U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Exchange Act
For the transition period from ______ to ______
Commission File Number: 0-22543
COMMUNITY FIRST BANKING COMPANY
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
GEORGIA 58-2309605
--------------------------------- ---------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
110 Dixie Street
Carrollton, Georgia 30117
(770) 834-1071
-------------------------------------------------------
(Address of Principal Executive Offices and Telephone Number)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of October 31, 1998, there
were 1,641,027 shares issued and 1,381,291 shares outstanding of the
Registrant's Common Stock, par value $.01 per share.
CONTENTS
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998 (unaudited) and
December 31, 1997
Consolidated Statements of Earnings for the Three and Nine Months Ended
September 30, 1998 and 1997 (unaudited)
Consolidated Statements of Comprehensive Income for the Three and Nine
Months Ended September 30, 1998 and 1997 (unaudited)
Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997 (unaudited)
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
COMMUNITY FIRST BANKING COMPANY
Consolidated Balance Sheets
(In thousands of dollars)
<TABLE>
<CAPTION>
September 30, December 31,
Assets 1998 1997
(Unaudited)
<S> <C> <C>
Cash and due from banks ......................................... 8,243 10,766
Interest-bearing deposits in financial institutions ............. 2,839 1,863
Federal funds sold and repurchase agreements .................... 32,610 17,655
-------- --------
Cash & cash equivalents ...................................... 43,692 30,284
Securities available for sale ................................... 68,965 49,492
Securities held to maturity ..................................... 3,444 6,006
Other investments ............................................... 2,328 2,269
Mortgage loans held for sale .................................... 174 789
Loans, net ...................................................... 262,296 283,602
Premises & equipment net ........................................ 9,024 9,095
Accrued interest receivable ..................................... 2,926 3,169
Other real estate ............................................... 5,505 6,627
Other assets .................................................... 3,384 2,960
-------- --------
Total assets ................................................. 401,738 394,293
======== ========
Liabilities and Stockholders' Equity
Deposits:
Demand ........................................................ 15,893 18,734
Interest-bearing demand ....................................... 58,008 51,198
Savings ....................................................... 36,585 38,273
Time .......................................................... 161,007 161,431
Time, over $100,000 ........................................... 44,462 45,895
-------- --------
Total deposits ............................................. 315,955 315,531
Federal Home Loan Bank advances ................................. 44,343 5,495
Note payable .................................................... 5,000 --
Subordinated debentures ......................................... 900 900
Accrued interest payable & other liabilities .................... 3,840 3,329
-------- --------
Total liabilities .......................................... 370,038 325,255
Stockholders' Equity:
Convertible preferred stock, par value $.01, 96,542 shares issued 1 --
Common stock, $.01 par, 10,000,000 authorized, 1,641,027 issued . 16 24
Additional paid in capital ...................................... 13,446 47,040
Unearned ESOP shares and stock awards ........................... (4,492) (3,476)
Retained earnings ............................................... 26,080 24,725
Treasury stock at cost .......................................... (2,837) --
Accumulated other comprehensive income and (loss)................ (514) 725
-------- --------
Total stockholders' equity ................................. 31,700 69,038
Total liabilities & stockholders' equity ........................ 401,738 394,293
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
COMMUNITY FIRST BANKING COMPANY
Consolidated Statement of Earnings
(Unaudited)
(In thousands of dollars - except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans ....................................... 6,480 6,975 19,570 19,708
Interest-bearing deposits and federal funds sold ................. 419 369 1,050 788
Interest and dividends on investment securities:
U.S. Treasury ................................................. 45 48 135 62
U.S. Govt. agency and mortgage-backed ......................... 1,106 898 3,288 2,577
State, county & municipals .................................... 29 29 88 79
Other ......................................................... 93 41 250 129
-- -- --- ---
Total interest income ....................................... 8,172 8,360 24,381 23,343
Interest Expense:
Interest on deposits:
Demand ......................................................... 399 387 1,109 1,138
Savings ....................................................... 250 283 844 858
Time .......................................................... 2,951 2,956 8,773 8,865
----- ----- ----- -----
3,600 3,626 10,726 10,861
Interest on debt ................................................. 758 170 1,700 692
--- --- ----- ---
Total interest expense ................................. 4,358 3,796 12,426 11,553
----- ----- ------ ------
Net interest income ............................... 3,814 4,564 11,955 11,790
----- ----- ------ ------
Provision for loan losses ........................................ 226 320 561 624
--- --- --- ---
Net interest income after provision for loan losses .... 3,588 4,244 11,394 11,166
Noninterest income:
Service charges on deposits ................................... 810 732 2,280 2,021
Gain (Loss) on calls and sales of securities available for sale 162 - 665 (27)
Insurance commissions ......................................... 134 169 498 396
Miscellaneous ................................................. 221 178 731 300
--- --- --- ---
Total noninterest income ............................... 1,327 1,079 4,174 2,690
Noninterest expenses:
Salaries and employee benefits ................................ 1,813 1,733 5,565 5,322
ESOP & retirement expense ..................................... 416 335 1,666 335
Occupancy and equipment ....................................... 548 561 1,647 1,647
Deposit insurance premiums .................................... 45 47 136 105
Other operating expense ....................................... 1,011 1,299 3,340 3,588
----- ----- ----- -----
Total noninterest expense ............................... 3,833 3,975 12,354 10,997
----- ----- ------ ------
Earnings before income tax expense ...................... 1,082 1,348 3,214 2,859
Income tax expense ............................................... 339 432 1,028 938
