Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
Statements included in this report 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. 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," "believes," "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 beliefs, expectations or
projections will result or be achieved or accomplished. The Company cautions
readers that forward-looking statements, including without limitation, those
relating to the Company's recent and continuing expansion, its future business
prospects, revenues, working capital, liquidity, capital needs, interest costs,
income, and adequacy of the allowance for loan losses, are not guarantees of
future performance and are subject to 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. The risks and
uncertainties include, but are not limited to
o our growth and our ability to maintain growth;
o governmental monetary and fiscal policies, as well as legislative
and regulatory changes;
o the effect of interest rate changes on our level and composition
of deposits, loan demand and the value of our collateral and
securities;
o the effects of competition from other financial institutions
operating in our market area and elsewhere, including
institutions operating locally, nationally and internationally,
together with competitors that offer banking products and
services by mail, telephone and computer and/or the Internet;
o failure of assumptions underlying the establishment of our
allowance for loan losses, including the value of collateral
securing loans; and
o loss of consumer confidence and economic disruptions resulting
from terrorist activities.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Changes in Financial Condition
During the three months ended September 30, 2007, loans grew by
$10,936,000, or 4.8%, and securities available-for-sale decreased by $3,873,000,
or 3.7%. Total deposits increased by $8,981,000, or 2.7%, during the 2007 third
quarter, due to higher amounts of public deposits. The Company also purchased
bank-owned life insurance of $7,000,000 during the third quarter of 2007. This
asset is intended to fund certain retirement benefits of the Company's Chief
Executive Officer under the terms of an agreement dated July 31, 2007. The
Company accrued $290,000 for those benefits during the third quarter of 2007.
Loans grew by $33,941,000, or 16.7% and, as noted above, bank-owned
life insurance of $7,000,000 was purchased during the 2007 nine month period.
These items were funded primarily by an increase of $27,232,000, or 10.2%, in
interest bearing deposits and a reduction of $13,178,000 in federal funds sold
during the period. The Company reduced its short-term borrowings by $4,500,000
during the 2007 nine month period.
8
The Company believes that it continues to have sufficient flexibility
to fund loan requests or make investments in securities at attractive yields,
and to meet normal demands for deposit withdrawals by its customers, while
maintaining its exposure to any further increases in interest rates at an
acceptable level.
Results of Operations
Three Months Ended September 30, 2007 and 2006
The Company recorded consolidated net income of $771,000 or $.26 per
share for the third quarter of 2007 compared with net income of $904,000 and
earnings per share of $.31 for the third quarter of 2006. Net income per share,
assuming dilution was $.24 for the 2007 quarter and $.28 for the 2006 period.
Net income per share amounts for 2006 have been retroactively adjusted to
reflect a five percent stock dividend effective December 18, 2006.
Loan growth was primarily responsible for higher interest income for
the 2007 third quarter. Higher rates paid on, and increased volumes of, time
deposits combined to increase interest expense. In the 2007 third quarter, the
Company continued to incur higher occupancy expenses associated with its new
Seneca, SC office and began incurring expenses related to training of personnel
and publicity for its new banking office in Anderson, SC, which opened for
business early in the fourth quarter of 2007. The Company also incurred higher
expenses for public relations and professional services during the 2007 period.
In addition, the Company incurred expenses of $290,000 related to a salary
continuation agreement entered into with its Chief Executive Officer on July 31,
2007. The contract terms were made effective as of January 1, 2007, however, and
the current three month period reflects a disproportionate share of the expense.
Such expenses for the fourth quarter of 2007 are expected to be approximately
$97,000. Income tax expense was reduced due to the lower amount of net income
before taxes.
Summary Income Statement
------------------------
(Dollars in thousands)
For the Three Months Ended September 30, 2007 2006 Dollar Change Percentage Change
---- ---- ------------- -----------------
Interest income .................................... $ 5,981 $ 4,942 $ 1,039 21.0%
Interest expense ................................... 3,367 2,672 695 26.0%
------- ------- -------
Net interest income ................................ 2,614 2,270 344 15.2%
Provision for loan losses .......................... 150 15 135 900.0%
Noninterest income ................................. 583 559 24 4.3%
Noninterest expenses ............................... 1,901 1,469 432 29.4%
Income tax expense ................................. 375 441 (66) -15.0%
------- ------- -------
Net income ......................................... $ 771 $ 904 $ (133) -14.7%
======= ======= =======
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Nine Months Ended September 30, 2007 and 2006
The Company recorded consolidated net income of $2,667,000 or $.89 per
share for the first nine months of 2006 compared with net income of $2,557,000
and earnings per share of $.87 for the same period of 2006. Net income per
share, assuming dilution was $.84 for the 2007 nine months and $.81 for the same
period of 2006. Net income per share amounts for 2006 have been retroactively
adjusted to reflect the five percent stock dividend effective December 18, 2006.
Increases in interest income, interest expenses and net interest income
for the 2007 nine month period reflect the effects of loan growth, higher rates
earned on securities and loans, and higher rates paid for, and higher volumes
of, interest bearing deposits, especially time deposits.
Salaries and employee benefits and directors' fees for the 2006 nine
month period included approximately $178,000 representing the effect of the
adoption of SFAS 123(R). No such amounts were incurred during the 2007 period.
The Company incurred higher legal and other professional fees in the 2007 period
primarily due to expenses associated with the recent contractual agreements
between the Company and its Chief Executive Officer. The Company previously has
not provided for the chief executive officer's retirement except to the extent
that matching contributions were made in conjunction with his participation in
the Company's 401(k) plan. During the third quarter of 2007, the Company
purchased life insurance that will be used to fund its liability under this
arrangement. It is expected that increases in the cash surrender value of the
life insurance will substantially offset the effects on earnings of the
Company's anticipated liability.
9
Summary Income Statement
------------------------
(Dollars in thousands)
For the Nine Months Ended September 30, 2007 2006 Dollar Change Percentage Change
---- ---- ------------- -----------------
Interest income .................................... $17,462 $14,392 $ 3,070 21.3%
Interest expense ................................... 9,777 7,553 2,224 29.4%
------- ------- -------
Net interest income ................................ 7,685 6,839 846 12.4%
Provision for loan losses .......................... 270 65 205 315.4%
Noninterest income ................................. 1,571 1,637 (66) -4.0%
Noninterest expenses ............................... 5,077 4,581 496 10.8%
Income tax expense ................................. 1,242 1,273 (31) -2.4%
------- ------- -------
Net income ......................................... $ 2,667 $ 2,557 $ 110 4.3%
======= ======= =======
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Net Interest Income
Net interest income, the principal source of the Company's earnings,
was higher in both the 2007 three month and nine month periods. Changes in the
composition of earning assets and interest bearing liabilities, combined with
more responsive practices with regard to changing the initial interest rates
offered for deposits and charged for fixed-rate loans, led to these increases.
In August and September 2007, the Federal Reserve Board reduced its
discount rate by a total of 100 basis points. These adjustments were made in
response to the well-publicized concerns about imminent interest rate "resets"
associated with subprime mortgage loans, which could cause some borrowers'
payments to increase so significantly as to be unaffordable and result in
significantly increased foreclosure rates. The Company generally does not
originate subprime mortgage loans. Most of the mortgage loans originated by the
Company are retained and serviced by the Bank and are underwritten using
traditional mortgage guidelines.
In response to the Federal Reserve's rate cuts, the Bank lowered the
rates it offers for deposits late in the third quarter of 2007. Approximately
$72,000,000 of savings and money market accounts were potentially subject to
such immediate rate changes as of September 30, 2007. Yields on variable rate
loans which are indexed to the prime rate were similarly reduced during the 2007
third quarter. Variable rate loans totaled $71,980,000 at the end of the 2007
third quarter.
Three Months Ended September 30, 2007 and 2006
For the third quarter of 2007, net interest income totaled $2,614,000,
an increase of $344,000 over the amount for the same period of 2006. The
Company's interest rate spread for the third quarter of 2007 was 2.15%, an
increase of 8 basis points over the 2.07% interest rate spread for the third
quarter of 2006. Net yield on earning assets for the 2007 third quarter was
2.91%, an increase of 12 basis points over the 2006 third quarter net yield. The
average amount of the Company's higher yielding loan category for the third
quarter of 2007 was 23.3% more than for the third quarter of 2006. Interest
rates associated with those loans in the 2007 period were 40 basis points higher
than in the 2006 period. As a result, interest income on loans was $1,065 higher
in the 2007 three month period. Rates associated with other significant
categories of earning assets were higher in the 2007 three month period as well
and the yield on earning assets for the 2007 period was 57 basis points higher
than for the 2006 period.
Rates paid for interest bearing liabilities also generally increased
above the prior year level. Rates paid for time deposits rose most dramatically
and rates paid for other types of interest bearing deposit accounts and for
borrowings rose only modestly or fell. Average amounts of time deposits
outstanding for the 2007 period increased by $29,540,000, or 15.8%, over the
amount for the 2006 period.
10
Average Balances, Yields and Rates
Three Months Ended September 30,
--------------------------------
2007 2006
---- ----
Interest Interest
Average Income/ Yields/ Average Income/ Yields/
Balances Expense Rates (1) Balances Expense Rates (1)
-------- ------- --------- -------- ------- ---------
(Dollars in thousands)
Assets
Interest-bearing balances due from banks ........ $ 227 $ 3 5.24% $ 46 $ - 0.00%
Securities
Taxable ................................... 93,000 975 4.16% 101,222 995 3.90%
Tax exempt (2) ............................ 19,574 212 4.30% 18,346 178 3.85%
---------- ------- --------- -------
Total investment securities .......... 112,574 1,187 4.18% 119,568 1,173 3.89%
Other investments ............................... 845 14 6.57% 980 14 5.67%
Federal funds sold .............................. 11,770 145 4.89% 14,246 188 5.24%
Loans (2) (3) (4) ............................... 231,452 4,632 7.94% 187,669 3,567 7.54%
---------- ------- --------- -------
Total interest earning assets ........ 356,868 5,981 6.65% 322,509 4,942 6.08%
Cash and due from banks ......................... 8,698 6,331
Allowance for loan losses ....................... (2,302) (2,268)
Valuation allowance - Available-for-
sale securities ........................... (1,602) (2,701)
Premises and equipment .......................... 8,227 7,815
Other assets .................................... 6,560 4,051
---------- ---------
Total assets ......................... $ 376,449 $ 335,737
========== =========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts ..... $ 57,297 $ 457 3.16% $ 51,698 $ 406 3.12%
Savings ................................... 19,068 92 1.91% 20,826 118 2.25%
Time deposits $100M and over .............. 85,990 1,038 4.79% 72,426 808 4.43%
Other time deposits ....................... 130,076 1,734 5.29% 114,100 1,285 4.47%
---------- ------- --------- -------
Total interest bearing
deposits ........................... 292,431 3,321 4.51% 259,050 2,617 4.01%
Long-term debt .................................. 4,500 46 4.06% 5,500 55 3.97%
---------- ------- --------- -------
Total interest bearing
liabilities ........................ 296,931 3,367 4.50% 264,550 2,672 4.01%
Noninterest bearing demand deposits ............. 41,084 38,053
Other liabilities ............................... 3,061 2,398
Shareholders' equity ............................ 35,373 30,736
---------- ---------
Total liabilities and shareholders'
equity ............................... $ 376,449 $ 335,737
========== =========
Interest rate spread ............................ 2.15% 2.07%
Net interest income and net yield
on earning assets ......................... $ 2,614 2.91% $ 2,270 2.79%
Interest free funds supporting earning
assets .................................... $ 59,937 $ 57,959
|
(1) Yields and rates are annualized
(2) Yields on tax exempt instruments have not been adjusted to a tax-equivalent
basis.
(3) Nonaccrual loans are included in the average loan balances and income on
such loans is recognized on a cash basis. (4) Includes immaterial amounts
of loan fees.
11
Nine Months Ended September 30, 2007 and 2006
For the first nine months of 2007, net interest income totaled
$7,685,000, an increase of $846,000, or 12.4%, over the amount for the same
period of 2006. The Company's interest rate spread for the 2007 nine month
period was 2.13%, only slightly lower than the 2.14% spread for the 2006 period.
The yield on interest earning assets increased to 6.54% for the 2007 period,
compared with 5.90% for the 2006 period, due to higher rates earned on all
significant categories of earning assets, but especially as related to loans. A
significant portion of the Company's loans are variable rate instruments that
are repriced in response to changes in the "prime rate." Also, for all loans
with original anticipated maturities of more than five years, the Company
generally includes a provision that allows it to adjust the interest rate on
each loan at least every five years.
Rates paid for interest bearing liabilities during the 2007 nine month
period were 65 basis points higher than for the 2006 period. Rates paid for time
deposits during the 2007 period were 79 basis points higher than in the 2006
period. The average amounts of time deposits outstanding during the 2007 period
were $17,949,000, or 9.6%, more than in the 2006 period. Rates paid for interest
bearing transaction accounts for the 2007 nine month period were 46 basis points
more than for the same period of 2006 and the average amount of such accounts in
the 2007 period was $13,228,000, or 30.0%, more than for the 2006 period.
Increases in rates paid for other interest-bearing funding sources were less
significant.
The Company continues to pursue a strategy to increase its market share
in its local market areas in Anderson and Oconee Counties of South Carolina.
Oconee County is served from four offices, which are located in Seneca, Walhalla
and Westminster. The Company currently is using its temporary facility at the
Westminster location and there presently are no firm plans, timetables or
budgets for constructing a permanent facility for this office. The Anderson
County market is served from three offices in Anderson and Williamston,
including an office on Highway 81 in Anderson County opened early in the fourth
quarter of 2007.
12
Average Balances, Yields and Rates
Nine Months Ended September 30,
2007 2006
---- ----
Interest Interest
Average Income/ Yields/ Average Income/ Yields/
Balances Expense Rates (1) Balances Expense Rates (1)
-------- ------- --------- -------- ------- ---------
(Dollars in thousands)
Assets
Interest-bearing balances due from banks $ 141 $ 4 3.79% $ 103 $ 4 5.19%
Securities
Taxable 91,100 2,907 4.27% 100,842 2,883 3.82%
Tax exempt (2) 19,588 616 4.20% 15,646 456 3.90%
---------- ------- --------- ----
Total investment securities 110,688 3,523 4.26% 116,488 3,339 3.83%
Other investments 904 43 6.36% 969 38 5.24%
Federal funds sold 25,733 1,007 5.23% 28,776 1,011 4.70%
Loans (2) (3) (4) 219,261 12,885 7.86% 179,560 10,000 7.45%
---------- ------- --------- -------
Total interest earning assets 356,727 17,462 6.54% 325,896 14,392 5.90%
Cash and due from banks 8,256 6,586
Allowance for loan losses (2,253) (2,266)
Valuation allowance - Available-for-
sale securities (1,282) (2,607)
Premises and equipment 8,048 7,451
Other assets 4,673 3,973
---------- ---------
Total assets $ 374,169 $ 339,033
========== =========
Liabilities and shareholders' equity
Interest bearing deposits
Interest bearing transaction accounts $ 57,293 $ 1,373 3.20% $ 44,065 $ 903 2.74%
Savings 28,282 616 2.91% 30,946 617 2.67%
Time deposits $100M and over 82,312 2,901 4.71% 73,978 2,273 4.11%
Other time deposits 123,391 4,729 5.12% 113,776 3,580 4.21%
---------- ------- --------- ------
Total interest bearing
deposits 291,278 9,619 4.42% 262,765 7,373 3.75%
Short-term borrowings 17 3 23.59% 26 2 10.28%
Long-term debt 5,119 155 4.05% 6,108 178 3.90%
---------- ------- --------- ----
Total interest bearing
liabilities 296,414 9,777 4.41% 268,899 7,553 3.76%
Noninterest bearing demand deposits 40,028 37,727
Other liabilities 3,139 2,482
Shareholders' equity 34,588 29,925
---------- ---------
Total liabilities and shareholders'
equity $ 374,169 $ 339,033
========== =========
Interest rate spread 2.13% 2.14%
Net interest income and net yield
on earning assets $ 7,685 2.88% $ 6,839 2.81%
Interest free funds supporting earning
assets $ 60,313 $ 56,997
|
(1) Yields and rates are annualized
(2) Yields on tax exempt instruments have not been adjusted to a tax-equivalent
basis.
(3) Nonaccrual loans are included in the average loan balances and income on
such loans is recognized on a cash basis. (4) Includes immaterial amounts
of loan fees.
13
Provision and Allowance for Loan Losses
The provision for loan losses was $150,000 for the third quarter of
2007 compared with $15,000 for the third quarter of 2006. For the first nine
months of 2007, the provision for loan losses was $270,000, compared with
$65,000 for the first nine months of 2006. At September 30, 2007, the allowance
for loan losses was 1.00% of loans, compared with 1.10% at December 31, 2006.
The increase in the provision and allowance was made as a result of moderate
increases in the amounts of nonaccrual and potential problem loans and net
charge-offs and higher volumes of loans.
For the first nine months of 2007, net charge-offs totaled $141,000,
compared with $72,000 in net charge offs during the same period of 2006. As of
September 30, 2007, nonaccrual loans totaled $426,000 and there were no loans 90
days or more past due and still accruing interest. As of September 30, 2006,
there were $481,000 in nonaccrual loans and no loans 90 days or more past due
and still accruing interest. The activity in the allowance for loan losses is
summarized in the table below:
Nine Months Nine Months
Ended Year Ended Ended
September 30, December 31, September 31,
------------- ------------ -------------
(Dollars in thousands)
Allowance at beginning of period ................................. $ 2,242 $ 2,266 $ 2,266
Provision for loan losses ........................................ 270 65 65
Net charge-offs .................................................. (141) (89) (72)
--------- --------- ---------
Allowance at end of period ....................................... $ 2,371 $ 2,242 $ 2,259
========= ========= =========
Allowance as a percentage of loans outstanding
at period end .................................................. 1.00% 1.10% 1.16%
Loans at end of period ........................................... $ 236,907 $ 202,966 $ 193,935
========= ========= =========
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14
Non-Performing and Potential Problem Loans
90 Days or
More Past Due Total Non- Percentage Percentage
Nonaccruing and Still performing of Total Potential of Total
Loans Accruing Loans Loans Problem Loans Loans
----- -------- ----- ----- ------------- -----
(Dollars in thousands)
January 1, 2006 ................ $ 900 $ 5 $ 905 0.53% $2,148 1.27%
Net change ..................... (321) (5) (326) 615
------ ------ ------ ------
March 31, 2006 ................. 579 - 579 0.34% 2,763 1.61%
Net change ..................... (82) - (82) 1,047
------ ------ ------ ------
June 30, 2006 .................. 497 - 497 0.27% 3,810 2.05%
Net change ..................... (16) - (16) (151)
------ ------ ------ ------
September 30, 2006 ............. 481 - 481 0.25% 3,659 1.89%
Net change ..................... (431) - (431) (483)
------ ------ ------ ------
December 31, 2006 .............. 50 - 50 0.02% 3,176 1.56%
Net change ..................... 143 - 143 (151)
------ ------ ------ ------
March 31, 2007 ................. 193 - 193 0.09% 3,025 1.43%
Net change ..................... 219 - 219 97
------ ------ ------ ------
June 30, 2007 .................. 412 - 412 0.18% 3,122 1.38%
Net change ..................... 14 - 14 106
------ ------ ------ ------
September 30, 2007 ............. $ 426 $ - $ 426 0.18% $3,228 1.36%
====== ====== ====== ======
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Potential problem loans include loans, other than non-performing loans,
that management has identified as having possible credit problems sufficient to
cast doubt upon the abilities of the borrowers to comply with the current
repayment terms. Management believes that potential problem loans reflect
circumstances unique to each individual borrower. The Company does not currently
originate or invest in, nor has it historically originated or invested in,
significant amounts of subprime mortgage loans.
Noninterest Income
Noninterest income totaled $583,000 for the third quarter of 2007,
compared with $559,000 for the 2006 quarter. Service charges on deposit accounts
in the 2007 quarter were $394,000 representing a decrease of $10,000 from the
prior year period. Increases in the cash surrender value of bank-owned life
insurance obtained in the third quarter of 2007 totaled $33,000. There were no
sales of any securities in either the 2007 or 2006 period.
For the nine months ended September 30, 2007, noninterest income
totaled $1,571,000, compared with $1,637,000 for the same period of 2006.
Service charges on deposit accounts in the 2007 period were $1,071,000
representing a decrease of $79,000 from the prior year period. There were no
sales of any securities in either the 2007 or 2006 period. A gain of $31,000
from the sale of foreclosed assets was recognized in the 2006 period; there has
been no such gain in 2007. During the 2007 period, $33,000 of increases in the
cash surrender value of life insurance were recognized.
Noninterest Expenses
Noninterest expenses totaled $1,901,000 for the third quarter of 2007
compared with $1,469,000 for the same period of 2006, representing an increase
of $432,000 or 29.4%. Salaries and employee benefits increased by $326,000, or
40.5%, to $1,130,000. During the 2006 period, share-based compensation expense
of $38,000 was recognized due to the adoption of SFAS 123(R). No share-based
compensation expense was recognized in the 2007 period. During the three and
nine month periods of 2007, $290,000 was accrued for a salary continuation
agreement with the Company's chief executive officer. The agreement was reached
on July 31, 2007 and was effective as of January 1, 2007.
Occupancy and furniture and equipment expenses for the third quarter of
2007 increased by $25,000 compared with 2006 primarily due to the Company's
occupancy of new corporate offices and the opening of the new banking office in
Seneca, SC, as well as higher maintenance expenses associated with the Company's
equipment. Directors' fees for the 2006 three month period include $17,000 of
share-based compensation expenses that resulted from the adoption of SFAS
123(R). No share-based expenses were recognized in the 2007 period. In addition,
higher expenses were incurred in 2007 for stationery, supplies and promotional
15
expenses resulting from the opening of the new corporate offices and additional
banking offices. Legal and consulting expenses were higher in the 2007 period as
a result of expenses incurred in negotiating agreements with the Company's Chief
Executive Officer.
For the nine months ended September 30, 2007, salaries and employee
benefits increased by $392,000, or 16.0%, over the amount for 2006. No
share-based compensation expense was recognized in the 2007 period, while
$98,000 of such expenses were recognized in the 2006 period. The increase in
salaries and benefits for 2007 is attributable to an increase in the number of
employees for the new Seneca and Anderson offices, higher costs of providing
health insurance benefits, the aforementioned expense for the Chief Executive's
Salary Continuation Agreement, and normal salary increases. Net occupancy and
furniture and equipment expenses increased by an aggregate of $85,000, or 15.3%.
Early in the second quarter of 2006, the Company moved its corporate offices
into a newly constructed office building in Seneca, SC that also houses a new
full-service banking office. The new Anderson office was opened early in the
fourth quarter of 2007 and, consequently, had no effect on this increase. Other
expenses increased due to legal and consulting fees as discussed in the
preceding paragraph. During the first nine months of 2006, the Company
recognized share-based expenses for directors fees of $80,000. No such expenses
were incurred in the 2007 period.
Liquidity
Liquidity is the ability to meet current and future obligations through
the liquidation or maturity of existing assets or the acquisition of additional
liabilities. The Company manages both assets and liabilities to achieve
appropriate levels of liquidity. Cash and short-term investments are the
Company's primary sources of asset liquidity. These funds provide a cushion
against short-term fluctuations in cash flow from both deposits and loans.
Securities available-for-sale are the Company's principal source of secondary
asset liquidity. However, the availability of this source is influenced by
market conditions. Individual and commercial deposits are the Company's primary
source of funds for credit activities. The Company has significant amounts of
credit availability under its FHLB lines of credit and federal funds purchased
facilities.
As of September 30, 2007, the ratio of loans to total deposits was
70.3%, compared with 65.9% as of December 31, 2006. Deposits as of September 30,
2007 were $337,166,000, an increase of $29,209,000 or 9.5% over the amount as of
December 31, 2006. Management believes that the Company's liquidity sources are
adequate to meet its operating needs.
Capital Resources
The Company's capital base increased by $3,119,000 since December 31,
2006 as the result of net income of $2,667,000 for the first nine months of
2007, $83,000 from the exercise of employee stock options, plus a $369,000
change in unrealized gains and losses on available-for-sale securities, net of
deferred income tax effects.
The Company and its banking subsidiary (the "Bank") are subject to
regulatory risk-based capital adequacy standards. Under these standards, bank
holding companies and banks are required to maintain certain minimum ratios of
capital to risk-weighted assets and average total assets. Under the provisions
of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA),
federal bank regulatory authorities are required to implement prescribed "prompt
corrective actions" upon the deterioration of the capital position of a bank. If
the capital position of an affected institution were to fall below certain
levels, increasingly stringent regulatory corrective actions are mandated.
The September 30, 2007 risk based capital ratios for the Company and
the Bank are presented in the following table, compared with the "well
capitalized" and minimum ratios under the regulatory definitions and guidelines:
Total
Tier 1 Capital Leverage
------ ------- --------
Community First Bancorporation ................. 14.6% 15.6% 9.7%
Community First Bank ........................... 14.1% 15.1% 9.4%
Minimum "well-capitalized" requirement ......... 6.0% 10.0% 6.0%
Minimum requirement ............................ 4.0% 8.0% 5.0%
|
16
Off-Balance-Sheet Arrangements
In the normal course of business, the Bank is party to financial
instruments with off-balance-sheet risk including commitments to extend credit
and standby letters of credit. Such instruments have elements of credit risk in
excess of the amount recognized in the balance sheet. The exposure to credit
loss in the event of nonperformance by the other parties to the financial
instruments for commitments to extend credit and standby letters of credit is
represented by the contractual notional amount of those instruments. Generally,
the same credit policies used for on-balance-sheet instruments, such as loans,
are used in extending loan commitments and standby letters of credit.
Following are the off-balance-sheet financial instruments whose
contract amounts represent credit risk:
September 30, 2007
------------------
(Dollars in thousands)
Loan commitments .......................................... $54,529
Standby letters of credit ................................. 774
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Loan commitments involve agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and some
involve payment of a fee. Many of the commitments are expected to expire without
being fully drawn; therefore, the total amount of loan commitments does not
necessarily represent future cash requirements. Each customer's creditworthiness
is evaluated on a case-by-case basis. The amount of collateral obtained, if any,
upon extension of credit is based on management's credit evaluation of the
borrower. Collateral held varies but may include commercial and residential real
properties, accounts receivable, inventory and equipment.
Standby letters of credit are conditional commitments to guarantee the
performance of a customer to a third party. The credit risk involved in issuing
standby letters of credit is the same as that involved in making loan
commitments to customers. Many letters of credit will expire without being drawn
upon and do not necessarily represent future cash requirements. The Bank
receives fees for loan commitments and standby letters of credit. The amount of
such fees was not material for either the nine months or three months ended
September 30, 2007.
As described under "Liquidity," management believes that its various
sources of liquidity provide the resources necessary for the Bank to fund the
loan commitments and to perform under standby letters of credit, if the need
arises. Neither the Company nor the Bank are involved in other off-balance sheet
contractual relationships or transactions that could result in liquidity needs
or other commitments or significantly impact earnings.