10-Q 1 d600531d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period Ended: September 30, 2013

OR

 

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

FOR THE TRANSITION PERIOD FROM              TO             

Commission File Number 000-49966

 

 

COMMUNITY FIRST, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Tennessee   04-3687717

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

501 South James M. Campbell Blvd.

Columbia, Tennessee

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

(931) 380-2265

(Registrant’s Telephone Number, Including Area Code)

None

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

 

 

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

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).

    Yes   x    No  ¨

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

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date. Common stock outstanding (no par value): 3,274,777 shares of common stock, no par value per share, as of November 14, 2013.

 

 

 


Table of Contents

COMMUNITY FIRST, INC.

TABLE OF CONTENTS

 

PART I.    FINANCIAL INFORMATION   
Item 1.    Financial Statements (Unaudited)   
   Consolidated Balance Sheets September 30, 2013 (Unaudited) and December 31, 2012      3   
   Consolidated Statements of Operations and Comprehensive Income (Loss) Three months and nine months ended September 30, 2013 and 2012 (Unaudited)      5   
   Consolidated Statement of Changes in Shareholders’ Equity Nine months ended September 30, 2013 (Unaudited)      7   
   Consolidated Statements of Cash Flows Nine months ended September 30, 2013 and 2012 (Unaudited)      8   
   Notes to Consolidated Financial Statements (Unaudited)      10   
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations      49   
Item 3.    Quantitative and Qualitative Disclosures about Market Risk      73   
Item 4.    Controls and Procedures      74   
PART II.    OTHER INFORMATION   
Item 1.    Legal Proceedings      75   
Item 1A.    Risk Factors      75   
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds      75   
Item 3.    Defaults Upon Senior Securities      75   
Item 4.    Mine Safety Disclosures      75   
Item 5.    Other Information      75   
Item 6.    Exhibits      76   
SIGNATURES      77   

 

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Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Community First, Inc.

Consolidated Balance Sheets

September 30, 2013 (Unaudited) and December 31, 2012

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

 

     September 30,
2013
    December 31,
2012
 

Assets

    

Cash and due from financial institutions

   $ 55,640      $ 94,877   

Time deposits in other financial institutions

     1,000        1,000   

Securities available for sale, at fair value

     67,761        70,180   

Loans held for sale, at fair value

     79        921   

Loans

     284,723        306,881   

Allowance for loan losses

     (8,363     (9,767
  

 

 

   

 

 

 

Net loans

     276,360        297,114   
  

 

 

   

 

 

 

Restricted equity securities, at cost

     1,727        1,727   

Premises and equipment, net

     10,276        8,770   

Accrued interest receivable

     1,092        1,377   

Core deposit and customer relationship intangibles, net

     1,249        1,352   

Other real estate owned, net

     22,117        19,769   

Bank owned life insurance

     9,536        9,331   

Other assets

     3,681        4,297   
  

 

 

   

 

 

 

Total Assets

   $ 450,518      $ 510,715   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Deposits:

    

Noninterest-bearing

   $ 51,869      $ 47,908   

Interest-bearing

     357,382        401,038   
  

 

 

   

 

 

 

Total Deposits

     409,251        448,946   
  

 

 

   

 

 

 

Federal Home Loan Bank advances

     —          13,000   

Subordinated debentures

     23,000        23,000   

Repurchase agreement

     —          7,000   

Accrued interest payable

     4,304        3,628   

Other liabilities

     5,707        4,805   
  

 

 

   

 

 

 

Total Liabilities

     442,262        500,379   
  

 

 

   

 

 

 

 

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Table of Contents

Community First, Inc.

Consolidated Balance Sheets

September 30, 2013 and December 31, 2012

(Continued)

 

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

 

     (Unaudited)
September 30,

2013
    December 31,
2012
 

Shareholders’ Equity

    

Senior Preferred shares, no par value; 5% cumulative. Authorized 2,500,000 shares; 17,806 issued and outstanding with liquidation value of $20,143 at September 30, 2013 and $19,477 at December 31, 2012.

     17,806        17,806   

Warrant Preferred shares, no par value; 9% cumulative. 890 issued and outstanding with liquidation value of $1,100 at September 30, 2013 and $1,040 at December 31, 2012.

     890        890   

Net discount on Preferred shares

     (84     (232
  

 

 

   

 

 

 

Total Preferred shares

     18,612        18,464   

Common stock, no par value. Authorized 10,000,000 shares; 3,274,724 shares issued and outstanding at September 30, 2013 and 3,274,305 shares issued and outstanding at December 31, 2012

     28,590        28,588   

Accumulated deficit

     (36,310     (36,319

Accumulated other comprehensive loss, net

     (2,636     (397
  

 

 

   

 

 

 

Total Shareholders’ Equity

     8,256        10,336   
  

 

 

   

 

 

 

Total Liabilities and Shareholders’ Equity

   $ 450,518      $ 510,715   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Table of Contents

Community First, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

Three Months and Nine Months Ended September 30, 2013 and 2012

(Unaudited)

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

 

    

Nine Months

Ended

    

Three Months

Ended

 
     September 30,      September 30,  
     2013      2012      2013      2012  

Interest income

           

Loans, including fees

   $ 12,079       $ 16,336       $ 3,930       $ 5,063   

Taxable securities

     875         888         304         284   

Tax-exempt securities

     110         266         32         72   

Federal funds sold and other

     211         220         60         78   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     13,275         17,710         4,326         5,497   

Interest expense

           

Deposits

     2,501         3,873         753         1,227   

FHLB advances and federal funds purchased

     108         261         —           78   

Subordinated debentures and other

     689         1,300         202         446   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     3,298         5,434         955         1,751   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     9,977         12,276         3,371         3,746   

Provision for loan losses

     300         2,700         —           2,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     9,677         9,576         3,371         1,746   

Noninterest income

           

Service charges on deposit accounts

     1,276         1,256         444         433   

Gain on sale of loans

     75         137         26         36   

Gain on sale of securities available for sale

     182         1,215         —           686   

Gain on sale of branch

     —           1,466         —           —     

Other

     558         693         192         235   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     2,091         4,767         662         1,390   

Noninterest expense

           

Salaries and employee benefits

     4,889         5,479         1,632         1,771   

Regulatory and compliance

     877         1,070         279         328   

Occupancy

     732         964         241         326   

Furniture and equipment

     305         403         101         136   

Data processing fees

     794         890         272         277   

Advertising and public relations

     68         158         18         58   

Operational expense

     315         297         113         95   

Other real estate owned expense

     768         1,707         399         679   

Other

     2,137         2,650         688         859   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expenses

     10,885         13,618         3,743         4,529   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) before income tax expense

     883         725         290         (1,393

 

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Table of Contents

Community First, Inc.

Consolidated Statements of Operations and Comprehensive Income (Loss)

Three Months and nine Months Ended September 30, 2013 and 2012

(Unaudited, Continued)

 

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

 

    

Nine Months

Ended

   

Three Months

Ended

 
     September 30,     September 30,  
     2013     2012     2013     2012  

Income tax expense

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     883        725        290        (1,393

Preferred stock dividends declared

     (726     (728     (245     (244

Accretion of preferred stock discount

     (148     (140     (50     (48
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available (allocated) to common shareholders

   $ 9      $ (143   $ (5   $ (1,685
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) per share available (allocated) to common shareholders

        

Basic

   $ 0.00      $ (0.04   $ 0.00      $ (0.51

Diluted

     0.00        (0.04     0.00        (0.51

Weighted average common shares outstanding

        

Basic

     3,274,551        3,274,049        3,274,716        3,274,183   

Diluted

     3,274,551        3,274,049        3,274,716        3,274,183   

Comprehensive Income (Loss)

        

Net income (loss)

   $ 883      $ 725      $ 290      $ (1,393

Reclassification adjustment for realized gains included in net income, net of $0 income taxes in 2012

     112        750        —          424   

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

     (2,351     (1,688     (112     (803
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (1,356   $ (213   $ 178      $ (1,772
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Community First, Inc.

Consolidated Statement of Changes in Shareholders’ Equity

Nine Months Ended September 30, 2013

(Unaudited)

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

 

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

Balance at January 1, 2013

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

Accretion of discount on preferred stock

     —           148         —           (148       —     

Sale of shares of common stock

     419         —           2         —          —          2   

Cash dividends declared on preferred stock

     —           —           —           (726     —          (726

Net income

     —           —           —           883        —          883   

Reclassification adjustment for realized gains included in net income, net of $0 income tax

     —           —           —           —          112        112   

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

                (2,351     (2,351
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

     3,274,724       $ 18,612       $ 28,590       $ (36,310   $ (2,636   $ 8,256   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

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Community First, Inc.

