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EXCEL - IDEA: XBRL DOCUMENT - COMMUNITY FIRST INC | Financial_Report.xls |
EX-31.1 - EX-31.1 - COMMUNITY FIRST INC | g25570exv31w1.htm |
EX-32.1 - EX-32.1 - COMMUNITY FIRST INC | g25570exv32w1.htm |
EX-31.2 - EX-31.2 - COMMUNITY FIRST INC | g25570exv31w2.htm |
EX-32.2 - EX-32.2 - COMMUNITY FIRST INC | g25570exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended: June 30, 2011
OR
o | 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
(Registrants Telephone Number, Including Area Code)
(Registrants Telephone Number, Including Area Code)
None
(Former Name, Address and Fiscal Year, if Changed Since Last Report)
(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 þ No o
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
þ No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act:
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock as of the
latest practicable date. Common stock outstanding (no par value): 3,273,590 shares of common
stock, no par value per share, as of August 15, 2011.
COMMUNITY FIRST, INC.
TABLE OF CONTENTS
- 2 -
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Community First, Inc.
Consolidated Balance Sheets
June 30, 2011 (Unaudited) and December 31, 2010
June 30, 2011 (Unaudited) and December 31, 2010
(Unaudited) | ||||||||
June 30, | December 31, | |||||||
(amounts in thousands, except share and per share data) | 2011 | 2010 | ||||||
Assets |
||||||||
Cash and due from banks |
$ | 58,215 | $ | 59,919 | ||||
Federal funds sold |
470 | 384 | ||||||
Cash and cash equivalents |
58,685 | 60,303 | ||||||
Time deposits in other financial institutions |
500 | 1,959 | ||||||
Securities available for sale |
62,306 | 63,482 | ||||||
Loans held for sale, at fair value |
5,083 | 4,282 | ||||||
Loans |
485,703 | 506,974 | ||||||
Allowance for loan losses |
(18,897 | ) | (18,167 | ) | ||||
Net loans |
466,806 | 488,807 | ||||||
Restricted equity securities |
1,727 | 1,727 | ||||||
Premises and equipment |
14,749 | 15,037 | ||||||
Accrued interest receivable |
2,262 | 2,528 | ||||||
Core deposit and customer relationship intangibles |
1,668 | 1,790 | ||||||
Other real estate owned, net |
13,471 | 11,791 | ||||||
Bank owned life insurance |
8,889 | 8,743 | ||||||
Other assets |
5,289 | 6,931 | ||||||
Total Assets |
$ | 641,435 | $ | 667,380 | ||||
Liabilities and Shareholders Equity |
||||||||
Deposits: |
||||||||
Noninterest-bearing |
$ | 48,022 | $ | 49,333 | ||||
Interest-bearing |
523,559 | 545,736 | ||||||
Total Deposits |
571,581 | 595,069 | ||||||
Federal Home Loan Bank advances |
16,000 | 16,000 | ||||||
Subordinated debentures |
23,000 | 23,000 | ||||||
Repurchase agreement |
7,000 | 7,000 | ||||||
Accrued interest payable |
2,271 | 1,667 | ||||||
Other liabilities |
2,551 | 1,883 | ||||||
Total Liabilities |
622,403 | 644,619 | ||||||
- 3 -
Table of Contents
Community First, Inc.
Consolidated Balance Sheets
June 30, 2011 (Unaudited) and December 31, 2010
(Continued)
Consolidated Balance Sheets
June 30, 2011 (Unaudited) and December 31, 2010
(Continued)
(Unaudited) | ||||||||
June 30, | December 31, | |||||||
(amounts in thousands, except share and per share data) | 2011 | 2010 | ||||||
Shareholders Equity |
||||||||
Senior preferred shares, no par value; 5% cumulative.
Authorized 2,500,000 shares; issued 17,806 with
liquidation value of $17,806 at June 30, 2011 and
December 31, 2010. |
17,806 | 17,806 | ||||||
Warrant preferred shares, no par value; 9% cumulative.
Issued 890 with liquidation value of $890 at June 30,
2011 and December 31, 2010. |
890 | 890 | ||||||
Net discount on preferred shares |
(507 | ) | (594 | ) | ||||
Total preferred shares |
18,189 | 18,102 | ||||||
Common stock, no par value. Authorized 10,000,000
shares; issued 3,273,226 shares at June 30, 2011 and
3,272,412 shares at December 31, 2010 |
28,561 | 28,500 | ||||||
Accumulated deficit |
(27,438 | ) | (22,005 | ) | ||||
Accumulated other comprehensive loss |
(280 | ) | (1,836 | ) | ||||
Total Shareholders Equity |
19,032 | 22,761 | ||||||
Total Liabilities and Shareholders Equity |
$ | 641,435 | $ | 667,380 | ||||
See accompanying notes to unaudited consolidated financial statements.
- 4 -
Table of Contents
Community First, Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
Three Months and Six Months Ended June 30, 2011 and 2010
(Unaudited)
Three Months and Six Months Ended June 30, 2011 and 2010
(Unaudited)
Six Months | Three Months | |||||||||||||||
Ended | Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(amounts in thousands, except share and per share data) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Interest income: |
||||||||||||||||
Loans, including fees |
$ | 13,762 | $ | 15,269 | $ | 6,726 | $ | 7,615 | ||||||||
Taxable securities |
890 | 1,168 | 384 | 549 | ||||||||||||
Tax-exempt securities |
232 | 189 | 116 | 109 | ||||||||||||
Federal funds sold and other |
168 | 136 | 80 | 65 | ||||||||||||
Total interest income |
15,052 | 16,762 | 7,306 | 8,338 | ||||||||||||
Interest expense: |
||||||||||||||||
Deposits |
3,854 | 5,275 | 1,824 | 2,414 | ||||||||||||
FHLB advances and federal funds purchased |
186 | 249 | 93 | 129 | ||||||||||||
Subordinated debentures and other |
822 | 813 | 405 | 408 | ||||||||||||
Total interest expense |
4,862 | 6,337 | 2,322 | 2,951 | ||||||||||||
Net interest income |
10,190 | 10,425 | 4,984 | 5,387 | ||||||||||||
Provision for loan losses |
7,030 | 3,309 | 5,200 | 2,182 | ||||||||||||
Net interest income (loss) after provision for loan losses |
3,160 | 7,116 | (216 | ) | 3,205 | |||||||||||
Noninterest income: |
||||||||||||||||
Service charges on deposit accounts |
919 | 885 | 482 | 452 | ||||||||||||
Gain on sale of loans |
418 | 297 | 132 | 174 | ||||||||||||
Gain on sale of securities available for sale |
| 315 | | | ||||||||||||
Other |
559 | 634 | 278 | 359 | ||||||||||||
Total noninterest income |
1,896 | 2,131 | 892 | 985 | ||||||||||||
Noninterest expense: |
||||||||||||||||
Salaries and employee benefits |
4,352 | 4,641 | 2,079 | 2,345 | ||||||||||||
Regulatory and compliance |
736 | 635 | 359 | 337 | ||||||||||||
Occupancy |
757 | 750 | 377 | 369 | ||||||||||||
Furniture and equipment |
377 | 450 | 187 | 245 | ||||||||||||
Data processing fees |
615 | 475 | 306 | 263 | ||||||||||||
Advertising and public relations |
193 | 310 | 112 | 170 | ||||||||||||
Operational expense |
221 | 400 | 107 | 186 | ||||||||||||
Other real estate expense |
978 | 212 | 718 | 107 | ||||||||||||
Other |
1,692 | 1,798 | 827 | 899 | ||||||||||||
Total noninterest expenses |
9,921 | 9,671 | 5,072 | 4,921 | ||||||||||||
Loss before income tax expense |
(4,865 | ) | (424 | ) | (4,396 | ) | (731 | ) |
- 5 -
Table of Contents
Community First, Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
Three Months and Six Months Ended June 30, 2011 and 2010
(Unaudited, Continued)
Consolidated Statements of Operations and Comprehensive Income (Loss)
Three Months and Six Months Ended June 30, 2011 and 2010
(Unaudited, Continued)
Six Months | Three Months | |||||||||||||||
Ended | Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(amounts in thousands, except share and per share data) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Income tax expense |
| 229 | | 229 | ||||||||||||
Net loss |
(4,865 | ) | (653 | ) | (4,396 | ) | (960 | ) | ||||||||
Preferred stock dividends declared |
(481 | ) | (481 | ) | (242 | ) | (242 | ) | ||||||||
Accretion of preferred stock discount |
(87 | ) | (81 | ) | (45 | ) | (41 | ) | ||||||||
Net loss allocated to common shareholders |
$ | (5,433 | ) | $ | (1,215 | ) | $ | (4,683 | ) | $ | (1,243 | ) | ||||
Loss per share allcoated to common shareholders |
||||||||||||||||
Basic |
$ | (1.66 | ) | $ | (0.37 | ) | $ | (1.43 | ) | $ | (0.38 | ) | ||||
Diluted |
(1.66 | ) | (0.37 | ) | (1.43 | ) | (0.38 | ) | ||||||||
Weighted average common shares outstanding |
||||||||||||||||
Basic |
3,272,964 | 3,271,005 | 3,273,159 | 3,271,529 | ||||||||||||
Diluted |
3,272,964 | 3,271,005 | 3,273,159 | 3,271,529 | ||||||||||||
Comprehensive Loss |
||||||||||||||||
Net loss |
$ | (4,865 | ) | $ | (653 | ) | $ | (4,396 | ) | $ | (960 | ) | ||||
Reclassification adjustment for gains included in net loss, net of income taxes of $121 for 2010 |
| (194 | ) | | | |||||||||||
Unrealized gains on securities, net of income taxes of $0 and $32 for 2011 and 2010 |
1,556 | 189 | 1,114 | 58 | ||||||||||||
Comprehensive loss |
$ | (3,309 | ) | $ | (658 | ) | $ | (3,282 | ) | $ | (902 | ) | ||||
See accompanying notes to unaudited consolidated financial statements.
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Table of Contents
Community First, Inc.
Consolidated Statement of Changes in Shareholders Equity and Comprehensive Income
Six Months Ended June 30, 2011
(Unaudited)
Six Months Ended June 30, 2011
(Unaudited)
Accumulated | ||||||||||||||||||||||||
Other | Total | |||||||||||||||||||||||
Common | Preferred | Common | Accumulated | Comprehensive | Shareholders | |||||||||||||||||||
(amounts in thousands, except share and per share data) | Shares | Stock | Stock | Deficit | Loss | Equity | ||||||||||||||||||
Balance at January 1, 2011 |
3,272,412 | $ | 18,102 | $ | 28,500 | $ | (22,005 | ) | $ | (1,836 | ) | $ | 22,761 | |||||||||||
Stock-based compensation
Stock options |
| 54 | | | 54 | |||||||||||||||||||
Accretion of discount on preferred stock |
| 87 | | (87 | ) | | | |||||||||||||||||
Sale of shares of common stock |
814 | | 7 | | | 7 | ||||||||||||||||||
Cash dividends declared on preferred stock |
| | | (481 | ) | | (481 | ) | ||||||||||||||||
Comprehensive income (loss) |
||||||||||||||||||||||||
Net loss |
| | | (4,865 | ) | | (4,865 | ) | ||||||||||||||||
Change in unrealized loss on securities available for sale, net of income taxes |
| | | | 1,556 | 1,556 | ||||||||||||||||||
Total comprehensive income (loss) |
(3,309 | ) | ||||||||||||||||||||||
Balance at June 30, 2011 |
3,273,226 | $ | 18,189 | $ | 28,561 | $ | (27,438 | ) | $ | (280 | ) | $ | 19,032 | |||||||||||
See accompanying notes to unaudited consolidated financial statements.
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Community First, Inc.
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2011 and 2010
(Unaudited)
Six Months Ended June 30, 2011 and 2010
(Unaudited)
Six Months Ended | ||||||||
June 30, | ||||||||
(amounts in thousands, except share and per share data ) | 2011 | 2010 | ||||||
Cash flows from operating activities |
||||||||
Net loss |
$ | (4,865 | ) | $ | (653 | ) | ||
Adjustments to reconcile net loss to net cash from operating activities |
||||||||
Depreciation |
534 | 598 | ||||||
Amortization on securities, net |
293 | 202 | ||||||
Core deposit intangible amortization |
122 | 141 | ||||||
Provision for loan losses |
7,030 | 3,309 | ||||||
Loans originated for sale |
(10,213 | ) | (15,355 | ) | ||||
Proceeds from sale of loans |
9,344 | 16,800 | ||||||
Gain on sale of loans |
(418 | ) | (297 | ) | ||||
Decrease (increase) in accrued interest receivable |
266 | (116 | ) | |||||
Increase (decrease) in accrued interest payable |
604 | (698 | ) | |||||
Gain on sale of securities |
| (315 | ) | |||||
Gain on sale of premises and equipment |
(6 | ) | | |||||
Increase in surrender value of Bank owned life insurance |
(146 | ) | (162 | ) | ||||
Net write down of other real estate |
635 | 21 | ||||||
Compensation expense under stock based compensation |
54 | 84 | ||||||
Other, net |
2,355 | 591 | ||||||
Net cash from operating activities |
5,589 | 4,150 | ||||||
Cash flows from investing activities |
||||||||
Available for sale securities |
||||||||
Purchases: |
||||||||
Mortgage-backed securities |
(3,728 | ) | (3,692 | ) | ||||
Other |
(453 | ) | (63,644 | ) | ||||
Sales of securities: |
||||||||
Mortgage-backed securities |
| 29,868 | ||||||
Maturities, prepayments, and calls: |
||||||||
Mortgage-backed securities |
3,546 | 4,741 | ||||||
Other |
3,074 | 45,500 | ||||||
Net decrease in loans |
9,868 | 8,119 | ||||||
Proceeds from sales of other real estate owned |
2,991 | 3,215 | ||||||
(Increase) decrease in time deposits in other financial institutions |
1,459 | (2,600 | ) | |||||
Proceeds from sale of premises and equipment |
7 | 32 | ||||||
Additions to premises and equipment |
(247 | ) | (195 | ) | ||||
Net cash from investing activities |
16,517 | 21,344 | ||||||
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Table of Contents
Community First, Inc.
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2011 and 2010
(Unaudited, Continued)
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2011 and 2010
(Unaudited, Continued)
Six Months Ended | ||||||||
June 30, | ||||||||
(amounts in thousands, except share and per share data ) | 2011 | 2010 | ||||||
Cash flows from financing activities |
||||||||
Decrease in deposits |
(23,488 | ) | (29,633 | ) | ||||
Payments on Federal Home Loan Bank advances |
| (2,000 | ) | |||||
Proceeds from Federal Home Loan Bank advances |
| 5,000 | ||||||
Proceeds from issuance of common stock |
7 | 7 | ||||||
Cash dividends paid on preferred stock |
(243 | ) | (485 | ) | ||||
Net cash from financing activities |
(23,724 | ) | (27,111 | ) | ||||
Net change in cash and cash equivalents |
(1,618 | ) | (1,617 | ) | ||||
Cash and cash equivalents at beginning of period |
60,303 | 31,120 | ||||||
Cash and cash equivalents at end of period |
$ | 58,685 | $ | 29,503 | ||||
Supplemental disclosures of cash flow information |
||||||||
Cash paid during year for: |
||||||||
Interest |
$ | 4,258 | $ | 7,035 | ||||
Income taxes paid (refunded) |
(887 | ) | 25 | |||||
Supplemental noncash disclosures |
||||||||
Transfer from loans to repossessed assets |
5,306 | 5,463 | ||||||
Transfer of premises and equipment to other real estate owned |
| 759 | ||||||
Preferred stock dividends declared but not paid |
359 | 117 | ||||||
Loans made to facilitate the sale of other real estate |
210 | | ||||||
Net transfer from loans to loans held for sale |
4,252 | |
See accompanying notes to unaudited consolidated financial statements.
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Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
June 30, 2011
(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. The sole subsidiary of Community First Bank & Trust is
Community First Title, Inc., a Tennessee chartered and regulated title insurance company. CFBT
Investments, Inc. is the only subsidiary of Community First Title, Inc. and is the parent of
Community First Properties, Inc., which was established as a Real Estate Investment Trust.
Community First Bank & Trust together with its subsidiaries are referred to as the Bank.
Community First, Inc., together with the Bank is referred to as the Company. Intercompany
transactions and balances are eliminated in consolidation.
The unaudited consolidated financial statements as of June 30, 2011 and for the six month and three
month periods ended June 30, 2011 and 2010 have been prepared in accordance with the accounting
principles generally accepted in the United States of America 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, to present fairly the information. They
do not include all the information and footnotes required by generally accepted accounting
principles 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 2010 consolidated audited financial statements and footnotes thereto
included in the Companys Annual Report on Form 10-K for the year ended December 31, 2010 (the
2010 Form 10-K) as filed with the SEC.
Critical Accounting Policies:
Allowance for Loan Losses: The allowance for loan losses is 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 managements 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 impaired when, based on current information and events, it is probable that the Company
will be unable to collect the scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Loans for which the terms have been modified resulting in
a concession, and for which the borrower is experiencing financial difficulties, are considered
troubled debt restructurings and classified as impaired.
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Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION (Continued)
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
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 borrowers prior
payment record, and the amount of the shortfall in relation to the principal and interest owed.
Commercial and commercial real estate loans over $25 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 loans 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. Troubled debt restructurings are separately identified for impairment disclosures and
are measured at the present value of estimated future cash flows using the loans 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 covers non-impaired loans 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 3 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 include 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
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Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION (Continued)
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 are 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 borrowers 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 are secured by farmland or by improved commercial property. Farmland
includes all land known to be used or usable for agricultural purposes, such as crop and livestock
production, grazing, or pasture land. Improved commercial property can be owner occupied or
non-owner occupied secured by 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.
Other Real Estate Secured Loans include those loans secured by 5 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 are 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 are 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.
- 12 -
Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION (Continued)
Tax exempt loans are 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 are those loans which are not elsewhere classified in these categories and are not
secured by real estate.
NOTE 2. ACCOUNTING STANDARDS NEWLY ISSUED NOT YET EFFECTIVE
In April 2011, the FASB issued ASU No. 2011-02, Receivables (Topic 310) A Creditors
Determination of Whether a Restructuring is a Troubled Debt Restructuring. The ASU provides
additional guidance to creditors for evaluating whether a modification or restructuring of a
receivable constitutes a troubled debt restructuring (TDR) by clarifying the existing guidance on
whether (1) the creditor has granted a concession and (2) whether the debtor is experiencing
financial difficulties, which are the two criteria used to determine whether a modification or
restructuring is a TDR. The ASU:
| Provides additional guidance on determining whether a creditor has granted a concession, including guidance on collection on all amounts due, receipt of additional collateral or guarantees from the debtor, and restructuring the debt at a below-market rate; | ||
| Includes factors and examples for creditors to determine whether an insignificant delay in payment is considered a concession; | ||
| Prohibits creditors from using the borrowers effective rate test in ASC 470-50, Debt, Modifications and Extinguishment, to evaluate whether a concession has been granted to a borrower; | ||
| Adds factors for creditors to use to determine whether the debtor is experiencing financial difficulties; and | ||
| Ends the FASBs deferral of the additional disclosures about TDR activities required by ASU 2010-20. |
This ASU is effective for the first interim period beginning on or after June 15, 2011. The
Company is currently evaluating the impact this new ASU will have on the financial statements.
- 13 -
Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 2. ACCOUNTING STANDARDS NEWLY ISSUED NOT YET EFFECTIVE (Continued)
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220) Presentation of
Comprehensive Income. The ASU requires entities to present items of net income and other
comprehensive income either in one continuous statement referred to as the statement of
comprehensive income or in two separate, but consecutive, statements of net income and other
comprehensive income. The ASU is effective for the first interim period beginning after December
15, 2011. The adoption of this guidance will not materially impact the Company.
In May, 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820) Amendments to
Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. This
ASU represents the converged guidance of the FASB and the IASB (the Boards) on fair value
measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have
resulted in common requirements for measuring fair value and for disclosing information about fair
value measurements, including a consistent meaning of the term fair value. The Boards have
concluded the common requirements will result in greater comparability of fair value measurements
presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs.
Included in the ASU are requirements to disclose additional quantitative disclosures about
unobservable inputs for all Level 3 fair value measurements, as well as qualitative disclosures
about the sensitivity inherent in recurring Level 3 fair value measurements. The ASU is effective
during the interim and annual periods beginning after December 15, 2011. The Company is currently
evaluating the impact this new ASU will have on the financial statements.
- 14 -
Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 3 SECURITIES AVAILABLE FOR SALE
The following table summarizes the amortized cost and fair value of the available for sale
securities portfolio at June 30, 2011 and December 31, 2010 and the corresponding amounts of gross
unrealized gains and losses recognized in accumulated other comprehensive loss:
Gross | Gross | |||||||||||||||
Amortized | Unrealized | Unrealized | Fair | |||||||||||||
Cost | Gains | Losses | Value | |||||||||||||
June 30, 2011 |
||||||||||||||||
U.S. government sponsored entities |
$ | 5,902 | $ | 7 | $ | (29 | ) | $ | 5,880 | |||||||
Mortgage-backed residential |
31,452 | 1,087 | (14 | ) | 32,525 | |||||||||||
State and municipal |
19,138 | 622 | (23 | ) | 19,737 | |||||||||||
Corporate |
6,000 | | (1,836 | ) | 4,164 | |||||||||||
Total |
$ | 62,492 | $ | 1,716 | $ | (1,902 | ) | $ | 62,306 | |||||||
December 31, 2010 |
||||||||||||||||
U.S. government sponsored entities |
$ | 6,016 | $ | | $ | (79 | ) | $ | 5,937 | |||||||
Mortgage-backed residential |
31,428 | 720 | (173 | ) | 31,975 | |||||||||||
State and municipal |
18,831 | 148 | (428 | ) | 18,551 | |||||||||||
Corporate |
8,949 | | (1,930 | ) | 7,019 | |||||||||||
Total |
$ | 65,224 | $ | 868 | $ | (2,610 | ) | $ | 63,482 | |||||||
The proceeds from sales of securities and the associated gains and losses are listed below:
Six months ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Proceeds |
$ | | $ | 29,868 | ||||
Gross gains |
| 315 | ||||||
Gross losses |
| |
- 15 -
Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 3 SECURITIES AVAILABLE FOR SALE (Continued)
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.
June 30, 2011 | ||||||||
Amortized Cost | Fair Value | |||||||
Due in one year or less |
$ | | $ | | ||||
Due after one through five years |
3,888 | 3,917 | ||||||
Due after five through ten years |
14,890 | 15,317 | ||||||
Due after ten years |
12,262 | 10,547 | ||||||
Mortgage backed residential |
31,452 | 32,525 | ||||||
Total |
$ | 62,492 | $ | 62,306 | ||||
At June 30, 2011 and December 31, 2010, respectively, securities totaling $46,409 and $43,279 were
pledged to secure public deposits and repurchase agreements.
The Company held securities with a face value of $5,000 and fair value of $3,183 at June 30, 2011
and $3,176 at December 31, 2010 in trust preferred securities issued by Tennessee Commerce
Statutory Trust. Other than these investments and investments of U.S. Government sponsored
entities, the Company did not hold securities of any one issuer in an amount greater than 10% of
shareholders equity as of June 30, 2011 or December 31, 2010.
The following table summarizes securities with unrealized losses at June 30, 2011 and December 31,
2010 aggregated by major security type and length of time in a continuous unrealized loss position:
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
June 30, 2011 | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||
Description of Securities | Value | Loss | Value | Loss | Value | Loss | ||||||||||||||||||
U.S. Government sponsored
entities |
$ | 3,095 | $ | (29 | ) | $ | | $ | | $ | 3,095 | (29 | ) | |||||||||||
Mortgage-backed -
residential |
4,007 | (14 | ) | | | 4,007 | (14 | ) | ||||||||||||||||
State and municipal |
2,034 | (15 | ) | 669 | (8 | ) | 2,703 | (23 | ) | |||||||||||||||
Corporate |
| | 4,164 | (1,836 | ) | 4,164 | (1,836 | ) | ||||||||||||||||
Total temporarily impaired |
$ | 9,136 | $ | (58 | ) | $ | 4,833 | $ | (1,844 | ) | $ | 13,969 | $ | (1,902 | ) | |||||||||
- 16 -
Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 3 SECURITIES AVAILABLE FOR SALE (Continued)
Less than 12 Months | 12 Months or More | Total | ||||||||||||||||||||||
December 31, 2010 | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | ||||||||||||||||||
Description of Securities | Value | Loss | Value | Loss | Value | Loss | ||||||||||||||||||
U.S. Government sponsored
entities |
$ | 5,937 | $ | (79 | ) | $ | | $ | | $ | 5,937 | $ | (79 | ) | ||||||||||
Mortgage-backed -
residential |
10,301 | (173 | ) | | | 10,301 | (173 | ) | ||||||||||||||||
State and municipal |
9,299 | (419 | ) | 669 | (9 | ) | 9,968 | (428 | ) | |||||||||||||||
Corporate |
2,936 | (12 | ) | 4,083 | (1,918 | ) | 7,019 | (1,930 | ) | |||||||||||||||
Total temporarily impaired |
$ | 28,473 | $ | (683 | ) | $ | 4,752 | $ | (1,927 | ) | $ | 33,225 | $ | (2,610 | ) | |||||||||
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
- 17 -
Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 3 SECURITIES AVAILABLE FOR SALE (Continued)
basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the
entire difference between the investments amortized cost basis and its fair value at the balance
sheet date. If an entity does not intend to sell the security and it is not more likely than not
that the entity will be required to sell the security before recovery of its amortized cost basis
less any current-period loss, the OTTI shall be separated into the amount representing the credit
loss and the amount related to all other factors. The amount of the total OTTI related to the
credit loss is determined based on the present value of cash flows expected to be collected and is
recognized in earnings. The amount of the total OTTI related to other factors is recognized in
other comprehensive income, net of applicable taxes. The previous amortized cost basis less the
OTTI recognized in earnings becomes the new amortized cost basis of the investment.
As of June 30, 2011, the Companys security portfolio consisted of 92 securities, 12 of which were
in an unrealized loss position. The majority of unrealized losses are related to the Companys
corporate securities, as discussed below:
Corporate Securities
The Companys unrealized losses on corporate securities relate primarily to its investment in
single issue trust preferred securities. The decline in fair value is primarily attributable to
illiquidity and the financial crisis affecting these markets and not necessarily the expected cash
flows of the individual securities. Due to the illiquidity in the market, it is unlikely that the
Company would be able to recover its investment in these securities if the Company sold the
securities at this time. Managements analysis concluded that the securities have not had an
adverse change in credit quality of the issuer and the Company does not intend to sell the
securities, and it is more likely than not that the Company will not be required to sell the
securities prior to their anticipated recovery. Therefore, the Company does not consider these
securities to be other-than-temporarily impaired at June 30, 2011.
NOTE 4. 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) of 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.
- 18 -
Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 4. FAIR VALUE (Continued)
Level 3: Significant unobservable inputs that reflect a reporting entitys 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 of securities available for sale are determined by
obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs) or 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 but rather by relying on
the securities relationship to other benchmark quoted securities (Level 2 inputs). 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 inputs). 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.
Loans Held For Sale: Loans held for sale are carried at fair value, as determined by outstanding
commitments, from third party investors.
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: Nonrecurring adjustments to certain commercial and residential real
estate properties classified as other real estate owned are measured at fair value, less costs to
sell. Fair values are generally based on third party appraisals of the property, resulting in a
Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to
sell, an impairment loss is recognized.
Mortgage Banking Derivatives: The fair value of mortgage banking derivatives is determined by
individual third party sales contract prices for the specific loans held at each reporting period
end (level 2 inputs). The fair value adjustment is included in other assets.
- 19 -
Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 4. FAIR VALUE (Continued)
Assets and Liabilities Measured on a Recurring Basis
Fair Value Measurements at | ||||||||||||
June 30, 2011 using | ||||||||||||
Significant Other | Significant | |||||||||||
Observable Inputs | Unobservable Inputs | |||||||||||
Carrying Value | (Level 2) | (Level 3) | ||||||||||
Assets: |
||||||||||||
Available for sale securities: |
||||||||||||
U.S. Government sponsored
entities |
$ | 5,880 | $ | 5,880 | $ | | ||||||
Mortgage-backed residential |
32,525 | 32,525 | | |||||||||
State and municipal |
19,737 | 19,737 | | |||||||||
Corporate |
4,164 | | 4,164 | |||||||||
Total available for sale securities |
62,306 | 58,142 | 4,164 | |||||||||
Mortgage banking derivatives |
3 | 3 | | |||||||||
Loans held for sale |
5,083 | 5,083 | |
Fair Value Measurements at | ||||||||||||
December 31, 2010 using | ||||||||||||
Significant Other | Significant | |||||||||||
Observable Inputs | Unobservable Inputs | |||||||||||
Carrying Value | (Level 2) | (Level 3) | ||||||||||
Assets: |
||||||||||||
Available for sale securities: |
||||||||||||
U.S. Government sponsored
entities |
$ | 5,937 | $ | 5,937 | $ | | ||||||
Mortgage-backed residential |
31,975 | 31,975 | | |||||||||
State and municipal |
18,551 | 18,551 | | |||||||||
Corporate |
7,019 | 2,936 | 4,083 | |||||||||
Total available for sale securities |
63,482 | 59,399 | 4,083 | |||||||||
Mortgage banking derivatives |
28 | 28 | | |||||||||
Loans held for sale |
4,282 | 4,282 | |
- 20 -
Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 4. 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 six months and three month periods ended June 30, 2011 and 2010:
Fair Value Measurements Using Significant Unobservable | ||||||||||||||||
Inputs (Level 3) | ||||||||||||||||
Available for sale securities - Corporate | ||||||||||||||||
Six months ended June 30, | Three months ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Balance at January 1 |
$ | 4,083 | $ | 5,639 | $ | 4,053 | $ | 5,652 | ||||||||
Securities impairment |
| | | | ||||||||||||
Change in fair value |
81 | (612 | ) | 111 | (625 | ) | ||||||||||
Balance at June 30 |
$ | 4,164 | $ | 5,027 | $ | 4,164 | $ | 5,027 | ||||||||
Assets and Liabilities Measured on a Non-Recurring Basis
Assets and liabilities measured at fair value on a non-recurring basis are summarized below:
June 30, 2011 | ||||||||
Fair Value | ||||||||
Measurements using | ||||||||
other significant | ||||||||
unobservable inputs | ||||||||
Carrying Value | (Level 3) | |||||||
Assets: |
||||||||
Impaired loans: |
||||||||
Real estate construction |
$ | 17,064 | $ | 17,064 | ||||
1-4 Family residential |
8,673 | 8,673 | ||||||
Commercial real estate |
7,144 | 7,144 | ||||||
Other real estate secured loans |
1,829 | 1,829 | ||||||
Commercial, financial and
agricultural |
268 | 268 | ||||||
Other loans |
6,969 | 6,969 | ||||||
Total impaired loans |
41,947 | 41,947 | ||||||
Other real estate owned: |
||||||||
Construction and development |
9,720 | 9,720 | ||||||
1-4 Family residential |
3,139 | 3,139 | ||||||
Commercial |
47 | 47 | ||||||
Total other real estate owned |
$ | 12,906 | $ | 12,906 |
- 21 -
Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 4. FAIR VALUE (Continued)
December 31, 2010 | ||||||||
Fair Value | ||||||||
Measurements using | ||||||||
other significant | ||||||||
unobservable inputs | ||||||||
Carrying Value | (Level 3) | |||||||
Assets: |
||||||||
Impaired loans: |
||||||||
Real estate construction |
$ | 19,174 | $ | 19,174 | ||||
1-4 Family residential |
6,997 | 6,997 | ||||||
Commercial real estate |
2,691 | 2,691 | ||||||
Commercial, financial and
agricultural |
513 | 513 | ||||||
Total impaired loans |
29,375 | 29,375 | ||||||
Other real estate owned: |
||||||||
Construction and development |
8,026 | 8,026 | ||||||
1-4 Family residential |
2,799 | 2,799 | ||||||
Commercial |
399 | 399 | ||||||
Total other real estate owned |
$ | 11,224 | $ | 11,224 |
Impaired loans, with specific allocations or partial charge offs based on the fair value of the
underlying collateral for collateral dependent loans, had a principal balance of $50,013, with a
valuation allowance of $8,066, resulting in an additional provision for loan losses of $5,705 for
the six month period ended June 30, 2011, compared to additional provision of $3,274 in the first
six months of 2010 and additional provision of $3,916 and $3,274 for the three months ended June
30, 2011 and 2010, respectively. Impaired loans, with specific allocations or partial charge offs
based on the fair value of the underlying collateral for collateral dependent loans, had a carrying
amount of $35,860, with a valuation allowance of $6,485, resulting in an additional provision for
loan losses of $9,129 for the year ended December 31, 2010.
Other real estate owned, measured at fair value less costs to sell, had a net carrying amount of
$12,906, which is made up of the outstanding balance of $16,460, net of a valuation allowance of
$3,554 at June 30, 2011, resulting in a write-down of $635 charged to expense in the six months
ended June 30, 2011, compared to a write-down of $21 charged to expense in the first six months of
2010. Net carrying amount was $11,224 at December 31, 2010, which was made up of the outstanding
balance of $14,294, net of a valuation allowance of $3,070, resulting in a write-down of $2,318
charged to expense during 2010.
- 22 -
Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 4. FAIR VALUE (Continued)
Carrying amount and estimated fair values of significant financial instruments at June 30, 2011 and
December 31, 2010 were as follows:
June 30, 2011 | December 31, 2010 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
Amount | Value | Amount | Value | |||||||||||||
Financial assets |
||||||||||||||||
Cash and cash equivalents |
$ | 58,685 | $ | 58,685 | $ | 60,303 | $ | 60,303 | ||||||||
Time deposits in other
financial institutions |
500 | 504 | 1,959 | 1,960 | ||||||||||||
Securities available for sale |
62,306 | 62,306 | 63,482 | 63,482 | ||||||||||||
Loans held for sale |
5,083 | 5,083 | 4,282 | 4,282 | ||||||||||||
Loans, net of allowance |
466,806 | 460,903 | 488,807 | 480,657 | ||||||||||||
Restricted equity securities |
1,727 | N/A | 1,727 | N/A | ||||||||||||
Accrued interest receivable |
2,262 | 2,262 | 2,528 | 2,528 | ||||||||||||
Financial liabilities |
||||||||||||||||
Total deposits |
$ | 571,581 | $ | 573,095 | $ | 595,069 | $ | 597,596 | ||||||||
Accrued interest payable |
2,271 | 2,271 | 1,667 | 1,667 | ||||||||||||
Repurchase agreement |
7,000 | 7,365 | 7,000 | 7,447 | ||||||||||||
Federal Home Loan Bank advances |
16,000 | 16,238 | 16,000 | 16,317 | ||||||||||||
Subordinated debentures |
23,000 | 13,704 | 23,000 | 13,519 |
Carrying amount is the estimated fair value for cash and cash equivalents, accrued interest
receivable and payable, demand deposits, short-term debt, and variable rate loans or deposits that
reprice frequently and fully. 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. For fixed rate loans or deposits and for variable rate loans or
deposits with infrequent repricing or repricing limits, fair value is based on discounted cash
flows using current market rates applied to the estimated life and credit risk. Fair values for
impaired loans are estimated using discounted cash flow analysis or underlying collateral values.
Fair value of loans held for sale is based on market quotes. Fair value of debt is based on
current rates for similar financing. The fair value of off-balance-sheet items is not considered
material.
- 23 -
Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 5. LOANS
Set forth below is a table of the Companys loans by class at June 30, 2011 and December 31, 2010:
June 30, 2011 | December 31, 2010 | |||||||||||||||
Amount | % of Total | Amount | % of Total | |||||||||||||
Real estate construction: |
||||||||||||||||
Residential construction |
$ | 36,100 | 7.4 | % | $ | 37,689 | 7.4 | % | ||||||||
Other construction |
46,087 | 9.5 | % | 52,220 | 10.3 | % | ||||||||||
1-4 Family residential: |
||||||||||||||||
Revolving, open ended |
39,814 | 8.2 | % | 40,608 | 8.0 | % | ||||||||||
First liens |
116,661 | 24.0 | % | 118,493 | 23.4 | % | ||||||||||
Junior liens |
7,240 | 1.5 | % | 7,775 | 1.5 | % | ||||||||||
Commercial real estate: |
||||||||||||||||
Farmland |
8,841 | 1.8 | % | 8,986 | 1.8 | % | ||||||||||
Owner occupied |
68,403 | 14.1 | % | 69,901 | 13.8 | % | ||||||||||
Non-owner occupied |
98,513 | 20.3 | % | 96,629 | 19.1 | % | ||||||||||
Other real estate secured loans |
6,472 | 1.3 | % | 7,206 | 1.4 | % | ||||||||||
Commercial, financial and agricultural: |
||||||||||||||||
Agricultural |
1,156 | 0.2 | % | 1,279 | 0.3 | % | ||||||||||
Commercial and industrial |
38,737 | 8.0 | % | 47,174 | 9.3 | % | ||||||||||
Consumer |
8,607 | 1.8 | % | 9,723 | 1.9 | % | ||||||||||
Tax exempt |
62 | 0.0 | % | 118 | 0.0 | % | ||||||||||
Other |
9,010 | 1.9 | % | 9,173 | 1.8 | % | ||||||||||
$ | 485,703 | 100.0 | % | $ | 506,974 | 100.0 | % | |||||||||
(1) | Does not include mortgage loans held for sale at June 30, 2011 and December 31, 2010. |
Transactions in the allowance for loan losses for the six month and three month periods ended June 30, 2011 and 2010 were
as follows:
Six Months | Six Months | Three Months | Three Months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
June 30, 2011 | June 30, 2010 | June 30, 2011 | June 30, 2010 | |||||||||||||
Beginning Balance |
$ | 18,167 | $ | 13,347 | $ | 19,775 | $ | 12,673 | ||||||||
Add (deduct): |
||||||||||||||||
Losses charged to allowance |
(6,401 | ) | (3,030 | ) | (6,138 | ) | (1,176 | ) | ||||||||
Recoveries credited to allowance |
101 | 74 | 60 | 21 | ||||||||||||
Provision for loan losses |
7,030 | 3,309 | 5,200 | 2,182 | ||||||||||||
Ending Balance |
$ | 18,897 | $ | 13,700 | $ | 18,897 | $ | 13,700 |
- 24 -
Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 5 LOANS (Continued)
The following tables present activity in allowance for loan losses and the outstanding loan balance
by portfolio segment and based on impairment method as of June 30, 2011. The balances for recorded
investment in the following tables related to credit quality do not include approximately $1,880
and $2,035 in accrued interest receivable at June 30, 2011 and December 31, 2010, respectively.
Accrued interest receivable is a component of the Companys recorded investment in loans.
Other | ||||||||||||||||||||||||||||||||||||||||
Real | ||||||||||||||||||||||||||||||||||||||||
Estate | Commercial, | |||||||||||||||||||||||||||||||||||||||
Real Estate | 1-4 Family | Commercial | Secured | Financial and | Tax | Other | ||||||||||||||||||||||||||||||||||
Construction | Residential | Real Estate | Loans | Agricultural | Consumer | Exempt | Loans | Unallocated | Total | |||||||||||||||||||||||||||||||
Six months ended June 30, 2011 |
||||||||||||||||||||||||||||||||||||||||
Allowance for Loan Losses: |
||||||||||||||||||||||||||||||||||||||||
Beginning Balance |
$ | 6,522 | $ | 5,513 | $ | 2,373 | $ | 22 | $ | 1,536 | $ | 103 | $ | | $ | 1,472 | $ | 626 | $ | 18,167 | ||||||||||||||||||||
Charge-offs |
(4,581 | ) | (1,150 | ) | (163 | ) | | (478 | ) | (8 | ) | | (21 | ) | | (6,401 | ) | |||||||||||||||||||||||
Recoveries |
44 | 19 | 6 | | 3 | 18 | | 11 | | 101 | ||||||||||||||||||||||||||||||
Provision |
3,813 | 2,262 | (341 | ) | 707 | 342 | (53 | ) | | 286 | 14 | 7,030 | ||||||||||||||||||||||||||||
Total ending
allowance balance |
$ | 5,798 | $ | 6,644 | $ | 1,875 | $ | 729 | $ | 1,403 | $ | 60 | $ | | $ | 1,748 | $ | 640 | $ | 18,897 | ||||||||||||||||||||
Three months ended June 30, 2011 |
||||||||||||||||||||||||||||||||||||||||
Allowance for Loan Losses: |
||||||||||||||||||||||||||||||||||||||||
Beginning Balance |
$ | 8,389 | $ | 5,490 | $ | 2,013 | $ | 67 | $ | 1,376 | $ | 63 | $ | | $ | 1,746 | $ | 631 | $ | 19,775 | ||||||||||||||||||||
Charge-offs |
(4,450 | ) | (1,041 | ) | (163 | ) | | (471 | ) | (6 | ) | | (7 | ) | | (6,138 | ) | |||||||||||||||||||||||
Recoveries |
42 | 1 | | | 2 | 9 | | 6 | | 60 | ||||||||||||||||||||||||||||||
Provision |
1,817 | 2,194 | 25 | 662 | 496 | (6 | ) | | 3 | 9 | 5,200 | |||||||||||||||||||||||||||||
Total ending
allowance balance |
$ | 5,798 | $ | 6,644 | $ | 1,875 | $ | 729 | $ | 1,403 | $ | 60 | $ | | $ | 1,748 | $ | 640 | $ | 18,897 | ||||||||||||||||||||
- 25 -
Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 5 LOANS (Continued)
Other | ||||||||||||||||||||||||||||||||||||||||
Real | ||||||||||||||||||||||||||||||||||||||||
Estate | Commercial, | |||||||||||||||||||||||||||||||||||||||
Real Estate | 1-4 Family | Commercial | Secured | Financial and | Tax | Other | ||||||||||||||||||||||||||||||||||
Construction | Residential | Real Estate | Loans | Agricultural | Consumer | Exempt | Loans | Unallocated | Total | |||||||||||||||||||||||||||||||
Ending allowance balance attributable to loans at June 30, 2011: | ||||||||||||||||||||||||||||||||||||||||
Individually
evaluated for
impairment |
$ | 2,517 | $ | 3,096 | $ | 850 | $ | 719 | $ | 255 | $ | 11 | $ | | $ | 1,742 | $ | | $ | 9,190 | ||||||||||||||||||||
Collectively
evaluated for
Impairment |
3,281 | 3,548 | 1,025 | 10 | 1,148 | 49 | | 6 | 640 | 9,707 | ||||||||||||||||||||||||||||||
Total ending
allowance
balance |
$ | 5,798 | $ | 6,644 | $ | 1,875 | $ | 729 | $ | 1,403 | $ | 60 | $ | | $ | 1,748 | $ | 640 | $ | 18,897 | ||||||||||||||||||||
Ending allowance balance attributable to loans at December 31, 2010: | ||||||||||||||||||||||||||||||||||||||||
Individually
evaluated for
impairment |
$ | 4,796 | $ | 1,579 | $ | 690 | $ | | $ | 233 | $ | 10 | $ | | $ | | $ | | $ | 7,308 | ||||||||||||||||||||
Collectively
evaluated for
Impairment |
1,726 | 3,934 | 1,683 | 22 | 1,303 | 93 | | 1,472 | 626 | 10,859 | ||||||||||||||||||||||||||||||
Total ending
allowance
balance |
$ | 6,522 | $ | 5,513 | $ | 2,373 | $ | 22 | $ | 1,536 | $ | 103 | $ | | $ | 1,472 | $ | 626 | $ | 18,167 | ||||||||||||||||||||
Loans at June 30, 2011: |
||||||||||||||||||||||||||||||||||||||||
Individually evaluated
for impairment |
$ | 26,527 | $ | 16,700 | $ | 10,057 | $ | 2,548 | $ | 569 | $ | 160 | $ | | $ | 8,711 | $ | 65,272 | ||||||||||||||||||||||
Collectively evaluated
for impairment |
55,660 | 147,015 | 165,700 | 3,924 | 39,324 | 8,447 | 62 | 299 | 420,431 | |||||||||||||||||||||||||||||||
Total loans balance |
$ | 82,187 | $ | 163,715 | $ | 175,757 | $ | 6,472 | $ | 39,893 | $ | 8,607 | $ | 62 | $ | 9,010 | $ | 485,703 | ||||||||||||||||||||||
Loans at December 31, 2010: |
||||||||||||||||||||||||||||||||||||||||
Individually evaluated for
impairment |
$ | 30,552 | $ | 15,881 | $ | 4,798 | $ | | $ | 818 | $ | 10 | $ | | $ | | $ | 52,059 | ||||||||||||||||||||||
Collectively evaluated for
impairment |
59,357 | 150,995 | 170,718 | 7,206 | 47,635 | 9,713 | 118 | 9,173 | 454,915 | |||||||||||||||||||||||||||||||
Total loans balance |
$ | 89,909 | $ | 166,876 | $ | 175,516 | $ | 7,206 | $ | 48,453 | $ | 9,723 | $ | 118 | $ | 9,173 | $ | 506,974 | ||||||||||||||||||||||
- 26 -
Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 5. LOANS (Continued)
Individually impaired loans were as follows:
Six Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Average of impaired loans during the period |
$ | 57,288 | $ | 38,693 |
Three Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Average of impaired loans during the period |
$ | 59,903 | $ | 38,693 | ||||
Interest income recognized during impairment |
44 | 436 | ||||||
Cash-basis interest income recognized |
120 | 276 |
- 27 -
Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 5. LOANS (Continued)
Loans individually evaluated for impairment by class of loans as of and for the six months ended June 30, 2011:
Allowance | ||||||||||||||||||||||||
Unpaid | for Loan | Average | Cash Basis | |||||||||||||||||||||
Principal | Recorded | Losses | Recorded | Income | Income | |||||||||||||||||||
Balance | Investment | Allocated | Investment | Recognized | Recognized | |||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||
Real estate construction: |
||||||||||||||||||||||||
Residential construction |
$ | 13,659 | $ | 8,553 | $ | | $ | 4,844 | $ | 77 | $ | 77 | ||||||||||||
Other construction |
7,583 | 5,535 | | 3,391 | 23 | 24 | ||||||||||||||||||
1-4 Family residential: |
||||||||||||||||||||||||
Revolving, open ended |
| | | 61 | | | ||||||||||||||||||
First liens |
5,460 | 4,729 | | 2,681 | 63 | 66 | ||||||||||||||||||
Junior liens |
144 | 111 | | 142 | 2 | 2 | ||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||
Farmland |
| | | | | | ||||||||||||||||||
Owner occupied |
1,921 | 1,764 | | 1,004 | 21 | 20 | ||||||||||||||||||
Non-owner occupied |
199 | 199 | | 284 | 3 | 3 | ||||||||||||||||||
Other real estate secured loans |
| | | | | | ||||||||||||||||||
Commercial, financial and
agricultural: |
||||||||||||||||||||||||
Commercial and industrial |
1,867 | 279 | | 439 | | 1 | ||||||||||||||||||
Consumer |
149 | 149 | | 51 | 3 | 3 | ||||||||||||||||||
Total with no related allowance recorded |
30,982 | 21,319 | | 12,897 | 192 | 196 | ||||||||||||||||||
With an allowance recorded: |
||||||||||||||||||||||||
Real estate construction: |
||||||||||||||||||||||||
Residential construction |
4,933 | 4,933 | 1,753 | 9,828 | 24 | 75 | ||||||||||||||||||
Other construction |
7,726 | 7,505 | 763 | 11,677 | 17 | 17 | ||||||||||||||||||
1-4 Family residential: |
||||||||||||||||||||||||
Revolving, open ended |
407 | 407 | 182 | 849 | 5 | 7 | ||||||||||||||||||
First Liens |
11,088 | 11,089 | 2,869 | 11,481 | 126 | 117 | ||||||||||||||||||
Junior Liens |
365 | 365 | 45 | 310 | 1 | 1 | ||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||
Farmland |
485 | 485 | 24 | 620 | | | ||||||||||||||||||
Owner occupied |
5,006 | 5,006 | 419 | 3,035 | 7 | 10 | ||||||||||||||||||
Non-owner occupied |
2,603 | 2,603 | 408 | 2,430 | 33 | 33 | ||||||||||||||||||
Other real estate secured loans |
2,548 | 2,548 | 719 | 954 | 28 | 28 | ||||||||||||||||||
Commercial, financial and
agricultural: |
||||||||||||||||||||||||
Commercial and industrial |
290 | 290 | 255 | 293 | 1 | 1 | ||||||||||||||||||
Consumer |
11 | 11 | 11 | 11 | | | ||||||||||||||||||
Other loans |
8,711 | 8,711 | 1,742 | 2,904 | | | ||||||||||||||||||
Total with an allocated allowance
recorded |
44,173 | 43,953 | 9,190 | 44,390 | 242 | 289 | ||||||||||||||||||
Total |
$ | 75,155 | $ | 65,272 | $ | 9,190 | $ | 57,287 | $ | 434 | $ | 485 | ||||||||||||
- 28 -
Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 5. LOANS (Continued)
Loans individually evaluated for impairment by class of loans at December 31, 2010:
Allowance for | ||||||||||||
Unpaid Principal | Recorded | Loan Losses | ||||||||||
Balance | Investment | Allocated | ||||||||||
With no related allowance recorded: |
||||||||||||
Real estate construction: |
||||||||||||
Residential construction |
$ | 5,896 | $ | 3,822 | $ | | ||||||
Other construction |
4,722 | 2,505 | | |||||||||
1-4 Family residential: |
||||||||||||
Revolving, open ended |
289 | 92 | | |||||||||
First Liens |
2,233 | 1,693 | | |||||||||
Commercial real estate: |
||||||||||||
Farmland |
| | | |||||||||
Owner occupied |
473 | 473 | | |||||||||
Non-owner occupied |
496 | 496 | | |||||||||
Other real estate secured loans |
| | | |||||||||
Commercial, financial and agricultural: |
||||||||||||
Commercial and industrial |
1,904 | 546 | | |||||||||
With an allowance recorded: |
||||||||||||
Real estate construction: |
||||||||||||
Residential construction |
11,107 | 11,107 | 3,057 | |||||||||
Other construction |
13,117 | 13,117 | 1,739 | |||||||||
1-4 Family residential: |
||||||||||||
Revolving, open ended |
1,957 | 1,957 | 162 | |||||||||
First Liens |
11,651 | 11,651 | 1,326 | |||||||||
Junior Liens |
649 | 489 | 91 | |||||||||
Commercial real estate: |
||||||||||||
Farmland |
485 | 485 | 37 | |||||||||
Owner occupied |
1,165 | 1,165 | 259 | |||||||||
Non-owner occupied |
2,179 | 2,179 | 394 | |||||||||
Commercial, financial and agricultural: |
||||||||||||
Commercial and industrial |
272 | 272 | 233 | |||||||||
Consumer |
10 | 10 | 10 | |||||||||
Total |
$ | 58,605 | $ | 52,059 | $ | 7,308 | ||||||
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
Troubled debt restructurings still accruing |
$ | 10,486 | $ | 16,558 |
- 29 -
Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 5. LOANS (Continued)
The Company has allocated $4,949 of specific allocations to customers whose loan terms have been
modified in troubled debt restructurings as of June 30, 2011 compared to $3,261 at December 31,
2010. The Company lost $138 of interest income in the first six months of 2011 that would have
been recorded in interest income if the specific loans had not been restructured. The Company lost
$104 in interest income during the three months ended June 30, 2011. Balances for troubled debt
restructurings by class of loan were as follows:
June 30, 2011 | ||||||||||||
Pre-Modification | Post-Modification | |||||||||||
Outstanding | Outstanding | |||||||||||
Number of | Recorded | Recorded | ||||||||||
Contracts | Investment | Investment | ||||||||||
Real estate construction: |
||||||||||||
Residential construction |
2 | $ | 2,631 | $ | 2,631 | |||||||
Other construction |
6 | 6,276 | 6,276 | |||||||||
1-4 Family residential: |
||||||||||||
First Liens |
22 | 8,273 | 8,273 | |||||||||
Junior Liens |
1 | 9 | 9 | |||||||||
Commercial real estate: |
||||||||||||
Farmland |
1 | 485 | 485 | |||||||||
Non-owner occupied |
1 | 2,175 | 2,175 | |||||||||
Other real estate secured loans |
4 | 2,227 | 2,227 | |||||||||
Commercial, financial and agricultural: |
||||||||||||
Commercial and industrial |
1 | 22 | 22 | |||||||||
Total |
38 | $ | 22,098 | $ | 22,098 |
- 30 -
Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 5. LOANS (Continued)
Nonperforming loans include both smaller balance homogeneous loans that are collectively evaluated
for impairment and individually classified impaired loans. The following table presents the
recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of
loans as of June 30, 2011 and December 31, 2010:
June 30, 2011 | December 31, 2010 | |||||||||||||||
Loans past due | Loans past due | |||||||||||||||
over 90 days still | over 90 days | |||||||||||||||
Nonaccrual | accruing | Nonaccrual | still accruing | |||||||||||||
Real estate construction: |
||||||||||||||||
Residential construction |
$ | 11,173 | $ | | $ | 11,258 | $ | | ||||||||
Other construction |
15,617 | | 12,598 | | ||||||||||||
1-4 Family residential: |
||||||||||||||||
Revolving, open ended |
17 | | 62 | | ||||||||||||
First Liens |
9,971 | | 2,060 | | ||||||||||||
Junior Liens |
316 | | 469 | | ||||||||||||
Commercial real estate: |
||||||||||||||||
Farmland |
485 | | 1,357 | | ||||||||||||
Owner occupied |
5,206 | | 7,453 | | ||||||||||||
Non-owner occupied |
790 | | 505 | | ||||||||||||
Other real estate loans |
320 | | | | ||||||||||||
Commercial, financial and
agricultural: |
||||||||||||||||
Commercial and industrial |
554 | | 869 | | ||||||||||||
Consumer |
11 | | 44 | | ||||||||||||
Other loans |
8,810 | | | | ||||||||||||
Total |
$ | 53,277 | $ | | $ | 36,675 | $ | | ||||||||
- 31 -
Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 5. LOANS (Continued)
The following tables present the aging of the recorded investment in past due loans, including
nonaccrual loans as of June 30, 2011 and December 31, 2010 by class of loans:
30 59 | 60-89 | Greater than | ||||||||||||||||||||||
Days | Days | 90 Days Past | Total Past | Loans Not | ||||||||||||||||||||
June 30, 2011 | Past Due | Past Due | Due | Due | Past Due | Total | ||||||||||||||||||
Real estate construction: |
||||||||||||||||||||||||
Residential construction |
$ | 672 | $ | 2,630 | $ | 3,937 | $ | 7,239 | $ | 28,861 | $ | 36,100 | ||||||||||||
Other construction |
198 | 559 | 6,793 | 7,550 | 38,537 | 46,087 | ||||||||||||||||||
1-4 Family residential: |
||||||||||||||||||||||||
Revolving, open ended |
549 | | 17 | 566 | 39,248 | 39,814 | ||||||||||||||||||
First Liens |
4,367 | 506 | 4,737 | 9,610 | 107,051 | 116,661 | ||||||||||||||||||
Junior Liens |
16 | | 316 | 332 | 6,908 | 7,240 | ||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||
Farmland |
| | 485 | 485 | 8,356 | 8,841 | ||||||||||||||||||
Owner occupied |
| 63 | 5,206 | 5,269 | 63,134 | 68,403 | ||||||||||||||||||
Non-owner occupied |
| | 790 | 790 | 97,723 | 98,513 | ||||||||||||||||||
Other real estate secured loans |
| | 320 | 320 | 6,152 | 6,472 | ||||||||||||||||||
Commercial, financial and
agricultural: |
||||||||||||||||||||||||
Agricultural |
20 | | | 20 | 1,136 | 1,156 | ||||||||||||||||||
Commercial and industrial |
566 | | 508 | 1,074 | 37,663 | 38,737 | ||||||||||||||||||
Consumer |
46 | 11 | 11 | 68 | 8,539 | 8,607 | ||||||||||||||||||
Tax exempt |
| | | | 62 | 62 | ||||||||||||||||||
Other loans |
| 8,711 | | 8,711 | 299 | 9,010 | ||||||||||||||||||
Total |
$ | 6,434 | $ | 12,480 | $ | 23,120 | $ | 42,034 | $ | 443,669 | $ | 485,703 | ||||||||||||
30 59 | 60-89 | Greater than | ||||||||||||||||||||||
Days | Days | 90 Days Past | Total Past | Loans Not | ||||||||||||||||||||
December 31, 2010 | Past Due | Past Due | Due | Due | Past Due | Total | ||||||||||||||||||
Real estate construction: |
||||||||||||||||||||||||
Residential construction |
$ | 1,721 | $ | | $ | 4,924 | $ | 6,645 | $ | 31,044 | $ | 37,689 | ||||||||||||
Other construction |
638 | 191 | 6,395 | 7,224 | 44,996 | 52,220 | ||||||||||||||||||
1-4 Family residential: |
||||||||||||||||||||||||
Revolving, open ended |
693 | 222 | 62 | 977 | 39,631 | 40,608 | ||||||||||||||||||
First Liens |
1,647 | 1,843 | 2,060 | 5,550 | 112,943 | 118,493 | ||||||||||||||||||
Junior Liens |
144 | 328 | 469 | 941 | 6,834 | 7,775 | ||||||||||||||||||
Commercial real estate: |
||||||||||||||||||||||||
Farmland |
104 | | 1,356 | 1,460 | 7,526 | 8,986 | ||||||||||||||||||
Owner occupied |
844 | 65 | 7,914 | 8,823 | 61,078 | 69,901 | ||||||||||||||||||
Non-owner occupied |
| | 535 | 535 | 96,094 | 96,629 | ||||||||||||||||||
Other real estate secured loans |
| | | | 7,206 | 7,206 | ||||||||||||||||||
Commercial, financial and
agricultural: |
||||||||||||||||||||||||
Agricultural |
6 | | | 6 | 1,273 | 1,279 | ||||||||||||||||||
Commercial and industrial |
509 | 47 | 1,019 | 1,575 | 45,599 | 47,174 | ||||||||||||||||||
Consumer |
155 | 87 | 44 | 286 | 9,437 | 9,723 | ||||||||||||||||||
Tax exempt |
| | | | 118 | 118 | ||||||||||||||||||
Other loans |
| | | | 9,173 | 9,173 | ||||||||||||||||||
Total |
$ | 6,461 | $ | 2,783 | $ | 24,778 | $ | 34,022 | $ | 472,952 | $ | 506,974 | ||||||||||||
- 32 -
Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
June 30, 2011
(Unaudited)
NOTE 5. 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 at origination. All loan relationships
with aggregate debt greater than $250 are reviewed at least annually. 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 borrowers financial status. After a loan initially becomes
risk rated, its rating is reviewed at least quarterly. Loans rated special mention or higher are
reevaluated monthly. The Company uses the following definitions for risk ratings:
Watch. Loans characterized by borrowers who have marginal cash flow, marginal profitability,
or have experienced operating losses and declining financial condition. The borrower has
satisfactorily handled debts with the Bank in the past, but in recent months has either been late,
delinquent in making payments, or made sporadic payments. While the Bank continues to be
adequately secured, the borrowers margins have decreased or are decreasing, despite the borrowers
continued satisfactory condition. Other characteristics of borrowers in this class include
inadequate credit information, weakness of financial statement and repayment capacity, but with
collateral that appears to limit the Banks exposure. This classification includes loans to
establish borrowers that are reasonably margined by collateral, but where potential for improvement
in financial capacity is limited.
Special Mention. Loans with potential weaknesses that deserve managements close attention.
If left uncorrected, these potential weaknesses may result in deteriorating prospects for the
repayment source or in the Banks credit position in the future.
Substandard. Loans inadequately protected by the payment capacity of the borrower or the
pledged collateral.
Doubtful. Loans with the same characteristics as substandard loans with the added
characteristic that the weaknesses make collection or liquidation in full highly questionable and
improbable on the basis of currently existing facts, conditions, and values. These are poor
quality loans in which neither the collateral nor the financial condition of the borrower presently
ensure collectability in full in a reasonable period of time or evidence of permanent impairment in
the collateral securing the loan.
Impaired loans are evaluated separately from other loans in the Banks portfolio. Credit quality
information related to impaired loans was presented above and is excluded from the tables below.
- 33 -
Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 5. 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 June 30, 2011 and December 31, 2010, and
based on the most recent analysis performed, the risk category of loans by class of loans is as
follows:
Special | ||||||||||||||||||||
June 30, 2011: | Pass | Watch | Mention | Substandard | Doubtful | |||||||||||||||
Real estate construction: |
||||||||||||||||||||
Residential construction |
$ | 9,946 | $ | 9,053 | $ | 3,615 | $ | | $ | | ||||||||||
Other construction |
20,121 | 3,549 | 2,316 | 7,061 | | |||||||||||||||
1-4 Family residential: |
||||||||||||||||||||
Revolving, open ended |
37,124 | 967 | 50 | 1,266 | | |||||||||||||||
First Liens |
74,750 | 17,132 | 846 | 8,115 | | |||||||||||||||
Junior Liens |
5,840 | 910 | | 14 | | |||||||||||||||
Commercial real estate: |
||||||||||||||||||||
Farmland |
4,923 | 2,701 | | 732 | | |||||||||||||||
Owner occupied |
48,921 | 5,887 | 1,045 | 5,780 | | |||||||||||||||
Non-owner occupied |
75,527 | 6,821 | 1,892 | 11,471 | | |||||||||||||||
Other real estate loans |
3,168 | | 756 | | | |||||||||||||||
Commercial, financial and
agricultural: |
||||||||||||||||||||
Agricultural |
1,156 | | | | | |||||||||||||||
Commercial and industrial |
34,736 | 1,936 | 920 | 576 | | |||||||||||||||
Consumer |
8,263 | 92 | 4 | 88 | | |||||||||||||||
Tax exempt |
62 | | | | | |||||||||||||||
Other loans |
299 | | | | | |||||||||||||||
Total |
$ | 324,836 | $ | 49,048 | $ | 11,444 | $ | 35,103 | $ | | ||||||||||
Special | ||||||||||||||||||||
December 31, 2010 | Pass | Watch | Mention | Substandard | Doubtful | |||||||||||||||
Real estate construction: |
||||||||||||||||||||
Residential construction |
$ | 15,622 | $ | 5,430 | $ | | $ | 1,708 | $ | | ||||||||||
Other construction |
31,327 | 4,158 | | 1,112 | | |||||||||||||||
1-4 Family residential: |
||||||||||||||||||||
Revolving, open ended |
36,878 | 246 | 50 | 1,386 | | |||||||||||||||
First Liens |
86,178 | 11,512 | 1,766 | 5,694 | | |||||||||||||||
Junior Liens |
6,261 | 575 | | 449 | | |||||||||||||||
Commercial real estate: |
||||||||||||||||||||
Farmland |
6,514 | 1,987 | | | | |||||||||||||||
Owner occupied |
57,556 | 1,426 | 969 | 8,311 | | |||||||||||||||
Non-owner occupied |
80,715 | 55 | 653 | 12,532 | | |||||||||||||||
Other real estate loans |
7,206 | | | | | |||||||||||||||
Commercial, financial and
agricultural: |
||||||||||||||||||||
Agricultural |
1,229 | | | 50 | | |||||||||||||||
Commercial and industrial |
43,302 | 2,488 | 64 | 502 | | |||||||||||||||
Consumer |
9,294 | 87 | 12 | 320 | | |||||||||||||||
Tax exempt |
118 | | | | | |||||||||||||||
Other loans |
371 | | | 8,802 | | |||||||||||||||
Total |
$ | 382,571 | $ | 27,964 | $ | 3,514 | $ | 40,866 | $ | | ||||||||||
- 34 -
Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 6. EARNINGS (LOSS) PER SHARE
In accordance with ASC 260-10, Earnings Per Share, basic earnings (loss) per share available to
common shareholders is computed by dividing net income (loss) allocated to common shareholders by
the weighted average number of common shares outstanding during the period. Diluted earnings
(loss) 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 earnings
(loss) of the Company. The factors used in the earnings per share computation follow:
Six months ended | Three months ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Basic |
||||||||||||||||
Net loss |
$ | (4,865 | ) | $ | (653 | ) | $ | (4,396 | ) | $ | (960 | ) | ||||
Less: Earnings allocated to
preferred stock |
(481 | ) | (481 | ) | (242 | ) | (242 | ) | ||||||||
Less: Accretion of preferred
stock discount |
(87 | ) | (81 | ) | (45 | ) | (41 | ) | ||||||||
Net loss allocated to common stock |
(5,433 | ) | (1,215 | ) | (4,683 | ) | (1,243 | ) | ||||||||
Weighted average common shares |
3,272,964 | 3,271,005 | 3,273,159 | 3,271,529 | ||||||||||||
Basic loss per share |
$ | (1.66 | ) | $ | (0.37 | ) | $ | (1.43 | ) | $ | (0.38 | ) | ||||
Diluted |
||||||||||||||||
Net loss allocated to common stock |
$ | (5,433 | ) | $ | (1,215 | ) | $ | (4,683 | ) | $ | (1,243 | ) | ||||
Weighted average common shares |
3,272,964 | 3,271,005 | 3,273,159 | 3,271,529 | ||||||||||||
Add: Dilutive effects of
assumed exercises of stock
options |
| | | | ||||||||||||
Average common shares and
dilutive potential common shares
outstanding |
3,272,964 | 3,271,005 | 3,273,159 | 3,271,529 | ||||||||||||
Diluted loss per share |
$ | (1.66 | ) | $ | (0.37 | ) | $ | (1.43 | ) | $ | (0.38 | ) | ||||
At June 30, 2011 and 2010, respectively, stock options for 192,030 and 212,881 shares of common
stock were not considered in computing diluted loss per share for the six month and three month
periods ended June 30, 2011 and 2010 because they were antidilutive.
- 35 -
Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 7. INCOME TAXES
Due to economic conditions and losses recognized during the past three years, the Company
established a valuation allowance against materially all of its deferred tax assets. 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.
NOTE 8. REGULATORY MATTERS
During the first quarter of 2010, the Bank was subject to a joint examination by the FDIC and the
Tennessee Department of Financial Institutions (TDFI). During the third quarter of 2010, the
Bank received a final report from the examination and notification of an informal regulatory action
in the form of an informal memorandum of understanding (MOU) between the Company, the FDIC, and
TDFI. The MOU, which the Bank entered into on October 19, 2010 requires the Bank to achieve by
March 31, 2011 and maintain thereafter regulatory capital ratios higher than those required under
current regulatory capital guidelines. The required ratios are 8.0% for tier 1 capital to average
assets, 10.0% for tier 1 capital to risk weighted assets, and 12.0% for total capital to risk
weighted assets. The Bank did not achieve the capital ratios required by the MOU at March 31,
2011 or June 30, 2011. Based on the June 30, 2011, levels of average assets and risk-weighted
assets, the required amount of additional tier 1 capital required to meet the requirements was
approximately $12,328, which would also satisfy the total capital requirement. The MOU also
restricts the Bank from paying any dividends to the Company if the dividend would cause the Banks
regulatory capital ratios to fall below the agreement-required ratios. The Bank was also required
to implement additional programs to improve the overall asset quality and reduce exposure to
problem assets.
At the request of the Federal Reserve Bank (FRB), the board of directors adopted a resolution
agreeing that the Company will not incur additional debt, pay common or preferred dividends, or
redeem treasury stock without approval from the FRB. The Company requested permission to make
preferred dividend payments and interest payments on subordinated debt that are scheduled for the
first quarter of 2011. The FRB granted permission to pay the preferred dividends that were due on
February 15, 2011, but denied permission to make interest payments on the Companys subordinated
debt. As a result of the FRBs decision, the Company was required to begin the deferral of interest payments on
each of its three subordinated debentures during the first quarter of 2011. The Company has the
right to defer the payment of interest on the subordinated debentures at any time, for a period not
to exceed 20 consecutive quarters. At June 30, 2011, the company has $762 of interest accrued
for which payment is being deferred. During the period during which it is deferring the payment of interest on its subordinated debentures, the Company cannot pay any
dividends on its common or preferred stock. Accordingly, the Company was required to suspend its
dividend payments on its fixed rate cumulative perpetual preferred stock beginning in the second
quarter of 2011.
- 36 -
Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 8. REGULATORY MATTERS (Continued)
As a result of its losses in 2010 and 2009, the Bank is prohibited under applicable Tennessee law
from declaring dividends, without prior approval from the TDFI. The terms of the MOU with the FDIC
and TDFI also prohibit the Bank from paying dividends to the Company without prior TDFI and FDIC
approval so long as its capital levels are below the minimum levels set out in the MOU. The
Company is currently considering the options available to it to increase capital levels at the
Bank, including the sale of common or preferred stock of the Company or the sale of certain branch
locations or other assets, or alternatively the sale of the Company. Any sale of the Companys
common stock would likely be at a price that would result in substantial dilution in ownership for
the Companys existing common shareholders and could result in a change in control of the Company.
The Company is also unlikely to pay any dividends as a result of its informal commitment to the FRB
and the suspension of dividends on the preferred stock the Company sold the United States Treasury
and of interest on its trust preferred securities.
During the first quarter of 2011, the Bank was subject to a joint examination by the FDIC and the
Tennessee Department of Financial Institutions (TDFI). Based on initial findings presented to
the Companys management, the Company expects that either the FDIC or TDFI or both may replace the
existing MOU with a formal agreement or consent order, the form of which is yet undetermined. The
Company believes that the formal agreement or consent order will impose restrictions on the Bank
similar to those included in the MOU currently in effect. As a result of entering into the formal
agreement or consent order, the Bank will be subject to additional limitations on its operations
including its ability to pay interest on deposits above proscribed rates and its ability to accept,
rollover or renew brokered deposits, which could adversely affect the Banks liquidity and/or
operating results. The Company also believes that as a result of the above-described joint examination that it is likely
that the Bank will be limited in its ability to pay severance payments to its
employees and will be required to receive the consent of the FDIC and TDFI to appoint new officers or directors.
- 37 -
Table of Contents
COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 8. REGULATORY MATTERS (Continued)
At June 30, 2011 and December 31, 2010, the Banks and the Companys risk-based capital ratios and
the minimums to be considered well-capitalized under the Federal Reserve Boards prompt corrective
action guidelines and the ratios required by the Banks informal commitment to the FDIC were as
follows:
To Be Considered | ||||||||||||||||||||||||||||||||
Well Capitalized | ||||||||||||||||||||||||||||||||
For Capital | Under Applicable | Required by Terms | ||||||||||||||||||||||||||||||
Actual | Adequacy Purposes | Regulations | of MOU with FDIC | |||||||||||||||||||||||||||||
June 30, 2011 | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||
Total Capital to risk
weighted assets |
||||||||||||||||||||||||||||||||
Bank |
$ | 46,048 | 9.69 | % | $ | 38,031 | 8.00 | % | $ | 47,539 | 10.00 | % | $ | 57,046 | 12.00 | % | ||||||||||||||||
Consolidated |
46,846 | 9.83 | % | 38,115 | 8.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
Tier 1 to risk weighted
assets |
||||||||||||||||||||||||||||||||
Bank |
$ | 39,946 | 8.40 | % | $ | 19,015 | 4.00 | % | $ | 28,523 | 6.00 | % | $ | 47,539 | 10.00 | % | ||||||||||||||||
Consolidated |
24,569 | 5.16 | % | 19,058 | 4.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
Tier 1 to average assets |
||||||||||||||||||||||||||||||||
Bank |
$ | 39,946 | 6.11 | % | $ | 26,137 | 4.00 | % | $ | 32,671 | 5.00 | % | $ | 52,274 | 8.00 | % | ||||||||||||||||
Consolidated |
24,569 | 3.75 | % | 26,241 | 4.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
December 31, 2010 |
||||||||||||||||||||||||||||||||
Total Capital to risk
weighted assets |
||||||||||||||||||||||||||||||||
Bank |
$ | 50,066 | 10.14 | % | $ | 39,508 | 8.00 | % | $ | 49,385 | 10.00 | % | N/A | N/A | ||||||||||||||||||
Consolidated |
52,220 | 10.57 | % | 39,538 | 8.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
Tier 1 to risk weighted
assets |
||||||||||||||||||||||||||||||||
Bank |
$ | 43,745 | 8.86 | % | $ | 19,754 | 4.00 | % | $ | 29,631 | 6.00 | % | N/A | N/A | ||||||||||||||||||
Consolidated |
31,123 | 6.30 | % | 19,770 | 4.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
Tier 1 to average assets |
||||||||||||||||||||||||||||||||
Bank |
$ | 43,745 | 6.44 | % | $ | 27,159 | 4.00 | % | $ | 33,949 | 5.00 | % | N/A | N/A | ||||||||||||||||||
Consolidated |
31,123 | 4.57 | % | 27,259 | 4.00 | % | N/A | N/A | N/A | N/A |
- 38 -
Table of Contents
ITEM 2. MANAGEMENTS 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 Community First, Inc. (the Company)
at June 30, 2011, to December 31, 2010, and the results of operations for the six months and three
months ended June 30, 2011 and 2010. 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, 2010, filed with the SEC on April 15, 2011 (File No.
000-49966) (the 2010 Form 10-k) and in other reports we file with the SEC from time to time;
including Part II, Item 1A Risk Factors below, and the following:
| deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses; | ||
| further declines in real estate markets in the Companys market; | ||
| greater than anticipated deterioration or lack of sustained growth in the national or local economies including Maury, Williamson, Hickman, and Rutherford Counties Tennessee; | ||
| our ability to raise sufficient amounts of capital to enable the Bank to achieve the capital commitments it has made to its primary regulators; | ||
| failure to maintain capital levels above levels required by federal banking regulators or commitments or agreements the Company or the Bank makes with its regulators; | ||
| the failure of assumptions underlying the establishment of valuation allowances for probable loan losses and other estimates; | ||
| further deterioration in the valuation of other real estate owned; |
- 39 -
Table of Contents
OVERVIEW (Continued)
| governmental monetary and fiscal policies, as well as legislative and regulatory changes, including changes in banking, securities and tax laws and regulations, including those resulting from the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act); | ||
| 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; | ||
| rapid fluctuations or unanticipated changes in interest rates; | ||
| any activity that would cause the Company to conclude that there was impairment of any asset, including any other intangible asset; | ||
| the effects of competition from a wide variety of local, regional, national and other providers of financial, investment, and insurance services; | ||
| changes in accounting policies, rules and practices; | ||
| the impact of governmental restrictions on entities participating in the CPP; | ||
| 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 June 30, 2011, total assets were $641,435, a decrease of $25,945 or 3.9% compared to $667,380 at
December 31, 2010. The decrease in total assets was primarily due to decreases in net loans,
securities, and cash and cash equivalents. Total liabilities decreased 3.4%, or $22,216 to
$622,403 at June 30, 2011 compared to $644,619 at December 31, 2010. The decrease in liabilities
was due to decreases in deposits. Total equity decreased 16.4%, or $3,729 to $19,032 at June 30,
2011 compared to $22,761 at December 31, 2010. The decrease in equity is primarily due to the net
loss for the first six months of 2011.
- 40 -
Table of Contents
FINANCIAL CONDITION (Continued)
Cash and Cash Equivalents
Cash and cash equivalents were $58,685 at June 30, 2011 compared to $60,303 at December 31, 2010.
The Bank has continued to maintain unusually high cash balances during 2011 due to the availability
of excess liquidity in the Banks market area coupled with reduced loan demand as a result of weak
economic conditions.
Loans
Total loans (excluding mortgage loans held for sale) at June 30, 2011 were $485,703, compared to
$506,974 at December 31, 2010, a decrease of $21,271 or 4.2%. The decrease in loans during the
first six months of 2011 is primarily due to Small Business Association (SBA) guaranteed loans
totaling $4,610 that were transferred to loans held for sale, $6,300
of net charge offs, continuation
of decreased loan demand, and increased loan repayments. The most significant decreases in loan
balances occurred in commercial and industrial loans and real estate construction loans.
Loans in the portfolio at June 30, 2011 of approximately $179,462, or 36.9%, are at a variable
rate of interest, $252,964, or 52.1%, are at a fixed rate, and $53,277, or 11.0% are nonaccrual.
$255,030 or 50.5% of total loans reprice within one year. As market rates dropped during the
economic recession, management implemented rate floors for many variable rate loans in order to
protect the Banks 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.
Management anticipates continued reduced loan demand during the remainder of 2011, which will
likely result in further decreases in gross loans. If economic conditions in the Banks market
area contribute to continued reductions in loan demand, additional decreases in total loans is
possible.
Securities Available for Sale
Set forth below is a table showing the carrying amount and breakdown of the Companys securities
available for sale at June 30, 2011 and December 31, 2010:
June 30, 2011 | December 31, 2010 | |||||||||||||||
Amount | % of Total | Amount | % of Total | |||||||||||||
U.S. Government sponsored entities |
$ | 5,880 | 9.4 | % | $ | 5,937 | 9.4 | % | ||||||||
Mortgage-backed residential |
32,525 | 52.2 | % | 31,975 | 50.4 | % | ||||||||||
State and municipal |
19,737 | 31.7 | % | 18,551 | 29.2 | % | ||||||||||
Corporate |
4,164 | 6.7 | % | 7,019 | 11.0 | % | ||||||||||
Total |
$ | 62,306 | 100.0 | % | $ | 63,482 | 100.0 | % | ||||||||
The Companys securities portfolio is used to provide yield and for pledging purposes to
secure public fund deposits. As of June 30, 2011, the carrying value of securities decreased
$1,176 to $62,306, compared to $63,482 at December 31, 2010. Securities available for sale as a
percentage of total assets was 9.7% at June 30, 2011, compared to 9.5% at December 31, 2010. Net
unrealized loss on available for sale securities was $186 at June 30, 2011, compared to $1,742 at
December 31, 2010. Management is continually monitoring the credit quality of the Banks
investments and believes any
- 41 -
Table of Contents
FINANCIAL CONDITION (Continued)
unrealized losses that exist in the Banks portfolio to be temporary based on the bond ratings and
anticipated recovery of bonds held. The Company does 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 June 30, 2011, other real estate owned totaled $13,471, an increase of $1,680 from $11,791 at
December 31, 2010. The balance of other real estate owned is comprised of $12,906 of properties
acquired through or in lieu of foreclosure on real estate loans, $80 of loans made to facilitate
the sale of other real estate owned, and $484 of property acquired by the Company for future Bank
branch locations that is no longer intended for that purpose and currently held for sale. The
balance of other real estate owned (excluding adjustments for loans to facilitate the purchase of
foreclosed properties and bank properties) increased 15.0% to $12,906 at June 30, 2011 compared to
$11,224 at December 31, 2010.
Deposits
The Company relies on the Banks deposit growth, as well as alternative funding sources such as
other borrowed money, FHLB advances, and federal funds purchased from correspondent banks to fund
its operations.
The following table sets forth the composition of the deposits at June 30, 2011 and December 31,
2010.
June 30, 2011 | December 31, 2010 | |||||||||||||||
Amount | % of Total | Amount | % of Total | |||||||||||||
Noninterest-bearing demand accounts |
$ | 48,022 | 8.4 | % | $ | 49,333 | 8.3 | % | ||||||||
Interest-bearing demand accounts |
131,604 | 23.0 | % | 121,759 | 20.5 | % | ||||||||||
Savings accounts |
20,120 | 3.5 | % | 19,250 | 3.2 | % | ||||||||||
Time deposits greater than $100 |
164,238 | 28.8 | % | 188,751 | 31.7 | % | ||||||||||
Other time deposits |
207,597 | 36.3 | % | 215,976 | 36.3 | % | ||||||||||
Total |
$ | 571,581 | 100.0 | % | $ | 595,069 | 100.0 | % | ||||||||
Total deposits were $571,581 at June 30, 2011, compared to $595,069 at December 31, 2010, a
decrease of $23,488. The decrease was primarily due to reductions in personal CDs and the Bank
utilizing excess cash on hand to pay off maturing national market time deposits. Personal CDs
decreased $19,756 during the first six months of 2011. The decrease is due to unusually low rates
in the Banks market area prompting some customers to maintain their funds in more liquid demand
accounts rather than in time deposits. Interest bearing demand accounts increased $9,845 during
the same period. Current rates available on some money market demand account products is
attractive to some customers who may be anticipating that rates will begin to trend upward in the
near future. The lower CD rates offered by the Bank have also led some non-core customers to move
their CDs to other institutions, following the highest available rates in the market. National
market time deposits decreased $12,592 during the first six months of 2011 as part of managements
efforts to reduce reliance on non-core funding sources.
- 42 -
Table of Contents
FINANCIAL CONDITION (Continued)
During the majority of 2010 and through June 30, 2011, the Bank has maintained higher than normal
balances in cash and cash equivalents as a result of loan payoffs outpacing loan demand.
Management has been utilizing the available cash to pay off national market and broker deposits as
they have matured, resulting in significant reductions in cost of funds. Management further
anticipates seeking additional core customer deposits during 2011 in order to improve the Banks
overall liquidity position as well as net interest income and to continue to reduce the Banks
reliance on national market and broker deposits.
If the
Bank enters into a formal agreement or consent order with the FDIC
and TDFI, as described
in more detail in Note 9 to the financial statements, the Bank will be subject to additional
limitations on its operations including its ability to pay interest on deposits above proscribed
raes and its ability to accept, rollover or renew brokered deposits, which could adversely affect
the Banks liquidity and/or operating results.
Federal Home Loan Bank Advances
The Company had borrowed $16,000 in fixed rate advances from the Federal Home Loan Bank (FHLB) as
of June 30, 2011 and December 31, 2010. The Company had $18,223 available for future borrowings
from the FHLB at June 30, 2011. The fixed interest rates on these advances ranged from 1.91% to
2.71% at June 30, 2010 with a weighted average rate of 2.34% and a weighted average remaining
maturity of 20.07 months. These borrowings are secured by a blanket collateral agreement for
certain loans secured by 1-4 family residential properties, commercial real estate, and home equity
lines of credit. At June 30, 2011, undrawn standby letters of credit with FHLB totaled $9,000.
The letters of credit are used to meet pledging requirements of the State of Tennessee Bank
Collateral Pool.
Shareholders Equity
At June 30, 2011, shareholders equity totaled $19,032, a decrease of $3,729 from $22,761 at
December 31, 2010. The decrease was primarily due to net loss of $4,865, dividends declared on
preferred stock and amortization of the discount on preferred stock offset by an increase in other
comprehensive income of $1,556.
The preferred shares represent the U.S. Treasurys investment in the Company as part of our
participation in the Capital Purchase Program (the CPP). The $17,806 liquidation value Senior
Preferred shares have a cumulative dividend rate of 5% per year, until February 27, 2014, the fifth
anniversary of the Treasury investment, and a dividend rate of 9% thereafter. In addition, under
the terms of the CPP, the Company issued warrants to Treasury to purchase additional preferred
shares equal to 5% of the investment in Senior Preferred shares at a discounted exercise price.
The U.S. Treasury exercised the options immediately upon investment in the Senior Preferred shares,
which resulted in issuance of 890 warrant preferred shares. The U.S. Treasurys exercise of the
warrants resulted in a net discount on the issuance of the preferred shares of $890. The discount
will be amortized over the next five years, which is the anticipated life of the shares. The $890
liquidation value Warrant Preferred shares have a cumulative dividend rate of 9% per year until
redeemed. Dividends on both Senior Preferred and Warrant Preferred shares are required to be
- 43 -
Table of Contents
FINANCIAL CONDITION (Continued)
paid quarterly. Total required annual dividends for both Senior Preferred and Warrant Preferred shares
are expected to be as follows: 2011 2013: $970 per year; 2014: $1,564; 2015 and thereafter:
$1,683 per year. The Company is permitted to redeem all or a portion of the preferred shares at
any time after consultation with its primary federal regulator, but may not redeem the Warrant
Preferred shares until all of the Senior Preferred shares have been redeemed. Dividend payments on
both Senior Preferred and Warrant Preferred shares would be reduced for any redemption.
In January 2011, the Company entered into an informal agreement with the FRB-Atlanta that, among
other items, the Board of Directors would not pay any dividends on common or preferred stock or any
interest payments on outstanding subordinated debentures without prior approval. During the first
quarter of 2011, the Company sought such approval from FRB-Atlanta and was approved to make the
dividend payment on the Companys outstanding preferred shares that were issued to the U.S.
Treasury that was due on February 15, 2011. FRB-Atlanta denied the Companys request to make
interest payments on outstanding subordinated debentures that were due in March 2011. As a result
of its failure to pay interest on its trust preferred securities, the Company is also prohibited
under the terms of the agreements related to these securities, from paying dividends on the Senior
Preferred and Warrant Preferred shares until such time as all unpaid interest payments on the trust
preferred securities are paid in full. Accordingly, the Company did not pay the dividends on its
Senior Preferred and Warrant Preferred shares due in May 2011 or
August 2011. These amounts
however, were accrued, and accordingly increased the Companys net loss available to common
shareholders. The Company will be required to continue deferring payments on both preferred stock
and subordinated debentures until such time as management is able to obtain approval from
FRB-Atlanta to make the payments which will not be until the Company raises a sufficient amount of
capital necessary to ensure the Bank is able to achieve and maintain the minimum capital ratios it
has committed to the FDIC or TDFI that it will maintain and has sufficient earnings to pay
dividends under Tennessee law.
RESULTS OF OPERATIONS
Net Loss
The Company had a net loss of $4,865 for the six months ended June 30, 2011 compared to net loss of
$653 for the same period in 2010, an increase in losses of $4,212. Net loss allocated to common
shareholders was $5,433 for the first six months of 2011 compared to net loss allocated to common
shareholders of $1,215 for the first six months of 2010.
The net loss reported for the first six months of 2011 is primarily due to additional losses
identified in the loan portfolio, primarily during the second quarter of 2011. The Bank recorded
provision for loan losses of $7,030 through June 30, 2011. During the first six months of 2011,
management utilized third party providers to perform a review of all loan relationships totaling
$1,000 or more and a significant sampling of loans below that threshold. That process identified
several additional problem loans and charge offs, which were recognized during the second quarter
of 2011. Management and the Board of Directors are in the process of implementing new processes
and procedures to improve the Banks credit administration and underwriting processes. On June 28,
2011, the Board of Directors appointed a new president to lead the Company. Other management
changes related to credit administration and lending management have also been implemented.
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Table of Contents
Management anticipates that these changes will ultimately help to improve the Banks asset quality.
As the new management team implements new processes and procedures concerning loan quality,
additional problem loans may be identified from the portion of the portfolio that was not reviewed
by a third party during the first six months of 2011.
The Company had a net loss of $4,396 for the three months ended June 30, 2011 compared to net loss
of $960 for the same period in 2010, an increase in losses of $3,436. The Company had a net loss
allocated to common shareholders of $4,683 for the three months ended June 30, 2011 compared to a
net loss allocated to common shareholders of $1,243 for the same period in 2010.
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Table of Contents
Average Balance Sheets, Net Interest Income
Changes in Interest Income and Interest Expense
The following table shows the average daily balances of each principal category of our assets,
liabilities and shareholders equity and an analysis of net interest income for the six month
periods ended June 30, 2011 and 2010. The table reflects how changes in the volume of interest
earning assets and interest-bearing liabilities and changes in interest rates have affected our
interest income, interest expense, and net interest income for the periods indicated. Information
is provided in each category with respect to changes attributable to (1) changes in volume (changes
in volume multiplied by prior rate); (2) changes in rate (changes in rate multiplied by prior
volume); and (3) changes in rate/volume (changes in rate multiplied by change in volume). The
changes attributable to the combined impact of volume and rate have all been allocated to the
changes due to rate.
June 30, 2011 | June 30,2010 | Change | ||||||||||||||||||||||||||||||||||
Average | Interest | Revenue/ | Average | Interest | Revenue/ | Due to | Due to | |||||||||||||||||||||||||||||
Balance | Rate | Expense | Balance | Rate | Expense | Volume | Rate | Total | ||||||||||||||||||||||||||||
Gross loans (1 and 2) |
$ | 502,508 | 5.52 | % | $ | 13,762 | $ | 535,531 | 5.75 | % | $ | 15,269 | $ | (942 | ) | $ | (565 | ) | $ | (1,507 | ) | |||||||||||||||
Taxable securities available for sale
(3) |
50,732 | 3.54 | % | 890 | 60,233 | 3.91 | % | 1,168 | (184 | ) | (94 | ) | (278 | ) | ||||||||||||||||||||||
Tax exempt securities available for
sale (3) |
13,024 | 3.59 | % | 232 | 10,174 | 3.75 | % | 189 | 53 | (10 | ) | 43 | ||||||||||||||||||||||||
Federal funds sold and other |
59,407 | 0.57 | % | 168 | 24,800 | 1.11 | % | 136 | 190 | (158 | ) | 32 | ||||||||||||||||||||||||
Total interest earning assets |
625,671 | 4.85 | % | 15,052 | 630,738 | 5.36 | % | 16,762 | (883 | ) | (827 | ) | (1,710 | ) | ||||||||||||||||||||||
Cash and due from banks |
9,225 | 10,096 | ||||||||||||||||||||||||||||||||||
Other nonearning assets |
46,143 | 60,177 | ||||||||||||||||||||||||||||||||||
Allowance for loan losses |
(19,365 | ) | (12,946 | ) | ||||||||||||||||||||||||||||||||
Total assets |
$ | 661,674 | $ | 688,065 | ||||||||||||||||||||||||||||||||
Deposits: |
||||||||||||||||||||||||||||||||||||
NOW & money market investments |
$ | 133,161 | 0.80 | % | $ | 527 | $ | 90,977 | 0.82 | % | $ | 370 | $ | 172 | $ | (15 | ) | $ | 157 | |||||||||||||||||
Savings |
19,593 | 0.14 | % | 14 | 19,907 | 0.15 | % | 15 | | (1 | ) | (1 | ) | |||||||||||||||||||||||
Time deposits $100 and over |
173,770 | 1.77 | % | 1,526 | 196,564 | 2.27 | % | 2,208 | (256 | ) | (426 | ) | (682 | ) | ||||||||||||||||||||||
Other time deposits |
214,368 | 1.68 | % | 1,787 | 236,641 | 2.29 | % | 2,682 | (253 | ) | (642 | ) | (895 | ) | ||||||||||||||||||||||
Total interest-bearing deposits |
540,892 | 1.44 | % | 3,854 | 544,089 | 2.08 | % | 5,275 | (338 | ) | (1,083 | ) | (1,421 | ) | ||||||||||||||||||||||
Federal Home Loan Bank advances |
16,000 | 2.34 | % | 186 | 18,260 | 2.75 | % | 249 | (31 | ) | (32 | ) | (63 | ) | ||||||||||||||||||||||
Subordinated debentures |
23,000 | 6.20 | % | 707 | 23,000 | 6.12 | % | 698 | | 9 | 9 | |||||||||||||||||||||||||
Repurchase agreement |
7,000 | 3.31 | % | 115 | 7,000 | 3.31 | % | 115 | | | | |||||||||||||||||||||||||
Federal funds purchased and other |
32 | 0.00 | % | | 9 | 0.00 | % | | | | | |||||||||||||||||||||||||
Total other borrowings |
46,032 | 4.42 | % | 1,008 | 48,269 | 4.44 | % | 1,062 | (31 | ) | (23 | ) | (54 | ) | ||||||||||||||||||||||
Total interest-bearing liabilities |
586,924 | 1.67 | % | 4,862 | 592,358 | 2.16 | % | 6,337 | (368 | ) | (1,107 | ) | (1,475 | ) | ||||||||||||||||||||||
Noninterest-bearing liabilities |
52,439 | 51,720 | ||||||||||||||||||||||||||||||||||
Total liabilities |
638,544 | 644,078 | ||||||||||||||||||||||||||||||||||
Shareholders equity |
22,311 | 43,987 | ||||||||||||||||||||||||||||||||||
Total liabilities and shareholders
equity |
$ | 661,674 | $ | 688,065 | ||||||||||||||||||||||||||||||||
Net interest income |
$ | 10,190 | $ | 10,425 | $ | (515 | ) | $ | 280 | $ | (235 | ) | ||||||||||||||||||||||||
Net interest margin (4) |
3.28 | % | 3.33 | % | ||||||||||||||||||||||||||||||||
1 | Interest income includes fees on loans of $273 and $259 in 2011 and 2010, respectively. | |
2 | Nonaccrual loans are included in average loan balances and the associated income (recognized on a cash basis) is included in interest income. | |
3 | Amortized cost is used in the calculation of yields on securities available for sale. | |
4 | Annualized interest income to average interest earning assets. |
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Table of Contents
RESULTS OF OPERATIONS (Continued)
Net Interest Income
Net interest income for the first six months of 2011 was $10,190, a decrease of $235, or 2.3%
compared to $10,425 for the same period in 2010. Net interest margin for the first six months of
2011 was 3.28%, compared to 3.33% for the same period in 2010. The decrease in net interest income
and net interest margin is primarily due to decreases in the average balance of earning assets and
decreases in the average rate earned on loans and securities, together with increases in
non-performing assets offset by decreases in the average rate paid for deposits.
Total interest income for the first six months of 2011 was $15,052, a decrease of $1,710 from
$16,762 for the same period in 2010. The decrease is primarily due to a decline in loan interest
income. The average rate earned on loans decreased 23 basis points to 5.52% for the first six
months of 2011 compared to 5.75% for the first six months of 2010. In addition to the decrease in
average rate earned on loans, the average balance of loans outstanding decreased $33,023 in the
first six months of 2011 compared to the same period in 2010. The decrease in the average rate
earned on loans is primarily due to continued high levels of nonaccrual loans in the portfolio.
The decrease in the average balance of loans reflects the reduction in loan demand in the second
half of 2010 and first half of 2011 and the continued negative impact on loan balances of
chargeoffs and foreclosures.
Interest income on taxable securities decreased $278 to $890 in the first six months of 2011
compared to $1,168 in the first six months of 2010. The decrease is primarily due to a reduction
in the average balance of taxable securities during the first six months of 2011 when compared to
the first six months of 2010. The decrease was supported by a decrease in the average rate earned
on taxable securities in the first six months of 2011 compared to the same period in 2010. The
decrease in the average rate earned on taxable securities is due to one corporate security owned by
the Bank with a face amount of $2,880 and yielding 7.40% being called during the second quarter of
2011. Interest income on tax-exempt securities increased $43 to $232 in the first six months of
2011 compared to $189 in the first six months of 2010. The increase is primarily due to the
increase in average balance for tax-exempt in the first quarter of 2011.
Total interest expense was $4,862 in the first six months of 2011, a decrease of $1,475 from $6,337
in the first six months of 2010. The decrease in interest expense is primarily due to a reduction
in the average rate paid on deposits in the first quarter of 2011 compared to the same period in
2010.
Total interest expense on deposits was $3,854 in the first six months of 2011, a reduction of
$1,421 from $5,275 in the first six months of 2010. The average rate paid on deposits was 1.44% in
the first six months of 2011 compared to 2.08% for the same period in 2010. The most significant
decreases in average rates were on time deposits. The reduction in average rate paid on deposits
was the result of continued decreases in market rates in the Banks market area. During 2010,
management was successful at reducing rates for various deposit products while growing the Banks
core deposit base and reducing reliance on wholesale funding sources. This success was possible
due to historically low rates combined with excess liquidity in the Banks market area.
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Table of Contents
RESULTS OF OPERATIONS (Continued)
Net interest income for the three months ended June 30, 2011 was $4,984, a decrease of $403 from
$5,387 for the same period in 2010. The decrease was primarily due to reductions in loan interest
income offset by decreases in deposit interest expense. Total interest income for the three months
ended June 30, 2011 was $7,306, a decrease of $1,032 from $8,338 for the same period in 2010.
Total interest expense was $2,322 for the three months ended June 30, 2011, a decrease of $629 from
$2,951 for the same period in 2010. The factors causing the fluctuations in interest income and
interest expense during the second quarter of 2011 are similar to those noted above for the six
month period ended June 30, 2011.
Management expects some minor improvements in net interest margin through the remainder of 2011 as
the Banks overall cost of funds continues to decline. However, management anticipates loan demand
to remain weak during 2011, which could result in further reductions in loan balances which could,
particularly if excess liquidity is invested in lower yielding investment securities, negatively
impact net interest margins. No appreciable increase in loan demand is expected until economic
conditions in the Banks market area improve. If economic conditions in the Banks market area
further deteriorate, the Bank could experience additional increases in nonaccrual loans and
chargeoffs, which could negatively impact net interest margin.
Provisions for Loan Losses
In the first six months of 2011, the Bank recorded provisions for loan loss of $7,030, an
increase of $3,721 from $3,309 in the same period in 2010. The ratio of allowance for loan losses
to gross loans was 3.89% at June 30, 2011 compared to 3.58% at December 31, 2010.
Managements determination of the appropriate level of the provision for loan losses and the
adequacy of the allowance for loan losses in 2011 is based, in part, on an evaluation of specific
loans, as well as the consideration of historical loss, which management believes is representative
of probable incurred loan losses. Other factors considered by management include the composition
of the loan portfolio, economic conditions, results of internal and external loan review,
regulatory examinations, reviews of updated real estate appraisals, and the creditworthiness of the
Banks borrowers and other qualitative factors.
The Bank has experienced significant increases in past due loans, impaired loans, adversely
classified loans and charge offs as a result of the economic downturn that began in 2008, the
Banks concentration in real estate lending, and the dramatic decline in real estate markets. The
Bank and its customers continue to be affected by the impacts of the economic downturn,
particularly in the real estate market. Historically, more than half of the Banks loan portfolio
has been secured by real estate of some form, whether residential, commercial, or development, with
a significant portion of those loans being residential developments. One of the most significant
impacts of the economic downturn in the Banks market area has been the collapse of the housing
market and subsequent decline in market values for existing properties. Those impacts caused
several of the Banks borrowers who were residential and commercial developers to find themselves
owning larger parcels of partially developed land with virtually no demand for finished properties.
Several of these developers became unable to service their debt causing the loans to become past
due. At the same time, the decline in activity in the housing market caused significant reductions
in market values, causing collateral values for many loans to fall below the outstanding loan
balance. The Bank has experienced increases in problem loans in virtually all segments of the loan
portfolio, however the effect of the adverse real estate market has been the cause of the majority
of the Banks impaired loans and chargeoffs during 2011 and 2010.
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Table of Contents
RESULTS OF OPERATIONS (Continued)
Loans past due 30 to 59 days decreased slightly to $6,434 at June 30, 2011 from $6,461 at December
31, 2010. Loans past due 60 to 89 days increased to $12,516 at June 30, 2011 from $2,783 at
December 31, 2010. The increase during the first six months of the year is primarily due to one
relationship of approximately $8,700 that was classified as impaired for the period ended June 30,
2011.
Impaired loans totaled $65,272 at June 30, 2011 compared to $52,059 at December 31, 2010, an
increase of $13,213. The majority of these relationships are 1-4 family residential properties and
real estate development projects that were severely impacted by the downturn in the economy and
housing market. In general, the borrowers are residential developers and the collateral for the
loans is raw land that was intended for development. As a result of the collapse of the housing
market, lot absorption declined dramatically, reducing cash flow available to service the debt.
Many of the borrowers were able to service the debt though cash reserves for a period of time, but
the extended period of the economic downturn exhausted their reserve funds, rendering the loans
impaired. Management has worked extensively with these borrowers to find ways to liquidate the
underlying collateral or stimulate activity within the respective developments in order to avoid
foreclosure and/or additional charge offs. The relationships in this group as of June 30, 2011
will likely continue to be classified as impaired until there is significant improvement in the
housing market and lot absorption improves.
Included in the $13,213 increase in impaired loans is one relationship totaling $8,711 secured by
common stock in another company. This loan is a participation in a larger relationship totaling
approximately $18,000. The loan participants, including the Banks management, are negotiating
with the borrower and regulatory authorities to resolve the issues with the debt. It appears
likely that the participants will assume ownership of the common stock securing the debt.
Problem loans that are not impaired are categorized 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 uses the following definitions for risk ratings:
Watch. Loans characterized by borrowers who have marginal cash flow, marginal profitability,
or have experienced operating losses and declining financial condition. The borrower has
satisfactorily handled debts with the Bank in the past, but in recent months has either been late,
delinquent in making payments, or made sporadic payments. While the Bank is believed to be
adequately secured, the borrowers margins have decreased or are decreasing, despite the borrowers
continued satisfactory condition. Other characteristics of borrowers in this class include
inadequate credit information, weakness of financial statement and repayment capacity, but with
collateral that appears to limit the Banks exposure. This classification includes loans to
established borrowers that are reasonably margined by collateral, but where potential for
improvement in financial capacity is limited.
Special Mention. Loans with potential weaknesses that deserve managements close attention.
If left uncorrected, these potential weaknesses may result in deteriorating prospects for the
repayment source or in the Banks credit position in the future.
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Table of Contents
RESULTS OF OPERATIONS (Continued)
Substandard. Loans inadequately protected by the payment capacity of the borrower or the
pledged collateral.
Doubtful. Loans with the same characteristics as substandard loans with the added
characteristic that the weaknesses make collection or liquidation in full highly questionable and
improbable on the basis of currently existing facts, conditions, and values. These are poor
quality loans in which neither the collateral nor the financial condition of the borrower presently
ensure collectability in full in a reasonable period of time or evidence of permanent impairment in
the collateral securing the loan.
Impaired loans are evaluated separately from other loans in the Banks portfolio. Credit quality
information related to impaired loans was presented above and is excluded from the tables below.
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 June 30, 2011, and based on the most recent
analysis performed, the risk category of loans by segment of loans is as follows:
Special | ||||||||||||||||||||
Pass | Watch | Mention | Substandard | Doubtful | ||||||||||||||||
Real estate construction |
$ | 30,067 | $ | 12,602 | $ | 5,931 | $ | 7,061 | $ | | ||||||||||
1-4 Family residential |
117,714 | 19,009 | 896 | 9,395 | | |||||||||||||||
Commercial real estate |
129,371 | 15,409 | 2,937 | 17,983 | | |||||||||||||||
Other real estate loans |
3,168 | | 756 | | | |||||||||||||||
Commercial, financial
and agricultural |
35,892 | 1,936 | 920 | 576 | | |||||||||||||||
Consumer |
8,263 | 92 | 4 | 88 | | |||||||||||||||
Tax exempt |
62 | | | | | |||||||||||||||
Other loans |
299 | | | | | |||||||||||||||
Total |
$ | 324,836 | $ | 49,048 | $ | 11,444 | $ | 35,103 | $ | | ||||||||||
Loans graded watch or higher, excluding impaired loans, totaled $95,595 at June 30, 2011
compared to $72,344 at December 31, 2010. The increase in classified loans is primarily
attributable to managements efforts to identify all potential problem loans within the portfolio
during the first six months of 2011. The majority of the loans that are classified are real estate
loans that exhibit some of the same credit quality issues as noted for impaired loans, though the
severity of the credit quality issues is not as extensive as those of impaired loans. The majority
of the increase is in watch rated loans.
As discussed previously, managements consideration of environmental factors impact the amount of
allowance for loan loss that is needed for classified and pass rated loans. Below are some of the
factors considered by management:
The commercial real estate market has declined significantly as a result of the local and national
economic recession that began during 2008 and the resulting sluggish economic conditions that have
remained through the first six months of 2011. Real estate related loans, including commercial
real estate loans, residential construction and residential development and 1-4 family residential
loans, comprised approximately 88% of the Companys loan portfolio at June 30, 2011. Market
conditions for residential development and residential construction have seen substantial declines
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Table of Contents
RESULTS OF OPERATIONS (Continued)
due to the effects of the recession and continued weak economy on individual developers,
contractors and builders. In addition, the local market, particularly in Maury County, has seen
significantly weaker demand for residential housing. The historical and environmental component of
the allowance has decreased in absolute dollars and as a percentage of non-impaired loans since
December 31, 2010. The decrease in the dollar amount of this
component is largely due to a reduction of $34,484 or 7.6% in the
balance of total non-impaired loans. The
reduction in non-impaired loans was more significant for certain loan segments that have been
assigned higher reserve factors based on the risk of the portfolio
segment.
The table below illustrates changes in the AFLL ratio (the ratio, expressed as a percentage, of the
allowance for loan losses to total loans) over the past five quarters and the changes in related
risk metrics over the same periods:
June 30, | March 31, | December 31, | September 30, | June 30, | ||||||||||||||||
Quarter Ended | 2011 | 2011 | 2010 | 2010 | 2010 | |||||||||||||||
AFLL Ratio |
3.89 | % | 3.95 | % | 3.58 | % | 2.71 | % | 2.61 | % | ||||||||||
ASC 450-10 allowance ratio (1) |
2.31 | % | 2.30 | % | 2.39 | % | 1.34 | % | 1.21 | % | ||||||||||
Specifically Impaired Loans
(ASC 310 component) |
$ | 9,190 | $ | 9,542 | $ | 7,308 | $ | 7,708 | $ | 7,916 | ||||||||||
Historical and environmental
(ASC 450-10 component) |
9,707 | 10,233 | 10,859 | 6,472 | 5,784 | |||||||||||||||
Total allowance for loan loss |
$ | 18,897 | $ | 19,775 | $ | 18,167 | $ | 14,180 | $ | 13,700 | ||||||||||
Nonperforming loans to gross
loans (2) |
13.13 | % | 11.10 | % | 10.50 | % | 6.42 | % | 5.23 | % | ||||||||||
Impaired loans to gross loans |
13.44 | % | 10.90 | % | 10.27 | % | 7.83 | % | 8.51 | % | ||||||||||
Allowance to nonperforming
loans ratio |
29.64 | % | 35.62 | % | 34.09 | % | 42.23 | % | 46.40 | % | ||||||||||
Quarter-to-date net charge
offs to average gross loans |
1.21 | % | 0.04 | % | 1.17 | % | 0.09 | % | 0.22 | % |
(1) | Historical and environmental component as a percentage of non-impaired loans. | |
(2) | Nonaccrual loans and loans past due 90 or more days still accruing interest as a percentage of gross loans. |
At June, 2011 the following loan concentrations exceeded 10% of total loans: 1-4 family
residential loans, real estate construction loans, and commercial real estate. Management does not
believe that this loan concentration presents an abnormally high risk. Loan concentrations are
amounts loaned to a multiple number of borrowers engaged in similar activities which would cause
them to be similarly impacted by economic or other conditions.
Interest income on loans is discontinued at the time the loan is 90 days delinquent unless the loan
is well-secured and in process of collection. Past due status is based on the contractual terms of
the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if
collection of principal or interest is considered doubtful.
The following table presents information regarding loans included as nonaccrual and the gross
income that would have been recorded in the six month and three month periods ended June 30, 2011
and 2010 if the loans had been current:
Six months ended | Three months ended | |||||||||||||||
June 30, 2011 | June 30, 2010 | June 30, 2011 | June 30, 2010 | |||||||||||||
Nonaccrual interest |
$ | 2,764 | $ | 938 | $ | 749 | $ | 42 | ||||||||
Troubled debt
restructurings
interest |
138 | 83 | 104 | 50 |
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Table of Contents
RESULTS OF OPERATIONS (Continued)
Noninterest Income
Total noninterest income for the first six months of 2011 was $1,896, a decrease of $235, or 11.0%
from $2,131 for the same period in 2010. The decrease is primarily due to a reduction in gain on
sale of securities available for sale, offset by an increase in gain on sale of loans.
The reduction in gain on sale of securities available for sale is due to the Bank selling no
securities during the first six months of 2011. The Bank sold a group of securities during the
first six months of 2010 that resulted in a gain on sale of $315.
Gain on sale of loans is comprised of two main components, secondary market sales of traditional
single family mortgages, and sales of Small Business Association (SBA) guaranteed commercial
loans. Income recognized from sale of traditional single family mortgages totaled $129 for the
first six months of 2011 compared to $297 for the same period in 2010. The reduction in income is
due to a reduction in demand for refinance activity and continued low sales activity in the housing
market. For the three month period ended June 30, 2011, the Bank recorded income of $64 on sales of
traditional single family mortgages compared to $174 for the same period in 2010.
The decrease in mortgage activity was also impacted by a restructuring of the Banks mortgage
banking operations that occurred in the first quarter of 2011. Mortgage banking activities have
historically produced significant revenue for the Bank however, operations, additional regulatory
requirements, and potential for recourse losses have prevented the Bank from operating the service
line profitably. During the first quarter of 2011 the Bank partnered with a third-party mortgage
originator to continue offering residential mortgage products to our customers while moving much of
the overhead and a portion of the revenue to the third party. Due to this new partnership, the
Bank believes it is relieved of significant regulatory reporting requirements and potential
recourse losses. The restructuring of the product line also eliminated 5 full time employee
positions at the Bank, resulting in significant future cost savings. Management expects the
reduction in revenue in future periods will be more than offset by the overhead cost savings
allowing the product line to contribute to net income.
The Bank recorded gains of $289 during the first six months of 2011 compared to $123 for the same
period in 2010 related to the sale of SBA-guaranteed commercial loans. The guaranteed portions of
the loans were sold at a premium, resulting in the recorded gain. The Bank has begun pursuing
additional opportunities to originate new SBA-guaranteed loans. In general, managements intent is
to sell the guaranteed portion of SBA loans with servicing rights retained, though occasionally the
guaranteed portion may be held in the Banks portfolio.
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RESULTS OF OPERATIONS (Continued)
The table below shows noninterest income for the six month and three month periods ended June 30,
2011 and 2010.
Six Months Ended | Three Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Service charge on deposit accounts |
$ | 919 | $ | 885 | $ | 482 | $ | 452 | ||||||||
Gain on sale of loans |
418 | 297 | 132 | 174 | ||||||||||||
Gain on sale of securities available for sale |
| 315 | | | ||||||||||||
Other: |
||||||||||||||||
Investment service income |
165 | 249 | 53 | 157 | ||||||||||||
Check printer income |
13 | 15 | 7 | 8 | ||||||||||||
Safe deposit box rental |
16 | 16 | 7 | 7 | ||||||||||||
Credit life insurance commissions |
4 | 4 | 3 | 3 | ||||||||||||
Bank Owned Life Insurance income |
146 | 162 | 73 | 80 | ||||||||||||
ATM income |
66 | 57 | 34 | 28 | ||||||||||||
Other customer fees |
34 | 28 | 15 | 16 | ||||||||||||
Other equity investment income |
2 | 1 | | | ||||||||||||
Other service charges, commissions and fees |
113 | 102 | 86 | 60 | ||||||||||||
Total noninterest income |
$ | 1,896 | $ | 2,131 | $ | 892 | $ | 985 | ||||||||
Noninterest Expense
Noninterest expense for the first six months of 2011 was $9,921, an increase of $250, or 2.6% from
the same period in 2010. The increase is primarily due to an increase in other real estate
expense, offset by small decreases in several expense categories.
Other real estate expense is composed of three types of charges: maintenance, marketing and selling
costs; valuation adjustments based on new appraisals; and gains or losses on disposition. Other
real estate expenses increased $766, or 361.3%, to $978 for the six months ended June 30, 2011
compared to $212 for the same period in 2010. Maintenance, marketing, and selling costs totaled
$343, valuation adjustments based on new appraisals totaled $544, and losses on sale of other real
estate totaled $91 in the first six months of 2011. The valuation adjustments relate to two
specific high-value residential properties. Market values for homes in that category have
continued to experience significant declines in the Banks market area. Market values for homes at
or below the median
home price have begun to level off. The majority of the Banks residential other real estate is in
this more stable category. Management currently does not expect significant amounts of additional
adjustments based on new appraisals during 2011; however if market conditions and real estate
values deteriorate further, additional losses could be incurred. The balance of other real estate
owned (excluding adjustments for loans to facilitate the purchase of foreclosed properties and bank
properties) increased 15.0% to $12,906 at June 30, 2011 compared to $11,224 at December 31, 2010.
Management has been focused on reducing noninterest expenses wherever possible. Those efforts
have resulted in reductions in expense in several categories. The most significant decrease is in
salaries and employee benefits, which decreased $289 to $4,352 for the first six months of 2011
compared to $4,641 for the same period in 2011. The reduction in expense is primarily due to a
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RESULTS OF OPERATIONS (Continued)
reduction in workforce that occurred in the first quarter of 2011. The reduction in workforce
affected approximately 10% of the Banks full time employees, with reductions affecting most
departments, but most significantly impacting the mortgage banking department as discussed above.
Management anticipates a gross annual savings of approximately $900 as a result of the reductions,
with a portion of that savings being offset by regular salary increases for remaining employees.
In addition to the reduction in workforce, mortgage loan production has resulted in lower mortgage
commissions in the first six months of 2011. The Bank anticipates that it will incur additional
expense in the second half of 2011 associated with its compliance with the anticipated regulatory
consent order described in Note 9 to the financial statements, including additional legal and
consultant expenses.
Noninterest expense for the three months ended June 30, 2011 was $4,987, an increase of $66, or
1.3%, from $4,921 for the same period in 2010. The increase is primarily due to increase in other
real estate expense, offset by a decrease in salaries and employee benefits and small decreases in
several expense categories, similar to the factors noted for the six month period.
The table below shows noninterest expense for the six month and three month periods ended June 30,
2011 and 2010:
Six Months Ended | Three Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Salaries and employee benefits |
$ | 4,352 | $ | 4,641 | $ | 2,079 | $ | 2,345 | ||||||||
Regulatory and compliance |
736 | 635 | 359 | 337 | ||||||||||||
Occupancy |
757 | 750 | 377 | 369 | ||||||||||||
Furniture and equipment |
377 | 450 | 187 | 245 | ||||||||||||
Data processing fees |
615 | 475 | 306 | 263 | ||||||||||||
Advertising and public relations |
193 | 310 | 112 | 170 | ||||||||||||
Operational expense |
221 | 400 | 107 | 186 | ||||||||||||
Other real estate expense |
978 | 212 | 718 | 107 | ||||||||||||
Other: |
||||||||||||||||
Loan expense |
91 | 214 | 53 | 103 | ||||||||||||
Legal |
105 | 33 | 65 | 18 | ||||||||||||
Audit and accounting fees |
254 | 259 | 121 | 160 | ||||||||||||
Postage and freight |
175 | 170 | 88 | 84 | ||||||||||||
Director expense |
111 | 112 | 50 | 50 | ||||||||||||
ATM expense |
272 | 262 | 142 | 137 | ||||||||||||
Amortization of intangible asset |
122 | 141 | 61 | 71 | ||||||||||||
Other insurance expense |
116 | 96 | 58 | 47 | ||||||||||||
Printing |
56 | 37 | 30 | 21 | ||||||||||||
Other employee expenses |
91 | 123 | 31 | 61 | ||||||||||||
Dues & memberships |
42 | 35 | 22 | 17 | ||||||||||||
Miscellaneous chargeoff (recovery) |
(1 | ) | | (1 | ) | (24 | ) | |||||||||
Miscellaneous taxes and fees |
41 | 53 | 15 | 30 | ||||||||||||
Federal Reserve and other bank charges |
23 | 19 | 9 | 11 | ||||||||||||
Other |
194 | 244 | 83 | 113 | ||||||||||||
Total noninterest expense |
$ | 9,921 | $ | 9,671 | $ | 5,072 | $ | 4,921 | ||||||||
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RESULTS OF OPERATIONS (Continued)
Income Taxes
Due to the current economic condition and losses recognized since the fourth quarter of 2008, the
Company established during 2010 a valuation allowance against materially all of its deferred tax
assets. 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.
During the first six months of 2011, the Company reported additional net losses. As a result, the
Company recorded no income tax expense during the quarter.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity refers to the Companys ability to fund loan demand, meet deposit customers withdrawal
needs and provide for operating expenses. As summarized in the Consolidated Statements of Cash
Flows, the Banks main source of cash flow is from receiving deposits from its customers and, to a
lesser extent, repayment of loan principal and interest income on loans and investments, FHLB
advances, and federal funds purchased.
During the first quarter of 2010, the Bank was subject to a joint examination by the FDIC and
the Tennessee Department of Financial Institutions (TDFI). During the third quarter of 2010, the
Bank received a final report from the examination and notification of an informal regulatory action
in the form of an informal memorandum of understanding (MOU) between the Company, the FDIC, and
TDFI. The MOU, which the Bank entered into on October 19, 2010, required the Bank to achieve by
March 31, 2011 and maintain thereafter regulatory capital ratios higher than those required under
current regulatory capital guidelines. The required ratios are 8.0% for tier 1 capital to average
assets, 10.0% for tier 1 capital to risk weighted assets, and 12.0% for total capital to risk
weighted assets. The MOU also restricted the Bank from paying any dividends to the Company if the
dividend would cause the Banks regulatory capital ratios to fall below the MOU-required ratios.
The Bank failed to attain the required capital ratios as of March 31, 2011 and June 30, 2011.
Based on the June 30, 2011 levels of average assets and risk-based assets, the shortfall between
the required level of capital to meet all of the MOU requirements was approximately $12,300. The
Bank was also required to implement additional programs to improve the overall asset quality and
reduce exposure to problem assets. As a result of its most recent examination, the Bank has been
advised that it will be required to enter into a consent order with the FDIC, and that
the consent order could contain a requirement for the Bank to ultimately achieve Tier 1 capital to
average assets of 9.0% as well as Tier 1 capital to risk weighted assets of 10% and total capital
to risk weighted assets of 12%. Once this consent order is issued, the Bank will be prohibited from paying interest on
deposits above certain federally prescribed rate Caps and will not be able to renew, accept, or roll over brokered deposits, except in each case, with the consent of the FDIC.
At the request of the Federal Reserve Bank (FRB) the board of directors adopted, in the first
quarter of 2011, a resolution agreeing that the Company will not incur additional debt, pay common
or preferred dividends, or redeem treasury stock without prior approval from the FRB. The Company
requested permission to make preferred dividend payments and interest payments on subordinated debt
that were scheduled for the first quarter of 2011. The FRB granted permission to pay the preferred
dividends that were due on February 15, 2011, but denied permission to make interest payments on
the Companys subordinated debt. As a result of the FRBs decision, the Company was required to
defer interest payments on each of its three subordinated debentures (related to its trust
preferred securities) beginning during the first quarter of 2011, which deferral continued during the Second quarter of 2011. The Company has the right to defer the
payment of interest on the subordinated debentures at any time, for a period not to
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exceed 20 consecutive quarters. During the deferral period, the Company cannot pay any dividends
on its common or preferred stock. Accordingly, the Company was required to suspend its dividend
payments on its fixed rate cumulative perpetual preferred stock beginning in the second quarter of
2011. Because of its recent losses, the Company does not anticipate it will be able to resume
preferred dividends or subordinated debt interest payments in the near future, and believes that it
may be required to enter into a written agreement with the FRB with terms similar to the above-described board
resolution.
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Table of Contents
LIQUIDITY AND CAPITAL RESOURCES (Continued)
The Companys principal source of funds for dividend payments is dividends received from the Bank.
As a result of its losses in the first six months of 2011 and in 2010 and 2009, the Bank is prohibited under applicable Tennessee
banking law from declaring dividends, without prior approval from the TDFI and FDIC. The terms of
the MOU with the FDIC and TDFI also prohibit the Bank from paying dividends to the Company if its
capital levels are below the minimum levels set out in the agreement. The minimum levels outlined
in the agreement were: total capital to risk weighted assets, 12.00%; tier 1 to risk weighted
assets, 10.00%; and tier 1 to average assets, 8.00%. The Bank agreed to achieve and maintain the
higher capital ratios by March 31, 2011. Because the Banks capital levels at March 31, 2011 and
June 30, 2011 were below those that it had committed to the TDFI and FDIC it would maintain, the
Bank will be required to take actions to increase its capital levels and/or shrink its asset levels
to achieve the required ratios. The Company is currently considering the options available to it
to increase capital ratios at the Bank, including through the sale of common or preferred stock of
the Company or the sale of certain branch locations or other assets, or alternatively the sale of
the Company. Any sale of the Companys common stock would likely be at a price that would result
in substantial dilution for the Companys existing common shareholders and could result in a change
of control in the Company. The Company is unlikely to be able to pay any dividends for the
foreseeable future as a result of its informal commitment to the FRB and the suspension of
dividends on the Senior Preferred and Warrant Preferred shares and of interest on its subordinated
debentures related to its trust preferred securities.
The primary uses of cash are lending to the Companys borrowers and investing in securities and
short-term interest-earning assets. During 2010, regular loan repayments outpaced loan demand,
resulting in a decrease in gross loans and contributing to the increase in cash and cash
equivalents. During the first six months of 2011, this trend continued, though to a lesser extent.
Management anticipates loan demand to remain weak during the remainder of 2011, likely resulting
in further decreases in gross loans. As such, loan repayments are likely to be a significant
source of cash for the remainder of 2011. Other sources of liquidity that are available to the Bank
include national market and broker deposits, FHLB advances, and federal funds purchased.
At June 30, 2011, we had unfunded loan commitments outstanding of $36,986 and unfunded letters of
credit of $3,687. Because these commitments generally have fixed expiration dates and many will
expire without being drawn upon, the total commitment level does not necessarily represent future
cash requirements. If we needed to fund these outstanding commitments, we have the ability to
liquidate federal funds sold or securities available for sale or on a short-term basis to borrow
and purchase federal funds from other financial institutions. Additionally, we could sell
participations in these or other loans to correspondent banks.
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Table of Contents
LIQUIDITY AND CAPITAL RESOURCES (Continued)
At June 30, 2011 and December 31, 2010, the Banks and the Companys risk-based capital ratios and
the minimums to be considered well-capitalized under the Federal Reserve Boards prompt corrective
action guidelines and the ratios required by the Banks MOU with the FDIC were as follows:
To Be Considered | ||||||||||||||||||||||||||||||||
Well Capitalized | ||||||||||||||||||||||||||||||||
Under | ||||||||||||||||||||||||||||||||
For Capital | Applicable | Required by Terms | ||||||||||||||||||||||||||||||
Actual | Adequacy Purposes | Regulations | of MOU with FDIC | |||||||||||||||||||||||||||||
June 30, 2011 | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||
Total Capital to risk
weighted assets |
||||||||||||||||||||||||||||||||
Bank |
$ | 46,048 | 9.69 | % | $ | 38,031 | 8.00 | % | $ | 47,539 | 10.00 | % | $ | 52,274 | 12.00 | % | ||||||||||||||||
Consolidated |
46,846 | 9.83 | % | 38,115 | 8.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
Tier 1 to risk weighted
assets |
||||||||||||||||||||||||||||||||
Bank |
$ | 39,946 | 8.40 | % | $ | 19,015 | 4.00 | % | $ | 28,523 | 6.00 | % | $ | 47,539 | 10.00 | % | ||||||||||||||||
Consolidated |
24,569 | 5.16 | % | 19,058 | 4.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
Tier 1 to average assets |
||||||||||||||||||||||||||||||||
Bank |
$ | 39,946 | 6.11 | % | $ | 26,137 | 4.00 | % | $ | 32,671 | 5.00 | % | $ | 57,046 | 8.00 | % | ||||||||||||||||
Consolidated |
24,569 | 3.75 | % | 26,241 | 4.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
December 31, 2010 |
||||||||||||||||||||||||||||||||
Total Capital to risk
weighted assets |
||||||||||||||||||||||||||||||||
Bank |
$ | 50,066 | 10.14 | % | $ | 39,508 | 8.00 | % | $ | 49,385 | 10.00 | % | N/A | N/A | ||||||||||||||||||
Consolidated |
52,220 | 10.57 | % | 39,538 | 8.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
Tier 1 to risk weighted
assets |
||||||||||||||||||||||||||||||||
Bank |
$ | 43,745 | 8.86 | % | $ | 19,754 | 4.00 | % | $ | 29,631 | 6.00 | % | N/A | N/A | ||||||||||||||||||
Consolidated |
31,123 | 6.30 | % | 19,770 | 4.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
Tier 1 to average assets |
||||||||||||||||||||||||||||||||
Bank |
$ | 43,745 | 6.44 | % | $ | 27,159 | 4.00 | % | $ | 33,949 | 5.00 | % | N/A | N/A | ||||||||||||||||||
Consolidated |
31,123 | 4.57 | % | 27,259 | 4.00 | % | N/A | N/A | N/A | N/A | ||||||||||||||||||||||
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management uses a gap simulation model that takes cash flows into consideration. These include
mortgage backed securities, loan prepayments, and expected calls and maturities on securities.
Non-maturing balances such as money markets, savings, and NOW accounts have no contractual or
stated maturities. A challenge in the rate risk analysis is to determine the impact of the
non-maturing balances on the net interest margin as the interest rates change. Because these
balances do not mature, it is difficult to know how they will reprice as rates change. It is
possible to glean some understanding by reviewing the Banks pricing history on these categories
relative to interest rates. Using the interest rate history from our asset liability management
software database spanning up to 20 quarters of data, we derive the relationship between interest
rates changes and the offering rates themselves. The analysis uses the T-Bill rate as an indicator
of rate changes. The gap analysis uses beta factors to spread balances to reflect repricing speed.
In the gap analysis, the model considers deposit rate movements to determine what percentage of
interest bearing deposits is actually repriceable within a year. Our cumulative one-year gap
position at June 30, 2011 was -4.91% of total assets. Our policy states that our one-year
cumulative gap should not exceed 20% of total assets.
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Table of Contents
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued)
As of June 30, 2011, approximately $398,583 of $580,341 in interest earning assets will reprice or
mature within one year. Loans maturing or repricing within one year total $336,400, or 70.61%, of
total loans, including loans held for sale, at June 30, 2010. The Bank has approximately $293,692
in time deposits maturing or repricing within one year.
Gap analysis only shows the dollar volume of assets and liabilities that mature or reprice. It
does not provide information on how frequently they will reprice. To more accurately capture the
Companys interest rate risk, we measure the actual effects the repricing opportunities have on
earnings through income simulation models such as rate shocks of economic value of equity and rate
shock interest income simulations.
To truly evaluate the impact of rate change on income, we believe the rate shock simulation of
interest income is the best technique because variables are changed for the various rate
conditions. The interest income change in each category of earning assets and liabilities is
calculated as rates ramp up and down. In addition, the prepayment speeds and repricing speeds are
changed. Rate shock is a method for stress testing the net interest margin over the next four
quarters under several rate change levels. These levels span four 100 basis point increments up
and down from the current interest rate. Our policy guideline is that the maximum percentage
change in net interest income cannot exceed plus or minus 10% on a 100 basis point interest rate
change and cannot exceed plus or minus 15% on a 200 basis point interest rate change.
Although interest rates are currently very low, the Company believes a -200 basis point rate shock
is an effective and realistic test since interest rates on many of the Companys loans still have
the ability to decline 200 basis points. For those loans that have floors above the -200 basis
point rate shock, the interest rate would be at the floor rate. All deposit account rates would
likely fall to their floors under the -200 basis point rate shock as well. This simulation
analysis assumes that NOW and savings accounts have a lower correlation to changes in market
interest rates than do loans, securities, and time deposits.
The following illustrates the effects on net interest income of shifts in market interest rates
from the rate shock simulation model:
June 30, 2011 | ||||||||||||||||
Basis Point Change |
+200 bp | +100bp | -100bp | -200bp | ||||||||||||
Increase (decrease) in net interest income |
3.35 | % | 0.80 | % | (1.43 | %) | (10.02 | %) |
Our Economic Value of Equity simulation measures our long-term interest rate risk. The
economic value is the difference between the market value of assets and liabilities. The technique
is to apply rate changes and compute the resulting economic value. The slope of the change between
shock levels is a measure of the volatility of value risk. The slope is called duration. The
greater the slope, the greater the impact of rate change on the Banks long-term performance. Our
policy guideline is that the maximum percentage change on economic value of equity cannot exceed
plus or minus 10% on a 100bp change and cannot exceed plus or minus 20% on a 200bp change.
June 30, 2011 | ||||||||||||||||||||||||||||
Basis Point Change |
+200 bp | +100bp | -100bp | -200bp | ||||||||||||||||||||||||
Increase (decrease) in equity at risk |
3.57 | % | 3.34 | % | (0.0.53 | %) | 4.12 | % |
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Table of Contents
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued)
One of managements objectives in managing the Banks balance sheet for interest rate sensitivity
is to reduce volatility in the net interest margin by matching, as closely as possible, the timing
of the repricing of its interest rate sensitive assets with interest rate sensitive liabilities.
ITEM 4. CONTROLS AND PROCEDURES
The Company, with the participation of its management, including the Companys Chief Executive
Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design
and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the Exchange Act)) as of the end of the period covered
by this Report.
Based upon that evaluation and as of the end of the period covered by this Report, the Companys
Chief Executive Officer and Chief Financial Officer concluded that, as a result of the material
weakness described below and in the Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2010, filed with the SEC on April 15, 2011 (the 2010 Form 10-k), the Companys
disclosure controls and procedures were not effective to ensure information required to be
disclosed in reports the Company files or submits to the Securities and Exchange Commission under
the Exchange Act is recorded, processed, summarized, and reported timely.
Changes in Internal Control Over Financial Reporting
Managements assessment of the internal control over financial reporting at December 31, 2010,
identified a material weakness in the Companys internal control over financial reporting related
to the determination of the allowance for credit losses which remains as of June 30, 2011. The
deficiencies contributing to the material weakness related to grading of loans used in the
determination of the allowance for credit losses.
There have been no changes in the Companys internal control over financial reporting that occurred
during the period covered by this report that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting, except for the
remediation efforts management commenced in the first quarter of 2011 related to the
above-described material weakness. Following managements determination of this material weakness,
management began to take the following remedial actions:
| Development of a strategy for criticized loans concerning monitoring, detailed documentation of status, grading, and impairment analysis. This will include revisions to the current forms used to document criticized loans and enhancing the monitoring process to increase efficiency and effectiveness. | ||
| Review of the existing Credit Policy by an independent third-party and lender training on the updated Policy. | ||
| Additional credit personnel will be added. | ||
| Increased coverage and focus for independent and in-house loan review function. |
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ITEM 4. CONTROLS AND PROCEDURES (Continued)
| Review of information presented to the Board regarding credit quality to ensure the Board is receiving adequate and accurate information concerning significant problem loans and potentially problematic portfolios. |
Management anticipates these remedial actions will strengthen the Companys internal control over
financial reporting and will address the material weakness described above. Because some of these
remedial actions will take place quarterly, their successful implementation will continue to be
evaluated before management is able to conclude the material weakness has been remediated. The
Company cannot provide any assurance these remediation efforts will be successful or the Companys
internal control over financial reporting will be effective as a result of these efforts.
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Table of Contents
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 1A. RISK FACTORS
Except as set forth below, there have been no material changes in our Risk Factors as
previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010.
The results of the Banks recent regulatory examinations
may result in the issuance of a formal enforcement action against the Bank that may negatively impact the Banks and the
Companys operations, liquidity and capital resources.
During the second quarter of 2011, the Bank received notice from
the FDIC, following the most recently completed joint safety and soundness examination by the FDIC and the TDFI, that the
FDIC was pursuing the issuance of a consent order against the Bank. The Bank is seeking to negotiate the terms of this
formal enforcement action with the FDIC, and while the final terms of the consent order are not currently known, the
Company believes that it may contain requirements somewhat more restrictive than those that the Bank has already
committed to comply with in the MOU, including a requirement to maintain certain of the Banks capital ratios
above the levels required in the MOU. It is likely that the consent order will also include requirements that the Bank,
among other things, (i) improve the management and oversight of the Bank; (ii) institute a plan for the reduction of
charge-offs and classified assets; (iii) restrict its advances to certain classified borrowers; and (iv) implement a plan
for the reduction of certain loan concentrations. Because the consent order will constitute a formal enforcement action
requiring the Bank to maintain specified capital levels above those required to be well-capitalized under the
prompt corrective action provisions of the FDICIA, the Bank will, if the order is issued, be subject to additional
limitations on its operations including its ability to pay interest on deposits above certain national rate caps and its
ability to accept, rollover or renew brokered deposits, which could adversely affect the Banks liquidity and/or
operating results. Limits on the Banks ability to accept, renew or rollover brokered deposits could also cause
funding constraints that could limit the Banks ability to grow its asset base. If the Bank fails to comply with the
requirements of the consent order, after it is issued, it may be subject to further regulatory action. The FDIC and the
TDFI each has broad authority to take additional actions against the Bank, including assessing civil fines and penalties,
issuing additional consent or cease and desist orders and removing
officers and directors.
The Bank also believes that as a result of its recent regulatory
examination, it is likely that it will be limited in its ability to pay severance payments to its employees and will be
required to receive the consent of the FDIC and TDFI to appoint new
executive officers or directors.
The Banks capital levels are below those levels that
the Bank committed to maintain in the MOU and below those levels that the Bank expects that it will be required to
maintain by the consent order and written agreement being sought by
the FDIC.
The terms of the MOU require that the Bank maintain a ratio of
Tier 1 capital to average assets of at least 8%; a ratio of Tier 1 capital to risk-weighted assets of at least 10%; and a
ratio of total capital to risk-weighted assets of at least 12%. The Bank believes that the minimum capital maintenance
requirements that will be included in the consent order being sought by the FDIC will be
respectively 9%, 10% and 12%. At June 30, 2011, none of the Banks capital levels exceeded the minimum amounts that
it had committed to maintain in the MOU and that it expects it will be required to maintain under the terms of the
consent order and written agreement. The Company does not have sufficient capital available to contribute to the Bank to
aid the Bank in meeting its commitments, and, accordingly, is currently considering the options available to it to
increase capital levels at the Bank, including through the sale of common or preferred stock of the Company or the sale
of certain branch locations or other assets, or alternatively the sale of the Company. Any sale of the Companys
common stock would likely be at a price that would result in substantial dilution in ownership for the Companys
existing common shareholders and could result in a change in control of the Company. While the Company had previously
been considering raising capital through participation in the Small Business Lending Fund, the Company now believes that
it will not qualify for participation in the program as a result of guidelines issued by the U.S. Treasury in May 2011
that effectively prohibit the participation of entities that, like the Company, are required to obtain prior regulatory
approval in order to pay dividends as more fully discussed above. As a result of the new guidelines, the Company does
not currently anticipate it will participate in the SBLF.
As the Banks capital levels decline, the amounts that
it can lend any one borrower is reduced.
At June 30, 2011, the Banks legal lending limit under
applicable regulations (based upon the maximum legal lending limits of 25% of capital and surplus) was $10,312. As the
Banks capital levels have declined, its legal lending limit has been reduced. If the legal lending limit is reduced
below the level of credit, including lines of credit, that the Bank has extended to a borrower, it can no longer renew or
continue undrawn credit lines or make additional loans or advances to its largest borrower relationships, and its ability
to renew outstanding loans to such customers is extremely limited. Additionally, if the Bank seeks to reduce the amount
of credit that it has extended to a particular borrower because of a reduction in its legal lending limit, the borrower
may decided to move its loan relationships to another financial institution with legal lending limits high enough to
accommodate the borrowers relationships. A loss of loan customers as a result of being subject to lower lending
limits, could negatively impact the Banks liquidity and results
of operations.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. REMOVED AND RESERVED
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
Exhibit | ||||
Number | Description | |||
31.1 | Certification
of President pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|||
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|||
32.1 | Certification
of President pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|||
32.2 | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|||
101 | Interactive
Data File |
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Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
Community First, Inc. (Registrant) |
||||
August 15, 2011 | /s/ Louis E. Holloway | |||
(Date) | Louis E. Holloway, | |||
President | ||||
August 15, 2011 | /s/ Dianne Scroggins | |||
(Date) | Dianne Scroggins, | |||
Chief Financial Officer | ||||
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