--- --- ----- ---
Net earnings ...................................... 743 916 2,186 1,921
=== === ===== =====
Basic earnings per common share .................................. 0.46 0.41 1.18 N/A
Diluted earnings per common share ................................ 0.43 0.41 1.11 N/A
Dividends per common share ....................................... 0.18 0.15 0.48 N/A
</TABLE>
<PAGE>
COMMUNITY FIRST BANKING COMPANY
Consolidated Statements of Comprehensive Income
(Unaudited - in thousands of dollars)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings ................................................................. 743 916 2,186 1,921
Other comprehensive income (loss), net of income taxes:
Unrealized gains (losses) on securities available for sale ................. (1,935) 310 (1,877) 260
Income tax on gains (losses) ............................................... (658) 105 (638) 88
---- --- ---- --
Unrealized gains (losses) arising during the period, net of tax .......... (1,277) 205 (1,239) 172
Less: Reclassification adjustment for gains included in net earnings ....... 162 -- 665 --
Income tax on reclassification on adjustments ............................. 55 -- 226 --
---- --- ---- --
Reclassification adjustment for gains included in net earnings, net of tax 107 -- 439 --
---- --- ---- --
Other comprehensive income (loss)........................................ (1,384) 205 (1,678) 172
------ --- ------ ---
COMPREHENSIVE INCOME (LOSS)................................................... (641) 1,121 508 2,093
==== ===== === =====
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
COMMUNITY FIRST BANKING COMPANY
Consolidated Statements of Cash Flows
(Unaudited - in thousands of dollars)
<TABLE>
<CAPTION>
Nine Months Ended
Sept. 30, Sept. 30
1998 1997
---- ----
<S> <C> <C>
Net earnings ................................................................................. 2,186 1,921
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation, amortization and accretion ................................................... 973 996
Provision for loan losses .................................................................. 561 624
Gain on calls and sales of securities available for sale ................................... (665) --
Gain on sale of other real estate .......................................................... (209) --
Loss (gain) on sales of premises and equipment, net ........................................ 23 (19)
ESOP and stock award compensation expense .................................................. 2,046 --
Change in:
Mortgage loans held for sale ............................................................. 615 69
Accrued interest receivable .............................................................. 243 (502)
Other assets ............................................................................. (425) 135
Accrued interest payable ................................................................. 1,057 293
Accrued expenses and other liabilities ................................................... 233 1,003
------ ------
Net cash provided by operating activities ............................................. 6,638 4,520
------ ------
Cash flows from investing activities:
Proceeds from sales and calls of securities available for sale ............................. 46,494 10,968
Proceeds from calls and maturities of securities held to maturity .......................... 3,078 1,447
Proceeds from maturities of other investments .............................................. 974 --
Purchases of other investments ............................................................. (60) --
Proceeds from sales of other investments ................................................... 220
Purchases of securities available for sale ................................................. (69,071) (20,676)
Net change in loans ........................................................................ 20,745 (30,984)
Proceeds from sale of real estate .......................................................... 1,332 54
Proceeds from sales of premises and equipment .............................................. 30 32
Purchases of premises and equipment ........................................................ (1,003) (1,624)
Organization costs ......................................................................... -- (30)
------ ------
Net cash provided by (used in) investing activities ................................... 2,519 (40,593)
------ ------
Cash flows from financing activities:
Net change in demand and savings deposits .................................................. 2,282 10,349
Net change in time deposits ................................................................ (1,857) (3,084)
Payment of FHLB advances ................................................................... (1,153) --
Proceeds from FHLB advances ................................................................ 40,000 (10,403)
Proceeds from note payable ................................................................. 5,000 --
Payment of subordinated debentures ......................................................... -- (1,100)
Treasury stock purchased ................................................................... (39,219) --
Cash dividends paid ........................................................................ (802) (362)
Net Proceeds from issuance of common stock ................................................. -- 43,250
------ ------
Net cash provided by financing activities .............................................. 4,251 38,650
------ ------
Net change in cash and cash equivalents ................................................ 13,408 2,576
------ -----
Cash and cash equivalents at beginning of year ............................................... 30,284 23,097
------ ------
Cash and cash equivalents at quarter end ..................................................... 43,692 25,673
====== ======
Supplemental disclosure of cash flow information: Cash paid for:
Interest ................................................................................ 11,369 11,261
Income taxes ............................................................................ 1,250 935
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
COMMUNITY FIRST BANKING COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. NATURE OF BUSINESS
GENERAL
Community First Banking Company (the "Company") was incorporated in the
State of Georgia on March 12, 1997, for the purpose of becoming a holding
company to own 100% of the outstanding capital stock of Carrollton Federal Bank,
FSB (the "Savings Bank"). The Savings Bank was organized on August 1, 1994 as a
federal savings bank subsidiary of CF Mutual Holdings (the "Mutual Holding
Company"), a federally chartered mutual holding company. Prior to that date, the
predecessor of the Savings Bank had operated as a mutual savings bank since
1929.
