SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934.
(Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)
(2)
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss. 240.14a-12
COMMUNITY FIRST BANCORPORATION
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No Fee Required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
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4) Proposed maximum aggregate value of transaction:
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5) Total fee paid
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[ ] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
COMMUNITY FIRST BANCORPORATION
449 Highway 123 ByPass
Seneca, South Carolina 29678
Dear Shareholder:
You are cordially invited to attend the Special Meeting of Shareholders
of Community First Bancorporation to be held on Tuesday, January 27, 2009, 1:30
p.m. EST, at Community First Bank, 449 Highway 123 ByPass, Seneca, South
Carolina 29678.
This important meeting is being held for the following purposes:
1. Creation of a New Class of Capital Stock. To vote on an amendment to
our Articles of Incorporation to authorize the issuance of 10 million shares of
preferred stock with such preferences, limitations and relative rights, within
legal limits, of the class, or one or more series within the class, as are set
by the Board of Directors.
2. Other Business. To transact such other business as may properly come
before the Special Meeting or any adjournment of the Special Meeting.
The purpose of the amendment to our Articles of Incorporation is to
increase the types of equity instruments we may use to raise capital, and to
cause us to be eligible to participate in the U.S. Department of the Treasury's
Capital Purchase Program under the Emergency Economic Stabilization Act of 2008.
We are proposing the amendment because our Board of Directors has concluded,
after careful consideration, that it is in the best interest of our Company for
the Board of Directors to be given the authority to issue preferred stock with
terms set by the Board of Directors on short notice, especially during periods
of unsettled economic conditions such as national and international markets are
currently experiencing. Although our current capital position continues to be
strong, our Board of Directors believes that it is prudent to prepare for the
possibility that a need for additional capital could arise unexpectedly. OUR
BOARD RECOMMENDS THAT YOU VOTE "FOR" THE AMENDMENT TO OUR ARTICLES OF
INCORPORATION. We encourage you to read carefully the Proxy Statement and
attached appendices.
Shareholders are or may be entitled to assert dissenters' rights under
Chapter 13 of the South Carolina Business Corporation Act if: (i) you do not
vote in favor of the proposed amendment to our Articles of Incorporation, (ii)
you elect to dissent, and perfect your dissenters' rights, (iii) the amendment
to our Articles of Incorporation is approved by our shareholders, and (iv) we
make the required filing to amend our Articles of Incorporation. If you comply
with the statutory requirements to perfect your dissenters' rights, you will be
entitled to receive the "fair value" of your shares. A copy of Chapter 13 of the
South Carolina Business Corporation Act is attached as Appendix A to the
enclosed Proxy Statement. You must strictly comply with the requirements of
Chapter 13 in order to exercise your dissenters' rights. Please read Chapter 13
of the South Carolina Business Corporation Act and the section entitled "
Dissenters' Rights" beginning on page 4 of the Proxy Statement in their entirety
for complete disclosure about your dissenters' rights. We encourage you not to
exercise your dissenters' rights because doing so will reduce our capital, and
would thus be contrary to the purpose of the amendment to our Articles of
Incorporation, which is to facilitate our ability to raise capital. Should
dissenters' rights be exercised for a substantial number of shares, our Board of
Directors will make a judgment as to whether it is in our best interest to
proceed with the amendment or abandon it.
Your vote is very important. Whether or not you plan to attend the
Special Meeting, please complete, date, sign and return your proxy, or such
other document as your broker or other nominee instructs you to use if your
shares are held in "street name," promptly in the enclosed pre-addressed,
postage-paid envelope. If you are a record shareholder and attend the Special
Meeting, you may vote in person if you wish, even if you have previously
returned your proxy.
On behalf of our Board of Directors, I would like to express our
appreciation for your continued loyal support of our Company.
Sincerely,
s/Frederick D. Shepherd, Jr.
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December 29, 2008 Frederick D. Shepherd, Jr.
President
Community First Bancorporation
449 Highway 123 ByPass
Seneca, South Carolina 29678
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO OUR SHAREHOLDERS:
NOTICE IS HEREBY GIVEN THAT a Special Meeting of the Shareholders of
Community First Bancorporation will be held at the offices of Community First
Bank at 449 Highway 123 ByPass, Seneca, South Carolina, on Tuesday, January 27,
2009, at 1:30 p.m., for the following purposes:
(1) To vote on an amendment to our Articles of Incorporation to
authorize the issuance of 10 million shares of preferred stock with
such preferences, limitations and relative rights, within legal limits,
of the class, or one or more series within the class, as are set by the
Board of Directors; and
(2) To act upon other such matters as may properly come before the
meeting or any adjournment thereof.
Only shareholders of record at the close of business on December 20,
2008, are entitled to notice of and to vote at the Special Meeting and any
adjournment of the Special Meeting.
Shareholders are or may be entitled to assert dissenters' rights under
Chapter 13 of the South Carolina Business Corporation Act if: (i) you do not
vote in favor of the proposed amendment to our Articles of Incorporation, (ii)
you elect to dissent, and perfect your dissenters' rights, (iii) the amendment
to our Articles of Incorporation is approved by our shareholders, and (iv) we
make the required filing to amend our Articles of Incorporation. A copy of
Chapter 13 of the South Carolina Business Corporation Act is attached as
Appendix A to the enclosed Proxy Statement. You must strictly comply with the
requirements of Chapter 13 in order to exercise your dissenters' rights. Please
read Chapter 13 of the South Carolina Business Corporation Act and the section
entitled " Dissenters' Rights" beginning on page 4 of the Proxy Statement in
their entirety for complete disclosure about your dissenters' rights. We
encourage you not to exercise your dissenters' rights because doing so will
reduce our capital, and would thus be contrary to the purpose of the amendment
to our Articles of Incorporation, which is to facilitate our ability to raise
capital. Should dissenters' rights be exercised for a substantial number of
shares, our Board of Directors will make a judgment as to whether it is in our
best interest to proceed with the amendment or abandon it.
You are cordially invited and urged to attend the Special Meeting in
person. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE
COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY, OR SUCH OTHER
DOCUMENT AS YOUR BROKER OR OTHER NOMINEE INSTRUCTS YOU TO USE IF YOUR SHARES ARE
HELD IN "STREET NAME," IN THE ACCOMPANYING PRE-ADDRESSED, POSTAGE-PAID ENVELOPE.
If you need assistance in completing your proxy, please call the Company at
(864) 886-0206. If you are the record owner of your shares and attend the
Special Meeting and desire to revoke your proxy and vote in person, you may do
so. In any event, a proxy may be revoked by the record owner of shares at any
time before it is exercised by giving notice of revocation to our Corporate
Secretary, or by returning a properly executed proxy with a later date at or
before the meeting. If your shares are held in "street name" by your broker, you
must follow the instructions you will receive from your broker to change or
revoke your proxy.
We do not know of any other matters to be presented at the Special
Meeting, but if other matters are properly presented, the persons named as proxy
agents will vote on such matters in their discretion.
THE COMPANY'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE
"FOR" THE PROPOSAL TO AMEND OUR ARTICLES OF INCORPORATION PRESENTED ABOVE.
By Order of the Board of Directors
s/Frederick D. Shepherd, Jr.
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December 29, 2008 Frederick D. Shepherd, Jr.
President
Community First Bancorporation
449 Highway 123 ByPass
Seneca, South Carolina 29678
PROXY STATEMENT FOR SPECIAL MEETING OF SHAREHOLDERS
We are providing this Proxy Statement to our shareholders in connection
with the solicitation of proxies by the Board of Directors of Community First
Bancorporation for use at a Special Meeting of Shareholders to be held on
Tuesday, January 27, 2009, at 1:30 p.m. at Community First Bank, 449 Highway 123
ByPass, Seneca, South Carolina, and at any adjournment or adjournments thereof.
Throughout this Proxy Statement, we use terms such as "we," "us," "our," "our
Company," and "the Company" to refer to Community First Bancorporation, and
terms such as "you" and "your" to refer to our shareholders.
A Notice of Special Meeting is attached to this Proxy Statement and a
form of proxy is enclosed. We first began mailing this Proxy Statement to
shareholders on or about December 29, 2008. We are paying the costs of this
solicitation of proxies and other expenses associated with the Special Meeting
of Shareholders. The only method of solicitation we currently plan to use, other
than the mail, is personal contact, including by telephone, or other electronic
means by our directors, officers and regular employees, who will not be
specially compensated. We may, however, subsequently decide to use paid proxy
solicitors if we determine it would be helpful to do so. We do not believe the
cost of such solicitors would be significant. We intend to request that
brokerage houses, nominees, fiduciaries and other custodians forward
solicitation materials to beneficial owners of our common stock and obtain their
voting instructions, if necessary, and we will reimburse them for their
expenses.
PURPOSE OF THE MEETING
The purpose of the Special Meeting of Shareholders is to vote on an
amendment to our Articles of Incorporation to authorize the issuance of 10
million shares of preferred stock with such preferences, limitations and
relative rights, within legal limits, of the class, or one or more series within
the class, as are set by the Board of Directors, and to act upon such other
matters as may properly come before the meeting or any adjournment thereof. We
sometimes refer to the amendment to our Articles of Incorporation described
above as the "Amendment."
Reasons for the Amendment
Our existing Articles of Incorporation only allow us to issue one class
of stock - common stock. We propose to amend the Articles of Incorporation to
allow us to issue up to 10 million shares of preferred stock in addition to the
10 million shares of common stock already authorized by our Articles of
Incorporation. If the Amendment is approved, our Board of Directors will be
authorized to set the preferences, limitations and relative rights, within legal
limits, of the class of preferred stock or one or more series within the class
of preferred stock, and will have the authority to issue preferred stock at any
time it deems it appropriate to do so.
Amending our Articles of Incorporation to authorize the issuance of
preferred stock will provide our Board of Directors with much greater
flexibility in raising capital, which will enable us and our bank subsidiary to
continue to meet our various capital requirements and to respond to
unanticipated circumstances that could adversely affect our capital positions.
Although we are currently well capitalized and have not experienced many of the
problems currently besetting our industry, we face the challenges of a weak
economy and real estate market. Accordingly, there can be no assurance that we
will not have a need for additional capital in the future. Thus, our Board
believes it is in our interest to be prepared to respond quickly to such
situations should the need arise.
Our timing for seeking to amend the Articles of Incorporation is
occasioned by the U. S. Department of the Treasury's creation of a Capital
Purchase Program under the authority of the recently enacted Emergency Economic
Stabilization Act of 2008. The program permits eligible institutions to sell
senior preferred stock to the Treasury. If we had a class of preferred stock, we
would be eligible to participate in the program, which is why we are seeking
approval of the Amendment at this time. The program outlines numerous
requirements and conditions for the sale of the preferred stock, which are
discussed in more detail under the caption "Description of Capital Stock and
Capital Purchase Program - Proposed Issuance of Senior Preferred Stock" and
"--Additional Terms of Participation in the Capital Purchase Program." The
Treasury has adopted two versions of the Capital Purchase Program, one of which
applies to public companies and one of which applies to non-public companies.
Although it is not completely clear from the Treasury's definition of the term
"public company," we believe we would be deemed a non-public company. Included
among the conditions to non-public company participation in the program is a
condition that an application to sell the preferred stock be filed by December
8, 2008, which we have done, and that all required documentation be completed
within 30 days after receiving preliminary approval. We do not know whether or
when we will receive preliminary approval. Nevertheless, we believe approval of
the proposed Amendment at the Special Meeting would allow us to meet the
applicable deadline. Further information about the requirements of the program
is discussed under the caption "Description of Capital Stock and Capital
Purchase Program - Proposed Issuance of Senior Preferred Stock" and
"--Additional Terms of Participation in the Capital Purchase Program."
Although we have not made a final decision to participate in the
program if the Amendment is approved, our Board of Directors currently believes
that participation could be in our best interest. The additional capital that
would be obtained by selling preferred stock to the Treasury would provide
additional protection against an unanticipated event or series of events that
might erode our capital to levels below regulatory requirements. If our capital
were to erode to levels below regulatory requirements, we or our bank could be
exposed to strenuous corrective measures, which could severely impair our
ability to do business. Thus, although participation in the program will entail
a level of cost, it may provide us with a desirable level of protection against
a disastrous situation.
We have no assurance that our application will be approved. The
Treasury has not announced the criteria it will use in making its decision and
our impact on the stability of the national economy is minimal. Fortunately, we
do not presently need the capital for liquidity purposes or to support our
current operations, and we do not believe we will need it in the next few years.
Indeed, even if our application is approved, we could decide that the costs of
having the capital are unreasonable in comparison to the benefit we will derive
from having it in case it is ever useful.
Whether or not we participate in the Capital Purchase Program, if the
Amendment is approved and we file Articles of Amendment to our Articles of
Incorporation, our Board of Directors will be authorized to issue preferred
shares at any time it deems it appropriate to do so, and will be authorized to
set the preferences, limitations and relative rights, within legal limits, of
such stock.
Our Board of Directors believes the Amendment is in the best interest
of our Company, and unanimously recommends that you vote "FOR" the Amendment.
VOTING PROCEDURES
Quorum
You are only entitled to notice of and to vote at the Special Meeting
if you were a record shareholder of our common stock on December 20, 2008 (the
"record date"). On that date, we had outstanding 3,394,873 shares of our common
stock, no par value per share. Each share outstanding will be entitled to one
vote upon each matter submitted at the meeting.
A majority of the shares entitled to be voted at the Special Meeting
constitutes a quorum. If a share is represented for any purpose at the Special
Meeting by the presence of the registered owner or a person holding a valid
proxy for the registered owner, it is deemed to be present for purposes of
establishing a quorum. Therefore, valid proxies which are marked "Abstain" or
"Withhold" and shares that are not voted, including proxies submitted by brokers
that are the record owners of shares (so-called "broker non-votes"), will be
included in determining the number of votes present or represented at the
Special Meeting.
If a quorum is not present or represented at the meeting, the
shareholders entitled to vote, present in person or represented by proxy, have
the power to adjourn the meeting from time to time. If the meeting is to be
reconvened within thirty days, no notice of the reconvened meeting will be given
other than an announcement at the adjourned meeting. If the meeting is to be
adjourned for thirty days or more, notice of the reconvened meeting will be
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given as provided in the Bylaws. At any reconvened meeting at which a quorum is
present or represented, any business may be transacted that might have been
transacted at the meeting as originally noticed.
Vote Required and Method of Counting Votes
If a quorum is present at the Special Meeting, the Amendment will
require the affirmative vote of two-thirds of our outstanding common stock, or
at least 2,263,249 shares. Our directors and executive officers own
approximately 36% of our outstanding shares, and they have indicated that they
intend to vote their shares "FOR" the Amendment. If a quorum is present, all
other matters that may be considered and acted upon at the Special Meeting will
be approved if the number of shares of common stock voted in favor of the matter
exceeds the number of shares of common stock voted against the matter.
Only shares affirmatively voted for approval of the Amendment,
including proxies properly executed by shareholders of record that do not
contain voting instructions, will be counted in favor of the proposal. A record
shareholder's failure to execute and return a proxy card or otherwise to vote at
the special meeting will have the same effect as a vote "AGAINST" the Amendment.
If a record shareholder abstains from voting, the abstention will also have the
effect of a vote "AGAINST" the Amendment. Additionally, failure of a shareholder
whose shares are held in street name to complete and return voting instructions
as required by the broker or other nominee that holds such shares of record will
have the same effect as a vote "AGAINST" the Amendment.
Accordingly, our Board of Directors urges you to complete, date, and
sign the accompanying proxy form, or such other document as your broker or other
nominee instructs you to use if your shares are held in "street name," and
return it promptly in the enclosed, postage-paid envelope.
Voting by Record Shareholders
If you hold your shares of record in your own name, you can vote your
shares by marking the enclosed proxy form, dating it, signing it, and returning
it to us in the enclosed postage-paid envelope. If you are a shareholder of
record and sign, date, and return your proxy card without indicating how you
want to vote, your proxy will be voted "FOR" approval of the Amendment. If you
are a shareholder of record, you can also attend the Special Meeting and vote in
person.
Voting by Shareholders whose Shares are held in "Street Name"
If you hold your shares in street name with a broker or other nominee,
you can direct their vote by submitting voting instructions to your broker or
nominee in accordance with the procedure on the voting card provided by your
broker or nominee. If you hold your shares in street name, you may attend the
Special Meeting, but you may not vote in person without a proxy appointment from
a shareholder of record.
Brokers or other nominees will not have the authority to vote shares
they hold for you in street name on the Amendment unless you give them specific
instructions on how to vote following the directions they have provided to you
with this Proxy Statement. Although valid proxies submitted by brokers or other
nominees that hold shares in street name as record owners and as to which no
vote is marked (so-called "broker non-votes"), will be included in determining
the number of votes present or represented at the Special Meeting for purposes
of determining a quorum, the shares will not be voted on the Amendment, and will
have the same effect as votes "AGAINST" the Amendment.
Revocation of Proxy by Record Shareholder
If you hold your shares of record in your own name and execute and
deliver a proxy, you may revoke the proxy at any time before it is voted by any
of the following methods:
o by mailing or delivering written notice of revocation to
Community First Bancorporation, 449 Highway 123 ByPass, Seneca,
South Carolina 29678, Attention: Corporate Secretary;
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o by submitting a proxy having a later date;
o by appearing at the meeting and giving notice of revocation to
the corporate officers responsible for maintaining the list of
shareholders; or
o by giving notice of such revocation in open meeting of the
shareholders.
Your attendance at the Special Meeting will not in itself, constitute
revocation of a proxy. However, if you are a record shareholder and desire to do
so, you may attend the meeting and vote in person, in which case the proxy will
not be used.
Revocation of Proxy by Shareholders whose Shares are held in "Street Name"
If you hold your shares in street name with a broker or other nominee
you may change or revoke your proxy instructions only by submitting new voting
instructions to the broker or other nominee in accordance with the procedures
provided by the broker or other nominee.
Actions to be Taken by the Proxies
Our Board of Directors selected the persons named as proxy agents on
the enclosed proxy form. When the form of proxy enclosed is properly executed
and returned, the shares that it represents will be voted at the meeting. In
each case where you have appropriately specified how the proxy is to be voted,
it will be voted in accordance with your specifications. If you are a
shareholder of record and you return a properly executed proxy card that does
not contain voting instructions, the proxy agents will vote your shares "FOR"
approval of the Amendment to our Articles of Incorporation. Our Board of
Directors is not aware of any other matters that may be presented for action at
the Special Meeting of Shareholders, but if other matters do properly come
before the meeting, the persons named in the proxy intend to vote on such
matters in accordance with their best judgment.
EFFECTIVENESS OF PROPOSED AMENDMENT
If the proposed Amendment is approved by the affirmative vote of
two-thirds of the shares of our common stock outstanding on the record date, the
Amendment will become effective if, and when, Articles of Amendment to our
Articles of Incorporation are filed with the Secretary of State of South
Carolina. Approval of the Amendment by the shareholders will not require that
the Articles of Amendment be filed, and our Board of Directors may decide to
abandon the Amendment after shareholder approval.
Should dissenters' rights be exercised for a substantial number of
shares, our Board of Directors will make a judgment as to whether it is in the
best interest of the Company to proceed with filing the Articles of Amendment or
to abandon the Amendment. In making its judgment, the Board of Directors will
take into consideration the negative impact on the Company's capital and cash
resources of paying dissenters the fair value of their shares. Because such
impact is completely at odds with the purpose of the Amendment, the Board of
Directors encourages shareholders not to exercise dissenters' rights, which are
discussed below.
DISSENTERS' RIGHTS
If the Amendment is approved by shareholders and becomes effective, and
if you comply with the requirements of Sections 33-13-101 et seq. of the South
Carolina Business Corporation Act ("SCBCA"), you have the right to dissent to
adoption of the Amendment and receive the fair value of your shares in cash. As
discussed above under the caption "Effectiveness of Proposed Amendment," the
Amendment will become effective only if (i) it is approved by our shareholders
and (ii) Articles of Amendment to our Articles of Incorporation are filed with
the South Carolina Secretary of State. Accordingly, even if our shareholders
approve the Amendment, if we decide not to file the Articles of Amendment, the
Amendment will not become effective, and you will not be entitled to be paid the
fair value of your shares.
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The discussion below summarizes the provisions of Sections 33-13-101 et
seq. of the SCBCA, but it does not grant you any rights that are not provided by
the SCBCA. Your only rights of dissent are those provided by Sections 33-13-101
et seq. of the SCBCA, a copy of which is included as Appendix A to this Proxy
Statement.
Pursuant to the provisions of Sections 33-13-101 et seq. of the SCBCA,
if the Amendment becomes effective, you will only be entitled to receive the
fair value of your shares if you:
o prior to the vote at the Special Meeting with respect to the
approval of the Amendment, give us written notice of your intent
to demand payment for your shares of our common stock
(hereinafter referred to as "shares") if the Amendment becomes
effective;
o do not vote in favor of the Amendment, provided that a vote in
favor of the Amendment cast by the holder of a proxy solicited by
us will not disqualify a shareholder from demanding payment for
his shares; and
o comply with the statutory requirements summarized below.
If you perfect your dissenters' rights, you will receive the fair value
of your shares determined as of the effective date of the Amendment.
If you are a record shareholder, you may assert dissenters' rights as
to fewer than all of the shares registered in your name only if you dissent with
respect to all shares beneficially owned by any one beneficial shareholder and
you notify us in writing of the name and address of each person on whose behalf
you are asserting dissenters' rights. The rights of a partial dissenter are
determined as if the shares as to which that holder dissents and that holder's
other shares were registered in the names of different shareholders.
If you are a beneficial owner of shares but do not hold your shares of
record in your name, you may assert dissenters' rights as to shares held on your
behalf only if you dissent with respect to all shares of which you are the
beneficial shareholder or over which you have power to direct the vote, and you
must notify us in writing of the name and address of the record shareholder of
the shares, if known to you.
Voting against the Amendment will not satisfy the written demand
requirement. In addition to not voting in favor of the Amendment, if you wish to
preserve the right to dissent and seek appraisal, you must give a separate
written notice of your intent to demand payment for your shares if the Amendment
is effected. Such written notice should be addressed to Community First
Bancorporation, 449 Highway 123 ByPass, Seneca, South Carolina 29678, Attention:
Corporate Secretary.
If our shareholders approve the Amendment at the Special Meeting, we
must deliver a written dissenters' notice (the "Dissenters' Notice") to all of
our shareholders who have satisfied the foregoing requirements. The Dissenters'
Notice must be sent within 10 days after the effective date of the Amendment and
must:
o state where and when dissenting shareholders should send the
demand for payment and where and when dissenting shareholders
should deposit certificates for the shares;
o inform holders of uncertificated shares to what extent transfer
of these shares will be restricted after the demand for payment
is received;
o supply a form for demanding payment that includes the date of the
first announcement of the terms of the Amendment and requires the
person asserting dissenters' rights (or the beneficial
shareholder on whose behalf he is asserting dissenters' rights)
to certify whether or not he acquired beneficial ownership of the
shares prior to the announcement date;
o set a date by which we must receive the demand for payment (which
date may not be fewer than 30 nor more than 60 days after the
Dissenters' Notice is delivered) and set a date by which
certificates for certificated shares must be deposited, which may
not be earlier than 20 days after the demand date; and
o be accompanied by a copy of Sections 33-13-101 et seq. of the
SCBCA.
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A shareholder who receives the Dissenters' Notice must demand payment,
certify whether he (or the beneficial shareholder on whose behalf he is
asserting dissenters' rights) acquired beneficial ownership of the shares before
the date of announcement of the terms of the Amendment as set forth in the
Dissenters' Notice, and deposit such holder's certificates in accordance with
the terms of the Dissenters' Notice. Dissenting shareholders will retain all
other rights of a shareholder until those rights are canceled or modified by
effectiveness of the Amendment. A shareholder who does not comply substantially
with the requirements that he demand payment and deposit his share certificates
where required, each by the date set in the Dissenters' Notice, is not entitled
to payment for his shares under Sections 33-13-101 et seq. of the SCBCA.
We may restrict the transfer of uncertificated shares from the date we
receive the demand for payment for them until the Amendment becomes effective or
the restrictions are released as discussed below.
Except as described below, we must upon the effective date of the
Amendment, pay each dissenting shareholder who substantially complied with the
payment demand and deposit requirements described above the amount we estimate
to be the fair value of the shares, plus accrued interest. Our payment must be
accompanied by:
o our balance sheet, income statement and statement of changes in
shareholders' equity as of the end of the fiscal year ending not
more than 16 months before the date of payment, and interim
financial statements, if any;
o our estimate of the fair value of the shares and an explanation
of how the fair value was calculated;
o an explanation of how the interest was calculated;
o a statement of the dissenter's right to demand additional payment
under the SCBCA; and
o a copy of Sections 33-13-101 et seq. of the SCBCA.
If the Amendment does not become effective within 60 days after the
date set for demanding payment and depositing share certificates, we must return
the deposited certificates and release the transfer restrictions imposed on
uncertificated shares. We must send a new Dissenters' Notice if the Amendment
becomes effective after the return of certificates and repeat the payment demand
procedure described above.
A dissenting shareholder may notify us in writing of his or her own
estimate of the fair value of such holder's shares and the interest due, and may
demand payment of such holder's estimate (less any payment made under the
procedure described above) (the "Additional Payment"), if:
o he or she believes that the amount we paid is less than the fair
value of his or her shares or that we have calculated incorrectly
the interest due;
o we fail to make payment within 60 days after the date set for
demanding payment; or
o we, having failed to cause the Amendment to become effective, do
not return the deposited certificates or release the transfer
restrictions imposed on uncertificated shares within 60 days
after the date set for demanding payment.
A dissenting shareholder waives his or her right to demand the
Additional Payment unless he or she notifies us of his or her demand in writing
within 30 days after we make payment for his or her shares.
If a demand for Additional Payment remains unsettled, we must commence
a proceeding in the Court of Common Pleas of Oconee County, South Carolina,
within 60 days after receiving the Additional Payment demand and must petition
the court to determine the fair value of the shares and accrued interest. If we
do not commence the proceeding within those 60 days, we must pay each dissenting
shareholder whose demand for Additional Payment remains unsettled the amount
demanded. We are required to make all dissenting shareholders whose demands for
Additional Payment remain unsettled parties to the proceeding and serve a copy
of the petition upon each of them. The court may appoint appraisers to receive
evidence and to recommend a decision on fair value. Each dissenting shareholder
6
made a party to the proceeding is entitled to judgment for the amount, if any,
by which the court finds the fair value of his shares, plus interest, exceeds
the amount we paid.
The court in an appraisal proceeding commenced under the foregoing
provision must determine the costs of the proceeding, excluding fees and
expenses of attorneys and experts for the respective parties, and must assess
those costs against us, except that the court may assess the costs against all
or some of the dissenting shareholders to the extent the court finds they acted
arbitrarily, vexatiously, or not in good faith in demanding payment. The court
also may assess the fees and expenses of attorneys and experts for the
respective parties against us if the court finds we did not substantially comply
with the requirements of specified provisions of the SCBCA, or against either us
or a dissenting shareholder if the court finds that such party acted
arbitrarily, vexatiously, or not in good faith with respect to the dissenters'
rights provided by the SCBCA.
If the court finds that the services of attorneys for any dissenting
shareholder were of substantial benefit to other dissenting shareholders
similarly situated, and that the fees for those services should be not assessed
against us, the court may award those attorneys reasonable fees out of the
amounts awarded the dissenting shareholders who were benefited. In a proceeding
commenced by dissenters to enforce our statutory liability for our failure to
commence an appraisal proceeding within the 60 day period described above, the
court will assess costs of the proceeding and fees and expenses of dissenters'
counsel against us and in favor of the dissenters.
This is a summary of the material rights of a dissenting shareholder
and is qualified in its entirety by reference to Sections 33-13-101 et seq. of
the SCBCA, included as Appendix A to this Proxy Statement. If you intend to
dissent from approval of the Amendment, you should review carefully the text of
Appendix A and should also consult with your attorney. We will not give you any
further notice of the events giving rise to dissenters' rights or any steps
associated with perfecting dissenters' rights, except as indicated above or
otherwise required by law.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following table shows information as of December 20, 2008 about
shares of our common stock beneficially owned by each of our directors and
executive officers. Except as otherwise indicated, to management's knowledge,
all shares are owned directly with sole voting power. Other than as shown below,
no persons were known by management to be the beneficial owners, as defined in
Rule 13d-3 of the Securities and Exchange Commission, of 5% or more of our
common stock.
Name and Amount and Nature
Address of 5% owners of Beneficial Ownership % of Class
-------------------- ----------------------- ----------
Larry S. Bowman, M.D. 107,959 (1) 3.19%
William M. Brown 98,258 (2) 2.91%
Robert H. Edwards 125,303 (3) 3.70%
Blake L. Griffith 163,453 (4) 4.82%
John R. Hamrick 111,366 (5) 3.31%
James E. McCoy 126,729 (6) 3.74%
Frederick D. Shepherd, Jr. 289,088 (7) 8.44%
449 Highway 123 Bypass
Seneca, S.C. 29678
Gary V. Thrift 92,598 (8) 2.73%
James E. Turner 216,984 (9) 6.42%
P. O. Box 367
Seneca, S.C. 29679
7
Charles L. Winchester 171,307 (10) 5.06%
P. O. Box 456
Salem, S.C. 29676
All Directors, nominees
and executive officers
as a group (10 persons) 1,503,045 (11) 41.24%
----------------
(1) Includes 41,698 shares jointly owned with Mary M. Bowman, Dr. Bowman's
wife; 16,728 shares owned by Mrs. Bowman; 11,733 shares held as trustee for
Dr. Bowman's children; and 23,045 shares subject to currently exercisable
options.
