. Such competition could
adversely affect us in the future.
THE SUCCESS AND GROWTH OF OUR BUSINESS WILL DEPEND ON OUR ABILITY TO ADOPT AND
IMPLEMENT TECHNOLOGICAL CHANGES.
The banking industry and the ability to deliver financial services is
becoming more dependent on technological advancement, such as the ability to
process loan applications on the Internet, accept deposits remotely, accept
electronic signatures, provide process status updates instantly and on-line
banking capabilities and other expected customer conveniences that are cost
efficient to our business processes. We are continually improving our
information technologies and reviewing our overall information technology
structure. We may be required to make significant capital expenditures in
technology in order to comply with regulatory requirements and remain
competitive.
9
WE MAY BE REQUIRED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE, BUT THAT CAPITAL
MAY NOT BE AVAILABLE.
We are required by federal banking regulations to maintain adequate levels
of capital for the safe and sound operation of our business. We anticipate that
our capital resources following the offering will be sufficient to meet our
needs for the immediate future. However, because we have not been profitable
during recent periods, we may have to raise additional equity capital in the
future to support our continued growth or for other reasons. Our ability to
raise capital, if needed, will depend on conditions in the capital markets at
that time, which are outside our control, and on our financial performance and
condition. Accordingly, we cannot assure you of our ability to raise additional
capital if needed on terms acceptable to us or at all. If we cannot raise
additional capital when needed, our ability to further expand our business
through internal growth or otherwise could be materially limited and we could be
subject to further enforcement actions by our regulators.
RISKS RELATED TO OUR COMMON STOCK AND THIS OFFERING
THERE IS LITTLE OR NO TRADING MARKET FOR OUR COMMON STOCK, WHICH MAY ADVERSELY
IMPACT YOUR ABILITY TO SELL YOUR SHARES AND THE PRICE YOU RECEIVE FOR YOUR
SHARES.
Our common stock trades only in the over-the-counter market, and trades are
reported on the OTCBB. Our common stock has limited or no trading activity, and
we cannot assure you that an active trading market in our common stock will
develop as a result of the offering or at any time in the foreseeable future.
This means that there may be limited liquidity for our common stock, which may
make it difficult to buy or sell our common stock, may negatively affect the
price of our common stock and may cause volatility in the price of our common
stock.
THE OFFERING PRICE OF OUR COMMON STOCK DOES NOT NECESSARILY REFLECT THE MARKET
VALUE OF OUR COMMON STOCK OR THE PRICE YOU WOULD RECEIVE IF YOU SELL YOUR SHARES
FOLLOWING COMPLETION OF THE OFFERING.
The offering price of the shares of our common stock to be sold in the
offering has been determined by the Board of Directors. The trading price of our
common stock following the offering will be determined by the marketplace.
Accordingly, the offering price of our common stock does not necessarily reflect
the price at which our stock would sell in the limited market for our common
stock following the offering. Therefore, you may not be able to sell our shares
at or above the offering price after the offering.
SINCE THIS IS A BEST EFFORTS OFFERING WITH NO MINIMUM NUMBER OF SHARES THAT MUST
BE SOLD, WE MAY NOT RAISE SUFFICIENT CAPITAL TO FULLY IMPLEMENT OUR BUSINESS
PLANS AND YOU MAY BE ONE OF ONLY A SMALL NUMBER OF INVESTORS IN THE OFFERING.
This is a best efforts offering with no minimum number of shares that must
be sold. We will use our best efforts to sell the common stock that we are
offering but there is no minimum dollar amount or number of shares that must be
sold to complete the offering. To the extent that we sell significantly less
than the total number of shares that we are offering through this prospectus,
you may be one of only a small number of investors in this offering, and we may
be required to use a substantial percentage of the offering proceeds to pay for
the offering expenses, and not for the purposes identified under the caption
"Use of Proceeds." If significantly fewer than all shares offered are sold, our
capital may not be sufficiently increased to achieve our growth objectives and
we may be required to seek additional capital sooner, or on less favorable
terms, than would otherwise be necessary. Any funds received from investors in
the offering will be available to us regardless of the number of shares sold in
this offering and will not be refunded to the investor.
WE COULD TERMINATE OUR SECURITIES AND EXCHANGE COMMISSION REGISTRATION WHICH
COULD CAUSE OUR COMMON STOCK TO BE DE-LISTED FROM THE OTCBB AND WOULD REDUCE THE
INFORMATION AVAILABLE TO INVESTORS.
We currently have approximately 140 stockholders of record. If we have
fewer than 300 stockholders of record after the offering, we will be eligible to
de-register our common stock under the Securities Exchange Act of 1934 in 2007.
Although we currently do not intend to de-register, there can be no assurance
that we will not de-register the common stock at some point in the future. If we
de-register, we will no longer be required to file annual and quarterly reports
with the Securities and Exchange Commission and will no longer be subject to
various
10
substantive requirements of Securities and Exchange Commission regulations.
De-registration will reduce the amount of information available to investors
about us and may cause our common stock to be de-listed from the OTCBB. In
addition, investors will not have the protections of certain Securities and
Exchange Commission regulations to which we will no longer be subject.
WE HAVE NOT PAID A CASH DIVIDEND ON OUR COMMON STOCK AND THERE ARE SUBSTANTIAL
RESTRICTIONS ON OUR ABILITY TO PAY CASH DIVIDENDS ON OUR COMMON STOCK.
We have not paid a cash dividend on our common stock and we do not
currently expect to pay cash dividends on our common stock for the foreseeable
future. We intend to use our profits, if any, to support future growth. Because
we will not have substantial liquid assets at the holding company level, we can
only pay a dividend if Community First Bank pays a dividend to Community First
Bancorp, Inc. Unless approved by federal bank regulators, Community First Bank
may not pay dividends in excess of its retained earnings for the past two fiscal
years and any interim period. Future payment of cash dividends, if any, will be
at the discretion of the Board of Directors and will be dependent upon our
financial condition, results of operations, capital requirements and such other
factors as the Board may deem relevant and will be subject to applicable federal
and state laws that impose restrictions on our ability to pay dividends.
OUR COMMON STOCK IS NOT INSURED AND YOU COULD LOSE THE VALUE OF YOUR ENTIRE
INVESTMENT.
An investment in shares of our common stock is not a deposit and is not
insured against loss by the government. Accordingly, you could lose the entire
value of your investment.
OUR MANAGEMENT HAS BROAD DISCRETION CONCERNING THE APPLICATION OF NET PROCEEDS
FROM THE OFFERING.
The net proceeds of the offering will be used to repay existing
indebtedness, to provide additional regulatory capital for expansion capability
and for general corporate purposes, including but not limited to, increased
commercial and commercial mortgage lending activity and investment in
securities. Within these categories, management may determine to apply the net
proceeds in its discretion. Up to $1.15 million in offering proceeds may be used
to pay off existing indebtedness, including up to approximately $400,000 in
indebtedness to directors.
OUR ARTICLES OF INCORPORATION AND BYLAWS INCLUDE ANTI-TAKEOVER PROVISIONS,
WHICH, TOGETHER WITH STATUTORY ANTI-TAKEOVER PROVISIONS TO WHICH WE ARE SUBJECT,
COULD DISCOURAGE HOSTILE ACQUISITIONS OF CONTROL.
Provisions in our articles of incorporation and bylaws, the General
Corporation Law of the State of Maryland, and certain federal regulations may
make it difficult, and expensive, to pursue a tender offer, change in control or
takeover attempt which we oppose. As a result, stockholders who might desire to
participate in such a transaction may not have an opportunity to do so. Such
provisions will also render the removal of the current Board of Directors or
management of Community First Bancorp, Inc. more difficult. These provisions
include: restrictions on the acquisition of our equity securities and
limitations on voting rights; staggered terms for members of the Board of
Directors; removal of directors only for cause and by an 80% vote; certain
provisions relating to meetings of stockholders; denial of cumulative voting by
stockholders in the election of directors; the issuance of preferred stock and
additional shares of common stock without shareholder approval; and
super-majority provisions for the approval of certain business combinations. The
Board of Directors is authorized to issue serial preferred stock and to fix and
state voting powers, designations, preferences or other special rights of such
shares and the qualifications, limitations and restrictions thereof without
stockholder approval.
RISKS RELATED TO OUR INDUSTRY
WE OPERATE IN A COMPETITIVE MARKET WHICH COULD CONSTRAIN OUR FUTURE GROWTH AND
PROFITABILITY.
We operate in a competitive environment, competing for deposits and loans
with commercial banks, savings associations and other financial entities.
Competition for deposits comes primarily from other commercial banks, savings
associations, credit unions, money market and mutual funds and other investment
alternatives. Competition for loans comes primarily from other commercial banks,
savings associations, mortgage banking firms, credit unions and non-traditional
lenders. Many of the financial intermediaries operating in our market area offer
11
certain services, such as trust services, which we do not offer. Moreover, banks
with a larger capitalization and financial intermediaries not subject to bank
regulatory restrictions have larger lending limits and are thereby able to serve
the needs of larger customers.
WE ARE REQUIRED TO COMPLY WITH EXTENSIVE AND COMPLEX GOVERNMENTAL REGULATION
WHICH CAN ADVERSELY AFFECT OUR BUSINESS.
Our operations are and will be affected by current and future legislation
and by the policies established from time to time by various federal and state
regulatory authorities. Banking regulations, designed primarily for the safety
of depositors, may limit a financial institution's growth and the return to its
investors by restricting such activities as the payment of dividends, mergers
with or acquisitions by other institutions, investments, loans and interest
rates, interest rates paid on deposits, expansion of branch offices, and the
offering of securities or trust services. We are also subject to capitalization
guidelines established by federal law and could be subject to enforcement
actions to the extent that we are found by regulatory examiners to be
undercapitalized. It is not possible to predict what changes, if any, will be
made to existing federal and state legislation and regulations or the effect
that any such changes may have on our future business and earnings prospects.
Further, the cost of compliance with regulatory requirements may adversely
affect our ability to operate profitability.
During the past several years, significant legislative attention has been
focused on the regulation and deregulation of the financial services industry.
Non-bank financial institutions, such as securities brokerage firms, insurance
companies and money market funds, have been permitted to engage in activities
which compete directly with traditional bank business.
WE REALIZE INCOME PRIMARILY FROM THE DIFFERENCE BETWEEN INTEREST EARNED ON LOANS
AND INVESTMENTS AND INTEREST PAID ON DEPOSITS AND BORROWINGS, AND CHANGES IN
INTEREST RATES MAY ADVERSELY AFFECT OUR PROFITABILITY AND ASSETS.
Changes in prevailing interest rates may hurt our business. We derive our
income mainly from the difference or "spread" between the interest earned on
loans, securities and other interest-earning assets, and interest paid on
deposits, borrowings and other interest-bearing liabilities. In general, the
larger the spread, the more we earn. When market rates of interest change, the
interest we receive on our assets and the interest we pay on our liabilities
will fluctuate. This can cause decreases in our spread and can adversely affect
our income.
Interest rates affect how much money we can lend. For example, when
interest rates rise, the cost of borrowing increases and loan originations tend
to decrease. In addition, changes in interest rates can affect the average life
of loans and investment securities. A reduction in interest rates generally
results in increased prepayments of loans and mortgage-backed securities, as
borrowers refinance their debt in order to reduce their borrowing cost. This
causes reinvestment risk, because we generally are not able to reinvest
prepayments at rates that are comparable to the rates we earned on the prepaid
loans or securities. Changes in market interest rates could also reduce the
value of our financial assets. If we are unsuccessful in managing the effects of
changes in interest rates, our financial condition and results of operations
could suffer.
THE COSTS OF BEING A PUBLIC COMPANY ARE PROPORTIONATELY HIGHER FOR SMALL
COMPANIES LIKE US DUE TO THE REQUIREMENTS OF THE SARBANES-OXLEY ACT.
The Sarbanes-Oxley Act of 2002 and the related rules and regulations
promulgated by the Securities and Exchange Commission have increased the scope,
complexity, and cost of corporate governance, reporting, and disclosure
practices. These regulations are currently applicable to us. We expect to
experience increasing compliance costs, including costs related to internal
controls and the requirement that our auditors attest to and report on
management's assessment of our internal controls, as a result of the
Sarbanes-Oxley Act. The internal control reporting requirements are currently
scheduled to become applicable to us with respect to the fiscal year ending
December 31, 2007. These necessary costs are proportionately higher for a
company of our size and will affect our profitability more than that of some of
our larger competitors.
12
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the matters discussed under the captions "Prospectus Summary,"
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business of Community First Bancorp, Inc. and Community
First Bank" and elsewhere in this prospectus include forward-looking statements.
These forward-looking statements include statements regarding profitability,
liquidity, allowance for loan and lease losses, interest rate sensitivity,
market risk and financial and other goals. Forward-looking statements often use
words such as "believe," "expect," "plan," "may," "will," "should," "project,"
"contemplate," " anticipate," "forecast," "intend" or other words of similar
meaning. You can also identify them by the fact that they do not relate strictly
to historical or current facts. The forward-looking statements we use in this
prospectus are subject to significant risks, assumptions and uncertainties,
including among other things, the following important factors that could affect
the actual outcome of future events:
o fluctuations in market rates of interest and loan and deposit pricing,
which could negatively affect our net interest margin, asset valuation
and income and expense projections;
o adverse changes in the overall national economy as well as adverse
economic conditions in our market areas;
o competitive factors within the financial services industry;
o changes in regulatory requirements and/or restrictive banking
legislation; and
o other factors described in the "Risk Factors" section of this
prospectus.
Because of these and other uncertainties, our actual results and
performance may be materially different from results indicated by these
forward-looking statements. You should not put undue reliance on any
forward-looking statements.
All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by the cautionary statements
set forth in this prospectus. Forward-looking statements speak only as of the
date they are made, and we undertake no obligation to update publicly any of
these statements in light of new information or future events.
THE RIGHTS OFFERING
We are offering 750,000 shares of our common stock in the rights offering,
which expires at 5:00 p.m. Central Time on February 9, 2007. The rights offering
shares are being offered for sale to our shareholders of record at 5:00 p.m.
Central Time on December 29, 2006, at a price of $7.25 per share. Subject to the
10% beneficial ownership limitation described below, shareholders of record on
the record date may purchase 2.286 shares for every share owned of record by
them on that date. Fractional shares will not be sold, but shareholders may
round any such fraction up to a full share. Shareholders are permitted to
subscribe for less than the maximum number of rights offering shares allocated
to them.
Shareholders may oversubscribe for additional shares. If oversubscriptions
exceed the available rights offering shares, the available rights offering
shares will be allocated among the oversubscribers. This allocation will be
based upon the ratio that the number of shares owned by the oversubscriber on
the record date bears to the number of shares owned on the record date by all
oversubscribers. Notwithstanding the foregoing, we reserve the right to reject
any oversubscription in whole or in part. We may offer unsubscribed shares to
local investors selected by us.
No person may exercise subscription rights and oversubscription privileges
to acquire beneficial ownership of 10% or more of the outstanding shares of
common shares following the offering. In the event a shareholder subscribes for
a number of shares that would result in their becoming the beneficial owner of
10% or more of the outstanding shares of common stock following the offering,
their subscription for shares in excess of 9.9% will be refunded. Determinations
of the Board of Directors as to beneficial ownership will be final and binding
on all parties.
13
The rights offering price was determined by us based upon various factors
including the book value per share of our common stock as of September 30, 2006,
the trading history of our common stock, our operating history and our prospects
for future earnings, our current performance, the prospects of the banking
industry in which we compete, the general condition of the equity securities
market at the time of the offerings, and the prices of equity securities of
comparable companies.
The rights offering will expire at, and all subscription agreements must be
received by, 5:00 p.m. Central Time on February 9, 2007 unless extended by us.
We reserve the right to extend the offering until March 9, 2007. The rights
offering is not contingent on the sale of any minimum number or dollar amount of
shares. Subscription funds received from shareholders in the rights offering
will be deposited with and held by us in a noninterest bearing account until the
closing of the rights offering. Subscription funds will not be released to us or
for our use or commingled with our funds unless your subscription is accepted
and shares are to be issued to you with respect to your funds.
All rights offering shares unsubscribed for at 5:00 p.m. Central Time on
February 9, 2007 may be offered by us to selected local investors. We reserve
the right to increase the number of shares sold in the rights offering by up to
112,500 shares to cover oversubscriptions or other sales. There can be no
assurance that any shares will be sold in the rights offering.
To subscribe for rights offering shares, shareholders should complete and
execute the subscription agreement which accompanies this prospectus and deliver
it with payment of the full purchase price for the shares you want to purchase.
Payment must be by check , cashiers check, bank draft, money order or wire
transfer. Your subscription agreement and payment must be received before the
expiration time. If you use the mail to submit your subscription agreement, we
recommend that you use registered mail, return receipt requested.
The address to which subscription agreements and payment should be
delivered is:
Community First Bancorp, Inc.
P.O. Box 736
Madisonville, KY 42431
Attention: William Tandy
President and Chief Executive Officer
Telephone: (270) 326-3500
Your check, cashiers check, bank draft, money order or wire transfer should
be made payable to "Community First Bancorp, Inc. Escrow Account." Please
contact Mr. Tandy for wire transfer instructions.
SUBSCRIPTION AGREEMENTS AND PAYMENT IN FULL FOR RIGHTS OFFERING SHARES MUST
BE RECEIVED NO LATER THAN 5:00 P.M. CENTRAL TIME ON FEBRUARY 9, 2007.
SHAREHOLDERS WHO DO NOT SUBMIT SUBSCRIPTION AGREEMENTS AND FULL PAYMENT BY THAT
TIME WILL HAVE FORFEITED THEIR RIGHT TO PURCHASE SHARES IN THE RIGHTS OFFERING.
USE OF PROCEEDS
The following table reflects the anticipated allocation of the net proceeds
of the offering at the offering price of $7.25 per share, after deducting
estimated expenses. Because this is a best efforts offering and there is no
minimum number of shares that must be sold, any funds received from an investor
will be available to us regardless of the number of shares sold, and will not be
refunded to the investor. We are presenting this information assuming that we
sell 10%, 50% and 100% of the shares of common stock that we are offering. Our
management will have broad discretion in determining the specific timing and use
of the proceeds.
14
10% 50% 100%
-------------------- -------------------- ----------------------
PERCENT PERCENT PERCENT
OF GROSS OF GROSS OF GROSS
AMOUNT PROCEEDS AMOUNT PROCEEDS AMOUNT PROCEEDS
------ -------- ------ -------- ------ --------
Gross offering proceeds........ $543,750 100.00% $2,718,750 100.00% $5,437,500 100.00%
Estimated offering
expenses (1).............. 150,000 27.59 150,000 5.52 150,000 2.76
-------- ------ ---------- ------ ---------- ------
Net offering proceeds.......... $393,750 72.41% $2,568,750 94.48% $5,287,500 97.24%
======== ====== ========== ====== ========== ======
<FN>
(1) This amount includes filing fees, printer fees and fees incurred by us for
legal and accounting services.
</FN>
We intend to use up to approximately $1.15 million in net proceeds to repay
indebtedness we incurred in the last year to provide funds for a capital
infusion into Community First Bank. Of this indebtedness, $750,000 is to our
correspondent bank. This indebtedness bears an interest rate equal to the prime
rate plus 25 basis points (currently 8.50%) and matures on February 15, 2007.
The remaining indebtedness is to Directors Riddle, Carson and Teague at an
interest rate of 7.50% and also matures on February 15, 2007. See "Business of
Community First Bancorp, Inc. and Community First Bank -- Sources of Funds --
Correspondent Bank and Other Borrowings." In the event we sell less than all the
shares offered, we may seek to refinance our current indebtedness at maturity
rather than repay it. In the event we sell less than the number of shares
required to repay our indebtedness to our correspondent bank, we will seek to
refinance that indebtedness.
We intend to invest substantially all of the remaining net offering
proceeds in Community First Bank. The net proceeds will provide Community First
Bank with additional capital to support its loan growth and business expansion
activities. We have not made a specific allocation for the use of these net
proceeds by Community First Bank. Until utilized, we anticipate that we will
invest the net offering proceeds in liquid assets. See "Risk Factors - Risks
Related to Our Common Stock and the Offering, - Our management has broad
discretion concerning the application of net proceeds from the offering."
MARKET FOR OUR COMMON STOCK
Our common stock has limited trading activity and is traded
over-the-counter. Trades in our common stock are reported on the OTCBB under the
symbol "CFBC." We cannot assure you that an active trading market will develop
in the future or that an investor will otherwise be able to dispose of his or
her shares of common stock. As of September 30, 2006, there were approximately
140 stockholders of record of our common stock, which does not include
stockholders who hold stock in the name of their brokers or other nominees.
The table below presents the high and low sales prices for our common stock
as reported by the OTCBB for the periods indicated. Market quotations for the
OTCBB reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not represent actual transactions.
15
PERIOD HIGH LOW
------ ---- ---
2006
4th quarter $ 8.50 $ 7.00
3rd quarter 8.50 7.10
2nd quarter 8.90 6.90
1st quarter 9.00 6.90
2005
4th quarter 10.90 9.00
3rd quarter 11.50 10.90
2nd quarter 12.75 10.75
1st quarter 13.50 12.50
2004
4th quarter 14.25 13.25
3rd quarter 15.00 13.40
2nd quarter 18.44 15.00
1st quarter 20.00 13.85
DIVIDEND POLICY
We have not paid cash dividends in the past and do not anticipate paying
any cash dividends in the foreseeable future. We expect that we will retain all
earnings, if any, in order to provide more funds to operate our business. Any
payment of dividends is subject to the discretion of our board of directors,
which will consider a number of factors, including our prospects for future
earnings, financial condition, cash needs and general business conditions.
We are organized under the Maryland General Corporation Law, which
prohibits the payment of a dividend if, after giving it effect, the corporation
would not be able to pay its debts as they become due in the usual course of
business or the corporation's total assets would be less than the sum of its
total liabilities plus, unless the charter permits otherwise, the amount that
would be needed, if the corporation were to be dissolved, to satisfy the
preferential rights upon dissolution of stockholders whose preferential rights
on dissolution are superior to those receiving the distribution.
Our ability to pay any cash dividends in the future will depend primarily
on Community First Bank's ability to pay cash dividends to us. Community First
Bank may only pay dividends if it is in compliance with certain regulatory
requirements governing the payment of dividends by it. Community First Bank may
only pay dividends to the extent of its earnings for the current year and
retained earnings for the prior two years. See "Supervision and Regulation -
Regulation of Community First Bank - Dividends."
16
CAPITALIZATION
The following table sets forth our consolidated capitalization at September
30, 2006.
You should read this information together with our consolidated financial
statements and related notes, which are included elsewhere in this prospectus.
AT SEPTEMBER 30, 2006
---------------------
Stockholders' Equity:
Common stock, par value $0.01 per share, 5,000,000 shares $ 3,280
authorized, 328,088 shares issued and outstanding
Preferred stock, par value $0.01 per share, 1,000,000 shares --
authorized, no shares issued and outstanding
Additional paid-in capital 2,829,943
Retained earnings - substantially restricted (13,518)
Accumulated other comprehensive loss (19,195)
--------------
Total stockholders' equity $ 2,800,510
=============
Stockholders' equity per share $ 8.54
=============
Community First Bank Capital Ratios:
Tier 1/core capital to adjusted total assets 5.06%
Tier 1 risk-based capital to risk-based assets 8.63%
Total risk-based capital to risk-based assets 9.45%
DILUTION
Net tangible book value per share represents the amount of stockholders'
equity, less goodwill and other intangible assets, divided by the number of
shares of common stock that are outstanding. On September 30, 2006, our net
tangible book value was $2,800,510 or $8.54 per share of common stock. Dilution
per share to new investors in this offering represents the difference between
the amount per share that these investors pay and the pro forma net tangible
book value per share of common stock immediately after completion of the
offering.
Assuming the sale of all 750,000 shares of common stock in the offering at
the offering price of $7.25 per share, and after giving effect to the estimated
offering expenses, at September 30, 2006, our adjusted net tangible book value
would be $8,088,010 or $7.50 per share. This represents an immediate increase to
new investors of $0.25 per share or approximately 3.45% more than the price per
share paid in the offering.
The following table illustrates the dilution to book value and new
investors assuming that we sell 10%, 50% and 100% of the common stock being
offered. This is a best efforts offering and there is no minimum number of
shares that we must sell. The tables below do not take into account the sale of
any of the additional 112,500 shares that we may offer.
10% 50% 100%
--- --- ----
Net tangible book value per share at September 30, 2006......... $ 8.54 $ 8.54 $ 8.54
Increase (decrease) attributable to investors in the offering... (0.62) (0.90) (1.04)
------ ------- --------
Pro-forma net tangible book value per share after offering...... $ 7.92 $ 7.64 $ 7.50
====== ======= ========
Offering price per share........................................ $ 7.25 $ 7.25 $ 7.25
Increase per share to new investors............................. 0.67 0.39 0.25
Increase as a percentage of offering price...................... 9.24% 5.38% 3.45%
17
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data at and for the nine
months ended September 30, 2006 and 2005 is derived from our unaudited financial
statements for the nine months then ended and reflect all adjustments necessary,
in the opinion of management, for a fair presentation. Our results of operations
for the nine months ended September 30, 2006 do not necessarily reflect the
results that may be expected for the full year. The following selected
consolidated financial data at and for the fiscal years ended December 31, 2005,
2004 and 2003 is derived from our audited consolidated financial statements for
the fiscal years then ended and should be read in conjunction with the
consolidated financial statements and notes thereto.