On June 27, 1997, a plan of conversion and reorganization (the
"Conversion") whereby the Company became the unitary holding company for the
Savings Bank and the dissolution of the Mutual Holding Company was completed.
On December 29, 1997, the Savings Bank converted from a federal savings
bank regulated by the Office of Thrift Supervision (the "OTS") to a Georgia
chartered state commercial bank regulated by the Georgia Department of Banking
and Finance (the "Georgia Department") and concurrently changed the name of the
institution to Community First Bank (the "Bank").
NOTE 2. BASIS OF PRESENTATION
Prior to June 27, 1997, the Company had not issued any stock, had no assets or
liabilities, and had not engaged in any business activities other than of an
organizational nature. Accordingly, the financial data for periods prior to June
27, 1997 included herein reflect the operations of the consolidated Mutual
Holding Company.
The accompanying unaudited consolidated financial statements (except for
statements of financial condition on December 31, 1997, which are audited) have
been prepared in accordance with instructions to Form 10Q. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (none of which were other than normal recurring
accruals) necessary for a fair presentation of the financial position and
results of operations for the periods presented have been included. Certain
amounts in the prior year's financial statements have been reclassified to
conform with the 1998 presentation. These reclassifications had no effect on net
income. The accompanying consolidated financial statements include the accounts
of the Company and the Bank. All significant intercompany items have been
eliminated.
The results of operations for the three and nine months ended September 30, 1998
are not necessarily indicative of the results of operations that may be expected
for the year ended December 31, 1998. The accompanying consolidated financial
statements and related notes of Community First Banking Company and subsidiary
should be read in conjunction with the audited consolidated financial statements
and related notes included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
NOTE 3. EARNINGS PER COMMON SHARE
Earnings per common share calculations for the three month period ended
September 30, 1998 and 1997 and the nine month period ended September 30, 1998
are presented based on the net earnings for the three and nine months divided by
the weighted average number of shares outstanding, or 1,603,083 shares (three
months ended September 30, 1998), 2,220,477 shares (three months ended
September 30, 1997) and 1,850,436 shares (nine months ended September 30, 1998).
Net earnings per common share are not presented for the nine months ended
September 30, 1997 since shares issued in conjunction with the conversion and
offering were not outstanding for the majority of the period. Diluted earnings
per common share takes into account the effect of dilution from the assumed
exercise of all outstanding stock options and awards. Diluted earnings per
common share is calculated by dividing net earnings by the average number of
common shares outstanding adjusted for the incremental shares resulting from the
exercise of dilutive options during the period, or 1,715,465 and 2,220,477
shares for the three months ended September 30, 1998 and 1997 respectively, and
1,972,608 for the nine months ended September 30, 1998.
NOTE 4. RECENTLY ISSUED ACCOUNTING STANDARDS
On January 1, 1998, The Company adopted Statement of Financial Accounting
Standard No. 130, "Reporting Comprehensive Income". This Statement establishes
standards for the reporting and display of comprehensive income and its
components in the financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from non-owner sources. For the Company,
comprehensive income includes net income reported in the statements of earnings
and changes in the fair value of securities available for sale reported as a
component of stockholders' equity.
In February 1998, the Financial Accounting Standards Board issued Statement No.
132, "Employer's Disclosures about Pensions and Other Postretirement Benefits".
The new statement revises employers' disclosures about pension and other
postretirement benefit plans but does not change the measurement or recognition
provisions of those plans. Statement No. 132 provides additional information to
facilitate financial analysis and eliminates certain disclosures which are no
longer useful. The statement is effective for fiscal years beginning after
December 15, 1997. The statement is not expected to have a material impact on
the consolidated financial statements of the Company.
In March 1998, the AICPA issued SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which is effective for all
nongovernmental entities for fiscal years beginning after December 15, 1998. The
SOP, among other things, provides guidance as to when and what types of costs
should be capitalized as it relates to internal-use software. Upon adoption, the
Company expects that this SOP will not have any impact on its financial
statements.
In April 1998, the AICPA issued Statement of Position (SOP) 98-5, "Reporting on
the Costs of Start-Up Activities," which is effective for all nongovernmental
entities, except as provided for therein, for fiscal years beginning after
December 15, 1998. The SOP requires that all start-up costs (except for those
that are capitalizable under other GAAP) be expensed as incurred. At September
30, 1998, the Company had approximately $23,000 of deferred costs associated
with organizing the Company. Upon adoption of this statement, it is anticipated
that these deferred costs will be expensed.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
standardizes the accounting for derivative instruments by requiring that all
derivatives be recognized as assets and liabilities and measured at fair value.
This statement is effective for fiscal years beginning after June 15, 1999. The
Company does not believe the provisions of SFAS No. 133 will have a significant
impact on the consolidated financial statements upon adoption.