(2) Includes 3,790 shares owned by Annie B. Brown, Mr. Brown's wife; and 23,045
shares subject to currently exercisable options.
(3) Includes 30,055 shares jointly owned with Ruth D. Edwards, Mr. Edward's
wife; 7,035 shares owned by Mrs. Edwards; 11,222 shares owned by Robert H.
Edwards LLC; and 30,180 shares subject to currently exercisable options.
(4) Includes 19,477 shares owned by Susan P. Griffith, Mr. Griffith's wife;
113,622 shares jointly owned with Mrs. Griffith; and 30,180 shares subject
to currently exercisable options.
(5) Includes 33,547 shares jointly owned with Frances R. Hamrick, Mr. Hamrick's
wife; 6,839 shares owned by Mrs. Hamrick; and 4,735 shares subject to
currently exercisable options.
(6) Includes 85,714 shares jointly owned with Charlotte B. McCoy, Mr. McCoy's
wife, and 30,180 shares subject to currently exercisable options. Of the
total shares beneficially owned by Mr. McCoy, 67,330 have been pledged as
security.
(7) Includes presently exercisable options to purchase 67,653 shares. Of the
total shares beneficially owned by Mr. Shepherd, 74,443 have been pledged
as security.
(8) Includes 30,180 shares subject to currently exercisable options.
(9) Includes 22,636 shares owned by Patricia S. Turner, Mr. Turner's wife; and
23,045 shares subject to currently exercisable options.
(10) Includes 46,643 shares jointly owned with Joan O. Winchester, Mr.
Winchester's wife; 3,460 shares owned by Mrs. Winchester; 1,906 shares held
as custodian for Mr. Winchester's grandchildren; and 23,045 shares subject
to currently exercisable options.
(11) Includes currently exercisable options to purchase 285,288 shares.
DESCRIPTION OF CAPITAL STOCK AND
CAPITAL PURCHASE PROGRAM
Common Stock
Capitalization
We currently have 10 million shares of authorized voting common stock,
no par value per share. As of the record date, we had 3,394,873 shares of common
stock outstanding. The outstanding shares of common stock are fully paid and
nonassessable.
General voting requirements
The holders of our common stock are entitled to one vote per share in
all proceedings in which action shall be taken by our shareholders, and have
sole voting control over the Company. Our Board is divided into three classes,
which have as nearly equal a number of directors as possible. Approximately
one-third of our directors are elected each year and directors serve three-year
terms. Directors are elected by a plurality of the votes cast by shares present
and entitled to vote at a meeting at which a quorum is present. Except for such
greater voting requirements as may be required by law or our Articles of
Incorporation, as discussed below under the caption "--Additional Rights of our
Common Stock and Preferred Stock," all other matters acted upon by the
shareholders will be approved if a quorum is present and the number of shares
8
voted in favor of the matter exceeds the number of shares voted against the
matter. Our common stock does not have cumulative voting rights.
In the event any issue of preferred stock is entitled to vote, the
common stock would vote together with the preferred stock, unless the matter
being voted on would change the rights of the preferred stock, or the matter to
be voted on was unique to the preferred stock, in which case it would vote as a
separate group.
Dividend Rights
We have never paid cash dividends, and in order to support our
continuing need for capital to support anticipated asset growth and market
expansion, we do not expect to declare or pay cash dividends on our common stock
in the near future. We are not required to pay any dividends on our common
stock. The holders of our common stock are entitled to dividends when, as, and
if declared by our Board of Directors out of funds legally available for
dividends. Under South Carolina law, we may legally declare or pay dividends
only if, after their payment, we can pay our debts as they come due in the usual
course of business, and then only if our total assets equal or exceed the sum of
our liabilities. Our principal source of funds with which to pay cash dividends
is cash dividends our subsidiary bank pays to us. South Carolina banking
regulations restrict the amount of cash dividends the bank can pay to us, and
the bank's payment of cash dividends to us is subject to the prior approval of
the South Carolina Commissioner of Banking.
If the Amendment is approved, the payment of any dividends on our
common stock may be subject to the rights granted to holders of any shares of
the preferred stock we issue, for example, as discussed below under the caption
"--Proposed Issuance of Senior Preferred Stock - Preferences, Limitations and
Relative Rights of the Senior Preferred Stock --Dividend Rights."
No Preemptive Rights
Our shareholders do not have preemptive rights with respect to the
issuance of additional shares, options or rights to any class of our stock. As a
result, the directors may sell additional authorized shares of our common stock
without first offering them to existing shareholders and giving them the
opportunity to purchase sufficient additional shares to prevent dilution of
their ownership interests.
Rights upon liquidation
In the event of our voluntary or involuntary liquidation or
dissolution, or the winding-up of our affairs, our assets will be applied first
to the payment, satisfaction and discharge of our existing debts and
obligations, including the necessary expenses of dissolution or liquidation,
then, if the Amendment is effective, to any issued preferred stock with a
liquidation preference, and then pro rata to the holders of our common stock.
Conversion; Redemption; Sinking Fund
None of our common stock is convertible, has any redemption rights or
is entitled to any sinking fund.
Preferred Stock
Our Articles of Incorporation do not currently authorize us to issue
any shares of preferred stock. The Amendment to our Articles of Incorporation
that you will consider at the Special Meeting will provide for the authorization
of 10 million shares of preferred stock.
If the Amendment is approved and we file Articles of Amendment to our
Articles of Incorporation, our Board of Directors would have the authority,
without approval of our shareholders, from time to time to authorize the
issuance of preferred stock in one or more series with such preferences,
limitations and relative rights, within legal limits, and for such consideration
as our Board of Directors may determine.
9
Although our Board of Directors has no intention at the present time of
doing so, it could cause the issuance of preferred stock that could discourage
an acquisition attempt or other transactions that some, or a majority of, our
shareholders might believe to be in their best interests or in which the
shareholders might receive a premium for their shares of common stock over the
market price of such shares.
Proposed Issuance of Senior Preferred Stock
If the Amendment is approved and we file Articles of Amendment to our
Articles of Incorporation, and our application is approved, we currently plan to
participate in the U.S. Department of the Treasury's Capital Purchase Program
under the Emergency Economic Stabilization Act of 2008 ("EESA"). Although we
currently have enough capital to meet our foreseeable needs, the additional
capital would provide additional protection against unforeseeable effects of a
prolonged continuation of current economic conditions. We do not know the exact
terms of our potential participation at this time. However, the Treasury has
published term sheets which set out the terms of the program for public and
non-public companies as it was contemplated by the Treasury on October 14, 2008
and November 17, 2008, respectively. We applied after the deadline for the
public company program and currently plan to participate in the non-public
company version of the Capital Purchase Program. Although the terms of our
participation, if any, could change, if our application is accepted and we
participate substantially as described in the term sheet for non-public
companies, we would issue between approximately 3,000 and 9,000 shares of Senior
Preferred Stock and warrants to the Treasury for proceeds of between
approximately $3 million and $9 million. Based on the term sheet, the material
terms of our participation in the Capital Purchase Program and the material
terms of the securities we would issue to the Treasury are described below.
Preferences, Limitations and Relative Rights of the Senior Preferred Stock
The Senior Preferred Stock would have the following preferences,
limitations and relative rights.
Dividend Rights. The Senior Preferred Stock will pay cumulative
compounding dividends at a rate of 5% per annum until the fifth anniversary of
the date of issue and thereafter at a rate of 9% per annum.
Redemption Provisions. The Senior Preferred Stock may not be redeemed
for a period of three years from the date of issue, except with the proceeds
from one or more cash sales of common or preferred stock which result in
aggregate gross proceeds to us of not less than 25% of the issue price of the
Senior Preferred Stock. After the third anniversary of the date of issue, the
Senior Preferred Stock may be redeemed, in whole or in part, at any time and
from time to time, at our option. All redemptions of the Senior Preferred Stock
will be at 100% of its issue price, plus any accrued and unpaid dividends, and
will be subject to the approval of the Federal Reserve.
Voting Rights and Right to Elect Directors. The Senior Preferred Stock
will be non-voting, other than class voting rights on (i) any authorization or
issuance of shares ranking senior to the Senior Preferred Stock, (ii) any
amendment to the rights of Senior Preferred Stock, or (iii) any merger, exchange
or similar transaction which would adversely affect the rights of the Senior
Preferred Stock. If dividends on the Senior Preferred Stock are not paid in full
for six dividend periods, whether or not consecutive, the Senior Preferred Stock
will have the right to elect two directors. The right to elect directors will
end when dividends have been paid in full for four consecutive dividend periods.
Liquidation Rights. The Senior Preferred Stock will have a liquidation
preference of $1,000 per share which must be paid before the common stock
receives any proceeds of a liquidation.
Restrictions on Dividends. For as long as any Senior Preferred Stock is
outstanding, no dividends may be declared or paid on junior preferred shares,
preferred shares ranking equally with the Senior Preferred Stock, or common
shares (other than, in the case of equally preferred shares, dividends on a pro
rata basis with the Senior Preferred Stock), nor may we repurchase or redeem any
junior preferred shares, preferred shares ranking equally with the Senior
Preferred Stock or common shares, unless all accrued and unpaid dividends for
all past dividend periods on the Senior Preferred Stock are fully paid. The
Treasury's consent will be required for any increase in common stock dividends
per share until the third anniversary of the date of issue unless, prior to such
third anniversary, the Senior Preferred Stock is redeemed in whole or the
Treasury has transferred all of the Senior Preferred Stock to third parties. In
10
addition to these restrictions, under the non-public company version of the
program, increases in common stock dividends will be limited to 3% per year
until the tenth anniversary of the issue date, unless, prior to such tenth
anniversary, the Senior Preferred Stock is redeemed in whole or the Treasury has
transferred all of the Senior Preferred Stock to third parties. Additionally,
under the non-public company version of the program, after the tenth anniversary
of the issue date no dividends may be paid as long as the Treasury owns any of
our securities.
Repurchases. The Treasury's consent will be required for any share
repurchases (other than (i) repurchases of the Senior Preferred Stock and (ii)
repurchases of junior preferred shares or common shares in connection with any
benefit plan in the ordinary course of business consistent with past practice)
until the tenth anniversary of the date of issue unless, prior to such tenth
anniversary, the Senior Preferred Stock is redeemed in whole or the Treasury has
transferred all of the Senior Preferred Stock to third parties. In addition,
there may be no repurchases of junior preferred shares, preferred shares ranking
equally with the Senior Preferred Stock, or common shares if prohibited as
described above under "--Restrictions on Dividends."
Additional Terms of Participation in the Capital Purchase Program
Additional terms that would apply to us as a result of participation in
the program include the following.
Registration Rights
We will be required to file a shelf registration statement covering the
Senior Preferred Stock as promptly as practicable after the date of issue and,
if necessary, will be required to take all action required to cause such shelf
registration statement to be declared effective as soon as possible. We will
also grant to the Treasury piggyback registration rights for the Senior
Preferred Stock.
Executive Compensation
As a condition to the closing of the issuance of Senior Preferred
Stock, we and our senior executive officers covered by EESA must modify or
terminate all benefit plans, arrangements and agreements (including golden
parachute agreements) to the extent necessary to be in compliance with, and
following the closing and for so long as Treasury holds any of our equity or
debt securities, we will agree to be bound by, the executive compensation and
corporate governance requirements of Section 111 of EESA and any guidance or
regulations issued by the Secretary of the Treasury on or prior to the date of
issue to carry out the provisions of such subsection. As an additional condition
to closing, we and our senior executive officers covered by EESA must grant to
the Treasury a waiver releasing the Treasury from any claims that we and such
senior executive officers may otherwise have as a result of the issuance of any
regulations which modify the terms of benefits plans, arrangements and
agreements to eliminate any provisions that would not be in compliance with the
executive compensation and corporate governance requirements of Section 111 of
EESA and any guidance or regulations issued by the Secretary of the Treasury on
or prior to the date of issue to carry out the provisions of such subsection.
The specific impact of participation in the program on our executive
compensation arrangements is further discussed below under the caption "--
Impact of Participation in the Capital Purchase Program - Company Operations."
Related Party Transactions
The non-public company version of the program would prohibit us from
entering into any related party transactions unless the terms are no less
favorable to us than could be obtained from an unaffiliated third party, and any
permissible related party transactions would have to be approved by our
independent directors.
Warrants
If we participate in the non-public company version of the program, in
addition to the shares of Senior Preferred Stock, we would be required to issue
to the Treasury, for no additional consideration, ten-year warrants to purchase
between 150 shares and 450 shares of our preferred stock (the "Warrant Preferred
Stock"). The exercise price of the preferred stock warrant will be one cent per
share. The Warrant Preferred Stock covered by the warrants will have a
liquidation preference equal to $1,000 per share. The terms of the Warrant
Preferred Stock will be exactly the same as the Senior Preferred Stock, except
11
the dividend will be 9% instead of 5%, and it may not be redeemed until all of
the Senior Preferred Stock has been redeemed. The Treasury has indicated that it
intends to exercise these warrants immediately.
Impact of Participation in the Capital Purchase Program
Use of Proceeds
If our application is approved and we sell Senior Preferred Stock to
the Treasury, we expect to receive proceeds of between $3 million and $9 million
before the payment of expenses associated with the sale of the Senior Preferred
Stock and warrants, which are estimated to be $25,000 or less. Unless our
agreement with the Treasury requires some other use, we expect to use the amount
we receive to pay the expenses of the sale and, initially, to deposit the rest
in a non-interest bearing account with our bank subsidiary, which will use the
funds for additional liquidity. Thereafter, the funds may be contributed to the
bank subsidiary as capital or used for other corporate purposes. However, there
can be no assurance that our application will be approved or if it is approved,
that we will receive an amount within the range estimated above.
Rights of Existing Common Shareholders
Issuance of Senior Preferred Stock and Warrant Preferred Stock will
give holders the right, in case we are ever liquidated, to be paid the
liquidation value of the Senior Preferred Stock and Warrant Preferred Stock out
of our residual assets before any payment is made to the common shareholders.
All dividends due on the Senior Preferred Stock and Warrant Preferred Stock must
be paid before any dividends can be paid on our common stock and the amount of
our common stock dividends cannot be increased in the first three years that the
Treasury owns the Senior Preferred Stock or Warrant Preferred Stock without the
consent of the Treasury. If we do not pay the dividends on the Senior Preferred
Stock or Warrant Preferred Stock in full for six dividend periods, whether or
not consecutive, the holders of the Senior Preferred Stock and Warrant Preferred
Stock will have the right to elect two directors to our board of directors. That
right will continue until all past dividends on the Senior Preferred Stock and
Warrant Preferred Stock are paid in full.
Dilution of Common Shareholders
Because the preferential liquidation amount of the Senior Preferred
Stock will equal its gross purchase price, the issuance of the Senior Preferred
Stock will not change the tangible book value of our common stock, pro rated
between the Senior Preferred Stock and our common stock on the basis of their
relative tangible book value. Issuance of Warrant Preferred Stock will cause an
immaterial reduction in the tangible book of our common stock. Because the
Senior Preferred Stock's and the Warrant Preferred Stock's claim on our earnings
is limited to a fixed amount, the tangible book value of our common stock before
the payment of any common stock distributions may increase or decrease in the
future depending on whether or not our earnings exceed the amount required to
pay dividends due on the Senior Preferred Stock and the Warrant Preferred Stock.
As noted above, we will not be able to pay dividends on our common stock unless
we have paid all dividends due on the Senior Preferred Stock and the Warrant
Preferred Stock.
Registration Rights
As discussed above under "-- Additional Terms of Participation in the
Capital Purchase Program," if we sell Senior Preferred Stock to the Treasury, we
will be required to grant registration rights to the Treasury. Those rights
require us, at our expense, to register with the SEC some or all of our
securities that are held by the Treasury in order to permit the Treasury to make
a public offering of those securities. The out-of-pocket cost to us of doing so,
as well as the indirect cost of the time that would have to be spent by our
personnel, could be substantial.
Company Operations
If we sell Senior Preferred Stock and warrants to the Treasury we will
be required to make modifications to the way our executive compensation
12
arrangements are structured. Specifically, our board of directors will have to
review our incentive compensation arrangements with our senior officers and make
reasonable efforts to ensure that such arrangements do not encourage our senior
executive officers to take unnecessary and excessive risks that threaten the
value of our Company. As long as the Treasury owns our securities, our board
will also have to meet annually with our senior executive officers to review the
relationship between our risk management policies and practices. It will also be
a requirement that any bonus and incentive compensation paid to our senior
executives during the period that the Treasury holds our securities acquired
under the Capital Purchase Program be subject to being repaid to us if the
payments were based on materially inaccurate financial statements or other
performance metric criteria. Further, we will be required, during the period the
Treasury holds our securities acquired under the Capital Purchase Program, to
prohibit severance payments to our senior executive officers in excess of an
amount which is approximately three times the average of their annual
compensation for the prior five years. This requirement will necessitate a
temporary change in the terms of our president's compensation arrangements.
Finally, we will be required not to claim a deduction for federal income tax
purposes of executive compensation that would not be deductible if Section
162(m)(5) of the Internal Revenue Code were to apply to us.
All of these requirements are expected to increase our administrative
costs somewhat and are not likely to reduce the compensation paid to our senior
executive officers. Neither are they expected to have any material impact on the
way we operate our business or our financial condition or results of operations.
Capital
If we sell between $3 million and $9 million of Senior Preferred Stock
and warrants to the Treasury, the impact on our capital will be approximately as
follows (using the assumption that the sale had occurred, and the proceeds were
held as cash, on September 30, 2008):
o Our total shareholders equity would increase from $40,790,000
(actual) to $43,790,000 (if $3 million is received) or
$49,790,000 (if $9 million is received).
o Our regulatory capital ratios would increase as shown below:
Actual at $3 million $9 million
Ratio Sept. 30, 2008 Sold Sold
----- -------------- ---- ----
Total capital (to risk-weighted assets) 15.0% 16.0% 18.0%
Tier 1 capital (to risk-weighted assets) 13.8% 14.8% 16.8%
Tier 1 capital (to average assets) 9.5% 10.2% 11.6%
Pro Forma Financial Impact of Senior Preferred Stock
The following tables set forth our financial position as of September
30, 2008 and results of operations for the nine months ended September 30, 2008
and the year ended December 31, 2007:
o on an actual basis; and
o on an as adjusted basis to give effect to the sale of $3 million and
$9 million of Senior Preferred Stock and issuance of warrants to purchase 150
shares and 450 shares, respectively, of Warrant Preferred Stock with a 9%
dividend for $1.50 and $4.50, respectively.
The pro forma financial information below assumes that the warrants are
immediately exercised and that we received proceeds from the sale of Senior
Preferred Stock to the Treasury and deposited the funds into a noninterest
bearing account during the periods presented. This pro forma impact does not
represent the planned use of the proceeds of the sale of Senior Preferred Stock.
If Treasury makes the investment and does not impose limitations on our use of
the funds, we expect ultimately to use these proceeds to increase the capital of
our bank subsidiary or for other corporate purposes. The financial impact and
13
benefit to us from these uses is expected to be significant, but has not been
included in the pro forma financial information.
These tables should be read in conjunction with the information under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our unaudited condensed consolidated financial
statements for the nine months ended September 30, 2008 included in our
Quarterly Report on Form 10-Q for the quarter then ended, and the information
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our audited consolidated financial statements for
the year ended December 31, 2007 and related notes and other financial
information included in our Annual Report on Form 10-K for the year then ended,
all of which is included in Appendix B to this proxy statement.
The following unaudited pro forma consolidated financial data is not
necessarily indicative of our financial position or results of operations that
actually would have been attained had proceeds from the Capital Purchase Program
been received, or had the warrants been issued and exercised pursuant to the
Capital Purchase Program, at the dates indicated, and is not necessarily
indicative of our financial position or results of operations that will be
achieved in the future. We have included the following unaudited pro forma
consolidated financial data solely for the purpose of providing shareholders
with information that may be useful for purposes of considering and evaluating
the proposal to amend our Articles of Incorporation. Our future results are
subject to prevailing economic and industry specific conditions and financial,
business and other known and unknown risks and uncertainties, certain of which
are beyond our control.
14
Condensed Consolidated Balance Sheets
As of September 30, 2008
(Unaudited)
-----------
(Dollars in thousands except share data) $3,000 $9,000
Actual Pro forma Pro forma
------ --------- ---------
Assets
Cash and cash equivalents ........................................................ $ 29,044 $ 32,044 $ 38,044
Securities available for sale .................................................... 110,524 110,524 110,524
Other investments, at cost ....................................................... 13,527 13,527 13,527
Loans, net of allowance for loan losses ($3,503) ................................. 263,572 263,572 263,572
Premises and equipment, net ...................................................... 8,691 8,691 8,691
Bank owned life insurance ........................................................ 8,388 8,388 8,388
Interest receivable .............................................................. 2,557 2,557 2,557
Other assets ..................................................................... 2,062 2,062 2,062
--------- --------- ---------
Total assets ..................................................................... $ 438,365 $ 441,365 $ 447,365
========= ========= =========
Liabilities
Deposits:
Noninterest bearing ......................................................... $ 42,830 $ 42,830 $ 42,830
Interest bearing ............................................................ 340,892 340,892 340,892
--------- --------- ---------
Total deposits ......................................................... 383,722 383,722 383,722
Short-term borrowings ............................................................ 1,500 1,500 1,500
Long-term debt ................................................................... 9,500 9,500 9,500
Accrued interest payable ......................................................... 1,911 1,911 1,911
Other liabilities ................................................................ 942 942 942
--------- --------- ---------
Total liabilities ................................................................ 397,575 397,575 397,575
--------- --------- ---------
Shareholders' Equity
Preferred stock, no par value; 10,000,000 shares authorized pro
forma:
3,000 and 9,000 shares with 5% initial dividend issued and
outstanding pro forma (1) .................................................. - 3,000 9,000
150 and 450 shares with 9% dividend issued and outstanding
pro forma (1) .............................................................. - 150 450
Discount on 5% initial dividend preferred stock (2) (4) .......................... - (177) (532)
Premium on 9% dividend preferred stock (3) (4) ................................... - 27 82
Common stock, no par value; 10,000,000 shares authorized;
3,394,873 shares issued and outstanding as of September 30, 2008 ............. 35,374 35,374 35,374
Additional paid-in capital ....................................................... 681 681 681
Retained earnings ................................................................ 4,654 4,654 4,654
Accumulated other comprehensive income ........................................... 81 81 81
--------- --------- ---------
Total shareholders' equity ....................................................... 40,790 43,790 49,790
--------- --------- ---------
Total liabilities and shareholders' equity ....................................... $ 438,365 $ 441,365 $ 447,365
========= ========= =========
(1) Recorded at the redemption value of the shares issued.
(2) Pro forma amounts include discount recorded at issuance of preferred stock
of $177 and $532.
(3) Pro forma amounts include premium recorded at issuance of preferred stock
of $27 and $82.
(4) Discount and premium were computed using the fair value of the preferred
stock assuming a 12% discount rate (market rate) and an expected life upon
issuance of five years. The premium and discount were allocated between the
Senior Preferred Stock and the Warrant Preferred stock based on their
relative estimated fair values.
15
Condensed Consolidated Statements of Operations
Nine Months Ended September 30, 2008
(Unaudited)
-----------
(Dollars in thousands except per share data) $3,000 $9,000
Actual Pro forma Pro forma
------ --------- ---------
Interest income (1) ....................................................... $ 18,629 $ 18,629 $ 18,629
Interest expense .......................................................... 9,741 9,741 9,741
---------- ---------- ----------
Net interest income .............................................. 8,888 8,888 8,888
Provision for loan losses ................................................. 1,375 1,375 1,375
---------- ---------- ----------
Net interest income after provision for loan losses .............. 7,513 7,513 7,513
---------- ---------- ----------
Other income .............................................................. 1,868 1,868 1,868
Other expense ............................................................. 5,830 5,830 5,830
---------- ---------- ----------
Income before income taxes ....................................... 3,551 3,551 3,551
Income tax expense ........................................................ 1,037 1,037 1,037
---------- ---------- ----------
Net income ....................................................... 2,514 2,514 2,514
========== ========== ==========
Net income attributable to preferred shareholders (2) ..................... - 142 427
---------- ---------- ----------
Net income available to common shareholders ............................... $ 2,514 $ 2,372 $ 2,087
========== ========== ==========
Earnings per common share - basic (3) ..................................... 0.71 0.67 0.59
========== ========== ==========
Earnings per common share - diluted (3) ................................... 0.68 0.64 0.56
========== ========== ==========
Average basic common shares outstanding (3) ............................... 3,534,926 3,534,926 3,534,926
========== ========== ==========
Average diluted common shares outstanding (3) ............................. 3,703,561 3,703,561 3,703,561
========== ========== ==========
(1) Funds received from issuance of preferred stock are assumed to be included in non-interest bearing cash. Subsequent deployment
of the funds is anticipated but the timing is uncertain.
(2) The pro forma amounts include dividends paid on the preferred stock of $123 and $368 and net accretion and amortization of the
discount and premium recorded at issuance of $19 and $59. The discount and premium are accreted and amortized using a constant
effective yield method over a five year term, which is the expected life of the preferred stock upon issuance.
(3) Actual and pro forma per common share amounts and average amounts of common shares outstanding have been retroactively adjusted
to reflect a 5% common stock dividend declared on November 20, 2008.
Year Ended December 31, 2007 (Unaudited)
----------------------------------------
(Dollars in thousands except per share data) $3,000 $9,000
Actual Pro forma Pro forma
------ --------- ---------
Interest income (1) ....................................................... $ 23,578 $ 23,578 $ 23,578
Interest expense .......................................................... 13,230 13,230 13,230
---------- ---------- ----------
Net interest income .............................................. 10,348 10,348 10,348
Provision for loan losses ................................................. 594 594 594
---------- ---------- ----------
Net interest income after provision for loan losses .............. 9,754 9,754 9,754
---------- ---------- ----------
Other income .............................................................. 2,206 2,206 2,206
Other expense ............................................................. 7,132 7,132 7,132
---------- ---------- ----------
Net income before tax expense .................................... 4,828 4,828 4,828
Income tax expense ........................................................ 1,497 1,497 1,497
---------- ---------- ----------
Net income ....................................................... $ 3,331 $ 3,331 $ 3,331
========== ========== ==========
Net income attributable to preferred shareholders (2) ..................... - 190 570
---------- ---------- ----------
Net income available to common shareholders ............................... $ 3,331 $ 3,141 $ 2,761
========== ========== ==========
Earnings per common share - basic (3) ..................................... 0.97 0.92 0.80
========== ========== ==========
Earnings per common share - diluted (3) ................................... 0.91 0.86 0.76
========== ========== ==========
Average basic common shares outstanding (3) ............................... 3,432,494 3,432,494 3,432,494
========== ========== ==========
Average diluted common shares outstanding (3) ............................. 3,652,016 3,652,016 3,652,016
========== ========== ==========
(1) Funds received from issuance of preferred stock are assumed to be included in non-interest bearing cash. Subsequent deployment
of the funds is anticipated but the timing is uncertain.
(2) The pro forma amounts include dividends paid on the preferred stock of $163 and $490 and net accretion and amortization of the
discount and premium recorded at issuance of $27 and $80. The discount and premium are accreted and amortized using a constant
effective yield method over a five year term, which is the expected life of the preferred stock upon issuance.
(3) Actual and pro forma per common share amounts and average amounts of common shares outstanding have been retroactively adjusted
to reflect a 5% common stock dividend declared on November 20, 2008. No Assurances as to Issuance of Preferred Stock
16
As noted above, although we intend to apply to participate in the
Capital Purchase Program, our application may not be accepted or it may not be
accepted on the terms described above. We may or may not also decide to issue
preferred stock whether or not we participate in the Capital Purchase Program.
Accordingly, there can be no assurance that we will ever issue any preferred
stock and, if we do, what its terms will be.
Additional Rights of our Common Stock and Preferred Stock
Statutory Matters
Business Combination Statute. The South Carolina Business Combinations
Statute provides that a 10% or greater shareholder of a resident domestic
corporation cannot engage in a "business combination" (as defined in the
statute) with such corporation for a period of two years following the date on
which the 10% shareholder became such, unless the business combination or the
acquisition of shares is approved by a majority of the disinterested members of
such corporation's board of directors before the 10% shareholder's share
acquisition date. This statute further provides that at no time (even after the
two-year period subsequent to such share acquisition date) may the 10%
shareholder engage in a business combination with the relevant corporation
unless certain approvals of the board of directors or disinterested shareholders
are obtained or unless the consideration given in the combination meets certain
minimum standards set forth in the statute. The law is very broad in its scope
and is designed to inhibit unfriendly acquisitions but it does not apply to
corporations whose articles of incorporation contain a provision electing not to
be covered by the law. Our Articles of Incorporation do not contain such a
provision. An amendment of our Articles of Incorporation to that effect would,
however, permit a business combination with an interested shareholder although
that status was obtained prior to the amendment. This statute will only apply to
us as long as we continue to have a class of securities registered under Section
12 of the Securities Exchange Act of 1934.
Control Share Acquisitions. The South Carolina law also contains
provisions that, under certain circumstances, would preclude an acquiror of the
shares of a South Carolina corporation who crosses one of three voting
thresholds (20%, 33-1/3% or 50%) from obtaining voting control with respect to
such shares unless a majority in interest of the disinterested shareholders of
the corporation votes to accord voting power to such shares.
