Attached files
EXHIBIT 13
COMMUNITY FIRST BANCORPORATION
Portions of Registrant's
2009 Annual Report to
Shareholders Incorporated
by Reference into 2009 Form 10-K
About the Company
Community First Bancorporation (the "Company") is a bank holding
company organized as a South Carolina corporation. Through its banking
subsidiary, Community First Bank (the "Bank"), the Company provides a wide range
of lending and deposit services and electronic, internet and telephone banking.
Substantially all lending and deposit acquisition activities occur within the
Company's local market areas in Oconee and Anderson counties of South Carolina.
The Company markets its products and services principally by offering attractive
interest rates and fees along with a friendly, personal service approach which
management believes can best be accomplished by a locally-owned community bank.
The Bank first commenced operations on March 12, 1990, and the Company was
organized in 1997 to become the Bank's holding company under a plan approved by
the Bank's shareholders. In 2009, the Company formed an additional subsidiary to
hold certain troubled assets sold to it by the Bank.
Financial Highlights
December 31, Percent Change
------------ --------------
(Dollars in thousands, except per common share) 2009 2008 2007 2009/08 2008/07
----- ----- ----- ------- -------
Balance Sheet
Total assets ......................................... $ 492,898 $ 469,473 $ 402,148 5.0% 16.7%
Loans ................................................ 267,248 270,413 244,131 -1.2% 10.8%
Securities ........................................... 150,734 138,546 104,689 8.8% 32.3%
Total deposits ....................................... 436,648 416,115 355,867 4.9% 16.9%
Shareholders' equity ................................. 44,818 39,928 37,911 12.2% 5.3%
For the Year
Net interest income .................................. $ 12,068 $ 11,717 $ 10,348 3.0% 13.2%
Provision for loan losses ............................ 4,355 4,550 594 -4.3% 666.0%
Noninterest income ................................... 2,718 2,495 2,206 8.9% 13.1%
Noninterest expenses ................................. 9,249 8,067 7,132 14.7% 13.1%
Income tax expense ................................... 81 253 1,497 -68.0% -83.1%
Net income ........................................... 1,101 1,342 3,331 -18.0% -59.7%
Net income available to common shareholders .......... 1,101 1,342 3,331 -18.0% -59.7%
Per common share (1)
Net income, basic .................................... $ 0.29 $ 0.36 $ 0.92 -19.4% -60.9%
Net income, assuming dilution ........................ 0.29 0.34 0.87 -14.7% -60.9%
Book value at year end ............................... 11.02 10.67 10.34 3.3% 3.2%
Financial Performance Ratios
Return on average assets ............................. 0.23% 0.31% 0.88%
Return on average equity ............................. 2.64% 3.38% 9.46%
Asset Quality Ratios (2)
Nonperforming loans to total loans ................... 4.19% 4.36% 0.26%
Allowance for loan losses times
nonperforming loans ................................ 0.4x 0.5x 4.1x
Net charge-offs to
average total loans ................................ 1.39% 0.64% 0.12%
(1) Adjusted to reflect 5% stock dividends effective December 15, 2009 and
December 20, 2008 and a 10% stock dividend effective December 20, 2007.
(2) Nonperforming loans include nonaccrual loans and loans 90 days or more past
due.
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Financial Summary
Years Ended December 31,
------------------------
2009 2008 2007 2006 2005
---- ---- ---- ---- ----
(Dollars in thousands, except per common share data)
Financial Condition
Securities .............................................. $150,734 $138,546 $104,689 $109,082 $109,821
Allowance for loan losses ............................... 6,052 5,475 2,574 2,242 2,266
Net loans (1) ........................................... 261,196 264,938 241,557 200,724 167,052
Premises and equipment - net ............................ 8,470 8,655 8,622 7,937 6,805
Total assets ............................................ 492,898 469,473 402,148 353,909 320,712
Noninterest bearing deposits ............................ 47,067 41,962 42,289 40,576 38,061
Interest bearing deposits ............................... 389,581 374,153 313,578 267,381 241,932
Total deposits .......................................... 436,648 416,115 355,867 307,957 279,993
Total liabilities ....................................... 448,080 429,545 364,237 320,694 291,858
Total shareholders' equity .............................. 44,818 39,928 37,911 33,215 28,854
Results of Operations
Interest income ......................................... $ 22,951 $ 24,551 $ 23,578 $ 19,600 $ 15,923
Interest expense ........................................ 10,883 12,834 13,230 10,385 6,621
-------- -------- -------- -------- --------
Net interest income ..................................... 12,068 11,717 10,348 9,215 9,302
Provision for loan losses ............................... 4,355 4,550 594 65 250
-------- -------- -------- -------- --------
Net interest income after provision ..................... 7,713 7,167 9,754 9,150 9,052
Other income ............................................ 2,718 2,495 2,206 2,154 2,139
Other expenses .......................................... 9,249 8,067 7,132 6,752 5,420
-------- -------- -------- -------- --------
Income before income taxes .............................. 1,182 1,595 4,828 4,552 5,771
Income tax expense ...................................... 81 253 1,497 1,534 2,041
-------- -------- -------- -------- --------
Net income .............................................. 1,101 1,342 3,331 3,018 3,730
Deduction for dividends declared or accumulated
on preferred stock and unavailable to
common shareholders ................................... - - - - -
-------- -------- -------- -------- --------
Net income available to common shareholders ............. $ 1,101 $ 1,342 $ 3,331 $ 3,018 $ 3,730
======== ======== ======== ======== ========
Per Common Share Data (2)
Net income, basic ....................................... $ 0.29 $ 0.36 $ 0.92 $ 0.85 $ 1.05
Net income, assuming dilution ........................... 0.29 0.34 0.87 0.79 1.00
Period end book value ................................... 11.02 10.67 10.34 9.26 8.10
(1) Excludes any loans held for sale.
(2) Per common share amounts have been retroactively adjusted to reflect 5%
stock dividends effective December 15, 2009 and December 20, 2008, a 10%
stock dividend effective December 20, 2007 and a 5% stock dividend effective
December 18, 2006.
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Quarterly Financial Information (Unaudited)
Years Ended December 31,
------------------------
2009 2008
---- ----
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
(Dollars in thousands, except per common share)
Interest and dividend income ..................... $ 5,577 $ 5,730 $ 5,861 $ 5,783 $ 5,922 $ 6,236 $ 6,037 $ 6,356
Interest expense ................................. 2,339 2,706 2,838 3,000 3,093 3,006 3,147 3,588
------- ------- ------- ------- ------- ------- ------- -------
Net interest income .............................. 3,238 3,024 3,023 2,783 2,829 3,230 2,890 2,768
Provision for loan losses ........................ 1,895 1,010 700 750 3,175 965 280 130
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after provision .............. 1,343 2,014 2,323 2,033 (346) 2,265 2,610 2,638
Noninterest income ............................... 691 704 752 571 627 634 625 609
Noninterest expense .............................. 2,429 2,297 2,426 2,097 2,237 1,938 2,005 1,887
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes ................ (395) 421 649 507 (1,956) 961 1,230 1,360
Provision for income taxes ....................... (273) 101 160 93 (784) 252 385 400
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) ................................ (122) 320 489 414 (1,172) 709 845 960
Dividends declared or accrued
on preferred stock ............................. - - - - - - - -
------- ------- ------- ------- ------- ------- ------- -------
Net income available to
common shareholders ............................ $ (122) $ 320 $ 489 $ 414 $(1,172) $ 709 $ 845 $ 960
======= ======= ======= ======= ======= ======= ======= =======
Net income per common share *
Basic .......................................... $ (0.04) $ 0.09 $ 0.13 $ 0.11 $ (0.31) $ 0.19 $ 0.23 $ 0.27
Diluted ........................................ (0.04) 0.09 0.13 0.11 (0.31) 0.18 0.22 0.25
---------------------------------
* Per common share amounts have been retroactively adjusted to reflect a 5%
stock dividend effective December 15, 2009.
During the third and fourth quarters of 2009 and 2008, management
observed that economic activity in the Company's market areas had deteriorated
significantly from assessments made earlier in each year. Numerous factors led
to those conclusions including higher amounts of past due and nonaccrual loans,
reduced local sales of housing units, and increasing, or continuing high,
numbers of layoffs and other unfavorable trends in unemployment statistics in
the local area. Consequently, management reevaluated the adequacy of its
allowance for loan losses and determined that significant increases were
warranted.
CAUTIONARY NOTICE WITH RESPECT TO
FORWARD LOOKING STATEMENTS
This report contains "forward-looking statements" within the meaning of
the securities laws. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to comply with
the terms of the safe harbor, the Company notes that a variety of factors could
cause the Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements.
All statements that are not historical facts are statements that could
be "forward-looking statements." You can identify these forward-looking
statements through the use of words such as "may," "will," "should," "could,"
"would," "expect," "anticipate," "assume, "indicate," "contemplate," "seek,"
"plan," "predict," "target," "potential," "believe," "intend," "estimate,"
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"project," "continue," or other similar words. Forward-looking statements
include, but are not limited to, statements regarding the Company's future
business prospects, revenues, working capital, liquidity, capital needs,
interest costs, income, business operations and proposed services.
These forward-looking statements are based on current expectations,
estimates and projections about the banking industry, management's beliefs, and
assumptions made by management. Such information includes, without limitation,
discussions as to estimates, expectations, beliefs, plans, strategies, and
objectives concerning future financial and operating performance. These
statements are not guarantees of future performance and are subject to risks,
uncertainties and assumptions that are difficult to predict. Therefore, actual
results may differ materially from those expressed or forecasted in such
forward-looking statements. The risks and uncertainties include, but are not
limited to:
o future economic and business conditions;
o lack of sustained growth in the economies of the Company's market
areas;
o government monetary and fiscal policies;
o the effects of changes in interest rates on the levels,
composition and costs of deposits, loan demand, and the values of
loan collateral, securities, and interest sensitive assets and
liabilities;
o the effects of competition from a wide variety of local,
regional, national and other providers of financial, investment,
and insurance services, as well as competitors that offer banking
products and services by mail, telephone, computer and/or the
Internet;
o credit risks;
o higher than anticipated levels of defaults on loans;
o perceptions by depositors about the safety of their deposits;
o capital adequacy;
o the failure of assumptions underlying the establishment of the
allowance for loan losses and other estimates, including the
value of collateral securing loans;
o ability to weather the current economic downturn;
o loss of consumer or investor confidence;
o availability of liquidity sources;
o the risks of opening new offices, including, without limitation,
the related costs and time of building customer relationships and
integrating operations as part of these endeavors and the failure
to achieve expected gains, revenue growth and/or expense savings
from such endeavors;
o changes in laws and regulations, including tax, banking and
securities laws and regulations;
o changes in accounting policies, rules and practices;
o changes in technology or products may be more difficult or
costly, or less effective, than anticipated;
o the effects of war or other conflicts, acts of terrorism or other
catastrophic events that may affect general economic conditions
and economic confidence; and
o other factors and information described in this report and in any
of the other reports that we file with the Securities and
Exchange Commission under the Securities Exchange Act of 1934.
All forward-looking statements are expressly qualified in their
entirety by this cautionary notice. The Company has no obligation, and does not
undertake, to update, revise or correct any of the forward-looking statements
after the date of this report. The Company has expressed its expectations,
beliefs and projections in good faith and believes they have a reasonable basis.
However, there is no assurance that these expectations, beliefs or projections
will result or be achieved or accomplished.
Market for Common Stock and Dividends
Trading in the Company's common stock is reported on the OTC Bulletin
Board under the ticker symbol "CFOK.OB." The following table summarizes the
range of high and low bid prices for the Company's common stock as reported on
the OTC Bulletin Board for each quarterly period of 2009 and 2008. Prices shown
represent inter-dealer prices without retail markup, markdown or commissions,
and may not represent actual transactions. Furthermore, trading in the Company's
stock is very limited. Per share prices in the table have been adjusted to
reflect a 5% stock dividend effective December 15, 2009.
2009 2008
---- ----
Quarter Ended High Low High Low
------------- ---- --- ---- ---
March 31 $ 9.52 $ 2.95 $ 14.96 $ 10.97
June 30 $ 7.14 $ 3.14 $ 15.19 $ 14.29
September 30 $10.48 $ 6.19 $ 14.51 $ 10.97
December 31 $ 7.62 $ 6.67 $ 11.79 $ 6.85
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As of February 28, 2010, there were approximately 765 holders of record
of the Company's common stock, excluding individual participants in security
position listings.
The Company has not declared or paid any cash dividends since its
inception. The Board of Directors declared 5% stock dividends effective December
15, 2009 and December 20, 2008, a 10% stock dividend effective December 20, 2007
and a 5% stock dividend effective December 18, 2006.
The Company's ability to declare and pay cash dividends is largely
dependent upon the successful operation of the subsidiary bank and its ability
to pay cash dividends to the Company and the ability of the Company to pay 5%
cumulative dividends on the preferred stock issued in 2009. In addition, South
Carolina banking regulations restrict the amount of cash dividends that can be
paid by the banking subsidiary to the Company. Any of the Bank's cash dividends
to the Company in excess of the current year's earnings are subject to the prior
approval of the South Carolina Commissioner of Banking. In addition, dividends
paid by the Bank to the Company, or by the Company to its shareholders, would be
prohibited if the effect thereof would cause the capital of the banking
subsidiary or the Company to be reduced below minimum capital requirements.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
This discussion is intended to assist in understanding the consolidated
financial condition and results of operations of Community First Bancorporation
and its wholly-owned subsidiaries, Community First Bank (the "Bank") and Upstate
Resource Management, Inc., which are collectively referred to as the "Company."
This information should be reviewed in conjunction with the consolidated
financial statements and related notes contained elsewhere in this report. Net
income per common share and net income per common share, assuming dilution, have
been adjusted to reflect 5% stock dividends effective December 15, 2009 and
December 20, 2008 and a 10% stock dividend effective December 20, 2007.
During the two years ended December 31, 2009, both the national and
local economies have been adversely affected by high delinquency and foreclosure
rates of real estate loans, principally those related to residential real
estate, and high levels of unemployment. Evidencing the severity and the
abruptness of this deterioration, December unemployment for Anderson County was
13.4%, 9.6% and 5.6% for 2009, 2008 and 2007, respectively and, for Oconee
County, December unemployment was 14.6%, 10.6% and 6.2% for 2009, 2008 and 2007,
respectively. Since December 2007, the number of unemployed in Anderson and
Oconee counties increased by approximately 9,300, or 140%, to about 16,000
people. By comparison, the national unemployment rate was 10.0%, 7.4% and 5.0%
as of December 2009, 2008 and 2007, respectively. As of December 2009, the
number of unemployed members of the national labor force was approximately
15,267,000. Unemployment statistics and other indicators of economic activity
may have recursive and magnifying effects on each other as business owners and
consumers use these measures to assess their current conditions and future
prospects. Currently, there are only low levels of optimism concerning the
probability of a prolonged economic recovery beginning in the near term.
Nationally, the number of bank failures continues to increase and other
indicators of the health of the banking system continue to deteriorate. The
Federal Deposit Insurance Corporation ("FDIC"), which insures the Bank's
deposits, increased deposit coverage to $250,000 for most types of deposit
accounts and offered insured institutions the option to provide unlimited
coverage for certain transaction accounts. Costs associated with those
enhancements included a special assessment collected from insured institutions
in the second quarter of 2009 that added approximately $215,000 to the Bank's
FDIC insurance expenses for 2009. In 2009, banks were also subjected by the FDIC
to mandatory prepayment of the deposit insurance assessments that normally would
be paid over the next three years. This prepayment by the Bank in 2009 totaled
approximately $2,600,000 and will be recognized as deposit insurance expense
over the three year period. The Bank recently opted out of an extended period
for unlimited coverage of certain transaction accounts while maintaining the
maximum regular FDIC insurance of $250,000 on all accounts.
Also evidencing concerns about the health of the financial industry,
banks continue to be reluctant to engage in overnight lending arrangements with
other financial institutions. The Bank continues to maintain its excess reserves
in an interest-bearing account with the Federal Reserve Bank of Richmond and
intends to continue to do so until interest rates on federal finds sold increase
enough to compensate the Bank sufficiently for the incremental risks of those
investments.
The Bank's management and other personnel are working diligently to
assess the financial condition of loan customers and to maximize the amounts
collected from nonaccrual and other distressed loans. During 2009, nonaccrual
loans increased by $2,071,000, charge-offs totaled $3,886,000, and $6,382,000
was transferred from loans to foreclosed assets. Management realizes that it
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must continue to monitor all aspects of the local economy, its individual loan
customers, and the many factors that affect them for the foreseeable future.
During 2009, the Company established a new subsidiary, Upstate Resource
Management, Inc., to acquire certain loans in process of foreclosure and
foreclosed properties from the Bank, which it expects to hold until the local
real estate markets improve. Management believes that there are, in some cases,
potential longer-term advantages to holding some properties rather than selling
them at current "distressed" levels.
Because of the level of attention required by loans previously made,
the Bank recently has concentrated on purchasing investment securities,
primarily those issued by government-sponsored enterprises, rather than
investing more heavily in new loans. Even though investment securities earn
interest at lower rates than loans, the administrative costs of such investments
are lower and there are generally fewer risks of loss. In addition, those types
of securities are generally eligible to be pledged to public depositors whose
deposits are in excess of FDIC insurance limits, as required by law.
Deposit growth during 2009 totaled approximately $20,533,000, an
increase of 4.9% over the 2008 year-end amount. The Bank does not purchase
brokered deposits but instead relies on deposits obtained in the local market
areas and limited amounts of low-cost borrowings from the Federal Home Loan Bank
of Atlanta to fund its lending and investing activities. Management believes
that this practice imposes prudent limits on the Bank's ability to extend credit
and has proven to be an important contributing factor to the Bank's positive
earnings performance over the past two years. Management does not expect a
significant reduction in deposits to result from its decision not to participate
in the FDIC's optional period of unlimited transaction account coverage because
it has significant amounts of investment securities eligible to be pledged to
the public entities that make up the majority of such large depositors.
The Company's Board of Directors, realizing that the amounts of loan
losses experienced over the past two years have been higher than normal,
provided just over $3,000,000 of new capital to the Company by purchasing 3,150
shares of Series A preferred stock in December 2009.
During 2009, the Company's management increased its efforts to maintain
communications with its largest borrowers, stay abreast of changes in the local
real estate market and other facets of the local economy, and reassess the
values of loan collateral given the current economic environment. These efforts
and reassessments resulted in an increase in the amounts of the provision and
allowance for loan losses, a preference for investments in investment securities
rather than in loans, and the strengthening of the Company's capital position
through the issuance of preferred stock.
Earnings Performance
2009 Compared with 2008
For the year ended December 31, 2009, the Company recorded net income
of $1,101,000, a decrease of $241,000, or 18.0%, from net income of $1,342,000
for 2008. Net income per common share was $.29 for 2009, compared with $.36 for
2008. Net income per common share, assuming dilution was $.29 for 2009 and $.34
for 2008. Return on average assets was .23% for 2009 compared with .31% for
2008. Return on average shareholders' equity was 2.64% for 2009 compared with
3.38% for 2008.
The decrease in net income for 2009 was caused primarily by higher
expenses for deposit insurance coverage, higher expenses for salaries and
employee benefits, the continuing effects of low interest rates, which hindered
the Company's ability to increase net interest margin, and higher amounts of
nonaccrual and other problem loans that resulted in continuing high provisions
for loan losses as well as higher legal and other expenses associated with
acquiring and carrying foreclosed assets.
During 2009, the FDIC imposed both rate increases and special
assessments that resulted in immediately-recognized increases in the amount of
deposit insurance expense. For 2009, FDIC insurance expenses totaled $711,000,
an increase of $523,000, or 278%, over the $188,000 of such expenses incurred
for 2008. As long as the number of bank failures continues to increase,
management expects that the assessment rate per dollar of insured deposits will
continue to be under upward pressure. Consequently, deposit insurance expenses
are expected to increase for the foreseeable future.
Higher salaries and employee benefits resulted from normal salary
increases among the Bank's staff and the addition or promotion of personnel to
positions with higher levels of responsibility related to the management and
resolution of problem loans. Management expects that expenses for those
employee-provided services will continue at current levels through the end of
2010 at least.
During 2009, interest rates were maintained at low levels. Rates
available for short-term investments, including for federal funds sold and for
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reserves held with Federal Reserve Banks, averaged in the .10% to .20% range.
Accordingly, interest income realized from those holdings totaled just $50,000
for 2009 compared with $650,000 for 2008 when the average rates were
approximately 2.45%. Rates earned on newly-issued investment securities and
loans were similarly low. Furthermore, rates earned on variable rate loans that
both used the prime rate as their index rate and had repricing dates in 2009
generally had lower rates during 2009. In all, interest income was $1,600,000
lower in 2009 than in 2008. The lower interest rates in 2009 also resulted in
lower interest expenses for deposits. The average rate paid for deposits in 2009
was 90 basis points lower than for 2008 and interest expenses for deposits were
$2,084,000 less in 2009 than in 2008. Interest expenses for borrowed funds were
$133,000 higher in 2009 primarily because higher average volumes of such funding
sources were utilized during 2009.
The provision for loan losses for 2009 was $195,000 less than for 2008.
