COMMUNITY FIRST INC - FORM 10-Q

COMMUNITY FIRST INC - FORM 10-Q - August 7, 2015

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COMMUNITY FIRST INC Reports

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EX-31.2 - EX-31.2 - COMMUNITY FIRST INC	d28657dex312.htm
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EX-31.1 - EX-31.1 - COMMUNITY FIRST INC	d28657dex311.htm
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EX-32.2 - EX-32.2 - COMMUNITY FIRST INC	d28657dex322.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended: June 30, 2015

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

FOR THE TRANSITION PERIOD FROM TO

Commission File Number 000-49966

COMMUNITY FIRST, INC.

(Exact Name of Registrant as Specified in its Charter)


Tennessee		04-3687717
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

501 South James M. Campbell Blvd. Columbia, Tennessee		38401
(Address of Principal Executive Offices)		(Zip Code)

(931) 380-2265

(Registrant’s Telephone Number, Including Area Code)

None

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date. Common stock outstanding (no par value): 3,275,439 shares of common stock, no par value per share, as of August 7, 2015.

COMMUNITY FIRST, INC.

TABLE OF CONTENTS


PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets June 30, 2015 (Unaudited) and December 31, 2014	3

	Consolidated Statements of Operations and Comprehensive Income Six months and three months ended June 30, 2015 and 2014 (Unaudited)	5

	Consolidated Statement of Changes in Shareholders’ Equity Six months ended June 30, 2015 (Unaudited)	7

	Consolidated Statements of Cash Flows Six months ended June 30, 2015 and 2014 (Unaudited)	8

	Notes to Consolidated Financial Statements (Unaudited)	10

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	48

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	73

Item 4.	Controls and Procedures	74

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	75

Item 1A.	Risk Factors	75

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	75

Item 3.	Defaults Upon Senior Securities	75

Item 4.	Mine Safety Disclosures	75

Item 5.	Other Information	75

Item 6.	Exhibits	76

SIGNATURES		77

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PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Community First, Inc.

Consolidated Balance Sheets

June 30, 2015 (Unaudited) and December 31, 2014

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


	June 30,			December 31,
	2015			2014
*Assets*
Cash and due from financial institutions	$	35,026		$	38,256
Time deposits in other financial institutions		20,175			22,177
Securities available for sale, at fair value		101,717			91,440
Loans held for sale, at fair value		162			106
Loans		266,185			256,436
Allowance for loan losses		(4,540	)		(5,171	)

*Net loans*		261,645			251,265

Restricted equity securities, at cost		1,727			1,727
Premises and equipment, net		11,691			11,832
Accrued interest receivable		1,080			1,034
Core deposit and customer relationship intangibles, net		1,008			1,078
Other real estate owned, net		10,226			13,734
Bank owned life insurance		9,997			9,864
Other assets		1,337			1,042

*Total Assets*	$	455,791		$	443,555


*Liabilities and Shareholders’ Equity*
Deposits:
Noninterest-bearing	$	66,546		$	60,780
Interest-bearing		341,048			337,300

*Total Deposits*		407,594			398,080

Subordinated debentures		23,000			23,000
Accrued interest payable		5,392			4,921
Other liabilities		7,613			6,668

*Total Liabilities*		443,599			432,669

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Community First, Inc.

Consolidated Balance Sheets

June 30, 2015 (Unaudited) and December 31, 2014

(Continued)

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


	June 30,			December 31,
	2015			2014

Shareholders’ Equity

Senior Preferred shares, no par value; 9% cumulative. Authorized 2,500,000 shares; 17,806 issued and outstanding with liquidation value of $22,643 at June 30, 2015 and $21,849 at December 31, 2014.		17,806			17,806

Warrant Preferred shares, no par value; 9% cumulative. 890 issued and outstanding with liquidation value of $1,250 at June 30, 2015 and $1,211 at December 31, 2014.		890			890

Total Preferred shares		18,696			18,696

Common stock, no par value; Authorized 10,000,000 shares; 3,275,168 shares issued and outstanding at June 30, 2015 and 3,274,946 shares issued and outstanding at December 31, 2014		28,600			28,591
Accumulated deficit		(33,350	)		(34,957	)
Accumulated other comprehensive loss, net		(1,754	)		(1,444	)

*Total Shareholders’ Equity*		12,192			10,886


*Total Liabilities and Shareholders’ Equity*	$	455,791		$	443,555

See accompanying notes to unaudited consolidated financial statements.

- 4 -

Community First, Inc.

Consolidated Statements of Operations and Comprehensive Income

Six Months and Three Months Ended June 30, 2015 and 2014

(Unaudited)


	Six Months Ended						Three Months Ended
(amounts in thousands, except share and per share data)	June 30,						June 30,
	2015			2014			2015			2014
Interest income
Loans, including fees	$	6,910		$	6,907		$	3,494		$	3,449
Taxable securities		915			899			453			463
Tax-exempt securities		25			47			11			22
Federal funds sold and other		177			150			84			79

*Total interest income*		8,027			8,003			4,042			4,013
Interest expense
Deposits		996			1,145			500			556
Subordinated debentures and other		400			390			203			197

*Total interest expense*		1,396			1,535			703			753

*Net interest income*		6,631			6,468			3,339			3,260
Provision for loan losses		(1,563	)		(800	)		(1,106	)		(300	)

*Net interest income after provision for loan losses*		8,194			7,268			4,445			3,560
Noninterest income
Service charges on deposit accounts		870			854			460			447
Gain on sale of loans		49			22			26			12
Gain on sale of securities available for sale		1			40			—			40
Other		277			316			147			166

*Total noninterest income*		1,197			1,232			633			665
Noninterest expense
Salaries and employee benefits		3,464			3,298			1,731			1,651
Regulatory and compliance		347			532			175			268
Occupancy		477			372			236			226
Furniture and equipment		148			154			74			77
Data processing fees		601			568			305			293
Advertising and public relations		97			102			47			47
Operational expense		241			206			128			106
Other real estate owned expense		253			378			210			139
Other		1,322			1,298			669			620

*Total noninterest expenses*		6,950			6,908			3,575			3,427

*Income before income tax expense*		2,441			1,592			1,503			798

See accompanying notes to unaudited consolidated financial statements.

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Community First, Inc.

Consolidated Statements of Operations and Comprehensive Income

Six Months and Three Months Ended June 30, 2015 and 2014

(Unaudited, Continued)


(amounts in thousands, except share and per share data)	Six Months Ended June 30,						Three Months Ended June 30,
	2015			2014			2015			2014
Income tax expense		—			—			—			—

*Net income*		2,441			1,592			1,503			798
Preferred stock dividends declared		(834	)		(723	)		(419	)		(419	)
Accretion of preferred stock discount		—			(33	)		—			—

Net income available to common shareholders	$	1,607		$	836		$	1,084		$	379

Income per share available to common shareholders
Basic	$	0.49		$	0.26		$	0.33		$	0.12
Diluted		0.49			0.26			0.33			0.12
Weighted average common shares outstanding
Basic		3,275,096			3,274,828			3,275,168			3,274,830
Diluted		3,275,096			3,274,828			3,275,168			3,274,830

Comprehensive Income
Net income	$	2,441		$	1,592		$	1,503		$	798
Reclassification adjustment for realized gains included in net income, net of $0 income taxes		(1	)		(40	)		—			(40	)
Unrealized (losses) gains on securities, net of $0 income taxes		(309	)		1,183			(701	)		785

Comprehensive income	$	2,131		$	2,735		$	802		$	1,543

See accompanying notes to unaudited consolidated financial statements.

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Community First, Inc.

Consolidated Statement of Changes in Shareholders’ Equity

Six Months Ended June 30, 2015

(Unaudited)

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


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

Balance at January 1, 2015		3,274,946	$	18,696	$	28,591	$	(34,957	)	$	(1,444	)	$	10,886
Sale of shares of common stock		222		—		9		—			—			9
Cash dividends declared on preferred stock		—		—		—		(834	)		—			(834	)
Net income		—		—		—		2,441			—			2,441
Reclassification adjustment for realized gains included in net income, net of $0 income taxes		—		—		—		—			(1	)		(1	)
Change in unrealized loss on securities available for sale, net of $0 income tax		—		—		—		—			(309	)		(309	)


Balance at June 30, 2015		3,275,168	$	18,696	$	28,600	$	(33,350	)	$	(1,754	)	$	12,192

See accompanying notes to unaudited consolidated financial statements.

- 7 -

Community First, Inc.

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2015 and 2014

(Unaudited)


(amounts in thousands, except share and per share data )	Six Months Ended June 30,
	2015			2014
Cash flows from operating activities
Net income	$	2,441		$	1,592
Adjustments to reconcile net income to net cash from operating activities
Depreciation		282			271
Amortization on securities, net		422			205
Core deposit intangible amortization		70			69
Reversal of provision for loan losses		(1,563	)		(800	)
Loans originated for sale		(1,749	)		(1,538	)
Proceeds from sale of loans		1,748			1,440
Gain on sale of loans		(49	)		(22	)
(Increase) decrease in accrued interest receivable		(46	)		7
Increase in accrued interest payable		471			308
Increase in surrender value of bank owned life insurance		(133	)		(128	)
Gain on sale of securities		(1	)		(40	)
Net write down of other real estate owned		329			365
Other, net		101			172

Net cash from operating activities		2,323			1,901

Cash flows from investing activities
Available for sale securities
Purchases:
Mortgage-backed securities		(22,186	)		(25,589	)
Other		—			(3,750	)
Sales:
Mortgage-backed securities		1,930			4,077
Other		1,730			7,685
Maturities, prepayments, and calls:
Mortgage-backed securities		7,266			3,782
Other		—			1,010
Net (increase) decrease in loans		(9,064	)		8,096
Proceeds from sales of other real estate owned		3,426			2,028
Decrease (increase) in time deposits in other financial institutions		2,002			(14,952	)
Additions to premises and equipment		(180	)		(1,612	)

Net cash used in investing activities		(15,076	)		(19,225	)

- 8 -

Community First, Inc.

