SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998 Commission File Number 29640
COMMUNITY FIRST BANCORPORATION
(Exact Name of Small Business Issuer in its Charter)
South Carolina 58-2322486
(State or Other Jurisdiction of (IRS Employer Identification Number)
Incorporation or Organization)
3685 Blue Ridge Boulevard, Walhalla, South Carolina 29691
(Address of Principal Executive Office, Zip Code)
Issuer's Telephone Number, Including Area Code: (864) 638-2105
Securities Registered Pursuant to Section 12(b) of the Act:
None
(Title of Class)
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock (no par value)
(Title of Class)
Check whether the issuer (1) has filed all the reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or 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 [_]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for the most recent fiscal year. $9,479,051
The aggregate market value of the voting and non-voting common equity
held by non-affiliates on March 1, 1999, was approximately $20,867,680. As of
March 1, 1999, there were 1,793,792 shares of the Registrant's Common Stock, no
par value, outstanding. For purposes of the foregoing calculation only, all
directors and executive officers of the Registrant have been deemed affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Annual Report to the Shareholders for the year ended
December 31, 1998 - Parts I and II
(2) Portions of the Registrant's Proxy Statement for the 1999 Annual
Meeting of Shareholders - Part III
Transitional Small Business Disclosure Format.
Yes __ No X
<PAGE>
10-KSB CROSS REFERENCE INDEX
Part I Page
Item 1 Description of Business ........................................ 1
Item 2 Description of Property ........................................ 7
Item 3 Legal Proceedings .............................................. 8
Item 4 Submission of Matters to a Vote of Security Holders ............ None
Part II
Item 5 Market for Common Equity and Related Stockholder Matters ....... 8
Item 6 Management's Discussion and Analysis or Plan of Operation ...... 8
Item 7 Financial Statements ........................................... 8
Item 8 Changes In and Disagreements with Accountants ..................
on Accounting and Financial Disclosure ....................... None
Part III
Item 9 Directors and Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the Exchange Act ..... *
Item 10 Executive Compensation ......................................... *
Item 11 Security Ownership of Certain Beneficial Owners and Management . *
Item 12 Certain Relationships and Related Transactions ................. *
Part IV
Item 13 Exhibits and Reports on Form 8-K .............................. 9
* Incorporated by reference to the Registrant's Proxy Statement for the
1999 Annual Meeting of Shareholders
<PAGE>
PART I
This Annual Report on Form 10-KSB contains forward-looking statements
as defined by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements should be read with the cautionary statements and
important factors included in this Form 10-KSB. (See Item 6. - Management's
Discussion and Analysis of Financial Condition and Results of Operations, Safe
Harbor for Forward-Looking Statements.) Forward-looking statements include
statements concerning plans, objectives, goals, strategies, future events or
performance and underlying assumptions and other statements which are other than
statements of historical facts. Such forward- looking statements may be
identified, without limitation, by the use of the words "anticipates,"
"estimates," "expects," "intends," "plans," "predicts," "projects," and similar
expressions. The Company's expectations, beliefs and projections are expressed
in good faith and are believed by the Company to have a reasonable basis,
including without limitation, management's examination of historical operating
trends, data contained in the Company's records and other data available from
third parties, but there can be no assurance that management's expectations,
beliefs or projections will result or be achieved or accomplished.
Item 1. Description of Business
FORM OF ORGANIZATION
Community First Bancorporation (the "Company") is a South Carolina
corporation and a bank holding company incorporated May 23, 1997. The Company
commenced operations on October 16, 1997, upon effectiveness of the acquisition
of Community First Bank (the "Bank") as a wholly owned subsidiary. The principal
business of the Company is ownership and operation of the Bank.
BUSINESS OF BANKING
General
The Bank is a South Carolina state bank which was incorporated in
December, 1988, and commenced operations as a commercial bank in March, 1990.
The Bank operates from its offices in Walhalla and Seneca, South Carolina. The
main office is located at 3685 Blue Ridge Boulevard, in Walhalla, South
Carolina, and the Seneca office is located at 1600 Sandifer Boulevard in Seneca,
South Carolina.
Services and Products Offered
The Bank offers a full array of commercial bank services. Deposit
services include business and personal checking accounts, NOW accounts, savings
accounts, money market accounts, various term certificates of deposit, IRA
accounts, and other deposit services. Most of the Bank's deposits are attracted
from individuals and small businesses. The Bank does not offer trust services,
and does not accept brokered deposits.
The Bank offers secured and unsecured, short-to-intermediate term
loans, with floating and fixed interest rates for commercial and consumer
purposes. Consumer loans include generally car loans, home equity improvement
loans (secured by first and second mortgages), personal expenditure loans,
education loans, and overdraft lines of credit. Commercial loans include
generally short term unsecured loans, short and intermediate term real estate
mortgage loans, loans secured by listed stocks, loans secured by equipment
inventory, and accounts receivable. Management believes that the credit staff
possesses knowledge of the community and lending skills sufficient to enable the
Bank to maintain a sufficient volume of high quality loans.
Management of the Bank believes that the loan portfolio is adequately
diversified. There are no significant concentrations of loans in any particular
individuals, industries or groups of related individuals or industries and the
Bank has no foreign loans. The loan portfolio consists primarily of extensions
of credit to businesses and individuals in its service area within Oconee
County, South Carolina. The economy of this area is diversified and does not
depend on any one industry or group of related industries. Management has
established loan policies and practices that include set limitations on
loan-to-collateral value for different types of collateral, requirements for
appraisals, obtaining and maintaining current credit and financial information
on borrowers, and credit approvals.
<PAGE>
Other services offered by the Bank include residential mortgage loan
origination services, safe deposit boxes, night depository service, VISA and
MasterCard charge cards, tax deposits, sale of U.S. Treasury bonds, notes and
bills and other U.S. government securities (through a correspondent), travelers
checks, and twenty-four hour automated teller service. The ATM is part of the
Cirrus network.
As of December 31, 1998, local governmental deposits comprised
approximately 27% of the Bank's total deposits. These deposits are concentrated
among a few local governmental entities and are somewhat volatile. Management of
the Bank has, however, taken steps that it believes are sufficient to minimize
to the greatest extent possible the impact of such volatibility on the Bank's
liquidity position, including maintaining the ratio of average loans to average
total deposits at 63.9% in 1998, and concentrating these funds in short-term
investments and securities available-for-sale.
Employees
At December 31, 1998, the Company employed 40 people.
Competition
The banking laws of South Carolina allow statewide branching, and,
therefore, commercial banking in the state is highly competitive. South Carolina
law also permits bank holding companies in other states with reciprocal laws to
acquire depository institutions in South Carolina, and most of the other
financial institutions in the Oconee County area are branch offices of large,
regional banks. Further, Congress has enacted the Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994, which has increased the ability of bank
holding companies and banks to operate across state lines.
Banks generally compete with other financial institutions through the
banking services and products offered, the pricing of services, the level of
service provided, the convenience and availability of services, and the degree
of expertise and personal concern with which services are offered. The Bank
encounters strong competition from most of the financial institutions in the
Bank's market area, which generally encompasses Oconee County and the
immediately surrounding area. The Bank's primary competitors in its market area
are eleven other banks and branches of banks and six savings and loan
associations and branches. Additionally, in the conduct of certain banking
business, the Bank also competes with credit unions, consumer finance companies,
insurance companies, money market mutual funds, and other financial
institutions, some of which are not subject to the same degree of regulation and
restrictions imposed upon the Bank. Many of these competitors have substantially
greater resources and lending limits than the Bank and offer certain services,
such as international banking and trust services, that the Bank does not
provide. The Bank believes, however, that its relatively small size permits it
to offer more personalized services than many of its competitors. The Bank
attempts to compensate for its lower lending limits by participating larger
loans with other institutions.
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EFFECT OF GOVERNMENT REGULATION
Bank holding companies and banks are extensively regulated under
federal and state law. To the extent that the following information describes
statutory and regulatory provisions, it is qualified in its entirety by
reference to such statutes and regulations. Any change in applicable law or
regulation may have a material effect on the business of the Holding Company and
the Bank.
General
As a bank holding company registered under the Bank Holding Company Act
("BHCA"), the Company is subject to supervision, and to regular inspection by
the Federal Reserve. The Company is also subject to regulation by the State
Board. The Bank is a state bank subject to regulation by the State Board and the
FDIC. The following discussion summarizes certain aspects of those laws and
regulations that affect the Company and the Bank. Proposals to change the laws
and regulations governing the banking industry are frequently raised in
Congress, the state legislature and before the various bank regulatory agencies.
The likelihood and timing of any changes and the impact such changes might have
on the Company and the Bank are difficult to determine.
Under the BHCA, the Company's activities and those of its subsidiaries
are limited to banking, managing or controlling banks, furnishing services to or
performing services for its subsidiaries or engaging in any other activity which
the Federal Reserve determines to be so closely related to banking or managing
or controlling banks as to be a proper incident thereto. The BHCA prohibits the
Company from acquiring direct or indirect control of more than 5% of the
outstanding voting stock or substantially all of the assets of any bank or from
merging or consolidating with another bank holding company without prior
approval of the Federal Reserve. In making such determinations, the Federal
Reserve is required to consider whether the performance of such activities by a
bank holding company or its subsidiaries can reasonably be expected to produce
benefits to the public such as greater convenience, increased competition or
gains in efficiency that outweigh possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices.
Additionally, the BHCA prohibits the Company from engaging in, or from
acquiring ownership or control of more than 5% of the outstanding voting stock
of any company engaged in, a non-banking business unless such business is
determined by the Federal Reserve to be so closely related to banking as to be
properly incident thereto.
In addition to registration with the Federal Reserve under the BHCA,
all South Carolina bank holding companies must register with the State Board
under the South Carolina Bank Holding Company Act (the "South Carolina Act"). A
registered bank holding company must provide the State Board with information
with respect to the financial condition, operations, management, and
inter-company relationships of the holding company and its subsidiaries. The
State Board may also require such other information as is necessary to keep
itself informed about whether the provisions of South Carolina law and the
regulations and orders issued thereunder by the State Board have been complied
with, and the State Board may make examinations of any bank holding company and
its subsidiaries.
3
<PAGE>
Obligations of the Company to its Subsidiary Bank
A number of obligations and restrictions are imposed on bank holding
companies and their depository institution subsidiaries by Federal law and
regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance funds in
the event the depository institution is in danger of becoming insolvent or is
insolvent. For example, under the policy of the Federal Reserve with respect to
bank holding company operations, a bank holding company is required to serve as
a source of financial strength to its subsidiary depository institutions and to
commit resources to support such institutions in circumstances where it might
not do so absent such policy. In addition, the "cross-guarantee" provisions of
the Federal Deposit Insurance Act, as amended ("FDIA"), require insured
depository institutions under common control to reimburse the FDIC for any loss
suffered or reasonably anticipated by either the Savings Association Insurance
Fund ("SAIF") or the Bank Insurance Fund ("BIF") of the FDIC as a result of the
default of a commonly controlled insured depository institution or for any
assistance provided by the FDIC to a commonly controlled insured depository
institution in danger of default. The FDIC may decline to enforce the
cross-guarantee provisions if it determines that a waiver is in the best
interest of the SAIF or the BIF or both. The FDIC's claim for damages is
superior to claims of stockholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
The FDIA also provides that amounts received from the liquidation or
other resolution of any insured depository institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit liabilities of
the institution prior to payment of any other general or unsecured senior
liability, subordinated liability, general creditor or stockholder. This
provision would give depositors a preference over general and subordinated
creditors and stockholders in the event a receiver is appointed to distribute
the assets of the Bank.
Any capital loans by a bank holding company to any of its subsidiary
banks are subordinate in right of payment to deposits and to certain other
indebtedness of such subsidiary bank. In the event of a bank holding company's
bankruptcy, any commitment by the bank holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.
Capital Adequacy Guidelines for Bank Holding Companies and State Banks
The various federal bank regulators, including the Federal Reserve and
the FDIC, have adopted risk-based capital requirements for assessing bank
holding company and bank capital adequacy. These standards define what qualifies
as capital and establish minimum capital standards in relation to assets and
off-balance sheet exposures, as adjusted for credit risks.
The Company's and the Bank's December 31, 1998 ratios are set forth in
the Annual Report to Shareholders for the year ended December 31, 1998 under the
caption "Management's Discussion and Analysis -- Capital Resources."
Failure to meet capital guidelines could subject the Bank to a variety
of enforcement remedies, including termination of deposit insurance by the FDIC.
The risk-based capital standards of both the Federal Reserve Board and
the FDIC explicitly identify concentrations of credit risk and the risk arising
from non-traditional activities, as well as an institution's ability to manage
these risks, as important factors to be taken into account by the agency in
assessing an institution's overall capital adequacy. The capital guidelines also
provide that an institution's exposure to a decline in the economic value of its
capital due to changes in interest rates be considered by the agency as a factor
in evaluating a bank's capital adequacy. The Federal Reserve Board also has
recently issued additional capital guidelines for bank holding companies that
engage in certain trading activities.
Payment of Dividends
The Company is a legal entity separate and distinct from its bank
subsidiary. Most of the revenues of the Company are expected to result from
dividends paid to the Company by the Bank. There are statutory and regulatory
4
<PAGE>
requirements applicable to the payment of dividends by subsidiary banks as well
as by the Company to its stockholders. It is not anticipated that the Company
will pay cash dividends in the near future.
Certain Transactions by the Company with its Affiliates
Federal law regulates transactions between the Company and its
affiliates, including the amount of the Bank's loans to or investments in
nonbank affiliates and the amount of advances to third parties collateralized by
securities of an affiliate. Further, a bank holding company and its subsidiaries
are prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit, lease or sale of property or furnishing of services.
FDIC Insurance Assessments
Because the Bank's deposits are insured by the BIF, the Bank is subject
to insurance assessments imposed by the FDIC. The FDIC equalized the assessment
rates for BIF-insured and SAIF-insured deposits effective January 1, 1997. Thus,
for the semi-annual period beginning January 1, 1997, the assessments imposed on
all FDIC deposits for deposit insurance have an effective rate ranging from 0 to
27 basis points per $100 of insured deposits, depending on the institution's
capital position and other supervisory factors. However, because legislation
enacted in 1996 requires that both SAIF-insured and BIF-insured deposits pay a
pro rata portion of the interest due on the obligations issued by the Financing
Corporation ("FICO"), the FDIC is currently assessing BIF-insured deposits an
additional 1.26 basis points per $100 of deposits, and SAIF-insured deposits an
additional 6.30 basis points per $100 of deposits, to cover those obligations.
The FICO assessment is based on deposit balances and will be adjusted quarterly
to reflect changes in the assessment bases of the respective funds based on
quarterly Call Report and Thrift Financial Report submissions.
Regulation of the Bank
The Bank is also subject to examination by the South Carolina state
bank examiners. In addition, the Bank is subject to various other state and
federal laws and regulations, including state usury laws, laws relating to
fiduciaries, consumer credit and laws relating to branch banking. The Bank's
loan operations are also subject to certain federal consumer credit laws and
regulations promulgated thereunder, including, but not limited to: the federal
Truth-In-Lending Act, governing disclosures of credit terms to consumer
borrowers; the Home Mortgage Disclosure Act, requiring financial institutions to
provide certain information concerning their mortgage lending; the Equal Credit
Opportunity Act and the Fair Housing Act, prohibiting discrimination on the
basis of certain prohibited factors in extending credit; the Fair Credit
Reporting Act, governing the use and provision of information to credit
reporting agencies; the Bank Secrecy Act, dealing with, among other things, the
reporting of certain currency transactions; and the Fair Debt Collection Act,
governing the manner in which consumer debts may be collected by collection
agencies. The deposit operations of the Bank are also subject to the Truth in
Savings Act, requiring certain disclosures about rates paid on savings accounts;
the Expedited Funds Availability Act, which deals with disclosure of the
availability of funds deposited in accounts and the collection and return of
checks by banks; the Right to Financial Privacy Act, which imposes a duty to
maintain certain confidentiality of consumer financial records and the
Electronic Funds Transfer Act and regulations promulgated thereunder, which
govern automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
5
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The Bank is also subject to the requirements of the Community
Reinvestment Act (the "CRA"). The CRA imposes on financial institutions an
affirmative and ongoing obligation to meet the credit needs of their local
communities, including low- and moderate-income neighborhoods, consistent with
the safe and sound operation of those institutions. Each financial institution's
actual performance in meeting community credit needs is evaluated as part of the
examination process, and also is considered in evaluating mergers, acquisitions
and applications to open a branch or facility.
Other Safety and Soundness Regulations
Prompt Corrective Action. The federal banking agencies have broad
powers under current federal law to take prompt corrective action to resolve
problems of insured depository institutions. The extent of these powers depends
upon whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" or
"critically undercapitalized."
A bank that is "undercapitalized" becomes subject to provisions of the
FDIA restricting payment of capital distributions and management fees; requiring
FDIC to monitor the condition of the bank; requiring submission by the bank of a
capital restoration plan; restricting the growth of the bank's assets and
requiring prior approval of certain expansion proposals. A bank that is
"significantly undercapitalized" is also subject to restrictions on compensation
paid to senior management of the bank, and a bank that is "critically
undercapitalized" is further subject to restrictions on the activities of the
bank and restrictions on payments of subordinated debt of the bank. The purpose
of these provisions is to require banks with less than adequate capital to act
quickly to restore their capital and to have the FDIC move promptly to take over
banks that are unwilling or unable to take such steps.
Brokered Deposits. Under current FDIC regulations, "well capitalized"
banks may accept brokered deposits without restriction, "adequately capitalized"
banks may accept brokered deposits with a waiver from the FDIC (subject to
certain restrictions on payment of rates), while "undercapitalized" banks may
not accept brokered deposits. The regulations provide that the definitions of
"well capitalized", "adequately capitalized" and "undercapitalized" are the same
as the definitions adopted by the agencies to implement the prompt corrective
action provisions of the 1991 Banking Law (described in the previous paragraph).