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2013 and 2012

(Unaudited)

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

 

     Nine Months Ended  
     September 30,  
     2013     2012  

Cash flows from operating activities

    

Net income

   $ 883      $ 725   

Adjustments to reconcile net income to net cash from operating activities

    

Depreciation

     478        582   

Amortization on securities, net

     276        368   

Core deposit intangible amortization

     103        158   

Provision for loan losses

     300        2,700   

Loans originated for sale

     (4,168     (7,485

Proceeds from sale of loans

     5,085        25,307   

Gain on sale of loans

     (75     (137

Decrease in accrued interest receivable

     285        778   

Increase in accrued interest payable

     676        1,270   

Increase in surrender value of bank owned life insurance

     (205     (218

Gain on sale of securities

     (182     (1,215

Loss on disposal of fixed assets

     —          16   

Gain on sale of branch

     —          (1,466

Net write down of other real estate owned

     797        1,123   

Compensation expense under stock based compensation

     —          5   

Change in other liabilities

     797        2,993   
  

 

 

   

 

 

 

Net cash from operating activities

     5,050        25,504   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Available for sale securities

    

Purchases:

    

Mortgage-backed securities

     (6,154     (11,998

Other

     (18,284     (35,100

Sales:

    

Mortgage-backed securities

     3,087        —     

Other

     588        12,437   

Maturities, prepayments, and calls:

    

Mortgage-backed securities

     6,295        5,986   

Other

     14,555        25,480   

Net decrease in loans

     13,395        46,582   

Proceeds from sales of other real estate owned

     3,914        9,767   

Decrease in time deposits in other financial institutions

     —          (250

Net cash paid in connection with sale of branch operations

     —          (25,691

Additions to premises and equipment

     (1,990     (301
  

 

 

   

 

 

 

Net cash from investing activities

     15,406        26,912   
  

 

 

   

 

 

 

 

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Table of Contents

Community First, Inc.

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2013 and 2012

(Unaudited, Continued)

 

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

 

     Nine Months Ended
September 30,
 
     2013     2012  

Cash flows from financing activities

    

Net decrease in deposits

     (39,695     (23,566

Payments on Federal Home Loan Bank advances

     (13,000     (3,000

Payments on repurchase agreements

     (7,000     —     

Proceeds from issuance of common stock

     2        3   
  

 

 

   

 

 

 

Net cash used in financing activities

     (59,693     (26,563
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (39,237     25,853   

Cash and cash equivalents at beginning of period

     94,877        76,742   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 55,640      $ 102,595   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information

    

Cash paid during year for:

    

Interest

   $ 2,622      $ 4,230   

Income taxes paid

     8        6   

Supplemental noncash disclosures

    

Transfers from loans to repossessed assets

     202        5,715   

Preferred stock dividends declared but not paid

     726        728   

Transfer to loans from loans held for sale

     —          4,443   

Components of sale of branch operations

    

Loans sold

     —          7,102   

Premises and equipment sold

     —          81   

Accrued interest receivable

     —          22   

Deposits sold

     —          (34,446

Accrued interest payable

     —          (66

See accompanying notes to unaudited consolidated financial statements.

 

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COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

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

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION

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

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

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

The unaudited consolidated financial statements as of September 30, 2013 and for the nine-month and three-month periods ended September 30, 2013 and 2012 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (the “SEC”) and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary to present fairly the information. They do not include all the information and footnotes required by GAAP for complete financial statements. Operating results for interim periods are not necessarily indicative of the results that may be expected for the entire year. For further information, refer to the 2012 consolidated audited financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on March 15, 2013 (File No. 000-49966) (the “2012 Form 10-K”).

 

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COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION (Continued)

 

Critical Accounting Policies:

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

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

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

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

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

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

 

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COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION (Continued)

 

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

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

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

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

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

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

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION (Continued)

 

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

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

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

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

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

NOTE 2 – REGULATORY MATTERS AND MANAGEMENT PLANS

Although the Company reported net income in 2012 and for the first nine months of 2013, the Company reported losses for each year from 2008 to 2011. The losses incurred by the Company were primarily the result of the economic recession that began in 2008 and the continued impacts of that recession and the resulting sluggish economic conditions. The Bank is a community bank that focuses heavily on commercial and residential development lending. As a result of the collapse of the housing market, many developments stalled, resulting in developers no longer being able to meet their payment obligations to the Bank. Also, during this time, market values for existing real estate properties decreased, which jeopardized the collateral securing the loans made by the Bank. The losses incurred by the Bank and the Company have contributed to both the Bank and the Company being subject to additional regulatory scrutiny and increased supervisory actions by regulators.

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

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 2 – REGULATORY MATTERS AND MANAGEMENT PLANS (Continued)

 

Prompt corrective action regulations classify banks into one of five capital categories depending on how well they meet their minimum capital requirements. Although these terms are not used to represent the overall financial condition of a bank, the classifications are: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. If adequately capitalized or worse, or subject to a written agreement, consent order, or cease and desist order requiring higher minimum capital levels as the Bank is, regulatory approval is required for the Bank to accept, renew or rollover brokered deposits. If a bank is classified as undercapitalized or worse, its capital distributions are restricted, as is asset growth and expansion, and capital restoration plans are required. At September 30, 2013, the Bank’s capital ratios were above those levels necessary to be considered “well capitalized” under the regulatory framework for prompt corrective action and all ratios, with the exception of Tier 1 to Average Assets, were above those levels required by the Consent Order (as defined below) and the written agreement that the Bank has entered into with the Tennessee Department of Financial Institutions (the “Department”). The Company’s capital ratios are below what is required to be considered “adequately capitalized” under the regulatory framework. Two of the three capital ratios were considered “adequate”; however, the Tier 1 to Average Assets ratio was below the requirements to be considered “adequate”, which prohibits the Company from being “adequately capitalized”.

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 2 – REGULATORY MATTERS AND MANAGEMENT PLANS (Continued)

 

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

 

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

 

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

 

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

 

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

 

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

As of September 30, 2013, all of the plans required to be submitted to the FRB have been submitted and approved. Management believes that the Company is in full compliance with the requirements of the Written Agreement as of September 30, 2013.

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

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

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 2 – REGULATORY MATTERS AND MANAGEMENT PLANS (Continued)

 

Consequently, at September 30, 2013, the Company had $3,528 of interest accrued on its subordinated debentures for which payment is being deferred. In addition, the Company had accumulated $2,547 in deferred dividends on the shares of Preferred Stock it had sold to the United States Department of the Treasury (the “U.S. Treasury”) under the TARP Capital Purchase Program (the “CPP”). Under the terms of the CPP, failure to pay dividends for six dividend periods triggers the U.S. Treasury’s right to elect two directors to an institution’s board. Since the Company has deferred payment of dividends on its Preferred Stock for more than six quarters, the U.S. Treasury now has the right to elect up to two directors to the Company’s board of directors.

Similarly, the sole subsidiary of the Bank, Community First Properties, Inc., also suspended the payment of dividends on its preferred stock beginning with the dividend payment due on December 31, 2011. At September 30, 2013, Community First Properties, Inc. had $31 of preferred stock dividends accrued for which payment is being deferred.

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

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 2 – REGULATORY MATTERS AND MANAGEMENT PLANS (Continued)

 

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

The Consent Order includes time frames to implement the foregoing and on-going compliance requirements for the Bank, such as quarterly progress reports to its regulators. At September 30, 2013, the Bank’s regulatory capital ratios, with the exception of Tier 1 to Average Assets, met the minimum regulatory capital ratios proscribed by the Consent Order. In accordance with the terms of the Consent Order, management has prepared and submitted a capital plan with the objective of attaining the capital ratios required by the Consent Order. Management has submitted a written plan to the FDIC to bring the Bank into compliance with the loan concentration component of the Consent Order, and that plan was approved by the FDIC.

