10-Q 1 d511771d10q.htm FORM 10-Q FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: March 31, 2013

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION

PERIOD FROM                  TO                 

Commission File Number 000-49966

 

 

COMMUNITY FIRST, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Tennessee   04-3687717

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

501 South James M. Campbell Blvd.

Columbia, Tennessee

  38401
(Address of Principal Executive Offices)   (Zip Code)

(931) 380-2265

(Registrant’s Telephone Number, Including Area Code)

None

(Former Name, Address and Fiscal Year, if Changed Since Last Report)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

Common stock outstanding (no par value): 3,274,544 shares of common stock, no par value per share, as of May 10, 2013.

 

 

 


Table of Contents

COMMUNITY FIRST, INC.

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

  

Item 1. Financial Statements (Unaudited)

  

Consolidated Balance Sheets March 31, 2013 (Unaudited) and December 31, 2012

     3   

Consolidated Statements of Operations and Comprehensive Income Three months ended March  31, 2013 and 2012 (Unaudited)

     5   

Consolidated Statement of Changes in Shareholders’ Equity Three months ended March  31, 2013 (Unaudited)

     7   

Consolidated Statements of Cash Flows Three months ended March 31, 2013 and 2012 (Unaudited)

     8   

Notes to Consolidated Financial Statements (Unaudited)

     10   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     46   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     70   

Item 4. Controls and Procedures

     71   

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

     72   

Item 1A. Risk Factors

     72   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     72   

Item 3. Defaults Upon Senior Securities

     72   

Item 4. Mine Safety Disclosures

     72   

Item 5. Other Information

     72   

Item 6. Exhibits

     73   

SIGNATURES

     74   

 

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PART I. FINANCIAL INFORMATION

ITEM  1. FINANCIAL STATEMENTS

Community First, Inc.

Consolidated Balance Sheets

March 31, 2013 (Unaudited) and December 31, 2012

(amounts in thousands, except share and per share data)

 

     March 31,
2013
    December 31,
2012
 

Assets

    

Cash and due from financial institutions

   $ 99,230      $ 94,877   

Time deposits in other financial institutions

     750        1,000   

Securities available for sale, at fair value

     72,256        70,180   

Loans held for sale in secondary market, at fair value

     595        921   

Loans

     292,987        306,881   

Allowance for loan losses

     (10,033     (9,767
  

 

 

   

 

 

 

Net loans

     282,954        297,114   
  

 

 

   

 

 

 

Restricted equity securities, at cost

     1,727        1,727   

Premises and equipment, net

     8,679        8,770   

Accrued interest receivable

     1,294        1,377   

Core deposit and customer relationship intangibles, net

     1,318        1,352   

Other real estate owned, net

     19,249        19,769   

Bank owned life insurance

     9,399        9,331   

Other assets

     3,879        4,297   
  

 

 

   

 

 

 

Total Assets

   $ 501,330      $ 510,715   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Deposits:

    

Noninterest-bearing

   $ 49,835      $ 47,908   

Interest-bearing

     389,498        401,038   
  

 

 

   

 

 

 

Total Deposits

     439,333        448,946   
  

 

 

   

 

 

 

Federal Home Loan Bank advances

     13,000        13,000   

Subordinated debentures

     23,000        23,000   

Repurchase agreement

     7,000        7,000   

Accrued interest payable

     3,841        3,628   

Other liabilities

     5,044        4,805   
  

 

 

   

 

 

 

Total Liabilities

     491,218        500,379   
  

 

 

   

 

 

 

 

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Community First, Inc.

Consolidated Balance Sheets

March 31, 2013 and December 31, 2012

(Continued)

 

(amounts in thousands, except share and per share data)

 

     (Unaudited)
March 31,
2013
    December 31,
2012
 

Shareholders’ Equity

    

Senior Preferred shares, no par value; 5% cumulative. Authorized 2,500,000 shares; 17,806 issued and outstanding with liquidation value of $19,867 at March 31, 2013 and $19,626 at December 31, 2012.

     17,806        17,806   

Warrant Preferred shares, no par value; 9% cumulative. 890 issued and outstanding with liquidation value of $890 at March 31, 2013 and December 31, 2012.

     890        890   

Net discount on preferred shares

     (184     (232
  

 

 

   

 

 

 

Total preferred shares

     18,512        18,464   

Common stock, no par value. Authorized 10,000,000 shares; 3,274,405 shares issued and outstanding at March 31, 2013 and 3,274,305 shares issued and outstanding at December 31, 2012

     28,589        28,588   

Accumulated deficit

     (36,403     (36,319

Accumulated other comprehensive loss, net

     (586     (397
  

 

 

   

 

 

 

Total Shareholders’ Equity

     10,112        10,336   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 501,330      $ 510,715   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Community First, Inc.

Consolidated Statements of Operations and Comprehensive Income

Three Months Ended March 31, 2013 and 2012

(Unaudited)

(amounts in thousands, except share and per share data)

 

    

Three Months

Ended March 31,

 
     2013     2012  

Interest income

    

Loans, including fees

   $ 4,189      $ 5,796   

Taxable securities

     298        317   

Tax-exempt securities

     44        101   

Federal funds sold and other

     77        69   
  

 

 

   

 

 

 

Total interest income

     4,608        6,283   

Interest expense

    

Deposits

     911        1,399   

FHLB advances and federal funds purchased

     78        93   

Subordinated debentures and other

     251        425   
  

 

 

   

 

 

 

Total interest expense

     1,240        1,917   
  

 

 

   

 

 

 

Net interest income

     3,368        4,366   

Provision for loan losses

     300        —     
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     3,068        4,366   

Noninterest income

    

Service charges on deposit accounts

     384        394   

Gain on sale of loans

     30        42   

Gain on sale of branch

     —          1,468   

Other

     183        245   
  

 

 

   

 

 

 

Total noninterest income

     597        2,149   

Noninterest expense

    

Salaries and employee benefits

     1,652        1,902   

Regulatory and compliance

     294        382   

Occupancy

     266        340   

Furniture and equipment

     101        139   

Data processing fees

     263        315   

Advertising and public relations

     42        40   

Operational expense

     100        104   

Other real estate owned expense

     (26     697   

Other

     770        827   
  

 

 

   

 

 

 

Total noninterest expenses

     3,462        4,746   
  

 

 

   

 

 

 

Income before income tax expense

     203        1,769   

 

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Community First, Inc.

Consolidated Statements of Operations and Comprehensive Income

Three Months Ended March 31, 2013 and 2012

(Unaudited, Continued)

 

(amounts in thousands, except share and per share data)

 

     

Three Months

Ended March 31,

 
     2013     2012  

Income tax expense

     —          —     
  

 

 

   

 

 

 

Net income

     203        1,769   

Preferred stock dividends declared

     (239     (242

Accretion of preferred stock discount

     (48     (45
  

 

 

   

 

 

 

Net income (loss) allocated to common shareholders

   $ (84   $ 1,482   
  

 

 

   

 

 

 

Income (loss) per share allocated to common shareholders

    

Basic

   $ (0.03   $ 0.45   

Diluted

     (0.03     0.45   

Weighted average common shares outstanding

    

Basic

     3,274,394        3,273,908   

Diluted

     3,274,394        3,273,908   

Comprehensive Income

    

Net income

   $ 203      $ 1,769   

Unrealized losses on securities, net of income taxes of $0 in 2013 and $0 in 2012

     (189     (110
  

 

 

   

 

 

 

Comprehensive income

   $ 14      $ 1,659   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Community First, Inc.

Consolidated Statement of Changes in Shareholders’ Equity

Three Months Ended March 31, 2013

(Unaudited)

(amounts in thousands, except share and per share data)

 

     Common
Shares
     Preferred
Stock
     Common
Stock
     Accumulated
Deficit
    Accumulated
Other
Comprehensive
Loss, Net
    Total
Shareholders’
Equity
 

Balance at January 1, 2013

     3,274,305       $ 18,464       $ 28,588       $ (36,319   $ (397   $ 10,336   

Accretion of discount on preferred stock

     —           48         —           (48     —          —     

Sale of shares of common stock

     100         —           1         —          —          1   

Cash dividends declared on preferred stock

     —           —           —           (239     —          (239

Net income

     —           —           —           203        —          203   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Change in unrealized loss on securities available for sale, net of $0 income tax

                (189     (189
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at March 31, 2013

     3,274,405       $ 18,512       $ 28,589       $ (36,403   $ (586   $ 10,112   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Community First, Inc.

Consolidated Statements of Cash Flows

Three Months Ended March 31, 2013 and 2012

(Unaudited)

(amounts in thousands, except share and per share data )

 

     Three Months Ended
March 31,
 
     2013     2012  

Cash flows from operating activities

    

Net income

   $ 203      $ 1,769   

Adjustments to reconcile net income to net cash from operating activities

    

Depreciation

     158        206   

Amortization on securities, net

     107        166   

Core deposit intangible amortization

     34        53   

Provision for loan losses

     300        —     

Loans originated for sale

     (1,678     (1,627

Proceeds from sale of loans

     2,029        1,988   

Gain on sale of loans

     (30     (42

Decrease in accrued interest receivable

     83        153   

Increase in accrued interest payable

     213        338   

Increase in surrender value of bank owned life insurance

     (68     (72

Loss on disposal of fixed assets

     —          16   

Gain on sale of branch

     —          (1,468

Net write down (gain on sale) of other real estate owned

     (54     421   

Compensation expense under stock based compensation

     —          1   

Change in other liabilities

     (53     2,441   

Other, net

     478        2,857   
  

 

 

   

 

 

 

Net cash from operating activities

     1,722        7,200   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Available for sale securities

    

Purchases

     (13,852     (9,500

Maturities, prepayments, and calls:

    

Mortgage-backed securities

     2,480        1,916   

Other

     9,000        4,500   

Net decrease in loans

     12,844        22,534   

Proceeds from sales of other real estate owned

     1,594        3,206   

Decrease in time deposits in other financial institutions

     250        —     

Net cash paid in connection with sale of branch operations

     —          (25,700

Additions to premises and equipment

     (73     (175
  

 

 

   

 

 

 

Net cash from (used in) investing activities

     12,243        (3,219
  

 

 

   

 

 

 

 

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Community First, Inc.

Consolidated Statements of Cash Flows

Three Months Ended March 31, 2013 and 2012

(Unaudited, Continued)

 

(amounts in thousands, except share and per share data )

 

     Three Months Ended
March 31,
 
     2013     2012  

Cash flows from financing activities

    

Net decrease in deposits

     (9,613     (5,752

Proceeds from issuance of common stock

     1        1   
  

 

 

   

 

 

 

Net cash from (used in) financing activities

     (9,612     (5,751
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     4,353        (1,770

Cash and cash equivalents at beginning of period

     94,877        76,742   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 99,230      $ 74,972   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information

    

Cash paid during year for:

    

Interest

   $ 1,027      $ 1,513   

Supplemental noncash disclosures

    

Transfers from loans to repossessed assets

     1,020        3,359   

Preferred stock dividends declared but not paid

     239        242   

See accompanying notes to unaudited consolidated financial statements.

 

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COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

(amounts in thousands, except share and per share data)

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

The consolidated financial statements include Community First, Inc. and its wholly-owned subsidiary, Community First Bank & Trust. Community First, Inc., together with the Bank, is referred to herein as the “Company.” The sole subsidiary of Community First Bank & Trust is Community First Properties, Inc., which was originally established as a Real Estate Investment Trust (“REIT”) but which terminated its REIT election in the first quarter of 2012. Community First Bank & Trust together with its subsidiary is referred to herein as the “Bank.” Intercompany transactions and balances are eliminated in consolidation. On March 30, 2012, the Company dissolved two of the Bank’s previously existing subsidiaries, Community First Title, Inc. and CFBT Investments, Inc. The assets of these two subsidiaries were distributed to the Bank.

The Bank conducts substantially all of its banking activities in Maury, Williamson and Hickman Counties, in Tennessee. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flows from operations of businesses. The significant loan concentrations that exceed 10% of total loans are as follows: commercial real estate loans, 1-4 family residential loans, and construction loans. The customers’ ability to repay their loans is dependent, however, on the real estate and general economic conditions in the Company’s market areas. Other financial instruments, which potentially represent concentrations of credit risk, include deposit accounts in other financial institutions and federal funds sold.

On December 28, 2011, the Bank entered into a Purchase and Assumption Agreement with Southern Community Bank (“Southern Community”), pursuant to which the Bank agreed to sell certain of its loans and deposits of its Murfreesboro, Tennessee branch location to Southern Community. This transaction was completed on March 30, 2012. On September 17, 2012, the Bank entered into a Purchase and Assumption Agreement with First Citizens National Bank (“First Citizens”), pursuant to which the Bank agreed to sell certain of its assets and liabilities of its Franklin, Tennessee branch location to First Citizens. This transaction was completed on December 7, 2012. Additional information regarding these transactions is set forth in Note 3.

The unaudited consolidated financial statements as of March 31, 2013 and for the three-month periods ended March 31, 2013 and 2012 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (the “SEC”) and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary to present fairly the information. They do not include all the information and footnotes required by GAAP for complete financial statements. Operating results for interim periods are not necessarily indicative of the results that may be expected for the entire year. For further information, refer to the 2012 consolidated audited financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on March 15, 2013 (File No. 000-49966) (the “2012 Form 10-K”).

 

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COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION (Continued)

 

Critical Accounting Policies:

The consolidated financial statements in this report are prepared in conformity with GAAP and with general practices in the banking industry. As such, we are required to make certain estimates, judgments, and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. A summary of our significant accounting policies is described in our 2012 Form 10-K. The significant accounting policies and estimates which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

Allowance for Loan Losses: Credit risk is inherent in the business of extending loans to borrowers. This credit risk is addressed through a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.

A loan is identified as impaired when, based on current information and events, it is probable that the scheduled payments of principal or interest will not be collected when due according to the contractual terms of the loan agreement. However, there are some loans that are termed impaired because of doubt regarding collectability of interest and principal according to the contractual terms, which are both fully secured by collateral and are current in their interest and principal payments. Additionally, loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Commercial and commercial real estate loans over $100 are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

 

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COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION (Continued)

 

Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component of the allowance covers loans collectively evaluated for impairment and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent three years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following loan portfolio segments have been identified with a discussion of the risk characteristics of these portfolio segments:

Real Estate Construction loans consist of loans made for both residential and commercial construction and land development. Residential real estate construction loans are loans secured by real estate to build 1-4 family dwellings. These are loans made to borrowers obtaining loans in their personal name for the personal construction of their own dwellings, or loans to builders for the purpose of constructing homes for resale. These loans to builders can be for speculative homes for which there is no specific homeowner for which the home is being built, as well as loans to builders that have a pre-sale contract to another individual.

Commercial Construction loans are loans extended to borrowers secured by and to build commercial structures such as churches, retail strip centers, industrial warehouses or office buildings. Land development loans are granted to commercial borrowers to finance the improvement of real estate by adding infrastructure so that ensuing construction can take place. Construction and land development loans are generally short term in maturity to match the expected completion of a particular project. These loan types are generally more vulnerable to changes in economic conditions in that they project there will be a demand for the product. They require monitoring to ensure the project is progressing in a timely manner within the expected budgeted amount. This monitoring is accomplished via periodic physical inspections by an outside third party.

1-4 Family Residential loans consist of both open end and closed end loans secured by first or junior liens on 1-4 family improved residential dwellings. Open end loans are Home Equity Lines of Credit that allow the borrower to use equity in the real estate to borrow and repay as the need arises. First and junior lien residential real estate loans are closed end loans with a specific maturity that generally does not exceed 7 years. Economic conditions can affect the borrower’s ability to repay the loans and the value of the real estate securing the loans can change over the life of the loan.

Commercial Real Estate loans consist of loans secured by farmland or by improved commercial property. Farmland includes all land known to be used or usable for agricultural purposes, such as crop and livestock production, grazing, or pasture land. Improved commercial property can be owner occupied or non-owner occupied secured by commercial structures such as churches, retail strip centers, hotels, industrial warehouses or office buildings. The repayment of these loans tends to depend upon the operation and management of a business or lease income from a business, and therefore adverse economic conditions can affect the ability to repay.

 

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COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION (Continued)

 

Other Real Estate Secured loans consist of loans secured by five or more multi-family dwelling units. These loans are typically exemplified by apartment buildings or complexes. The ability to manage and rent units affects the income that usually provides repayment for this type of loan.

Commercial, Financial, and Agricultural loans consist of loans extended for the operation of a business or a farm. They are not secured by real estate. Commercial loans are used to provide working capital, acquire inventory, finance the carrying of receivables, purchase equipment or vehicles, or purchase other capital assets. Agricultural loans are typically for purposes such as planting crops, acquiring livestock, or purchasing farm equipment. The repayment of these loans comes from the cash flow of a business or farm and is generated by sales of inventory or providing of services. The collateral tends to depreciate over time and is difficult to monitor. Frequent statements are required from the borrower pertaining to inventory levels or receivables aging.

Consumer loans consist largely of loans extended to individuals for purposes such as to purchase a vehicle or other consumer goods. These loans are not secured by real estate but are frequently collateralized by the consumer items being acquired with the loan proceeds. This type of collateral tends to depreciate and therefore the term of the loan is tailored to fit the expected value of the collateral as it depreciates, along with specific underwriting policies and guidelines.

Tax Exempt loans consist of loans that are extended to entities such as municipalities. These loans tend to be dependent on the ability of the borrowing entity to continue to collect taxes to repay the indebtedness.

Other Loans consist of those loans which are not elsewhere classified in these categories and are not secured by real estate.

NOTE 2. REGULATORY MATTERS AND MANAGEMENT PLANS

Although the Company reported net income in 2012, the Company reported losses for each year from 2008 to 2011. The losses incurred by the Company were primarily the result of the economic recession that began in 2008 and the continued impacts of that recession and the resulting sluggish economic conditions. The Bank is a community bank that focuses heavily on commercial and residential development lending. As a result of the collapse of the housing market, many developments stalled, resulting in developers no longer being able to meet their payment obligations to the Bank. Also, during this time, market values for existing real estate properties decreased, which jeopardized the collateral securing the loans made by the Bank. The losses incurred by the Bank and the Company have contributed to both the Bank and the Company being subject to additional regulatory scrutiny and increased supervisory actions by regulators.

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet minimum capital requirements can initiate regulatory actions that could have a direct material effect on the financial statements.

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 2. REGULATORY MATTERS AND MANAGEMENT PLANS (Continued)

 

Prompt corrective action regulations classify banks into one of five capital categories depending on how well they meet their minimum capital requirements. Although these terms are not used to represent the overall financial condition of a bank, the classifications are: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. If adequately capitalized or worse, or subject to a written agreement, consent order, or cease and desist order requiring higher minimum capital levels as the Bank is, regulatory approval is required for the Bank to accept, renew or rollover brokered deposits. If a bank is classified as undercapitalized or worse, its capital distributions are restricted, as is asset growth and expansion, and capital restoration plans are required. At March 31, 2013, the Bank’s capital ratios were above those levels necessary to be considered “well capitalized” under the regulatory framework for prompt corrective action and all ratios, with the exception of Tier 1 to Average Assets, were above those levels required by the Consent Order (as defined below). The Company’s capital ratios are below what is required to be considered “adequately capitalized” under the regulatory framework.

On April 19, 2012, the Company entered into a written agreement (the “Written Agreement”) with the Federal Reserve Bank of Atlanta (the “FRB”). Under the terms of the Written Agreement, the Company agreed to, among other things, take the following actions:

 

   

Take appropriate steps to fully utilize the Company’s financial and managerial resources to serve as a source of strength to the Bank, including taking steps to ensure that the Bank complies with the Consent Order (as defined below);

 

   

Submit within 60 days of April 19, 2012 a written plan to maintain sufficient capital at the Company on a consolidated basis, and within 10 days of approval of the plan by the FRB, adopt the approved capital plan;

 

   

Submit within 60 days of April 19, 2012 a written statement of the Company’s planned sources and uses of cash for debt service, operating expenses, and other purposes for 2012;

 

   

Provide notice in compliance with applicable federal law and regulations, of any changes in directors or senior executive officer of the Company;

 

   

Comply with applicable federal law and regulations restricting indemnification and severance payments; and

 

   

Provide within 45 days after the end of each calendar quarter, a written progress report detailing the form and manner of all actions taken to secure compliance with the provisions of the Written Agreement.

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 2. REGULATORY MATTERS AND MANAGEMENT PLANS (Continued)

 

In addition, under the terms of the Written Agreement, the Company has agreed to, among other things:

 

   

Refrain from declaring or paying any dividends without prior approval of the FRB;

 

   

Not directly or indirectly take dividends or any other form of payment representing a reduction in capital from the Bank without prior approval;

 

   

Not (along with the Company’s nonbank subsidiary) make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without prior approval;

 

   

Not (along with the Company’s non-bank subsidiaries) directly or indirectly incur, increase, or guarantee any debt without prior approval; and

 

   

Not directly or indirectly purchase or redeem any shares of its stock without prior approval.

As of March 31, 2013, all of the plans required to be submitted to the FRB have been submitted and approved. Management believes that the Company is in full compliance with the requirements of the Written Agreement as of March 31, 2013.

At the request of the FRB, the board of directors of the Company, on January 18, 2011, adopted a board resolution agreeing that the Company would not incur additional debt, pay common or preferred dividends, or redeem treasury stock without approval from the FRB. The terms of the Written Agreement, which replaced the board resolution, among other things, similarly prohibit the Company from incurring debt, paying dividends or interest or redeeming shares of its capital stock. The Company requested permission to make dividend payments on its outstanding preferred stock (the “Preferred Stock”) and interest payments on its subordinated debt that were scheduled for the first quarter of 2011. The FRB granted permission to pay the preferred dividends that were due on February 15, 2011, but denied permission to make interest payments on the Company’s subordinated debt. As a result of the FRB’s decision, the Company was required to begin the deferral of interest payments on each of its three subordinated debentures during the first quarter of 2011.

The Company has the right to defer the payment of interest on its subordinated debentures at any time, for a period not to exceed 20 consecutive quarters. During the period in which it is deferring the payment of interest on its subordinated debentures, the Company may not pay any dividends on its common or preferred stock and the Company’s subsidiaries may not pay dividends on the subsidiaries’ common or preferred stock owned by entities other than the Company and its subsidiaries. Accordingly, the Company was required to suspend dividend payments on the Preferred Stock beginning in the second quarter of 2011.

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 2. REGULATORY MATTERS AND MANAGEMENT PLANS (Continued)

 

Consequently, at March 31, 2013, the Company had $3,128 of interest accrued on its subordinated debentures for which payment is being deferred. In addition, the Company had accumulated $2,061 in deferred dividends on the shares of Preferred Stock it had sold to the United States Department of the Treasury (the “U.S. Treasury”) under the TARP Capital Purchase Program (the “CPP”). Under the terms of the CPP, failure to pay dividends for six dividend periods triggers the U.S. Treasury’s right to elect two directors to an institution’s board. Since the Company has deferred payment of dividends on its Preferred Stock for more than six quarters, the U.S. Treasury now has the right to elect up to two directors to the Company’s board of directors.

Similarly, the sole subsidiary of the Bank, Community First Properties, Inc., also suspended the payment of dividends on its preferred stock beginning with the dividend payment due on December 31, 2011. At March 31, 2013, Community First Properties, Inc. had $23 of preferred stock dividends accrued for which payment is being deferred.

On September 20, 2011, the Bank consented to the issuance of a consent order (the “Consent Order”) by the Federal Deposit Insurance Corporation (the “FDIC”). The Consent Order requires the Bank to attain and achieve regulatory capital ratios higher than those required by regulatory standards, improve, among other things, its processes for identifying and classifying problem loans, and improve its overall profitability. The Consent Order required the Bank to formulate written plans detailing how the Bank would achieve such requirements. As of December 31, 2012, the Bank has prepared and submitted all of the required plans to the FDIC and the FDIC has approved those plans as written. In addition, the terms of the Consent Order require the Bank to provide quarterly progress reports to the FDIC. On March 14, 2013, the Bank entered into a written agreement with the Tennessee Department of Financial Institutions (the “Department”), the terms of which are substantially the same as those of the Consent Order, including as to required minimum levels of capital that the Bank must maintain.

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 2. REGULATORY MATTERS AND MANAGEMENT PLANS (Continued)

 

As a result of entering into the Consent Order, the Bank also is subject to additional limitations on its operations including a prohibition on accepting, rolling over, or renewing brokered deposits, which could adversely affect the Bank’s liquidity and/or operating results. The existence of the Consent Order also limits the Bank from paying deposit rates above national rate caps published weekly by the FDIC unless the Bank is determined to be operating in a high-rate market area. On December 1, 2011, the Bank received notification from the FDIC that it is operating in a high-rate environment, which allows the Bank to pay rates higher than the national rate caps, but continues to limit the Bank to rates that do not exceed the prevailing rate in the Bank’s market by more than 75 basis points. The Bank is also limited, as a result of its condition, in its ability to pay more than de minimis severance payments to its employees and must receive the consent of the FDIC and the Department to appoint new officers or directors.

The Consent Order includes time frames to implement the foregoing and on-going compliance requirements for the Bank, such as quarterly progress reports to its regulators. At March 31, 2013, the Bank’s regulatory capital ratios, with the exception of Tier 1 to Average Assets, met the minimum regulatory capital ratios proscribed by the Consent Order. In accordance with the terms of the Consent Order, management has prepared and submitted a capital plan with the objective of attaining the capital ratios required by the Consent Order. In addition to the capital ratios, the Bank is also not compliant with the portion of the Consent Order requiring reductions in loan concentrations. Management submitted a written plan to the FDIC to bring the Bank into compliance with the loan concentration component of the Consent Order, and that plan was approved by the FDIC.

The Company’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net income, combined with the retained net income of the preceding two years, subject to the capital requirements described above. As a result of its losses in 2011, the Bank is prohibited under applicable Tennessee law from declaring dividends without prior approval from the Department. The terms of the Consent Order with the FDIC and the written agreement with the Department also prohibit the Bank from paying dividends to the Company without prior approval from the FDIC and the Department. The Company is also restricted in the types and amounts of dividends that can be paid because of its participation in the CPP and by the terms of the Written Agreement, which prohibits the Company from paying interest or dividends (including interest on the Company’s subordinated debentures and dividends on the Company’s Preferred Stock) without the FRB’s prior approval.

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 2. REGULATORY MATTERS AND MANAGEMENT PLANS (Continued)

 

Bank holding companies and banks are subject to various regulatory capital requirements administered by State and Federal banking agencies. The Company’s and the Bank’s capital amounts and ratios at March 31, 2013 and December 31, 2012, were as follows:

 

     Actual     For Capital
Adequacy
Purposes
    To Be Well
Capitalized Under
Applicable

Regulatory
Provisions
    Required by
terms of
Consent Order with
FDIC
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio     Amount      Ratio  

March 31, 2013

                    

Total Capital to risk weighted assets

                    

Community First Bank & Trust

   $ 39,260         13.40   $ 23,431         8.00   $ 29,289         10.00   $ 35,146         12.00

Consolidated

     23,339         7.97     23,433         8.00     29,291         10.00     N/A         N/A   

Tier 1 Capital to risk weighted assets

                    

Community First Bank & Trust

   $ 35,521         12.13   $ 11,715         4.00   $ 17,573         6.00   $ 29,289         10.00

Consolidated

     13,066         4.46     11,716         4.00     17,575         6.00     N/A         N/A   

Tier 1 Capital to average assets

                    

Community First Bank & Trust

   $ 35,521         7.10   $ 20,008         4.00   $ 25,010         5.00   $ 42,517         8.50

Consolidated

     13,066         2.60     20,085         4.00     N/A         N/A        N/A         N/A   

December 31, 2012

                    

Total Capital to risk weighted assets

                    

Community First Bank & Trust

   $ 39,038         12.65   $ 24,684         8.00   $ 30,854         10.00   $ 37,025         12.00

Consolidated

     23,551         7.62     24,734         8.00     30,918         10.00     N/A         N/A   

Tier 1 Capital to risk weighted assets

                    

Community First Bank & Trust

   $ 35,108         11.38   $ 12,342         4.00   $ 18,513         6.00   $ 30,854         10.00

Consolidated

     13,076         4.23     12,367         4.00     18,551         6.00     N/A         N/A   

Tier 1 Capital to average assets

                    

Community First Bank & Trust

   $ 35,108         6.46   $ 21,741         4.00   $ 27,176         5.00   $ 46,199         8.50

Consolidated

     13,076         2.40     21,811         4.00     N/A         N/A        N/A         N/A   

The sales of the Bank’s Murfreesboro, Tennessee branch location, on March 30, 2012, and Franklin, Tennessee branch location, on December 7, 2012, resulted in gains of $1,466 and $2,601, respectively. These gains contributed to the improvement in the Bank’s capital in 2012. However, despite the improvement, the Bank’s Tier 1 to Average Assets ratio as of March 31, 2013 was below what the Bank agreed to achieve under the terms of the Consent Order. Based on March 31, 2013 levels of average assets and risk-weighted assets, the required amount of additional Tier 1 capital necessary to meet the requirements of the Consent Order was approximately $7,000. The Bank’s capital ratios at March 31, 2013 were above those levels necessary to be considered “well capitalized” under the regulatory framework for prompt corrective action. The existence of the Consent Order requires regulators to continue to classify the Bank as “adequately capitalized” even though the capital levels would qualify as “well capitalized” if the Consent Order were not in place.

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 2. REGULATORY MATTERS AND MANAGEMENT PLANS (Continued)

 

The Company’s capital levels at March 31, 2013 were below those required to be considered “adequately capitalized” under applicable regulations.

Management’s Plans

The Company is currently considering the options available to increase capital levels at the Company and the Bank, including the sale of common or preferred stock of the Company or other assets, or alternatively the sale of the Company. Because the Company does not have cash available to contribute to the Bank in an amount sufficient to enable the Bank to achieve the capital levels it committed to maintain in the Consent Order, the Company will continue to seek additional alternatives to raise capital in order to assist the Bank in meeting its required capital levels under the Consent Order and the Company in meeting its required capital levels under the Written Agreement. Any sale of the Company’s common stock would likely be at a price that would result in substantial dilution in ownership for the Company’s existing common shareholders and could result in a change in control of the Company. If a change in control was deemed to have occurred, certain IRS regulations related to the preservation of net operating loss carryforwards could subject the Company to risk of forfeiture of these tax benefits. The loss of these tax benefits would not cause the Company to recognize a direct reduction in cash, but rather would eliminate the tax benefits that the Company would otherwise be able to utilize to offset future year’s profits, if any, to reduce the Company’s tax liabilities. Continued failure by the Bank or the Company to comply with the terms of the Consent Order, the Written Agreement or the written agreement that the Bank has entered into with the Department, as applicable, may result in additional adverse regulatory action.

NOTE 3—BRANCH DIVESTITURES

In an effort to comply with the capital requirements set forth in the Consent Order described in Note 2, in 2012 the Bank sold two of its branches that were located on the outer limits of its geographic footprint and return focus to the Bank’s core markets. The branch sales improved the Bank’s capital ratios and concentration levels, both of which are specific requirements of the Consent Order.

The following paragraphs outline certain of the terms of these branch divestitures.

On March 30, 2012, the Bank and Southern Community closed the sale of certain assets and liabilities relative to the Bank’s Murfreesboro, Tennessee branch location. The Bank sold approximately $7,102 in loans and $34,446 in deposits to Southern Community. Southern Community also acquired the fixed assets and assumed the lease on the branch building. The transaction resulted in a net gain of $1,466 based on a 4% deposit premium.

On December 7, 2012, the Bank and First Citizens closed the sale of certain assets, including the real property on which the branch is located, and liabilities relative to the Bank’s Franklin, Tennessee branch location. The Bank sold approximately $19,584 in loans and $54,565 in deposits to First Citizens. The transaction resulted in a net gain of $2,601 based on a 4% deposit premium.

The Company does not currently have plans to sell any additional branches.

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 4—SECURITIES AVAILABLE FOR SALE

The following table summarizes the amortized cost and fair value of the available for sale securities portfolio at March 31, 2013 and December 31, 2012 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss), net of applicable income taxes:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

March 31, 2013

          

U.S. Government sponsored entities

   $ 35,602       $ 20       $ (74   $ 35,548   

Mortgage-backed (residential)

     29,089         979         (11     30,057   

State and municipal

     5,473         189         —          5,662   

Corporate

     1,000         —           (11     989   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 71,164       $ 1,188       $ (96   $ 72,256   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2012

          

U.S. Government sponsored entities

   $ 30,750       $ 17       $ (49   $ 30,718   

Mortgage-backed (residential)

     31,673         1,105         —          32,778   

State and municipal

     5,477         220         —          5,697   

Corporate

     1,000         —           (13     987   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 68,900       $ 1,342       $ (62   $ 70,180   
  

 

 

    

 

 

    

 

 

   

 

 

 

There were no sales of securities during the three month periods ended March 31, 2013 and 2012.

The amortized cost and fair value of the securities portfolio are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage backed securities are presented separately due to varying maturity dates as a result of prepayments.

 

     March 31, 2013  
     Amortized Cost      Fair Value  

Due in one year or less

   $ 970       $ 972   

Due after one through five years

     10,343         10,398   

Due after five through ten years

     26,350         26,402   

Due after ten years

     4,412         4,427   

Mortgage backed (residential)

     29,089         30,057   
  

 

 

    

 

 

 

Total

   $ 71,164       $ 72,256   
  

 

 

    

 

 

 

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 4—SECURITIES AVAILABLE FOR SALE (Continued)

 

At March 31, 2013 and December 31, 2012, respectively, securities totaling $52,574 and $49,272 were pledged to secure public deposits and repurchase agreements.

At March 31, 2013 and December 31, 2012, the Company held no securities for which the aggregate face amount of investments is greater than 10% of shareholders’ equity as of March 31, 2013 and December 31, 2013.

The following table summarizes securities with unrealized losses at March 31, 2013 and December 31, 2012 aggregated by major security type and length of time in a continuous unrealized loss position:

 

     Less than 12 Months     12 Months or More     Total  

March 31, 2013

  

 

   

 

   

 

 

Description of Securities

   Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 

U.S. Government sponsored entities

   $ 21,661       $ (74   $       $      $ 21,661       $ (74

Mortgage backed (residential)

     1,608         (11     —           —          1,608         (11

Corporate

     —           —          989         (11     989         (11
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired

   $ 23,269       $ (85   $ 989       $ (11   $ 24,258       $ (96
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     Less than 12 Months     12 Months or More     Total  

December 31, 2012

                  

Description of Securities

   Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
    Fair
Value
     Unrealized
Loss
 

U.S. Government sponsored entities

   $ 13,701       $ (49   $       $      $ 13,701       $ (49

Corporate

     —           —          987         (13     987         (13
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired

   $ 13,701       $ (49   $ 987       $ (13   $ 14,688       $ (62
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 4—SECURITIES AVAILABLE FOR SALE (Continued)

 

During the second quarter of 2013, the Company sold securities with a face value of $3,477 and realized a gain of $182.

Other-Than-Temporary Impairment

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Securities classified as available for sale are generally evaluated for OTTI under the provisions of ASC 320-10, Investments—Debt and Equity Securities. In determining OTTI, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.

As of March 31, 2013, the Company’s securities portfolio consisted of 103 securities, 28 of which were in an unrealized loss position. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2013.

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 4—SECURITIES AVAILABLE FOR SALE (Continued)

 

The table below presents a rollforward for the three months ended March 31, 2013 and 2012 of the credit losses recognized in earnings:

 

     Three months ended
March 31,
 
     2013      2012  

Beginning Balance

   $ 6,338       $ 6,338   

Additions for credit losses on securities for which no previous other-than-temporary impairment was recognized

     —           —     
  

 

 

    

 

 

 

Ending Balance

   $ 6,338       $ 6,338   
  

 

 

    

 

 

 

NOTE 5—FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on matrix pricing which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities’ relationship to other benchmark quoted securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using estimates of current market rates for each type of security. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 5—FAIR VALUE (Continued)

 

Loans Held for Sale in Secondary Market: Generally, the fair value of loans held for sale is based on what secondary markets are currently offering for loans with similar characteristics or based on an agreed upon sales price with third party investors and typically result in a Level 2 classification of the inputs for determining fair value.

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Other Real Estate Owned: Real estate acquired through foreclosure on a loan or by surrender of the real estate in lieu of foreclosure is called “OREO”. OREO is initially recorded at the fair value of the property less estimated costs to sell, which establishes a new cost basis. OREO is subsequently accounted for at the lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Valuation adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Valuation adjustments are also required when the listing price to sell an OREO has had to be reduced below the current carrying value. If there is a decrease in the fair value of the property from the last valuation, the decrease in value is charged to noninterest expense. All income produced from, changes in fair values in, and gains and losses on OREOs is also included in noninterest expense. During the time the property is held, all related operating and maintenance costs are expensed as incurred.

Appraisals for both collateral dependent impaired loans and OREO are performed by certified general appraisers, certified residential appraisers or state licensed appraisers whose qualifications and licenses are annually reviewed and verified by the Bank. Once received, either Bank personnel or an independent review appraiser reviews the assumptions and approaches utilized in the appraisal, as well as the overall resulting fair value, and determine whether the appraisal is reasonable. Appraisals for collateral dependent impaired loans and OREO are updated annually. On an annual basis, the Company compares the actual selling costs of collateral that has been liquidated to the selling price to determine what additional adjustment should be made to the appraisal value to arrive at fair value. Beginning in the third quarter of 2010, the Company’s analysis indicated that an additional discount of 15% should be applied to properties with appraisals performed within 12 months.

Mortgage Banking Derivatives: Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market are accounted for as free standing derivatives. Fair values of these mortgage derivatives are estimated based on the anticipated gain from the sale of the underlying loan. Changes in the fair values of these derivatives are included in noninterest income as gain on sale of loans.

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 5—FAIR VALUE (Continued)

 

Assets and Liabilities Measured on a Recurring Basis

 

            Fair Value Measurements at
March 31, 2013 using
 
     Carrying Value     

Significant Other
Observable
Inputs

(Level 2)

     Significant
Unobservable
Inputs (Level 3)
 

Assets:

        

Available for sale securities:

        

U.S. government sponsored entities

   $ 35,548       $ 35,548       $ —     

Mortgage-backed (residential)

     30,057         30,057         —     

State and municipal

     5,662         5,554         108   

Corporate

     989         —           989   
  

 

 

    

 

 

    

 

 

 

Total available for sale securities

     72,256         71,159         1,097   

Loans held for sale, in secondary market

     595         595         —     

 

            Fair Value Measurements at
December 31, 2012 using
 
     Carrying Value     

Significant Other
Observable
Inputs

(Level 2)

     Significant
Unobservable
Inputs (Level 3)
 

Assets:

        

Available for sale securities:

        

U.S. government sponsored entities

   $ 30,718       $ 30,718       $ —     

Mortgage-backed (residential)

     32,778         32,778         —     

State and municipal

     5,697         5,589         108   

Corporate

     987         —           987   
  

 

 

    

 

 

    

 

 

 

Total available for sale securities

     70,180         69,085         1,095   

Loans held for sale, in secondary market

     921         921         —     

There were no transfers among fair value pricing levels during the three months ended March 31, 2013 and 2012.

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 5—FAIR VALUE (Continued)

 

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three month periods ended March 31, 2013 and 2012:

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

Corporate Securities

 

    

Three months ended

March 31,

 
     2013      2012  

Beginning balance

   $ 987       $ 968   

Change in fair value

     2         9   
     

 

 

 

Ending balance

   $ 989       $ 977   
  

 

 

    

 

 

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

State and County Municipal Securities

 

    

Three months ended

March 31,

 
     2013      2012  

Beginning balance

   $ 108       $ 4,427   

Change in fair value

             40   
     

 

 

 

Ending balance

   $ 108       $ 4,467   
  

 

 

    

 

 

 

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 5—FAIR VALUE (Continued)

 

The following methods and assumptions were used by the Company in generating its fair value disclosures:

U.S. Government Sponsored Entities and Mortgage-Backed Securities:

The Company uses an independent third party to value its U.S. government sponsored entities and mortgage-backed securities, which are obligations that are not backed by the full faith and credit of the United States government and consist of Government Sponsored Entities that either issue the securities or guarantee the collection of principal and interest payments thereon. The third party’s valuation approach uses relevant information generated by recently executed transactions that have occurred in the market place that involve similar assets, as well as using cash flow information when necessary. These inputs are observable, either directly or indirectly in the market place for similar assets. The Company considers these valuations to be Level 2 pricing; however, when the securities are added to the portfolio after the third party’s system-wide market value monthly update, the valuations are considered Level 3 pricing.

State and Municipal Securities:

The valuation of the Company’s state and municipal securities is supported by analysis prepared by an independent third party. Their approach to determining fair value involves using recently executed transactions for similar securities and market quotations for similar securities. For these securities that are rated by the rating agencies and have recent trades, the Company considers these valuations to be Level 2 pricing. For these securities that are not rated by the rating agencies and for which trading volumes are thin, the valuations are considered Level 3 pricing.

Corporate Securities:

For corporate securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows (Level 3) as determined by an independent third party. The significant unobservable inputs used in the valuation model include discount rates and yields or current spreads to U.S. Treasury rates.

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 5—FAIR VALUE (Continued)

 

Assets and Liabilities Measured on a Non-Recurring Basis

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

 

     March 31, 2013  
     Carrying Value      Fair Value
Measurements
using other
significant
unobservable
inputs (Level 3)
 

Assets:

     

Impaired loans:

     

Real estate construction

   $ 6,261       $ 6,261   

1-4 Family residential

     5,214         5,214   

Commercial real estate

     1,667         1,667   

Commercial, financial and agricultural

     483         483   

Other loans

     1,253         1,253   
  

 

 

    

 

 

 

Total impaired loans

     14,878         14,878   

Other real estate owned:

     

Construction and development

     2,911         2,911   

1-4 Family residential

     461         461   

Non-farm, non-residential

     2,363         2,363   
  

 

 

    

 

 

 

Total other real estate owned

     5,735         5,735   

 

- 28 -


Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 5—FAIR VALUE (Continued)

 

 

     December 31, 2012  
     Carrying Value      Fair Value
Measurements
using other
significant
unobservable
inputs (Level 3)
 

Assets:

     

Impaired loans:

     

Real estate construction

   $ 8,953       $ 8,953   

1-4 Family residential

     3,194         3,194   

Commercial real estate

     2,102         2,102   

Commercial, financial and agricultural

     25         25   
  

 

 

    

 

 

 

Total impaired loans

     14,274         14,274   

Other real estate owned:

     

Construction and development

     2,949         2,949   

1-4 Family residential

     1,066         1,066   

Non-farm, non-residential

     2,363         2,363   
  

 

 

    

 

 

 

Total other real estate owned

     6,378         6,378   

Impaired loans, with specific allocations or partial charge offs based on the fair value of the underlying collateral for collateral dependent loans, had a recorded investment of $18,059, with a valuation allowance of $3,181, resulting in an additional provision for loan losses of $262 for the three month period ended March 31, 2013, compared to an additional provision of $0 in the first three months of 2012. Impaired loans, with specific allocations or partial charge offs based on the fair value of the underlying collateral for collateral dependent loans, had a recorded investment of $15,840, with a valuation allowance of $1,566, resulting in an additional provision for loan losses of $1,306 for the year ended December 31, 2012.

Other real estate owned, measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $5,735, which is made up of the outstanding balance of $7,341, net of a valuation allowance of $1,606 at March 31, 2013, resulting in a write-down of $16 charged to expense in the three months ended March 31, 2013, compared to a write-down of $304 charged to expense in the first three months of 2012. Net carrying amount was $6,378 at December 31, 2012, which was made up of the outstanding balance of $8,010, net of a valuation allowance of $1,632.

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 5—FAIR VALUE (Continued)

 

The following table presents quantitative information about Level 3 fair value measurements for financial instruments at fair value on a non-recurring basis at March 31, 2013:

 

     Fair
Value
    

Valuation
Technique(s)

  

Unobservable Input(s)

   Range (Weighted
Average) (1)

Impaired Loans:

           

Real estate construction

   $ 6,261       Sales comparison approach    Adjustment for differences between the comparable sales    (0.0%) - (21.0%)

(8.9%)

1-4 Family residential

     5,214       Sales comparison approach    Adjustment for differences between the comparable sales    (0.0%) - (0.0%)

(0.0%)

Commercial real estate

     1,667       Sales comparison approach    Adjustment for differences between the comparable sales    (9.0%) - (9.0%)

(9.0%)

Commercial, financial and agricultural

     483       Sales comparison approach    Adjustment for differences between the comparable sales    (0.0%) - (0.0%)

(0.0%)

Other loans

     1,253       Sales comparison approach    Adjustment for differences between the comparable sales    (10.0%) – (17.0%)

(11.4%)

Other real estate owned:

           

Construction and development

     2,911       Sales comparison approach    Adjustment for differences between the comparable sales    (0.0%) - (22.0%)

(3.4%)

1-4 Family residential

     461       Sales comparison approach    Adjustment for differences between the comparable sales    (7.5%) - (10.0%)

(8.9%)

Non-farm, non-residential

     2,363       Sales comparison approach    Adjustment for differences between the comparable sales    (0.0%) - (0.0%)

(0.0%)

 

(1) The range presented in the table reflects the discounts applied by the independent appraiser in arriving at their conclusion of market value. Management applies an additional 15% discount to the appraiser’s conclusion of market value to arrive at fair value.

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 5—FAIR VALUE (Continued)

 

Carrying amount and estimated fair values of significant financial instruments at March 31, 2013 and December 31, 2012 were as follows:

 

     March 31, 2013  
     Carrying
Amount
     Total      Level 1      Level 2      Level 3  

Financial assets

              

Cash and cash equivalents

   $ 99,230       $ 99,230       $ 99,230       $ —         $ —     

Time deposits in other financial institutions

     750         751         —           751         —     

Securities available for sale

     72,256         72,256         —           71,159         1,097   

Loans held for sale in secondary market, at fair value

     595         595         —           595         —     

Loans, net of allowance

     282,955         283,833         —           —           283,833   

Restricted equity securities

     1,727         NA         NA         NA         NA   

Accrued interest receivable

     1,294         1,294         12         271         1,011   

Financial liabilities

              

Deposits with stated maturities

     279,919         279,919         —           279,919         —     

Deposits without stated maturity

     159,414         159,414         159,414         —           —     

Accrued interest payable

     3,841         3,841         6         707         3,128   

Repurchase agreements

     7,000         7,023         —           —           7,023   

Federal Home Loan Bank advances

     13,000         13,033         —           13,033         —     

Subordinated debentures

     23,000         12,000         —           —           12,000   
     December 31, 2012  
     Carrying
Amount
     Total      Level 1      Level 2      Level 3  

Financial assets

              

Cash and cash equivalents

   $ 94,877       $ 94,877       $ 94,877       $ —         $ —     

Time deposits in other financial institutions

     1,000         1,000         —           1,000         —     

Securities available for sale

     70,180         70,180         —           69,085         1,095   

Loans held for sale in secondary market, at fair value

     921         921         —           921         —     

Loans, net of allowance

     297,114         299,039         —           —           299,039   

Restricted equity securities

     1,727         NA         NA         NA         NA   

Accrued interest receivable

     1,377         1,377         8         255         1,114   

Financial liabilities

              

Deposits with stated maturities

     280,024         280,422         —           280,422         —     

Deposits without stated maturity

     168,922         168,922         168,922         —           —     

Accrued interest payable

     3,628         3,628         3         692         2,933   

Repurchase agreements

     7,000         7,046         —           —           7,046   

Federal Home Loan Bank advances

     13,000         13,096         —           13,096         —     

Subordinated debentures

     23,000         12,500         —           —           12,500   

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 5—FAIR VALUE (Continued)

 

Carrying amount is the estimated fair value for cash and cash equivalents, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully resulting in a Level 1 classification. Fair value for accrued interest receivable and payable is based on the contractual terms of the facility, resulting in a Level 1, Level 2 or Level 3 classification based on the classification of the respective facility. The method for determining fair values of securities is discussed above. Restricted equity securities do not have readily determinable fair values due to their restrictions on transferability, therefore no fair value is presented. For fixed rate loans and variable rate loans with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk resulting in a Level 3 classification. For fixed and variable rate deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk resulting in a Level 2 classification. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values resulting in a Level 3 classification. Fair value of loans held for sale is based on market quotes resulting in a Level 2 classification. Fair value of FHLB advances is based on discounted cash flows using current rates for similar financing resulting in a Level 2 classification. Fair value of subordinated debentures is based on discounted cash flows using current rates for similar financing resulting in a Level 3 classification. The fair value of off-balance-sheet items is not considered material.

NOTE 6—LOANS

Loans outstanding by category at March 31, 2013 and December 31, 2012 were as follows:

 

     March 31,
2013
     December 31,
2012
 

Real estate construction:

     

Residential construction

   $ 8,487       $ 9,485   

Other construction

     26,215         27,163   

1-4 Family residential:

     

Revolving, open ended

     25,136         25,111   

First liens

     83,674         84,555   

Junior liens

     3,063         3,268   

Commercial real estate:

     

Farmland

     7,905         7,670   

Owner occupied

     39,686         39,541   

Non-owner occupied

     59,049         68,381   

Other real estate secured loans

     5,663         5,726   

Commercial, financial and agricultural:

     

Agricultural

     838         928   

Commercial and industrial

     25,647         26,980   

Consumer

     5,434         5,707   

Tax exempt

     72         72   

Other

     2,118         2,294   
  

 

 

    

 

 

 
   $ 292,987       $ 306,881   
  

 

 

    

 

 

 

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 6—LOANS (Continued)

 

The following tables present activity in allowance for loan losses and the outstanding loan balance by portfolio segment and based on impairment method as of March 31, 2013 and 2012. The balances for “recorded investment” in the following tables related to credit quality do not include approximately $1,011, $1,485and $1,114 in accrued interest receivable at March 31, 2013, March 31, 2012 and December 31, 2012, respectively. Accrued interest receivable is a component of the Company’s recorded investment in loans.

 

     Real Estate
Construction
    1-4 Family
Residential
    Commercial
Real Estate
    Other
Real
Estate
Secured
Loans
    Commercial,
Financial
and
Agricultural
    Consumer     Tax
Exempt
     Other
Loans
    Unallocated     Total  

Three months ended March 31, 2013

                     

Activity in the allowance for loan losses:

                     

Beginning Balance

   $ 1,938      $ 4,133      $ 1,514      $ 226      $ 994      $ 14      $ —         $ 368      $ 580      $ 9,767   

Charge-offs

     —          (55     —          —          (96     (3     —           (9     —          (163

Recoveries

     3        56        8        —          51        5        —           6        —          129   

Provision

     (136     283        (64     (26     9        (2     —           238        (2     300   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total ending allowance balance

   $ 1,805      $ 4,417      $ 1,458      $ 200      $ 958      $ 14      $ —         $ 603      $ 578      $ 10,033   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Three months ended March 31, 2012

                     

Activity in the allowance for loan losses:

                     

Beginning Balance

   $ 4,809      $ 5,564      $ 3,505      $ 244      $ 1,394      $ 84      $ —         $ 3,337      $ 609      $ 19,546   

Charge-offs

     (36     (429     (211     —          (95     (25     —           —          —          (796

Recoveries

     7        7        —          —          21        10        —           —          —          45   

Provision

     (431     556        (272     33        98        —          —           —          16        —     

Transfers due to completed branch sale

     2        15        —          —          1        —          —           —          —          18   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total ending allowance balance

   $ 4,351      $ 5,713      $ 3,022      $ 277      $ 1,419      $ 69      $ —         $ 3,337      $ 625      $ 18,813   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

- 33 -


Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 6—LOANS (Continued)

 

     Real Estate
Construction
     1-4 Family
Residential
     Commercial
Real Estate
     Other
Real
Estate
Secured
Loans
     Commercial,
Financial
and
Agricultural
     Consumer      Tax
Exempt
     Other
Loans
     Unallocated      Total  

Ending allowance balance attributable to loans at March 31, 2013:

                             

Individually evaluated for impairment

   $ 951       $ 969       $ 338       $ 69       $ 348       $ —         $ —         $ 600       $ —         $ 3,275   

Collectively evaluated for Impairment

     854         3,448         1,120         131         610         14         —           3         578         6,758   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 1,805       $ 4,417       $ 1,458       $ 200       $ 958       $ 14       $ —         $ 603       $ 578       $ 10,033   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending allowance balance attributable to loans at December 31, 2012:

                             

Individually evaluated for impairment

   $ 951       $ 593       $ 318       $ 70       $ 12       $ —         $ —         $ 363       $ —         $ 2,307   

Collectively evaluated for Impairment

     987         3,540         1,196         156         982         14         —           5         580         7,460   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 1,938       $ 4,133       $ 1,514       $ 226       $ 994       $ 14       $ —         $ 368       $ 580       $ 9,767   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans at March 31, 2013:

                             

Individually evaluated for impairment

   $ 14,478       $ 8,835       $ 5,381       $ 2,319       $ 837       $ —         $ —         $ 1,853          $ 33,703   

Collectively evaluated for impairment

     20,224         103,038         101,259         3,344         25,648         5,434         72         265            259,284   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total loans balance

   $ 34,702       $ 111,873       $ 106,640       $ 5,663       $ 26,485       $ 5,434       $ 72       $ 2,118          $ 292,987   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Loans at December 31, 2012:

                             

Individually evaluated for impairment

   $ 15,358       $ 6,689       $ 6,943       $ 2,330       $ 382       $ —         $ —         $ 1,853          $ 33,555   

Collectively evaluated for impairment

     21,290         106,245         108,649         3,396         27,526         5,707         72         441            273,326   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total loans balance

   $ 36,648       $ 112,934       $ 115,592       $ 5,726       $ 27,908       $ 5,707       $ 72       $ 2,294          $ 306,881   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

 

- 34 -


Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 6—LOANS (Continued)

 

Loans individually evaluated for impairment by class of loans as of and for the three months ended March 31, 2013:

    
     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance
for Loan
Losses
Allocated
     Average
Recorded
Investment
     Income
Recognized
    Cash Basis
Income
Recognized
 

With no related allowance recorded:

                

Real estate construction:

                

Residential construction

   $ 714       $ 714       $ —         $ 1,265       $ 8      $ 8   

Other construction

     6,551         6,551         —           8,101         —          —     

1-4 Family residential:

                

Revolving, open ended

     40         40         —           20         —          —     

First liens

     2,059         2,059         —           2,252         12        11   

Junior liens

     67         67         —           71         1        1   

Commercial real estate:

                

Owner occupied

     1,096         1,096         —           1,097         12        14   

Non-owner occupied

     2,121         2,121         —           2,057         32        32   

Other real estate loans

     125         125         —           126         —          —     

Commercial, financial and agricultural:

                

Commercial and industrial

     6         6         —           176         —          —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total with no related allowance recorded

     12,779         12,779         —           15,165         65        66   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

With an allowance recorded:

                

Real estate construction:

                

Residential construction

     3,124         3,124         397         3,003         11        11   

Other construction

     6,044         4,089         554         2,550         13        13   

1-4 Family residential:

                

Revolving, open ended

     575         575         575         575         1        1   

First Liens

     6,010         6,010         392         4,672         37        27   

Junior Liens

     84         84         2         174         1        1   

Commercial real estate:

                

Owner occupied

     2,015         2,015         283         1,869         35        38   

Non-owner occupied

     148         149         55         1,141         3        3   

Other real estate loans

     2,194         2,194         69         2,199         35        36   

Commercial, financial and agricultural:

                

Commercial and industrial

     831         831         348         434         (25     —     

Other loans

     6,227         1,853         600         1,854         —          —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total with an allocated allowance recorded

     27,252         20,924         3,275         18,471         111        130   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 40,031       $ 33,703       $ 3,275       $ 33,636       $ 176      $ 196   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 6—LOANS (Continued)

 

Loans individually evaluated for impairment by class of loans as of and for the three months ended March 31, 2012:

    
     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance
for Loan
Losses
Allocated
     Average
Recorded
Investment
     Income
Recognized
    Cash Basis
Income
Recognized
 

With no related allowance recorded:

                

Real estate construction:

                

Residential construction

   $ 8,079       $ 4,600       $ —         $ 4,717       $ —        $ —     

Other construction

     10,747         9,779         —           8,453         —          —     

1-4 Family residential:

                

Revolving, open ended

     —           —           —           —           —          —     

First liens

     3,935         3,492         —           5,071         15        35   

Junior liens

     —           —           —           —           —          —     

Commercial real estate:

                

Farmland

     485         234         —           234         —          —     

Owner occupied

     1,097         1,097         —           549         12        11   

Non-owner occupied

     2,343         2,343         —           1,262         35        34   

Other real estate secured loans

                

Commercial, financial and agricultural:

                

Commercial and industrial

     141         141         —           141         —          —     

Consumer

     55         55         —           28         1        1   

Other loans

     —           —           —           734         —          —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total with no related allowance recorded

     26,882         21,741         —           21,189         63        81   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

With an allowance recorded:

                

Real estate construction:

                

Residential construction

     1,258         1,143         55         923         6        7   

Other construction

     5,525         5,525         2,206         4,879         (19     —     

1-4 Family residential:

                

Revolving, open ended

     1,172         1,171         471         596         (12     —     

First Liens

     1,643         1,643         407         2,324         21        22   

Junior Liens

     109         109         109         268         1        2   

Commercial real estate:

                

Farmland

     —           —           —           —           —          —     

Owner occupied

     792         792         359         1,039         2        6   

Non-owner occupied

     3,603         3,603         1,400         4,690         13        34   

Other real estate secured loans

     2,223         2,223         73         2,226         34        35   

Commercial, financial and agricultural:

                

Commercial and industrial

     231         231         65         186         (1     —     

Consumer

     120         121         58         145         1        2   

Other loans

     7,696         7,696         3,335         6,963         —          —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total with an allocated allowance recorded