Interstate Banking
In July 1994, South Carolina enacted legislation which effectively
provides that, after September 30, 1996, out-of-state bank holding companies
(including bank holding companies in the Southern Region, as defined under the
statute) may acquire other banks or bank holding companies having offices in
South Carolina upon the approval of the South Carolina State Board of Financial
Institutions and assuming compliance with certain other conditions, including
that the effect of the transaction not lessen competition and that the laws of
the state in which the out-of-state bank holding company filing the applications
has its principal place of business permit South Carolina bank holding companies
to acquire banks and bank holding companies in that state. Although such
legislation has increased takeover activity in South Carolina, the Bank does not
believe that such legislation will have a material impact on its competitive
position. However, no assurance of such fact may be given.
6
<PAGE>
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
has increased the ability of bank holding companies and banks to operate across
state lines. Under Riegle-Neal, the existing restrictions on interstate
acquisitions of banks by bank holding companies have been repealed, such that
the Company and any other adequately capitalized bank holding company located in
South Carolina can acquire a bank located in any other state, and a bank holding
company located outside South Carolina could acquire any South Carolina-based
bank, in either case subject to certain deposit percentage and other
restrictions. The legislation also provides that, unless an individual state
elects beforehand either (i) to accelerate the effective date or (ii) to
prohibit out-of-state banks from operating interstate branches within its
territory, on or after June 1, 1997, adequately capitalized and managed bank
holding companies will be able to consolidate their multistate bank operations
into a single bank subsidiary and to branch interstate through acquisitions. De
novo branching by an out-of-state bank would be permitted only if it is
expressly permitted by the laws of the host state. The authority of a bank to
establish and operate branches within a state will continue to be subject to
applicable state branching laws. South Carolina law was amended, effective July
1, 1996, to permit such interstate branching but not de novo branching by an
out-of-state bank. The Company believes that this legislation will result in
additional acquisitions of South Carolina financial institutions by out-of-state
financial institutions. However, the Company does not presently anticipate that
such legislation will have a material impact on its operations or future plans.
Legislative Proposals
Other proposed legislation which could significantly affect the
business of banking has been introduced or may be introduced in Congress from
time to time. Management of the Bank cannot predict the future course of such
legislative proposals or their impact on the Company and the Bank should they be
adopted.
Fiscal and Monetary Policy
Banking is a business which depends to a large extent on interest rate
differentials. In general, the difference between the interest paid by a bank on
its deposits and its other borrowings, and the interest received by a bank on
its loans and securities holdings, constitutes the major portion of a bank's
earnings. Thus, the earnings and growth of the Company and the Bank are subject
to the influence of economic conditions generally, both domestic and foreign,
and also to the monetary and fiscal policies of the United States and its
agencies, particularly the Federal Reserve. The Federal Reserve regulates the
supply of money through various means, including open-market dealings in United
States government securities, the discount rate at which banks may borrow from
the Federal Reserve, and the reserve requirements on deposits. The nature and
timing of any changes in such policies and their impact on the Company and the
Bank cannot be predicted.
Item 2. Description of Property
(a) The Bank owns in fee simple with no major encumbrances, real
property at 3685 Blue Ridge Boulevard, Walhalla, South Carolina, and real
property at 1600 Sandifer Boulevard in Seneca, South Carolina, where two of its
offices are located. The Bank also owns in fee simple with no major
encumbrances, real property at 4002 Clemson Boulevard, Anderson, South Carolina,
where it is currently operating a temporary branch office while it is in the
process of building a permanent branch office on the site. Management of the
Bank believes the Bank's facilities are suitable and adequate for the Company's
needs.
7
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Item 3. Legal Proceedings
The Bank is from time to time a party to various legal proceedings
arising in the ordinary course of business, but management of the Bank is not
aware of any pending or threatened litigation or unasserted claims or
assessments that are expected to result in losses, if any, that would be
material to the Bank's business and operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted for a vote of the security holders during
the fourth quarter of 1998.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The information set forth under the caption "Market for Common Stock
and Dividends" and in Note H to the Company's Consolidated Financial Statements
under the caption "Restrictions on Subsidiary Dividends, Loans or Advances" in
the Annual Report to Shareholders for the year ended December 31, 1998 (the
"1998 Annual Report") is incorporated herein by reference. The information set
forth in Part I, Item 1 of this Form 10-KSB under the caption "Effect of
Government Regulation -- Payment of Dividends" is also incorporated herein by
reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
The information set forth under the caption "Management's Discussion
and Analysis" in the 1998 Annual Report is incorporated herein by reference.
Item 7. Financial Statements
The Consolidated Financial Statements, including Notes thereto, set
forth in the 1998 Annual Report are incorporated herein by reference.
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no disagreements with or changes in accountants.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
The information set forth under the captions "Management of the
Company" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Proxy Statement to be used in conjunction with the 1999 Annual Meeting of
Shareholders (the "Proxy Statement"), which will be filed within 120 days of the
Corporation's fiscal year end, is incorporated herein by reference.
Item 10. Executive Compensation
The information set forth under the caption "Management Compensation"
in the Proxy Statement is incorporated herein by reference.
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Item 11. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the caption "Security Ownership of
Certain Beneficial Owners" and "Management of the Company" in the Proxy
Statement is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
The information set forth under the caption "Certain Relationships and
Related Transactions" in the Proxy Statement is incorporated herein by
reference.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibit No.(from Description
item 601 of
Regulation S-B)
3.1 Articles of Incorporation, as amended
3.2 By-laws (Incorporated by reference to the
Annual Report on Form 10-KSB for the year
ended December 31, 1997 (the "1997 10-KSB"))
4 Specimen Stock certificate (Incorporated by
reference to the 1997 10-KSB)
10.1 Community First Bank 1989 Incentive
Stock Option Plan (Incorporated by reference
to the 1997 10-KSB)
10.2 Community First Bank Incentive Stock
Agreement with Frederick D.Shepherd, Jr.
(Incorporated by reference to the 1997 10-KSB)
10.3 Community First Bancorporation 1998 Stock
Option Plan (Incorporated by reference to
Proxy Statement filed in connection with the
1998 Annual Meeting of Shareholders)
13 Portions of the Annual Report to Shareholders
for the Year Ended December 31, 1998
21 Subsidiaries of the registrant
23 Consent of Donald G. Jones and Company, P.A.
27 Financial data schedule
(b) No Reports on Form 8-K were filed during the year ended December 31, 1998.
9
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SIGNATURES
In accordance with Section 13 or 15(d) 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 BANK
s/Frederick D. Shepherd, Jr.
Date: March 17, 1999 By:-------------------------------------------
Frederick D. Shepherd, Jr.
Its President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
<S> <C> <C>
- - ------------------------------- Vice Chairman and Director March __, 1999
(Larry S. Bowman)
s/William M. Brown
- - ------------------------------- Director and Secretary March 17, 1999
(William M. Brown)
s/Robert H. Edwards
- - ------------------------------- Director March 17, 1999
(Robert H. Edwards)
- - ------------------------------- Director March __, 1999
(Blake L. Griffith)
s/John R. Hamrick
- - ------------------------------- Director March 16, 1999
(John R. Hamrick)
- - ------------------------------- Director March __, 1999
(R. Theo Harris, Sr.)
s/James E. McCoy
- - ------------------------------- Chairman and Director March 16, 1999
(James E. McCoy)
s/Frederick D. Shepherd, Jr.
- - ------------------------------- Director, President, Chief March 17, 1999
(Frederick D. Shepherd, Jr.) Executive Officer, Treasurer and
Principal Financial Officer
s/Gary V. Thrift
- - ------------------------------- Director March 16, 1999
(Gary V. Thrift)
- - ------------------------------- Director March __, 1999
(James E. Turner)
s/Charles L. Winchester
- - ------------------------------- Director March 17, 1999
(Charles L. Winchester)
</TABLE>
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EXHIBIT INDEX
3.1 Articles of Incorporation, as amended
3.2 By-laws (Incorporated by reference to the
Annual Report on Form 10-KSB for the year
ended December 31, 1997 (the "1997 10-KSB"))
4 Specimen Stock certificate (Incorporated by
reference to the 1997 10-KSB)
10.1 Community First Bank 1989 Incentive
Stock Option Plan (Incorporated by reference
to the 1997 10-KSB)
10.2 Community First Bank Incentive Stock
Agreement with Frederick D.Shepherd, Jr.
(Incorporated by reference to the 1997 10-KSB)
10.3 Community First Bancorporation 1998 Stock
Option Plan (Incorporated by reference to
Proxy Statement filed in connection with the
1998 Annual Meeting of Shareholders)
13 Portions of the Annual Report to Shareholders
for the Year Ended December 31, 1998
21 Subsidiaries of the registrant
23 Consent of Donald G. Jones and Company, P.A.
27 Financial data schedule
11
EXHIBIT 3.1
STATE OF SOUTH CAROLINA
SECRETARY OF STATE
ARTICLES OF INCORPORATION
1. The name of the proposed corporation is Community First Bancorporation
2. The initial registered office of the corporation is 3685 Blue Ridge
Boulevard, Walhalla, SC 29691 and the initial registered agent at such
address is Frederick D. Shepherd, Jr.
3. The corporation is authorized to issue shares of stock as follows:
Complete a or b, whichever is applicable: a. [x] If the corporation is
authorized to issue a single class of shares, the total number of
shares authorized is 5,000,000.
b. [] The corporation is authorized to issue more than one class of
shares:
Class of Shares Authorized No. of Each Class
--------------- ---------------------
-------------- ---------------------
The relative rights, preferences, and limitations of the shares of each
class, and of each series within a class, are as follows:
4. The existence of the corporation shall begin when these articles are
filed with the Secretary of State unless a delayed date is indicated
(See ss.33-1-230(b)) : effective at filing
5. The optional provisions which the corporation elects to include in the
articles of incorporation are as follows (See ss.33-2-102 and the
applicable comments thereto; and 35-2-105 and 35-2-221 of the 1976
South Carolina Code):
(a) The number of Directors of the Corporation may be fixed by the
bylaws, but shall not be less than nine (9).
The Board of Directors shall be divided into three classes as
equal as may be feasible, with the term of office of one class expiring
each year. The members of the initial Board of Directors shall be
divided into three classes as hereinafter provided with directors of
the first class to hold office for a term expiring at the 1998 annual
meeting of shareholders, directors of the second class to hold office
for a term expiring at the 1999 annual meeting of shareholders, and
directors of the third class to hold office for the term expiring at
the 2000 annual meeting of shareholders. At each annual meeting of
shareholders, successors to the directors whose term shall then expire
shall be elected to hold office for terms expiring at the third
succeeding annual meeting. In case of any vacancies, by reason of an
increase in the number of directors of otherwise, each additional
director may be elected by the Board of Directors to hold office until
the next shareholders' meeting at which directors are elected and until
his successor shall have been elected and qualified. Directors shall
continue to hold office until others are chosen and qualified in their
stead. When the number of directors is changed, any newly created
directorships or any decrease in directorships shall be so assigned
among the classes by a majority of the directors then in office, though
less than a quorum, as to make all classes as equal in number as may be
feasible. No decrease in the number of directors shall shorten the term
of any incumbent director.
1
<PAGE>
Any director may be removed from office as a director, but
only for cause, by the affirmative vote at a meeting called as provided
in the bylaws for that purpose, of at least sixty-six and two-thirds
(66-2/3%) percent in interest of the holders of voting stock of the
corporation issued and outstanding.
(b) The number of directors constituting the initial Board of
Directors of the corporation shall be twelve (12) in number and the
names and addresses of the persons who are to serve as the initial
Board of Directors until the first, second and third annual meetings of
the shareholders or until their successors be elected and qualify are:
FIRST CLASS: Terms expiring at the Annual Meeting of Shareholders
in 1998 are:
Names: Addresses:
Robert H. Edwards s/Robert H. Edwards
Walhalla, S.C.
B. Molgro England, Sr. s/B. Molgro England, Sr.
Westminster, S.C.
Blake L. Griffith s/Blake L. Griffith
Walhalla, S.C.
Gary V. Thrift s/Gary V. Thrift
Seneca, S.C.
SECOND CLASS: Terms expiring at the Annual Meeting of
Shareholders in 1999 are:
R. Theo Harris, Jr. s/R. Theo Harris, Jr.
Westminster, S.C.
James E. McCoy s/James E. McCoy
Walhalla, S.C.
James E. Turner s/James E. Turner
Seneca, S.C.
Charles L. Winchester s/Charles L. Winchester
Sunset, S.C.
THIRD CLASS: Terms expiring at the Annual Meeting of Shareholders
in 2000 are:
Larry S. Bowman, M.D. s/Larry S. Bowman, M.D.
Seneca, S.C.
William M. Brown s/William M. Brown
Salem, S.C.
John R. Hamrick s/John R. Hamrick
Seneca, S.C.
Frederick D. Shepherd, Jr. s/Frederick D. Shepherd, Jr.
Walhalla, S.C.
(c) Shareholders shall not have the right to cumulate their votes for
directors.
(d) The Corporation elects not to have preemptive rights.
(e) The corporation shall indemnify and advance expenses to its
officers, directors, employees and agents to the full extent permitted
by the South Carolina Business Corporation Act of 1988.
2
<PAGE>
6. The name and address of each incorporator is as follows (only one is
required):
<TABLE>
<CAPTION>
Name Address Signature
<S> <C> <C>
Frederick D. Shepherd, Jr. 3685 Blue Ridge Blvd. s/Frederick D. Shepherd, Jr.
Walhalla, SC 29691
</TABLE>
7. I, Suzanne Hulst Clawson, an attorney licensed to practice in the State of
South Carolina, certify that the corporation, to whose articles of
incorporation this certificate is attached, has complied with the
requirements Chapter 2, Title 33 of the 1976 South Carolina Code relating
to the articles of incorporation.
Date May 22, 1997
Suzanne Hulst Clawson
(Type or Print Name)
Address Sinkler & Boyd, P.A.
Post Office Box 11889
Columbia, SC 29211
3
<PAGE>
Jim Miles STATE OF SOUTH CAROLINA
Secretary of State SECRETARY OF STATE
Filed
July 30, 1998 ARTICLES OF AMENDMENT
Pursuant to Section 33-10-106 of the 1976 South Carolina Code, as
amended, the undersigned corporation adopts the following Articles of Amendment
to its Articles of Incorporation:
1. The name of the corporation is Community First Bancorporation.
2. On June 18, 1998, the corporation adopted the following Amendment(s) of
its Articles of Incorporation.
RESOLVED, that pursuant to a two-for-one split of the authorized shares
of the Corporation's Common Stock, the total number of authorized
shares of the Corporation's Common Stock shall be increased from 5
million shares to 10 million shares.
3. The manner, if not set forth in the amendment, in which any exchange,
reclassification, or cancellation of issued shares provided for in the
Amendment shall be effected, is as follows: (if not applicable, insert
"not applicable" or "NA").
Shareholders of record on July 1, 1998 will be issued additional stock
certificates representing one additional share of the Corporation's
Common Stock for every share currently held.
4. Complete either a or b, whichever is applicable.
a. Amendment(s) adopted by shareholder action.
At the date of adoption of the amendment, the number of
outstanding shares of each voting group entitled to vote
separately on the Amendment, and the vote of such shares was:
Number of Number of Number of Number of
out- Votes Shares Undisputed*
Voting standing Entitled Represented Shares Voted
Group Shares to be Cast at the meeting For Against
----- ------ ---------- -------------- --- -------
b. [x] The amendment(s) was duly adopted by the Incorporators or
board of directors without shareholder approval pursuant to
ss.33-6-102(d), 33-10-102 and 33-10-105 of the 1976 South
Carolina Code as amended, and shareholder action was not
required.
5. Unless a delayed date is specified, the effective date of these
Articles of Amendments shall be the date of acceptance for filing by
the Secretary of State (See ss.33-1-230(b)) .
COMMUNITY FIRST BANCORPORATION
DATE: June 18, 1998 ------------------------------------
(Name of Corporation)
s/Frederick D. Shepherd, Jr.
By:---------------------------------
(Signature)
Frederick D. Shepherd, Jr.
President and Chief Executive Officer
-------------------------------------
(Type or Print Name and Office)
*NOTE: Pursuant to Section 33-10-106(6)(i), the corporation can alternatively
state the total number of votes cast for and against the amendment by
each voting group entitled to vote separately on the amendment or the
total number of undisputed votes cast for the amendment by each voting
group together with a statement that the number cast for the amendment
by each voting group was sufficient for approval by that voting group.
4
EXHIBIT 13
PORTIONS OF THE ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 1998
Financial Summary*
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
Financial Condition
<S> <C> <C> <C> <C> <C>
Securities ....................................... $ 38,284 $ 25,510 $26,525 $22,962 $19,809
Allowance for loan losses ........................ 955 890 705 575 460
Net loans ........................................ 66,938 64,948 53,953 43,600 36,725
Premises and equipment - net ..................... 2,871 1,675 1,782 1,562 1,609
Total assets ..................................... 127,127 104,968 98,673 83,995 75,852
Noninterest bearing deposits ..................... 14,798 16,501 10,352 10,534 8,716
Interest bearing deposits ........................ 97,698 75,790 77,108 63,406 58,371
Total deposits ................................... 112,496 92,291 87,460 73,940 67,087
Obligation under capital lease ................... - - - - 28
Total liabilities ................................ 113,524 93,118 88,338 74,770 67,764
Total shareholders' equity ....................... 13,603 11,850 10,335 9,225 8,088
Results of Operations
Interest income .................................. $ 8,904 $ 7,578 $ 6,928 $ 5,919 $ 4,587
Interest expense ................................. 4,518 3,664 3,695 3,171 2,106
-------- -------- ------- ------- -------
Net interest income .............................. 4,386 3,914 3,233 2,748 2,481
Provision for loan losses ........................ 213 315 223 153 173
-------- -------- ------- ------- -------
Net interest income after provision .............. 4,173 3,599 3,010 2,595 2,308
Securities gains ................................. - - - - 7
Other income ..................................... 574 522 342 287 212
Other expenses ................................... 2,155 1,909 1,559 1,549 1,430
-------- -------- ------- ------- -------
Income before income taxes ....................... 2,592 2,212 1,793 1,333 1,097
Income tax expense ............................... 928 807 641 476 389
-------- -------- ------- ------- -------
Net income ....................................... $ 1,664 $ 1,405 $ 1,152 $ 857 $ 708
======== ======== ======= ======= =======
Comprehensive income ............................. $ 1,664 $ 1,467 $ 1,065 $ 1,117 $ 414
======== ======== ======= ======= =======
Per Share Data**
Net income ....................................... $ 0.94 $ 0.80 $ 0.66 $ 0.49 $ 0.41
Net income, assuming dilution .................... 0.88 0.77 0.64 0.48 0.40
Cash dividends declared .......................... - - - - -
Period end book value ............................ 7.58 6.69 5.88 5.29 4.65
</TABLE>
* Community First Bancorporation became the bank holding company of Community
First Bank effective October 16, 1997 as part of a corporate reorganization
which was accounted for as if it were a pooling-of-interests. The
consolidated financial statements and related information for the year
ended December 31, 1997 are presented as if the reorganization had occurred
on January 1, 1997. The financial statements and related information for
the years ended December 31, 1994 through December 31, 1996 are the same as
the amounts reported previously by Community First Bank, adjusted for a
stock split, stock dividends and the 1997 change in accounting principle
for reporting earnings per share requiring the restatement of prior year
figures. Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", effective for 1998, requires the reporting and
display of comprehensive income with reclassification of financial
statements for prior periods. The Company's other comprehensive income
consists of the change in unrealized holding gains and losses on
available-for-sale securities, net of applicable income taxes, that was
previously reported only as an adjustment of shareholders' equity.