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

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 2 – REGULATORY MATTERS AND MANAGEMENT PLANS (Continued)

 

Bank holding companies and banks are subject to various regulatory capital requirements administered by State and Federal banking agencies. The Company’s and the Bank’s capital amounts and ratios at September 30, 2013 and December 31, 2012, were as follows:

 

     Actual     For Capital
Adequacy
Purposes
    To Be Well
Capitalized Under
Applicable
Regulatory
Provisions
    Required by
terms of
Consent Order
with FDIC
 
     Amount      Ratio     Amount      Ratio     Amount      Ratio     Amount      Ratio  

September 30, 2013

                    

Total Capital to risk weighted assets

                    

Community First Bank & Trust

   $ 40,352         13.82   $ 23,350         8.00   $ 29,188         10.00   $ 35,025         12.00

Consolidated

     23,708         8.12     23,385         8.00     29,232         10.00     N/A         N/A   

Tier 1 Capital to risk weighted assets

                    

Community First Bank & Trust

   $ 36,646         12.56   $ 11,675         4.00   $ 17,512         6.00   $ 29,188         10.00

Consolidated

     13,332         4.56     11,692         4.00     17,539         6.00     N/A         N/A   

Tier 1 Capital to average assets

                    

Community First Bank & Trust

   $ 36,646         8.04   $ 18,225         4.00   $ 22,781         5.00   $ 38,727         8.50

Consolidated

     13,332         2.91     18,311         4.00     N/A         N/A        N/A         N/A   

December 31, 2012

                    

Total Capital to risk weighted assets

                    

Community First Bank & Trust

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

Consolidated

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

Tier 1 Capital to risk weighted assets

                    

Community First Bank & Trust

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

Consolidated

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

Tier 1 Capital to average assets

                    

Community First Bank & Trust

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

Consolidated

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

The sales of the Bank’s Murfreesboro, Tennessee branch location, on March 30, 2012, and Franklin, Tennessee branch location, on December 7, 2012, resulted in gains of $1,466 and $2,601, respectively. These gains contributed to the improvement in the Bank’s capital in 2012. However, despite the improvement, the Bank’s Tier 1 to Average Assets ratio as of September 30, 2013 was below what the Bank agreed to achieve under the terms of the Consent Order. Based on September 30, 2013 levels of average assets and risk-weighted assets, the required amount of additional Tier 1 capital necessary to meet the requirements of the Consent Order was approximately $2,100. The Bank’s capital ratios at September 30, 2013 were above those levels necessary to be considered “well capitalized” under the regulatory framework for prompt corrective action. The existence of the Consent Order requires regulators to continue to classify the Bank as “adequately capitalized” even though the capital levels would qualify as “well capitalized” if the Consent Order were not in place.

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 2 – REGULATORY MATTERS AND MANAGEMENT PLANS (Continued)

 

The Company’s capital levels at September 30, 2013 were below those required to be considered “adequately capitalized” under applicable regulations. Two of the three capital ratios were considered “adequate”; however, the Tier 1 to Average Assets ratio was below the requirements to be considered “adequate”, which prohibits the Company from being considered “adequately capitalized”.

Management’s Plans

The Company is currently considering various options to increase capital levels at the Company and the Bank, including the sale of common or preferred stock of the Company or other assets, or alternatively the sale of the Company. Despite the income received from the branch sales and the Bank’s improved operating performance, the Bank’s Tier 1 leverage ratio remains below the level that the Bank is required to maintain in the Consent Order. Because the amount of cash available at the Company is not sufficient to pay the accrued but unpaid dividends on the Preferred Stock and interest on the subordinated debentures and contribute cash to the Bank, the Company will continue to seek additional alternatives to raise capital in order to assist the Bank in meeting its required capital levels under the Consent Order and the written agreement with the Department and the Company in meeting its required capital levels under the Written Agreement. Any sale of the Company’s common stock would likely be at a price that would result in substantial dilution in ownership for the Company’s existing common shareholders and could result in a change in control of the Company. If a change in control was deemed to have occurred, certain IRS regulations related to the preservation of net operating loss carryforwards could subject the Company to risk of forfeiture of these tax benefits. The loss of these tax benefits would not cause the Company to recognize a direct reduction in cash, but rather would eliminate the tax benefits that the Company would otherwise be able to utilize to offset future year’s profits, if any, to reduce the Company’s tax liabilities. Continued failure by the Bank or the Company to comply with the terms of the Consent Order, the Written Agreement or the written agreement that the Bank has entered into with the Department, as applicable, may result in additional adverse regulatory action.

NOTE 3 – BRANCH DIVESTITURES

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

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

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

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

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

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 4 – SECURITIES AVAILABLE FOR SALE

The following table summarizes the amortized cost and fair value of the available for sale securities portfolio at September 30, 2013 and December 31, 2012 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss), net of applicable income taxes:

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

September 30, 2013

          

U.S. Government sponsored entities

   $ 36,104       $ 3       $ (1,247   $ 34,860   

Mortgage-backed (residential)

     28,313         528         (326     28,515   

State and municipal

     4,303         85         (2     4,386   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 68,720       $ 616       $ (1,575   $ 67,761   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2012

          

U.S. Government sponsored entities

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

Mortgage-backed (residential)

     31,673         1,105         —          32,778   

State and municipal

     5,477         220         —          5,697   

Corporate

     1,000         —           (13     987   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

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

 

 

    

 

 

    

 

 

   

 

 

 

The proceeds from sales of securities and the associated gains and losses are listed below:

 

    

Nine months ended

September 30,

 
     2013      2012  

Proceeds

   $ 3,675       $ 12,437   

Gross gains

     182         1,215   

Gross losses

     —           —     

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

 

     September 30, 2013  
     Amortized Cost      Fair Value  

Due in one year or less

   $ 66       $ 66   

Due after one through five years

     13,684         13,503   

Due after five through ten years

     21,813         21,006   

Due after ten years

     4,844         4,671   

Mortgage backed (residential)

     28,313         28,515   
  

 

 

    

 

 

 

Total

   $ 68,720       $ 67,761   
  

 

 

    

 

 

 

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 4 – SECURITIES AVAILABLE FOR SALE (Continued)

 

At September 30, 2013 and December 31, 2012, respectively, securities totaling $38,975 and $49,272 were pledged to secure public deposits and, in the case of December 31, 2012, repurchase agreements.

At September 30, 2013 and December 31 2012, the Company held no securities for which the aggregate face amount of investments is greater than 10% of the Company’s shareholders’ equity as of September 30, 2013 and December 31, 2012, respectively.

The following table summarizes securities with unrealized losses at September 30, 2013 and December 31, 2012 aggregated by major security type and length of time in a continuous unrealized loss position:

 

     Less than 12 Months     12 Months or More     Total  

September 30, 2013

Description of Securities

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

U.S. Government sponsored entities

   $ 32,856       $ (1,247   $ —         $ —        $ 32,856       $ (1,247

Mortgage backed (residential)

     12,102         (326     —           —          12,102         (326

State and municipal

     431         (2     —           —          431         (2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired

   $ 45,389       $ (1,575   $ —         $ —        $ 45,389       $ (1,575
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     Less than 12 Months     12 Months or More     Total  

December 31, 2012

Description of Securities

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

U.S. Government sponsored entities

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

Corporate

     —           —          987         (13     987         (13
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired

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

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 4 – SECURITIES AVAILABLE FOR SALE (Continued)

 

Other-Than-Temporary Impairment

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

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

As of September 30, 2013, the Company’s securities portfolio consisted of 105 securities, 54 of which were in an unrealized loss position. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company did not have at September 30, 2013 the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company did not consider these securities to be other-than-temporarily impaired at September 30, 2013.

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 4 – SECURITIES AVAILABLE FOR SALE (Continued)

 

The table below presents a rollforward for the three month and nine month periods ended September 30, 2013 and 2012 of the credit losses recognized in earnings:

 

     Nine months ended
September 30,
     Three months ended
September 30,
 
     2013     2012      2013      2012  

Beginning Balance

   $ 6,338      $ 6,338       $ —         $ 6,338   

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

     —          —           —           —     

Reduction for credit losses on securities for which no recovery has been received and for which no recovery is expected

     (6,338     —           —           —     
  

 

 

   

 

 

    

 

 

    

 

 

 

Ending Balance

   $ —        $ 6,338       $ —         $ 6,338   
  

 

 

   

 

 

    

 

 

    

 

 

 

During the second quarter of 2013, the Company wrote off two securities for which previous other than temporary losses had been recognized. Both of the securities written off were trust preferred securities issued by financial institutions that have failed and are no longer in existence. Management does not anticipate that the Company will recover any of the charged off balances in the future.

NOTE 5 – FAIR VALUE

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

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

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

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

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

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

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 5 – FAIR VALUE (Continued)

 

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

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

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

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

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

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 5 – FAIR VALUE (Continued)

 

Assets and Liabilities Measured on a Recurring Basis

 

            Fair Value Measurements at
September 30, 2013 using
 
     Carrying Value     

Significant Other
Observable

Inputs

(Level 2)

    

Significant

Unobservable

Inputs (Level 3)

 

Assets:

        

Available for sale securities:

        

U.S. government sponsored entities

   $ 34,860       $ 34,860       $ —     

Mortgage-backed (residential)

     28,515         28,515         —     

State and municipal

     4,386         4,280         106   
  

 

 

    

 

 

    

 

 

 

Total available for sale securities

     67,761         67,655         106   

Loans held for sale

     79         79         —     
            Fair Value Measurements at
December 31, 2012 using
 
     Carrying Value     

Significant Other
Observable
Inputs

(Level 2)

     Significant
Unobservable
Inputs (Level 3)
 

Assets:

        

Available for sale securities:

        

U.S. government sponsored entities

   $ 30,718       $ 30,718       $ —     

Mortgage-backed (residential)

     32,778         32,778         —     

State and municipal

     5,697         5,589         108   

Corporate

     987         —           987   
  

 

 

    

 

 

    

 

 

 

Total available for sale securities

     70,180         69,085         1,095   

Loans held for sale

     921         921         —     

There were no transfers among fair value pricing levels during the nine months ended September 30, 2013 and 2012.