AT OR FOR THE
NINE MONTHS ENDED AT OR FOR THE
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- -------------------------------------
2006 2005 2005 2004 2003
-------- -------- -------- -------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED FINANCIAL CONDITION DATA:
Assets................................................. $ 77,267 $ 69,983 $ 71,729 $ 63,503 $ 42,541
Loans receivable, net.................................. 70,696 61,821 64,578 51,932 35,066
Cash and cash equivalents.............................. 1,876 2,435 2,009 5,793 1,109
Investment securities:
Available-for-sale................................. 1,222 2,203 1,703 2,215 1,976
Held-to-maturity................................... 57 71 66 89 1,424
Deposits............................................... 62,696 53,011 54,477 46,466 33,172
Advances from Federal Home Loan Bank................... 10,275 12,500 13,000 13,000 5,000
Stockholders' equity................................... 2,801 2,826 2,720 3,164 4,209
SELECTED OPERATIONS DATA:
Interest income........................................ $ 3,144 $ 2551 3,556 $ 2,692 $ 2,182
Interest expense....................................... 1,885 1,254 1,783 1,079 833
--------- -------- ---------- --------- ---------
Net interest income................................ 1,259 1,297 1,773 1,613 1,349
Provision for loan losses.............................. 18 69 79 164 82
--------- -------- ---------- --------- ---------
Net interest income after provision for loan
losses........................................... 1,241 1,228 1,694 1,449 1,267
Non-interest income.................................... 375 280 346 216 195
Non-interest expenses.................................. 1,922 1,841 2,479 2,581 1,564
--------- -------- ---------- --------- ---------
Income (loss) before federal income tax expense
(benefit)............................................ (306) (333) (439) (916) (102)
Federal income tax expense (benefit)................... -- -- -- 116 (116)
--------- -------- ---------- --------- ---------
Net income (loss).................................. $ (306) $ (333) $ (439) $ (1,032) $ 14
========= ======== ========== ========= =========
PER SHARE DATA:
Earnings per share - Basic............................ $ (0.99) $ (1.20) $ (1.58) $ (3.71) $ 0.05
Earnings per share - Diluted.......................... (0.99) (1.20) (1.58) (3.71) 0.05
Book value per share.................................. 8.54 10.18 9.79 11.40 15.15
PERFORMANCE RATIOS:
Return on average assets (1).......................... (0.55)% (0.67)% (0.65)% (2.00)% 0.03%
Return on average equity (1).......................... (14.92) (15.38) (14.98) (27.85) 0.33
Interest rate spread (1).............................. 2.16 2.70 2.70 3.41 3.20
Net interest margin (1)............................... 2.43 2.84 2.85 3.48 3.43
Ratio of average interest-earning assets to average
interest-bearing liabilities....................... 107.53 105.12 105.18 103.09 110.83
Ratio of noninterest expense to average total
assets (1).......................................... 3.47 3.72 3.69 5.00 3.78
ASSET QUALITY RATIOS:
Nonperforming assets to total assets at end of period. 0.61% 0.29% 0.43% 0.46% 0.11%
Nonperforming loans to total loans at end of period... 0.59 0.33 0.47 0.57 0.13
Allowance for loan losses to total loans at end
of period........................................... 0.52 0.61 0.60 0.61 0.51
Allowance for loan losses to nonperforming loans
at end of period................................... 88.69 183.64 126.80 108.09 376.99
Net charge-offs to average loans outstanding (1)...... 0.05 0.02 0.02 0.05 0.02
CAPITAL RATIOS:
Equity to total assets at end of period............... 3.63% 4.04% 3.79% 4.95% 9.89%
Average equity to average assets...................... 3.70 4.38 4.36 7.18 10.03
Tier 1/core capital to adjusted total assets (2)...... 5.06 5.72 5.47 6.05 9.73
Tier 1 capital to risk-based assets (2)............... 8.63 9.86 9.30 10.88 18.12
Total capital to risk-based assets (2)................ 9.45 10.79 10.22 11.78 18.91
<FN>
- ---------
(1) Ratios for the nine-month periods have been annualized.
(2) Community First Bank only.
</FN>
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is intended to assist readers in understanding and
evaluating our financial condition and results of operations. You should read
this review in conjunction with our financial statements and accompanying notes
included elsewhere in this prospectus. Because Community First Bancorp, Inc. has
no material operations and conducts no business on its own other than owning its
subsidiary, Community First Bank, the discussion primarily concerns the business
of Community First Bank. However, for ease of reading and because our financial
statements are presented on a consolidated basis, references to "we," "us, " or
"our" refers to both Community First Bancorp, Inc. and Community First Bank.
GENERAL
Community First Bancorp, Inc. is the holding company for Community First
Bank, a federal savings bank headquartered in Madisonville, Kentucky. Community
First Bank operates from its main office at 2420 North Main Street and a branch
office at 240 South Main Street, both in Madisonville, Kentucky. Community First
Bank's lending activities consist primarily of the origination of loans secured
by residential and commercial properties in its primary market area of
Madisonville.
Founded in 1923 as the Madisonville Building & Loan Association, Community
First Bank historically operated as a traditional thrift from its South Main
Street location, offering long-term mortgages and small consumer loans to local
residents and funding these loans with certificates of deposit. In late 2001,
the Board of Directors brought in current management to effect a turn-around. As
part of its new strategy, Community First Bank remodeled and updated its
existing office, opened a new main office and substantially broadened its
product lines. In 2003, Community First Bank converted to stock form and raised
$2.7 million in capital, which has allowed us to grow significantly. Since the
stock conversion, we have nearly doubled our assets making us one of the fastest
growing financial institutions in the Commonwealth of Kentucky during this
period.
PERFORMANCE OVERVIEW
We incurred losses for the nine months ended September 30, 2006 and for
each of the two prior fiscal years. During the nine months ended September 30,
2006, our loss was $306,000, or $0.99 per diluted share. For the years ended
December 31, 2005 and 2004, we had losses of $439,000 ($1.58 per diluted share)
and $1.0 million ($3.71 per diluted share), respectively. Our losses are
primarily attributable to the increase in overhead resulting from the opening of
our new main office in March 2004 and expenses related to our change in data
processors in 2004.
To offset the increase in expenses, we have grown and diversified our loan
portfolio in order to increase our profitability. Since December 31, 2003, our
loan portfolio has grown from $35.1 million to $70.7 million at September 30,
2006, an increase of 101.4%. Within the portfolio, residential mortgages have
declined to 77% of the portfolio at September 30, 2006 from over 83% of the
portfolio at December 31, 2003. During this same period, our commercial
mortgages have grown from $2.4 million, or 6.61% of the portfolio, at December
31, 2003 to $7.3million, or 10.38% of the portfolio, at September 30, 2006.
During this period of growth, our asset quality has remained strong. Our
ratio of non-performing assets to total assets has not been greater than 0.7%
since 2003. The ratio of our net charge-offs to average loans has not exceeded
0.06% during any period and was 0.05% for the nine months ended September 30,
2006. We believe that our asset quality reflects a strong credit culture and
disciplined underwriting.
The growth and diversification in our loan portfolio has driven an increase
in interest income from $2.2 million for the year ended December 31, 2003 to
$3.6 million for the year ended December 31, 2005, an increase of 63%. Despite
the increase in interest income, our net interest income has only grown by
$424,000, or 31%, during this period as interest expense has grown at a faster
rate, increasing from $833,000 during the fiscal year ended December 31, 2003 to
$1.8 million during the fiscal year ended December 31, 2005. The increase in
interest expense reflects deposit growth from $33.2 million at December 31, 2003
to $54.5 million at December 31, 2005 and our increased use of Federal Home Loan
Bank advances which grew from $5.0 million at December 31, 2003 to $13.0 million
at December 31, 2005. Additionally contributing to the increase in interest
expense has been the
19
successive increases in the federal funds rate by the Federal Reserve since June
2004, which have affected our cost of funds to a greater degree than the yields
on our earning assets.
As the result of these factors, our interest rate spread and net interest
margin narrowed to 2.70% and 2.85%, respectively, for the year ended December
31, 2005 from 3.41% and 3.48%, respectively for the year ended December 31,
2004. The compression of our margin and spread has continued during the nine
months ended September 30, 2006 when they narrowed to an annualized 2.43% and
2.16%, respectively, from 2.84% and 2.70%, respectively, for the nine months
ended September 30, 2005.
Since 2003, our non-interest income has grown as we have diversified our
income sources. Non-interest income has increased from $195,000 during 2003 to
$346,000 in 2005. For the nine months ended September 30, 2006, non-interest
income was $375,000 compared to $280,000 in the prior year. The increase in
non-interest income has primarily been driven by additional fees and service
charges on deposits including overdraft charges which have increased over
tenfold since we dropped our fee for overdrafts to $9.95 in 2002.
Other expenses climbed from $1.6 million in 2003 to $2.6 million in 2004
due to the opening of our new main office and expenses incurred in connection
with the conversion of our computer system. Other expenses declined to $2.5
million in 2005 due primarily to the absence of conversion-related expenses.
Other expense, however, continues to trend upwards due to our growth.
Our operating losses have adversely affected our stockholders' equity which
has declined from $4.2 million at December 31, 2003 to $2.8 million at September
30, 2006. On a percentage basis, stockholders' equity has declined from 9.89% of
assets at December 31, 2003 to 3.63% of assets at September 30, 2006. Despite
the decline in consolidated equity, Community First Bank has remained adequately
capitalized for regulatory capital purposes as Community First Bancorp, Inc. has
primarily used borrowings at the holding company level for capital infusions.
Our capital position, however, has been a restraining factor in our continued
growth.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
ALLOWANCE FOR LOAN LOSSES. Our 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 Community First
Bancorp, Inc. are presented in Note 1 to the consolidated financial statements.
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
consolidated balance sheet. Note 1 to the consolidated financial statements
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 Statement of Financial Accounting Standards
("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan." Community
First Bancorp, Inc. evaluates the collectibility of both principal and interest
when assessing the need
20
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.
Community First Bancorp, Inc. 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 $371,000 was adequate, but not excessive, to absorb estimated
credit losses associated with the loan portfolio at September 30, 2006.
DEFERRED INCOME TAXES. We have a deferred tax asset of $10,000. We evaluate
this asset on a quarterly basis. To the extent we believe it is more likely than
not that it will not be utilized, we establish a valuation allowance to reduce
its carrying amount to the amount we expect to be realized. At September 30,
2006, the valuation allowance is $670,700. The estimate of the realizable amount
of this asset is a critical accounting policy.
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006
AND 2005 AND FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
NET INCOME/LOSS. 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 loss for the year ended December 31, 2005 was $439,000 ($1.58 per
diluted share) compared to a net loss of $1.0 million ($3.71 per diluted share)
for the year ended December 31, 2004. The improvement in net loss for the 2005
period reflected increases in net interest income and non-interest income, a
lower provision for loan losses, and a decrease in non-interest expense.
NET INTEREST INCOME. The primary component of our net income is its net
interest income, which is the difference between interest income earned on loans
and investments and interest expense paid on the deposits and borrowings used to
fund the interest earning assets. Net interest income is determined by the
spread between the yields earned on our interest-earning assets and the rates
paid on interest-bearing liabilities as well as the relative amounts of such
assets and liabilities. Net interest income divided by average interest-earning
assets represents our net interest margin.
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005. Year-to-date net interest
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 nine months ended September
30, 2006 was $3.1 million, an increase of $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
21
million, or 17.0%. The increased income from loans helped offset increases in
interest expense of $630,800, or 50.3%, for the nine months ended September 30,
2006. 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 2.16% for the nine months ended September 30, 2006 compared to
2.70% for the nine months ended September 30, 2005. Net interest margin
decreased to 2.43% for the 2006 period compared to 2.84% for the 2005 period.
YEARS ENDED DECEMBER 31, 2005 AND 2004. For the year ended December 31,
2005, net interest income increased approximately $160,000, or 9.9%, compared to
the prior year. The increase in net interest income during the 2005 period was
attributable to a higher volume of loans. Interest income increased
approximately $864,000, or 32.1%, for the year ended December 31, 2005, while
interest expense increased approximately $704,000, or 65.3%. The increase in
interest income reflects a higher volume of interest-earning assets and a shift
in interest-earning assets into higher-yielding loans. During the year ended
December 31, 2005, net loans averaged $58.5 million as compared to $42.6 million
during fiscal year 2004, an increase of $15.9 million or 37.3%. While the
average yield on the loan portfolio declined during 2005, interest income
increased by $864,000 due to higher outstanding loan balances.
The increased income from loans helped offset an increase in interest
expense of $704,000 or 65.3% for the year ended December 31, 2005. The increase
in interest expense reflects both a higher volume of deposits and increases in
short-term rates as the result of the Federal Reserve's eleven increases in the
targeted Federal Funds rate since September 30, 2004. Interest expense has also
increased due to our greater use of Federal Home Loan Bank borrowings to fund
loan growth, as well as our use of a revolving line of credit with our
correspondent bank to provide additional capital for Community First Bank.
Reflecting the recent increases in short-term interest rates, which have not
been accompanied by increased long-term rates, our interest rate spread
decreased to 2.70% for the year ended December 31, 2005 compared to 3.41% for
the year ended December 31, 2004. Net interest margin decreased to 2.85% for the
2005 period compared to 3.48% for the 2004 period.
During the year ended December 31, 2005, we reported net interest income,
before provision for loan losses, of $1.8 million. Interest income consisted of
$3.4 million in interest and fees on loans, $81,000 in interest on investment
securities, and $36,000 in dividends on Federal Home Loan Bank stock, totaling
$3.5 million, while interest expense, which consisted of $1.3 million in
interest on deposits and $442,000 in interest on Federal Home Loan Bank advances
and other borrowings, totaled $1.8 million.
During the year ended December 31, 2004, we reported net interest income,
before provision for loan losses, of $1.6 million. Interest income consisted of
$2.6 million in interest and fees on loans, $90,000 in interest on investment
securities, and $27,000 in dividends on Federal Home Loan Bank stock, totaling
$2.7 million, while interest expense, which consisted of $950,000 in interest on
deposits and $129,000 in interest on Federal Home Loan Bank advances and other
borrowings, totaled $1.1 million.
AVERAGE BALANCE SHEETS. The following table sets forth certain information
relating to our average balance sheet and reflects the average yields earned on
assets and average rates paid on liabilities for the periods indicated. Such
yields and costs are derived by dividing income or expense by the average daily
balance of assets or liabilities, respectively, for the periods presented.
22
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------
2006 2005
------------------------------------- -----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ---- ------- -------- ----
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable, net(1).................. $ 66,674 $ 3,075 6.15% $ 56,973 $ 2,462 5.76%
Investment securities..................... 1,569 38 3.23 3,178 65 2.73
Other investments......................... 737 31 5.61 697 25 4.78
---------- -------- ----------- -------
Total interest-earning assets.......... 68,980 3,144 6.08 60,848 2,551 5.59
Non-interest-earning assets................ 4,874 5,065
---------- -----------
Total assets........................... $ 73,854 $ 65,913
========== ===========
Interest-bearing liabilities:
Deposits.................................. $ 53,281 1,443 3.61 $ 46,384 970 2.79
Borrowings................................ 10,870 442 5.42 11,503 284 3.29
---------- -------- ----------- -------
Total interest-bearing liabilities..... 64,151 1,885 3.92 57,887 1,254 2.89
Non-interest-bearing liabilities........... 6,970 5,139
---------- -----------
Total liabilities...................... 71,121 63,026
Total stockholders' equity................. 2,733 2,887
---------- -----------
Total liabilities and stockholders'
equity............................... $ 73,854 $ 65,913
========== ===========
Net interest income........................ $ 1,259 $ 1,297
======== =======
Interest rate spread....................... 2.16% 2.70%
======= ======
Net interest margin........................ 2.43% 2.84%
======= ======
Ratio of average interest-earning assets to
average interest-bearing liabilities.... 107.53% 105.12%
====== ======
<FN>
- ----------------
(1) Non-accrual loans are included in average balances, less allowance for loan losses and deferred fees.
</FN>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
2005 2004
------------------------------------- -----------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ---- ------- -------- ----
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Loans receivable, net(1).................. $58,486 $3,439 5.88% $42,637 $2,575 6.04%
Investment securities..................... 2,926 81 2.77 3,140 90 2.87
Other investments......................... 702 36 5.13 564 27 4.79
-------- ------ ------- ------
Total interest-earning assets.......... 62,114 3,556 5.72 46,341 2,692 5.81
Non-interest-earning assets................ 5,059 5,279
-------- -------
Total assets........................... $67,173 $51,620
======= =======
Interest-bearing liabilities:
Deposits.................................. $46,858 1,341 2.86 $37,236 950 2.55
Borrowings................................ 12,197 442 3.66 7,717 129 1.67
-------- ------ ------- ------
Total interest-bearing liabilities..... 59,055 1,783 3.02 44,953 1,079 2.40
Non-interest-bearing liabilities........... 5,188 2,963
-------- -------
Total liabilities...................... 64,243 47,916
Total stockholders' equity................. 2,930 3,705
-------- ------
Total liabilities and stockholders' equity $67,173 $51,620
======= =======
Net interest income........................ $1,773 $1,613
====== ======
Interest rate spread....................... 2.70% 3.41%
====== ======
Net interest margin........................ 2.85% 3.48%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities.... 105.18% 103.09%
====== ======
<FN>
- ----------------
(1) Non-accrual loans are included in average balances, less allowance for loan losses and deferred fees.
</FN>
23
RATE/VOLUME ANALYSIS. The table below sets forth certain information
regarding changes in interest income and interest expense for the periods
indicated. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to: (i) changes in
volume (changes in volume multiplied by old rate); and (ii) changes in rate
(change in rate multiplied by old volume). Changes in rate-volume (changes in
rate multiplied by the changes in volume) are allocated between changes in rate
and changes in volume proportionately.
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------------------- -----------------------------
2006 VS. 2005 2005 VS. 2004
---------------------------------- -----------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO DUE TO
------------------- ------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
------ ---- ----- ------ ---- -----
(IN THOUSANDS)
Interest income:
Loans................................ $ 447 $ 167 $ 614 $ 957 $ (140) $ 817
Investment securities................ (39) 12 (27) (6) (3) (9)
Other investments.................... 2 4 6 7 2 9
------ ------ ------ ------ ------ ------
Total interest-earning assets..... 410 183 593 958 (141) 817
------ ------ ------ ------ ------ ------
Interest expense:
Deposits............................. $ 187 $ 286 $ 473 $ 245 $ 146 $ 391
Borrowings........................... (26) 184 158 69 245 314
------ ------ ------ ------ ------ ------
Total interest-bearing
liabilities..................... 161 470 631 314 391 705
------ ------ ------ ------ ------ ------
Change in net interest income........... $ 249 $ (287) $ (38) $ 644 $ (532) $ 112
====== ====== ====== ====== ====== ======
PROVISION FOR LOAN LOSSES. Our provision for loan losses was $17,500 for
the nine months ended September 30, 2006 compared to $69,500 for the nine months
ended September 30, 2005. 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. Although net charge-offs increased to $34,000 for
the nine months ended September 30, 2006 from $11,000 for the nine months ended
September 30, 2005 and nonperforming loans increased to 0.59% of the portfolio
from 0.47% from December 31, 2005, management does not believe that these levels
were indicative of adverse trends. Moreover, although the allowance declined as
a percentage of loans, the Bank's loan growth was primarily in one- to
four-family loans. The provision for loan losses for the year ended December 31,
2005 was $79,000, compared to $164,000 for the year ended December 31, 2004. Net
charge-offs for the year ended December 31, 2005 were $10,000 (0.02% of average
loans), compared to $24,000 (0.05% of average loans) during the year ended
December 31, 2004. The ratio of the allowance for loan losses to total loans was
0.60% at December 31, 2005 compared to 0.61% at December 31, 2004. The allowance
for loan losses is management's estimate of probable inherent credit losses in
the loan portfolio at the balance sheet date. We determine the allowance based
on ongoing evaluations. Increases to the allowance are made by charges to the
provision for loan losses, which is reflected in the statement of operations.
Loans deemed to be uncollectible are charged against the allowance. Recoveries
of loans previously charged off are credited to the allowance. We increased the
amount of the allowance allocated to various forms of consumer loans, and
reduced the proportion allocated to residential first mortgages reflecting
changes in the portfolio. Reserves are provided for consumer and residential
loans based on average loss experience, applied to the outstanding balance in
each category. Specific reserves are determined for loans classified as special
mention, substandard or doubtful. Specific reserves are determined on a loan by
loan basis. As the loan portfolio diversifies to include more commercial and
multi-family real estate loans, future charge-off rates may differ from
historical rates, necessitating revisions to the estimate.
24
ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES. The following table sets forth
an analysis of our allowance for loan losses for the periods indicated.
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------- ---------------------------
2006 2005 2005 2004
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Balance at beginning of period..................... $ 388 $ 320 $ 320 $ 181
------- ------- ------- -------
Loans charged-off:
Real estate mortgage loans:
One- to four-family residential first.......... (4) (5) (5) (9)
One- to four-family residential second......... (3) -- --
Multi-family................................... -- -- --
Commercial..................................... -- -- --
Construction................................... -- -- --
Other loans: --
Consumer installment........................... -- (2) -- --
Commercial..................................... -- -- --
Automobile..................................... (27) (6) (6) (12)
Deposit........................................ -- -- --
Other.......................................... (1) (3) (5) (4)
------- ------- ------- -------
Total charge-offs.................................. (35) (16) (16) (25)
------- ------- ------- -------
Recoveries:
Real estate mortgage loans:
One- to four-family residential first.......... -- -- -- --
One- to four-family residential second......... -- -- -- --
Multi-family................................... -- -- -- --
Commercial..................................... -- -- --
Construction................................... -- -- --
Other loans:
Consumer installment........................... 1 1 -- 1
Commercial..................................... -- -- -- --
Automobile..................................... -- 4 3 --
Deposit........................................ -- -- -- --
Other.......................................... -- -- 3 --
------- ------- ------- -------
Total recoveries................................... 1 5 6 1
------- ------- ------- -------
Net loans charged-off.............................. (34) (11) (10) (24)
------- ------- ------- -------
Provision for loan losses.......................... 17 69 78 163
------- ------- ------- -------
Balance at end of period........................... $ 371 $ 378 $ 388 $ 320
======= ======= ======= =======
Ratio of net charge-offs to average
loans outstanding during the period............. 0.05% 0.02% 0.02% 0.05%
======= ======= ======= =======
25
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES. The following table
illustrates the allocation of the allowance for loan losses for each category of
loan. The allocation of the allowance to each category is not necessarily
indicative of future loss in any particular category and does not restrict our
use of the allowance to absorb losses in other loan categories.
AT SEPTEMBER 30, AT DECEMBER 31,
------------------------- ----------------------------------------------------
2006 2005 2004
------------------------- ------------------------- ----------------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH LOANS IN EACH
CATEGORY CATEGORY CATEGORY
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
------ ----------- ------ ----------- ------ -----------
(DOLLARS IN THOUSANDS)
Real estate mortgage loans:
One- to four-family residential first $ 223 75.30% $ 285 73.49% $ 257 76.09%
One- to four-family residential second 8 3.63 11 2.70 3 2.31
Multi-family......................... 4 1.52 5 1.22 2 2.06
Commercial........................... 35 10.33 44 11.32 22 5.65
Construction......................... 7 1.82 14 3.55 8 3.64
Other loans:
Consumer installment................. 1 0.28 1 0.30 6 0.48
Commercial........................... 4 1.27 5 1.26 8 4.54
Automobile........................... 14 4.59 17 4.46 14 3.64
Deposit.............................. 0 0.51 2 0.61 -- 0.63
Other................................ 75 0.75 4 1.09 -- 0.96
----- ------ ----- ------ ----- ------
Total allowance for loan losses..... $ 371 100.00% $ 388 100.00% $ 320 100.00%
===== ====== ===== ====== ===== ======
In our allocation of the Allowance for Loan Losses we have designated
$75,000 to "Other loans - Other" to accommodate losses that we may incur in
connection with uncollected overdrafts identified during the reconciliation
process discussed in a later section. See " -- Internal Controls."
NONINTEREST INCOME. Noninterest income was $375,200 for the nine months
ended September 30, 2006 compared to $280,500 for the nine months ended
September 30, 2005. The increase in noninterest 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 nine months ended September 30,
2006 was $79,300 in ATM fees, an increase of $22,300 over 2005 when such fees
were categorized as other income. Noninterest income for the year ended December
31, 2005 was $346,000, compared to $216,000 for the year ended December 31,
2004, an increase of approximately $130,000, or 60.2%. The increase for the most
recent period is due primarily to increases in deposit-related fees including
non-sufficient funds fees and overdraft fees which management attributes to a
larger deposit base and management's efforts to enhance this type of fee income.
NONINTEREST EXPENSES.
NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005. Noninterest expense was
$1,922,200 and $1,840,800 for the nine months ended September 30, 2006 and 2005,
respectively.
Compensation and benefits expense 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 $45,100, or 110.3%, to $86,000 for the nine months ended
September 30, 2006. Salaries decreased by $25,500, or 3.9%, to $630,400 for the
nine months ended September 30, 2006 compared to $655,900 for the nine months
ended September 30, 2005. Director fees declined $19,200, or 59.3% to $13,200
for the nine months ended September 30, 2006 from $32,400 for the nine months
ended September 30, 2005 as certain directors have agreed to waive their fees
indefinitely.
26
Professional fees increased $27,600, or 36.0%, to $104,200 for the nine
months ended September 30, 2006 compared to $76,600 for the nine months ended
September 30, 2005 due to higher accruals for legal and accounting fees.
Computer and data processing expense increased by $23,100, or 13.0%, to
$200,900 for the nine months ended September 30, 2006 as 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 decreased $1,800, or 2.5%, to $71,600 for the nine
months ended September 30, 2006 compared to $73,400 for the nine months ended
September 30, 2005.
Office supplies and postage expenses increased $700, or 0.8%, to $90,300
for the nine months ended September 30, 2006 compared to $89,600 for the 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 $28,700, or 11.7%, to $274,700
year-to-date due in part to an increase in regulatory assessments of $10,900, or
51.2%, to $32,200 for the nine months ended September 30, 2006. ATM-related fees
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 $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.
YEARS ENDED DECEMBER 31, 2005 AND 2004. Noninterest expense for the year
ended December 31, 2005 was $2.5 million compared to $2.6 million for the year
ended December 31, 2004, a decrease of approximately $100,000, or 3.8%. The
decrease in noninterest expense of $100,000 or 3.8% was due primarily to the
absence of the data processor conversion related expenses incurred during 2004.
During the year ended December 31, 2004, expenses related to the conversion of
the data processor totaled $111,000 compared to no such expenses during 2005.
Compensation and benefits expense decreased by $27,000 or 2.5% to $1.04
million for the year ended December 31, 2005 compared to $1.07 million for the
year ended December 31, 2004. The FASB No. 91 accounting entry for the year
ended December 31, 2005 resulted in a deferred salaries expense reduction of
$87,000. No such entry was made during the year ended December 31, 2004 as the
Company implemented this accounting standard in 2005. Additionally, employee
education expense decreased by $31,000 or 81.2% to $7,000 as extensive employee
training for the data processor conversion was not incurred during the year
ended December 31, 2005 as it was during the year ended December 31, 2004.