** Per share amounts have been retroactively adjusted to reflect a two-for-one
stock split effective July 31, 1998, a 15% stock dividend effective
December 30, 1997 and 5% stock dividends effective May 1, 1996, 1995 and
1994. Net income per share and net income per share, assuming dilution,
reflect the adoption of Statement of Financial Accounting Standards No.
128, "Earnings per Share" for the year ended December 31, 1997, with
restatement of prior years on a comparable basis.
1
<PAGE>
Market for Common Stock and Dividends
Although a limited number of shares of common stock of Community First
Bancorporation (the "Company") are traded from time to time on an individual
basis, no established trading market has developed and none is expected to
develop in the near future. The common stock is not traded on the NASDAQ
National Market System, nor are there any market makers known to management.
During 1998, management was aware of a few transactions in which the Company's
common stock traded in a price range from $9.00 to $21.00 per share (per share
prices have been adjusted to reflect a two-for-one stock split effective July
31, 1998). However, management has not ascertained that these transactions are
the result of arm's length negotiations between the parties involved, and
because of the limited number of shares involved, these prices may not be
indicative of the market value of the common stock.
As of February 28, 1999, there were approximately 749 holders of
record of the Company's common stock, excluding individual participants in
security position listings.
There have been no cash dividends declared or paid since the Company's
inception. In order to support the Company's continuing need for capital to
support anticipated asset growth and market expansion, management does not
expect to declare or pay cash dividends in 1999.
The Board of Directors declared a two-for-one stock split effective
July 31, 1998 and a 15% stock dividend effective December 30, 1997.
Management's Discussion and Analysis
This discussion is intended to assist in understanding the
consolidated financial condition and results of operations of Community First
Bancorporation and its wholly-owned subsidiary, Community First Bank (the
"Bank"), which are collectively referred to as the "Company". This information
should be reviewed in conjunction with the consolidated financial statements and
related notes contained elsewhere in this report. Per share net income and net
income, assuming dilution, have been adjusted to reflect a two-for-one stock
split effective July 31, 1998, a 15% stock dividend effective December 30, 1997,
and a 5% stock dividend effective May 1, 1996.
Beginning in 1998, Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," requires the reporting and
display of comprehensive income and its components. This SFAS provides for
reclassification of financial statements for earlier periods for comparative
purposes. Comprehensive income includes net income and other comprehensive
income or loss. Other comprehensive income or loss consists of changes in
shareholders' equity, other than those resulting from net income or investments
by or distributions to shareholders, that are due to transactions, events and
circumstances from non-shareholder sources. The Company's other comprehensive
income consists of the change in unrealized holding gains and losses on
available-for-sale securities, net of applicable income taxes, that was
previously reported only as an adjustment of shareholders' equity. Because of
the material amounts of available-for-sale securities carried in the
consolidated balance sheet, changes in estimated fair values of such securities
could significantly affect the amount of other comprehensive income or loss used
to compute comprehensive income.
Community First Bancorporation was incorporated on May 23, 1997 as a
bank holding company to effect a plan of corporate reorganization in which the
Bank became its wholly-owned subsidiary on October 16, 1997. The discussion and
figures in this section present information regarding the Company since the date
of reorganization and information and figures of the Bank prior to that date.
Per share information prior to the reorganization is presented in terms of the
current equivalent of the number of shares of the Company's common stock
outstanding.
Forward Looking Statements
Statements included in Management's Discussion and Analysis which are
not historical in nature are intended to be, and are hereby identified as
"forward looking statements" for purposes of the safe harbor provided by Section
21E of the Securities Exchange Act of 1934, as amended. The Company cautions
readers that forward looking statements, including without limitation, those
relating to the Company's planned new office expansion into Anderson County, its
response to the Year 2000 problem, future business prospects, revenues, working
capital, liquidity, capital needs, interest costs, and income, are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those indicated in the forward looking statements, due to
several important factors herein identified, among others, and other risks and
factors identified from time to time in the Company's reports filed with the
Securities and Exchange Commission.
2
<PAGE>
Earnings Performance
1998 Compared with 1997
For the year ended December 31, 1998, the Company recorded net income
of $1,664,000, an increase of $259,000, or 18.4%, over net income of $1,405,000
for 1997. Net income per share for 1998 was $.94 compared with $.80 for 1997.
Per share net income, assuming dilution for unexercised stock options, was $.88
for 1998 compared with $.77 for 1997. Return on average assets was 1.38% for
both 1998 and 1997. Return on average shareholders' equity increased to 13.07%
for 1998 from 12.64% for 1997. Comprehensive income was $1,664,000 for 1998
compared with $1,467,000 for 1997. Other comprehensive income was negligible for
1998, and was $62,000 for 1997.
Net income continued to increase, primarily because of the $472,000
increase in net interest income and a $102,000 decrease in the provision for
loan losses charged to expense. The increase in net interest income resulted
from the Company's rapid deposit growth and its ability to invest those funds
profitably. Interest-bearing deposit liabilities at the end of 1998 increased
$21,908,000 or 28.9% compared with the end of 1997 amount, and interest earning
assets increased $22,479,000 or 22.9% over the same period.
Other income increased by $52,000 to $574,000 in 1998, largely as a
result of continued increases in deposit account service charges assessed to
customers. These charges increased by $62,000 in 1998 to $369,000. Partially
offsetting the increase in net interest income and other income was an increase
of $246,000 in other expenses resulting mainly from hiring new employees,
expenses relating to upgrading the Bank's computer hardware and software systems
that were placed in service for a part of 1997, and higher expenses for
repairing and maintaining the Bank's equipment and facilities.
1997 Compared with 1996
The Company achieved net income of $1,405,000 for the year ended
December 31, 1997, up $253,000 or 22.0%, over net income of $1,152,000 for 1996.
Basic per share net income was $.80 for 1997 compared with $.66 for 1996, and
net income per share, assuming dilution, was $.77 for 1997 and $.64 for 1996. In
1997, return on average assets was 1.38%, up from 1.19% for 1996. Return on
average shareholders' equity increased to 12.64% from 11.97% for 1996.
Comprehensive income was $1,467,000 for 1997, and $1,065,000 for 1996. Other
comprehensive income was $62,000 for 1997, and an other comprehensive loss of
$87,000 was recorded for 1996.
Net income increased primarily because of a $681,000 increase in net
interest income in 1997. This increase was largely the result of steady loan
growth which was achieved with neither a significant reduction in the Company's
loan yield nor a significant increase in the degree of risk assumed in funding
loan requests. A secondary factor contributing to increased net interest income
was a somewhat lower interest expense associated with deposits. In 1997, the
Company's interest expense was $31,000 less than in 1996. Noninterest income
increased by $180,000 in 1997 to $522,000. Approximately one-half of this
increase was from deposit account service charges. Noninterest expenses also
increased during 1997, totaling $1,909,000, or $350,000 more than in 1996.
Salaries and employee benefits increased by $149,000.
Net Interest Income
Net interest income, comprising the difference between interest income
earned and interest expense incurred, is the principal source of the Company's
earnings. Net interest income is affected by changes in the levels of interest
rates and by changes in the volume and mix of interest earning assets and
interest bearing liabilities.
Net interest income was $4,386,000, $3,914,000 and $3,233,000 for
1998, 1997 and 1996, respectively. The $472,000 growth in net interest income
for 1998 resulted primarily from the positive effects of higher levels of
interest earning assets which were partially offset by higher rates paid on
increased levels of interest bearing liabilities. A relatively stable interest
rate environment during 1998 further strengthened the Company's results in this
area. During 1998, average interest earning assets increased by $18,121,000, or
18.5%, and average interest bearing liabilities increased by $14,578,000, or
19.4%. Interest income increased by $1,326,000 to $8,904,000 in 1998 and
interest expense increased by $854,000 to $4,518,000.
3
<PAGE>
The table, "Average Balances, Yields and Rates", provides a detailed
analysis of the effective yields and rates on the categories of average interest
earning assets and interest bearing liabilities for the years ended December 31,
1998, 1997 and 1996.
Average Balances, Yields and Rates
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ---------------------------- ----------------------------
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
Balances(1) Expense Rates Balances(1) Expense Rates Balances(1) Expense Rates
---------------------------- ---------------------------- ----------------------------
(Dollars in thousands)
Assets
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Taxable securities ........................ $ 30,148 $1,841 6.11% $ 27,024 $1,646 6.09% $ 25,895 $1,544 5.96%
Federal funds sold ........................ 16,882 926 5.49% 10,001 534 5.34% 16,990 911 5.36%
Other investments ......................... 343 21 6.12% 19 - 0.00% - - 0.00%
Loans(2),(3) .............................. 68,499 6,116 8.93% 60,707 5,398 8.89% 49,952 4,473 8.95%
--------- ------ --------- ------ -------- ------
Total interest earning assets ..... 115,872 8,904 7.68% 97,751 7,578 7.75% 92,837 6,928 7.46%
Cash and due from banks ................... 2,791 2,088 2,091
Allowance for loan losses ................. (975) (790) (636)
Premises and equipment .................... 2,116 1,725 1,551
Other assets .............................. 1,176 982 656
--------- --------- --------
Total assets ...................... $ 120,980 $ 101,756 $ 96,499
========= ========= ========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts . $ 13,778 $ 575 4.17% $ 10,639 $ 414 3.89% $ 10,460 $ 378 3.61%
Savings ............................... 20,443 779 3.81% 16,448 596 3.62% 18,801 738 3.93%
Time deposits $100M and over .......... 24,977 1,391 5.57% 21,889 1,201 5.49% 19,560 1,026 5.25%
Other time deposits ................... 30,428 1,773 5.83% 26,065 1,452 5.57% 25,573 1,553 6.07%
--------- ------ --------- ------ ------- ------
Total interest bearing
deposits ........................ 89,626 4,518 5.04% 75,041 3,663 4.88% 74,394 3,695 4.97%
Short-term borrowings ..................... - - 0.00% 7 1 14.29% - - 0.00%
--------- ------ --------- ------ -------- ------
Total interest bearing
liabilities ..................... 89,626 4,518 5.04% 75,048 3,664 4.88% 74,394 3,695 4.97%
Noninterest bearing demand deposits ....... 17,599 14,790 11,646
Other liabilities ......................... 1,018 799 835
Shareholders' equity ...................... 12,737 11,119 9,624
--------- --------- --------
Total liabilities and shareholders'
equity ............................ $ 120,980 $ 101,756 $ 96,499
========= ========= ========
Interest rate spread(4) ................... 2.64% 2.87% 2.49%
Net interest income and net yield
on earning assets(5) .................. $4,386 3.79% $3,914 4.00% $3,233 3.48%
Interest free funds supporting earning
assets(6) ............................. $ 26,246 $ 22,703 $ 18,443
</TABLE>
- - --------------------------
(1) Average balances are computed on a daily basis.
(2) No taxable equivalent adjustment has been made because the Company has no
material amounts of non-taxable interest income.
(3) Nonaccrual loans are included in the average loan balances and income on
such loans is recognized on a cash basis.
(4) Total interest bearing assets yield less the total interest bearing
liabilities rate.
(5) Net interest income divided by total interest earning assets.
(6) Total interest earning assets less total interest bearing liabilities.
4
<PAGE>
Although loan growth continued to be strong in 1998, loan demand and
the rate of loan growth decreased toward the end of the year. Average loans for
the year increased by $7,792,000, or 12.8%, but loans at 1998 year-end increased
by only $2,055,000, or 3.1%, over the 1997 year-end amount. In contrast, the
Company's average investment in taxable securities increased by $3,124,000, or
11.6%, during 1998, but the 1998 year-end amount was $12,774,000, or 50.1%,
greater than the 1997 year-end amount. Average federal funds sold investments
increased by $6,881,000, or 68.8%, during 1998 and the year-end increase was
$7,640,000, or 117.4%. Because the largest changes in average earning assets
during 1998 were in the lower-yielding categories, the average yield on earning
assets decreased by 7 basis points to 7.68%.
Growth in interest-bearing deposits was the primary funding source
during 1998. Strong growth was experienced in all categories of such liabilities
during the year. Average interest bearing deposits increased during 1998 by
$14,585,000, or 19.4%, over the 1997 average amounts. The average rate paid on
interest bearing liabilities in 1998 increased by 16 basis points over the
average rate paid in 1997.
Because growth in funding sources was greater than loan demand, the
Company has invested relatively larger amounts in taxable securities and federal
funds sold during 1998. If loan demand becomes stronger in 1999, a source of
funds is readily available to accommodate it.
The $681,000 increase in net interest income for 1997 resulted from
increased loan volume and higher levels of interest-free funding sources. These
funding sources included noninterest bearing demand deposits and equity capital.
Loan growth was steady in 1997, with average loans for 1997 increasing by
$10,755,000, or 21.5%, over the 1996 average. Because average deposit funding
sources grew by only $3,791,000, or 4.4% during 1997, the Company funded the
growth in loans by reducing its federal funds sold position. These actions
resulted in a shift in the earning assets mix toward higher yielding, less
liquid assets and a 29 basis point increase in the earning asset yield.
The table, "Volume and Rate Variance Analysis", provides a summary of
changes in net interest income resulting from changes in volumes of interest
earning assets and interest bearing liabilities, and the rates earned and paid
on such assets and liabilities. As reflected in the table, increased volumes
accounted for $582,000 of the growth in net interest income for 1998, which was
partially offset by a $110,000 decrease due to higher rates paid on interest
bearing funding sources. Increased volumes were responsible for $575,000 of the
growth in net interest income for 1997, which was augmented by a $106,000
increase due to lower rates paid.
Volume and Rate Variance Analysis
<TABLE>
<CAPTION>
1998 Compared with 1997 1997 Compared with 1996
----------------------- -----------------------
Volume (1) Rate (1) Total Volume (1) Rate (1) Total
---------- -------- ----- ---------- -------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Taxable securities ..................................... $ 191 $ 4 $ 195 $ 69 $ 33 $ 102
Federal funds sold ..................................... 377 15 392 (373) (4) (377)
Other investments ...................................... 21 - 21 - - -
Loans(2) ............................................... 696 22 718 956 (31) 925
------- ----- ------- ----- ----- -----
Total interest income .................... 1,285 41 1,326 652 (2) 650
------- ----- ------- ----- ----- -----
Interest bearing deposits
Interest bearing transaction accounts ............. 129 32 161 7 29 36
Savings ........................................... 151 32 183 (88) (54) (142)
Time deposits $100M and over ...................... 172 18 190 126 49 175
Other time deposits ............................... 252 69 321 31 (132) (101)
Short-term borrowings .................................. (1) - (1) 1 - 1
------- ----- ------- ----- ----- -----
Total interest expense ................... 703 151 854 77 (108) (31)
------- ----- ------- ----- ----- -----
Net interest income ...................... $ 582 $(110) $ 472 $ 575 $ 106 $ 681
======= ===== ======= ===== ===== =====
</TABLE>
- - -------------------------------
(1) The rate/volume variance for each category has been allocated on a
consistent basis between rate and volume variances based on the percentage
of rate or volume variance to the sum of the two absolute variances except
in categories having balances in only one period. In such cases, the entire
variance is attributed to volume variances.
(2) No taxable equivalent adjustment has been made because the Company has no
material amounts of non-taxable interest income.
5
<PAGE>
During 1999, management expects that interest rates will move within a
narrow range, and management has not identified any factors that might cause
interest rates to increase or decrease sharply in a short period of time. Any
improvements in net interest income for 1999 are expected, therefore, to be
largely the result of increases in the volume of interest earning assets and
liabilities. Management expects to continue to use aggressive marketing
strategies to increase the Company's market share for both deposits and quality
loans within its service areas in Oconee and Anderson counties of South
Carolina. These strategies involve offering attractive interest rates and
continuing the Company's commitment to providing outstanding customer service.
Interest Rate Sensitivity
Interest rate sensitivity measures the timing and magnitude of the
repricing of assets compared with the repricing of liabilities and is an
important part of asset/liability management. The objective of interest rate
sensitivity management is to generate stable growth in net interest income, and
to control the risks associated with interest rate movements. Management
constantly monitors interest rate risk exposures and the expected interest rate
environment so that adjustments in interest rate sensitivity can be timely made.
The table, "Interest Sensitivity Analysis", indicates that, on a
cumulative basis through twelve months, rate sensitive liabilities exceeded rate
sensitive assets at the end of 1998 by $59,553,000, resulting in a cumulative
gap ratio of .37. When interest sensitive assets exceed interest sensitive
liabilities for a specific repricing "horizon," a positive interest sensitivity
gap results. The gap is negative when interest sensitive liabilities exceed
interest sensitive assets, as was the case at the end of 1998 with respect to
the one-year time horizon. For a bank with a negative gap, falling interest
rates would be expected to have a positive effect on net interest income and
rising rates would be expected to have the opposite effect.