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 5 – FAIR VALUE (Continued)

 

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine month and three month periods ended September 30, 2013 and 2012:

 

    

Fair Value Measurements Using

Significant Unobservable Inputs

(Level 3)

 
     Corporate Securities  
    

Nine months ended

September 30,

   

Three months ended

September 30,

 
     2013     2012     2013     2012  

Beginning balance

   $ 987      $ 968      $ 987      $ 977   

Securities Matured

     (987     —          (987     —     

Change in fair value

     —          12        —          3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ —        $ 980      $ —        $ 980   
  

 

 

   

 

 

   

 

 

   

 

 

 
    

Fair Value Measurements Using

Significant Unobservable Inputs

(Level 3)

 
     State and County Municipal Securities  
    

Nine months ended

September 30,

   

Three months ended

September 30,

 
     2013     2012     2013     2012  

Beginning balance

   $ 108      $ 4,427      $ 107      $ 1,112   

Securities sold

     —          (4,396     —          (1,008

Change in fair value

     (2     78        (1     5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 106      $ 109      $ 106      $ 109   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 5 – FAIR VALUE (Continued)

 

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

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

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

State and Municipal Securities:

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

Corporate Securities:

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

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 5 – FAIR VALUE (Continued)

 

Assets and Liabilities Measured on a Non-Recurring Basis

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

 

     September 30, 2013  
     Carrying Value      Fair Value
Measurements
using other
significant
unobservable
inputs (Level 3)
 

Assets:

     

Impaired loans:

     

Real estate construction

   $ 4,583       $ 4,583   

1-4 Family residential

     4,940         4,940   

Commercial real estate

     3,090         3,090   

Commercial, financial and agricultural

     10         10   

Other loans

     1,053         1,053   
  

 

 

    

 

 

 

Total impaired loans

     13,676         13,676   

Other real estate owned:

     

Construction and development

     6,083         6,083   

1-4 Family residential

     185         185   

Non-farm, non-residential

     4,721         4,721   
  

 

 

    

 

 

 

Total other real estate owned

     10,989         10,989   

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 5 – FAIR VALUE (Continued)

 

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

Assets:

     

Impaired loans:

     

Real estate construction

   $ 8,953       $ 8,953   

1-4 Family residential

     3,194         3,194   

Commercial real estate

     2,102         2,102   

Commercial, financial and agricultural

     25         25   
  

 

 

    

 

 

 

Total impaired loans

     14,274         14,274   

Other real estate owned:

     

Construction and development

     2,949         2,949   

1-4 Family residential

     1,066         1,066   

Non-farm, non-residential

     2,363         2,363   
  

 

 

    

 

 

 

Total other real estate owned

     6,378         6,378   

Impaired loans, with specific allocations or partial charge offs based on the fair value of the underlying collateral for collateral dependent loans, had a recorded investment of $16,263, with a valuation allowance of $2,587, resulting in an additional provision for loan losses of $262 for the nine-month period ended September 30, 2013, compared to an additional provision of $2,700 in the first nine months of 2012. Impaired loans, with specific allocations or partial charge offs based on the fair value of the underlying collateral for collateral dependent loans, had a recorded investment of $15,840, with a valuation allowance of $1,565, resulting in an additional provision for loan losses of $1,306 for the year ended December 31, 2012.

Other real estate owned, measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $10,989, which is made up of the outstanding balance of $13,118, net of a valuation allowance of $2,129 at September 30, 2013, resulting in a write-down of $829 charged to expense in the nine months ended September 30, 2013, compared to a write-down of $524 charged to expense in the first nine months of 2012. Net carrying amount was $6,378 at December 31, 2012, which was made up of the outstanding balance of $8,010, net of a valuation allowance of $1,632.

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 5 – FAIR VALUE (Continued)

 

The following table presents quantitative information about Level 3 fair value measurements for financial instruments at fair value on a non-recurring basis at September 30, 2013:

 

     Fair
Value
    

Valuation

Technique(s)

  

Unobservable

Input(s)

   Range (Weighted
Average) (1)

Impaired Loans:

           

Real estate construction

   $ 4,583       Sales comparison approach    Adjustment for differences between the comparable sales    (0.0%) – (21.0%)

(8.9%)

1-4 Family residential

     4,940       Sales comparison approach    Adjustment for differences between the comparable sales    (0.0%) – (0.0%)

(0.0%)

Commercial real estate

     3,090       Sales comparison approach    Adjustment for differences between the comparable sales    (9.0%) – (9.0%)

(9.0%)

Commercial, financial and agricultural

     10       Sales comparison approach    Adjustment for differences between the comparable sales    (0.0%) – (0.0%)

(0.0%)

Other loans

     1,053       Sales comparison approach    Adjustment for differences between the comparable sales    (10.0%) – (17.0%)

(11.4%)

Other real estate owned:

           

Construction and development

     6,083       Sales comparison approach    Adjustment for differences between the comparable sales    (0.0%) – (22.0%)

(3.4%)

1-4 Family residential

     185       Sales comparison approach    Adjustment for differences between the comparable sales    (7.5%) – (10.0%)

(8.9%)

Non-farm, non-residential

     4,721       Sales comparison approach    Adjustment for differences between the comparable sales    (0.0%) – (0.0%)

(0.0%)

 

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

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 5 – FAIR VALUE (Continued)

 

Carrying amount and estimated fair values of significant financial instruments at September 30, 2013 and December 31, 2012 were as follows:

 

     September 30, 2013  
     Carrying
Amount
     Total      Level 1      Level 2      Level 3  

Financial assets

              

Cash and cash equivalents

   $ 55,640       $ 55,640       $ 55,640       $ —         $ —     

Time deposits in other financial institutions

     1,000         1,002         —           1,002         —     

Securities available for sale

     67,761         67,761         —           67,655         106   

Loans held for sale, at fair value

     79         79         —           79         —     

Loans, net of allowance

     276,360         275,137         —           —           275,137   

Restricted equity securities

     1,727         NA         NA         NA         NA   

Accrued interest receivable

     1,092         1,092         4         255         833   

Financial liabilities

              

Deposits with stated maturities

     221,433         222,585         —           222,585         —     

Deposits without stated maturity

     187,818         187,818         187,818         —           —     

Accrued interest payable

     4,304         4,304         1         775         3,528   

Subordinated debentures

     23,000         11,500         —           —           11,500   

 

     December 31, 2012  
     Carrying
Amount
     Total      Level 1      Level 2      Level 3  

Financial assets

              

Cash and cash equivalents

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

Time deposits in other financial institutions

     1,000         1,000         —           1,000         —     

Securities available for sale

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

Loans held for sale, at fair value

     921         921         —           921         —     

Loans, net of allowance

     297,114         299,039         —           —           299,039   

Restricted equity securities

     1,727         NA         NA         NA         NA   

Accrued interest receivable

     1,377         1,377         8         255         1,114   

Financial liabilities

              

Deposits with stated maturities

     280,024         280,422         —           280,422         —     

Deposits without stated maturity

     168,922         168,922         168,922         —           —     

Accrued interest payable

     3,628         3,628         3         692         2,933   

Repurchase agreements

     7,000         7,046         —           —           7,046   

Federal Home Loan Bank advances

     13,000         13,096         —           13,096         —     

Subordinated debentures

     23,000         12,500         —           —           12,500   

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 5 – FAIR VALUE (Continued)

 

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

NOTE 6 – LOANS

Loans outstanding by category at September 30, 2013 and December 31, 2012 were as follows:

 

     September 30,
2013
     December 31,
2012
 

Real estate construction:

     

Residential construction

   $ 7,801       $ 9,485   

Other construction

     21,695         27,163   

1-4 Family residential:

     

Revolving, open ended

     21,806         25,111   

First liens

     85,603         84,555   

Junior liens

     2,287         3,268   

Commercial real estate:

     

Farmland

     7,950         7,670   

Owner occupied

     38,793         39,541   

Non-owner occupied

     64,128         68,381   

Other real estate secured loans

     5,539         5,726   

Commercial, financial and agricultural:

     

Agricultural

     722         928   

Commercial and industrial

     20,835         26,980   

Consumer

     5,479         5,707   

Tax exempt

     61         72   

Other

     2,024         2,294   
  

 

 

    

 

 

 
   $ 284,723       $ 306,881   
  

 

 

    

 

 

 

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 6 – LOANS (Continued)

 

The following tables present activity in allowance for loan losses and the outstanding loan balance by portfolio segment and are based on impairment methods as of September 30, 2013 and 2012. The balances for “recorded investment” in the following tables related to credit quality do not include approximately $0, $1,068 and $1,520 in accrued interest receivable at September 30, 2013, September 30, 2012 and December 31, 2012, respectively. Accrued interest receivable is a component of the Company’s recorded investment in loans.