Further, retirement fund expense increased by $12,000 or 23.8% to $65,000 during
the year ended December 31, 2005.
Advertising expenses decreased $78,000 or 45.9% to $91,000 for the year
ended December 31, 2005 compared to $169,000 for the year ended December 31,
2004. The reduction was due primarily to no longer having the need to market the
new main office and the activities associated with its grand opening on March 5,
2004, as well as marketing efforts to explain our computer conversion and its
effects to our customers.
Office supplies and postage expenses decreased $55,000, or 31.2% to
$121,000 for the year ended December 31, 2005 compared to $176,000 for the year
ended December 31, 2004. The reduction was due primarily to not having the
startup expenses associated with opening the new location experienced during the
2004 period.
27
Computer and data processing expense increased by $17,000 or 7.9% to
$235,000 for the year ended December 31, 2005 compared to $218,000 for the year
ended December 31, 2004. The increase reflects additional technical assistance
during the period, the receipt of certain introductory discounts during the
prior year and bank growth.
Professional fees increased $20,000, or 23.4% to $106,000 for the year
ended December 31, 2005 compared to $86,000 for the year ended December 31,
2004. Monthly accruals are now being used for audit and accounting expenses to
more evenly distribute these costs throughout the year, rather than expensing as
incurred.
INCOME TAX EXPENSE. Community First Bancorp, Inc. 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. Community First Bancorp, Inc. 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, Community First
Bancorp, Inc. determined in 2004 that it was appropriate to establish a
valuation allowance of $418,000 for its net deferred tax assets. The balance of
the valuation allowance at September 30, 2006 was $671,000 compared to $567,000
at December 31, 2005 and $418,000 and December 31, 2004. The increase in the
valuation allowance for the nine months ended September 30, 2006 of $104,000 and
for the year ended December 31, 2005 of $148,000 relates primarily to the net
losses incurred in those periods.
As of September 30, 2006, we had approximately $2.2 million in net
operating loss carryforwards 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.
ANALYSIS OF FINANCIAL CONDITION
COMPARISON OF 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.
28
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.
COMPARISON OF DECEMBER 31, 2005 AND DECEMBER 31, 2004. Our total assets as
of December 31, 2005 were $71.7 million, an increase of $8.2 million or 12.9%
from December 31, 2004's level of $63.5 million. The increase was due primarily
to growth in the loan portfolio, more specifically an increase in one- to
four-family first mortgage loans which increased $8.0 million, or 20.1%. Net
loans receivable increased by $12.6 million, or 24.3%, which reflected our
continued marketing efforts. Commercial mortgage loans increased $4.4 million or
149.1% and increased to 11.3% of the portfolio from 5.6% at December 31, 2004.
Our investment securities decreased by $535,000, or 23.2%, to $1.8 million at
December 31, 2005 due to maturities of securities as we used cash flows from the
securities portfolio to pay down Federal Home Loan Bank advances. Premises and
equipment decreased $209,000, or 8.3%, primarily due to a full year's
depreciation on the new main office. Our cash and cash equivalents as of
December 31, 2005 were $2.0 million, a decrease of $3.8 million from December
31, 2004's level of $5.8 million. This decrease is due primarily to the maturity
of $3.0 million in Federal Home Loan Bank certificates of deposit that served as
pledged collateral for several new accounts with the Hopkins County Sheriff's
Department. The Sheriff's Department accounts housed the collection of county
property taxes.
Liabilities increased by $8.7 million, or 14.4%, to $69.0 million due
primarily to a $7.8 million, or 16.7%, increase in deposits as Community First
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 of $13.0 million remained at the December 31,
2004 level of $13.0 million. Community First Bank has used proceeds from the
advances to help meet loan demand. Advances under our line of credit from our
correspondent bank increased to $850,000 at December 31, 2005 from $750,000 at
December 31, 2004. In addition, Community First Bancorp, Inc. had $400,000 in
loans from directors at December 31, 2005. These borrowings were used to fund a
capital contribution to Community First Bank. See "Business of Community First
Bancorp, Inc. and Community First Bank - Sources of Funds - Correspondent Bank
and Other Borrowings."
Stockholders' equity decreased to $2.7 million at December 31, 2005 from
$3.2 million at December 31, 2004. The decrease in stockholders' equity
principally reflects $439,000 in losses during the period.
29
LOAN PORTFOLIO
LOAN PORTFOLIO COMPOSITION. The following table sets forth information
concerning the types of loans in our portfolio at the dates indicated.
AT DECEMBER 31,
AT SEPTEMBER 30, ---------------------------------------------------
2006 2005 2004
--------------------- ------------------------- ----------------------
AMOUNT % AMOUNT % AMOUNT %
-------- ------ -------- ------- --------- -------
(DOLLARS IN THOUSANDS)
Real estate mortgage loans:
One- to four-family residential first... $ 53,511 75.30% $ 47,739 73.49% $ 39,758 76.09%
One- to four-family residential second.. 2,583 3.63 1,755 2.70 1,208 2.31
Multi-family............................ 1,082 1.52 791 1.22 1,075 2.06
Commercial.............................. 7,340 10.33 7,356 11.32 2,953 5.65
Construction............................ 1,291 1.82 2,305 3.55 1,900 3.64
Other loans:
Consumer installment.................... 200 0.28 194 0.30 252 0.48
Commercial.............................. 899 1.27 820 1.26 2,370 4.54
Automobile.............................. 3,263 4.59 2,898 4.46 1,905 3.64
Deposit................................. 365 0.51 398 0.61 330 0.63
Other................................... 533 0.75 710 1.09 501 0.96
---------- ------ -------- ------ -------- ------
71,067 100.00% 64,966 100.00% 52,252 100.00%
====== ====== ======
Less:
Unearned interest....................... -- -- --
Allowance for loan losses............... 371 388 320
Loans in process........................ -- -- --
---------- -------- --------
Total................................ $ 70,696 $ 64,578 $ 51,932
========== ======== ========
LOAN MATURITIES. The following table sets forth the estimated maturity of
our loan portfolio at December 31, 2005. The table does not include the effects
of possible prepayments or scheduled repayments. All mortgage loans are shown as
maturing based on the date of the last payment required by the loan agreement.
DUE WITHIN DUE AFTER DUE OVER 5
ONE YEAR AFTER 1 THROUGH 5 YEARS YEARS AFTER
DECEMBER 31, 2005 DECEMBER 31, 2005 DECEMBER 31, 2005 TOTAL
----------------- ----------------- ----------------- -----
(IN THOUSANDS)
Real estate mortgage loans:
One- to four-family residential first $1,270 $1,202 $45,267 $47,739
One- to four-family residential second 3 1,583 169 1,755
Multi-family...................... -- -- 791 791
Commercial........................ 329 1,322 5,705 7,356
Construction...................... 2,077 -- 228 2,305
Other loans:
Consumer installment.............. 38 100 56 194
Commercial........................ 311 263 246 820
Automobile........................ 117 2,702 79 2,898
Deposit........................... 168 121 109 398
Other............................. 121 177 412 710
------ ------ ------- -------
Total......................... $4,434 $7,470 $53,062 $64,966
====== ====== ======= =======
30
LOAN SENSITIVITY. The next table sets forth at December 31, 2005, the
dollar amount of all loans due one year or more after December 31, 2005 which
have predetermined interest rates and have floating or adjustable interest
rates. The majority of our floating or adjustable rate loans are mortgages whose
rates do not adjust until after an initial period of one, three, five or seven
years.
PREDETERMINED FLOATING OR
RATE ADJUSTABLE RATES
---- ----------------
(IN THOUSANDS)
Real estate mortgage loans:
One- to four-family residential first........... $ 7,919 $ 38,596
One- to four-family residential second.......... 416 1,335
Multi-family.................................... 375 416
Commercial...................................... 6,081 947
Construction.................................... 185 43
Other loans:
Consumer installment............................ 155 --
Commercial...................................... 511 --
Automobile...................................... 2,781 --
Deposit......................................... 230 --
Other........................................... 542 --
-------- --------
Total...................................... $ 19,195 $ 41,337
======== ========
LOAN ORIGINATIONS. The following table sets forth certain information
with respect to our loan originations for the periods indicated. We have not
purchased or sold any loans in the secondary market in recent years.
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------------------- -------------------------
2006 2005 2005 2004
---------- ---------- ---------- ----------
(IN THOUSANDS)
Loans originated:
Real estate mortgage loans:
One- to four-family residential first................... $ 13,074 $ 15,985 $ 17,539 $ 16,696
One- to four-family residential second.................. 2,204 1,011 991 231
Multi-family............................................ -- -- -- 269
Commercial.............................................. 1,201 2,206 2,903 4,208
Construction............................................ 1,262 1,161 2,201 3,043
Other loans:
Consumer installment.................................... 153 245 72 419
Commercial.............................................. 415 697 680 1,167
Automobile.............................................. 1,851 1,794 2,054 1,810
Deposit................................................. 329 224 265 353
Other................................................... 313 318 291 109
---------- ---------- ---------- ----------
Total loans originated............................... $ 20,802 $ 23,641 $ 26,996 $ 28,305
========== ========== ========== ==========
31
NONPERFORMING ASSETS
The following table sets forth information regarding our non-accrual loans,
accruing loans past due 90 days or more and real estate owned. We did not have
any troubled debt restructurings within the meaning of SFAS No. 15 at the dates
indicated below.
AT AT DECEMBER 31,
SEPTEMBER 30, ----------------------
2006 2005 2004
------------ ------ ------
(IN THOUSANDS)
Loans accounted for on a non-accrual basis:(1)
Real estate:
One- to four-family residential first.......... $ 84 $ 259 $ 119
One- to four-family residential second......... -- 3 3
Multi-family................................... -- -- --
Commercial..................................... -- -- --
Construction................................... -- -- --
Other loans:
Consumer installment.......................... -- -- --
Commercial.................................... -- -- --
Automobile.................................... 6 1 9
Deposit....................................... -- -- --
Other......................................... -- -- --
------ ------ ------
Total......................................... $ 90 $ 263 $ 131
====== ====== ======
Accruing loans which are contractually
past due 90 days or more:
Real estate:
One- to four-family residential first.......... $ 315 $ 44 $ 158
One- to four-family residential second......... -- -- --
Multi-family................................... -- -- --
Commercial..................................... -- -- --
Construction................................... -- -- --
Other loans:
Consumer installment.......................... 1 -- --
Commercial.................................... -- -- --
Automobile.................................... 12 -- 6
Deposit....................................... -- -- --
Other......................................... -- -- 1
------ ------ ------
Total......................................... $ 328 $ 44 $ 165
====== ====== ======
Total nonperforming loans..................... $ 418 $ 307 $ 296
====== ====== ======
Percentage of total loans........................ 0.59% 0.47% 0.57%
====== ====== ======
Other non-performing assets(2)................... $ 53 $ -- $ --
====== ====== ======
<FN>
_______________
(1) Non-accrual status denotes loans on which, in the opinion of
management, the collection of additional interest is unlikely. Payments
received on a nonaccrual loan are either applied to the outstanding
principal balance or recorded as interest income, depending on
management's assessment of the collectibility of the loan.
(2) Other nonperforming assets represents property acquired through
foreclosure or repossession. This property is carried at the lower of
its fair market value or the principal balance of the related loan,
whichever is lower.
</FN>
Non-accrual loans at September 30, 2006 consisted of two loans. There were
10 accruing loans past due 90 days or more at September 30, 2006.
During the nine months ended September 30, 2006 and during the year ended
December 31, 2005, gross interest income of approximately $9,600 and $6,400
would have been recorded on loans accounted for on a
32
nonaccrual basis if the loans had been current throughout the period. No
interest on such loans was included in income during the nine months ended
September 30, 2006 or the year ended December 31, 2005.
At September 30, 2006, there were no loans which are not currently
classified as non-accrual, 90 days past due or restructured but where known
information about possible credit problems of borrowers causes management to
have serious concerns as to the ability of the borrowers to comply with present
loan repayment terms and may result in disclosure as non-accrual, 90 days past
due or restructured.
INVESTMENT PORTFOLIO
INVESTMENT PORTFOLIO COMPOSITION. The following table sets forth the
carrying value of our investment securities and mortgage-backed portfolio at the
dates indicated.
AT AT DECEMBER 31,
SEPTEMBER 30, --------------------------
2006 2005 2004
-------- ------- -------
(IN THOUSANDS)
Securities available-for-sale:
U.S. government and agency securities.............. $ 1,222 $ 1,703 $ 2,215
Securities held-to-maturity:
Mortgage-backed securities......................... 57 66 89
-------- ------- -------
Total investments............................... $ 1,279 $ 1,769 $ 2,304
======== ======= =======
MATURITY DISTRIBUTION. The following table sets forth the scheduled
maturities, amortized cost, market values and average yields for our investment
portfolio at September 30, 2006. The amortized cost and fair value of
mortgage-backed securities are presented in the held-to-maturity category by
contractual maturity in the following table. Expected maturities of
mortgage-backed securities may differ from contracted maturities because
borrowers may have the right to call or prepay obligations without call or
prepayment penalties.
ONE YEAR OR LESS ONE TO FIVE YEARS FIVE TO TEN YEARS
--------------------- ----------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD COST YIELD COST YIELD
---- ----- ---- ----- ---- -----
(DOLLARS IN THOUSANDS)
Securities available-for-sale:
U.S. government and
agency securities............... $ 751 2.61% $ 500 3.01% $ -- -- %
Securities held-to-maturity:
Mortgage-backed securities......... -- -- 10 8.00 -- --
-------- ------ -------
Total........................... $ 751 $ 510 $ --
======== ====== =======
AFTER TEN YEARS TOTAL INVESTMENT SECURITIES
------------------------ -----------------------------------
WEIGHTED
AMORTIZED AVERAGE AMORTIZED MARKET AVERAGE
COST YIELD COST VALUE YIELD
---- ----- ---- ----- -----
(DOLLARS IN THOUSANDS)
Securities available-for-sale:
U.S. government and
agency securities............. $ -- -- % $ 1,251 $ 1,222 2.77%
Securities held-to-maturity:
Mortgage-backed securities....... 47 8.38 57 60 8.31
-------- -------- -------
Total......................... $ 47 $ 1,308 $ 1,282
======== ======== =======
33
DEPOSITS
DEPOSIT DISTRIBUTION. The following table sets forth the average
balances and rates paid for our various categories of deposits for the nine
months ended September 30, 2006 and 2005 and the past two fiscal years.
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------------------------- ---------------------------------------
2006 2005 2005 2004
------------------ ------------------ ------------------- ------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE
(DOLLARS IN THOUSANDS)
Non-interest-bearing demand...........$ 6,557 -- % $ 4,852 -- % $ 4,968 -- % $ 2,722 -- %
Interest-bearing demand................ 4,619 0.82% 4,750 0.43% 4,726 0.44% 5,125 0.33%
Passbook savings....................... 4,067 1.06% 3,859 0.36% 3,807 0.39% 3,645 0.30%
Certificates of deposit................ 44,594 4.13% 37,776 3.33% 38,325 3.41% 28,466 3.24%
-------- -------- --------- --------
Total............................$ 59,837 $ 51,237 $ 51,826 $ 39,958
========= ======== ========= ========
CERTIFICATES OF DEPOSIT OVER $100,000. At September 30, 2006, time
certificates in amounts of $100,000 or more constituted $11.8 million, or 18.8%,
of our total deposit base. The majority of these certificates represent deposits
from long-standing customers. The following table classifies our time
certificates of $100,000 or more by time remaining to maturity as of September
30, 2006.
CERTIFICATES
MATURITY PERIOD OF DEPOSIT
- --------------- ----------
(IN THOUSANDS)
Three months or less.............................. $ 1,581
Over three through six months..................... 3,203
Over six through 12 months........................ 4,459
Over 12 months.................................... 2,577
---------
$ 11,820
=========
BORROWINGS
The following table sets forth certain information at the dates and for the
periods indicated regarding our Federal Home Loan Bank advances, which was our
only category of short-term borrowings whose average balance exceeded 30% of
stockholders' equity at the end of the period.
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------------- ------------------------
2006 2005 2005 2004
---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Amounts outstanding at end of period:
FHLB advances.................................. $ 10,275 $ 12,500 $ 13,000 $13,000
Weighted average rate paid:
FHLB advances.................................. 5.50% 4.06% 4.33% 2.42%
Maximum amount of borrowings outstanding
at any month end:
FHLB advances.................................. $ 12,500 $ 13,500 $ 13,000 $13,000
Average borrowings outstanding:
FHLB advances.................................. $ 9,597 $ 10,944 $ 11,583 $ 8,000
Approximate weighted average rate paid:
FHLB advances.................................. 5.13% 3.32% 3.49% 1.63%
34
MARKET/INTEREST RATE RISK DISCLOSURE
QUALITATIVE DISCLOSURE. Our assets and liabilities may be analyzed by
examining the extent to which its assets and liabilities are interest-rate
sensitive and by monitoring the expected effects of interest rate changes on our
net portfolio value.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If assets mature or
reprice more quickly or to a greater extent than liabilities, the net portfolio
value and net interest income would tend to increase during periods of rising
interest rates but decrease during periods of falling interest rates.
Conversely, if our assets mature or reprice more slowly or to a lesser extent
than liabilities, the net portfolio value and net interest income would tend to
decrease during periods of rising interest rates but increase during periods of
falling interest rates. Community First Bank's policy has been to mitigate the
interest rate risk inherent in the historical savings institution business of
originating long-term loans funded by short-term deposits by pursuing certain
strategies designed to decrease the vulnerability of our earnings to material
and prolonged changes in interest rates.
Our primary method of managing interest rate risk is to emphasize the
origination of adjustable-rate mortgage loans. Community First Bank's
adjustable-rate mortgage loans provide that the interest rate will adjust every
one, three, five or seven years. The terms of these loans generally limit the
amount of any single rate change to a maximum of two percentage points and also
provide that the rate may not increase above a "ceiling" rate established at the
time the loan is made, nor below a floor rate which is the initial rate on the
loan. At September 30, 2006, approximately 69.9% of our mortgage loan portfolio
had adjustable rates. We also purchase investment securities with relatively
short maturities, normally three years or less. At September 30, 2006,
approximately 96.4% of our investment portfolio had a maturity of five years or
less. We monitor our deposit rates on a weekly basis to ensure that it remains
competitive.
QUANTITATIVE ANALYSIS. The analysis of an institution's interest rate gap
(the difference between the repricing of interest-earning assets and
interest-bearing liabilities during a give period of time) is a standard tool
for the measurement of exposure to interest rate risk. The following table sets
forth the amounts of interest-earning assets and interest-bearing liabilities
outstanding at September 30, 2006 which are projected to reprice or mature in
each of the future time periods shown. The amounts of assets and liabilities
shown which reprice or mature within a particular period were determined in
accordance with the contractual terms of the assets or liabilities. Loans with
adjustable rates are shown as being due at the end of the next upcoming
adjustment period. In making the sensitivity gap computations, none of the
assumptions sometimes made regarding prepayment rates have been used for any
interest-earning assets. Decay rates have not been used on money market, NOW or
savings accounts. In addition, the table does not reflect scheduled principal
payments which will be received throughout the lives of the loans and
mortgage-backed securities. The interest rate sensitivity of our assets and
liabilities illustrated in the following table would vary substantially if
different assumptions were used or if actual experience differs from the
indicated by such assumptions.
35
The following table presents our interest sensitivity gap between
interest-earning assets and interest-bearing liabilities for the period
indicated.
AS OF SEPTEMBER 30, 2006
------------------------------------------------------------------------
WITHIN 3 OVER
MONTHS 4-12 MONTHS 1-5 YEARS 5 YEARS TOTAL
------ ----------- --------- ------- -----
(DOLLARS IN THOUSANDS)
Interest-earning assets:
Investment securities.................... $ 496 $ 245 $ 537 $ -- $ 1,278
Loans.................................... 2,362 1,592 5,738 61,003 70,695
FHLB stock............................... 753 -- -- -- 753
Total interest-earning assets........ 3,611 1,837 6,275 61,003 72,726
Non-interest-earning assets:
Cash and due from banks.................. -- -- -- -- 1,876
Premises and equipment................... -- -- -- -- 2,139
Other assets............................. - - -- -- -- 526
Total non-interest-earning assets -- -- -- -- 4,541
--------- -------- -------- -------- ---------
Total assets......................... $ 3,611 $ 1,837 $ 6,275 $ 61,003 $ 77,267
========= ======== ======== ======== =========
Interest-bearing liabilities:
Interest checking........................ $ 2,714 $ -- $ -- $ -- $ 2,714
Money Market accounts.................... 1,849 -- -- -- 1,849
Savings accounts......................... 3,854 -- -- -- 3,854
Certificates of deposit.................. 7,797 33,088 7,716 -- 48,601
FHLB advances............................ 10,665 -- -- -- 10,665
Advances under line of credit............ 750 -- -- -- 750
--------- -------- -------- -------- ---------
Total interest-bearing liabilities... 27,629 33,088 7,716 -- 68,433
Non-interest-bearing liabilities:
Demand deposits.......................... -- -- -- -- 5,708
Interest payable and other
liabilities........................... -- -- -- -- 325
--------- -------- -------- -------- ---------
Total non-interest-bearing
Liabilities...................... -- -- -- -- 6,033
Stockholders' equity........................ -- -- -- -- 2,801
--------- -------- -------- -------- ---------
Total liabilities and stockholders'
equity........................... $ 27,629 $ 33,088 $ 7,716 $ -- $ 77,267
========= ======== ======== ======== =========
Interest sensitivity gap.................... $ (24,018) $(31,251) $(1,441) $ 61,003 $ (4,293)
Cumulative gap.............................. (24,018) (55,269) (56,710) 4,293
Cumulative gap/total assets................. (31.08)% (71.53)% (73.39)% 5.56%
The Board of Directors reviews our asset and liability policies. The Board
of Directors meets regularly to review interest rate risk and trends, as well as
liquidity and capital ratios and requirements. Management administers the
policies and determinations of the Board of Directors with respect to our asset
and liability goals and strategies. We expect that our asset and liability
policies and strategies will continue as described so long as competitive and
regulatory conditions in the financial institution industry and market interest
rates continue as they have in recent years.
36
LIQUIDITY AND CAPITAL RESOURCES
Community First Bancorp, Inc. currently has no operating business other
than that of Community First Bank and does not have material funding needs other
than servicing its outstanding debt. In the future, Community First Bancorp,
Inc. may require funds for dividends and tax payments for which it will rely on
dividends and other distributions from Community First Bank. Community First
Bank is subject to various regulatory restrictions on the payment of dividends.
Community First 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. Community First
Bank is also able to obtain advances from the Federal Home Loan Bank 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. Community First
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 September 30, 2006, cash and cash
equivalents totaled $1.9 million.
Our primary investing activity is the origination of loans. During the nine
months ended September 30, 2006 and 2005, we originated $20.8 million and $23.6
million in loans, respectively. During the years ended December 31, 2005 and
2004, loan originations totaled $27.0 million and $28.3 million, respectively.
These originations were funded in part by proceeds from repayments of loans,
maturities and calls of investment and mortgage-backed securities and increases
in deposits and Federal Home Loan Bank borrowings.
At September 30, 2006, we had $2.7 million in outstanding commitments to
originate loans. We anticipate that we will have sufficient funds available to
meet our current loan origination commitments. Time certificates which are
scheduled to mature in one year or less totaled $40.9 million at September 30,
2006. Based on historical experience, management believes that a significant
portion of such deposits will remain with Community First Bank, although there
can be no assurance that it will do so. In the event we are unable to retain
these deposits, we may seek replacement funding through the Federal Home Loan
Bank of Cincinnati or other sources.
Community First Bank relies primarily on local deposits for its funding
needs. In order to finance loan growth, we may also borrow from the Federal Home
Loan Bank of Cincinnati. At September 30, 2006, Community First Bank had $22.0
million in unused borrowing capacity at the Federal Home Loan Bank of
Cincinnati.
Community First Bank is subject to minimum capital requirements under
Office of Thrift Supervision regulations. To be "well-capitalized" under these
regulations, Community First Bank must maintain a ratio of Tier 1 or Core
Capital to adjusted total assets of 5.0%, a ratio of Tier 1 capital to
risk-based assets of 6.0% and a ratio of total capital to risk-based assets of
10.0%. At September 30, 2006, Community First Bank's ratio of Tier 1/Core
Capital to adjusted total assets was 5.06%, its ratio of Tier 1 capital to
risk-based assets was 8.63% and its ratio of total capital to risk-based assets
was 9.45%. Although Community First Bank was not "well capitalized;" these
ratios equaled or exceeded regulatory requirements to be adequately capitalized.
Community First Bank,
37
however, does not have sufficient capital to grow, particularly if it continues
to experience losses. We have maintained Community First Bank's capital
compliance primarily through borrowings at the holding company level. See
"Business of Community First Bancorp, Inc. and Community First Bank - Sources of
Funds - Correspondent Bank and Other Borrowings."
OFF-BALANCE SHEET ARRANGEMENTS
We are parties to financial instruments with off-balance sheet risk in the
normal course of business. These financial instruments primarily include loan
commitments, lines of credit, including home-equity lines and commercial lines,
and letters of credit. We use these financial instruments to meet the financing
needs of its customers. Outstanding loan commitments and lines and letters of
credit at September 30, 2006 were $2.7 million and $135,400, respectively, and
at December 31, 2005 were $766,000 and $7,000, respectively. These financial
instruments involve, to varying degrees, elements of credit, interest rate, and
liquidity risk. These do not represent unusual risks and management does not
anticipate any accounting losses, which would have a material effect on us.
NEW ACCOUNTING PRONOUNCEMENTS
In December of 2003, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") No. 03-3, "Accounting for Certain Loans or
Debt Securities Acquired in a Transfer." SOP No. 03-3 addresses accounting for
differences between contractual cash flows and cash flows expected to be
collected from an investor's initial investment in loans or debt securities
acquired in a transfer if those differences are attributable, at least in part,
to credit quality. This SOP prohibits "carry over" or creation of valuation
allowances in the initial accounting of all loans acquired in transfers within
the scope of SOP No. 03-3, which includes loans acquired in a purchase business
combination. SOP No. 03-3 is effective for loans acquired in fiscal years
beginning after December 15, 2004.
