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 June 30, 1998
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Exchange Act
For the transition period from ______ to ______
Commission File Number:
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 July 31, 1998, there were
1,842,572 shares issued and 1,697,036 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 June 30, 1998 (unaudited) and December
31, 1997
Consolidated Statements of Earnings for the Three and Six Months Ended June
30, 1998 and 1997 (unaudited)
Consolidated Statements of Comprehensive Income for the Three and Six
Months Ended June 30, 1998 and 1997 (unaudited)
Consolidated Statements of Cash Flows for the Three and Six Months Ended
June 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>
June 30, December 31,
Assets 1998 1997
<S> <C> <C>
Cash and due from banks ......................................... 7,973 10,766
Interest-bearing deposits in financial institutions ............. 2,132 1,863
Federal funds sold and repurchase agreements .................... 16,960 17,655
------ ------
Cash & cash equivalents ...................................... 27,065 30,284
Securities available for sale ................................... 89,767 49,492
Securities held to maturity ..................................... 5,949 6,006
Other investments ............................................... 2,328 2,269
Mortgage loans held for sale .................................... 709 789
Loans, net ...................................................... 267,497 283,602
Premises & equipment net ........................................ 9,120 9,095
Accrued interest receivable ..................................... 3,600 3,169
Other real estate ............................................... 6,089 6,628
Other assets .................................................... 3,531 2,959
----- -----
Total assets ................................................. 415,655 394,293
======= =======
Liabilities and Stockholders' Equity
Deposits:
Demand ........................................................ 14,800 18,734
Interest-bearing demand ....................................... 58,141 51,198
Savings ....................................................... 38,313 38,273
Time .......................................................... 160,032 161,431
Time, over $100,000 ........................................... 44,212 45,895
------ ------
Total deposits ............................................. 315,498 315,531
Federal Home Loan Bank advances ................................. 44,407 5,495
Note payable .................................................... 5,000 -
Subordinated debentures ......................................... 900 900
Accrued interest payable & other liabilities .................... 4,011 3,329
----- -----
Total liabilities .......................................... 369,816 325,255
Stockholders' Equity:
Convertible preferred stock, par value $.01, 96,542 shares issued 2,064 -
Common stock, $.01 par, 10,000,000 authorized, 1,883,339 issued . 19 24
Additional paid in capital ...................................... 22,160 47,040
Unearned ESOP shares and stock awards ........................... (4,788) (3,476)
Retained earnings ............................................... 25,620 24,725
Accumulated other comprehensive income .......................... 764 725
--- ---
Total stockholders' equity ................................. 45,839 69,038
Total liabilities & stockholders' equity ........................ 415,655 394,293
======= =======
</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 Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans ......................... 6,485 6,492 13,090 12,733
Interest-bearing deposits and federal funds sold ... 268 267 632 419
Interest and dividends on investment securities:
U.S. Treasury ................................... 45 7 90 14
U.S. Govt. agency and mortgage-backed ........... 1,315 881 2,182 1,679
State, county & municipals ...................... 29 22 59 50
Other ........................................... 79 41 157 88
-- -- --- --
Total interest income ......................... 8,221 7,710 16,210 14,983
Interest Expense:
Interest on deposits:
Demand ........................................... 356 390 710 751
Savings ......................................... 295 322 595 575
Time ............................................ 2,921 2,986 5,822 5,908
----- ----- ----- -----
3,572 3,698 7,127 7,234
Interest on debt ................................... 678 261 942 522
--- --- --- ---
Total interest expense ................... 4,250 3,959 8,069 7,756
----- ----- ----- -----
Net interest income ................. 3,971 3,751 8,141 7,227
----- ----- ----- -----
Provision for loan losses .......................... 182 209 335 304
--- --- --- ---
Net interest inc. after provision for loan losses. 3,789 3,542 7,806 6,923
Noninterest income:
Service charges on deposits ..................... 773 683 1,470 1,288
Gain on calls and sales of securities available for sale 452 - 503 -
Insurance commissions ........................... 112 166 364 227
Miscellaneous ................................... 321 77 510 223
--- -- --- ---
Total noninterest income ................. 1,658 926 2,847 1,738
Noninterest expenses:
Salaries and employee benefits .................. 1,901 1,787 3,751 3,590
ESOP & retirement expense ....................... 825 - 1,250 -
Occupancy and equipment ......................... 539 543 1,098 1,087
Deposit insurance premiums ...................... 46 46 92 58
Other operating expense ......................... 1,045 1,138 2,329 2,416
----- ----- ----- -----
Total noninterest expense ................. 4,356 3,514 8,520 7,151
----- ----- ----- -----
Earnings before income tax expense ........ 1,091 954 2,133 1,510
Income tax expense ................................. 355 317 690 505
Net earnings ........................ 736 637 1,443 1,005
=== === ===== =====
Basic earnings per common share 0.39 N/A 0.73 N/A
Diluted earnings per common share 0.36 N/A 0.69 N/A
Dividends per common share 0.15 N/A 0.30 N/A
</TABLE>
<PAGE>
COMMUNITY FIRST BANKING COMPANY