     24,372         24,257         8,538         24,239         46        108   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 51,254       $ 45,998       $ 8,538       $ 45,428       $ 109      $ 189   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

- 36 -


Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 6—LOANS (Continued)

 

Loans individually evaluated for impairment by class of loans as of and for the year ended December 31, 2012:

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Allowance
for Loan
Losses
Allocated
     Average
Recorded
Investment
     Income
Recognized
    Cash Basis
Income
Recognized
 

With no related allowance recorded:

                

Real estate construction:

                

Residential construction

   $ 3,208       $ 1,816       $ —         $ 2,650       $ 35      $ 35   

Other construction

     11,604         9,649         —           9,334         4        8   

1-4 Family residential:

                

Revolving, open ended

     —           —           —           —           —          —     

First liens

     2,446         2,444         —           3,943         81        80   

Junior liens

     74         74         —           15         47        47   

Commercial real estate:

                

Farmland

     —           —           —           187         —          —     

Owner occupied

     1,097         1,097         —           1,017         50        48   

Non-owner occupied

     1,992         1,992         —           3,519         766        835   

Other real estate loans

     126         126         —           32         30        37   

Commercial, financial and agricultural:

                

Commercial and industrial

     345         345         —           125         26        25   

Consumer

     —           —           —           11         —          —     

Other Loans

     —           —           —           914         —          —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total with no related allowance recorded

     20,892         17,543         —           21,747         1,039        1,115   

With an allowance recorded:

                

Real estate construction:

                

Residential construction

     2,883         2,882         552         2,691         55        67   

Other construction

     1,011         1,011         399         3,883         42        43   

1-4 Family residential:

                

Revolving, open ended

     575         575         121         608         (2     3   

First Liens

     3,333         3,333         288         3,118         157        184   

Junior Liens

     263         263         184         213         16        16   

Commercial real estate:

                

Farmland

     —           —           —           —           —          —     

Owner occupied

     1,722         1,722         287         1,105         149        143   

Non-owner occupied

     2,132         2,132         30         6,130         131        132   

Other real estate loans

     2,204         2,204         70         2,217         143        143   

Commercial, financial and agricultural:

                

Commercial and industrial

     37         37         12         172         1        1   

Consumer

     —           —           —           62         —          —     

Other loans

     6,227         1,853         364         3,775         —          —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total with an allocated allowance recorded

     20,387         16,012         2,307         23,974         692        732   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 41,279       $ 33,555       $ 2,307       $ 45,721       $ 1,731      $ 1,847   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

- 37 -


Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 6—LOANS (Continued)

 

Troubled Debt Restructurings

The Company has $28,616 of loans with allocated specific reserves of $1,990 to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2013 compared to $28,451 with allocated specific reserves of $1,596 at December 31, 2012. The Company lost $47 and $54 of interest income in the first three months of 2013 and 2012, respectively, that would have been recorded in interest income if the specific loans had not been restructured. The Bank had commitments to lend up to $119 and $0 of additional funds to loans classified as troubled debt restructurings at March 31, 2013, and December 31, 2012, respectively.

During the first three months of 2013, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or granting of amortization terms for balloon notes that are longer than the Bank’s typical practice.

Modifications involving a reduction of the stated interest rate and extension of the maturity date of the loan were for periods ranging from six months to two years.

Loans classified as troubled debt restructurings are included in impaired loans.

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 6—LOANS (Continued)

 

The following table presents loans by class modified as troubled debt restructurings that occurred during the first three months of 2013 and 2012:

 

March 31, 2013    Number of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
 

1-4 Family residential

        

First liens

     3         5,501         5,501   

Commercial real estate:

        

Owner occupied

     1         162         162   
  

 

 

    

 

 

    

 

 

 

Total

     4       $ 5,663       $ 5,663   
  

 

 

    

 

 

    

 

 

 

March 31, 2012

        

Real estate construction:

        

Residential construction

     1       $ 1,097       $ 1,097   

Commercial real estate:

        

Owner occupied

     1         737         737   
  

 

 

    

 

 

    

 

 

 

Total

     2       $ 1,834       $ 1,834   
  

 

 

    

 

 

    

 

 

 

Troubled debt restructurings described above had an outstanding balance of $5,663 at March 31, 2013 and increased the allowance for loan losses by $38 during the first three months of 2013. Troubled debt restructurings still accruing interest totaled $14,440 and $9,038 at March 31, 2013 and December 31, 2012, respectively.

A loan is considered to be in payment default once it is more than 90 days contractually past due under the modified terms. There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the first three months of 2013 or 2012.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without modification. This evaluation is performed in accordance with the Company’s internal loan policy. Nonperforming loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 6—LOANS (Continued)

 

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still accruing by class of loans as of March 31, 2013 and December 31, 2012:

 

     March 31, 2013      December 31, 2012  
     Nonaccrual      Loans past due
over 90 days still
accruing
     Nonaccrual      Loans past due
over 90 days still
accruing
 

Real estate construction:

           

Residential construction

   $ 3,124       $ —         $ 3,976       $ —     

Other construction

     10,489         —           10,507         —     

1-4 Family residential:

           

Revolving, open ended

     616         —           616         —     

First Liens

     1,660         —           4,396         —     

Junior Liens

     67         —           74         —     

Commercial real estate:

           

Farmland

     —           —           1,304         —     

Owner occupied

     581         —           54         —     

Non-owner occupied

     —           —           1,775         —     

Other real estate loans

     125         —           126         —     

Commercial, financial and agricultural:

           

Agricultural

     —           —           —           —     

Commercial and industrial

     5,160         —           282         —     

Consumer

     19         —           12         —     

Other loans

     1,853         —           1,853         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23,694       $ —         $ 24,975       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

- 40 -


Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

March 31, 2013

(Unaudited)

 

NOTE 6—LOANS (Continued)

 

The following table presents the aging of the recorded investment in past due loans, including nonaccrual loans as of March 31, 2013 and December 31, 2012 by class of loans:

 

March 31, 2013    30 – 59
Days
Past Due
     60 – 89
Days
Past Due
     Greater than
90 Days Past
Due
     Total Past
Due
     Loans
Not Past
Due
     Total  

Real estate construction:

                 

Residential construction

   $ 78       $ —         $ —         $ 78       $ 8,409       $ 8,487   

Other construction

     937         —           1,340         2,277         23,938         26,215   

1-4 Family residential:

                 

Revolving, open ended

     650         152         616         1,418         23,718         25,136   

First Liens

     921         499         954         2,374         81,300         83,674   

Junior Liens

     19         —           —           19         3,044         3,063   

Commercial real estate:

                 

Farmland

     —           —           —           —           7,905         7,905   

Owner occupied

     475         —           581         1,056         38,630         39,686   

Non-owner occupied

     149         359         —           508         58,541         59,049   

Other real estate secured loans

     —           —           —           —           5,663         5,663   

Commercial, financial and agricultural:

                 

Agricultural

     —           —           —           —           838         838   

Commercial and industrial

     12         492         5,149         5,653         19,994         25,647   

Consumer

     16         —           19         35         5,399         5,434   

Tax exempt

     —           —           —           —           72         72   

Other loans

     36         —           1,854         1,890         228         2,118   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,293       $ 1,502       $ 10,513       $ 15,308       $ 277,679       $ 292,987   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2012    30 – 59
Days
Past Due
     60 – 89
Days
Past Due
     Greater than
90 Days Past
Due
     Total Past
Due
     Loans
Not Past
Due
     Total  

Real estate construction:

                 

Residential construction

   $ —         $ —         $ 825       $ 825       $ 8,660       $ 9,485   

Other construction

     86         12         1,359         1,457         25,706         27,163   

1-4 Family residential:

                 

Revolving, open ended

     695         57         616         1,368         23,743         25,111   

First Liens

     1,490         121         3,685         5,296         79,259         84,555   

Junior Liens

     86         —           —           86         3,182         3,268   

Commercial real estate:

                 

Farmland

     —           —           1,311         1,311         6,359         7,670   

Owner occupied

     769         324         54         1,147         38,394         39,541   

Non-owner occupied

     361         370         1,775         2,506         65,875         68,381   

Other real estate secured loans

     —           —           —           —           5,726         5,726   

Commercial, financial and agricultural:

                 

Agricultural

     3         —           —           3         925         928   

Commercial and industrial

     5,258         —           245         5,503         21,477         26,980   

Consumer

     55         23         1,865         1,943         3,764         5,707   

Tax exempt

     —           —           —           —           72         72   

Other loans

     23         14         —           37         2,257