At its March 2004 meetings, the Emerging Issues Task Force ("EITF")
revisited EITF Issue No. 03-1, "The Meaning of Other-than-Temporary Impairment
and its Application to Certain Investments" (EITF No. 03-1). Effective with
reporting periods beginning after June 15, 2004, companies carrying certain
types of debt and equity securities whose amortized cost is higher than the
securities' fair values will have to use more detailed criteria to evaluate
whether to record a loss and will have to disclose additional information about
unrealized losses. The additional disclosure has been included in the
accompanying financial statements but the application of the new measurement
provisions was delayed by the EITF on September 30, 2004 to give the FASB and
EITF more time to study this issue.
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS 123 (revised), "Share-Based Payment" ("SFAS 123(R)"). This standard
requires expensing of stock options and other share-based payments beginning in
2005, and supersedes FASB's earlier rule (the original SFAS 123) that had
allowed companies to choose between expensing stock options or showing pro forma
disclosure only. Public entities (other than those filing as small business
issuers) are required to apply SFAS 123(R) as of the first interim or annual
reporting period that begins after June 15, 2005. Public entities that file as
small business issuers are required to apply SFAS 123(R) in the first interim or
annual reporting period that begins after December 15, 2005.
On December 15, 2005, the FASB issued an FASB Staff Position "SOP
94-6-1-Terms of Loan Products That May Give Rise to a Concentration of Credit
Risk" which addresses the disclosure requirements for certain nontraditional
mortgage and other loan products, the aggregation of which may constitute a
concentration of credit risk under existing accounting literature. The FASB's
intentions were to reemphasize the adequacy of such disclosures and noted that
the recent popularity of certain loan products such as negative amortization
loans, high loan-to-value loans, interest only loans, teaser rate loans, option
adjusted rate mortgage loans and other loan product types may aggregate to the
point of being a concentration of credit risk to an issuer and thus may require
enhanced disclosures under existing guidance. This FASB Staff Position was
effective immediately. We have
38
evaluated the impact of this FASB Staff Position and have concluded that the
disclosures contained in our financial statements are consistent with the
objectives of the FASB Staff Position.
On February 16, 2006, the FASB issued SFAS 155, which resolves issues
addressed in Statement 133 Implementation Issue No. D1, Application of Statement
133 to Beneficial Interests in Securitized Financial Assets (DIG Issue D1). SFAS
155 amends SFAS 133 for certain derivatives embedded in other financial
instruments (a hybrid financial instrument) by permitting fair value
remeasurement for any hybrid financial instrument that contains an embedded
derivative that otherwise required bifurcation, provided that the entire hybrid
financial instrument is accounted for on a fair value basis. SFAS 155 also
establishes the requirement to evaluate interests in securitized financial
assets to identify interests that are freestanding derivatives or that are
hybrid financial instruments that contain an embedded derivative requiring
bifurcation, which replaces the interim guidance in DIG Issue D1. SFAS 155
amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishment of Liabilities a replacement of FASB Statement 125 to allow a
qualifying special-purpose entity to hold a derivative financial instrument that
pertains to beneficial interests other than another derivative financial
instrument. SFAS 155 is effective for all financial instruments acquired or
issued after the beginning of the first fiscal year that begins after September
15, 2006, with earlier adoption allowed. Management does not expect the adoption
of this pronouncement to have a material effect on our consolidated financial
statements.
In July of 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement 109" ("FIN
48"). FIN 48 establishes, among other things, that a tax benefit from an
uncertain position may only be recognized if it is "more likely than not" that
the position is sustainable based on its technical merits. The tax benefit of a
qualifying position will be measured by calculating the largest amount of tax
benefit that is greater than 50 percent likely of being realized upon ultimate
settlement with a taxing authority having full knowledge of all relevant
information. The assessment of the recognition threshold and the measurement of
the associated tax benefit might change as new information becomes available.
Unrecognized tax benefits will be recognized in the period that the position
reaches the recognition threshold, which might occur prior to absolute finality
of the matter. Similarly, recognized tax benefits will be derecognized in the
period in which the position falls below the threshold. FIN 48 also requires
qualitative and quantitative disclosures, including discussion of reasonably
possible changes that might occur in the recognized tax benefits over the next
twelve months, a description of open tax years by major jurisdictions and a
roll-forward of all unrecognized tax benefits, presented as a reconciliation of
the beginning and ending balances of the unrecognized tax benefits on a
worldwide aggregated basis. FIN 48 is effective for us as of January 1, 2007.
The change in net assets, if any, that results from the application of FIN 48
will be recorded as an adjustment to retained earnings. Management has not yet
determined the impact that the adoption of FIN 48 will have on our consolidated
financial position, results of operations and earnings per common share.
These recently issued pronouncements are not expected to have a material
impact on us as the generally accepted accounting principles requirements either
are not applicable to us or the impact is insignificant.
INTERNAL CONTROLS
In connection with the audit of our financial statements for the fiscal
year ended December 31, 2005, our auditors identified several material
weaknesses in our internal controls, including:
o Failure to reconcile certain correspondent bank accounts;
o Failure to reconcile certain suspense and clearing accounts; and
o Inadequate segregation of the duties of certain employees.
In connection with their audit of our financial statements for the fiscal
year ended December 31, 2004, our former auditors identified the above
weaknesses and a number of others as discussed in our periodic filings.
Management believes that these weaknesses are primarily attributable to
human resource limitations within our accounting and financial reporting
function and has instituted a schedule of ongoing reconciliations as well as
additional reviews of entries made by employees. We have hired additional
personnel with internal audit
39
experience including a chief accounting officer with extensive internal audit
experience in the banking industry. Daily reconciliations of the cited accounts
are now being performed. All entries made by personnel in the reconciliation
function are now reviewed daily by a member of management. Management believes
that our internal controls have been substantially improved as the result of
these measures.
CHANGE IN AUDITORS
On November 14, 2005, our independent auditors, BKD, LLP, informed us of
its decision to resign as our independent auditors effective with the conclusion
of its procedures related to the Form 10-QSB for the quarter ended September 30,
2005. The decision to change accountants was not recommended by the audit
committee of our Board of Directors. BKD, LLP's reports on our consolidated
financial statements for the two fiscal years ended December 31, 2004 did not
contain an adverse opinion or disclaimer of opinion, and were not qualified or
modified as to uncertainty, audit scope or accounting principles. In connection
with their audits of the two fiscal years ended December 31, 2004, there were no
disagreements between BKD, LLP and us on any matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved to the satisfaction of BKD, LLP, would have caused them
to make a reference to the subject matter of the disagreements in connection
with their reports.
IMPACT OF INFLATION AND CHANGING PRICES
Our financial statements and the accompanying notes presented elsewhere in
this document, have been prepared in accordance with accounting principles
generally accepted in the United States of America, which require the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time and due to inflation. The impact of inflation is reflected in the
increased cost of our operations. As a result, interest rates have a greater
impact on our performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the prices of goods and services.
BUSINESS OF COMMUNITY FIRST BANCORP, INC. AND COMMUNITY FIRST BANK
Community First Bancorp, Inc. was incorporated as a Maryland corporation to
become the holding company for Community First Bank upon completion of its
conversion to stock form. Community First Bancorp, Inc. does not engage in any
activities other than holding the stock of Community First Bank.
Our executive offices are located at 2420 North Main Street, Madisonville,
Kentucky and our main telephone number is (270) 326-3500. We also maintain a
website at www.cfbky.com. Information on our website should not be treated as
part of this prospectus.
Community First Bank is a federal stock savings bank operating through two
offices in Madisonville, Kentucky. Founded in 1923 as the Madisonville Building
and Loan Association, Community First Bank converted to a federal mutual savings
bank charter and adopted its current name in 2002. In June 2003, Community First
Bank converted to stock form and became a subsidiary of Community First Bancorp,
Inc. Community First Bank is a member of the Federal Home Loan Bank System. Its
deposits are insured up to applicable limits by the Federal Deposit Insurance
Corporation.
Community First Bank's principal business consists of attracting deposits
from the general public and originating residential mortgage loans. Community
First Bank also offers commercial and multi-family real estate loans, various
types of consumer loans and a limited number of commercial business loans.
40
MANAGEMENT STRATEGY
Founded in 1923 as the Madisonville Building & Loan Association, Community
First Bank historically operated as a traditional thrift from its South Main
Street location, offering long-term mortgages and small consumer loans to local
residents. As the profitability of this business came under increasing pressure
during the 1990s, Community First Bank suffered continuing losses, which
severely eroded its capital base.
In late 2001, the Board of Directors brought in Mr. William M. Tandy, who
had extensive prior experience in bank turn-arounds, to take over management of
Community First Bank. Prior to joining Community First Bank, Mr. Tandy had been
brought in to serve as President of Hacienda Bank, a troubled bank in Santa
Maria, California in 1993. Mr. Tandy restored Hacienda Bank to profitability and
grew it from a low of $17.5 million in assets to $60 million in assets. Prior to
Hacienda Bank, Mr. Tandy had been brought in to serve as the President of First
National Bank of Pottsboro, Texas, another troubled bank, which he also returned
to profitability and sold to American Bank in Sherman, Texas in 1992.
Under Mr. Tandy's leadership, Community First Bank has executed a
multi-pronged strategy to re-invigorate its franchise and enable it to compete
more effectively. The principal elements of this strategy have included:
GROWING AND DIVERSIFYING THE LOAN PORTFOLIO. In order to increase the
profitability of Community First Bank, management has grown the loan
portfolio and diversified it into more profitable lines of business than
the one- to four-family lending which historically dominated the portfolio.
With the capital from our 2003 conversion to stock form, we significantly
increased our commercial and commercial mortgage lending. As the result of
our conversion to a new computer system in 2004, we also gained the
capability of offering commercial loans and lines of credit and other forms
of lending on which higher rates may be charged as well as the ancillary
services these customers require. The additional capital from this offering
will increase our lending limits and allow us to further grow and diversify
the portfolio.
DEVELOPMENT OF NON-INTEREST INCOME SOURCES. Like most thrift
institutions, Community First Bank traditionally relied on net interest
income (i.e., the difference between the interest earned on its loan and
securities portfolios and interest paid on its deposits and borrowings) to
cover its operating expenses (salaries, occupancy, data processing, etc.).
In order to diversify our income sources and create income streams that are
less affected by changes in interest rates, we have developed various
additional types of non-interest income including fees for various loan and
deposit services and commission income. Our new computer system expanded
the array of services we offer, including on-line banking and internet
bill-pay, which have created new fee opportunities.
MAINTAINING STRONG ASSET QUALITY. We have maintained our asset quality
while growing Community First Bank. Our ratio of non-performing assets to
total assets has been consistently 0.61% or less since 2003. We believe
that our low level of non-performing assets reflects a strong credit
culture and disciplined underwriting and we intend to continue operating
Community First Bank in this manner.
MODERNIZATION OF FACILITIES. In 2004, Community First Bank relocated
its main office to a modern building in a faster-growing part of
Madisonville. The new main office has drive-up facilities and more
convenient hours. We had previously extensively remodeled our South Main
Street office to make it more convenient and appealing to customers. These
more modern facilities enabled us to attract new customers and better serve
existing customers.
IMPROVE MARKET AWARENESS. In 2002, Community First Bank adopted its
current name to better reflect its community focus and the products it
offers. The name change was accompanied by a marketing campaign to help
establish our new identity and create greater market awareness of Community
First Bank. Community First Bank has continued to be actively involved in
the community and believes that these efforts have helped build further
customer identification and loyalty.
CONVERSION TO STOCK FORM. In 2003, Community First Bank completed a
successful conversion to stock form selling 277,725 shares of newly issued
stock to its depositors in accordance with Office of
41
Thrift Supervision regulations. The conversion to stock form not only
provided Community First Bank with the capital needed to grow but further
increased our visibility in the market.
As a result of the foregoing strategies, we have successfully grown our
assets and our net interest income and other income over the past several years.
Despite our success in growing Community First Bank, we have incurred losses as
our income growth has not been sufficient to offset the increased expenses
resulting from our new main office. During 2004, we also experienced significant
non-recurring charges related to the conversion of our data processor. In
addition, we believe that our profitability has been negatively affected by the
recent flattening of the yield curve, which began in June 2004 when the Federal
Reserve Board initiated a series of interest rate increases. The Federal
Reserve's actions have triggered an increase in short-term rates which has
primarily affected the rates we pay on our deposits and borrowings while the
long-term rates which determine the pricing of our loans have remained fairly
constant.
While we have undertaken various cost-cutting initiatives, management
believes that the best strategy for achieving profitability is to continue to
emphasize growth. Management believes that its success in growing the loan
portfolio demonstrates that loan demand in its market area is sufficient to
support further growth. At its current capital levels, however, the Bank cannot
grow to the size needed for profitability. The additional capital from this
offering will increase our legal lending limits and allow us to serve a broader
range of customers. In addition, the capital-based regulatory limits on our
non-residential real estate lending will be increased.
LOCATION AND MARKET AREA
We consider our primary market area to be the City of Madisonville and
surrounding Hopkins County, Kentucky. Located in the Western Coalfield Region of
Kentucky, Hopkins County had a population of approximately 46,161 in 2005.
Madisonville is located on US-41 (which will be part of the future Interstate 69
- - designed to run North-South through the United States connecting Canada and
Mexico) and just seven miles from the junction with the Western Kentucky Parkway
which connects the Lexington/Louisville area to the western part of the state
and Interstate 24. Madisonville is 49 miles south of Evansville, Indiana, 104
miles northwest of Nashville, Tennessee, and 153 miles southwest of Louisville,
Kentucky. It is one half hour from Interstate 24. Commercial airline service is
available at the Evansville Regional Airport in Evansville Indiana and
Owensboro-Daviess County Regional Airport (both are within 50 miles of the
city.) Madisonville is the county seat and largest city in Hopkins County and is
home to one of the major healthcare facilities in the Commonwealth of Kentucky.
The city is 35 miles from Kentucky's Lake Region, a popular recreation area
consisting of two of Kentucky's largest lakes - Kentucky Lake and Lake Barkley.
The largest employers in Madisonville and the surrounding communities
include the Trover Regional Medical Center, General Electric Aircraft Engine,
Carhartt, Inc. and Lear Corporation. By industry, the largest sectors of the
Madisonville economy are healthcare and manufacturing. Land O' Frost, Inc., a
packaged lunch meat producer, is in the process of completing a $49 million,
175,000 square foot industrial facility that will bring 500 new jobs to the
area. Additionally, Fort Knox National recently established a new call center
that will eventually add approximately 200 new jobs and Jennmar Corporation, a
manufacturer of mining support products, announced it will build a 45,000 square
foot plant which will generate over 40 new jobs.
The 2005 unemployment rate for Hopkins County was 6.1%, the same rate as
the state-wide rate. The median household income of $36,780 in 2005 for Hopkins
County was below the median for Kentucky as a whole of $41,175 and for the
United States of $49,747. Projections for median household income growth through
2010 for Hopkins County exceed the projections for growth in the United States
as a whole. While the population of Madisonville grew by approximately 19% from
1990 to 2000, Hopkins County as a whole grew less than 1.0%. By comparison, the
population of Kentucky grew by 9.6%.
LENDING ACTIVITIES
Our loan portfolio consists primarily of mortgage loans secured by first
liens on one- to four-family residences. We also make consumer, residential
construction and commercial real estate and commercial business loans. While we
have continued our historic emphasis on one- to four-family lending, we have
also sought to grow our portfolio of commercial mortgages.
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At September 30, 2006, our gross loans totaled $71.1 million, of which
$53.5 million were first mortgage loans secured by one- to four-family
residences. We originate adjustable-rate mortgage loans with rates that adjust
annually after an initial period of one, three, five or seven years during which
the interest rate is fixed. We offer similar terms on our commercial and
multi-family mortgages. Our consumer loans may have either fixed or variable
rates.
Substantially all of our borrowers are located in Hopkins County, Kentucky
and would be expected to be similarly affected by economic and other conditions
in this area. We do not believe that there are any other concentrations of loans
or borrowers exceeding 10% of total loans.
ONE- TO FOUR-FAMILY RESIDENTIAL LOANS. Our primary lending activity
consists of the origination of one- to four-family residential first mortgage
loans secured by property located in our primary market area. We generally
originate one- to four-family residential mortgage loans in amounts up to 80% of
the lesser of the appraised value or the purchase price with a maximum loan
amount of $642,000 and a maximum term of 30 years. We will make residential
mortgage loans with loan-to-value ratios greater than 80% as long as they comply
with secondary market standards. Currently we do not sell our loans in the
secondary market, but instead act as an originator by taking the loan
application and then forwarding it to a secondary market lender. Although we
make loans on one- to four-family rental properties, the majority of our
residential first mortgages are on owner-occupied properties.
The first mortgage loans that we originate for our portfolio generally have
rates that adjust annually after an initial period of one, three, five or seven
years during which the rate is fixed. We do not originate 30-year fixed-rate
loans for our portfolio.
The interest rate on adjustable-rate mortgage loans is based on an index
plus a stated margin. Adjustable-rate mortgage loans provide for periodic
interest rate adjustments upward or downward of up to two percentage points per
year with a limit of six percentage points over the life of the loan. Borrowers
on adjustable-rate mortgage loans must qualify at the fully adjusted rate. The
rates on our adjustable-rate mortgage loans are generally indexed to the rates
on one-year U.S. Treasury bills adjusted to a constant maturity. We also have in
our portfolio adjustable-rate mortgage loans which are indexed to the average
cost of funds for savings associations in the 11th Federal Home Loan Bank
District. We discontinued using this index in 1996 because it tended to lag the
market and such loans were less than 0.72% of the portfolio at September 30,
2006.
In addition to one- to four-family first mortgage loans, we offer second
mortgage loans. We offer second mortgages to customers on whose property we hold
the first mortgage and to other customers as well. Our second mortgage loans
have fixed terms of up to 10 years and have fixed rates of interest. We only
originate a second mortgage if the aggregate indebtedness secured by the
property will not exceed 80% of its appraised value. We also offer home equity
lines of credit, which are similar to our second mortgages, but on a revolving
term.
Adjustable-rate mortgage loans decrease the risk associated with changes in
interest rates by periodically repricing, but involve other risks because as
interest rates increase, the underlying payments by the borrower increase, thus
increasing the potential for default by the borrower. At the same time, the
marketability of the underlying collateral may be adversely affected by higher
interest rates. Upward adjustment of the contractual interest rate is also
limited by the maximum periodic and lifetime interest rate adjustment permitted
by the loan documents, and, therefore is potentially limited in effectiveness
during periods of rapidly rising interest rates. At September 30, 2006,
approximately 79% of the one- to four-family residential loans we held had
adjustable rates of interest. Adjustable-rate loans consist primarily of one,
three, five or seven year adjustable-rate mortgage loans whose rates may not be
currently adjusting.
The mortgage loans we originate and hold generally include due-on-sale
clauses. These clauses give us the right to deem the loan immediately due and
payable in the event the borrower transfers ownership of the property securing
the mortgage loan without our consent.
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RESIDENTIAL CONSTRUCTION LOANS. We make a limited number of residential
construction loans on one- to four-family residential properties to the
individuals who will be the owners and occupants upon completion of
construction. Borrowers are required to pay interest on disbursed funds during
the construction period, which may not last beyond 12 months. The borrower may
pay off the loan with a permanent loan from us at completion of construction.
Loan proceeds are disbursed according to a draw schedule and the appraiser must
inspect the progress of the construction before additional funds are disbursed.
Construction loans are offered on either a fixed or adjustable basis.
Construction lending is generally considered to involve a higher degree of
credit risk than long-term financing of residential properties. Our risk of loss
on a construction loan is dependent largely upon the accuracy of the initial
estimate of the property's value at completion of construction and the estimated
cost of construction. If the estimate of construction cost and the marketability
of the property upon completion of the project prove to be inaccurate, we may be
compelled to advance additional funds to complete the construction. Furthermore,
if the final value of the completed property is less than the estimated amount,
the value of the property might not be sufficient to assure the repayment of the
loan.
COMMERCIAL AND MULTI-FAMILY REAL ESTATE LOANS. We offer commercial and
multi-family real estate loans secured by apartment buildings, churches, office
buildings, and other commercial properties. Commercial and multi-family real
estate loans are made for terms of up to 20 years and have rates of interest
that are fixed for a period of one to seven years and adjust annually
thereafter. The interest rates on commercial and multi-family loans are indexed
to the prime rate. Loan amounts may not exceed 70% of the appraised value of the
property. Over the past several years, we have sought to increase our
originations of commercial and multi-family real estate loans in order to
diversify the portfolio and serve the needs of the market.
At September 30, 2006, our largest commercial real estate loan was a
$456,000 loan secured by a farm in Morganfield, Kentucky originated in October
2005. The 10-year fully amortizing loan bears a fixed rate of interest for the
life of the loan. The loan-to-value ratio at origination was 43% and the loan is
personally guaranteed by the principal of the corporate borrower. Our second
largest loan was a $406,000 loan secured by an apartment complex in Madisonville
originated in December 2003. The 20-year fully amortizing loan bears a fixed
rate of interest for seven years and floats with the prime rate thereafter. The
loan-to-value ratio at origination was 64% and the loan is personally guaranteed
by the principals of the corporate borrower.
Commercial and multi-family real estate lending entails significant
additional risks compared to residential property lending. These loans typically
involve large loan balances to single borrowers or groups of related borrowers.
The repayment of these loans typically is dependent on the successful operation
of the real estate project securing the loan. These risks can be significantly
affected by supply and demand conditions in the market for office and retail
space and may also be subject to adverse conditions in the economy. To minimize
these risks, we generally limit this type of lending to our market area and to
borrowers who are otherwise well known to us.
COMMERCIAL BUSINESS LOANS. We engage in a limited amount of commercial
business lending primarily for the accommodation of existing customers. Our
commercial business loans generally are secured by equipment or other tangible
assets. Our largest commercial business loan at September 30, 2006 had a balance
of approximately $101,000 and was made to a hydraulic hose and pipe-fitting
company and is secured by equipment, inventory and accounts receivable.
Unlike residential mortgage loans, which generally are made on the basis of
the borrower's ability to make repayment from his or her employment and other
income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself and the general economic environment.
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CONSUMER LOANS. We offer various types of consumer loans in order to
provide a wider range of financial services to our customers. Consumer loans
totaled $4.4 million, or 6.1%, of our total loans at September 30, 2006. Our
consumer loans consist of automobile, personal unsecured loans, passbook, home
improvement loans and equipment loans. Passbook and certificate of deposit
secured loans are offered up to the maximum of the deposit balance and are due
on demand.
We offer loans for both new and used automobiles with maximum terms of six
years and maximum loan amounts up to 90% of the manufacturer's suggested retail
price on new cars or fair market value of the automobile on used cars. Personal
unsecured loans generally are made for amounts of $2,000 or less and terms of 6
months and may have fixed or variable interest rates.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
assets that depreciate rapidly. Repossessed collateral for a defaulted consumer
loan may not be sufficient for repayment of the outstanding loan, and the
remaining deficiency may not be collectible.
LOAN SOLICITATION, APPROVAL AND UNDERWRITING. Community First Bank obtains
loan customers from a variety of sources, including advertising, personal
solicitation, repeat customers and referrals from existing customers, realtors,
builders and others. We also solicit applications for residential mortgages
through our website. Although the President and Vice Presidents have authority
to originate loans up to the loans-to-one borrower limits, loans other than
single-family owner-occupied mortgages and residential mortgage loans in excess
of $250,000 are generally submitted to the Board of Directors for approval.
Upon receipt of a completed loan application from a prospective borrower, a
credit report is ordered. Income and certain other information is verified. If
necessary, additional financial information may be requested. An appraisal or
other estimate of value of the real estate intended to be used as security for
the proposed loan is obtained. Appraisals are prepared by outside fee appraisers
who are approved by the Board of Directors.
A title opinion or title insurance is generally required on all real estate
loans. Borrowers also must obtain fire and casualty insurance. Flood insurance
is also required on loans secured by property which is located in a flood zone.
LOANS TO ONE BORROWER. The maximum amount of loans which we may make to any
one borrower may not exceed the greater of $500,000 or 15% of our unimpaired
capital and unimpaired surplus. We may lend an additional 10% of our unimpaired
capital and unimpaired surplus if the loan is fully secured by readily
marketable collateral. Our maximum loans-to-one-borrower limit was $642,000 at
September 30, 2006. At September 30, 2006, our largest loan concentration
outstanding had a balance of $934,000 and consisted of two loans secured by
non-residential commercial properties and two loans secured by multi-family
apartment complexes. This was in excess of our loans-to-one-borrower limit at
the time of origination and we are attempting to reduce it through the sale of
the loan or a participation.
NONPERFORMING AND PROBLEM ASSETS
LOAN DELINQUENCIES. Generally when a mortgage loan becomes 15 days past
due, a notice of nonpayment is sent to the borrower. If payment is still
delinquent after 30 days, the borrower will receive a formal delinquency notice.
The borrower will be contacted by telephone or visited personally if the loan
remains delinquent after 45 days. If the loan continues in a delinquent status
for 120 days past due and no repayment plan is in effect, the loan will be
referred to an attorney for collection, with foreclosure commenced no later than
180 days. The customer will be notified when foreclosure is commenced. At
September 30, 2006, our loans past due between 30 and 89 days totaled $354,000.
45
Loans are reviewed on a monthly basis and are generally placed on a
non-accrual status when the loan becomes more than 90 days delinquent or when,
in our opinion, the collection of additional interest is doubtful. Interest
accrued and unpaid at the time a loan is placed on nonaccrual status is charged
against interest income. Subsequent interest payments, if any, are either
applied to the outstanding principal balance or recorded as interest income,
depending on the assessment of the ultimate collectibility of the loan.
CLASSIFIED ASSETS. Office of Thrift Supervision regulations provide for a
classification system for problem assets of savings institutions which covers
all problem assets. Under this classification system, problem assets of savings
institutions such as ours are classified as "substandard," "doubtful," or
"loss." An asset is considered substandard if it is inadequately protected by
the current net worth and paying capacity of the borrower or of the collateral
pledged, if any. Substandard assets include those characterized by the "distinct
possibility" that the savings institution will sustain "some loss" if the
deficiencies are not corrected. Assets classified as doubtful have all of the
weaknesses inherent in those classified substandard, with the added
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, conditions, and, values, "highly
questionable and improbable." Assets classified as loss are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
may be designated "special mention" because of potential weakness that do not
currently warrant classification in one of the aforementioned categories.