 

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

Nine months ended September 30, 2013

  

        

Activity in the allowance for loan losses:

                     

Beginning Balance

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

Charge-offs

     —          (753     (577     —          (550     (5     —           (42     —          (1,927

Recoveries

     19        68        29        —          78        7        —           22        —          223   

Provision

     (493     (171     575        (145     119        7        —           454        (46     300   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total ending allowance balance

   $ 1,464      $ 3,277      $ 1,541      $ 81      $ 641      $ 23      $ —         $ 802      $ 534      $ 8,363   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Nine months ended September 30, 2012

  

        

Activity in the allowance for loan losses:

                     

Beginning Balance

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

Charge-offs

     (2,819     (1,261     (833     —          (581     (112     —           (5,884     —          (11,490

Recoveries

     35        189        77        —          44        6        —           18        —          369   

Provision

     254        (239     (96     31        155        29        —           2,538        28        2,700   

Transfers due to potential branch sale

     48        320        37        —          64        12        —           —          —          481   

Transfers due to completed branch sale

     2        15        —          —          1        —          —           —          —          18   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total ending allowance balance

   $ 2,329      $ 4,588      $ 2,690      $ 275      $ 1,077      $ 19      $ —         $ 9      $ 637      $ 11,624   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

- 33 -


Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 6 – LOANS (Continued)

 

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

Three months ended September 30, 2013

                      

Activity in the allowance for loan losses:

                      

Beginning Balance

   $ 1,509      $ 3,571      $ 2,016      $ 82      $ 624      $ 24      $ —         $ 703      $ 525       $ 9,054   

Charge-offs

     —          (47     (575     —          (101     (1     —           (9     —           (733

Recoveries

     16        8        8        —          2        1        —           7        —           42   

Provision

     (61     (255     92        (1     116        (1     —           101        9         —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total ending allowance balance

   $ 1,464      $ 3,277      $ 1,541      $ 81      $ 641      $ 23      $ —         $ 802      $ 534       $ 8,363   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Three months ended September 30, 2012

                      

Activity in the allowance for loan losses:

                      

Beginning Balance

   $ 4,000      $ 5,232      $ 2,674      $ 275      $ 1,297      $ 44      $ —         $ 528      $ 622       $ 14,672   

Charge-offs

     (2,130     (151     —          —          (453     (13     —           (2,505     —           (5,252

Recoveries

     5        2        —          —          16        1        —           9        —           33   

Provision

     458        (652     (4     —          231        (25     —           1,977        15         2,000   

Transfers due to completed branch sale

     (4     157        20        —          (14     12        —           —          —           171   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total ending allowance balance

   $ 2,329      $ 4,588      $ 2,690      $ 275      $ 1,077      $ 19      $ —         $ 9      $ 637       $ 11,624   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

- 34 -


Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 6 – LOANS (Continued)

 

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

Ending allowance balance attributable to loans at September 30, 2013:

                             

Individually evaluated for impairment

   $ 645       $ 565       $ 420       $ —         $ 179       $ —         $ —         $ 800       $ —         $ 2,609   

Collectively evaluated for Impairment

     819         2,712         1,121         81         462         23         —           2         534         5,754   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

   $ 1,464       $ 3,277       $ 1,541       $ 81       $ 641       $ 23       $ —         $ 802       $ 534       $ 8,363   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

                             

Individually evaluated for impairment

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

Collectively evaluated for Impairment

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total ending allowance balance

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans at September 30, 2013:

                       

Individually evaluated for impairment

   $ 11,802       $ 7,291       $ 4,742       $ 120       $ 188       $ 14       $ —         $ 1,853          $ 26,010   

Collectively evaluated for impairment

     17,694         102,405         106,129         5,419         21,369         5,465         61         171            258,713   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total loans balance

   $ 29,496       $ 109,696       $ 110,871       $ 5,539       $ 21,557       $ 5,479       $ 61       $ 2,024          $ 284,723   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Loans at December 31, 2012:

                       

Individually evaluated for impairment

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

Collectively evaluated for impairment

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Total loans balance

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

 

- 35 -


Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 6 – LOANS (Continued)

 

Loans individually evaluated for impairment by class of loans as of and for the nine months ended September 30, 2013:

 

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

With no related allowance recorded:

                

Real estate construction:

                

Residential construction

   $ —         $ —         $ —         $ 633       $ —        $ —     

Other construction

     6,564         6,564         —           7,507         1        1   

1-4 Family residential:

                

Revolving, open ended

     40         40         —           170         1        1   

First liens

     1,593         1,593         —           1,837         38        42   

Junior liens

     83         83         —           70         2        2   

Commercial real estate:

                

Owner occupied

     1,092         1,092         —           1,095         35        37   

Non-owner occupied

     —           —           —           1,028         —          —     

Other real estate loans

     120         120         —           123         —          —     

Commercial, financial and agricultural:

                

Agricultural

     2         1         —           1         —          —     

Commercial and industrial

     20         9         —           95         1        1   

Consumer

     2         2         —           1         —          —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total with no related allowance recorded

     9,516         9,504         —           12,560         78        84   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

With an allowance recorded:

                

Real estate construction:

                

Residential construction

     2,779         2,779         170         2,921         —          —     

Other construction

     2,459         2,459         475         2,899         18        18   

1-4 Family residential:

                

Revolving, open ended

     180         180         132         378         2        4   

First Liens

     5,395         5,395         433         5,022         155        125   

Junior Liens

     —           —           —           87         —          —     

Commercial real estate:

                

Owner occupied

     1,852         1,852         278         1,863         96        101   

Non-owner occupied

     3,753         1,798         142         1,584         5        6   

Other real estate loans

     —           —           —           1,100         —          —     

Commercial, financial and agricultural:

                

Agricultural

     —           —           —           —           —          —     

Commercial and industrial

     179         179         179         375         (35     —     

Consumer

     12         12         —           7         1        1   

Other loans

     6,227         1,853         800         1,853         —          —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total with an allocated allowance recorded

     22,836         16,507         2,609         18,089         242        255   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 32,352       $ 26,011       $ 2,609       $ 30,649       $ 320      $ 339   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

- 36 -


Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 6 – LOANS (Continued)

 

Loans individually evaluated for impairment by class of loans as of and for the three months ended September 30, 2013:

 

     Average
Recorded
Investment
     Income
Recognized
    Cash Basis
Income
Recognized
 

With no related allowance recorded:

       

Real estate construction:

       

Residential construction

   $ —         $ —        $ —     

Other construction

     6,913         (14     (14

1-4 Family residential:

       

Revolving, open ended

     319         —          (6

First liens

     1,422         23        24   

Junior liens

     70         —          —     

Commercial real estate:

       

Owner occupied

     1,093         12        12   

Non-owner occupied

     —           —          —     

Other real estate loans

     121         —          —     

Commercial, financial and agricultural:

       

Agricultural

     1         —          —     

Commercial and industrial

     15         —          —     

Consumer

     2         —          —     
  

 

 

    

 

 

   

 

 

 

Total with no related allowance recorded

     9,956         21        16   
  

 

 

    

 

 

   

 

 

 

With an allowance recorded:

       

Real estate construction:

       

Residential construction

     2,839         —          —     

Other construction

     3,249         (1     (1

1-4 Family residential:

       

Revolving, open ended

     180         1        1   

First Liens

     5,372         64        43   

Junior Liens

     —           —          —     

Commercial real estate:

       

Owner occupied

     1,858         32        32   

Non-owner occupied

     2,028         (65     (64

Other real estate loans

     —           —          —     

Commercial, financial and agricultural:

       

Agricultural

     1         —          —     

Commercial and industrial

     315         (35     —     

Consumer

     14         1        1   

Other loans

     1,853         —          —     
  

 

 

    

 

 

   

 

 

 

Total with an allocated allowance recorded

     17,709         (3     12   
  

 

 

    

 

 

   

 

 

 

Total

   $ 27,665       $ 18      $ 28   
  

 

 

    

 

 

   

 

 

 

 

- 37 -


Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 6 – LOANS (Continued)

 

Loans individually evaluated for impairment by class of loans as of and for the Nine months ended September 30, 2012:

 

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

With no related allowance recorded:

                

Real estate construction:

                

Residential construction

   $ 2,173       $ 896       $ —         $ 3,443       $ 11      $ 11   

Other construction

     13,924         10,709         —           9,205         —          —     

1-4 Family residential:

                

Revolving, open ended

     —           —           —           —           —          —     

First liens

     3,321         3,320         —           4,487         102        112   

Junior liens

     —           —           —           —           —          —     

Commercial real estate:

                

Farmland

     485         234         —           234         —          —     

Owner occupied

     1,445         1,445         —           847         41        40   

Non-owner occupied

     10,924         10,925         —           4,483         782        845   

Other real estate secured loans

                

Commercial, financial and agricultural:

                

Commercial and industrial

     —           —           —           94         —          —     

Consumer

     —           —           —           18         —          —     

Other Loans

     6,227         1,853         —           1,107         —          —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total with no related allowance recorded

     38,499         29,382         —           23,918         936        1,008   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

With an allowance recorded:

                

Real estate construction:

                

Residential construction

     4,273         4,158         614         2,001         137        149   

Other construction

     2,979         2,979         913         4,246         47        64   

1-4 Family residential:

                

Revolving, open ended

     575         575         121         589         (3     2   

First Liens

     3,422         3,422         320         2,690         195        170   

Junior Liens

     264         264         185         267         42        13   

Commercial real estate:

                

Farmland

     —           —           —           —           —          —     

Owner occupied

     1,725         1,725         292         1,267         114        114   

Non-owner occupied

     5,167         5,168         1,452         4,849         124        149   

Other real estate secured loans

     2,213         2,213         72         2,222         118        119   

Commercial, financial and agricultural:

                

Commercial and industrial

     146         146         55         173         1        1   

Consumer

     4         4         5         98         —          —     

Other loans

     —           —           —           4,642         —          —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total with an allocated allowance recorded

     20,768         20,654         4,029         23,044         775        781   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 59,267       $ 50,036       $ 4,029       $ 46,962       $ 1,711      $ 1,789   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

- 38 -


Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 6 – LOANS (Continued)

 

Loans individually evaluated for impairment by class of loans as of and for the three months ended September 30, 2012:

 

     Average
Recorded
Investment
     Income
Recognized
    Cash Basis
Income
Recognized
 

With no related allowance recorded:

       

Real estate construction:

       

Residential construction

   $ 1,001       $ 11      $ 11   

Other construction

     10,057         (1     —     

1-4 Family residential:

       

Revolving, open ended

     —           —          —     

First liens

     3,564         38        39   

Junior liens

     —           —          —     

Commercial real estate:

       

Farmland

     234         —          —     

Owner occupied

     1,445         16        17   

Non-owner occupied

     6,540         717        779   

Other real estate secured loans

       

Commercial, financial and agricultural:

       

Commercial and industrial

     —           —          —     

Consumer

     1         —          —     

Other Loans

     1,550         —          —     
  

 

 

    

 

 

   

 

 

 

Total with no related allowance recorded

     24,392         781        846   
  

 

 

    

 

 

   

 

 

 

With an allowance recorded:

       

Real estate construction:

       

Residential construction

     4,363         62        60   

Other construction

     4,322         55        51   

1-4 Family residential:

       

Revolving, open ended

     637         (2     —     

First Liens

     3,804         64        42   

Junior Liens

     132         42        13   

Commercial real estate:

       

Farmland

     —           —          —     

Owner occupied

     863         114        114   

Non-owner occupied

     9,569         (317     —     

Other real estate secured loans

     2,216         49        45   

Commercial, financial and agricultural:

       

Commercial and industrial

     227         —          —     

Consumer

     11         —          —     

Other loans

     1,547         —          —     
  

 

 

    

 

 

   

 

 

 

Total with an allocated allowance recorded

     27,691         67        325   
  

 

 

    

 

 

   

 

 

 

Total

   $ 52,083       $ 848      $ 1,171   
  

 

 

    

 

 

   

 

 

 

 

- 39 -


Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 6 – LOANS (Continued)

 

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

 

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

With no related allowance recorded:

                

Real estate construction:

                

Residential construction

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

Other construction

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

1-4 Family residential:

                

Revolving, open ended

     —           —           —           —           —          —     

First liens

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

Junior liens

     74         74         —           15         47        47   

Commercial real estate:

                

Farmland

     —           —           —           187         —          —     

Owner occupied

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

Non-owner occupied

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

Other real estate loans

     126         126         —           32         30        37   

Commercial, financial and agricultural:

                

Commercial and industrial

     345         345         —           125         26        25   

Consumer

     —           —           —           11         —          —     

Other Loans

     —           —           —           914         —          —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total with no related allowance recorded

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

With an allowance recorded:

                

Real estate construction:

                

Residential construction

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

Other construction

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

1-4 Family residential:

                

Revolving, open ended

     575         575         121         608         (2     3   

First Liens

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

Junior Liens

     263         263         184         213         16        16   

Commercial real estate:

                

Farmland

     —           —           —           —           —          —     

Owner occupied

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

Non-owner occupied

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

Other real estate loans

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

Commercial, financial and agricultural:

                

Commercial and industrial

     37         37         12         172         1        1   

Consumer

     —           —           —           62         —          —     

Other loans

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total with an allocated allowance recorded

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 6 – LOANS (Continued)

 

Troubled Debt Restructurings

The Company has $23,607 of loans with allocated specific reserves of $1,968 to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2013 compared to $28,451 with allocated specific reserves of $1,596 at December 31, 2012. The Company lost $121 and $183 of interest income in the nine months and $36 and $49 of interest income in the three months ended September 30, 2013 and 2012, respectively, that would have been recorded in interest income if the specific loans had not been restructured. The Bank had no commitments to lend additional funds to loans classified as troubled debt restructurings at September 30, 2013 or December 31, 2012.

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

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

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

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 6 – LOANS (Continued)

 

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

 

     Number of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
 

September 30, 2013

        

Real estate construction:

        

Other construction

     3       $ 1,365       $ 1,365   

1-4 Family residential:

        

Revolving, open ended

     1         6         6   

First liens

     8         5,575         5,575   

Commercial real estate:

        

Owner occupied

     1         162         162   

Commercial, financial and agricultural

        

Agricultural

     1         1         1   

Commercial and industrial

     2         21         21   

Consumer

     5         16         16   
  

 

 

    

 

 

    

 

 

 

Total

     21       $ 7,146       $ 7,146   
  

 

 

    

 

 

    

 

 

 

September 30, 2012

        

Real estate construction:

        

Residential construction

     1       $ 737       $ 737   

Other construction

     2         6,552         6,552   

1-4 Family residential:

        

First liens

     15         6,062         6,062   

Junior liens

     1         9         9   

Commercial real estate:

        

Owner occupied

     2         2,823         2,823   

Non-owner occupied

     4         13,971         13,971   

Other real estate secured loans

     3         1,246         1,246   
  

 

 

    

 

 

    

 

 

 

Total

     28       $ 31,400       $ 31,400   
  

 

 

    

 

 

    

 

 

 

Troubled debt restructurings described above had an outstanding balance of $7,076 at September 30, 2013 and increased the allowance for loan losses by $38 during the first nine months of 2013. Troubled debt restructurings still accruing interest totaled $8,439 and $9,038 at September 30, 2013 and December 31, 2012, respectively.

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

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

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 6 – LOANS (Continued)

 

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still accruing by class of loans as of September 30, 2013 and December 31, 2012:

 

     September 30, 2013      December 31, 2012  
     Nonaccrual      Loans past due
over 90 days still
accruing
     Nonaccrual      Loans past due
over 90 days still
accruing
 

Real estate construction:

           

Residential construction

   $ 2,779       $ —         $ 3,976       $ —     

Other construction

     9,001         —           10,507         —     

1-4 Family residential:

           

Revolving, open ended

     120         —           616         —     

First Liens

     1,439         —           4,396         —     

Junior Liens

     —           —           74         —     

Commercial real estate:

           

Farmland

     —           —           1,304         —     

Owner occupied

     324         —           54         —     

Non-owner occupied

     2,158         —           1,775         —     

Other real estate loans

     120         —           126         —     

Commercial, financial and agricultural:

           

Agricultural

     —           —           —           —     

Commercial and industrial

     1,798         —           282         —     

Consumer

     —           —           12         —     

Other loans

     1,855         —           1,853         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 19,594       $ —         $ 24,975       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 6 – LOANS (Continued)

 

The following table presents the aging of the recorded investment in past due loans, including nonaccrual loans as of September 30, 2013 and December 31, 2012 by class of loans:

 

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

Real estate construction:

                 

Residential construction

   $ —         $ —         $ —         $ —         $ 7,801       $ 7,801   

Other construction

     97         —           151         248         21,447         21,695   

1-4 Family residential:

                 

Revolving, open ended

     110         —           120         230         21,576         21,806   

First Liens

     763         451         308         1,522         84,081         85,603   

Junior Liens

     120         —           —           120         2,167         2,287   

Commercial real estate:

                 