The legislation provides that, if authorized by the articles of
incorporation or bylaws prior to the occurrence of a control share acquisition,
the corporation may redeem the control shares if the acquiring person has not
complied with certain procedural requirements (including the filing of an
"acquiring person statement" with the corporation within 60 days after the
control share acquisition) or if the control shares are not accorded full voting
rights by the shareholders. We are not authorized by our Articles of
Incorporation or Bylaws to redeem control shares.
The provisions of the Control Share Acquisitions Act will only apply to
us as long as we continue to have a class of securities registered under Section
12 of the Securities Exchange Act of 1934.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We expect that representatives from J. W. Hunt and Company, LLP,
Certified Public Accountants, our independent registered public accounting firm,
will be present and available to answer appropriate questions at the Special
Meeting, and will have the opportunity to make a statement if they desire to do
so.
OTHER MATTERS
The Board of Directors knows of no other business to be presented at
the Special Meeting of shareholders. If matters other than those described
herein should properly come before the meeting, the persons named in the
enclosed form of proxy intend to vote at such meeting in accordance with their
best judgment on such matters. If you specify a different choice on your proxy,
your shares will be voted in accordance with the specifications so made.
17
FORWARD-LOOKING STATEMENTS
Statements contained in this Proxy Statement that are not purely
historical are forward-looking statements, including, but not limited to,
statements regarding our expectations, hopes, beliefs, intentions or strategies
regarding the future. Actual results could differ materially from those
projected in any forward-looking statements as a result of a number of factors,
including those detailed in this Proxy Statement. The forward-looking statements
are made as of the date of this Proxy Statement and we undertake no obligation
to update or revise the forward-looking statements, or to update the reasons why
actual results could differ materially from those projected in the
forward-looking statements.
We caution you not to place undue reliance on any forward-looking
statements made by us, or on our behalf in this Proxy Statement or in any of our
filings with the Securities and Exchange Commission ("SEC") or otherwise.
Additional information with respect to factors that may cause the results to
differ materially from those contemplated by forward-looking statements is
included in our current and subsequent filings with the SEC. See "Where You Can
Find More Information" below.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith we file reports,
proxy statements and other information with the SEC. Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities of the SEC at 100 F Street, N.E., Washington, DC 20549.
Copies of such materials can also be obtained at prescribed rates by writing to
the Public Reference Section of the SEC at 100 F Street, N.E., Washington, DC
20549. In addition, such reports, proxy statements and other information are
available from the Edgar filings that can be obtained through the SEC's Internet
Website (http://www.sec.gov).
SHAREHOLDER PROPOSALS
If you wish to submit proposals for the consideration of the
shareholders at our 2009 Annual Meeting you may do so by sending them in writing
to Community First Bancorporation, 449 Highway 123 ByPass, Seneca, South
Carolina 29678, Attention: Corporate Secretary. You must send or deliver such
written proposals in time for us to receive them prior to December 1, 2008, if
you want us to include them, if otherwise appropriate, in our proxy statement
and form of proxy relating to that meeting. If we do not receive notice of a
shareholder proposal prior to February 15, 2009, the persons named as proxy
agents in the proxy materials relating to the 2009 Annual Meeting will use their
discretion in voting the proxies when such proposal is raised at that meeting.
18
APPENDIX A
DISSENTERS' RIGHTS
SOUTH CAROLINA CODE SECTIONS 33-13-101, et seq.
CHAPTER 13
DISSENTERS' RIGHTS
ARTICLE 1.
RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
SECTION 33-13-101. Definitions.
In this chapter:
(1) "Corporation" means the issuer of the shares held by a dissenter before the
corporate action, or the surviving or acquiring corporation by merger or
share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from corporate
action under Section 33 13 102 and who exercises that right when and in the
manner required by Sections 33 13 200 through 33 13 280.
(3) "Fair value", with respect to a dissenter's shares, means the value of the
shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action to which the dissenter objects,
excluding any appreciation or depreciation in anticipation of the corporate
action unless exclusion would be inequitable. The value of the shares is to
be determined by techniques that are accepted generally in the financial
community.
(4) "Interest" means interest from the effective date of the corporate action
until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair
and equitable under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are registered
in the records of a corporation or the beneficial owner of shares to the
extent of the rights granted by a nominee certificate on file with a
corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner of
shares held by a nominee as the record shareholder.
(7) "Shareholder" means the record shareholder or the beneficial shareholder.
SECTION 33-13-102. Right to dissent.
(A) A shareholder is entitled to dissent from, and obtain payment of the
fair value of, his shares in the event of any of the following
corporate actions:
(1) consummation of a plan of merger to which the corporation is a
party (i) if shareholder approval is required for the merger by
Section 33-11-103 or the articles of incorporation and the
shareholder is entitled to vote on the merger or (ii) if the
corporation is a subsidiary that is merged with its parent under
Section 33-11-104 or 33-11-108 or if the corporation is a parent
that is merged with its subsidiary under Section 33-11-108;
(2) consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares are to be acquired, if
the shareholder is entitled to vote on the plan;
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(3) consummation of a sale or exchange of all, or substantially all,
of the property of the corporation other than in the usual and
regular course of business, if the shareholder is entitled to
vote on the sale or exchange, including a sale in dissolution,
but not including a sale pursuant to court order or a sale for
cash pursuant to a plan by which all or substantially all of the
net proceeds of the sale must be distributed to the shareholders
within one year after the date of sale;
(4) an amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares
because it:
(i) alters or abolishes a preferential right of the shares;
(ii) creates, alters, or abolishes a right in respect of
redemption, including a provision respecting a sinking fund
for the redemption or repurchase, of the shares;
(iii) alters or abolishes a preemptive right of the holder of the
shares to acquire shares or other securities;
(iv) excludes or limits the right of the shares to vote on any
matter, or to cumulate votes, other than a limitation by
dilution through issuance of shares or other securities
with similar voting rights; or
(v) reduces the number of shares owned by the shareholder to a
fraction of a share if the fractional share so created is
to be acquired for cash under Section 33-6-104; or
(5) any corporate action to the extent the articles of incorporation,
bylaws, or a resolution of the board of directors provides that
voting or nonvoting shareholders are entitled to dissent and
obtain payment for their shares.
(6) the conversion of a corporation into a limited liability company
pursuant to Section 33-11-111 or conversion of a corporation into
either a general partnership or limited partnership pursuant to
Section 33-11-113;
(7) the consummation of a plan of conversion to a limited liability
company pursuant to Section 33-11-111 or to a partnership or
limited partnership pursuant to Section 33-11-113.
(B) Notwithstanding subsection (A), no dissenters' rights under this
section are available for shares of any class or series of shares
which, at the record date fixed to determine shareholders entitled to
receive notice of a vote at the meeting of shareholders to act upon
the agreement of merger or exchange, were either listed on a national
securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of
Securities Dealers, Inc.
SECTION 33-13-103. Dissent by nominees and beneficial owners.
(a) A record shareholder may assert dissenters' rights as to fewer than all the
shares registered in his name only if he dissents with respect to all
shares beneficially owned by any one person and notifies the corporation in
writing of the name and address of each person on whose behalf he asserts
dissenters' rights. The rights of a partial dissenter under this subsection
are determined as if the shares to which he dissents and his other shares
were registered in the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares held on
his behalf only if he dissents with respect to all shares of which he is
the beneficial shareholder or over which he has power to direct the vote. A
beneficial shareholder asserting dissenters' rights to shares held on his
A-2
behalf shall notify the corporation in writing of the name and address of
the record shareholder of the shares, if known to him.
ARTICLE 2.
PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
SECTION 33-13-200. Notice of dissenters' rights.
(a) If proposed corporate action creating dissenters' rights under Section
33-13-102 is submitted to a vote at a shareholders' meeting, the meeting
notice must state that shareholders are or may be entitled to assert
dissenters' rights under this chapter and be accompanied by a copy of this
chapter.
(b) If corporate action creating dissenters' rights under Section 33-13-102 is
taken without a vote of shareholders, the corporation shall notify in
writing all shareholders entitled to assert dissenters' rights that the
action was taken and send them the dissenters' notice described in Section
33-13-220.
SECTION 33-13-210. Notice of intent to demand payment.
(a) If proposed corporate action creating dissenters' rights under Section
33-13-102 is submitted to a vote at a shareholders' meeting, a shareholder
who wishes to assert dissenters' rights (1) must give to the corporation
before the vote is taken written notice of his intent to demand payment for
his shares if the proposed action is effectuated and (2) must not vote his
shares in favor of the proposed action. A vote in favor of the proposed
action cast by the holder of a proxy solicited by the corporation shall not
disqualify a shareholder from demanding payment for his shares under this
chapter.
(b) A shareholder who does not satisfy the requirements of subsection (a) is
not entitled to payment for his shares under this chapter.
SECTION 33-13-220. Dissenters' notice.
(a) If proposed corporate action creating dissenters' rights under Section
33-13-102 is authorized at a shareholders' meeting, the corporation shall
deliver a written dissenters' notice to all shareholders who satisfied the
requirements of Section 33-13-210(a).
(b) The dissenters' notice must be delivered no later than ten days after the
corporate action was taken and must:
(1) state where the payment demand must be sent and where certificates for
certificated shares must be deposited;
(2) inform holders of uncertificated shares to what extent transfer of the
shares is to be restricted after the payment demand is received;
(3) supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of
the proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not he or, if he is a nominee
asserting dissenters' rights on behalf of a beneficial shareholder,
the beneficial shareholder acquired beneficial ownership of the shares
before that date;
(4) set a date by which the corporation must receive the payment demand,
which may not be fewer than thirty nor more than sixty days after the
date the subsection (a) notice is delivered and set a date by which
certificates for certificated shares must be deposited, which may not
be earlier than twenty days after the demand date; and
A-3
(5) be accompanied by a copy of this chapter.
SECTION 33-13-230. Shareholders' payment demand.
(a) A shareholder sent a dissenters' notice described in Section 33-13-220 must
demand payment, certify whether he (or the beneficial shareholder on whose
behalf he is asserting dissenters' rights) acquired beneficial ownership of
the shares before the date set forth in the dissenters' notice pursuant to
Section 33-13-220(b)(3), and deposit his certificates in accordance with
the terms of the notice.
(b) The shareholder who demands payment and deposits his share certificates
under subsection (a) retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate
action.
(c) A shareholder who does not comply substantially with the requirements that
he demand payment and deposit his share certificates where required, each
by the date set in the dissenters' notice, is not entitled to payment for
his shares under this chapter.
SECTION 33-13-240. Share restrictions.
(a) The corporation may restrict the transfer of uncertificated shares from the
date the demand for payment for them is received until the proposed
corporate action is taken or the restrictions are released under Section
33-13-260.
(b) The person for whom dissenters' rights are asserted as to uncertificated
shares retains all other rights of a shareholder until these rights are
canceled or modified by the taking of the proposed corporate action.
SECTION 33-13-250. Payment.
(a) Except as provided in Section 33-13-270, as soon as the proposed corporate
action is taken, or upon receipt of a payment demand, the corporation shall
pay each dissenter who substantially complied with Section 33-13-230 the
amount the corporation estimates to be the fair value of his shares, plus
accrued interest.
(b) The payment must be accompanied by:
(1) the corporation's balance sheet as of the end of a fiscal year ending
not more than sixteen months before the date of payment, an income
statement for that year, a statement of changes in shareholders'
equity for that year, and the latest available interim financial
statements, if any;
(2) a statement of the corporation's estimate of the fair value of the
shares and an explanation of how the fair value was calculated;
(3) an explanation of how the interest was calculated;
(4) a statement of the dissenter's right to demand additional payment
under Section 33-13-280; and
(5) a copy of this chapter.
A-4
SECTION 33-13-260. Failure to take action.
(a) If the corporation does not take the proposed action within sixty days
after the date set for demanding payment and depositing share certificates,
the corporation, within the same sixty day period, shall return the
deposited certificates and release the transfer restrictions imposed on
uncertificated shares.
(b) If, after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under Section 33-13-220 and repeat the payment demand
procedure.
SECTION 33-13-270. After acquired shares.
(a) A corporation may elect to withhold payment required by section 33-13-250
from a dissenter as to any shares of which he (or the beneficial owner on
whose behalf he is asserting dissenters' rights) was not the beneficial
owner on the date set forth in the dissenters' notice as the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action, unless the beneficial ownership of the shares
devolved upon him by operation of law from a person who was the beneficial
owner on the date of the first announcement.
(b) To the extent the corporation elects to withhold payment under subsection
(a), after taking the proposed corporate action, it shall estimate the fair
value of the shares, plus accrued interest, and shall pay this amount to
each dissenter who agrees to accept it in full satisfaction of his demand.
The corporation shall send with its offer a statement of its estimate of
the fair value of the shares, an explanation of how the fair value and
interest were calculated, and a statement of the dissenter's right to
demand additional payment under Section 33-13-280.
SECTION 33-13-280. Procedure if shareholder dissatisfied with payment or offer.
(a) A dissenter may notify the corporation in writing of his own estimate of
the fair value of his shares and amount of interest due and demand payment
of his estimate (less any payment under Section 33-13-250) or reject the
corporation's offer under Section 33-13-270 and demand payment of the fair
value of his shares and interest due, if the:
(1) dissenter believes that the amount paid under Section 33-13-250 or
offered under Section 33-13-270 is less than the fair value of his
shares or that the interest due is calculated incorrectly;
(2) corporation fails to make payment under Section 33-13-250 or to offer
payment under Section 33-13-270 within sixty days after the date set
for demanding payment; or
(3) corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within sixty days after the date set
for demanding payment.
(b) A dissenter waives his right to demand additional payment under this
section unless he notifies the corporation of his demand in writing under
subsection (a) within thirty days after the corporation made or offered
payment for his shares.
A-5
ARTICLE 3.
JUDICIAL APPRAISAL OF SHARES
SECTION 33-13-300. Court action.
(a) If a demand for additional payment under Section 33-13-280 remains
unsettled, the corporation shall commence a proceeding within sixty days
after receiving the demand for additional payment and petition the court to
determine the fair value of the shares and accrued interest. If the
corporation does not commence the proceeding within the sixty day period,
it shall pay each dissenter whose demand remains unsettled the amount
demanded.
(b) The corporation shall commence the proceeding in the circuit court of the
county where the corporation's principal office (or, if none in this State,
its registered office) is located. If the corporation is a foreign
corporation without a registered office in this State, it shall commence
the proceeding in the county in this State where the principal office (or,
if none in this State, the registered office) of the domestic corporation
merged with or whose shares were acquired by the foreign corporation was
located.
(c) The corporation shall make all dissenters (whether or not residents of this
State) whose demands remain unsettled parties to the proceeding as in an
action against their shares and all parties must be served with a copy of
the petition. Nonresidents may be served by registered or certified mail or
by publication, as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced under
subsection (b) is plenary and exclusive. The court may appoint persons as
appraisers to receive evidence and recommend decisions on the question of
fair value. The appraisers have the powers described in the order
appointing them or in any amendment to it. The dissenters are entitled to
the same discovery rights as parties in other civil proceedings.
(e) Each dissenter made a party to the proceeding is entitled to judgment for
the amount, if any, by which the court finds the fair value of his shares,
plus interest, exceeds the amount paid by the corporation.
SECTION 33-13-310. Court costs and counsel fees.
(a) The court in an appraisal proceeding commenced under Section 33-13-300
shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court
shall assess the costs against the corporation, except that the court may
assess costs against all or some of the dissenters, in amounts the court
finds equitable, to the extent the court finds the dissenters acted
arbitrarily, vexatiously, or not in good faith in demanding payment under
Section 33-13-280.
(b) The court also may assess the fees and expenses of counsel and experts for
the respective parties, in amounts the court finds equitable:
(1) against the corporation and in favor of any or all dissenters if the
court finds the corporation did not comply substantially with the
requirements of Sections 33-13-200 through 33-13-280; or
(2) against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good
faith with respect to the rights provided by this chapter.
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(c) If the court finds that the services of counsel for any dissenter were of
substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to these counsel reasonable fees to be paid out of the
amounts awarded the dissenters who were benefited.
(d) In a proceeding commenced by dissenters to enforce the liability under
Section 33-13-300(a) of a corporation that has failed to commence an
appraisal proceeding within the sixty day period, the court shall assess
the costs of the proceeding and the fees and expenses of dissenters'
counsel against the corporation and in favor of the dissenters.
A-7
APPENDIX B
FINANCIAL INFORMATION
The following information is included in this Appendix:
o our Quarterly Report on Form 10-Q for the quarter ended September
30, 2008 (without exhibits); and
o the following portions of our Annual Report to Shareholders,
which are filed as a part of Exhibit 13 to our Form 10-K for the
fiscal year ended December 31, 2007:
o Report of Independent Registered Public Accounting Firm
o Consolidated Balance Sheets at December 31, 2007 and 2006
o Consolidated Statements of Income for the years ended
December 31, 2007, 2006 and 2005
o Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 2007, 2006 and 2005
o Consolidated Statements of Cash Flows for the years ended
December 31, 2007, 2006 and 2005
o Notes to Consolidated Financial Statements
o Management's Discussion and Analysis of Financial Condition
and Results of Operations
B-1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 2008 Commission File No. 000-29640
COMMUNITY FIRST BANCORPORATION
-------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
South Carolina 58-2322486
------------------------------- ----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
449 HIGHWAY 123 BYPASS
SENECA, SOUTH CAROLINA 29678
--------------------------------------------------------------------------------
(Address of principal executive offices, zip code)
(864) 886-0206
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Common Stock, no par
or stated value, 3,394,873 Shares Outstanding on November 1, 2008
B-2
COMMUNITY FIRST BANCORPORATION
FORM 10-Q
Index
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets .................................................................... 3
Consolidated Statements of Income .............................................................. 4
Consolidated Statements of Changes in Shareholders' Equity ..................................... 5
Consolidated Statements of Cash Flows .......................................................... 6
Notes to Unaudited Consolidated Financial Statements ........................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .......... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..................................... 20
Item 4T. Controls and Procedures ........................................................................ 21
PART II - OTHER INFORMATION
Item 6. Exhibits ....................................................................................... 22
SIGNATURE ................................................................................................ 23
B-3
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
COMMUNITY FIRST BANCORPORATION
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
2008 2007
----- ----
(Dollars in thousands)
Assets
Cash and due from banks ................................................................... $ 8,675 $ 10,272
Interest bearing balances due from banks .................................................. 282 165
Federal funds sold ........................................................................ 20,087 24,236
--------- ---------
Cash and cash equivalents ............................................................. 29,044 34,673
Securities available-for-sale ............................................................. 110,524 99,026
Securities held-to-maturity (fair value $12,382 for 2008 and $5,625 for 2007) ............. 12,307 5,663
Other investments ......................................................................... 1,220 840
Loans ..................................................................................... 267,075 244,131
Allowance for loan losses ............................................................. (3,503) (2,574)
--------- ---------
Loans - net ........................................................................ 263,572 241,557
Premises and equipment - net .............................................................. 8,691 8,621
Accrued interest receivable ............................................................... 2,557 2,529
Bank-owned life insurance ................................................................. 8,388 7,108
Other assets .............................................................................. 2,062 2,131
--------- ---------
Total assets ....................................................................... $ 438,365 $ 402,148
========= =========
Liabilities
Deposits
Noninterest bearing ................................................................... $ 42,830 $ 42,289
Interest bearing ...................................................................... 340,892 313,578
--------- ---------
Total deposits ..................................................................... 383,722 355,867
Short-term borrowings ..................................................................... 1,500 -
Long-term debt ............................................................................ 9,500 4,500
Accrued interest payable .................................................................. 1,911 3,480
Other liabilities ......................................................................... 942 391
--------- ---------
Total liabilities .................................................................. 397,575 364,238
--------- ---------
Shareholders' equity
Common stock - no par value; 10,000,000 shares authorized; issued and
outstanding - 3,394,873 for 2008 and 3,324,105 for 2007 ............................... 35,374 35,009
Additional paid-in capital ................................................................ 681 681
Retained earnings ......................................................................... 4,654 2,140
Accumulated other comprehensive income .................................................... 81 80
--------- ---------
Total shareholders' equity ......................................................... 40,790 37,910
--------- ---------
Total liabilities and shareholders' equity ......................................... $ 438,365 $ 402,148
========= =========
See accompanying notes to unaudited consolidated financial statements.
B-4
COMMUNITY FIRST BANCORPORATION
Consolidated Statements of Income
(Unaudited)
Period Ended September 30,
--------------------------
Three Months Nine Months
------------ -----------
2008 2007 2008 2007
---- ---- ---- ----
(Dollars in thousands, except per share)
Interest income
Loans, including fees ................................... $ 4,647 $ 4,632 $ 13,902 $ 12,885
Interest bearing balances due from banks ................ 10 3 17 4
Securities
Taxable ............................................... 1,275 975 3,464 2,907
Tax-exempt ............................................ 209 212 623 616
Other investments ....................................... 14 14 39 43
Federal funds sold ...................................... 81 145 584 1,007
-------- -------- -------- --------
Total interest income ............................... 6,236 5,981 18,629 17,462
-------- -------- -------- --------
Interest expense
Time deposits $100M and over ............................ 1,021 1,038 3,231 2,901
Other deposits .......................................... 1,885 2,283 6,323 6,718
Short-term borrowings ................................... 8 - 8 3
Long-term debt .......................................... 92 46 179 155
-------- -------- -------- --------
Total interest expense .............................. 3,006 3,367 9,741 9,777
-------- -------- -------- --------
Net interest income .......................................... 3,230 2,614 8,888 7,685
Provision for loan losses .................................... 965 150 1,375 270
-------- -------- -------- --------
Net interest income after provision .......................... 2,265 2,464 7,513 7,415
-------- -------- -------- --------
Other income
Service charges on deposit accounts ..................... 374 394 1,109 1,071
ATM interchange and other fees .......................... 142 115 412 336
Net losses on sales of securities
available-for-sale .................................. (3) - (3) -
Credit life insurance commissions ....................... 5 8 12 24
Increase in value of bank-owned
life insurance ...................................... 94 33 280 33
Other income ............................................ 22 33 58 107
-------- -------- -------- --------
Total other income .................................. 634 583 1,868 1,571
-------- -------- -------- --------
Other expenses
Salaries and employee benefits .......................... 1,073 1,130 3,218 2,844
Net occupancy expense ................................... 135 116 384 318
Furniture and equipment expense ......................... 110 111 326 321
Amortization of computer software ....................... 85 62 241 179
ATM interchange and related expenses .................... 96 66 301 215
Directors' fees ......................................... 20 20 81 67
Other expense ........................................... 419 396 1,279 1,133
-------- -------- -------- --------
Total other expenses ................................ 1,938 1,901 5,830 5,077
-------- -------- -------- --------
Income before income taxes ................................... 961 1,146 3,551 3,909
Income tax expense ........................................... 252 375 1,037 1,242
-------- -------- -------- --------
Net income ................................................... $ 709 $ 771 $ 2,514 $ 2,667
======== ======== ======== ========
Per share*
Net income .............................................. $ 0.21 $ 0.24 $ 0.74 $ 0.82
Net income, assuming dilution ........................... 0.20 0.21 0.71 0.77
--------
* Per share information has been retroactively adjusted to reflect a 10% stock
dividend effective December 20, 2007.
See accompanying notes to unaudited consolidated financial statements.
B-5
COMMUNITY FIRST BANCORPORATION
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
Common Stock Accumulated
------------ Additional Other
Number of Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income (Loss) Total
------ ------ ------- -------- ------------- -----
(Dollars in thousands)
Balance, January 1, 2007 ................................. 2,958,558 $ 30,061 $ 593 $ 3,285 $ (724) $ 33,215
---------
Comprehensive income:
Net income ........................................... - - - 2,667 - 2,667
---------
Unrealized holding gains and losses
on available-for-sale securities arising
during the period, net of
income taxes of $207 ............................... - - - - 369 369
---------
Total other comprehensive income ................. - - - - - 369
---------
Total comprehensive income ..................... - - - - - 3,036
---------
Exercise of employee stock options ....................... 14,636 83 - - - 83
--------- --------- --------- --------- --------- ---------
Balance, September 30, 2007 .............................. 2,973,194 $ 30,144 $ 593 $ 5,952 $ (355) $ 36,334
========= ========= ========= ========= ========= =========
Balance, January 1, 2008 ................................. 3,324,105 $ 35,009 $ 681 $ 2,140 $ 80 $ 37,910
---------
Comprehensive income:
Net income ........................................... - - - 2,514 - 2,514
---------
Unrealized holding gains and (losses)
on available-for-sale securities arising
during the period, net of
income taxes of $1 ................................. - - - - (1) (1)
Reclassification adjustment for losses (gains)
realized in income, net of income taxes
of $1 .............................................. - - - - 2 2
---------
Total other comprehensive income (loss) .......... 1
---------
Total comprehensive income ..................... - - - - - 2,515
---------
Exercise of employee stock options ....................... 70,768 365 - - - 365
--------- --------- --------- --------- --------- ---------
Balance, September 30, 2008 .............................. 3,394,873 $ 35,374 $ 681 $ 4,654 $ 81 $ 40,790
========= ========= ========= ========= ========= =========
See accompanying notes to unaudited consolidated financial statements.
B-6
COMMUNITY FIRST BANCORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
-------------
2008 2007
----- ----
(Dollars in thousands)
Operating activities
Net income ................................................................................ $ 2,514 $ 2,667
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses .......................................................... 1,375 270
Depreciation ....................................................................... 316 298
Amortization of net loan (fees) and costs .......................................... (147) (174)
Securities accretion and premium amortization ...................................... 45 65
Net loss on sales of securities available-for-sale ................................. 3 -
Loss on sale of foreclosed assets .................................................. 6 -
Increase in value of bank-owned life insurance ..................................... (280) (33)
Increase in interest receivable .................................................... (28) (326)
(Decrease) increase in interest payable ............................................ (1,569) 68
Decrease (increase) in prepaid expenses and other assets ........................... 29 (3)
Increase in other accrued expenses ................................................. 551 227
-------- --------
Net cash provided by operating activities ...................................... 2,815 3,059
-------- --------
Investing activities
Purchases of available-for-sale securities ................................................ (55,484) (17,448)
Purchases of securities held-to-maturity .................................................. (7,490) -
Maturities, calls and paydowns of securities available-for-sale ........................... 34,204 19,655
Maturities, calls and paydowns of securities held-to-maturity ............................. 848 736
Proceeds of sales of securities available-for-sale ........................................ 9,732 -
Purchases of other investments ............................................................ (380) -
Proceeds from sales of other investments .................................................. - 140
Net increase in loans made to customers ................................................... (23,242) (33,908)
Purchases of premises and equipment ....................................................... (386) (589)
Proceeds of sale of foreclosed assets ..................................................... 34 15
Proceeds of sale of real estate held for sale ............................................. - 36
Investment in bank-owned life insurance ................................................... (1,000) (7,000)
-------- --------
Net cash used by investing activities .......................................... (43,164) (38,363)
-------- --------
Financing activities
Net decrease in demand deposits, interest
bearing transaction accounts and savings accounts ..................................... (8,289) (8,925)
Net increase in certificates of deposit and other
time deposits ......................................................................... 36,144 38,134
Net increase (decrease) in short-term borrowings .......................................... 1,500 (4,500)
Proceeds from issuing long-term debt ...................................................... 6,000 -
Repayments of long-term debt .............................................................. (1,000) (1,000)
Exercise of employee stock options ........................................................ 365 83
-------- --------
Net cash provided by financing activities ...................................... 34,720 23,792
-------- --------
Decrease in cash and cash equivalents .......................................................... (5,629) (11,512)
Cash and cash equivalents, beginning ........................................................... 34,673 31,145
-------- --------
Cash and cash equivalents, ending .............................................................. $ 29,044 $ 19,633
======== ========
Supplemental Disclosure of Cash Flow Information Cash paid during the year for:
Interest .............................................................................. $ 11,310 $ 9,709
Income taxes .......................................................................... 1,240 1,278
Noncash investing and financing activities:
Other comprehensive income ............................................................ 1 369
See accompanying notes to unaudited consolidated financial statements.
B-7
COMMUNITY FIRST BANCORPORATION
Notes to Unaudited Consolidated Financial Statements
Accounting Policies - A summary of significant accounting policies is included
in Community First Bancorporation's (the "Company") Annual Report on Form 10-K
for the year ended December 31, 2007 filed with the Securities and Exchange
Commission. Certain amounts in the 2007 financial statements have been
reclassified to conform to the current presentation. Such reclassifications had
no effect on net income or retained earnings for any period.
Management Opinion - In the opinion of management, the accompanying unaudited
consolidated financial statements of Community First Bancorporation reflect all
adjustments necessary for a fair presentation of the results of the periods
presented. Such adjustments were of a normal, recurring nature.
Nonperforming Loans - As of September 30, 2008, there were $4,725,000 in
nonaccrual loans.
Earnings Per Share - Basic earnings per common share is computed by dividing net
income applicable to common shares by the weighted average number of common
shares outstanding. Diluted earnings per share is computed by dividing
applicable net income by the weighted average number of common shares
outstanding and any dilutive potential common shares and dilutive stock options.