The table "Interest Sensitivity Analysis" reflects the balances of
interest earning assets and interest bearing liabilities at the earlier of their
repricing or maturity dates. Amounts of fixed rate loans are reflected at the
loans' final maturity dates. Variable rate loans are reflected at the earlier of
their contractual maturity date or the date at which the loans may be repriced
contractually. Taxable securities are reflected at the earlier of each
instrument's ultimate maturity or contractual repricing date. Overnight federal
funds sold are reflected in the earliest contractual repricing interval due to
the immediately available nature of these funds. Interest bearing liabilities
with no contractual maturity, such as interest bearing transaction accounts and
savings deposits are reflected in the earliest repricing interval due to
contractual arrangements which give management the opportunity to vary the rates
paid on these deposits within a thirty-day or shorter period. However, the
Company is not obligated to vary the rates paid on those deposits within any
given period. Fixed rate time deposits, principally certificates of deposit, are
reflected at their contractual maturity dates. Variable rate time deposits,
principally individual retirement accounts, are reflected at the earlier of
their next repricing or maturity dates.
During 1999, management plans, where possible, to reduce the Company's
liability sensitive position by attempting to increase the mix of variable
versus fixed rate loans and by extending the maturities of fixed rate time
deposits. This strategy, if successful, would help to provide a stable net
interest spread and soften the negative effects of any increase in interest
rates that might occur.
6
<PAGE>
Interest Sensitivity Analysis
<TABLE>
<CAPTION>
December 31, 1998
-----------------
Within 4-12 Over 1-5 Over 5
3 Months Months Years Years Total
-------- ------ ----- ----- -----
(Dollars in thousands)
Interest earning assets
<S> <C> <C> <C> <C> <C>
Taxable securities ................................. $ 24 $ 1,003 $11,452 $25,805 $ 38,284
Other investments .................................. 345 - - - 345
Federal funds sold ................................. 14,150 - - - 14,150
Loans (1) .......................................... 13,243 6,127 41,368 6,789 67,527
-------- -------- ------- ------- --------
Total interest earning assets ............. 27,762 7,130 $52,820 $32,594 $120,306
-------- -------- ======= ======= ========
Interest bearing liabilities
Interest bearing deposits
Interest bearing transaction accounts ......... $ 17,240 $ - $ - $ - $ 17,240
Savings ....................................... 16,872 - - - 16,872
Time deposits $100M and over .................. 19,430 8,891 736 - 29,057
Other time deposits ........................... 9,909 22,083 2,537 - 34,529
-------- -------- ------- ------- --------
Total interest bearing liabilities ........ $ 63,451 $ 30,974 $ 3,273 $ - $ 97,698
======== ======== ======= ======= ========
Interest sensitivity gap ................................ $(35,689) $(23,844)
Cumulative interest sensitivity gap ..................... $(35,689) $(59,533)
Gap ratio ............................................... 0.44 0.23
Cumulative gap ratio .................................... 0.44 0.37
</TABLE>
(1) Loans are net of nonaccruing loans totaling $366,000.
Provision for Loan Losses
The provision for loan losses is charged to earnings based on
management's continuing review and evaluation of the loan portfolio and general
economic conditions. Provisions for loan losses were $213,000, $315,000 and
$223,000 for the years ended December 31, 1998, 1997 and 1996, respectively. The
decreased provision in 1998 is attributable to a slower rate of loan growth as
compared with prior years, and no material increases in the ratios of net loan
charge-offs to average loans outstanding or net charge-offs to allowance for
loan losses. The allowance for loan losses as a percentage of total loans at
year end was 1.41% for 1998 compared with 1.35% at the end of 1997. Net loan
charge-offs were $148,000 in 1998 compared with $130,000 and $93,000 for 1997
and 1996, respectively. See "Impaired Loans" and "Allowance for Loan Losses" for
a discussion of the factors management considers in its review of the adequacy
of the allowance and provision for loan losses.
Other Income
Noninterest income for 1998 increased $52,000 or 10.0% compared with
an increase of $180,000 or 52.6% for 1997. Service charges on deposit accounts
increased $62,000 in 1998 and $94,000 in 1997. These increases were primarily
due to increased chargeable account activity. Credit life insurance commission
income was static at $39,000 for both 1998 and 1997, while such income in 1997
increased $15,000. There were no realized securities gains or losses in 1998,
1997 or 1996. Other noninterest income decreased $10,000 in 1998 compared with
the previous year. In 1997, other noninterest income included a $44,000 gain
from the sale of foreclosed real estate with no such transaction in 1998.
Categories of other noninterest income that increased included commissions
earned on customer check orders (increase of $6,000), merchant discounts and
other fees earned on credit card transactions (increase of $23,000) and other
miscellaneous fees (increase of $6,000).
7
<PAGE>
Other Expenses
Noninterest expenses for 1998 increased $246,000 or 12.9%, compared
with an increase of $350,000 or 22.5% for 1997. Salaries and employee benefits
increased $130,000 in 1998 and $149,000 in 1997. The 1998 increase resulted
primarily from personnel added in anticipation of the opening of the Bank's new
branch office in Anderson, South Carolina. Hiring for this branch began in 1998
so that training in the Company's systems and procedures could be completed well
before the branch's opening date on January 4, 1999. Incentive and other bonuses
and the Company's 401(k) plan expenses were largely unchanged for 1998 compared
with 1997.
Net occupancy and furniture and equipment expenses increased by
$43,000, or 16.1%, for 1998. This increase resulted principally from a $9,000
increase in building maintenance and repair expenses, a $7,000 increase in
expenses of equipment maintenance contracts and a $22,000 increase in
depreciation expense associated with the new computer system placed in service
only during part of 1997.
Other expense increased $73,000, or 11.5%, for 1998. Increases in many
categories of other expense were related to an increasing customer base and the
associated processing of larger transaction volumes. In addition, the Company's
product lines have been broadened in an attempt to make banking more convenient
and accessible to the Bank's customers through electronic, card-based and
telebanking transaction services. Some categories with significant increases
were stationery, printing and postage (up $14,000) and advertising and promotion
(up $13,000). Data processing expenses were up $40,000, primarily due to
increased costs associated with operating the Bank's ATM, providing for disaster
recovery contingencies and amortization of software costs. Some expenses
decreased, however, including professional service fees (down $23,000) and
expenses associated with other real estate (down $31,000). Professional service
fees were higher in 1997 because of the corporate reorganization and formation
of the bank holding company. During 1998, the Company held no significant other
real estate.
The 1997 increase in noninterest expenses included a new incentive
bonus totaling $81,000, which was divided among all employees. Retirement plan
expense increased in 1997 as the number of employees participating in the
Company's 401(k) plan expanded. Net occupancy and furniture and equipment
expenses combined for a 1997 increase of $19,000 or 7.7%. The 1997 increase is
attributable to higher depreciation expense related to the Company's placing
into service a new mainframe computer system and other peripheral equipment.
Other noninterest expenses increased a net total of $181,000 or 40.1% in 1997
compared with 1996. Included in this net increase in expenses were: stationery,
printing and postage - $21,000 increase, advertising and promotion - $3,000
increase, FDIC insurance - $6,000 increase, and expenses incurred in connection
with the reorganization of Community First Bank into the present bank holding
company structure totaling approximately $44,000. Expenses associated with
holding other real estate totaled $32,000 in 1997 while there were no such
expenses in 1996.
Noninterest overhead expenses for 1999 are expected to increase
significantly as compared with 1998 in many categories because of the Company's
de novo expansion into the adjacent Anderson County market. Until the new office
acquires a sufficiently large customer base and attains volumes of deposits and
interest earning assets that would enable it to contribute to the Company's
profitability, management expects that the new office will have a negative
effect on net income. A temporary office has been obtained and opened for
business on January 4, 1999. At December 31, 1998, $1,233,000 had been expended
on land and construction for the project. Management estimates that an
additional $697,000 will be required to complete the new permanent office
building with occupancy expected by September, 1999. The Company plans to sell
approximately $600,000 of surplus land associated with the original property
acquisition that would reduce the overall cost of the project. However, plans
for dividing and marketing of the surplus land have not been finalized, and no
contracts for sales have been entered into. The success of the project may be
affected adversely if the Company is unable to attract a substantial number of
new customers, or if facilities or personnel costs are higher than projected.
The Company's FDIC insurance rates are assessed based on the lowest
rate available under regulations and are expected to continue at relatively low
levels for the near future. Increases in noninterest expenses are closely
monitored and cost control will continue to be emphasized by management where
possible in order to achieve profitability objectives and attain the goal of
growth in the Company's market share in Oconee and Anderson counties.
8
<PAGE>
Income Taxes
For 1998, federal and state income tax expenses increased to $928,000
from $807,000 in 1997 and $641,000 in 1996. The increases in income tax expense
are due to higher earnings. The effective income tax rate (income tax expense
divided by income before income taxes) was 35.8% for 1998, compared with 36.5%
and 35.8% for 1997 and 1996, respectively. The effective income tax rate for
1997 was higher than for 1998 and 1996 because of the non-deductible corporate
reorganization expenses incurred that year in conjunction with the formation of
the bank holding company.
Securities
The following table summarizes the carrying value amounts of
securities held by the Company at each of the dates indicated.
Securities Portfolio Composition
December 31,
------------
1998 1997 1996
---- ---- ----
Available- Available- Available-
for-Sale for-Sale for-Sale
-------- -------- --------
(Dollars in thousands)
U. S. Treasury ........................ $ - $ 2,003 $ 5,025
U. S. Government agencies ............. 30,919 18,932 16,355
Mortgage-backed securities ............ 7,365 4,575 5,145
------- ------- -------
Total .... $38,284 $25,510 $26,525
======= ======= =======
The following table presents maturities and weighted average yields of
securities at December 31, 1998.
Securities Portfolio Maturities and Yields
December 31, 1998
-----------------
Available-
for-Sale Yield
-------- -----
(Dollars in thousands)
U. S. Government agencies
Within one year ................. $ - . %
After one through five years .... 8,034 6.21%
After five through ten years .... 21,900 6.14%
After ten years ................. 985 6.40%
-------
30,919 6.17%
-------
Mortgage-backed securities
Within one year ................. 1,027 6.66%
After one through five years .... 3,418 6.05%
After five through ten years .... 2,920 5.47%
------
7,365 5.91%
------
Total
Within one year ................. 1,027 6.66%
After one through five years .... 11,452 6.16%
After five through ten years .... 24,820 6.06%
After ten years ................. 985 6.40%
-------
Total ......................... $38,284 6.12%
=======
On an ongoing basis, management assigns securities upon purchase into
one of three categories (trading, available-for-sale or held-to-maturity) based
on intent, taking into consideration other factors including expectations for
changes in market rates of interest, liquidity needs, asset/liability management
strategies, and capital requirements. The Company has never held securities for
trading purposes. During 1998, 1997 and 1996, there have been no sales of
securities or any transfers of available-for-sale or held-to-maturity securities
to other categories.
All mortgage-backed securities held by the Company were issued by yhe
Federal Home Loan Mortgage Corporation or the Federal National Mortgage
Association.
9
<PAGE>
Loan Portfolio
Management believes the loan portfolio is adequately diversified.
There are no significant concentrations of loans in any particular individual,
industry or groups of related individuals or industries, and there are no
foreign loans.
The amounts of loans outstanding at December 31, 1998, 1997 and 1996
are shown in the following table according to type of loan, and the percentage
of each category to total loans:
Loan Portfolio Composition
<TABLE>
<CAPTION>
December 31,
------------
1998 1997 1996
---- ---- ----
Amount % Amount % Amount %
------ - ------ - ------ -
(Dollars in thousands)
Commercial, financial and industrial
<S> <C> <C> <C> <C> <C> <C>
Commercial and industrial .................... $ 9,255 13.6% $ 9,685 14.7% $ 7,600 13.9%
Purchasing or carrying securities ............ 282 .4% 79 .1% 66 .1%
Real estate - construction ........................ 51 .1% 78 .1% 146 .3%
Real estate - mortgage
1-4 family residential ....................... 30,187 44.5% 29,835 45.3% 24,423 44.7%
Multifamily (5 or more) residential .......... 90 .1% 104 .2% 198 .4%
Nonfarm, nonresidential ...................... 11,376 16.8% 11,357 17.2% 10,300 18.8%
Consumer instalment
Credit card and checking credit .............. 1,022 1.5% 838 1.3% 766 1.4%
Other ........................................ 15,630 23.0% 13,862 21.1% 11,159 20.4%
------- ----- ------- ----- ------- -----
Total loans .............. $67,893 100.0% $65,838 100.0% $54,658 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
A certain degree of risk taking is inherent in the extension of
credit. Management has established loan and credit policies designed to control
both the types and amounts of risks assumed, and to minimize losses. Such
policies include limitations on loan-to-collateral values for various types of
collateral, requirements for appraisals of real estate collateral, problem loan
management practices and collection procedures, and nonaccrual and charge-off
guidelines.
Commercial and industrial loans primarily represent loans made to
businesses, and may be made on either a secured or an unsecured basis. When
taken, collateral consists of liens on receivables, equipment, inventories,
furniture and fixtures. Unsecured business loans are generally short-term with
emphasis on repayment strengths and low debt-to-worth ratios. During 1998, total
commercial and industrial loans decreased $227,000 or 2.3%. Loans mainly for
business and investment purposes that are secured by real estate (nonfarm,
nonresidential) increased by $19,000 or .2% during 1998. Commercial lending
involves significant risk because repayment usually depends on the cash flows
generated by a borrower's business, and the debt service capacity of a business
can deteriorate because of downturns in national and local economic conditions.
To control risk, more in-depth initial and continuing financial analysis of a
borrower's cash flows and other financial information is generally required.
Real estate construction loans generally consist of financing the
construction of 1-4 family dwellings and some nonfarm, nonresidential real
estate. Usually, loan-to-cost ratios are limited to 75% and permanent financing
commitments are usually required prior to the advancement of loan proceeds.
Loans secured by real estate mortgages comprised approximately 61% and
63% of the Company's loan portfolio at the end of 1998 and 1997, respectively.
Real estate mortgage loans of all types grew $357,000 during 1998. Residential
real estate loans consist mainly of first and second mortgages on single family
homes, with some multifamily loans. Loan-to-value ratios for these instruments
are generally limited to 80%. Nonfarm, nonresidential loans are secured by
business and commercial properties with loan-to-value ratios generally limited
to 70%. The repayment of both residential and business real estate loans is
dependent primarily on the income and cash flows of the borrowers, with the real
estate serving as a secondary or liquidation source of repayment.
10
<PAGE>
Maturity Distribution of Loans
The following table sets forth the maturity distribution of the Company's
loans, by type, as of December 31, 1998, as well as the type of interest
requirement on such loans.
<TABLE>
<CAPTION>
December 31, 1998
-----------------
One Year One to Five Years
or Less Five Years or More Total
------- ---------- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial, financial and industrial ............................... $ 4,509 $ 4,605 $ 423 $ 9,537
Real estate - construction ......................................... - 51 - 51
Real estate - mortgage ............................................. 5,708 11,306 24,639 41,653
Consumer instalment loans .......................................... 3,583 12,194 875 16,652
------- ------- ------- -------
Total loans .......................................... $13,800 $28,156 $25,937 $67,893
======= ======= ======= =======
Predetermined rate, maturity greater than one year ................. $24,804 $ 6,607 $31,411
======= ======= =======
Variable rate or maturity within one year .......................... $13,800 $ 3,352 $19,330 $36,482
======= ======= ======= =======
</TABLE>
Impaired Loans
Impaired loans are those loans on which, based on current information
and events, it is probable that the Company will be unable to collect all
amounts due according to the contractual terms of the loan agreement. Loans
which management has identified as impaired generally are nonperforming loans.
Nonperforming loans include nonaccrual loans or loans which are 90 days or more
delinquent as to principal or interest payments. Following is a summary of the
Company's impaired loans:
Nonaccrual and Past Due Loans
December 31, 1998
-----------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
Nonaccrual loans .............................. $366 $163 $249
Accruing loans 90 days or more past due ....... 10 1 -
---- ---- ----
Total ............................. $376 $164 $249
==== ==== ====
Percent of total loans ........................ 0.6% 0.2% 0.5%
When an impaired loan is 90 days or more past due as to interest or
principal or there is serious doubt as to ultimate collectibility, the accrual
of interest income is generally discontinued. Previously accrued interest on
loans placed in a nonaccrual status is reversed against current income, and
subsequent interest income is recognized on a cash basis when received. When the
collectibility of a significant amount of principal is in serious doubt,
collections are credited first to the remaining principal balance on a cost
recovery basis. An impaired nonaccrual loan is not returned to accrual status
unless principal and interest are current and the borrower has demonstrated the
ability to continue making payments as agreed. The effects of interest income
accrued and collected on impaired loans were immaterial to the consolidated
financial statements for 1998, 1997 and 1996.
As of December 31, 1998, there were no commitments to lend additional
funds to debtors owing amounts on nonaccrual loans.
11
<PAGE>
Potential Problem Loans
Management has identified and maintains a list of potential problem
loans. These are loans that are not included in impaired loans (nonaccrual or
past due 90 days or more and still accruing). A loan is added to the potential
problem list when management becomes aware of information about possible credit
problems of borrowers that causes doubts as to the ability of such borrowers to
comply with the current loan repayment terms. The total amount of loans
outstanding at December 31, 1998 determined by management to be potential
problem loans was $541,000. This amount does not represent management's estimate
of potential losses since a large proportion of such loans is secured by various
types of collateral. The following table presents information about the
categories and types of collateral with respect to potential problem loans as of
December 31, 1998.
December 31, 1998
-----------------
Amount %
------ ------
(Dollars in thousands)
Commercial and industrial
Equipment ...................... $16 3.0%
Real estate - mortgage
1-4 family residential ......... 284 52.5%
Consumer installment
Vehicles ....................... 163 30.1%
Other secured .................. 37 6.8%
Unsecured ...................... 41 7.6%
---- -----
$541 100.0%
==== =====
Allowance for Loan Losses
The allowance for loan losses is increased by direct charges to
operating expense. Losses on loans are charged against the allowance in the
period in which management has determined it is more likely than not that such
loans have become uncollectible. Recoveries of previously charged off loans are
credited to the allowance. The table, "Summary of Loan Loss Experience",
summarizes loan balances at the end of each period indicated, averages for each
period, changes in the allowance arising from charge-offs and recoveries by loan
category, and additions to the allowance which have been charged to expense.
In reviewing the adequacy of the allowance for loan losses at each
year end, management took into consideration the historical loan losses
experienced by the Company, current economic conditions affecting the borrowers'
ability to repay, the volume of loans, the trends in delinquent, nonaccruing,
and potential problem loans, and the quality of collateral securing
nonperforming and problem loans. After charging off all known losses, management
considers the allowance for loan losses adequate to cover its estimate of
possible future loan losses inherent in the loan portfolio as of December 31,
1998.