Farmland

     —           —           —           —           7,950         7,950   

Owner occupied

     —           —           324         324         38,469         38,793   

Non-owner occupied

     —           150         506         656         63,472         64,128   

Other real estate secured loans

     —           —           —           —           5,539         5,539   

Commercial, financial and agricultural:

                 

Agricultural

     —           —           —           —           722         722   

Commercial and industrial

     —           9         1,798         1,807         19,028         20,835   

Consumer

     5         —           —           5         5,474         5,479   

Tax exempt

     —           —           —           —           61         61   

Other loans

     —           —           1,855         1,855         169         2,024   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,095       $ 610       $ 5,062       $ 6,767       $ 277,956       $ 284,723   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Real estate construction:

                 

Residential construction

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

Other construction

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

1-4 Family residential:

                 

Revolving, open ended

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

First Liens

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

Junior Liens

     86         —           —           86         3,182         3,268   

Commercial real estate:

                 

Farmland

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

Owner occupied

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

Non-owner occupied

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

Other real estate secured loans

     —           —           —           —           5,726         5,726   

Commercial, financial and agricultural:

                 

Agricultural

     3         —           —           3         925         928   

Commercial and industrial

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

Consumer

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

Tax exempt

     —           —           —           —           72         72   

Other loans

     23         14         —           37         2,257         2,294   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,826       $ 921       $ 11,735       $ 21,482       $ 285,399       $ 306,881   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 6 – LOANS (Continued)

 

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. The Company assigns an initial credit risk rating on every loan. All loan relationships with aggregate debt greater than $250 are reviewed at least annually or more frequently if performance of the loan or other factors warrants review. Smaller balance loans are reviewed and evaluated based on changes in loan performance, such as becoming past due or upon notifying the Bank of a change in the borrower’s financial status. This analysis is performed on a monthly basis. The Company uses the following definitions for risk ratings:

Watch. Loans classified as watch are considered to be of acceptable credit quality, but contain greater credit risk than pass rated loans due to weak balance sheets, marginal earnings or cash flow, or other uncertainties. These loans warrant a higher than average level of monitoring to ensure that weaknesses do not advance.

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those 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.

Impaired loans are evaluated separately from other loans in the Bank’s portfolio. Credit quality information related to impaired loans was presented above and is excluded from the tables below.

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 6 – LOANS (Continued)

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of September 30, 2013 and December 31, 2012, and based on the most recent analysis performed, the risk categories of loans by class of loans are as follows:

 

September 30, 2013    Pass      Watch      Special
Mention
     Substandard      Doubtful  

Real estate construction:

              

Residential construction

   $ 4,580       $ 442       $ —         $ —         $ —     

Other construction

     3,953         7,549         —           1,169         —     

1-4 Family residential:

              

Revolving, open ended

     19,652         681         —           1,253         —     

First Liens

     67,114         6,329         44         5,128         —     

Junior Liens

     1,951         253         —           —           —     

Commercial real estate:

              

Farmland

     5,093         1,143         —           1,714         —     

Owner occupied

     26,987         6,544         —           2,318         —     

Non-owner occupied

     54,523         4,896         —           2,911         —     

Other real estate loans

     835         3,881         —           703         —     

Commercial, financial and agricultural:

              

Agricultural

     676         45         —           —           —     

Commercial and industrial

     18,950         1,528         9         160         —     

Consumer

     5,291         10         —           164         —     

Tax exempt

     61         —           —           —           —     

Other loans

     169         —           —           2         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 209,835       $ 33,301       $ 53       $ 15,522       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

December 31, 2012    Pass      Watch      Special
Mention
     Substandard      Doubtful  

Real estate construction:

              

Residential construction

   $ 1,625       $ 3,162       $ —         $ —         $ —     

Other construction

     7,765         7,169         —           1,569         —     

1-4 Family residential:

              

Revolving, open ended

     21,608         1,150         25         1,753         —     

First Liens

     51,698         17,885         822         8,373         —     

Junior Liens

     2,600         261         —           70         —     

Commercial real estate:

              

Farmland

     3,907         1,449         —           2,314         —     

Owner occupied

     27,737         8,349         —           636         —     

Non-owner occupied

     53,614         3,942         —           6,701         —     

Other real estate loans

     961         —              2,435         —     

Commercial, financial and agricultural:

              

Agricultural

     925         —           —           3         —     

Commercial and industrial

     20,829         4,339            1,430         —     

Consumer

     5,404         64         23         216         —     

Tax exempt

     72         —           —           —           —     

Other loans

     404         37         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 199,149       $ 47,807       $ 870       $ 25,500       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 7 – INCOME PER SHARE

In accordance with ASC 260-10, Earnings Per Share, basic income per share available to common shareholders is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted income per share available to common shareholders reflects the potential dilution that could occur if securities, stock options or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income of the Company. The factors used in the income per share computation follow:

 

     Nine months ended
September 30,
    Three months ended
September 30,
 
     2013     2012     2013     2012  

Basic

        

Net income

   $ 883      $ 725      $ 290      $ (1,393

Less: Earnings allocated to preferred stock

     (726     (728     (245     (244

Less: Accretion of preferred stock discount

     (148     (140     (50     (48
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (loss) available (allocated) to common stock

   $ 9      $ (143   $ (5   $ (1,685
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares

     3,274,551        3,274,049        3,274,716        3,274,183   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income (loss) per share

   $ 0.00      $ (0.04   $ 0.00      $ (0.51
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

        

Net income (loss) available (allocated) to common stock

   $ 9      $ (143   $ (5   $ (1,685
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares

     3,274,551        3,274,049        3,274,716        3,274,183   

Add: Dilutive effects of assumed exercises of stock options

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Average common shares and dilutive potential common shares outstanding

     3,274,551        3,274,049        3,274,716        3,274,183   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income (loss) per share

   $ 0.00      $ (0.04   $ 0.00      $ (0.51
  

 

 

   

 

 

   

 

 

   

 

 

 

At September 30, 2013 and 2012, respectively, stock options for 60,200 and 79,900 shares of common stock were not considered in computing diluted net income per share for the nine month and three month periods ended September 30, 2013 and 2012 because they were antidilutive.

 

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Table of Contents

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

September 30, 2013

(Unaudited)

 

NOTE 8 – INCOME TAXES

The Company recorded no tax expense during the first nine months of 2013. During 2010, the Company established a valuation allowance against all of its deferred tax assets and has maintained that valuation allowance through the first nine months of 2013. The Company intends to maintain this valuation allowance until it determines it is more likely than not that the asset can be realized through current and future taxable income. Because the Company has recorded a valuation allowance against its deferred tax assets, any deferred tax benefit or expense will be offset by a corresponding increase or decrease, respectively, to the valuation allowance. Until the reversal of the deferred tax valuation allowance, tax benefit or expense from current year operations is expected to be minimal.

 

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Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

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

The following discussion compares the financial condition of the Company at September 30, 2013 to December 31, 2012, and the results of operations for the nine months and three months ended September 30, 2013 and 2012. This discussion should be read in conjunction with the interim financial statements and footnotes included herein.

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 our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on March 15, 2013 (File No. 000-49966) (the “2012 Form 10-K”) and in other reports we file with the SEC from time to time, and the following:

 

    deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses;

 

    greater than anticipated deterioration or lack of sustained growth in the national or local economies including the Nashville-Davidson-Murfreesboro-Franklin MSA;

 

    changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions or regulatory development;

 

    the inability to meet the requirements of our regulatory orders and agreements, which we and our Bank subsidiary are subject to;

 

    failure to maintain capital levels above levels required by banking regulations or commitments or agreements we make with our regulators;

 

    the inability to comply with regulatory capital requirements, including those resulting from recently adopted changes to capital calculation methodologies and required capital maintenance levels, and to secure any required regulatory approvals for capital actions;

 

    the continued reduction of our loan balances and, conversely, the inability to ultimately grow our loan portfolio;

 

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

 

- 49 -


Table of Contents

OVERVIEW (Continued)

 

    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;

 

    continuation of the historically low short-term interest rate environment;

 

    the ability to retain large, uninsured deposits with the expiration of the Federal Deposit Insurance Corporation’s (“FDIC”) transaction account guarantee program;

 

    rapid fluctuations or unanticipated changes in interest rates;

 

    any activity that would cause us to conclude that there was impairment of any asset, including goodwill or any other intangible asset;

 

    our recording a further valuation allowance related to our deferred tax asset;

 

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

 

    changes in state and federal legislation, regulations or policies applicable to banks and other financial service providers, including regulatory or legislative developments arising out of current unsettled conditions in the economy, including implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”);

 

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

 

    further deterioration in the valuation of other real estate owned;

 

    changes in accounting policies, rules and practices;

 

    the impact of governmental restrictions on entities participating in the United States Department of the Treasury’s (the “U.S. Treasury”) Capital Purchase Program (the “CPP”) or the sale by the U.S. Treasury of the preferred securities of ours that it owns;

 

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

 

    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.