It is assumed that all dilutive stock options are exercised at the beginning of
each period and that the proceeds are used to purchase shares of the Company's
common stock at the average market price during the period. All 2007 per share
information has been retroactively adjusted to give effect to a 10% stock
dividend effective December 20, 2007. Net income per share and net income per
share, assuming dilution, were computed as follows:
Unaudited
Period Ended September 30,
--------------------------
Three Months Nine Months
------------ -----------
2008 2007 2008 2007
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
Net income per share, basic
Numerator - net income ............................... $ 709 $ 771 $ 2,514 $ 2,667
========== ========== ========== ==========
Denominator
Weighted average common shares
issued and outstanding ........................... 3,394,873 3,269,841 3,366,596 3,268,635
========== ========== ========== ==========
Net income per share, basic ........................ $ .21 $ .24 $ .75 $ .82
========== ========== ========== ==========
Net income per share, assuming dilution
Numerator - net income ............................... $ 709 $ 771 $ 2,514 $ 2,667
========== ========== ========== ==========
Denominator
Weighted average common shares
issued and outstanding ........................... 3,394,873 3,269,841 3,366,596 3,268,635
Effect of dilutive stock options ................... 124,047 229,477 160,605 215,034
---------- ---------- ---------- ----------
Total shares ............................ 3,518,920 3,499,318 3,527,201 3,483,669
========== ========== ========== ==========
Net income per share, assuming dilution ............ $ .20 $ .22 $ .71 $ .77
========== ========== ========== ==========
Fair Value Measurements - The Company implemented Statement of Financial
Accounting Standards No. 157, "Fair Value Measurements," ("SFAS No. 157") as
required on January 1, 2008. SFAS No. 157 defines fair value as 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, and establishes a
framework for measuring fair value. It also establishes a three-level hierarchy
for fair value measurements based upon the transparency of inputs to the
valuation of an asset or liability as of the measurement date, eliminates the
consideration of large position discounts for financial instruments quoted in
B-8
active markets, requires consideration of the Company's creditworthiness when
valuing its liabilities, and expands disclosures about instruments measured at
fair value. 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:
(Unaudited)
Fair Value Measurement at Reporting Date Using
----------------------------------------------
Quoted Prices
in Active Significant
Markets for Other Significant
Identical Observable Unobservable
Assets Inputs Inputs
Description September 30, 2008 (Level 1) (Level 2) (Level 3)
------------------ --------- --------- ---------
(Dollars in thousands)
Securities available-for-sale ................................... $ - $110,524 $ -
Pricing for the Company's securities available-for-sale is obtained from an
independent third-party that uses a process that may incorporate current market
prices, benchmark yields, broker/dealer quotes, issuer spreads, two-sided
markets, benchmark securities, bids, offers, other reference data and industry
and economic events that a market participant would be expected to use 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. The techniques
used after adoption of SFAS No. 157 are consistent with the methods used
previously.
In February 2008, the Financial Accounting Standards Board Staff issued FASB
Staff Position No. FAS 157-2 ("FSP 157-2") which delays for one year the
effective date of the application of Statement of Financial Accounting Standards
No. 157 "Fair Value Measurements" ("SFAS No. 157") to nonfinancial assets and
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually). In accordance
with FSP 157-2, the Company has only partially applied SFAS No. 157. There are
currently no major categories of assets or liabilities disclosed at fair value
in the financial statements for which the Company has not applied the provisions
of SFAS No. 157.
No cumulative effect adjustments were required upon initial application of SFAS
No. 157. Available-for-sale securities continue to be measured at fair value
with unrealized gains and losses, net of income taxes, recorded in other
comprehensive income.
The Security and Exchange Commission's ("SEC") Office of the Chief Accountant
and the staff of the Financial Accounting Standards Board ("FASB") issued press
release 2008-234 on September 30, 2008 ("Press Release") to provide
clarifications on fair value accounting. The Press Release includes guidance on
the use of management's internal assumptions and the use of "market" quotes. The
Press Release also reiterates the factors included in SEC Staff Accounting
Bulletin Topic 5M which should be considered when determining
other-than-temporary impairment; i.e., the length of time and extent to which
the market value has been less than cost, financial condition and near-term
prospects of the issuer, and the intent and ability of the holder to retain its
investment for a period of time sufficient to allow for any anticipated recovery
in market value.
On October 10, 2008, the FASB issued FASB Staff Position SFAS 157-3 "Determining
the Fair Value of a Financial Asset When the Market for That Asset Is Not
Active". This FSP clarifies the application of SFAS No. 157 "Fair Value
Measurements" in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial
instrument when the market for that asset is not active. The FSP is effective
upon issuance, including prior periods for which financial statements have not
been issued. For the Company, this FSP is effective for the quarter ended
September 30, 2008.
The Company considered the guidance in the Press Release and in FSP SFAS 157-3
when conducting its review of other-than-temporary impairment as of September
30, 2008 and determined that it did not result in a change to its impairment
estimation techniques.
New Accounting Pronouncements - In February 2008, the FASB issued FASB Staff
Position No. 140-3, "Accounting for Transfers of Financial Assets and Repurchase
Financing Transactions" ("FSP 140-3"). This FSP provides guidance on accounting
for a transfer of a financial asset and the transferor's repurchase financing of
the asset. This FSP presumes that an initial transfer of a financial asset and a
B-9
repurchase financing are considered part of the same arrangement (linked
transaction) under SFAS No. 140. However, if certain criteria are met, the
initial transfer and repurchase financing are not evaluated as a linked
transaction and are evaluated separately under Statement 140. FSP 140-3 will be
effective for financial statements issued for fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years and earlier
application is not permitted. Accordingly, this FSP is effective for the Company
on January 1, 2009. The Company is currently evaluating the impact, if any, that
the adoption of FSP 140-3 will have on its financial position, results of
operations and cash flows.
In May, 2008, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 162, "The Hierarchy of Generally
Accepted Accounting Principles," ("SFAS No. 162"). SFAS No. 162 identifies the
sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities that
are presented in conformity with generally accepted accounting principles (GAAP)
in the United States (the GAAP hierarchy). SFAS No. 162 is effective November
15, 2008. The FASB has stated that it does not expect SFAS No. 162 will result
in a change in current practice. The application of SFAS No. 162 will have no
effect on the Company's financial position, results of operations or cash flows.
In June, 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, "Determining
Whether Instruments Granted in Share-Based Payment Transactions are
Participating Securities," ("FSP EITF 03-6-1"). The Staff Position provides that
unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents are participating securities and must be
included in the earnings per share computation. FSP EITF 03-6-1 is effective for
financial statements issued for fiscal years beginning after December 15, 2008,
and interim periods within those years. All prior-period earnings per share data
presented must be adjusted retrospectively. Early application is not permitted.
The adoption of this Staff Position will have no effect on the Company's
financial position, results of operations or cash flows.
FSP SFAS 133-1 and FIN 45-4, "Disclosures about Credit Derivatives and Certain
Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No.
45; and Clarification of the Effective Date of FASB Statement No. 161," ("FSP
SFAS 133-1 and FIN 45-4") was issued September 2008, effective for reporting
periods (annual or interim) ending after November 15, 2008. FSP SFAS 133-1 and
FIN 45-4 amends SFAS 133 to require a seller of credit derivatives to disclose
the nature of the credit derivative, the maximum potential amount of future
payments, fair value of the derivative, and the nature of any recourse
provisions. Disclosures must be made for entire hybrid instruments that have
embedded credit derivatives.
The staff position also amends FIN 45 to require disclosure of the current
status of the payment/performance risk of the credit derivative guarantee. If an
entity utilizes internal groupings as a basis for the risk, how the groupings
are determined must be disclosed as well as how the risk is managed.
The staff position encourages that the amendments be applied in periods earlier
than the effective date to facilitate comparisons at initial adoption. After
initial adoption, comparative disclosures are required only for subsequent
periods.
FSP SFAS 133-1 and FIN 45-4 clarifies the effective date of SFAS 161 such that
required disclosures should be provided for any reporting period (annual or
quarterly interim) beginning after November 15, 2008. The adoption of this Staff
Position will have no material effect on the Company's financial position,
results of operations or cash flows.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies are not expected to have a material impact on the
Company's financial position, results of operations or cash flows.
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
forwarding-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,"
"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.
B-10
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.
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Changes in Financial Condition
The Company has been affected by the recent events in the financial and
credit markets primarily in the following ways: depositors who previously left
funds in excess of federal deposit insurance limits in a single bank have been
less prone to do so; and pricing anomalies have arisen in the securities
marketplace and, we believe, have provided opportunities for those with
sufficient financial mettle to realize outsized returns stemming from the
pessimism of others. We experienced both deposit inflows and outflows due to
customers seeking to maximize deposit insurance coverage for their accounts.
Because there are other larger banks in our market area, we were a net recipient
of funds from this source. In early October 2008 the Federal Deposit Insurance
Corporation ("FDIC") temporarily increased deposit insurance coverage to
$250,000 per account. The temporary increase is currently set to expire on
December 31, 2009. The Company expects that its expenses for deposit insurance
coverage will increase significantly during the period of higher deposit
insurance limits. The unwillingness or inability of others to lend to those we
believe to be creditworthy allowed us to increase loans during the 2008 third
quarter while adhering to our normal, conservative underwriting standards. We
repositioned our portfolio of available-for-sale investment securities to
capture higher yields that were available primarily on mortgage-backed
securities issued by the Federal National Mortgage Association and the Federal
Home Loan Mortgage Corporation.
B-11
Furthermore, we eliminated from our portfolio any adjustable rate
mortgage-backed securities. At the end of the third quarter of 2008, the yield
of the Company's mortgage-backed securities investments was 4.71%, compared with
4.49% as of June 30, 2008 and 4.07% as of December 31, 2007.
Nonaccrual and past due loans increased by $2,853,000, or 151.8%,
during the third quarter of 2008. Approximately $3,093,000 of the $3,493,000
newly added to the nonaccrual category during the third quarter of 2008 were
loans secured by real estate with approximately $1,523,000 representing
construction and development loans. Of the total $4,725,000 in nonaccrual loans
as of September 30, 2008, approximately $2,083,000 were construction and
development loans. Real estate activity in the Company's market area recently
has begun to exhibit the weaknesses that have plagued other markets for more
than a year. These developments have resulted in the higher amounts of
distressed assets reflected above.
During the first nine months of 2008, loans increased by $22,944,000,
or 9.4%, securities available-for-sale increased by $11,498,000, or 11.6% and
securities held-to-maturity increased by $6,644,000. Federal funds sold
decreased by $4,149,000, or 17.1%. Interest bearing deposits increased by
$27,314,000, or 8.7%. Approximately $22,646,000 of that increase was in the form
of certificates of deposits of $100,000 or more. Also during the period,
short-term borrowings increased by $1,500,000 and long-term debt increased by
$5,000,000.
The Company believes that its liquidity position continues to provide
it with sufficient flexibility to fund loan requests or make investments in
securities at attractive yields, and to meet normal demands for deposit
withdrawals by its customers. Management also believes that the current balance
sheet position maintains the Company's exposures to changes in interest rates at
acceptable levels.
Results of Operations
Three Months Ended September 30, 2008 and 2007
The Company recorded consolidated net income of $709,000 or $.21 per
share for the third quarter of 2008 compared with net income of $771,000 and
earnings per share of $.24 for the third quarter of 2007. Net income per share,
assuming dilution was $.20 for the 2008 quarter and $.21 for the 2007 period.
Net income per share amounts for 2007 have been retroactively adjusted to
reflect a ten percent stock dividend effective December 20, 2007.
Interest income for the third quarter of 2008 increased by $255,000
over the same period of 2007 due to higher rates earned on taxable investment
securities and, to a lesser degree, an increase in the average amount of such
instruments held. Interest expenses for the third quarter of 2008 were $361,000
lower than for the same prior year period due to lower rates paid. During the
2008 three month period, depositors were extremely concerned about maximizing
the deposit insurance coverage for their funds. As a result, diversification of
those funds among federally-insured financial institutions to ensure safety of
principal was more important than the interest return that could be realized
from investing those funds.
The Company increased the provision for loan losses to $965,000 for the
third quarter of 2008 from $150,000 for the same period of 2007. Factors that
management considered when determining the amount to be provided for loan losses
included higher volumes of nonaccrual and past due loans, increased charge-offs
taken during the quarter, signs of deterioration in the local economy,
especially conditions in the local real estate markets, and recent disruption of
the flow of and sharply higher prices charged for automotive fuels resulting
from the effects of Hurricanes Gustav and Ike on the Gulf Coast refineries that
supply fuel to the Company's market area.
B-12
Summary Income Statement
(Dollars in thousands)
For the Three Months Ended September 30, 2008 2007 Dollar Change Percentage Change
---- ---- ------------- -----------------
Interest income .......................................... $6,236 $5,981 $ 255 4.3%
Interest expense ......................................... 3,006 3,367 (361) -10.7%
------ ------ ------
Net interest income ...................................... 3,230 2,614 616 23.6%
Provision for loan losses ................................ 965 150 815 543.3%
Noninterest income ....................................... 634 583 51 8.7%
Noninterest expenses ..................................... 1,938 1,901 37 1.9%
Income tax expense ....................................... 252 375 (123) -32.8%
------ ------ ------
Net income ............................................... $ 709 $ 771 $ (62) -8.0%
====== ====== ======
Nine Months Ended September 30, 2008 and 2007
The Company recorded consolidated net income of $2,514,000 or $.74 per
share for the first nine months of 2008 compared with net income of $2,667,000
and earnings per share of $.82 for the same period of 2007. Net income per
share, assuming dilution was $.71 for the 2008 nine months and $.77 for the same
period of 2007. Net income per share amounts for 2007 have been retroactively
adjusted to reflect a ten percent stock dividend effective December 20, 2007.
Increases in interest income and net interest income for the 2008 nine
month period reflect primarily the effects of growth of earning assets and
higher rates earned on taxable securities. Interest expense for the 2008 nine
month period is not much changed from the prior year amount as the effects of
increased amounts of deposits and borrowed funds were offset by reductions in
the rates paid for deposits and borrowings due to the factors stated previously.
Noninterest income for the 2008 nine month period was $297,000 more
than for the same period of 2007 primarily due to the recognition of increases
in the value of life insurance assets totaling $280,000.
Salaries and employee benefits for the 2008 nine month period were
$374,000 more than for the same prior year period primarily due to higher
amounts of deferred compensation expenses. Increases in other categories of
other expenses reflect higher volumes of transactions, increased numbers of
accounts, and higher depreciation and other expenses associated with the
Company's banking offices.
Summary Income Statement
------------------------
(Dollars in thousands)
For the Nine Months Ended September 30, 2008 2007 Dollar Change Percentage Change
---- ---- ------------- -----------------
Interest income .................................. $18,629 $17,462 $ 1,167 6.7%
Interest expense ................................. 9,741 9,777 (36) -0.4%
------- ------- -------
Net interest income .............................. 8,888 7,685 1,203 15.7%
Provision for loan losses ........................ 1,375 270 1,105 409.3%
Noninterest income ............................... 1,868 1,571 297 18.9%
Noninterest expenses ............................. 5,830 5,077 753 14.8%
Income tax expense ............................... 1,037 1,242 (205) -16.5%
------- ------- -------
Net income ....................................... $ 2,514 $ 2,667 $ (153) -5.7%
======= ======= =======
Net Interest Income
Net interest income, the principal source of the Company's earnings,
was higher in both the 2008 three month and nine month periods. During much of
the third quarter of 2008, financial and credit markets nationwide have been
stressed. The deterioration of real estate markets that began in other areas of
the country more than one year ago is now evident within the Company's market.
B-13
Primarily because of constrained demand, some developers and builders are
finding it difficult or impossible to satisfy their obligations except by
surrendering the properties that were pledged to secure their loans either
voluntarily or involuntarily through foreclosure. As a consequence, property
values have fallen due to conditions such as oversupply of unsold housing units
and physical deterioration of those units during prolonged sales periods, or
because some homes and, indeed entire development projects, may be only
partially completed when the builders and developers are overwhelmed by negative
events and simply walk away, leaving completion of the project in the hands of
lenders.
Furthermore, the recent reluctance of large financial institutions to
lend either to long-standing customers or even to other financial institutions
is beginning to be exhibited at the community bank level. This reluctance stems
from the recent failures of several banks and other financial institutions and
reflects an aversion to the liquidity risk that a lending institution would
encounter if a counterparty, including another financial institution, was unable
to repay borrowed funds as agreed.
As a consequence of these events, the level of uncertainty in any
financing transaction increased dramatically during the 2008 third quarter.
Attempts by government agencies to intervene initially were largely ineffective
to alleviate fears or provide needed liquidity and order to the credit markets.
Interest rates in this environment have been, and are expected to continue to
be, very volatile. The structure of interest rates will probably continue to be
erratic and depart from historic relationships. For the foreseeable future,
management believes that short-term market interest rates, especially rates
related to most of its funding sources, will fluctuate significantly. However,
because depositors are currently more concerned with safety of principal than
return on investment, deposit costs are not expected to change significantly in
the near future. If the Company obtains additional funding from non-deposit
sources, the costs of such borrowing would be expected to be more closely
correlated to fluctuations in the broader credit markets.
In a further effort to encourage inter-bank lending and to reduce the
effect that the failure of a financial institution might have on the viability
of other financial institutions and other market participants, on October 14,
2008, the FDIC initiated coverage of newly issued senior unsecured debt
(including federal funds purchased), subject to certain limits, of FDIC-insured
depository institutions, U.S. bank holding companies, including financial
holding companies, and certain U.S. savings and loan holding companies and began
to provide a temporary and unlimited guarantee of funds in non-interest bearing
transaction accounts at FDIC-insured institutions under a newly created
Temporary Liquidity Guarantee Program. Coverage under this program was provided
without cost for the first thirty days of coverage. Institutions have the option
to continue coverage after the initial period and be assessed fees for such
coverage by the FDIC, or may opt out of one or both components of the program.
The FDIC will maintain on its website a list of eligible institutions that
choose to opt out of either component after the initial coverage period ends.
Management expects that it will elect to continue coverage under both components
of this program.
Three Months Ended September 30, 2008 and 2007
For the third quarter of 2008, net interest income totaled $3,230,000,
an increase of $616,000 over the $2,614,000 for the same period of 2007. The
Company's interest rate spread for the third quarter of 2008 was 2.68%, an
increase of 53 basis points over the 2.15% interest rate spread for the third
quarter of 2007. Net yield on earning assets for the 2008 third quarter was
3.18%, an increase of 27 basis points over the 2007 third quarter net yield of
2.91%. The yield on taxable investment securities for the third quarter of 2008
was 4.98% compared with 4.16% for the same period of 2007. As discussed
previously, the Company acted during the third quarter of 2008 to revamp its
portfolio of mortgage-backed securities. The average amount of taxable
securities in the 2008 period was $8,802,000 more than in the 2007 period.
Consequently, income on such securities in the 2008 period was $300,000 more
than in the 2007 period. The average amount of the Company's loan category for
the third quarter of 2008 was 13.6% more than for the third quarter of 2007, but
the interest rates associated with those loans in the 2008 period were 91 basis
points lower than in the 2007 period. The Company adjusted for approximately
$90,000 of accrued interest on loans included in nonaccrual loans for the first
time during the third quarter of 2008. As a result, interest income on loans was
only $15,000 higher in the 2008 three month period.
Rates paid for interest bearing liabilities were significantly reduced
from the prior year level. Rates paid for all types of deposits fell
dramatically and rates paid for borrowings fell more modestly. Average amounts
of time deposits outstanding for the 2008 period increased by $43,575,000, or
20.2%, over the amount for the 2007 period.
B-14
Average Balances, Yields and Rates
Three Months Ended September 30,
--------------------------------
2008 2007
---- ----
Interest Interest
Average Income/ Yields/ Average Income/ Yields/
Balances Expense Rates (1) Balances Expense Rates (1)
-------- ------- --------- -------- ------- ---------
(Dollars in thousands)
Assets
Interest-bearing balances due from banks .......... $ 1,533 $ 10 2.60% $ 227 $ 3 5.24%
Securities
Taxable ..................................... 101,802 1,275 4.98% 93,000 975 4.16%
Tax exempt (2) .............................. 20,998 209 3.96% 19,574 212 4.30%
---------- ------- --------- -------
Total investment securities ............ 122,800 1,484 4.81% 112,574 1,187 4.18%
Other investments ................................. 1,216 14 4.58% 845 14 6.57%
Federal funds sold ................................ 15,844 81 2.03% 11,770 145 4.89%
Loans (2) (3) (4) ................................. 262,977 4,647 7.03% 231,452 4,632 7.94%
---------- ------- --------- -------
Total interest earning assets .......... 404,370 6,236 6.14% 356,868 5,981 6.65%
Cash and due from banks ........................... 8,122 8,698
Allowance for loan losses ......................... (2,956) (2,302)
Valuation allowance - Available-for-
sale securities ............................. (596) (1,602)
Premises and equipment ............................ 8,768 8,227
Other assets ...................................... 12,572 6,560
---------- ---------
Total assets ........................... $ 430,280 $ 376,449
========== =========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts ....... $56,370 $ 250 1.76% $57,297 $ 457 3.16%
Savings ..................................... 18,700 46 0.98% 19,068 92 1.91%
Time deposits $100M and over ................ 113,755 1,021 3.57% 85,990 1,038 4.79%
Other time deposits ......................... 145,886 1,589 4.33% 130,076 1,734 5.29%
---------- ------- --------- -------
Total interest bearing
deposits ............................. 334,711 2,906 3.45% 292,431 3,321 4.51%
Short-term borrowings ............................. 1,500 8 2.12% - - 0.00%
Long-term debt .................................... 9,500 92 3.85% 4,500 46 4.06%
---------- ------- --------- -------
Total interest bearing
liabilities .......................... 345,711 3,006 3.46% 296,931 3,367 4.50%
Noninterest bearing demand deposits ............... 41,637 41,084
Other liabilities ................................. 2,907 3,061
Shareholders' equity .............................. 40,025 35,373
--------- ---------
Total liabilities and shareholders'
equity ............................... $ 430,280 $ 376,449
========== =========
Interest rate spread .............................. 2.68% 2.15%
Net interest income and net yield
on earning assets ........................... $ 3,230 3.18% $ 2,614 2.91%
Interest free funds supporting earning assets .... $58,659 $ 59,937
-----------------------------------------
(1) Yields and rates are annualized
(2) Yields on tax exempt instruments have not been adjusted to a tax-equivalent
basis.
(3) Nonaccrual loans are included in the average loan balances and income on
such loans is recognized on a cash basis.
(4) Includes immaterial amounts of loan fees.
B-15
Nine Months Ended September 30, 2007 and 2006
For the first nine months of 2008, net interest income totaled
$8,888,000, an increase of $1,203,000, or 15.7%, over the $7,685,000 amount for
the same period of 2007. The Company's interest rate spread for the 2008 nine
month period was 2.41%, an increase of 28 basis points over the 2.13% spread for
the 2007 period. The yield on interest earning assets decreased to 6.17% for the
2008 period, compared with 6.54% for the 2007 period, due to lower rates earned
on loans and federal funds sold. A significant portion of the Company's loans
are variable rate instruments that are repriced in response to changes in the
"prime rate." Actions taken by the Federal Reserve in the third quarter of 2008
generally were intended to reduce market rates of interest. Those efforts were
only partially successful due to the increased influence on interest rates of
other uncertainties that were evident.
Rates paid for interest bearing liabilities during the 2008 nine month
period were 65 basis points lower than for the 2007 period. Rates paid for time
deposits $100,000 and over were 73 basis points lower during the 2008 period
than in the 2007 period and rates paid for other time deposits decreased by 33
basis points compared with the same 2007 period. The average amounts of time
deposits outstanding during the 2008 period were $46,525,000, or 22.6%, more
than in the 2007 period. Rates paid for interest bearing transaction accounts
for the 2008 nine month period were 126 basis points less than for the same
period of 2007 and the average amount of such accounts in the 2008 period was
only $729,000, or 1.3%, more than for the 2007 period.
The Company continues to pursue a strategy to increase its market share
in its local market areas in Anderson and Oconee Counties of South Carolina.
Oconee County is served from four offices, which are located in Seneca, Walhalla
and Westminster. The Anderson County market is served from three offices in
Anderson and Williamston, including an office on Highway 81 in Anderson County
opened early in the fourth quarter of 2007.
B-16
Average Balances, Yields and Rates
Nine Months Ended September 30,
-------------------------------
2008 2007
---- ----
Interest Interest
Average Income/ Yields/ Average Income/ Yields/
Balances Expense Rates (1) Balances Expense Rates (1)
-------- ------- --------- -------- ------- ---------
(Dollars in thousands)
Assets
Interest-bearing balances due from banks ........... $ 1,251 $ 17 1.82% $ 141 $ 4 3.79%
Securities
Taxable ...................................... 95,782 3,464 4.83% 91,100 2,907 4.27%
Tax exempt (2) ............................... 20,683 623 4.02% 19,588 616 4.20%
---------- ------- --------- -------
Total investment securities ............. 116,465 4,087 4.69% 110,688 3,523 4.26%
Other investments .................................. 997 39 5.23% 904 43 6.36%
Federal funds sold ................................. 28,624 584 2.73% 25,733 1,007 5.23%
Loans (2) (3) (4) .................................. 255,866 13,902 7.26% 219,261 12,885 7.86%
---------- ------- --------- -------
Total interest earning assets ........... 403,203 18,629 6.17% 356,727 17,462 6.54%
Cash and due from banks ............................ 7,916 8,256
Allowance for loan losses .......................... (2,725) (2,253)
Valuation allowance - Available-for-
sale securities .............................. 347 (1,282)
Premises and equipment ............................. 8,812 8,048
Other assets ....................................... 12,355 4,673
---------- ---------
Total assets ............................ $ 429,908 $ 374,169
========== =========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts ........ $58,022 $ 843 1.94% $57,293 $ 1,373 3.20%
Savings ...................................... 28,523 323 1.51% 28,282 616 2.91%
Time deposits $100M and over ................. 108,347 3,231 3.98% 82,312 2,901 4.71%
Other time deposits .......................... 143,881 5,157 4.79% 123,391 4,729 5.12%
---------- ------- --------- -------
Total interest bearing
deposits .............................. 338,773 9,554 3.77% 291,278 9,619 4.42%
Short-term borrowings .............................. 504 8 2.12% 17 3 23.59%
Long-term debt ..................................... 6,321 179 3.78% 5,119 155 4.05%
---------- ------- --------- -------
Total interest bearing
liabilities ........................... 345,598 9,741 3.76% 296,414 9,777 4.41%
Noninterest bearing demand deposits ................ 40,910 40,028
Other liabilities .................................. 3,787 3,139
Shareholders' equity ............................... 39,613 34,588
---------- ---------
Total liabilities and shareholders'
equity ................................ $ 429,908 $ 374,169
========== =========
Interest rate spread ............................... 2.41% 2.13%
Net interest income and net yield
on earning assets ............................ $ 8,888 2.94% $ 7,685 2.88%
Interest free funds supporting earning assets ...... $57,605 $ 60,313
-----------------------------------------
(1) Yields and rates are annualized
(2) Yields on tax exempt instruments have not been adjusted to a tax-equivalent
basis.
(3) Nonaccrual loans are included in the average loan balances and income on
such loans is recognized on a cash basis.
(4) Includes immaterial amounts of loan fees.
B-17
Provision and Allowance for Loan Losses
The provision for loan losses was $965,000 for the third quarter of
2008 compared with $150,000 for the third quarter of 2007. For the first nine
months of 2008, the provision for loan losses was $1,375,000, compared with
$270,000 for the first nine months of 2007. At September 30, 2008, the allowance
for loan losses was 1.31% of loans, compared with 1.05% at December 31, 2007.
The increase in the provision and allowance was made as a result of significant
increases in the amounts of nonaccrual and potential problem loans, increased
net charge-offs, higher volumes of loans and heightened concerns about the
ability of customers to perform in accordance with the terms of their loans due
to weaknesses in the broader economic situation.
For the first nine months of 2008, net charge-offs totaled $446,000,
compared with $141,000 in net charge offs during the same period of 2007. As of
September 30, 2008, nonaccrual loans totaled $4,725,000. As of September 30,
2007, there were $481,000 in nonaccrual loans and no loans 90 days or more past
due and still accruing interest. The activity in the allowance for loan losses
is summarized in the table below:
Nine Months Nine Months
Ended Year Ended Ended
September 30, December 31, September 30,
2008 2007 2007
---- ---- ----
(Dollars in thousands)
Allowance at beginning of period ................................. $ 2,574 $ 2,242 $ 2,242
Provision for loan losses ........................................ 1,375 594 270
Net charge-offs .................................................. (446) (262) (141)
--------- --------- ---------
Allowance at end of period ....................................... $ 3,503 $ 2,574 $ 2,371
========= ========= =========
Allowance as a percentage of loans outstanding
at period end ................................................. 1.31% 1.05% 1.00%
Loans at end of period ........................................... $ 267,075 $ 244,131 $ 236,907
========= ========= =========
B-18
Non-Performing and Potential Problem Loans
90 Days or
More Past Due Total Non- Percentage Percentage
Nonaccrual and Still performing of Total Potential of Total
Loans Accruing Loans Loans Problem Loans Loans
----- -------- ----- ----- ------------- -----
(Dollars in thousands)
January 1, 2007 ................... $ 50 $ - $ 50 0.02% $ 3,176 1.56%
Net change ........................ 143 - 143 (151)
------- ------- ------- -------
March 31, 2007 .................... 193 - 193 0.09% 3,025 1.43%
Net change ........................ 219 - 219 97
------- ------- ------- -------
June 30, 2007 ..................... 412 - 412 0.18% 3,122 1.38%
Net change ........................ 14 - 14 106
------- ------- ------- -------
September 30, 2007 ................ 426 - 426 0.18% 3,228 1.36%
Net change ........................ 199 - 199 (140)
------- ------- ------- -------
December 31, 2007 ................. 625 - 625 0.26% 3,088 1.26%
Net change ........................ (181) - (181) 962
------- ------- ------- -------
March 31, 2008 .................... 444 - 444 0.18% 4,050 1.61%
Net change ........................ 1,436 - 1,436 1,338
------- ------- ------- -------
June 30, 2008 ..................... 1,880 - 1,880 0.73% 5,388 2.10%
Net change ........................ 2,845 - 2,853 1,194
------- ------- ------- -------
September 30, 2008 ................ $ 4,725 $ - $ 4,733 1.77% $ 6,582 2.46%
======= ======= ======= =======
Potential problem loans include loans, other than non-performing loans,
that management has identified as having possible credit problems sufficient to
cast doubt upon the abilities of the borrowers to comply with the current
repayment terms. Such loans are assigned to one of several risk-rating grades
depending on factors such as past due status, collateral values, and other
factors affecting the customers' ability to repay. As of September 30, 2008,
approximately 75% of the Company's potential problem loans were included in the
Company's least severe risk-rating grade. Approximately 90% of potential problem
loans were secured by real estate. Management expects that further deterioration
of economic conditions within the Company's market areas is likely in the
short-term, especially with respect to real estate related activities and real
property values. Consequently, it is expected that increased provisions for loan
losses will be needed in the future.