When a savings institution classifies problem assets as either substandard
or doubtful, it may establish general allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been established to recognize the inherent risk associated with lending
activities, but which, unlike specific allowances, have not been allocated to
particular problem assets. When a savings institution classifies problem assets
as loss, it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge off such
amount. A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
Office of Thrift Supervision, which may order the establishment of additional
general or specific loss allowances. A portion of general loss allowances
established to cover possible losses related to assets classified as substandard
or doubtful may be included in determining a savings institution's regulatory
capital. Specific valuation allowances for loan losses generally do not qualify
as regulatory capital.
At September 30, 2006, we had $413,000 in loans classified as substandard
and no loans classified as doubtful or loss. Our substandard assets at September
30, 2006 consisted of 13 residential first mortgages. Reserves of $59,000 have
been allocated to the substandard assets.
FORECLOSED REAL ESTATE. Real estate acquired in settlement of loans is
carried at the lower of the unpaid loan balance or fair value less estimated
costs to sell. Write-downs from the unpaid loan balance to fair value at the
time of foreclosure are charged to the allowance for loan losses. Subsequent
write-downs to fair value, net of disposal costs, are charged to other expenses.
At September 30, 2006, we owned two one- to four-family residential properties,
totaling $53,000, which we received through the process of foreclosure.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is management's
estimate of probable inherent credit losses in the loan portfolio at the balance
sheet date. We determine the allowance based on ongoing evaluations. This
evaluation is inherently subjective because it requires material estimates,
including the amounts and timing of cash flows expected to be received on
impaired loans. Those estimates may be susceptible to significant change.
Increases to the allowance are made by charges to the provision for loan losses,
which is reflected in the statements of operations. Loans deemed to be
uncollectible are charged against the allowance. Recoveries of loans previously
charged off are credited to the allowance. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Critical Accounting
Policies" for further discussion of our methodology for determining the
allowance.
We monitor our allowance for loan losses and make additions to the
allowance as economic and other conditions dictate. Although we maintain our
allowance for loan losses at a level that we consider adequate for
46
the inherent risk of loss in our loan portfolio, actual losses could exceed the
balance of the allowance for loan losses and additional provisions for loan
losses could be required. In addition, our determination as to the amount of its
allowance for loan losses is subject to review by the Office of Thrift
Supervision, as part of its examination process. After a review of the
information available, the Office of Thrift Supervision might require the
establishment of an additional allowance.
INVESTMENT ACTIVITIES
INVESTMENT SECURITIES. We are required by federal regulations to maintain a
minimum amount of liquid assets which may be invested in specified short-term
securities and certain other investments. The level of liquid assets varies
depending upon several factors, including: (i) the yields on investment
alternatives; (ii) our judgment as to the attractiveness of the yields then
available in relation to other opportunities; (iii) expectation of future yield
levels; and (iv) our projections as to the short-term demand for funds to be
used in loan origination and other activities. At September 30, 2006, our
investment securities portfolio consisted primarily of Federal Home Loan Bank
bonds of various maturities.
Our securities at September 30, 2006 did not contain securities of any
issuer with an aggregate book value in excess of 10% of our equity, excluding
those issued by the United States Government or its agencies.
MORTGAGE-BACKED SECURITIES. We have invested from time to time in
residential mortgage-backed securities. Mortgage-backed securities can serve as
collateral for borrowings and, through repayments, as a source of liquidity.
Mortgage-backed securities represent a participation interest in a pool of one-
to four-family or other type of mortgages. Principal and interest payments are
passed from the mortgage originators, through intermediaries (generally
quasi-governmental agencies) that pool and repackage the participation interests
in the form of securities, to investors such as us. Our mortgage-backed
securities portfolio consists primarily of participations or pass-through
certificates issued by the Government National Mortgage Association ("GNMA").
GNMA certificates are guaranteed as to principal and interest by the full faith
and credit of the United States. Our mortgage-backed securities portfolio was
classified as "held-to-maturity" at September 30, 2006.
Expected maturities will differ from contractual maturities due to
scheduled repayments and because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.
Mortgage-backed securities typically are issued with stated principal
amounts. The securities are backed by pools of mortgages that have loans with
interest rates that are within a set range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate or adjustable
mortgage loans. Mortgage-backed securities are generally referred to as mortgage
participation certificates or pass-through certificates. The interest rate risk
characteristics of the underlying pool of mortgages (i.e., fixed-rate or
adjustable-rate) and the prepayment risk, are passed on to the certificate
holder. The life of a mortgage-backed pass-through security is equal to the life
of the underlying mortgages.
SOURCES OF FUNDS
Deposits are our major external source of funds for lending and other
investment purposes. Funds are also derived from the receipt of payments on
loans and prepayment of loans and, to a much lesser extent, maturities of
investment securities and mortgage-backed securities, borrowings and operations.
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are significantly
influenced by general interest rates and market conditions.
DEPOSITS. We attract deposits principally from within our primary market
area through the offering of a selection of deposit instruments including
regular savings accounts, money market accounts, and term certificate accounts.
Deposit account terms vary according to the minimum balance required, the time
period the funds must remain on deposit, and the interest rate. The interest
rates we pay on deposits are set weekly at the direction of our senior
management. Interest rates are determined based on our liquidity requirements,
interest rates paid by our competitors, and our growth goals and applicable
regulatory restrictions and requirements.
47
Like most savings institutions, Community First Bank has historically
relied primarily on certificates of deposit for funding. In order to attract
funds in prior years, we had paid higher rates on certificate accounts which
caused its cost of funds to increase. Recently, Community First Bank has
attempted to reduce its reliance on certificate accounts by attracting more
transaction accounts, such as checking, NOW and money market accounts. As higher
rate certificates mature, we expect to reduce our cost of funds.
FEDERAL HOME LOAN BANK BORROWINGS. Advances (borrowings) may be obtained
from the Federal Home Loan Bank of Cincinnati to supplement our supply of
lendable funds. Advances from the Federal Home Loan Bank of Cincinnati are
typically secured by a pledge of our stock in the Federal Home Loan Bank of
Cincinnati and a portion of our first mortgage loans. Each Federal Home Loan
Bank credit program has its own interest rate, which may be fixed or adjustable,
and range of maturities. At September 30, 2006, our borrowings from the Federal
Home Loan Bank consisted of $10.3 million in short-term, variable-rate advances.
CORRESPONDENT BANK AND OTHER BORROWINGS. In order to maintain the
regulatory capital levels of Community First Bank, we have borrowed funds at the
holding company level for capital infusions. Community First Bancorp, Inc. has
previously borrowed up to $1.25 million on a line of credit from our
correspondent bank for this purpose. The line of credit provides for an interest
rate at the prime rate plus 25 basis points (currently 8.50%) and is secured by
all of our stock in Community First Bank. In December 2005 the line of credit's
principal balance was reduced by $400,000 using the proceeds from an unsecured
loan from four members of our Board of Directors. The four directors loaned
these funds for the sole purpose of paying down the outstanding line of credit
with a correspondent bank. This loan paid the four directors a fixed interest
rate of 7.50%. Subsequently, one director took shares of common stock in
exchange for his note.
In May 2006, the line of credit was renewed at the same interest rate until
November 15, 2006. In order to obtain the renewal, we were required to pay the
line down to $750,000. Under the terms of the renewal, 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%, 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. The correspondent bank has extended the maturity
date on the line of credit to February 15, 2007 and waived compliance with the
minimum total risk-based capital ratio requirement as of September 30, 2006. The
three directors who continue to have loans outstanding to Community First
Bancorp, Inc. have agreed to extend their loans on the same terms until February
15, 2007 with accrued interest capitalized.
COMPETITION
We compete for deposits with other insured financial institutions such as
local commercial banks, thrift institutions, credit unions and multi-state
regional banks in our market area. We also compete for funds with insurance
products sold by local agents and investment products such as mutual funds and
other securities sold by local and regional brokers. According to data from the
Federal Deposit Insurance Corporation, we held approximately 11.0% of
FDIC-insured deposits in Hopkins County as of June 30, 2006, the latest date for
which such data was available. Such data does not cover deposits held by credit
unions. We have historically competed for deposits by paying higher rates than
our local competitors.
Our competition for loans depends on market conditions and the type of
lending. Our competition for residential mortgages comes primarily from mortgage
bankers and brokers who primarily originate long-term fixed-rate loans on behalf
of secondary market investors. While we also originate long-term, fixed-rate
loans on behalf of secondary market investors, our principal residential
mortgage loan offerings are our various adjustable-rate mortgage loans which we
market based on flexibility of terms and superior service. We compete primarily
against other local depository institutions for commercial and multi-family real
estate loans. We compete for these lending opportunities primarily on the basis
of our flexibility and responsiveness as a locally owned and oriented community
bank. We compete against other local financial institutions and a variety of
other lenders including finance companies and automobile dealers for consumer
loans and second mortgages. We generally compete for these loans based on our
variety of lending solutions, customer relationships and quality of service.
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PROPERTIES
The following table sets forth certain information regarding our two
offices.
BOOK VALUE AT
YEAR OWNED OR SEPTEMBER 30, APPROXIMATE
OPENED LEASED 2006 SQUARE FOOTAGE
------ ------ ------------ --------------
(DOLLARS IN THOUSANDS)
MAIN OFFICE:
2420 North Main Street
Madisonville, KY 42431 2004 Owned $1,255 8,400
BRANCH OFFICE:
240 South Main Street
Madisonville, KY 42431 1959 Owned $ 589 4,200
The book value of our investments in premises and equipment totaled $1.8
million at September 30, 2006. In addition, we have acquired two buildings
adjacent to our South Main Street office for future expansion of parking and
improved vehicle access. The properties are currently being rented out for a
total rental income of $500 per month. Our aggregate investment in these
properties is $200,000.
PERSONNEL
At September 30, 2006, we had 24 full-time employees and one part-time
employee. None of our employees are represented by a collective bargaining
group. We believe that our relationship with our employees is good.
LEGAL PROCEEDINGS
We are, from time to time, a party to legal proceedings arising in the
ordinary course of our business, including legal proceedings to enforce our
rights against borrowers. We are not currently a party to any legal proceedings
which are expected to have a material adverse effect on our financial
statements.
SUPERVISION AND REGULATION
GENERAL
As a federally chartered, FDIC-insured savings institution, Community First
Bank is subject to extensive regulation by the Office of Thrift Supervision and
the Federal Deposit Insurance Corporation. Community First Bank's lending
activities and other investments must comply with various federal and state
statutory and regulatory requirements, and the Office of Thrift Supervision
periodically examines Community First Bank for compliance with various
regulatory requirements. The Federal Deposit Insurance Corporation also has
authority to conduct periodic examinations. We must file reports with the Office
of Thrift Supervision describing our activities and our financial condition, and
we must obtain approvals from regulatory authorities before entering into
certain transactions, such as the conversion or mergers with other financial
institutions. We are also subject to certain reserve requirements promulgated by
the Board of Governors of the Federal Reserve System ("Federal Reserve System").
Our relationship with our depositors and borrowers is also regulated to a great
extent by federal and state law, especially in such matters as the ownership of
savings accounts and the form and content of our mortgage documents. This
supervision and regulation is primarily intended to protect depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in regulations, whether by the Office of Thrift Supervision, the Federal
Deposit Insurance Corporation or any other government agency, could have a
material adverse impact on our operations.
49
REGULATION OF COMMUNITY FIRST BANK
INSURANCE OF DEPOSITS. The Federal Deposit Insurance Corporation has
adopted a risk-based assessment system for insured depository institutions that
takes into account the risks attributable to different categories and
concentrations of assets and liabilities. The system assigns an institution to
one of three capital categories (1) well capitalized; (2) adequately
capitalized; and (3) undercapitalized. These three categories are substantially
similar to the prompt corrective action categories described above, with the
"undercapitalized" category including institutions that are undercapitalized,
significantly undercapitalized and critically undercapitalized for prompt
corrective action purposes. The Federal Deposit Insurance Corporation also
assigns an institution to one of three supervisory subgroups based on a
supervisory evaluation that the institution's primary federal regulator provides
to the Federal Deposit Insurance Corporation and information that the Federal
Deposit Insurance Corporation determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance fund.
Assessments currently range from 0 to 27 cents per $100 deposits, depending on
the institution's capital group and supervisory subgroup.
Under the Federal Deposit Insurance Reform Act of 2005, which was signed
into law on February 15, 2006: (i) the Bank Insurance Fund (which formerly
insured the deposits of banks) and the Savings Association Insurance Fund (which
formerly insured the deposits of savings associations) were merged into a new
combined fund, called the Deposit Insurance Fund effective March 31, 2006, (ii)
the current $100,000 deposit insurance coverage will be indexed for inflation
(with adjustments every five years, commencing January 1, 2011); and (iii)
deposit insurance coverage for retirement accounts has been increased to
$250,000 per participant subject to adjustment for inflation. The FDIC will be
given greater latitude in setting the assessment rates for insured depository
institutions, which could be used to impose minimum assessments.
The FDIC is authorized to set the reserve ratio for the Deposit Insurance
Fund annually at between 1.15% and 1.5% of estimated insured deposits. If the
Deposit Insurance Fund's reserves exceed the designated reserve ratio, the FDIC
is required to pay out all or, if the reserve ratio is less than 1.5%, a portion
of the excess as a dividend to insured depository institutions based on the
percentage of insured deposits held on December 31, 1996 adjusted for
subsequently paid premiums. Insured depository institutions that were in
existence on December 31, 1996 and paid assessments prior to that date (or their
successors) are entitled to a one-time credit against future assessments based
on their past contributions to the Bank Insurance Fund or Savings Association
Insurance Fund.
REGULATORY CAPITAL REQUIREMENTS. Office of Thrift Supervision regulations
require savings institutions to meet three capital standards: (1) tangible
capital equal to at least 1.5% of total adjusted assets, (2) core capital equal
to at least 4.0% of adjusted total assets (3.0% for the strongest institutions),
and (3) total risk-based capital equal to at least 8.0% of total risk-weighted
assets. In addition, the Office of Thrift Supervision may require a savings
institution that has a risk-based capital ratio of less than 8.0%, a ratio of
Tier 1 capital to risk-weighted assets of less than 4.0% or a ratio of Tier 1
capital to adjusted total assets of less than 4.0% (3.0% if the institution has
received the highest rating on its most recent examination) take certain actions
to increase its capital ratios. If the institution's capital is significantly
below the minimum required levels or if it is unsuccessful in increasing its
capital ratios, the Office of Thrift Supervision may significantly restrict its
activities.
Core capital is defined as common stockholders' equity (including retained
earnings), non-cumulative perpetual preferred stock and minority interests in
the equity accounts of consolidated subsidiaries, certain non-withdrawable
accounts and pledged deposits of mutual savings associations and qualifying
supervisory goodwill, less intangible assets (other than core deposit
intangibles, servicing assets, purchased credit card relationships and other
qualifying intangible assets) and investments in certain subsidiaries. Tier 1
has the same definition as core capital. Tangible capital is defined as core
capital less supervisory goodwill, non-mortgage servicing assets and purchased
credit card relationships and less certain investments in subsidiaries.
50
Total risk-based capital equals the sum of core capital plus supplementary
capital. The components of supplementary capital include, among other items,
cumulative perpetual preferred stock, perpetual subordinated debt, mandatory
convertible subordinated debt, intermediate-term preferred stock, and the
portion of the allowance for loan losses not designated for specific loan
losses. Overall, supplementary capital is limited to 100% of core capital. A
savings institution must calculate its risk-weighted assets by multiplying each
asset and off-balance sheet item by various risk factors as determined by the
Office of Thrift Supervision, which range from 0% for cash to 100% for
delinquent loans, property acquired through foreclosure, commercial loans, and
other assets. At September 30, 2006, we were in compliance with all regulatory
capital requirements.
Community First Bank currently meets the criteria to be treated as
adequately capitalized under Office of Thrift Supervision regulations. As an
adequately capitalized institution, Community First Bank is not subject to
various sanctions that may be imposed on undercapitalized institutions. As long
as Community First Bank is well capitalized or adequately capitalized, it may be
eligible for expedited treatment of its regulatory applications and lower
examination and deposit insurance assessment rates.
DIVIDEND AND OTHER CAPITAL DISTRIBUTION LIMITATIONS. Office of Thrift
Supervision regulations require Community First Bank to give the Office of
Thrift Supervision 30 days advance notice of any proposed declaration of
dividends to Community First Bancorp, Inc. The Office of Thrift Supervision may
prohibit the payment of dividends to Community First Bancorp, Inc. In addition,
Community First Bank may not declare or pay a cash dividend on its capital stock
if the effect would be to reduce Community First Bank's regulatory capital below
the amount required for the liquidation account established at the time of the
conversion to stock form.
Savings associations must submit notice to the Office of Thrift Supervision
prior to making a capital distribution (which includes dividends, stock
repurchases and amounts paid to stockholders in another institution in a cash
merger) if (a) they would not be well capitalized after the distribution, (b)
the distribution would result in the retirement of any of the association's
common or preferred stock or debt counted as its regulatory capital, or (c) the
association is a subsidiary of a holding company. A savings association must
make application to the Office of Thrift Supervision to pay a capital
distribution if (x) the association would not be adequately capitalized
following the distribution, (y) the association's total distributions for the
calendar year exceed the association's net income for the calendar year to date
plus its net income (less distributions) for the preceding two years, or (z) the
distribution would otherwise violate applicable law or regulation or an
agreement with or condition imposed by the Office of Thrift Supervision.
A savings institution is prohibited from making a capital distribution if,
after making the distribution, the savings institution would be undercapitalized
(i.e., not meet any one of its minimum regulatory capital requirements).
Further, a savings institution cannot distribute regulatory capital that is
needed for its liquidation account.
QUALIFIED THRIFT LENDER TEST. Savings institutions must meet a Qualified
Thrift Lender test. To satisfy the test, the Bank must either (i) qualify as a
"domestic building and loan association" under the Internal Revenue Code by
maintaining at least 60% of our total assets in specified types of assets,
including cash, certain government securities, loans secured by and other assets
related to residential real property, educational loans and investments in
premises of the institution or (ii) maintain at least 65% of Community First
Bank's portfolio assets (total assets less intangible assets, property we use in
conducting our business and liquid assets in an amount not exceeding 20% of
total assets) in Qualified Thrift Investments. Qualified Thrift Investments
consist primarily of residential mortgage loans and mortgage-backed and other
securities related to domestic, residential real estate or manufactured housing.
The shares of stock Community First Bank owns in the Federal Home Loan Bank of
Cincinnati also qualify as Qualified Thrift Investments. Subject to an aggregate
limit of 20% of portfolio assets, we may also count the following as Qualified
Thrift Investments: (i) 50% of the dollar amount of residential mortgage loans
originated for sale; (ii) investments in the capital stock or obligations of any
service corporation or operating subsidiary as long as such subsidiary derives
at least 80% of its revenues from domestic housing related activities; (iii)
200% of the dollar amount of loans and investments to purchase, construct or
develop "starter homes," subject to certain other restrictions; (iv) 200% of the
dollar amount of loans for the purchase,
51
construction or development of domestic residential housing or community centers
in "credit needy" areas or loans for small businesses located in such areas; (v)
loans for the purchase, construction or development of community centers; (vi)
loans for personal, family, household or educational purposes, subject to a
maximum of 10% of portfolio assets; and (vii) shares of the Federal Home Loan
Mortgage Corporation or the Federal National Mortgage Association stock.
If Community First Bank satisfies the Qualified Thrift Lender test, it will
continue to enjoy full borrowing privileges from the Federal Home Loan Bank of
Cincinnati. If Community First Bank does not satisfy the test, it may lose its
borrowing privileges and become subject to the activities and branching
restrictions applicable to national banks. Compliance with the Qualified Thrift
Lender test is determined on a monthly basis in nine out of every 12 months. As
of September 30, 2006, Community First Bank was in compliance with the Qualified
Thrift Lender requirement.
TRANSACTIONS WITH AFFILIATES. Generally, transactions between a savings
institution and its affiliates are subject to certain limitations. Such
transactions must be on terms as favorable to the savings institution as
comparable transactions with non-affiliates. In addition, certain types of
transactions are restricted to an aggregate percentage of the savings
institution's capital. Collateral in specified amounts must usually be provided
by affiliates in order to receive loans from the savings institution. Community
First Bank's affiliates include Community First Bancorp, Inc. and any company
under common control with Community First Bank. In addition, a savings
institution may not extend credit to any affiliate engaged in activities not
permissible for a bank holding company or acquire the securities of any
affiliate that is not a subsidiary. The Office of Thrift Supervision has the
discretion to treat subsidiaries of savings institution as affiliates on a
case-by-case basis.
LOANS TO DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL STOCKHOLDERS.
Community First Bank's loans to its directors, executive officers and our
principal stockholders may not be made on terms more favorable than those
afforded to other borrowers, except loans made as part of a benefit or
compensation program widely available to the Bank's employees and which does not
give more preferential terms to directors, executive officers or principal
stockholders than to other employees. In addition, Community First Bank cannot
make loans in excess of certain levels to directors, executive officers or 10%
or greater stockholders (or any of their affiliates) unless the loan is approved
in advance by a majority of the Board of Directors with any "interested"
director not voting. We are also prohibited from paying any overdraft of any of
our executive officers or directors. We are also subject to certain other
restrictions on the amount and type of loans to executive officers and directors
and must annually report such loans to our regulators.
FEDERAL HOME LOAN BANK SYSTEM. Community First Bank is a member of the
Federal Home Loan Bank of Cincinnati, which is one of 12 regional Federal Home
Loan Banks. Each Federal Home Loan Bank serves as a reserve or central bank for
its members within its assigned region. It is funded primarily from funds
deposited by savings institutions and proceeds derived from the sale of
consolidated obligations of the Federal Home Loan Bank System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the Board of Directors of the Federal Home Loan Bank.
As a member, Community First Bank is required to purchase and maintain
stock in the Federal Home Loan Bank of Cincinnati in an amount equal to at least
1% of its aggregate unpaid residential mortgage loans, home purchase contracts
or similar obligations at the beginning of each year, or 1/20 of its advances
from the Federal Home Loan Bank of Cincinnati, whichever is greater. At
September 30, 2006, Community First Bank had $753,000 in Federal Home Loan Bank
stock, at cost, which was in compliance with this requirement.
FEDERAL RESERVE SYSTEM. The Federal Reserve System requires all depository
institutions to maintain non-interest bearing reserves at specified levels
against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts) and non-personal time certificates. At September 30, 2006,
Community First Bank's reserves met the minimum level required by the Federal
Reserve System.
52
REGULATION OF COMMUNITY FIRST BANCORP, INC.
GENERAL. Community First Bancorp, Inc. is registered and required to file
reports with the Office of Thrift Supervision and is subject to regulation and
examination by the Office of Thrift Supervision. In addition, the Office of
Thrift Supervision has enforcement authority over the Company and any
non-savings institution subsidiaries. This permits the Office of Thrift
Supervision to restrict or prohibit activities that it determines to be a
serious risk to Community First Bank. This regulation is intended primarily for
the protection of Community First's depositors and not for the benefit of
stockholders. Community First Bancorp, Inc. is also required to file certain
reports with, and comply with the rules and regulations of, the Securities and
Exchange Commission under the federal securities laws.
ACTIVITIES RESTRICTIONS. As a savings and loan holding company formed after
May 4, 1999, Community First Bancorp, Inc. and its non-savings association
subsidiaries are subject to statutory and regulatory restrictions on their
business activities. Under the Home Owners' Loan Act, as amended by the
Gramm-Leach-Bliley Act (the "GLB Act"), the non-banking activities of Community
First Bancorp, Inc. are restricted to certain activities specified by statute or
Office of Thrift Supervision regulation, which include performing services and
holding properties used by a savings association subsidiary, activities
authorized for multiple savings and loan holding companies as of March 5, 1987,
and non-banking activities permissible for bank holding companies pursuant to
the Bank Holding Company Act of 1956 (the "BHC Act") or authorized for financial
holding companies pursuant to the GLB Act. Furthermore, no company may acquire
control of Community First Bancorp, Inc. unless the acquiring company was a
unitary savings and loan holding company on May 4, 1999 (or became a unitary
savings and loan holding company pursuant to an application pending as of that
date) or the company is only engaged in activities that are permitted for
multiple savings and loan holding companies or for financial holding companies
under the BHC Act as amended by the GLB Act.
RESTRICTIONS ON ACQUISITIONS. Community First Bancorp, Inc. must obtain
approval from the Office of Thrift Supervision before acquiring control of any
other savings institution or savings and loan holding company, substantially all
the assets thereof or in excess of 5% of the outstanding shares of another
savings institution or savings and loan holding company. Community First
Bancorp, Inc.'s directors and officers or persons owning or controlling more
than 25% of Community First Bancorp, Inc.'s stock must also obtain approval of
the Office of Thrift Supervision before acquiring control of any savings
institution or savings and loan holding company.
The Office of Thrift Supervision may only approve acquisitions that will
result in the formation of a multiple savings and loan holding company which
controls savings institutions in more than one state if: (i) the multiple
savings and loan holding company involved controls a savings institution which
operated a home or branch office in the state of the institution to be acquired
as of March 5, 1987; (ii) the acquiror is authorized to acquire control of the
savings institution pursuant to the emergency acquisition provisions of the
Federal Deposit Insurance Act; or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a holding
company that controls such state-chartered savings institutions).
53
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of Community First Bancorp, Inc. is composed of nine
members. Directors are divided into three equal classes and serve for terms of
three years each. Officers are elected annually and serve at the Board's
discretion. The directors and executive officers of Community First Bancorp,
Inc. are as follows:
DIRECTOR CURRENT TERM
NAME AGE(1) POSITION SINCE (2) TO EXPIRE
---- ------ -------- --------- ---------
William M. Tandy 51 President, Chief Executive Officer, 2001 2007
Chairman of the Board and Director
Michael D. Wortham 36 Vice President, Chief Financial Officer 1998 2008
and Director
Ralph T. Teague 88 Vice Chairman and Director 1979 2008
Paul W. Arison 55 Director 1993 2009
Charlotte E. Baldwin 74 Director 1991 2009
Steven E. Carson 54 Director 1991 2007
Charles G. Ramsey 55 Director 2001 2008
J. Craig Riddle 82 Director 1970 2007
C. Barry Vaughn 58 Director 1999 2009
Charlotte Sellers 41 Senior Lending Officer, Senior Vice N/A N/A
President
Amy D. Lyons 33 Chief Accounting Officer N/A N/A
<FN>
___________
(1) As of September 30, 2006.
(2) Includes service on the Board of Directors of Community First Bank. All
current directors became directors of Community First Bancorp, Inc.
upon its incorporation in 2003.
</FN>
The principal occupation of each director and executive officer of
Community First Bancorp, Inc. for the last five years is set forth below.
WILLIAM M. TANDY has served as President and Chief Executive Officer of
Community First Bank from November 2001 to the present. From 1993 to 2001, Mr.
Tandy served as President of Hacienda Bank, Santa Maria, California. From 1987
to 1992, he was president of First National Bank of Pottsboro, Texas. Mr. Tandy
has been in the banking industry since 1974 and has been brought in by three
different banks to successfully effect turnarounds. Mr. Tandy is a member of the
Madisonville Rotary Club and is past president of the Santa Maria Valley
Economic Association and a past board member of the Santa Maria Chamber of
Commerce and the Santa Barbara County Workforce Investment Board.
MICHAEL D. WORTHAM has been employed with Community First Bank since 1994
and currently serves as the Bank's Chief Financial Officer, Secretary and
Treasurer. Mr. Wortham has served as a board member with the Madisonville
Chamber of Commerce and the United Way and as President of the Kiwanis Club.
RALPH T. TEAGUE is a retired coal company executive. Mr. Teague is a real
estate investor and serves as president of Tea-Win Mine Storage in Hanson,
Kentucky. He is a trustee of the First United Methodist Church in Madisonville
and is active in the Madisonville Kiwanis Club.
PAUL W. ARISON has been employed at the Hopkins County Detention Center as
Commissary Manager, Program Director and G.E.D. Coordinator since 2001. Prior to
that time, he was a manager of Kuester's Hardware Stores in Evansville and
Newburgh, Indiana and in Madisonville, Kentucky. Mr. Arison is a member of the
First United Methodist Church and Madisonville Noon Kiwanis Club.
54
CHARLOTTE E. BALDWIN, a former mayor of Madisonville and Secretary of the
Kentucky Cabinet of Natural Resources and Environmental Protection. She is a
former vice-president and trust officer of First National Bank of Louisville and
former Kentucky marketing director for Cadre Securities, Inc. Ms. Baldwin is a
member of the Madisonville Chamber of Commerce and First United Methodist
Church. A graduate of the University of Evansville, she is a volunteer for
Hospice and the Western Kentucky Veterans Center.
STEVEN E. CARSON is the owner/operator of Barnett-Strother Funeral Home,
Inc., in Madisonville. Mr. Carson is a member of the Madisonville Lions Club,
the Madisonville Masonic Lodge #142 F & AM and is Past President of the Kentucky
Funeral Directors Association. He is Vice President of Forest Lawn Memorial
Gardens of Hopkins County.
CHARLES G. RAMSEY is Vice President - Finance and Chief Financial Officer
of the Renshaw Automotive Group, a multi-franchise automobile dealership group
with dealerships in Hopkinsville, Bowling, Green and Paducah, Kentucky. Prior to
his affiliation with Renshaw Automotive Group, he was a partner in a local
Madisonville CPA firm. Mr. Ramsey is an Elder and Trustee at the First Christian
Church in Madisonville. He is Past President of the Madisonville Kiwanis Club
and is currently on the Board of Directors of the Hopkinsville Kiwanis Club. Mr.
Ramsey has been a Kiwanian for 31 years. He is also Past President of the
Hopkins County Family YMCA. Mr. Ramsey has served on various United Way and
Chamber of Commerce committees. Mr. Ramsey is a Certified Public Accountant.
J. CRAIG RIDDLE is a retired insurance agent. Mr. Riddle was the owner and
principal of the J. Craig Riddle Insurance Co., a full-line insurance broker in
Madisonville, Kentucky. Mr. Riddle is a founding member and past Commodore of
the Kentucky Lake Sailing Club and a past-president of the Madisonville Country
Club. Mr. Riddle is a graduate of the University of Kentucky and a University of
Kentucky Fellow.
C. BARRY VAUGHN is the President and co-owner of Happy's of Madisonville,
an office equipment dealer located in Madisonville. Mr. Vaughn is a past member
of the board of the Madisonville Chamber of Commerce, past President and
Campaign Chair of the United Way of Hopkins County, and past President of
Madisonville Noon Kiwanis. He is currently Chairman of the City of Madisonville
Renaissance Committee and is an Elder in the First Christian Church.
CHARLOTTE SELLERS serves as Senior Lender, Senior Vice President and has
been employed by Community First Bank since September 2003. Prior to joining the
Bank, she was an Assistant Cashier and Assistant Vice President at Fifth Third
Bank in Madisonville, Kentucky. She has seven years of banking experience in
Commercial Lending. She is a board member of the Madisonville Hopkins County
Chamber of Commerce and is active in the Kiwanis Club.
AMY D. LYONS joined Community First Bank as Vice President and Chief
Accounting Officer in May 2006. Prior to joining Community First Bank, Ms. Lyons
had served with BKD, LLP since December 2005 as a senior consultant specializing
in internal audits, credit quality analysis and other industry specific
consulting for banks and thrifts in Kentucky and Indiana. From 2002 to 2005, she
served as an internal auditor and credit review officer with First Security Bank
in Owensboro, Kentucky. From 1999 to 2002, she was involved in loan review and
training at Area Bancshares Corporation.
DIRECTOR COMPENSATION
Directors do not receive separate compensation for their service on the
Board of Directors of Community First Bancorp, Inc. Directors (including
directors who are also employees) of Community First Bank receive a monthly fee
of $300 plus $100 for committee meetings. Total fees paid to the directors for
the year ended December 31, 2005 were $43,200. Effective April 6, 2006, fees
were suspended for all directors other than Mr. Wortham through September 30,
2006. Pursuant to the 2005 Restricted Stock Plan which was approved by
stockholders on May 19, 2005, directors were granted the following awards of
restricted stock which vest at the rate of 20% per year beginning one year from
the date of grant: Paul Arison - 305 shares; Charlotte Baldwin and Steven E.
Carson - 354 shares each; Charles G. Ramsey - 206 shares; J. Craig Riddle and
Ralph T. Teague - 416 shares
55
each; William Tandy - 2,082 shares; C. Barry Vaughn - 231 shares; and Michael D.
Wortham - 833 shares. Effective December 8, 2005, each director agreed to the
cancellation of their previously issued options without the payment of any
consideration.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table sets forth the cash and
noncash compensation awarded to or earned by our Chief Executive Officer and by
each executive officer whose salary and bonus earned in fiscal year 2005
exceeded $100,000 for services rendered in all capacities to Community First
Bancorp, Inc. and its subsidiaries (the "Named Executive Officers").
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
--------------------------------------- --------------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS OPTIONS COMPENSATION
--------------------------- ---- ------ ----- ------------ ------ ------- ------------
William M. Tandy 2005 $110,000 $ 500 $ -- $23,943 (1) -- $13,338 (2)
Chief Executive Officer 2004 105,040 500 -- -- 6,943 (3) 13,338
2003 100,000 7,340 -- -- -- 13,450
<FN>
_______________
(1) Based on the grant-date value ($11.50 per share) of 2,082 shares of
restricted stock awarded under the 2005 Restricted Stock Plan effective
May 19, 2005. Such shares vest at the rate of 20% per year beginning
one year from the date of grant. Any dividends paid on the restricted
stock will be paid to Mr. Tandy on vesting. At December 31, 2005, Mr.
Tandy had 2,082 unvested shares which had an aggregate value of $18,738
based the last sale price for the Common Stock reported on the OTCBB on
that date ($9.00 per share).
(2) Consisted of $4,800 in directors fees, $6,000 automobile allowance and
$2,538 in unused sick leave. (3) All such options were cancelled
without the payment of consideration effective December 8, 2005.
</FN>
EMPLOYMENT AGREEMENT. We have entered into an employment agreement with our
President, William M. Tandy. The agreement has a term of three years which may
be extended for an additional one-year period on each anniversary date if the
Board of Directors determines that Mr. Tandy has met the requirements of the
Board. The Board of Directors has determined that Mr. Tandy has met its
requirements as of the most recent anniversary date and the term of the
agreement was extended accordingly. Mr. Tandy's base salary under the employment
agreement is $110,000. Mr. Tandy is also eligible to receive bonuses of 7% of
Community First Bank's quarterly net profits. His agreement is terminable by us
for "just cause" as defined in the agreement. If we terminate Mr. Tandy without
just cause or if Mr. Tandy terminates his employment for "good reason," he will
be entitled to a continuation of his salary from the date of termination through
the remaining term of the agreement, plus an additional 12 months. If Mr. Tandy
shall become disabled during the term of his agreement, he shall continue to
receive payment of 100% of the base salary for a period of up to 180 days. Such
payments shall not be reduced by any other benefit payments made under other
disability program in effect for our employees. If Mr. Tandy's employment
terminates for a reason other than just cause, he will be entitled to purchase
from us family medical insurance through any group health plan maintained by us.
Mr. Tandy's agreement also contains a provision stating that in the event of the
termination of employment in connection with any change in control of Community
First Bancorp, Inc. or Community First Bank, Mr. Tandy will be paid a lump sum
amount equal to 2.99 times his five-year average annual taxable cash
compensation. If such payment had been made under the agreement as of September
30, 2006, such payment would have equaled approximately $318,000.
TRANSACTIONS WITH MANAGEMENT
From time to time, Community First Bank engages in banking transactions
with its directors, officers and their associates in the ordinary course of
business. At September 30, 2006, approximately $591,000 of loans were
outstanding to directors and executive officers. Loans to directors and
executive officers are only made in the ordinary course of business of Community
First Bank and on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons and do not
56
involve more than the normal risk of collectibility or present other unfavorable
features. Community First Bank waives certain loan document and other fees for
full-time employees, including full-time executive officers.
The following table sets forth information on all loans outstanding to
executive officers during the last fiscal year where the aggregate outstanding
indebtedness exceeded $60,000 and fees were waived.
HIGHEST
OUTSTANDING BALANCE AT
NAME AND TITLE TYPE OF LOAN RATE BALANCE 12/31/05
- -------------- ------------ ---- ------- --------
William M. Tandy Home Mortgage 5.25% $231,331 $228,070
President Home Equity 9.25% 72,463 71,602
Charlotte Sellers Home Mortgage 5.50% $ 52,321 $ 47,363
Senior Vice President Automobile 6.75% 9,569 5,806
Unsecured 12.00% 4,892 3,416
Michael D. Wortham Home Mortgage 6.00% $ 75,855 $ 73,862
Vice President
During the fiscal year ended December 31, 2005, Directors Steven E. Carson
and J. Craig Riddle lent Community First Bancorp, Inc. $150,000 and $200,000,
respectively, to allow it to pay down its indebtedness to a third-party
financial institution as required by that institution. The loans provided for
the payment of principal and interest at the rate of 7.50% per annum at
maturity. The loans have been extended and are scheduled to mature on November
15, 2006. During the fiscal year ended December 31, 2005, Community First Bank
paid $19,871 for office supplies and furniture purchased from Happy's, Inc., an
office supply store of which Director Vaughn is a co-owner.
57
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of the common stock
as of the date of this prospectus by: (i) persons believed by Community First
Bancorp, Inc. to beneficially own more than five percent (5%) of the common
stock; (ii) Community First Bancorp, Inc.'s directors and Named Executive
Officers; and (iii) all directors and executive officers of Community First
Bancorp, Inc. as a group. Unless otherwise noted below, we believe that each
person named in the table has or will have the sole voting and sole investment
power with respect to each of the securities reported as owned by such person.
NUMBER OF SHARES PERCENT OF
NAME BENEFICIALLY OWNED (1) CLASS (2)
- ---- ---------------------- ---------
William M. Tandy 6,636 2.02%
Michael D. Wortham 491 0.15
Ralph T. Teague 6,333 1.93
Paul W. Arison 9,357 2.85
Charlotte E. Baldwin 2,320 0.71
Steven E. Carson 6,570 2.00
Charles G. Ramsey 6,291 1.92
J. Craig Riddle 13,208 4.03
C. Barry Vaughn 5,156 1.57
All directors and executive officers 56,362 17.18
as a group (11 persons)
Gary B. Kivett 18,800 5.73
P.O. Box 707
Spruce Pine, NC 28777
Israel Englander 25,500 (3) 7.77
Millenium Management, L.L.C.
Millenco, L.P.
666 Fifth Avenue
New York, NY 10103
<FN>
__________
(1) For purposes of this table, a person is deemed to be the beneficial
owner of any shares of Common Stock if he or she has or shares voting
or investment power with respect to such Common Stock or has a right to
acquire beneficial ownership of such Common Stock at any time within 60
days. As used herein, "voting power" is the power to vote or direct the
voting of shares and "investment power" is the power to dispose or
direct the disposition of shares. Except as otherwise noted, ownership
is direct, and the named persons exercise sole voting and investment
power over the shares of the Common Stock.
(2) In calculating the percentage ownership of an individual or group, the
number of shares outstanding is deemed to include any shares which the
individual or group has the right to acquire within 60 days.
(3) According to the Statement on Schedule 13D filed by the Reporting
Persons on July 25, 2006, Millennium Management, L.L.C. is the general
partner of Millenco, L.P. and Israel Englander is the managing member
of Millennium Management, L.L.C.
</FN>
DESCRIPTION OF CAPITAL STOCK
Community First Bancorp, Inc. is authorized to issue 5,000,000 shares of
common stock, $0.01 par value per share, of which 328,088 shares are
outstanding, and 1,000,000 shares of preferred stock, $0.01 par value per share
of which no shares are outstanding. Each share of common stock has the same
relative rights as, and is identical in all respects with, each other share of
common stock. THE COMMON STOCK REPRESENTS NONWITHDRAWABLE CAPITAL AND IS NOT
INSURED BY US, THE FEDERAL DEPOSIT INSURANCE CORPORATION, OR ANY OTHER
GOVERNMENT AGENCY.
58
COMMON STOCK
VOTING RIGHTS. Each share of the common stock has the same relative rights
and will be identical in all respects with every other share of the common
stock. The holders of the common stock possess exclusive voting rights in
Community First Bancorp, Inc., except to the extent that shares of preferred
stock issued in the future may have voting rights, if any. Each holder of the
common stock is entitled to only one vote for each share held of record on all
matters submitted to a vote of holders of the common stock and is permitted to
cumulate their votes in the election of directors.
LIQUIDATION. In the unlikely event of the complete liquidation or
dissolution of Community First Bancorp, Inc., the holders of the common stock
will be entitled to receive all assets of Community First Bancorp, Inc.
available for distribution in cash or in kind, after payment or provision for
payment of: (i) all debts and liabilities of the Company (including all deposits
with us and accrued interest thereon); (ii) any accrued dividend claims; (iii)
liquidation preferences of any preferred stock which may be issued in the
future; and (iv) any interests in the liquidation account established upon the
stock conversion for the benefit of certain eligible account holders who
continue to have their deposits with us.
DIVIDENDS. From time to time, dividends may be declared and paid to the
holders of the common stock, who will share equally in any such dividends.
RESTRICTIONS ON ACQUISITION OF THE COMMON STOCK. See "Restrictions on
Acquisition of Community First Bancorp, Inc." for a discussion of the
limitations on acquisition of shares of the common stock.
OTHER CHARACTERISTICS. Holders of the common stock do not have preemptive
rights with respect to any additional shares of the common stock which may be
issued. The common stock is not subject to call for redemption, and the
outstanding shares of common stock when issued and upon receipt by Community
First Bancorp, Inc. of the full purchase price therefor will be fully paid and
non-assessable.
TRANSFER AGENT AND REGISTRAR. The transfer agent and registrar for our
common stock is Illinois Stock Transfer Company, 223 West Jackson Boulevard,
Suite 1210, Chicago, Illinois 60606.
SERIAL PREFERRED STOCK
The Board of Directors is authorized to issue serial preferred stock and to
fix and state voting powers, designations, preferences or other special rights
of such shares and the qualifications, limitations and restrictions thereof,
subject to regulatory approval but without stockholder approval. If and when
issued, the serial preferred stock is likely to rank prior to the common stock
as to dividend rights, liquidation preferences, or both, and may have full or
limited voting rights. The Board of Directors, without stockholder approval, can
issue serial preferred stock with voting and conversion rights which could
adversely affect the voting power of the holders of the common stock. No shares
of series of preferred stock have been issued.
RESTRICTIONS ON ACQUISITIONS OF COMMUNITY FIRST BANCORP, INC.
The following discussion is a general summary of the provisions of the
articles of incorporation and bylaws of Community First Bancorp, Inc. and
certain other Maryland corporate law and regulatory provisions, which may be
deemed to have such an anti-takeover effect. The description of these provisions
is necessarily general and we refer you, in each case, to the articles of
incorporation and bylaws of Community First Bancorp, Inc. which are incorporated
herein by reference. See "Where You Can Find More Information" as to how to
obtain a copy of these documents.
59
PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS
RESTRICTION ON ACQUISITION OF COMMON STOCK; LIMITATIONS ON VOTING RIGHTS.
Our articles of incorporation provide that, for a period of five years after
completion of the stock conversion of Community First Bank, no person may,
directly or indirectly, acquire or offer to acquire beneficial ownership of more
than 10% of any class of equity security outstanding of Community First Bancorp,
Inc., unless the "continuing" Board of Directors has first approved the offer or
acquisition by a two-thirds vote. Any shares acquired in violation of this
restriction will not be counted as shares outstanding for voting purposes, nor
will the holder be entitled to vote such shares. After five years from the date
of conversion, should any party acquire the beneficial ownership of shares in
excess of 10%, the record holders of more than 10% of any outstanding class of
equity security of Community First Bancorp, Inc. who obtained such shares
without the requisite approval would be entitled to cast only one-hundredth
(1/100) of a vote for each share owned in excess of 10%, and the aggregate
voting power of such holders shall be allocated proportionately among such
record holders. A person is a beneficial owner of a security if he has the power
to vote or direct the voting of all or part of the voting rights of the
security, or has the power to dispose of or direct the disposition of the
security. Our articles of incorporation further provide that this provision
limiting voting rights may only be amended upon the vote of 80% of the
outstanding shares of voting stock unless the amendment has been approved by
two-thirds of the continuing directors.
ELECTION OF DIRECTORS. Our articles of incorporation provide that the Board
of Directors is divided into three staggered classes, with directors in each
class elected for three-year terms. As a result of this provision, it would take
two annual elections to replace a majority of the Board. Our bylaws provide that
the size of the Board of Directors may be increased or decreased only if
two-thirds of the directors then in office concur in such action. We have also
elected to be subject to certain provisions of Maryland law that provide that
any vacancy occurring in the Board of Directors, including a vacancy created by
an increase in the number of directors, shall be filled by the Board. Finally,
the articles impose certain notice and information requirements in connection
with the nomination by stockholders of candidates for election to the Board of
Directors or the proposal by stockholders of business to be acted upon at an
annual or special meeting of stockholders.
The articles of incorporation provide that a director may only be removed
for cause and only by the affirmative vote of at least 80% of the shares
entitled to vote generally in an election of directors cast at a meeting of
stockholders called for that purpose.
RESTRICTIONS ON CALL OF SPECIAL MEETING. In our articles of incorporation,
we have elected to be subject to certain provisions of Maryland law that provide
that special meetings of stockholders may be called only by a majority of the
Board of Directors, or a duly designated committee of the Board, or on the
written request of a majority of the stockholders.
ABSENCE OF CUMULATIVE VOTING. Our articles of incorporation provide that
stockholders may not cumulate their votes in the election of directors.
AUTHORIZED SHARES. The articles of incorporation authorize the issuance of
5,000,000 shares of common stock and 1,000,000 shares of preferred stock. The
shares of common stock and preferred stock were authorized in an amount greater
than that to be issued in the conversion to provide the Board of Directors with
as much flexibility as possible to effect, among other transactions, financings,
acquisitions, stock dividends, stock splits and the exercise of stock options.
However, these additional authorized shares may also be used by the Board of
Directors consistent with its fiduciary duty to deter future attempts to gain
control of Community First Bancorp, Inc. The Board of Directors also has sole
authority to determine the terms of any one or more series of Preferred Stock,
including voting rights, conversion rates, and liquidation preferences. As a
result of the ability to fix voting rights for a series of Preferred Stock, the
Board has the power, to the extent consistent with its fiduciary duty, to issue
a series of Preferred Stock to persons friendly to management in order to
attempt to block a post-tender offer merger or other transaction by which a
third party seeks control, and thereby assist management to retain its position.
Our Board currently has no plans for the issuance of additional shares, other
than the issuance of additional shares pursuant to this Offering and pursuant to
existing stock benefit plans.
60
PROCEDURES FOR CERTAIN BUSINESS COMBINATIONS. The articles of incorporation
require the affirmative vote of at least (i) 80% of the outstanding shares of
Community First Bancorp, Inc. entitled to vote in the election of directors and
(ii) two-thirds of the outstanding shares entitled to vote in the election of
directors and not held by "Related Persons" (as defined below), in order for
Community First Bancorp, Inc. to engage in or enter into certain "Business
Combinations," as defined in the articles of incorporation, with any Related
Person or any affiliates of the Related Person, unless the proposed transaction
has been approved in advance by two-thirds of Community First Bancorp, Inc.'s
Board of Directors, excluding those who are affiliated with the Related Person
or who were not directors prior to the time the "Related Person" became the
"Related Person." Absent this provision, only the approval of two-thirds of the
shares outstanding would be generally required unless the Maryland Business
Combination Statute described below applies.
The term "Related Person" is defined to include any person and the
affiliates and associates of the person (other than Community First Bancorp,
Inc. or its subsidiary) who beneficially owns, directly or indirectly, 10% or
more of the outstanding shares of voting stock of Community First Bancorp, Inc.
Any amendment to this provision of the articles of incorporation requires the
affirmative vote of at least 80% of the shares of Community First Bancorp, Inc.
entitled to vote generally in an election of directors unless the amendment has
been pre-approved by two-thirds of the continuing directors, in which case a
majority of the outstanding shares is required. The term "Business Combination"
includes mergers between Community First Bancorp, Inc. and a Related Person,
transactions between Community First Bancorp, Inc. and the Related Person
involving 25% or more of Community First Bancorp, Inc.'s or the Related Person's
assets, the issuance of the securities of Community First Bancorp, Inc. or its
subsidiaries to the Related Person, the acquisition of the Related Person's
securities by Community First Bancorp, Inc. or a reclassification or
recapitalization involving Community First Bancorp, Inc.'s stock that has the
effect of increasing the Related Person's ownership by 5% or more.
AMENDMENT TO ARTICLES OF INCORPORATION AND BYLAWS. Amendments to our
articles of incorporation must be approved by our Board of Directors and also by
two-thirds of the outstanding shares of our voting stock, provided, however,
that approval by at least 80% of the outstanding voting stock is generally
required for certain provisions (i.e., provisions relating to restrictions on
the acquisition and voting of greater than 10% of the common stock; number,
classification, election and removal of directors; amendment of Bylaws; call of
special stockholder meetings; director liability; certain business combinations;
power of indemnification; and amendments to provisions relating to the foregoing
in the articles of incorporation). If the amendment is approved by two-thirds of
the Continuing Directors, however, the vote required for approval of the
amendment is reduced to a majority of shares outstanding.
The bylaws may be amended by a majority vote of the Board of Directors or
the affirmative vote of the holders of at least 80% of the outstanding shares of
Community First Bancorp, Inc. entitled to vote in the election of directors cast
at a meeting called for that purpose.
MARYLAND GENERAL CORPORATION LAW
The Maryland General Corporation Law contains several provisions described
below which are applicable to Community First Bancorp, Inc.
BUSINESS COMBINATIONS. Under the Maryland General Corporation Law, mergers,
consolidations and sales of substantially all of the assets of a Maryland
corporation must generally be approved by the affirmative vote of the holders of
two-thirds of the outstanding shares of stock entitled to vote thereon.
Maryland's Business Combination Statute, however, restricts certain transactions
between a Maryland corporation (or its majority owned subsidiaries), and any
person who, after the date the corporation has 100 or more beneficial owners of
its stock, beneficially owns 10% or more of the corporation's outstanding voting
stock, together with affiliates or associates thereof (an "Interested
Stockholder"). For a period of five years following the date that a stockholder
becomes an Interested Stockholder, Maryland's Business Combination Statute
generally prohibits the following
61
types of transactions between the corporation and the Interested Stockholder
(unless certain conditions, described below, are met):
(i) mergers, consolidations or share exchanges;
(ii) sales, leases, exchanges or other dispositions other than in the
ordinary course of business or pursuant to a dividend, in any twelve-month
period, of assets having an aggregate book value of 10% or more of the
total market value of the outstanding stock of the corporation or of its
net worth;
(iii) issuances or transfers by the corporation or any subsidiary
thereof of any equity securities of the corporation or any subsidiary
thereof having a market value of 5% or more of the total market value of
the outstanding stock of the corporation;
(iv) the adoption of a proposal or plan of liquidation or dissolution
of the corporation in which anything other than cash will be received by
the Interested Stockholder or any affiliate of any Interested Stockholder;
(v) any reclassification of securities, or recapitalization of the
corporation, or any merger, consolidation, or share exchange of the
corporation with any of its subsidiaries which has the effect of increasing
by 5% or more of the total number of shares, the proportionate amount of
the outstanding shares of any class of equity securities of the corporation
or any subsidiary thereof which is owned by an Interested Stockholder; and
(vi) the receipt by any Interested Stockholder or any affiliate
thereof of the benefit, directly or indirectly (except proportionately as a
stockholder), of any loan, advance, guarantee, pledge, or other financial
assistance or any tax credit or other tax advantage provided by the
corporation or any of its subsidiaries.