In calculating the amount required in the allowance for loan losses,
management applies a consistent methodology that is updated monthly. The
methodology utilizes a loan risk grading system and detailed loan reviews to
assess credit risks and the overall quality of the loan portfolio, as well as
other off-balance-sheet credit risks such as loan commitments and standby
letters of credit. In addition, the calculation provides for management's
assessment of trends in national and local economic conditions that might affect
the general quality of the loan portfolio. Management's calculation of the
allowance for loan losses does not provide an allocation by individual loan
categories.
12
<PAGE>
The Company has not historically allocated its allowance for loan
losses to individual loan categories. Management believes that its stringent
loan charge-off policy, along with its limited historic net charge-off
experience, makes an aggregate evaluation that emphasizes individual loan risk
grades and specific problem loan allocations more meaningful. Management's
analysis of historical net charge-offs and the composition of the loan portfolio
at the end of 1998 did not reflect any material change from the prior years, nor
is management aware of any significant degree of increased exposure, risk of
collection or other adverse features toward any particular category of loans.
Consequently, management has not estimated future charge-offs related to
individual loan categories or subcategories.
Summary of Loan Loss Experience
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total loans outstanding at end of period .......................... $67,893 $65,838 $54,658 $44,175 $37,185
Average amount of loans outstanding ............................... 68,499 60,707 49,952 40,956 33,553
Balance of allowance for loan losses - beginning .................. $ 890 $ 705 $ 575 $ 460 $ 338
------- ------- ------- ------- -------
Loans charged off
Commercial and industrial .................................... 44 37 11 14 34
Real estate - mortgage ....................................... 9 31 29 - -
Consumer instalment .......................................... 116 72 69 26 19
------- ------- ------- ------- -------
Total charge-offs .................................... 169 140 109 40 53
------- ------- ------- ------- -------
Recoveries of loans previously charged off
Commercial and industrial .................................... - 3 1 - -
Real estate - mortgage ....................................... 15 - 5 - -
Consumer instalment .......................................... 6 7 10 2 2
------- ------- ------- ------- -------
Total recoveries ..................................... 21 10 16 2 2
------- ------- ------- ------- -------
Net charge-offs ................................................... 148 130 93 38 51
------- ------- ------- ------- -------
Additions to allowance charged to expense ......................... 213 315 223 153 173
------- ------- ------- ------- -------
Balance of allowance for loan losses - ending ..................... $ 955 $ 890 $ 705 $ 575 $ 460
======= ======= ======= ======= =======
Ratios
Net charge-offs to average loans ............................. 0.22% 0.21% 0.19% 0.09% 0.15%
Net charge-offs to loans at end of period .................... 0.22% 0.20% 0.17% 0.09% 0.14%
Allowance for loan losses to average loans ................... 1.39% 1.47% 1.41% 1.40% 1.37%
Allowance for loan losses to loans at end of period .......... 1.41% 1.35% 1.29% 1.30% 1.24%
Net charge-offs to allowance for loan losses ................. 15.50% 14.61% 13.19% 6.61% 11.09%
Net charge-offs to provision for loan losses ................. 69.48% 41.27% 41.70% 24.84% 29.48%
</TABLE>
13
<PAGE>
Deposits
The average amounts and percentage composition of deposits held by the
Company for the years ended December 31, 1998, 1997 and 1996, are summarized
below:
Average Deposits
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
Amount % Amount % Amount %
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand ....................... $ 17,599 16.4% $14,790 16.5% $11,646 13.5%
Interest bearing transaction accounts ............ 13,778 12.8% 10,639 11.8% 10,460 12.2%
Savings .......................................... 20,443 19.1% 16,448 18.3% 18,801 21.9%
Time deposits $100M and over ..................... 24,977 23.3% 21,889 24.4% 19,560 22.7%
Other time ....................................... 30,428 28.4% 26,065 29.0% 25,573 29.7%
-------- ----- ------- ----- ------- -----
Total deposits .................... $107,225 100.0% $89,831 100.0% $86,040 100.0%
======== ===== ======= ===== ======= =====
</TABLE>
As of December 31, 1998, there were $29,057,000 in time deposits of
$100,000 or more. Approximately $19,430,000 mature within three months,
$2,185,000 mature over three through six months, $6,706,000 mature over six
through twelve months and $736,000 mature after one year. This level of large
time deposits, as well as the growth in other deposits, can be attributed to
growth planned by management. The vast majority of time deposits $100,000 and
over are acquired within the Company's service areas in the ordinary course of
business. The Company does not purchase brokered deposits. Most of the large
time deposits are acquired from customers with standing banking relationships.
However, it is a common industry practice to not consider these deposits as core
deposits since their retention can be influenced heavily by rates offered.
Therefore, such deposits have the characteristics of shorter-term purchased
funds. Certificates of deposit $100,000 and over require that the Company
achieve and maintain an appropriate matching of maturity distributions and a
diversification of sources to achieve an appropriate level of liquidity.
Return on Equity and Assets
The following table shows the return on assets (net income divided by
average total assets), return on equity (net income divided by average equity),
dividend payout ratio (dividends declared per share divided by net income per
share), and equity to assets ratio (average equity divided by average total
assets) for each period indicated.
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
Return on assets 1.38% 1.38% 1.19%
Return on equity 13.07% 12.64% 11.97%
Dividend payout ratio 0.00% 0.00% 0.00%
Equity to assets ratio 10.53% 10.93% 9.97%
Liquidity
Liquidity is the ability to meet current and future obligations
through liquidation or maturity of existing assets or the acquisition of
additional liabilities. Adequate liquidity is necessary to meet the requirements
of customers for loans and deposit withdrawals in the most timely and economical
manner. Some liquidity is ensured by maintaining assets which are convertible
immediately into cash at minimal cost (amounts due from banks and federal funds
sold). However, the most manageable sources of liquidity are composed of
liabilities, with the primary focus on liquidity management being on the ability
to obtain deposits within the Company's service areas. Core deposits (total
deposits less time deposits of $100,000 and over) provide a relatively stable
funding base, and the average of these deposits represented 68.0% of average
14
<PAGE>
total assets during 1998 compared with 66.8% during 1997. Deposits of several
local governmental entities comprised approximately 27% and 33% of total
deposits at the end of 1998 and 1997, respectively. Because of the potentially
volatile nature of this funding source, management maintains the Bank's
membership in the Federal Home Loan Bank of Atlanta (the "FHLB") in order to
gain access to its credit programs. As of December 31, 1998, the banking
subsidiary is eligible to borrow up to $10,600,000 from the FHLB. Such
borrowings, if utilized, would be secured by a lien on its investment in FHLB
stock and all first mortgage residential loans held. Assets potentially subject
to this lien totaled approximately $27,734,000 as of December 31, 1998. In
addition, the banking subsidiary has available unused short-term lines of credit
to purchase up to $2,500,000 of federal funds from unrelated correspondent
institutions. The lines are generally available on a one to seven day basis.
Asset liquidity is provided from several sources, including amounts due from
banks and federal funds sold. Securities available-for-sale, particularly those
maturing within one year, and funds available from maturing loans provide
secondary sources of liquidity.
Community First Bancorporation's ability to meet its cash obligations
or to pay any possible future cash dividends to shareholders is dependent
primarily on the successful operation of the subsidiary bank and its ability to
pay cash dividends to the parent company. All of the banking subsidiary's cash
dividends are subject to the prior approval of the South Carolina Commissioner
of Banking and are generally payable only from its undivided profits. At
December 31, 1998, the banking subsidiary's available undivided profits totaled
$4,487,000. Under Federal Reserve Board regulations, the amounts of loans or
advances from the banking subsidiary to the parent company are also restricted.
During 1998, the parent company received no cash dividends from its banking
subsidiary. However, the parent company received a $250,000 cash dividend from
the bank subsidiary during 1997.
Management believes that the overall liquidity sources of both the
Company and its banking subsidiary are adequate to meet their operating needs.
Capital Resources
Shareholders' equity increased by $1,753,000 and $1,515,000 during
1998 and 1997, respectively. During 1998, net income increased shareholders'
equity $1,664,000, and the exercise of employee stock options provided an
$89,000 increase. Management has continued to use retained earnings to provide
adequate capital for expected growth.
During 1998, the Company's Board of Directors declared a two-for-one
stock split, and in 1997, declared a 15% stock dividend. These actions resulted
in the issuance of 889,198 and 228,902 additional shares of the Company's common
stock to its shareholders, respectively.
The Company and its banking subsidiary are each subject to regulatory
risk-based capital adequacy standards. Under these standards, bank holding
companies and banks are required to maintain certain minimum ratios of capital
to risk-weighted assets and average total assets. Under the provisions of the
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), federal
bank regulatory authorities are required to implement prescribed "prompt
corrective actions" upon the deterioration of the capital position of a bank or
bank holding company. If the capital position of an affected institution were to
fall below certain levels, increasingly stringent regulatory corrective actions
are mandated. Unrealized holding gains and losses on available-for-sale
securities are generally excluded for purposes of calculating regulatory capital
ratios. However, the extent of any unrealized appreciation or depreciation on
securities will continue to be a factor that regulatory examiners consider in
their overall assessment of capital adequacy.
Quantitative measures established by regulation to ensure capital
adequacy require both the Company and the Bank to maintain minimum amounts and
ratios, as set forth in the table below, of Total and Tier 1 Capital, as defined
in the regulation, to risk weighted assets, as defined, and of Tier 1 Capital,
as defined, to average assets, as defined. Management believes, as of December
31, 1998 and 1997, that the Company and the Bank exceeded all capital adequacy
minimum requirements to which they were subject.
To be categorized as well capitalized, the Company and the Bank must
maintain minimum Total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as set forth in the table below. The federal regulators may also categorize the
Company or the Bank as less than well capitalized based on subjective criteria.
There are no conditions or events that management believes would cause the
Company's or the Bank's category to be other than that resulting from meeting
the minimum ratio requirements.
15
<PAGE>
<TABLE>
<CAPTION>
Minimum for Minimum to be
Actual Capital Adequacy Well Capitalized
------ ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 1998 (Dollars in thousands)
The Company
<S> <C> <C> <C> <C> <C> <C>
Total Capital to risk weighted assets ............... $14,497 20.7% $5,615 8.0% $7,019 10.0%
Tier 1 Capital to risk weighted assets .............. $13,620 19.4% $2,807 4.0% $4,211 6.0%
Tier 1 Capital to average assets (leverage) ......... $13,620 11.0% $3,703 3.0% $6,172 5.0%
Community First Bank
Total Capital to risk weighted assets ............... $14,197 20.2% $5,615 8.0% $7,019 10.0%
Tier 1 Capital to risk weighted assets .............. $13,320 19.0% $2,807 4.0% $4,211 6.0%
Tier 1 Capital to average assets (leverage) ......... $13,320 10.8% $3,703 3.0% $6,172 5.0%
December 31, 1997
The Company
Total Capital to risk weighted assets ............... $12,646 20.3% $4,994 8.0% $6,242 10.0%
Tier 1 Capital to risk weighted assets .............. $11,866 19.0% $2,497 4.0% $3,745 6.0%
Tier 1 Capital to average assets (leverage) ......... $11,866 12.0% $2,959 3.0% $4,932 5.0%
Community First Bank
Total Capital to risk weighted assets ............... $12,407 19.9% $4,993 8.0% $6,242 10.0%
Tier 1 Capital to risk weighted assets .............. $11,620 18.6% $2,497 4.0% $3,745 6.0%
Tier 1 Capital to average assets (leverage) ......... $11,620 11.8% $2,958 3.0% $4,930 5.0%
</TABLE>
Year 2000 Readiness Disclosure
The Company is presently on schedule in implementing its Y2K
Preparedness Plan. The plan has five phases: (1) Awareness, (2) Assessment, (3)
Renovation, (4) Validation, and (5) Implementation. The awareness and assessment
phases have been substantially completed as of December 31 1998, which included
the identification of critical systems and equipment potentially vulnerable to
the Year 2000 problem. This also included identification of significant loan
customers whose businesses could possibly be adversely affected by the problem
and communicating with them about their progress in addressing the Year 2000
changeover. The renovation phase, consisting of upgrading or replacing systems
and equipment, had also been largely completed for all mission-critical systems
as of December 31, 1998. The validation portion of the plan calls for the actual
testing of systems and equipment as of several critical dates with such testing
to be completed by June 30, 1999. This testing is presently on schedule with no
major problems encountered. Finally, the implementation phase, which requires
addressing any problems encountered in the validation phase, along with
continued review and assessment of the Company's systems and equipment, is
presently underway and will continue until the year 2000 has arrived. As a part
of contingency planning, the Company has engaged an outside contractor to make
available a compatible portable hardware and software system, represented to be
Year 2000 compliant, which could timely be brought to the Company's location in
the event of a system failure.
Management is of the opinion that the Company's systems and equipment
will be ready for the Year 2000 in a timely manner without any material adverse
effect on the Company's business. Because of the planned comprehensive computer
hardware and software upgrade begun in 1996 and completed in 1997, the Company
has incurred no material expenditures in 1998 or 1997 relating directly to the
Year 2000 problem. The new components, which were largely Year 2000 compliant
when installed, were acquired in the normal course of business to upgrade the
Bank's computer capabilities. The previous system was over six years old and was
becoming functionally obsolete. The Company has been able to use previously
existing internal personnel and resources to carry out its Y2K Preparedness
Plan, and has used few outside resources that would incur significant additional
costs. Management is not aware of any material future expenditures required to
complete its preparedness plan.
Inflation
Since the assets and liabilities of a bank are primarily monetary in
nature (payable in fixed, determinable amounts), the performance of a bank is
affected more by changes in interest rates than by inflation. Interest rates
generally increase as the rate of inflation increases, but the magnitude of the
change in rates may not be the same.
While the effect of inflation on banks is normally not as significant
as is its influence on those businesses having large investments in plant and
inventories, it does have an effect. During periods of high inflation, there are
normally corresponding increases in the money supply, and banks will normally
experience above-average growth in assets, loans and deposits. Also, general
increases in the prices of goods and services will result in increased operating
expenses.
16
<PAGE>
Independent Auditors' Report
The Shareholders and Board of Directors
of Community First Bancorporation
We have audited the accompanying consolidated balance sheet of Community
First Bancorporation and subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of income, comprehensive income, changes in
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Community First Bancorporation and subsidiary as of December 31, 1998 and 1997,
and the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
s/Donald G. Jones and Company, P.A.
Donald G. Jones and Company, P.A.
Certified Public Accountants
Columbia, South Carolina
February 4, 1999
17
<PAGE>
Consolidated Balance Sheet
Community First Bancorporation
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
Assets
<S> <C> <C>
Cash and due from banks (Note C) .................................................. $ 3,319,892 $ 4,833,659
Federal funds sold ................................................................ 14,150,000 6,510,000
Securities available-for-sale (Note D) ............................................ 38,284,136 25,510,524
Other investments ................................................................. 345,400 335,000
Loans (Note E) .................................................................... 67,893,169 65,837,908
Allowance for loan losses ..................................................... (954,788) (890,125)
------------- -------------
Loans - net ................................................................ 66,938,381 64,947,783
Premises and equipment - net (Note F) ............................................. 2,871,156 1,675,492
Accrued interest receivable ....................................................... 829,201 792,715
Other assets ...................................................................... 388,610 362,966
------------- -------------
Total assets ............................................................... $ 127,126,776 $ 104,968,139
============= =============
Liabilities
Deposits (Note G)
Noninterest bearing ........................................................... $ 14,797,785 $ 16,501,066
Interest bearing .............................................................. 97,698,387 75,789,506
------------- -------------
Total deposits ............................................................. 112,496,172 92,290,572
Accrued interest payable .......................................................... 965,653 772,105
Other liabilities ................................................................. 61,991 55,741
------------- -------------
Total liabilities .......................................................... 113,523,816 93,118,418
------------- -------------
Commitments and contingent liabilities (Note L)
Shareholders' equity (Notes B and H)
Common stock - no par value; 10,000,000 shares authorized; issued and
outstanding - 1,793,792 for 1998 and
1,772,280 for 1997 ............................................................ 10,568,522 10,479,137
Retained earnings ................................................................. 3,051,399 1,387,121
Accumulated other comprehensive income ............................................ (16,961) (16,537)
------------- -------------
Total shareholders' equity ................................................. 13,602,960 11,849,721
------------- -------------
Total liabilities and shareholders' equity ................................. $ 127,126,776 $ 104,968,139
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
Consolidated Statement of Income
Community First Bancorporation
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
Interest Income
<S> <C> <C> <C>
Loans, including fees .................................... $6,116,208 $5,397,962 $4,473,299
Securities - taxable ..................................... 1,841,050 1,645,718 1,543,986
Federal funds sold ....................................... 926,264 534,153 910,946
Other investments ........................................ 20,797 - -
---------- ---------- ----------
Total interest income ................................ 8,904,319 7,577,833 6,928,231
---------- ---------- ----------
Interest expense
Time deposits $100,000 and over .......................... 1,390,866 1,201,135 1,026,257
Other deposits ........................................... 3,127,035 2,462,426 2,668,609
Short-term borrowings .................................... - 649 -
---------- ---------- ----------
Total interest expense ............................... 4,517,901 3,664,210 3,694,866
---------- ---------- ----------
Net interest income ........................................... 4,386,418 3,913,623 3,233,365
Provision for loan losses (Note E) ............................ 213,486 315,183 223,075
---------- ---------- ----------
Net interest income after provision ........................... 4,172,932 3,598,440 3,010,290
---------- ---------- ----------
Other income
Service charges on deposit accounts ...................... 368,777 306,435 212,879
Credit life insurance commissions ........................ 39,189 38,827 23,512
Other income ............................................. 166,766 176,753 105,518
---------- ---------- ----------
Total other income ................................... 574,732 522,015 341,909
---------- ---------- ----------
Other expenses (Notes I and K)
Salaries and employee benefits ........................... 1,138,752 1,008,265 858,916
Net occupancy expense .................................... 115,789 100,605 97,802
Furniture and equipment expense .......................... 194,429 166,612 150,257
Other expense ............................................ 706,289 633,020 451,958
---------- ---------- ----------
Total other expenses ................................. 2,155,259 1,908,502 1,558,933
---------- ---------- ----------
Income before income taxes .................................... 2,592,405 2,211,953 1,793,266
Income tax expense (Note J) ................................... 928,127 806,903 640,825
---------- ---------- ----------
Net income .................................................... $1,664,278 $1,405,050 $1,152,441
========== ========== ==========
Per share (Note H)
Net income ............................................... $ 0.94 $ 0.80 $ 0.66
Net income, assuming dilution ............................ 0.88 0.77 0.64
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
Consolidated Statement of Comprehensive Income
Community First Bancorporation
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income ......................................................... $ 1,664,278 $1,405,050 $ 1,152,441
----------- ---------- -----------
Other comprehensive income (loss)
Change in unrealized holding gains and
losses on available-for-sale securities .................... (661) 97,051 (137,147)
Income tax expense (benefit) on other
comprehensive income (loss) ............................... (237) 34,841 (49,236)
----------- ---------- -----------
Total other comprehensive income (loss) ................ (424) 62,210 (87,911)
----------- ---------- -----------
Comprehensive income ............................................... $ 1,663,854 $1,467,260 $ 1,064,530
=========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
Consolidated Statement of Changes in Shareholder's Equity
Community First Bancorporation
<TABLE>
<CAPTION>
Common Stock
------------ Accumulated
Number of Capital Retained Other Comprehensive
Shares* Amount Surplus Earnings Income Total
------- ------ ------- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 ................. 1,445,250 $ 3,613,125 $4,280,674 $ 1,321,589 $ 9,164 $ 9,224,552
Issuance of 5% stock dividend,
including cash payment for
fractional shares ..................... 71,448 178,620 357,240 (541,969) (6,109)
Exercise of employee stock options ....... 12,410 31,025 20,689 51,714
Change in unrealized holding gains
and losses on available-for-sale
securities, net of income tax
benefit of $49,236 .................... (87,911) (87,911)
Net income ............................... - - - 1,152,441 - 1,152,441
---------- ------------ ---------- ----------- -------- -----------
Balance, December 31, 1996 ............... 1,529,108 3,822,770 4,658,603 1,932,061 (78,747) 10,334,687
Issuance of 15% stock dividend,
including cash payment for
fractional shares ..................... 228,902 1,945,667 - (1,949,990) (4,323)
Exercise of employee stock options ....... 14,270 50,767 1,330 52,097
Change in unrealized holding gains
and losses on available-for-sale
securities, net of income taxes
of $34,841 ............................ 62,210 62,210
Exchange of no par value common stock
of Community First Bancoporation
for all of the outstanding shares
of Community First Bank (Note B) ...... 4,659,933 (4,659,933)
Net income ............................... - - - 1,405,050 - 1,405,050
---------- ------------ ---------- ----------- -------- -----------
Balance, December 31, 1997 ............... 1,772,280 10,479,137 - 1,387,121 (16,537) 11,849,721
Exercise of employee stock options ....... 21,512 89,385 89,385
Change in unrealized holding gains
and losses on available-for-sale ......
securities, net of income tax
benefit of $237 ....................... (424) (424)
Net income ............................... - - - 1,664,278 - 1,664,278
---------- ------------ ---------- ----------- -------- -----------
Balance, December 31, 1998 ............... 1,793,792 $ 10,568,522 $ - $ 3,051,399 $(16,961) $13,602,960
========== ============ ========== =========== ======== ===========
</TABLE>
* Adjusted for a two-for-one stock split effective July 31, 1998.
See accompanying notes to consolidated financial statements.
21
<PAGE>
Consolidated Statement of Cash Flows
Community First Bancorporation
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
Operating Activities
<S> <C> <C> <C>
Net income ........................................................ $ 1,664,278 $ 1,405,050 $ 1,152,441
Adjustments to reconcile net income to net
cash provided by operating activities
Provision for loan losses .................................. 213,486 315,183 223,075
Depreciation ............................................... 149,463 129,703 97,338
Deferred income taxes ...................................... 1,957 (49,529) (36,161)
Amortization of net loan fees and costs .................... 55,014 37,959 26,717
Securities accretion and premium amortization .............. (98,401) (14,705) (32,860)
Writedowns of other real estate ............................ - 25,000 -
Gain on sale of other real estate .......................... - (44,547) -
Loss on disposal of fixed assets ........................... 439 - -
Increase in interest receivable ............................ (36,486) (74,475) (80,135)
Increase (decrease) in interest payable .................... 193,548 (46,600) 17,439
(Increase) decrease in prepaid expenses .................... (27,364) (94,750) 3,350
Increase (decrease) in other accrued expenses .............. 6,250 (4,370) 31,107
------------ ------------ ------------
Net cash provided by operating activities .............. 2,122,184 1,583,919 1,402,311
------------ ------------ ------------
Investing activities
Purchases of available-for-sale securities ........................ (60,961,204) (7,999,531) (13,434,774)
Maturities of available-for-sale securities ....................... 48,285,332 9,125,412 9,768,227
Purchases of other investments .................................... (10,400) (335,000) -
Net increase in loans made to customers ........................... (2,259,098) (11,347,996) (10,628,127)
Proceeds from sale of other real estate ........................... - 44,547 -
Purchases of premises and equipment ............................... (1,345,566) (22,770) (317,713)
------------ ------------ ------------
Net cash used by investing activities .................. (16,290,936) (10,535,338) (14,612,387)
------------ ------------ ------------
Financing activities
Net increase in demand deposits, interest
bearing transaction accounts and savings accounts ............. 6,111,490 1,442,368 7,970,374
Net increase in certificates of deposit and other
time deposits ................................................. 14,094,110 3,388,290 5,549,239
Payment of cash in lieu of of fractional shares
for stock dividend ............................................ - (4,323) (6,109)
Exercise of employee stock options ................................ 89,385 52,097 51,714
------------ ------------ ------------
Net cash provided by financing activities .............. 20,294,985 4,878,432 13,565,218
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ....................... 6,126,233 (4,072,987) 355,142
Cash and cash equivalents, beginning ................................... 11,343,659 15,416,646 15,061,504
------------ ------------ ------------
Cash and cash equivalents, ending ...................................... $ 17,469,892 $ 11,343,659 $ 15,416,646
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
Notes to Consolidated Financial Statements
Community First Bancorporation
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization Community First Bancorporation (the "Company"), a bank holding
company, and its wholly-owned subsidiary, Community First Bank, are engaged in
providing domestic commercial banking services from their headquarters office in
Walhalla, and other offices in Seneca and Anderson, South Carolina. The Company
is a South Carolina corporation and its banking subsidiary is a state chartered
commercial bank with its deposits insured by the Federal Deposit Insurance
Corporation (the "FDIC"). Therefore, the Company and its bank subsidiary operate
under the supervision, rules and regulations of the Federal Reserve Board, FDIC
and South Carolina State Board of Financial Institutions. The holding company
was incorporated on May 23, 1997, pursuant to a plan of reorganization as
described in Note B to the consolidated financial statements. Community First
Bank was organized on December 1, 1988, and received its charter and commenced
operations on March 12, 1990.
The subsidiary, Community First Bank, is a community-oriented institution
offering a full range of traditional banking services, with the exception of
trust services. Substantially all of its loans are made to individuals and
business within markets in Oconee and Anderson counties of South Carolina. Also,
substantially all of its deposits are acquired within its local market areas and
no brokered deposits are accepted.
Principles of Consolidation and Basis of Presentation The consolidated financial
statements include the accounts of the parent company and its banking subsidiary
after elimination of all significant intercompany balances and transactions. The
accounting and reporting policies of the Company and its subsidiary are in
conformity with generally accepted accounting principles and general practices
within the banking industry.
Securities Equity securities that have readily determinable fair values and all
debt securities are classified generally at the time of purchase into one of
three categories: held-to-maturity, trading or available-for-sale. Debt
securities which the Company has the positive intent and ability to hold to
ultimate maturity are classified as held-to-maturity and accounted for at
amortized cost. Debt and equity securities that are bought and held primarily
for sale in the near term are classified as trading and are accounted for on an
estimated fair value basis, with unrealized gains and losses included in other
income. However, the Company has never held any securities for trading purposes.
Securities not classified as either held-to-maturity or trading are classified
as available-for-sale and are accounted for at estimated fair value. Unrealized
holding gains and losses on available-for-sale securities are excluded from net
income and recorded as other comprehensive income, net of applicable income tax
effects. Dividend and interest income, including amortization of any premium or
accretion of discount arising at acquisition, is included in earnings for all
three categories of securities. Realized gains and losses on all categories of
securities are included in other operating income, based on the amortized cost
of the specific certificate on a trade date basis.
Other Investments Other investments consist of restricted securities which are
carried at cost. Management periodically evaluates these securities for
impairment, with any appropriate downward valuation adjustments being made when
necessary. Other investments at December 31, 1998 and 1997, consisted of Federal
Home Loan Bank of Atlanta (the "FHLB") stock with the carrying amount
approximating estimated fair value.
Loans and Interest Income Loans are carried at principal amounts outstanding,
increased or reduced by deferred net loan costs or fees. Interest income on
loans is recognized using the interest method based upon the principal amounts
outstanding. Loan origination and commitment fees and certain direct loan
origination costs (principally salaries and employee benefits) are being
deferred and amortized as an adjustment of the related loan's yield. Generally,
these amounts are being amortized over the contractual life of the related loans
or commitments.
23
<PAGE>
A loan is considered to be impaired when, in management's judgment based on
current information and events, it is probable that the obligation's principal
or interest will not be collectible in accordance with the terms of the original
loan agreement. Impaired loans, when not material, are carried in the balance
sheet at a value not to exceed their observable market price or the fair value
of the collateral if the repayment of the loan is expected to be provided solely
by the underlying collateral. The carrying value of any material impaired loan
is measured based on the present value of expected future cash flows discounted
at the loan's effective interest rate, which is the contractual interest rate
adjusted for any deferred loan fees or costs, premium or discount existing at
the inception or acquisition of the loan. Generally, the accrual of interest is
discontinued on impaired loans and any previously accrued interest on such loans
is reversed against current income. Any subsequent interest income is recognized
on a cash basis when received unless collectibility of a significant amount of
principal is in serious doubt. In such cases, collections are credited first to
the remaining principal balance on a cost recovery basis. An impaired loan is
not returned to accrual status unless principal and interest are current and the
borrower has demonstrated the ability to continue making payments as agreed.
Allowance for Loan Losses An allowance for possible loan losses is maintained at
a level deemed appropriate by management to provide adequately for known and
inherent risks in the loan portfolio. When management determines that a loan
will not perform substantially as agreed, a review of the loan is initiated to
ascertain whether it is more likely than not that a loss has occurred. If it is
determined that a loss is likely, the estimated amount of the loss is charged
off and deducted from the allowance. The provision for possible loan losses and
recoveries on loans previously charged off are added to the allowance.
Determining the amount and adequacy of the allowance for loan losses involves
estimating uncertain future events and their effects based on judgment applied
to currently known facts and circumstances. Changes in the estimated allowance
for loan losses necessitated as new events occur or more information is obtained
are accounted for as changes in accounting estimates in the accounting period in
which the change occurs.
Management considers the Company's historical loan loss experience, current
national and local economic conditions affecting the borrowers' ability to
repay, the volume of loans, the trends in delinquent, impaired and potential
problem loans, and the amount and quality of collateral securing such loans in
reviewing the adequacy of the allowance for loan losses. In calculating its
estimate, management applies a consistent methodology that is updated monthly.
The calculation involves applying various estimated percentage factors to the
loan portfolio categorized into assessed risk grades utilizing the Company's
ongoing system of detailed loan reviews. For some loans, particularly those
identified as impaired or potential problem, specific allocations are made in
the calculation. The methodology also includes assessing the risk associated
with off-balance-sheet extensions of credit such as loan commitments and standby
letters of credit.
Premises and Equipment Premises and equipment are stated at cost, less
accumulated depreciation. The provision for depreciation is computed using the
straight-line method. Rates of depreciation are generally based on the following
estimated useful lives: buildings - 40 years; land improvements - 15 years;
furniture and equipment - 5 to 25 years. The cost of assets sold or otherwise
disposed of, and the related allowance for depreciation is eliminated from the
accounts and the resulting gains or losses are reflected in the consolidated
income statement. Maintenance and repairs are charged to current expense as
incurred and the costs of major renewals and improvements are capitalized.
Other Real Estate Other real estate includes properties acquired through
foreclosure or acceptance of a deed in lieu of foreclosure. Other real estate is
initially recorded at the lower of cost or the estimated fair market value, less
estimated selling costs. Loan losses arising from the acquisition of such
property are charged to the allowance for loan losses. An allowance for losses
on other real estate is maintained for subsequent downward valuation
adjustments.
Retirement Plan The Company has a salary reduction profit sharing plan pursuant
to Section 401(k) of the Internal Revenue Code as more fully described in Note
K. The Company does not sponsor any postretirement or postemployment benefits.
24
<PAGE>
Deferred Income Taxes The Company uses an asset and liability approach for
financial accounting and reporting of deferred income taxes. Deferred tax assets
and liabilities are determined based on the difference between the financial
statement and income tax bases of assets and liabilities as measured by the
currently enacted tax rates which are assumed will be in effect when these
differences reverse. If it is more likely than not that some portion or all of a
deferred tax asset will not be realized, a valuation allowance is recognized.
Deferred income tax expense or credit is the result of changes in deferred tax
assets and liabilities.
Stock-Based Compensation The Company applies only the disclosure provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation", but applies Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", for recording compensation cost
for stock options granted. Accordingly, compensation expense is measured as the
excess, if any, of the estimated fair value of the Company's common stock at the
date of grant over the amount the grantee must pay to acquire the shares under
option. Refer to Note H for further information.
Earnings Per Share Basic net income per share is calculated by dividing net
income by the weighted average number of shares of the Company's common stock
outstanding during the period. Net income per share, assuming dilution, is
calculated by dividing net income by the total of the weighted average number of
shares outstanding during the period and the weighted average number of any
dilutive potential common shares and stock options that would have been
outstanding if the dilutive potential shares and stock options had been issued.
In computing the number of dilutive potential common shares, it is assumed that
all dilutive stock options are exercised at the beginning of each year and that
the proceeds are used to purchase shares of the Company's common stock at the
average market price during the year. See Note H.
Comprehensive Income In June, 1997, the Financial Accounting Standards Board
issued SFAS No. 130, "Reporting Comprehensive Income". As required, the Company
adopted the provisions of this SFAS beginning January 1, 1998, with
reclassifications included for any earlier comparative accounting periods
presented. Comprehensive income consists of net income or loss for the current
period and other comprehensive income, defined as income, expenses, gains and
losses that bypass the consolidated statement of income and are reported
directly in a separate component of shareholders' equity. SFAS No. 130 provides
that the Company is to classify and report items of other comprehensive income
by their nature, report total comprehensive income in a financial statement and
display the accumulated balance of other comprehensive income separately in the
shareholders' equity section of the consolidated balance sheet.
The Company has elected to report comprehensive income in the accompanying
consolidated statement of comprehensive income. The only other comprehensive
income category the Company has is the change in unrealized holding gains and
losses on available-for-sale securities, net of income tax effects, which had
previously been accounted for only in the consolidated statement of changes in
shareholders' equity. See Note H.
Consolidated Statement of Cash Flows The consolidated statement of cash flows
reports net cash provided or used by operating, investing and financing
activities and the net effect of those flows on cash and cash equivalents. Cash
equivalents include amounts due from banks, federal funds sold and securities
purchased under agreements to resell.
During 1998, 1997 and 1996, interest paid on deposits and other borrowings
amounted to $4,348,010, $3,710,810 and $3,677,427, respectively. Income tax
payments of $958,200, $864,056 and $679,072 were made during 1998, 1997 and
1996, respectively. Noncash transfers from retained earnings of $1,945,667 and
$535,860 were made as the result of stock dividends declared in 1997 and 1996,
respectively. As a result, common stock in 1997 and 1996 increased $1,945,667
and $178,620, respectively, and capital surplus increased $357,240 in 1996.
Effective October 16, 1997, Community First Bancorporation acquired all of the
then outstanding shares of Community First Bank's $5.00 par value common stock
in exchange for shares of Community First Bancorporation's no par value common
stock. As a result, a noncash transfer of $4,659,933 was made from capital
surplus to common stock. During 1998, 1997 and 1996, noncash valuation
25
<PAGE>
adjustments totaling $661, $97,051 and $137,147 were made which decreased,
increased and decreased, respectively, the carrying amount of available-for-sale
securities. In 1998, accumulated other comprehensive income decreased $424 and
deferred tax assets increased $237; in 1997, accumulated other comprehensive
income increased $62,210 and deferred tax assets decreased $34,841; and in 1996,
accumulated other comprehensive income decreased $87,911 and deferred tax assets
increased $49,236. In 1996, a loan with a carrying amount of $25,000 was
transferred to other real estate as the result of a foreclosure.
Fair Value Estimates Fair value estimates are made at a specific point in time
based on relevant market information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no active trading market exists for a significant portion of
the Company's financial instruments, fair value estimates are based on
management's judgments regarding future expected loss experience, current
economic conditions, risk characteristics of various financial instruments, and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.
Fair value estimates are based on existing on-and-off balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include net deferred tax assets and
premises and equipment. In addition, the income tax ramifications related to the
realization for the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in the estimates.
For cash and due from banks, federal funds sold and accrued interest receivable
and payable, the carrying amount approximates fair value because these
instruments generally mature in 90 days or less and do not present unanticipated
credit concerns.
NOTE B - CORPORATE REORGANIZATION
On May 20, 1997, the shareholders of Community First Bank approved a plan of
corporate reorganization under which Community First Bank would become a
wholly-owned subsidiary of Community First Bancorporation. As a result,
Community First Bancorporation was organized on May 23, 1997 at the direction of
Community First Bank's management. The authorized common stock of Community
First Bancorporation at that time was 5,000,000 shares with no par value per
share. Pursuant to the reorganization, the parent company issued 764,702
(unadjusted for stock dividend and stock split) shares of its common stock in
exchange for all of the 764,702 outstanding common shares of Community First
Bank.
The reorganization was effected on October 16, 1997 and accounted for as if it
were a pooling-of-interests. As a result, the consolidated financial statements
for the year ended December 31, 1997 are presented as if the reorganization had
occurred on January 1, 1997. Except for per share data, the consolidated
financial statements for the year ended December 31, 1996 are unchanged from the
amounts previously reported by Community First Bank. Per share data for 1996 is
presented in terms of the current equivalent of the number of shares
outstanding, and has been adjusted for a subsequent 15% stock dividend in 1997
and a two-for-one stock split in 1998, and restated because of the 1997 change
in accounting principle for the computation and display of earnings per share
NOTE C - CASH AND DUE FROM BANKS
Banks are generally required by regulation to maintain an average cash reserve
balance based on a percentage of deposits. The average amount of the cash
reserve balances at December 31, 1998 and 1997, were approximately $697,000 and
$475,000, respectively.
26
<PAGE>
NOTE D - SECURITIES
The aggregate amortized cost and estimated fair values of securities, as well as
gross unrealized gains and losses of securities were as follows:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
Gross Gross Gross Gross
Unrealized Unrealized Estimated Unrealized Unrealized Estimated
Amortized Holding Holding Fair Amortized Holding Holding Fair
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
Available-for-sale
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury ...... $ - $ - $ - $ - $ 2,000,550 $ 2,810 $ - $ 2,003,360
U.S. Government
agencies ....... 30,971,303 58,970 111,202 30,919,071 18,980,911 19,963 68,899 18,931,975
Mortgage-backed
securities ..... 7,339,293 54,007 28,235 7,365,065 4,554,862 22,698 2,371 4,575,189
----------- -------- -------- ----------- ----------- ------- ------- -----------
Total ...... $38,310,596 $112,977 $139,437 $38,284,136 $25,536,323 $45,471 $71,270 $25,510,524
=========== ======== ======== =========== =========== ======= ======= ===========
</TABLE>
The amortized cost and estimated fair value of securities by contractual
maturity are shown below:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
Available-for-sale
<S> <C> <C> <C> <C>
Due in one year or less .......................... $ - $ - $ 6,001,296 $ 5,965,560
Due after one through five years ................. 7,990,095 8,034,377 12,483,764 12,472,275
Due after five through ten years ................. 21,981,208 21,900,007 2,496,401 2,497,500
Due after ten years .............................. 1,000,000 984,688 - -
----------- ----------- ----------- -----------
30,971,303 30,919,072 20,981,461 20,935,335
Mortgage-backed securities ....................... 7,339,293 7,365,064 4,554,862 4,575,189
----------- ----------- ----------- -----------
Total ........................................ $38,310,596 $38,284,136 $25,536,323 $25,510,524
=========== =========== =========== ===========
</TABLE>
The fair value of U.S. Treasury and U.S. Government agencies debt securities is
estimated based on published closing quotations. Fair Value for mortgage-backed
securities is estimated primarily using dealers' quotes.
There were no sales or transfers to other categories of available-for-sale
securities in 1998, 1997 and 1996.
At December 31, 1998, securities with an amortized cost of $36,246,811 and an
estimated fair value of $36,219,904 were pledged as collateral to secure public
deposits. The amortized cost and estimated fair value of such pledged securities
were $21,990,882 and $21,966,454, respectively, at the end of 1997.
27
<PAGE>
NOTE E - LOANS
Loans consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Commercial, financial and industrial ............... $ 9,537,226 $ 9,430,082 $ 9,763,982 $ 9,627,061
Real estate - construction ......................... 50,820 50,471 78,318 77,318
Real estate - mortgage ............................. 41,653,728 41,254,837 41,294,769 40,931,053
Consumer installment ............................... 16,651,395 16,607,402 14,700,839 14,571,074
------------ ----------- ------------ -----------
Total ........................................ 67,893,169 67,342,792 65,837,908 65,206,506
Allowance for loan losses .......................... (954,788) - (890,125) -
------------ ----------- ------------ -----------
Loans - net .................................. $ 66,938,381 $67,342,792 $ 64,947,783 $65,206,506
============ =========== ============ ===========
</TABLE>
Net deferred loan costs of $35,576 and $13,834 have been allocated to the
various loan categories as of December 31, 1998 and 1997, respectively.
Fair values are estimated for loan categories with similar financial
characteristics. Within each category, the fair value of loans is calculated by
discounting estimated cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest rate risk inherent in
the loan. For certain categories of loans, such as variable rate loans, credit
card receivables, and other lines of credit, the carrying amount, adjusted for
credit risk, is a reasonable estimate of fair value because there is no
contractual maturity or because the Company has the ability to reprice the loans
as interest rate shifts occur. Since the discount rates are based on current
loan rates offered as well as management's estimates, the fair values presented
may not necessarily be indicative of the value negotiated in an actual sale.
Loans which management has identified as impaired generally are nonperforming
loans. Nonperforming loans include nonaccrual loans or loans which are 90 days
or more delinquent as to principal or interest payments. Following is a summary
of activity regarding the Company's impaired loans:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
Investment in impaired loans
<S> <C> <C>
Nonaccrual ........................................................................ $365,626 $162,032
Accruing 90 days and over past due ................................................ 10,575 1,468
-------- --------
Total ......................................................................... $376,201 $163,500
======== ========
Average total investment in impaired loans during the year ............................. $184,800 $303,875
Allowance for loan losses on impaired loans ............................................ 29,347 16,890
</TABLE>
The average total investment in impaired loans during 1996 was $299,436. There
were no outstanding commitments at December 31, 1998, to lend additional funds
to debtors owing amounts on impaired loans.
28
<PAGE>
As of December 31, 1998 and 1997, there were no significant concentrations of
credit risk in any single borrower or groups of borrowers. The Company's loan
portfolio consists primarily of extensions of credit to businesses and
individuals in its Oconee County, South Carolina market area. The economy of
this area is diversified and does not depend on any one industry or group of
related industries. The Company entered the Anderson County, South Carolina
market on a de novo basis from its temporary office facility in January, 1999.
Management has established loan policies and practices that include set
limitations on loan-to-collateral value for different types of collateral,
requirements for appraisals, obtaining and maintaining current credit and
financial information on borrowers, and credit approvals.
Transactions in the allowance for loan losses are summarized below:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at January 1 .................................... $ 890,125 $ 705,000 $ 575,000
Provision charged to expense ............................ 213,486 315,183 223,075
Recoveries .............................................. 20,915 10,146 15,589
Charge-offs ............................................. (169,738) (140,204) (108,664)
--------- --------- ---------
Balance at December 31 .................................. $ 954,788 $ 890,125 $ 705,000
========= ========= =========
</TABLE>
Certain officers and directors of the Company and its subsidiary, their
immediate families and business interests were loan customers of, and had other
transactions with the banking subsidiary in the normal course of business.
Related party loans are made on substantially the same terms, including interest
rates and collateral, and do not involve more than normal risk of
collectibility. The aggregate dollar amount of these loans was $3,288,367 and
$4,604,451 at December 31, 1998 and 1997, respectively. During 1998, $4,127,752
of new loans were made and repayments totaled $5,443,836.
NOTE F - PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
<S> <C> <C>
Land ......................................................................... $ 384,773 $ 384,773
Buildings and land improvements .............................................. 972,836 966,417
Furniture and equipment ...................................................... 894,822 848,366
Construction in progress ..................................................... 1,233,175 -
---------- ----------
Total .......................................................... 3,485,606 2,199,556
Accumulated depreciation ..................................................... 614,450 524,064
---------- ----------
Premises and equipment - net ................................... $2,871,156 $1,675,492
========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1998, 1997 and 1996 was
$149,463, $129,703 and $97,338, respectively.
29
<PAGE>
Construction in progress at December 31, 1998, consists of costs incurred in
connection with the Company's branch office in Anderson, South Carolina.
Management has entered into contracts and estimates that an additional $697,000
will be required to complete the project.
NOTE G - DEPOSITS
A summary of deposits follows:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Noninterest bearing demand ........................... $ 14,797,785 $ 14,797,785 $16,501,066 $16,501,066
Interest bearing transaction accounts ................ 17,239,636 17,239,636 10,106,001 10,106,001
Savings .............................................. 16,872,016 16,872,016 16,190,880 16,190,880
Time deposits $100,000 and over ...................... 29,057,397 29,061,084 23,046,080 23,048,468
Other time deposits .................................. 34,529,338 34,576,445 26,446,545 26,454,311
------------ ------------ ----------- -----------
Total deposits ................................. $112,496,172 $112,546,966 $92,290,572 $92,300,726
============ ============ =========== ===========
</TABLE>
As of December 31, 1998 and 1997, local governmental deposits comprised
approximately 27% and 33%, respectively, of total deposits.
The fair value of deposits with no stated maturity (noninterest bearing demand,
interest bearing transaction accounts and savings) is equal to the amount
payable on demand, or carrying amount, as of December 31, 1998 and 1997. The
fair value of time deposits is estimated based on the discounted value of
contractual cash flows. The discount rate is estimated using the rate currently
offered as of December, 31, 1998 and 1997, for deposits of similar remaining
maturities.
At December 31, 1998, the scheduled maturities of time deposits are as follows:
Year Amount
---- ------
1999 $ 57,428,126
2000 5,919,794
2001 179,815
2002 26,000
2003 and thereafter 33,000
NOTE H - SHAREHOLDERS' EQUITY
Restrictions on Subsidiary Dividends, Loans or Advances South Carolina
regulations restrict the amount of dividends that banks can pay to shareholders.
All of the Banking subsidiary's dividends to the parent company are subject to
the prior approval of the South Carolina Commissioner of Banking and are
generally payable only from its undivided profits. At December 31, 1998, the
banking subsidiary's available undivided profits totaled $4,487,285. Under
Federal Reserve Board regulations, the amounts of loans or advances from the
banking subsidiary to the parent company are also restricted.
Stock Split and Stock Dividends The Company's Board of Directors declared a
two-for-one stock split effective on July 31, 1998. At that time, the Company's
number of authorized shares of its common stock was increased from 5,000,000 to
10,000,000 shares. Effective December 30, 1997 and May 1, 1996, the Company
issued stock dividends of 15% and 5%, respectively. All per share information
has been retroactively adjusted to give effect to the stock split and stock
dividends.
30
<PAGE>
Accumulated Other Comprehensive Income As of December 31, 1998 and 1997,
accumulated other comprehensive income included as a reduction of shareholders'
equity in the accompanying consolidated balance sheet consisted of the
accumulated changes in the unrealized holding gains and losses on
available-for-sale securities amounting to $16,961 and $16,537, respectively.
Earnings per Share In 1997, the Company adopted the required provisions of SFAS
No. 128, "Earnings per Share". This SFAS mandated certain changes in the
computation and display of earnings per share, and required the restatement of
prior years' figures on a comparable basis.
Net income per share and net income per share, assuming dilution, were computed
as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
Net income per share, basic
<S> <C> <C> <C>
Numerator - net income .................................................. $ 1,664,278 $ 1,405,050 $ 1,152,441
=========== =========== ===========
Denominator
Weighted average common shares issued and outstanding .................. 1,777,495 1,758,216 1,743,880
=========== =========== ===========
Net income per share, basic ............................... $ .94 $ .80 $ .66
=========== =========== ===========
Net income per share, assuming dilution
Numerator - net income ................................................... $ 1,664,278 $ 1,405,050 $ 1,152,441
=========== =========== ===========
Denominator
Weighted average common shares issued and outstanding ................... 1,777,495 1,758,216 1,743,880
Effect of dilutive stock options ........................................ 115,397 56,696 54,072
----------- ----------- -----------
Total shares ............................................. 1,892,892 1,814,912 1,797,952
=========== =========== ===========
Net income per share, assuming dilution ................... $ .88 $ .77 $ .64
=========== =========== ===========
</TABLE>
Regulatory Capital All bank holding companies and banks are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if undertaken,
could have a direct material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, bank holding companies and banks must meet specific
capital guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. Capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and its banking subsidiary to maintain minimum amounts and
ratios set forth in the table below of Total and Tier 1 Capital, as defined in
the regulations, to risk weighted assets, as defined, and of Tier 1 Capital, as
defined, to average assets, as defined. Management believes, as of December 31,
1998 and 1997, that the Company and its subsidiary bank exceeded all capital
adequacy minimum requirements.
As of December 31, 1998, the most recent notification from the FDIC categorized
Community First Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, the Company and
its banking subsidiary must maintain minimum Total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed Community First Bank's category. The Company's and Community First
Bank's actual capital amounts and ratios are also presented in the table.
31
<PAGE>
<TABLE>
<CAPTION>
Minimum for Minimum to be
Actual Capital Adequacy Well Capitalized
------ ---------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
December 31, 1998 (Dollars in thousands)
The Company
<S> <C> <C> <C> <C> <C> <C>
Total Capital to risk weighted assets ................... $14,497 20.7% $5,615 8.0% $7,019 10.0%
Tier 1 Capital to risk weighted assets .................. $13,620 19.4% $2,807 4.0% $4,211 6.0%
Tier 1 Capital to average assets (leverage) ............. $13,620 11.0% $3,703 3.0% $6,172 5.0%
Community First Bank
Total Capital to risk weighted assets ................... $14,197 20.2% $5,615 8.0% $7,019 10.0%
Tier 1 Capital to risk weighted assets .................. $13,320 19.0% $2,807 4.0% $4,211 6.0%
Tier 1 Capital to average assets (leverage) ............. $13,320 10.8% $3,703 3.0% $6,172 5.0%
December 31, 1997
The Company
Total Capital to risk weighted assets ................... $12,646 20.3% $4,994 8.0% $6,242 10.0%
Tier 1 Capital to risk weighted assets .................. $11,866 19.0% $2,497 4.0% $3,745 6.0%
Tier 1 Capital to average assets (leverage) ............. $11,866 12.0% $2,959 3.0% $4,932 5.0%
Community First Bank
Total Capital to risk weighted assets ................... $12,407 19.9% $4,993 8.0% $6,242 10.0%
Tier 1 Capital to risk weighted assets .................. $11,620 18.6% $2,497 4.0% $3,745 6.0%
Tier 1 Capital to average assets (leverage) ............. $11,620 11.8% $2,958 3.0% $4,930 5.0%
</TABLE>
Stock Options In 1998, the Company's shareholders approved the 1998 Stock Option
Plan under which an aggregate of 400,000 (adjusted for a two-for-one stock split
effective July 31, 1998) shares of the Company's authorized but unissued common
stock was reserved for possible issuance pursuant to the exercise of stock
options. Generally, options may be granted to directors, officers and employees
under terms and conditions, including expiration date, exercise price, and
vesting as determined by the Board of Directors. In 1990, the shareholders
approved the 1989 Incentive Stock Option Plan. The 1989 plan provided for the
granting of options to certain eligible employees and reserved 279,556 shares
(adjusted for the stock split and stock dividends) of authorized common stock
for issuance upon the exercise of such options. For all stock options ever
granted under the two plans through the end of 1998, the exercise price was the
fair market value of the Company's common stock on the date the option was
granted as determined by the Board of Directors. Options terminate according to
the conditions of the grant not to exceed 10 years from the date of grant. The
expiration of the options accelerates upon the optionee's termination of
employment with the Company or death, or if there is a change in control of the
Company, in accordance with the provisions of the two plans. Options awarded
during 1998, 1997 and 1996 provided for 20% vesting immediately upon award, with
20% vesting on the anniversary date of the award for each of the four subsequent
years, and ten year expiration dates.
As of January 1, 1996, the Company adopted only the disclosure provision of SFAS
No. 123, "Accounting for Stock-Based Compensation", but applies Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its plans. Since the exercise price of each option equals the market price of
the Company's stock on the date of grant, no compensation cost has been
recognized for the plan for any period. Had compensation cost for the plans been
determined based on the fair value of the options at the grant dates consistent
with the method of SFAS No. 123, the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated below.
32
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
Net income
<S> <C> <C> <C>
As reported ................................................ $ 1,664,278 $ 1,405,050 $ 1,152,441
Pro forma .................................................. 1,576,137 1,376,930 1,135,241
Net income per share
As reported ................................................ $ 0.94 $ 0.80 $ 0.66
Pro forma .................................................. 0.89 0.78 0.65
Net income per share, assuming dilution
As reported ................................................ $ 0.88 $ 0.77 $ 0.64
Pro forma .................................................. 0.83 0.76 0.63
</TABLE>
The fair values of options granted during 1998, 1997 and 1996 were $5.39, $3.68
and $3.36 per share. Such fair value was estimated as of the date of the grant
using the minimum value option pricing method. The following assumptions were
used for grants in 1998, 1997 and 1996: dividend yield of 0%, expected life of
10 years, and risk-free interest rates of 5.51%, 6.57% and 6.87%, respectively.
Transactions under the plans for the years ended December 31, 1998, 1997 and
1996 are summarized as follows:
Weighted
Average
Number of Exercise
Shares Price
------ -----
Options oustanding January 1, 1996 ............... 139,360 $ 5.24
Granted .................................... 10,000 7.50
Exercised .................................. (12,410) 4.17
Canceled ................................... (1,030) 7.15
Stock dividend ............................. 6,984
--------
Options oustanding December 31, 1996 ............. 142,904 5.22
Granted .................................... 14,500 8.00
Exercised .................................. (14,270) 3.65
Canceled ................................... (1,022) 7.61
Stock dividend ............................. 23,540
--------
Options oustanding December 31, 1997 ............. 165,652 4.84
Granted .................................... 78,600 9.19
Exercised .................................. (21,512) 4.16
Canceled ................................... (2,742) 7.30
--------
Options oustanding December 31, 1998 ............. 219,998 6.43
========
Options exercisable at year end
1998 ........................................ 141,800 $ 5.21
1997 ........................................ 133,796 4.49
1996 ........................................ 132,462 4.23
33
<PAGE>
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
------------------- -------------------
Number Exercise Number Exercise
of Shares Price of Shares Price
--------- ----- --------- -----
Options at December 31, 1998 expire
<S> <C> <C> <C> <C>
December 31, 1999 ........................................ 13,982 $ 3.58 13,982 $ 3.58
May 9, 2000 .............................................. 10,906 3.58 10,906 3.58
December 31, 2000 ........................................ 13,982 3.58 13,982 3.58
January 22, 2001 ......................................... 3,084 3.88 3,084 3.88
March 1, 2001 ............................................ 6,990 3.88 6,990 3.88
April 27, 2002 ........................................... 13,708 4.65 13,708 4.65
October 1, 2002 .......................................... 8,388 4.83 8,388 4.83
January 25, 2003 ......................................... 5,436 5.01 5,436 5.01
January 18, 2004 ......................................... 23,962 5.07 23,962 5.07
June 1, 2004 ............................................. 2,540 5.32 2,540 5.32
December 21, 2005 ........................................ 13,938 6.21 11,054 6.21
July 25, 2006 ............................................ 11,500 6.52 6,900 6.52
January 16, 2007 ......................................... 14,102 6.95 5,468 6.95
February 19, 2008 ........................................ 27,480 9.13 5,400 9.13
June 1, 2008 ............................................. 6,000 9.25 1,200 9.25
June 18, 2008 ............................................ 44,000 9.25 8,800 9.25
</TABLE>
Included in the 219,998 outstanding options as of December 31, 1998, were
options to purchase 78,198 shares at an average price of $8.69 per share that
had not become exercisable. The number of shares, average exercise price and
years in which these options become exercisable are as follows: 23,582 shares at
$8.30 in 1999, 20,698 shares at $8.59 in 2000, 18,398 shares at $8.85 in 2001,
and 15,520 shares at $9.20 in 2002. Of the 679,566 authorized shares of the
Company's common stock originally reserved for issuance upon the exercise of
options under the two plans, 356,004 had not been awarded as of December 31,
1998.