Noninterest Income
Noninterest income totaled $634,000 for the third quarter of 2008,
compared with $583,000 for the 2007 quarter. Service charges on deposit accounts
in the 2008 quarter were $374,000 representing a decrease of $20,000 from the
prior year period. Increases in the value of bank-owned life insurance during
the third quarter of 2008 totaled $94,000 compared with $33,000 during the same
period of 2007. Sales of securities in the 2008 third quarter were undertaken to
take advantage of attractive yields for fixed rate mortgage backed securities
and to eliminate adjustable rate mortgage backed securities from the Company's
portfolio. Those sales resulted in net losses of $3,000. There were no sales of
securities in the 2007 period.
For the nine months ended September 30, 2008, noninterest income
totaled $1,868,000, compared with $1,571,000 for the same period of 2007.
Service charges on deposit accounts in the 2008 period were $1,109,000
representing an increase of $38,000 from the prior year period's $1,071,000.
During the 2008 and 2007 nine month periods, increases in the value of life
insurance assets totaling $280,000 and $33,000 were recognized, respectively.
Noninterest Expenses
Noninterest expenses totaled $1,938,000 for the third quarter of 2008
compared with $1,901,000 for the same period of 2007, representing an increase
of $37,000 or 1.9%. Salaries and employee benefits decreased by $57,000, or
5.0%, to 1,073,000 due to lower rates paid for employee life and disability
insurance coverage.
Occupancy and furniture and equipment expenses for the third quarter of
2008 increased by $18,000 compared with 2007 primarily due to higher
depreciation and operating costs of the Company's offices. Higher expenses were
incurred in 2008 for stationery, postage, supplies and promotional expenses
resulting from the opening of the new corporate offices and additional banking
offices and increased numbers of deposit accounts. The cost of deposit insurance
B-19
was $58,000 for the third quarter of 2008, compared with $10,000 for the third
quarter of 2007. Further increases in these expenses are expected to occur due
to costs expected to be incurred to continue coverage of certain debt and
non-interest bearing transaction accounts under the Temporary Liquidity
Guarantee Program.
For the nine months ended September 30, 2008, salaries and employee
benefits increased by $374,000, or 13.2%, over the amount for 2007. The increase
in salaries and benefits for 2008 is attributable to an increase in the number
of employees for the new Seneca and Anderson offices, and normal salary
increases. Net occupancy and furniture and equipment expenses increased by an
aggregate of $101,000, or 15.8%, due to expansion of the Company's network of
banking offices and higher costs of utilities, maintenance, and other recurring
expenses.
Liquidity
Liquidity is the ability to meet current and future obligations through
the liquidation or maturity of existing assets or the acquisition of additional
liabilities. The Company manages both assets and liabilities to achieve
appropriate levels of liquidity. Cash and short-term investments are the
Company's primary sources of asset liquidity. These funds provide a cushion
against short-term fluctuations in cash flow from both deposits and loans.
Securities available-for-sale are the Company's principal source of secondary
asset liquidity. However, the availability of this source is influenced by
market conditions. Individual and commercial deposits are the Company's primary
source of funds for credit activities. The Company has approximately $20,000,000
of credit availability under its FHLB lines of credit and additional amounts are
available under federal funds purchased facilities. Provided the Company
continues to participate in the Temporary Liquidity Guarantee Program, any newly
issued senior unsecured debt issued before July 1, 2009 would be fully
guaranteed by the FDIC until its maturity not later than June 30, 2012.
Management believes that continuing to participate in that program would
significantly increase the Company's ability to secure financing as needed up to
the limits imposed by the program.
As of September 30, 2008, the ratio of loans to total deposits was
69.6%, compared with 68.6% as of December 31, 2007. Deposits as of September 30,
2008 were $383,722,000, an increase of $27,855,000 or 7.8% over the amount as of
December 31, 2007. Management believes that the Company's liquidity sources are
adequate to meet its operating needs.
Capital Resources
The Company's capital base increased by $2,880,000 since December 31,
2007 as the result of net income of $2,514,000 for the first nine months of
2008, $365,000 from the exercise of employee stock options, plus a $1,000 change
in unrealized gains and losses on available-for-sale securities, net of deferred
income tax effects.
The Company and its banking subsidiary (the "Bank") are 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. If
the capital position of an affected institution were to fall below certain
levels, increasingly stringent regulatory corrective actions are mandated.
The September 30, 2008 risk based capital ratios for the Company and
the Bank are presented in the following table, compared with the "well
capitalized" and minimum ratios under the regulatory definitions and guidelines:
Total
Tier 1 Capital Leverage
------ ------- --------
Community First Bancorporation 13.8% 15.0% 9.5%
Community First Bank 13.1% 14.3% 9.0%
Minimum "well-capitalized" requirement 6.0% 10.0% 6.0%
Minimum requirement 4.0% 8.0% 5.0%
B-20
Off-Balance-Sheet Arrangements
In the normal course of business, the Bank is party to financial
instruments with off-balance-sheet risk including 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 the financial
instruments for commitments to extend credit and standby letters of credit is
represented by the contractual 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:
September 30, 2008
(Dollars in thousands)
Loan commitments ..................... $ 43,081
Standby letters of credit ............ 889
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. Many letters of credit will expire without being drawn
upon and do not necessarily represent future cash requirements. The Bank
receives fees for loan commitments and standby letters of credit. The amount of
such fees was not material for either the nine months or three months ended
September 30, 2008.
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.
Item 3. - Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk is primarily related to the risk
of loss from adverse changes in market prices and rates. This risk arises
principally from interest rate risk inherent in the Company's lending, deposit
gathering and borrowing activities. Management actively monitors and manages its
interest rate risk exposure. Although the Company manages other risks, such as
credit quality and liquidity risk in the normal course of business, management
considers interest rate risk to be its most significant market risk and this
risk could potentially have the largest material effect on the Company's
financial condition and results of operations. Other types of market risk, such
as commodity price risk and foreign currency exchange risk, do not arise in the
normal course of the Company's community banking operations.
The Company uses a simulation model to assist in achieving consistent
growth in net interest income while managing interest rate risk. As of September
30 2008, the model indicates that net interest income would increase $103,000
and net income would increase $64,000 in the next twelve months if interest
rates rose by 100 basis points. Conversely, net interest income would decrease
$52,000 and net income would decrease $32,000 in the next twelve months if
interest rates declined by 100 basis points. In the current interest rate
environment, it appears unlikely that there will be any large changes in
interest rates in the immediate future. The prospective effects of hypothetical
interest rate changes are based on a number of assumptions, including the
relative levels of market interest rates and prepayment assumptions affecting
loans, and should not be relied on as indicative of actual future results. The
prospective effects also do not contemplate potential actions that the Company,
its customers and the issuers of its investment securities could undertake in
response to changes in interest rates.
As of September 30, 2008, there was no significant change from the
interest rate sensitivity analysis for the various changes in interest rates
B-21
calculated as of December 31, 2007. The foregoing disclosures related to the
Company's market risk should be read in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations included in the
2007 Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
Item 4T. - Controls and Procedures
Based on the evaluation required by 17 C.F.R. Section 240.13a-15(b) or
240.15d-15(b) of the issuer's disclosure controls and procedures (as defined in
17 C.F.R. Sections 240.13a-15(e) and 240.15d-15(e)), the issuer's chief
executive officer and chief financial officer concluded such controls and
procedures, as of the end of the period covered by this report, were effective.
There has been no change in the Company's internal control over financial
reporting during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II - OTHER INFORMATION
Item 1A. Risk Factors
The following are additional risk factors for the Company, to be read in
conjunction with Item 1A, "Risk Factors - Risks Related to Our Industry" in the
Company's Form 10-K for the year ended December 31, 2007.
1. There can be no assurance that recent government actions will help
stabilize the U.S. financial system.
In response to the financial crises affecting the banking system and financial
markets and going concern threats to investment banks and other financial
institutions, various branches and agencies of the U.S. government have put in
place laws, regulations and programs to address capital and liquidity issues in
the banking system. There can be no assurance, however, as to the actual impact
that such laws, regulations and programs will have on the financial markets,
including the extreme levels of volatility, liquidity and confidence issues and
limited credit availability currently being experienced. The failure of such
laws, regulations and programs to help stabilize the financial markets and a
continuation or worsening of current financial market conditions could
materially and adversely affect our business, financial condition, results of
operations, access to credit or the trading price of our common stock.
2. Current levels of market volatility are unprecedented.
Although many markets have been experiencing volatility and disruption for
months, in the past few weeks, the volatility and disruption of financial and
credit markets has reached unprecedented levels for recent times. In some cases,
the markets have produced downward pressure on stock prices and credit
availability for certain issuers without regard to those issuers' underlying
financial strength. If current levels of market disruption and volatility
continue or worsen, there can be no assurance that we will not experience an
adverse effect, which may be material, on our ability to access capital and on
our business, financial condition and results of operations.
3. The soundness of other financial institutions could adversely affect us.
Financial services institutions are interrelated as a result of trading,
clearing, counterparty, or other relationships. We have exposure to many
different industries and counterparties, and we routinely execute transactions
with counterparties in the financial services industry, including brokers,
dealers, commercial banks, investment banks, and government sponsored
enterprises. Many of these transactions expose us to credit risk in the event of
default of our counterparty. In addition, our credit risk may be exacerbated
when the collateral held by us cannot be realized or is liquidated at prices not
sufficient to recover the full amount of the loan or other obligation due us.
There is no assurance that any such losses would not materially and adversely
affect our results of operations or earnings.
4. Current market developments may adversely affect our industry, business and
results of operations.
Dramatic declines in the housing market during the prior year, with falling home
prices and increasing foreclosures and unemployment, have resulted in
significant write-downs of asset values by financial institutions, including
government-sponsored entities and major commercial and investment banks. These
write-downs, initially of mortgage-backed securities but spreading to credit
default swaps and other derivative securities have caused many financial
institutions to seek additional capital, to merge with larger and stronger
institutions and, in some cases, to fail. Reflecting concern about the stability
of the financial markets generally and the strength of counterparties, many
lenders and institutional investors have reduced, and in some cases, ceased to
provide funding to borrowers, including other financial institutions. The
resulting lack of available credit, lack of confidence in the financial sector,
increased volatility in the financial markets and reduced business activity
B-22
could materially and adversely, directly or indirectly, affect our business,
financial condition and results of operations.
Item 6. - Exhibits
Exhibits
31. Rule 13a-14(a)/15d-14(a) Certifications
32. Certifications Pursuant to 18 U.S.C. Section 1350
B-23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMMUNITY FIRST BANCORPORATION
November 14, 2008 /s/ Frederick D. Shepherd, Jr.
----------------- ----------------------------------------------
Date Frederick D. Shepherd, Jr., Chief Executive
Officer and Chief Financial Officer
B-24
FINANCIAL INFORMATION FROM THE FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2008
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 subsidiary as of December 31, 2007 and 2006,
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, 2007. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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
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 includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Community First Bancorporation and subsidiary as of December 31, 2007 and 2006,
and the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended December 31, 2007, in
conformity with U. S. generally accepted accounting principles.
s/J. W. Hunt and Company, LLP
------------------------------------
J. W. Hunt and Company, LLP
Columbia, South Carolina
March 28, 2008
B-25
Consolidated Balance Sheets
Community First Bancorporation and Subsidiary
December 31,
------------
2007 2006
---- ----
Assets
Cash and due from banks (Note B) ................................................... $ 10,272,260 $ 6,951,934
Interest bearing deposits due from banks ........................................... 164,781 66,941
Federal funds sold ................................................................. 24,236,000 24,126,000
------------- -------------
Cash and cash equivalents ..................................................... 34,673,041 31,144,875
Securities available-for-sale (Note C) ............................................. 99,026,049 102,487,395
Securities held-to-maturity (fair value of $5,625,083 for 2007 and
$6,529,691 for 2006) (Note C) ................................................. 5,663,113 6,595,026
Federal Home Loan Bank stock, at cost .............................................. 839,900 980,200
Loans (Note D) ..................................................................... 244,131,013 202,965,700
Allowance for loan losses ..................................................... (2,573,758) (2,241,947)
------------- -------------
Loans - net .............................................................. 241,557,255 200,723,753
Premises and equipment - net (Note E) .............................................. 8,621,525 7,937,482
Accrued interest receivable ........................................................ 2,529,155 2,181,572
Bank-owned life insurance .......................................................... 7,107,784 -
Other assets ....................................................................... 2,130,413 1,859,069
------------- -------------
Total assets ............................................................. $ 402,148,235 $ 353,909,372
============= =============
Liabilities
Deposits (Note F)
Noninterest bearing ........................................................... $ 42,288,971 $ 40,576,371
Interest bearing .............................................................. 313,577,582 267,380,938
------------- -------------
Total deposits ........................................................... 355,866,553 307,957,309
Accrued interest payable ........................................................... 3,479,569 2,702,946
Short-term borrowings (Note G) ..................................................... - 4,500,000
Long-term debt (Note H) ............................................................ 4,500,000 5,500,000
Other liabilities .................................................................. 391,125 34,087
------------- -------------
Total liabilities ........................................................ 364,237,247 320,694,342
------------- -------------
Commitments and contingent liabilities (Note M)
Shareholders' equity (Note I)
Common stock - no par value; 10,000,000 shares authorized; issued and
outstanding - 3,324,105 for 2007 and
2,958,558 for 2006 ............................................................ 35,008,926 30,061,392
Additional paid-in capital ......................................................... 681,498 593,100
Retained earnings .................................................................. 2,140,465 3,284,692
Accumulated other comprehensive income (loss) ...................................... 80,099 (724,154)
------------- -------------
Total shareholders' equity ............................................... 37,910,988 33,215,030
------------- -------------
Total liabilities and shareholders' equity ............................... $ 402,148,235 $ 353,909,372
============= =============
See accompanying notes to consolidated financial statements.
B-26
Consolidated Statements of Income
Community First Bancorporation and Subsidiary
Years Ended December 31,
------------------------
2007 2006 2005
---- ---- ----
Interest income
Loans, including fees ....................................... $17,600,104 $13,864,479 $11,497,766
Securities
Taxable .................................................. 3,890,240 3,868,407 3,564,081
Tax-exempt ............................................... 816,428 635,967 149,880
Federal funds sold .......................................... 1,208,738 1,174,768 667,735
Other ....................................................... 55,829 52,121 38,714
Interest bearing deposits due from banks .................... 6,277 4,393 5,003
----------- ----------- -----------
Total interest income .................................... 23,577,616 19,600,135 15,923,179
----------- ----------- -----------
Interest expense
Time deposits $100,000 and over ............................. 4,054,315 2,952,983 2,117,851
Other deposits .............................................. 8,972,052 7,193,745 4,202,097
Short-term borrowings ....................................... - 1,789 17,971
Long-term debt .............................................. 203,871 236,864 282,893
----------- ----------- -----------
Total interest expense ................................... 13,230,238 10,385,381 6,620,812
----------- ----------- -----------
Net interest income .............................................. 10,347,378 9,214,754 9,302,367
Provision for loan losses (Note D) ............................... 594,000 65,000 250,000
----------- ----------- -----------
Net interest income after provision .............................. 9,753,378 9,149,754 9,052,367
----------- ----------- -----------
Other income
Service charges on deposit accounts ......................... 1,473,469 1,515,390 1,580,043
Credit life insurance commissions ........................... 28,587 48,303 32,422
Mortgage brokerage income ................................... 33,203 68,194 109,890
Other income ................................................ 671,140 521,855 416,244
----------- ----------- -----------
Total other income ....................................... 2,206,399 2,153,742 2,138,599
----------- ----------- -----------
Other expenses (Notes J and L)
Salaries and employee benefits .............................. 4,120,766 3,647,451 2,902,693
Net occupancy expense ....................................... 432,852 346,610 267,760
Furniture and equipment expense ............................. 441,010 431,078 344,687
Other expense ............................................... 2,136,968 2,326,626 1,905,008
----------- ----------- -----------
Total other expenses ..................................... 7,131,596 6,751,765 5,420,148
----------- ----------- -----------
Income before income taxes ....................................... 4,828,181 4,551,731 5,770,818
Income tax expense (Note K) ...................................... 1,497,469 1,533,762 2,040,892
----------- ----------- -----------
Net income ....................................................... $ 3,330,712 $ 3,017,969 $ 3,729,926
=========== =========== ===========
Per share (Note I)
Net income, basic ........................................... $ 1.02 $ 0.93 $ 1.16
Net income, assuming dilution ............................... 0.96 0.87 1.10
See accompanying notes to consolidated financial statements.
B-27
Consolidated Statements of Changes in Shareholders' Equity
Community First Bancorporation and Subsidiary
Common Stock Accumulated
------------ Additional Other
Number of Paid-in Retained Comprehensive
Shares Amount Capital Earnings Income (Loss) Total
------ ------ ------- -------- ------------- -----
Balance, January 1, 2005 .................. 2,648,230 $ 24,216,002 $ - $ 2,220,083 $ (499,640) $ 25,936,445
Comprehensive income:
Net income ............................ - - - 3,729,926 - 3,729,926
------------
Unrealized net holding losses
on available-for-sale securities
arising during the period, net of
income tax effects of $502,764 ...... - - - - (897,693) (897,693)
------------
Total other comprehensive
income (loss) .................... - - - - - (897,693)
------------
Total comprehensive income ..... - - - - - 2,832,233
------------
Issuance of 5% stock dividend,
including cash payment for
fractional shares ..................... 132,136 2,647,600 - (2,653,949) - (6,349)
Exercise of employee stock options ........ 18,043 92,059 - - - 92,059
--------- ------------ --------- ------------ ------------ ------------
Balance, December 31, 2005 ................ 2,798,409 26,955,661 - 3,296,060 (1,397,333) 28,854,388
Comprehensive income:
Net income ............................ - - - 3,017,969 - 3,017,969
------------
Unrealized net holding gains on
available-for-sale securities arising
during the period, net of income tax
effects of $377,023 ................. - - - - 673,179 673,179
------------
Total other comprehensive
income (loss).................... - - - - - 673,179
------------
Total comprehensive income ..... - - - - - 3,691,148
------------
Issuance of 5% stock dividend,
including cash payment for
fractional shares ..................... 140,570 3,022,534 - (3,029,337) - (6,803)
Share-based compensation, net
of tax benefits .......................... - - 593,100 - - 593,100
Exercise of employee stock options ........ 19,579 83,197 - - - 83,197
--------- ------------ --------- ------------ ------------ ------------
Balance, December 31, 2006 ................ 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
========= ============ ========= ============ ============ ============
See accompanying notes to consolidated financial statements.
B-28
Consolidated Statements of Cash Flows
Community First Bancorporation and Subsidiary
Years Ended December 31,
------------------------
2007 2006 2005
---- ---- ----
Operating activities
Net income .................................................................... $ 3,330,712 $ 3,017,969 $ 3,729,926
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses .............................................. 594,000 65,000 250,000
Writedowns of foreclosed assets ........................................ - - 25,000
Depreciation ........................................................... 399,456 373,883 298,889
Deferred income taxes .................................................. (266,418) (131,488) (43,114)
Amortization of net loan fees and costs ................................ (225,117) (224,944) (96,374)
Securities accretion and premium amortization .......................... 53,843 152,566 275,137
Accretion of cash surrender value of life insurance .................... (107,784) - -
Loss on sale or other disposition of fixed assets ...................... - - 5,000
(Gain) loss on sale of foreclosed assets ............................... (354) (30,621) 9,191
Increase in interest receivable ........................................ (347,583) (552,818) (297,296)
Increase in interest payable ........................................... 776,623 885,813 595,015
(Increase) decrease in prepaid expenses ................................ (506,041) (179,823) 148,738
Increase (decrease) in other accrued expenses .......................... 357,038 (13,753) 6,991
Share-based compensation expense ....................................... - 593,100 -
------------ ------------ ------------
Net cash provided by operating activities .......................... 4,058,375 3,954,884 4,907,103
------------ ------------ ------------
Investing activities
Purchases of available-for-sale securities .................................... (25,224,140) (25,209,833) (58,600,965)
Maturities, calls and paydowns of available-for-sale securities ............... 29,879,688 25,682,329 46,930,477
Maturities, calls and paydowns of held-to-maturity securities ................. 938,552 1,163,035 1,626,880
Purchases of other investments ................................................ - (31,800) (162,300)
Proceeds of redemptions of other investments .................................. 140,300 - 225,000
Net increase in loans made to customers ....................................... (41,202,385) (33,566,455) (11,670,099)
Purchases of premises and equipment ........................................... (1,083,499) (1,506,718) (2,695,756)
Proceeds from sale of foreclosed assets ....................................... 14,589 167,942 57,768
Proceeds from sale of real estate held for sale ............................... 36,449 - -
Purchases of bank-owned life insurance ........................................ (7,000,000) - -
------------ ------------ ------------
Net cash used by investing activities .............................. (43,500,446) (33,301,500) (24,288,995)
------------ ------------ ------------
Financing activities
Net (decrease) increase in demand deposits, interest
bearing transaction accounts and savings accounts ......................... (4,715,971) 25,163,011 (1,966,994)
Net increase in certificates of deposit and other
time deposits ............................................................. 52,625,215 2,801,699 13,811,368
Net (decrease) increase in short-term borrowings .............................. (4,500,000) 1,000,000 1,000,000
Repayment of long-term debt ................................................... (1,000,000) (1,000,000) (1,000,000)
Payment of cash in lieu of fractional shares
for stock dividend ........................................................ (5,495) (6,803) (6,349)
Exercise of employee stock options ............................................ 478,090 83,197 92,059
Excess tax benefits of exercises of stock options ............................. 88,398 - -
------------ ------------ ------------
Net cash provided by financing activities .......................... 42,970,237 28,041,104 11,930,084
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ................................... 3,528,166 (1,305,512) (7,451,808)
Cash and cash equivalents, beginning ............................................... 31,144,875 32,450,387 39,902,195
------------ ------------ ------------
Cash and cash equivalents, ending .................................................. $ 34,673,041 $ 31,144,875 $ 32,450,387
============ ============ ============
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for:
Interest (net of amount capitalized) ...................................... $ 12,453,615 $ 9,499,568 $ 6,025,797
Income taxes .............................................................. 1,700,000 1,851,154 1,980,856
Noncash investing and financing activities:
Transfer of loans to foreclosed assets .................................... - 54,235 -
Transfers from retained earnings to common stock
in connection with stock dividends ..................................... 4,469,444 3,022,534 2,647,600
Other comprehensive income (loss) ......................................... 804,253 673,179 (897,693)
See accompanying notes to consolidated financial statements.
B-29
Notes to Consolidated Financial Statements
Community First Bancorporation and Subsidiary
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.
Principles of Consolidation and Basis of Presentation - The consolidated
financial statements include the accounts of the parent company and its banking
subsidiary after elimination of all significant intercompany balances and
transactions. The accounting and reporting policies of the Company and its
subsidiary 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 with the current presentation. Such reclassifications
had no effect on previously reported shareholders' equity or net income.
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 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 Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Values of Financial
Instruments."
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 which the Company has the positive intent and ability to hold to
ultimate maturity are classified as held-to-maturity and 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
B-30
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, when not material, are carried in the
balance sheet at a value not to exceed their observable market price or the fair
value of the collateral if the repayment of the loan is expected to be provided
solely by the underlying collateral. The carrying value of any material impaired
loan is measured based on 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. 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
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 is probable, 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 probable 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 necessitated as new events occur or more information is obtained are
accounted for as changes in accounting estimates in the accounting period in
which the change occurs.
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 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 the Company's external credit reviewer who is
independent of the lending function.
Premises and Equipment - Premises and equipment are stated at cost, less
accumulated depreciation. The provision for depreciation is computed using the
B-31
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 $40,000 and $54,235 as of December 31, 2007 and 2006,
respectively.
Bank-owned Life Insurance - The Company accounts for bank-owned life insurance
in accordance with Emerging Issues Task Force Issue No. 06-4, "Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements" which concludes that an employer
should not offset the liability to provide postretirement benefits with 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
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, 2007, the Company has two
stock-based employee compensation plans, which are 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." Prior to adoption of SFAS 123(R), the Company accounted for those
plans under the recognition and measurement principles of 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 those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant.
The following table illustrates the effect on net income and net income per
share if the Company had applied the fair value recognition provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," to stock-based employee compensation awarded in 2005.
Per share amounts have been adjusted to reflect the effects of a 10% stock
dividend effective as of December 20, 2007 and a 5% stock dividend effective as
of December 18, 2006.
B-32
Year Ended
December 31, 2005
-----------------
Net income, as reported ................................... $ 3,729,926
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of any related tax effects ...................... (237,807)
-------------
Pro forma net income ...................................... $ 3,492,119
=============
Net income per share, basic
As reported ......................................... $ 1.16
Pro forma ........................................... 1.09
Net income per share, assuming dilution
As reported ......................................... $ 1.10
Pro forma ........................................... 1.03
The fair values of options granted during 2006 and 2005 were $9.90, and $8.06
per share, respectively. No options were granted in 2007. For 2006 and 2005, the
fair value was estimated as of the grant date using the Black-Scholes options
pricing model and the following assumptions: dividend yield of 0%, expected life
of 10 years, risk free interest rates of 5.08% and 4.38% and stock price
volatility of 25.35% and 25.71%, respectively. Because of the limited time
during which the Company's stock has traded in a public market, the Company
estimated stock price volatility based primarily on the historic volatility of
another bank holding company domiciled in South Carolina that was founded at
about the same time as the Company. Management believes that the other bank
holding company is sufficiently similar to the Company in its operating history
to make it a suitable reference for estimating the volatility of the Company's
stock price.
Earnings Per Share - Basic net income per share is calculated by dividing net
income by the weighted average number of shares of the Company's common stock
outstanding during the period. Net income per share, assuming dilution, is
calculated by dividing net income 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, 2007 and 2006 were approximately $1,847,000 and
$2,403,000, respectively.
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:
B-33
December 31,
------------
2007 2006
---- ----
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
Government sponsored
enterprises (GSEs) ..... $ 56,098,415 $ 511,039 $ 64,423 $ 56,545,031 $ 56,616,368 $ 125,758 $ 537,843 $ 56,204,283
Mortgage-backed securities
issued by GSEs ......... 22,471,385 48,925 327,297 22,193,013 28,135,834 3,299 795,252 27,343,881
State, county and
municipal .............. 20,331,290 92,261 135,546 20,288,005 18,864,918 122,074 47,761 18,939,231
------------ --------- --------- ------------ ------------ --------- ----------- ------------
Total ..... $ 98,901,090 $ 652,225 $ 527,266 $ 99,026,049 $103,617,120 $ 251,131 $ 1,380,856 $102,487,395
============ ========= ========= ============ ============ ========= =========== ============
Held-to-maturity
Government sponsored
enterprises ............ $ - $ - $ - $ - $ - $ - $ - $ -
Mortgage-backed securities
issued by GSEs ......... 5,663,113 967 38,997 5,625,083 6,595,026 - 65,335 6,529,691
State, county and
municipal .............. - - - - - - - -
------------ --------- --------- ------------ ------------ --------- ----------- ------------
Total ..... $ 5,663,113 $ 967 $ 38,997 $ 5,625,083 $ 6,595,026 $ - $ 65,335 $ 6,529,691
============ ========= ========= ============ ============ ========= =========== ============
The amortized cost and estimated fair value of securities by contractual
maturity are shown below:
December 31, 2007
-----------------
Available-for-sale Held-to-maturity
------------------ ----------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
Due within one year ................................ $14,137,093 $14,096,156 $ - $ -
Due after one through five years ................... 18,619,977 18,822,524 - -
Due after five through ten years ................... 23,146,709 23,392,611 - -
Due after ten years ................................ 20,525,926 20,521,745 - -
----------- ----------- ----------- -----------
76,429,705 76,833,036 - -
Mortgage-backed securities
issued by government-
sponsored enterprises ............................ 22,471,385 22,193,013 5,663,113 5,625,083
----------- ----------- ----------- -----------
Total ......................................... $98,901,090 $99,026,049 $ 5,663,113 $ 5,625,083
=========== =========== =========== ===========
The estimated fair values and gross unrealized losses of all of the Company's
investment securities whose estimated fair values were less than amortized cost
as of December 31, 2007 and 2006 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.