During 2009, management aggressively charged-off uncollectible loans,
re-assessed the value of collateral associated with distressed loans, and
foreclosed and repossessed collateral in order to enhance the Bank's ability to
maximize the amount realizable from disposition of the properties. After taking
those actions, nonaccrual loans at the end of 2009 were $13,870,000, an increase
of $2,071,000 over the amount of such loans held as of the end of 2008.
Expenses to hold foreclosed assets increased to $132,000 for 2009 from
$8,000 for 2008. Such expenses primarily include property taxes.
2008 Compared with 2007
For the year ended December 31, 2008, the Company recorded net income
of $1,342,000, a decrease of $1,989,000, or 59.7%, from net income of $3,331,000
for 2007. Net income per common share for 2008 was $.36 compared with $.92 for
2007. Net income per common share, assuming dilution from outstanding stock
options, was $.34 for 2008 and $.87 for 2007. Return on average assets was .31%
for 2008 compared with .88% for 2007. Return on average shareholders' equity was
3.38% for 2008 compared with 9.46% for 2007.
The decrease in net income for 2008 was caused primarily by a
significantly higher provision for loan losses. The provision for loan losses
for 2008 was $4,550,000, an increase of $3,956,000, or 666.0%, over the 2007
provision. Deterioration in asset quality, evidenced by larger amounts of
nonaccrual, past due and potential problem loans led to those increased
provisions.
Net interest income for 2008 was $1,369,000 more than for 2007 due to
higher levels of taxable securities and loans, higher rates earned on taxable
securities and lower rates paid for deposits (especially the rates paid for
interest bearing transaction and savings accounts) and other funding sources.
Higher amounts of nonaccrual loans had a detrimental effect on the amount of
interest income on loans recognized in the period. When a loan is placed in
nonaccrual status, the Company discontinues recognition of interest accrual in
income and reverses any amount of previously accrued but uncollected interest
attributable to that loan against interest income. Loans categorized as
nonaccrual as of December 31, 2008 totaled $11,799,000 and included
approximately $8,494,000 of loans that were not categorized as nonaccrual loans
as of December 31, 2007. Despite those effects, interest income on loans for
2008 was $612,000 more than for 2007. The average rate earned on loans in 2008
was 81 basis points lower than for 2007.
Other income for 2008 increased by $289,000 over the 2007 amount,
primarily as a result of increases in the value of life insurance contracts.
Other expenses increased by $935,000 primarily due to higher salaries and
employee benefits, increased expenses related to the banking office network and
higher data processing expenses.
Net Interest Income
Net interest income, the difference between interest income earned and
interest expense incurred, is the principal source of the Company's earnings.
Net interest income is affected by changes in the levels of interest rates and
by changes in the volume and mix of interest earning assets and interest bearing
liabilities.
2009 Compared with 2008
Net interest income was $12,068,000 for 2009 compared with $11,717,000
for 2008. The $351,000 increase during 2009 resulted primarily from interest
expenses declining more than interest income. The primary driver of lower
interest expenses was an 86 basis point reduction in the average rate paid for
average interest bearing liabilities. Rates paid for time deposits, the largest
category of interest bearing liabilities, fell to 3.29% for 2009 from 4.29% for
2008. As a result of the decrease in rates, even though the average volume of
time deposits increased by $44,087,000, interest expense for these deposits fell
by $1,145,000. Rates paid for savings and interest bearing transaction accounts
decreased by 97 and 115 basis points, respectively, and the average amounts of
such deposits decreased by a total of $7,302,000. Interest expense for these
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deposits decreased by $939,000. Interest expense for borrowed funds increased by
$133,000 in large part because the Company utilized such funding sources to a
greater degree in 2009.
Similarly, interest income was lower for 2009 than for 2008. This
resulted primarily from lower interest income on loans. Yields were lower for
all categories of interest earning assets except tax-exempt securities in 2009.
Loan yields were affected by several factors including Federal Reserve policies
that kept interest rates at low levels throughout 2009, the effects of
nonaccrual loans and loan charge-offs, repricing of variable rate loans at lower
rates and some refinancing activity by borrowers seeking lower rates. Interest
earned on federal funds sold and interest earning deposits due from banks was
$50,000 for 2009, a decrease of $600,000 from 2008. The Bank maintained its
excess reserves in an interest bearing account with the Federal Reserve
throughout 2009, foregoing a nominal increase in the yield that might have been
realized by participating in the sale of excess funds in the overnight federal
funds market in exchange for the certainty of repayment by the Federal Reserve.
2008 Compared with 2007
Net interest income was $11,717,000 and $10,348,000 for 2008 and 2007,
respectively. Interest income for 2008 was $24,551,000, an increase of $973,000,
or 4.1%, over 2007. Interest expense for 2008 was $12,834,000, a decrease of
$396,000, or 3.0% from $13,230,000 for 2007. Larger average amounts of interest
earning assets, especially in the relatively higher-yielding loan and taxable
securities categories, resulted in the increased interest income amount in 2008,
overcoming a 55 basis point decrease in the yield on earning assets for the 2008
period. Interest expense for 2008 decreased despite large increases in the
average amounts of time deposits, in large part because the average cost of
interest-bearing liabilities for 2008 was 76 basis points lower than for 2007.
During 2008, the amount of nonaccrual loans increased significantly.
This was especially noteworthy during the last six months of the year.
Consequently, the amount of accrued but uncollected interest on such loans was
more than in prior years. The reversal of that income, and the loss of income
after the nonaccrual date, negatively affected both the dollar amount of the
income and the Company's yield on loans for 2008. Approximately $340,000 of
interest income attributable to nonaccrual loans was not recognized in 2008;
this decreased the yield on loans by approximately 13 basis points. The amounts
of interest on nonaccrual loans in prior years were not material. Also
contributing to the lower loan yield for 2008 were the effects of decreases in
the prime rate on variable rate loans. As of December 31, 2008 and 2007,
approximately $75,000,000 and $70,000,000 of loans were variable rate loans.
Interest income on investment securities for 2008 increased by $934,000
over the prior year amount as a result of both higher average amounts and higher
rates earned. During 2008, the Bank sold approximately $9,736,000 of its
investments in mortgage-backed securities and securities issued by
government-sponsored enterprises. In addition, maturities, calls and paydowns of
securities during 2008 totaled approximately $48,364,000. During 2008,
approximately $91,647,000 of new securities were purchased, including purchases
of approximately $37,671,000, or 41% of all purchases for the year, during the
last four months of 2008. The average yield on taxable and tax-exempt securities
was 4.66% for 2008 compared with 4.30% for 2007. As of December 31, 2008, the
average yield on investment securities was 4.79% compared with 4.44% at December
31, 2007.
Interest earned on federal funds sold decreased by $577,000, primarily
due to lower rates resulting from the Federal Reserve's actions to provide
economic stimulus.
Interest expense for 2008 decreased by $396,000 compared with 2007
primarily due to lower rates paid for deposit accounts. The average rate paid
for all deposit accounts in 2008 was 3.66%, a decrease of 76 basis points from
the 2007 level. As stated previously, many depositors shifted their focus from
income accumulation to loss prevention, especially during the last few months of
2008. Consequently, total deposits as of December 31, 2008 were $32,393,000 more
than they were as of September 30, 2008 and $60,248,000 more than at December
31, 2007.
9
Average Balances, Yields and Rates
Years Ended December 31,
------------------------
2009 2008 2007
---- ---- ----
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
Balances (1) Expense Rates Balances (1) Expense Rates Balances (1) Expense Rates
----------- ------- ----- ------------ ------- ----- ------------ ------- -----
(Dollars in thousands)
Assets
Interest bearing deposits due from banks . $ 20,906 $ 47 0.22% $ 995 $ 18 1.81% $ 157 $ 6 3.82%
Taxable securities ....................... 136,619 5,569 4.08% 100,395 4,808 4.79% 89,867 3,890 4.33%
Tax-exempt securities (2) ................ 19,912 811 4.07% 20,699 833 4.02% 19,630 817 4.16%
Federal funds sold ....................... 1,981 3 0.15% 25,579 632 2.47% 23,730 1,209 5.09%
Federal Home Loan Bank stock ............. 1,289 4 0.31% 1,053 48 4.56% 888 56 6.31%
Loans (2) (3) (4) ........................ 272,330 16,517 6.07% 259,055 18,212 7.03% 224,353 17,600 7.84%
-------- ------- --------- -------- -------- -------
Total interest earning assets ... 453,037 22,951 5.07% 407,776 24,551 6.02% 358,625 23,578 6.57%
Cash and due from banks .................. 5,598 8,913 8,370
Allowance for loan losses ................ (5,461) (3,038) (1,065)
Unrealized securities gains (losses) ..... 1,432 (64) (2,286)
Premises and equipment ................... 8,588 8,774 8,189
Other assets ............................. 16,712 12,578 6,227
-------- --------- --------
Total assets ...................... $479,906 $ 434,939 $378,060
======== ========= ========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing
transaction accounts ............. $ 54,202 $ 370 0.68% $ 57,416 $ 1,049 1.83% $ 57,117 $ 1,783 3.12%
Savings ............................. 21,093 80 0.38% 25,181 340 1.35% 25,042 658 2.63%
Time deposits $100M and over ........ 131,115 3,752 2.86% 111,780 4,326 3.87% 85,815 4,054 4.72%
Other time deposits ................. 173,047 6,268 3.62% 148,295 6,839 4.61% 126,588 6,531 5.16%
-------- ------ --------- -------- -------- -------
Total interest bearing
deposits ...................... 379,457 10,470 2.76% 342,672 12,554 3.66% 294,562 13,026 4.42%
Short-term borrowings .................... 437 47 10.76% 1,219 11 0.90% - - 0.00%
Long-term debt ........................... 9,463 366 3.87% 6,615 269 4.07% 4,975 204 4.10%
-------- ------- --------- -------- -------- -------
Total interest
bearing liabilities ............ 389,357 10,883 2.80% 350,506 12,834 3.66% 299,537 13,230 4.42%
Noninterest bearing demand deposits ...... 44,243 41,173 40,099
Other liabilities ........................ 4,667 3,583 3,225
Shareholders' equity ..................... 41,639 39,677 35,199
-------- --------- -------
Total liabilities and
shareholders' equity ............ $479,906 $ 434,939 $378,060
======== ========= ========
Interest rate spread (5) ................. 2.27% 2.36% 2.15%
Net interest income and net yield
on earning assets (6) ............... $12,068 2.66% $ 11,717 2.87% $10,348 2.89%
Interest free funds supporting
earning assets (7) .................. $ 63,680 $ 57,270 $ 59,088
_________________________
(1) Average balances are computed on a daily basis.
(2) Income and yields on tax-exempt securities and loans have not been adjusted
on a tax equivalent basis.
(3) Nonaccrual loans are included in the average loan balances and income on
such loans generally is recognized on a cash basis.
(4) Includes immaterial amounts of loan fees.
(5) Total interest earning assets yield less the total interest bearing
liabilities rate.
(6) Net interest income divided by total interest earning assets.
(7) Total interest earning assets less total interest bearing liabilities.
10
The table, "Volume and Rate Variance Analysis," provides a summary of changes in
net interest income resulting from changes in volumes of interest earning assets
and interest bearing liabilities (change in volume times prior period rate), and
the rates earned and paid on such assets and liabilities (change in rate times
prior period volume).
Volume and Rate Variance Analysis
2009 Compared with 2008 2008 Compared with 2007
----------------------- -----------------------
Volume (1) Rate (1) Total Volume (1) Rate (1) Total
------- ----- ----- ------- ----- -----
(Dollars in thousands)
Interest bearing deposits due from banks .............. $ 58 $ (29) $ 29 $ 16 $ (4) $ 12
Taxable securities .................................... 1,552 (791) 761 481 437 918
Tax-exempt securities ................................. (32) 10 (22) 43 (27) 16
Federal funds sold .................................... (312) (317) (629) 88 (665) (577)
Federal Home Loan Bank stock .......................... 9 (53) (44) 9 (17) (8)
Loans ................................................. 898 (2,593) (1,695) 2,553 (1,941) 612
------- ------- ------- ------- ------- -------
Total interest income ...................... 2,173 (3,773) (1,600) 3,190 (2,217) 973
------- ------- ------- ------- ------- -------
Interest bearing deposits
Interest bearing transaction accounts ............. (56) (623) (679) 9 (743) (734)
Savings ........................................... (48) (212) (260) 4 (322) (318)
Time deposits $100M and over ...................... 670 (1,244) (574) 1,088 (816) 272
Other time deposits ............................... 1,034 (1,605) (571) 1,047 (739) 308
Short-term borrowings ................................. (11) 47 36 11 - 11
Long-term debt ........................................ 111 (14) 97 67 (2) 65
------- ------- ------- ------- ------- -------
Total interest expense ..................... 1,700 (3,651) (1,951) 2,226 (2,622) (396)
------- ------- ------- ------- ------- -------
Net interest income ........................ $ 473 $ (122) $ 351 $ 964 $ 405 $ 1,369
======= ======= ======= ======= ======= =======
----------------------------------------------------
(1) The rate/volume variance for each category has been allocated on a
consistent basis between rate and volume variances based on the percentage
of rate or volume variance to the sum of the two absolute variances except
in categories having balances in only one period. In such cases, the entire
variance is attributed to volume variances.
Management currently is not able to predict with any significant degree
of certainty either the direction or frequency of changes in interest rates that
may occur during 2010. While management considers it more likely than not that
Federal Reserve policies during 2010 would lead to slightly higher interest
rates, no catalyst for any immediate change in rates is currently evident.
Interest Rate Sensitivity
Interest rate sensitivity measures the timing and magnitude of the
repricing of assets compared with the repricing of liabilities and is an
important part of asset/liability management. The objective of interest rate
sensitivity management is to generate stable growth in net interest income, and
to control the risks associated with interest rate movements. Management
constantly monitors interest rate risk exposures and the expected interest rate
environment so that adjustments in interest rate sensitivity can be timely made.
The table, "Interest Sensitivity Analysis", indicates that, on a
cumulative basis through twelve months, rate sensitive liabilities exceeded rate
sensitive assets at the end of 2009 by $163,801,000, resulting in a cumulative
gap ratio of .48. When interest sensitive assets exceed interest sensitive
liabilities for a specific repricing "horizon," a positive interest sensitivity
gap results. The gap is negative when interest sensitive liabilities exceed
interest sensitive assets, as was the case at the end of 2009 with respect to
the one-year time horizon. For a bank with a negative gap, falling interest
rates would ordinarily be expected to have a positive effect on net interest
income and rising rates would ordinarily be expected to have a negative effect.
However, if interest rates on other investment types increased sufficiently, the
Company's large amount of interest bearing deposits due from banks, which
consists of excess reserves held at the Federal Reserve, provides a ready source
of funds that could be invested into those higher-yielding asset classes. By
simultaneously limiting the magnitude of any increases in rates paid for
deposits, the Company could mitigate or overcome the negative effects of the gap
position indicated in the table.
The table, "Interest Sensitivity Analysis", reflects the balances of
interest earning assets and interest bearing liabilities at the earlier of their
repricing or maturity dates. Amounts of fixed rate loans are reflected at the
11
loans' final maturity dates. Variable rate loans are reflected at the earlier of
their contractual maturity date or the date at which the loans may be repriced
contractually. Securities are reflected at the earlier of each instrument's
ultimate maturity or contractual repricing date. Overnight federal funds sold
are reflected in the earliest contractual repricing interval due to the
immediately available nature of these funds. Interest bearing liabilities with
no contractual maturity, such as interest bearing transaction accounts and
savings deposits, are reflected in the earliest repricing interval. These
liabilities are subject to contractual arrangements that allow management to
vary the rates paid on these deposits within a thirty-day or shorter period.
However, the Company is not obligated to vary the rates paid on those deposits
within any given period. Fixed rate time deposits, principally certificates of
deposit, are reflected at their contractual maturity dates.
Interest Sensitivity Analysis
December 31, 2009
Within 4-12 Over 1-5 Over 5
3 Months Months Years Years Total
-------- ------ ----- ----- -----
(Dollars in thousands)
Interest earning assets
Interest bearing deposits due from banks ............. $ 46,021 $ - $ - $ - $ 46,021
Securities ........................................... - 4,286 14,646 131,802 150,734
Federal Home Loan Bank stock ......................... 1,307 - - - 1,307
Loans (1) ............................................ 61,903 34,845 141,382 15,248 253,378
--------- --------- --------- --------- ---------
Total interest earning assets ................. 109,231 39,131 156,028 147,050 $ 451,440
--------- --------- --------- --------- =========
Interest bearing liabilities
Interest bearing deposits
Interest bearing transaction accounts ............ $ 50,576 $ - $ - $ - $ 50,576
Savings .......................................... 27,561 - - - 27,561
Time deposits $100M and over ..................... 30,398 65,568 32,948 - 128,914
Other time deposits .............................. 23,460 109,600 49,470 - 182,530
Long-term debt ....................................... 3,500 1,500 3,000 - 8,000
--------- --------- --------- --------- ---------
Total interest bearing liabilities ............ 135,495 176,668 85,418 - $ 397,581
--------- --------- --------- --------- =========
Interest sensitivity gap .................................. $ (26,264) $(137,537) $ 70,610 $ 147,050
Cumulative interest sensitivity gap ....................... $ (26,264) $(163,801) $ (93,191) $ 53,859
Gap ratio ................................................. 0.81 0.22
Cumulative gap ratio ...................................... 0.81 0.48
------------------------------
(1) Loans are net of nonaccruing loans totaling $13,870,000.
Provision for Loan Losses
The provision for loan losses is charged to earnings based on
management's continuing review and evaluation of the loan portfolio and its
estimate of the related allowance for loan losses. Provisions for loan losses
were $4,355,000, $4,550,000 and $594,000 for the years ended December 31, 2009,
2008 and 2007, respectively. During 2009 and 2008, the Company experienced
higher amounts of nonaccrual, past due and other potential problem loans. Some
signs of deterioration in the local real estate market were observed in the
first quarter of 2008 and the rate of deterioration was gradual through the
first three quarters of that year. However, during the fourth quarter of 2008,
the rate of deterioration increased significantly and the resulting distressed
real estate values continue as of December 31, 2009.
The Company is monitoring these conditions closely and is working
proactively with its customers in an effort to collect or recover the maximum
amounts possible. When management determines that repayment of an impaired loan
is dependent solely on the liquidation of its collateral, management assesses
the value of the collateral using independent appraisers, or through other
market-based measures, and, if the loan's carrying amount is more than the value
12
so determined, a valuation allowance is established, or a portion of the loan
may be charged-off, such that the carrying amount of the loan does not exceed
the fair value of the collateral. During 2009, the Company charged-off loans
totaling $3,886,000, an increase of $2,220,000, or 133.3%, over the amount
charged-off in 2008. For 2008, the Company charged off loans totaling
$1,666,000, an increase of $1,374,000, or 471%, more than the 2007 amount.
Recoveries of charge-offs were not significant in either 2009 or 2008.
See "Impaired Loans," "Potential Problem Loans," "Allowance for Loan
Losses" and "The Application of Critical Accounting Policies" for further
information and a discussion of the methodology used and factors considered by
management in its estimate of the allowance for loan losses.
Other Income
Other income for 2009 was $2,718,000, an increase of $223,000, or 8.9%,
over the 2008 amount. Mortgage brokerage income increased by $152,000 over the
prior year amount due to increased activity. For these lending transactions, the
Bank contracts with an unrelated financial institution to provide certain
services as the other bank's agent. The Bank takes the borrower's application,
obtains the credit report and other supporting documentation and forwards them
to the other institution which makes the credit decision and funds any resulting
loan. During 2009, gains on the sale of investment securities were $90,000
compared with losses of $3,000 in 2008.
Other income for 2008 increased by $289,000 over the 2007 amount. Due
to increased usage, debit card transaction fees increased by $94,000. The value
of life insurance contracts increased by $267,000 over the 2007 amounts.
Decreases were noted in credit life insurance commissions, mortgage brokerage
income and other income. These categories of other income have been in a
declining trend. Net losses of $3,000 were incurred on the sales of investments.
Other Expenses
2009 Compared with 2008
Noninterest expense for 2009 totaled $9,249,000 compared with
$8,067,000 for 2008. FDIC insurance assessments increased by $523,000, salaries
and employee benefits increased by $394,000, professional services expenses
increased by $99,000, and expenses related to foreclosed assets increased by
$124,000.
FDIC insurance expenses increased because the FDIC is required to
maintain its reserves at specified levels relative to insured deposits. When
those reserve levels are not maintained, the FDIC must increase the assessments
charged to insured depository institutions in order to replenish the reserves.
During 2009, the FDIC increased the amount of its base assessment and imposed a
special assessment, both of which produced immediate and substantial increases
in the amounts of deposit insurance expense. In addition, at the end of 2009,
the FDIC required insured institutions to prepay an estimate of their insurance
assessments that would have been payable for the next three years. While not
currently included in expenses, the prepaid assessment amount eliminated the
Bank's ability to earn interest income on those funds.