NOTE I - OTHER EXPENSES
Other expenses are summarized below:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Salaries and employee benefits ................................... $1,138,752 $1,008,265 $ 858,916
Net occupancy expense ............................................ 115,789 100,605 97,802
Furniture and equipment expense .................................. 194,429 166,612 150,257
Other expense
Stationery, printing and postage ............................ 153,901 139,888 119,170
Telephone ................................................... 22,828 20,578 22,138
Advertising and promotion ................................... 41,134 27,654 24,450
Professional services ....................................... 54,456 77,038 32,641
Insurance ................................................... 19,052 26,651 18,532
FDIC insurance assessment ................................... 11,565 7,760 2,000
Directors' fees ............................................. 34,200 31,200 25,200
Other real estate costs and expenses, net ................... 864 32,334 -
Data processing expenses .................................... 92,841 52,748 46,520
Other ....................................................... 275,448 217,169 161,307
---------- ---------- ----------
Total ................................................... $2,155,259 $1,908,502 $1,558,933
========== ========== ==========
</TABLE>
34
<PAGE>
NOTE J - INCOME TAXES
Income tax expense consisted of:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
Current
<S> <C> <C> <C>
Federal .................................................... $849,500 $ 786,786 $ 621,981
State ...................................................... 76,670 69,646 55,005
-------- --------- ---------
Total current .................................... 926,170 856,432 676,986
-------- --------- ---------
Deferred
Federal .................................................... 1,800 (45,555) (33,260)
State ...................................................... 157 (3,974) (2,901)
-------- --------- ---------
Total deferred ................................... 1,957 (49,529) (36,161)
-------- --------- ---------
Total income tax expense ......................... $928,127 $ 806,903 $ 640,825
======== ========= =========
</TABLE>
The principal components of the deferred portion of income tax expense or
(credit) were:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Provision for loan losses .................................. $(23,213) $(66,460) $(46,670)
Accelerated depreciation ................................... 17,365 10,870 4,308
Deferred net loan costs and fees ........................... 7,805 6,276 6,201
Other real estate .......................................... - (215) -
-------- -------- --------
Total ....................................... $ 1,957 $(49,529) $(36,161)
======== ======== ========
</TABLE>
Income before income taxes presented in the consolidated statement of income for
the years ended December 31, 1998, 1997 and 1996, included no foreign component.
A reconciliation between the income tax expense and the amount computed by
applying the federal statutory rate of 34% to income before income taxes
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Tax expense at statutory rate .............................. $ 881,418 $ 752,064 $ 609,710
State income tax, net of federal
income tax benefit .................................... 50,706 43,344 34,389
Tax-exempt interest income ................................. (6,538) (5,854) (5,625)
Non-deductible interest expense to
carry tax-exempt instruments .......................... 491 480 540
Non-deductible corporate
reorganization expenses ............................... - 15,069 -
Other, net ................................................. 2,050 1,800 1,811
--------- --------- ---------
Total ....................................... $ 928,127 $ 806,903 $ 640,825
========= ========= =========
</TABLE>
35
<PAGE>
Deferred tax assets and liabilities included in the consolidated balance sheet
consisted of the following:
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
Deferred tax assets
<S> <C> <C>
Allowance for loan losses ................................................. $280,949 $257,735
Other real estate ......................................................... 8,975 8,975
Unrealized holding gains and losses on
available-for-sale securities ........................................... 9,499 9,262
-------- --------
Gross deferred tax assets ....................................... 299,423 275,972
Valuation allowance ....................................................... - -
-------- --------
Total ........................................................... 299,423 275,972
-------- --------
Deferred tax liabilities
Accelerated depreciation .................................................. 90,254 72,889
Deferred net loan costs ................................................... 12,772 4,966
-------- --------
Gross deferred tax liabilities .................................. 103,026 77,855
-------- --------
Net deferred income tax assets ................................................. $196,397 $198,117
======== ========
</TABLE>
A portion of the change in net deferred tax assets or liabilities related to
unrealized holding gains and losses on available-for-sale securities is charged
or credited directly to other comprehensive income. The balance of the change in
net deferred tax assets is charged or credited to income tax expense. In 1998,
1997 and 1996, $237 was credited, $34,841 was charged, and $49,236 was credited
to other comprehensive income, respectively. In 1998, $1,957 was charged to
income tax expense, and, in 1997 and 1996, $49,529 and $36,161 were credited to
income tax expense, respectively.
Management believes that the Company will fully realize the deferred tax assets
as of December 31, 1998 and 1997 based on refundable income taxes available from
carryback years, as well as estimates of future taxable income.
NOTE K - RETIREMENT PLAN
In 1996, the Company established the Community First Bank 401(k) Plan (the
"401(k) Plan") for the exclusive benefit of all eligible employees and their
beneficiaries. Employees are eligible to participate in the 401(k) Plan with no
minimum age requirement after completing twelve months of service in which they
are credited with at least 501 hours of service. Employees are allowed to defer
and contribute up to 15% of their salary each year. The Company matches $.50 for
each dollar deferred up to 10% of total salary. The Board of Directors can also
elect to make discretionary contributions. Employees are fully vested in both
the matching and any discretionary contributions after five years of service.
The employer contributions to the plan for 1998, 1997 and 1996 totaled $30,044,
$29,550 and $13,286, respectively.
NOTE L - COMMITMENTS AND CONTINGENCIES
Commitments to Extend Credit In the normal course of business, the banking
subsidiary is party to financial instruments with off-balance-sheet risk. These
financial instruments include commitments to extend credit and standby letters
of credit, and have elements of credit risk in excess of the amount recognized
in the balance sheet. The exposure to credit loss in the event of nonperformance
by the other parties to the financial instruments for commitments to extend
credit and standby letters of credit is represented by the contractual notional
amount of those instruments. Generally, the same credit policies used for
on-balance-sheet instruments, such as loans, are used in extending loan
commitments and standby letters of credit.
36
<PAGE>
Following are the off-balance-sheet financial instruments whose contract amounts
represent credit risk:
December 31,
------------
1998 1997
---- ----
Loan commitments ....................... $4,880,316 $6,172,000
Standby letters of credit .............. 333,100 374,577
Loan commitments involve agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and some involve
payment of a fee. Many of the commitments are expected to expire without being
fully drawn; therefore, the total amount of loan commitments does not
necessarily represent future cash requirements. Each customer's creditworthiness
is evaluated on a case-by-case basis. The amount of collateral obtained, if any,
upon extension of credit is based on management's credit evaluation of the
borrower. Collateral held varies but may include commercial and residential real
properties, accounts receivable, inventory and equipment.
Standby letters of credit are conditional commitments to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
standby letters of credit is the same as that involved in making loan
commitments to customers. As of December 31, 1998 and 1997, a majority of the
outstanding letters of credit were secured by real estate.
The estimated fair values of off-balance-sheet financial instruments such as
loan commitments and standby letters of credit are generally based upon fees
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the counterparties' creditworthiness. The vast
majority of the banking subsidiary's loan commitments do not involve the
charging of a fee, and fees associated with outstanding standby letters of
credit are not material. Therefore, as of December 31 1998 and 1997, the
estimated fair values of these off-balance-sheet financial instruments is
nominal. For loan commitments and standby letters of credit, the committed
interest rates are either variable or approximate current interest rates offered
for similar commitments. Management is not aware of any significant change in
the credit risk associated with these commitments.
Borrowing Commitments At December 31, 1998, the banking subsidiary had unused
short-term lines of credit to purchase up to $2,500,000 of federal funds from
unrelated correspondent financial institutions. The correspondent lines are
generally available on a one to seven day basis for general corporate purposes
of the Bank. The lenders have reserved the right to withdraw the lines at their
option. The Bank also has an unused line of credit agreement with the FHLB.
Under the terms of the FHLB agreement, the Bank may borrow up to $10,600,000 for
its general corporate purposes. Borrowings under the line may bear interest at
either a variable or fixed rate established by the FHLB. The line, if utilized,
would be secured by FHLB capital stock with a carrying value of $345,400, and a
blanket lien on all 1-4 family residential first lien mortgage loans held by the
Bank. The carrying value of such loans at December 31, 1998 was approximately
$27,389,000.
Litigation The Company and its subsidiary were not involved as defendants in any
litigation at December 31, 1998. Management is not aware of any pending or
threatened litigation, or unasserted claims or assessments that are expected to
result in losses, if any, that would be material to the consolidated financial
statements.
Accounting Estimates In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of revenues and
expenses during the reporting period. Actual results could differ significantly
from those estimates. Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination of the allowance
for loan losses. In connection with the determination of the allowance for loan
losses, management has identified specific loans as well as adopting a policy of
providing amounts for loan valuation purposes which are not identified with any
specific loans and are derived from actual loss experience ratios, loan types,
loan volume, economic conditions and industry standards.
37
<PAGE>
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the banking subsidiary's allowance for
loan losses. Such agencies may require the recognition of additions to the
allowance based on their judgments about information available to them at the
time of their examination.
Year 2000 Readiness Management believes that the Company is presently on
schedule in implementing its Y2K Preparedness Plan. The plan has five phases:
(1) Awareness, (2) Assessment, (3) Renovation, (4) Validation, and (5)
Implementation. The awareness and assessment phases have been substantially
completed as of December 31 1998, which included the identification of critical
systems and equipment potentially vulnerable to the Year 2000 problem. This also
included identification of significant loan customers whose businesses could
possibly be adversely affected by the problem and communicating with them about
their progress in addressing the Year 2000 changeover. The renovation phase,
consisting of upgrading or replacing systems and equipment, had also been
largely completed for all mission-critical systems as of December 31, 1998. The
validation portion of the plan calls for the actual testing of systems and
equipment as of several critical dates with such testing to be completed by June
30, 1999. This testing is presently on schedule with no major problems
encountered. Finally, the implementation phase, which requires addressing any
problems encountered in the validation phase, along with continued review and
assessment of the Company's systems and equipment, is presently underway and
will continue until the year 2000 has arrived. As a part of contingency
planning, the Company has engaged an outside contractor to make available a
compatible portable hardware and software system, represented to be Year 2000
compliant, which could timely be brought to the Company's location in the event
of a system failure.
Management is of the opinion that the Company's systems and equipment will be
ready for the Year 2000 in a timely manner without any material adverse effect
on the Company's business. Because of the planned comprehensive computer
hardware and software upgrade begun in 1996 and completed in 1997, the Company
has incurred no material expenditures in 1998 or 1997 relating directly to the
Year 2000 problem. The new components, which were largely Year 2000 compliant
when installed, were acquired in the normal course of business to upgrade the
Bank's computer capabilities. The previous system was over six years old and was
becoming functionally obsolete. The Company has been able to use previously
existing internal personnel and resources to carry out its Y2K Preparedness
Plan, and has used few outside resources that would incur significant additional
costs. Management is not aware of any material future expenditures required to
complete its preparedness plan.
NOTE M - FAIR VALUE OF FINANCIAL INSTRUMENTS
Following is summary information on the estimated fair value of financial
instruments, cross referenced to the location in the consolidated financial
statements and notes where more detailed information can be obtained:
38
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
of Assets of Assets of Assets of Assets
(Liabilities) (Liabilities) (Liabilities) (Liabilities)
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash and due from banks (Note A) ............. $ 3,319,892 $ 3,319,892 $ 4,833,659 $ 4,833,659
Federal funds sold (Note A) .................. 14,150,000 14,150,000 6,510,000 6,510,000
Securities (Note D) .......................... 38,284,136 38,284,136 25,510,524 25,510,524
Other investments (Note A) ................... 345,400 345,400 335,000 335,000
Loans (Note E) ............................... 66,938,381 67,342,792 64,947,783 65,206,506
Accrued interest receivable (Note A) ......... 829,201 829,201 792,715 792,715
Deposits (Note G) ............................ (112,496,172) (112,546,966) (92,290,572) (92,300,726)
Accrued interest payable (Note A) ............ (965,653) (965,653) (772,105) (772,105)
Loan commitments (Note L) .................... (4,880,316) (6,172,000)
Standby letters of credit (Note L) ........... (333,100) (374,577)
</TABLE>
NOTE N - COMMUNITY FIRST BANCORPORATION (PARENT COMPANY ONLY)
<TABLE>
<CAPTION>
December 31,
------------
1998 1997
---- ----
Condensed Balance Sheet
Assets
<S> <C> <C>
Cash .................................................................... $ 282,464 $ 245,705
Investment in banking subsidiary ........................................ 13,303,767 11,602,938
Other assets ............................................................ 19,047 2,370
----------- -----------
Total assets ......................................................... $13,605,278 $11,851,013
=========== ===========
Liabilities
Other liabilities ....................................................... $ 2,318 $ 1,292
Shareholders' equity ........................................................ 13,602,960 11,849,721
----------- -----------
Total liabilities and shareholders' equity ........................... $13,605,278 $11,851,013
=========== ===========
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1998 1997
---- ----
Condensed Statement of Income
Income
<S> <C> <C>
Dividends received from banking subsidiary ............................ $ - $ 250,000
Interest income ....................................................... 793 -
----------- -----------
Total income ....................................................... 793 250,000
----------- -----------
Expenses
Interest expense ...................................................... - 649
Other expenses ........................................................ 56,815 50,642
----------- -----------
Total expenses ..................................................... 56,815 51,291
----------- -----------
Income (loss) before income taxes and equity in
undistributed earnings of banking subsidiary .......................... (56,022) 198,709
Income tax expense (credit) ............................................... (19,047) (2,370)
Equity in undistributed earnings
of banking subsidiary ................................................. 1,701,253 1,203,971
----------- -----------
Net income ................................................................ $ 1,664,278 $ 1,405,050
=========== ===========
<CAPTION>
Years Ended December 31,
------------------------
1998 1997
---- ----
Condensed Statement of Comprehensive Income
<S> <C> <C>
Net income .............................................................. $ 1,664,278 $1,405,050
Equity in other comprehensive income
(loss) of banking subsidiary ......................................... (424) 62,210
----------- ----------
Comprehensive income .................................................... $ 1,663,854 $1,467,260
=========== ==========
<CAPTION>
Years Ended December 31,
------------------------
1998 1997
---- ----
Condensed Statement of Cash Flows
Operating activities
<S> <C> <C>
Net income ................................................................ $ 1,664,278 $ 1,405,050
Adjustments to reconcile net income to net
cash provided by operating activities
Equity in undistributed earnings
of banking subsidiary ........................................ (1,701,253) (1,203,971)
Increase in other assets ....................................... (16,677) (2,370)
Increase in other liabilities .................................. 1,026 1,292
----------- -----------
Net cash (used) provided by
operating activities ...................................... (52,626) 200,001
----------- -----------
Financing activities
Exercise of employee stock options ........................................ 89,385 50,027
Payment of cash in lieu of fractional
shares for stock dividend .............................................. - (4,323)
----------- -----------
Net cash provided by financing activities .................... 89,385 45,704
----------- -----------
Increase in cash and cash equivalents ......................................... 36,759 245,705
Cash and cash equivalents, beginning .......................................... 245,705 -
----------- -----------
Cash and cash equivalents, ending ............................................. $ 282,464 $ 245,705
=========== ===========
</TABLE>
40
Exhibit 21
Subsidiaries of the Registrant
Community First Bank
INDEPENDENT AUDITORS' CONSENT
Board of Directors
Community First Bancorporation
We consent to the incorporation by reference into the Registration
Statement on Form S-8 (No. 333-71401) filed by Community First Bancorporation in
connection with the Community First Bancorporation 1998 Stock Option Plan and
into the Registration Statement on Form S-8 (No. 333-66097) filed by Community
First Bancorporation in connection with the Community First Bancorporation 1989
Stock Option Plan, of our Report dated February 4, 1999, included in Community
First Bancorporation's Annual Report on Form 10-KSB for the year ended December
31, 1998.
s/Donald G. Jones and Company, P.A.
Donald G. Jones and Company, P.A
Columbia, South Carolina
March 18, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at December 31, 1998 and the Consolidated Statement
of Income for the year ended December 31, 1998 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,320
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 14,150
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 38,284
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 67,893
<ALLOWANCE> 955
<TOTAL-ASSETS> 127,127
<DEPOSITS> 112,496
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,028
<LONG-TERM> 0
0
0
<COMMON> 10,569
<OTHER-SE> 3,034
<TOTAL-LIABILITIES-AND-EQUITY> 127,127
<INTEREST-LOAN> 6,116
<INTEREST-INVEST> 1,841
<INTEREST-OTHER> 947
<INTEREST-TOTAL> 8,904
<INTEREST-DEPOSIT> 4,518
<INTEREST-EXPENSE> 4,518
<INTEREST-INCOME-NET> 4,386
<LOAN-LOSSES> 213
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,155
<INCOME-PRETAX> 2,592
<INCOME-PRE-EXTRAORDINARY> 1,664
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,664
<EPS-PRIMARY> .94
<EPS-DILUTED> .88
<YIELD-ACTUAL> 3.79
<LOANS-NON> 366
<LOANS-PAST> 10
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 541
<ALLOWANCE-OPEN> 890
<CHARGE-OFFS> 169
<RECOVERIES> 21
<ALLOWANCE-CLOSE> 955
<ALLOWANCE-DOMESTIC> 955
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