B-34
December 31, 2007
-----------------
Continuously in Unrealized Loss Position for a Period of
--------------------------------------------------------
Less than 12 Months 12 Months or more Total
------------------- ----------------- -----
Available-for-sale Estimated Unrealized Estimated Unrealized Estimated Unrealized
Fair Value Loss Fair Value Loss Fair Value Loss
---------- ---- ---------- ---- ---------- ----
Government-sponsored
enterprises (GSEs) ..................... $ 3,993,971 $ 4,322 $16,072,715 $ 60,101 $20,066,686 $ 64,423
Mortgage-backed securities
issued by GSEs ......................... 293,088 1,269 18,403,894 326,028 18,696,982 327,297
State, county and
municipal securities ................... 7,681,060 78,781 3,201,751 56,765 10,882,811 135,546
----------- ----------- ----------- ----------- ----------- -----------
Total ............ $11,968,119 $ 84,372 $37,678,360 $ 442,894 $49,646,479 $ 527,266
=========== =========== =========== =========== =========== ===========
Held-to-maturity
Government-sponsored enterprises ....... $ - $ - $ 4,719,740 $ 38,997 $ 4,719,740 $ 38,997
----------- ----------- ----------- ----------- ----------- -----------
Total ............ $ - $ - $ 4,719,740 $ 38,997 $ 4,719,740 $ 38,997
=========== =========== =========== =========== =========== ===========
December 31, 2006
-----------------
Continuously in Unrealized Loss Position for a Period of
--------------------------------------------------------
Less than 12 Months 12 Months or more Total
------------------- ----------------- -----
Available-for-sale Estimated Unrealized Estimated Unrealized Estimated Unrealized
Fair Value Loss Fair Value Loss Fair Value Loss
---------- ---- ---------- ---- ---------- ----
Government-sponsored
enterprises ............................ $ 7,977,500 $ 18,329 $34,233,795 $ 519,514 $42,211,295 $ 537,843
Mortgage-backed securities
issued by GSEs ......................... 617,351 20,299 26,253,632 774,953 26,870,983 795,252
State, county and
municipal securities ................... 4,783,660 30,100 2,422,828 17,661 7,206,488 47,761
----------- ----------- ----------- ----------- ----------- -----------
Total ............ $13,378,511 $ 68,728 $62,910,255 $ 1,312,128 $76,288,766 $ 1,380,856
=========== =========== =========== =========== =========== ===========
Held-to-maturity
Government-sponsored enterprises ....... $ 2,463,645 $ 19,498 $ 4,066,046 $ 45,837 $ 6,529,691 $ 65,335
----------- ----------- ----------- ----------- ----------- -----------
$ 2,463,645 $ 19,498 $ 4,066,046 $ 45,837 $ 6,529,691 $ 65,335
=========== =========== =========== =========== =========== ===========
At December 31, 2007, 29 securities had been continuously in an unrealized loss
position for less than 12 months and 72 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 resulted primarily from higher interest rates and the securities consist
primarily of issuances of government-sponsored enterprises such as the Federal
Home Loan Banks, Federal National Mortgage Association and Federal Home Loan
Mortgage Corporation. The contractual terms of securities issued by
government-sponsored enterprises do not permit the issuer to settle the
securities at a price less than the face amount of the securities. The principal
and interest payments of mortgage-backed securities issued by
government-sponsored enterprises are guaranteed by that enterprise and it is
expected that those securities would not be settled at a price less than the
face amount of the securities. 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. Also, there have been no
significant adverse changes in the credit ratings of any of the security issuers
that would indicate that the Company will be unable to collect all principal and
interest amounts according to contractual terms. Substantially all of the
issuers of state, county and municipal securities held were rated at least
"investment grade" as of December 31, 2007 and 2006.
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
B-35
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.
The Company did not sell any available-for-sale securities during 2007, 2006 or
2005. There were no transfers of available-for-sale securities to other
categories in 2007, 2006 or 2005.
At December 31, 2007 and 2006, securities with a carrying value of $63,853,671
and $72,203,027, respectively, were pledged as collateral to secure public
deposits.
NOTE D - LOANS
Loans consisted of the following:
December 31,
------------
2007 2006
---- ----
Commercial, financial and industrial ........ $ 23,865,216 $ 24,268,227
Real estate- construction ................... 2,201,343 1,982,035
Real estate - mortgage ...................... 185,198,250 147,944,221
Consumer installment ........................ 32,866,204 28,771,217
------------- -------------
Total ................................. 244,131,013 202,965,700
Allowance for loan losses ................... (2,573,758) (2,241,947)
------------- -------------
Loans - net ........................... $ 241,557,255 $ 200,723,753
============= =============
--------------------------
Net deferred loan fees of $382,235 and $308,944 were allocated to the various
loan categories as of December 31, 2007 and 2006, respectively.
Loans which management has identified as impaired generally are nonperforming
loans. Nonperforming loans include nonaccrual loans or loans which are 90 days
or more delinquent as to principal or interest payments. Following is a summary
of activity regarding the Company's impaired loans:
December 31,
------------
2007 2006
---- ----
Investment in impaired loans
Nonaccrual .................................................................................. $625,017 $ 50,384
Accruing 90 days and over past due .......................................................... - -
-------- --------
Total ................................................................................... $625,017 $ 50,384
======== ========
Average total investment in impaired loans during the year ....................................... $413,500 $399,000
Amount of impaired loans for which an allowance for loan losses is established ................... 625,017 50,384
Allowance for loan losses on impaired loans at year end .......................................... 145,038 19,976
The amount of interest income that would have been included in income if
nonaccrual loans had been current in accordance with their terms and the amounts
of interest income actually accrued and collected were immaterial to the
consolidated financial statements for 2007, 2006 and 2005. The average total
investment in impaired loans during 2005 was $1,052,000. There were no
irrevocable commitments to lend additional funds to debtors owing amounts on
impaired loans at December 31, 2007.
As of December 31, 2007 and 2006, 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.
B-36
Transactions in the allowance for loan losses are summarized below:
Years Ended December 31,
------------------------
2007 2006 2005
---- ---- ----
Balance at January 1 .............. $ 2,241,947 $ 2,266,086 $ 2,239,873
Provision charged to expense ...... 594,000 65,000 250,000
Recoveries ........................ 30,098 44,981 79,374
Charge-offs ....................... (292,287) (134,120) (303,161)
----------- ----------- -----------
Balance at December 31 ............ $ 2,573,758 $ 2,241,947 $ 2,266,086
=========== =========== ===========
Certain officers and directors of the Company and its 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 $5,356,855 and
$6,238,430 at December 31, 2007 and 2006, respectively. During 2007, $691,347 of
new loans were made and repayments totaled $1,572,922.
NOTE E - PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
December 31,
------------
2007 2006
---- ----
Land ....................................... $ 2,916,997 $ 2,916,997
Buildings and land improvements ............ 5,400,702 4,569,189
Furniture and equipment .................... 3,279,919 3,027,933
----------- -----------
Total ................................. 11,597,618 10,514,119
Accumulated depreciation ................... 2,976,093 2,576,637
----------- -----------
Premises and equipment - net .......... $ 8,621,525 $ 7,937,482
=========== ===========
Depreciation expense for the years ended December 31, 2007, 2006 and 2005 was
$399,456, $373,883, and $298,889, respectively. During 2006, the Company
capitalized interest of $18,218 to construction in progress.
NOTE F - DEPOSITS
A summary of deposits follows:
December 31,
------------
2007 2006
---- ----
Noninterest bearing demand ................... $ 42,288,971 $ 40,576,371
Interest bearing transaction accounts ........ 55,389,292 52,619,354
Savings ...................................... 21,457,667 30,656,176
Time deposits $100,000 and over .............. 96,547,178 68,276,913
Other time deposits .......................... 140,183,445 115,828,495
------------ ------------
Total deposits .......................... $355,866,553 $307,957,309
============ ============
As of December 31, 2007 and 2006, local governmental deposits comprised
approximately 12% and 13% of total deposits, respectively. As of December 31,
2007 and 2006, $153,964 and $141,405, respectively, of overdrawn demand deposit
balances have been reclassified as loans. As of December 31, 2007 and 2006,
deposits of directors, officers and their related business interests totaled
approximately $7,817,000 and $12,039,000, respectively.
B-37
At December 31, 2007, the scheduled maturities of time deposits are as follows:
Year Amount
---- ------
2008 $ 223,939,600
2009 12,130,147
2010 225,690
2011 317,871
2012 117,315
Thereafter -
NOTE G - SHORT-TERM BORROWINGS
Short-term borrowings consisted of:
December 31,
------------
2007 2006
---- ----
Federal funds purchased .................... $ - $4,500,000
==== ==========
As of December 31, 2006, federal funds were purchased from a correspondent bank
at a rate of 5.63% and were repayable on January 3, 2007.
As of December 31, 2007, the banking subsidiary had unused short-term credit
accommodations available from unrelated banks which allow the banking subsidiary
to purchase up to $10,900,000 of federal funds. The accommodations limit the
Bank's ability to obtain funds to, in one case, seven consecutive days, or, in
the other case, fourteen days in any calendar month. The counterparties may, in
their sole discretion, allow the banking subsidiary to borrow for time periods
longer than indicated above, but higher rates would be charged for such
borrowings, if any are allowed.
NOTE H - LONG-TERM DEBT
Long-term debt consisted of:
December 31,
------------
2007 2006
---- ----
Fixed rate notes due to FHLB due in
annual installments of $1,000,000
beginning in 2007 ......................... $1,000,000 $2,000,000
Variable rate note due to FHLB
due June 18, 2014 ......................... 3,500,000 3,500,000
---------- ----------
$4,500,000 $5,500,000
========== ==========
Long-term debt represents amounts borrowed from the FHLB under the FHLB's Fixed
Rate Advance Credit and Convertible Advance programs. Borrowings obtained under
the Fixed Rate Credit program were $1,000,000 at a rate of 4.40%, maturing on
June 18, 2008. The remaining $3,500,000 is an FHLB Convertible Advance bearing
interest initially at 3.92% and maturing June 18, 2014. The interest rate on
this Convertible Advance has remained at its initial value subject to the FHLB's
option to convert the advance to a variable rate instrument on any quarterly
interest payment date on or after June 18, 2005 if the 3-month LIBOR rate is
7.00% or greater. In the event of such conversion, this advance would thereafter
be subject to a variable interest rate until maturity. As of December 31, 2007,
the 3-month LIBOR rate was 4.70%. 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.
B-38
The contractual maturities of long-term debt are as follows:
December 31, 2007
-----------------
Fixed Rate Variable Rate Total
---------- ------------- -----
Due in 2008 .................... $1,000,000 $ - $1,000,000
Due in 2014 .................... - 3,500,000 3,500,000
---------- ---------- ----------
Total long-term debt ...... $1,000,000 $3,500,000 $4,500,000
========== ========== ==========
The Company has pledged certain of its first mortgage loans secured by
one-to-four family residential properties and its holdings of FHLB stock,
included in the balance sheet in other investments, (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,
2007 was approximately $35,466,000. The qualifying collateral instruments
required to secure the Company's short-term borrowings and long-term debt as of
December 31, 2007 was approximately $5,415,000.
The banking subsidiary had unused credit availability under the FHLB's blanket
lien agreement of up to an additional $24,041,000 under the FHLB's various
credit programs, subject to pledging and other requirements. The amount of
eligible collateral instruments remaining available as of December 31, 2007 to
secure any additional FHLB borrowings totaled approximately $29,211,000.
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 ($3,346,110 at December
31, 2007) 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.
Stock Dividends - For stockholders of record on December 20, 2007, December 18,
2006 and November 30, 2005 the Company's Board of Directors declared stock
dividends of 10%, 5% and 5%, 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, 2007 and
2006, 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 $80,099
and $(724,154) respectively.
Earnings per Share - Net income per share and net income per share, assuming
dilution, were computed as follows:
B-39
Years Ended December 31,
------------------------
2007 2006 2005
---- ---- ----
Net income per share, basic
Numerator - net income .................................................. $3,330,712 $3,017,969 $3,729,926
========== ========== ==========
Denominator
Weighted average common shares issued and outstanding ................. 3,269,042 3,242,502 3,214,643
========== ========== ==========
Net income per share, basic ............................... $ 1.02 $ .93 $ 1.16
========== ========== ==========
Net income per share, assuming dilution
Numerator - net income .................................................. $3,330,712 $3,017,969 $3,729,926
========== ========== ==========
Denominator
Weighted average common shares issued and outstanding ................. 3,269,042 3,242,502 3,214,643
Effect of dilutive stock options ...................................... 209,068 215,339 186,040
---------- ---------- ----------
Total shares .............................................. 3,478,110 3,457,841 3,400,683
========== ========== ==========
Net income per share, assuming dilution ................... $ .96 $ .87 $ 1.10
========== ========== ==========
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,
2007 and 2006, that the Company and its subsidiary bank exceeded all capital
adequacy minimum requirements.
As of December 31, 2007, 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.
B-40
Minimum for Minimum to be
Actual Capital Adequacy Well Capitalized
------ ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 2007 (Dollars in thousands)
The Company
Total Capital to risk weighted assets ........ $40,405 17.3% $18,642 8.0% NA NA
Tier 1 Capital to risk weighted assets ....... $37,831 16.2% $ 9,321 4.0% NA NA
Tier 1 Capital to average assets (leverage) .. $37,831 9.7% $15,594 4.0% NA NA
Community First Bank
Total Capital to risk weighted assets ........ $38,763 17.3% $18,642 8.0% $23,302 10.0%
Tier 1 Capital to risk weighted assets ....... $36,189 16.2% $ 9,321 4.0% $13,981 6.0%
Tier 1 Capital to average assets (leverage) .. $36,189 9.7% $15,594 4.0% $19,492 5.0%
December 31, 2006
The Company
Total Capital to risk weighted assets ........ $35,457 15.7% $18,063 8.0% NA NA
Tier 1 Capital to risk weighted assets ....... $33,215 14.7% $ 9,032 4.0% NA NA
Tier 1 Capital to average assets (leverage) .. $33,215 9.7% $13,737 4.0% NA NA
Community First Bank
Total Capital to risk weighted assets ........ $34,997 15.5% $18,063 8.0% $22,579 10.0%
Tier 1 Capital to risk weighted assets ....... $32,755 14.5% $ 9,032 4.0% $13,547 6.0%
Tier 1 Capital to average assets (leverage) .. $32,755 9.5% $13,738 4.0% $17,172 5.0%
Stock Options - In 1998, the Company's shareholders approved the 1998 Stock
Option Plan under which an aggregate of 713,467 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 may 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 498,654 shares
(adjusted for stock dividends and splits) of authorized common stock for
issuance upon the exercise of such options. Although some options granted under
the 1989 Plan can still be exercised, no further options may be granted under
the 1989 Plan. 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 two plans. 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 pre-tax expenses of approximately $394,000 being
recognized in 2006 that would otherwise have been recognized in 2007, 2008 and
2009.
B-41
Transactions under the plans are summarized as follows:
Years Ended December 31,
------------------------
2007 2006 2005
---- ---- ----
Average Average
Wtd. Avg. Intrinsic Wtd. Avg. Intrinsic Wtd. Avg.
Exercise Value Exercise Value Exercise
Shares Price (000s) Shares Price (000s) Shares Price
------ ----- ------ ------ ----- ------ ------ -----
Outstanding at beginning of year ....... 520,212 $ 10.95 494,664 $ 9.90 476,687 $ 9.17
Granted ................................ - - 48,164 18.40 40,142 15.67
Exercised .............................. (70,077) 6.82 (22,614) 3.68 (20,839) 4.39
Forfeited or expired ................... (13) 5.55 (2) 3.90 (1,326) 12.71
------- ------- -------
Outstanding at end of year ............. 450,122 11.59 $ 2,435 520,212 10.95 $ 3,970 494,664 9.90
======= ======= =======
Options exercisable at year-end ........ 450,122 $ 11.59 $ 2,435 520,212 $ 10.95 $ 3,970 403,893 $ 9.08
======= ======= =======
-------------------
Numbers of shares and exercise prices have been adjusted in the table above for
a 10% stock dividend effective December 20, 2007 and 5% stock dividends
effective December 18, 2006 and November 30, 2005.
The aggregate intrinsic value of a stock option in the table above represents
the pre-tax intrinsic value (the amount by which the current market value of the
underlying stock exceeds the exercise price of the option) that would have been
received by the option holder had all option holders exercised their options on
December 31, 2007. This amount changes based on changes in the market value of
the Company's stock.
Information pertaining to the fair values of stock options issued in each of the
past three years and the methods and assumptions used to compute those values
are included in Note A.
The following table summarizes information about the options outstanding:
December 31, 2007
-----------------
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average
Remaining Weighted Weighted
Number Contractual Average Number Average
Range of Exercise Prices Outstanding Life (Years) Exercise Price Outstanding Exercise Price
------------------------ ----------- ------------ -------------- ----------- --------------
$ 2.84 to $ 5.19 70,779 0.31 $ 5.16 70,779 $ 5.16
10.65 to 12.74 291,200 3.88 11.47 291,200 11.47
15.67 to 18.61 88,143 7.86 17.16 88,143 17.16
------- -------
450,122 4.10 $11.59 450,122 $ 11.59
======= =======
Of the 1,212,121 shares of the Company's authorized common stock originally
reserved for issuance upon the exercise of options under the plans, 175,814
shares authorized under the 1998 plan remained available for future grants as of
December 31, 2007. However, the 1998 plan terminated on March 19, 2008, and no
further options may be granted under the plan after that date. The Company has
no current plans to adopt a new stock option plan, though the Board may decide
to do so in the future.
B-42
NOTE J - OTHER EXPENSES
Other expenses are summarized below:
Years Ended December 31,
------------------------
2007 2006 2005
---- ---- ----
Salaries and employee benefits ...................................... $4,120,766 $3,647,451 $2,902,693
Net occupancy expense ............................................... 432,852 346,610 267,760
Furniture and equipment expense ..................................... 441,010 431,078 344,687
Other expense
Stationery, printing and postage .............................. 286,382 299,042 247,126
Telephone ..................................................... 152,656 143,422 102,249
Advertising and promotion ..................................... 118,565 124,968 97,258
Professional services ......................................... 284,907 202,278 169,465
Insurance ..................................................... 73,991 75,507 67,374
FDIC insurance assessment ..................................... 37,168 35,654 35,785
Directors' compensation ....................................... 94,400 392,471 100,800
Foreclosed assets costs and expenses, net ..................... 3,142 8,154 42,933
Data processing expenses ...................................... 250,728 272,867 236,445
Other ......................................................... 835,029 772,263 805,573
---------- ---------- ----------
Total ..................................................... $7,131,596 $6,751,765 $5,420,148
========== ========== ==========
NOTE K - INCOME TAXES
Income tax expense consisted of:
Years Ended December 31,
------------------------
2007 2006 2005
---- ---- ----
Current
Federal ........................ $ 1,613,312 $ 1,528,379 $ 1,915,653
State .......................... 150,575 136,871 168,353
----------- ----------- -----------
Total current .............. 1,763,887 1,665,250 2,084,006
Deferred
Federal ........................ (266,418) (131,488) (43,114)
----------- ----------- -----------
Total income tax expense ... $ 1,497,469 $ 1,533,762 $ 2,040,892
=========== =========== ===========
The principal components of the deferred portion of income tax expense or
(credit) were:
Years Ended December 31,
------------------------
2007 2006 2005
---- ---- ----
Provision for loan losses ............ $(109,564) $ 7,971 $ (8,656)
Accelerated depreciation ............. (5,049) (18,701) (29,869)
Deferred net loan costs and fees ..... (24,201) (34,576) (4,589)
Writedowns of other real estate ...... - 9,906 -
Non-qualified stock options .......... - (96,088) -
Deferred compensation expense ........ (127,604) - -
--------- --------- ---------
Total .................... $(266,418) $(131,488) $ (43,114)
========= ========= =========
Income before income taxes presented in the consolidated statements of income
for the years ended December 31, 2007, 2006 and 2005 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:
B-43
Years Ended December 31,
------------------------
2007 2006 2005
---- ---- ----
Tax expense at statutory rate ..... $ 1,641,582 $ 1,547,589 $ 1,962,078
State income tax, net of federal
income tax benefit ............ 99,380 90,335 111,403
Tax-exempt interest income ........ (276,416) (220,098) (60,143)
Non-deductible interest expense to
carry tax-exempt instruments .. 46,616 34,608 7,209
Other, net ........................ (13,693) 81,328 20,345
----------- ----------- -----------
Total ................. $ 1,497,469 $ 1,533,762 $ 2,040,892
=========== =========== ===========
Deferred tax assets and liabilities included in the consolidated balance sheet
consisted of the following:
December 31,
------------
2007 2006
---- ----
Deferred tax assets
Allowance for loan losses .................... $ 702,622 $ 593,058
Deferred net loan fees ....................... 126,214 102,013
Non-qualified stock options .................. 96,088 96,088
Deferred compensation ........................ 127,604 -
Unrealized net holding losses on
available-for-sale securities .............. - 405,571
---------- ----------
Gross deferred tax assets ............ 1,052,528 1,196,730
Valuation allowance .......................... - -
---------- ----------
Total ................................ 1,052,528 1,196,730
---------- ----------
Deferred tax liabilities
Accelerated depreciation ..................... 195,411 200,460
Unrealized net holding gains on
available-for-sale securities .............. 44,860 -
---------- ----------
Gross deferred tax liabilities ....... 240,271 200,460
---------- ----------
Net deferred income tax assets ................... $ 812,257 $ 996,270
========== ==========
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 2007, 2006 and 2005, $450,431 was charged, $377,023 was
charged, and $502,764 was credited to other comprehensive income or loss,
respectively. In 2007, $266,418 was credited to income tax expense; in 2006,
$131,488 was credited to income tax expense; and, in 2005, $43,114 was credited
to income tax expense.
Management believes that the Company will fully realize the deferred tax assets
as of December 31, 2007 and 2006 based on refundable income taxes available from
carryback years, as well as estimates of future taxable income.
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
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
B-44
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 2007, 2006 and 2005 totaled $84,941,
$66,764, and $58,983, 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
$386,446 in 2007.
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,
------------
2007 2006
---- ----
Loan commitments ............... $35,953,550 $33,764,489
Standby letters of credit ...... 1,038,600 1,113,600
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 not involved as defendants in
any litigation at December 31, 2007. Management is not aware of any 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.
New Offices - Land intended to be used for the Bank's future expansion has been
obtained 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 OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Values of Financial Instruments," as
amended, requires disclosure of the estimated fair value of on-balance sheet and
off-balance sheet financial instruments. A financial instrument is defined by
SFAS No. 107 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.
Fair value estimates are made at a specific point in time based on relevant
market information about the financial instrument. These estimates do not
reflect any premium or discount that could result from offering for sale at one
time the Company's entire holdings of a particular financial instrument. No
active trading market exists for a significant portion of the Company's
financial instruments. Fair value estimates for these instruments are based on
management's judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments, and
other factors. These estimates are subjective in nature and involve
B-45
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on-and-off balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include net deferred tax assets and
premises and equipment. In addition, the income tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in the estimates.
The following methods and assumptions were used by the Company in estimating the
fair values of its financial instruments:
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 debt securities issued by Government sponsored enterprises is
estimated based on published closing quotations. The fair value of state, county
and municipal securities is generally not available from published quotations;
consequently, their fair values estimates are based on matrix pricing or quoted
market prices of similar instruments adjusted for credit quality differences
between the quoted instruments and the securities being valued. Fair value for
mortgage-backed securities is estimated primarily using dealers' quotes.
The fair value of FHLB stock approximates the carrying amount.
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. 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 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
rates offered for similar commitments. Therefore, the estimated fair values of
these off-balance-sheet financial instruments are nominal.
B-46
The following is a summary of the carrying amounts and estimated fair values of
the Company's financial assets and liabilities:
December 31,
------------
2007 2006
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Financial assets
Cash and due from banks ............................. $ 10,272,260 $ 10,272,260 $ 6,951,934 $ 6,951,934
Interest bearing deposits due from banks ............ 164,781 164,781 66,941 66,941
Federal funds sold .................................. 24,236,000 24,236,000 24,126,000 24,126,000
Securities available-for-sale ....................... 99,026,049 99,026,049 102,487,395 102,487,395
Securities held-to-maturity ......................... 5,663,113 5,625,083 6,595,026 6,529,691
Federal Home Loan Bank stock ........................ 839,900 839,900 980,200 980,200
Loans ............................................... 241,557,255 238,670,000 200,723,753 200,447,000
Accrued interest receivable ......................... 2,529,155 2,529,155 2,181,572 2,181,572
Financial liabilities
Deposits ............................................ 355,866,553 357,308,000 307,957,309 307,326,000
Accrued interest payable ............................ 3,479,569 3,479,569 2,702,946 2,702,946
Short-term borrowings ............................... - - 4,500,000 4,500,000
Long-term debt ...................................... 4,500,000 4,483,000 5,500,000 5,497,000
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,
------------
2007 2006
---- ----
Notional/ Estimated Notional/ Estimated
Contract Fair Contract Fair
Amount Value Amount Value
------ ----- ------ -----
Off-balance sheet commitments
Loan commitments ..................................... $35,953,550 $ - $33,764,489 $ -
Standby letters of credit ............................ 1,038,600 - 1,113,600 -
NOTE O - ACCOUNTING CHANGES
Hybrid Financial Instruments - The provisions of Statement of Financial
Accounting Standards No. 155 ("SFAS No. 155"), "Accounting for Certain Hybrid
Financial Instruments, an amendment of FASB Statements No. 133 and 140," were
effective January 1, 2007. The Company has no affected financial instruments and
adoption of the Statement had no effect on the Company's consolidated financial
statements.
Servicing of Financial Assets - The provisions of Statement of Financial
Accounting Standards No. 156 ("SFAS No. 156"), "Accounting for Servicing of
Financial Assets, an amendment of FASB Statement No. 140" were effective January
1, 2007. This Statement potentially simplified the accounting for separately
recognized loan servicing assets and liabilities and any financial instruments
used to hedge risks associated with those assets and liabilities. Under SFAS
156, separately recognized servicing assets and liabilities are accounted for
initially at fair value, if practicable, and subsequently are accounted for
either at fair value or amortized over the economic lives of the related loans.
If the fair value method of subsequent valuation is elected, SFAS No. 156
permits income statement recognition of the potential offsetting changes in the
fair values of the financial servicing rights and liabilities and the derivative
instruments used to hedge them in the same accounting period. The Company
currently has no separately recognized loan servicing rights or liabilities, and
adoption of SFAS No. 156 had no effect on the Company's consolidated financial
statements.
Fair Value Measurements - The provisions of Statement of Financial Accounting
Standards No. 157 ("SFAS No. 157"), "Fair Value Measurements," are effective for
B-47
fiscal years beginning after November 15, 2007 (January 1, 2008 for the
Company). SFAS No. 157 defines fair value and establishes a framework for
measuring fair value in GAAP. The Statement describes fair value as being based
on a hypothetical transaction to sell an asset or transfer a liability at a
specific measurement date, as considered from the perspective of a market
participant who holds the asset or owes the liability (an exit price
perspective). In addition, fair value should be viewed as a market-based
measurement, rather than an entity-specific measurement. Therefore, fair value
should be determined based on the assumptions that market participants would use
in pricing an asset or liability, including all risks and restrictions that may
be associated with that asset or liability. SFAS No. 157 does not amend the
definition of fair value used in conjunction with Share-Based Payments accounted
for under SFAS No. 123(R). The adoption of SFAS No. 157 in 2008 is not expected
to have a material effect on the Company's consolidated financial statements.
Accounting for Uncertainty in Income Taxes - The provisions of Financial
Accounting Standards Board Interpretation No. 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,"
clarify the accounting for uncertainty in income tax positions. FIN 48
prescribes a two-step evaluation process that includes both a recognition
threshold and a measurement attribute for tax positions taken or expected to be
taken in a tax return. The provisions of FIN 48 were effective for the Company
as of January 1, 2007. The adoption of FIN 48 did not have a material effect on
the Company's consolidated financial statements.
Fair Value Option -The provisions of Statement of Financial Accounting Standards
No. 159 ("SFAS No. 159"), "The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB Statement No. 115," are
effective as of January 1, 2008. SFAS No 159 allows entities to choose whether
or not to measure many financial instruments and certain other items at fair
value. However, the Statement also specifies the times at which an entity is
allowed choose to elect the fair value option for a particular item. For
eligible financial instruments that an entity elects to measure at fair value,
all changes in fair value, including both unrealized and realized gains and
losses, will be recognized in income. The Company currently does not expect to
value any items using the fair value option of SFAS No. 159 and adoption of the
Statement, therefore, is expected to have no effect on the Company's financial
statements.
B-48
NOTE P - COMMUNITY FIRST BANCORPORATION (PARENT COMPANY ONLY)
December 31,
------------
2007 2006
---- ----
Condensed Balance Sheets
Assets
Cash .................................................................... $ 1,633,623 $ 1,172,196
Investment in banking subsidiary ........................................ 36,269,433 32,030,672
Other assets ............................................................ 7,932 12,162
----------- -----------
Total assets ....................................................... $37,910,988 $33,215,030
=========== ===========
Liabilities
Other liabilities ....................................................... $ - $ -
Shareholders' equity .......................................................... 37,910,988 33,215,030
----------- -----------
Total liabilities and shareholders' equity ......................... $37,910,988 $33,215,030
=========== ===========
Years Ended December 31,
------------------------
2007 2006 2005
---- ---- ----
Condensed Statements of Income
Income
Interest income ........................................... $ 41,048 $ 38,182 $ 15,191
Other income .............................................. - - 6,070
----------- ----------- -----------
Total income ......................................... 41,048 38,182 21,261
----------- ----------- -----------
Expenses
Other expenses ............................................ 64,378 73,953 53,098
----------- ----------- -----------
Total expenses ....................................... 64,378 73,953 53,098
----------- ----------- -----------
Income (loss) before income taxes and equity in
undistributed earnings of banking subsidiary .............. (23,330) (35,771) (31,837)
Income tax expense (credit) ..................................... (7,932) (12,162) (10,825)
Equity in undistributed earnings
of banking subsidiary ..................................... 3,346,110 3,041,578 3,750,938
----------- ----------- -----------
Net income ...................................................... $ 3,330,712 $ 3,017,969 $ 3,729,926
=========== =========== ===========
Years Ended December 31,
------------------------
2007 2006 2005
---- ---- ----
Condensed Statements of Cash Flows
Operating activities
Net income ......................................................... $ 3,330,712 $ 3,017,969 $ 3,729,926
Adjustments to reconcile net income to net
cash used by operating activities
Equity in undistributed earnings
of banking subsidiary ........................... (3,346,110) (3,041,578) (3,750,938)
Decrease (increase) in other assets ............... 4,230 (1,337) 2,625
----------- ----------- -----------
Net cash used by operating activities ........... (11,168) (24,946) (18,387)
----------- ----------- -----------
Financing activities
Exercise of employee stock options ................................. 478,090 83,197 92,059
Payment of cash in lieu of fractional
shares for stock dividend ..................................... (5,495) (6,803) (6,349)
----------- ----------- -----------
Net cash provided by financing activities ....... 472,595 76,394 85,710
----------- ----------- -----------
Increase in cash and cash equivalents .................................... 461,427 51,448 67,323
Cash and cash equivalents, beginning ..................................... 1,172,196 1,120,748 1,053,425
----------- ----------- -----------
Cash and cash equivalents, ending ........................................ $ 1,633,623 $ 1,172,196 $ 1,120,748
=========== =========== ===========
B-49
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
forwarding-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,"
"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 the failure of assumptions underlying the establishment of the
allowance for loan losses and other estimates, including the
value of collateral securing loans;
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.
B-50
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 subsidiary, Community First Bank (the "Bank"), 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. Per share net income and net income,
assuming dilution, have been adjusted to reflect a 10% stock dividend effective
December 20, 2007 and 5% stock dividends effective December 18, 2006 and
November 30, 2005.
Earnings Performance
2007 Compared with 2006
For the year ended December 31, 2007, the Company recorded net income
of $3,331,000, an increase of $313,000, or 10.4%, over net income of $3,018,000
for 2006. Net income per share for 2007 was $1.02 compared with $.93 for 2006.
Per share net income, assuming dilution from outstanding stock options, was $.96
for 2007 and $.87 for 2006. Return on average assets was .88% for 2007 compared
with .89% for 2006. Return on average shareholders' equity was 9.46% for 2007
compared with 9.87% for 2006.
Net income for 2007 increased due to increased amounts of net interest
income and other income. Partially offsetting those factors were increased
expenses resulting from an increase of $529,000 in the amount provided for loan
losses during 2007, expenses related to the opening and operation of a new
banking office in the City of Anderson and the effects of agreements between the
Company and its Chief Executive Officer related to his compensation and
retention.
Higher volumes of interest earning assets and interest bearing
liabilities resulted in increased interest income and interest expenses.
Interest income increased $3,978,000 with approximately 71% of the increase
attributable to higher average amounts of interest earning assets and 29%
attributable to higher interest rates earned. Interest expense increased
$2,845,000. Approximately 53% of this increase was attributable to higher rates
paid for interest bearing deposit accounts and borrowings.
Year-end total interest earning assets increased $36,840,000 during
2007. Total loans increased $41,165,000, but securities available-for-sale
decreased $3,461,000 and securities held-to-maturity decreased $932,000. Average
loans for 2007 increased $40,321,000 and average investment securities decreased
$6,882,000 compared with the 2006 average amounts.
Year-end total deposits grew $47,910,000 during 2007 with more than 96%
of that growth in interest bearing deposits. Average interest bearing deposits
during 2007 were $32,080,000 more than in 2006 and average noninterest bearing
demand deposits were $1,902,000 more than in 2006.
A significant portion of the growth in loans and deposits during 2007
was attributable to continued growth of the Bank's new office in Seneca.
The yield on average earning assets for 2007 was 6.57%, an increase of
56 basis points over the 2006 yield, and the rate paid on average interest
bearing liabilities for 2007 increased by 55 basis points to 4.42% in 2007 from
3.87% in 2006. The combination of these factors resulted in a 1 basis point
increase in the interest rate spread. Net yield on earning assets increased by 7
basis points to 2.89%.
The Bank opened a new full-service banking office on Highway 81 in the
City of Anderson, SC during the fourth quarter of 2007. The cost of construction
was approximately $800,000. Land intended to be used for the Bank's further
expansion in Anderson County has also been obtained near Powdersville, SC. The
Company has established neither a budget nor a schedule for the construction of
that proposed office. During 2007, the Company, the Bank and their Chief
Executive Officer entered into agreements related to his compensation and
retention. The subsidiary Bank purchased life insurance contracts to partially
fund its obligations under those agreements. Approximately $386,000 of expenses
related to those agreements is included in compensation expenses for 2007.
Increases in the cash surrender value of the insurance contracts during 2007 of
approximately $108,000 are included in other income for 2007.
The provision for loans losses for 2007 was $594,000, an increase of
$529,000 or 813.8% from the $65,000 provided in 2006. For 2007, net loan
B-51
charge-offs were $262,000, or $173,000 more than in 2006. Year end 2007
nonperforming loans (nonaccrual loans and accruing loans 90 days or more past
due) increased $575,000 from the amount at the end of 2006. Potential problem
loans decreased $88,000 by the end of 2007 compared with the end of 2006. Of the
2007 year end potential problem loans, 76.1% were secured by real estate
mortgages compared with 86.4% at the end of 2006.
2006 Compared with 2005
For the year ended December 31, 2006, the Company recorded net income
of $3,018,000, a decrease of $712,000, or 19.1%, from net income of $3,730,000
for 2005. Net income per share for 2006 was $.93 compared with $1.16 for 2005.
Per share net income, assuming dilution from outstanding stock options, was $.87
for 2006 and $1.10 for 2005. Return on average assets was 0.89% for 2006
compared with 1.21% for 2005. Return on average shareholders' equity was 9.87%
for 2006 compared with 13.65% for 2005.
Net income for 2006 decreased due to several primary factors: a
contraction of net interest income, the adoption of an accounting standard that
resulted in the initial recognition in 2006 of share-based compensation expenses
associated with certain stock options granted to employees and directors, and
expenses related to the opening of a new banking office in Seneca, SC and
relocation of the corporate executive offices. Partially offsetting these
factors, the provision for loan losses charged to expense during 2006 was
$185,000 less than in 2005.
Rising interest rates during the first seven months of 2006, coupled
with increasing volumes of interest earning assets and interest bearing
liabilities, resulted in increased interest earnings and interest expenses
across all major categories. Total loans grew $33,648,000 during 2006. Interest
income increased $3,677,000 with approximately half of the increase attributable
to higher average amounts of interest earning assets and half attributable to
higher interest rates earned. Interest expense increased $3,764,000.
Approximately 83% of this increase was attributable to higher interest rates
paid for interest bearing deposit accounts and borrowings.
Total deposits grew $27,964,000 during 2006 with more than 90% of that
growth accounted for in interest bearing deposits. Average interest bearing
deposits during 2006 were $27,166,000 more than in 2005 and average noninterest
bearing demand deposits were $3,522,000 more than in 2005.
The significant growth in loans and deposits in 2006 was attributable
primarily to the opening of the Bank's new Seneca office.
The yield on average earning assets for 2006 was 6.01%, an increase of
66 basis points over the 2005 yield. However, the rate paid on average interest
bearing liabilities for 2006 increased by 115 basis points to 3.87% in 2006 from
2.72% in 2005. Promotional rates paid for deposits in conjunction with the
opening of the new Seneca office were a significant factor in this increase. The
combination of these factors resulted in a decrease in the interest rate spread
of 49 basis points, and the net yield on earning assets decreased by 30 basis
points to 2.82%.
The Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004), "Share-Based Payment," ("SFAS 123(R)") effective on January 1,
2006. Accordingly, compensation expenses related to certain stock options issued
to officers and directors were initially recognized in 2006. Also in 2006, the
Company modified the terms of all remaining affected non-vested options to
provide for the vesting of those options in 2006. As a result, all of the future
compensation costs associated with the Company's option grants to date were
accelerated and recognized during 2006. Share-based compensation expenses
recognized in 2006 totaled $593,000. Of this amount, $302,000 was included in
salaries and employee benefits and $291,000 was included in other expense.
During the second quarter of 2006, the Company completed construction
of a multi-story office building which houses an additional full service banking
office in Seneca, SC and the Company's corporate offices. Certain officers and
other personnel were relocated into the building, as well.
The provision for loans losses for 2006 was $65,000, a decrease of
$185,000 or 74.0% from the $250,000 provided in 2005. For 2006, net loan
charge-offs decreased by $135,000 from the 2005 amount. Year end 2006
nonperforming loans (nonaccrual loans and accruing loans 90 days or more past
due) decreased $855,000 from the amount at the end of 2005. Potential problem
loans increased $1,028,000 by the end of 2006 compared with the end of 2005. Of
the 2006 year end potential problem loans, 86.4% were secured by real estate
mortgages compared with 83.7% at the end of 2005.
B-52
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.
2007 Compared with 2006
Net interest income was $10,348,000 and $9,215,000 for 2007 and 2006,
respectively. Interest income for 2007 was $23,578,000, an increase of
$3,978,000, or 20.3%, over 2006. Interest expense for 2007 was $13,230,000, an
increase of $2,845,000, or 27.4%, over 2006. The Company experienced higher
average volumes of interest earning assets and interest bearing liabilities in
2007 as well as higher average yields and rates on those instruments.
During the first seven months of 2007, the Federal Reserve maintained
its interest rate targets at levels set previously. Beginning in September 2007,
however, a series of rate cuts began which reduced the Federal Reserve's
Discount Window Primary Credit rate from 6.25% to 4.75% by the end of the year.
During 2007, the amount of loans outstanding increased significantly.
Year-end loans for 2007 were $244,131,000, an increase of $41,165,000, or 20.3%,
over the 2006 year-end amount. The average amount of loans outstanding during
2007 increased by $40,321,000, or 21.9%, over the 2006 average amount. The
average yield earned on loans in 2007 was 7.84%, compared with 7.53% during
2006.
Loans secured by real estate mortgages increased by $37,254,000, or
25.2%, over the 2006 year-end amount. Closed-end loans secured by conventional
1-4 family residential properties increased by $31,448,000, or 36.4%, during
2007. The Company does not originate or hold sub-prime mortgage loans. Although
residential property values in the Company's market areas have not thus far been
affected negatively by the current mortgage crisis to the same extent as in some
other areas of the country, management can make no assurances that local
property values are immune from such effects. The Company generally requires
that borrowers initially provide, and maintain throughout the life of the loan,
significant amounts of equity in real properties used as collateral.
Additionally, and partially in response to the uncertainty surrounding potential
future effects of the current national mortgage crisis on local real estate
values, the Company increased its provision for loan losses in 2007.
Consumer installment loans increased by $4,095,000, or 14.2%, during
2007 primarily due to an increase of $2,543,000, or 19.8%, in the amount of
loans secured by automobiles.
As of December 31, 2007 and 2006, approximately $70,000,000 and
$54,000,000, respectively, or 28.7% and 26.6%, respectively, of the Company's
loan portfolio was composed of variable rate loans directly indexed to movements
in the prime rate.
Competition for deposits in the Company's market areas continued to be
strong during 2007. In response, the Company offered higher rates and interest
bearing deposits increased by $46,197,000, or 17.3%, over the prior year-end
amount, which, as discussed below under the caption "2006 compared with 2005,"
had already been significantly increased over the rates paid in 2005. Time
deposits issued in amounts of $100,000 or more grew by the largest amount of any
deposit category, increasing by $28,270,000, or 41.4%, over the prior year-end
amount. The average rate paid for these deposits in 2007 was 67 basis points
higher than the 2006 average rate. Growth in other time deposits also was
significant, with the 2007 year-end amount increasing by $24,355,000, or 21.0%,
over the 2006 year-end amount. The average rate paid for these deposits in 2007
was 69 basis points higher than in 2006. Savings deposits at the end of 2007
declined by $9,198,000, or 30.0%, from the end of 2006. The average rate paid
for savings deposits in 2007 was only 5 basis points higher than the rate paid
in 2006. The average rate paid for all interest bearing deposits in 2007 was
4.42%, an increase of 55 basis points over the average rate paid in 2006.
2006 Compared with 2005
Net interest income was $9,215,000 and $9,302,000 for 2006 and 2005,
respectively. Interest income for 2006 was $19,600,000, an increase of
$3,677,000, or 23.1%, over 2005. Interest expense for 2006 was $10,385,000, an
increase of $3,764,000, or 56.8%, over 2005. The Company experienced higher
average volumes of interest earning assets and interest bearing liabilities in
2006 as well as higher average yields and rates on those instruments.
Managing net interest margin effectively during 2006 was extremely
challenging. During the first seven months of 2006, the Federal Reserve
B-53
continued regular, quarter-point increases in the federal funds rate which it
began in June 2004. For the remainder of the year, the central bank adopted a
"wait and see" attitude, and maintained its interest rate targets at the levels
set previously. Interest rates applicable to the Company's deposit and loan
products were mainly in the shorter, more volatile end of the maturity spectrum.
The average interest rate spread (average yield on interest earning
assets less the average rate paid on interest bearing liabilities) declined by
49 basis points in 2006 compared with 2005, and the net yield on average earning
assets (net interest income divided by average interest earning assets) declined
by only 30 basis points. This was the result of increasing higher yielding
average loans by a greater percentage than either the other categories of
earning assets or interest bearing liabilities during 2006.
As of December 31, 2006 and 2005, approximately $54,000,000 and
$47,000,000, respectively, or 26.6% and 27.8%, respectively of the Company's
loan portfolio was composed of variable rate loans directly indexed to movements
in the prime rate. The average yield earned on loans in 2006 was 7.53%, compared
with 7.00% during 2005.
Competition for interest bearing deposits was strong in 2006, and the
Company responded by increasing the rates paid for those funds. Additionally, in
conjunction with the opening of the new banking office in Seneca, SC, the
Company offered promotional interest rates that were higher than market rates on
interest bearing transaction account products. As a result, the average rates
paid for those deposit accounts in 2006 were 183 basis points higher than in
2005. Overall, the rates paid for all categories of average interest bearing
deposits increased by 118 basis points for 2006 when compared with 2005, and
interest expense for those funds in 2006 was $3,827,000, or 60.6%, more than in
2005. Year-over-year deposit growth was particularly strong in interest bearing
transaction accounts, primarily due to the promotional rates paid.
B-54
Average Balances, Yields and Rates
Years ended December 31,
------------------------
2007 2006 2005
---- ---- ----
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 ..... $ 157 $ 6 3.82% $ 82 $ 4 4.88% $ 168 $ 5 2.98%
Taxable securities ........................... 89,867 3,890 4.33% 99,922 3,868 3.87% 106,149 3,564 3.36%
Tax-exempt securities (2) .................... 19,630 817 4.16% 16,457 636 3.86% 4,407 150 3.40%
Federal funds sold ........................... 23,730 1,209 5.09% 24,814 1,175 4.74% 21,884 668 3.05%
Federal Home Loan Bank stock ................. 888 56 6.31% 972 52 5.35% 999 38 3.80%
Loans (2) (3) (4) ............................ 224,353 17,600 7.84% 184,032 13,865 7.53% 164,243 11,498 7.00%
-------- -------- -------- ------- -------- -------
Total interest earning assets ....... 358,625 23,578 6.57% 326,279 19,600 6.01% 297,850 15,923 5.35%
Cash and due from banks ...................... 8,370 6,573 4,845
Allowance for loan losses .................... (1,065) (2,263) (2,304)
Unrealized securities gains (losses) ......... (2,286) (2,341) (1,601)
Premises and equipment ....................... 8,189 7,586 5,240
Other assets ................................. 6,227 3,914 3,346
-------- -------- --------
Total assets ........................ $378,060 $339,748 $307,376
======== ======== ========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts ... $ 57,117 $ 1,783 3.12% $ 46,942 $ 1,358 2.89% $ 36,111 $ 383 1.06%
Savings ................................. 25,042 658 2.63% 28,513 736 2.58% 28,586 381 1.33%
Time deposits $100M and over ............ 85,815 4,054 4.72% 72,936 2,953 4.05% 64,821 2,118 3.27%
Other time deposits ..................... 126,588 6,531 5.16% 114,091 5,100 4.47% 105,798 3,438 3.25%
-------- -------- -------- ------- -------- -------
Total interest bearing
deposits .......................... 294,562 13,026 4.42% 262,482 10,147 3.87% 235,316 6,320 2.69%
Short-term borrowings ........................ - - 0.00% 56 2 3.57% 736 18 2.45%
Long-term debt ............................... 4,975 204 4.10% 5,955 236 3.96% 7,456 283 3.80%
-------- -------- -------- ------- -------- -------
Total interest bearing liabilities .. 299,537 13,230 4.42% 268,493 10,385 3.87% 243,508 6,621 2.72%
Noninterest bearing demand deposits .......... 40,099 38,197 34,675
Other liabilities ............................ 3,225 2,489 1,873
Shareholders' equity ......................... 35,199 30,569 27,320
-------- -------- --------
Total liabilities and shareholders'
equity .............................. $378,060 $339,748 $307,376
======== ======== ========
Interest rate spread (5) .................... 2.15% 2.14% 2.63%
Net interest income and net yield
on earning assets (6) .................. $ 10,348 2.89% $ 9,215 2.82% $ 9,302 3.12%
Interest free funds supporting earning
assets (7) ............................. $ 59,088 $ 57,786 $ 54,342
__________________________
(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.
B-55
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
---------------------------------
2007 Compared with 2006 2006 Compared with 2005
----------------------- -----------------------
Volume (1) Rate (1) Total Volume (1) Rate (1) Total
---------- -------- ----- ---------- -------- -----
(Dollars in thousands)
Interest bearing deposits due from banks ............. $ 3 $ (1) $ 2 $ (3) $ 2 $ (1)
Taxable securities ................................... (410) 432 22 (218) 522 304
Tax-exempt securities ................................ 129 52 181 463 23 486
Federal funds sold ................................... (53) 87 34 99 408 507
Federal Home Loan Bank stock ......................... (4) 8 4 (1) 15 14
Loans ................................................ 3,143 592 3,735 1,450 917 2,367
------- ------- ------- ------- ------- -------
Total interest income .............. 2,808 1,170 3,978 1,790 1,887 3,677
------- ------- ------- ------- ------- -------
Interest bearing deposits
Interest bearing transaction accounts .......... 311 114 425 144 831 975
Savings ........................................ (91) 13 (78) (1) 356 355
Time deposits $100M and over ................... 566 535 1,101 287 548 835
Other time deposits ............................ 594 837 1,431 287 1,375 1,662
Short-term borrowings ................................ (2) - (2) (22) 6 (16)
Long-term debt ....................................... (40) 8 (32) (59) 12 (47)
------- ------- ------- ------- ------- -------
Total interest expense ............. 1,338 1,507 2,845 636 3,128 3,764
------- ------- ------- ------- ------- -------
Net interest income ................ $ 1,470 $ (337) $ 1,133 $ 1,154 $(1,241) $ (87)
======= ======= ======= ======= ======= =======
--------------------------------------------
(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 2008. The heightened uncertainty is related to the potential
lingering effects of the "liquidity crunch" that arose in short-term credit
markets late in the third quarter of 2007 and to the government-initiated
response to concerns that a significant number of homeowners across the country
could face foreclosure during 2008 because of certain lending practices,
primarily in the sub-prime segment of the residential housing loan market.
Changes in interest rates that can significantly affect the Company, either
positively or negatively, are possible.
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 $594,000, $65,000 and $250,000 for the years ended December 31, 2007, 2006
and 2005, respectively. The larger provision amount for 2007 resulted from
higher net charge-offs, a significant increase in loans outstanding at the end
of the year, uncertainty about whether the Company's market areas would be
susceptible to the declines in real estate values that have been exhibited
elsewhere, and an increase in the amount of nonaccrual loans. The allowance for
loan losses as a percentage of total loans at year-end was 1.05% for 2007
compared with 1.10% for 2006. Net charge-offs for 2007 were $262,000, an
increase of $173,000 over the 2006 amount. 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.
B-56
Other Income
Noninterest income for 2007 increased by $52,000 over the amount for
2006 due to increases in the cash surrender value of life insurance policies
owned by the Bank and higher amounts of income from ATM and other debit
card-related services. There were no realized gains or losses on sales of
investment securities in 2007 or 2006. Service charges on deposit accounts for
2007 were $42,000 less than in 2006 due to lower activity associated with an
overdraft protection product. Mortgage brokerage income declined to less than
half of its 2006 level as the Company originated more residential mortgage loans
for its own portfolio in 2007.
Noninterest income for 2006 increased by $15,000 over the amount for
2005, primarily due to increased sales of credit life insurance and higher
amounts of income from ATM and other debit card-related services. There were no
realized gains or losses on sales of investment securities in 2006 or 2005.
Mortgage brokerage income for 2006 was $42,000 less than for 2005.
Other Expenses
2007 Compared with 2006
Noninterest expense for 2007 increased by $380,000, or 5.6%, over the
amount for 2006. Salaries and employee benefits increased by $474,000, or 13.0%,
over the amount for 2006 primarily due to $386,000 in deferred compensation
expense recognized under the compensation and retention agreements entered into
with the Company's Chief Executive Officer, which was partially offset by the
non-recurring effects of the adoption of SFAS 123(R) and acceleration of the
vesting schedules of all affected options in 2006. Share-based compensation
expense recognized in salaries and employee benefits in 2006 was approximately
$302,000. During 2006, the Company discontinued granting stock options to its
officers and directors; therefore, there was no comparable expense in 2007. The
remainder of the increase in salaries and benefits is attributable to normal
salary increases, and increases in personnel related to the continued expansion
of the Bank's network of offices.
Net occupancy and furniture and equipment expense for 2007 increased by
$96,000 over the amounts for 2006 due to higher depreciation, real estate taxes
and other expenses related to operating the expanded office network.
Other expenses for 2007 decreased by $190,000 from the 2006 amount. The
non-recurring effects of adopting SFAS 123(R) in 2006 included $291,000 of
directors' compensation that was then included in other operating expenses.
Other expenses decreasing in 2007 including expenses for printing and stationery
(down $13,000), advertising and promotion (down $6,000), other real estate
expenses (down $5,000), and data processing and software expenses (down
$22,000). Other notable increases in other expenses were noted in telephone
expense which increased by $9,000 and professional services expense which
increased by $83,000 primarily for fees paid to a compensation consultant for
services related to the CEO's compensation and retention agreements.
Certain noninterest expenses are expected to continue to increase in
2008, including occupancy and furniture and equipment expense. The Company
continues to expand the Bank's network of offices as evidenced by the new
Seneca, SC office opened in 2006, a new Highway 81 Anderson, SC office which
opened in the fourth quarter of 2007, and the acquisition of property for future
expansion near Powdersville, SC. Management closely monitors noninterest
expenses so that profitability objectives may be achieved while promoting growth
in the Company's market share in Oconee and Anderson counties.
2006 Compared with 2005
Noninterest expense for 2006 increased by $1,332,000, or 24.6%, over
the amount for 2005. Salaries and employee benefits increased by $744,000, or
25.6%, over the amount for 2005 primarily due to the effects of the adoption of
SFAS 123(R), the opening of the new Seneca banking office, and normal periodic
salary increases. Occupancy and furniture and equipment expenses for 2006
increased by $166,000 or 27.1%.
Prior to January 1, 2006, the Company accounted for its stock-based
compensation plans under the recognition and measurement principles of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. No stock-based employee compensation
cost was previously reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
B-57
stock on the date of grant. The Company previously provided only the pro forma
disclosures required by Financial Accounting Standards Board ("FASB") Statement
No. 123, "Accounting for Stock-Based Compensation," as amended. Effective
January 1, 2006, the Company adopted SFAS 123(R), "Share-Based Payment." In the
fourth quarter of 2006, the Company's Board of Directors modified all
outstanding options so that they would be vested immediately. Therefore, all of
the compensation costs for all affected options ever granted were included in
the determination of net income for 2006.
In the second quarter of 2006, the Company completed construction of a
new three-story office building in Seneca, SC where it opened a new full-service
banking office and into which it relocated several of its officers and related
support staff. As a result, the Walhalla banking office and the deposit and
computer operations departments expanded into the floor space previously
occupied by those personnel, the older office in Seneca gained additional office
space, and the Company realized increased efficiency by having its officers
housed in one location.
Income Taxes
For 2007, federal and state income taxes decreased by $37,000 from the
2006 amount. For 2006, federal and state income taxes decreased by $507,000, or
24.8%, to $1,534,000. The effective income tax rates (income tax expense divided
by income before income taxes) were 31.0% for 2007, 33.7% for 2006, and 35.4%
for 2005. The Company's income from nontaxable sources, such as nontaxable
investment securities or loans to local governments, has recently become a more
significant factor in the determination of its effective tax rate. Nontaxable
securities income totaled $817,000 in 2007, $636,000 in 2006, and $150,000 in
2005. Also, 2007 is the first year in which the Company had income representing
increases in the cash surrender value of bank-owned life insurance policies.
Such income, which totaled $108,000, is not subject to federal 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,
------------
2007 2006 2005
---- ---- ----
(Dollars in thousands)
Available-for-sale
Government-sponsored enterprises (GSEs) ............................. $ 56,545 $ 56,204 $ 58,004
State, county and municipal ......................................... 20,288 18,939 9,960
Mortgage-backed securities issued by GSEs ........................... 22,193 27,344 34,106
-------- -------- --------
Total available-for-sale ........................................ 99,026 102,487 102,070
-------- -------- --------
Held-to-maturity
Mortgage-backed securities issued by GSEs ........................... 5,663 6,595 7,751
-------- -------- --------
Total securities ................................................ $104,689 $109,082 $109,821
======== ======== ========
B-58
The following table presents maturities and weighted average yields of
securities at December 31, 2007. 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, 2007
-----------------
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)
Government-sponsored
enterprises (GSEs) .......... $ 14,096 3.58% $ 17,539 4.66% $ 20,894 5.45% $ 4,016 5.83% $ 56,545 4.77%
State, county and municipal ...... - 0.00% 1,284 3.49% 2,499 3.98% 16,505 4.07% 20,288 4.02%
Mortgage-backed securities
issued by GSEs .............. 1,247 3.79% 9,521 3.87% 4,097 3.84% 12,991 4.32% 27,856 4.07%
-------- -------- -------- -------- ---------
Total .................... $ 15,343 3.60% $ 28,344 4.34% $ 27,490 5.08% $ 33,512 4.38% $ 104,689 4.44%
======== ======== ======== ======== =========
____________________________
(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 high-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. The Company believes that its investment in these
securities at these levels is prudent, given the excellent credit ratings of the
GSEs. As of December 31, 2007, securities with a carrying value of $63,852,000
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 2007, 2006 and 2005, 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
2005 through 2007.
The investment portfolio decreased by $4,393,000 in 2007 from the 2006
year-end amount. During 2007, the Company's investment in securities issued by
GSEs increased only minimally, securities issued by state, county and municipal
governments increased by $1,349,000, or 7.1%, and investments in mortgage-backed
securities issued by GSEs decreased by $6,083,000, or 17.9%. The Company last
purchased mortgage-backed securities issued by GSEs in July 2005. Income from
securities issued by state, county and municipal governments is generally exempt
from federal income taxes. Through the interest rate cycle, the advantages of
holding different types of securities, and management's preferences among
categories of earning assets, change. Consequently, the composition of the
investment portfolio may change as management continually seeks to maximize the
yield realized from earning assets within the constraints of other risk
mitigation policies.
The investment portfolio decreased by $739,000 in 2006 from the 2005
year-end amount. During 2006, the Company's investment in securities issued by
state, county and municipal governments increased by $8,979,000 while its
investment in mortgage-backed securities issued by GSEs decreased by $7,918,000,
continuing a trend which began in 2005.
The overall yield on investment securities held as of December 31, 2007
was 4.44%, compared with 4.10% as of December 31, 2006 and 3.61% as of December
31, 2005. Short-term market rates of interest were steady for the first half of
2007 before declining somewhat in the latter half of the year. Those rates
increased somewhat during 2006 and more dramatically in 2005. Longer-term
interest rates have been relatively more stable. These external factors
B-59
determine the yields available on investment securities and contribute
significantly to the Company's pricing structure for its loan and deposit
products.
All mortgage-backed securities held by the Company in 2007 and 2006
were issued by the Federal Home Loan Mortgage Corporation, the Federal National
Mortgage Association or the Government National Mortgage Association.
