CFB Annual Report 2018
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Celebrating a Record-Setting Performance
COMMUNITY FIRST
BANCORPORATION
2018 Annual Report
Record-Setting Performance
President’s Report to the Shareholders of
Community First Bancorporation
I am pleased to report a record-breaking year for the Company and the Bank. This past year
we continued building on a strong foundation laid by our people, our products, and our
services. The results of these efforts provided the Company and the Bank with a record-setting
performance in 2018.
In 2018, our net income was $4,440,000, which represented an increase of $3,553,000 or 401%
over earnings of $887,000 recognized in 2017. This significant increase in earnings was the
result of the Bank’s ability to recapture $3,600,000 in Deferred Tax Assets (DTA) held by the
Bank over the last several years.
DTA are recorded when a company experiences significant losses such as those we experienced
in 2010 - 2014. Companies can recognize an asset that represents the future tax deductibility
of losses when it appears likely that the company will be able to utilize the previous losses to
offset taxable income. In 2018, the Company was able to demonstrate that it can generate the
income necessary to utilize the DTA.
Excluding the net effect of one-time charges in late 2018, we were on track to have a solid year
for the Company and the Bank with an increase in core earnings of over 100% above the 2017
numbers.
The Company continued to experience sound growth in 2018 with year-end assets totaling
$382,019,000, compared to $354,460,000 one year ago. The Company’s net loans were
$275,305,000 as of December 31, 2018, an increase of 10.1% over 2017 loans of $249,939,000.
The Company’s deposits were $329,369,000 as of December 31, 2018, compared to
$317,688,000, an increase of $11,681,000 or 3.7%.
Ultimately every organization must move beyond its initial footprint in order to grow and
prosper. Historically, Community First Bank was focused on growing deposit relationships,
with a heavy emphasis on time deposits, in Anderson and Oconee Counties. While remaining
highly competitive in this sector, our current and future strategy focuses on other types of
core deposits and deposit customers. We will continue to expand the deposit base to keep pace
with the loan growth.
In 2016, we recognized the need to look beyond our home markets to new markets that would
provide additional opportunities for loans and deposits, and we responded by opening loan
production offices (LPOs). The revenue generated by our growth has been the driving force
behind our return to profitability. For 15 out of the last 16 quarters the Company has been
profitable, has significantly reduced nonperforming assets, and has offered additional products
and services.
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In 2018, we continued reducing our nonperforming assets, comprising non-accrual loans and
foreclosed assets. These nonperforming assets declined to $1,208,000 as of December 31,
2018, compared to $1,977,000 at year-end 2017. Our overall loan quality remains excellent,
as demonstrated by a year-end past-due ratio of .61%, which is well below the industry standard
of 1.0%.
We took another big step forward in the 4th quarter of 2018 and the early part of the 1st
quarter 2019 with the payment in full of all previously accrued dividends due on the preferred
shares. Those shares were offered in 2009. In 2013, the Bank was placed under a consent order
by the regulators. At the time the Bank went under the order, it was allowed to accrue for the
dividends but was forbidden to pay them as part of the regulatory agreement. With our earnings
in 2018, we were able to pay $354,375 in December 2018 and the remaining $354,375 in
early January to bring our preferred obligations current.
We continued to follow our strategic plan during 2018. Ours is a dual strategy. We will maintain
our focus on strong, profitable, organic growth within our core South Carolina and North
Carolina markets while increasing the Company’s Return on Assets (ROA) to a level commensurate
with that of a group of high performing peer institutions. We will also evaluate market
opportunities that arise to improve the Company’s strategic position.
Continuing with our strategic plan, we expect to branch into markets currently served by our
LPOs opened in 2016 and 2017, and we are moving forward as indicated below:
• In June 2018, the Bank purchased a future branch site located at 210 Brendan Way,
Greenville, South Carolina. The Bank has received approval from our regulators to open
this branch, and we expect to open a full-service branch on April 15, 2019, to serve
our customers in the Greenville market.
• In December 2018, the Company and the Bank received the approval of its regulators
to acquire two future branch locations in North Carolina, and we have completed the
purchase of 800 East Arrowood Road in Charlotte, along with 202 West Trade Street
in Dallas.
We believe both of these markets will provide the Bank with robust deposit and loan
opportunities.
• We intend to consolidate our Charlotte and Fort Mill LPOs into the new Charlotte
location, given its proximity to both existing LPO locations. We are targeting a 3rd
quarter opening for the Charlotte location and a 4th quarter opening for Dallas, subject
to approval of our regulators.
As we turn our attention to 2019, we are coming off a great year of income and earnings with
an ROA of 1.20%, ROE of 13.70%, and an increase in our tangible book value to $8.02. In 2019
and beyond we will continue our focus on safely growing our Bank and our income organically
or through strategic opportunities.
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We believe we are properly positioned to continue sound growth as we concentrate our efforts in
the right growth markets with the proper lines of business, staffed by an excellent talent pool of
associates driven to be successful. At Community First Bank we have core values that epitomize
the manner in which the Board of Directors, management, and employees go about doing
business, and I want to share those with you.
CUSTOMER COMMITTMENT – We develop strong relationships that make a positive impact on
our customer’s lives and businesses.
TEAMWORK – We work together, across all boundaries, to meet the needs of our customers and
to help the Company win.
INTEGRITY – We uphold the highest standards of integrity in all of our actions.
RESPECT FOR OUR TEAM MEMBERS – We value our team members and the contributions they
make to our organization every day! We encourage and promote their development, and we reward
performance.
GOOD CITIZENS OF OUR COMMUNITY – We are good citizens in the communities in which we
live and work.
SUCCESS – We expect to be successful in the marketplace and in every aspect of our business.
PERSONAL ACCOUNTABILITY – We are personally accountable for delivering on our commitments.
In closing, I wish to thank each of you for your continued support. Together, we have come a great
distance over the last four years, and I believe the best is yet to come for both the Company and
the Bank. I’m very excited about our organization and our possibilities in the future. It is certainly
my honor and privilege to be your President and Chief Executive Officer.
I encourage you to further honor your investment in the Company by allowing us to earn your
business. Remember, at Community First Bank, We know what matters.
Thank you again for your support and confidence.
Respectfully,
Richard D. Burleson, Jr.
President and Chief Executive Officer
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Business of the Company
Community First Bancorporation (the “Company”) is a South Carolina corporation and a bank holding
company incorporated on 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. In November 2011, the
Company acquired Bank of Westminster (“Westminster”), Westminster, South Carolina, in an all cash
transaction pursuant to the merger of Westminster with and into the Bank.
Business of the Bank
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, Seneca,
Anderson, Westminster and Williamston, South Carolina. As of December 31, 2018, the Bank also operates
loan production offices (“LPOs”) in Greenville and Fort Mill, South Carolina and in Charlotte and Concord,
North Carolina. In 2019, the Greenville LPO is scheduled to open as a full-service location, and the Fort
Mill LPO is scheduled to be consolidated into the Charlotte LPO. In 2017, the Bank established Community
First Financial Services, which works through a trusted partner to offer online pricing options for
various types of insurance products. To date, Community First Financial Services has engaged in limited
operations.
Deposits
The Bank offers a full range of deposit services, including checking accounts, NOW accounts, retirement
accounts (including Individual Retirement Accounts), time deposits and savings accounts of various types,
ranging from daily money market accounts to longer-term certificates of deposit. The transaction accounts
and time certificates are tailored to the principal market area at rates competitive with those offered
by other institutions in the area. All deposit accounts are insured by the Federal Deposit Insurance
Corporation (“FDIC”) up to the maximum amount permitted by law. The Bank solicits these accounts from
individuals, businesses, associations and organizations, and government authorities. The Bank does not
offer trust services.
Lending Activities
The Bank offers a range of lending services, including commercial loans, consumer loans, and real estate
mortgage loans. The Bank offers secured and unsecured, short-to-intermediate term loans, with floating
and fixed interest rates for commercial and consumer purposes. Consumer loans generally include car and
boat loans, home equity improvement loans (secured by first and second mortgages), personal expenditure
loans, education loans, and overdraft lines of credit. Commercial loans generally include 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 appropriate to enable the Bank to maintain
a sufficient volume of high quality loans.
To address the risks inherent in making loans, management maintains an allowance for loan losses based
on, among other things, an evaluation of the Bank’s loan loss experience, management’s experience at
other financial institutions in the market area, peer data, the amount of and trends in past due and
nonperforming loans, current economic conditions and the values of loan collateral.
Other Services
The Bank participates in a network of automated teller machines that may be used by Bank customers
throughout the United States and the world. The Bank offers credit and debit cards together with related
lines of credit. The lines of credit may be used for overdraft protection as well as pre-authorized credit for
personal purchases and expenses. The Bank also provides direct deposit of payroll and social security
benefits, and automatic drafts for various accounts. The Bank offers foreign payments and currency
exchange through a correspondent bank. The Bank offers an internet banking product accessible via the
Bank’s website at www.C1stbank.com. The interactive banking product includes an electronic bill payment
service that allows customers to make scheduled and/or recurring bill payments electronically. The Bank
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also offers mobile banking as a component of internet banking. Additionally, the Bank offers remote check
deposit services, merchant services, and other related services to commercial and small business customers.
Managements Discussion of Financial
Condition and Results of Operations
The following information describes various financial aspects of the Bank's business. This information
should be read in conjunction with the consolidated financial statements of the Company, which appear
elsewhere in this document.
Effect of Economic Trends
The current outlook for the Company’s market areas and for the national economy in the United States
(“U.S.”) is optimistic. The Company expects a growing economy in 2019 in its market areas. As of December
31, 2018, employment options are plentiful in the Company’s market areas.
Earnings Performance
The Company reported net income of $4,440,000 in 2018 compared to $887,000 in 2017 and $924,000
in 2016. After adjusting for dividends allocated to preferred shares, the net income per common share was
$1.02 for 2018, $0.18 for 2017 and $0.18 for 2016. Fully diluted net income per share was $1.01 for 2018.
Stock based compensation in the form of vested options has the potential to create a difference between
basic and fully diluted earnings per common share. In 2018, the effect of vested options on earnings
per common share was minimal. In 2017 and 2016, there was no dilutive effect. Net income increased
significantly in 2018 relative to 2017 due to the reversal of the Company’s deferred tax asset valuation
allowance in 2018 and significant investments in 2017 for conversion of the Bank’s core processing system.
The Company’s net interest income (the difference between interest earned on interest earning assets and
interest paid on interest bearing liabilities) after provision for loan losses increased to $13,145,000 in
2018 from $12,043,000 and $10,197,000 in 2017 and 2016, respectively. The Company had noninterest
income of $2,273,000 in 2018 following $2,683,000 in 2017 and $2,780,000 in 2016. Noninterest income
for 2018 included losses on the sale of investments of $50,000 and gains on the sale of investments of
$11,000, and $309,000 in 2017 and 2016, respectively. The Company recorded a provision to the allowance
for loan losses of $148,000 in 2018, $0 in 2017, and $50,000 in 2016. The Company had other operating
expenses of $14,791,000, $13,837,000, and $12,045,000, in 2018, 2017, and 2016, respectively.
Net Interest Income
Net interest income is the amount of interest earned on interest earning assets (loans, investment
securities, deposits in other banks and federal funds sold), less the interest expenses incurred on interest
bearing liabilities (interest bearing deposits and borrowed money), and is the principal source of the Bank's
earnings. Net interest income is affected by the level of interest rates, volume and mix of interest earning
assets and the relative funding of these assets. Due to the fact that the Bank’s and therefore, the Company’s,
assets are largely monetary in nature, material changes in interest rates can have a material impact on the
Bank’s net interest income.
For the years ended December 31, 2018, 2017, and 2016, net interest income was $13,293,000,
$12,043,000, and $10,247,000, respectively. The increase in net interest income in 2018 compared to 2017
and 2016 is primarily attributable to larger volumes of loans, the asset type with the highest yield for the
Bank. The increase in interest income was partially offset by increases in the Bank’s interest expense (see
“Rate/Volume Analysis of Net Interest Income” below). In 2018 the average balance of loans outstanding
increased $43,379,000 in comparison to 2017 average loan balances. Average yields on total loans increased
slightly to 5.04% from 5.01% in 2017. The increase in interest income attributable to loans was partially
offset by a decrease in interest income attributable to investments as those instruments amortized. Average
balances on investments securities declined by $13,416,000 in 2018 compared to 2017; however, yields
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on investments increased slightly at 2.25% in 2018 compared to 2.12% in 2017. Average yields on total
interest earning assets increased from 4.05% in 2017 to 4.38% in 2018.
The table, "Average Balances, Yields and Rates," provides a detailed analysis of the effective yields and rates
on the categories of interest earning assets and interest bearing liabilities for the Company for the years
ended December 31, 2018, compared to 2017.
Average Balances, Yields and Rates
(Dollars in thousands)
Year ended December 31, 2018 Year ended December 31, 2017
Interest Average
Interest Average
Average Income/ Yields/ Average Income/ Yields/
Balances(1) Expense Rates(2) Balances(1) Expense Rates(2)
Assets
Federal Funds Sold and other interest-earning $ 25,505 $ 412 1.62% $ 31,690 $ 322 1.02%
balances
Securities available-for-sale 50,385 1,135 2.25% 63,801 1,354 2.12%
Loans (3) 271,163 13,654 5.04% 227,784 11,418 5.01%
Other 666 34 5.08% 361 18 4.97%
Total interest earning assets 347,719 15,235 4.38% 323,636 13,112 4.05%
Non interest earning assets, net 22,965 24,185
Total assets $ 370,684 $ 347,821
Liabilities and shareholders' equity
Interest bearing liabilities:
Interest bearing transaction accounts $ 67,246 $ 41 .06% $ 58,191 $ 32 .06%
Savings and money market 64,796 122 .19% 62,410 97 .16%
Time deposits 129,879 1,603 1.23% 121,482 940 .77%
Borrowings 8,055 176 2.18% - - -%
Total interest bearing liabilities 269,976 1,942 .72% 242,083 1,069 .44%
Noninterest bearing demand deposits and other
Liabilities and equity 100,708 105,738
Total liabilities and shareholders' equity $ 370,684 $347,821
Interest rate spread (4) 3.66% 3.61%
Net interest income and net yield on earning
$13,293 3.82% $ 12,043 3.72%
assets (5)
Interest free funds supporting earning assets (6) $ 77,743 $ 81,553
(1) Average balances of interest-earning assets and interest-bearing liabilities calculated on a daily basis.
(2) Calculated based on the number of days in the year that each type of asset or liability was in existence. Yield calculated on a pre-tax
basis.
(3) Nonaccruing loans are included in the average loan balances and income on such loans is recognized on a cash basis.
(4) Total yield on interest earning assets less the ratepaidontotal interest bearingliabilities.
(5) Net interest income divided by total interest earning assets.
(6) Total interest earning assets less total interest bearing liabilities.
Rate/Volume Analysis of Net Interest Income
As discussed under the caption “Net Interest Income,” the Bank’s net income is largely dependent on net
interest income. The table below calculates the relative impact on net interest income caused by changes
in the average balances (volume) of interest sensitive assets and liabilities and the impact caused by changes
in interest rates earned or paid. Each table compares two years as indicated below. The effect of a change
in average balance has been determined by applying the average rate in the earlier year to the change in
average balance in the later year, as compared with the earlier year. The effect of a change in the average
rate has been determined by applying the average balance in the earlier year to the change in the average
rate in the later year, as compared with the earlier year.
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Year ended December 31, 2018 compared to 2017
Increase (Decrease) Due to
Rate Volume Rate/Volume(1) Change
Interest earned on:
(Dollars in thousands)
Securities (2) $ 83 $ (285) $ (17) $ (219)
Federal Funds sold and other interestearning
balances 190 (63) (37) 90
Loans 52 2,174 10 2,236
Other - 16 - 16
Total interest income 325 1,842 (44) 2,123
Interest paid on:
Deposits 577 78 42 697
Borrowings - - 176 176
Total interest expense 577 78 218 873
Change in Net Interest Income $ (252) $1,764 $ (262) $1,250
(1) Rate/Volume is calculated as the difference between the average balances for the periods multiplied by the difference between the
average rates for the periods.
(2) Income calculated on a pre-tax basis.
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 reviews interest rate risk exposure and
the expected interest rate environment so that adjustments in interest rate sensitivity can be made in a
timely manner.
When interest sensitive liabilities exceed interest sensitive assets for a specific repricing “horizon,” a
negative interest sensitivity gap results. The gap is positive when interest sensitive assets exceed interest
sensitive liabilities. For a bank with a negative gap, falling interest rates would be expected to have a positive
effect on net interest income and increasing rates would be expected to have the opposite effect. However,
if one or more assumptions prove incorrect, the margin may not be impacted in the manner expected. On
a cumulative basis, rate sensitive liabilities exceeded rate sensitive assets, resulting in a liability sensitive
position at the end of 2018 at the one-year time horizon, assuming that all assets and liabilities would
reprice at the earliest possible time. However, many instruments may not reprice in conjunction with final
maturities, and interest-bearing liabilities, in particular, may not reprice in conjunction with or by the
same magnitude as movements in market interest rates.
Noninterest Income
Noninterest income, which consists primarily of service charges on deposit accounts, other fee income,
increases in the cash surrender value of bank owned life insurance contracts, and gains and losses on
securities sales, decreased by $410,000. The main reasons for the decrease relate to the decrease in gains
on sale of foreclosed assets, decrease in miscellaneous other income, and decrease in mortgage brokerage
income. There were no gains on the sale of foreclosed assets recognized in 2018 compared to $229,000
in gains on the sale of foreclosed assets in 2017 which were included in other noninterest income on the
accompanying statements of operations. Miscellaneous other income decreased to $3,000 in 2018
compared to $109,000 in 2017. Mortgage brokerage income decreased to $48,000 in 2018 compared to
$117,000 in 2017.
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Noninterest Expenses
Noninterest expenses, which consist primarily of salaries and employee benefits, occupancy costs, data
processing expenses, professional fees and FDIC insurance premiums, totaled $14,791,000 in 2018,
$13,837,000 in 2017, and $12,045,000 in 2016. Salaries and employee benefits increased in each of the
periods due to an increase in employees and personnel costs. Additionally, increases in 2018 were the
result of incentive compensation triggered by the Company’s net income and an additional accrual of
supplemental retirement benefits related to a former executive officer. Net occupancy and equipment
expenses declined slightly in 2018 compared to 2017. Data processing expenses declined in 2018 compared
to 2017. In 2017 the primary driver of the increase in data processing expenses was related to expenses
associated with the conversion of the Bank’s core processing system. Increases in training, printing,
software, and certain other conversion-related costs totaled $668,000 in 2017. The Company did not incur
similar costs in 2018. Other noninterest expense was $2,308,000 in 2018, $4,268,000 in 2017, and
$2,982,000 in 2016.
Income Taxes
In 2018 the Company recorded an income tax benefit of $3,813,000 as a result of reversing the valuation
allowance against its deferred tax asset, net of current income taxes. The valuation allowance was recorded
against the Company’s deferred tax asset in 2012 and 2011. A valuation allowance is recorded against a
deferred tax asset in situations where evidence regarding the ability to use the benefit in the near term
does not outweigh the likelihood that the benefit will not be available for use. In 2018 the Company was
able to demonstrate that evidence exists that the Company will be able to utilize the tax benefits in
the near term. The Company recorded income tax expense of $2,000 and $8,000 in 2017 and 2016,
respectively. Refer to Notes 1 and 12 to the Company’s consolidated financial statements contained
elsewhere herein for more information.
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 that may be immediately converted 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 Bank's service area. Core deposits (total deposits less time deposits $250,000 and greater) provide a
relatively stable funding base, and were equal to 81.9% and 87.2% of total assets at December 31, 2018
and 2017, respectively.
Asset liquidity is provided from several sources, including amounts due from banks and federal funds sold,
unpledged securities, and funds from maturing loans. The Company had $29,194,000 in cash and cash
equivalents at December 31, 2018. The Bank has access to a line of credit with the Federal Home Loan
Bank of Atlanta (“FHLB”), which is subject to various conditions and may be terminated at the option of
the lender, as an additional source of liquidity funding. The line with the FHLB is equal to 25% of assets,
provided that adequate collateral is available for pledging. The line may be used for short or long term
funding needs and may be used on a fixed or variable-rate basis. As of December 31, 2018, the Bank had
$10,000,000 in borrowings from the FHLB. As of December 31, 2018, approximately $84,187,000 of additional
funds were available under the FHLB line provided that eligible collateral is available. The Bank
primarily uses loans to collateralize advances, but can also pledge bonds and mortgage- backed securities
issued by U.S. Government agencies as collateral. As of December 31, 2018 loans with a collateral value of
$15,128,000 were pledged as collateral to the FHLB for future borrowing capacity. Additional securities
with a market value of $40,256,000 were unpledged and could be used as collateral for borrowings should
the Company require additional funding. Management believes that the Bank's overall liquidity sources
are adequate to meet its operating needs in the ordinary course of its business.
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Off-Balance-Sheet Risk
The Company, through the operations of the Bank, makes contractual commitments to extend credit in
the ordinary course of its business activities. These commitments are legally binding agreements to lend
money to customers of the Bank at predetermined interest rates for a specified period of time. At December
31, 2018 and 2017, unfunded commitments to extend credit were $46,691,000 and $37,736,000,
respectively. Past experience indicates that many of these commitments to extend credit will expire unused
and it is unlikely that a large portion would be used in a short period of time. However, through its various
sources of liquidity discussed above, the Bank believes that it will have the necessary resources to meet
these obligations should the need arise.
In addition to commitments to extend credit, the Bank also issues standby letters of credit which are
assurances to a third party that it will not suffer a loss if the Bank's customer fails to meet its contractual
obligation to the third party. Standby letters of credit totaled approximately $1,011,000 at December 31,
2018. Past experience indicates that many of these standby letters of credit will expire unused. However,
through its various sources of liquidity discussed above, the Bank believes that it will have the necessary
resources to meet these obligations should the need arise.
Neither the Company nor the Bank is involved in other off-balance sheet contractual relationships,
unconsolidated related entities that have off-balance sheet arrangements or transactions that could result
in liquidity needs or other commitments or significantly impact earnings. The Company maintained
obligations under non-cancelable operating lease agreements of $5,000 at December 31, 2018. The
Company has approximately six years remaining on a seven-year contract with a company which provides
data and item processing and ATM network services. The monthly costs are approximately $61,000. Refer
to Note 14 to the Company’s consolidated financial statements for additional discussion on other
commitments and contingencies and financial instruments with off-balance sheet risk.
Capital Resources
Total shareholders’ equity increased from $32,494,000 at December 31, 2017 to $36,614,000 at December
31, 2018. The increase was due to net income and items related to stock-based compensation, net of a
decrease in accumulated other comprehensive income related to changes in market values on the
Company’s available for sale securities. The Company may determine that additional capital is required to
support planned growth and expansion in the coming years. The Company’s internal policies require
maintenance of sufficient capital to remain classified as a Well Capitalized institution under the regulatory
capital guidelines.
The Company and the Bank are subject to regulatory capital adequacy standards. The Company’s and the
Bank’s regulatory capital requirements and positions are summarized in Note 10 to the consolidated
financial statements contained elsewhere herein.
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Independent Auditor’s Report
To the Board of Directors
Community First Bancorporation and Subsidiaries
Walhalla, South Carolina
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of Community First Bancorporation and its subsidiaries,
which comprise the consolidated balance sheets as of December 31, 2018 and 2017, and the related consolidated statements
of operations, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period
ended December 31, 2018, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America; this includes the design, implementation and
maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that
are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our
audits in accordance with auditing standards generally accepted in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are
free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated
financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks
of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the
consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for
the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such
opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial
statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Community First Bancorporation and its subsidiaries as of December 31, 2018 and 2017, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2018 in accordance with accounting
principles generally accepted in the United States of America.
Greenville, South Carolina
April 16, 2019
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Consolidated Balance Sheets
Community First Bancorporation and Subsidiaries
(Dollars in thousands, except share information)
December 31,
2018 2017
ASSETS
Cash and due from banks $ 3,475 $ 3,385
Interest-bearing deposits due from banks 25,719 22,109
Cash and cash equivalents 29,194 25,494
Debt securities available-for-sale 47,522 55,567
Equity securities available-for-sale 11 29
Federal home Loan Bank stock, at cost 744 353
Loans 278,881 253,293
Allowance for loan losses (3,576) (3,354)
Loans, net 275,305 249,939
Premises and equipment, net 10,233 7,663
Accrued interest receivable 957 870
Bank-owned life insurance 12,243 11,938
Foreclosed assets 646 1,232
Deferred income tax assets, net 4,346 -
Other assets 818 1,375
Total assets $ 382,019 $ 354,460
LIABILITIES
Deposits
Noninterest-bearing $ 58,557 $ 63,126
Interest-bearing 270,812 254,562
Total deposits 329,369 317,688
Federal Home Loan Bank advances payable 10,000 -
Accrued interest payable 732 558
Other liabilities 5,304 3,720
Total liabilities 345,405 321,966
Commitments and contingent liabilities (Note 14)
Shareholders’ equity
Preferred stock – Series A – non-voting 5% cumulative - $1,000 per
share liquidation preference; 5,000 shares authorized,
3,150 shares issued and outstanding 3,126 3,126
Preferred stock – no par value; 9,995,000 shares authorized, none
issued - -
Common stock – no par value; 10,000,000 shares authorized;
4,160,878 and 4,152,294 shares issued and outstanding
at December 31, 2018 and 2017, respectively 40,668 40,668
Additional paid-in capital 986 848
Retained deficit (6,937) (11,179)
Accumulated other comprehensive loss (1,229) (969)
Total shareholders’ equity 36,614 32,494
Total liabilities and shareholders’ equity $ 382,019 $ 354,460
The Notes to Consolidated Financial Statements are an integral part of these financial statements.
11
Consolidated Statements of Operations
Community First Bancorporation and Subsidiaries
(Dollars in thousands, except per common share information)
Year Ended December 31,
2018 2017 2016
Interest income
Interest and fees on loans $ 13,654 $ 11,418 $ 8,531
Interest on securities
Taxable 1,131 1,339 1,969
Tax-exempt 4 15 23
Interest-bearing deposits 412 322 207
Other 34 18 19
Total interest income 15,235 13,112 10,749
Interest expense
Interest on time deposits $100,000 and over 898 504 152
Interest on other deposits 868 565 350
Interest on advances from Federal Home Loan Bank 176 - -
Total interest expense 1,942 1,069 502
Net interest income 13,293 12,043 10,247
Provision for loan losses 148 - 50
Net interest income after provision for loan losses 13,145 12,043 10,197
NONINTEREST INCOME
Service charges on deposit accounts 949 989 1,056
Mortgage brokerage income 48 117 135
Net (loss) gain on sale of investment securities (50) 11 309
Increase in cash surrender value of life insurance contracts 305 317 326
Other 1,021 1,249 954
Total other income 2,273 2,683 2,780
NONINTEREST EXPENSES
Salaries and employee benefits 8,566 6,881 6,220
Net occupancy 829 794 867
Furniture and equipment 415 476 456
Legal and professional fees 1, 146 1,014 1,019
FDIC insurance 206 179 409
Expenses of foreclosed assets 263 134 47
Data processing 1,058 2,084 1,207
Other 2,308 2,275 1,820
Total other expenses 14,791 13,837 12,045
Income before income taxes 627 889 932
Income tax (benefit) expense (3,813) 2 8
Net income 4,440 887 924
Deductions for amounts not available to common shareholders:
Dividends declared or accumulated on preferred stock 198 157 157
Net income available to common shareholders $ 4,242 $ 730 $ 767
Per common share
Net income $ 1.02 $ 0.18 $ 0.18
Net income, assuming dilution $ 1.01 $ 0.18 $ 0.18
The Notes to Consolidated Financial Statements are an integral part of these financial statements.
12
Consolidated Statements of Comprehensive Income
Community First Bancorporation and Subsidiaries
(Dollars in thousands)
Year Ended December 31,
2018 2017 2016
Net income $ 4,440 $ 887 $ 924
Other comprehensive income (loss):
Unrealized gains (losses) on securities available for sale
arising during the period, net (297) 293 (208)
Less: Reclassification adjustment for net losses (gains) included in
net income 50 (11) (309)
Related income tax expense (benefit) (13) 4 118
Other comprehensive income (loss) (260) 286 (399)
Comprehensive income $ 4,180 $ 1,173 $ 525
The Notes to Consolidated Financial Statements are an integral part of these financial statements.
Consolidated Statements of Changes in Shareholders’ Equity
Community First Bancorporation and Subsidiaries
(Dollars in thousands, except share information)
Preferred
Stock
Shares of
Common
Stock
Common
Stock
Additional
Paid-in
Capital
Retained
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
Balance, December 31, 2015 $ 3,126 4,152,294 $ 40,668 $ 748 $ (12,676) $ (856) $ 31,010
Net income - - - - 924 - 924
Other comprehensive loss - - - - - (399) (399)
Accrued dividends on preferred stock - - - - (157) - (157)
Balance, December 31, 2016 3,126 4,152,294 40,668 748 (11,909) (1,255) 31,378
Net income - - - - 887 - 887
Other comprehensive income - - - - - 286 286
Dividends accrued/paid on preferred
stock - - - - (157) - (157)
Stock based compensation - - - 100 - - 100
Balance, December 31, 2017 3,126 4,152,294 40,668 848 (11,179) (969) 32,494
Net income - - - - 4,440 - 4,440
Other comprehensive loss - - - - - (260) (260)
Dividends paid on preferred stock - - - - (198) - (198)
Proceeds from exercise of stock
options - 2,000 - 13 - - 13
Issuance of restricted stock - 6,584 - 24 - - 24
Stock based compensation - - - 101 - - 101
Balance, December 31, 2018 $ 3,126 4,160,878 $40,668 $ 986 $ (6,937) $ (1,229) $36,614
The Notes to Consolidated Financial Statements are an integral part of these financial statements.
13
Consolidated Statements of Cash Flows
Community First Bancorporation and Subsidiaries
(Dollars in thousands)
For the years ended December 31,
2018 2017 2016
OPERATING ACTIVITIES
Net income $ 4,440 $ 887 $ 924
Adjustments to reconcile net income to net cash
provided by operating activities
Provision for loan losses 148 - 50
Depreciation 404 437 521
Accretion of net loan fees and costs (421) (82) (104)
Securities accretion and premium amortization 428 576 768
Stock based compensation 125 100 -
Net losses (gains) realized on sales of available-for-sale securities 50 (11) (255)
Net gains realized on sales of held-to-maturity securities - - (54)
Increase in cash surrender value of life insurance (305) (317) (326)
Loss (gain) on sale of foreclosed assets 58 (176) (70)
Subsequent writedowns of foreclosed assets 18 120 50
(Increase) decrease in accrued interest receivable (87) (138) 28
Increase in interest payable 174 436 10
Net deferred income tax assets (4,346) - -
(Increase) decrease in prepaid expenses and other assets 957 404 538
Increase (decrease) in accrued expenses 1,938 (65) (67)
Net cash provided by operating activities 3,581 2,171 2,013
INVESTING ACTIVITIES
Purchases of available for sale securities (1,304) (5,042) (28,382)
Maturities, calls, and paydowns of available-for-sale securities 7,770 9,318 41,357
Proceeds from the sale of securities available for sale 459 11,133 21,689
Maturities, calls, and paydowns of held-to-maturity securities - - 78
Proceeds from sales of held-to-maturity securities - - 951
Purchases of Federal Home Loan Bank stock (391) - -
Proceeds from redemptions of Federal Home Loan Bank stock - 34 12
Net increase in loans made to customers (25,277) (53,571) (53,352)
Purchases of premises and equipment (2,974) (102) (117)
Proceeds from sale of foreclosed assets 694 661 1,043
Net cash used for investing activities (21,023) (37,569) (16,721)
FINANCING ACTIVITIES
Net increase (decrease) in non-maturing deposits 2,668 8,388 (29,779)
Net increase (decrease) in time deposits 9,013 26,854 (8,538)
Increase in advances from Federal Home Loan Bank 10,000 - -
Proceeds from exercise of stock options 13 - -
Payment of dividends on preferred stock (552) (118) -
Net cash provided by (used for) financing activities 21,142 35,124 (38,317)
Increase (decrease) in cash and cash equivalents 3,700 (274) (53,025)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 25,494 25,768 78,793
CASH AND CASH EQUIVALENTS, END OF YEAR $ 29,194 $ 25,494 $ 25,768
Supplemental Disclosure of Cash Flow Information
Cash paid during the period for
Interest $ 1,768 $ 633 $ 492
Income taxes 185 2 8
Noncash investing and financing activities
Transfer of loans to foreclosed assets 184 94 567
Unrealized gain (loss) on securities available-for-sale, net of tax (260) 286 (399)
Accrual of dividends on preferred stock - 39 157
The Notes to Consolidated Financial Statements are an integral part of these financial statements.
14
Notes to Consolidated Financial Statements
Community First Bancorporation and Subsidiaries
(Dollars in thousands, except per common share information)
NOTE 1 – ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - Community First Bancorporation (the “Company,” “we” and other such terms), a bank holding company, and its
wholly-owned subsidiary, Community First Bank (the “Bank”), are engaged in providing domestic commercial banking services
from offices in Walhalla, Seneca, Anderson, Williamston and Westminster, South Carolina. The Bank has loan production offices
in Greenville and Fort Mill, South Carolina, and in Concord and Charlotte, North 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 Board of Governors of the Federal Reserve System (the “Federal Reserve”), FDIC and South Carolina State
Board of Financial Institutions. Community First Bank was organized on December 1, 1988 and received its charter and
commenced operations on March 12, 1990. The holding company was incorporated on May 23, 1997. In 2017, the Bank
established Community First Financials Services, which works through a trusted partner to offer online pricing options for
various types of insurance products. To date, Community First Financial Services has engaged in limited operations.
The Bank is a community-oriented institution offering a full range of traditional banking services, with the exception of trust
services. Substantially all of its loans are made to individuals and businesses within its local markets in South Carolina and
North Carolina, and substantially all of its deposits are acquired within its local market areas.
Order of the FDIC and the South Carolina Board of Financial Institutions and Memorandum of Understanding with the Federal
Reserve Bank – Community First Bank agreed to the entry of a Consent Order (the “Order”) by the FDIC and the South
Carolina Board of Financial Institutions (the “Supervisory Authorities”) effective December 4, 2012. The Board of Directors
and management worked aggressively to address each article set forth in the Order, and as a result, effective January 11,
2016, the Order was replaced by a Memorandum of Understanding. All practices and procedures necessary to correct all remaining
deficiencies were corrected in 2016, and effective November 23, 2016, the Memorandum of Understanding was
lifted. During the first quarter of 2015, Community First Bank agreed to the entry of an IT Consent Order by the FDIC and
the South Carolina Board of Financial Institutions effective January 15, 2015. The IT Consent Order sought to enhance the
Bank’s existing practices and procedures in the area of information technology. The Board of Directors and management
worked aggressively to address each article set forth in the IT Consent Order, and as a result, effective January 11, 2016, the
IT Consent Order was decreased to a Memorandum of Understanding. All practices and procedures necessary to correct
all remaining deficiencies were corrected in 2016, and effective November 23, 2016, the Memorandum of Understanding
was terminated.
Community First Bancorporation entered into a Memorandum of Understanding (the “MOU”) with the Federal Reserve Bank
(“the FRB”) that, among other things, restricted the Company’s ability to pay dividends on its common and preferred stock
or make other capital distributions. Effective February 1, 2017, the Memorandum of Understanding was terminated.
Principles of Consolidation and Basis of Presentation - The consolidated financial statements include the accounts of the
parent company and its subsidiaries after elimination of all significant intercompany balances and transactions. The accounting
and reporting policies of the Company and its subsidiaries are in conformity with generally accepted accounting principles
and general practices within the banking industry.
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
and valuation of deferred tax assets. In connection with the determination of the allowance for loan losses, management has
identified specific loans and adopted a policy of providing amounts for loan valuation purposes which are not identified with
any specific loan but are derived from actual loss experience ratios, loan types, loan volume, economic conditions and industry
standards. Management believes that the allowance for loan losses is adequate. While management uses available information
to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions.
In addition, regulatory agencies, as an integral part of their examination process, periodically review the banking subsidiary’s
allowance for loan losses. Such agencies may require additions to the allowance based on their judgments about information
available to them at the time of their examination.
15
Concentrations of Credit Risk – Most of the Company’s, and its banking subsidiary’s, activities are with customers located
within the Company’s local market areas. See Note 4 for a discussion of the types of lending the Bank is engaged in. The
ability of borrowers to comply with the terms of their loan contracts is largely dependent upon local real estate and general
economic conditions in our market areas. We do not have any significant concentrations to any single industry or customer
nor do we engage in originating, holding, guaranteeing, servicing or investing in loans where the terms of the loan give rise
to a concentration of credit risk.
Securities – The majority of the securities invested in by the Company and the Bank are considered to have low levels of credit
risk. 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 that we have the positive
intent and ability to hold until ultimate maturity are classified as held-to-maturity and are accounted for at amortized cost.
Debt and equity securities bought and held primarily for sale in the near term would be classified as trading, and accounted
for on an estimated fair value basis, with unrealized gains and losses included in other income; however, we have never held
any securities for trading purposes. Securities not classified as either held-to-maturity or trading are classified as availablefor-sale
and are accounted for at estimated fair value. Unrealized holding gains and losses on available-for-sale securities are
excluded from net income and recorded as other comprehensive income, net of applicable income tax effects. Dividend and
interest income, including amortization of any premium or accretion of discount arising at acquisition, are included in earnings
for all three categories of securities. Realized gains and losses on all categories of securities are included in other operating
income, based on the amortized cost of the specific security on a trade date basis.
Federal Home Loan Bank Stock –The Bank is a member of the Federal Home Loan Bank of Atlanta (“FHLB”) and, accordingly,
is required to own restricted stock in that institution in amounts that may vary from time to time. Because of the restrictions
imposed, the stock may not be sold to other parties, but is redeemable by the FHLB at the same price as that at which it was
acquired by the Bank. We evaluate this security for impairment based on the probability of ultimate recoverability of the par
value of the investment. No impairment has been recognized based on this evaluation.
Loans and Interest Income – The recorded investment in a loan is generally its principal amount outstanding, increased or
reduced by net deferred 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 are deferred
and amortized as an adjustment of the related loan’s yield. Generally, these amounts are amortized over the contractual life
of the related loans or commitments.
We determine past due status according to the loan’s contractual terms. A scheduled payment is considered to have been
made only if all amounts due, including principal and interest, have been received. Any payments received in amounts
exceeding the contractual amount due do not extend the next due date. Instead, any such payments are treated as curtailments
and deducted from the last scheduled payment.
A loan is considered to be impaired when, in management’s judgment based on current information and events, it is probable
that the obligation’s principal or interest will not be collectible in accordance with the terms of the original loan agreement.
Impaired loans include nonaccrual loans and loans past due according to their contractual terms 90 days or more with respect
to interest or principal payments and other loans where, based on current information and events, it is probable that we will
be unable to collect principal and interest payments according to the contractual terms of the loan agreements. A loan is not
considered to be impaired, however, if any periods of delay or shortfalls of amounts expected to be collected are insignificant
or if we expect that we will collect all amounts due including accrued interest at the contractual interest rate during the period
of delay. Impaired loans that have been evaluated individually under our normal loan review process are carried in the balance
sheet at the lowest of (1) 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, (2) a value not to exceed its observable market price or the fair value of the collateral if repayment of
the loan is expected to be provided solely by the underlying collateral, or (3) its recorded amount. Generally, the accrual of
interest is discontinued on nonaccrual 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 collectability 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. A 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.
16
Allowance for Loan Losses - An allowance for loan losses is maintained at a level estimated by management to provide
adequately for probable losses we believe are inherent in the loan portfolio. The allowance for loan losses is established
through a provision for loan losses charged to expense. If we determine that a loss has been incurred, the estimated amount
of the loss is charged off and deducted from the allowance. The provision for loan losses and recoveries on loans previously
charged off are added to the allowance. Changes in the estimated allowance for loan losses which are deemed necessary due
to the occurrence of new events or because more information is obtained are accounted for as changes in accounting estimates
in the accounting period in which the changes occur. Assessing the adequacy of the allowance for loan losses requires the
exercise of considerable judgment about the collectability of loans, the quality, mix and size of the overall loan portfolio,
economic conditions that may affect the loan portfolio generally or an individual borrower’s ability to repay, collateral values,
and historical losses.
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. Loans identified as impaired loans may be carried in the balance
sheet at the lowest of their recorded amount, the present value of expected cash flows, or, in the case of collateral dependent
impaired loans, the fair value of any underlying collateral less estimated costs of sale or other disposal. To account for an
impaired loan that is not collateral dependent, a specific allowance may be included in the allowance for loan losses. For an
impaired loan that is considered to be collateral dependent, any shortfall of the fair value of the collateral compared with the
recorded investment in the loan is generally charged off against the allowance and the amount of any expected costs to sell
or otherwise dispose of the property is maintained in the allowance for loan losses as a specific reserve.
In addition to the specific allowances previously described, the allowance for loan losses also is composed of general and
unallocated amounts. General amounts are provided for loans, excluding those for which specific amounts were determined,
by applying estimated loss percentages to the portfolio categorized using risk grades. The unallocated portion of the allowance
consists of an amount deemed appropriate to provide for the elements of imprecision and estimation risk inherent in the
specific and general amounts, and is determined based on management’s evaluation of various conditions that are not directly
measured by the other components of the allowance. This evaluation includes consideration of general national and local
economic and business conditions affecting key lending market areas, credit quality trends, collateral values, loan volumes,
portfolio seasoning, and any identified credit concentrations. The findings of internal credit reviews and results from external
audits and regulatory examinations are also considered.
We utilize our risk grading system for all loans held in the portfolio. This system involves our lending officers’ assigning a
risk grade, on a loan-by-loan basis, considering information about the borrower’s capacity to repay, collateral, payment history,
and other known factors. Assigned risk grades are updated monthly for any known changes in circumstances affecting
the borrower or the loan. The risk grading system is monitored on a continuing basis by management and an external credit
reviewer who is independent of the lending function.
We estimate losses related to off-balance-sheet credit exposures such as loan commitments, standby letters of credit, and
any unrecognized liabilities under recourse provisions related to certain mortgage loans that are originated by the Bank’s
personnel, but are funded by another financial institution, based on historical experience and by monitoring any large
positions individually. When management determines that a loss on such a position has been incurred, a charge is made
against earnings and a liability for off-balance-sheet positions is recorded.
Premises and Equipment - Premises and equipment are stated at cost, less accumulated depreciation. 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 accumulated depreciation are eliminated from the accounts and the resulting gains or losses are reflected
in the consolidated statement of operations. Maintenance and repairs are charged to current expense as incurred and the
costs of major renewals and improvements are capitalized.
Foreclosed Assets - Assets (primarily real estate and vehicles) acquired through, or in lieu of, foreclosure are held for sale and
are initially recorded at fair value, less estimated costs to sell, at the date of foreclosure, establishing a new cost basis. Losses
determined as of the date a collateral is acquired are charged against the allowance for loan losses. Subsequent to foreclosure
or acquisition, valuations are periodically obtained from independent appraisers and the assets are carried at the lower of the
new cost basis or fair value, less estimated costs to sell. Revenues and expenses from operations and changes in any subsequent
valuation allowance are included in expenses of foreclosed assets.
Bank-Owned Life Insurance – In connection with the supplemental retirement benefits described in Note 13, the Bank has
purchased life insurance policies on certain key executives and employees. The bank-owned life insurance is recorded at the
amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted
for other charges or other amounts due that are probable at settlement.
17
Transfers of Financial Assets - Transfers of financial assets are accounted for as sales when control over the assets has been
surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from us, (2)
the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange
the transferred assets, and (3) we do not maintain effective control over the transferred assets through an agreement to
repurchase them before their maturity.
Advertising - We expense advertising and promotion costs as they are incurred. See Note 11.
Retirement Plans – We have a salary reduction profit sharing plan pursuant to Section 401(k) of the Internal Revenue Code
as more fully described in Note 13. We do not sponsor any other postretirement or postemployment benefits, except with
respect to the former Chief Executive Officer. In 2007, the Company’s Board of Directors approved supplemental benefits
for the former Chief Executive Officer as more fully described in Note 13.
Deferred Income Taxes - We use 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. See Note 12 for more information.
Net Income Per Common Share - Net income per common share is calculated by dividing net income available to common
shareholders by the weighted average number of shares of the Company’s common stock outstanding during the period. Net
income per common share, assuming dilution, is calculated by dividing net income available to common shareholders 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 9.
Comprehensive Income - Comprehensive income consists of net income for the current period and other comprehensive
income (loss), defined as income, expenses, gains and losses that bypass the consolidated statements of operations and are
reported directly in a separate component of shareholders’ equity. We classify and report items of other comprehensive
income (loss) according to their nature, report total comprehensive income in the consolidated statements of changes in
shareholders’ equity, and display the accumulated balance of other accumulated comprehensive income (loss) separately in
the shareholders’ equity section of the consolidated balance sheets. At December 31, 2018 and 2017, the only component of
accumulated other comprehensive income (loss) was unrealized gains and losses on available-for-sale investments.
Consolidated Statements of Cash Flows - The consolidated statements of cash flows report 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.
Reclassifications - Certain reclassifications have been made to prior years’ financial statements in order to comply with
current year presentation. These reclassifications had no effect on previously reported results of operations or shareholders’
equity.
NOTE 2 – 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 cash reserve balances may be in the form of vault cash or unencumbered deposit balances with the Federal Reserve Bank.
The average amounts of the cash reserve balances at December 31, 2018 and 2017 were approximately $1,638 and $2,058,
respectively.
18
NOTE 3 – SECURITIES
The aggregate amortized cost and estimated fair values of securities, as well as gross unrealized gains and losses of securities
were as follows:
Available-for-sale
Debt securities
Mortgage-backed securities
issued by U.S. Government
December 31,
2018 2017
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
agencies $ 168 $ 9 $ - $ 177 $ 199 $ 10 $ - $ 209
Government sponsored
enterprises (GSEs) 7,937 - 242 7,695 8,719 - 213 8,506
Mortgage-backed securities
issued by GSEs 40,566 - 1,388 39,178 46,242 - 746 45,496
State, county and
municipal 489 - 17 472 1,403 1 48 1,356
Total debt securities 49,160 9 1,647 47,522 56,563 11 1,007 55,567
Equity securities 2 9 - 11 2 27 - 29
Total $ 49,162 $ 18 $ 1,647 $ 47,533 $ 56,565 $ 38 $ 1,007 $ 55,596
The amortized cost and estimated fair value of available-for-sale debt securities by contractual maturity are shown below:
December 31, 2018 December 31, 2017
Available-for-sale
Available-for-sale
Amortized Estimated Amortized Estimated
Non-mortgage backed securities issued by GSEs and Cost Fair Value Cost Fair Value
by state, county and municipal issuers
Due within one year $ - $ - $ 402 $ 402
Due after one through five years 3,994 3,881 1,998 1,967
Due after five through ten years 489 473 2,996 2,897
Due after ten years 3,943 3,813 4,726 4,596
8,426 8,167 10,122 9,862
Mortgage-backed securities issued by:
US Government agencies 168 177 199 209
GSEs 40,566 39,178 46,242 45,496
Total $ 49,160 $ 47,522 $ 56,563 $ 55,567
19
The estimated fair values and gross unrealized losses of investment securities whose estimated fair values were less than
amortized cost as of December 31, 2018 and 2017 which had not been determined to be other-than-temporarily impaired
are presented below. The securities have been aggregated by investment category and the length of time that individual
securities have been in a continuous unrealized loss position.
December 31, 2018
Continuously in Unrealized Loss Position for a Period of
Less than 12 Months 12 Months or more Total
Estimated
Fair Value
Unrealized
Loss
Estimated
Fair Value
Unrealized
Loss
Estimated
Fair Value
Unrealized
Loss
Government-sponsored
enterprises (GSEs) $ - $ - $ 7,695 $ 242 $ 7,695 $ 242
Mortgage-backed securities
issued by GSEs 1,293 8 37,885 1,380 39,178 1,388
State, county and
municipal securities - - 403 17 403 17
Total $ 1,293 $ 8 $ 45,983 $ 1,639 $ 47,276 $ 1,647
Available-forsale
Available-forsale
December 31, 2017
Continuously in Unrealized Loss Position for a Period of
Less than 12 Months 12 Months or more Total
Estimated
Fair Value
Unrealized
Loss
Estimated
Fair Value
Unrealized
Loss
Estimated
Fair Value
Unrealized
Loss
Government-sponsored
enterprises (GSEs) $ - $ - $ 8,506 $ 213 $ 8,506 $ 213
Mortgage-backed securities
issued by GSEs 6,458 47 39,038 699 45,496 746
State, county and
municipal securities - - 884 48 884 48
Total $ 6,458 $ 47 $ 48,428 $ 960 $ 54,886 $ 1,007
At December 31, 2018 and 2017, one and eight securities, respectively, had been continuously in an unrealized loss position
for less than 12 months, and 51 and 44 securities, respectively, had been continuously in an unrealized loss position for 12
months or more. We do not consider these investments to be other-than-temporarily impaired because the unrealized losses
involve primarily securities issued by government-sponsored enterprises and state, county and municipal governments, none
of the rated securities have been downgraded below investment grade, and there have been no failures by the issuers to remit
their periodic interest payments as required. Although we classify our investment securities as available-for-sale, management
has not determined that any specific securities will be disposed of prior to maturity and believes that we have both the ability
and the intent to hold those investments until a recovery of fair value, including until maturity. Substantially all of the
issuers of state, county and municipal securities held were rated at least “investment grade” as of December 31, 2018 and
2017. For non-rated state, county and municipal government obligations with significant unrealized losses, management
periodically reviews financial information and continuing disclosures to assess the issuers’ condition and ability to honor
their obligations.
During 2018, one security was sold, resulting in net realized losses of $50 and one security matured. No securities were called
during 2018. During 2017, 21 securities were sold, resulting in net realized gains of $11. No securities were called or matured
in 2017. During 2016, 36 securities were sold, resulting in net realized gains of $200 and 24 securities were called, resulting
in net realized gains of $109. One security matured in 2016. During 2016, the Bank sold 14 odd lot sized mortgage backed
securities that had been classified as held-to-maturity and reinvested the proceeds in order to increase the yield on the Bank’s
investment portfolio. In completing these sales, management has considered appropriate accounting guidance and determined
that these transactions have not tainted the held-to-maturity portfolio for future classification of securities.
At December 31, 2018 securities with a carrying value of $7,266, were pledged as collateral to secure public deposits.
20
NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans consisted of the following:
December 31,
2018 2017
Commercial, financial and industrial $ 10,064 $ 10,788
Real estate - construction 15,356 16,766
Real estate - mortgage 176,373 167,402
Consumer installment 77,088 58,337
Total 278,881 253,293
Allowance for loan losses (3,576) (3,354)
Loans - net $ 275,305 $ 249,939
Net deferred loan costs of $2,407 and $1,730 were allocated to the various loan categories as of December 31, 2018 and 2017,
respectively.
Certain officers and directors of the Company and the Bank, their immediate families and business interests were loan
customers of, and had other transactions with, the Bank in the normal course of business. Related party loans are made on
substantially the same terms, including interest rates and collateral, as loans made to unrelated third parties and do not
involve more than normal risk of collectability of loans to such third parties. The aggregate dollar amount of these loans was
$3,222 and $3,018 at December 31, 2018 and 2017, respectively. During 2018, $804 of new loans and advances on lines of
credit were made and repayments and other reductions totaled $600.
As of December 31, 2018 and 2017, there were no significant concentrations of credit risk in any single borrower or groups
of borrowers. Our loan portfolio consists primarily of extensions of credit to businesses and individuals in our market areas.
The economy of these areas is diversified and does not depend on any one industry or group of related industries. Management
has established loan policies and practices that include set limitations on loan-to-collateral value for different types of
collateral, requirements for appraisals, obtaining and maintaining current credit and financial information on borrowers, and
credit approvals. The Bank makes loans to consumers that are collateralized by personal property such as boats, recreational
vehicles and automobiles through a direct relationship with fully vetted retailers that meet certain criteria. The Bank utilizes
defined underwriting procedures which are designed to mitigate risks associated with such loans, which are financed indirectly
to consumers. These loans are typically made with loan to actual collateral values averaging at or below 100% and can typically
have terms ranging from 60 to 180 months on average.
The following tables provide information about the payment status of loans:
30-89 Days
Past Due
Nonaccrual or 90
Days or More
Past Due Current Total Loans
As of December 31, 2018
Commercial, financial and
industrial $ 34 $ - $ 10,030 $ 10,064
Real estate - construction 7 13 15,336 15,356
Real estate - mortgage 997 455 174,921 176,373
Consumer installment 402 94 76,592 77,088
Total $ 1,440 $ 562 $ 276,879 $ 278,881
21
30-89 Days
Past Due
Nonaccrual or 90
Days or More
Past Due Current Total Loans
As of December 31, 2017
Commercial, financial and
industrial $ - $ - $ 10,788 $ 10,788
Real estate - construction 88 25 16,653 16,766
Real estate - mortgage 688 615 166,099 167,402
Consumer installment 333 105 57,899 58,337
Total $ 1,109 $ 745 $ 251,439 $ 253,293
The following table provides information about nonaccrual loans:
As of December 31,
2018 2017
Commercial, financial and industrial $ - $ -
Real estate - construction 13 25
Real estate - mortgage 455 615
Consumer installment 94 105
Total $ 562 $ 745
As of December 31, 2018, 2017 and 2016, no loans were past due 90 days or more and still accruing interest.
The following tables provide information about the credit quality of the Bank’s loans as indicated by its grading system:
Internally Assigned Risk Grade
As of December 31, 2018
Pass
Special
Mention Substandard Total
Commercial, financial and industrial $ 10,028 $ 36 $ - $ 10,064
Real estate - construction 15,260 39 57 15,356
Real estate - mortgage 167,709 7,347 1,317 176,373
Consumer installment 76,807 179 102 77,088
$ 269,804 $ 7,601 $ 1,476 $ 278,881
Internally Assigned Risk Grade
As of December 31, 2017
Pass
Special
Mention Substandard Total
Commercial, financial and industrial $ 10,769 $ 19 $ - $ 10,788
Real estate - construction 16,586 151 29 16,766
Real estate - mortgage 158,638 7,402 1,362 167,402
Consumer installment 58,222 10 105 58,337
$ 244,215 $ 7,582 $ 1,496 $ 253,293
22
Loans that are graded Special Mention are not believed to represent more than a minimal likelihood of loss. A rating of Special
Mention indicates that a change in the borrower’s circumstances, or some other event, has occurred such that an elevated
level of monitoring is warranted. Such loans generally are evaluated collectively for purposes of estimating the allowance
for loan losses. Loans graded Substandard are believed to present a moderate likelihood of loss due to the presence of
well-defined weakness in the borrower’s financial condition, a change in the customer’s demonstrated repayment history, the
effects of lower collateral values combined with other financial difficulties that the borrower may be experiencing, and
deterioration of other indicators of the borrower’s ability to service the loan as agreed. Loans graded Doubtful are believed
to present a high likelihood of loss due to serious deterioration of a borrower’s financial condition, severe past due status
and/or substantial deterioration of collateral value, or other factors. Loans graded Substandard and Doubtful are evaluated
individually for impairment. Management updates its internal risk grading no less often than monthly.
Impaired loans are generally nonaccrual loans, loans that are 90 days or more delinquent as to principal or interest payments,
and other loans where, based on current information and events, it is probable that we will be unable to collect principal and
interest payments according to the contractual terms of the loan agreements. A loan is not considered to be impaired, however,
if any periods of delay or shortfalls of amounts expected to be collected are insignificant or if we expect that we will collect all
amounts due including interest accrued at the contractual interest rate during the period of delay. Following is a summary
of our impaired loans, by class:
As of December 31, 2018
With no related allowance recorded:
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
Commercial, financial and industrial $ - $ - $ - $ - $ -
Real estate - construction - - - - -
Real estate - mortgage 4,006 4,728 - 4,358 187
Consumer installment - - - 16 -
With an allowance recorded:
Commercial, financial and industrial $ 3 $ 3 $ 1 $ 3 $ 1
Real estate - construction 105 97 8 171 7
Real estate - mortgage 2,405 2,202 203 2,902 131
Consumer installment - - - - -
Total:
Commercial, financial and industrial $ 3 $ 3 $ 1 $ 3 $ 1
Real estate - construction 105 97 8 171 7
Real estate - mortgage 6,411 6,930 203 7,260 318
Consumer installment - - - 16 -
Total $ 6,519 $ 7,030 $ 212 $ 7,450 $ 326
23
As of December 31, 2017
With no related allowance recorded:
Recorded
Investment
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
Commercial, financial and industrial $ - $ - $ - $ - $ -
Real estate - construction 70 76 - 120 5
Real estate - mortgage 5,865 7,024 - 6,031 297
Consumer installment 63 202 - 31 3
With an allowance recorded:
Commercial, financial and industrial $ 6 $ 4 $ 1 $ 6 $ 1
Real estate - construction 269 250 19 272 15
Real estate - mortgage 2,719 2,448 271 2,753 140
Consumer installment - - - - -
Total:
Commercial, financial and industrial $ 6 $ 4 $ 1 $ 6 $ 1
Real estate - construction 339 326 19 392 20
Real estate - mortgage 8,584 9,472 271 8,784 437
Consumer installment 63 202 - 31 3
Total $ 8,992 $ 10,004 $ 291 $ 9,213 $ 461
The amount of interest income that would have been included in income if nonaccrual loans had been current in accordance
with their terms was approximately $23, $55, and $46 for 2018, 2017, and 2016, respectively. There were no irrevocable
commitments to lend additional funds to debtors owing amounts on impaired loans at December 31, 2018, 2017, or 2016.
24
The following tables provide information about how we evaluated loans for impairment, the amount of the allowance for loan
losses estimated for loans subjected to each type of evaluation, and the related total amounts, by loan portfolio segment:
Real Estate-
Construction
Real Estate-
Mortgage
December 31, 2018
Commercial,
Financial
and
Industrial
Consumer
Installment Unallocated Total
Allowance for loan losses
Ending balance $ 185 $ 2,333 $ 12 $ 785 $ 261 $ 3,576
Ending balance - individually
evaluated for impairment $ 8 $ 203 $ 1 $ - $ - $ 212
Ending balance - collectively
evaluated for impairment $ 177 $ 2,130 $ 11 $ 785 $ 261 $ 3,364
Loans
Ending balance $ 15,356 $ 176,373 $ 10,064 $ 77,088 N/A $ 278,881
Ending balance - individually
evaluated for impairment $ 105 $ 6,411 $ 3 $ - N/A $ 6,519
Ending balance - collectively
evaluated for impairment $ 15,251 $ 169,962 $ 10,061 $ 77,088 N/A $ 272,362
Real Estate-
Construction
Real Estate-
Mortgage
December 31, 2017
Commercial,
Financial
and
Industrial
Consumer
Installment Unallocated Total
Allowance for loan losses
Ending balance $ 410 $ 2,141 $ 242 $ 329 $ 232 $ 3,354
Ending balance - individually
evaluated for impairment $ 19 $ 271 $ 1 - $ - $ 291
Ending balance - collectively
evaluated for impairment $ 391 $ 1,870 $ 241 $ 329 $ 232 $ 3,063
Loans
Ending balance $ 16,766 $ 167,402 $ 10,788 $ 58,337 N/A $ 253,293
Ending balance - individually
evaluated for impairment $ 339 $ 8,584 $ 6 $ 63 N/A $ 8,992
Ending balance - collectively
evaluated for impairment $ 16,427 $ 158,818 $ 10,782 $ 58,274 N/A $ 244,301
Troubled debt restructurings (“TDRs”) occur when, for reasons related to a borrower’s financial difficulties, we agree to modify
the terms of a loan and, in the process, grant a concession. Modifications of loan terms and concessions granted may take
many forms. Sometimes, both we and the borrower may grant concessions. In such cases, we are considered to have granted
a concession if the value of the concession(s) we made in the borrower’s favor exceed the value of the concession(s) made by
the borrower in our favor.
25
The following table presents information about loans that were modified in troubled debt restructurings during 2018 and
2017:
Troubled Debt Restructurings
Number of
Contracts
Pre-
Modification
Outstanding
Recorded
Investment
2018 2017
Post-
Modification
Outstanding
Recorded
Investment
Number of
Contracts
Pre-
Modification
Outstanding
Recorded
Investment
Post-
Modification
Outstanding
Recorded
Investment
Commercial, financial and
industrial - $ - $ - - $ - $ -
Real estate - construction - - - 1 38 41
Real estate - mortgage 4 361 330 2 141 100
Consumer installment - - - - - -
Troubled Debt Restructurings
that Subsequently Defaulted
Number of
Contracts
Recorded
Investment
Number of
Contracts
Recorded
Investment
Commercial, financial and
industrial - $ - - $ -
Real estate - construction - - 1 70
Real estate - mortgage - - 1 218
Consumer installment - - 1 1
Due to the concessions granted in loan modifications that result in TDRs, we generally recognize loan losses when such
modifications are made. For loans in the real estate segment, TDR recognition generally indicates that the loans are collateral
dependent. Consequently, we write down such restructured loans to the extent that the pre-modification outstanding recorded
investment exceeds the fair value of the collateral, less estimated selling costs. For loans in the other segments, collateral
may or may not be held. If we hold collateral and the loan is collateral dependent, we write down to the fair value of the
collateral. If we hold no collateral, the expected cash flows under the modified terms are discounted at the effective interest
rate of the original loan and, if there is a shortfall, we write down to that amount. In both cases, if we had previously allowed
for the losses sufficiently in the allowance for loan losses, no further provision expense would result in the current period. If
we had not previously allowed sufficiently, additional current expenses may be necessary to cover the shortfall.
At December 31, 2018 and 2017, the recorded investment in TDRs totaled $6,360 and $8,662, respectively. All TDRs were
considered classified and impaired at December 31, 2018 and 2017. Of the balance outstanding at December 31, 2018, four
loans totaling $172 were on nonaccrual status. The remaining loans were accruing and performing in accordance with the
new terms. The allowance for loan losses associated with troubled debt restructurings, on the basis of a current evaluation
of loss, was $212 and $290 at December 31, 2018 and 2017, respectively.
As of December 31, 2018 and 2017, we had no loan commitments to borrowers who have loans included in TDRs.
The following table provides information about charge-offs and recoveries of loans, and the provision and allowance for loan
losses:
Year Ended December 31,
2018 2017
Balance of allowance at January 1 $ 3,354 $ 3,031
Charge-offs (245) (82)
Recoveries 319 405
Provision charged to expense 148 -
Balance of allowance at December 31 $ 3,576 $ 3,354
26
The following tables provide additional information about charge-offs and recoveries of loans, and the provision and allowance
for loan losses for the years ended December 31, 2018 and 2017:
Real Estate-
Construction
Real Estate-
Mortgage
For the Year Ended December 31, 2018
Commercial,
Financial and
Industrial
Consumer-
Installment Unallocated Total
Allowance for loan losses:
Beginning balance $ 410 $ 2,141 $ 242 $ 329 $ 232 $ 3,354
Charge-offs - (134) - (111) - (245)
Recoveries 68 69 173 9 - 319
Provision for loan losses (293) 257 (403) 558 29 148
Ending balance $ 185 $ 2,333 $ 12 $ 785 $ 261 $ 3,576
For the Year Ended December 31, 2017
Real Estate-
Construction
Real Estate-
Mortgage
Commercial,
Financial and
Industrial
Consumer-
Installment Unallocated Total
Allowance for loan losses:
Beginning balance $ 605 $ 1,737 $ 227 $ 133 $ 329 $ 3,031
Charge-offs (50) - - (32) - (82)
Recoveries 157 100 94 54 - 405
Provision for loan losses (302) 304 (79) 174 (97) -
Ending balance $ 410 $ 2,141 $ 242 $ 329 $ 232 $ 3,354
NOTE 5 – PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
December 31,
2018 2017
Land $ 3,117 $ 3,117
Buildings and land improvements 6,674 6,574
Furniture and equipment 5,217 4,997
Construction in progress 2,654 -
Total 17,662 14,688
Accumulated depreciation 7,429 7,025
Premises and equipment - net $ 10,233 $ 7,663
Depreciation expense for the years ended December 31, 2018, 2017 and 2016 was $404, $437, and $521, respectively.
NOTE 6 – FORECLOSED ASSETS
The following table summarizes activity with respect to foreclosed assets:
December 31,
2018 2017
Balance, beginning of year $ 1,232 $ 1,743
Additions, net 184 94
Sales (752) (485)
Write-downs (18) (120)
Balance, end of year $ 646 $ 1,232
27
NOTE 7 - DEPOSITS
A summary of deposits follows:
December 31,
2018 2017
Noninterest bearing demand $ 58,557 $ 63,126
Interest bearing transaction accounts 95,713 92,628
Savings 38,651 34,499
Time deposits $100 and over 66,374 56,624
Other time deposits 70,074 70,811
Total deposits $ 329,369 $ 317,688
At December 31, 2018 and 2017, time deposits $250,000 and greater totaled $16,314 and $8,611, respectively.
As of December 31, 2018 and 2017, $78 and $58, respectively, of overdrawn deposit balances were reclassified as loans. As
of December 31, 2018 and 2017, deposits of directors, officers and their related business interests totaled approximately
$4,104 and $3,645, respectively.
At December 31, 2018, the scheduled maturities of time deposits were as follows:
Year
Amount
2019 $ 55,866
2020 44,209
2021 22,573
2022 11,144
2023 2,656
$ 136,448
NOTE 8 – LONG-TERM DEBT
At December 31, 2018 and 2017, the Bank had the ability to borrow up to 25 percent of its total assets from the FHLB subject
to available qualifying collateral and collateralization requirements. We may use different forms of collateral (certain eligible
loans, certain investment securities, etc.) for each advance and the amounts of collateral required to secure borrowings vary
depending upon the type of collateral utilized.
At December 31, 2018 and 2017, the outstanding balances of FHLB advances are summarized as follows:
The scheduled maturity dates and related interest rates on FHLB advances at December 31, 2018:
Maturity Date
2018 2017
Weighted Average
Weighted Average
Balance Coupon Rate
Balance Coupon Rate
FHLB Advances $ 10,000 2.155% $ -
-%
Interest Rate
Outstanding Amount
March 13, 2028 2.045% $ 5,000
March 13, 2028 2.265% 5,000
Total FHLB Advances $ 10,000
On March 13, 2020 and 2021, respectively, the above advances can be converted to variable interest rates at the option of the
FHLB. If the FHLB converts the advances to variable rates of interest, the Bank has the option to prepay the advances without
penalty.
28
We have pledged certain of our first mortgage loans secured by one-to-four family residential properties and our holdings
of FHLB stock (collectively, “qualifying collateral instruments”) to secure our debt due to the FHLB under a blanket lien
agreement. The amount of qualifying collateral instruments pledged to secure any potential borrowings as of December 31,
2018 and 2017 was approximately $15,128 and $14,335, respectively.
We have been granted access to the Federal Reserve Bank of Richmond’s (the “FRB”) Discount Window which would allow us
to borrow approximately $40,256 and $46,897 from it at the end of 2018 and 2017, respectively, subject to our providing
collateral of sufficient market value.
The Company has arranged for unsecured lines of credit totaling $24,961 from correspondent banks. The Company has not
pledged securities toward these lines and did not draw on these lines during 2018 or 2017. The lines are usable on a shortterm
basis and may be withdrawn by the correspondent banks at any time.
NOTE 9 – SHAREHOLDERS’ EQUITY
Preferred Stock - The Company issued 3,150 shares of Series A Cumulative Convertible Preferred Stock (“Series A”) on
December 31, 2009. The shares were issued following the approval on January 27, 2009, by the Company’s shareholders, of
an amendment to the Company’s articles of incorporation authorizing the issuance of up to 10,000,000 shares of preferred
stock in one or more series with the preferences, limitations, and relative rights of each series to be determined by the
Company’s Board of Directors before any such series is issued. The issued shares have a liquidation preference of $1,000 each.
On the tenth anniversary of the Effective Date (as defined), or June 17, 2019, the shares are convertible to shares of common
stock at the option of the holder. The original conversion ratio was 100 shares of common stock per surrendered share of
preferred stock. The number of shares of common stock to be issued upon conversion was affected by 5% stock dividends
issued in each of the years 2010 and 2011. As a result, on June 17, 2019, the total number of common shares that could be
issued if all shares of preferred stock were surrendered to be converted into shares of common stock is 347,287 shares.
Dividends on the Series A non-voting preferred shares accumulate at 5% per annum and, under the terms of the preferred
stock, no cash dividends may be declared or become payable on common shares unless all of the accumulated preferred shares
have been paid. In 2017 the Company began paying current dividends on the outstanding preferred shares. In 2018 the
Company paid a portion of previously accrued, but unpaid dividends. Dividends accumulated prior to May 1, 2017 that remain
accrued but unpaid as of December 31, 2018 total $354. Accrued and unpaid dividends are included in Other Liabilities in
the Company’s consolidated balance sheets.
Stock Options - The Company currently awards incentive stock options under a plan approved by the Company’s Shareholders
in 2016, as amended. The 2016 Long-Term Stock Incentive Plan (“The 2016 Plan”) replaced the 1998 Stock Option Plan (“the
1998 Plan”). All options granted under the 1998 Plan expired, with none exercised, in 2016
Pursuant to the 2016 Plan, as amended, 500,000 shares of the Company’s authorized but unissued common stock were
reserved for possible issuance pursuant to the exercise of stock awards. Under the 2016 Plan, eligible employees will be eligible
for awards of non-qualified stock options (“NSOs”), incentive stock options (“ISOs”), rights to receive shares of common stock
at a future date or dates (“Restricted Stock Units”), restricted shares of the Company’s common stock (“Restricted Stock”),
and/or performance units having a designated value (“Performance Units”) (collectively “Awards”) over the 10-year term of
the 2016 Plan. Non-employees (including non-employee directors) will be eligible for awards of NSOs, Restricted Stock Units
and/or Restricted Stock. Except with respect to Awards then outstanding, unless sooner terminated, all Awards must be
granted or awarded on or before the 10th anniversary of the date on which the 2016 Plan was approved by the Company’s
shareholders, May 25, 2016.
In December 2016, 55,000 NSOs were granted to the members of the Board of Directors and certain executive officers of the
Company. Each option has an exercise price of $6.48 as determined on the grant date and expires 10 years from the grant
date. The fair value of each option award was estimated on the date of the grant using the Black-Scholes option valuation
model, which resulted in a per share fair value of $2.85. These options are scheduled to vest over a five-year period. During
2018, 4,000 of these options were forfeited prior to meeting vesting requirements as the associated executive officer ceased
employment with the Company.
In May 2017, 72,700 NSOs were granted to the members of the Board of Directors and certain executive officers of the
Company. Each option has an exercise price of $7.10 as determined on the grant date and expires 10 years from the grant
date. The fair value of each option award was estimated on the date of the grant using the Black-Scholes option valuation
model, which resulted in a per share fair value of $3.04. These options are scheduled to vest over a five-year period.
29
In August 2017, 49,500 NSOs were granted to the employees of the Company. Each option has an exercise price of $7.10 as
determined on the grant date and expires 10 years from the grant date. The fair value of each option award was estimated on
the date of the grant using the Black-Scholes option valuation model, which resulted in a per share fair value of $3.03. These
options are scheduled to vest over a five-year period. During 2018, 2,500 of these options were forfeited prior to meeting
vesting requirements as several of the employees who received grants ceased employment with the Company.
In August 2018, 20,000 NSOs were granted to a member of the Board of Directors and an executive officer of the Company.
Each option has an exercise price of $8.15 as determined on the grant date and expires 10 years from the grant date. The fair
value of each option award was estimated on the date of the grant using the Black-Scholes option valuation model, which
resulted in a per share fair value of $3.21. These options are scheduled to vest over a five-year period.
A summary of the activity in the 2016 Plan is presented below:
Options
to
Acquire
Shares
Weighted
Average
Exercise
Price Per
Share
Weighted
Average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic
Value (1)
Outstanding at December 31, 2016 55,000 $ 6.48 9.0
Options Granted 122,200 $ 7.10 9.6
Exercised -
Forfeited (13,500) $6.87
Outstanding at December 31, 2017 163,700 $ 6.92 9.4 $ 253,735
Options Granted 20,000 $ 8.15 9.7
Exercised (2,000) $ 6.48
Forfeited (6,500) $ 6.72
Outstanding at December 31, 2018 175,200 $ 7.06 8.5 $ 89,352
Restricted stock awards approved,
not issued, net of forfeitures -
Remaining unissued options or units
under the 2016 Plan 315,300
(1) The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the
current market value of the underlying stock exceeds the exercise priceintheoption).Ateachyearenddatetheamountrepresentsthe
value that would have been received by the option holders had all option holders exercised their options on that date. This amount
changes based on changes in the market value of the Company’s common stock.
In May 2017, the Company granted 2,500 restricted stock units to an executive officer of the Company. The restricted stock
units vested over the eight month period ended December 31, 2017. In November 2017, the Company granted 5,000 restricted
stock units to an executive officer of the Company. The restricted stock units vested over the six month period ended May
31, 2018. In January 2018, a former executive officer of the Company forfeited 916 restricted stock units in connection with
the exercise of stock options.
Total compensation expense recognized in the statement of operations for share-based payment arrangements during the
years ended December 31, 2018 and 2017 was $125 and $100, respectively. No compensation expense was recognized for
share-based payment arrangements in the year ended December 31, 2016.
As of December 31, 2018 and 2017, there was $310 and $438, respectively, of total unrecognized compensation expense
related to non-vested share based compensation arrangements granted under the Plan. That cost is expected to be recognized
over a weighted average period of 4.3 years.
30
Net Income per Common Share - Net Income per common share and net income per common share, assuming dilution, were
computed as follows:
Year Ended December 31,
2018 2017 2016
Net income per common share, basic
Numerator - net income available to common
shareholders $ 4,242 $ 730 $ 767
Denominator - weighted average common
shares issued and outstanding 4,156,954 4,152,294 4,152,294
Net income per common share, basic $ 1.02 $ 0.18 $ 0.18
Year Ended December 31,
2018 2017 2016
Net income per common share, diluted
Numerator - net income available to common
shareholders $ 4,242 $ 730 $ 767
Denominator - weighted average common
shares issued and outstanding 4,156,954 4,152,294 4,152,294
Effect of dilutive stock options
Stock options 27,286 13,687 -
Restricted stock units - 2,884 -
Total shares 4,184,240 4,168,865 4,152,294
Net income per common share, assuming
dilution $ 1.01 $ 0.18 $ 0.18
Dividends - The FRB granted its approval for the Company to pay all dividends accumulated on the Company’s cumulative
preferred stock as called for in the preferred stock instruments through November 15, 2012. When preferred stock dividends
accumulate and are unpaid, the Company is unable to make any distributions to holders of its common stock until such time
as all of the arrearages on the preferred stock are satisfied. In December 2018 the Company paid $354 of $708 in accrued
dividends on preferred stock.
NOTE 10 – REGULATORY MATTERS
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.
Minimum capital levels are regulated by risk-based capital adequacy guidelines, which require the Company and the Bank to
maintain certain capital as a percentage of assets and certain off-balance sheet items adjusted for predefined credit risk factors
(risk-weighted assets). Quantitative measures of capital adequacy include the leverage ratio (Tier 1 capital as a percentage of
average assets), Tier 1 risk-based capital ratio (Tier 1 capital as a percent of risk-weighted assets), Total Risk-Based Capital
rate (Total Risk-Based Capital as a percentage of Total Risk-Weighted assets), and Common Equity Tier 1 (“CET1”) capital
ratio. Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions
by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action applicable to banks, the Company and
the Bank must meet specific capital guidelines. Prompt corrective action provisions are not applicable to bank holding
companies.
31
In September 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking
Supervision, adopted Basel III, which constitutes a set of capital reform measures designed to strengthen the regulation,
supervision and risk management of banking organizations worldwide. In order to implement Basel III and certain additional
capital changes required by the Dodd-Frank Act, the FDIC approved, as an interim final rule in July 2014, the regulatory
capital requirements substantially similar to final rules issued by the Board of Governors of the Federal Reserve System for
U.S. state nonmember banks and the Office of the Comptroller of the Currency for national banks.
The interim final rule includes new risk-based capital and leverage ratios that will be phased-in from 2015 to 2019 for most
state nonmember banks. The rule includes the new CET1 ratio of 4.5% of risk-weighted assets and a common equity Tier 1
capital conservation buffer of 2.5% of risk-weighted assets, which will be fully phased in by 2019, in addition to the Tier 1
and Total risk-based capital requirements. The interim final rule also raises the minimum ratio of Tier 1 capital to risk-weighted
assets from 4.0% to 6.0% and requires a minimum leverage ratio of 4.0%. The required minimum ratio of Total Capital to
risk-weighted assets will remain 8.0%. The new risk-based capital requirements (except for the capital conservation buffer)
became effective for the Company and the Bank on January 1, 2015.
The Company’s and the Banks’ actual capital amounts and ratios and minimum regulatory amounts and ratios are presented
in the table that follows.
Minimum for
Minimum to be
Actual Capital Adequacy Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
December 31, 2018
(Dollars in thousands)
The Company
Total Capital to risk-weighted assets $ 39,347 13.4% $ 23,483 8.0% NA NA
Tier 1 Capital to risk-weighted assets $ 35,771 12.2% $ 17,612 6.0% NA NA
CET1 Capital to risk-weighted assets $ 35,771 12.2% $ 13,209 4.5% NA NA
Tier 1 Capital to average assets (leverage) $ 35,771 9.5% $ 15,102 4.0% NA NA
Community First Bank
Total Capital to risk-weighted assets $ 37,567 12.8% $ 23,460 8.0% $ 29,326 10.0%
Tier 1 Capital to risk-weighted assets $ 33,991 11.6% $ 17,595 6.0% $ 23,460 8.0%
CET1 Capital to risk-weighted assets $ 33,991 11.6% $ 13,196 4.5% $ 19,062 6.5%
Tier 1 Capital to average assets (leverage) $ 33,991 9.0% $ 15,097 4.0% $ 18,871 5.0%
Minimum for
Minimum to be
Actual Capital Adequacy Well Capitalized
Amount Ratio Amount Ratio Amount Ratio
December 31, 2017
(Dollars in thousands)
The Company
Total Capital to risk-weighted assets $ 36,723 13.7% $ 21,444 8.0% NA NA
Tier 1 Capital to risk-weighted assets $ 33,357 12.4% $ 16,140 6.0% NA NA
CET1 Capital to risk-weighted assets $ 33,357 12.4% $ 12,105 4.5% NA NA
Tier 1 Capital to average assets (leverage) $ 33,357 9.3% $ 14,347 4.0% NA NA
Community First Bank
Total Capital to risk-weighted assets $ 35,695 13.3% $ 21,471 8.0% $ 26,838 10.0%
Tier 1 Capital to risk-weighted assets $ 32,329 12.0% $ 10,776 4.0% $ 21,553 8.0%
CET1 Capital to risk-weighted assets $ 32,329 12.0% $ 12,123 4.5% $ 17,512 6.5%
Tier 1 Capital to average assets (leverage) $ 32,329 9.0% $ 14,368 4.0% $ 17,961 5.0%
32
NOTE 11 – NONINTEREST EXPENSES
Other expenses are summarized below:
Year Ended December 31,
2018 2017 2016
Salaries and employee benefits $ 8,566 $ 6,881 $ 6,220
Net occupancy 829 794 867
Furniture and equipment 415 476 456
Legal and professional fees 1146 1,014 1,019
FDIC insurance 206 179 409
Foreclosed assets costs and expenses, net 263 134 47
Data processing 1,058 2,084 1,207
Other
Miscellaneous loan expenses 276 312 229
Stationery, printing and postage 103 227 215
Telephone 197 225 233
Advertising and promotion 370 245 175
Insurance 50 109 164
Directors' compensation 166 125 129
Losses other than loans 133 91 45
Other 1,013 941 630
Total $ 14,791 $ 13,837 $ 12,045
NOTE 12 – INCOME TAXES
The Company’s provision for income taxes differs from applying the federal statutory income tax rate to income before income
taxes. The primary difference results from the changes effected from the enactment of the Tax Cuts and Jobs Act (“Tax Act”)
on December 22, 2017, including the impact of a remeasurement of the deferred taxes at the rate in which the deferred taxes
are expected to reverse which is 21% for federal purposes.
Income tax expense (benefit) consisted of:
Year Ended December 31,
2018 2017 2016
Current
Federal $ (9) $ - $ -
State 142 2 8
Total current 133 2 8
Deferred
Federal 12 2,848 189
Reduction in valuation allowance against net deferred tax assets (3,958) (2,848) (189)
Total deferred (3,946) - -
Total income tax expense (benefit) $ (3,813) $ 2 $ 8
33
A reconciliation between the income tax expense (benefit) and the amount computed by applying the federal statutory rate
of 21% for 2018 and 34% for 2017 and 2016 to income before income taxes follows:
Year Ended December 31
2018 2017 2016
Tax expense at statutory rate $ 132 $ 302 $ 317
State income taxes, net of federal benefit 112 1 5
Tax-exempt interest income (5) (13) (18)
Non-taxable increase in value of life insurancecontracts (64) (108) (111)
Change in federal tax rate - 2,548 -
Reduction in valuation allowance against net deferred tax
assets (3,958) (2,848) (189)
Write-off/expiration of deferred tax assets 7 119 -
Other, net (37) 1 4
Total $ (3,813) $ 2 $ 8
Deferred tax assets and liabilities included in the consolidated balance sheets consisted of the following:
December 31,
2018 2017 2016
Deferred tax assets
Allowance for loan losses $ 781 $ 704 $ 1,030
Writedowns of foreclosed assets 65 90 254
Non-qualified stock options 45 21 99
Deferred compensation 644 538 871
Excess charitable contributions carryforward 21 24 56
Net operating loss carryforward 2,999 3,257 4,956
Unrealized net holding losses on available-for-sale securities 400 238 464
Other 311 92 177
Gross deferred tax assets 5,266 4,964 7,907
Valuation allowance (90) (4,286) (7,240)
Net deferred taxes 5,176 678 667
Deferred tax liabilities
Accelerated depreciation and amortization 271 277 499
Deferred net loan fees 525 363 97
Acquired in business combination, net 34 38 71
Gross deferred tax liabilities 830 678 667
Net deferred income tax assets $ 4,346 $ - $ -
As of December 31, 2018, we have federal net operating loss carryforwards totaling $13,854. The remaining amount will
expire as follows: $271 in 2031, $2,110 in 2032, $3,522 in 2033, $2,937 in 2034, $3,409 in 2035, $896 in 2036, and $709 in
2037. As of December 31, 2018, we have South Carolina net operating loss carry forwards totaling $2,280, which will expire
2026 through 2038.
Deferred tax assets represent the future tax benefit of deductible differences and, if it is more-likely-than-not that a tax asset
will not be realized, a valuation allowance is required to reduce the recorded deferred tax assets to net realizable value. During
2018 the Company reversed a majority of the valuation allowance as management believes the net deferred tax asset will
ultimately be realized. The remaining valuation allowance relates to the parent company’s state operating loss carryforwards
for which realizability is uncertain. Realization of deferred tax assets is dependent upon sufficient taxable income during the
period that deductible temporary differences and carryforwards are expected to be available to reduce taxable income. Based
on management’s projections, the deferred tax assets are more-likely-than-not to be fully recovered with projected taxable
income.
34
As of December 31, 2018 and 2017, there were no uncertain tax positions. The amount of uncertain tax positions may increase
or decrease in the future for various reasons including adding amounts for current tax positions, expiration of open tax returns
due to statutes of limitations, changes in management’s judgment about the level of uncertainty, status of examinations,
litigation and legislative activity and the addition or elimination of uncertain tax positions. The Company’s policy is to report
interest and penalties, if any, related to uncertain tax positions in income tax expense. With few exceptions, the Company is
no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2015.
NOTE 13 – RETIREMENT PLANS
The Company sponsors the Community First Bank 401(k) Plan (the “401(k) Plan”) for the exclusive benefit of all eligible
employees and their beneficiaries. Employees are eligible to participate in the 401(k) Plan with a minimum age requirement
of 18, and there is no minimum service requirement for deferral. Employees are allowed to defer and contribute any amount
of their salary, up to a maximum determined under the Internal Revenue Code each year. The Company will match 50% of
each dollar deferred up to 10% of total salary for employees with a minimum of 1,000 hours of service during the 12-month
period immediately following date of hire. 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 2018, 2017 and 2016 totaled $150, $133 and $114, respectively.
In 2007, the Bank’s Board of Directors approved certain supplemental retirement benefits for a former Chief Executive Officer
under a salary continuation plan (the “Plan”). These benefits are not qualified under the Internal Revenue Code. Although
these benefits are not funded, the Bank has accrued the related expenses under Generally Accepted Accounting Principles.
Moreover, life insurance contracts owned by the Bank provide informal, indirect funding for those benefits. During 2015,
the Bank ceased making payments to the former officer due to certain issues of suspected misconduct. As a result, the former
officer filed legal action against the Bank in state court. The Bank removed the case to federal court on October 23, 2015.
On November 25, 2015, the Bank filed a motion to dismiss on the grounds that the claims were preempted by the Employee
Retirement Income Security Act (“ERISA”). The former officer moved to remand the case to state court on November 23,
2015. On March 7, 2016, the federal court denied the motion to remand and granted a motion to dismiss with leave to amend.
The former officer filed an amended complaint on April 1, 2016. The Bank has also filed counterclaims seeking to recover
payments made to the former officer under the Plan which the Bank claims should not have been made due to the disqualifying
actions. On November 1, 2017, the court dismissed the Bank’s state law counterclaims stating that they were preempted by
ERISA. The Bank disagrees with that decision and may appeal at the appropriate time. The court also denied the former
officer’s motion to dismiss the ERISA-based claims seeking recovery of previously paid benefits. On January 26, 2018, the
parties filed cross-motions for summary judgment seeking a determination of whether the Bank’s decision to stop payments
should be upheld. A hearing on these cross-motions was held on November 9, 2018. Subsequent to year end, on March 28,
2019, the Bank was notified that the court awarded to former officer benefits that would have been paid to date in accordance
with the Plan, plus attorney fees. The Bank believes the court’s ruling was erroneous and that the Bank has meritorious
defenses to the former officer’s claims. It is currently considering an appeal. As of December 31, 2018, the Company adjusted
its deferred compensation accrual with regard to the Plan to bring the liability current and adjusted accrued legal expenses.
No deferred compensation expense related to these benefits was recorded in 2017. At December 31, 2018 and 2017, the
deferred compensation accrued and unpaid totaled $2,949 and $2,561, respectively, and is included in Other Liabilities in
the Company’s consolidated financial statements.
NOTE 14 – COMMITMENTS AND CONTINGENCIES
Commitments to Extend Credit - In the normal course of business, the Bank is party to financial instruments with offbalance-sheet
risk. These financial instruments include commitments to extend credit and standby letters of credit, and have
elements of credit risk in excess of the amount recognized in the balance sheet. The exposure to credit loss in the event of
nonperformance by the other parties to the financial instruments for commitments to extend credit and standby letters of
credit is represented by the contractual, or notional, amount of those instruments. Generally, the same credit policies used
for on-balance-sheet instruments, such as loans, are used in extending loan commitments and standby letters of credit.
Following are the off-balance-sheet financial instruments whose contract amounts represent credit risk:
December 31,
2018 2017
Loan commitments $ 46,691 $ 37,736
Standby letters of credit 1,011 1,065
35
Loan commitments involve agreements to lend to a customer as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or other termination clauses and some involve payment of
a fee. Many of the commitments are expected to expire without being fully drawn; therefore, the total amount of loan
commitments does not necessarily represent future cash requirements. Each customer’s creditworthiness is evaluated on a
case-by-case basis. The amount of collateral obtained, if any, upon extension of credit is based on management’s credit
evaluation of the borrower. Collateral held varies but may include commercial and residential real properties, accounts
receivable, inventory and equipment.
Standby letters of credit are conditional commitments to guarantee the performance of a customer to a third party. The
credit risk involved in issuing standby letters of credit is the same as that involved in making loan commitments to customers.
Litigation - As of December 31, 2018, the Bank was involved as a defendant in litigation brought by a former bank customer.
The former customer is asserting tort claims, as well as a claim for an accounting, against the Bank and a former Bank employee
based on allegations that the former employee, who held the former customer’s power of attorney, misappropriated funds
from the former customer’s account. The former customer is seeking damages in excess of $1,750. The Bank is vigorously
defending its interests, has denied all of the former customer’s substantive allegations, has asserted various defenses, and
has asserted counterclaims against the former customer of approximately $789. In September 2017, the Court entered an
order granting the Bank summary judgment on all claims. Counsel for the former customer filed a motion to reconsider that
order. Counsel for the Bank argued that motion in December, 2017, and the court still has it under consideration.
Prior to 2015, the Board of Directors became aware of a loan to a customer which was charged off in excess of $800 without
their informed agreement. The Bank obtained a payoff agreement and schedule from this customer. Discussion with the
customer and further investigation by the Bank revealed the loan proceeds may have been used to also benefit the Bank’s
former Chief Executive Officer, the Bank’s former Chairman of the Board, and their related interests. When the customer
defaulted on the payoff agreement, the Bank filed legal actions against all three parties and their related companies for the
full amount of the loan. Counterclaims were filed by the customer. During the course of the litigation the trial Court issued
an order awarding the former Chief Executive Officer $64 in discovery-related sanctions. The Bank vigorously disagrees with
the Court’s order and has appealed it. The appeal is pending with a decision expected in 2019. The Bank believes the appeal
has significant merit and that the Court of Appeals will reverse the trial court. The Bank and the parties resolved the remaining
issues in the litigation and all claims by all parties were dismissed, including the counterclaims asserted by the customer.
Please see Note 13 for information concerning additional litigation with the Bank’s former Chief Executive Officer.
NOTE 15 – DISCLOSURES ABOUT FAIR VALUES
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market
participants at the measurement date. A three-level hierarchy is used for fair value measurements based upon the transparency
of inputs to the valuation. For disclosure purposes, fair values for assets and liabilities are shown in the level of the hierarchy
that correlates with the least observable level input that is significant to the fair value measurement in its entirety. The three
levels of the fair value hierarchy are described as follows:
Level 1 inputs reflect quoted prices in active markets for identical assets or liabilities.
Level 2 inputs reflect observable inputs that may consist of quoted market prices for similar assets or liabilities, quoted prices
that are not in an active market, or other inputs that are observable in the market and can be corroborated by observable
market data for substantially the full term of the assets or liabilities being valued.
Level 3 inputs reflect the use of pricing models and/or discounted cash flow methodologies using other than contractual
interest rates or methodologies that incorporate a significant amount of management judgment, use of the entity’s own data,
or other forms of unobservable data.
Pricing for securities available-for-sale is obtained from an independent third-party that uses a process that may incorporate
current prices, benchmark yields, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers,
other reference items and industry and economic events that a market participant would be expected to use as inputs in
valuing the securities. Not all of the inputs listed apply to each individual security at each measurement date. The independent
third party assigns specific securities into an “asset class” for the purpose of assigning the applicable level of the fair value
hierarchy used to value the securities. Securities available-for-sale are measured at fair value with unrealized gains and losses,
net of income taxes, recorded in other comprehensive income.
36
The following is a summary of the measurement attributes applicable to financial assets and liabilities that would be measured
at fair value on a recurring basis:
Fair Value Measurement at Reporting Date Using
Measured at
Fair Value at
Description December 31, 2018 Level 1 Level 2 Level 3
Securities available-for-sale:
Mortgage-backed securities issued
by U.S. Government agencies $ 177 $ - $ 177 $ -
Government sponsored enterprises (GSEs) 7,695 - 7,695 -
Mortgage-backed securities issued
by GSEs 39,178 - 39,178 -
State, county and municipal 472 - 472 -
Equity securities 11 11 - -
Total securities available-for-sale $ 47,533 $ 11 $ 47,522 $ -
Measured at
Fair Value at
Fair Value Measurement at Reporting Date Using
Description December 31, 2017 Level 1 Level 2 Level 3
Securities available-for-sale:
Mortgage-backed securities issued
by U.S. Government agencies $ 209 $ - $ 209 $ -
Government sponsored enterprises (GSEs) 8,506 - 8,506 -
Mortgage-backed securities issued
by GSEs 45,496 - 45,496 -
State, county and municipal 1,356 - 1,356 -
Equity securities 29 29 - -
Total securities available-for-sale $ 55,596 $ 29 $ 55,567 $ -
Fair values of collateral dependent impaired loans are estimated based on recent appraisals of the underlying properties or
other information derived from market sources. The fair value of foreclosed assets is estimated based on recent appraisals or
other information obtained from market sources. Management reviews all fair value estimates periodically or whenever new
information indicates that there may have been a significant change in the fair value of a property.
The following is a summary of assets measured at fair value on a nonrecurring basis in the consolidated balance sheets,
including the general classification of such instruments pursuant to the valuation hierarchy.
Measured at
Fair Value at
Fair Value Measurement at Reporting Date Using
Description December 31, 2018 Level 1 Level 2 Level 3
Collateral dependent impaired loans $ 1,936 $ - $ - $ 1,936
Foreclosed assets 646 - - 646
Measured at
Fair Value at
Fair Value Measurement at Reporting Date Using
Description December 31, 2017 Level 1 Level 2 Level 3
Collateral dependent impaired loans $ 2,707 $ - $ - $ 2,707
Foreclosed assets 1,232 - - 1,232
37
NOTE 16 – RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued guidance to change the recognition of revenue from contracts with customers. The core principle
of the new guidance is that an entity should recognize revenue to reflect the transfer of goods and services to customers in
an amount equal to the consideration the entity receives or expects to receive. The guidance will be effective for the Company
for annual periods beginning after December 15, 2018 and interim periods within annual reporting periods beginning after
December 15, 2019.
The Company will apply the guidance using a modified retrospective approach. The Company’s revenue is primarily comprised
of net interest income and noninterest income. The scope of the guidance explicitly excludes net interest income as well as
many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. Accordingly, the
majority of our revenues will not be affected. The Company is currently assessing our revenue contracts related to revenue
streams that are within the scope of the standard. Our accounting policies will not change materially since the principles of
revenue recognition from the ASU are largely consistent with existing guidance and current practices applied by our businesses.
We have not identified material changes to the timing or amount of revenue recognition. Based on the updated guidance,
we do anticipate changes in our disclosures associated with our revenues. We will provide qualitative disclosures of our
performance obligations related to our revenue recognition and we continue to evaluate disaggregation for significant
categories of revenue in the scope of the guidance.
In January 2016, the FASB amended the Financial Instruments topic of the Accounting Standards Codification to address
certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be
effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December
15, 2019. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the
beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values
will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company
does not expect these amendments to have a material effect on its financial statements.
In February 2016, the FASB amended the Leases topic of the Accounting Standards Codification to revise certain aspects of
recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal
years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early
adoption is permitted. We expect to adopt the guidance using the modified retrospective method and practical expedients
for transition. The practical expedients allow us to largely account for our existing leases consistent with current guidance
except for the incremental balance sheet recognition for lessees. We have started an initial evaluation of our leasing contracts
and activities. We have also started developing our methodology to estimate the right-of use assets and lease liabilities, which
is based on the present value of lease payments. We do not expect a material change to the timing of expense recognition,
but we are early in the implementation process and will continue to evaluate the impact. We are evaluating our existing disclosures
and may need to provide additional information as a result of adoption of the Accounting Standards Update (“ASU”).
In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment award transactions
including the income tax consequences, the classification of awards as either equity or liabilities, and the classification
on the statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business
entities allowing them apply a practical expedient to estimate the expected term for all awards with performance or service
conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all
liability-classified awards at fair value to measuring them at intrinsic value. The amendments were effective for the Company
for annual periods beginning after December 15, 2017, and interim periods within annual reporting periods beginning after
December 15, 2018. The amendment did not have a material effect on the financial statements.
In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for
certain debt securities. The amendments will be effective for the Company for annual periods beginning after December 15,
2020, and interim periods within annual reporting periods beginning after December 15, 2021. Early adoption is permitted
for all organizations for periods beginning after December 15, 2018. While early adoption is permitted beginning in
first quarter 2019, we do not expect to elect that option. The Company will apply the amendments to the ASU through a
cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. We expect the ASU will result
in an increase in the recorded allowance for loan losses given the change to estimated losses over the contractual life of the
loans adjusted for expected prepayments. In addition to our allowance for loan losses, we will also record an allowance for
credit losses on debt securities instead of applying the impairment model currently utilized. The amount of the adjustments
will be impacted by each portfolio’s composition and credit quality at the adoption date as well as economic conditions and
forecasts at that time. The Company is currently evaluating the effect that implementation of the new standard will have on
its financial position, results of operations, and cash flows.
38
In May 2017, the FASB amended the requirements in the Compensation—Stock Compensation Topic of the Accounting
Standards Codification related to changes to the terms or conditions of a share-based payment award. The amendments
provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply
modification accounting. The amendments will be effective for the Company for annual periods, and interim periods within
those annual periods, beginning after December 15, 2017. Early adoption is permitted. The Company does not expect these
amendments to have a material effect on its financial statements.
In February 2018, the FASB amended the Income Statement—Reporting Comprehensive Income Topic of the Accounting
Standards Codification. The amendments allow a reclassification from accumulated other comprehensive income to retained
earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The amendments are effective for fiscal years
beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company
does not expect these amendments to have a material effect on its financial statements.
In February 2018, the FASB amended the Financial Instruments Topic of the Accounting Standards Codification. The
amendments clarify certain aspects of the guidance issued in ASU 2016-01. The amendments are effective for fiscal years
beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Entities may
early adopt these amendments for fiscal years beginning after December 15, 2017, including interim periods within those
fiscal years, as long as they have adopted ASU 2016-01. The Company does not expect these amendments to have a material
effect on its financial statements.
In May 2018, the FASB amended the Financial Services—Depository and Lending Topic of the Accounting Standards
Codification to remove outdated guidance related to Circular 202. The amendments were effective upon issuance and did not
have a material effect on the financial statements.
In August 2018, the FASB amended the Fair Value Measurement Topic of the Accounting Standards Codification. The
amendments remove, modify, and add certain fair value disclosure requirements based on the concepts in the FASB Concepts
Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. The amendments are
effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.
Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this
ASU and delay adoption of the additional disclosures until their effective date. The Company does not expect these
amendments to have a material effect on its financial statements.
In November 2018, the FASB issued guidance to amend the Financial Instruments - Credit Losses topic of the Accounting
Standards Codification. The guidance aligns the implementation date of the topic for annual financial statements of nonpublic
companies with the implementation date for their interim financial statements. The guidance also clarifies that receivables
arising from operating leases are not within the scope of the topic, but rather, should be accounted for in accordance with the
leases topic. The amendments will be effective for the Company for fiscal years beginning after December 15, 2021, including
interim periods within those fiscal years. Early adoption is permitted for all organizations for periods beginning after
December 15, 2018. The Company is currently in the process of evaluating the impact of adoption of this guidance on the
financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected
to have a material impact on the Company’s financial position, results of operations or cash flows.
NOTE 17 – CONDENSED FINANCIAL INFORMATION
The following is condensed financial information of Community First Bancorporation (parent company only).
December 31,
2018 2017
Condensed Balance Sheets
Assets
Cash $ 1,540 $ 1,618
Investment in banking subsidiary 35,151 31,446
Deferred income tax assets, net 139 -
Land held for sale 138 138
Total assets $ 36,968 $ 33,202
Liabilities
Accrued preferred stock dividends $ 354 $ 708
Shareholders' equity 36,614 32,494
Total liabilities and shareholders' equity $ 36,968 $ 33,202
39
Condensed Statements of Income
Income
Expenses
Distribution income from banking subsidiary $ 552 $ 118 $ -
Other income - - -
Total income 552 118 -
Other expenses 91 66 59
Total expenses 91 66 59
Income (loss) before income taxes and equity
in undistributed earnings of subsidiaries 461 52 (59)
Equity in undistributed earnings of banking subsidiary 3,840 835 983
Income before taxes
Income tax benefit
Year Ended December 31,
2018 2017 2016
4,301 887 924
139 - -
Net income $ 4,440 $887 $ 924
Income before taxes
Condensed Statements of Cash Flows
Operating activities
Net income $ 4,440 $ 887 $ 924
Adjustments to reconcile net income to net cash provided by
operating activities
Financing activities
Year Ended December 31,
2018 2017 2016
Net deferred income tax assests (139) - -
Equity in undistributed net income of banking subsidiary (3,840) (835) (983)
Net cash provided (used) by operating activities 461 52 (59)
Cash dividends (552) (118) -
Proceeds from exercise of stock options 13 - -
Net cash used by financing activities (539) (118) -
Decrease in cash and cash equivalents (78) (66) (59)
Cash and cash equivalents, beginning 1,618 1,684 1,743
Cash and cash equivalents, ending $ 1,540 $ 1,618 $ 1,684
NOTE 18 – SUBSEQUENT EVENTS
The Company has evaluated subsequent events through April 16, 2019, the date these consolidated financial statements were
available to be issued, and has determined that there are no other subsequent events that would require recognition or
disclosure in the Company’s consolidated financial statements. See Note 13 for information regarding a subsequent event
for which an accrual has been included in the Company’s consolidated financial statements.
This Annual Report serves as the ANNUAL FINANCIAL DISCLOSURE STATEMENT furnished pursuant to Part 350
of the Federal Deposit Insurance Corporation’s Rules and Regulations. THIS STATEMENT HAS NOT BEEN
REVIEWED OR CONFIRMED FOR ACCURACY OR RELEVANCE, BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION. Community First Bancorporation will furnish free of charge a copy of this Annual Report upon
written request to Community First Bancorporation, P.O. Box 1097, Walhalla, South Carolina 29691.
40
Board of Directors, Community First Bancorporation
Dr. Larry S. Bowman
Vice Chairman
Orthopedic Surgeon
GHS Blue Ridge Orthopedic
Association, P.A.
William M. Brown
Secretary
Retired President
and Executive Officer
Lindsay Oil, Inc.
Richard D. Burleson, Jr.
President and
Chief Executive Officer
Community First Bancorporation
and Community First Bank
T. Brandon Cox, CFP
Managing Director
United Capital
Joel R. Davis
President and Owner
J. Davis Construction, Inc.
Amber B. Glidewell, Esq.
Partner, Roe Cassidy Coates
& Price, P.A.
John R. Hamrick
President
John Hamrick Real Estate
Charles L. Winchester
President, Winchester Lumber
Company, Inc.
Vice President,
Boones Lumber Company
R. Joseph Jackson
Founder and Managing Partner
Metrolina Capital Advisors, LLC
Gary V. Thrift, Chairman
President, Thrift Development Corp
President, Thrift Group, Inc
Officers, Community First
Bancorporation
Richard D. Burleson, Jr.
President and Chief Executive Officer
William M. Brown
Secretary
Jennifer M. Champagne
Executive Vice President,
Chief Financial Officer, and Treasurer
William P. Lackey, Jr.
Executive Vice President
41
Officers, Community First Bank
William P. Lackey, Jr.
Executive Vice President and
Chief Operating Officer
Jennifer M. Champagne
Executive Vice President and
Chief Financial Officer
Richard D. Burleson, Jr.
President and
Chief Executive Officer
Kimberly A. Blackwell
Senior Vice President,
Commercial Lending Officer
Amanda J. Brackens
Director of Compliance
Chase M. Christopher
Senior Vice President,
Senior Credit Officer
Keith B. Crain
Senior Vice President,
Sales Finance Manager
Sheila L. Galloway
Senior Vice President,
City Executive and Commercial
Lending Officer
Sandra D. Gravley
Senior Vice President,
Loan Operations Manager
Jeffery A. Griffith
Senior Vice President,
Enterprise Risk Officer
Stuart L. Hester
Senior Vice President,
Regional Market Executive
Andrew L. Howard
Senior Vice President,
Commercial Lending Officer
Michelle L. Riley
Senior Vice President,
City Executive
Robert R. Shaw
Senior Vice President,
City Executive and Commercial
Lending Officer
M. Scott Shires
Senior Vice President,
Commercial Lending Officer
Alisa M. Suddeth
Senior Vice President,
Chief of Talent
and Marketing Officer
Randall C. Townes
Senior Vice President,
Information Technology Manager
Trisha W. Warwick
Senior Vice President,
Chief Credit Officer
Carol G. Wilson
Senior Vice President,
Deposit Operations Officer
Douglas B. Alexander
Vice President,
Credit Administration
James W. Blakely, III
Vice President,
Special Assests and Facilities
Management
Scot S. Frith
Vice President,
Branch Manager
Kevin P. Harmon
Vice President, Controller
Timothy W. Hawks
Vice President, City Executive
Tammy T. Holt
Vice President,
Central Documentation
Mananger
Murphy R. Mahaffey, III
Vice President, Credit Manager
Katie A. Melton
Vice President, Director of
Human Resources
Scott J. Merriam
Vice President,
Commercial Lending Officer
Grantham A. Nicholson
Vice President, SBA Officer,
CRA Officer, and
Commercial Lending Officer
Tammy S. Pitt
Vice President,
Branch Operations
Rhonda P. Tippett
Vice President,
Credit Card Operations Manager
Angela L. Blackwell
Assistant Vice President,
BSA Officer
Chris L. Blue
Assistant Vice President,
Branch Manager
Preston A. Bruce
Assistant Vice President,
Relationship Manager
V. Marie Clark
Assistant Vice President,
Call Center Specialist
Elizabeth M. Coppola
Assistant Vice President,
Compliance Officer
Emily G. Crawford
Assistant Vice President,
Branch Manager
Megan L. Grisham
Assistant Vice President,
Manager of Deposit Operations
Jennifer N. Lee
Assistant Vice President,
Branch Manager
V. Jo Nelson
Assistant Vice President,
Branch Manager
Amanda B. Olson
Assistant Vice President,
Branch Manager
Kim L. Rhodes
Assistant Vice President,
Credit Card Specialist
Julie P. Whitfield
Assistant Vice President,
Branch Manager
42
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COMMUNITY FIRST
BANCORPORATION
Stock Transfer Agent
Transfer Online, Inc.
512 SE Salmon St., Portland, OR 97214 • (503) 227-2950
info@transferonline.com • www.transferonline.com
Stock Symbol
CFOK
Community First Bank Full-Service Offices
1600 Sandifer Blvd., Seneca, SC 29678
3685 Blue Ridge Blvd., Walhalla, SC 29691
306 East Windsor St., Westminster, SC 29693
449 Highway 123 Bypass, Seneca, SC 29678
2007 East Greenville St., Anderson, SC 29621
4002 Clemson Blvd., Anderson, SC 29621
208 East Main St., Williamston, SC 29697
210 Brendan Way, Greenville, SC 29615
Community First Bank Loan Production Offices
800 East Arrowood Rd., Charlotte, NC 28217
300 McGill Avenue NW, Ste 200, Concord, NC 28207
www.c1stbank.com