NOTE 5. DIVIDENDS DECLARED
On February 19, 1998, the Board of Directors of the Company approved a cash
dividend of $.15 per share payable April 1, 1998 for stockholders of record on
March 15, 1998. On June 18, 1998 the Board of Directors of the Company approved
a cash dividend of $.15 per share payable July 1, 1998 for stockholders of
record on June 18, 1998. On September 17, 1998 the Board of Directors of the
Company approved a cash dividend of $.18 per share payable October 1, 1998 for
stockholders of record on September 17, 1998. The dividends are accrued on the
September 30, 1998 consolidated balance sheet.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
On September 30, 1998, the Company had total assets of $401.7 million compared
to $394.3 million at December 31, 1997. This increase of $7.4 million or 1.9% is
primarily due to the purchase of available for sale securities which increased
$19.5 million or 39.4% during the nine month period. Securities purchased during
the first quarter of 1998 were government agency bonds issued by FHLMC and FNMA
totaling $25.5 million and Federal Home Loan Bank (FHLB) bonds totaling $14.5
million. These bonds have a federal tax equivalent yield of 6.59% with an
average duration of 4.96 years. This purchase of bonds was funded by borrowing
$40 million from the FHLB on the Bank's available line of credit. In the three
months ended September 30, 1998 $20 million of these bonds were sold and $12.2
million of GNMA mortgage pool securities were purchased with a yield of 6.42%.
During the three months ended September 30, 1998, $10.9 million of securities
were called and, of this amount, $2.5 million were held to maturity securities.
Net loans decreased $21.3 million or 7.5% during the nine months ended September
30,1998. This decrease in net loans can be attributed to increased reliance on
the secondary market for mortgage loans, increased refinancing activity and more
stringent underwriting criteria in regards to consumer lending.
Other real estate decreased $1.1 million primarily from the sale of one
foreclosed commercial property and two residential properties. Other assets
increased $.4 million primarily as a result of the purchase of an interest rate
cap on February 27, 1998. This interest rate cap was purchased as part of an
arbitrage transaction where the Bank borrowed $40 million of FHLB 7 yr./2 yr.
callable advances, and purchased $40 million in bonds.
Total deposit liabilities were consistent from December 31, 1997 through
September 30 1998 increasing $.4 million or .13%. Demand deposits increased $4.0
million or 5.7%, savings deposits decreased $.4 million or .3% and time deposits
decreased $1.4 million or 3.1%. FHLB advances increased $38.8 million at
September 30, 1998 as compared to December 31, 1997, primarily due to the
aforementioned arbitrage transaction. The Company borrowed $5 million on June 2,
1998 and pledged all the issued and outstanding shares of capital stock owned of
the Bank. The note payable bears interest at prime less one percent with the
entire outstanding balance due December 2, 1998. This money was borrowed to help
fund the repurchase of 238,700 shares of the Company's common stock on June 2,
1998 in accordance with the Company's stock repurchase plan. Accrued interest
payable and other liabilities increased $511,000 or 15.4% during the nine months
ended September 30, 1998. This increase was primarily the result of an increase
of $1,057,000 in accrued interest payable due to the increase in FHLB advances.
On January 8, 1998, 96,542 shares of unregistered restricted convertible
preferred stock were issued under the Management Recognition Plan. The stock
awards are being amortized as earned over a five year period.
On December 29, 1997 the Board of Directors of the Company authorized a stock
repurchase program whereby the Company would to purchase up to 600,000 shares of
its common stock through open market purchases. On August 20, 1998 the Company
completed cumulative common stock repurchases of 600,000 shares. Also on August
20, 1998, the Company's Board of Directors authorized the negotiation for the
repurchase of 172,535 shares from a single shareholder. The purchase of the
172,535 shares was concluded on August 21, 1998. The total of 772,535 shares
were retired during the first nine months of 1998 at an average cost of $47.13
per share.
On August 25, 1998 the Board of Directors of the Company authorized a stock
repurchase program for treasury to fund the future requirements for common stock
as required under the Management Recognition Plan and 1997 Stock Option Plan.
The Company intends to repurchase an aggegrate number of shares of common stock
not to exceed 337,898 shares. In accordance with this plan 71,918 shares have
been purchased at an average price of $39.02 per share as of September 30, 1998.
On September 25, 1998 the Company and First Citizens Corporation (FSTC), Newnan,
Georgia announced the execution of a definitive agreement whereby First Citizens
Bank, a wholly-owned subsidiary of FSTC, would acquire three branches of the
Bank that are located in Wal*Mart Superstores in Newnan, Stockbridge and
Fayetteville, Georgia. The transaction is subject to regulatory approval. The
purchase price will be determined based on deposit and loan balances at a cutoff
date following the receipt of all regulatory approvals. On November 9, 1998,
First Citizens requested that the terms of the agreement be renegotiated. The
Company is currently renegotiating the terms of the transaction with First
Citizens, and although no assurance can be given, management anticipates this
transaction will be consummated on or before December 31, 1998. Management
believes the transaction will not adversely effect the Bank's earnings or
financial condition.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30,
1998 AND 1997
GENERAL. Net earnings totaled $743,000 for the three months ended September 30,
1998, a decrease of 18.9% from the $916,000 earned in the same three-month
period in 1997. This decrease is the result of lower net interest income caused
by both lower interest income and higher interest expense. The lower net
interest margin was partially offset by an increase in non-interest income and a
reduction of non-interest expense. These and other significant fluctuations are
discussed below.
NET INTEREST INCOME. Net interest income for the three months ended September
30, 1998 decreased $750,000 or 16.4% compared to the same three-month period in
1997. Total interest income decreased $188,000 or 2.2%, while interest expense
increased $562,000 or 14.8%. The decrease in earnings on interest bearing assets
was caused by a smaller loan portfolio and higher levels of investment
securities. The loan portfolio mix continues to move away from residential
mortgage loans and into higher yielding commercial loans. The average balance of
loans by type for the third quarters of 1998 and 1997 were as follows:
Average Balances
Three Months Ended
September 30,
1998 1997
---- ----
(In thousands)
Mortgage loans 117,241 132,110
Consumer loans 59,053 68,176
Credit card loans 3,542 4,370
Commercial loans 87,558 83,600
------- -------
267,394 288,256
======= =======
Interest and fee income on loans decreased $495,000 or 7.1% for the third
quarter 1998 compared to the same quarter in 1997, while the average balance of
loans decreased $20.9 million or 7.2%. Interest income on federal funds sold and
interest bearing deposits increased $49,000 or 13.3% for the three months ended
September 30, 1998 compared to the same three months ended September 30, 1997.
Interest income on investment securities increased $257,000 or 25.4% while the
average balance of investment securities increased $29.2 million or 52.5%.
The net interest rate spread measures the difference between the average yield
on earning assets and the average rate paid on interest bearing sources of
funds. The net interest rate spread for the quarters ended September 30, 1998
and 1997 was 3.82% and 4.42% respectively. This decrease resulted primarily from
the increase in the amount of investment securities and the average rates earned
on these securities. The average rate earned on investment securities decreased
by 1.19 basis points for the quarter ended September 30, 1998 compared to the
same quarter in 1997. This decrease was the result of higher yielding
investments being called and lower yields on newly purchased investment
securities. Yields on interest earning assets other than investment securities
increased for the three months ended September 30, 1998 compared to the three
months ended September 30, 1997. Average yields paid on total funding sources
increased by 14 basis points for the quarter ended September 30, 1998 compared
to the same quarter in 1997.
The following table presents average balances and associated rates earned and
paid for all interest earning assets and interest bearing liabilities for the
three months ended September 30, 1998 and 1997. (dollars in thousands)
<TABLE>
<CAPTION>
Quarter ended September 30, 1998 Quarter ended September 30, 1997
Average Interest Effective Average Interest Effective
Balance Yield Rate Balance Yield Rate
<S> <C> <C> <C> <C> <C> <C>
Loans 267,395 6,480 9.83% 288,256 6,975 9.81%
Interest Bearing Deposits & FF Sold 28,740 419 5.91% 26,153 369 5.73%
Securities 87,015 1,273 5.93% 57,801 1,015 7.12%
- --------------------------------------------------------------------------------------------------------------------------------
383,149 8,172 8.65% 372,210 8,360 9.11%
- --------------------------------------------------------------------------------------------------------------------------------
Demand Deposits 74,536 399 2.17% 73,365 387 2.14%
Savings 37,064 250 2.73% 37,120 283 3.10%
Certificates of Deposit 204,348 2,951 5.86% 206,486 2,956 5.81%
Borrowings 50,272 758 6.11% 11,550 170 5.97%
- --------------------------------------------------------------------------------------------------------------------------------
366,220 4,358 4.83% 328,521 3,797 4.69%
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income & spread 3,814 3.82% 4,563 4.42%
</TABLE>
PROVISION FOR LOAN LOSSES. The provision for loan losses was $226,000 for the
three months ended September 30, 1998 compared to $320,000 for the three months
ended September 30, 1997. In 1997 management increased the loan loss reserve to
1% of total loans outstanding at December 31, 1997. Since then the loan loss
reserve has increased by $125,000 while the net total loans outstanding has
decreased $21.3 million. At September 30, 1998, the loan loss reserve was $2.9
million or 1.13% of total loans compared to $2.1 million or .70% of total loans
at September 30, 1997. Management deemed the allowance for loan losses adequate
at September 30, 1998.
NONPERFORMING ASSETS AND PAST DUE LOANS. Nonperforming assets, comprised of
non-accrual loans (loans on which payments are more than 90 days past due) and
other real estate owned totaled $5.9 million or 1.5% of total assets at
September 30, 1998, and $8.2 million or 2.1% of total assets at September 30,
1997. The majority of nonperforming assets or $4.9 million at September 30, 1998
and September 30, 1997 were the result of foreclosure on five loans to one
borrower represented by two parcels of undeveloped land.
OTHER INCOME. Total noninterest income increased $248,000, or 22.9%, for the
three months ended September 30, 1998 versus the same three months in 1997.