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.
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,
------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
(Dollars in thousands)
Commercial, financial and industrial
Commercial and industrial .................... $ 22,042 $ 22,268 $ 20,873 $ 21,907 $ 20,592
Purchasing or carrying securities ............ 1,823 2,000 2,136 2,372 2,323
Real estate - construction ......................... 2,201 1,982 674 338 436
Real estate - mortgage
1-4 family residential ....................... 131,944 98,708 72,774 65,360 58,762
Multifamily (5 or more) residential .......... 2,421 1,900 1,229 1,036 2,095
Nonfarm, nonresidential ...................... 50,833 47,337 46,544 43,589 40,834
Consumer installment
Credit card and checking credit .............. 1,407 1,334 1,148 1,036 998
Other ........................................ 31,460 27,437 23,940 22,137 21,610
-------- -------- -------- -------- --------
Total loans ................... $244,131 $202,966 $169,318 $157,775 $147,650
======== ======== ======== ======== ========
Percentage Loan Portfolio Composition
December 31,
------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
Commercial, financial and industrial
Commercial and industrial .............................. 9.0% 11.0% 12.3% 13.9% 13.9%
Purchasing or carrying securities ...................... 0.8% 1.0% 1.3% 1.5% 1.6%
Real estate - construction ................................... 0.9% 1.0% 0.4% 0.2% 0.3%
Real estate - mortgage
1-4 family residential ................................. 54.0% 48.6% 43.0% 41.4% 39.8%
Multifamily (5 or more) residential .................... 1.0% 0.9% 0.7% 0.7% 1.4%
Nonfarm, nonresidential ................................ 20.8% 23.3% 27.5% 27.6% 27.7%
Consumer installment
Credit card and checking credit ........................ 0.6% 0.7% 0.7% 0.7% 0.7%
Other .................................................. 12.9% 13.5% 14.1% 14.0% 14.6%
----- ----- ----- ----- -----
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.
B-60
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 grew $41,165,000 or 20.3% in 2007, compared with
$33,648,000 or 19.9% in 2006. The ratio of total loans to total deposits at the
end of 2007 was 68.6%, compared with 65.9% at the end of 2006. The percentage
composition of the loan portfolio as to type of loan trended more toward loans
secured by 1-4 family residential real estate and away from commercial,
financial and industrial loans during the five year period ended December 31,
2007.
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 2007, total commercial and industrial loans decreased by $226,000 or
1.0%, compared with an increase of $1,395,000 or 6.7%, during 2006. Loans mainly
for business and investment purposes that are secured by real estate (nonfarm,
nonresidential) increased by $3,496,000 or 7.4% in 2007, compared with an
increase of $793,000 or 1.7% in 2006. 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 comprised approximately 76% and
73% of the Company's loan portfolio at the end of 2007 and 2006, respectively.
Real estate mortgage loans of all types grew $37,253,000 during 2007 and by
$27,398,000 during 2006. 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, loans with high
loan-to-value ratios (without requiring the purchaser to obtain private mortgage
insurance), 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, have so far remained relatively steady and have not
suffered the precipitous decreases seen in some areas, though there can be no
assurance that such values will not suffer declines in the future. High
foreclosure rates drive down property values, are related to higher crime rates,
displace families, and have other negative effects on the local and national
economies. 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 initiated a series
of interest rate cuts to provide stimulus to the national economy and has on
several occasions proactively provided liquidity to the banking system.
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, 2007, as well as the type of
interest requirement on such loans.
B-61
December 31, 2007
-----------------
Due in Due after
One Year One through Due after
or Less Five Years Five Years Total
------- ---------- ---------- -----
(Dollars in thousands)
Commercial, financial and industrial ............................... $ 10,199 $ 12,624 $ 1,042 $ 23,865
Real estate - construction ......................................... 519 1,624 58 2,201
Real estate - mortgage ............................................. 68,804 75,154 41,240 185,198
Consumer installment ............................................... 8,747 21,276 2,844 32,867
-------- --------- -------- ---------
Total loans ....................................... $ 88,269 $ 110,678 $ 45,184 $ 244,131
======== ========= ======== =========
Predetermined rate, maturity greater than one year ................. $ 101,348 $ 10,635 $ 111,983
========= ======== =========
Variable rate or maturity within one year .......................... $ 88,269 $ 9,330 $ 34,549 $ 132,148
======== ========= ======== =========
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. 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:
Nonaccrual and Past Due Loans
December 31,
------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
(Dollars in thousands)
Nonaccrual loans ........................................ $ 625 $ 50 $ 900 $1,465 $ 997
Accruing loans 90 days or more past due ................. - - 5 9 -
------ ------ ------ ------ ------
Total ...................................... $ 625 $ 50 $ 905 $1,474 $ 997
====== ====== ====== ====== ======
Percent of total loans .................................. 0.3% 0.0% 0.5% 0.9% 0.7%
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 and the amounts of interest income actually accrued
and collected were immaterial to the consolidated financial statements for 2007,
2006 and 2005.
As of December 31, 2007, 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 (nonaccrual or past due 90 days or
more and still accruing). 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
B-62
the current loan repayment terms. The total amount of loans outstanding at
December 31, 2007 determined by management to be potential problem loans was
$3,088,000, a decrease of $88,000 from the amount of such loans as of December
31, 2006. 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 information about the types of
collateral securing potential problem loans.
December 31, 2007
-----------------
Amount %
------ ------
(Dollars in thousands)
Real estate mortgage ....................... $2,349 76.1%
Vehicles ................................... 131 4.2%
Mobile homes ............................... 16 0.5%
Other ...................................... 467 15.1%
Unsecured .................................. 125 4.1%
------ -----
Total ........................... $3,088 100.0%
====== =====
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.
Management believes that an aggregate evaluation that emphasizes
individual loan risk grades and specific problem loan allocations is more
meaningful than an allocation by loan categories. Management is not aware of any
significant degree of increased exposure, risk of collection or other adverse
features in any particular category of loans. 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.
B-63
Summary of Loan Loss Experience
Years Ended December 31,
------------------------
2007 2006 2005 2004 2003
---- ---- ---- ---- ----
(Dollars in thousands)
Total loans outstanding at end of period .......................... $244,131 $202,966 $169,318 $157,775 $147,650
Average amount of loans outstanding ............................... 224,353 184,032 164,243 152,546 142,322
Balance of allowance for loan losses - beginning .................. $ 2,242 $ 2,266 $ 2,240 $ 2,197 $ 1,950
-------- -------- -------- -------- --------
Loans charged off
Commercial and industrial .................................... 88 13 - 31 305
Real estate - mortgage ....................................... 13 6 61 104 -
Consumer installment ......................................... 191 115 242 226 -
-------- -------- -------- -------- --------
Total charge-offs ...................................... 292 134 303 361 305
-------- -------- -------- -------- --------
Recoveries of loans previously charged off
Commercial and industrial .................................... - - - 6 30
Real estate - mortgage ....................................... - 31 10 - -
Consumer installment ......................................... 30 14 69 18 -
-------- -------- -------- -------- --------
Total recoveries ....................................... 30 45 79 24 30
-------- -------- -------- -------- --------
Net charge-offs ................................................... 262 89 224 337 275
-------- -------- -------- -------- --------
Additions to allowance charged to expense ......................... 594 65 250 380 522
-------- -------- -------- -------- --------
Balance of allowance for loan losses - ending ..................... $ 2,574 $ 2,242 $ 2,266 $ 2,240 $ 2,197
======== ======== ======== ======== ========
Ratios
Net charge-offs to average loans ............................. 0.12% 0.05% 0.14% 0.22% 0.19%
Net charge-offs to loans at end of period .................... 0.11% 0.04% 0.13% 0.21% 0.19%
Allowance for loan losses to average loans ................... 1.15% 1.22% 1.38% 1.47% 1.54%
Allowance for loan losses to loans at end of period .......... 1.05% 1.10% 1.34% 1.42% 1.49%
Net charge-offs to allowance for loan losses ................. 10.18% 3.97% 9.89% 15.04% 12.52%
Net charge-offs to provision for loan losses ................. 44.11% 136.92% 89.60% 88.68% 52.68%
Deposits
The average amounts and percentage composition of deposits held by the
Company for the years ended December 31, 2007, 2006 and 2005, are summarized
below:
Average Deposits
Years Ended December 31,
------------------------
2007 2006 2005
Amount % Amount % Amount %
------ ----- ------ ----- ------ ------
(Dollars in thousands)
Noninterest bearing demand ..................... $ 40,099 12.0% $ 38,197 12.7% $ 34,675 12.8%
Interest bearing transaction accounts .......... 57,117 17.1% 46,942 15.6% 36,111 13.4%
Savings ........................................ 25,042 7.5% 28,513 9.5% 28,586 10.6%
Time deposits $100M and over ................... 85,815 25.6% 72,936 24.3% 64,821 24.0%
Other time deposits ............................ 126,588 37.8% 114,091 37.9% 105,798 39.2%
-------- ----- -------- ----- -------- -----
Total deposits ..................... $334,661 100.0% $300,679 100.0% $269,991 100.0%
======== ===== ======== ===== ======== =====
As of December 31, 2007, there were $96,547,000 in time deposits of
$100,000 or more. Approximately $25,246,000 mature within three months,
B-64
$32,252,000 mature over three through six months, $34,559,000 mature over six
through twelve months and $4,490,000 mature after one year. This level of large
time deposits, as well as the growth in other deposits, is attributed to growth
planned by management. The vast majority of time deposits $100,000 and over are
acquired within the Company's market areas in the ordinary course of business
from customers with standing banking relationships. As of December 31, 2007,
approximately $23,345,000 of time deposits of $100,000 or more represented
deposits of local governmental entities. 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 does not purchase
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 share divided by net income per
share), and equity to assets ratio (average equity divided by average total
assets) for each period indicated.
Years Ended December 31,
------------------------
2007 2006 2005
---- ---- ----
Return on assets ............. 0.88% 0.89% 1.21%
Return on equity ............. 9.46% 9.87% 13.65%
Dividend payout ratio ........ 0.00% 0.00% 0.00%
Equity to assets ratio ....... 9.31% 9.00% 8.89%
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 on 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 65.8% of average
total assets during 2007 compared with 67.0% during 2006. Deposits of several
local governmental entities comprised approximately 12% and 13% of total
deposits at the end of 2007 and 2006, 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. During 2004, the banking subsidiary obtained approximately
$10,000,000 of short-term borrowings and long-term debt from the FHLB. As of
December 31, 2007, $4,500,000 of these borrowings remained outstanding and the
banking subsidiary is eligible to borrow up to an additional $39,779,000 from
the FHLB. Such borrowings are secured by a lien on its investment in FHLB stock
and certain first mortgage residential loans held. The amount of eligible
collateral instruments remaining available as of December 31, 2007 to secure any
additional FHLB borrowings totaled approximately $29,211,000. In addition, the
banking subsidiary has available unused short-term lines of credit to purchase
up to an additional $10,900,000 of federal funds from unrelated correspondent
institutions. The lines generally limit the period of time that any related
borrowings may be outstanding and are cancelable at any time in the sole
discretion of the lender. Asset liquidity is provided from several sources,
including amounts due from banks and federal funds sold. Securities
available-for-sale and funds available from maturing loans and paydowns of
mortgage-backed securities provide secondary sources of liquidity.
Community First Bancorporation'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 parent company. Any of the banking subsidiary's cash
dividends in excess of the amount of the subsidiary's current year-to-date
earnings ($3,346,000 at December 31, 2007) 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
regulatory requirements. In 2007, 2006 and 2005, the parent company received no
cash dividends from its banking subsidiary. Under Federal Reserve Board
regulations, the amounts of loans or advances from the banking subsidiary to the
parent company are also restricted.
B-65
Management believes that the overall liquidity sources of both the
Company and its banking subsidiary are adequate to meet their operating needs.
Capital Resources
Shareholders' equity increased by $4,696,000 and $4,361,000 during 2007
and 2006, respectively. During 2007, net income increased shareholders' equity
by $3,331,000 and the exercise of stock options and related income tax benefits
provided increases totaling $566,000. Other comprehensive income or loss, which
consisted of the change in unrealized holding gains and losses on
available-for-sale securities, net of deferred tax effects, increased
shareholders' equity by $804,000. Approximately $5,000 was paid in lieu of the
issuance of fractional shares in conjunction with the 10% stock dividend
declared in 2007. During 2006, net income increased shareholders' equity by
$3,018,000 and the exercise of employee stock options provided an increase of
$83,000. Share-based compensation costs included in net income were offset by
increases in additional paid-in capital totaling $593,000, as required by SFAS
123(R). Other comprehensive income or loss, which consisted of the change in
unrealized holding gains and losses on available-for-sale securities, net of
deferred tax effects, increased shareholders' equity by $673,000. Approximately
$6,000 was paid in lieu of the issuance of fractional shares in conjunction with
the 5% stock dividend declared in 2006.
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, 2007 and 2006, 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 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.
B-66
Minimum for Minimum to be
Actual Capital Adequacy Well Capitalized
------ ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 2007 (Dollars in thousands)
The Company
Total Capital to risk weighted assets ........ $40,405 17.3% $18,642 8.0% NA NA
Tier 1 Capital to risk weighted assets ....... $37,831 16.2% $ 9,321 4.0% NA NA
Tier 1 Capital to average assets (leverage) .. $37,831 9.7% $15,594 4.0% NA NA
Community First Bank
Total Capital to risk weighted assets ........ $38,763 17.3% $18,642 8.0% $23,302 10.0%
Tier 1 Capital to risk weighted assets ....... $36,189 16.2% $ 9,321 4.0% $13,981 6.0%
Tier 1 Capital to average assets (leverage) .. $36,189 9.7% $15,594 4.0% $19,492 5.0%
December 31, 2006
The Company
Total Capital to risk weighted assets ........ $35,457 15.7% $18,063 8.0% NA NA
Tier 1 Capital to risk weighted assets ....... $33,215 14.7% $ 9,032 4.0% NA NA
Tier 1 Capital to average assets (leverage) .. $33,215 9.7% $13,737 4.0% NA NA
Community First Bank
Total Capital to risk weighted assets ........ $34,997 15.5% $18,063 8.0% $22,579 10.0%
Tier 1 Capital to risk weighted assets ....... $32,755 14.5% $ 9,032 4.0% $13,547 6.0%
Tier 1 Capital to average assets (leverage) .. $32,755 9.5% $13,738 4.0% $17,172 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:
B-67
December 31,
------------
2007 2006
---- ----
(Dollars in thousands)
Loan commitments ................ $ 35,954 $ 33,764
Standby letters of credit ....... 1,039 1,114
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 short-term borrowings outstanding at any
time during 2007.
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 that body'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
B-68
must be applied in assessing the current creditworthiness of the Company's
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
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 loans
are identified as 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 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.
The provision for loan losses charged to expense increased in 2007 to
$594,000 compared with $65,000 in 2006 and $250,000 for 2005. The allowance for
loan losses at the end of 2007 was $2,574,000, an increase of $332,000 from the
allowance of $2,242,000 as of the end of 2006. As a percentage of total loans
outstanding at year end, the allowance for loan losses was 1.05%, 1.10%, 1.34%,
1.42%, and 1.49% for 2007, 2006, 2005, 2004 and 2003, respectively.
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.
If values in a local market become overstated due to relaxed credit standards of
other lenders or other factors, appraisals become less reliable indicators of
the properties' true values. While management believes that the appraised values
of real estate in the Company's markets have been fairly stated, there remains a
higher-than-normal possibility that property values could decline if economic
conditions deteriorate significantly.
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. The Company's loan portfolio increasingly is collateralized by
residential and commercial real estate. Such collateral, combined with other
conservative underwriting standards, is believed to offer the Company
substantial protection from ultimately incurring losses in the event that
foreclosure and liquidation of the collateral is necessary, though there can be
no assurances to that effect.
The $250,000 provision for loan losses 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.
In 2004, the $380,000 provision for loan losses resulted primarily from
higher levels of charge-offs, increased levels of nonaccrual and potential
problem loans, changes in the economic characteristics of the Company's market
area, uncertainty about the effect of increasing interest rates on loan
customers' abilities to cope with potentially higher repayment requirements, and
growth of the loan portfolio.
B-69
In 2003, the $522,000 provision for loan losses resulted primarily from
uncertainty caused by the bankruptcy of the funding subsidiary of a local
mortgage banking operation which resulted in losses of approximately
$200,000,000 among local investors. In making its judgments about the percentage
factors applied to loan risk grade categories in 2003, management was relatively
pessimistic about local conditions. Several key factors influenced management's
development of its loan loss estimates that year, including increases in loans
outstanding, net loan charge-offs, impaired or non-performing loans and
potential problem loans over the previous three years.
Management believes that the local economy remains relatively healthy
and the effects on the Company's borrowers from the 2003 bankruptcy are now
better understood. Manufacturing remains a significant sector of the local
economy, but it continues to be affected by industry pressures including
increased off-shoring of production, especially as related to textile products.
Total year-end loans grew 20.3%, 19.9% and 7.3% in 2007, 2006 and 2005,
respectively. Net loan charge-offs increased to $262,000 in 2007 and decreased
to $89,000 in 2006 from $224,000 in 2005. As of the end of 2007, impaired loans
increased to $625,000 compared with $50,000 one year earlier, representing an
increase of $575,000. Potential problem loans were $3,088,000 as of the end of
2007 compared with $3,176,000 as of the end of 2006 and $2,148,000 at the end of
2005. Collateral values of real estate and vehicles taken on many of the loans
recognized as impaired and potential problem loans in prior years have so far
helped keep charge-offs relatively low considering the total credit exposures
present in those loans.
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.
The total amount of loans secured by real estate mortgages increased by
$83,507,000, or 82.1%, from $101,691,000 at the end of 2003 to $185,198,000 at
the end of 2007. Of this increase, $73,182,000 consisted of loans secured by 1-4
family residential real estate mortgages, and $9,999,000 consisted of loans
secured by nonfarm, nonresidential real estate mortgages. A significant or
prolonged downturn in national and local economic and business conditions could
negatively affect 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
Hybrid Financial Instruments - The provisions of Statement of Financial
Accounting Standards No. 155 ("SFAS No. 155"), "Accounting for Certain Hybrid
Financial Instruments, an amendment of FASB Statements No. 133 and 140," were
effective January 1, 2007. The Company has no affected financial instruments and
adoption of the Statement had no effect on the Company's consolidated financial
statements.
Servicing of Financial Assets - The provisions of Statement of Financial
Accounting Standards No. 156 ("SFAS No. 156"), "Accounting for Servicing of
Financial Assets, an amendment of FASB Statement No. 140" were effective January
1, 2007. This Statement potentially simplified the accounting for separately
recognized loan servicing assets and liabilities and any financial instruments
used to hedge risks associated with those assets and liabilities. Under SFAS
156, separately recognized servicing assets and liabilities are accounted for
initially at fair value, if practicable, and subsequently are accounted for
either at fair value or amortized over the economic lives of the related loans.
If the fair value method of subsequent valuation is elected, SFAS No. 156
permits income statement recognition of the potential offsetting changes in the
fair values of the financial servicing rights and liabilities and the derivative
instruments used to hedge them in the same accounting period. The Company
currently has no separately recognized loan servicing rights or liabilities, and
adoption of SFAS No. 156 had no effect on the Company's consolidated financial
statements.
B-70
Fair Value Measurements - The provisions of Statement of Financial Accounting
Standards No. 157 ("SFAS No. 157"), "Fair Value Measurements," are effective for
fiscal years beginning after November 15, 2007 (January 1, 2008 for the
Company). SFAS No. 157 defines fair value and establishes a framework for
measuring fair value in GAAP. The Statement describes fair value as being based
on a hypothetical transaction to sell an asset or transfer a liability at a
specific measurement date, as considered from the perspective of a market
participant who holds the asset or owes the liability (an exit price
perspective). In addition, fair value should be viewed as a market-based
measurement, rather than an entity-specific measurement. Therefore, fair value
should be determined based on the assumptions that market participants would use
in pricing an asset or liability, including all risks and restrictions that may
be associated with that asset or liability. SFAS No. 157 does not amend the
definition of fair value used in conjunction with Share-Based Payments accounted
for under SFAS No. 123(R). The adoption of SFAS No. 157 in 2008 is not expected
to have a material effect on the Company's consolidated financial statements.
Accounting for Uncertainty in Income Taxes - The provisions of Financial
Accounting Standards Board Interpretation No. 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,"
clarify the accounting for uncertainty in income tax positions. FIN 48
prescribes a two-step evaluation process that includes both a recognition
threshold and a measurement attribute for tax positions taken or expected to be
taken in a tax return. The provisions of FIN 48 were effective for the Company
as of January 1, 2007. The adoption of FIN 48 did not have a material effect on
the Company's consolidated financial statements.
Fair Value Option -The provisions of Statement of Financial Accounting Standards
No. 159 ("SFAS No. 159"), "The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB Statement No. 115," are
effective as of January 1, 2008. SFAS No 159 allows entities to choose whether
or not to measure many financial instruments and certain other items at fair
value. However, the Statement also specifies the times at which an entity is
allowed choose to elect the fair value option for a particular item. For
eligible financial instruments that an entity elects to measure at fair value,
all changes in fair value, including both unrealized and realized gains and
losses, will be recognized in income. The Company currently does not expect to
value any items using the fair value option of SFAS No. 159 and adoption of the
Statement, therefore, is expected to have no effect on the Company's financial
statements.
Quantitative and Qualitative Disclosures about Market Risk
Market risk for the Company consists primarily of interest rate risk,
particularly with respect to appropriately aligning the repricing
characteristics of its earning assets and interest bearing funding sources.
Management actively monitors and manages the Company's interest rate risk
exposure. Other risks, such as credit quality and liquidity risk, are also
managed in the normal course of business, but management considers interest rate
risk to be the most significant market risk facing the Company. Other types of
market risks, such as foreign currency exchange risk and commodity price risk do
not constitute significant risks to the Company in the conduct of its business.
The Company's primary goal is to manage the mix and repricing
characteristics of its interest earning assets and interest bearing liabilities
within the context of a dynamic interest rate environment in such a way that net
interest income grows consistently. To be successful, the Company must be able
to achieve this result while simultaneously maintaining adequate capital and
liquidity to meet its other obligations.
All of the Company's interest bearing deposits and its long-term debt
mature or reprice within five years. Accordingly, the interest rates offered by
the Company to attract such deposits are determined principally by reference to
(1) the yield curve for U. S. Treasury securities with similar remaining
maturities (adjusted for credit quality) and (2) the rates offered by other
financial institutions in the Company's local market areas.
Rates charged for loans and accepted in return for investments in
securities are determined similarly. Certain loan products, such as residential
mortgage loans and loans for the purpose of financing commercial real estate
development, may be relatively long-lived instruments. As such, the life-time
funding of these types of loans usually consists of several short-term deposit
or other debt instruments acquired serially throughout the life of the asset.
Each of those funding events is associated with its own borrowing cost.
Therefore, the profitability of the Company's interest earning assets may vary
as the funding sources for the assets change through time. In some cases,
longer-term deposits and borrowings may be acquired on a variable rate basis.
The repricing characteristics of those sources do not necessarily match with the
repricing characteristics of the assets that may be purchased with those funds.
B-71
Management limits the risks inherent in funding long-term assets with
short-term sources primarily by limiting the potential period of "mismatch" in
the repricing characteristics of affected assets and liabilities or by
attempting to limit the amount by which the rates may vary. Generally, all loans
with original maturities in excess of five years are made on a variable rate
basis with frequent interest rate "reset" dates. Alternatively, when the
repayment term of a loan is initially established in excess of five years, the
Company ordinarily requires that the loan be reviewed and the interest rate
changed to reflect current market conditions at least as often as every five
years.
To mitigate other types of risks that are indirectly related to changes
in interest rate, such as those risks that could arise for customers who have
sufficient resources to service their debts as long as interest rates remain low
but insufficient resources if interest rates rise, the Company generally does
not promote or grant loans to borrowers who qualify for credit only if the
associated initial interest rate is unusually low. Also, consumers are not
encouraged to borrow the maximum amount for which they might qualify.
In addition, the Company does not offer interest-only type loans for
protracted periods, and discourages loans where there are high loan-to-value or
high debt-to-income ratios. The Company generally does not use credit scoring
techniques in isolation as a basis for extending consumer credit.
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 2007 by $155,857,000, resulting in a cumulative
gap ratio of .49. 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 2007 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.
During 2007, the Company was able to prolong the maturities of certain time
deposits beyond the one-year horizon, invested in longer-term securities and
originated more loans with extended maturities or repricing periods.
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
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. Variable rate time
deposits, principally individual retirement accounts, are reflected at the
earlier of their next repricing or maturity dates.
B-72
Interest Sensitivity Analysis
December 31, 2007
-----------------
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 ............ $ 165 $ - $ - $ - $ 165
Securities .......................................... 4,442 12,091 32,677 55,479 104,689
Federal Home Loan Bank stock ........................ 840 - - - 840
Federal funds sold .................................. 24,236 - - - 24,236
Loans (1) ........................................... 62,405 45,055 125,250 10,796 243,506
--------- --------- --------- --------- ---------
Total interest earning assets ............... 92,088 57,146 157,927 66,275 $ 373,436
--------- --------- --------- --------- =========
Interest bearing liabilities
Interest bearing deposits
Interest bearing transaction accounts ........... $ 55,389 $ - $ - $ - $ 55,389
Savings ......................................... 21,458 - - - 21,458
Time deposits $100M and over .................... 25,246 66,811 4,317 173 96,547
Other time deposits ............................. 22,609 109,078 8,234 263 140,184
Long-term debt ...................................... 3,500 1,000 - - 4,500
--------- --------- --------- --------- ---------
Total interest bearing liabilities .......... 128,202 176,889 12,551 436 $ 318,078
--------- --------- --------- --------- =========
Interest sensitivity gap .................................. $ (36,114) $(119,743) $ 145,376 $ 65,839
Cumulative interest sensitivity gap ....................... $ (36,114) $(155,857) $ (10,481) $ 55,358
Gap ratio ................................................. 0.72 0.32
Cumulative gap ratio ...................................... 0.72 0.49
-----------------------------------------------------
(1) Loans are net of nonaccruing loans totaling $625,000.
The following table shows the Company's financial instruments that are
sensitive to changes in interest rates. The Company uses certain assumptions to
estimate fair values and expected maturities. For assets, expected maturities
are based upon contractual maturity, projected repayments and prepayments of
principal, and potential and probable calls of investment securities. For core
deposits without contractual maturity (i.e., interest checking, savings and
money market accounts), the table presents cash flows based on management's
estimate of their most likely runoff pattern. Actual cash flows could vary
significantly from the estimated amounts presented.
B-73
2007 Year-
End
Average Estimated
Yield/Rate 2008 2009 2010 2011 2012 Thereafter Balance Fair Value
---------- ---- ---- ---- ---- ---- ---------- ------- ----------
(Dollars in thousands)
Interest earning assets
Interest-bearing deposits
with other banks .................. 4.00% $ 165 $ - $ - $ - $ - $ - $ 165 $ 165
Investment securities ............... 4.36% 30,766 22,794 14,337 4,574 3,206 29,012 104,689 104,651
Federal funds sold .................. 5.09% 24,236 - - - - - 24,236 24,236
Loans ............................... 7.84% 128,572 55,685 55,371 1,919 1,098 1,486 244,131 238,670
Interest bearing liabilities
Savings ............................. 2.64% $ 21,458 $ - $ - $ - $ - $ - $ 21,458 $ 21,458
Interest bearing transaction accounts 3.24% 55,389 - - - - - 55,389 55,389
Time deposits ....................... 4.98% 224,814 11,258 225 317 117 - 236,731 238,172
-------- ------- ------- ------ ------ ------- -------- --------
Total interest bearing deposits 4.49% 301,661 11,258 225 317 117 - 313,578 315,019
Long-term debt ...................... 4.21% 1,000 - - - - 3,500 4,500 4,483
B-74
[FORM OF PROXY]
REVOCABLE PROXY
PLEASE MARK VOTES
AS IN THIS EXAMPLE
COMMUNITY FIRST BANCORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR SPECIAL MEETING OF SHAREHOLDERS - January 27, 2009
Frederick D. Shepherd, Jr. and Benjamin L. Hiott, or either of them,
with full power of substitution, are hereby appointed as agent(s) of the
undersigned to vote as proxies for the undersigned at a Special Meeting of
Shareholders to be held on Tuesday, January 27, 2009, and at any adjournment
thereof, as follows:
1. Proposal to amend our Articles of Incorporation to authorize the
issuance of 10 million shares of preferred stock with such preferences,
limitations and relative rights, within legal limits, of the class, or
one or more series within the class, as are set by the Board of
Directors.
FOR [ ] AGAINST [ ] ABSTAIN [ ]
2. And, in the discretion of said agents, upon such other business as may
properly come before the meeting, and matters incidental to the conduct
of the meeting. (Management at present knows of no other business to be
brought before the meeting.)
THE PROXIES WILL BE VOTED AS INSTRUCTED. IF NO CHOICE IS INDICATED WITH RESPECT
TO A MATTER WHERE A CHOICE IS PROVIDED, THIS PROXY WILL BE VOTED "FOR" SUCH
MATTER.
Please sign exactly as name appears below. When signing as attorney, executor,
administrator, trustee, or guardian, please give full title. If more than one
trustee, all should sign. All joint owners must sign.
------------------
Please be sure to sign and date Date
this Proxy in the box below.
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Shareholder sign above Co-holder (if any) sign above