FINANCIAL CONDITION

At September 30, 2013, total assets were $450,518 and total liabilities were $442,262. Total assets decreased $60,197 or 11.8% compared to $510,715 at December 31, 2012. Total liabilities decreased $58,117 or 11.6% compared to $500,379 at December 31, 2012. The decrease in both assets and liabilities was caused by maturities of deposits, Federal Home Loan Bank (“FHLB”) advances, the repurchase agreement, and their corresponding uses of cash. Total equity decreased 20.1%, or $2,080, to $8,590 at September 30, 2013 compared to $10,336 at December 31, 2012. The decrease in equity is primarily due to losses in other comprehensive income during the first nine months of 2013 caused by market fluctuations in securities available for sale.

 

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FINANCIAL CONDITION (Continued)

 

Cash and Cash Equivalents

Cash and cash equivalents were $55,640 at September 30, 2013 compared to $94,877 at December 31, 2012. This decrease is primarily due to maturities of deposits, FHLB advances and the repurchase agreement. The Bank has continued to maintain unusually high cash balances during 2013 due to the availability of excess liquidity in the Bank’s market area coupled with reduced loan demand as a result of weak economic conditions.

Loans

Total loans (excluding loans held for sale) at September 30, 2013 were $284,723, compared to $306,881 at December 31, 2012, a decrease of $22,158 or 7.2%. The decrease in loans during the first nine months of 2013 is due to regular loan payments outpacing demand for new loans and additional foreclosure activity.

Loans in the portfolio at September 30, 2013 of approximately $55,556, or 19.5%, are at a variable rate of interest, $209,581, or 73.6%, are at a fixed rate, and $19,585, or 6.9%, are nonaccrual. $113,491, or 39.9%, of total loans reprice within one year of September 30, 2013. As market rates dropped during the economic recession, management implemented rate floors for many variable rate loans in an effort to protect the Bank’s net interest margin. As a result, when market rates begin to rise, loans at their floor will not reprice at higher rates until market rates rise above their contractual floor rates. Only the loans noted above that have variable rates not at a floor rate will reprice with the first increase in market rates. The existence of these rate floors may negatively impact our net interest margin when rates begin to rise, at least until rates rise above these floors.

On September 30, 2013, the Company’s loan to deposit ratio (including loans held for sale) was 69.6%, compared to 68.6% at December 31, 2012. Management expects loan demand to modestly improve through the remainder of 2013, which should slow or stop the decline in gross loans, though foreclosure activity could result in some additional decreases in loan balances. Management anticipates that there will not be significant growth in loans until there are indicators of significant improvements in both the local and national economy, leading customers to begin spending more and resulting in increased demand. If the Company’s deposit growth among core deposit customers continues to outpace its loan demand, the Company’s net interest margin may be adversely affected as the funds from these deposits may be invested in securities and other interest earning assets that offer lower yields than loans.

 

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FINANCIAL CONDITION (Continued)

 

Securities Available for Sale

Set forth below is a table showing the carrying amount and breakdown of the Company’s securities available for sale at September 30, 2013 and December 31, 2012:

 

     September 30, 2013     December 31, 2012  
     Amount      % of Total     Amount      % of Total  

U.S. government sponsored entities

   $ 34,860         51.4   $ 30,718         43.8

Mortgage-backed (residential)

     28,515         42.1     32,778         46.7

State and municipal

     4,386         6.5     5,697         8.1

Corporate

     —           —       987         1.4
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 67,761         100.0   $ 70,180         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The Company’s securities portfolio is used to, among other things, provide yield and for pledging purposes to secure public fund deposits. As of September 30, 2013, the carrying value of securities decreased $2,419 to $67,761, compared to $70,180 at December 31, 2012. Securities available for sale as a percentage of total assets was 15.0% at September 30, 2013, compared to 13.7% at December 31, 2012. Net unrealized loss on securities available for sale was $959 at September 30, 2013, compared to a net unrealized gain of $1,280 at December 31, 2012. Changes in interest rates in the securities market combined with realizing $182 in gains through security sales caused this fluctuation in the net unrealized gain (loss). Management is continually monitoring the credit quality of the Bank’s investments and believes that the unrealized losses that existed in the Bank’s portfolio at September 30, 2013 are temporary based on the bond ratings and anticipated recovery of bonds held. At September 30, 2013, the Company did not have the intent to sell these securities and it is more likely than not that it will not be required to sell the securities before their anticipated recovery.

Other Real Estate Owned

At September 30, 2013, other real estate owned (“ORE”) totaled $22,117, an increase of $2,348 from $19,769 at December 31, 2012. This increase is due to the Company foreclosing on two large properties during the third quarter of 2013. One of these properties is expected to sell by the end of 2013. The balance of ORE is comprised of properties acquired through or in lieu of foreclosure on real estate loans, property acquired by the Company for future Bank branch locations that is no longer intended for that purpose and is currently held for sale, and loans made to facilitate the sale of ORE properties that are required to be reported as ORE (“FAS 66 Loans”). The balances recorded for each individual property are based on appraisals that are not more than twelve months old, discounted by an additional 15%. The additional 15% discount was adopted by the Company beginning in the third quarter of 2010 based on an analysis of actual recoveries of ORE balances, including selling costs. Based on that analysis, the Company recorded a valuation allowance of $346 (recognized through ORE expense) in the third quarter of 2010. In addition, the Company began applying the additional 15% discount in its determination of specific reserves for impaired loans that are collateral dependent. As a result, the majority of the financial loss incurred by the Company as a result of the 15% discount has been recognized through loan charge-offs and the provision for loan losses at the time the property is transferred to ORE, with the foreclosed property being transferred into ORE at the discounted value. The Company annually updates its analysis regarding the additional 15% discount. Should such updates indicate that a change in the 15% discount is warranted, the Company would implement the change accordingly and that change would be applied to all properties that are subsequently moved into ORE. Additional write-downs of individual properties typically occur when the results of updated appraisals and further application of the 15% discount on the value reflected in the updated appraisal indicates that the value of the respective property has declined. The Company obtains updated appraisals for ORE properties at least annually. These write-downs are recognized in the quarterly period in which the appraisal is accepted by the Company.

 

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FINANCIAL CONDITION (Continued)

 

The Company actively markets the properties within its ORE portfolio utilizing both Bank personnel and third parties (brokers, agents, etc.). All ORE properties are classified into one of four categories: rental properties, non-rental properties, auction properties, and land. Rental properties consist of any property that can be leased or rented in order to produce income for the Company while the Company is pursuing the sale of the property. Non-rental properties consist of improved real estate that the Company’s management has concluded would not be attractive to a renter or that management believes will be most efficiently sold unoccupied. Auction properties are typically properties of lower value that the Company is willing to accept the risk of an auction in order to sell. These properties are typically auctioned off within six to twelve months of the property being transferred into ORE; however, circumstances related to a particular property may warrant holding the property for a longer period. Auction properties are typically auctioned off in absolute auctions with no minimum reserves. Land generally consists of unimproved raw land, though some properties may have some infrastructure work completed for housing development. Properties within the land category of ORE are typically held for longer periods of time than other ORE properties as the marketing of these properties, particularly large parcels, often extends for over six months.

The following table shows a breakdown of the ORE portfolio by category as of the end of the periods indicated:

 

     September 30, 2013     June 30, 2013     March 31, 2013     December 31, 2012  

Bank Premises

   $ 484         2.2   $ 484         2.6   $ 484         2.5   $ 484         2.4

Rental

     11,382         51.5     7,675         41.5     7,997         41.5     8,384         42.4

Non-rental

     1,083         4.9     493         2.7     382         2.0     1,041         5.3

Auction

     21         0.1     235         1.3     336         1.7     344         1.7

Land

     9,147         41.3     9,589         51.9     10,050         52.3     9,516         48.2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 22,117         100.0   $ 18,476         100.0   $ 19,249         100.0   $ 19,769         100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The Company makes every effort to sell ORE as quickly as feasible while still recovering as much of the original investment as possible. Management also considers the cost associated with holding individual properties in determining how aggressively it markets an individual property. The Company’s ORE that is classified as rental properties generally consists of 1-4 family properties, though some are commercial real estate. Rental income generated by this group has typically exceeded the holding costs of the respective properties. The majority of the rental properties are listed for sale with real estate agents; however, properties in this group are not the primary focus of management’s marketing efforts given the income producing nature of the property. The Company’s ORE that is classified as auction properties are marketed aggressively with dates set for auctions and most auction properties being allowed to sell without a reserve price. The Company’s other ORE properties are being marketed, though there is no definite date as to when they may be expected to be sold.

 

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FINANCIAL CONDITION (Continued)

 

The following table provides activity within the ORE portfolio in terms of individual parcels for the three-month and nine-month periods ended on the dates indicated: