Community First, Inc.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


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

For the fiscal year ended December 31, 2007


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT FOR THE TRANSITION PERIOD

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 S. James Campbell Blvd. Columbia, Tennessee		38401

(Address of principal executive offices)		(Zip Code)

(931) 380-2265

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b)of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, no par value
(Title of Class)

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark whether the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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 the definitions of “large accelerated filer ,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
	(Do not check if a 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 o No þ

The aggregate market value of the Registrant’s outstanding Common Stock held by nonaffiliates of the Registrant on June 30, 2007 was approximately $79,626,540. There were 3,180,496 shares of Common Stock outstanding on March 17, 2008.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive Proxy Statement for its 2008 Annual Meeting of Shareholders, currently scheduled to be held on April 29, 2008, are incorporated by reference into Part III of this Annual Report on Form 10-K.

SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS

Certain of the statements made herein, including information incorporated herein by reference to other documents, are “forward-looking statements” within the meaning and subject to the protections of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “point to,” “project,” “could,” “intend,” “target,” and other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation those described under Item 1A, “Risk Factors”, in this document and the following:

	•		the effects of future economic or business conditions nationally and in our local market;

	•		our potential growth, including our entrance or expansion into new markets, and the need for sufficient capital to support that growth;

	•		governmental monetary and fiscal policies, as well as legislative and regulatory changes, including changes in banking, securities and tax laws and regulations;

	•		the risks of changes in interest rates on the levels, composition and costs of deposits, loan demand, and the values of loan collateral, securities, and interest sensitive assets and liabilities;

	•		credit risks of borrowers;

	•		the effects of competition from a wide variety of local, regional, national and other providers of financial, investment, and insurance services;

	•		the failure of assumptions underlying the establishment of reserves for possible loan losses and other estimates;

	•		changes in accounting policies, rules and practices;

	•		changes in technology or products that may be more difficult, or costly, or less effective, than anticipated;

	•		risks associated with the successful integration of the Company and First National, including the risk that cost savings and any revenue synergies from the acquisition may not be realized or may take longer than anticipated and the risk of potential disruption associated with the acquisition with respect to customers, suppliers or employee relationships;

	•		the effects of war or other conflict, acts of terrorism or other catastrophic events that may affect general economic conditions; and

•

other circumstances, many of which may be beyond our control.

All written or oral forward-looking statements that are made by or are attributable to us are expressly qualified in their entirety by this cautionary notice. We have no obligation and do not undertake to update, revise or correct any of the forward-looking statements after the date of this report, or after the respective dates on which such statements otherwise are made.

PART I

ITEM 1. BUSINESS

(Dollar amounts in thousands, except per share data)

General

Community First, Inc., (the “Company”) is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and became so upon the acquisition of all the voting shares of Community First Bank & Trust (the “Bank”) on August 30, 2002. An application for the bank holding company was approved by the Federal Reserve Bank of Atlanta (the “FRB”) on August 6, 2002. The Company was incorporated under the laws of the State of Tennessee as a Tennessee corporation on April 9, 2002.

The Bank commenced business on May 18, 1999, as a Tennessee-chartered commercial bank whose deposits are insured by the Federal Deposit Insurance Corporation’s (the “FDIC”) Bank Insurance Fund (the “BIF”). The Bank is regulated by the Tennessee Department of Financial Institutions (the “Department”) and the FDIC. The Bank’s sole subsidiary is Community First Title, Inc., a Tennessee chartered and regulated title insurance company. CFBT Investments, Inc., a Nevada corporation, is a wholly-owned subsidiary of Community First Title, Inc., and is the parent of Community First Properties, Inc., a Maryland corporation, which was established as a real estate investment trust pursuant to Internal Revenue Service regulations. The Bank’s principal business is to accept demand and saving deposits from the general public and to make residential mortgage, commercial, and consumer loans.

The Company completed its acquisition of 100% of the outstanding shares of common stock of The First National Bank of Centerville, a national banking association (“First National”) on October 26, 2007 pursuant to the terms of an Agreement and Plan of Reorganization and Share Exchange, dated as of August 1, 2007, by and between the Company and First National. First National operated under a National Bank Charter and provides full banking services. As a national Bank, First National was subject regulation by the Office of the comptroller of the currency and the FDIC. On January 31, 2008, First National was merged with and into the Bank, with the Bank continuing as the surviving entity.

The Company conducts banking activities from the main office and three branch offices in Columbia, Tennessee, one branch office in Mount Pleasant, Tennessee, one branch office in Franklin, Tennessee, one branch office in Murfreesboro, Tennessee, one branch office in Centerville, Tennessee and one branch office in Lyles, Tennessee. The Company also operates eleven automated teller machines in Maury County, two automated teller machines in Williamson County, one automated teller machine in Rutherford County, Tennessee and two automated teller machines in Hickman County, Tennessee.

The Company’s assets consist primarily of its investment in the Bank. Its primary activities are conducted through the Bank. At December 31, 2007, the Company’s consolidated total assets were $636,062, its consolidated net loans, including loans held for sale, were $490,232, its total deposits were $559,303, and its

total shareholders’ equity was $37,173. At December 31, 2006, consolidated total assets were $421,393, consolidated net loans, including loans held for sale, were $348,695, total deposits were $366,766, and total shareholders’ equity was $30,657. At December 31, 2005, consolidated total assets were $328,806, consolidated net loans, including loans held for sale, were $258,040, total deposits were $286,243, and total shareholders’ equity was $24,017.

Loans

We make secured loans and unsecured loans to individuals, partnerships, corporations, and other business entities within the Middle Tennessee area. Our loan portfolio consists of commercial, financial and agricultural loans, residential and commercial mortgage loans, and consumer loans. Our legal lending limits under applicable regulations (based upon the legal lending limits of 25% of capital and surplus) are currently $9,293.

Commercial loans are made primarily to small- and medium-sized businesses. These loans are secured and unsecured and are made available for general operating inventory and accounts receivables as well as any other purposes considered appropriate. We will generally look to a borrower’s business operations as the principal source of repayment, but will also receive, when appropriate, a security interest in personal property and/or personal guarantees. In addition, the majority of commercial loans that are not mortgage loans are secured by a lien on equipment, inventory, and/or other assets of the commercial borrower.

Commercial lending (including commercial real estate lending) involves more risk than residential real estate lending because loan balances are greater and repayment is dependent up on the borrower’s operations. We attempt to minimize the risks associated with these transactions by generally limiting our exposure to owner-operated properties of customers with an established profitable history. In many cases, risk can be further reduced by limiting the amount of credit to any one borrower to an amount less than our legal lending limit and avoiding types of commercial real estate financing considered risky.

We originate residential mortgage loans with either fixed or variable interest rates. Our general policy is to sell most fixed rate loans in the secondary market. This policy is subject to review by management and may be revised as a result of changing market and economic conditions and other factors. We do not retain servicing rights with respect to secondary market residential mortgage loans that we originate. Typically, all of our residential real estate loans are secured by a first lien on the real estate. Also, we offer home equity loans, which are secured by prior liens on the subject residence.

We make personal loans and lines of credit available to consumers for various purposes, such as the purchase of automobiles, boats and other recreational vehicles, and the making of home improvements and personal investments. All such loans are retained by us.

Consumer loans generally have shorter terms and higher interest rates than residential mortgage loans and usually involve more credit risk than mortgage loans because of the type and nature of the collateral. Consumer lending collections are dependent on a borrower’s continuing financial stability and are thus likely to be adversely affected by job loss, illness, or personal bankruptcy. In many cases, repossessed collateral for a defaulted consumer loan will not provide an adequate source of repayment of the outstanding loan balance because of depreciation of the underlying collateral. We underwrite our loans carefully, with a strong emphasis on the amount of the down payment, credit quality and history, employment stability, and monthly income. These loans are generally expected to be repaid on a monthly repayment schedule with the payment amount tied to the borrower’s periodic income. We believe that the generally higher yields earned on consumer loans help compensate for the increased credit risk associated with such loans and that consumer loans are important to our efforts to serve the credit needs of our customer base.

Although we take a progressive and competitive approach to lending, we stress high quality in our loans. We are subject to written loan policies that contain general lending guidelines and are subject to periodic review and revision by our board of directors’ Loan Policy Committee. These policies concern loan administration, documentation, approval, and reporting requirements for various types of loans.

Lending Policies of the Company

While the ultimate authority to approve loans rests with the Board of Directors (the “Directors”) of the Company, lending authority is delegated by the Directors to the loan officers and loan committee. Loan officers, each of whom is limited as to the amount of secured and unsecured loans that he or she can make to a single borrower or related group of borrowers, report to the Chief Lending Officer, Roger Stewart. Marc Lively, President and Chief Executive Officer, chairs the loan committee. The Chief Credit Officer, Carl Campbell, serves as Vice Chairman of the loan committee. Lending limits of individual officers are documented in the Company’s Loan Policy and Procedures and are approved by the Directors. Loan officers discuss with the Senior Lending Officer or Chief Credit Officer any loan request that exceeds their individual lending limit. The loan must have the approval from the Senior Lending Officer, Chief Credit Officer or the loan committee as required by Loan Policy and Procedures. The President and Chief Executive Officer, Marc R. Lively, Chief Credit Officer, Carl Campbell, and the Senior Lending Officer, Roger Stewart, have lending authority on secured and unsecured loans up to $500,000.

Our policies provide written guidelines for lending activities and are reviewed at least annually by the Company’s directors. The directors recognize that, from time to time, it is in the best interests of the Company to deviate from the established, written credit policy and have established guidelines for granting exceptions to the policy. Situations in which such exceptions might be granted include the waiving of requirements for independent audited financial statements when a comfort level with respect to the financial statements of the borrower can be otherwise obtained and when it is deemed desirable to meet the terms offered by a competitor.

We seek to maintain a diversified loan portfolio, including secured and unsecured consumer loans, secured loans to individuals for business purposes, secured commercial loans, secured agricultural production loans, and secured real estate loans. Our primary trade area lies in the counties of Middle Tennessee, with the primary focus in Maury, Williamson, Hickman and Rutherford counties. The loan committee must approve all out-of-trade area loans.

As a general rule, we seek to maintain loan-to-collateral value ratios in conformity with industry and regulatory guidelines. The following standards, established by inter-agency guidelines by the federal bank regulators, including the FDIC, went into effect on March 19, 1993:


	Maximum Allowable
Loan Category	Loan-to-Value Ratio

Land		65	%
Land development		75	%
Construction
Commercial, multifamily (1) and other nonresidential		80	%
1-4 family residential		85	%
Improved property		85	%
Owner-occupied 1-4 family and home equity (2)		85	%


(1)		Multifamily construction includes condominiums and cooperatives.

(2)		A loan-to-value limit has not been established for permanent mortgage or home equity loans or owner-occupied, 1-4 family residential property. However, for any such loan with a loan-to-value ratio that


		equals or exceeds 90% at origination, appropriate credit enhancement in the form of either mortgage insurance or readily marketable collateral is required. Home equity lines of credit (HELOC) loan-to-value may be up to 100% of the collateral appraisal value.

Loan Review and Nonperforming Assets

We have an internal loan review system to determine deficiencies and corrective action to be taken. Loans are graded as follows:

Class 1: High. Loans in this category are to persons or entities of unquestioned financial strength and a highly liquid financial position, with collateral that is liquid and well-margined. These borrowers have performed without question on past obligations, and we expect their performance to continue. Internally generated cash flow covers current maturities of long-term debt by a substantial margin. Loans secured by Bank certificates of deposit and savings accounts, with appropriate holds placed on the accounts, are to be rated in this category.

Class 2: Good. These loans are to persons or entities with strong financial condition and above-average liquidity who have previously satisfactorily handled their obligations with us. Collateral securing the Bank’s debt is margined in accordance with policy guidelines. Internally generated cash flow covers current maturities of long-term debt more than adequately. Unsecured loans to individuals supported by strong financial statements and on which repayment is satisfactory may be included in this classification.

Class 3: Acceptable. Loans to persons or entities with an average financial condition, adequate collateral margins, adequate cash flow to service long-term debt, and net worth comprised mainly of fixed assets are included in this category. These entities are minimally profitable now, with projections indicating continued profitability into the foreseeable future. Closely held corporations or businesses where a majority of the profits are withdrawn by the owners or paid in dividends are included in this rating category. Overall, these loans are basically sound.

Class 4: Watch. These loans are characterized by borrowers who have marginal cash flow, marginal profitability, or have experienced an unprofitable year and a declining financial condition. The borrower has in the past satisfactorily handled debts with us, but in recent months has either been late, delinquent in making payments, or made sporadic payments. While we continue to be adequately secured, margins have decreased or are decreasing, despite the borrower’s continued satisfactory condition. Other characteristics of borrowers in this class include inadequate credit information, weakness of financial statement and repayment capacity, and collateral that appears to limit exposure. This classification includes loans to established borrowers that are reasonably margined by collateral but where potential for improvement in financial condition appears limited.

Class 5: Other Loans Especially Mentioned (OLEM). Loans in this category have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deteriorating prospects for the asset or in the Bank’s credit position at some future date. OLEMs are not adversely classified and do not expose the Bank to sufficient risk to warrant adverse classification. We does not use an OLEM classification as a compromise between a loan rated 4 or higher and “substandard”.

Class 6: Substandard. A loan classified as “substandard” is inadequately protected by the sound worth and paying capacity of the borrower or the collateral pledged. Loss potential, while existing in the aggregate amount of the substandard loan, does not have to exist in individual assets.

Class 7: Doubtful. A loan classified as “doubtful” has all the weaknesses inherent in a loan classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. These are poor quality loans in which neither the collateral, if any, nor the financial condition of the borrower presently ensure collectibility in full in a reasonable period of time; in fact, there is permanent impairment in the collateral securing our loan. These loans are in a work-out status and have a defined work-out strategy.

Class 8: Loss. Loans classified as “loss” are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. We take the losses in the period in which they become uncollectible.

Loans graded “4”, “5”, “6”, “7”, or “8” are referred to management for inclusion on our “watch list”. Loans graded “4” and “5” are not considered adversely classified.

Nonperforming loans are placed on the non-accrual basis of accounting if: (i) there is deterioration in the financial condition of the borrower; (ii) payment in full of principal or interest is not expected; or (iii) principal or interest has been in default for 90 days or more, unless the obligation is well secured and in the process of collection. The three categories of nonperforming loans are non-accrual status loans, renegotiated debt, and loans in Chapter 13 bankruptcy unless a repayment schedule is adopted that pays out the loan.

Asset/Liability Management

A committee composed of officers and directors of the Company is responsible for managing the assets and liabilities. The chairperson of the committee is Chief Financial Officer Dianne Scroggins. The committee attempts to manage asset growth, liquidity and capital in order to maximize income and reduce interest rate risk. The committee directs our overall acquisition and allocation of funds. The committee reviews and discusses our assets and liability funds budget in relation to the actual flow of funds. The committee also reviews and discusses peer group comparisons; the ratio of the amount of rate-sensitive assets to the amount of rate-sensitive liabilities; the ratio of allowance for loan losses to outstanding and nonperforming loans; and other variables, such as expected loan demand, investment opportunities, core deposit growth within specific categories, regulatory changes, monetary policy adjustments, and the overall state of the local and national economies.

Investment Policy

Our investment portfolio policy is designed to provide guidelines by which the funds not otherwise needed to meet loan demand of our market area can best be invested to meet fluctuations in the loan demand and deposit structure. The Chief Financial Officer, Dianne Scroggins, also serves as its Investment Officer. We seek to balance the market and credit risk against the potential investment return, make investments compatible with the pledging requirements of our deposits of public funds, maintain compliance with regulatory investment requirements, and assist the various local public entities with their financing needs. Our investment policy is reviewed annually by the Investment Committee, chaired by Director Randy Maxwell, and by the Board of Directors.

Customers

In the opinion of management, there is no single customer or affiliated group of customers whose deposits, if withdrawn, would have a material adverse effect on our business. As of December 31, 2007, we had a total of 206 ending relationships that represent exposure to us of at least $500,000. We believe that the loss of one of

these relationships or an affiliated group of relationships, while significant, would not materially impact the performance of the Company.

Competition and Seasonality

The banking business is highly competitive. Our primary market area consists of Maury, Williamson, Hickman, and Rutherford counties in Tennessee. We compete with numerous commercial banks and savings institutions with offices in the market area. In addition to these competitors, we compete for loans with insurance companies, regulated small loan companies, credit unions, and certain government agencies. We also compete with numerous companies and financial institutions engaged in similar lines of business, such as mortgage banking companies, brokerage companies, investment banking firms and lending companies. These competitors have up to $1.18 billion in deposits in the Maury county market area, up to $4.83 billion in deposits in the Williamson county market area, up to $2.71 billion in the Rutherford County and up to $185 million in the Hickman county market as reported by the FDIC as of June 30, 2007. At December 31, 2007, the Bank had deposits of approximately $559 million. The Company does not experience significant seasonal trends in its operations.

Employees

As of December 31, 2007, the Company had 151 employees, which included 38 new employees from First National. The Company plans to continue to hire additional employees to meet growth demands. Neither the Company nor any of its subsidiaries is a party to any collective bargaining agreement, and the Company believes that its employee relations are in good standing.

Supervision and Regulation

General

As a registered bank holding company, Tennessee-chartered, federally insured commercial bank and a national chartered bank, the Company, Bank and First National are subject to extensive regulation. Lending activities and other investments must comply with various statutory and regulatory requirements, including prescribed minimum capital standards. The Bank is regularly examined by the FDIC and the Tennessee Department of Financial Institutions (“Department”) and file periodic reports concerning its activities and financial condition with its regulators. The Bank’s relationships with depositors and borrowers are also regulated to a great extent by both federal law and the laws of the State of Tennessee, especially in such matters as the ownership of accounts and the form and content of mortgage documents.

First National operates under a National Bank Charter and is subject to regulations by the Office of the comptroller of the Currency (“OCC”) and FDIC.

Federal and state banking laws and regulations govern all areas of the operation of the Company and its bank subsidiaries, including reserves, loans, mortgages, capital, issuance of securities, payment of dividends, and establishment of branches. Federal and state bank regulatory agencies also have the general authority to limit the dividends paid by insured banks if such payments should be deemed to constitute an unsafe and unsound practice. Both the Department, FDIC and the OCC have the authority to impose penalties, initiate civil and administrative actions and take other steps intended to prevent banks from engaging in unsafe or unsound practices.

The following summaries of statutes and regulations affecting banks do not purport to be complete. Such summaries are qualified in their entirety by reference to the statutes and regulations described.

Bank Holding Company Act of 1956

The Company is a bank holding company registered under the provisions of the federal Bank Holding Company Act of 1956, as amended (the “BHC Act”), and consequently is subject to examination by the Board of Governors of the Federal Reserve System (the “FRS”).

A bank holding company is required to file, with the Federal Reserve Bank of Atlanta (the “FRB”), annual reports and other information regarding its business operations and those of its subsidiaries. It is also subject to examination by the FRB and is required to obtain FRB approval prior to acquiring, directly or indirectly, ownership or control of any voting shares of any bank, if, after such acquisition, it would own or control, directly or indirectly, more than 5% of the voting stock of such bank unless it already owns a majority of the voting stock of such bank. Furthermore, a bank holding company is, with limited exceptions, prohibited from acquiring direct or indirect ownership or control of any voting stock of any company which is not a bank or a bank holding company, and must engage only in the business of banking or managing or controlling banks or furnishing services to or performing services for its subsidiary banks. One of the exceptions to this prohibition is the ownership of shares of a company, the activities of which the Federal Reserve Board has determined to be so closely related to banking or management or controlling banks as to be properly incident thereto.

A bank holding company and its subsidiaries are also prohibited from engaging in certain tying arrangements in connection with the extension of credit or provision of any property or service. Thus, an affiliate of a bank holding company may not extend credit, lease, sell property, or furnish any services or fix or vary the consideration for these on the condition that (i) the customer must obtain or provide some additional credit, property, or services from or to the bank holding company or subsidiaries thereof or (ii) the customer may not obtain some other credit, property, or services from a competitor, except to the extent reasonable conditions are imposed to assure the soundness of the credit extended. The FRB has adopted significant amendments to its anti-tying rules that: (1) removed FRB-imposed anti-tying restrictions on bank holding companies and their non-bank subsidiaries; (2) allow banks greater flexibility to package products with their affiliates; and (3) establish a safe harbor from the tying restrictions for certain foreign transactions. These amendments were designed to enhance competition in banking and non-banking products and to allow banks and their affiliates to provide more efficient, lower cost service to their customers.

In approving acquisitions by bank holding companies of banks and companies engaged in banking-related activities, the FRB considers a number of factors, including expected benefits to the public such as greater convenience, increased competition, or gains in efficiency, as weighed against the risks of possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices. The FRB is also empowered to differentiate between new activities and activities commenced through the acquisition of a going concern.

The Change in Bank Control Act of 1978, as amended, requires a person (or group of persons acting in concert) acquiring “control” of a bank holding company to provided the FRB with 60 days’ prior written notice of the proposed acquisition. Following receipt of this notice, the FRB has 60 days within which to issue a notice disapproving the proposed acquisition, but the FRB may extend this time period for up to another 30 days. An acquisition may be completed before expiration of the disapproval period if the FRB issues written notice of its intent not to disapprove the transaction. In addition, any “company” must obtain the FRB’s approval before acquiring 25% (5% if the “company” is a bank holding company) or more of the outstanding shares or otherwise obtaining control over the company.

The Attorney General of the United States may, within 15 days after approval by the FRB of an acquisition, bring an action challenging such acquisition under the federal antitrust laws, in which case the effectiveness of such approval is stayed pending a final ruling by the courts. Failure of the Attorney General to challenge

an acquisition does not, however, exempt the holding company from complying with both state and federal antitrust laws after the acquisition is consummated or immunize the acquisition from future challenge under the anti-monopolization provisions of the Sherman Act.

Bank holding companies are not permitted to engage in “unsafe and unsound” banking practices. The FRS’s Regulation Y, for example, generally requires a bank holding company to give the FRS prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with consideration paid for any repurchases or redemptions in the preceding year, is equal to 10% or more of the bank holding company’s consolidated net worth. The FRS may oppose the transaction if it believes that the transaction would constitute an unsafe and unsound practice or would violate any law or regulation. Depending upon the circumstances, the FRS could take the position that paying a dividend would constitute an unsafe and unsound banking practice.

The FRS has broad authority to prohibit activities of bank holding companies and their non-bank subsidiaries which represent unsafe and unsound banking practices or which constitute knowing or reckless violations of laws or regulations, if those activities caused a substantial loss to a depository institution. These penalties can be as high as one million dollars for each day the activity continues.

Securities Registration and Reporting

The Common Stock of the Company is registered as a class with the SEC under the1934 Act and thus is subject to the periodic reporting and proxy solicitation requirements and the insider-trading restrictions of the Act. In addition, the securities issued by the Company are subject to the registration requirements of the 1933 Act and applicable state securities laws unless exemptions are available. The periodic reports, proxy statements, and other information filed by the Company with the SEC are available at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company is an electronic filer with the SEC and the Company’s filings may also be obtained free of charge at the SEC website (http://www.sec.gov) and on the Company’s website (http://www.cfbk.com).

Tennessee Supervision and Regulation

As a Tennessee-chartered commercial bank, the Bank is subject to various state laws and regulations which limit the amount that can be loaned to a single borrower, the type of permissible investments, and geographic expansion, among other things. The Bank must submit an application and receive the approval of the Department before opening a new branch office or merging with another financial institution. The Commissioner of the Department has the authority to enforce state laws and regulations by ordering a director, officer or employee of the Bank to cease and desist from violating a law or regulation and from engaging in unsafe or unsound banking practices. The Bank will be required to file annual reports and such other additional information as Tennessee law requires.