Service charges on deposits increased $78,000 or 10.5% for the third quarter of
1998 verses the same period in 1997 because of an increase in the number of
transaction accounts and the fee structure on these accounts. The number of
customer demand deposit accounts of the Bank increased by 381 accounts or 1.9%
as of September 30, 1998 compared to September 30, 1997. Fees on transaction
accounts were increased during the first quarter of 1998 as the result of an
independent review of the Bank's fee structure that was performed in the fourth
quarter of 1997. Gains on the sales of available for sale securities totaling
$162,000 were from the sale and call of securities owned by the Bank and the
Company. Income from insurance commissions decreased $34,000 or 20.5% for the
three months ended September 30, 1998 versus the same three months in 1997 as a
result of lower loan volume and stricter underwriting standards. Miscellaneous
income increased $43,000 for the quarter ended September 30, 1998 compared to
the same three months in 1997 primarily from the gain on sales of other real
estate owned totaling $39,000.
NONINTEREST EXPENSES. Total noninterest expenses decreased $139,000 or 3.5% for
the three months ended September 30, 1998 as compared to the same three months
in 1997. This decrease is primarily the result of other operating expense which
decreased $288,000 or 22.1%. Other operating expense reductions include lower
expenses and losses on demand deposit accounts which decreased $59,000 for the
three months ended September 30,1998 compared to the same three months in 1997.
The Bank received a refund of $33,000 in September 1998 of a contribution made
in April of 1997 to help fund a regional revolving loan fund to create jobs in a
four county area served by the Bank. This regional development center never
materialized and the donation was returned to the Bank. Salaries and employee
benefits increased $80,000 for the three months ended September 30, 1998 verses
the same three months in 1997. This is due primarily to the Management
Recognition Plan (MRP) expense recorded for the three months ended September 30,
1998 of $122,000. The MRP was not in place during the three months ended
September 30, 1997. ESOP and retirement expense increased $80,000 for the three
months ended September 30, 1998 compared to the same three months in 1997. This
resulted from the increase in the average market value of the Company's stock
price for the three months ended September 30, 1998 which was $42.53/share
verses $34.38/share for the same three months in 1997. Occupancy and equipment
expense decreased slightly ($13,000 or 2.0%) for the three months ended
September 30, 1998 versus the same three months in 1997. This decrease is the
result of closing two branches in February 1998. One branch was located inside a
grocery store and the other was attached to a convenience store. Both of these
facilities were leased and within the city of Carrollton, Georgia. Closing of
these branches was deemed appropriate by management because of the volume of
customer traffic and the addition of the McIntosh branch in Carrollton which has
been expanded in 1998 to add three offices, one interior teller window, an
enlarged lobby and more parking area to better serve walk-in customers.
INCOME TAXES. Income tax expense for the quarter ended September 30, 1998 was
$339,000 or 31.4% of pretax income and $317,000 or 32.1% of pretax income for
the same three month period in 1997. The difference between these rates and the
statutory rate is primarily the result of interest income on tax exempt
securities.
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
AND 1997
GENERAL. Net earnings totaled $2.2 million for the nine months ended September
30, 1998, an increase of 13.8% from the $1.9 million earned in the same
nine-month period in 1997. This increase in earnings results from an increase in
net interest income of 1.4% and an increase in non-interest income of 48.2%.
These increases in income were partially offset by an increase in non-interest
expense of 11.1%. These and other significant fluctuations are discussed below.
NET INTEREST INCOME. Total interest income increased $1.0 million or 4.4%.
Interest and fee income on loans decreased $138,000 or .7% for the nine months
ended September 30, 1998 compared to the same nine months in 1997. The average
balance of loans decreased $7.3 million or 2.6%, but the yield on loans
increased by 18 basis points for the same nine months in 1998 compared to 1997.
This resulted from a shift in the loan portfolio away from residential mortgage
loans and into higher yielding commercial loans. Interest income on interest
bearing deposits and federal funds sold increased $262,000 or 33.4% while the
average balance on these interest bearing deposits increased $5.0 million
(25.8%) and the yield on the same increased 33 basis points. Interest income
from securities increased $913,000 or 32.1% while the yield on securities
decreased 1.21% and the average balance of securities increased $31.4 million
(59.0%) for the nine months ended September 30, 1998 compared to the same nine
months in 1997. The higher volume and lower yields on investments resulted from
some higher yielding securities being called and lower yields on newly purchased
securities; the higher average balance of securities resulted from the arbitrage
transaction discussed earlier.
The net interest rate spread for the nine months ended September 30, 1998 and
1997 was 3.82% and 4.22% respectively. This decrease was primarily the result of
the increase in the amount of investment securities and the average rates earned
on these securities. Average yields paid on total funding sources increased by 9
basis points for the nine months ended September 30, 1998 compared to the same
quarter in 1997. Interest expense on borrowings increased $1.0 million or 145.6%
for the first nine months of 1998 compared to the same nine months in 1997. The
average balance of borrowings increased $22.9 million (144.2%) and the rate paid
on borrowings increased 3 basis points during the first nine months of 1998
compared to the same nine months in 1997.
The following table presents average balances and associated rates earned and
paid for all interest earning assets and interest bearing liabilities for the
nine months ended September 30, 1998 and 1997. (dollars in thousands)
<TABLE>
<CAPTION>
Nine Months ended September 30, 1998 Nine Months ended September 30, 1997
Average Interest Effective Average Interest Effective
Balance Yield Rate Balance Yield Rate
<S> <C> <C> <C> <C> <C> <C>
Loans 273,623 19,570 9.56% 280,903 19,708 9.38%
Interest Bearing Deposits & FF Sold 24,338 1,051 5.77% 19,351 788 5.44%
Securities 84,761 3,760 5.93% 53,315 2,847 7.14%
- -------------------------------------------------------------------------------------------------------------------------------
382,721 24,381 8.52% 353,569 23,343 8.83%
- -------------------------------------------------------------------------------------------------------------------------------
Demand Deposits 72,175 1,109 2.05% 70,408 1,138 2.16%
Savings 38,359 844 2.94% 39,690 858 2.89%
Certificates of Deposit 204,549 8,772 5.73% 209,426 8,865 5.66%
Borrowings 38,736 1,700 5.87% 15,862 692 5.83%
- -------------------------------------------------------------------------------------------------------------------------------
353,820 12,426 4.70% 335,386 11,553 4.61%
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income & spread 11,955 3.82% 11,790 4.22%
</TABLE>
PROVISION FOR LOAN LOSSES. The provision for loan losses was $561,000 for the
nine months ended September 30, 1998 compared to $624,000 for the nine months
ended September 30, 1997. The loan loss reserve balance has increased by
$842,000 from September 30, 1997 to the same date in 1998.
OTHER INCOME. Total noninterest income increased $1.5 million, or 55.2%, for the
nine months ended September 30, 1998 versus the same nine months in 1997.
Service charges on deposits increased $259,000 or 12.8% for the first nine
months of 1998 versus the same period in 1997 because of an increase in the
number of transaction accounts and the fee structure on these accounts. Gains on
the sales and calls of available for sale securities for the nine months ended
September 30, 1998 totaling $665,000 were from the sale of equity securities
owed by the Company and the sale and call of securities owned by the Bank. The
Company's investments were sold to help fund the purchase of a block of 238,700
shares of the Company's common stock on June 2, 1998. Income from insurance
commissions increased $102,000 or 25.8% for the nine months ended September 30,
1998 versus the same nine months in 1997. This increase was due to a $169,000
commission rebate on insurance sales received during the first quarter of 1998.
Miscellaneous income increased $431,000 for the nine months ended September 30,
1998 compared to the same nine months in 1997 primarily from the gain on sales
of other real estate owned totaling $223,000 in 1998 compared to $9,000 for the
same period in 1997. Other increases in miscellaneous income for the nine months
ended September 30, 1998 versus the same nine months in 1997 include higher
return item charges by $93,000, greater gains on sales of loans by $63,000,
higher income from real estate owned of $31,000 and higher check cashing fees of
$17,000.
NONINTEREST EXPENSES. Total noninterest expenses increased $1.4 million or 12.3%
for the nine months ended September 30, 1998 as compared to the same nine months
in 1997. This increase is primarily the result of compensation expense related
to the ESOP and Management Recognition Plan (MRP) which totaled $2.0 million for
the nine months ended September 30, 1998 and $335,000 for the three months ended
September 30, 1997. The ESOP and MRP were not in place during the first six
months of 1997. Occupancy and equipment expense remained relatively unchanged
for the nine months ended September 30, 1998 versus the same nine months in
1997. Deposit insurance premiums increased $31,000 or 29.8% for the nine months
ended September 30, 1998 compared to the same nine months of 1997. This is the
result of a credit for $34,000 received in the first quarter of 1997 for
overpayment of the special SAIF assessment paid in the fourth quarter of 1996.
Other operating expense decreased by $248,000 or 6.9% in the first nine months
of 1998 verses 1997. This decrease was primarily from lower losses and expenses
on transaction accounts.
INCOME TAXES. Income tax expense for the nine months ended September 30, 1998
was $1.0 million or 32.0% of income before tax and $938,000 or 32.8% of income
before tax for the same nine month period in 1997. The difference between these
rates and the statutory rate is the result of interest income on tax exempt
securities and the dividend received deduction on some preferred stock
dividends.
LIQUIDITY AND CAPITAL RESOURCES. The Company's liquidity, represented by cash
and cash equivalents, is a product of its operating, investing and financing
activities. The Company's primary sources of funds are deposits, amortization,
prepayments and maturities of outstanding loans, maturities of investment
securities, mortgage-backed securities and other short-term investments and
funds provided from operations. While scheduled loan amortization and maturing
investment securities, mortgage-backed securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition. The Company manages the pricing of its deposits to maintain a
steady deposit balance. In addition, the Company invests excess funds in
overnight deposits and other short-term interest-earning assets which provide
liquidity to meet lending requirements. The Company has generally been able to
generate enough cash through the retail deposit market, its traditional funding
source, to offset the cash utilized in investing activities. As an additional
source of funds, the Bank may borrow from the FHLB of Atlanta. At September 30,
1998, the Bank had outstanding advances from the FHLB of Atlanta in the amount
of $44.3 million. Such advances were used in the Bank's normal operations and
investing activities. On June 2, 1998 the Company borrowed $5 million to help
fund the repurchase of 234,700 shares of the Company's stock. The note bears
interest at prime less one percent with the entire principal balance payable on
December 2, 1998.
