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Table of Contents

 
 
UNITED STATES
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
(Registrant’s Telephone Number, Including Area Code)
None
(Former Name, Address and Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 issuer’s 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.
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 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
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 EX-101 DEFINITION LINKBASE DOCUMENT

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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Community First, Inc.
Consolidated Balance Sheets
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  
 

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Community First, Inc.
Consolidated Balance Sheets
June 30, 2011 (Unaudited) and December 31, 2010

(Continued)
Consolidated Balance Sheets
                 
    (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.

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Community First, Inc.
Consolidated Statements of Operations and Comprehensive Income (Loss)
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 )

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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)
                                 
    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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Community First, Inc.
Consolidated Statement of Changes in Shareholders’ Equity and Comprehensive Income
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,  
(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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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,  
(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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COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
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 Company’s 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 management’s judgment, should be charged off.
The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.
A loan is 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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COMMUNITY FIRST, INC.
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 borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
Commercial and commercial real estate loans over $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 loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures. Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
The general component 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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COMMUNITY FIRST, INC.
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 borrower’s ability to repay the loans and the value of the real estate securing the loans can change over the life of the loan.
Commercial Real Estate loans 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.

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COMMUNITY FIRST, INC.
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 Creditor’s 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 borrower’s 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 FASB’s 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.

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COMMUNITY FIRST, INC.
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.

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COMMUNITY FIRST, INC.
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
           

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COMMUNITY FIRST, INC.
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 )
 
                                   

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COMMUNITY FIRST, INC.
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

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Table of Contents

COMMUNITY FIRST, INC.
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 investment’s amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.
As of June 30, 2011, the Company’s security portfolio consisted of 92 securities, 12 of which were in an unrealized loss position. The majority of unrealized losses are related to the Company’s corporate securities, as discussed below:
Corporate Securities
The Company’s 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. Management’s 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.

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COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 4. FAIR VALUE (Continued)
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:
Investment Securities: The fair values 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.

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COMMUNITY FIRST, INC.
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        

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Table of Contents

COMMUNITY FIRST, INC.
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  

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Table of Contents

COMMUNITY FIRST, INC.
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.

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COMMUNITY FIRST, INC.
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.

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Table of Contents

COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 5. LOANS
Set forth below is a table of the Company’s 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  

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Table of Contents

COMMUNITY FIRST, INC.
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 Company’s 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  
 
                                                           

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Table of Contents

COMMUNITY FIRST, INC.
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  
 
                                                           

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Table of Contents

COMMUNITY FIRST, INC.
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  

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Table of Contents

COMMUNITY FIRST, INC.
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  
 
                                   

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Table of Contents

COMMUNITY FIRST, INC.
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  

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Table of Contents

COMMUNITY FIRST, INC.
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  

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Table of Contents

COMMUNITY FIRST, INC.
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     $  
 
                       

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Table of Contents

COMMUNITY FIRST, INC.
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  
 
                                   

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COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
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 borrower’s 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 borrower’s margins have decreased or are decreasing, despite the borrower’s continued satisfactory condition. Other characteristics of borrowers in this class include inadequate credit information, weakness of financial statement and repayment capacity, but with collateral that appears to limit the Bank’s 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 management’s close attention. If left uncorrected, these potential weaknesses may result in deteriorating prospects for the repayment source or in the Bank’s 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 Bank’s portfolio. Credit quality information related to impaired loans was presented above and is excluded from the tables below.

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COMMUNITY FIRST, INC.
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     $  
 
                             

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COMMUNITY FIRST, INC.
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.

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COMMUNITY FIRST, INC.
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 Bank’s 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 Company’s subordinated debt. As a result of the FRB’s decision, the Company was required to begin the deferral of interest payments on each of its three subordinated debentures during the first quarter of 2011. The Company has the right to defer the payment of interest on 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.

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COMMUNITY FIRST, INC.
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 Company’s common stock would likely be at a price that would result in substantial dilution in ownership for the Company’s existing common shareholders and could result in a change in control of the Company. 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 Company’s 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 Bank’s 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.

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COMMUNITY FIRST, INC.
Notes to Consolidated Financial Statements
June 30, 2011
(Unaudited)
NOTE 8. REGULATORY MATTERS (Continued)
At June 30, 2011 and December 31, 2010, the Bank’s and the Company’s risk-based capital ratios and the minimums to be considered well-capitalized under the Federal Reserve Board’s prompt corrective action guidelines and the ratios required by the Bank’s 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  

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
(amounts in thousands, except share and per share data)
The following discussion compares the financial condition of 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 Company’s 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;

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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.

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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 Bank’s 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 Bank’s net interest margin. As a result, when market rates begin to rise, loans at their floor will not reprice at higher rates until market rates rise above their contractual floor rates. Only the loans noted above that have variable rates not at a floor rate will reprice with the first increase in market rates. The existence of these rate floors may negatively impact our net interest margin when rates begin to rise, at least until rates rise above these floors.
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 Bank’s 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 Company’s 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 Company’s 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 Bank’s investments and believes any

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FINANCIAL CONDITION (Continued)
unrealized losses that exist in the Bank’s 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 Bank’s 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 Bank’s 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 management’s efforts to reduce reliance on non-core funding sources.

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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 Bank’s overall liquidity position as well as net interest income and to continue to reduce the Bank’s 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 Bank’s 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. Treasury’s 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. Treasury’s 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

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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 Company’s outstanding preferred shares that were issued to the U.S. Treasury that was due on February 15, 2011. FRB-Atlanta denied the Company’s 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 Company’s 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 Bank’s 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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Management anticipates that these changes will ultimately help to improve the Bank’s 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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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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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 Bank’s market area. During 2010, management was successful at reducing rates for various deposit products while growing the Bank’s 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 Bank’s market area.

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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 Bank’s 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 Bank’s market area improve. If economic conditions in the Bank’s 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.
Management’s 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 Bank’s 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 Bank’s 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 Bank’s 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 Bank’s 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 Bank’s 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 Bank’s impaired loans and chargeoffs during 2011 and 2010.

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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 Bank’s 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 borrower’s margins have decreased or are decreasing, despite the borrower’s continued satisfactory condition. Other characteristics of borrowers in this class include inadequate credit information, weakness of financial statement and repayment capacity, but with collateral that appears to limit the Bank’s 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 management’s close attention. If left uncorrected, these potential weaknesses may result in deteriorating prospects for the repayment source or in the Bank’s credit position in the future.

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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 Bank’s 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 management’s 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, management’s 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 Company’s loan portfolio at June 30, 2011. Market conditions for residential development and residential construction have seen substantial declines

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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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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 Bank’s 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, management’s intent is to sell the guaranteed portion of SBA loans with servicing rights retained, though occasionally the guaranteed portion may be held in the Bank’s 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 Bank’s market area. Market values for homes at or below the median home price have begun to level off. The majority of the Bank’s 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 Bank’s 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 Company’s 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 Bank’s 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 Bank’s 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 Company’s subordinated debt. As a result of the FRB’s 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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LIQUIDITY AND CAPITAL RESOURCES (Continued)
The Company’s 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 Bank’s 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 Company’s common stock would likely be at a price that would result in substantial dilution for the Company’s 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 Company’s 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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LIQUIDITY AND CAPITAL RESOURCES (Continued)
At June 30, 2011 and December 31, 2010, the Bank’s and the Company’s risk-based capital ratios and the minimums to be considered well-capitalized under the Federal Reserve Board’s prompt corrective action guidelines and the ratios required by the Bank’s 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 Bank’s 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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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 Company’s 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 Company’s 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 Bank’s 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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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued)
One of management’s objectives in managing the Bank’s 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 Company’s 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 Company’s Chief Executive Officer and Chief Financial Officer concluded that, as a result of the material weakness described below and in the Company’s 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 Company’s 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
Management’s assessment of the internal control over financial reporting at December 31, 2010, identified a material weakness in the Company’s 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 Company’s 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 Company’s 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 management’s 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 Company’s 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 Company’s internal control over financial reporting will be effective as a result of these efforts.

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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 Bank’s recent regulatory examinations may result in the issuance of a formal enforcement action against the Bank that may negatively impact the Bank’s and the Company’s 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 Bank’s 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 Bank’s liquidity and/or operating results. Limits on the Bank’s ability to accept, renew or rollover brokered deposits could also cause funding constraints that could limit the Bank’s 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 Bank’s 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 Bank’s 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 Company’s common stock would likely be at a price that would result in substantial dilution in ownership for the Company’s existing common shareholders and could result in a change in control of the Company. 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 Bank’s capital levels decline, the amounts that it can lend any one borrower is reduced.
At June 30, 2011, the Bank’s legal lending limit under applicable regulations (based upon the maximum legal lending limits of 25% of capital and surplus) was $10,312. As the Bank’s 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 borrower’s relationships. A loss of loan customers as a result of being subject to lower lending limits, could negatively impact the Bank’s 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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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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