After the five-year moratorium on business combinations has expired, a
business combination must (i) be recommended by the Board of Directors and
approved by (a) 80% of the stockholders entitled to vote, and (b) two-thirds of
the disinterested stockholders, or (ii) meet the fair price requirements of the
business combination statute, or (iii) qualify for one of the statutory
exemptions. This restriction does not apply if before such person becomes an
Interested Stockholder, the Board of Directors approves the transaction in which
the Interested Stockholder becomes an Interested Stockholder or approves the
business combination, or a statutory exemption applies. A Maryland corporation
may exempt particular interested stockholders from the requirements of the
statute by resolution adopted by its Board of Directors prior to the date the
Interested Stockholder first became an Interested Stockholder. Our articles of
incorporation provide that the Business Combination Statute will not apply to
any business combination that has been approved by two-thirds of the continuing
directors as defined in the articles of incorporation.
CONTROL SHARE ACQUISITIONS. The Maryland General Corporation Law provides
that "control shares" of a Maryland corporation acquired in a "control share
acquisition" have no voting rights except to the extent approved by a vote of
two-thirds of the shares entitled to be voted on the matter, excluding shares of
stock owned by the acquiror or by officers or directors who are employees of the
corporation. "Control shares" are voting shares of stock which, if aggregated
with all other such shares of stock previously acquired by the acquiror, or in
respect of which the acquiror is able to exercise or direct the exercise of
voting power except solely by virtue of a revocable proxy, would entitle the
acquiror to exercise voting power in electing directors within one of the
following ranges of voting power:
(i) one-tenth or more but less than one-third;
(ii) one-third or more but less than a majority; or
(iii) a majority of all voting power.
62
Control shares do not include shares the acquiring person is then entitled
to vote as a result of having previously obtained stockholder approval. A
"control share acquisition" means the acquisition of control shares, subject to
certain exceptions for shares acquired through descent or distribution, in
satisfaction of a pledge or in a merger, consolidation or share exchange to
which the corporation is a party. The control share acquisition statute applies
to any Maryland corporation with 100 or more beneficial owners of its stock
other than a close corporation or an investment company.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses and
delivery of an "acquiring person statement"), may compel the corporation's Board
of Directors to call a special meeting of stockholders to be held within 50 days
of demand to consider the voting rights of the shares. If no request for a
meeting is made, the corporation may itself present the question at any
stockholders' meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement within 10 days following a
control share acquisition then, subject to certain conditions and limitations,
the corporation may redeem any or all of the control shares (except for those
which voting rights have previously been approved) for fair value, determined
without regard to the absence of voting rights for the control shares, as of the
date of the last control share acquisition or of any meeting of stockholders at
which the voting rights of such shares are considered and not approved.
Moreover, if voting rights for control shares are approved at a stockholders'
meeting and the acquiror becomes entitled to exercise or direct the exercise of
a majority or more of all voting power, other stockholders may exercise
appraisal rights. The fair value of the shares as determined for purposes of
such appraisal rights may not be less than the highest price per share paid by
the acquiror in the control share acquisition. The foregoing provisions may be
modified by a Maryland corporation's charter or bylaws. Our charter and bylaws,
however, do not contain a provision modifying these statutory provisions.
REGULATORY RESTRICTIONS
Federal law provides that no company, "directly or indirectly or acting in
concert with one or more persons, or through one or more subsidiaries, or
through one or more transactions," may acquire "control" of a savings
association at any time without the prior approval of the Office of Thrift
Supervision. In addition, any company that acquires such control becomes a
"savings and loan holding company" subject to registration, examination and
regulation as a savings and loan holding company. Control in this context means
ownership of, control of, or holding proxies representing more than 25% of the
voting shares of a savings association or the power to control in any manner the
election of a majority of the directors of such institution.
Federal law also provides that no "person," acting directly or indirectly
or through or in concert with one or more other persons, may acquire control of
a savings association unless at least 60 days prior written notice has been
given to the Office of Thrift Supervision and the Office of Thrift Supervision
has not objected to the proposed acquisition. Control is defined for this
purpose as the power, directly or indirectly, to direct the management or
policies of a savings association or to vote more than 25% of any class of
voting securities of a savings association. Under federal law (as well as the
regulations referred to below) the term "savings association" includes
state-chartered and federally chartered FDIC-insured institutions, federally
chartered savings and loans and savings banks whose accounts are insured by the
FDIC and holding companies thereof.
Federal regulations require that, prior to obtaining control of an insured
institution, a person, other than a company, must give 60 days notice to the
Office of Thrift Supervision and have received no Office of Thrift Supervision
objection to such acquisition of control, and a company must apply for and
receive Office of Thrift Supervision approval of the acquisition. Control
involves a 25% voting stock test, control in any manner of the election of a
majority of the institution's directors, or a determination by the Office of
Thrift Supervision that the acquiror has the power to direct, or directly or
indirectly to exercise a controlling influence over, the management or policies
of the institution. Acquisition of more than 10% of an institution's voting
stock, if the acquiror also is subject to any one of either "control factors,"
constitutes a rebuttable determination of control under the
63
regulations. The determination of control may be rebutted by submission to the
Office of Thrift Supervision, prior to the acquisition of stock or the
occurrence of any other circumstances giving rise to such determination, of a
statement setting forth facts and circumstances which would support a finding
that no control relationship will exist and containing certain undertakings. The
regulations provide that persons or companies which acquire beneficial ownership
exceeding 10% or more of any class of a savings association's stock after the
effective date of the regulations must file with the Office of Thrift
Supervision a certification that the holder is not in control of such
institution, is not subject to a rebuttable determination of control and will
take no action which would result in a determination or rebuttable determination
of control without prior notice to or approval of the Office of Thrift
Supervision, as applicable.
LEGAL MATTERS
The validity of the shares of common stock offered by this prospectus will
be passed upon for Community First Bancorp, Inc. by Malizia Spidi & Fisch, PC,
Washington, D.C.
EXPERTS
The audited financial statements as of and for the year ended December 31,
2005 included in this prospectus and in the registration statement have been
audited by King + Company, PSC, Independent Registered Public Accounting Firm,
as set forth in their report thereon appearing elsewhere herein and in the
registration statement and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
The audited financial statements as of and for the year ended December 31,
2004 included in this prospectus and in the registration statement have been
audited by BKD, LLP, Independent Registered Public Accounting Firm, as set forth
in their report thereon appearing elsewhere herein and in the registration
statement and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the information requirements of the Securities Exchange
Act of 1934, as amended, and we file annual, quarterly and current reports,
proxy statements and other information with the Securities and Exchange
Commission. You may read and copy any document that we file at the Securities
and Exchange Commission's public reference room facility located at 100 F
Street, N.E., Room 1580, Washington, D.C. 20549. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information on the public
reference room. The Securities and Exchange Commission also maintains an
Internet site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding issuers, including us, that file
documents with the Securities and Exchange Commission electronically through the
Securities and Exchange Commission's electronic data gathering, analysis and
retrieval system known as EDGAR. On EDGAR, our reports are listed under
"Community First Bancorp, Inc."
This prospectus is part of a registration statement we have filed with the
Securities and Exchange Commission. Because the rules and regulations of the
Securities and Exchange Commission allow us to omit certain portions of the
registration statement from this prospectus, this prospectus does not contain
all the information set forth in the registration statement. You may review the
registration statement and the exhibits filed with the registration statement
for further information regarding us and the shares of our common stock being
offered by this prospectus. The registration statement and its exhibits may be
inspected at the public reference facility of the Securities and Exchange
Commission at the location described above.
64
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AT AND FOR THE NINE
MONTHS ENDED SEPTEMBER 30, 2006
Condensed Consolidated Balance Sheets as of September 30, 2006 (unaudited) and
December 31, 2005 F-1
Condensed Consolidated Statements of Operations for the nine months ended
September 30, 2006 and 2005 (unaudited) F-2
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2006 and 2005 (unaudited) F-3
Condensed Consolidated Statements of Changes in Stockholders' Equity for the
nine months ended September 30, 2006 and 2005 (unaudited) F-5
Notes to Condensed Consolidated Financial Statements (unaudited) F-6
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2005 AND 2004
Reports of Independent Registered Public Accounting Firms F-10
Consolidated Balance Sheets as of December 31, 2005 and 2004 F-12
Consolidated Statements of Operations for the years ended December 31, 2005 and 2004 F-13
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2005 and 2004 F-14
Consolidated Statements of Cash Flows for the years ended December 31, 2005 and 2004 F-15
Notes to Consolidated Financial Statements F-16
64
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 F-1
COMMUNITY FIRST BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------------------
2006 2005
------------- -------------
INTEREST AND DIVIDEND INCOME:
Loans $ 3,074,640 $ 2,460,955
Investment securities 37,584 64,682
Dividends on FHLB Stock 31,491 25,405
------------- -------------
Total interest and dividend income 3,143,715 2,551,042
------------- -------------
INTEREST EXPENSE:
Deposits 1,443,233 969,485
FHLB advances 367,642 250,587
Other borrowings 73,854 33,832
------------- -------------
Total interest expense 1,884,729 1,253,904
------------- -------------
Net interest income 1,258,986 1,297,138
Provision for loan losses 17,500 69,500
------------- -------------
Net interest income after provision for
loan losses 1,241,486 1,227,638
------------- -------------
NONINTEREST INCOME:
Service charges and fees 345,827 272,721
Gain (loss) on sale of foreclosed assets -- (2,000)
Foreclosed real estate expense, net (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 4,633 4,600
Other income 22,709 11,626
------------- -------------
Total noninterest income 375,243 280,483
------------- -------------
NONINTEREST EXPENSE:
Compensation and benefits 782,659 768,610
Directors fees 13,200 32,400
Occupancy expense 239,441 243,825
Insurance premiums 30,669 21,358
Data processing 200,877 177,828
Advertising 71,569 73,352
Office supplies and postage 90,288 89,647
Payroll and other taxes 114,629 111,224
Professional fees 104,179 76,581
Other operating expenses 274,729 245,993
------------- -------------
Total noninterest expense 1,922,240 1,840,818
------------- -------------
LOSS BEFORE INCOME TAXES (305,511) (332,697)
PROVISION (CREDIT) FOR INCOME TAXES -- --
------------- -------------
NET LOSS $ (305,511) $ (332,697)
============= =============
BASIC LOSS PER SHARE $ (0.99) $ (1.20)
============= =============
DILUTED LOSS PER SHARE $ (0.99) $ (1.20)
============= =============
See Notes to Condensed Consolidated Financial Statements F-2
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 used by operating activities:
FHLB stock dividend (31,300) (24,600)
Provision for loan losses 17,500 69,500
Depreciation, amortization and accretion 154,602 162,778
Loss on sale of foreclosed assets -- 2,000
Loss on sale of repossessed assets -- 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 used by 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 F-3
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 F-4
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 F-5
COMMUNITY FIRST BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 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.
NOTE 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
material intercompany balances and transactions have been eliminated in
consolidation.
F-6
NOTE 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 ENDED
SEPTEMBER 30,
2005
--------------
Net loss, as reported $(332,697)
Less total stock-based employee compensation cost
determined under the fair value based method, net
of income taxes 9,718
---------
Pro forma net loss $(342,415)
=========
Earnings per share:
Basic - as reported $ (1.20)
=========
Basic - pro forma $ (1.23)
=========
Diluted - as reported $ (1.20)
=========
Diluted - pro forma $ (1.23)
=========
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
the three and nine months ended September 30, 2006 relating to these
shares of restricted stock was approximately $3,000 and $6,000,
respectively.
F-7
NOTE 4: OTHER COMPREHENSIVE LOSS
Other comprehensive loss components and related taxes were as follows:
FOR THE NINE
MONTH PERIOD ENDED
SEPTEMBER 30,
2006
------------------
Unrealized loss on available-for-sale securities
Before tax effect $(19,705)
Tax benefit 6,700
--------
Other comprehensive income (loss) $(13,005)
========
NOTE 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)
========= =========
F-8
NOTE 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
FOR CAPITAL ADEQUACY PROMPT CORRECTIVE ACTION
ACTUAL PURPOSES REQUIRED PROVISIONS REQUIRED
---------------------------------------------------------------------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
---------------------------------------------------------------------------------------
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
FOR CAPITAL ADEQUACY PROMPT CORRECTIVE ACTION
ACTUAL PURPOSES REQUIRED PROVISIONS REQUIRED
---------------------------------------------------------------------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
---------------------------------------------------------------------------------------
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%
F-9
REPORT OF INDEPENDENT REGISTERED
--------------------------------
PUBLIC ACCOUNTING FIRM
----------------------
Audit Committee, Board of Directors and Stockholders
Community First Bancorp, Inc.
Madisonville, Kentucky
We have audited the accompanying consolidated balance sheet of the Community
First Bancorp, Inc. as of December 31, 2005, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2005 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the
Community First Bancorp, Inc. as of December 31, 2005 and the results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
King + Company, PSC
/s/ King + Company, PSC
Louisville, Kentucky
February 23, 2006
F-10
Report of Independent Registered Public Accounting Firm
Audit Committee, Board of Directors
and Stockholders
Community First Bancorp, Inc.
Madisonville, Kentucky
We have audited the accompanying consolidated balance sheet of Community First
Bancorp, Inc. (Company) as of December 31, 2004, and the related consolidated
statement of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2004, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
/s/ BKD, LLP
Louisville, Kentucky
February 25, 2005
F-11
COMMUNITY FIRST BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2005 AND 2004
2005 2004
----------------------------
ASSETS
Cash and due from banks $ 785,814 $ 614,155
Interest-bearing demand deposits 1,223,134 2,179,041
Interest-bearing time deposits -- 3,000,000
------------ ------------
Cash and cash equivalents 2,008,948 5,793,196
Held-to-maturity securities 65,522 88,965
Available-for-sale securities 1,703,147 2,215,285
Loans receivable, net of the allowance for loan loss of $387,822
and $319,937, for December 31, 2005 and 2004, respectively 64,578,288 51,931,555
Premises and equipment, net 2,286,004 2,495,324
Federal Home Loan Bank (FHLB) stock 721,900 687,000
Interest receivable 288,501 227,066
Deferred income taxes 16,587 14,521
Other assets 59,817 50,467
------------ ------------
Total assets $ 71,728,714 $ 63,503,379
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 54,476,673 $ 46,466,036
FHLB advances 13,000,000 13,000,000
Advances under line of credit 850,000 750,000
Loans from directors 400,000 --
Interest payable 158,391 56,231
Other liabilities 123,649 67,617
------------ ------------
Total liabilities 69,008,713 60,339,884
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, authorized 1,000,000 shares -- --
Common stock, $.01 par value; authorized 5,000,000 shares
authorized; 277,725 shares, issued and outstanding 2,777 2,777
Additional paid-in capital 2,457,428 2,457,428
Retained earnings - substantially restricted 291,993 731,477
Accumulated other comprehensive loss (32,197) (28,187)
------------ ------------
Total stockholders' equity 2,720,001 3,163,495
------------ ------------
Total liabilities and stockholders' equity $ 71,728,714 $ 63,503,379
============ ============
See Notes to Consolidated Financial Statements
F-12
COMMUNITY FIRST BANCORP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
--------------------------------
INTEREST AND DIVIDEND INCOME
Loans $ 3,439,471 $ 2,574,729
Investment securities and deposits 80,730 89,988
Dividends on FHLB stock 35,718 26,931
----------- -----------
Total interest and dividend income 3,555,919 2,691,648
----------- -----------
INTEREST EXPENSE
Deposits 1,340,870 950,342
FHLB advances 387,922 126,856
Other borrowings 54,581 1,751
----------- -----------
Total interest expense 1,783,373 1,078,949
----------- -----------
NET INTEREST INCOME 1,772,546 1,612,699
PROVISION FOR LOAN LOSSES 78,500 163,500
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,694,046 1,449,199
----------- -----------
NONINTEREST INCOME
Service charges and fees 326,462 215,602
Loss on sale of fixed assets -- (12,702)
Loss on sale of other real estate (2,000) (449)
Foreclosed real estate expense, net (4,356) (4,739)
Insurance commissions and premiums 5,189 3,484
Other income 20,850 14,601
----------- -----------
Total noninterest income 346,145 215,797
----------- -----------
NONINTEREST EXPENSE
Compensation and benefits 1,043,406 1,070,113
Directors fees 43,200 43,200
Occupancy expense 335,013 316,300
Insurance premiums 31,352 38,975
Data processing 235,385 218,077
Advertising 91,332 168,813
Office supplies, telephone and postage 120,885 175,702
Payroll and other taxes 148,459 111,875
Professional fees 105,864 85,791
Data processor conversion expenses -- 102,595
Other operating expenses 324,779 249,543
----------- -----------
Total noninterest expense 2,479,675 2,580,984
----------- -----------
LOSS BEFORE INCOME TAX (439,484) (915,988)
PROVISION (CREDIT) FOR INCOME TAXES -- 115,580
------------ ----------
NET LOSS $ (439,484) $ (1,031,568)
=========== ===========
BASIC LOSS PER SHARE $ (1.58) $ (3.71)
DILUTED LOSS PER SHARE $ (1.58) $ (3.71)
See Notes to Consolidated Financial Statements
F-13
COMMUNITY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2005 AND 2004
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
---------------- PAID-IN RETAINED COMPREHENSIVE COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) INCOME (LOSS) TOTAL
-----------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2004 277,725 $ 2,777 $2,466,428 $ 1,763,045 $ (23,483) $4,208,767
Comprehensive income (loss)
Net loss -- -- -- (1,031,568) -- $(1,031,568) (1,031,568)
Change in unrealized depreciation
on available-for-sale securities,
net of taxes -- -- -- -- (4,704) (4,704) (4,704)
----------
Total comprehensive loss (1,036,272)
Cost related to issuance of stock -- -- (9,000) -- -- (9,000)
-------- ------ --------- ----------- -------- ----------
BALANCE, DECEMBER 31, 2004 277,725 2,777 2,457,428 731,477 (28,187) 3,163,495
Comprehensive income (loss)
Net loss -- -- -- (439,484) (439,484) (439,484)
Change in unrealized depreciation
on available-for-sale securities,
net of taxes -- -- -- -- (4,010) (4,010) (4,010)
-----------
Total comprehensive loss $ (443,494)
==========
------- ------ --------- ---------- ------- ---------
BALANCE, DECEMBER 31, 2005 277,725 $ 2,777 $2,457,428 $ 291,993 $(32,197) $2,720,001
======= ====== ========= ========== ======= =========
See Notes to Consolidated Financial Statements F-14
COMMUNITY FIRST BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005 AND 2004
2005 2004
----------------------------------------
OPERATING ACTIVITIES
Net loss $ (439,484) $ (1,031,568)
Items not requiring (providing) cash
Provision for loan losses 78,500 163,500
Depreciation, amortization and accretion 216,032 191,776
Deferred compensation for restricted stock plan 7,470 --
Loss on disposal of equipment -- 12,702
Loss on sale of other real estate owned 2,000 449
Deferred income taxes -- 115,580
FHLB stock dividends (34,900) (27,400)
Changes in
Interest receivable (61,435) (67,916)
Other assets (34,350) 2,436
Interest payable and other liabilities 383,901 (37,323)
------------- ------------
Net cash provided by (used in) operating activities 117,734 (677,764)
------------- ------------
INVESTING ACTIVITIES
Net change in loans (12,725,233) (17,028,913)
Purchases of available-for-sale securities -- (252,570)
Proceeds from maturities of available-for-sale securities 500,000 --
Proceeds from maturities of held-to-maturity securities 23,443 1,335,102
Purchase of premises and equipment (650) (741,378)
Proceeds from sale of foreclosed assets 23,000 14,147
------------- ------------
Net cash used in investing activities (12,179,440) (16,673,612)
-------------- ------------
FINANCING ACTIVITIES
Net increase in deposits 7,777,458 13,294,510
Repayment of FHLB advances (15,000,000) (4,500,000)
Proceeds from FHLB advances 15,000,000 12,500,000
Proceeds from line of credit and notes payable 900,000 750,000
Repayment of line of credit and notes payable (400,000) --
Costs of issuance of stock -- (9,000)
------------- ------------
Net cash provided by financing activities 8,277,458 22,035,510
------------- ------------
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS (3,784,248) 4,684,134
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,793,196 1,109,062
------------- ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,008,948 $ 5,793,196
============= ============
SUPPLEMENTAL CASH FLOWS INFORMATION
Interest paid $ 1,672,758 $ 1,034,411
Loans transferred to foreclosed real estate $ 29,879 $ 42,596
Loans to facilitate sale of foreclosed real estate $ 30,000 $ 28,000
See Notes to Consolidated Financial Statements F-15
COMMUNITY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Community First Bancorp, Inc. (Company) is a thrift holding company
whose principal activity is the ownership and management of its wholly
owned subsidiary, Community First Bank (Bank). The Bank is primarily
engaged in providing a full range of banking and financial services to
individual and corporate customers, primarily in Madisonville,
Kentucky and the surrounding area. The Bank is subject to competition
from other financial institutions. The Bank is subject to the
regulation of certain federal and state agencies and undergoes
periodic examinations by those regulatory authorities.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and the Bank. All significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States of
America, requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for losses on
loans, valuation allowance related to deferred taxes, and the
valuation of real estate acquired in connection with foreclosures or
in satisfaction of loans. In connection with the determination of the
allowances for losses on loans and foreclosed real estate, management
obtains independent appraisals for significant properties.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments with original maturities
of three months or less to be cash equivalents.
INVESTMENT SECURITIES
Available-for-sale securities, which include any security for which
the Bank has no immediate plan to sell but which may be sold in the
future, are carried at fair value. Unrealized gains and losses are
recorded, net of related income tax effects, in other comprehensive
income.
F-16
COMMUNITY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
Held-to-maturity securities, which include any security for which the
Bank has the positive intent and ability to hold until maturity, are
carried at historical cost adjusted for amortization of premiums and
accretion of discounts.
Amortization of premiums and accretion of discounts are recorded as
interest income from securities. Realized gains and losses are
recorded as net security gains (losses). Gains and losses on sales of
securities are determined on the specific-identification method.
LOANS
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoffs are reported at their
outstanding principal balances adjusted for any charge-offs and the
allowance for loan losses. Interest income is reported on the interest
method. Generally, loans are placed on nonaccrual status at 90 days
past due and interest is considered a loss, unless the loan is well
secured and in the process of collection.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are estimated
to have occurred through a provision for loan losses charged to
income. Loan losses are charged against the allowance when management
believes the uncollectibility of a loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective, as it requires estimates that are
susceptible to significant revision as more information becomes
available.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status,
collateral value and the probability of collecting scheduled principal
and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as
impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration
all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the
borrower's prior payment record and the amount of the shortfall in
relation to the principal and interest owed. Impairment is measured on
a loan-by-loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the
loan's effective interest rate, the loan's obtainable market price or
the fair value of the collateral if the loan is collateral dependent.
F-17
COMMUNITY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
Large groups of smaller balance homogenous loans are collectively
evaluated for impairment. Accordingly, the Bank does not separately
identify individual consumer and residential loans for impairment
measurements.
PREMISES AND EQUIPMENT
Depreciable assets are stated at cost, less accumulated depreciation.
Depreciation is charged to expense primarily using the straight-line
method over the estimated useful lives of the related assets as
follows:
Buildings 39 - 50 years
Building improvements 7 - 40 years
Furniture and equipment 3 - 15 years
FEDERAL HOME LOAN BANK STOCK
Federal Home Loan Bank (FHLB) stock is a required investment for
institutions that are members of the FHLB system. The required
investment in the common stock is based on a predetermined formula.
FORECLOSED REAL ESTATE
Assets acquired through, or in lieu of, loan foreclosure are held for
sale and are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. Subsequent to foreclosure,
management periodically performs valuations and the assets are carried
at the lower of carrying amount or fair value less cost to sell.
Revenue and expenses from operations and changes in the valuation
allowance are included in net income or expense from foreclosed
assets.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the tax effects
of differences between the financial statement and tax basis of assets
and liabilities. A valuation allowance is established to reduce
deferred tax assets if it is more likely than not that a deferred tax
asset will not be realized. The Company files consolidated income tax
returns with its subsidiary.
STOCK OPTIONS
The Company has a stock-based employee compensation plan, which is
described more fully in Note 8. 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.
F-18
COMMUNITY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
YEAR ENDED DECEMBER 31,
2005 2004
----------------------------
Net loss, as reported $ (439,484) $ (1,031,568)
Less total stock-based employee compensation cost
determined under the fair value based method, net
of income taxes 0 7,558
----------- -------------
Pro forma net loss $ (439,484) $ (1,039,126)
Loss per share:
Basic - as reported $ (1.58) $ (3.71)
=========== =============
Basic - pro forma $ (1.58) $ (3.74)
=========== =============
Diluted - as reported $ (1.58) $ (3.71)
=========== =============
Diluted - pro forma $ (1.58) $ (3.74)
=========== =============
ADVERTISING COSTS
Advertising costs are expensed as incurred.
EARNINGS PER SHARE
Earnings per share have been computed based upon the weighted-average
common shares outstanding during 2005 and 2004. Since there are no
dilutive securities, basic and diluted earnings per share is the same.
RECLASSIFICATIONS
Certain reclassifications have been made to the 2004 financial
statements to conform to the 2005 financial statement presentation.
These reclassifications had no effect on net income.
NOTE 2: CONVERSION TO STOCK OWNERSHIP
On June 26, 2003, the Bank consummated its conversion from a federally
charted mutual savings bank to a federally chartered stock savings
bank pursuant to the Bank's plan of conversion. Concurrent with the
formation of the Company, the Company acquired 100% of the stock of
the Bank and issued 277,725 shares of the Company's common stock, with
$.01 par value, at $10.00 per share. Net proceeds of the Company's
stock issuance, after costs of approximately $308,000, were
approximately $2,469,000. Additional costs of approximately $9,000
were incurred during 2004.
F-19
COMMUNITY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 3: INVESTMENT SECURITIES
The amortized cost and approximate fair values of securities are as
follows:
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
-------------------------------------------------------------------------
AVAILABLE-FOR-SALE SECURITIES
December 31, 2005
U. S. Government
agencies $ 1,751,931 $ 0 $ 48,784 $ 1,703,147
============== ============ ============== ============
December 31, 2004
U. S. Government
agencies $ 2,257,993 $ 0 $ 42,708 $ 2,215,285
============== ============ ============== ============
HELD-TO-MATURITY SECURITIES
December 31, 2005
Mortgage-backed
securities $ 65,522 $ 3,901 $ 166 $ 69,257
============ ============ ============== ============
December 31, 2004
Mortgage-backed
securities $ 88,965 $ 6,060 $ 0 $ 95,025
============ ============ ============== ============
The amortized cost and fair value of debt securities, including
mortgage-backed securities at December 31, 2005, by contractual maturity
are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
AVAILABLE-FOR-SALE HELD-TO-MATURITY
---------------------------------------------------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---------------------------------------------------------------------
Within one year $ 1,000,000 $ 981,720 -- --
One to five years 751,931 721,427 -- --
Five to 10 years -- -- -- --
Mortgage-backed securities -- -- $ 65,522 $ 69,257
------------ ---------- ----------- ----------
$ 1,751,931 $ 1,703,147 $ 65,522 $ 69,257
============ =========== ============ ===========
Investment securities with a carrying value of approximately $191,000 and
$2,035,000 at December 31, 2005 and 2004, respectively, were pledged as
collateral for certain customer deposits.
F-20
COMMUNITY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
Certain investments in debt securities are reported in the financial
statements at an amount less than their historical cost. Total fair value
of these investments at December 31, 2005 and 2004, was $1,703,147 and
$2,215,285, which is approximately 96% and 95% of the Bank's
available-for-sale and held-to-maturity investment portfolio. These
declines primarily resulted from recent increases in market interest rates
and failure of certain investments to maintain consistent credit quality
ratings.
Based on evaluation of available evidence, including recent changes in
market interest rates, credit rating information and information obtained
from regulatory filings, management believes the declines in fair value for
these securities are temporary.
Should the impairment of any of these securities become other than
temporary, the cost basis of the investment will be reduced and the
resulting loss recognized in net income in the period the
other-than-temporary impairment is identified.
The following table shows our investments' gross unrealized losses and fair
value, aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position at December
31, 2005 and 2004:
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
------------------------------------------------------------------------------------
DESCRIPTION OF FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
SECURITIES VALUE LOSSES VALUE LOSSES VALUE LOSSES
--------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2005
Mortgage-backed
securities $ 19,664 $ 166 $ -- $ -- $ 19,664 $ 166
U. S. Government agencies -- -- 1,703,147 48,784 1,703,147 48,784
-------- -------- --------- --------- --------- ---------
Total temporarily
impaired
securities $ 19,664 $ 166 $1,703,147 $ 48,784 $1,722,811 $ 48,950
======== ========= ========= ========= ========= =========
LESS THAN 12 MONTHS 12 MONTHS OR MORE TOTAL
------------------------------------------------------------------------------------
DESCRIPTION OF FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
SECURITIES VALUE LOSSES VALUE LOSSES VALUE LOSSES
--------------------------------------------------------------------------------------------------------------
DECEMBER 31, 2004
U. S. Government
agencies $2,215,285 $ 42,708 $ -- $ -- $2,215,285 $ 42,708
--------- --------- --------- --------- --------- ---------
Total temporarily
impaired
securities $2,215,285 $ 42,708 $ 0 $ 0 $2,215,285 $ 42,708
========= ========= ========= ========= ========= =========
F-21
COMMUNITY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 4: LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans at December 31 are summarized as follows:
2005 2004
----------------------------------
Real estate mortgage loans
One-to-four family residential - first $ 47,739,224 $ 39,757,639
One-to-four family residential - second 1,755,309 1,208,539
Multi-family 791,323 1,075,088
Commercial 7,355,604 2,952,877
Construction 2,304,825 1,899,906
Other loans
Consumer installment 194,396 252,549
Commercial 819,447 2,369,656
Automobile 2,897,924 1,904,563
Passbook 397,879 330,085
Overdrafts 51,792 12,104
Other 658,387 488,486
--------------- ---------------
64,966,110 52,251,492
Less
Allowance for loan losses 387,822 319,937
--------------- ---------------
Net loans $ 64,578,288 $ 51,931,555
=============== ===============
Activity in the allowance for loan losses was as follows:
2005 2004
----------------------------------------
Balance, beginning of year $ 319,937 $ 180,955
Provision charged to expense 78,500 163,500
Losses charged off (16,192) (25,434)
Recoveries 5,577 916
--------------- ---------------
Balance, end of year $ 387,822 $ 319,937
=============== ===============
At December 31, 2005 and 2004, the total recorded investment in loans on
nonaccrual amounted to approximately $262,716 and $130,968, respectively,
and the total recorded investment in loans past due 90 days or more and
still accruing interest amounted to approximately $43,900 and $165,700,
respectively. At December 31, 2005 and 2004, there were no loans, which
were specifically classed as impaired loans.
F-22
COMMUNITY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
In the ordinary course of business, the Bank has and expects to continue to
have transactions, including borrowings, with its officers and directors.
In the opinion of management, such transactions were on substantially the
same terms, including interest rates and collateral, as those prevailing at
the time of comparable transactions with other persons and did not involve
more than a normal risk of collectibility or present any other unfavorable
features to the Bank. Loans to such borrowers, at December 31, are
summarized as follows:
2005 2004
---------------------------------
Balance, beginning of year $ 429,651 $ 544,102
Loan proceeds 239,382 105,853
Payments (44,224) (220,304)
-------------- -------------
Balance, end of year $ 624,809 $ 429,651
=============== =============
Letters of Credit $ 7,000 $ 0
=============== =============
NOTE 5: PREMISES AND EQUIPMENT
Major classifications of premises and equipment stated at cost, are as
follows:
2005 2004
-----------------------------------
Land $ 261,649 $ 261,649
Buildings and improvements 1,769,087 1,769,087
Furniture, fixtures and equipment 968,488 971,307
--------------- ---------------
2,999,224 3,002,043
Less accumulated depreciation 713,220 506,719
--------------- ---------------
Net premises and equipment $ 2,286,004 $ 2,495,324
=============== ===============
Depreciation expense for the year ended December 31, 2005 and 2004 totaled
$209,970 and $183,816, respectively.
F-23
COMMUNITY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 6: DEPOSITS
Deposits at December 31 are summarized as follows:
2005 2004
----------------------------------------------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
----------------------------------------------------------------
Non-interest bearing
demand $ 6,143,507 11% $ 4,047,403 9%
NOW accounts 2,642,483 5 2,183,898 5
Money market accounts 2,099,769 4 3,467,230 7
Passbook savings 3,789,177 7 4,091,194 9
Time deposits 39,801,737 73 32,676,311 70
-------------- --------- -------------- ---------
$ 54,476,673 100% $ 46,466,036 100%
============== ========= ============== =========
Time deposit accounts in denominations of $100,000 or more were $9,048,175
and $9,646,446, at December 31, 2005 and 2004, respectively.
At December 31, 2005, the scheduled maturities of time deposit were as
follows:
2006 $ 24,239,440
2007 10,085,443
2008 3,900,097
2009 289,130
2010 1,287,627
---------------
$ 39,801,737
===============
Interest expense on deposits for the years ended December 31, are
summarized as follows:
2005 2004
-----------------------------------
Certificates of deposit $ 1,305,311 $ 922,649
Money market accounts 13,626 11,343
NOW accounts 6,932 5,517
Passbook savings 15,001 10,903
--------------- ---------------
1,340,870 950,412
Less interest retained for early withdrawal -- 70
--------------- ---------------
$ 1,340,870 $ 950,342
=============== ===============
In the ordinary course of business, the Bank has continued to have
transactions, including deposits, with its officers and directors. In the
opinion of management, such transactions were on substantially the same
terms, including interest rates prevailing at the time, of comparable
transactions with other persons. Deposits from officers and directors
totaled $363,622 and $490,335, on December 31, 2005 and 2004, respectively.
F-24
COMMUNITY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
The aggregate amount of overdrawn deposit accounts reclassified as
loans as of December 31, 2005 and 2004 totaled $35,100 and $31,858,
respectively.
NOTE 7: FEDERAL HOME LOAN BANK ADVANCES AND OTHER SHORT-TERM BORROWINGS
Short-term debt consisted of short-term fixed rate advances from FHLB
totaling $13,000,000 at December 31, 2005 and 2004. The advances at
December 31, 2005 and 2004, have a 4.33% and a 2.42% variable interest
rate respectively. Advances from FHLB are collateralized with the
Bank's mortgage portfolio to 135% of the balance of the note (blanket
mortgage collateral) in the amount of $17,550,000 and is further
collateralized by the Bank's stock in the FHLB. At December 31, 2005
the Bank had an additional borrowing capacity with the Federal Home
Loan Bank of approximately $18 million.
LINE OF CREDIT
The Company has a $1,250,000 revolving line of credit, which expires
on March 31, 2006. At December 31, 2005, $850,000 was advanced against
this line. The line of credit is restricted by various financial and
non-financial covenants, one of which limits the Company's total
non-FHLB borrowing capacity to $1,250,000. The Company's current draws
of $850,000 coupled with its notes payable to directors of $400,000
equals its total borrowing capacity under such covenant and prevents
further draws on this line without written consent by the Banker's
Bank. The line is collateralized by all of the Company's stock in the
Bank. Interest varies monthly and is based on the prime rate plus
.25%, which was 7.50% on December 31, 2005. Interest is payable
monthly and principal is due at maturity.
RELATED PARTY NOTES PAYABLE
The Company has four unsecured notes payable to directors of the Bank
totaling $400,000. These loans are set to mature on March 31, 2006.
The notes bear a fixed rate of interest of 7.50%. Interest is payable
monthly and principal is due at maturity.
As of December 31, 2005, the Company maintained cash reserves of
$45,603 for payment of interest on its Bankers Bank line of credit and
its notes payable to directors.
NOTE 8: EMPLOYEE BENEFITS
DEFINED BENEFIT PLAN
The Bank is a participant in a pension fund known as the Pentegra
Group. This plan is a multi-employer plan; separate actuarial
valuations are not made with respect to each participating employer.
The plan required contributions in the amount of approximately $64,800
and $59,700 for the years ended December 31, 2005 and 2004,
respectively. The plan provides pension benefits for substantially all
of the Bank's employees.
F-25
COMMUNITY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
DEFINED CONTRIBUTION PLAN
The Bank began a retirement savings 401(k) plan covering substantially
all employees on January 1, 2004. Employees may contribute up to 20%
of their compensation with the Bank matching a certain percentage of
the employee's compensation using a formula to be determined each
year. The Bank made no matching contribution to the plan in 2005 or
2004.
RESTRICTED STOCK PLAN
The Company has a Restricted Stock Plan, covering 8,331 shares of
common stock, the purpose of which 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. 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 expense recorded for the year ended December 31,
2005 relating to these shares of restricted stock was approximately
$7,500.
STOCK OPTION PLAN
On May 20, 2004, the stockholders of the Company approved the
establishment of the Community First Bancorp, Inc. 2004 Stock Option
Plan. Under the Option Plan, the Company may grant either incentive or
nonincentive stock options to directors and key employees for an
aggregate of 27,772 shares of the Company's common stock, with an
exercise price equal to the fair market value of the stock at the date
of the award. Upon exercise of the options, the Company may issue
stock out of authorized shares or purchase the stock in the open
market. The option to purchase shares expires 10 years after the date
of the grant. The options vest, and thereby become exercisable, at the
rate of 20% on the one-year anniversary of the date of the grant and
20% annually thereafter. The options become vested immediately in the
case of death or disability or upon a change in the control of the
Company.
On December 8, 2005 the optionees agreed to the cancellation of all
the outstanding stock options, which totaled 16,442 as of that date.
F-26
COMMUNITY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
2005
----------------------------
WEIGHTED-
AVERAGE
SHARES EXERCISE PRICE
----------------------------
Outstanding, beginning of year 16,442 $16.00
Granted -- --
Exercised -- --
Forfeited -- --
Cancelled (16,442) 16.00
Expired
-------- ------
Outstanding, end of year 0 $ 0.00
======== =====
Options exercisable, end of year 0
========
2004
----------------------------
WEIGHTED-
AVERAGE
SHARES EXERCISE PRICE
----------------------------
Outstanding, beginning of year -- --
Granted 16,442 $16.00
Exercised -- --
Forfeited -- --
Expired -- --
------- ------
Outstanding, end of year 16,442 $16.00
======== =====
Options exercisable, end of year 0
========
The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option-pricing model. Weighted-average
assumptions, for the periods indicated, are presented in the following
table.
2004
------------
Dividend yields 0.00%
Volatility factors of expected market price of common stock 37.07%
Risk-free interest rates 2.18%
Expected life of options 5 years
Weighted-average fair value of options granted during the year $ 5.97
F-27
COMMUNITY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
The following table summarizes information about stock options under the
plan outstanding at December 31, 2005 and 2004:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------------------
WEIGHTED-AVERAGE WEIGHTED- WEIGHTED-
EXERCISE NUMBER REMAINING AVERAGE EXERCISE NUMBER AVERAGE EXERCISE
PRICE OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- --------------------------------------------------------------------------------------------------------------------------
December 31, 2005 $ 0.00 0 0 years $ 0.00 0 $0.00
December 31, 2004 $16.00 16,442 4.5 years $16.00 0 $0.00
NOTE 9: INCOME TAXES
The provision (credit) for income taxes includes these components:
2005 2004
-------------------------
Taxes currently payable $ -- $ --
Deferred income taxes -- 115,580
-------- --------
Income tax expense (credit) $ -- $115,580
======== ========
A reconciliation of income tax expense/(benefit) at the statutory rate to
the Bank's actual income tax expense is shown below:
2005 2004
-------------------------
Computed at the statutory rate (34%) $(149,425) $(311,436)
Increase (decrease) resulting from
Changes in the deferred tax asset valuation allowance 148,013 418,547
Other 1,412 8,469
--------- ---------
Actual tax expense (credit) $ 0 $ 115,580
========= =========
F-28
COMMUNITY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
The tax effects of temporary differences related to deferred taxes shown on
the balance sheets were:
2005 2004
----------------------
Deferred tax assets
Allowance for loan losses $ 131,859 $ 108,779
Net operating loss carryovers 683,842 523,408
Unrealized loss on available-for-sale securities 16,587 14,521
Capital loss carryover 5,100 5,100
Charitable contributions carryover 9,950 11,292
Deferred compensation 2,540 --
Other 850 --
--------- ---------
850,728 663,100
--------- ---------
Deferred tax liabilities
Depreciation 85,313 59,892
FHLB stock 181,968 170,102
Other -- 38
--------- ---------
267,281 230,032
--------- ---------
Net deferred tax asset before
valuation allowance 583,447 433,068
--------- ---------
Valuation allowance
Beginning balance (418,847) --
Increase during the period (148,013) (418,547)
--------- ---------
Ending balance (566,860) (418,547)
--------- ---------
Net deferred tax asset $ 16,587 $ 14,521
========= =========
As of December 31, 2005, the Company had approximately $2,011,000 of net
operating loss carryovers available to offset future federal income. The
net operating losses will begin to expire in the year 2010.
Retained earnings at December 31, 2005 and 2004, include approximately
$647,729, for which no deferred federal income tax liability has been
recognized. This amount represents an allocation of income to bad debt
deductions for tax purposes only. Reduction of amounts allocated for
purposes other than tax bad debt losses or adjustments arising from
carryback of net operating losses, would create income for tax purposes
only, which would be subject to the then-current corporate income tax
rate. The deferred income tax liability on the preceding amount that
would have been recorded if it was expected to reverse into taxable
income in the foreseeable future was approximately $220,228 at December
31, 2005 and 2004.
F-29
COMMUNITY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
NOTE 10: OTHER COMPREHENSIVE LOSS
Other comprehensive loss components and related taxes were as follows:
2005 2004
-------------------
Unrealized losses on available-for-sale securities $(6,076) $(7,128)
------- -------
Other comprehensive loss, before
tax effect (6,076) (7,128)
Tax benefit (2,066) (2,424)
------- -------
Other comprehensive loss $(4,010) $(4,704)
======= =======
NOTE 11: REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by certain federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below). Management believes, as of December 31, 2005 and 2004, that
the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2005, the most recent notification from the OTS
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Bank
must maintain minimum total risk-based, Tier I risk-based and Tier I
leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
Bank's category.
F-30
COMMUNITY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
The Bank's actual capital amounts and ratios are also presented in the
TO BE WELL CAPITALIZED
UNDER PROMPT CORRECTIVE
FOR CAPITAL ADEQUACY ACTION PROVISIONS
ACTUAL PURPOSES REQUIRED REQUIRED
---------------------------------------------------------------------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE AMOUNT PERCENTAGE
---------------------------------------------------------------------------------------
DECEMBER 31, 2005
Total risk-based
capital $ 4,311 10.22% $ 3,373 8.0% $ 4,217 10.0%
Tier I
risk-based
capital $ 3,923 9.30% $ 1,687 4.0% $ 2,530 6.0%
Tier I core
capital $ 3,923 5.47% $ 2,871 4.0% $ 3,589 5.0%
Tangible equity
capital $ 3,923 5.47% $ 1,077 1.5% $ 1,077 1.5%
DECEMBER 31, 2004
Total risk-based
capital $ 4,161 11.78% $ 2,826 8.0% $ 3,533 10.0%
Tier I
risk-based
capital $ 3,842 10.88% $ 1,413 4.0% $ 2,120 6.0%
Tier I core
capital $ 3,842 6.05% $ 2,542 4.0% $ 3,177 5.0%
Tangible equity
capital $ 3,842 6.05% $ 953 1.5% $ 953 1.5%
LIQUIDATION ACCOUNT. Upon conversion to a capital stock savings bank,
eligible account holders who continued to maintain their deposit accounts
in the Bank were granted priority in the event of the future liquidation of
the Bank through the establishment of a special "Liquidation Account" in an
amount equal to the consolidated net worth of the Bank as of the date
specified in the Plan of Conversion. The initial liquidation account
balance of $1,748,866 is reduced annually in proportion to decreases in the
accounts of the eligible account holders. The liquidation account does not
restrict the use or application of net worth, except with respect to the
cash payment of dividends. The Bank may not declare or pay a cash dividend
on or repurchase any of its common stock if the effect would cause its
regulatory capital to be reduced below the amount required for the
liquidation account.
DIVIDEND RESTRICTIONS. The payment of cash dividends by the Bank on its
common stock is limited by regulations of the Office of Thrift Supervision
(OTS). Interest on deposits will be paid prior to payments of dividends on
common stock. Additional limitation on dividends declared or paid or
repurchases of the Bank stock are tied to the Bank's level of compliance
with its regulatory capital requirements. Under current OTS regulations the
Bank must either 1) file notification with the OTS because it is a
subsidiary of a savings and loan holding company or 2) apply for
distributions if the total amount of capital distributions for the
applicable calendar year exceeds net income for that year to date plus
retained net income for the preceding two years.
F-31
COMMUNITY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
FEDERAL RESERVE ACT. In September 2005 the Company inadvertently violated
Section 23A of the Federal Reserve Act. The violation occurred when the
Company pledged assets of the Bank as collateral for the Company's note
payable to a third party lender. Prior to filing the Company's third
quarter Form 10Q with the Securities and Exchange Commission, the Company
discovered and corrected the violation.
PRIVATE PLACEMENT OFFERING. On March 8, 2006, the Company commenced a
Private Placement Offering for up to $6,000,000 in common stock to selected
accredited investors and a limited number of non-accredited investors under
SEC Rule 506 (the "Offering"). The Company is not using an underwriter or
placement agent. The Offering is intended to assist the Bank in maintaining
regulatory capital compliance.
NOTE 12: DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table presents estimated fair values of the Company's
financial instruments. The fair values of certain of these instruments were
calculated by discounting expected cash flows, which involves significant
judgments by management and uncertainties. Fair value is the estimated
amount at which financial assets or liabilities could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale. Because no market exists for certain of these financial
instruments and because management does not intend to sell these financial
instruments, the Company does not know whether the fair values shown below
represent values at which the respective financial instruments could be
sold individually or in the aggregate.
F-32
COMMUNITY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
2005 2004
------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------------------------------------------------------------------------
Financial assets
Cash and cash equivalents $ 2,008,948 $ 2,008,948 $ 5,793,196 $ 5,793,196
Held-to-maturity securities $ 65,522 $ 69,257 $ 88,965 $ 95,025
Available-for-sale securities $ 1,703,147 $ 1,703,147 $ 2,215,285 $ 2,215,285
FHLB stock $ 721,900 $ 721,900 $ 687,000 $ 687,000
Loans, net of allowance for
loan losses $ 64,578,288 $ 59,984,000 $ 51,931,555 $ 51,932,700
Interest receivable $ 288,501 $ 288,501 $ 227,066 $ 227,066
Financial liabilities
Deposits $ 54,476,673 $ 54,503,179 $ 46,466,036 $ 46,615,800
FHLB advances $ 13,000,000 $ 12,979,000 $ 13,000,000 $ 13,000,000
Advances under line of credit
and notes payable $ 1,250,000 $ 1,250,000 $ 750,000 $ 750,000
Interest payable $ 158,391 $ 158,391 $ 56,213 $ 56,213
Unrecognized financial
instruments (net of contract
amount)
Commitments to originate
loans $ 0 $ 0 $ 0 $ 0
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments.
CASH AND CASH EQUIVALENTS, INTEREST-BEARING DEPOSIT AND FEDERAL HOME LOAN
BANK STOCK
The carrying amount approximates fair value.
SECURITIES
Fair values equal quoted market prices, if available. If quoted market
prices are not available, fair value is estimated based on quoted
market prices of similar securities.
LOANS
The fair value of loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining
maturities. Loans with similar characteristics were aggregated for
purposes of the calculations. The carrying amount of accrued interest
approximates its fair value.
F-33
COMMUNITY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
DEPOSITS
Deposits include demand deposits, savings accounts, NOW accounts and
certain money market deposits. The carrying amount approximates fair
value. The fair value of fixed-maturity time deposits is estimated
using a discounted cash flow calculation that applies the rates
currently offered for deposits of similar remaining maturities.
SHORT-TERM BORROWINGS AND INTEREST PAYABLE
The carrying amount approximates fair value.
COMMITMENTS TO ORIGINATE LOANS
The fair value of commitments to originate loans is estimated using
the fees currently charged to enter into similar agreements, taking
into account the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between current
levels of interest rates and the committed rates.
NOTE 13: SIGNIFICANT ESTIMATES AND CONCENTRATIONS
Accounting principles generally accepted in the United States of
America require disclosure of certain significant estimates and
current vulnerabilities due to certain concentrations. Estimates
related to the allowance for loan losses are reflected in the note
regarding loans. Current vulnerabilities due to certain concentrations
of credit risk are discussed in the note on commitments and credit
risk.
NOTE 14: COMMITMENTS AND CREDIT RISK
The Bank grants agribusiness, commercial and residential loans to
customers primarily in Hopkins County, Kentucky.
COMMITMENTS TO ORIGINATE LOANS
Commitments to originate loans are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since a portion
of the commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. Each customer's creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment, commercial real
estate and residential real estate.
F-34
COMMUNITY FIRST BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
At December 31, 2005 and 2004, the Bank had granted commitments to
extend credit and unused lines of credit to borrowers aggregating
approximately $1,888,700 and $1,948,000, respectively. The commitments
to extend credit expire over varying periods of time with the majority
expiring within a one-year period.
STANDBY LETTERS OF CREDIT
Standby letters of credit are irrevocable conditional commitments
issued by the Bank to guarantee the performance of a customer to a
third party. Financial standby letters of credit are primarily issued
to support public and private borrowing arrangements, including
commercial paper, bond financing and similar transactions. Performance
standby letters of credit are issued to guarantee performance of
certain customers under nonfinancial contractual obligations. The
credit risk involved in issuing standby letters of credit is
essentially the same as that involved in extending loans to customers.
Should the Banks be obligated to perform under the standby letters of
credit, they may seek recourse from the customer for reimbursement of
amounts paid.
The Banks had outstanding standby letters of credit totaling $7,000 at
December 31, 2005. There were no outstanding letters of credit at
December 31, 2004.
OTHER CREDIT RISKS
At December 31, 2005 and 2004, approximately $101,000 and $4,076,000,
respectively, were held in deposits at financial institutions in
excess of federally insured amounts.
NOTE 15: FUTURE CHANGE IN ACCOUNTING PRINCIPLE
On December 16, 2004, the Financial Accounting Standards Board (FASB)
issued FASB STATEMENT NO. 123 (revised 2004), Share-Based Payment,
which is a revision of FASB Statement NO. 123, Accounting for
Stock-Based Compensation. STATEMENT 123(R) supersedes APB Opinion NO.
25, Accounting for Stock Issued to Employees, and amends FASB
STATEMENT NO. 95, Statement of Cash Flows. The approach to accounting
for share-based payments in STATEMENT 123(R) is similar to the
approach described in STATEMENT 123. However, STATEMENT 123(R)
requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements
based on their fair values and no longer allows pro forma disclosure
as an alternative to financial statement recognition. The Company will
be required to adopt STATEMENT 123(R) at the beginning of its quarter
ending March 31, 2006. The Company has not determined what financial
statement impact STATEMENT 123(R) will have on the Company.
F-35
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[LOGO]
NO ONE HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR
TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE COMMUNITY FIRST
PUBLIC OFFERING, OTHER THAN THOSE CONTAINED IN THIS BANCORP, INC.
PROSPECTUS. YOU MAY NOT ASSUME THAT WE HAVE
AUTHORIZED ANY OTHER INFORMATION OR REPRESENTA-TIONS.
THE DELIVERY OF THIS PROSPECTUS AND THE SALE OF OUR
COMMON STOCK DO NOT MEAN THAT THERE HAS BEEN NO CHANGE
IN OUR AFFAIRS SINCE THE DATE OF THIS PROSPECTUS.
THIS PROSPECTUS IS NOT AN OFFER TO SELL OR A 750,000 SHARES
SOLICITATION OF AN OFFER TO BUY SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
TABLE OF CONTENTS Page
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Prospectus Summary 1
Summary Financial Data 5
Risk Factors 6 ______________________
Special Note Regarding Forward-Looking
Statements 13 PROSPECTUS
The Rights Offering 13 ______________________
Use of Proceeds 14
Market for Our Common Stock 15
Dividend Policy 16
Capitalization 17
Dilution 17
Selected Consolidated Financial Data 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 19 DECEMBER 29, 2006
Business of Community First Bancorp, Inc.
and Community First Bank 40
Supervision and Regulation 49
Management 54
Security Ownership of Certain Beneficial Owners
and Management 58
Description of Capital Stock 58
Restrictions on Acquisition of Community
First Bancorp, Inc. 59
Legal Matters 64
Experts 64
Where You Can Find More Information 64
Index to Consolidated Financial Statements 65
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