Salaries and employee benefits increased due to normal salary increases
granted from time to time and because additional and some pre-existing personnel
were given additional responsibilities to provide oversight and loss-mitigation
measures related to nonaccrual and other problem loans. Weakness in the local
economy and the resulting deterioration in the Bank's credit quality metrics
have required the Bank's management to employ relatively more resources to
manage loans and related customer relationships, including obtaining and
analyzing updated financial information, visiting and interviewing customers,
and interpreting economic and other data about various aspects of the local
market areas. To offset some of the effects of those efforts, however,
management has allowed some vacant positions to remain unfilled, such that the
number of full-time equivalent employees was reduced to 82 as of December 31,
2009, compared with 91 as of December 31, 2008.
Expenses for professional services and expenses related to foreclosed
assets both increased due to higher levels of such activities. Twenty-five loans
totaling $6,382,000 were transferred to foreclosed assets during 2009, compared
with $706,000 transferred in 2008.
Management expects expenses related to problem loan management,
foreclosed properties, and professional services will continue to be higher than
normal until there is a significant turn-around in economic activity at the
local level. Likewise, expenses related to deposit insurance are not expected to
decrease in the foreseeable future.
13
2008 Compared with 2007
Noninterest expense for 2008 totaled $8,067,000, an increase of
$935,000, or 13.1%, over the amount for 2007. Salaries and employee benefits
increased by $416,000, or 10.1%, over the 2007 amount due to an increase of
$219,000 in salaries and wages, an increase of $139,000 for employee insurance
benefits expenses, and a $48,000 increase in deferred compensation expenses. Net
occupancy and furniture and equipment expenses increased by $70,000 due to
increased expenses for real estate taxes, utilities, and building depreciation
and maintenance. Transaction expenses related to debit card services increased
in 2008 to $373,000, or $96,000 more than for 2007 due to higher transaction
volumes. Expenses for FDIC deposit insurance in 2008 increased by $151,000 over
the 2007 amount. Other expenses for 2008 were $202,000 more than the 2007 amount
primarily due to an increase of $107,000 in data processing expenses.
Income Taxes
Income tax expense for 2009 was $81,000, a decrease of $172,000 from
the 2008 amount, primarily due to a decrease of $413,000 in income before income
taxes. The effective income tax rates (income tax expense divided by income
before income taxes) were 6.9% for 2009, 15.9% for 2008 and 31.0% for 2007. For
2009 and 2008, income from tax-exempt investment securities and nontaxable
increases in the value of life insurance contracts were approximately 100% and
76% of income before income taxes, respectively.
Income tax expense for 2008 fell by $1,244,000 from the 2007 amount,
due to the $3,233,000 decrease in income before income taxes.
Securities
The following table summarizes the carrying value amounts of securities
held by the Company at each of the dates indicated.
Securities Portfolio Composition
December 31,
------------
2009 2008 2007
---- ---- ----
(Dollars in thousands)
Available-for-sale
Mortgage-backed securities issued by
US Government agencies ............................................................ $ 1,475 $ 1,829 $ -
Government-sponsored enterprises (GSEs) ............................................... 72,303 63,981 56,545
Mortgage-backed securities issued by GSEs ............................................. 48,362 41,357 22,193
State, county and municipal ........................................................... 19,570 19,469 20,288
-------- -------- --------
Total available-for-sale .......................................................... 141,710 126,636 99,026
-------- -------- --------
Held-to-maturity
Mortgage-backed securities issued by GSEs ............................................. 9,024 11,910 5,663
-------- -------- --------
Total securities .................................................................. $150,734 $138,546 $104,689
======== ======== ========
14
The following table presents maturities and weighted average yields of
securities at December 31, 2009. Yields on tax-exempt state, county and
municipal obligations have not been computed on a taxable-equivalent basis.
Securities Portfolio Maturities and Yields
December 31, 2009
-----------------
After After
One Year Five Years
Within Through Through After
One Year Five Years Ten Years Ten Years Total
-------- ---------- --------- --------- -----
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Mortgage-backed securities
issued by US Government
agencies (1) ............. $ - 0.00% $ - 0.00% $ 1,475 4.23% $ - 0.00% $ 1,475 4.23%
Government-sponsored
enterprises (GSEs) ....... 1,520 3.44% 10,032 2.81% 25,889 3.80% 34,862 3.54% 72,303 3.53%
Mortgage-backed securities
issued by GSEs (1) ....... 2,465 3.44% 3,303 3.83% 16,136 4.11% 35,482 4.53% 57,386 4.32%
State, county and municipal ... 301 4.09% 1,000 3.87% 2,655 4.10% 15,614 4.09% 19,570 4.08%
------- -------- ------- -------- ---------
Total ................. $ 4,286 3.49% $ 14,335 3.12% $46,155 3.94% $ 85,958 4.05% $ 150,734 3.91%
======= ======== ======= ======== =========
----------------------------
(1) Maturity categories based upon final stated maturity dates. Average
maturity is substantially shorter because of the monthly return of
principal on certain securities.
Government-sponsored enterprises ("GSEs") are agencies and corporations
established by the U.S. Government, including, among others, the Federal Home
Loan Banks, Federal National Mortgage Association, Federal Home Loan Mortgage
Corporation, and Federal Farm Credit Banks. Securities issued by these
enterprises are not obligations of the U.S. Government and are not backed by the
full faith and credit of the U.S. Government or otherwise guaranteed by the U.S.
Government. Evidencing the quality of the issuers, however, these securities
generally are eligible to be used as security for public deposits of the U.S.
Treasury, government agencies and corporations, and states and other political
subdivisions, and may used as collateral to secure borrowings from the Federal
Reserve Bank's Discount Window. As of December 31, 2009, securities with a
carrying value of $59,482,000 were pledged to secure public deposits.
On an ongoing basis, management assigns securities upon purchase into
one of three categories (trading, available-for-sale or held-to-maturity) based
on intent, taking into consideration other factors including expectations for
changes in market rates of interest, liquidity needs, asset/liability management
strategies, and capital requirements. The Company has never held securities for
trading purposes. During 2009, the Company realized net gains of $90,000 on the
sales of securities. During 2008, the Company realized net losses of $3,000 on
such sales. During 2007, the Company realized no gains or losses on sales of
investment securities. No transfers of available-for-sale or held-to-maturity
securities to other categories were made in any of the years 2007 through 2009.
The investment portfolio increased by $12,188,000 in 2009 from the 2008
year-end amount. The Company invested significant amounts in mortgage-backed
securities issued by GSEs and other GSE securities, increasing these categories
by $12,441,000 over the prior year amounts. Yields associated with these
securities at the time of their purchase were generally superior to yields
available for other categories of securities with similar expected lives and the
Company's management believed that, because these types of securities are held
worldwide, there was no more than a remote probability that the U.S. Government
would fail to provide a commitment to repay these obligations.
The overall yield on investment securities held as of December 31, 2009
was 3.91%, compared with 4.79% as of December 31, 2008 and 4.44% as of December
31, 2007.
All mortgage-backed securities held by the Company in 2009 and 2008
were issued by the Federal Home Loan Mortgage Corporation, the Federal National
Mortgage Association, or the Government National Mortgage Association.
15
Loan Portfolio
Management believes the loan portfolio is adequately diversified. There
are no concentrations of loans in any particular individual, industry or groups
of related individuals or industries, and there are no foreign loans. The
Company's loan portfolio is, however, dependent upon economic and other factors
that affect its local market area, and a substantial portion of the loan
portfolio is secured by local real estate.
The amounts of loans outstanding as of the end of each of the last five
years, and the percentage of each category to total loans, are shown in the
following tables according to type of loan:
Loan Portfolio Composition
December 31,
------------
2009 2008 2007 2006 2005
---- ---- ---- ---- ----
(Dollars in thousands)
Commercial, financial and industrial
Commercial and industrial .......................... $ 21,511 $ 21,372 $ 22,042 $ 22,268 $ 20,873
Purchasing or carrying securities .................. 1,598 1,815 1,823 2,000 2,136
Real estate - construction .............................. 29,439 30,451 2,201 1,982 674
Real estate - mortgage
1-4 family residential ............................. 108,293 109,153 131,944 98,708 72,774
Multifamily (5 or more) residential ................ 2,899 66 2,421 1,900 1,229
Nonfarm, nonresidential ............................ 73,282 73,450 50,833 47,337 46,544
Consumer installment
Credit card and checking credit .................... 1,643 1,517 1,407 1,334 1,148
Other .............................................. 28,583 32,589 31,460 27,437 23,940
-------- -------- -------- -------- --------
Total loans ............................. $267,248 $270,413 $244,131 $202,966 $169,318
======== ======== ======== ======== ========
Percentage Loan Portfolio Composition
December 31,
------------
2009 2008 2007 2006 2005
---- ---- ---- ---- ----
Commercial, financial and industrial
Commercial and industrial ............................... 8.0% 7.9% 9.0% 11.0% 12.3%
Purchasing or carrying securities ....................... 0.6% 0.7% 0.8% 1.0% 1.3%
Real estate - construction ................................... 11.0% 11.2% 0.9% 1.0% 0.4%
Real estate - mortgage
1-4 family residential .................................. 40.5% 40.4% 54.0% 48.6% 43.0%
Multifamily (5 or more) residential ..................... 1.1% 0.0% 1.0% 0.9% 0.7%
Nonfarm, nonresidential ................................. 27.5% 27.2% 20.8% 23.3% 27.5%
Consumer installment
Credit card and checking credit ......................... 0.6% 0.6% 0.6% 0.7% 0.7%
Other ................................................... 10.7% 12.0% 12.9% 13.5% 14.1%
----- ----- ----- ----- -----
Total loans .................................. 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
A certain degree of risk taking is inherent in the extension of credit.
Management has established loan and credit policies and practices designed to
control both the types and amounts of risks assumed, and to minimize losses.
Such policies and practices include limitations on loan-to-collateral values for
various types of collateral, requirements for appraisals of real estate
collateral, problem loan management practices and collection procedures, and
nonaccrual and charge-off guidelines.
Total loans decreased by $3,165,000, or 1.2%, during 2009, after
growing $26,282,000, or 10.8%, during 2008. The decrease in 2009 was
attributable primarily to management's decision to devote the majority of its
attention and efforts toward increased oversight, loss mitigation and collection
16
of loans made previously. Overall, there were no large changes in any particular
categories of loans during 2009. The ratio of total loans to total deposits at
the end of 2009 was 61.2% compared with 65.0% at December 31, 2008. During 2008,
the Company changed the way it categorizes loans, including the 1-4 family
residential sub-category of the Real estate - mortgage grouping, the Real estate
- construction category, and the non-farm, non-residential loan category.
Accordingly, the categories shown for 2008 are not in all cases directly
comparable to amounts reported in previous years.
Commercial and industrial loans primarily represent loans to
businesses, and may be made on either a secured or an unsecured basis. When
taken, collateral usually consists of liens on receivables, equipment,
inventories, furniture and fixtures. Unsecured business loans are generally
short-term with emphasis on repayment strengths and low debt-to-worth ratios.
During 2009, commercial and industrial loans increased by $139,000, or 0.7%,
compared with a decrease of $670,000, or 3.0%, during 2008. Loans mainly for
business and investment purposes that are secured by real estate (nonfarm,
nonresidential) decreased by $168,000, or .2%, in 2008 compared with an increase
of $22,617,000, or 44.5%, in 2008. Commercial lending involves significant risk
because repayment usually depends on the cash flows generated by a borrower's
business, and the debt service capacity of a business can deteriorate because of
downturns in national and local economic conditions. To control risk, more
in-depth initial and continuing financial analysis of a borrower's cash flows
and other financial information is generally required.
Real estate construction loans generally consist of financing the
construction of 1-4 family dwellings and some nonfarm, nonresidential real
estate. Usually, loan-to-value ratios are limited to 75% and permanent financing
commitments are usually required prior to the advancement of loan proceeds.
Loans secured by real estate mortgages, excluding construction loans,
comprised approximately 69% and 68% of the Company's loan portfolio at the end
of 2009 and 2008, respectively. Real estate mortgage loans of all types totaled
$184,474,000 at the end of 2009 and $182,669,000 at the end of 2008. Residential
real estate loans consist mainly of first and second mortgages on single family
homes, with some multifamily home loans. Loan-to-value ratios for these
instruments are generally limited to 80%. Nonfarm, nonresidential real estate
loans are secured by business and commercial properties with loan-to-value
ratios generally limited to 70%. The repayment of both residential and business
real estate loans is dependent primarily on the income and cash flows of the
borrowers, with the real estate serving as a secondary or liquidation source of
repayment. The Company does not originate high-risk mortgage loans such as
so-called option ARMs, nor does it originate loans with high loan-to-value
ratios without requiring the purchaser to obtain private mortgage insurance. The
Company also does not originate loans with fixed monthly payment amounts that
are less than the interest accrued on the loan, or loans with low initial
monthly payments that increase to much higher levels at some future time.
Real estate values in the Company's market areas, particularly
residential real properties, began to show some signs of weakness beginning in
the first quarter of 2008 and have deteriorated further since that time. The
deterioration in the local real estate market was slow at first and accelerated
during the third and fourth quarters of 2008 and throughout 2009. Higher
foreclosure rates, increasing unemployment and other factors resulted in lower
demand for housing and have driven down property values. The decline in property
values does not directly cause defaults by borrowers other than home builders,
but it does reduce the likelihood that either the defaulting borrower or the
foreclosing bank will receive enough from the sale of the property to repay the
loan in full.
National political and industry leaders recently have been working to
encourage private-sector programs whereby lenders and mortgage servicers would
be able to work with distressed borrowers to prevent a glut of foreclosures. By
reworking loan terms, including eliminating or reducing to a manageable level
the payment shock that often results when certain adjustable-rate loans "reset,"
it may be possible for borrowers to continue making monthly payments and remain
in their homes. In addition, the Federal Reserve recently has maintained
interest rate at low levels to provide stimulus to the national economy.
Maturity and Interest Sensitivity Distribution of Loans
The following table sets forth the maturity distribution of the
Company's loans, by type, as of December 31, 2009, as well as the type of
interest requirement on such loans.
17
December 31, 2009
-----------------
Due in Due after
One Year One through Due after
or Less Five Years Five Years Total
------- ---------- ---------- -----
(Dollars in thousands)
Commercial, financial and industrial ................... $ 10,398 $ 12,286 $ 425 $ 23,109
Real estate - construction ............................. 20,121 6,478 2,840 29,439
Real estate - mortgage ................................. 37,615 96,071 50,788 184,474
Consumer installment ................................... 8,381 19,522 2,323 30,226
-------- -------- -------- --------
Total loans ........................... $ 76,515 $134,357 $ 56,376 $267,248
======== ======== ======== ========
Maturity greater than one year:
Predetermined rate ..................................... $139,530
========
Variable rate .......................................... $ 51,203
========
Impaired Loans
Impaired loans are those loans on which, based on current information
and events, it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement. Loans
which management has identified as impaired generally are nonperforming loans.
Nonperforming loans include nonaccrual loans and loans which are 90 days or more
delinquent as to principal or interest payments. Other impaired loans are loans
that management has identified as impaired through the Company's internal loan
review process based on other criteria, including the borrowers' deteriorated
financial condition, lower collateral values associated with loans that are
collateral dependent, and other specific factors. The Company had no loans
accounted for as troubled debt restructurings in the past five years. Following
is a summary of the Company's impaired loans:
Impaired Loans
December 31,
------------
2009 2008 2007 2006 2005
---- ---- ---- ---- ----
(Dollars in thousands)
Nonaccrual loans ................................... $13,870 $11,799 $ 625 $ 50 $ 900
Accruing loans 90 days or more past due ............ - - - - 5
Other .............................................. 3,478 - - - -
------- ------- ------- ------- -------
Total ................................. $17,348 $11,799 $ 625 $ 50 $ 905
======= ======= ======= ======= =======
Percent of total loans ............................. 6.5% 4.4% 0.3% 0.0% 0.5%
When an impaired loan is 90 days or more past due as to interest or
principal or there is serious doubt as to ultimate collectibility, the accrual
of interest income is generally discontinued. Previously accrued interest on
loans placed in a nonaccrual status is reversed against current income, and
subsequent interest income is recognized on a cash basis when received. When the
collectibility of a significant amount of principal is in serious doubt,
collections are credited first to the remaining principal balance on a cost
recovery basis. An impaired nonaccrual loan is not returned to accrual status
unless principal and interest are current and the borrower has demonstrated the
ability to continue making payments as agreed. The amount of interest income
that would have been included in income if nonaccrual loans had been current in
accordance with their terms for 2009 approximated $781,000. The amount of such
income for 2008 was approximately $821,000 and, for prior years, such amounts
were immaterial. The amount of interest income on nonaccrual loans that was
included in interest income for 2009 was $72,000, compared with $480,000 for
2008. For prior years, the amounts of such income were not material.
As of December 31, 2009, nonaccrual loans totaling $12,624,000, or 91%
of such loans, were secured by real estate.
18
As of December 31, 2009, there were no irrevocable commitments to lend
additional funds to debtors owing amounts on nonaccrual loans.
Potential Problem Loans
Management has identified and maintains a list of potential problem
loans that are not included in impaired loans. A loan is added to the potential
problem list when management becomes aware of information about possible credit
problems of borrowers that causes doubts as to the ability of such borrowers to
comply with the current loan repayment terms. The total amount of loans
outstanding at December 31, 2009 determined by management to be potential
problem loans was $7,305,000, an increase of $395,000 from the $6,910,000 of
such loans as of December 31, 2008. This amount does not represent management's
estimate of potential losses since a large proportion of such loans is secured
by various types of collateral. The following table presents the dollar amounts
and percentages of potential problem loans secured by various types of
collateral. The realizable value of the collateral in any given case may be less
than the amount due on the loan.
December 31, 2009
-----------------
Amount %
------ -
(Dollars in thousands)
Real estate mortgage ............... $6,128 83.9%
Vehicles ........................... 583 8.0%
Mobile homes ....................... 17 0.2%
Other .............................. 420 5.8%
Unsecured .......................... 157 2.1%
------ -----
Total ................... $7,305 100.0%
====== =====
Allowance for Loan Losses
The table, "Summary of Loan Loss Experience", summarizes loan balances
at the end of each period indicated, averages for each period, changes in the
allowance arising from charge-offs and recoveries by loan category, and
additions to the allowance which have been charged to expense. See "The
Application of Critical Accounting Policies" for further discussion of the
factors and procedures used by management in estimating the allowance for loan
losses.
19
Summary of Loan Loss Experience
Years Ended December 31,
------------------------
2009 2008 2007 2006 2005
---- ---- ---- ---- ----
(Dollars in thousands)
Total loans outstanding at end of period .......................... $267,248 $270,413 $244,131 $202,966 $169,318
Average amount of loans outstanding ............................... 272,330 259,055 224,353 184,032 164,243
Balance of allowance for loan losses - beginning .................. $ 5,475 $ 2,574 $ 2,242 $ 2,266 $ 2,240
-------- -------- -------- -------- --------
Loans charged off
Commercial and industrial .................................... 846 652 88 13 -
Real estate - mortgage ....................................... 1,866 667 13 6 61
Consumer installment ......................................... 1,174 347 191 115 242
-------- -------- -------- -------- --------
Total charge-offs ....................................... 3,886 1,666 292 134 303
-------- -------- -------- -------- --------
Recoveries of loans previously charged off
Commercial and industrial .................................... 6 5 - - -
Real estate - mortgage ....................................... - - - 31 10
Consumer installment ......................................... 102 12 30 14 69
-------- -------- -------- -------- --------
Total recoveries ........................................ 108 17 30 45 79
-------- -------- -------- -------- --------
Net charge-offs ................................................... 3,778 1,649 262 89 224
-------- -------- -------- -------- --------
Additions to allowance charged to expense ......................... 4,355 4,550 594 65 250
-------- -------- -------- -------- --------
Balance of allowance for loan losses - ending ..................... $ 6,052 $ 5,475 $ 2,574 $ 2,242 $ 2,266
======== ======== ======== ======== ========
Ratios
Net charge-offs to average loans ............................. 1.39% 0.64% 0.12% 0.05% 0.14%
Net charge-offs to loans at end of period .................... 1.41% 0.61% 0.11% 0.04% 0.13%
Allowance for loan losses to average loans ................... 2.22% 2.11% 1.15% 1.22% 1.38%
Allowance for loan losses to loans at end of period .......... 2.26% 2.02% 1.05% 1.10% 1.34%
Net charge-offs to allowance for loan losses ................. 62.43% 30.12% 10.18% 3.97% 9.89%
Net charge-offs to provision for loan losses ................. 86.75% 36.24% 44.11% 136.92% 89.60%
Deposits
The average amounts and percentage composition of deposits held by the
Company for the years ended December 31, 2009, 2008 and 2007, are summarized
below:
Average Deposits
Years Ended December 31,
------------------------
2009 2008 2007
---- ---- ----
Amount % Amount % Amount %
------ ----- ------ ------ ------ -------
(Dollars in thousands)
Noninterest bearing demand ..................... $ 44,243 10.4% $ 41,173 10.7% $ 40,099 12.0%
Interest bearing transaction accounts .......... 54,202 12.8% 57,416 15.0% 57,117 17.1%
Savings ........................................ 21,093 5.0% 25,181 6.6% 25,042 7.5%
Time deposits $100M and over ................... 131,115 31.0% 111,780 29.1% 85,815 25.6%
Other time deposits ............................ 173,047 40.8% 148,295 38.6% 126,588 37.8%
-------- ----- -------- ----- -------- -----
Total deposits ..................... $423,700 100.0% $383,845 100.0% $334,661 100.0%
======== ===== ======== ===== ======== =====
As of December 31, 2009, there were $128,914,000 in time deposits of
$100,000 or more. Approximately $30,398,000 mature within three months,
$15,414,000 mature over three through six months, $50,154,000 mature over six
20
through twelve months and $32,948,000 mature after one year. The amount of such
deposits maturing after one year increased significantly from the amount as of
December 31, 2008 because the rates paid for longer-term deposits are more
attractive than are the rates currently offered for short-term deposits. The
FDIC's deposit insurance coverage limit was increased to $250,000 per account
owner for all deposit accounts at all insured financial institutions through
December 31, 2013. On January 1, 2014, deposit insurance coverage will revert to
$100,000 per depositor, except for certain retirement accounts which will
continue to be insured up to $250,000 per depositor. The Bank participated in
the FDIC's initial Temporary Liquidity Guarantee Program (the "TLGP") for
deposits which provided an unlimited amount of deposit insurance for certain
noninterest-bearing transaction accounts through December 31, 2009. Even though
the Bank decided not to participate in the optional extended period for the
TLGP, the temporary maximum regular FDIC insurance of $250,000 remains in effect
for all of the Bank's deposit accounts. As of December 31, 2009, approximately
$24,365,000 of time deposits of $100,000 or more represented deposits of local
governmental entities compared with $33,380,000 at the end of 2008. It is a
common industry practice not to consider time deposits of $100,000 or more as
core deposits since their retention can be influenced heavily by rates offered.
Therefore, such deposits have the characteristics of shorter-term purchased
funds. Certificates of deposit $100,000 and over require that the Company
achieve and maintain an appropriate matching of maturity distributions and a
diversification of sources to achieve an appropriate level of liquidity. The
Company has never purchased brokered deposits.
Return on Equity and Assets
The following table shows the return on assets (net income divided by
average total assets), return on equity (net income divided by average equity),
dividend payout ratio (dividends declared per common share divided by net income
per common share), and equity to assets ratio (average equity divided by average
total assets) for each period indicated.
Years Ended December 31,
------------------------
2009 2008 2007
---- ---- ----
Return on assets 0.23% 0.31% 0.88%
Return on equity 2.64% 3.38% 9.46%
Dividend payout ratio 0.00% 0.00% 0.00%
Equity to assets ratio 8.68% 9.12% 9.31%
Liquidity
Liquidity is the ability to meet current and future obligations through
liquidation or maturity of existing assets or the acquisition of additional
liabilities. Adequate liquidity is necessary to meet the requirements of
customers for loans and deposit withdrawals in the most timely and economical
manner. Some liquidity is ensured by maintaining assets which are convertible
immediately into cash at minimal cost (amounts due from banks and federal funds
sold). However, the most manageable sources of liquidity are composed of
liabilities, with the primary focus of liquidity management being on the ability
to obtain deposits within the Company's market areas. Core deposits (total
deposits less time deposits of $100,000 and over) provide a relatively stable
funding base, and the average of these deposits represented 61.0% of average
total assets during 2009 compared with 62.6% during 2008. Deposits of several
local governmental entities comprised approximately 12% and 14% of total
deposits at the end of 2009 and 2008, respectively. Because of the potentially
volatile nature of this funding source, the Bank maintains membership in the
Federal Home Loan Bank of Atlanta (the "FHLB") in order to gain access to its
credit programs. As of December 31, 2009, the Bank had borrowed $8,000,000 from
the FHLB and was eligible to borrow up to an additional $15,147,000. Such
borrowings may be secured by a lien on its investment in FHLB stock, the Bank's
unencumbered holdings of securities issued by the FHLB, and certain first
mortgage residential loans held. The amount of eligible mortgage-related
collateral instruments remaining available as of December 31, 2009 to secure any
additional FHLB borrowings totaled approximately $8,722,000. The amount of the
Bank's unencumbered investment securities issued by the FHLB was approximately
$10,385,000 as of December 31, 2009. The Bank has no available short-term lines
of credit to purchase federal funds from unrelated correspondent institutions.
The Bank has been approved by the Federal Reserve Bank ("FRB") to have
immediate access to the FRB's Discount Window. Access to this facility allows
the Bank to obtain funds on short notice by pledging eligible securities to the
FRB to secure amounts borrowed. The Bank obtained access to this facility to
diversify and strengthen the financial position of available funding sources.
Asset liquidity is provided from several sources, including amounts due
from banks, securities available-for-sale and funds available from maturing
loans and paydowns of mortgage-backed securities.
21
The Company's ability to meet its cash obligations or to pay any
possible future cash dividends to shareholders is dependent primarily on the
successful operation of the subsidiary bank and its ability to pay cash
dividends to the Company. Any of the Bank's cash dividends in excess of the
amount of the subsidiary's current year-to-date earnings ($1,101,000 at December
31, 2009) are subject to the prior approval of the South Carolina Commissioner
of Banking. In addition, dividends paid by the Bank to the Company would be
prohibited if the effect thereof would cause the Bank's capital to be reduced
below applicable minimum regulatory requirements. In 2009, 2008 and 2007, the
Company received no cash dividends from its banking subsidiary. Under Federal
Reserve Board regulations, the amounts of loans or advances from the Bank to the
Company are also restricted.
Management believes that, by offering attractive interest rates for
deposits and by providing outstanding customer service, the Company and the Bank
will continue to be able to obtain sufficient funds to meet their operating
needs in the local marketplace.
Capital Resources
Shareholders' equity increased by $4,890,000 and $2,017,000 during 2009
and 2008, respectively. During 2009, net income increased shareholders' equity
by $1,101,000, exercises of stock options added $486,000, the issuance of
preferred stock provided an increase of $3,125,000 and repurchases of common
stock decreased shareholders' equity by $80,000. Other comprehensive income,
consisting of the change in unrealized holding gains and losses on
available-for-sale securities adjusted for the effects of realized losses, net
of deferred tax effects, increased shareholders' equity by $261,000 and cash
paid in lieu of issuing fractional shares in conjunction with the 5% stock
dividend declared in 2009 resulted in a $3,000 decrease. During 2008, net income
increased shareholders' equity by $1,342,000 and the exercise of stock options
and related income tax benefits resulted in increases totaling $431,000. Other
comprehensive income or loss, consisting of the change in unrealized holding
gains and losses on available-for-sale securities adjusted for the effects of
realized losses, net of deferred tax effects, increased shareholders' equity by
$247,000. Approximately $3,000 was payable in lieu of the issuance of fractional
shares in conjunction with the 5% stock dividend declared in 2008.
The Company and its banking subsidiary are each subject to regulatory
risk-based capital adequacy standards. Under these standards, bank holding
companies and banks are required to maintain certain minimum ratios of capital
to risk-weighted assets and average total assets. Under the provisions of the
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"),
federal bank regulatory authorities are required to implement prescribed "prompt
corrective actions" upon the deterioration of the capital position of a bank or
bank holding company. If the capital position of an affected institution were to
fall below certain levels, increasingly stringent regulatory corrective actions
are mandated. Unrealized holding gains and losses on available-for-sale
securities are generally excluded for purposes of calculating regulatory capital
ratios. However, the extent of any unrealized appreciation or depreciation on
securities will continue to be a factor that regulatory examiners consider in
their overall assessment of capital adequacy.
Quantitative measures established by regulation to ensure capital
adequacy require both the Company and the Bank to maintain minimum amounts and
ratios, as set forth in the table below, of Total and Tier 1 Capital, as defined
in the regulation, to risk weighted assets, as defined, and of Tier 1 Capital,
as defined, to average assets, as defined. Management believes, as of December
31, 2009 and 2008, that the Company and the Bank exceeded all capital adequacy
minimum requirements to which they were subject.
To be categorized as well capitalized as defined in the Federal Deposit
Insurance Act, the Bank must maintain minimum Total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table below. Federal
regulators may also categorize the Bank as less than well capitalized based on
subjective criteria. Bank holding companies with higher levels of risk, or that
are experiencing or anticipating significant growth, are expected by the Federal
Reserve to maintain capital well above the minimums. There are no conditions or
events that management believes would cause the Company's or the Bank's category
to be other than that resulting from meeting the minimum ratio requirements.
22
Minimum for Minimum to be
Actual Capital Adequacy Well Capitalized
------ ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- -------- ----- -------- -----
December 31, 2009 (Dollars in thousands)
The Company
Total Capital to risk weighted assets ......... $ 48,127 15.5% $ 24,769 8.0% NA NA
Tier 1 Capital to risk weighted assets ........ $ 44,230 14.3% $ 12,385 4.0% NA NA
Tier 1 Capital to average assets (leverage) ... $ 44,230 9.3% $ 18,991 4.0% NA NA
Community First Bank
Total Capital to risk weighted assets ......... $ 42,709 14.0% $ 24,461 8.0% $ 30,577 10.0%
Tier 1 Capital to risk weighted assets ........ $ 38,859 12.7% $ 12,231 4.0% $ 18,346 6.0%
Tier 1 Capital to average assets (leverage) ... $ 38,859 8.2% $ 18,985 4.0% $ 23,732 5.0%
December 31, 2008
The Company
Total Capital to risk weighted assets ......... $ 43,470 14.1% $ 24,633 8.0% NA NA
Tier 1 Capital to risk weighted assets ........ $ 39,601 12.9% $ 12,317 4.0% NA NA
Tier 1 Capital to average assets (leverage) ... $ 39,601 8.8% $ 18,010 4.0% NA NA
Community First Bank
Total Capital to risk weighted assets ......... $ 41,513 13.5% $ 24,622 8.0% $ 30,777 10.0%
Tier 1 Capital to risk weighted assets ........ $ 37,646 12.2% $ 12,311 4.0% $ 18,466 6.0%
Tier 1 Capital to average assets (leverage) ... $ 37,646 8.4% $ 18,004 4.0% $ 22,505 5.0%
Inflation
Since the assets and liabilities of a bank are primarily monetary in
nature (payable in fixed, determinable amounts), the performance of a bank is
affected more by changes in interest rates than by inflation. Interest rates
generally increase as the rate of inflation increases, but the magnitude of the
change in rates may not be the same.
While the effect of inflation on banks is normally not as significant
as is its influence on those businesses having large investments in plant and
inventories, it does have an effect. During periods of high inflation, there are
normally corresponding increases in the money supply, and banks will normally
experience above-average growth in assets, loans and deposits. Also, general
increases in the prices of goods and services will result in increased operating
expenses.
Off-Balance Sheet Arrangements, Contractual Obligations and Contingent
Liabilities and Commitments
The Company presently engages in only limited off-balance sheet
arrangements. Such arrangements are defined as potentially material
transactions, agreements, or other contractual arrangements which the Company
has entered into that involve an entity that is not consolidated into its
financial statements and, under which the Company, whether or not it is a party
to the arrangement, has, or in the future may have:
o any obligation under a direct or indirect guarantee or similar
arrangement;
o a retained or contingent interest in assets transferred to an
unconsolidated entity or similar arrangement;
o derivatives, to the extent that the fair value thereof is not fully
reflected as a liability or asset in the financial statements; or
o any obligation or liability, including a contingent obligation or
liability, to the extent that it is not fully reflected in the
financial statements (excluding the footnotes thereto).
The Company's off-balance-sheet arrangements presently include only
commitments to extend credit and standby letters of credit. Such instruments
have elements of credit risk in excess of the amount recognized in the balance
sheet. The exposure to credit loss in the event of nonperformance by the other
parties to these instruments is represented by the contractual, or notional,
amount of those instruments. Generally, the same credit policies used for
on-balance sheet instruments, such as loans, are used in extending loan
commitments and letters of credit. The following table sets out the contractual
amounts of those arrangements:
23
December 31,
------------
2009 2008
---- ----
(Dollars in thousands)
Loan commitments ..................... $ 28,527 $ 30,486
Standby letters of credit ............ 873 915
Loan commitments involve 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 some
involve payment of a fee. Many of the commitments are expected to expire without
being fully drawn; therefore, the total amount of loan commitments does not
necessarily represent future cash requirements. Each customer's creditworthiness
is evaluated on a case-by-case basis. The amount of collateral obtained, if any,
upon extension of credit is based on management's credit evaluation of the
borrower. Collateral held varies but may include commercial and residential real
properties, accounts receivable, inventory and equipment.
Standby letters of credit are conditional commitments to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
standby letters of credit is the same as that involved in making loan
commitments to customers.
The Bank obtained the required regulatory approval to purchase land on
which it plans to construct a new banking office building in Powdersville, South
Carolina. The Bank has not yet applied for regulatory approval to open that
office and no budgets or timetables for construction have yet been made.
As described under "Liquidity," management believes that its various
sources of liquidity provide the resources necessary for the Bank to fund the
loan commitments and to perform under standby letters of credit, if the need
arises. Neither the Company nor the Bank are involved in other off-balance sheet
contractual relationships or transactions that could result in liquidity needs
or other commitments or significantly impact earnings.
Short-Term Borrowings
The Company did not have any material short-term borrowings outstanding
at any time during 2009.
The Application of Critical Accounting Policies
The consolidated financial statements are based on the selection and
application of accounting principles generally accepted in the United States of
America, which require management to make estimates and assumptions about future
events that affect the amounts reported in the financial statements and
accompanying notes. Future events and their effects cannot be determined with
absolute certainty. Therefore, the determination of estimates requires the
exercise of judgment. Actual results could differ from those estimates, and any
such differences may be material to the financial statements. Management
believes that the provision and allowance for loan losses discussed below is a
critical accounting policy that may involve a higher degree of judgment and
complexity in its application and represents the critical accounting policy used
in the preparation of the Company's financial statements. If different
assumptions or conditions were to prevail, the results could be materially
different from the reported results.
Management has discussed the selection, development and disclosure of
this critical accounting policy's methodology and assumptions with the Company's
audit committee to enhance the committee's awareness of those factors and to
enable the committee to assess the appropriateness of management's procedures
and conclusions, and its disclosures about this accounting policy.
Provision and Allowance for Loan Losses
The Company is required to estimate the collectibility of its loan
portfolio as of each accounting period end and, based on such estimates, provide
for an allowance for loan losses. The allowance for loan losses is increased by
the provision for loan losses charged to expense, and any recoveries received on
loans previously charged off. The allowance is decreased by deducting the amount
of uncollectible loans charged off.
A considerable amount of judgment is required in order to compute an
estimate of the amount of the allowance for loan losses. Management's judgments
must be applied in assessing the current creditworthiness of the Company's
24
borrowers and in estimating probable losses incurred in the loan portfolio based
on factors discussed below and their potential effects based on currently known
facts and circumstances. Changes in the estimated allowance for loan losses
arising as new events occur or more information is obtained are accounted for as
changes in accounting estimates in the accounting period in which such a change
occurs.
The allowance for loan losses is composed of specific, general and
unallocated amounts. Specific allowance amounts are provided for individual
impaired loans based on management's evaluation of the Company's loss exposure
taking into account the current payment status, underlying collateral and other
known information about a particular borrower's circumstances. Typically, these
impaired loans are assigned internal risk grades of management attention,
special mention, substandard or doubtful. The findings of internal credit
reviews and results from external audits and regulatory examinations are also
considered. General amounts are provided for all other loans, excluding those
for which specific amounts were determined, by applying estimated loss
percentages to the portfolio categorized using risk grades. These percentages
are based on management's current evaluation with consideration given to
historical loss experience. The unallocated portion of the allowance consists of
an amount believed to be appropriate to provide for the elements of imprecision
and estimation risk inherent in the specific and general amounts and is
determined based on management's evaluation of various conditions that are not
directly measured by the other components of the allowance. This evaluation
includes general national and local economic and business conditions affecting
key lending market areas, credit quality trends, collateral values, loan
volumes, portfolio seasoning, and any identified credit concentrations. The
findings of internal credit reviews and results from external audits and
regulatory examinations are also considered.
The Company utilizes its risk grading system for all loans held in the
portfolio. This system involves the Company's lending officers assigning a risk
grade, on a loan-by-loan basis, considering information about the borrower's
capacity to repay, collateral, payment history, and other known factors. Risk
grades assigned are updated monthly for any known changes in circumstances
affecting the borrower or the loan. The risk grading system is monitored on a
continuing basis by management and validated by the Company's independent
external credit review firm.
During 2009, higher foreclosures rates resulted in the transfer of
approximately $6,382,000 of loans to foreclosed assets. Additionally, because
the performance of some other loans deteriorated, the amounts of nonaccrual
loans as of December 31, 2009 were $2,071,000 more than the amount of such loans
as of December 31, 2008. Because the amounts of problem loans increased
significantly during 2009 and 2008, and because individual borrowers'
circumstances were increasingly sensitive to events beyond their control,
management revamped its process for estimating the allowance for loan losses,
including providing more frequent independent loan-by-loan analysis of impaired
loans and a more robust procedure for analyzing and estimating losses associated
with other loans. Management's response to the deteriorated performance of the
Company's loans has led it to devote significantly more resources to the
processes of problem loan identification, management and work-out. The current
national and local economic environments, including high unemployment and
depressed real estate values, are expected to continue to result in the
occurrence of loan losses and the need for abnormally high provisions and
allowances for loan losses for the near term. However, because the Bank
historically has been relatively conservative in its lending policies and
practices, management believes that the Company is well-positioned to withstand
these problems absent further significant economic deterioration in the
Company's markets. Generally accepted accounting principles require that the
Company's allowance for loan losses reflect only losses incurred as of each
balance sheet date. Consequently, as new information is obtained, it is probable
that additional provisions for loan losses will be required.
During 2008, an environment of economic slowdown and uncertainty,
rising unemployment, increasing inventories of unsold housing units (including
new construction, owner-occupied resale properties, and properties foreclosed or
otherwise acquired by lenders), falling real estate values, a declining stock
market, and other negative factors led to higher levels of impaired and
potential problem loans. Problems which previously were confined in large part
to other areas of the country became local problems. Management estimates that
local real estate values decreased by at least 25% during 2008. Consequently,
some loans that were appropriately margined at inception were no longer fully
secured. In addition, completed residential units required a longer marketing
period, fewer borrowers qualified for loans due to tightening of underwriting
standards, and many of those who might have been able to find financing chose
not to purchase a new home. Speculative activity in real properties also
decreased significantly.
During the fourth quarter of 2008, approximately $8,494,000 of loans
were transferred to nonaccrual status. Of those loans, $5,949,000 represented
loans secured by owner-occupied residential properties, $1,755,000 represented
loans for construction and land development, and $643,000 represented loans
secured by commercial real estate. Of the remaining amount, $80,000 represented
a few small-balance consumer loans, and the remaining $67,000 was composed
primarily of loans for commercial vehicles. As of the end of 2008, impaired
loans increased to $11,799,000 compared with $625,000 one year earlier,
25
representing an increase of $11,174,000. Potential problem loans were $6,910,000
as of the end of 2008 compared with $3,088,000 as of the end of 2007 and
$3,176,000 at the end of 2006. The values of real estate and vehicles which
serve as collateral for many of the loans recognized as impaired and potential
problem loans in prior years helped keep charge-offs relatively low considering
the total credit exposures present in those loans. However, circumstances at the
end of 2008 indicate that, in most cases, the values of such items may have been
significantly reduced.
The provision for loan losses charged to expense increased in 2008 to
$4,550,000 compared with $594,000 for 2007 and $65,000 in 2006. The allowance
for loan losses at the end of 2008 was $5,475,000, an increase of $2,901,000
from the allowance of $2,574,000 as of the end of 2007.
A significant increase in the amount of loans outstanding during 2007,
higher amounts of net charge-offs, heightened uncertainty about the degree of
protection available to the Bank from residential properties taken as collateral
due to the negative pressure on property values stemming from the mortgage
lending crisis, higher levels of nonaccrual loans and only a slight reduction in
potential problem loans were factors leading to the increase in the provision
for loan losses in 2007. Although the Company uses conservative underwriting
standards, including adhering to prudent loan-to-value ratios, the values of
properties taken as collateral generally are determined by appraisal processes
that rely, in part, on other recent local transactions as an indicator of value.
Higher levels of loans collateralized by mortgages on real estate,
lower amounts of nonperforming loans, and a significantly lower incidence in
loan charge-offs in 2006 contributed to the decrease in the 2006 provision for
loan losses as compared with 2005. During this period of time, the Company's
loan portfolio increasingly was collateralized by residential and commercial
real estate. Such collateral, combined with other conservative underwriting
standards, was believed to offer the Company substantial protection from
ultimately incurring losses in the event that foreclosure and liquidation of the
collateral occurred, though there could be no assurances to that effect.
The $250,000 provision for loan losses in 2005 resulted primarily from
increases in potential problem loans, the $11,543,000 growth of the loan
portfolio, and was influenced by lower net charge-offs that reflected both a
reduced level of charge-offs and higher recoveries of amounts previously charged
against the allowance. Net charge-offs to average loans in 2005 was, however,
substantially lower than the trailing four-year average of that measure.
Management has established loan and credit policies and practices that
are designed to control credit risks as a part of the loan underwriting process.
These policies and practices include, for example, requirements for minimum loan
to collateral value ratios, real estate appraisal requirements, and obtaining
credit and financial information on borrowers. However, if the capacity for
borrowers to repay and/or collateral values should deteriorate subsequent to the
underwriting process, the estimate of the provision and allowance for loan
losses might increase, thereby decreasing net income and shareholders' equity. A
significant or prolonged downturn in national and local economic and business
conditions, such as the one that has continued over the past two years, could
further erode the borrowers' capacity to repay these loans as well as the value
of the underlying collateral. This scenario would be likely to substantially
increase the level of impaired or non-performing loans and non-earning
foreclosed assets and increase overall credit risk by shrinking the margin of
collateral values as compared with loans outstanding. Another factor that could
adversely affect borrowers' ability to make payments in accordance with loan
terms is the potential for continued increases in rates charged for loans. The
Company has a significant amount of variable rate loans outstanding. In
addition, some loans are refinanced at maturity rather than being paid out in a
lump sum. If interest rates were to increase sharply in a short time period,
some loan customers might not be able to afford payments on loans made or
repriced at the higher resulting interest rates, nor would they necessarily be
able to obtain more favorable terms elsewhere. This could also cause an increase
in the amounts of impaired or non-performing assets and other credit risks.
Impact of Recent Accounting Changes
Effective for periods on or after September 15, 2009, references to generally
accepted accounting principals ("GAAP") issued by the Financial Accounting
Standards Board ("FASB") in these footnotes are to the FASB Accounting Standards
Codification, which is sometimes referred to as the "Codification" or "ASC." The
Codification does not change how the Company accounts for its transactions or
the nature of related disclosures made. However, when referring to GAAP, the
Company refers to topics in the ASC. References to GAAP have been updated to
reflect the location of the guidance in the Codification. Other acronyms used in
the following discussion include "SFAS" or Statement of Financial Accounting
Standards, "FAS" or Financial Accounting Standard (a variant of SFAS), "FSP" or
FASB Staff Position, "EITF" or Emerging Issues Task Force", and "APB" or
Accounting Principles Board (an authoritative body that promulgated GAAP prior
to the establishment of the FASB).
The Transfers and Servicing Topic was updated (formerly SFAS No. 166,
"Accounting for Transfers of Financial Assets--an amendment of FASB Statement
26
No. 140") to remove the concept of a qualifying special-purpose entity from the
Topic and removes the exception from applying the Consolidations Topic (formerly
FASB Interpretation No. 46R). The objective in issuing this update is to improve
the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial statements about a
transfer of financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a transferor's continuing
involvement, if any, in transferred financial assets. This update must be
applied as of the beginning of each reporting entity's first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period and for interim and annual reporting periods
thereafter. The Company has no interests in any entities that were formerly
qualifying special-purpose entities. Therefore, the impact of adoption was not
material.
The Consolidations Topic was amended (formerly SFAS No. 167, "Amendments to FASB
Interpretation No. 46(R)") to improve financial reporting by enterprises
involved with variable interest entities. The amendment addresses (1) the
effects on certain provisions of the Topic as they relate to the elimination of
the qualifying special-purpose entity concept in the Transfers and Servicing
Topic and (2) constituent concerns about the application of certain key
provisions of the Topic including those in which the accounting and disclosures
under the Topic do not always provide timely and useful information about an
enterprise's involvement in a variable interest entity. This amendment is
effective as of the beginning of each reporting entity's first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period, and for interim and annual reporting periods
thereafter. The Company has no interests in any variable-interest entities.
Therefore, the impact of adoption was not material.
The Fair Value Measurements and Disclosure - Overall Topic has been amended for
interim and annual periods beginning after December 15, 2009 to require
reporting entities to disclose separately the amounts of significant transfers
in and out of Level 1 and Level 2 fair value measurements and the reasons for
the transfers. In addition, entities will be required to provide disclosures for
each class of assets and liabilities, which will increase the level of detail
beyond that of the individual balance sheet line item and, for measures that
fall within either Level 2 or Level 3, entities will be required to provide
disclosures about the valuation techniques and inputs used to measure fair value
for both recurring and nonrecurring fair value measurement. Management has not
yet determined how it will identify the appropriate classes of assets and
liabilities. In addition, effective for interim and annual periods beginning
after December 15, 2010, entities will be required by this update to present
separately information about purchases, sales, issuances and settlements of
items in the reconciliation for fair value measurements using Level 3 inputs.
The new requirements are expected to provide a greater level of disaggregated
information and more robust disclosures about valuation techniques and inputs
for fair value measurements. The effect of adopting these new disclosure
requirements is not expected to result in any material change in the Company's
financial condition or its results of operations.
27
Management's Report on Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in Rule 13a-15(f)
of the Securities Exchange Act of 1934 as amended (the "Exchange Act"). The
Company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America.
The Company's internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records, that in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the Company's assets; (2) provide reasonable assurance that
transactions are recorded as necessary to permit the preparation of financial
statements in accordance with generally accepted accounting principles and that
receipts and expenditures of the Company are made only in accordance with the
authorizations of the Company's management and directors; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company's assets that could have a
material impact on the financial statements.
Under the supervision and with the participation of management, including the
Chief Executive Officer and Chief Financial Officer of the Bank, the Company
conducted an evaluation of the effectiveness of internal control over financial
reporting as of December 31, 2009 based on the framework in "Internal Control -
Integrated Framework" promulgated by the Committee of Sponsoring Organizations
of the Treadway Commission and the interpretive guidance issued by the
Securities and Exchange Commission in Release No. 34-55929. Based on this
evaluation, management concluded that the Company's internal control over
financial reporting was effective as of December 31, 2009.
This annual report does not include an attestation report of the Company's
independent registered public accounting firm regarding internal control over
financial reporting because management's report was not subject to attestation
by the Company's registered public accounting firm pursuant to temporary rules
of the Securities and Exchange Commission that permit the Company to provide
only management's report in this annual report.
28
Report of Independent Registered Public Accounting Firm
The Shareholders and Board of Directors
of Community First Bancorporation
We have audited the accompanying consolidated balance sheets of Community
First Bancorporation and subsidiaries (the "Company") as of December 31,
2009 and 2008, and the related consolidated statements of income, changes
in shareholders' equity, and cash flows for each of the three years in the
period ended December 31, 2009. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits 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 consolidated 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Community First Bancorporation and subsidiaries as of December
31, 2009 and 2008, and the consolidated results of their operations and
their consolidated cash flows for each of the three years in the period
ended December 31, 2009, in conformity with accounting principles generally
accepted in the United States of America.
J. W. Hunt and Company, LLP
Columbia, South Carolina
March 30, 2010
29
Consolidated Balance Sheets
Community First Bancorporation and Subsidiaries
December 31,
------------
2009 2008
---- ----
Assets
Cash and due from banks (Note B) .................................................... $ 1,462,535 $ 9,204,306
Interest bearing deposits due from banks ............................................ 46,020,551 12,969,193
Federal funds sold .................................................................. - 18,793,000
------------- -------------
Cash and cash equivalents ....................................................... 47,483,086 40,966,499
Securities available-for-sale (Note C) .............................................. 141,710,113 126,635,534
Securities held-to-maturity (fair value of $9,476,399 for 2009 and
$12,238,445 for 2008) (Note C) .................................................. 9,023,999 11,910,268
Federal Home Loan Bank stock, at cost ............................................... 1,306,500 1,219,600
Loans (Note D) ...................................................................... 267,248,148 270,413,317
Allowance for loan losses ....................................................... (6,051,851) (5,475,294)
------------- -------------
Loans - net .................................................................. 261,196,297 264,938,023
Premises and equipment - net (Note E) ............................................... 8,469,682 8,655,253
Accrued interest receivable ......................................................... 2,424,113 2,775,788
Bank-owned life insurance ........................................................... 9,289,415 8,482,802
Other assets ........................................................................ 11,994,324 3,888,880
------------- -------------
Total assets ................................................................. $ 492,897,529 $ 469,472,647
============= =============
Liabilities
Deposits (Note F)
Noninterest bearing ............................................................. $ 47,066,775 $ 41,961,968
Interest bearing ................................................................ 389,580,956 374,153,215
------------- -------------
Total deposits ............................................................... 436,647,731 416,115,183
Accrued interest payable ............................................................ 2,043,563 3,044,981
Long-term debt (Note H) ............................................................. 8,000,000 9,500,000
Other liabilities ................................................................... 1,387,924 884,860
------------- -------------
Total liabilities ............................................................ 448,079,218 429,545,024
------------- -------------
Commitments and contingent liabilities (Note M)
Shareholders' equity (Note I)
Preferred Stock - Series A - non-voting 5% cumulative - $1,000 per share
liquidation preference; 5,000 shares authorized;
issued and outstanding - 3,150 shares for 2009 .................................. 3,126,215 -
Preferred Stock - no par value; 9,995,000 shares authorized;
None issued and outstanding ..................................................... - -
Common stock - no par value; 10,000,000 shares authorized;
issued and outstanding - 3,782,415 for 2009 and
3,564,279 for 2008 .............................................................. 38,922,623 37,084,462
Additional paid-in capital .......................................................... 747,621 747,621
Retained earnings ................................................................... 1,434,247 1,768,552
Accumulated other comprehensive income (loss) ....................................... 587,605 326,988
------------- -------------
Total shareholders' equity ................................................... 44,818,311 39,927,623
------------- -------------
Total liabilities and shareholders' equity ................................... $ 492,897,529 $ 469,472,647
============= =============
See accompanying notes to consolidated financial statements.
30
Consolidated Statements of Income
Community First Bancorporation and Subsidiaries
Years Ended December 31,
------------------------
2009 2008 2007
---- ---- ----
Interest income
Loans, including fees ............................................... $ 16,517,132 $ 18,212,174 $ 17,600,104
Securities
Taxable .......................................................... 5,568,337 4,807,778 3,890,240
Tax-exempt ....................................................... 811,052 833,677 816,428
Federal funds sold .................................................. 2,649 632,265 1,208,738
Other ............................................................... 4,088 47,714 55,829
Interest bearing deposits due from banks ............................ 47,314 17,787 6,277
------------ ------------ ------------
Total interest income ............................................ 22,950,572 24,551,395 23,577,616
------------ ------------ ------------
Interest expense
Time deposits $100,000 and over ..................................... 3,751,612 4,325,891 4,054,315
Other deposits ...................................................... 6,718,320 8,228,274 8,972,052
Short-term borrowings ............................................... 47,195 11,051 -
Long-term debt ...................................................... 365,850 269,208 203,871
------------ ------------ ------------
Total interest expense ........................................... 10,882,977 12,834,424 13,230,238
------------ ------------ ------------
Net interest income ...................................................... 12,067,595 11,716,971 10,347,378
Provision for loan losses (Note D) ....................................... 4,355,000 4,550,000 594,000
------------ ------------ ------------
Net interest income after provision ...................................... 7,712,595 7,166,971 9,753,378
------------ ------------ ------------
Other income
Service charges on deposit accounts ................................. 1,406,988 1,478,495 1,473,469
Credit life insurance commissions ................................... 15,777 14,375 28,587
Mortgage brokerage income ........................................... 178,347 26,646 33,203
Gain (loss) on sales of securities available-for-sale ............... 90,076 (3,396) -
Debit card transaction fees ......................................... 542,282 473,265 378,671
Increase in value of life insurance contracts ....................... 368,765 375,012 107,784
Other income ........................................................ 115,780 130,885 184,685
------------ ------------ ------------
Total other income ............................................... 2,718,015 2,495,282 2,206,399
------------ ------------ ------------
Other expenses (Notes J and L)
Salaries and employee benefits ...................................... 4,931,004 4,537,173 4,120,766
Net occupancy expense ............................................... 511,944 514,488 432,852
Furniture and equipment expense ..................................... 392,392 429,850 441,010
FDIC insurance expense .............................................. 711,033 188,000 37,168
Debit card transaction expenses ..................................... 409,740 373,382 276,993
Other expense ....................................................... 2,292,564 2,024,477 1,822,807
------------ ------------ ------------
Total other expenses ............................................. 9,248,677 8,067,370 7,131,596
------------ ------------ ------------
Income before income taxes ............................................... 1,181,933 1,594,883 4,828,181
Income tax expense (Note K) .............................................. 81,219 252,385 1,497,469
------------ ------------ ------------
Net income ............................................................... 1,100,714 1,342,498 3,330,712
------------ ------------ ------------
Deductions for amounts not available to common shareholders:
Dividends declared or accumulated on preferred stock ................ - - -
------------ ------------ ------------
Net income available to common shareholders .............................. $ 1,100,714 $ 1,342,498 $ 3,330,712
============ ============ ============
Per common share (Note I)
Net income, basic ................................................... $ 0.29 $ 0.36 $ 0.92
Net income, assuming dilution ....................................... 0.29 0.34 0.87
See accompanying notes to consolidated financial statements.
31
Consolidated Statements of Changes in Shareholders' Equity
Community First Bancorporation and Subsidiaries
Accumulated
Shares of Additional Other
Common Preferred Common Paid-in Retained Comprehensive
Stock Stock Stock Capital Earnings Income (Loss) Total
----- ----- ----- ------- -------- ------------- -----
Balance, January 1, 2007 .............. 2,958,558 $ - $30,061,392 $593,100 $ 3,284,692 $(724,154) $33,215,030
Comprehensive income:
Net income .......................... - - - - 3,330,712 - 3,330,712
-----------
Unrealized net holding gains
on available-for-sale securities
arising during the period, net of
income tax effects of $450,431 .... - - - - - 804,253 804,253
-----------
Total other comprehensive
income (loss) ................. - - - - - - 804,253
-----------
Total comprehensive income .. - - - - - - 4,134,965
-----------
Income tax benefits from exercises of
non-qualified stock options in excess
of amount previously provided ....... - - - 88,398 - - 88,398
Declaration of 10% stock dividend
distributed on January 15, 2008 and
cash payment for fractional shares .. 295,470 - 4,469,444 - (4,474,939) - (5,495)
Exercise of employee stock options .... 70,077 - 478,090 - - - 478,090
--------- ---------- ----------- -------- ----------- --------- -----------
Balance, December 31, 2007 ............ 3,324,105 - 35,008,926 681,498 2,140,465 80,099 37,910,988
Comprehensive income:
Net income .......................... - - - - 1,342,498 - 1,342,498
-----------
Unrealized net holding gains on
available-for-sale securities
arising during the period, net
of income tax effects of $137,053 . - - - - - 244,712 244,712
Reclassification adjustment, net
of income tax effects of $1,219 .... - - - - - 2,177 2,177
-----------
Total other comprehensive
income (loss) ................ - - - - - - 246,889
-----------
Total comprehensive income .... - - - - - - 1,589,387
-----------
Income tax benefits from exercises
of non-qualified stock options in excess
of amount previously provided ....... - - - 66,123 - - 66,123
Declaration of 5% stock dividend
distributed on January 20, 2009 and
cash payable for fractional shares .. 169,406 - 1,711,001 - (1,714,411) - (3,410)
Exercise of employee stock options .... 70,768 - 364,535 - - - 364,535
--------- ---------- ----------- -------- ----------- --------- -----------
Balance, December 31, 2008 ............ 3,564,279 - 37,084,462 747,621 1,768,552 326,988 39,927,623
Comprehensive income:
Net income .......................... - - - - 1,100,714 - 1,100,714
-----------
Unrealized net holding gains on
available-for-sale securities
arising during the period, net of
income tax effects of $178,299 .... - - - - - 318,356 318,356
Reclassification adjustment, net of
income tax effects of $32,336 ..... - - - - - (57,739) (57,739)
-----------
Total other comprehensive
income (loss) .................. - - - - - - 260,617
-----------
Total comprehensive income .... - - - - - - 1,361,331
-----------
Declaration of 5% stock dividend
distributed on January 15, 2010 and
cash payment for fractional shares .. 180,094 - 1,431,914 - (1,435,019) - (3,105)
Net proceeds from issuing 3,150 shares
of preferred stock (issuance costs
of $23,785) .. ...................... - 3,126,215 - - - - 3,126,215
Exercise of employee stock options .... 45,532 - 486,232 - - - 486,232
Common stock repurchased and cancelled (7,490) - (79,985) - - - (79,985)
--------- ---------- ----------- -------- ----------- --------- -----------
Balance, December 31, 2009 ............ 3,782,415 $3,126,215 $38,922,623 $747,621 $ 1,434,247 $ 587,605 $44,818,311
========= ========== =========== ======== =========== ========= ===========
See accompanying notes to consolidated financial statements.
32
Consolidated Statements of Cash Flows
Community First Bancorporation and Subsidiaries
Years Ended December 31,
------------------------
2009 2008 2007
---- ---- ----
Operating activities
Net income ........................................................... $ 1,100,714 $ 1,342,498 $ 3,330,712
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses ..................................... 4,355,000 4,550,000 594,000
Depreciation .................................................. 391,764 416,971 399,456
Deferred income taxes ......................................... (206,887) (956,973) (266,418)
Amortization of net loan fees and costs ....................... (138,490) (179,539) (225,117)
Securities accretion and premium amortization ................. 845,582 75,087 53,843
(Gains) losses realized on sales of
available-for-sale securities ............................. (90,076) 3,396 -
Accretion of cash surrender value of life insurance ........... (368,765) (375,012) (107,784)
Loss (gain) on sale of foreclosed assets ...................... 290 6,000 (354)
Decrease (increase) in interest receivable .................... 351,675 (246,633) (347,583)
(Decrease) increase in interest payable ....................... (1,001,418) (434,588) 776,623
Increase in prepaid expenses and other assets ................. (2,673,045) (273,766) (506,041)
Increase (decrease) in other accrued expenses ................. 20,277 56,209 (29,408)
Deferred compensation expense ................................. 486,197 434,116 386,446
------------- ------------- -------------
Net cash provided by operating activities ................. 3,072,818 4,417,766 4,058,375
------------- ------------- -------------
Investing activities
Purchases of available-for-sale securities ........................... (133,699,046) (84,156,840) (25,224,140)
Maturities, calls and paydowns of available-for-sale securities ...... 112,429,490 47,120,613 29,879,688
Proceeds of sales of available-for-sale securities ................... 5,851,147 9,732,462 -
Purchases of securities held-to-maturity ............................. - (7,490,035) -
Maturities, calls and paydowns of held-to-maturity securities ........ 2,881,173 1,243,838 938,552
Purchases of Federal Home Loan Bank stock ............................ (126,000) (379,700) -
Proceeds of redemptions of Federal Home Loan Bank stock .............. 39,100 - 140,300
Net increase in loans made to customers .............................. (6,856,415) (28,457,229) (41,202,385)
Purchases of premises and equipment .................................. (206,193) (450,699) (1,083,499)
Proceeds from sale of foreclosed assets .............................. 1,276,094 34,000 14,589
Capitalized additions to other real estate owned ..................... (266,228) - -
Proceeds from sale of real estate held for sale ...................... - - 36,449
Proceeds from redemptions of bank-owned life insurance ............... 1,062,152 - -
Purchases of bank-owned life insurance ............................... (1,500,000) (1,000,006) (7,000,000)
------------- ------------- -------------
Net cash used by investing activities ..................... (19,114,726) (63,803,596) (43,500,446)
------------- ------------- -------------
Financing activities
Net increase (decrease) in demand deposits, interest
bearing transaction accounts and savings accounts ................ 3,581,980 2,485,387 (4,715,971)
Net increase in certificates of deposit and other
time deposits .................................................... 16,950,568 57,763,243 52,625,215
Net decrease in short-term borrowings ................................ - - (4,500,000)
Proceeds of issuances of long-term debt .............................. - 6,000,000 -
Repayment of long-term debt .......................................... (1,500,000) (1,000,000) (1,000,000)
Net proceeds from issuing preferred stock
(issuance costs of $23,785) ...................................... 3,126,215 - -
Payment of cash in lieu of fractional shares
for common stock dividend ........................................ (6,515) - (5,495)
Exercise of employee stock options ................................... 486,232 364,535 478,090
Common stock repurchased and cancelled ............................... (79,985) - -
Excess tax benefits of exercises of stock options .................... - 66,123 88,398
------------- ------------- -------------
Net cash provided by financing activities ................. 22,558,495 65,679,288 42,970,237
------------- ------------- -------------
Increase in cash and cash equivalents ..................................... 6,516,587 6,293,458 3,528,166
Cash and cash equivalents, beginning ...................................... 40,966,499 34,673,041 31,144,875
------------- ------------- -------------
Cash and cash equivalents, ending ......................................... $ 47,483,086 $ 40,966,499 $ 34,673,041
============= ============= =============
See accompanying notes to consolidated financial statements.
33
Consolidated Statements of Cash Flows - continued
Community First Bancorporation and Subsidiaries
Years Ended December 31,
------------------------
2009 2008 2007
---- ---- ----
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for
Interest (net of amount capitalized) .......................... $11,884,395 $13,269,012 $12,453,615
Income taxes .................................................. 49,015 1,644,000 1,700,000
Noncash investing and financing activities
Transfer of loans to foreclosed assets ........................ 6,381,631 706,000 -
Transfers from retained earnings to common stock
in connection with stock dividends ......................... 1,431,914 1,711,001 4,469,444
Other comprehensive income .................................... 260,617 246,889 804,253
Cash payable in lieu of issuing fractional shares ............. - 3,410 -
See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
Community First Bancorporation and Subsidiaries
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - Community First Bancorporation (the "Company"), a bank holding
company, and its wholly-owned subsidiary, Community First Bank, are engaged in
providing domestic commercial banking services from their offices in Walhalla,
Seneca, Anderson, Williamston and Westminster, South Carolina. The Company is a
South Carolina corporation and its banking subsidiary is a state chartered
commercial bank with its deposits insured by the Federal Deposit Insurance
Corporation (the "FDIC"). Therefore, the Company and its bank subsidiary operate
under the supervision, rules and regulations of the Federal Reserve Board, FDIC
and South Carolina State Board of Financial Institutions. The holding company
was incorporated on May 23, 1997 and Community First Bank was organized on
December 1, 1988, and received its charter and commenced operations on March 12,
1990.
Community First Bank is a community-oriented institution offering a full range
of traditional banking services, with the exception of trust services.
Substantially all of its loans are made to individuals and businesses within its
markets in Oconee and Anderson counties of South Carolina. Also, substantially
all of its deposits are acquired within its local market areas and no brokered
deposits are accepted.
During 2009, the Company established a new subsidiary to hold and manage certain
loans and real estate assets that were acquired from Community First Bank.
References to Accounting Standards - In September 2009, the Financial Accounting
Standards Board ("FASB") established the FASB Accounting Standards
Codification(TM) (the "Codification" or "ASC") as the principal authoritative
source of generally accepted accounting principles ("GAAP") to be applied in the
preparation of financial statements in conformity with GAAP by nongovernmental
entities. The Codification also acknowledges that rules and interpretive
releases of the Securities and Exchange Commission ("SEC") under authority of
federal securities laws are also sources of authoritative GAAP for SEC
registrants. Consequently, references to authoritative accounting pronouncements
in these financial statements have been made using the new Codification. To
facilitate comparison with prior-year financial statements, we may present both
the reference under the previous system and/or the reference under the new
Codification.
Principles of Consolidation and Basis of Presentation - The consolidated
financial statements include the accounts of the parent company and its
subsidiaries after elimination of all significant intercompany balances and
transactions. The accounting and reporting policies of the Company and its
subsidiaries are in conformity with generally accepted accounting principles and
general practices within the banking industry. In certain instances, amounts
reported in prior years' consolidated financial statements have been
reclassified to conform to the current presentation. Such reclassifications had
no effect on previously reported shareholders' equity or net income.
34
Accounting Estimates - In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ significantly
from those estimates. Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination of the allowance
for loan losses. In connection with the determination of the allowance for loan
losses, management has identified specific loans as well as adopting a policy of
providing amounts for loan valuation purposes which are not identified with any
specific loan but are derived from actual loss experience ratios, loan types,
loan volume, economic conditions and industry standards. Management believes
that the allowance for loan losses is adequate. While management uses available
information to recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the banking subsidiary's allowance for loan losses. Such agencies may require
additions to the allowance based on their judgments about information available
to them at the time of their examination.
Concentrations of Credit Risk - Most of the Company's, and its banking
subsidiary's, activities are with customers located within the local market
areas of Oconee and Anderson Counties of South Carolina. Note C discloses the
types of securities invested in, and Note D discusses the types of lending
engaged in. The ability of borrowers to comply with the terms of their loan
contracts is largely dependent upon local real estate and general economic
conditions in the Company's market areas. The Company and its bank subsidiary do
not have any significant concentrations to any single industry or customer. The
Company does not engage in originating, holding, guaranteeing, servicing or
investing in loans where the terms of the loan product give rise to a
concentration of credit risk as that term is used in the ASC.
Securities - Equity securities that have readily determinable fair values and
all debt securities are classified generally at the time of purchase into one of
three categories: held-to-maturity, trading, or available-for-sale. Debt
securities that the Company has the positive intent and ability to hold until
ultimate maturity are classified as held-to-maturity and are accounted for at
amortized cost. Debt and equity securities that are bought and held primarily
for sale in the near term are classified as trading and are accounted for on an
estimated fair value basis, with unrealized gains and losses included in other
income. However, the Company has never held any securities for trading purposes.
Securities not classified as either held-to-maturity or trading are classified
as available-for-sale and are accounted for at estimated fair value. Unrealized
holding gains and losses on available-for-sale securities are excluded from net
income and recorded as other comprehensive income, net of applicable income tax
effects. Dividend and interest income, including amortization of any premium or
accretion of discount arising at acquisition, are included in earnings for all
three categories of securities. Realized gains and losses on all categories of
securities are included in other operating income, based on the amortized cost
of the specific security on a trade date basis.
Federal Home Loan Bank Stock - Federal Home Loan Bank stock is a restricted
security and is carried at cost. Management periodically evaluates this stock
for impairment, with any appropriate downward valuation adjustments being made
when necessary.
Loans and Interest Income - Loans are carried at principal amounts outstanding,
increased or reduced by deferred net loan costs or fees. Interest income on
loans is recognized using the interest method based upon the principal amounts
outstanding. Loan origination and commitment fees and certain direct loan
origination costs (principally salaries and employee benefits) are deferred and
amortized as an adjustment of the related loan's yield. Generally, these amounts
are amortized over the contractual life of the related loans or commitments.
A loan is considered to be impaired when, in management's judgment based on
current information and events, it is probable that the obligation's principal
or interest will not be collectible in accordance with the terms of the original
loan agreement. Impaired loans include non-accrual loans and loans past due
according to their contractual terms 90 days or more with respect to interest or
principal payments. Impaired loans that individually have been evaluated under
the Company's normal loan review process are carried in the balance sheet at
either (1) the present value of expected future cash flows discounted at the
loan's effective interest rate, which is the contractual interest rate adjusted
for any deferred loan fees or costs, premium or discount existing at the
inception or acquisition of the loan or (2) at a value not to exceed their
observable market price or the fair value of the collateral if repayment of the
loan is expected to be provided solely by the underlying collateral. Generally,
the accrual of interest is discontinued on impaired loans and any previously
accrued interest on such loans is reversed against current income. Any
subsequent interest income is recognized on a cash basis when received unless
collectibility of a significant amount of principal is in serious doubt. In such
cases, collections are credited first to the remaining principal balance on a
cost recovery basis. An impaired loan is not returned to accrual status unless
principal and interest are current and the borrower has demonstrated the ability
to continue making payments as agreed.
Allowance for Loan Losses - An allowance for loan losses is maintained at a
level deemed appropriate by management to provide adequately for known and
35
inherent losses in the loan portfolio. When management determines that a loan
will not perform substantially as agreed, a review of the loan is initiated to
ascertain whether it is more likely than not that a loss has occurred. If it is
determined that a loss has been incurred, the estimated amount of the loss is
charged off and deducted from the allowance. The provision for loan losses and
recoveries on loans previously charged off are added to the allowance.
Determining the amount and adequacy of the allowance for loan losses involves
estimating losses incurred in the loan portfolio based on factors discussed
below and their potential effects based on judgments applied to currently known
facts and circumstances. Changes in the estimated allowance for loan losses
which are deemed necessary due to the occurrence of new events or because more
information is obtained are accounted for as changes in accounting estimates in
the accounting period in which the changes occur.
The allowance for loan losses is composed of specific, general and unallocated
amounts. Specific amounts are determined when necessary on individual loans
based on management's evaluation of the Company's credit loss exposure
considering the current payment status, underlying collateral and other known
information about the particular borrower's circumstances. Typically, these
loans are considered impaired or have been assigned internal risk grades of
management attention, special mention, substandard or doubtful. General amounts
are provided for all other loans, excluding those for which specific amounts
were determined, by applying estimated loss percentages to the portfolio
categorized using risk grades. These percentages are based on management's
current evaluation with consideration given to historical loss experience. The
unallocated portion of the allowance consists of an amount deemed appropriate to
provide for the elements of imprecision and estimation risk inherent in the
specific and general amounts, and is determined based on management's evaluation
of various conditions that are not directly measured by the other components of
the allowance. This evaluation includes consideration of general national and
local economic and business conditions affecting key lending market areas,
credit quality trends, collateral values, loan volumes, portfolio seasoning, and
any identified credit concentrations. The findings of internal credit reviews
and results from external audits and regulatory examinations are also
considered.
The Company utilizes its risk grading system for all loans held in the
portfolio. This system involves the Company's lending officers' assigning a risk
grade, on a loan-by-loan basis, considering information about the borrower's
capacity to repay, collateral, payment history, and other known factors.
Assigned risk grades are updated monthly for any known changes in circumstances
affecting the borrower or the loan. The risk grading system is monitored on a
continuing basis by management and the Company's external credit reviewer, who
is independent of the lending function.
The Company estimates losses related to off-balance-sheet credit exposures such
as loan commitments, standby letters of credit, and unrecognized liabilities
under recourse provisions related to certain mortgage loans that are originated
by the Bank's personnel, but are funded by another financial institution, based
on historical experience and by monitoring any large positions individually.
When management determines that a loss on such a position has been incurred, a
charge is made against earnings and a liability for off-balance-sheet positions
is recorded.
Premises and Equipment - Premises and equipment are stated at cost, less
accumulated depreciation. The provision for depreciation is computed using the
straight-line method. Rates of depreciation are generally based on the following
estimated useful lives: buildings - 40 years; land improvements - 15 years;
furniture and equipment - 5 to 25 years. The cost of assets sold or otherwise
disposed of, and the related allowance for depreciation is eliminated from the
accounts and the resulting gains or losses are reflected in the consolidated
income statement. Maintenance and repairs are charged to current expense as
incurred and the costs of major renewals and improvements are capitalized.
Foreclosed Assets - Assets (primarily real estate and vehicles) acquired
through, or in lieu of, foreclosure are held for sale and are initially recorded
at fair value, less estimated costs to sell, at the date of foreclosure,
establishing a new cost basis. Loan losses arising from the acquisition of such
property as of that date are charged against the allowance for loan losses.
Subsequent to foreclosure, valuations are periodically performed by management
and the assets are carried at the lower of the new cost basis or fair value,
less estimated costs to sell. Revenues and expenses from operations and changes
in any subsequent valuation allowance are included in net foreclosed assets
costs and expenses. The carrying value of foreclosed assets included in the
balance sheets was $6,077,475 and $706,000 as of December 31, 2009 and 2008,
respectively.
Bank-owned Life Insurance - In accordance with applicable accounting standards,
the Company presents the gross amounts of the liability to provide
postretirement benefits and the cash surrender value of an endorsement
split-dollar life insurance arrangement held to fund the benefit.
Transfers of Financial Assets - Transfers of financial assets are accounted for
as sales when control over the assets has been surrendered. Control over
transferred assets is deemed to be surrendered when (1) the assets have been
isolated from the Company, (2) the transferee obtains the right (free of
36
conditions that constrain it from taking advantage of that right) to pledge or
exchange the transferred assets, and (3) the Company does not maintain effective
control over the transferred assets through an agreement to repurchase them
before their maturity.
Advertising - The Company expenses advertising and promotion costs as they are
incurred.
Retirement Plan - The Company has a salary reduction profit sharing plan
pursuant to Section 401(k) of the Internal Revenue Code as more fully described
in Note L. The Company does not sponsor any other postretirement or
postemployment benefits, except with respect to the Chief Executive Officer. In
2007, the Company's Board of Directors approved supplemental benefits for the
Chief Executive Officer as more fully described in Note L.
Deferred Income Taxes - The Company uses an asset and liability approach for
financial accounting and reporting of deferred income taxes. Deferred tax assets
and liabilities are determined based on the difference between the financial
statement and income tax bases of assets and liabilities as measured by the
currently enacted tax rates which are assumed will be in effect when these
differences reverse. If it is more likely than not that some portion or all of a
deferred tax asset will not be realized, a valuation allowance is recognized.
Deferred income tax expense or credit is the result of changes in deferred tax
assets and liabilities.
Stock-Based Compensation - As of December 31, 2009, the Company has a
stock-based employee compensation plan, which is described more fully in Note I.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised 2004) ("SFAS 123(R)") "Share-Based Payment"
(principally included in ASC Topics 718 and 505). Prior to adoption of SFAS
123(R), the Company accounted for its then existing plans under the recognition
and measurement principles of former Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, prior to adoption of SFAS 123(R), no stock-based employee
compensation cost was reflected in net income, as all options granted under the
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant.
In 2006, the Company accelerated the vesting of all previously awarded and
then-outstanding options such that all options were vested by December 31, 2006.
This acceleration of vesting resulted in the recognition of pre-tax expenses of
approximately $394,000 in 2006 that otherwise would have been recognized in
2007, 2008 and 2009.
No options were granted during 2009, 2008 or 2007. Accordingly, no
option-related compensation expense was recognized in any of those periods.
Earnings Per Common Share - Basic net income per common share is calculated by
dividing net income available to common shareholders by the weighted average
number of shares of the Company's common stock outstanding during the period.
Net income per common share, assuming dilution, is calculated by dividing net
income available to common shareholders by the total of the weighted average
number of shares outstanding during the period and the weighted average number
of any dilutive potential common shares and stock options that would have been
outstanding if the dilutive potential shares and stock options had been issued.
In computing the number of dilutive potential common shares, it is assumed that
all dilutive stock options are exercised at the beginning of each year and that
the proceeds are used to purchase shares of the Company's common stock at the
average market price during the year. See Note I.
Comprehensive Income - Comprehensive income consists of net income or loss for
the current period and other comprehensive income, defined as income, expenses,
gains and losses that bypass the consolidated statement of income and are
reported directly in a separate component of shareholders' equity. The Company
classifies and reports items of other comprehensive income according to their
nature, reports total comprehensive income or loss in the consolidated statement
of changes in shareholders' equity, and displays the accumulated balance of
other comprehensive income or loss separately in the shareholders' equity
section of the consolidated balance sheet. See Note I.
Consolidated Statement of Cash Flows - The consolidated statement of cash flows
reports net cash provided or used by operating, investing and financing
activities and the net effect of those flows on cash and cash equivalents. Cash
equivalents include amounts due from banks, federal funds sold and securities
purchased under agreements to resell.
NOTE B - CASH AND DUE FROM BANKS
Banks are generally required by regulation to maintain an average cash reserve
balance based on a percentage of deposits. The average amounts of the cash
reserve balances at December 31, 2009 and 2008 were approximately $2,576,000 and
$2,502,000, respectively.
37
NOTE C - SECURITIES
The aggregate amortized cost and estimated fair values of securities, as well as
gross unrealized gains and losses of securities were as follows:
December 31,
------------
2009 2008
---- ----
Gross Gross Gross Gross
Unrealized Unrealized Estimated Unrealized Unrealized Estimated
Amortized Holding Holding Fair Amortized Holding Holding Fair
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
Available-for-sale
Mortgage-backed
securities issued
by US Government
agencies .......... $ 1,426,107 $ 48,557 $ - $ 1,474,664 $ 1,790,998 $ 37,439 $ - $ 1,828,437
Government sponsored
enterprises (GSEs) 71,995,104 643,235 335,397 $ 72,302,942 62,840,000 1,141,220 500 63,980,720
Mortgage-backed
securities
issued by GSEs .... 47,854,685 1,005,630 497,891 48,362,424 40,753,955 625,965 22,768 41,357,152
State, county
and municipal ..... 19,517,517 240,544 187,978 19,570,083 20,740,461 41,197 1,312,433 19,469,225
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total ........... $140,793,413 $ 1,937,966 $ 1,021,266 $141,710,113 $126,125,414 $ 1,845,821 $ 1,335,701 $126,635,534
============ ============ ============ ============ ============ ============ ============ ============
Held-to-maturity
Mortgage-backed
securities issued
by US Government
agencies .......... $ - $ - $ - $ - $ - $ - $ - $ -
Government sponsored
enterprises ....... - - - - - - - -
Mortgage-backed
securities issued
by GSEs ........... 9,023,999 452,400 - 9,476,399 11,910,268 328,177 - 12,238,445
State, county and
municipal ........ - - - - - - - -
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Total ........... $ 9,023,999 $ 452,400 $ - $ 9,476,399 $ 11,910,268 $ 328,177 $ - $ 12,238,445
============ ============ ============ ============ ============ ============ ============ ============
The amortized cost and estimated fair value of securities by contractual
maturity are shown below:
December 31, 2009
-----------------
Available-for-sale Held-to-maturity
------------------ ----------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
Non-mortgage backed securities issued by GSEs and
by state, county and municipal issuers
Due within one year .......................... $ 1,803,611 $ 1,820,951 $ - $ -
Due after one through five years ............. 11,009,470 11,031,579 - -
Due after five through ten years ............. 28,393,476 28,544,577 - -
Due after ten years .......................... 50,306,064 50,475,918 - -
------------ ------------ ------------ ------------
91,512,621 91,873,025 - -
Mortgage-backed securities issued by:
US Government agencies ........................... 1,426,107 1,474,664 - -
GSEs ............................................. 47,854,685 48,362,424 9,023,999 9,476,399
------------ ------------ ------------ ------------
Total ........................................ $140,793,413 $141,710,113 $ 9,023,999 $ 9,476,399
============ ============ ============ ============
The estimated fair values and gross unrealized losses of the Company's
investment securities whose estimated fair values were less than amortized cost
as of December 31, 2009 and 2008 which had not been determined to be
other-than-temporarily impaired, are presented below. The securities have been
aggregated by investment category and the length of time that individual
securities have been in a continuous unrealized loss position.
38
December 31, 2009
-----------------
Continuously in Unrealized Loss Position for a Period of
--------------------------------------------------------
Less than 12 Months 12 Months or more Total
------------------- ----------------- -----
Estimated Unrealized Estimated Unrealized Estimated Unrealized
Fair Value Loss Fair Value Loss Fair Value Loss
---------- ---- ---------- ---- ---------- ----
Available-for-sale
US Government agencies ............. $ - $ - $ - $ - $ - $ -
Government-sponsored
enterprises (GSEs) ............... 26,770,038 335,397 - - 26,770,038 335,397
Mortgage-backed securities
issued by GSEs ................... 16,471,160 497,891 - - 16,471,160 497,891
State, county and
municipal securities ............. 6,220,000 187,978 - - 6,220,000 187,978
----------- ----------- ----------- ----------- ----------- -----------
Total .......................... $49,461,198 $ 1,021,266 $ - $ - $49,461,198 $ 1,021,266
=========== =========== =========== =========== =========== ===========
Held-to-maturity
GSEs ............................. $ - $ - $ - $ - $ - $ -
----------- ----------- ----------- ----------- ----------- -----------
Total .......................... $ - $ - $ - $ - $ - $ -
=========== =========== =========== =========== =========== ===========
December 31, 2008
-----------------
Continuously in Unrealized Loss Position for a Period of
--------------------------------------------------------
Less than 12 Months 12 Months or more Total
------------------- ----------------- -----
Estimated Unrealized Estimated Unrealized Estimated Unrealized
Fair Value Loss Fair Value Loss Fair Value Loss
---------- ---- ---------- ---- ---------- ----
Available-for-sale
US Government agencies ................... $ - $ - $ - $ - $ - $ -
Government-sponsored
enterprises (GSEs) ..................... 999,500 500 - - 999,500 500
Mortgage-backed securities
issued by GSEs ......................... 2,512,864 5,247 2,980,894 17,521 5,493,758 22,768
State, county and
municipal securities ................... 15,629,399 1,243,371 814,554 69,062 16,443,953 1,312,433
----------- ----------- ----------- ----------- ----------- -----------
Total ............ $19,141,763 $ 1,249,118 $ 3,795,448 $ 86,583 $22,937,211 $ 1,335,701
=========== =========== =========== =========== =========== ===========
Held-to-maturity
GSEs ................................... $ - $ - $ - $ - $ - $ -
----------- ----------- ----------- ----------- ----------- -----------
Total ............ $ - $ - $ - $ - $ - $ -
=========== =========== =========== =========== =========== ===========
At December 31, 2009, 50 securities had been continuously in an unrealized loss
position for less than 12 months and no securities had been continuously in an
unrealized loss position for 12 months or more. The Company does not consider
these investments to be other-than-temporarily impaired because the unrealized
losses involve primarily securities issued by government-sponsored enterprises
and state, county and municipal governments, none of the rated securities have
been downgraded below investment grade, and there have been no failures by the
issuers to remit their periodic interest payments as required. Although the
Company classifies a majority of its investment securities as
available-for-sale, management has not determined that any specific securities
will be disposed of prior to maturity and believes that the Company has both the
ability and the intent to hold those investments until a recovery of fair value,
including until maturity. Substantially all of the issuers of state, county and
municipal securities held were rated at least "investment grade" as of December
31, 2009 and 2008.
The Company's subsidiary bank is a member of the Federal Home Loan Bank of
Atlanta ("FHLB") and, accordingly, is required to own restricted stock in that
institution in amounts that may vary from time to time. Because of the
restrictions imposed, the stock may not be sold to other parties, but is
redeemable by the FHLB at the same price as that at which it was acquired by the
Company's subsidiary. The Company evaluates this security for impairment based
on the probability of ultimate recoverability of the par value of the
investment. No impairment has been recognized based on this evaluation.
39
During 2009, the Company sold three available-for-sale securities for gross
proceeds of $5,851,147. Gross gains realized from these sales totaled $90,076
and there were no losses. During 2008, the Company sold sixteen
available-for-sale securities for gross sales proceeds of $9,732,462. Gross
realized gains and losses resulting from these sales totaled $127,830 and
$131,226, respectively. The Company did not sell any available-for-sale
securities during 2007. There were no transfers of available-for-sale securities
to other categories in 2009, 2008 or 2007.
At December 31, 2009 and 2008, securities with a carrying value of $59,481,883
and $64,130,700, respectively, were pledged as collateral to secure public
deposits.
NOTE D - LOANS
Loans consisted of the following:
December 31,
------------
2009 2008
---- ----
Commercial, financial and industrial ..... $ 23,108,861 $ 23,187,252
Real estate- construction ................ 29,438,596 30,450,996
Real estate - mortgage ................... 184,474,249 182,668,353
Consumer installment ..................... 30,226,442 34,106,716
------------- -------------
Total .............................. 267,248,148 270,413,317
Allowance for loan losses ................ (6,051,851) (5,475,294)
------------- -------------
Loans - net ........................ $ 261,196,297 $ 264,938,023
============= =============
Net deferred loan fees of $290,444 and $405,584 were allocated to the
various loan categories as of December 31, 2009 and 2008, respectively.
Loans which management has identified as impaired generally are nonperforming
loans. Nonperforming loans include nonaccrual loans, loans which are 90 days or
more delinquent as to principal or interest payments, and other loans where,
based on current information and events, it is probable that the Company will be
unable to collect principal and interest payments according to the contractual
terms of the loan agreements. A loan is not considered to be impaired, however,
if any periods of delay or shortfalls of amounts expected to be collected are
insignificant or if the Company expects that it will collect all amounts due
including interest accrued at the contractual interest rate during the period of
delay. Following is a summary of activity regarding the Company's impaired
loans:
December 31,
------------
2009 2008
---- ----
Investment in impaired loans
Nonaccrual .............................................................................. $13,869,437 $11,798,654
Accruing 90 days and over past due ...................................................... - -
Other ................................................................................... 3,478,239 -
----------- -----------
Total ............................................................................... $17,347,676 $11,798,654
=========== ===========
Average total investment in impaired loans during the year ................................... $15,149,000 $ 4,712,000
Amount of impaired loans for which an allowance for loan losses is established ............... 8,660,112 11,296,779
Amount of impaired loans for which no allowance for loan losses is established ............... 8,687,564 501,875
Amount of allowance for loan losses related to impaired loans ................................ 2,844,014 1,603,493
For 2009, the amount of interest income that would have been included in income
if nonaccrual loans had been current in accordance with their terms was
approximately $781,000 and the amount of such income actually collected and
included in interest income was approximately $72,000. For 2008, the amount of
interest income that would have been included in income if nonaccrual loans had
been current in accordance with their terms was approximately $821,000 and the
amount of interest income actually collected and included in interest income was
approximately $480,000. Such amounts of interest income were immaterial to the
consolidated financial statements for 2007. The average total investment in
40
impaired loans during 2007 was $413,500. There were no irrevocable commitments
to lend additional funds to debtors owing amounts on impaired loans at December
31, 2009.
As of December 31, 2009 and 2008, there were no significant concentrations of
credit risk in any single borrower or groups of borrowers. The Company's loan
portfolio consists primarily of extensions of credit to businesses and
individuals in its Oconee and Anderson County, South Carolina market areas. The
economy of these areas is diversified and does not depend on any one industry or
group of related industries. Management has established loan policies and
practices that include set limitations on loan-to-collateral value for different
types of collateral, requirements for appraisals, obtaining and maintaining
current credit and financial information on borrowers, and credit approvals.
Transactions in the allowance for loan losses are summarized below:
Years Ended December 31,
------------------------
2009 2008 2007
---- ---- ----
Balance at January 1 .................................... $ 5,475,294 $ 2,573,758 $ 2,241,947
Provision charged to expense ............................ 4,355,000 4,550,000 594,000
Recoveries .............................................. 107,568 18,062 30,098
Charge-offs ............................................. (3,886,011) (1,666,526) (292,287)
----------- ----------- -----------
Balance at December 31 .................................. $ 6,051,851 $ 5,475,294 $ 2,573,758
=========== =========== ===========
Certain officers and directors of the Company and its banking subsidiary, their
immediate families and business interests were loan customers of, and had other
transactions with, the banking subsidiary in the normal course of business.
Related party loans are made on substantially the same terms, including interest
rates and collateral, and do not involve more than normal risk of
collectibility. The aggregate dollar amount of these loans was $8,534,488 and
$8,916,120 at December 31, 2009 and 2008, respectively. During 2009, $462,487 of
new loans were made and repayments totaled $844,119.
NOTE E - PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
December 31,
------------
2009 2008
---- ----
Land ....................................... $ 2,916,997 $ 2,916,997
Buildings and land improvements ............ 5,702,858 5,617,252
Furniture and equipment .................... 3,389,393 3,296,538
----------- -----------
Total ................................. 12,009,248 11,830,787
Accumulated depreciation ................... 3,539,566 3,175,534
----------- -----------
Premises and equipment - net .......... $ 8,469,682 $ 8,655,253
=========== ===========
Depreciation expense for the years ended December 31, 2009, 2008 and 2007 was
$391,764, $416,971, and $399,456, respectively.
NOTE F - DEPOSITS
A summary of deposits follows:
41
December 31,
------------
2009 2008
---- ----
Noninterest bearing demand ................... $ 47,066,775 $ 41,961,968
Interest bearing transaction accounts ........ 50,575,875 54,800,195
Savings ...................................... 27,560,647 24,859,154
Time deposits $100,000 and over .............. 128,914,487 126,492,251
Other time deposits .......................... 182,529,947 168,001,615
------------ ------------
Total deposits .......................... $436,647,731 $416,115,183
============ ============
As of December 31, 2009 and 2008, local governmental deposits comprised
approximately 12% and 14% of total deposits, respectively. As of December 31,
2009 and 2008, $213,506 and $204,623, respectively, of overdrawn demand deposit
balances have been reclassified as loans. As of December 31, 2009 and 2008,
deposits of directors, officers and their related business interests totaled
approximately $4,739,000 and $6,558,000, respectively.
At December 31, 2009, the scheduled maturities of time deposits are as follows:
Year Amount
---- ------
2010 $ 229,025,821
2011 79,166,600
2012 1,886,542
2013 1,295,834
2014 69,637
Thereafter -
NOTE G - SHORT-TERM BORROWINGS
There were no short-term borrowings outstanding at December 31, 2009 and 2008.
As of December 31, 2009, the banking subsidiary had no short-term credit
accommodation available from any unrelated bank to facilitate the purchase of
federal funds.
NOTE H - LONG-TERM DEBT
Long-term debt consisted of:
December 31,
------------
2009 2008
---- ----
Fixed rate notes due to FHLB ................. $1,500,000 $3,000,000
Variable rate notes due to FHLB .............. 6,500,000 6,500,000
---------- ----------
$8,000,000 $9,500,000
========== ==========
Long-term debt represents amounts borrowed from the FHLB under the FHLB's Fixed
Rate Advance Credit and Convertible Advance programs as shown in the table
below. The interest rate on Convertible Advances have remained at their initial
values and are subject to the FHLB's option to convert the advances to variable
rate instruments if 3-month LIBOR exceeds specified levels as of the dates
specified in each advance agreement. In the event of such conversions, the
affected advances would thereafter be subject to variable interest rates until
maturity. Each of the Fixed Rate and Convertible Advances may be prepaid on any
quarterly interest payment date at the Company's option. With limited
exceptions, any such prepayments would be subject to a prepayment penalty.
42
The contractual maturities of long-term debt are as follows:
December 31, 2009
-----------------
Fixed Rate Variable Rate Total
---------- ------------- -----
Due to Federal Home Loan Bank:
Due 2010, interest rate 3.834% ............................................... $1,500,000 $ - $1,500,000
Due 2013, interest rate 3.7475% convertible to variable rate at
lender's option on June 27, 2011 ......................................... - 1,500,000 1,500,000
Due 2014, interest rate 3.9200% convertible to variable rate at
lender's option on March 18, 2010 ........................................ - 3,500,000 3,500,000
Due 2015, interest rate 3.9250% convertible to variable rate at
lender's option on June 29, 2012 ......................................... - 1,500,000 1,500,000
---------- ---------- ----------
Total long-term debt .................................................... $1,500,000 $6,500,000 $8,000,000
========== ========== ==========
The Company has pledged certain of its first mortgage loans secured by
one-to-four family residential properties and its holdings of FHLB stock
(collectively, "qualifying collateral instruments") to secure its debt due to
the FHLB under a blanket lien agreement. The amount of qualifying collateral
instruments as of December 31, 2009 was approximately $22,288,000. The
qualifying collateral instruments required to secure the Company's long-term
debt as of December 31, 2009 totaled approximately $13,566,000.
The banking subsidiary had unused credit availability under the FHLB's blanket
lien agreement of up to an additional $15,147,000 under the FHLB's various
credit programs, subject to pledging and other requirements. The amount of
qualifying collateral instruments remaining available as of December 31, 2009 to
secure any additional FHLB borrowings totaled approximately $8,722,000. The
Company also had unencumbered investment securities issued by the FHLB with
carrying amounts totaling $10,423,000 which could be used to secure additional
advances of up to $10,385,000.
The banking subsidiary also has access to the Federal Reserve Bank's discount
window which would allow it to borrow approximately $90,948,000. Any such
borrowings from the discount window are limited by the amount of unpledged
eligible securities that could be used as collateral.
NOTE I - SHAREHOLDERS' EQUITY
Restrictions on Subsidiary Dividends, Loans or Advances - South Carolina banking
regulations restrict the amount of dividends that banks can pay to shareholders.
Any of the banking subsidiary's dividends to the parent company which exceed in
amount the subsidiary's current year-to-date earnings ($1,213,877 at December
31, 2009) are subject to the prior approval of the South Carolina Commissioner
of Banking. In addition, dividends paid by the banking subsidiary to the parent
company would be prohibited if the effect thereof would cause the Bank's capital
to be reduced below applicable minimum capital requirements. Under Federal
Reserve Board regulations, the amounts of loans or advances from the banking
subsidiary to the parent company are generally limited to 10% of the Bank's
capital stock and surplus on a secured basis. The terms of the Company's
outstanding preferred stock also restrict the Company's ability to pay cash
dividends to holders of the common stock. See "Preferred Stock" below.
Stock Dividends - For stockholders of record on December 15, 2009, December 20,
2008 and December 20, 2007, the Company's Board of Directors declared stock
dividends of 5%, 5% and 10%, respectively. All per share information has been
retroactively adjusted to give effect to the stock dividends.
Accumulated Other Comprehensive Income (Loss) - As of December 31, 2009 and
2008, accumulated other comprehensive income (loss) included as a component of
shareholders' equity in the accompanying consolidated balance sheets consisted
of accumulated changes in the unrealized holding gains and (losses) on
available-for-sale securities, net of income tax effects, amounting to $587,605
and $326,988, respectively.
Preferred Stock - On January 27, 2009, the Company's shareholders approved
revisions to its articles of incorporation authorizing the Company to issue up
to 10,000,000 shares of preferred stock in one or more series with the
preferences, limitations and relative rights of each series to be determined by
the Company's Board of Directors before any such series is issued. The Company
sought this authorization originally in anticipation of accepting funds from the
Troubled Assets Relief Program. The Company applied for such funds, but, after
receiving preliminary approval, ultimately withdrew its application and declined
such funds due to continuing uncertainties, including restrictions on use of the
funds and reporting requirements, among others. Subsequently, the Company
43
offered to its directors up to 5,000 shares of Series A preferred stock, of
which 3,150 shares were issued in exchange for proceeds of $3,126,215, net of
issuance costs of $23,785. The preferred shares, which were issued on December
31, 2009, have a liquidation preference of $1,000 each. Dividends on these
non-voting preferred shares accumulate at 5% per annum and, under the terms of
the preferred stock, no cash dividends may be declared or become payable on
common shares unless all of the accumulated preferred dividends have been paid.
Earnings per Common Share - Net income per common share and net income per
common share, assuming dilution, were computed as follows:
Years Ended December 31,
------------------------
2009 2008 2007
---- ---- ----
Net income per common share, basic
Numerator - net income available to common shareholders ................... $ 1,100,714 $1,342,498 $3,330,712
=========== ========== ==========
Denominator
Weighted average common shares issued and outstanding ................... 3,783,680 3,720,264 3,604,119
=========== ========== ==========
Net income per common share, basic ........................... $ .29 $ .36 $ .92
=========== ========== ==========
Net income per common share, assuming dilution
Numerator - net income available to common shareholders ................... $ 1,100,714 $1,342,498 $3,330,712
=========== ========== ==========
Denominator
Weighted average common shares issued and outstanding ................... 3,783,680 3,720,264 3,604,119
Effect of dilutive stock options ........................................ - 159,074 230,497
----------- ---------- ----------
Total shares ................................................. 3,783,680 3,879,338 3,834,616
=========== ========== ==========
Net income per common share, assuming dilution ............... $ .29 $ .34 $ .87
=========== ========== ==========
For the years ended December 31, 2009, 2008 and 2007, respectively, the number
of anti-dilutive stock options excluded from the calculation of net income per
common share, assuming dilution were 364,011, 97,179 and 97,179. If the market
price of the Company's common stock increases sufficiently, such shares may be
included in future calculations of earnings per common share, assuming dilution.
Regulatory Capital - All bank holding companies and banks are subject to various
regulatory capital requirements administered by the 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 Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, bank holding companies and banks must meet specific
capital guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. 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 Company and its banking subsidiary to maintain minimum amounts and
ratios set forth in the table below of Total and Tier 1 Capital, as defined in
the regulations, to risk weighted assets, as defined, and of Tier 1 Capital, as
defined, to average assets, as defined. Management believes, as of December 31,
2009 and 2008, that the Company and its subsidiary bank exceeded all capital
adequacy minimum requirements.
As of December 31, 2009, the most recent notification from the FDIC categorized
Community First Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized as defined in
the Federal Deposit Insurance Act, Community First Bank must maintain minimum
total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes have changed Community First Bank's category. Bank holding
companies with higher levels of risk, or that are experiencing or anticipating
significant growth, are expected by the Federal Reserve to maintain capital well
above the minimums. The Company's and Community First Bank's actual capital
amounts and ratios are also presented in the table.
44
Minimum for Minimum to be
Actual Capital Adequacy Well Capitalized
------ ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- ------- -----
December 31, 2009 (Dollars in thousands)
The Company
Total Capital to risk weighted assets ......... $ 48,127 15.5% $ 24,769 8.0% NA NA
Tier 1 Capital to risk weighted assets ........ $ 44,230 14.3% $ 12,385 4.0% NA NA
Tier 1 Capital to average assets (leverage) ... $ 44,230 9.3% $ 18,991 4.0% NA NA
Community First Bank
Total Capital to risk weighted assets ......... $ 42,709 14.0% $ 24,461 8.0% $ 30,577 10.0%
Tier 1 Capital to risk weighted assets ........ $ 38,859 12.7% $ 12,231 4.0% $ 18,346 6.0%
Tier 1 Capital to average assets (leverage) ... $ 38,859 8.2% $ 18,985 4.0% $ 23,732 5.0%
December 31, 2008
The Company
Total Capital to risk weighted assets ......... $ 43,470 14.1% $ 24,633 8.0% NA NA
Tier 1 Capital to risk weighted assets ........ $ 39,601 12.9% $ 12,317 4.0% NA NA
Tier 1 Capital to average assets (leverage) ... $ 39,601 8.8% $ 18,010 4.0% NA NA
Community First Bank
Total Capital to risk weighted assets ......... $ 41,513 13.5% $ 24,622 8.0% $ 30,777 10.0%
Tier 1 Capital to risk weighted assets ........ $ 37,646 12.2% $ 12,311 4.0% $ 18,466 6.0%
Tier 1 Capital to average assets (leverage) ... $ 37,646 8.4% $ 18,004 4.0% $ 22,505 5.0%
Stock Options - In 1998, the Company's shareholders approved the 1998 Stock
Option Plan under which an aggregate of 786,597 shares (adjusted for subsequent
stock dividends and a stock split) of the Company's authorized but unissued
common stock was reserved for possible issuance pursuant to the exercise of
stock options. Generally, options could be granted to directors, officers and
employees under terms and conditions, including expiration date, exercise price,
and vesting as determined by the Board of Directors. In 1990, the shareholders
approved the 1989 Incentive Stock Option Plan. The 1989 plan provided for the
granting of options to certain eligible employees and reserved 549,766 shares
(adjusted for stock dividends and splits) of authorized common stock for
issuance upon the exercise of such options. Both the 1998 Stock Option Plan and
the 1989 Stock Option Plan have now terminated. Although some options granted
under the 1998 Plan can still be exercised, no further options may be granted.
All options outstanding under the 1989 Plan have expired. For all stock options
ever granted under the two plans, the exercise price was the fair market value
of the Company's common stock on the date the option was granted as determined
by the Board of Directors. Options terminate according to the conditions of the
grant, not to exceed 10 years from the date of grant. The expiration of the
options accelerates upon the optionee's termination of employment with the
Company or death, and vesting of options accelerates upon a change in control of
the Company, in accordance with the provisions of the 1998 Plan.
During 2006, the Company's Board of Directors accelerated the vesting of all
other previously awarded and outstanding options such that all options were
vested by December 31, 2006. The acceleration of the options' vesting resulted
in the recognition of pre-tax expenses of approximately $394,000 in 2006 that
would otherwise have been recognized in 2007, 2008 and 2009.
45
Transactions under the plans during 2009 are summarized as follows:
Year Ended December 31, 2009
----------------------------
Weighted Average
Weighted Remaining Aggregate
Average Exercise Contractual Life Intrinsic
Shares Price Per Share (Years) Value
------ --------------- ------- -----
(Dollars in thousands, except per share)
Outstanding at beginning of year ......................... 418,227 $ 11.60
Granted .................................................. - -
Exercised ................................................ (47,805) 10.17
Forfeited or expired ..................................... (6,411) 10.17
-------
Outstanding at end of year ............................... 364,011 $ 11.82 3.34 $ -
======= ======
Options outstanding ...................................... 364,011 $ 11.82 3.34 $ -
and expected to vest
Options exercisable at year-end .......................... 364,011 $ 11.82 3.34 $ -
------------------------
Numbers of shares and exercise prices have been adjusted in the table above for
a 5% stock dividend effective December 15, 2009.
The aggregate intrinsic value of a stock option in the table above represents
the pre-tax intrinsic value (the amount, if any, by which the current fair value
of the underlying stock exceeds the amount required to exercise the options)
that would have been received by the option holder had all option holders
exercised their options on December 31, 2009. At that date, the exercise prices
of all of the Company's outstanding options exceeded the fair value of the
Company's stock.
NOTE J - OTHER EXPENSES
Other expenses are summarized below:
Years Ended December 31,
------------------------
2009 2008 2007
---- ---- ----
Salaries and employee benefits ...................................... $4,931,004 $4,537,173 $4,120,766
Net occupancy expense ............................................... 511,944 514,488 432,852
Furniture and equipment expense ..................................... 392,392 429,850 441,010
FDIC insurance expense .............................................. 711,033 188,000 37,168
Debit card transaction expense ...................................... 409,740 373,382 276,993
Other expense
Stationery, printing and postage ............................... 314,351 328,126 286,382
Telephone ...................................................... 188,867 176,972 152,656
Advertising and promotion ...................................... 155,337 129,327 118,565
Professional services .......................................... 389,760 290,528 284,907
Insurance ...................................................... 48,056 57,384 73,991
Directors' compensation ........................................ 133,401 115,400 94,400
Foreclosed assets costs and expenses, net ...................... 131,613 8,306 3,142
Data processing expenses ....................................... 436,364 357,561 250,728
Other .......................................................... 494,815 560,873 558,036
---------- ---------- ----------
Total ...................................................... $9,248,677 $8,067,370 $7,131,596
========== ========== ==========
46
NOTE K - INCOME TAXES
Income tax expense consisted of:
Years Ended December 31,
------------------------
2009 2008 2007
---- ---- ----
Current
Federal ....................... $ 233,481 $ 1,146,790 $ 1,613,312
State ......................... 54,625 62,568 150,575
----------- ----------- -----------
Total current ........... 288,106 1,209,358 1,763,887
Deferred
Federal ....................... (206,887) (956,973) (266,418)
----------- ----------- -----------
Total income tax expense $ 81,219 $ 252,385 $ 1,497,469
=========== =========== ===========
The principal components of the deferred portion of income tax expense or
(credit) were:
Years Ended December 31,
------------------------
2009 2008 2007
---- ---- ----
Provision for loan losses ........................................... $ 21,363 $(892,982) $(109,564)
Accelerated depreciation ............................................ 9,783 87,063 (5,049)
Deferred net loan costs and fees .................................... 38,019 (7,710) (24,201)
Deferred compensation expense ....................................... (160,544) (143,344) (127,604)
Disallowed charitable contribution carryforward ..................... (4,415) - -
Alternative minimum tax credit carryforward ......................... (111,093) - -
--------- --------- ---------
Total ..................................................... $(206,887) $(956,973) $(266,418)
========= ========= =========
Income before income taxes presented in the consolidated statements of income
for the years ended December 31, 2009, 2008 and 2007 included no foreign
component. A reconciliation between the income tax expense and the amount
computed by applying the federal statutory rate of 34% to income before income
taxes follows:
Years Ended December 31,
------------------------
2009 2008 2007
---- ---- ----
Tax expense at statutory rate .......................................... $ 401,857 $ 542,260 $ 1,641,582
State income tax, net of federal
income tax benefit ................................................. 36,053 41,295 99,380
Tax-exempt interest income ............................................. (274,727) (282,276) (276,416)
Non-deductible interest expense to
carry tax-exempt instruments ....................................... 30,394 41,195 46,616
Non-taxable increase in value of life insurance ........................ (125,380) (127,504) (36,647)
Other, net ............................................................. 13,022 37,415 22,954
----------- ----------- -----------
Total ........................................................ $ 81,219 $ 252,385 $ 1,497,469
=========== =========== ===========
Deferred tax assets and liabilities included in the consolidated balance sheet
consisted of the following:
47
December 31,
------------
2009 2008
---- ----
Deferred tax assets
Allowance for loan losses .................................................... $1,574,241 $1,595,604
Deferred net loan fees ....................................................... 95,905 133,924
Non-qualified stock options .................................................. 96,088 96,088
Deferred compensation ........................................................ 431,492 270,948
Disallowed charitable contributions .......................................... 4,415 -
Alternative minimum tax credit carryforward .................................. 111,093 -
---------- ----------
Gross deferred tax assets .............................................. 2,313,234 2,096,564
Valuation allowance .......................................................... - -
---------- ----------
Total .................................................................. 2,313,234 2,096,564
---------- ----------
Deferred tax liabilities
Accelerated depreciation ..................................................... 292,257 282,474
Unrealized net holding gains on
available-for-sale securities .............................................. 329,095 183,132
---------- ----------
Gross deferred tax liabilities ......................................... 621,352 465,606
---------- ----------
Net deferred income tax assets ................................................... $1,691,882 $1,630,958
========== ==========
The portion of the change in net deferred tax assets or liabilities which is
related to unrealized holding gains and losses on available-for-sale securities
is charged or credited directly to other comprehensive income or loss. The
balance of the change in net deferred tax assets is charged or credited to
income tax expense. In 2009, 2008 and 2007, $145,963, $138,272 and $450,431,
respectively, was charged to other comprehensive income or loss, respectively.
In 2009, 2008 and 2007, $206,887, $956,973 and $266,418, respectively, was
credited to income tax expense.
Management believes that the Company will fully realize the deferred tax assets
as of December 31, 2009 and 2008 based on refundable income taxes available from
carryback years, as well as estimates of future taxable income.
As of December 31, 2009 and 2008, the Company had no tax benefits disallowed
under ASC 740-10-25-5 through 17 (formerly the provisions of FASB Interpretation
48 "Accounting for Uncertainty in Income Taxes"). A tax position is recognized
as a benefit only if it is "more likely than not" that the tax position would be
sustained in a tax examination, with a tax examination being presumed to occur.
The amount recognized is the largest amount of tax benefit that is greater than
50% likely of being realized upon examination. For tax benefits that do meet the
"more likely than not" criterion, no tax benefit is recorded.
The Company and its subsidiaries are subject to US federal income tax as well as
income tax of the State of South Carolina. The Company is no longer subject to
examination by these taxing authorities for years before 2006 for federal and
state income tax.
The Company recognizes interest and penalties related to income tax matters as
interest expense and other noninterest expense, respectively.
NOTE L - RETIREMENT PLAN
The Company sponsors the Community First Bank 401(k) Plan (the "401(k) Plan")
for the exclusive benefit of all eligible employees and their beneficiaries.
Employees are eligible to participate in the 401(k) Plan with no minimum age
48
requirement after completing twelve months of service in which they are credited
with at least 501 hours of service. Employees are allowed to defer and
contribute up to 15% of their salary each year. The Company matches $.50 for
each dollar deferred up to 10% of total salary. The Board of Directors can also
elect to make discretionary contributions. Employees are fully vested in both
the matching and any discretionary contributions after five years of service.
The employer contributions to the plan for 2009, 2008 and 2007 totaled $69,572,
$73,039 and $84,941 respectively.
In 2007, the Company's Board of Directors approved certain supplemental benefits
for the Chief Executive Officer. These benefits are not qualified under the
Internal Revenue Code and they are not funded. However, life insurance contracts
owned by the Bank provide informal, indirect funding for those benefits. The
Company recorded deferred compensation expense related to these benefits of
$486,197, $434,116 and $386,446 in 2009, 2008 and 2007, respectively.
NOTE M - COMMITMENTS AND CONTINGENCIES
Commitments to Extend Credit - In the normal course of business, the banking
subsidiary is party to financial instruments with off-balance-sheet risk. These
financial instruments include commitments to extend credit and standby letters
of credit, and have elements of credit risk in excess of the amount recognized
in the balance sheet. The exposure to credit loss in the event of nonperformance
by the other parties to the financial instruments for commitments to extend
credit and standby letters of credit is represented by the contractual, or
notional, amount of those instruments. Generally, the same credit policies used
for on-balance-sheet instruments, such as loans, are used in extending loan
commitments and standby letters of credit.
Following are the off-balance-sheet financial instruments whose contract amounts
represent credit risk:
December 31,
------------
2009 2008
---- ----
Loan commitments ....................... $28,527,000 $30,485,940
Standby letters of credit .............. 872,735 914,735
Loan commitments involve 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 some involve
payment of a fee. Many of the commitments are expected to expire without being
fully drawn; therefore, the total amount of loan commitments does not
necessarily represent future cash requirements. Each customer's creditworthiness
is evaluated on a case-by-case basis. The amount of collateral obtained, if any,
upon extension of credit is based on management's credit evaluation of the
borrower. Collateral held varies but may include commercial and residential real
properties, accounts receivable, inventory and equipment.
Standby letters of credit are conditional commitments to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
standby letters of credit is the same as that involved in making loan
commitments to customers.
Litigation - The Company and its subsidiary were involved as defendants in
litigation at December 31, 2009 whereby a party being sued by the Bank for
foreclosure and deficiency on a loan has filed a countersuit alleging lender
liability. Management believes that no material losses will result from this
action. Management is not aware of any other pending or threatened litigation,
or unasserted claims or assessments that are expected to result in losses, if
any, that would be material to the consolidated financial statements.
49
New Offices - Land intended to be used for the Bank's future expansion is owned
near Powdersville, SC. The Company has established neither a budget nor a
schedule for the construction of that proposed office.
Other - The Company and its banking subsidiary are not involved in other
off-balance-sheet contractual relationships or transactions that could result in
liquidity needs or other commitments or significantly impact earnings.
NOTE N - DISCLOSURES ABOUT FAIR VALUES
The Company does not value any assets or liabilities at fair value under the
fair value option provisions of the ASC.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly fashion between market participants at the
measurement date. A three-level hierarchy is used for fair value measurements
based upon the transparency of inputs to the valuation. No consideration of
large position discounts for instruments quoted in active markets is allowed.
However, entities are required to consider their own creditworthiness when
valuing their liabilities. For disclosure purposes, fair values for assets and
liabilities are shown in the level of the hierarchy that correlates with the
least observable level input that is significant to the fair value measurement
in its entirety. The three levels of the fair value hierarchy are described as
follows:
Level 1 inputs reflect quoted prices in active markets for identical assets or
liabilities.
Level 2 inputs reflect observable inputs that may consist of quoted market
prices for similar assets or liabilities, quoted prices that are not in an
active market, or other inputs that are observable in the market and can be
corroborated by by observable market data for substantially the full term of the
assets or liabilities being valued.
Level 3 inputs reflect the use of pricing models and/or discounted cash flow
methodologies using other than contractual interest rates or methodologies that
incorporate a significant amount of management judgment, use of the entity's own
data, or other forms of unobservable data.
The following is a summary of the measurement attributes applicable to financial
assets and liabilities that are measured at fair value on a recurring basis:
Fair Value Measurement at Reporting Date Using
----------------------------------------------
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
Description December 31, 2009 (Level 1) (Level 2) (Level 3)
----------- ----------------- --------- --------- ---------
Securities available-for-sale $ 1,997,500 $139,712,613 $ -
Pricing for the Company's securities available-for-sale is obtained from an
independent third-party that uses a process that may incorporate current prices,
benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets,
benchmark securities, bids, offers, other reference items and industry and
economic events that a market participant would be expected to use as inputs in
valuing the securities. Not all of the inputs listed apply to each individual
security at each measurement date. The independent third party assigns specific
securities into an "asset class" for the purpose of assigning the applicable
level of the fair value hierarchy used to value the securities. Securities
available-for-sale are measured at fair value with unrealized gains and losses,
net of income taxes, recorded in other comprehensive income.
The following is a description of the valuation methodologies used for assets
measured at fair value on a nonrecurring basis in the Consolidated Balance
Sheets, including the general classification of such instruments pursuant to the
valuation hierarchy.
50
Fair Value Measurement at Reporting Date Using
----------------------------------------------
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable Total
Assets Inputs Inputs Gains
Description December 31, 2009 (Level 1) (Level 2) (Level 3) (Losses)
----------- ----------------- --------- --------- --------- --------
Collateral dependent impaired loans $ - $ 11,219,306 $ - $ -
Land held for sale - 138,551 - -
Foreclosed assets - 6,077,475 - -
Fair values of collateral dependent impaired loans are estimated based on recent
appraisals of the underlying properties or other information derived from market
sources.
The ASC requires disclosure of the estimated fair value of certain on-balance
sheet and off-balance sheet financial instruments and the methods and
assumptions used to estimate their fair values. A financial instrument is
defined as cash, evidence of an ownership interest in an entity or a contract
that creates a contractual obligation or right to deliver or receive cash or
another financial instrument from a second entity on potentially favorable or
unfavorable terms. Financial instruments within the ASC's scope that are not
carried at fair value on the Consolidated Balance Sheets are discussed below.
Accordingly, these fair value disclosures provide only a partial estimate of the
Company's fair value.
For cash and due from banks, interest bearing deposits due from banks and
federal funds sold, the carrying amount approximates fair value because these
instruments generally mature in 90 days or less. The carrying amounts of accrued
interest receivable or payable approximate fair values.
The fair value of held-to-maturity mortgage-backed securities issued by
Government sponsored enterprises is estimated based on dealers' quotes for the
same or similar securities.
The fair value of FHLB stock is estimated at its cost. The FHLB historically has
redeemed its outstanding stock at that value.
Fair values are estimated for loans using discounted cash flow analyses, using
interest rates currently offered for loans with similar terms and credit
quality. The Company does not engage in originating, holding, guaranteeing,
servicing or investing in loans where the terms of the loan product give rise to
a concentration of credit risk.
The fair value of deposits with no stated maturity (noninterest bearing demand,
interest bearing transaction accounts and savings) is estimated as the amount
payable on demand, or carrying amount, as required by the ASC. The fair value of
time deposits is estimated using a discounted cash flow calculation that applies
rates currently offered to aggregate expected maturities.
The fair values of the Company's short-term borrowings, if any, approximate
their carrying amounts.
The fair values of fixed rate long-term debt instruments are estimated using
discounted cash flow analyses, based on the borrowing rates currently in effect
for similar borrowings. The fair values of variable rate long-term debt
instruments are estimated at the carrying amount.
The estimated fair values of off-balance-sheet financial instruments such as
loan commitments and standby letters of credit are generally based upon fees
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the counterparties' creditworthiness. The vast
majority of the banking subsidiary's loan commitments do not involve the
charging of a fee, and fees associated with outstanding standby letters of
credit are not material. For loan commitments and standby letters of credit, the
committed interest rates are either variable or approximate current interest
51
rates offered for similar commitments. Therefore, the estimated fair values of
these off-balance-sheet financial instruments are nominal.
The following is a summary of the carrying amounts and estimated fair values of
the Company's financial assets and liabilities:
December 31,
------------
2009 2008
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Financial assets
Cash and due from banks ................................. $ 1,462,535 $ 1,462,535 $ 9,204,306 $ 9,204,306
Interest bearing deposits due from banks ................ 46,020,551 46,020,551 12,969,193 12,969,193
Federal funds sold ...................................... - - 18,793,000 18,793,000
Securities available-for-sale ........................... 141,710,113 141,710,113 126,635,534 126,635,534
Securities held-to-maturity ............................. 9,023,999 9,476,399 11,910,268 12,238,445
Federal Home Loan Bank stock ............................ 1,306,500 1,306,500 1,219,600 1,219,600
Loans, net .............................................. 261,196,297 262,308,000 264,938,023 265,053,000
Accrued interest receivable ............................. 2,424,113 2,424,113 2,775,788 2,775,788
Financial liabilities
Deposits ................................................ 436,647,731 436,444,000 416,115,183 376,043,000
Accrued interest payable ................................ 2,043,563 2,043,563 3,044,981 3,044,981
Long-term debt .......................................... 8,000,000 8,005,000 9,500,000 10,232,000
The following is a summary of the notional or contractual amounts and estimated
fair values of the Company's off-balance sheet financial instruments:
December 31,
------------
2009 2008
---- ----
Notional/ Estimated Notional/ Estimated
Contract Fair Contract Fair
Amount Value Amount Value
------ ----- ------ -----
Off-balance sheet commitments
Loan commitments ....................................... $ 28,527,000 $ - $ 30,485,940 $ -
Standby letters of credit .............................. 872,735 - 914,735 -
NOTE O - ACCOUNTING CHANGES
Effective for periods on or after September 15, 2009, references to generally
accepted accounting principals ("GAAP") issued by the Financial Accounting
Standards Board ("FASB") in these footnotes are to the FASB Accounting Standards
Codification, which is sometimes referred to as the "Codification" or "ASC." The
Codification does not change how the Company accounts for its transactions or
the nature of related disclosures made. However, when referring to GAAP, the
Company refers to topics in the ASC. References to GAAP have been updated to
reflect the location of the guidance in the Codification. Other acronyms used in
the following discussion include "SFAS" or Statement of Financial Accounting
Standards, "FAS" or Financial Accounting Standard (a variant of SFAS), "FSP" or
FASB Staff Position, "EITF" or Emerging Issues Task Force", and "APB" or
Accounting Principles Board (an authoritative body that promulgated GAAP prior
to the establishment of the FASB).
The Transfers and Servicing Topic was updated (formerly SFAS No. 166,
"Accounting for Transfers of Financial Assets--an amendment of FASB Statement
No. 140") to remove the concept of a qualifying special-purpose entity from the
Topic and removes the exception from applying the Consolidations Topic (formerly
FASB Interpretation No. 46R). The objective in issuing this update is to improve
52
the relevance, representational faithfulness, and comparability of the
information that a reporting entity provides in its financial statements about a
transfer of financial assets; the effects of a transfer on its financial
position, financial performance, and cash flows; and a transferor's continuing
involvement, if any, in transferred financial assets. This update must be
applied as of the beginning of each reporting entity's first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period and for interim and annual reporting periods
thereafter. The Company has no interests in any entities that were formerly
qualifying special-purpose entities. Therefore, the impact of adoption was not
material.
The Consolidations Topic was amended (formerly SFAS No. 167, "Amendments to FASB
Interpretation No. 46(R)") to improve financial reporting by enterprises
involved with variable interest entities. The amendment addresses (1) the
effects on certain provisions of the Topic as they relate to the elimination of
the qualifying special-purpose entity concept in the Transfers and Servicing
Topic and (2) constituent concerns about the application of certain key
provisions of the Topic including those in which the accounting and disclosures
under the Topic do not always provide timely and useful information about an
enterprise's involvement in a variable interest entity. This amendment is
effective as of the beginning of each reporting entity's first annual reporting
period that begins after November 15, 2009, for interim periods within that
first annual reporting period, and for interim and annual reporting periods
thereafter. The Company has no interests in any variable-interest entities.
Therefore, the impact of adoption was not material.
The Fair Value Measurements and Disclosure - Overall Topic has been amended for
interim and annual periods beginning after December 15, 2009 to require
reporting entities to disclose separately the amounts of significant transfers
in and out of Level 1 and Level 2 fair value measurements and the reasons for
the transfers. In addition, entities will be required to provide disclosures for
each class of assets and liabilities, which will increase the level of detail
beyond that of the individual balance sheet line item and, for measures that
fall within either Level 2 or Level 3, entities will be required to provide
disclosures about the valuation techniques and inputs used to measure fair value
for both recurring and nonrecurring fair value measurement. Management has not
yet determined how it will identify the appropriate classes of assets and
liabilities. In addition, effective for interim and annual period beginning
after December 15, 2010, entities will be required by this update to present
separately information about purchases, sales, issuances and settlements of
items in the reconciliation for fair value measurements using Level 3 inputs.
The new requirements are expected to provide a greater level of disaggregated
information and more robust disclosures about valuation techniques and inputs
for fair value measurements. The effect of adopting these new disclosure
requirements is not expected to result in any material change in the Company's
financial condition or its results of operations.
NOTE P - SUBSEQUENT EVENTS
The Company evaluated events subsequent to the balance sheet date through the
date that the financial statements were issued.
Subsequent events may provide additional evidence about conditions that existed
at the balance sheet date, including estimates inherent in the process of
preparing financial statements (recognized subsequent events), or may provide
evidence about conditions that did not exist at the balance sheet date but arose
after the balance sheet date but before the financial statements were issued
(nonrecognized subsequent events). The effects of recognized subsequent events,
if any, have been included in the financial statements. If the effects of
nonrecognized subsequent events, if any, are of a nature that they must be
disclosed to keep the financial statements from being misleading, the Company
would disclose both the nature of the event and an estimate of its financial
effect or would state that an estimate of the financial effect cannot be made.
As of December 31, 2009, there were no nonrecognized subsequent events that
required disclosure.
53
NOTE Q - COMMUNITY FIRST BANCORPORATION (PARENT COMPANY ONLY)
December 31,
------------
2009 2008
---- ----
Condensed Balance Sheets
Assets
Cash ..................................................................... $ 1,024,131 $ 1,794,968
Investment in banking subsidiary ......................................... 39,447,333 37,972,839
Investment in nonbanking subsidiary ...................................... 4,150,000 -
Land held for sale ....................................................... 138,551 138,551
Other assets ............................................................. 58,296 24,675
----------- -----------
Total assets ......................................................... $44,818,311 $39,931,033
=========== ===========
Liabilities
Other liabilities ........................................................ $ - $ 3,410
Shareholders' equity ......................................................... 44,818,311 39,927,623
----------- -----------
Total liabilities and shareholders' equity ........................... $44,818,311 $39,931,033
=========== ===========
Years Ended December 31,
------------------------
2009 2008 2007
---- ---- ----
Condensed Statements of Income
Income
Interest income ........................................... $ 13,690 $ 27,590 $ 41,048
Other income .............................................. - - -
----------- ----------- -----------
Total income .......................................... 13,690 27,590 41,048
----------- ----------- -----------
Expenses
Interest expense .......................................... 47,119 - -
Other expenses ............................................ 138,030 100,163 64,378
----------- ----------- -----------
Total expenses ........................................ 185,149 100,163 64,378
----------- ----------- -----------
Income (loss) before income taxes and equity in
undistributed earnings of banking subsidiary .............. (171,459) (72,573) (23,330)
Income tax expense (credit) ................................... (58,296) (24,675) (7,932)
Equity in undistributed earnings
of banking subsidiary ..................................... 1,213,877 1,390,396 3,346,110
----------- ----------- -----------
Net income .................................................... $ 1,100,714 $ 1,342,498 $ 3,330,712
=========== =========== ===========
54
Years Ended December 31,
------------------------
2009 2008 2007
---- ---- ----
Condensed Statements of Cash Flows
Operating activities
Net income ......................................................... $ 1,100,714 $ 1,342,498 $ 3,330,712
Adjustments to reconcile net income to net
cash used by operating activities
Equity in undistributed earnings
of banking subsidiary ................................ (1,213,877) (1,390,396) (3,346,110)
(Increase) decrease in other assets .................... (33,621) (16,743) 4,230
Other .................................................. - 2 -
----------- ----------- -----------
Net cash used by operating activities ................ (146,784) (64,639) (11,168)
----------- ----------- -----------
Investing activities
Investment in nonbanking subsidiary ................................ (4,150,000) - -
Purchase of land held for sale ..................................... - (138,551) -
----------- ----------- -----------
Net cash used by investing activities .................. (4,150,000) (138,551) -
----------- ----------- -----------
Financing activities
Exercise of employee stock options ................................. 486,232 364,535 478,090
Net proceeds from issuing preferred stock
(costs of $23,785) ............................................. 3,126,215 - -
Common stock repurchased and cancelled ............................. (79,985) - -
Payment of cash in lieu of fractional
shares for common stock dividend ............................... (6,515) - (5,495)
----------- ----------- -----------
Net cash provided by financing activities ............ 3,525,947 364,535 472,595
----------- ----------- -----------
(Decrease) increase in cash and cash equivalents ....................... (770,837) 161,345 461,427
Cash and cash equivalents, beginning ................................... 1,794,968 1,633,623 1,172,196
----------- ----------- -----------
Cash and cash equivalents, ending ...................................... $ 1,024,131 $ 1,794,968 $ 1,633,623
=========== =========== ===========
5