Tennessee law contains limitations on the interest rates that may be charged on various types of loans and restrictions on the nature and amount of loans that may be granted and on the type of investments which may be made. The operations of banks are also affected by various consumer laws and regulations, including those relating to equal credit opportunity and regulation of consumer lending practices. All Tennessee banks, including the Bank, must become and remain insured under the Federal Deposit Insurance Act.

The Company is a legal entity separate and distinct from the Bank. The principal source of the Company’s revenues however, is from dividends declared by the Bank. Under Tennessee law, the Bank can only pay dividends in an amount equal to or less than the total amount of its net income for that year combined with retained net income of the preceding two (2) years. Payment of dividends in excess of this amount requires

prior approval by the commissioner of the Department. The Bank’s ability to pay dividends also may depend on its ability to meet minimum capital levels established from time to time by the FDIC. Under such regulations, FDIC-insured state banks are prohibited from paying dividends, making other distributions or paying any management fee to a parent if, after such payment, the bank would fail to have a risk-based Tier 1 capital ratio of 4%, a risk-based total capital ratio of 8% and a Tier 1 leverage capital ratio of 4%.

Under Tennessee law, the Company may pay common stock dividends if, after giving effect to the dividends, the Company can pay its debts as they become due in the ordinary course of business and the Company’s total assets exceed its total liabilities. The payment of dividends by the Company also may be affected or limited by certain factors, such as the requirements to maintain adequate capital above regulatory guidelines. In addition, if, in the opinion of the applicable regulatory authority, a bank holding company or a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), such authority may take various supervisory actions to prevent such action, including a cease and desist order prohibiting such practice. See “Dividends.”

State banks are subject to regulation by the Department with regard to capital requirements. Tennessee has adopted the provisions of FRS Regulation O with respect to restrictions on loans and other extensions of credit to bank “insiders.” Further, under Tennessee law, state banks are prohibited from lending to any one person, firm or corporation amounts more than fifteen percent (15%) of its equity capital accounts, except (i) in the case of certain loans secured by negotiable title documents covering readily marketable nonperishable staples, or (ii) with the prior approval of the state bank’s board of directors or finance committee (however titled), the state bank may make a loan to any person, firm or corporation of up to twenty-five percent (25%) of its equity capital accounts.

Deposit Insurance—Our deposit accounts are insured by the FDIC up to applicable limits by the Bank Insurance Fund (“BIF”). The BIF was designated as an insurance fund pursuant to the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (“FIRREA”). FIRREA provides that a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC after August 9, 1989 in connection with (i) the default of a commonly controlled FDIC insured depository institution or (ii) any assistance provided by the FDIC to a commonly controlled FDIC insured depository institution in danger of default. FIRREA provides that certain types of persons affiliated with financial institutions can be fined by the federal regulatory agency having jurisdiction over a depository institution with federal deposit could be fined up to $1 million per day for each violation of certain regulations related (primarily) to lending to and transactions with executive officers, directors, and principal shareholders, including the interests of these individuals. Other violations may result in civil money penalties of $5,000 to $25,000 per day or in criminal fines and penalties. In addition, the FDIC has been granted enhanced authority to withdraw or to suspend deposit insurance in certain cases.

As an insurer, the FDIC issues regulations, conducts examinations, requires the filing of reports and generally supervises and regulates the operations of state-chartered banks that are not members of the Federal Reserve System. FDIC approval is required prior to any merger or consolidation involving state, nonmember banks, or the establishment or relocation of an office facility thereof. FDIC supervision and regulation is intended primarily for the protection of depositors and the FDIC insurance funds.

Pursuant to the Federal Deposit Insurance Act (“FDIA”), as amended by FIRREA, all BIF-insured banks were required to pay semiannual insurance assessments to recapitalize the BIF to a 1.25% of insured deposits ratio. In August 1995, the FDIC substantially reduced deposit insurance premiums for well-capitalized, well-managed BIF-insured institutions to the lowest assessment rate of 4 basis points per $100 of assessable deposits. The BIF premium reduction became effective in September 1995. Any insured bank which does not operate in accordance with or conform to FDIC regulations, policies and directives may be sanctioned for

non-compliance. For example, proceedings may be instituted against any insured bank or any director, officer or employee of such bank who engages in unsafe and unsound practices, including the violation of applicable laws and regulations. The FDIC has the authority to terminate deposit insurance pursuant to procedures established for that purpose.

At December 31, 2006, the Bank’s deposit base for purposes of FDIC premiums was $309,258. The Bank paid FDIC insurance premiums of $154 in 2007.

FDICIA & Prompt Corrective Action — The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), which was enacted on December 19, 1991, substantially revised the depository institution regulatory and funding provisions of the FDIA and revised several other banking statutes. The additional supervisory powers and regulations mandated by FDICIA include a “prompt corrective action” program based upon five regulatory zones for banks, in which all banks are placed, largely based on their capital positions. Regulators are permitted to take increasingly harsh action as a bank’s financial condition declines. Regulators are also empowered to place in receivership or require the sale of a bank to another depository institution when a bank’s capital leverage ratio reaches two percent. Better capitalized institutions are generally subject to less onerous regulation and supervision than banks with lesser amounts of capital. Each federal banking agency is required to implement a system of prompt corrective action for institutions which it regulates. The FDIC has adopted regulations implementing the prompt corrective action provisions of the FDICIA, which place financial institutions in the following five categories based upon capital ratios: (i) a “well capitalized” institution if it has a total risk-based capital ratio of 10.0%, a Tier 1 risk-based ratio of at least 6% and a leverage ratio of at least 5%; (ii) an “adequately capitalized” institution has a total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 4%, and a leverage ratio of 4%; (iii) an “undercapitalized” institution has a total risk-based capital ratio of under 8%, a Tier 1 risk-based capital ratio of under 4% or a leverage ratio of under 4%; (iv) a “significantly undercapitalized” institution has a total risk-based capital ratio of under 6%, a Tier 1 risk-based ratio of under 3% or a leverage ratio of under 3%; and (v) a “critically undercapitalized” institution has a leverage ratio of 2% or less.

The regulations also establish procedures for “downgrading” an institution to a lower capital category based on supervisory factors other than capital. Specifically, Section 38 of the FDIA and the implementing regulations provide that a federal banking agency may, after notice and an opportunity for a hearing, reclassify a well-capitalized institution as adequately capitalized and may require an adequately capitalized institution or an undercapitalized institution to comply with supervisory actions as it were in the next lower category if the institution is in an unsafe or unsound condition or engaging in an unsafe or unsound practice. (The FDIC may not, however, reclassify a significantly undercapitalized institution as critically undercapitalized).

FDICIA generally prohibits an FDIC-insured depository institution from making any capital distribution (including payment of dividends) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to restrictions on borrowing from the Federal Reserve System. In addition, undercapitalized depository institutions are subject to growth limitations and are required to submit capital restoration plans. A depository institution’s holding company must guarantee the capital plan, up to an amount equal to the lesser of 5% of the depository institution’s assets at the time it becomes undercapitalized or the amount of the capital deficiency when the institution fails to comply with the plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. If a depository institution fails to submit an acceptable plan, it is treated as if it is significantly undercapitalized.

Significantly undercapitalized depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become adequately capitalized, requirements to

reduce total assets and cessation of receipt of deposits from correspondent banks. Critically undercapitalized depository institutions are subject to appointment of a receiver or conservator.

FDICIA contains numerous other provisions, including accounting, audit and reporting requirements, beginning in 1995 termination of the “too big to fail” doctrine except in special cases, limitations on the FDIC’s payment of deposits at foreign branches, new regulatory standards in such areas as asset quality, earnings and compensation and revised regulatory standards for, among other things, powers of state banks, real estate lending and capital adequacy. FDICIA also requires that a depository institution provide 90 days prior notice of the closing of any branches.

Various other legislation, including proposals to revise the bank regulatory system and to limit or expand the investments that a depository institution may make with insured funds, is from time to time introduced in Congress. The Department and the FRB examines us periodically for compliance with various regulatory requirements. Such examinations, however, are for the protection of the BIF and depositors and not for the protection of investors and shareholders.

As of December 31, 2007, under the regulations promulgated under FDICIA, each of the Bank and First National would have been deemed to be a “well-capitalized” institution if solely viewed on the basis of capital ratios.

Standards for Safety and Soundness—The FDIA requires the federal banking regulatory agencies to prescribe, by regulation, standards for all insured depository institutions relating to: (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure; (v) asset growth; and (vi) compensation, fees and benefits. The federal banking agencies have adopted regulations and Interagency Guidelines Prescribing Standards for Safety and Soundness (the “Guidelines”) to implement safety and soundness standards required by the FDIA. The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The agencies also adopted asset quality and earnings standards which are part of the Guidelines. Under the regulations, if the FDIC determines that the Bank fails to meet any standards prescribed by the Guidelines, the agency may require the Bank to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the FDIA. The final regulations establish deadlines for the submission and review of such safety and soundness compliance plans.

Capital Requirements—The FDIC’s minimum capital standards applicable to FDIC-regulated banks and savings banks require the most highly-rated institutions to meet a “Tier 1” leverage capital ratio of at least 3.0% of total assets. Tier 1 (or “core capital”) consists of common stockholders’ equity, noncumulative perpetual preferred stock, and minority interests in consolidated subsidiaries minus all intangible assets other than limited amounts of purchased mortgage servicing rights and certain other accounting adjustments. All other banks must have a Tier 1 leverage ratio of at least 100-200 basis points above the 3% minimum. The FDIC capital regulations establish a minimum leverage ratio of not less than 4% for banks that are not highly rated or are anticipating or experiencing significant growth. Tier 2 capital is an amount equal to the sum of (i) the allowance for possible loan losses in an amount up to 1.25% of risk-weighted assets; (ii) cumulative perpetual preferred stock with an original maturity of 20 years or more and related surplus; (iii) hybrid capital instruments (instruments with characteristics of both debt and equity), perpetual debt and mandatory convertible debt securities; and (iv) in an amount up to 50% of Tier I capital, eligible term subordinated debt and intermediate-term preferred stock with an original maturity of five years or more, including related surplus. The inclusion of the foregoing elements of Tier 2 capital is subject to certain requirements and limitations of the FDIC.

FDIC capital regulations require higher capital levels for banks which exhibit more than a moderate degree of risk or exhibit other characteristics which necessitate that higher than minimum levels of capital be

maintained. Any insured bank with a Tier 1 capital to total assets ratio of less than 2% is deemed to be operating in an unsafe and unsound condition pursuant to Section 8(a) of the FDIA unless the insured bank enters into a written agreement, to which the FDIC is a party, to correct its capital deficiency. Insured banks operating with Tier 1 capital levels below 2% (and which have not entered into a written agreement) are subject to an insurance removal action. Insured banks operating with lower than the prescribed minimum capital levels generally will not receive approval of applications submitted to the FDIC. Also, inadequately capitalized state nonmember banks will be subject to such administrative action as the FDIC deems necessary.

FDIC regulations also require that banks meet a risk-based capital standard. The risk-based capital standard requires the maintenance of total capital (which is defined as Tier 1 capital and Tier 2 or supplementary capital) to risk weighted assets of 8% and Tier 1 capital to risk-weighted assets of 4%. In determining the amount of risk-weighted assets, all assets, plus certain off balance sheet items, are multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC believes are inherent in the type of asset or item. The components of Tier 1 capital are equivalent to those discussed above under the 3% leverage requirement. The components of mandatory convertible securities, term subordinated debt, intermediate-term preferred stock and allowance for possible loan losses. Allowance for possible loan losses includable in supplementary capital is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of capital counted toward supplementary capital cannot exceed 100% of Tier 1 capital. The FDIC includes in its evaluation of a bank’s capital adequacy an assessment of risk-based capital focusing principally on broad categories of credit risk. No measurement framework for assessing the level of a bank’s interest rate risk exposure has been codified but, effective board and senior management oversight of the banks tolerance for interest rate risk is required.

The FDIC has adopted the Federal Financial Institutions Examination Council’s recommendation regarding the adoption of Statement of Financial Accounting Standard No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Specifically, the FDIC determined that net unrealized holding gains or losses on available for sale debt and equity securities should not be included when calculating core and risk-based capital ratios.

FDIC capital requirements are designated as the minimum acceptable standards for banks whose overall financial condition is fundamentally sound, which are well-managed and have no material or significant financial weakness. The FDIC capital regulations state that, where the FDIC determines that the financial history or condition, including off-balance sheet risk, managerial resources and/or the future earnings prospects of a bank are not adequate and/or a bank has a significant volume of assets classified substandard, doubtful or loss or otherwise criticized, the FDIC may determine that the minimum adequate amount of capital for that bank is greater than the minimum standards established in the regulation.

The Company believes that, under the current regulations, we have sufficient capital to meet its minimum capital requirements. However, events beyond the control of the Bank and First National, such as a downturn in the economy in areas where we have most of its loans, could adversely affect future earnings and, consequently, the ability of us to meet our capital requirements.

Activities and Investments of Insured State-Chartered Banks—Section 24 of the FDIA, as amended by the FDICIA, generally limits the activities and equity investments of FDIC-insured, state-chartered banks to those that are permissible for national banks. Under regulations dealing with equity investments, an insured state bank generally may not directly or indirectly acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, (ii) investing as a limited partner in a partnership, the sole purpose of which is direct or indirect investment in the acquisition, rehabilitation or new construction of a qualified housing project, provided that such limited partnership investment may not exceed 2% of the bank’s total assets, (iii) acquiring up to 10% of the voting stock of a company that solely provides

or reinsures directors’, trustees’ and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions, and (iv) acquiring or retaining the voting shares of a depository institution if certain requirements are met.

In addition, an insured state bank (i) that is located in a state which authorized as of September 30, 1991 investment in common or preferred stock listed on a national securities exchange (“listed stock”) or shares of a registered investment company (“registered shares”), and (ii) which during the period beginning September 30, 1990 through November 26, 1991 (the “measurement period”) made or maintained investments in listed stocks and registered shares, may retain whatever shares that were lawfully acquired or held prior to December 19, 1991 and continue to acquire listed stock and registered shares, provided that the bank does not convert its charter to another form or undergo a change in control. In order to acquire or retain any listed stock or registered shares, however, the bank must file a one-time notice with the FDIC which meets specified requirements and which sets forth our intention to acquire and retain stocks or shares, and the FDIC must determine that acquiring or retaining the listed stocks or registered shares will not pose a significant risk to the deposit insurance fund of which the bank is a member.

FDIC regulations implementing Section 24 of the FDIA provide that an insured state-chartered bank may not, directly, or indirectly through a subsidiary, engage as “principal” in any activity that is not permissible for a national bank unless the FDIC has determined that such activities would pose no risk to the insurance fund of which it is a member, and the bank is in compliance with applicable regulatory capital requirements. Any insured state-chartered bank or savings bank directly or indirectly engaged in any activity that is not permitted for a national bank must cease the impermissible activity.

Loans-to-One-Borrower—The aggregate amount of loans that we are permitted to make under applicable regulations to any one borrower, including related entities, is the greater of 25% of unimpaired capital and surplus or $500,000. Based on the Company’s capitalization of $37,173 at December 31, 2007, our loans-to-one borrower limit is approximately $9,293. Our house limits loans-to-one borrower is equal to the loan to one borrower limit.

Federal Reserve System—In 1980 Congress enacted legislation which imposed Federal Reserve requirements (under “Regulation D”) on all depository institutions that maintain transaction accounts or non-personal time deposits. These reserves may be in the form of cash or non-interest-bearing deposits with the regional Federal Reserve Bank. NOW accounts and other types of accounts that permit payments or transfers to third parties fall within the definition of transaction accounts and are subject to Regulation D reserve requirements, as are any non-personal time deposits at a bank.

Community Reinvestment Act—The Company is also subject to the provisions of the Community Reinvestment Act of 1977, which requires the appropriate federal bank regulatory agency, in connection with its regular examination of a bank, to assess the bank’s record in meeting the credit needs of the community serviced by the bank, including low and moderate income neighborhoods. The regulatory agency’s assessment of the Company’s record is made available to the public. Further, such assessment is required of any bank which has applied, among other things, to establish a new branch office that will accept deposits, relocate an existing office or merge or consolidate with, or acquire the assets or assume the liabilities of, a federally regulated financial institution. As a component of its Community Reinvestment Act outreach, the Company has instituted an affordable home loan program for first-time home buyers and low to moderate income borrowers.

Interstate Banking—The Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Interstate Act”), which was enacted on September 29, 1994, among other things and subject to certain conditions and exceptions, (i) permits bank holding company acquisitions of banks of a minimum age of up to five years as established by state law in any state, (ii) mergers of national and state banks after May 31, 1997 across state

lines unless the home state of either bank has opted out of the interstate bank merger provision, (iii) branching de novo by national and state banks into others states if the state has elected this provision of the Interstate Act, and (iv) certain interstate bank agency activities after one year after enactment.

Gramm-Leach Bliley Act—The Gramm-Leach-Bliley Act of 1999 (the “Act”) represented a pivotal point in the history of financial services regulation in the United States. The Act removes large parts of a regulatory structure that had its roots in the 1930’s and creates new opportunities for banks, other depository institutions, insurance companies and securities firms to enter into combinations. The Act also provides new flexibility to design financial products and services that better serve the banking consumer. The Act, among other provisions, (i) substantially eliminates the prohibition under the Bank Holding Company Act which existed previously on affiliations between banks and insurance companies; (ii) repeals Section 20 of the Glass-Steagall Act which prohibited banks from affiliating with securities firms; (iii) sets forth procedures for such affiliations; (iv) provides for the formation of financial holding companies; and (v) eliminates the blanket exclusion of banks from the definitions of the terms “broker” and “dealer” under the Securities Exchange Act of 1934 (the “Exchange Act”), while permitting banks to continue to conduct certain limited brokerage and dealer activities without registration under the 1934 Act as a broker-dealer.

In addition to expanding the activities in which banks and bank holding companies may engage, the Gramm-Leach-Bliley Act also imposed new requirements on financial institutions with respect to customer privacy. The Gramm-Leach-Bliley Act generally prohibits disclosure of customer information to non-affiliated third parties unless the customer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are further required to disclose their privacy policies to customers annually. Financial institutions, however, will be required to comply with state law if it is more protective of customer privacy than the Gramm-Leach-Bliley Act.

The USA Patriot Act of 2001—The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”) was enacted in October 2001. The USA Patriot Act is intended to strengthen U.S. law enforcement’s and the intelligence communities’ ability to work cohesively to combat terrorism on a variety of fronts. The potential impact of the USA Patriot Act on financial institutions of all kinds is significant and wide ranging. The USA Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including: (i) due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons; (ii) standards for verifying customer identification at account opening; (iii) rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; (iv) reports by non-financial trades and businesses filed with the Treasury Department’s Financial Crimes Enforcement Network for transactions exceeding $10,000; and (v) filing of suspicious activities reports involving securities by brokers and dealers if they believe a customer may be violating U.S. laws and regulations.

Change in Control Restrictions

Statutory Provisions

The Change in Bank Control Act requires the written consent of the FDIC be obtained prior to any person or company acquiring “control” of a state-chartered bank. Tennessee law also requires the prior written consent of the Department to acquire control of a Tennessee-chartered bank. Upon acquiring control, a company will be deemed to be a bank holding company and must register with the Federal Reserve Board. Conclusive control is presumed to exist if, among other things, an individual or company acquires more than 25% of any class of voting stock of the Bank. Rebuttable control is presumed to exist if, among other things, a person acquires more than 10% of any class of voting stock and the issuer’s securities are registered under Section 12

of the Exchange Act (the Common Stock is not expected to be so registered) or the person would be the single largest stockholder. Restrictions applicable to the operations of a bank holding company and conditions that may be imposed by the Federal Reserve Board in connection with its approval of a company to become a bank holding company may deter companies from seeking to obtain control of the Bank.

Other

While not directly restricting efforts to acquire control of the Company, certain other characteristics of our organization may discourage attempts to acquire control of the Company. The Company’s Charter provides that approximately one-third of its Board of Directors are elected each year (see “Management — Classification of Directors”), thereby making it more difficult for a potential acquirer of control of the Company to replace the members of the Board of Directors than it would be if directors were elected at more frequent intervals or if a greater percentage of directors were elected at any one time.

As a result of all of the foregoing restrictions on acquisitions, the Company is a less attractive target for a “takeover” attempt than other less-highly regulated companies generally. Accordingly, these restrictions might deter offers to purchase the Company which stockholders may consider to be in their best interests, and may make it more difficult to remove incumbent management.

Dividends

The principal source of the Company’s cash revenues is dividends received from the Bank. The payment of dividends is subject to government regulation, in that regulatory authorities may prohibit banks and bank holding companies from paying dividends, which would constitute an unsafe or unsound banking practice. In addition, a bank may not pay cash dividends if that payment could reduce the amount of its capital below that necessary to meet minimum applicable regulatory capital requirements. Other than the laws and regulations noted above, which apply to all banks and bank holding companies, neither the Company nor Bank are currently subject to any regulatory restrictions on its dividends.

Under Tennessee law, the Bank can only pay dividends in an amount equal to or less than the total amount of its net income for that year combined with retained net income of the preceding two (2) years. Payment of dividends in excess of this amount requires prior approval by the commissioner of the Department.

Monetary Policy

The Bank and First National, like other depository institutions, is affected by the monetary policies implemented by the Board of Governors of the FRS. The FRS has the power to restrict or expand the money supply through open market operations, including the purchase and sale of government securities and the adjustment of reserve requirements. These actions may result in significant fluctuations in market interest rates, which could adversely affect the operations of the Bank, such as its ability to make loans and attract deposits, as well as market demand for loans. See “Supervision and Regulation.”

Capital Adequacy

See Supervision and Regulation — Capital Requirements for a discussion of bank regulatory agencies’ capital adequacy requirements.

Future Legislation

Any future banking legislation proposed by the United States Congress and the Tennessee General Assembly may have an effect on the structure, regulation and competitive relationships of the nation’s financial institutions.

ITEM 1A. RISK FACTORS

We are geographically concentrated in the Middle Tennessee area and changes in local economic conditions could impact our profitability.

Our primary market area consists of Maury County, Tennessee. We also have operations in Rutherford and Williamson counties in Tennessee and in late 2007, we acquired First National Bank of Centerville with branches in Centerville and Lyles, Tennessee in Hickman county. Substantially all of our loan customers and most of our deposit and other customers live or have operations in this same geographic area. Accordingly, our success significantly depends upon the growth in population, income levels, and deposits in these areas, along with the continued attraction of business ventures to the area and the stability of the housing market, and our profitability is impacted by the changes in general economic conditions in this market. In addition, unfavorable local or national economic conditions, including deterioration in the housing market, could reduce our growth rate, affect the ability of our customers to repay their loans and generally affect our financial condition and results of operations. We are less able than a larger institution to spread the risks of unfavorable local economic conditions across a large number of diversified economies.

We could sustain losses if our asset quality declines.

Our earnings are significantly affected by our ability to properly originate, underwrite and service loans. A significant portion of our loans are real estate based or made to real estate based borrowers, and the credit quality of such loans could deteriorate if real estate market conditions decline nationally or in our market areas. We could sustain losses if we incorrectly assess the creditworthiness of our borrowers or fail to detect or respond to deterioration in asset quality in a timely manner. Problems with asset quality could cause our interest income and net interest margin to decrease and our provisions for loan losses to increase, which could adversely affect our results of operations and financial condition.

An inadequate allowance for loan losses would reduce our earnings.

The risk of credit losses on loans varies with, among other things, general economic conditions, real estate market conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the value and marketability of the collateral for the loan.

Management maintains an allowance for loan losses based upon, among other things, historical experience, an evaluation of economic conditions and regular reviews of delinquencies and loan portfolio quality. Based upon such factors, management makes various assumptions and judgments about the ultimate collectibility of the loan portfolio and provides an allowance for loan losses based upon its estimate of probable incurred credit losses, using past loan experience, nature and value of the portfolio, specific borrower and collateral value information, economic conditions and other factors. A charge against earnings with respect to the provision is made quarterly to maintain the allowance at appropriate levels after loan charge offs less recoveries. If management’s assumptions and judgments prove to be incorrect and the allowance for loan losses is inadequate to absorb losses, or if the bank regulatory authorities require us to increase the allowance for loan losses as a part of their examination process, our earnings and capital could be significantly and adversely affected.

Our business is subject to local real estate market and other local economic conditions.

Any adverse market or economic conditions in the State of Tennessee may disproportionately increase the risk our borrowers will be unable to timely make their loan payments. In addition, the market value of the real estate securing loans as collateral could be adversely affected by unfavorable changes in market and economic conditions. As of December 31, 2007, approximately 84.2% of our loans held for investment were secured by real estate. Of this amount, approximately 23.7% were commercial real estate loans, 30.9% were residential real estate loans, 28.7% were construction and development loans and 0.9% were other real estate loans. Any sustained period of increased payment delinquencies, foreclosures or losses caused by adverse market or economic conditions in the markets we serve or in the State of Tennessee could adversely affect the value of our assets, our revenues, results of operations and financial condition. In addition, construction and development lending is generally considered to have more complex credit risks than traditional single-family residential lending because the principal is concentrated in a limited number of loans with repayment dependent on the successful operation of the related real estate project. Consequently, these loans are more sensitive to adverse conditions in the real estate market or the general economy. These loans are generally less predictable and more difficult to evaluate and monitor and collateral may be difficult to dispose of in a market decline. If we experiences significant construction loan loss because the cost and value of a construction loan project is inaccurately estimated or because of a general economic downturn, our results of operations could be adversely impacted and our net book value could be reduced

Liquidity needs could adversely affect our results of operations and financial condition.

We rely on dividends from the bank as our primary source of funds, and the bank relies on customer deposits and loan repayments as its primary source of funds. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters, and international instability. Additionally, deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, returns available to customers on alternative investments, and general economic conditions. We rely to a significant degree on national time deposits and brokered deposits, which may be more volatile and expensive than local time deposits. Accordingly, we may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include Federal Home Loan Bank advances and federal funds lines of credit from correspondent banks. To utilize brokered deposits and national market time deposits without additional regulatory approvals, we must remain well capitalized. While we believe that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands.

We may not be able to successfully consolidate our operations with First National

Our ability to successfully consolidate our operations with First National will depend substantially on our ability to consolidate operations, systems and procedures and to eliminate redundancies and costs. We may not be able to combine our and First National’s operations without encountering difficulties, such as:

	•		the loss of key employees and customers;

	•		the disruption of operations and business;

	•		the inability to maintain and increase competitive presence;

	•		deposit attrition, customer loss and revenue loss;

	•		possible inconsistencies in standards, control procedures and policies;

	•		unexpected problems with costs, operations, personnel, technology and credit; and/or

	•		problems from the assimilation of new operations, sites or personnel, which could divert resources from regular banking operations.

Additionally, general market and economic conditions or governmental actions affecting the financial industry generally may inhibit our successful integration of First National.

Further, we entered into the Reorganization Agreement with the expectation that the acquisition will result in various benefits including, among other things, benefits relating to enhanced revenues, cross selling opportunities, technology, cost savings and operating efficiencies. Achieving the anticipated benefits of the acquisition is subject to a number of uncertainties, including whether we integrate First National in an efficient and effective manner, and general competitive factors in the marketplace. Failure to achieve these anticipated benefits could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy and could materially impact our business, financial condition and operating results. Finally, any cost savings that are realized may be offset by losses in revenues or other charges to earnings.

Our business strategy includes the continuation of growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.

We intend to opportunistically pursue our growth strategy through continued de novo branching. We may also grow through the acquisition of branches or entire financial institutions. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in growth stages of development, including the following:

Management of Growth. We may be unable to successfully:

	•		maintain loan quality in the context of significant loan growth;

	•		maintain adequate management personnel and systems to oversee such growth;

	•		maintain adequate internal audit, loan review and compliance functions; and

	•		implement additional policies, procedures and operating systems required to support such growth.

Operating Results. There is no assurance that existing offices or future offices will maintain or achieve deposit levels, loan balances or other operating results necessary to avoid losses or produce profitability. Our growth and de novo branching strategy necessarily entails growth in overhead as we add new offices and staff. Our historical results may not be indicative of future results or results that may be achieved as we continue to increase the number and concentration of our branch offices. Should any new location be unprofitable or marginally profitable, or should any existing location experience a decline in profitability or incur losses, the adverse effect on our results of operations and financial condition could be more significant than would be the case for a larger company.

Development of Offices. There are considerable costs involved in opening branches and new branches

generally do not generate sufficient revenues to offset their costs until they have been in operation for at least a year or more. Accordingly, our new branches can be expected to negatively impact our earnings for some period of time until the branches reach certain economies of scale. Our expenses could be further increased if we encounter delays in the opening of any of our new branches. We may be unable to accomplish future expansion plans due to lack of available satisfactory sites, difficulties in acquiring such sites, increased expenses or loss of potential sites due to complexities associated with the zoning and permitting processes, higher than anticipated acquisition costs or other factors. Finally, we have no assurance our new branches will be successful even after they have been established.

Expansion into New Markets. Much of our recent and projected growth has been, and will continue to be, focused in the highly competitive Williamson county and Rutherford county, Tennessee markets. In these markets, we will initially have a smaller share of the deposits than our competitors, which include a wide array of financial institutions, including much larger, well-established financial institutions. Our expansion into these new markets may be unsuccessful if we are unable to meet customer demands or compete effectively with the financial institutions operating in these markets that currently maintain a greater percentage of market share than do we.

Regulatory and Economic Factors. Our growth and expansion plans may be adversely affected by a number of regulatory and economic developments or other events. Failure to obtain required regulatory approvals, failure to maintain appropriate capital or asset quality, changes in laws and regulations or other regulatory developments and changes in prevailing economic conditions or other unanticipated events may prevent or adversely affect our continued growth and expansion. Such factors may cause us to alter our growth and expansion plans or slow or halt the growth and expansion process, which may prevent us from entering certain target markets or allow competitors to gain or retain market share in our existing or expected markets.

Failure to successfully address the above issues could have a material adverse effect on our business, future prospects, financial condition or results of operations, and could adversely affect our ability to successfully implement our business strategy. Also, if our growth occurs more slowly than anticipated or declines, our operating results could be materially adversely affected.

Competition from financial institutions and other financial service providers may adversely affect our profitability.

The banking business is highly competitive and we experience competition in each of our markets, particularly our Williamson and Rutherford county, Tennessee markets, where we have a small market share. We compete with commercial banks, credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds and other mutual funds, as well as other community banks, super-regional and national financial institutions that operate offices in our primary market areas and elsewhere. Many of our competitors are well-established, larger financial institutions that have greater resources and lending limits and a lower cost of funds than we have.

Changes in interest rates could adversely affect our results of operations and financial condition.

Changes in interest rates may affect our level of interest income, the primary component of our gross revenue, as well as the level of our interest expense, our largest recurring expenditure. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and the policies of various governmental and regulatory authorities. In a period of rising interest rates, our interest expense, particularly deposit costs, could increase in different amounts and at different rates, while the interest that we earn on our assets may not change in the same amounts or at the same rates. Accordingly, increases in interest rates could decrease our net interest income. Changes in the level of interest rates also may

negatively affect our ability to originate real estate loans, the value of our assets and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings.

Our continued pace of growth may require us to raise additional capital in the future, but that capital may not be available when it is needed.

We are required by federal and state regulatory authorities to maintain adequate levels of capital to support our operations. We anticipate our capital resources following this offering will satisfy our capital requirements for the foreseeable future. We may at some point, however, need to raise additional capital to support our continued growth.

Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital if needed on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired.

Our key management personnel may leave at any time.

Our success depends in large part on the ability and experience of our senior management. The loss of services of one or more key employees could adversely affect our business and operating results. We have an employment contract with Marc Lively, our President and Chief Executive Officer.

Events beyond our control may disrupt operations and harm operating results.

We may be adversely affected by a war, terrorist attack, third party acts, natural disaster or other catastrophe. A catastrophic event could have a direct negative impact on us, our customers, the financial markets or the overall economy. It is impossible to fully anticipate and protect against all potential catastrophes. A security breach, criminal act, military action, power or communication failure, flood, hurricane, severe storm or the like could lead to service interruptions, data losses for customers, disruptions to our operations, or damage to our facilities. Any of these could have a material adverse effect on our business and financial results. In addition, we may incur costs in repairing any damage beyond our applicable insurance coverage.

We operate in a highly regulated environment and are supervised and examined by various federal and state regulatory agencies who may adversely affect our ability to conduct business.

The Company is a bank holding company regulated by the Board of Governors of the Federal Reserve System. The Bank is a state chartered bank and comes under the supervision of the Tennessee Department of Financial Institutions and the FDIC. The Bank is also governed by the laws of the State of Tennessee and federal banking laws under the FDIC and the Federal Reserve Act. The Bank is also regulated by other agencies including, but not limited to, the Internal Revenue Service, OSHA, and the Department of Labor. These and other regulatory agencies impose certain regulations and restrictions on the bank, including:

	•		explicit standards as to capital and financial condition;

	•		limitations on the permissible types, amounts and extensions of credit and investments;

	•		requirements for brokered deposits;

	•		restrictions on permissible non-banking activities; and

•

restrictions on dividend payments.

Federal and state regulatory agencies have extensive discretion and power to prevent or remedy unsafe or unsound practices or violations of law by banks and bank holding companies. As a result, we must expend significant time and expense to assure that we are in compliance with regulatory requirements and agency practices.

We also undergo periodic examinations by one or more regulatory agencies. Following such examinations, we may be required, among other things, to make additional provisions to our allowance for loan loss or to restrict our operations. These actions would result from the regulators’ judgments based on information available to them at the time of their examination. Our operations are also governed by a wide variety of state and federal consumer protection laws and regulations. These federal and state regulatory restrictions limit the manner in which we may conduct business and obtain financing. These laws and regulations can and do change significantly from time to time and any such change could adversely affect our results of operations.

An established public market for our common stock does not currently exist.

While our common stock is freely transferable by most shareholders, there is not an established public market for trading in our common stock and we cannot be sure when an active or established trading market will develop for our common stock, or, if one develops, that it will continue. Our common stock is traded locally among individuals and is not currently listed on The NASDAQ Global Market, the NASDAQ Capital Market or any other securities market.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. PROPERTIES

The Company’s principal office building is located at 501 South James M. Campbell Boulevard, Columbia, Tennessee 38401. The Bank constructed the building and owns the building and the property. Prior to the completion of construction in November, 2000, the Bank’s main office was located in a modular building at this location.

In December, 2000, the Bank moved the modular building previously located at the principal office to 601 North Garden Street, Columbia, Tennessee. In June, 2006, the modular building was moved to a temporary site located at 607 North Main Street, Columbia, Tennessee. During the third quarter of 2007, the Bank completed the downtown location at 601 North Garden Street, Columbia, TN. The Bank owns the building and leases the property at this location pursuant to the terms of a lease that expires in December 1, 2026.

In October 2007, the Company acquired First National with branches in Centerville and Lyles, Tennessee. As a result of the acquisition, the Company now owns the building and the property at both locations. In addition, the Company owns a storage facility located at Hackberry Street East in Centerville.

The Bank operates a branch office at 105 Public Square, Mount Pleasant, Tennessee. The Bank owns the building and the property at this location.

The Bank operates a branch office in the Wal-Mart store at 2200 Brookmeade Drive in Columbia. The Bank leases the space occupied by the branch at this location.

The Bank has an operations building located at 501 South James Campbell Boulevard, Columbia, Tennessee, 38401. The Bank owns the building and property.

The Bank operates a branch office at 9045 Carothers Parkway, Franklin, Tennessee in Williamson county. The Bank owns the building and the property at this location pursuant to the terms of a lease that expires in April 1, 2012.

The Bank operates a branch office at 1950 Old Fort Parkway, Murfreesboro, Tennessee in Rutherford county. The Bank currently leases the building and property at this location pursuant to the terms of a lease that expires in August 1, 2008.

The Bank operates a branch office at Neely’s Mill, 1412 Trotwood Avenue, Columbia, Tennessee. The Bank owns the building and leases the property.

At December 31, 2007, the cost of office properties and equipment (less allowances for depreciation and amortization) owned by us was $17,256.

ITEM 3. LEGAL PROCEEDINGS

The Bank was a co-defendant in a suit in Maury County Circuit Court, Holloway et al. v. Evers. Et al, filed May 31, 2005, in which the plaintiff alleged that a bank loan officer disclosed the plaintiff’s loan history at the bank to plaintiff’s two partners in a real estate development, who subsequently forced plaintiff to sell his interest to them. Plaintiff alleged causes of action for tortious interference with contract, breach of common law fiduciary duty, and violation of the Financial Records Privacy Act. Plaintiff sought $5,000,000 in compensatory damages and $5,000,000 in punitive damages, jointly and severally, from the bank and plaintiff’s two partners. The Company believed the claim was without merit and vigorously defended the suit. In the second quarter of 2006, the trial court granted the co-defendants summary judgment in favor of the plaintiff’s tow partners which was upheld on appeal. On December 29, 2007, plaintiffs voluntarily dismissed their claims against the Company without prejudice.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of shareholders of the Company during the fourth quarter of the Company’s fiscal year ended December 31, 2007.

PART II


ITEM 5.		MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

No public market exists for the Company’s Common Stock, and there can be no assurance that a public trading market for the Company’s Common Stock will develop. As of March 14, 2008 there were 2,116 holders of record of the Company’s Common Stock and 3,177,733 shares outstanding, excluding vested options. As of March 14, 2008, there were 194,128 vested options outstanding to purchase shares of common stock.

While there is no public market for the Company’s Common Stock, the most recent trade of the Company’s Common Stock known to the Company occurred on March 14, 2008 at a price of $30.00 per share. These sales are isolated transactions and, given the small volume of trading in the Company’s Common Stock, may not be indicative of its present value. Below is a table which sets forth Company’s high and low prices of which the Company is aware for the relevant quarters during the three fiscal year ended December 31:


2007	High		Low
First quarter	$	30.00	$	30.00
Second quarter	$	30.00	$	30.00
Third quarter	$	30.00	$	25.00
Fourth quarter	$	30.00	$	25.00


2006	High		Low
First quarter	$	35.00	$	20.71
Second quarter	$	30.00	$	27.00
Third quarter	$	32.50	$	29.00
Fourth quarter	$	30.00	$	30.00


2005	High		Low
First quarter	$	19.00	$	13.00
Second quarter	$	24.00	$	19.00
Third quarter	$	26.00	$	22.00
Fourth quarter	$	29.00	$	25.00

For a foreseeable period of time, the principal source of cash revenues to the Company will be dividends paid by the Bank with respect to its capital stock. There are certain restrictions on the payment of these dividends imposed by federal banking laws, regulations and authorities. Further, the dividend policy of the Bank is subject to the discretion of the Board of Directors of the Bank and will depend upon such factors as future earnings, financial conditions, cash needs, capital adequacy and general business conditions. The Company paid cash dividends totaling $696 to shareholders in second quarter of 2007 and $575 to shareholders in the second quarter of 2006. Tennessee law provides that without the approval of the Commissioner of the Tennessee Department of Financial Institution dividends may be paid by the Bank in an amount equal to net income in the calendar year the dividend declared plus retained earnings for the prior two years. Tennessee laws regulating banks require certain charges against and transfers from an institution’s undivided profits account before undivided profits can be made available for the payment of dividends.

In the future, the declaration and payment of dividends on the Company’s Common Stock will depend upon the Company’s earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, the Company’s ability to service any equity or debt obligations senior to the Common Stock, and other factors deemed relevant by the Board of Directors. As of December 31, 2007, an aggregate

ITEM 6. SELECTED FINANCIAL DATA (Dollars in thousands, except per share data)

The following selected financial data for the five years ended December 31, 2007, was derived from our consolidated financial statements and the related notes thereto. This data should be read in conjunction with our audited consolidated financial statements, including the related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”


	2007 (1)			2006			2005			2004			2003

INCOME STATEMENT DATA:
Interest income	$	35,369		$	25,789		$	17,305		$	12,593		$	10,000
Interest expense		20,606			13,528			7,006			4,272			3,819
Net interest income		14,763			12,261			10,299			8,321			6,181
Provision for loan losses		1,259			1,018			683			720			614
Noninterest income		3,697			3,125			2,356			2,107			1,936
Noninterest expense		13,997			10,453			8,146			6,329			5,451
Net income		2,380			2,802			2,565			2,132			1,264

BALANCE SHEET DATA:
Total assets	$	636,062		$	421,393		$	328,806		$	257,342		$	217,368
Total securities		80,933			35,211			29,965			27,867			29,181
Total loans, net		484,522			344,714			256,150			208,087			169,803
Allowance for loan losses		(6,086	)		(4,259	)		(3,268	)		(2,740	)		(2,249	)
Total deposits		559,303			366,766			286,243			223,778			195,239
FHLB advances		11,000			13,000			8,000			8,000			5,000
Subordinated debentures		23,000			8,000			8,000			3,000			3,000
Total shareholders’ equity		37,173			30,657			24,017			21,452			13,445

PER SHARE DATA:
Earnings per share — basic	$	0.76		$	0.97		$	0.89		$	0.78		$	0.55
Earnings per share diluted		0.73			0.94			0.86			0.75			0.52
Cash dividend declared and paid		0.22			0.20			—			—			—
Book value		11.72			10.17			8.36			7.49			5.82

PERFORMANCE RATIOS:
Return on average assets		0.47	%		0.76	%		0.90	%		0.90	%		0.67	%
Return on average equity		6.77			11.14			11.38			11.37			10.10
Net interest margin (2)		3.14			3.52			3.81			3.64			3.43

ASSET QUALITY RATIOS:
Nonperforming assets to total loans		0.56	%		0.30	%		0.20	%		0.45	%		0.49	%
Net loan charge offs to average loans		0.04			0.01			0.07			0.12			0.09
Allowance for loan losses to total loans		1.24			1.22			1.26			1.30			1.31

CAPITAL RATIOS:
Leverage ratio (3)		6.76	%		9.45	%		10.25	%		9.63	%		7.81	%
Tier 1 risk-based capital ratio		7.87			10.14			11.59			11.33			9.70
Total risk-based capital ratio		10.97			11.25			12.77			12.52			10.95


(1)		Includes the operations of First National from October 27, 2007, the date the Company acquired all of the outstanding common stock of that bank.

(2)		Net interest margin is the result of net interest income for the period divided by average interest earning assets.

(3)		Leverage ratio is defined as Tier 1 capital (pursuant to risk-based capital guidelines) as a percentage of adjusted average

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in thousands, except per share data)

The following is a discussion of our financial condition at December 31, 2007 and December 31, 2006, and our results of operations for each of the three years in the period ended December 31, 2007. The purpose of this discussion is to focus on information about our financial condition and results of operations which is not otherwise apparent from the annual audited consolidated financial statements. You should read the following discussion and analysis along with our consolidated financial statements and the related notes included elsewhere herein.

FORWARD-LOOKING STATEMENTS

Certain of the statements made herein, including information incorporated herein by reference to other documents, are “forward-looking statements” within the meaning and subject to the protections of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions, and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “point to,” “project,” “could,” “intend,” “target,” and other similar words and expressions of the future. These forward-looking statements may not be realized due to a variety of factors, including, without limitation, those described in our Annual Report on Form 10-K and below:

	•		the effects of future economic or business conditions nationally and in our local market;

	•		our potential growth, including our entrance or expansion into new markets, and the need for sufficient capital to support that growth;

	•		governmental monetary and fiscal policies, as well as legislative and regulatory changes, including changes in banking, securities and tax laws and regulations;

	•		the risks of changes in interest rates on the levels, composition and costs of deposits, loan demand, and the values of loan collateral, securities, and interest sensitive assets and liabilities;

	•		credit risks of borrowers;

	•		the effects of competition from a wide variety of local, regional, national and other providers of financial, investment, and insurance services;

	•		the failure of assumptions underlying the establishment of reserves for possible loan losses and other estimates;

	•		changes in accounting policies, rules and practices;

	•		changes in technology or products that may be more difficult, or costly, or less effective, than anticipated;

	•		risks associated with the successful integration of the Company and First National, including the risk that cost savings and any revenue synergies from the acquisition may not be realized or may take longer than anticipated and the risk of potential disruption associated with the acquisition with respect to customers, suppliers or employee relationships;

	•		the effects of war or other conflict, acts of terrorism or other catastrophic events that may affect general economic conditions; and

	•		other circumstances, many of which may be beyond our control.

General

Community First, Inc., (the “Company”) is a registered bank holding company under the Bank Holding Company Act of 1956, as amended, and became so upon the acquisition of all the voting shares of Community First Bank & Trust on August 30, 2002. We were incorporated under the laws of the State of Tennessee as a Tennessee corporation on April 9, 2002, and conduct substantially all of our activities through and derive substantially all of our income from our wholly-owned bank subsidiary, Community First Bank & Trust, a Tennessee chartered bank (the “Bank”).

The Bank commenced business on May 18, 1999, as a Tennessee-chartered commercial bank whose deposits are insured by the Federal Deposit Insurance Corporation’s Bank Insurance Fund. The Bank is regulated by the Tennessee Department of Financial Institutions and the FDIC. The Bank’s sole subsidiary is Community First Title, Inc.; a Tennessee chartered and regulated title insurance company. CFBT Investments, Inc., is a wholly-owned subsidiary of Community First Title, Inc., and is the parent of Community First Properties, Inc., which was established as a Real Estate Investment Trust pursuant to Internal Revenue Service regulations.

The Company completed its acquisition of 100% of the outstanding shares of common stock of The First National Bank of Centerville, a national banking association (“First National”) on October 26, 2007 pursuant to the terms of an Agreement and Plan of Reorganization and Share Exchange, dated as of August 1, 2007, by and between the Company and First National. The Company paid $22.8 million to acquire all of the outstanding shares of common stock of First National which it financed through the issuance of $15 million of subordinate debentures and $8 million distribution from First National.

First National operates under a National Bank Charter and provides full banking services. As a national Bank, First National is subject regulation by the Office of the comptroller of the currency and the FDIC. On January 31, 2008, First National was merged with and into the Bank, with the Bank continuing as the surviving entity.

branch office in Murfreesboro, Tennessee, one branch office in Centerville, Tennessee and one branch office in Lyles, Tennessee. The Company also operates eleven automated teller machines in Maury county, two automated teller machines in Williamson county, one automated teller machine in Rutherford county, Tennessee and two automated teller machines in Hickman county, Tennessee.

The Company and its subsidiaries’ principal business is to accept demand and savings deposits from the general public and to make residential mortgage, commercial, construction, and consumer loans. The Company’s results of operations depend primarily on net interest income, which is the difference between the interest income from earning assets, such as loans and investments, and the interest expense incurred on interest bearing liabilities, such as deposits, subordinated debentures, and other borrowings. The Company also generates noninterest income, including service charges on deposit accounts, mortgage lending income, investment service income, bank owned life insurance (“BOLI”) income, and other charges, and fees. The Company’s noninterest expense consists primarily of employee compensation and benefits, net occupancy and equipment expense, and other operating expenses. The Company’s results of operations are significantly affected by its provision for loan losses and its provision for income taxes. The following discussion provides a summary of the Company’s operations for the past three years and should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report.

Critical Accounting Policies

The accounting principles we follow and our methods of applying these principles conform with accounting principles generally accepted in the United States and with general practices within the banking industry. In connection with the application of those principles, we have made judgments and estimates which, in the case of the determination of our allowance for loan losses (ALL), have been critical to the determination of our financial position, results of operations and cash flows.

Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for probable incurred losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using the nature and volume of the portfolio, information about specific borrower situations, and estimated collateral values, economic conditions, and other factors in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 114, Accounting by Creditors for Impairments of a loan and Statement of Financial Accounting Standards (“SFAS”) No. 5, Accounting for Contingencies. . Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loans that, in management’s judgment, should be charged off.

The allowance for loan losses is maintained at a level that management believes will be adequate to absorb losses on existing loans that may become uncollectible. Provision to and adequacy of the allowance for loan losses are based on the evaluation of the loan portfolio utilizing objective and subjective criteria, in accordance with SFAS 114 and SFAS 5. The objective criteria primarily include an internal grading system and specific allocations for impaired loans. The Company utilizes a historical analysis to validate the overall adequacy of the allowance for loan losses in accordance with SFAS 5. The subjective criteria take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, and business conditions that may affect the borrowers’ ability to pay, and other relevant factors. Changes in any of these criteria or the availability of new information could require adjustments of the allowance for loan losses in future periods. No portion of the Company’s allowance for loan losses is restricted to any individual loan or group of loans, and the entire allowance for loan losses is available to absorb losses for any and all loans.

Under SFAS 114, a loan is impaired when it is probable that the Company will be unable to collect all

amounts due (including both interest and principal) according to the contractual terms of the loan agreement. Generally, a loan is impaired for purposes of SFAS 114 if it exhibits the same level of weaknesses and probability of loss as loans (or portions of loans) classified special mention, substandard, doubtful or loss. Commercial and commercial real estate loans are individually evaluated for impairment. Consumer and residential real estate loans are also 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, net of selling costs, if repayment is expected solely from the collateral.

The Bank automatically place loans on non-accrual when they become 90 days past due, however; when in management’s opinion the borrower may be unable to meet payments the loan may be placed on non-accrual at that time even if not then 90 days past due. When interest is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received.

ANALYSIS OF RESULTS OF OPERATION

Our income was $2,380 for the year ended December 31, 2007, a decrease of 15.1% over net income of $2,802 for 2006. Net income in 2005 was $2,565. Pretax income declined from $3,915 in 2006 to $3,204 in 2007. Pretax income in 2005 was $3,826. The decrease in pretax income in 2007 was primarily the result of expenses associated with expanding into markets in Williamson, Rutherford and Hickman counties and the $390 gain on sale of land recorded in 2006. Growth in interest income in 2007 and 2006 was offset in part by the increase in interest expense and noninterest expense as a result of an increase in the Bank’s and First National’s cost of funds and as a result of the Company’s expansion efforts. In 2007, noninterest expense increased by 33.9% while net interest income only increased 20.4% over 2006. The increase in noninterest expense is attributable primarily to salaries and other operating expenses associated with growth of the Company including adding additional branches in Maury county and expanding in Williamson, Rutherford and into Hickman county through the acquisition of First National in the fourth quarter of 2007. In 2006, noninterest expense increased by 28.3% while net interest income increased 19.1% over 2005 due to expanding into Williamson and Rutherford counties. Basic and diluted earnings per share were $0.76 and $0.73 for 2007 compared to $0.97 and $0.94 in 2006. Basic and diluted earnings per share in 2005 were $0.89 and $0.86.

Net Interest Income

Net interest income represents the amount by which interest earned on various earning assets exceeds interest paid on deposits and other interest-bearing liabilities and is the most significant component of the Company’s earnings.

2007 compared to 2006

Net interest income before the provision for loan losses for 2007 increased $2,502, or 20.4% to $14,763 compared to $12,261 in 2006. The increase was due primarily to continued growth in the Company’s loan portfolio, which was funded primarily by deposit growth as well as the Company’s acquisition of First National in the fourth quarter of 2007. The addition of First National increased net interest income $708 in 2007.

Interest and fee income on loans in 2007 was $32,657, an increase of $8,634, or 35.9%, over 2006. The increase in interest income is due to growth and higher average balances on loans. During 2007, approximately 49% of our loan portfolio was tied to a variable rate.

Interest income for tax exempt and taxable securities was $2,239, an increase of $723, or 47.7%, over 2006. The increase in interest income was the result of the acquisition of First National in October 2007 with First National’s investment securities totaling $54,385 at acquisition. Interest income also increased due to higher average balances as well as opportunities to reinvest in higher-yield bonds provided by the short term maturity structure of the investment portfolio. First National had $41,228 in its investment portfolio at year end which generated $380 of interest income after the acquisition date.

Although net interest income increased, our net interest margin continued to experience compression throughout 2007, declining to 3.14% from 3.52% in 2006, a decrease of 38 basis points (“bps”). We experienced challenging competitive conditions and continued competitive pricing pressures throughout 2007, which contributed to the decline in net interest margin. The Bank increased costs of funding resulting from competitive deposit pricing pressure in the Bank’s primary market area and its reliance on brokered and national market deposits contributed to the decline in our net interest margin in 2007. Management anticipates that the net interest margin will improve in 2008 due to the acquisition of First National whose deposit pricing is not as negatively impacted by competition as the Bank’s. Due to changes in market conditions, most of the securities purchased from First National are in an unrealized gain position. We plan to liquidate a portion of these securities in the first quarter of 2008 and reinvest the proceeds in higher yielding loans. We believe the First National acquisition will allow us to decrease our cost of funding through reducing dependency on brokered and national market deposits.

The yield on interest earning assets increased 13 bps to 7.53% in 2007, compared to 7.40% in 2006. This increase was primarily due to continued growth in the loan portfolio and the growth in the investment portfolio. Interest and fee income on loans increased $8,634 over 2006 and $8,200 of the increase was due to the increase in the volume of loans. Loan yields increased only 10 bps over 2006 due to the Federal Reserve Bank cutting rates in the fourth quarter of 2007 and which negatively impacted 49% of our portfolio that is variable rate loans. Investment yields increased 52 bps to 4.85% in 2007, compared to 4.33%in 2006. The increase of $723 in investment income was attributed primarily to the increase in volume of $557.

Interest expense totaled $20,606 for the year ended 2007, compared to $13,528 in 2006, an increase of $7,078 or 52.3%. The increase in interest expense was due to deposit growth in higher costing deposits, consisting primarily of time deposits, as well as an increase in higher costing brokered deposits and national market deposits. Interest expense on time deposits over $100,000 increased $1,787 in 2007. The increase of $1,787 was due to $188 in volume and $1,599 due to interest rates. However, an increase in interest expense of $3,848 in other time deposits was attributed primarily to the increase in volume. The increase in interest expense was also due to additional interest expense of $318 associated with the $15,000 of subordinated debentures issued by us in the third quarter of 2007 to finance a portion of the purchase price for the acquisition of First National. The cost of interest bearing deposits and other liabilities has followed the same trend, increasing 51 bps to 4.87% in 2007, up from 4.36% in 2006.

2006 compared to 2005

Net interest income before the provision for loan losses for 2006 increased $1,962, or 19.1% to $12,261 compared to $10,299 in 2005. The increase was due primarily to continued growth in the Bank’s loan portfolio, which was funded primarily by deposit growth.

Interest and fee income on loans in 2006 was $24,023, an increase of $7,834, or 48.4%, over 2005. The increase in interest income is due to the increase in interest rates and higher average balances on loans. During 2006, approximately 48% of our loan portfolio was tied to a variable rate.

Interest income for tax exempt and taxable securities was $1,516, an increase of $556, or 57.9%, over 2005. The increase in interest income was the result of higher average balances on the investment portfolio and opportunities to reinvest in higher-yielding bonds provided by the short term maturity structure of the investment portfolio.

Although net interest income increased, the Company’s net interest margin continued to compress throughout 2006, declining to 3.52% from 3.81% in 2005, a decrease of 29 bps. The yield curve between short-term and long-term interest rates was essentially flat or inverted throughout 2006, contributing to the decline in the Company’s net interest margin in 2006. This situation, along with challenging competitive conditions and continued competitive pricing pressures experienced by the Company, contributed to the decline in the Company’s net interest margin.

The yield on interest earning assets increased 99 bps to 7.40% in 2006, compared to 6.41% in 2005. This increase was primarily due to the Bank’s continued growth in the loan portfolio and variable rate loans that repriced as interest rates rose in the first half of 2006. Loan yields increased 99 bps and investment yields also benefited from the rise in interest rates as yields increased 91 bps over 2005.

Interest expense totaled $13,528 for the year ended 2006, compared to $7,006 in 2005, an increase of $6,522 or 93.1%. The increase in interest expense was due to deposit growth in higher cost deposits as well as an increase in higher costing brokered deposits and national market time deposits. Interest expense on time deposits over $100,000 increased $2,313 in 2006. The increase was due equally to higher volume and interest rates. The cost of interest bearing deposits and other liabilities has followed the same trend, increasing 140 bps to 4.36% in 2006, up from 2.96% in 2005.

Average Balance Sheets, Net Interest Income)

Changes in Interest Income and Interest Expense

The following table shows the average daily balances of each principal category of our assets, liabilities and stockholders’ equity, an analysis of net interest income for the three years ended December 31.


	2007								2006								2005
	Average			Interest			Revenue/		Average			Interest			Revenue/		Average			Interest			Revenue/
	Balance			Rate			Expense		Balance			Rate			Expense		Balance			Rate			Expense

Gross loans (1 and 2)	$	413,185			7.90	%	$	32,657	$	308,039			7.80	%	$	24,023	$	237,643			6.81	%	$	16,189

Securities available for sale (3)		48,490			4.62	%		2,239		35,465			4.27	%		1,516		28,102			3.42	%		960

Federal funds sold and other		8,079			5.85	%		473		4,824			5.18	%		250		4,260			3.66	%		156


Total interest earning assets		469,754			7.53	%		35,369		348,328			7.40	%		25,789		270,005			6.41	%		17,305

Cash and due from banks		8,847								7,547								6,091
Other nonearning assets		26,120								15,696								12,686
Allowance for loan losses		(4,879	)							(3,745	)							(2,991	)


Total assets	$	499,842							$	367,826							$	285,791


Deposits:
NOW & money market investments	$	61,043			2.75	%	$	1,679	$	47,022			2.24	%	$	1,053	$	49,096			1.53	%	$	751
Savings		12,550			1.17	%		147		8,872			1.33	%		118		9,436			1.20	%		113
Time deposits $100,000 and over		98,047			6.82	%		6,682		94,416			5.18	%		4,895		65,003			3.97	%		2,582
Other time deposits		218,509			4.59	%		10,037		137,488			4.50	%		6,189		99,988			2.96	%		2,963


Total interest-bearing deposits		390,149			4.75	%		18,545		287,798			4.26	%		12,255		223,523			2.87	%		6,409

Other borrowings		32,882			6.27	%		2,061		22,698			5.61	%		1,273		13,322			4.48	%		597


Total interest-bearing liabilities		423,031			4.87	%		20,606		310,496			4.36	%		13,528		236,845			2.96	%		7,006

Noninterest-bearing liabilities		41,635			—			—		32,173			—			—		26,399			—			—


Total liabilities		464,666								342,669								263,244

Shareholders’ equity		35,176								25,157								22,547


Total liabilities and shareholders’ equity	$	499,842							$	367,826							$	285,791


Net interest income							$	14,763							$	12,261							$	10,299


Net interest margin (4)					3.14	%							3.52	%							3.81	%


1		Interest income includes fees on loans of $1,267, $1,131 and $648 in 2007, 2006 and 2005.

2		Nonaccrual loans are included in average loan balances and the associated income (recognized on a cash basis) is included in interest.

3		Amortization cost is included in the calculation of yields on securities available for sale.

4		Net interest income to average interest earning assets.

The following table reflects how changes in the volume of interest earning assets and interest-bearing liabilities and changes in interest rates have affected our interest income, interest expense, and net interest income for the periods indicated. Information is provided in each category with respect to changes attributable to (1) changes in volume (changes in volume multiplied by prior rate); (2) changes in rate (changes in rate multiplied by prior volume); and (3) changes in rate/volume (changes in rate multiplied by change in volume). The changes attributable to the combined impact of volume and rate have all been allocated to the changes due to volume.

Analysis of Changes in Net Interest Income


	2007 to 2006							2006 to 2005
	Due to		Due to					Due to			Due to
	Volume (1)		Rate (2)			Total (3)		Volume (1)			Rate (2)			Total (3)

Interest Income:
Gross loans (4 and 5)	$	8,200	$	434		$	8,634	$	4,796		$	3,038		$	7,834

Securities available for sale		557		166			723		252			304			556

Federal funds sold and other		169		54			223		21			73			94


Total interest earning assets		8,920		660			9,580		5,069			3,415			8,484

Interest Expense:
Deposits:
NOW & money market investments	$	314	$	312		$	626	$	(32	)	$	334		$	302
Savings		49		(20	)		29		(7	)		12			5
Time deposits $100,000 and over		188		1,599			1,787		1,168			1,145			2,313
Other time deposits		3,647		201			3,848		1,111			2,115			3,226


Total interest-bearing deposits		4,198		2,092			6,290		2,240			3,606			5,846

Other borrowings		571		217			788		420			256			676



Total interest-bearing liabilities		4,769		2,309			7,078		2,660			3,862			6,522

Net interest income	$	4,151	$	(1,649	)	$	2,502	$	2,409		$	(447	)	$	1,962


4		Interest income includes fees on loans of $1,267, $1,131 and $648 in 2007, 2006 and 2005.

5		Nonaccrual loans are included in average loan balances and the associated income (recognized on a cash basis) is included in interest.

Noninterest Income

The Company’s noninterest income consists of service charges on deposit accounts, mortgage banking activities, investment service income, and other noninterest income.

2007 compared to 2006

Noninterest income for the year ended December 31, 2007 increased 18.3% to $3,697 compared to $3,125 in 2006. Service charges on deposit accounts are our largest source of noninterest income and increased $124, or 8.2% to $1,644 in 2007 compared to $1,520 in 2006. The largest component of the increase in service charge income was $71 from accounts at First National. First National was acquired by the Company in the

fourth quarter of 2007. The largest component of service charges on deposits is the Bank’s overdraft courtesy product, which generated $1,044 for 2007 compared to $1,037 in 2006. The Bank originates and sells long-term fixed rate mortgages and the related servicing. Mortgage loans originated and sold generated $1,212 in gains for 2007, an increase of $546, or 82.0%, compared to $666 in 2006. Income from mortgage loans originated and sold was impacted positively in 2007 by increasing our mortgage origination staff from 4 in 2006 to 9 in 2007 and expanding into Williamson and Rutherford counties. In 2005, the Bank sold property in Williamson county, Tennessee, which created a deferred gain of $390 due to the Bank’s financing of the loan for this property. During 2006 the Bank sold this loan to another financial institution and recognized the $390 gain into other noninterest income. First National sold investments during the fourth quarter of 2007 with a gain of $19. Other noninterest income increased $273, or 49.7%, to $822 in 2007 from $549 in 2006. The increase in other noninterest income was due primarily from the Bank offering new investment service products, including the Appalachian Fund for Growth II, LLC, an investment in an unconsolidated corporation which qualifies as a “Community Development Entity” and provides loans to low-income communities and an increase in BOLI cash surrender value. Management expects that noninterest income will continue to increase in 2008 as we expands its mortgage origination division and investment services group and as we increases in our size, although, if the housing market in our market areas is negatively impacted by continued economic difficulties, we may be unable to grow our noninterest income related to the origination of mortgage loans even if we increase our staff in these areas.

2006 compared to 2005

Noninterest income for the year ended December 31, 2006 increased 32.6% to $3,125 compared to $2,356 in 2005. Service charges on deposit accounts decreased 2.6% to $1,520 in 2006 compared to $1,561 in 2005. The decrease in service charge income was due to higher average balances on transaction deposit accounts, which allowed customers to avoid service charges. The largest component of service charges on deposits is the Bank’s overdraft courtesy product, which generated $1,037 for 2006 compared to $1,112 in 2005. The Bank originates and sells long-term fixed rate mortgages and the related servicing. Mortgage loans originated and sold generated $666 in gains for 2006, an increase of $197, or 42.0%, compared to $469 in 2005. In 2005, the Bank sold property in Williamson county, Tennessee, which created a deferred gain of $390 due to the Bank’s financing of the loan for this property. During 2006 the Bank subsequently sold this loan to another financial institution and recognized the $390 gain into other noninterest income. Other noninterest income increased $223, or 68.4%, to $549 in 2006 from $326 in 2005. The increase in other noninterest income was due primarily from the Bank offering new investment service products and an increase in BOLI cash surrender value.

The table below shows noninterest income for each of three years ended December 31:


	2007		2006		2005

Service charges on deposit accounts	$	1,644	$	1,520	$	1,561
Mortgage banking activities		1,212		666		469
Gain on sale of securities		19		—		—
Gain on sale of land		—		390		—
Other:
Investment service income		312		228		22
Check printing income		22		24		25
Safe deposit rental		18		12		12
Credit life insurance commissions		11		14		19
BOLI income		150		138		60
ATM income		113		74		70
Appalachian Fund Income		123		—		—
Other		73		59		118

Total noninterest income	$	3,697	$	3,125	$	2,356

Noninterest Expense

Noninterest expense consists of salaries and employee benefits, net occupancy, furniture and equipment, data processing, advertising and public relations, and other operating expenses.

2007 compared to 2006

Noninterest expense for the year ended December 31, 2007 increased 33.9% to $13,997 compared with $10,453 in 2006. During 2007 and 2006, noninterest expenses have increased as we have grown. The growth in noninterest expenses throughout 2007 and 2006 was attributable primarily to salaries and other operating expenses associated with our growth and expansion into Williamson and Rutherford counties and into Hickman county through our acquisition of First National in the fourth quarter of 2007. Salaries and employee benefits increased $1,645, or 30.2% to $7,096 in 2007 compared to $5,451 in 2006. The Company’s staff increased from 96 full time equivalent employees in 2006 to 142 in 2007, an increase of 46 employees. During the fourth quarter of 2007, we acquired First National and 38 additional employees were added to the staff. Also, included in salaries and employee benefits expense is stock based compensation expense of $253 for 2007 and $307 in 2006. The remaining increase of $1,899 was associated with operating expenses including data processing, advertising, audit and accounting, and other expenses. Management expects that noninterest expenses will continue to increase moderately during 2008 in conjunction with our growth in 2007 as we experience a full year of expenses of First National, but should decline as a percentage of average assets as we continue to experience operating efficiencies as our growth continues.

2006 compared to 2005

Noninterest expense for the year ended December 31, 2006 increased 28.3% to $10,453 compared with $8,146 in 2005. During 2006 and 2005, noninterest expenses increased as the Bank has grown. The growth in noninterest expenses throughout 2006 and 2005 was attributable primarily to salaries and other operating expenses associated with growth of the Bank and expansion into Williamson and Rutherford counties. Salaries and employee benefits increased $1,522, or 38.7% to $5,451 in 2006 compared to $3,929 in 2005. The Company’s staff increased from 76 full time equivalent employees at December 31, 2005 to 96 at December 31, 2006. Also included in salaries and employee benefits expense for 2006 is $307 in additional

expenses due to changes in accounting rules, which beginning on January 1, 2006 required compensation expense related to stock options and stock awards to be expensed. The remaining increase of $785 was associated with operating expenses including data processing, advertising, audit and accounting, and other expenses.

The table below shows noninterest expense for each of three years ended December 31:


	2007		2006		2005

Salaries and employee benefits	$	7,096	$	5,451	$	3,929
Occupancy		864		550		453
Furniture and equipment		721		545		518
Data processing fees		873		684		575
Advertising and public relations		719		509		340
Other:
Loan expense		139		146		152
Legal		23		63		119
Audit and accounting fees		345		214		290
Directors expense		174		152		97
Postage and freight		324		268		220
Operational expense		763		476		289
Regulatory and compliance		254		107		111
ATM expense		331		222		147
Other		1,371		1,066		906

Total noninterest expense	$	13,997	$	10,453	$	8,146

Provisions for Loan Losses

During 2007, we recorded a provision for loan losses of $1,259, an increase of $241, or 23.7%, over $1,018 in 2006. We reviewed the loans of First National at the time of acquisition and determined that no additional allowance for loan losses was needed and no additional provision was recorded during 2007, therefore; the growth in the provision was attributable to the growth of $93,039 in loans during 2007 at the Bank. In 2006, the Bank recorded a provision for loan losses of $1,018 compared to $683 for 2005.

Management’s determination of the appropriate level of the provision for loan losses and the adequacy of the allowance for loan losses is based, in part, on an evaluation of specific loans, as well as the consideration of historical loss experience, which management believes is representative of probable loan losses. Other factors considered by management include the composition of the loan portfolio, current and anticipated economic conditions, and the creditworthiness of our borrowers and other related factors. The provision for loan losses has been most directly impacted by the rapid loan growth experienced by the Bank as well as the impact of an increase in net charge offs in 2007 discussed in more detail below.

Income Taxes

The effective income tax rates were 25.7%, 28.4%, and 33.0%, for 2007, 2006 and 2005, respectively. The change in the effective tax rate for 2007 and 2006 was largely due to state net operating losses (NOLs) created in 2006 and 2005 provided by the Company’s real estate investment trust and the Bank’s investment in a project that qualifies for the New Markets Tax Credits program.

Analysis of Financial Condition

Total assets at December 31, 2007 were $636,062, an increase of $214,669 or 50.9%, over 2006 year end assets of $421,393. Average assets for 2007 were $499,842, an increase of $132,016 or 35.9% over average assets for 2006.

The primary reason for the increase in total assets was the acquisition of First National. First National’s assets as of the acquisition date of October 26, 2007 totaled $104,768, net of cash and cash equivalents. Also, continued strong loan demand, which resulted in organic loan growth of $141,635 in gross loans throughout 2007 at the Bank, contributed to the increase in total assets. The increase in total assets was funded primarily by the continued growth of new deposit accounts as well as obtaining national market time deposits, brokered deposits, and public fund deposits. Net loans of $484,522 (excluding mortgage loans held for sale) increased by $139,808 or 40.6% in 2007, from $344,714 in 2006. The increase in loans of $139,808 included $48,000 in loans held at First National at year end 2007. As of December 31, 2007, securities totaled $80,933, an increase of $45,722, or 129.9%, over year end 2006. The increase was primarily attributable to $41,228 of securities at First National. At December 31, 2007, cash and cash equivalents were $27,285, a increase of $12,212 over year end 2006. The increase in cash and cash equivalents resulted from selling $20,289 in securities at First National that resulted in a gain of $19.

Loans

Gross loans (excluding mortgage loans held for sale) grew from $348,973 at December 31, 2006, to $490,608 at December 31, 2007, an increase of $141,635, or 40.6%. Mortgage loans held for sale at December 31, 2007, were $5,710 compared to $3,981 at December 31, 2006, an increase of $1,729. Most of the net loan growth in 2007 was in 1-4 family residential real estate, construction and commercial real estate loans. Loans secured by 1-4 family real estate increased $55,169, while commercial real estate loans increased by $26,180. Construction loans secured by real estate increased $47,201, or 50.4% over 2006. The construction loan increase was due to expanding into the Williamson and Rutherford county markets.

Of the total loans of $490,608 in the portfolio as of year end 2007, $239,540, or 48.8% were variable rate loans and $251,068 were fixed rate loans.

On December 31, 2007, the Company’s loan to deposit ratio (including mortgage loans held for sale) was 88.7%, compared to 96.2% in 2006. The loan to asset ratio (including mortgage loans held for sale) was 78.0% for 2007, compared to 83.8% in 2006. Management expects loan demand to remain strong in 2008, especially in commercial and construction loans.


	December 31, 2007					December 31, 2006
	Amount		% of Total			Amount		% of Total
Real estate
Construction	$	140,905		28.7	%	$	93,704		26.9	%
1-4 family residential		151,478		30.9	%		96,309		27.6	%
Commercial		116,327		23.7	%		90,147		25.8	%
Other		4,567		0.9	%		3,009		0.9	%
Commercial, financial and agricultural		50,240		10.2	%		46,942		13.4	%
Consumer		14,969		3.1	%		11,560		3.3	%
Other		12,122		2.5	%		7,302		2.1	%

Total (1)	$	490,608		100.0	%	$	348,973		100.0	%


(1)		Does not include mortgage loans held for sale at December 31, 2007 and December 31, 2006.

The following table presents various categories of loans contained in our loan portfolio for the periods indicated and the total amount of all loans for such period:


	2007			2006			2005			2004			2003
Real estate
Construction	$	140,905		$	93,704		$	61,530		$	36,241		$	23,977
1-4 family residential		151,478			96,309			79,634			67,844			52,073
Commercial		116,327			90,147			69,549			66,319			63,513
Other		4,567			3,009			894			288			486
Commercial, financial and agricultural		50,240			46,942			36,601			30,068			21,765
Consumer		14,969			11,560			10,803			9,597			9,778
Other		12,122			7,302			407			470			460


Total loans	$	490,608		$	348,973			259,418			210,827			172,052


Allowance for possible loan losses		(6,086	)		(4,259	)		(3,268	)		(2,740	)		(2,249	)


Total loans (net of allowance)	$	484,522		$	344,714		$	256,150		$	208,087		$	169,803

The following is a presentation of an analysis of maturities of loans as of December 31, 2007:


	Due in 1		Due in 1		Due after
Type of Loan	year or less		to 5 years		5 Years		Total

Commercial, financial and agricultural and commercial real estate	$	50,386	$	96,806	$	19,375	$	166,567
Real estate-construction		102,330		36,385		2,190		140,905


Total	$	152,716	$	133,191	$	21,565	$	307,472

The following is a presentation of an analysis of sensitivities of loans to changes in interest rates as of December 31, 2007 for the loan types mentioned above:


Loans due after 1 year with predetermined interest rates	$	153,927
Loans due after 1 year with floating, or adjustable, interest rates	$	829

Asset Quality

The following table presents information regarding impaired, nonaccrual, past due and restructured loans at the dates indicated:


	December 31,
	2007		2006		2005		2004		2003
Loans considered by management as impaired:
Number		67		38		20		10		7
Amount	$	3,945	$	1,416	$	117	$	905	$	533

Loans accounted for on nonaccrual basis:
Number		63		27		12		10		7
Amount	$	2,764	$	1,059	$	508	$	905	$	533

Accruing loans (including consumer loans) which are contractually past due 90 days or more as to principal and interest payments:
Number		—		—		—		—		9
Amount	$	—	$	—	$	—	$	—	$	307

Loans defined as “troubled debt restructurings”
Number		—		—		—		—		—
Amount	$	—	$	—	$	—	$	—	$	—

As of December 31, 2007, there were $4,882 loans classified by management as doubtful or substandard that are not on nonaccrual, which (i) represent or result from trends or uncertainties which management reasonably expects will materially impact future operating results, liquidity, or capital resources, or (ii) represent material credits about which management is aware of any information which causes management to have serious doubts as to the ability of such borrowers to comply with the loan repayment terms.

Accrual of interest is discontinued on a loan when management of the Company determines upon consideration of economic and business factors affecting collection efforts that collection of interest is doubtful.

There are no other loans which are not disclosed above, but where known information about possible credit problems of borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms.

The following table presents information regarding loans included as non accrual and the gross income that would have recorded in the period if the loans had been current, and the amount of interest income on those that was included in net interest income for the period end December 31.


	2007		2006		2005		2004		2003
Nonaccrual interest	$	355	$	144	$	30	$	45	$	160
Lost interest		107		39		16		34		46

The current market condition for commercial real estate loans remains stable and will continue to be an area of growth for the Company. Market conditions for residential development and residential construction has seen a significant softening. In the short term, the Company anticipates market conditions for residential development and residential construction to remain soft and loan growth in the residential loan portfolio to be significantly slower than historical growth levels. The Company has not experienced significant loans problems within the residential development and residential construction loan portfolio. Management and the Board continuously monitor the market conditions and loan portfolio within these key loan areas.

Nonperforming loans are defined as nonaccrual loans, loans still accruing but past due 90 days or more, and restructured loans. The following table presents information regarding nonperforming loans at the dates indicated:


	2007		2006		2005		2004		2003
Loans secured by real estate	$	2,301	$	843	$	436	$	867	$	762
Commercial and Industrial		194		191		34		—		57
Consumer		256		25		—		38		14
Other		13		—		38		—		7

Total	$	2,764	$	1,059	$	508	$	905	$	840

Management classifies commercial and commercial real estate loans as nonaccrual loans when principal or interest is past due 90 days or more and the loan is not adequately collateralized. Also loans are classified as nonaccrual when they are in the process of collection, or when, in the opinion of management, principal or interest is not likely to be paid in accordance with the terms of the obligation. Nonaccrual loans are not reclassified as accruing until principal and interest payments are brought current and future payments appear reasonably certain. Loans are categorized as restructured if the original interest rate, repayment terms, or both were restructured due to deterioration in the financial condition of the borrower. However, restructured loans that demonstrate good performance under the restructured terms and that yield a market rate of interest may be removed from restructured status in the year following the restructure.

Summary of Loan Loss Experience

An analysis of our loss experience is furnished in the following table for the periods indicated, as well as a breakdown of the allowance for loan losses:


	December 31,
	2007			2006			2005			2004			2003
Balance at beginning of period	$	4,259		$	3,268		$	2,740		$	2,249		$	1,773
Increase due to acquisition of First National		730			—			—			—			—

Charge offs:
Commercial, financial and agricultural		(86	)		(8	)		(98	)		(66	)		—
Real Estate-construction		—			—			—			—			—
Real Estate-1 to 4 family residential		(47	)		—			(14	)		(7	)		(30	)
Real Estate-commercial		(2	)		—			—			—			—
Real Estate-other		—			—			—			—			—
Consumer and other loans		(77	)		(42	)		(121	)		(179	)		(130	)

		(212	)		(50	)		(233	)		(252	)		(160	)

Recoveries:
Commercials, financials and agriculture		27			—			—			—			2
Real Estate-construction		—			—			—			—			—
Real Estate-1 to 4 family residential		—			1			25			6			1
Real Estate-commercial		—			—			—			—			—
Real Estate-other		—			—			—			—			—
Consumer and other loans		23			22			53			17			19

		50			23			78			23			22

Net Charge offs		(162	)		(27	)		(155	)		(229	)		(138	)


Provision for loan losses		1,259			1,018			683			720			614

Balance at end of period	$	6,086		$	4,259		$	3,268		$	2,740		$	2,249

Ratio of net charge offs during the period to average loans outstanding during the period		0.04	%		0.01	%		0.07	%		0.12	%		0.09	%


Ratio of nonperforming loans to total loans		0.56	%		0.30	%		0.20	%		0.45	%		0.49	%
Ratio of impaired loans to total loans		0.80	%		0.41	%		0.05	%		0.43	%		0.31	%
Ratio of allowance for loan losses to total loans		1.24	%		1.22	%		1.26	%		1.30	%		1.31	%

At December 31, 2007 and 2006, the allowance was allocated as follows:


	2007					2006
			Percentage of loans					Percentage of loans
			to the allowance in					to the allowance in
	Amount		each category			Amount		each category

Commercial, financial and agricultural	$	596		10	%	$	547		13	%
Real estate-construction		1,611		27	%		1,053		25	%
Real estate-1 to 4 family residential		2,089		34	%		1,266		30	%
Real estate-commercial		1,342		22	%		1,110		26	%
Consumer and other loans		448		7	%		283		6	%

Total	$	6,086		100	%	$	4,259		100	%

At December 31, 2005 and 2004, the allowance was allocated as follows:


	2005					2004
			Percentage of loans					Percentage of loans
			to the allowance in					to the allowance in
	Amount		each category			Amount		each category

Commercial, financial and agricultural	$	458		14	%	$	379		14	%
Real estate-construction		772		24	%		494		17	%
Real estate-1 to 4 family residential		1,038		31	%		818		30	%
Real estate-commercial		871		27	%		925		34	%
Consumer and other loans		129		4	%		124		5	%

Total	$	3,268		100	%	$	2,740		100	%

At December 31, 2003, the allowance was allocated as follows:


	2003
			Percentage of loans to
			the allowance in each
	Amount		category

Commercial, financial and agricultural	$	275		12	%
Real estate-construction		354		16	%
Real estate-1 to 4 family residential		604		27	%
Real estate-commercial		892		39	%
Consumer and other loans		124		6	%

Total	$	2,249		100	%

Allowance for Loan Losses

In considering the adequacy of our allowance for loan losses, management has focused on the fact that as of December 31, 2007, 85% of outstanding loans are secured by real estate. Our consumer loan portfolio is also well secured and, as such, does not, in management’s opinion, involve more than normal credit risk.

Although our loan portfolio is concentrated in Middle Tennessee, management does not believe this geographic concentration presents an abnormally high risk. At December 31, 2007 there were no loan concentrations that exceeded 10% of total loans other than as included in the preceding table of types of loans. Loan concentrations are amounts loaned to a multiple number of borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions.

Securities

At December 31, 2007, we owned $80,933 in securities, compared to $35,211 at year end 2006. Total securities increased in 2007 by $45,722, primarily as a result of our acquisition of First National. The unrealized gains on securities at year end 2007 were $64, net of tax. The investment portfolio was 12.7% of total assets at December 31, 2007, and 8.4% of total assets at December 31, 2006. All of the Company’s securities are classified as available for sale. The Company’s investment portfolio is used to provide interest income and liquidity and for pledging purposes to secure public fund deposits.

The carrying value of securities at December 31 is summarized as follows:


	December 31, 2007					December 31, 2006
	Amount		% of Total			Amount		% of Total

U.S. Government sponsored entities	$	15,919		19.6	%	$	19,776		56.2	%
Mortgage-backed securities		54,119		66.9	%		7,857		22.3	%
State and municipals		6,233		7.7	%		6,092		17.3	%
Other debt securities		4,662		5.8	%		1,486		4.2	%

Total	$	80,933		100.0	%	$	35,211		100.0	%


	December 31, 2005
	Amount		% of Total

U.S. Government sponsored entities	$	18,887		63.0	%
Mortgage-backed securities		3,089		10.3	%
State and municipals		5,487		18.3	%
Other debt securities		2,502		8.4	%

Total	$	29,965		100.0	%

The following table presents the carrying value by maturity distribution of the investment portfolio, along with weighted average yields thereon, as of December 31, 2007:


	Within			1-5			5-10			Beyond
	1 Year			Years			Years			10 Years			Total
U.S. Government sponsored entities	$	3,503		$	11,416		$	1,000		$	—		$	15,919
State and municipals		—			—			3,965			2,268			6,233
Other debt securities		—			—			1,010			3,652			4,662

Total debt securities	$	3,503		$	11,416		$	5,975		$	5,920		$	26,814

Weighted average yield(tax equivalent)		4.82	%		4.68	%		4.87	%		6.54	%		5.15	%


Mortgage-backed securities													$	54,119


Weighted average yield														5.53	%

Premises and Equipment

In 2007, fixed assets, net of depreciation, increased $6,376. The largest component of the increase in fixed assets consisted of $3,166 due to the completion of the Bank’s new downtown Columbia, Tennessee branch.

Rent expense was $288 in 2007, compared to $162 in 2006. The increase was due to leasing a new bank building in Rutherford county, a new lease on the land for the new downtown building in Columbia, Tennessee, and the increase in the number of ATMs.

Deposits

We rely on having a growing deposit base to fund loan and other asset growth. Total deposits were $559,303 at December 31, 2007, compared to $366,766 at December 31, 2006. The following table sets forth the composition of the deposits at December 31:


	2007					2006
	Amount		% of Total			Amount		% of Total

Noninterest-bearing demand accounts	$	52,272		9.3	%	$	34,001		9.3	%
Interest-bearing demand accounts		81,637		14.6	%		46,530		12.7	%
Savings accounts		21,065		3.8	%		8,921		2.4	%
Time deposits greater than $100,000		145,735		26.1	%		114,480		31.2	%
Other time deposits		258,594		46.2	%		162,834		44.4	%

Total	$	559,303		100.0	%	$	366,766		100.0	%

The majority of the deposits continue to be in time deposits. The weighted yield for 2007 on total time deposits was 5.2%. Time deposits (certificate of deposits and IRAs) totaled $404,329, or 72.2% of total deposits. Time deposits less than $100,000 were $258,594 at December 31, 2007, which is an increase of $95,760 from year end 2006. The increase in time deposits less than $100,000 was from national market and personal time deposits. We had a promotion in 2007 that increased personal time deposits by increasing the rates we paid on these deposits. Personal time deposits under $100,000 increased from $50,899 in 2006 to $125,314 in 2007, which included $34,222 in personal time deposits at First National. At December 31, 2007, national market time deposits totaled $114,516, with a weighted average rate of 5.28%. Total brokered time deposits were $23,413 at December 31, 2007 with a weighted average rate of 5.06%. The variable rate time deposit interest rate can change one time over the term of the deposit. Total variable rate time deposits were $28,840 at December 31, 2007, with a weighted average rate of 5.33%. Total variable rate time deposits

were $23,426 at year end 2006 with a weighted average rate of 5.26%. At December 31, 2007, we had $401,110 in time deposits maturing within two years, of which $23,413 were brokered deposits. Time deposits maturing within one year of December 31, 2007 were $380,431, or 94.1% of total time deposits. If we are not able to retain these deposits at maturity, or attract additional deposits at comparable rates, we may be required to seek higher costing deposits to replace these deposits which could negatively impact our net interest margin. The weighted average cost of all deposit accounts was 4.33% in 2007 compared to 3.87% in 2006. The weighted average rate on time deposits was 5.28% in 2007, compared to 4.78% in 2006. Management expects to seek short-term time deposit funding to match variable rate loans. These efforts, if successful, are expected to reduce interest rate risk. The Bank has introduced a free checking account product and has expanded into Williamson and Rutherford counties to access lower cost business accounts. We also expect our expansion into Hickman county through the acquisition of First National to result in an increase in lower costing deposits.

The following tables present, for the periods indicated, the average amount of and average rate paid on each of the following deposit categories:


	Year Ended December 31,
	2007					2006					2005
			Average					Average					Average
	Average		Rate			Average		Rate			Average		Rate
	Amount		Paid			Amount		Paid			Amount		Paid

Noninterest-bearing demand deposits	$	38,112		n/a		$	29,272		n/a		$	24,927		n/a

Interest-bearing demand accounts		61,043		2.75	%		47,022		2.24	%		49,096		1.53	%
Savings deposits		12,550		1.17	%		8,872		1.33	%		9,436		1.20	%
Time deposits		316,556		5.28	%		231,904		4.78	%		164,991		3.36	%

The following table indicates the amount outstanding of time deposits of $100,000 or more and other time deposits of $100,000 or more and respective maturities as of December 31, 2007:


3 months or less	$	44,834
3 months-6 months		58,535
6 months-12 months		32,322
Over 12 months		10,044

Total	$	145,735

Contractual Obligations

The Company has the following contractual obligations as of December 31, 2007:


	Less than		1 — 3		3 — 5		More than
	1 year		years		years		5 years		Total
Long-term debt obligations	$	8,000	$	3,510	$	—	$	23,000	$	34,510

Operating leases		222		308		231		1,470		2,231


Total	$	8,222	$	3,818	$	231	$	24,470	$	36,741

Long-term debt obligations consist of advances from the Federal Home Loan Bank, other borrowed money, and subordinated debentures. The Bank has entered into operating lease agreements for certain branch properties and equipment. Future minimum rental payments under the terms of these noncancellable leases, including renewal options, are included in the operating lease obligations.

Short-Term Borrowings

The table below includes certain information related to borrowed funds with original maturities of less than one year. The short-term borrowings are made up of federal funds sold.


	2007			2006			2005
Balance at year-end		—			—			—
Weighted average interest rate at year-end		—			—			—
Maximum outstanding at any month-end during the year		14,199			8,000			7,400
Average amount outstanding		4,699			1,910			843
Weighted average rates during the year		5.52	%		5.45	%		4.10	%

Subordinated Debentures

We established a Trust that issued a $3,000 floating rate trust preferred security as a part of a private offering in 2002. The Trust can currently redeem the securities any time. The interest is paid and the interest rate resets quarterly. The interest rate is the New York Prime plus 50 basis points. The trust preferred security maturity date is December 31, 2032. The issued subordinated debentures count as Tier 1 capital for regulatory purposes. Debt issuance costs of $74,000 have been capitalized and are being amortized over the term of the securities. Principal officers, directors, and their affiliates at year end 2007 and 2006 owned $700 of the $3,000 subordinated debenture. The proceeds from this offering were utilized to increase the Bank’s capital by $3,000.

In 2005, we established a second Trust that issued $5,000 floating rate obligated mandatory redeemable securities through a special purpose entity as a part of pool offering. The interest is paid and the interest rate resets quarterly. The interest rate is the three month LIBOR plus 150 basis points. These securities mature on September 15, 2035; however, the maturity may be shortened to a date not earlier than September 15, 2010. We issued $5,000 of subordinated debentures to the Trust, which counts as Tier 1 capital for regulatory purposes. There was no debt issuance cost in obtaining the subordinated debenture. The proceeds from the pool offering were used to increase the Bank’s capital.

In 2007, the Company established a third Trust that issued $15,000 floating rate obligated mandatory redeemable securities through a special purpose entity as a part of pool offering. The interest is paid and the interest rate resets quarterly. The interest rate is 7.96% fixed for five years, thereafter; resets to the 3 month LIBOR plus 300 basis points. These securities mature on September 27, 2037; however, the maturity may be shortened to a date not earlier than December 15, 2012. They are presented in liabilities on the balance sheet and $4,390 count as Tier 1 capital and the remaining $10,610 is considered as Tier II capital for regulatory purposes. The proceeds from this offering were used to finance a portion of the cash purchase price paid in connection with the acquisition of First National.

Liquidity

Our liquidity, primarily represented by cash and cash equivalents, is a result of our operating, investing and financing activities. These activities are summarized below for the three years ended December 31:


	2007			2006			2005

Net income	$	2,380		$	2,802		$	2,565
Adjusted to reconcile net income to net cash from operating activities		1,490			(1,517	)		2,063


Net cash from operating activities		3,870			1,285			4,628
Net cash from investing activities		(116,771	)		(100,910	)		(55,702	)
Net cash from financing activities		125,113			88,972			67,560


Net change in cash and cash equivalents		12,212			(10,653	)		16,486


Cash and cash equivalents at beginning of period		15,073			25,726			9,240


Cash and cash equivalents at end of period	$	27,285		$	15,073		$	25,726

The adjustments to reconcile net income to net cash from operating activities consist of mortgage banking activities and provisions for loan losses. The significant components of operating activities for 2007 were $82,697 of mortgage loans originated for sales and proceeds from the sale of mortgage loans of $82,180 which resulted in a gain of $1,212, and provisions for loan loss of $1,259. The adjustments to reconcile net income to net cash from operating activities in 2006 consist of mortgage banking activities, gain on sale of land of $390, income from bank owned life insurance policies of $138, and provisions for loan losses of $1,018. The significant components of operating activities for 2005 were $25,007 mortgage loans originated for sales and proceeds from the sale of mortgage loans $25,094 which resulted in gain of $469 and provisions for loan loss of $683.

Significant components of investing activities during 2007 were net loan originations of $102,243, purchases of securities available for sale of $31,820, offset by the proceeds from the maturities and redemptions of securities available for sale of $20,453 and sales of $20,289 of investment securities. Net assets acquired from purchase of First National of $18,460 also contributed to cash from investing activities. Significant components of investing activities during 2006 were net loan originations of $89,704 and purchases of securities available for sale of $21,173, offset by the proceeds from the maturities and redemptions of securities available for sale of $14,062. Significant components of investing activities during 2005 were net loan originations of $49,950 and purchases of securities available for sale of $14,428, offset by the proceeds from the maturities and redemptions of securities available for sale of $11,745.

Financing activities during 2007 included the issuance of $15,000 in trust preferred securities, net deposits inflows of $107,846, proceeds from issuance of common stock of $4,380, and net proceeds from Federal Home Loan Bank advances of $2,000. Significant financing activities during 2006 included net deposit inflows of $80,523, proceeds from issuance of common stock of $3,761, and net proceeds from Federal Home Loan Bank advances of $5,000. Cash flows from financing activities during 2005 included net deposit inflows of $62,465 and issuance of $5,000 of subordinate debentures.

Liquidity refers to our ability to fund loan demand, meet deposit customers’ withdrawal needs and provide for operating expenses. As summarized in the statement of cash flows, our main sources of cash flow are receipts of deposits from our customers and, to a lesser extent, repayment of loan principal and interest income on loans and securities.

The primary uses of cash are lending to Company’s borrowers and investing in securities and short-term interest earning assets. In 2007, deposit growth kept pace with loan demand. At December 31, 2007, we had $18,000 in surety bonds and $9,000 in FHLB letters of credit to secure public deposits. Surety bonds and FHLB letters of credit were used to keep our security portfolio available for liquidity purposes. Other potential sources of liquidity include the sale of securities available for sale from the Bank’s securities portfolio, the sale of loans held for sale, Federal Home Loan Bank advances, acquisition of national market time deposits or broker time deposits, the purchase of federal funds, or repurchase agreements.

We consider our liquidity sufficient to meet our outstanding short and long-term needs. We expect to be able to fund or refinance, on a timely basis, our material commitments and long-term liabilities.

Off-Balance Sheet Arrangements

At December 31, 2007, we had unfunded loan commitments outstanding of $83,020 and unfunded letters of credit of $4,409. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, we have the ability to liquidate federal funds sold or securities available for sale or on a short-term basis to borrow and purchase federal funds from other financial institutions. Additionally, we could sell participations in these or other loans to correspondent banks.

Capital Resources

Our total shareholders’ equity at December 31, 2007, was $37,173 compared to $30,657 at December 31, 2006, and $24,017 at December 31, 2005. The increase in shareholder’s equity in 2007 of $6,516 was the result of net income of $2,380 and the issuance of 5,617 shares of common stock under the stock option plan of $61, $22 in vesting of restricted stock awards, and a tax benefit of $12 arising from exercising stock options. Also we had net proceeds of $4,380 from the issuance of 147,630 shares of common stock from a stock offering beginning in 2006 that positively impacted shareholders’ equity. The change also included stock-based compensation expense of $231 and an increase in the fair value of available for sale securities, net of tax, of $126. Offsetting these increases was a cash dividend paid to shareholders in the total amount of $696.

As of December 31, 2007, and December 31, 2006, the most recent regulatory notifications categorized the Bank and First National as well capitalized under the regulatory framework for prompt corrective action. Our total capital to risk-weighted assets ratios for year end 2007 and 2006 were 10.97% and 11.25%. Our Tier 1 to risk weighted assets ratios were 7.87% and 10.14% at year end 2007 and 2006. Also, our Tier 1 to average

assets ratios were 6.76% and 9.45% at year end 2007 and 2006. The subordinated debentures, issued in 2002, 2005 and 2007, increased Tier 1 capital, giving the Bank the opportunity to continue its asset growth.

We conducted a stock offering during the fourth quarter of 2006 and the first quarter 2007 in order to provide us with additional capital. As a result of this offering, we sold 273,090 shares for total net proceeds of $8,141. The proceeds of the stock offering were used to strengthen our capital base and position us to continue to help meet our goal of remaining “well capitalized.’’

Return on Equity and Assets

Returns on average consolidated assets and average consolidated equity and the ratio of average equity to average assets and the dividend payout ratio for the periods indicated are as follows:


	2007			2006			2005

Return on average assets		0.47	%		0.76	%		0.90	%
Return on average equity		6.77	%		11.14	%		11.38	%
Average equity to average assets ratio		7.04	%		6.84	%		7.89	%
Dividend payout ratio		29.24	%		20.52	%		—

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Sensitivity

Management uses a gap simulation model that takes cash flows into consideration. These include mortgage-backed securities, loan prepayments, and expected calls on securities. Non-maturing balances such as money markets, savings, and NOW accounts have no contractual or stated maturities. A challenge in the rate risk analysis is to determine the impact of the non-maturing balances on the net interest margin as the interest rates change. Because these balances do not “mature” it is difficult to know how they will reprice as rates change. It is possible to glean some understanding by reviewing our pricing history on these categories relative to interest rates. Using the interest rate history from the Asset Liability Management software database spanning up to 20 quarters of data, we can derive the relationship between interest rates changes and the offering rates themselves. The analysis uses the T-Bill rate as an indicator of rate changes. The gap analysis uses beta factors to spread balances to reflect repricing speed. In the gap analysis the model considers deposit rate movements to determine what percentage of interest-bearing deposits that is actually repriceable within a year. Our cumulative one year gap position at December 31, 2007, was -2.5% of total assets. Our policy states that our one-year cumulative gap should not exceed 15% of total assets.

At year end 2007, $403,264 of $592,753 of interest earning assets will reprice or mature within one year. Loans maturing or repricing within one year totaled $368,848, or 74.3% of total loans. We had $18,392 loans maturing or repricing after five years. As of December 31, 2007, we had $380,431 in time deposits maturing or repricing within one year.

Gap analysis only shows the dollar volume of assets and liabilities that mature or reprice. It does not provide information on how frequently they will reprice. To more accurately capture our interest rate risk, we measure the actual effects repricing opportunities have on earnings through income simulation models such as rate shocks of economic value of equity and rate shock interest income simulations.

To evaluate the impact of rate change on income, the rate shock simulation of interest income is the best technique because variables are changed for the various rate conditions. Each category of earning assets and

liabilities interest change is calculated as rates move up and down. In addition the prepayment speeds and repricing speeds are changed. Rate shock is a method for stress testing the net interest margin over the next four quarters under several rate change levels. These levels span four 100bps increments up and down from the current interest rate. Our policy guideline is that the maximum percentage change for net interest income cannot exceed plus or minus 10% on 100 bps change and 15% on 200bps change. The following illustrates the effects on net interest income of shifts in market interest rates from the rate shock simulation model.


December 31, 2007	+200 bp			+100bp			-100bp			-200bp
Basis Point Change
Increase (decrease in net interest income)		7.07	%		3.55	%		(3.60	%)		(7.36	%)


December 31, 2006	+200 bp			+100bp			-100bp			-200bp
Basis Point Change
Increase (decrease in net interest income)		8.17	%		4.11	%		(3.22	%)		(6.50	%)

There are more dollars at risk in income in 2007 if rates go down, compared to 2006. There are fewer dollars at risk in income in the rate shock simulation of interest income when rates were rising 100 bps compared to 2007 and 2006.

Our Economic Value of Equity simulation measures our long-term interest rate risk. The economic value is the difference between the market value of the assets and the liabilities and, technically, it is our liquidation. The technique is to apply rate changes and compute the value. The slope of the change between shock levels is a measure of the volatility of value risk. The slope is called duration. The greater the slope, the greater the impact or rate change on our long-term performance. Our policy guideline is that the maximum percentage change on economic value of equity cannot exceed plus or minus 10% on 100bp change and 20% on 200bp change. The following illustrates our equity at risk in the economic value of equity model.


December 31, 2007	+200 bp			+100bp			-100bp			-200bp
Basis Point Change
Increase (decrease in equity at risk)		15.63	%		6.77	%		(3.23	%)		(4.62	%)


December 31, 2006	+200 bp			+100bp			-100bp			-200bp
Basis Point Change
Increase (decrease in equity at risk)		(4.00	%)		(1.90	%)		1.60	%		2.80	%

There was significant impact on equity at risk in the economic value of equity simulation between 2007 and 2006. The impact was due to unmatched repricing of assets and liabilities primarily due to longer term investments of First National.

One of management’s objectives in managing our balance sheet for interest rate sensitivity is to reduce volatility in the net interest margin by matching, as closely as possible, the timing of the repricing of its interest rate sensitive assets with interest rate sensitive liabilities.

Impact of Inflation

The consolidated financial statements and related notes presented elsewhere in the report have been prepared in accordance with accounting principles generally accepted in the United States. This requires the measurement of financial position and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. Unlike most industrial

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following consolidated financial statements of the Company, together with the Notes thereto and the Management Report on Internal Control over Financial Reporting and Reports of Independent Registered Public Accounting Firm thereon, are included on pages F-1 to F-37 of this Annual Report on Form 10-K and are incorporated herein by reference:

	•		Balance Sheets as of December 31, 2007 and 2006

	•		Statements of Operations for the three years ended December 31, 2007

	•		Statements of Changes in Shareholders’ Equity for the three years ended December 31, 2007

	•		Statements of Cash Flows for the three years ended December 31, 2007

	•		Notes to Consolidated Financial Statements.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. MANAGEMENT’S EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures, as defined in Rules 13a-15(e)and 15d-15(d) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

The report of the Company’s management on the Company’s internal control over financial reporting is set forth on page F-1 of this Annual Report on Form 10-K.

There were no changes in the Company’s internal controls over financial reporting during the Company’s fiscal quarter ended December 31, 2007 that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

The information required by this Item 10 will appear in, and is hereby incorporated by reference to, the information under the headings “Proposal I: Election of Directors,” “Executive Officers,” “Meetings and Committees of the Board of Directors,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement for the 2008 annual meeting of shareholders.

The Company has adopted a code of conduct for its senior executive and financial officers (the “Code of Conduct”), a copy of which is available under the “Disclosures” section on the Company’s website at www.cfbk.com. The Company will make any legally required disclosures regarding amendments to or waivers of, provisions of its Code of Conduct on its website at www.cfbk.com.

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item 11 will appear in, and is hereby incorporated by reference to, the information under the headings “Executive and Director Compensation” and “Compensation Committee Interlocks and Insider Participation” in our definitive proxy statement for the 2008 annual meeting of shareholders.


ITEM 12.		SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Certain of the information required by this Item 12 will appear in, and is hereby incorporated by referenced from, the information under the heading “Security Ownership of Certain Beneficial Owners and Management” in our definitive proxy statement for the 2008 annual meeting of shareholders.

Equity Compensation Plan Information

The following table set forth certain information as of December 31, 2007 regarding compensation plans under which our equity securities are available for issuance.

Number of

Number of securities

securities to be

remaining available

issued upon

Weighted average

for future issuance

exercise of

exercise price of

under equity

outstanding

compensation plans

options, warrant

options, warrants

(excluding securities

and rights

reflected in (a))

(a)

(b)

(c)

Equity compensation plans approved by security holders

257,877

16.15

286,795

Equity compensation plans not approved by stockholders

—

257,877

16.15

286,795

SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	COMMUNITY FIRST, INC.
Date: March 17, 2008	By:	/s/ Marc R. Lively
		Marc R. Lively
		President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated and on the dates indicated.


Signature	Title	Date


/s/ Eslick E. Daniel, M.D. Eslick E. Daniel, M.D.	Chairman of the Board	March 17, 2008

/s/ Marc R. Lively Marc R. Lively	President and Chief Executive Officer and Director (Principal Executive Officer)	March 17, 2008

/s/ Dianne Scroggins Dianne Scroggins	Chief Financial Officer (Principal Financial and Accounting Officer)	March 17, 2008

/s/ Fred C. White Fred C. White	Director	March 17, 2008

/s/ Roger Witherow Roger Witherow	Director	March 17, 2008

/s/ Bernard Childress Bernard Childress	Director	March 17, 2008

MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Community First, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Community First, Inc.’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Community First, Inc.’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. In conducting Community First, Inc’s evaluation of the effectiveness of its internal control over financial reporting, the Company has excluded the operations of First National Bank of Centerville (FNB), which Community First, Inc. acquired October 26, 2007. At the acquisition date, total assets of FNB were $105 million. Further information concerning the acquisition of FNB appears in Note 18, Business Combinations, to the accompanying audited consolidated financial statements.

Based on our assessment we believe that, as of December 31, 2007, the Company’s internal control over financial reporting is effective based on those criteria. Community First, Inc.’s independent registered public accounting firm has issued an audit report on Community First, Inc.’s internal control over financial reporting.


March 14, 2008				/s/ Marc R. Lively
(Date)				Marc R. Lively, President and Chief Executive Officer


March 14, 2008				/s/ Dianne Scroggins
(Date)				Dianne Scroggins, Chief Financial Officer

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders
Community First, Inc.

We have audited Community First, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Community First, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Community First, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

The Company acquired First National Bank of Centerville (FNB) on October 26, 2007. Total assets of FNB were $105 million. Management excluded FNB’s internal control over financial reporting from its assessment of effectiveness of the Company’s internal control over financial reporting as of December 31, 2007. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of FNB.

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders
Community First, Inc.

We have audited the accompanying consolidated balance sheets of Community First, Inc. (the “Company”) as of December 31, 2007 and 2006 and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Community First, Inc. at December 31, 2007 and 2006 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Community First, Inc.’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2008, expressed an unqualified opinion thereon.

/s/ Crowe Chizek and Company LLC

Brentwood, Tennessee
March 14, 2008

F-4

COMMUNITY FIRST, INC.
CONSOLIDATED BALANCE SHEETS
December 31
(Dollar amounts in thousands, except per share data)


	2007			2006
ASSETS
Cash and due from banks	$	11,913		$	13,886
Federal funds sold		15,372			1,187

Cash and cash equivalents		27,285			15,073
Securities available for sale		80,933			35,211
Loans held for sale		5,710			3,981
Loans		490,608			348,973
Allowance for loan losses		(6,086	)		(4,259	)

Net loans		484,522			344,714

Restricted equity securities		1,090			905
Premises and equipment		17,256			10,880
Goodwill		4,622			—
Core deposit and customer relationship intangibles		2,812			—
Accrued interest receivable		3,382			2,376
Bank owned life insurance		3,848			3,698
Other assets		4,602			4,555


Total assets	$	636,062		$	421,393

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest-bearing	$	52,272		$	34,001
Interest-bearing		507,031			332,765

Total deposits		559,303			366,766

Federal Home Loan Bank advances		11,000			13,000
Subordinated debentures		23,000			8,000
Other borrowed money		510			—
Accrued interest payable		4,040			2,176
Other liabilities		1,036			794

Total liabilities		598,889			390,736

Commitments and contingent liabilities (Note 14)

Shareholders’ equity
Common stock, no par value, authorized 5,000,000 shares; 3,168,960 shares issued 2007, 3,015,540 shares issued 2006		26,695			21,989
Retained earnings		10,414			8,730
Accumulated other comprehensive income (loss)		64			(62	)

Total shareholders’ equity		37,173			30,657


Total liabilities and shareholders’ equity	$	636,062		$	421,393

See accompanying notes to consolidated financial statements.

F-5

COMMUNITY FIRST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31
(Dollar amounts in thousands, except per share data)


	2007		2006		2005
Interest income
Loans, including fees	$	32,657	$	24,023	$	16,189
Taxable securities		2,004		1,307		785
Tax exempt securities		235		209		175
Federal funds sold and other		473		250		156

Total interest income		35,369		25,789		17,305

Interest expense
Deposits		18,545		12,255		6,409
Federal Home Loan Bank advances and federal funds purchased		1,082		673		326
Subordinated debentures and other		979		600		271

Total interest expense		20,606		13,528		7,006


Net interest income		14,763		12,261		10,299
Provision for loan losses		1,259		1,018		683


Net interest income after provision for loan losses		13,504		11,243		9,616

Noninterest income
Service charges on deposit accounts		1,644		1,520		1,561
Mortgage banking activities		1,212		666		469
Net gains on sale of securities		19		—		—
Gain on sale of land		—		390		—
Other		822		549		326

Total noninterest income		3,697		3,125		2,356

Noninterest expenses
Salaries and employee benefits		7,096		5,451		3,929
Occupancy		864		550		453
Furniture and equipment		721		545		518
Data processing fees		873		684		575
Advertising and public relations		719		509		340
Other		3,724		2,714		2,331

Total noninterest expenses		13,997		10,453		8,146


Income before income taxes		3,204		3,915		3,826
Income taxes		824		1,113		1,261

Net income	$	2,380	$	2,802	$	2,565


Earnings per share
Basic	$	0.76	$	0.97	$	0.89
Diluted		0.73		0.94		0.86

See accompanying notes to consolidated financial statements.

F-6

COMMUNITY FIRST, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31
(Dollar amounts in thousands, except per share data)


								Accumulated
								Other			Total
			Common		Retained			Comprehensive			Shareholders’
	Shares		Stock		Earnings			Income (Loss)			Equity
Balance at January 1, 2005		2,865,848	$	17,563	$	3,938		$	(49	)	$	21,452

Exercise of stock options		7,666		56		—			—			56
Tax benefit arising from the exercised stock options		—		39		—			—			39
Comprehensive income
Net income		—		—		2,565			—			2,565
Other comprehensive income
Change in unrealized gain (loss) on securities available for sale, net		—		—		—			(95	)		(95	)


Total comprehensive income												2,470


Balance at December 31, 2005		2,873,514		17,658		6,503			(144	)		24,017

Stock offering, net of issuance costs		125,460		3,761		—			—			3,761
Exercise of stock options		16,566		121		—			—			121
Tax benefit arising from the exercised stock options		—		142		—			—			142
Stock based compensation expense
Restricted stock grants		—		5		—			—			5
Stock options		—		302		—			—			302
Cash dividend declared ( $.20 per share)		—		—		(575	)		—			(575	)
Comprehensive income
Net income		—		—		2,802			—			2,802
Other comprehensive income
Change in unrealized gain (loss) on securities available for sale, net		—		—		—			82			82


Total comprehensive income												2,884


Balance at December 31, 2006		3,015,540	$	21,989	$	8,730		$	(62	)	$	30,657

See accompanying notes to consolidated financial statements.

F-7

COMMUNITY FIRST, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31
(Dollar amounts in thousands, except per share data)


			Common		Retained			Accumulated Other Comprehensive			Total Shareholders’
	Shares		Stock		Earnings			Income (Loss)			Equity
Balance at December 31, 2006		3,015,540	$	21,989	$	8,730		$	(62	)	$	30,657

Stock offering, net of issuance costs		147,630		4,380		—			—			4,380
Exercise of stock options		5,617		61		—			—			61
Tax benefit arising from the exercised stock options		—		12		—			—			12
Stock based compensation expense
Restricted stock grants		173		22		—			—			22
Stock options		—		231		—			—			231
Cash dividend declared ( $.22 per share)		—		—		(696	)		—			(696	)
Comprehensive income
Net income		—		—		2,380			—			2,380
Other comprehensive income
Change in unrealized gain (loss) on securities available for sale, net		—		—		—			126			126

Total comprehensive income												2,506


Balance at December 31, 2007		3,168,960	$	26,695	$	10,414		$	64		$	37,173

See accompanying notes to consolidated financial statements.

F-8

COMMUNITY FIRST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
(Dollar amounts in thousands, except per share data)


	2007			2006			2005
Cash flows from operating activities
Net income	$	2,380		$	2,802		$	2,565
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		800			505			481
Amortization		(35	)		(3	)		68
Provision for loan losses		1,259			1,018			683
Deferred income tax benefits		(348	)		(429	)		(204	)
Mortgage loans originated for sale		(82,697	)		(46,084	)		(25,007	)
Proceeds from sale of mortgage loans		82,180			44,659			25,094
Gain on sale of loans		(1,212	)		(666	)		(469	)
Gain on sale of securities		(19	)		—			—
Loss on sale of other real estate owned		29			25			27
Federal Home Loan Bank stock dividends		(14	)		(43	)		(28	)
Increase in accrued interest receivable		(243	)		(912	)		(523	)
Increase in accrued interest payable		1,421			1,113			448
Gain on sale of land		—			(390	)		—
Compensation expense under stock based compensation		253			307			—
Bank owned life insurance		(150	)		(138	)		(60	)
Tax benefit on exercise of stock options		(12	)		(142	)		(39	)
Other, net		278			(337	)		1,592

Net cash from operating activities		3,870			1,285			4,628

Cash flows from investing activities
Available for sale securities
Sale of securities		20,289			—			—
Purchases:
Mortgage-backed securities		(16,514	)		(5,792	)		—
Other		(15,306	)		(15,381	)		(14,428	)
Maturities, prepayments, and calls:
Mortgage-backed securities		3,473			1,061			1,245
Other		16,980			13,001			10,500
Purchase of Federal Home Loan Bank stock		(139	)		(199	)		(54	)
Purchase of bank, net of cash acquired (Note 18)		(18,460	)		—			—
Net increase in loans		(102,243	)		(89,704	)		(49,950	)
Proceeds from sale of other real estate owned		81			188			319
Disposal of premises and equipment		—			—			1,591
Additions to premises and equipment		(4,932	)		(4,084	)		(1,425	)
Purchase of life insurance policies		—			—			(3,500	)

Net cash from investing activities		(116,771	)		(100,910	)		(55,702	)

See accompanying notes to consolidated financial statements.

F-9

COMMUNITY FIRST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
(Dollar amounts in thousands, except per share data)


	2007			2006			2005
Cash flows from financing activities
Increase in deposits		107,846			80,523			62,465
Proceeds from Federal Home Loan Bank advances		17,500			9,000			—
Payment on Federal Home Loan Bank advances		(19,500	)		(4,000	)		—
Proceeds from issuance of subordinated debentures		15,000			—			5,000
Proceeds from other borrowed money		8,310			—			—
Payments on other borrowed money		(7,800	)		—			—
Proceeds from issuance of common stock		4,380			3,761			—
Proceeds from stock option exercises		61			121			56
Tax benefit on exercise of stock options		12			142			39
Cash paid for dividends		(696	)		(575	)		—

Net cash from financing activities		125,113			88,972			67,560


Net change in cash and cash equivalents		12,212			(10,653	)		16,486

Cash and cash equivalents at beginning of period		15,073			25,726			9,240


Cash and cash equivalents at end of period	$	27,285		$	15,073		$	25,726


Supplemental disclosures of cash flow information Cash paid during year for:
Interest	$	19,178		$	12,415		$	6,558
Income taxes		1,130			1,470			1,388
Supplemental noncash disclosures Transfer from loans to repossessed assets		703			61			602

See accompanying notes to consolidated financial statements.

F-10

COMMUNITY FIRST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Principles of Consolidation: The consolidated financial statements include Community First, Inc. and its wholly-owned subsidiaries as of December 31, 2007, Community First Bank & Trust (the “Bank”) and First National Bank of Centerville (“First National”), together are referred to as “the Company”. Intercompany transactions and balances are eliminated in consolidation.

The Company provides financial services through its offices in Maury, Williamson, Rutherford and Hickman counties. 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 flow from operations of businesses. There are no significant concentrations of loans to any one industry or customer. The customers’ ability to repay their loans is dependent, however, on the real estate and general economic conditions in the area. Other financial instruments, which potentially represent concentrations of credit risk, include deposit accounts in other financial institutions and federal funds sold.

Use of Estimates: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses and fair values of financial instruments are particularly subject to change.

Cash Flows: Cash and cash equivalents include cash, deposits with other financial institutions with maturities under 90 days, and federal funds sold. Net cash flows are reported for customer loan and deposit transactions.

Securities: Debt securities are classified as available for sale when they might be sold before maturity. Equity securities with readily determinable fair values are classified as available for sale. Securities classified as available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income, net of tax.

Interest income includes amortization of purchase premium or discount. Premiums and discounts on securities are amortized on the level-yield method without anticipating prepayments, except for mortgage-backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

Declines in the fair value of securities below their amortized cost that are other than temporary are reflected as realized losses. In estimating other-than-temporary losses, management considers the length of time and extent that fair value has been less than amortized cost, the financial condition and near term prospects of the issuer, and the Company’s ability and intent to hold the security for a period sufficient to allow for any anticipated recovery in fair value.

Loans Held for Sale: Mortgage loans originated and intended for sale in the secondary market are carried at cost, which approximates market value. Loans held for sale are considered short term with the time frame being less than 90 days from when the Company funds the loan held for sale until the loan is purchased by a third party investor. Under normal course of business, at the time of funding of the loan held for sale by the Company there is a commitment from a third party investor to purchase the loan held for sale. The Company

(Continued)

F-11

COMMUNITY FIRST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

recognizes revenue upon purchase of the loan held for sale by the third party investor, with the Company receiving a service release premium from the third party investor.

Loans: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at the principal balance outstanding, net of unearned interest and an allowance for loan losses. Interest income is accrued on the unpaid principal balance.

Interest income on loans is discontinued at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not received for loans placed on nonaccrual is reversed against interest income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Purchased Loans: The Company purchased a group of loans in a business combination. Purchased loans that show evidence of credit deterioration since origination are recorded at the allocated fair value in a purchase business combination, such that there is no carryover of the seller’s allowance for loan losses. After acquisition, incurred losses are recognized by an increase in the allowance for loan losses.

Purchased loans are accounted for individually or aggregated into pools of loans based on common risk characteristics (e.g., credit score, loan type, and date of origination). The Company estimates the amount and timing of expected cash flows for each purchased loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).

Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

Allowance for Loan Loss: The allowance for loan losses is a valuation allowance for probable incurred losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using the nature and volume of the portfolio, information about specific borrower situations, and estimated collateral values, economic conditions, and other factors in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 114, Accounting by Creditors for Impairments of a loan and SFAS 5, Accounting for Contingencies. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loans that, in management’s judgment, should be charged off.

The allowance for loan losses is maintained at a level management believes will be adequate to absorb losses on existing loans that may become uncollectible. Provision to and adequacy of the allowance for

(Continued)

F-12

COMMUNITY FIRST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

loan losses are based on the evaluation of the loan portfolio utilizing objective and subjective criteria, in accordance with SFAS 114 and SFAS 5. The objective criteria primarily include an internal grading system and specific allocations for impaired loans. The Company utilizes a historical analysis to validate the overall adequacy of the allowance for loan losses in accordance with SFAS 5. The subjective criteria take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, and business conditions that may affect the borrowers’ ability to pay, and other relevant factors. Changes in any of these criteria or the availability of new information could require adjustments of the allowance for loan losses in future periods.

Under SFAS 114, a loan is impaired when it is probable that the bank will be unable to collect all amounts due (including both interest and principal) according to the contractual terms of the loan agreement. Generally, a loan is impaired for purposes of SFAS 114 if it exhibits the same level of weaknesses and probability of loss as loans (or portions of loans) classified special mention, substandard, doubtful or loss. Commercial and commercial real estate loans are individually evaluated for impairment. Consumer and residential real estate loans are also 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, net of selling costs, if repayment is expected solely from the collateral.

The Bank automatically places loans on non-accrual when they become 90 days past due, however; when in management’s opinion the borrower may be unable to meet payments the loan may be placed on non-accrual at that time even if not then 90 days past due. The accrual of interest on impaired loans is discontinued when, in management’s opinion, the Company may be unable to collect all outstanding principal and accrued interest. When interest is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received.

Foreclosed Assets/Assets Held For Resale: Real estate and personal property acquired through or in lieu of loan foreclosure and repossession are to be resold and are initially recorded at the lesser of current principal investment or fair market value less estimated cost to sell at the date of foreclosure. Valuation of these assets is periodically reviewed by management with such assets adjusted to the then fair market value net of estimated selling cost, if lower, until disposition.

Gains and losses from the sale of foreclosed asset, and real estate are recorded in noninterest income, and expenses used to maintain the properties are included in noninterest expense. If the fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense.

Premises and Equipment: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 5 to 39 years. Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 7 years.

Restricted Equity Securities: These securities consist primarily of Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank (“FRB”) stock. Members of the FHLB are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. These securities are carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate

(Continued)

F-13

COMMUNITY FIRST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

recovery of par value. Both cash and stock dividends are reported as income.

Bank Owned Life Insurance: The Company has purchased life insurance policies on certain key employees. Upon adoption of EITF 06-5, which is discussed further below, bank owned life insurance is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Prior to adoption of EITF 06-5, the Company recorded owned life insurance at its cash surrender value.

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5, Accounting for Purchases of Life Insurance — Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance). This Issue requires that a policyholder consider contractual terms of a life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all individual policies in a group are surrendered at the same time, that the surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the Issue requires disclosure when there are contractual restrictions on the Company’s ability to surrender a policy. The adoption of EITF 06-5 on January 1, 2007 had no impact on the Company’s financial condition or results of operations.

Goodwill and Other Intangible Assets: Goodwill results from a business acquisition and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable intangible assets. Goodwill is assessed at least annually for impairment and any such impairment will be recognized in the period identified.

Other intangible assets consist of core deposit and acquired customer relationship intangible assets arising from a bank acquisition. They are initially measured at fair value and then are amortized on an accelerated method over their estimated useful lives, which were determined to be 15 years.

Long-Term Assets: Premises and equipment, core deposit intangible, and other long-term assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

Loan Commitments and Related Financial Instruments: Financial instruments include off-balance sheet credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. Such financial instruments are recorded when they are funded.

Stock-Based Compensation: Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No.123(R), Share-Based Payment, using the modified prospective transition method. Accordingly, starting in 2006 the Company has recorded stock-based employee compensation cost using the fair value method.

Prior to January 1, 2006, employee compensation expense under stock options was reported using the intrinsic value method; therefore, no stock-based compensation cost is reflected in net income for the year ended December 31, 2005, as all options granted had an exercise price equal to or greater than the market price of the underlying common stock at date of grant.

(Continued)

F-14

COMMUNITY FIRST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The following table illustrates the effect on net income and earnings per share if expense was measured using the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, for the year ending December 31, 2005:


Net income as reported	$	2,565
Deduct: Stock-based compensation expense determined under fair value based method		173

Pro forma net income	$	2,392


Basic earnings per share
As reported	$	0.89
Pro forma		0.83

Diluted earnings per share
As reported		0.86
Pro forma		0.80

Income Taxes: Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.

The Company adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), as of January 1, 2007. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company’s adoption of FIN 48 had no affect on the Company’s financial statements.

The Company recognizes interest and/or penalties related to income tax matters in income tax expense.

Retirement Plans: Supplemental employee retirement plan (“SERP”) expense is the net of service and interest cost, return on plan assets and amortization of gains and losses not immediately recognized. Employee 401(k) and profit sharing plan expense is the amount of matching contributions. The Company will match 100% of the first 4% the employee contributes to their 401(k) annually.

Earnings per Common Share: Basic earnings per common share is net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock options and unvested stock awards. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issue of the financial statements.

Comprehensive Income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, which are also recognized as a separate component of equity.

(Continued)

F-15

COMMUNITY FIRST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loss Contingencies: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank was required to meet regulatory reserve and clearing requirements. These balances do not earn interest.

Stock Dividends: A two-for one stock split to shareholders in the form of a 100% stock dividend was distributed in May 2005, resulting in the issuance of 1,433,424 shares of common stock. Share data has been adjusted to reflect the stock dividend.

Dividend Restriction: Banking regulations require maintaining certain capital levels and may limit the dividends paid by the Bank and First National to the Company or by the Company to shareholders.

Fair Value of Financial Instruments: Fair value of financial instruments is estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

Operating Segments: While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated in one reportable operating segment.

Reclassifications: Some items in the prior year financial statements were reclassified to conform to the current presentation.

Adoption of New Accounting Standards: In February 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 155, Accounting for Certain Hybrid Financial Instruments (SFAS No.155), which permits fair value remeasurement for hybrid financial instruments that contain an embedded derivative that otherwise would require bifurcation. Additionally, SFAS No. 155 clarifies the accounting guidance for beneficial interests in securitizations. Under SFAS No. 155, all beneficial interests in a securitization will require an assessment in accordance with SFAS No. 133 to determine if an embedded derivative exists within the instrument. In January 2007, the FASB issued Derivatives Implementation Group Issue B40, Application of Paragraph 13(b) to Securitized Interests in Prepayable Financial Assets (DIG Issue B40). DIG Issue B40 provides an exemption from the embedded derivative test of paragraph 13(b) of SFAS No. 133 for instruments that would otherwise require bifurcation if the test is met solely because of a prepayment feature included with the securitized interest and prepayment is not controlled by the security holder. SFAS No. 155 and DIG Issue B40 are effective for fiscal years beginning after September 15, 2006. The adoption of SFAS No. 155 and DIG Issue B40 did not have a material impact on the Company’s consolidated financial position or results of operations.

(Continued)

F-16

COMMUNITY FIRST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Effect of Newly Issued But Not Yet Effective Accounting Standards: In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157. This FSP, delays the effective date of FAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company does not expect the impact of this standard to be material.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new standard is effective for the Company on January 1, 2008. The Company did not elect the fair value option for any financial assets or financial liabilities.

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This issue requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants’ employment or retirement. The required accrued liability will be based on either the post-employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. This Issue is effective for fiscal years beginning after December 15, 2007. The Company does not expect the impact of this standard to be material.

On November 5, 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value through Earnings (“SAB 109”). Previously, SAB 105, Application of Accounting Principles to Loan Commitments, stated that in measuring the fair value of a derivative loan commitment, a company should not incorporate the expected net future cash flows related to the associated servicing of the loan. SAB 109 supersedes SAB 105 and indicates that the expected net future cash flows related to the associated servicing of the loan should be included in measuring fair value for all written loan commitments that are accounted for at fair value through earnings. SAB 105 also indicated that internally-developed intangible assets should not be recorded as part of the fair value of a derivative loan commitment, and SAB 109 retains that view. SAB 109 is effective for derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The Company does not expect the impact of this standard to be material.

(Continued)

F-17

COMMUNITY FIRST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

NOTE 2 — SECURITIES AVAILABLE FOR SALE

The fair value of securities available for sale and the related gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) for 2007 and 2006 were as follows:


			Gross		Gross
	Fair		Unrealized		Unrealized
	Value		Gains		Losses
2007
U.S. Government sponsored entities	$	15,919	$	52	$	—
Mortgage-backed securities		54,119		178		(163	)
State and municipals		6,233		49		(26	)
Other debt securities		4,662		14		—

Total	$	80,933	$	293	$	(189	)

2006
U.S. Government sponsored entities	$	19,776	$	14	$	(45	)
Mortgage-backed securities		7,857		17		(76	)
State and municipals		6,092		47		(44	)
Other debt securities		1,486		4		(19	)

Total	$	35,211	$	82	$	(184	)

Sales of available for sale securities were as follows:


	2007
Proceeds	$	20,289
Gross gains		28
Gross losses		(9	)

There were no gains in 2006, and 2005 recognized from sale of securities available for sale. The tax provision related to the net realized gains for 2007 was $7.

The fair value of debt securities at December 31, 2007, by contractual maturity is set forth below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations. Securities not due at a single maturity date, primarily mortgage-backed securities, are shown separately.


	Fair Value
Due in one year or less	$	3,503
Due after one through five years		11,416
Due after five through ten years		5,975
Due after ten years		5,920
Mortgage-backed securities		54,119

Total	$	80,933

Securities carried at $38,890 and $21,170 at December 31, 2007 and 2006, were pledged to secure deposits and for other purposes as required or permitted by law.

At year end 2007 and 2006, the Company did not hold securities of any one issuer, other than the U.S. Government sponsored entities, in an amount greater than 10% of shareholders’ equity.

(Continued)

F-18

COMMUNITY FIRST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

NOTE 2 — SECURITIES AVAILABLE FOR SALE (Continued)

The following table shows securities with unrealized losses and their fair value, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position as of December 31, 2007 and 2006.


	Less than 12 Months					12 Months or More					Total
2007	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	Value		Loss			Value		Loss			Value		Loss

Mortgage-backed securities	$	11,510	$	(123	)	$	4,323	$	(40	)	$	15,833	$	(163	)
State and municipals		—		—			2,244		(26	)		2,244		(26	)


Total temporarily impaired	$	11,510	$	(123	)	$	6,567	$	(66	)	$	18,077	$	(189	)


	Less than 12 Months					12 Months or More					Total
2006	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	Value		Loss			Value		Loss			Value		Loss

US Government sponsored entities	$	2,392	$	(2	)	$	12,938	$	(43	)	$	15,330	$	(45	)
Mortgage-backed securities		2,990		—			3,436		(76	)		6,426		(76	)
State and municipals		494		(8	)		2,592		(36	)		3,086		(44	)
Other debt securities		—		—			981		(19	)		981		(19	)


Total temporarily impaired	$	5,876	$	(10	)	$	19,947	$	(174	)	$	25,823	$	(184	)

Unrealized losses on securities have not been recognized into income because the securities are of high credit quality, management has the intent and ability to hold until maturity or until recovery, and the decline in fair value is largely due to increases in market interest rates. The fair value is expected to recover as the securities approach their maturity date and/or market rates decline.

Management evaluates securities for other-than-temporary impairment on at least a semi-annual basis and the investment committee makes such an evaluation on an annual basis. These evaluations are made more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, and the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer’s financial condition, the Company may consider whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition.

(Continued)

F-19

COMMUNITY FIRST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

NOTE 3 — LOANS

A summary of loans outstanding by category at December 31, 2007 and 2006, follows:


	2007		2006
Real estate
Construction	$	140,905	$	93,704
1-4 family residential		151,478		96,309
Commercial		116,327		90,147
Other		4,567		3,009
Commercial, financial and agricultural		50,240		46,942
Consumer		14,969		11,560
Other		12,122		7,302

	$	490,608	$	348,973

Changes in the allowance for loan losses were as follows:


	2007			2006			2005
Balance at beginning of year	$	4,259		$	3,268		$	2,740
Increase due to acquisition of First National		730			—			—
Provision for loan losses		1,259			1,018			683
Loans charged off		(212	)		(50	)		(233	)
Recoveries		50			23			78


Balance of end of year	$	6,086		$	4,259		$	3,268

Impaired loans were as follows:


	2007		2006		2005
Year-end loans with no allocated allowance for loan losses	$	1,439	$	—	$	—
Year-end loans with allocated allowance for loan losses		2,506		1,416		117


Total	$	3,945	$	1,416	$	117

Amount of the allowance for loan losses allocated	$	599	$	149	$	36


	2007		2006		2005
Average of impaired loans during the year	$	1,736	$	361	$	176
Interest income recognized during impairment		145		12		3
Cash-basis interest income recognized		149		12		3

(Continued)

F-20

COMMUNITY FIRST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

NOTE 3 — LOANS (Continued)

Nonperforming loans were as follows:


	2007		2006
Loans past due over 90 days still on accrual	$	—	$	—
Nonaccrual loans		2,764		1,059

Nonperforming loans includes both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

As a result of the First National acquisition in 2007, the Company has acquired loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected. A summary of these loans is as follows:


	Contractually Required
	Payments		Basis in Acquired
	at Acquisition		Loans at Acquisition
Real Estate	$	119	$	37
Consumer		74		33

Outstanding balance at acquisition		193		70


Carrying amount, net of allowance of $98 at December 31, 2007			$	37

At the acquisition date, the company could not reasonably estimate the cash flows expected to be collected. Therefore, an accretable yield has not been established and income is not recognized on these loans except to the extent that cash collected exceeds the carrying value. During 2007, the Company collected cash in excess of the carrying value in the amount of $1, and this amount was recognized as interest income.

NOTE 4 — PREMISES AND EQUIPMENT

The following is a summary of premises and equipment as of December 31, 2007 and 2006:


	2007			2006
Land	$	2,743		$	2,617
Buildings and improvements		11,725			5,861
Furniture and equipment		5,800			4,147
Construction in process		81			619

		20,349			13,244
Less: Allowance for depreciation		(3,093	)		(2,364	)


	$	17,256		$	10,880

Depreciation expense for the years ended 2007, 2006, and 2005 was $800, $505, and $481, respectively.

(Continued)

F-21

COMMUNITY FIRST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

NOTE 4 — PREMISES AND EQUIPMENT (Continued)

The Bank purchased 6.45 acres of land totaling $2,759 in Williamson County in 2004. The Bank built a branch on 1.89 acres of the land on Carothers Parkway and sold the remaining 4.56 acres of the property in 2005. The $390 gain related to the sale of the property was deferred in 2005 due to the Bank’s financing of the loan for this property. During the second quarter of 2006 the Bank subsequently sold this loan to another financial institution and recognized the $390 gain into noninterest income.

The Bank leases certain branch properties and equipment under operating leases. Rent expense for 2007, 2006, and 2005 was $288, $162, and $126, respectively. Rent commitments under noncancelable operating leases including renewal options were as follows:


2008	$	222
2009		158
2010		150
2011		129
2012		102
Thereafter		1,470


	$	2,231

NOTE 5- GOODWILL AND INTANGIBLE ASSETS

Goodwill

The change in balance for goodwill during the year is as follows:


	2007

Beginning of year	$	—
Acquired goodwill		4,622


End of year	$	4,622

Acquired Intangible Assets

Acquired intangible assets resulting from the Company’s acquisition of First National were as follows at year end:


	2007
	Gross
	Carrying		Accumulated
	Amount		Amortization
Amortized intangible assets:
Core deposit and customer relationship intangibles	$	2,812	$	—

There was no aggregate amortization expense during 2007.

(Continued)

F-22

COMMUNITY FIRST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

NOTE 5 — GOODWILL AND INTANGIBLE ASSETS (Continued)

Estimated amortization expense for each of the next five years is as follows:


2008	$	375
2009		325
2010		282
2011		244
2012		212

NOTE 6 — DEPOSITS

Deposits at December 31, 2007 and 2006, are summarized as follows:


	2007		2006

Noninterest-bearing demand accounts	$	52,272	$	34,001
Interest-bearing demand accounts		81,637		46,530
Savings accounts		21,065		8,921
Time deposits greater than $100,000		145,735		114,480
Other time deposits		258,594		162,834


	$	559,303	$	366,766

At December 31, 2007 scheduled maturities of time deposits are as follows:


2008	$	380,431
2009		20,679
2010		2,337
2011		325
2012		557


	$	404,329

Included in other time deposits above are brokered time deposits of $23,413 at December 31, 2007, with a weighted rate of 5.06% and $19,601 with a weighted rate of 4.95% at December 31, 2006. These deposits represent funds which the Bank obtained, directly, or indirectly, through a deposit broker. A deposit broker places deposits from third parties with insured depository institutions or places deposits with an institution for the purpose of selling interest in those deposit to third parties. As of December 31, 2007 the Bank has $22,324 of brokered deposits that are scheduled to mature in 2008 and $1,089 scheduled to mature in 2009.

In addition, the Bank has $114,516 in national market deposits which are purchased by customers through a third-party internet site. Of these national market time deposits, $106,730 are scheduled to mature in 2008, $6,695 in 2009 and $1,091 in 2010.

(Continued)

F-23

COMMUNITY FIRST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

NOTE 7 — OTHER BORROWINGS

In 2007, the Company obtained a secured line of credit of $9,000 to assist with funding the Company’s acquisition of all of the outstanding capital stock of First National. The line of credit is secured by 100% of the Bank stock owned by the Company. At year end 2007, the balance on the line of credit was $510. The interest rate on the line of credit is based on the prime rate as designated in the Money Rates sections of the Wall Street Journal minus 125 bps and was 6.0% at year end 2007. The line of credit will mature in the fourth quarter of 2009.

NOTE 8 — FEDERAL HOME LOAN BANK ADVANCES

The Bank has established a line of credit with the Federal Home Loan Bank (FHLB), which is secured by a blanket pledge of 1-4 family residential mortgage loans, commercial real estate loans and open end home equity loans. The extent of the line is dependent, in part on available collateral. The arrangement is structured so that the carrying value of the loans pledged amounts to 125% on residential 1-4 family loans, 300% on commercial real estate, and 400% of open end home equity loans of the principal balance of the advances from the FHLB. To participate in this program, the Bank is required to be a member of the FHLB and own stock in the FHLB. The Bank had $1,058 of such stock at December 31, 2007, to satisfy this requirement.

At December 31, 2007 and 2006, advances from the FHLB totaled $11,000 and $13,000. The fixed interest rates on these advances range from 3.81% to 5.67% at December 31, 2007 and 3.36% to 5.67% at December 31, 2006. The weighted average rates at December 31, 2007 and 2006 were 5.28% and 4.99%. The FHLB advance maturities ranged from January 2008 to June 2009 at December 31, 2007. Each FHLB advance is payable at its maturity, with a prepayment penalty for all fixed rate advances. At December 31, 2007 and 2006, undrawn standby letters of credit with the FHLB totaled $10,000. The letter of credit is used as a pledge to the State of Tennessee Bank Collateral Pool. Qualifying loans totaling $140,880 were pledged as security under a blanket pledge agreement with the FHLB at December 31, 2007.

Maturities of the advances from the FHLB are as follows:


2008	$	8,000
2009		3,000

	$	11,000

NOTE 9 — SUBORDINATED DEBENTURES

In 2002, the Company borrowed $3,000 of 4.75% floating rate mandatory redeemable securities through a special purpose entity as part of a private offering. The securities mature on December 31, 2032; however, the Company can currently repay the securities at any time without penalty. They are presented in liabilities on the balance sheet and count as Tier 1 capital for regulatory capital purposes. Debt issuance costs of $74,000 have been capitalized and are being amortized over the term of the securities. Principal officers, directors, and their affiliates at year end 2007 and 2006 owned $700 of the $3,000 subordinated debentures. The proceeds from this offering were utilized to increase the Bank’s capital by $3,000.

In 2005, the Company borrowed $5,000 of 5.33% floating rate mandatory redeemable securities through a special purpose entity as part of a pool offering. These securities mature on September 15, 2035, however,

(Continued)

F-24

COMMUNITY FIRST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

the maturity may be shortened to a date not earlier than September 15, 2010. They are presented in liabilities on the balance sheet and count as Tier 1 capital for regulatory purposes. There was no debt issuance cost in obtaining the subordinated debenture. The proceeds from the pool offering were used to increase the Bank’s capital.

In 2007, the Company borrowed $15,000 redeemable securities through a special purpose entity as part of a pool offering. These securities mature in 2037, however, the maturity may be shortened to a date not earlier than December 15, 2012. The interest rate on the securities is 7.96% until December 15, 2012, and thereafter the securities bear interest at a floating rate equal to the 3-month LIBOR plus 3.0%. They are presented in liabilities on the balance sheet and $4,390 count as Tier 1 capital and the remaining $10,610 is considered as Tier II capital for regulatory purposes. There was no debt issuance cost in obtaining the subordinated debenture. The proceeds were used to help fund the acquisition of First National.

NOTE 10 — OTHER BENEFIT PLANS

401(k) Plan: A 401(k) benefit plan allows employee contributions up to 15% of their compensation, of which the Company will match 100% of the first 4% the employee contributes to their 401(k) annually for all periods presented. Expense for 2007, 2006 and of 2005 was $172, $89 and $64, respectively.

Deferred Compensation and Supplemental Retirement Plans: Deferred compensation and supplemental retirement plan (“SERP”) expense allocates the benefits over years of service. The Bank approved the SERP in 2005. The SERP will provide certain Company officers with benefits upon retirement, death, or disability in certain prescribed circumstances. SERP expense was $240 in 2007, $79 in 2006 and $28 in 2005, resulting in a deferred compensation liability for the last three years of $348, $107 and $28.

NOTE 11 — INCOME TAXES

The components of income tax expense (benefit) are summarized as follows:


	2007			2006			2005

Current
Federal	$	1,172		$	1,542		$	1,426
State		—			—			39

Total current taxes		1,172			1,542			1,465


Deferred
Federal		(126	)		(232	)		(181	)
State		(222	)		(146	)		(23	)

Total deferred taxes		(348	)		(378	)		(204	)


Change in valuation allowance		—			(51	)		—


Income tax expense	$	824		$	1,113		$	1,261

(Continued)

F-25

COMMUNITY FIRST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

NOTE 11 — INCOME TAXES (Continued)

A reconciliation of actual income tax expense in the financial statements to the expected tax benefit (computed by applying the statutory Federal income tax rate of 34% to income before income taxes) is as follows:


	2007			2006			2005
Federal statutory rate times financial statement income	$	1,089		$	1,331		$	1,301
Effect of:
Bank owned life insurance		(51	)		(71	)		(20	)
Tax-exempt income		(84	)		(48	)		(19	)
State income taxes, net of federal income effect		(147	)		(96	)		11
Expenses not deductible for U.S. income taxes		40			35			16
Compensation expense related to SFAS 123R		70			98			—
General business credit		(66	)		(66	)		—
Change in valuation allowance		—			(51	)		—
Other, net		(27	)		(19	)		(28	)


Income tax expense	$	824		$	1,113		$	1,261

The tax effect of each type of temporary difference that gives rise to net deferred tax assets and liabilities is as follows:


	2007			2006
Deferred tax assets:
Allowance for loan losses	$	2,145		$	1,528
Net operating loss carry forward		207			167
Deferred compensation		133			41
Unrealized loss on securities		—			46
Other		94			14

	$	2,579		$	1,796


Deferred tax liabilities:
Prepaids	$	(186	)	$	(150	)
Depreciation		(501	)		(348	)
Federal Home Loan Bank stock		(61	)		(56	)
Core Deposit Intangible		(1,077	)		—
Intercompany dividend		(215	)		—
Unrealized gain on securities		(40	)		—
Other		(84	)		(59	)

	$	(2,164	)	$	(613	)


Balance at end of year	$	415		$	1,183

At year end 2007, the Company had net operating loss carryforward for state tax purposes of approximately $0.8 million expiring in 2020, $1.9 million expiring in 2021, and $2.2 million expiring in 2022.

The Company currently has no unrecognized tax benefits that, if recognized, would favorably affect the effective income tax rate in future periods. The Company does not expect any unrecognized tax benefits to

(Continued)

F-26

COMMUNITY FIRST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

NOTE 11 — INCOME TAXES (Continued)

significantly increase or decrease in the next twelve months. It is the Company”s policy to recognize any interest accrued related to unrecognized tax benefits in interest expense, with any penalties recognized as operating expenses.

The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of the state of Tennessee. The Company is no longer subject to examination by taxing authorities for tax years before 2004.

NOTE 12 — RELATED PARTY TRANSACTIONS

Loans to principal officers, directors, and their affiliates in 2007 were as follows:


Beginning balance	$	4,732
New loans		1,119
Effect of changes in related parties		(1	)
Repayments		(1,691	)


Ending balance	$	4,159

Deposits from principal officers, directors, and their affiliates at year-end 2007 and 2006 were $3,407 and $2,885, respectively. Principal officers, directors, and their affiliates at year end 2007 and 2006 owned $700 of the $3,000 subordinated debentures due December 31, 2032. At December 31, 2007, the approved available unused lines of credit on related party loans were $1,870.

NOTE 13 — STOCK BASED COMPENSATION

Prior to the Company’s bank holding company reorganization, the Bank had in place the Community First Bank & Trust Stock Option Plan for organizers of the Bank and certain members of management and employees. In connection with the bank holding company reorganization, this plan was amended and replaced in its entirety by the Community First, Inc. Stock Option Plan in October 2002. There were 342,000 shares authorized by the Stock Option Plan in 2002. Additionally, the Community First, Inc. 2005 Stock Incentive Plan was approved at the stockholders meeting on April 26, 2005 authorizing shares of 450,000. The plans allow for the grant of options and other equity securities to key employees and directors. Exercise price is the market price at the date of grant. The organizer options vested ratably over three years and other non-qualified options vest ratably over four years. The employee options vest ratably from two to four years and the management options vest ratably over six years. All options expire within ten years from the date of grant. The Company has 286,795 authorized shares available for grant as of December 31, 2007. The Company recognized $231 as compensation expense resulting from stock options and $22 as compensation expense resulting from restricted stock awards in 2007. In 2006, the Company recognized $302 as compensation expense resulting from stock options and $5 as compensation expense resulting from restricted stock. The total income tax benefit from non-qualified stock options was $12 in 2007, $142 in 2006 and $39 in 2005.

The fair value of each option is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company’s common stock. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which

(Continued)

F-27

COMMUNITY FIRST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

NOTE 13 — STOCK BASED COMPENSATION (Continued)

takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on
the U.S. Treasury yield curve in effect at the time of the grant.

The fair value of options granted was determined using the following weighted average assumptions at grant date.


	2007			2006			2005
Risk-free interest rate		5.04	%		5.07	%		4.46	%
Expected option life	7 years			7 years			7 years
Expected stock price volatility		14.00	%		16.06	%		18.66	%
Dividend yield		0.74	%		1.00	%		0.00	%

A summary of option activity under the Company’s stock option incentive plans for 2007 is presented in the following table:


						Weighted Average
				Weighted		Remaining
				Average		Contractual Term		Aggregate Intrinsic
	Shares			Exercise Price/Share		in Years		Value
Options outstanding January 1, 2007		246,644		$	14.79
Granted		30,750			30.00
Options exercised		(5,617	)		10.86
Forfeited or expired		(13,900	)		24.73

Options outstanding December 31, 2007		257,877		$	16.15		4.86	$	3,571


Vested or expected to vest		257,877		$	16.15		4.86	$	3,571

Exercisable at December 31, 2007		194,128		$	11.84		3.56	$	3,525

Information related to the stock option incentive plans during each year is as follows:

($ amount in thousands except weighted average fair value of options granted)


	2007		2006		2005
Intrinsic value of options exercised	$	108	$	370	$	128
Cash received from option exercises		61		121		56
Tax benefit realized from option exercises		12		142		39
Weighted average fair value of options granted		8.46		8.46		8.06

As of December 31, 2007, there was $451 of total unrecognized compensation cost related to nonvested stock options granted under the Plans. The cost is expected to be recognized over a weighted average period of 2.5 years.

(Continued)

F-28

COMMUNITY FIRST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

NOTE 13 — STOCK BASED COMPENSATION (Continued)

Restricted stock is issued to certain officers on a discretionary basis. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at issue date. The fair value of the stock was determined using the market price on the day of issuance. Restricted stock vests over a 2-3 year period. Vesting occurs ratably on the anniversary day of the issuance.

The following table is a summary of changes in the Company’s nonvested shares from the issuance of restricted stock.


				Weighted Average
				Grant-Date
	Shares			Fair Value
Nonvested at January 1, 2007		346		$	28.00
Granted		2,297			30.00
Vested		(173	)		28.00
Forfeited		—			—


Nonvested at December 31, 2007		2,470		$	29.86

In first quarter of 2006, 346 shares of restricted stock were awarded at the market price of $28.00 per share. In first quarter of 2007, 2,297 shares of restricted stock were awarded at the market price of $30.00 per share. Unrecognized compensation cost related to these awards, as of December 31, 2007 was $52. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.16 years. Total fair value of shares vested during the year ended December 31, 2007 was $5.

NOTE 14— LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES

Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.

The contractual amount of financial instruments with off-balance sheet risk was as follows at year end 2007 and 2006:


	2007				2006
	Fixed		Variable		Fixed		Variable
	Rate		Rate		Rate		Rate
Unused lines of credit	$	3,084	$	71,946	$	4,505	$	58,858
Letters of credit		—		4,409		—		4,160
Commitments to make loans		—		7,990		—		6,200

These commitments are generally made for periods of one year or less. The fixed rate unused lines of credit have interest rates ranging from 3.35% to 12.75% and maturities ranging from 1 to 20 years.

(Continued)

F-29

COMMUNITY FIRST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

NOTE 15 — REGULATORY MATTERS

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 capital requirements can initiate regulatory action. Management believes as of December 31, 2007, the Company, the Bank and First National met all capital adequacy requirements to which they were subject.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At year end 2007 and 2006, the most recent regulatory notifications categorized the Bank and First National as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institutions’ category.

(Continued)

F-30

COMMUNITY FIRST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

NOTE 15 — REGULATORY MATTERS (Continued)

The Company’s and its subsidiary banks’ capital amounts and ratios at December 31, 2007 and 2006, were as follows:


											To Be Well
											Capitalized Under
						For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
2007	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital to risk weighted assets
Community First Bank & Trust	$	48,800		10.07	%	$	38,750		8.00	%	$	48,438		10.00	%
First National Bank of Centerville		8,652		17.61	%		3,930		8.00	%		4,912		10.00	%
Consolidated		58,676		10.97	%		42,773		8.00	%		N/A		N/A

Tier 1 to risk weighted assets
Community First Bank & Trust	$	43,313		8.96	%	$	19,375		4.00	%	$	29,063		6.00	%
First National Bank of Centerville		8,037		16.36	%		1,965		4.00	%		2,947		6.00	%
Consolidated		42,064		7.87	%		21,387		4.00	%		N/A		N/A

Tier 1 to average assets
Community First Bank & Trust	$	43,413		8.35	%	$	20,792		4.00	%	$	25,990		5.00	%
First National Bank of Centerville		8,037		8.27	%		3,889		4.00	%		4,861		5.00	%
Consolidated		42,064		6.76	%		24,889		4.00	%		N/A		N/A

2006
Total Capital to risk weighted assets
Community First Bank & Trust	$	41,635		10.91	%	$	30,526		8.00	%	$	38,158		10.00	%
Consolidated		42,978		11.25	%		30,560		8.00	%		N/A		N/A

Tier 1 to risk weighted assets
Community First Bank & Trust	$	37,376		9.80	%	$	15,263		4.00	%	$	22,895		6.00	%
Consolidated		38,719		10.14	%		15,280		4.00	%		N/A		N/A

Tier 1 to average assets
Community First Bank & Trust	$	37,376		9.16	%	$	16,320		4.00	%	$	20,400		5.00	%
Consolidated		38,719		9.45	%		16,384		4.00	%		N/A		N/A

The Company’s principal source of funds for dividend payments is dividends received from its subsidiary banks. 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 profits, combined with the retained net profits of the preceding two years, subject to the capital requirements described above. During 2008, the subsidiary banks could, without prior approval, declare dividends of approximately $5,984 plus any 2008 net profits retained to the date of the dividend declaration. However, if this amount was paid the Bank could drop below “well capitalized” under prompt corrective action provisions.

(Continued)

F-31

COMMUNITY FIRST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

NOTE 16 — FAIR VALUE OF FINANCIAL INSTRUMENTS

Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer. Restricted equity securities do not have readily determinable fair values. For fixed rate loans or deposits and for variable rate loans or 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. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of loans held for sale is based on market quotes. Fair value of debt is based on current rates for similar financing. The fair value of off-balance-sheet items is not considered material.

Carrying amount and estimated fair values of significant financial instruments at year end 2007 and 2006 were as follows:


	2007				2006
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets
Securities available for sale	$	80,933	$	80,933	$	35,211	$	35,211
Loans held for sale		5,710		5,710		3,981		3,981
Loans, net of allowance		484,522		485,906		344,714		345,259
Bank owned life insurance		3,848		3,848		3,698		3,698
Financial liabilities
Deposits with defined maturities	$	404,329	$	407,249	$	277,314	$	276,580
Federal Home Loan Bank advances		11,000		11,131		13,000		12,956
Subordinated debentures		23,000		23,000		8,000		8,000

NOTE 17 — LEASE REVENUE

The Bank built a branch at Carothers Parkway, located in Franklin, Tennessee that was completed in 2006 at cost of $2,370. The Bank’s principal leasing activities consist of 1,650 square feet of office space on the second floor of the Carothers Parkway Branch under an operating lease. The lessee rents approximately 8% of the branch. The lease term is for five years beginning October, 2007 with a renewal term of 36 months upon written notice of 120 days prior to the expiration of the original term. Lessee has five such renewal options. The five year lease with the Bank produces $175 in revenue, of which, $7 was recognized in 2007.

Approximate minimum rental for the noncancelable lease as of December 31, 2007 was:


2008	$	33
2009		34
2010		35
2011		36
2012		30

	$	168

(Continued)

F-32

COMMUNITY FIRST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

NOTE 18 — BUSINESS COMBINATIONS

On October 26, 2007, the Company acquired 100% of the outstanding shares of The First National Bank of Centerville. Operating results of First National Bank of Centerville are included in the consolidated financial statements since the date of the acquisition. On January 31, 2008, First National was merged with and into Community First Bank & Trust, with Community First Bank & Trust surviving. As a result of this acquisition, the Company expects to further solidify its market share in the Hickman county market, expand its customer base to enhance deposit fee income, provide an opportunity to market additional products and services to new customers, and reduce operating costs through economies of scale.

The aggregate purchase price was $22,800 in cash. The purchase price resulted in approximately $4,622 in goodwill, and $2,812 in core deposit and customer relationship intangible. The intangible assets will be amortized over 15 years, using an accelerated method. Goodwill will not be amortized but instead evaluated periodically for impairment.

The following table summarizes the estimated fair value of assets acquired and liabilities. The Company is in the process of finalizing the valuations and expects an immaterial adjustment to the purchase price allocation.


Securities available for sale	$	54,385
Loans, net		39,527
Premises and equipment		2,244
Goodwill		4,622
Core deposit and customer relationship intangibles		2,812
Other assets		1,178

Total assets acquired		104,768

Deposits		(84,691	)
Other liabilities		(1,617	)

Total liabilities assumed		(86,308	)


Purchase price net of cash acquired of $4,340	$	18,460

The following table presents pro forma information as if the acquisition had occurred at the beginning of 2007 and 2006. The pro forma information includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, depreciation expense on property acquired, interest expense on deposits acquired, and the related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transactions been effected on the assumed dates.


	(Unaudited)
	2007		2006

Net interest income	$	17,453	$	14,578

Net income	$	3,161	$	3,293


Basic earnings per share	$	1.00	$	1.15

Diluted earnings per share	$	0.97	$	1.11

(Continued)

F-33

COMMUNITY FIRST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

NOTE 19 — PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION

Condensed financial information of Community First, Inc. follows:

CONDENSED BALANCE SHEET

December 31


	2007		2006
Assets
Cash and cash equivalents	$	1,449	$	1,183
Investment in banking subsidiaries		59,659		37,562
Other assets		529		281


Total assets	$	61,637	$	39,026


Liabilities and shareholders’ equity
Subordinated debentures	$	23,000	$	8,000
Other liabilities		1,464		369

Total liabilities		24,464		8,369
Shareholders’ equity		37,173		30,657


Total liabilities and shareholders’ equity	$	61,637	$	39,026

CONDENSED STATEMENTS OF INCOME

Years Ended December 31


	2007			2006			2005

Interest income	$	90		$	18		$	8
Dividends from subsidiaries		—			875			100

Total income		90			893			108

Interest expense		979			600			270
Other expense		610			510			257

Total expenses		1,589			1,110			527


Losses before income tax and undistributed subsidiaries income		(1,499	)		(217	)		(419	)
Income tax benefit		495			419			151
Equity in undistributed income of subsidiaries		3,384			2,600			2,833


Net income	$	2,380		$	2,802		$	2,565

(Continued)

F-34

COMMUNITY FIRST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

NOTE 19 — PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)

CONDENSED STATEMENTS OF CASH FLOWS

Years Ended December 31


	2007			2006			2005

Cash flows from operating activities
Net income	$	2,380		$	2,802		$	2,565
Adjustments to reconcile net income to net cash from operating activities:
Equity in undistributed income of subsidiaries		(3,384	)		(2,600	)		(2,833	)
Compensation expense under stock based compensation		253			307			—
Tax benefit on exercise of stock options		(12	)		(142	)		(39	)
Change in other, net		(115	)		(24	)		(35	)

Net cash from operating activities		(878	)		343			(342	)

Cash flows from investing activities
Investments in and advances to bank subsidiaries		(18,123	)		(3,762	)		(4,500	)

Net cash from investing activities		(18,123	)		(3,762	)		(4,500	)

Cash flows from financing activities
Proceeds from issuance of stock		4,380			3,761			—
Proceeds from stock option exercises		61			121			56
Tax benefit on exercise of stock options		12			142			39
Cash paid for dividends		(696	)		(575	)		—
Proceeds other borrowed money		8,310			—			—
Repayment other borrowed money		(7,800	)		—			—
Proceeds from issuance of subordinated debentures		15,000			—			5,000

Net cash from financing activities		19,267			3,449			5,095


Net change in cash and cash equivalents		266			30			253

Beginning cash and cash equivalents		1,183			1,153			900


Ending cash and cash equivalents	$	1,449		$	1,183		$	1,153

(Continued)

F-35

COMMUNITY FIRST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
(Dollar amounts in thousands, except per share data)

NOTE 20 — EARNINGS PER SHARE

The factors used in the earnings per share computation follows:


	2007		2006		2005
Basic
Net income	$	2,380	$	2,802	$	2,565


Weighted average common shares outstanding		3,144,835		2,881,715		2,868,780


Basic earnings per common share	$	0.76	$	0.97	$	0.89


Diluted
Net income	$	2,380	$	2,802	$	2,565

Weighted average common shares outstanding for basic earnings per common share		3,144,835		2,881,715		2,868,780
Add: Dilutive effects of assumed exercise of stock options		105,071		99,385		105,331


Average shares and dilutive potential common shares		3,249,906		2,981,100		2,974,111


Diluted earnings per common share	$	0.73	$	0.94	$	0.86

At year end 2007 there were 69,100 antidilutive stock options. No options were antidilutive for 2006 or 2005.

NOTE 21—QUARTERLY FINANCIAL DATA (UNAUDITED)


	Interest		Net Interest				Earnings Per Share
	Income		Income		Net Income		Basic		Diluted
2007
First quarter	$	7,704	$	3,314	$	512	$	0.17	$	0.16
Second quarter		8,299		3,620		778		0.25		0.24
Third quarter		8,968		3,824		743		0.23		0.23
Fourth quarter		10,398		4,005		347		0.11		0.10

2006
First quarter	$	5,510	$	2,905	$	621	$	0.22	$	0.21
Second quarter		6,131		3,073		932		0.32		0.31
Third quarter		6,765		3,128		645		0.22		0.22
Fourth quarter		7,383		3,155		604		0.21		0.20

The increase in the 2006 second quarter net income was related to a gain on the sale of property that was deferred in 2005 due to the Bank’s financing of the loan for this property. During the second quarter of 2006 the Bank subsequently sold this loan to another financial institution and recognized the $390 gain into noninterest income.

(Continued)

F-36

COMMUNITY FIRST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except per share data)

NOTE 22—LEGAL PROCEEDINGS

The Bank was a co-defendant in a suit in Maury County Circuit Court, Holloway et al. v. Evers. Et al, filed May 31, 2005, in which the plaintiff alleged that a bank loan officer disclosed the plaintiff’s loan history at the bank to plaintiff’s two partners in a real estate development, who subsequently forced plaintiff to sell his interest to them. Plaintiff alleged causes of action for tortious interference with contract, breach of common law fiduciary duty, and violation of the Financial Records Privacy Act. Plaintiff sought $5,000,000 in compensatory damages and $5,000,000 in punitive damages, jointly and severally, from the Bank and plaintiff’s two partners. The Company believed the claim was without merit and vigorously defended the suit. In the second quarter of 2006, the trial court granted the co-defendants summary judgment in favor of the plaintiff’s two partners which was upheld on appeal. On December 29, 2007, plaintiffs voluntarily dismissed their claims against the Company without prejudice.

NOTE 23—STOCK OFFERING

The Company conducted a stock offering during the fourth quarter of 2006 and the first quarter of 2007 in order to provide the Bank with additional capital. As a result of this offering, the Company sold 273,090 shares of common stock for total net proceeds of $8,141.

F-37

EXHIBIT INDEX

The following exhibits are filed as a part of or incorporated by reference in this report:


Exhibit No.		Description

2.1		Agreement and Plan of Reorganization and Share Exchange, dated as of July 31, 2007, by and between Community First, Inc. and The First National Bank of Centerville (Pursuant to Item 601(b)(2) of Regulation S-K, the schedules of this agreement are omitted, but a supplemental copy will be furnished to the Securities and Exchange Commission upon request.) (Incorporated by reference herein to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the SEC on August 1, 2007)

3.1		Amended and Restated Charter of the Company (incorporated by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed with the SEC on April 29, 2005.

3.2		Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 21, 2005.

10.1		The Community First, Inc. Stock Option Plan. *+

10.2		Form of Management Stock Option Agreement pursuant to the Community First, Inc. Stock Option Plan. * +

10.3		Form of Organizers Stock Option Agreement pursuant to the Community First, Inc. Stock Option Plan. * +

10.4		Form of Employee Stock Option Agreement pursuant to the Community First, Inc. Stock Option Plan. *+

10.5		The Community First, Inc. 2005 Stock Incentive Plan (incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on April 29, 2005).+

10.6		Amendment to the Community First, Inc. 2005 Stock Incentive Plan (Incorporated by reference herein to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the SEC on August 1, 2007).+

10.7		Form of Incentive Stock Option Agreement (Incorporated by reference herein to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the SEC on August 1, 2007).+

10.8		Form of Non-Qualified Stock Option Agreement for Directors (incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on July 20, 2006).+


Exhibit No.		Description

10.9		Form of Non-Qualified Stock Option Agreement pursuant to the Community First, Inc. 2005 Stock Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-QSB filed with the SEC on March 31, 2005).+

10.10		Form of Incentive Stock Option Agreement pursuant to the Community First, Inc. 2005 Stock Incentive Plan (incorporated by reference to the Company’s Quarterly Report on Form 10-QSB filed with the SEC on March 31, 2005).+

10.11		Form of Restricted Stock Agreement under the Community First, Inc. 2005 Stock Incentive Plan (incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on January 23, 2006).+

10.12		Employment Agreement between Marc Lively and the Company (incorporated herein by reference to the Company’s current report on Form 8-K filed with the SEC on September 23, 2004).+

10.13		Amendment No. 1 to the Employment Agreement with Marc Lively (incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on August 22, 2005).+

10.14		Community First Bank & Trust Supplemental Executive Retirement Plan (incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on August 22, 2005).+

10.15		Participation Agreement, dated August 16, 2005, with Marc Lively pursuant to the Community First Bank & Trust Supplemental Executive Retirement Plan (incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on August 22, 2005).+

10.16		Participation Agreement, dated August 16, 2005, with Mike Saporito pursuant to the Community First Bank & Trust Supplemental Executive Retirement Plan.

10.17		Participation Agreement, dated August 16, 2005, with Carl Campbell pursuant to the Community First Bank & Trust Supplemental Executive Retirement Plan.

10.18		Participation Agreement, dated August 16, 2005, with Dianne Scroggins pursuant to the Community First Bank & Trust Supplemental Executive Retirement Plan.

21.1		List of Subsidiaries

23.1		Consent of Crowe Chizek and Company, LLC

31.1		Certification of CEO Pursuant to Securities and Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of CFO Pursuant to Securities and Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


Item		Page
Number		Number

	Part I

1.	Business	2

1A.	Risk Factors	17

1B.	Unresolved Staff Comments	22

2.	Properties	22

3.	Legal Proceedings	23

4.	Submission of Matters to a Vote of Security Holders	23

	Part II

5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	24

6.	Selected Financial Data	26

7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

7A.	Quantitative and Qualitative Disclosures about Market Risk	50

8.	Financial Statements and Supplementary Data	53

9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	53

9A.	Controls and Procedures	53

9B.	Other Information	53

	Part III

10.	Directors, Executive Officers and Corporate Governance	54

11.	Executive Compensation	54

12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	54

13.	Certain Relationships and Related Transactions and Directors Independence	55

14.	Principal Accounting Fees and Services	55

	Part IV

15.	Exhibits and Financial Statement Schedules	56

	Signatures
Ex-21.1 List of Subsidiaries
Ex-23.1 Consent of Crowe Chizek and Company, LLC
Ex-31.1 Section 302 Certification of the CEO
Ex-31.2 Section 302 Certification of the CFO
Ex-32.1 Section 906 Certification of the CEO
Ex-32.2 Section 906 Certification of the CFO


Exhibit No.		Description

32.2		Certification of CFO pursuant to 18 U.S.C. Section 1350 , as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*		Incorporated herein by reference to the Company’s Form 10-KSB for the year ended December 31, 2003.

+		Management compensatory plan or arrangement


		State of Incorporation

Community First Bank & Trust		Tennessee

Community First Capital Trust I		Delaware

Community First Capital Trust II		Delaware

Community First Capital Trust III		Delaware


		State of Incorporation

Community First Title, Inc.		Tennessee

CFBT Investments, Inc.		Nevada

Community First Properties, Inc.		Maryland

1)		I have reviewed this annual report on Form 10-K of Community First, Inc.;

2)		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3)		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4)		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		Evaluated the effectiveness of registrant’s disclosure controls and procedures presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	c)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	c)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	d)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and



Date: March 17, 2008	By:	/s/ Dianne Scroggins
		Dianne Scroggins
		Chief Financial Officer & Principal Accounting Officer



	/s/ Dianne Scroggins
	Dianne Scroggins
	Chief Financial Officer
	March 17, 2008