Consolidated Statements of Comprehensive Income
(Unaudited - in thousands of dollars)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net earnings ................................................................ 736 637 1,443 1,005
Other comprehensive income, net of income taxes:
Unrealized gains (losses) on securities available for sale ................ (1,300) 397 562 (50)
Income tax on gains (losses) .............................................. (442) 135 191 (17)
------ ------ ------ ------
Unrealized gains (losses) arising during the period, net of tax ......... (858) 262 371 (33)
Less: Reclassification adjustment for gains included in net earnings ...... 452 - 503 -
Income tax on reclassification adjustments ............................... 154 - 171 -
--- --- ---
Reclassification adjustment for gains included in net earnings net of tax 298 - 332 -
--- --- ---
Other comprehensive income ............................................. (560) 262 39 (33)
------ ------ ------ ------
COMPREHENSIVE INCOME ........................................................ 176 899 1,482 972
====== ====== ====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
COMMUNITY FIRST BANKING COMPANY
Consolidated Statements of Cash Flows
(Unaudited - in thousands of dollars)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
---- ----
<S> <C> <C>
Net earnings ..................................................................... 1,443 1,005
Adjustments to reconcile net earnings to net cash provided by (used in) operating
activities:
Depreciation, amortization and accretion ....................................... 768 645
Provision for loan losses ...................................................... 335 304
Gain on calls and sales of securities available for sale ....................... (503) --
Gain on sale of other real estate............................................... (178)
Loss on sales of premises and equipment, net ................................... 27 (19)
ESOP and stock award compensation expense ...................................... 1,264 --
Change in:
Mortgage loans held for sale ................................................. 80 126
Accrued interest receivable .................................................. (432) (12)
Other assets ................................................................. (571) (73)
Accrued interest payable ..................................................... 528 165
Accrued expenses and other liabilities ....................................... 154 1,417
------- -------
Net cash provided by (used in) operating activities ....................... 2,915 3,558
Cash flows from investing activities:
Proceeds from sales and calls of securities available for sale ................. 16,301 4,000
Proceeds from maturities of securities held to maturity ........................ 109 737
Proceeds from maturities of other investments .................................. 619 --
Purchases of other investments ................................................. 60 --
Proceeds from sales of other investments ....................................... -- 220
Purchases of securities available for sale ..................................... (56,934) (14,742)
Net change in loans ............................................................ 15,770 (18,174)
Proceeds from sale of real estate .............................................. 717 12
Proceeds from sales of premises and equipment .................................. 27 28
Purchases of premises and equipment ............................................ (737) (1,216)
Organization costs ............................................................. -- (32)
------- -------
Net cash used in investing activities ..................................... (24,068) (29,167)
Cash flows from financing activities:
Net change in demand and savings deposits ...................................... 3,049 55,960
Net change in time deposits .................................................... (3,082) (2,117)
Payment of FHLB advances ....................................................... (1,088) (338)
Proceeds from FHLB advances .................................................... 40,000 --
Proceeds from note payable. .................................................... 5,000 --
Payment of subordinated debentures ............................................. -- (1,100)
Treasury stock purchased ....................................................... (25,397) --
Cash dividend paid ............................................................. (548) --
Net proceeds from issuance of common stock ..................................... -- 43,160
------- -------
Net cash provided by financing activities .................................. 17,934 95,565
------- -------
Net change in cash and cash equivalents .................................... (3,219) 69,956
------- -------
Cash and cash equivalents at beginning of year ................................... 30,284 23,097
------- -------
Cash and cash equivalents at quarter end ......................................... 27,065 93,053
====== ======
Supplemental disclosure of cash flow information:
Cash paid for:
Interest 7,540 7,592
Income taxes 1,250 460
</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 six months ended June 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 and six month periods ended
June 30, 1998 are presented based on the net earnings for the three and six
months divided by the weighted average number of shares outstanding, or
1,897,932 and 1,977,561 shares respectively. Net earnings per common share are
not presented for the three and six months ended June 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 2,032,219 and 2,104,324 shares for the three and six months ended
June 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
nongovermental 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 nongovermental
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 June 30,
1998, the Company had approximately $24,000 of deferred costs associated with
organizing the Company. Upon adoption of this statement, it is anticipated that
these deferred costs will be expensed.
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. The dividends are accrued on the June 30, 1998
consolidated balance sheet.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1998 AND DECEMBER 31, 1997
On June 30, 1998, the Company had total assets of $415.7 million compared to
$394.3 million at December 31, 1997. This increase of $21.4 million or 5.4% is
primarily due to the purchase of available for sale securities which increased
$40.3 million or 81.4% during the six month period. Securities purchased 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.
The purchase of bonds was funded by borrowing $40 million from the FHLB on the
Bank's available line of credit.
Net loans decreased $16.1 million or 5.7% during the first half of 1998. Of this
decrease, $9.8 million were mortgage loans, $3.3 million were consumer loans,
$2.4 were commercial loans and $.6 million were credit card loans. These
decreases in net loans can be attributed to increased reliance on the secondary
market for mortgage loans, increased refinancing activity, more stringent
underwriting criteria in regard to consumer lending and normal seasonal
fluctuation in commercial loans outstanding.
Accrued interest receivable increased $.4 million as the result of the larger
securities investment portfolio. Other real estate decreased $.5 million from
the sale of one foreclosed commercial property. Other assets increased $.6
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 June
30, 1998. Demand deposits increased $3.0 million or 4.3%, savings deposits
remained consistent and time deposits decreased $3.1 million or 1.5%. FHLB
advances increased $38.9 million at June 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 one interest installment due on September 2, 1998
and 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 previously announced stock
repurchase plan. Accrued interest payable and other liabilities increased
$682,000 or 20.5% during the first half of 1998. This increase was primarily the
result of an increase of $528,000 in accrued interest payable primarily due to
the increase in FHLB advances.
On January 8, 1998, 96,542 shares of 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 intends to purchase up to 600,000 shares
of its common stock through open market purchases. In accordance with this plan,
530,223 shares of treasury stock were acquired and retired during the first six
months of 1998 at an average cost of $47.90 per share.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND
1997
GENERAL. Net earnings totaled $736,000 for the three months ended June 30, 1998,
an increase of 15.7% from the $636,000 earned in the same three-month period in
1997. This increase in earnings is primarily the result of an increase in net
interest income and an increase in non-interest income. This increase in income
was offset by increases in non-interest expense, primarily compensation expense
related to the employee stock ownership plan and the management recognition plan
totaling $979,000 for the second quarter of 1998. These and other significant
fluctuations are discussed below.
NET INTEREST INCOME. Net interest income for the three months ended June 30,
1998 increased $202,000 or 5.9% over the same three-month period in 1997. Total
interest income increased $511,000 or 6.6%, while interest expense increased
$291,000 or 7.3%. This increase in earnings on interest bearing assets was
caused by the change in mix of the loan portfolio and higher levels of
investment securities. The loan portfolio is moving away from residential
mortgage loans and into higher yielding commercial loans. The average balance of
loans by type for the second quarters of 1998 and 1997 were as follows:
Average Balances
Second Quarter
1998 1997
---- ----
(In thousands)
Mortgage loans 115,189 137,274
Consumer loans 61,508 65,384
Credit card loans 3,718 4,518
Commercial loans 92,247 74,952
------ ------
272,662 282,128
======= =======
Interest income on loans decreased $7,000 or .1% for the second quarter 1998
compared to the same quarter in 1997, while the average balance of loans
decreased $9.5 million or 3.4%. Interest income on federal funds sold and
interest bearing deposits remained almost unchanged for the three months ended
June 30, 1998 compared to the same three months ended June 30, 1997. Interest
income on investment securities increased $517,000 or 54.3% while the average
balance of investment securities increased $47.6 million or 91.9%.
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 June 30, 1998 and
1997 was 3.62% and 4.05% respectively. This decrease was primarily the result of
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 1.46 basis points for the quarter ended June 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 June 30, 1998 compared to the three months ended June 30,
1997. Average yields paid on total funding sources increased by 13 basis points
for the quarter ended June 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 June 30, 1998 and 1997. (dollars in thousands)
<TABLE>
<CAPTION>
Quarter Ended June 30, 1998 Quarter Ended June 30, 1997
Average Interest Effective Average Interest Effective
Balance Yield Rate Balance Yield Rate
------------------------------ --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans 269,818 6,485 9.75% 279,765 6,492 9.41%
Interest Bearing Deposits & FF Sold 19,036 268 5.72% 20,220 267 5.35%
Securities 99,455 1,468 5.99% 51,819 951 7.45%
------ ----- ---- ------ --- ----
388,309 8,221 8.59% 351,804 7,710 8.89%
------- ----- ---- ------- ----- ----
Demand Deposits 56,382 356 2.56% 55,588 390 2.85%
Savings 38,998 295 3.07% 46,555 322 2.80%
Certificates of Deposit 204,154 2,921 5.80% 211,687 2,986 5.72%
Borrowings 47,192 678 5.83% 17,778 261 5.95%
------ --- ---- ------ --- ----
346,726 4,250 4.97% 331,608 3,959 4.84%
------- ----- ---- ------- ----- ----
Net interest income & spread 3,972 3.62% 3,751 4.05%
</TABLE>
PROVISION FOR LOAN LOSSES. The provision for loan losses was $182,000 for
the three months ended June 30, 1998 compared to $209,000 for the three
months ended June 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 $30,000 while the net total loans outstanding has
decreased $16.1 million. At June 30, 1998, the loan loss reserve was $2.8
million or 1.02% of total loans compared to $2.4 million or .83% of total loans
at June 30, 1997. Management deemed the allowance for loan losses adequate at
June 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 $6.9 million or 1.7% of total assets at June 30,
1998, and $9.6 million or 2.4% of total assets at June 30, 1997. The majority of
nonperforming assets or $4.9 million at June 30, 1998 and June 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 $732,000, or 78.9%, for the
three months ended June 30, 1998 versus the same three months in 1997. Service
charges on deposits increased $90,000 or 13.2% for the second 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 1,267 accounts or 5.8%
as of June 30, 1998 compared to June 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 $452,000 were
from the sale of equity securities owned by the Company that 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 decreased $55,000 or 32.8% for
the three months ended June 30, 1998 versus the same three months in 1997 as a
result of lower loan volume and stricter underwriting standards. Miscellaneous
income increased $244,000 for the quarter ended June 30, 1998 compared to the
same three months in 1997 primarily from the gain on sales of other real estate
owned totaling $172,000.
NONINTEREST EXPENSES. Total noninterest expenses increased $842 thousand or
23.9% for the three months ended June 30, 1998 as compared to the same three
months in 1997. This increase is primarily the result of compensation expense
related to the ESOP and Management Recognition Plan (MRP). During the second
quarter of 1998 management increased the number of shares committed to be
released by the ESOP from 9,654 shares per quarter to 17,585 shares per quarter.
Compensation expense for the three months ended June 30, 1998 as a result of the
shares committed to be released by the ESOP totaled $822,000. The Company
recorded a market value adjustment for the MRP preferred stock of $51,000 for
the three months ended June 30, 1998, while the total compensation expense
recorded for the MRP including the market value adjustment was $154,000 for the
quarter ended June 30, 1998. The ESOP and MRP were not in place during the three
months ended June 30, 1997. Occupancy and equipment expense decreased slightly
($4,000 or .7%) for the three months ended June 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. Other operating expense decreased by $93,000 in
the second quarter of 1998 versus the same quarter of 1997. This decrease is
primarily due to reduced losses on demand deposit accounts.
INCOME TAXES. Income tax expense for the quarter ended June 30, 1998 was
$355,000 or 32.6% of pretax income and $317,000 or 33.3% 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 SIX MONTHS ENDED JUNE 30, 1998 AND
1997
GENERAL. Net earnings totaled $1.4 million for the six months ended June 30,
1998, an increase of 43.7% from the $1.0 million earned in the same six-month
period in 1997. This increase in earnings results from an increase in net
interest income of 12.7% and an increase in non-interest income of 63.8%. These
increases in income were partially offset by an increase in non-interest expense
of 19.2%. These and other significant fluctuations are discussed below.
NET INTEREST INCOME. Total interest income increased $1.2 million or 8.2%.
Interest income on loans increased $357,000 or 2.8% for the six months ended
June 30, 1998 compared to the same six months in 1997. The average balance of
loans decreased $1.1 million or .4%, but the yield on loans increased by 30
basis points for the same six 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 $213,000 or 51.0% while the average balance on
these interest bearing deposits increased $6.2 million (38.8%) and the yield on
the same increased 47 basis points. Interest income from securities increased
$656,000 or 35.8% while the yield on securities decreased 1.15% and the average
balance of securities increased $31.4 million (61.5%) for the six months ended
June 30, 1998 compared to the same six 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 mentioned in the
comparison of the Company's financial condition at June 30, 1998 and December
31, 1997.
The net interest rate spread for the six months ended June 30, 1998 and 1997 was
3.73% and 3.96% 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 3
basis points for the quarter ended June 30, 1998 compared to the same quarter in
1997. Interest expense on borrowings increased $420,000 or 80.5% for the
first six months of 1998 compared to the same six months in 1997. The average
balance of borrowings increased $15.0 million (83.0%) and the rate paid on
borrowings decreased 8 basis points during the first six months of 1998 compared
to the same six 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
six months ended June 30, 1998 and 1997. (dollars in thousands)
<TABLE>
<CAPTION>
Six months ended June 30, 1998 Six months ended June 30, 1997
Average Interest Effective Average Interest Effective
Balance Yield Rate Balance Yield Rate
------------------------------ -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans 273,865 13,090 9.64% 275,003 12,734 9.34%
Interest Bearing Deposits & FF Sold 22,137 632 5.76% 15,951 419 5.29%
Securities 82,470 2,487 6.08% 51,072 1,830 7.23%
------ ----- ---- ------ ----- ----
378,472 16,209 8.64% 342,026 14,983 8.83%
------- ------ ---- ------- ------ ----
Demand Deposits 55,144 710 2.59% 51,446 752 2.95%
Savings 39,007 595 3.07% 40,975 575 2.83%
Certificates of Deposit 204,650 5,822 5.74% 210,896 5,908 5.65%
Borrowings 32,969 942 5.76% 18,018 522 5.84%
------ --- ---- ------ --- ----
331,769 8,068 4.90% 321,335 7,757 4.87%
------- ----- ---- ------- ----- ----
Net interest income & spread 8,141 3.73% 7,226 3.96%
</TABLE>
PROVISION FOR LOAN LOSSES. The provision for loan losses was $335,000 for the
six months ended June 30, 1998 compared to $304,000 for the six months ended
June 30, 1997. This increase has been deemed appropriate by management to
reflect the higher risk associated with the change in loan portfolio mix
described under "Net Interest Income" above.
OTHER INCOME. Total noninterest income increased $1.1 million, or 63.8%, for the
six months ended June 30, 1998 versus the same six months in 1997. Service
charges on deposits increased $182,000 or 14.2% for the first half 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 were from the sale of bank stocks
owed by the Company and the call of one security 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. There were no sales of
securities during the first six months of 1997. Income from insurance
commissions increased $227,000 or 60.1% for the six months ended June 30, 1998
versus the same six months in 1997. This increase was due to a $169,000 thousand
commission rebate on insurance sales received during the first quarter of 1998.
Miscellaneous income increased $287,000 for the six months ended June 30, 1998
compared to the same six months in 1997 primarily from the gain on sales of
other real estate owned totaling $184,000 in 1998 compared to $12,000 for the
same period in 1997.
NONINTEREST EXPENSES. Total noninterest expenses increased $1.4 million or 19.2%
for the six months ended June 30, 1998 as compared to the same six months in
1997. This increase is primarily the result of compensation expense related to
the ESOP and Management Recognition Plan (MRP) which totaled $1.5 million for
the six months ended June 30, 1998. The ESOP and MRP were not in place during
the six months ended June 30, 1997. Occupancy and equipment expense increased
slightly ($11,000 or 1.0%) for the six months ended June 30, 1998 versus the
same six months in 1997. This increase is primarily the result of increased
depreciation expense. Deposit insurance premiums increased $33,000 or 57.2% for
the six months ended June 30, 1998 compared to the same six 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 $87,000 or 3.6% in the first six months of
1998 verses 1997.
INCOME TAXES. Income tax expense for the six months ended June 30, 1998 was
$690,000 or 32.3% of income before tax and $506,000 or 33.5% of income before
tax for the same six 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 June 30, 1998,
the Bank had outstanding advances from the FHLB of Atlanta in the amount of
$44.4 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 interest only payable September 2, 1998
and interest and the entire principal balance payable on December 2, 1998.
At June 30, 1998, total stockholders' equity was $45.8 million, or 11.03% 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 six months of 1998 in accordance with the Company's planned stock
repurchase program.
As of June 30, 1998, the Bank's regulatory capital was in excess of all
applicable regulatory requirements. At June 30,1998, the Bank's total risk-based
capital, tier 1 risk-based capital and tier 1 leverage ratios amounted to 14.9%,
13.9% and 9.88%, 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 has been approved by the Board of
Directors which includes contacting all of the software vendors that maintain
the computer programs that the Company relies upon. This plan provides that the
Company will obtain assurances from these software vendors that their product
will be Year 2000 compliant. All systems potentially affected will be evaluated.
The plan also includes contacting large commercial loan customers to determine
their readiness for this issue. At this time, it is anticipated that many, if
not all of these changes, should be ready for testing by December 31, 1998.
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. This
area is changing very rapidly and the actual results may differ from what has
been anticipated.
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 inside and outside resources for testing of
all hardware and software. The Company's main supplier of core processing
software and the Company's core processing service provider will begin testing
of their products during the second and third quarters of 1998. 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 most recent update from the Company's service
provider indicates the first phase of testing is targeted for July 31, 1998
completion. To date the Company's service provider has completed a nightly batch
update on the proxy banks of the loans and deposits applications for the work of
December 31, 1999 and the update of January 3, 2000, and is currently verifying
the results of both of these updates. The Company internally has completed
testing hardware and has begun internal software testing. All testing and
corrective processes for Year 2000 problems are expected to be completed by
December 31, 1998.
The total budget for the Year 2000 efforts has not been completed. 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.
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.
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
(a) Annual meeting of shareholders was held on April 23, 1998.
(b) Matters voted upon at the Annual Meeting on April 23, 1998
included the following items and the number of votes cast
included:
Votes
Election of Class I Directors Votes For Withheld
Gary M. Bullock 1,986,475 5,104
Jerry L. Clayton 1,986,475 5,104
Dean B. Talley 1,984,625 6,954
Votes
Ratification of Auditor Votes For Against Abstentions
Porter Keadle Moore, LLP 1,984,013 3,221 4,345
There were no broker non-votes, as no discretionary issues were
presented for approval.
ITEM 5. OTHER INFORMATION
Pursuant to Rule 14a-4(c)(1) promulated under the Securities
Exchange Act of 1934, as amended, shareholders desiring to
present a proposal for consideration at the Company's 1999 Annual
Meeting of Shareholders must notify the Company in writing at its
principal office, 110 Dixie Street, Carrollton, Georgia 30117,
attn: Corporate Secretary, of the contents of such proposal no
later than February 9, 1999. Failure to timely submit such a
proposal will enable the proxies appointed by management to
exercise their discretionary voting authority when the proposal
is raised at the Annual Meeting of Shareholders without any
discussion of the matter in the proxy statement.
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 June
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: May 12, 1998 /s/ Gary D. Dorminey
----------------------
Gary D. Dorminey
President
(Principal Executive Officer)
Date: May 12, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 7,973
<INT-BEARING-DEPOSITS> 2,132
<FED-FUNDS-SOLD> 16,960
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 89,767
<INVESTMENTS-CARRYING> 5,949
<INVESTMENTS-MARKET> 5,954
<LOANS> 270,316
<ALLOWANCE> 2,819
<TOTAL-ASSETS> 415,655
<DEPOSITS> 315,498
<SHORT-TERM> 6,100
<LIABILITIES-OTHER> 4,011
<LONG-TERM> 44,207
0
2,064
<COMMON> 19
<OTHER-SE> 43,756
<TOTAL-LIABILITIES-AND-EQUITY> 415,655
<INTEREST-LOAN> 13,090
<INTEREST-INVEST> 2,488
<INTEREST-OTHER> 632
<INTEREST-TOTAL> 16,210
<INTEREST-DEPOSIT> 7,127
<INTEREST-EXPENSE> 8,068
<INTEREST-INCOME-NET> 8,141
<LOAN-LOSSES> 335
<SECURITIES-GAINS> 503
<EXPENSE-OTHER> 8,521
<INCOME-PRETAX> 2,133
<INCOME-PRE-EXTRAORDINARY> 2,133
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,443
<EPS-PRIMARY> .73
<EPS-DILUTED> .69
<YIELD-ACTUAL> 0
<LOANS-NON> 817
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 484
<ALLOWANCE-OPEN> 2,789
<CHARGE-OFFS> 610
<RECOVERIES> 304
<ALLOWANCE-CLOSE> 2,819
<ALLOWANCE-DOMESTIC> 2,819
<ALLOWANCE-FOREIGN> 0
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</TABLE>