At September 30, 1998, total stockholders' equity was $31.7 million, or 7.89% of
total assets compared to $69.0 million, or 17.5% of total assets at December 31,
1997. This decrease is primarily due to treasury stock purchases during the
first nine months of 1998 in accordance with the Company's planned stock
repurchase programs.
As of September 30, 1998, the Bank's regulatory capital was in excess of all
applicable regulatory requirements. At September 30,1998, the Bank's total
risk-based capital, tier 1 risk-based capital and tier 1 leverage ratios
amounted to 11.3%, 10.3% and 7.3%, respectively, compared to regulatory
requirements of 8.0%, 4.0% and 4.0%, respectively.
YEAR 2000 ISSUES. The Company is currently addressing the many areas affected by
the Year 2000 computer issue. A Year 2000 Plan (Plan) has been approved by the
Board of Directors which addresses whether our computer, communications and
other operating systems will operate accurately after December 31, 1999. The
Plan addresses internal and external interfaces with third party computer
systems that communicate with our system. A committee has been established to
administer the Plan.
As of September 30, 1998 the Company has completed the inventory of its
information systems and identified critical systems. All systems potentially
affected will be evaluated. The plan also includes contacting large commercial
loan customers to determine their readiness for this issue. The Company has
identified all hardware and software that need date-sensitive testing to comply
with the Year 2000 issue. Vendors and suppliers have been contacted for
information concerning their product's readiness for the Year 2000 issue. The
Company is utilizing both internal and external resources for testing of all
hardware and software.
FDIC guidance on testing year 2000 compliance of service providers states that
proxy tests are acceptable compliance tests. In proxy testing, the service
provider tests with a representative sample of financial institutions who use a
particular service on the same platform. Test results are shared with all
similarly situated clients of the service provider. The Company's main supplier
of core processing software and the Company's core processing service provider
has completed its first phase of testing of their products for year 2000
compliance. The bank received documentation from its service provider dated
September 10, 1998 stating that its tests were conclusive that the application
software will operate at and beyond the year 2000, and that the item processing
software is year 2000 compliant. The documentation included proxy test results
from a sample of the banks tested. The next phase of testing by the Company's
service provider will include connectivity testing, sensitive date testing and
specific institution testing. The results of these tests will be provided as
they are completed by the service provider over the next 15 months.
The Company internally has completed testing hardware and has begun internal
software testing. Testing of internal mission critical processes for Year 2000
problems are expected to be completed by December 31, 1998. To date, $252,000
has been set aside to address obsolescence in existing hardware. All expenses
associated with year 2000 corrections will be expensed in the year incurred and
will be funded through normal operating cash flow. Since many of the programs
used by the Company are "off-the-shelf" as compared to "highly customized," the
cost to address these matters is not expected to have a material impact on
future operating results or financial condition. The costs and completion dates
for testing and corrections of Year 2000 problems are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those plans. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer programs,
and similar uncertainties.
The Company is in the process of developing a contingency plan related to year
2000 issues. While management believes that the Company's internal systems and
hardware will be year 2000 ready, the contingency plan will address internal
scenarios as well as external systems beyond the Bank's control.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is filed herewith:
Exhibit 27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
<PAGE>
SIGNATURES
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 BANKING COMPANY
Date: November 9, 1998 /s/ Gary D. Dorminey
----------------------
Gary D. Dorminey
President
(Principal Executive Officer)
Date: November 9, 1998 /s/ C. Lynn Gable
-------------------
C. Lynn Gable
Chief Financial Officer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 8,243
<INT-BEARING-DEPOSITS> 2,839
<FED-FUNDS-SOLD> 32,610
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 68,965
<INVESTMENTS-CARRYING> 3,444
<INVESTMENTS-MARKET> 3,452
<LOANS> 265,384
<ALLOWANCE> 2,914
<TOTAL-ASSETS> 401,738
<DEPOSITS> 315,955
<SHORT-TERM> 7,493
<LIABILITIES-OTHER> 3,840
<LONG-TERM> 42,749
0
2,134
<COMMON> 16
<OTHER-SE> 29,550
<TOTAL-LIABILITIES-AND-EQUITY> 401,738
<INTEREST-LOAN> 19,570
<INTEREST-INVEST> 3,760
<INTEREST-OTHER> 1,051
<INTEREST-TOTAL> 24,381
<INTEREST-DEPOSIT> 10,726
<INTEREST-EXPENSE> 12,426
<INTEREST-INCOME-NET> 11,955
<LOAN-LOSSES> 561
<SECURITIES-GAINS> 665
<EXPENSE-OTHER> 12,354
<INCOME-PRETAX> 3,214
<INCOME-PRE-EXTRAORDINARY> 3,214
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,186
<EPS-PRIMARY> 1.18
<EPS-DILUTED> 1.11
<YIELD-ACTUAL> 0
<LOANS-NON> 453
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 704
<ALLOWANCE-OPEN> 2,789
<CHARGE-OFFS> 868
<RECOVERIES> 432
<ALLOWANCE-CLOSE> 2,914
<ALLOWANCE-DOMESTIC> 2,914
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