Consolidated Statements of Cash Flows

Six Months Ended June 30, 2015 and 2014

(Unaudited, Continued)


(amounts in thousands, except share and per share data )	Six Months Ended June 30,
	2015			2014
Cash flows from financing activities
Net increase in deposits		9,514			567
Proceeds from issuance of common stock		9			1

Net cash from financing activities		9,523			568

Net decrease in cash and cash equivalents		(3,230	)		(16,756	)
Cash and cash equivalents at beginning of period		38,256			49,036

Cash and cash equivalents at end of period	$	35,026		$	32,280


Supplemental disclosures of cash flow information
Cash paid during year for:
Interest	$	925		$	1,227
Income taxes paid		16			5
Supplemental noncash disclosures
Transfers from loans to repossessed assets		—			414
Preferred stock dividends declared but not paid		834			723
Subordinated debenture interest accrued but not paid		400			390

See accompanying notes to unaudited consolidated financial statements.

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COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

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

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION

The consolidated financial statements include Community First, Inc. and its wholly-owned subsidiary, Community First Bank & Trust. Community First, Inc., together with the Bank, is referred to herein as the “Company.” The sole subsidiary of Community First Bank & Trust is Community First Properties, Inc., which was originally established as a Real Estate Investment Trust (“REIT”) but which terminated its REIT election in the first quarter of 2012. Community First Bank & Trust together with its subsidiary is referred to herein as the “Bank.” Intercompany transactions and balances are eliminated in consolidation.

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

The unaudited consolidated financial statements as of June 30, 2015 and for the six-month and three-month periods ended June 30, 2015 and 2014 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (the “SEC”) and, in the opinion of management, include all adjustments, consisting of normal recurring adjustments, necessary to present fairly the information. They do not include all the information and footnotes required by GAAP for complete financial statements. Operating results for interim periods are not necessarily indicative of the results that may be expected for the entire year. For further information, refer to the 2014 consolidated audited financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on February 27, 2015 (File No. 000-49966) (the “2014 Form 10-K”).

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COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION (Continued)

Critical Accounting Policies:

The consolidated financial statements in this report are prepared in conformity with GAAP and with general practices in the banking industry. As such, we are required to make certain estimates, judgments, and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. A summary of our significant accounting policies is described in our 2014 Form 10-K. The significant accounting policies and estimates which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

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

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

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

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

All loans over $150 that are unlikely to collect under existing terms are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

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COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION (Continued)

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

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

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

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

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

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

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COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION (Continued)

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

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

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

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

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

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COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 2 - SECURITIES AVAILABLE FOR SALE

The following table summarizes the amortized cost and fair value of the available for sale securities portfolio at June 30, 2015 and December 31, 2014 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss), net of applicable income taxes:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value

June 30, 2015
U.S. Government sponsored entities	$	14,118	$	—	$	(141	)	$	13,977
Mortgage-backed (residential)		86,169		309		(537	)		85,941
State and municipal		1,758		41		—			1,799

Total	$	102,045	$	350	$	(678	)	$	101,717


December 31, 2014
U.S. Government sponsored entities	$	15,618	$	—	$	(266	)	$	15,352
Mortgage-backed (residential)		73,576		530		(92	)		74,014
State and municipal		2,012		62		—			2,074

Total	$	91,206	$	592	$	(358	)	$	91,440

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


	Six months ended June 30,
	2015			2014
Proceeds	$	3,660		$	11,762
Gross gains		21			105
Gross losses		(20	)		(65	)

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, 2015
	Amortized Cost		Fair Value
Due in one year or less	$	341	$	346
Due after one through five years		13,137		13,047
Due after five through ten years		1,996		1,968
Due after ten years		402		415
Mortgage backed (residential)		86,169		85,941

Total	$	102,045	$	101,717

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COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 2 - SECURITIES AVAILABLE FOR SALE (Continued)

At June 30, 2015 and December 31, 2014, respectively, securities totaling $41,265 and $41,829 were pledged to secure public deposits.

The Company did not hold securities of any one issuer, other than U.S. Government sponsored entities, with a face amount greater than 10% of shareholders’ equity as of June 30, 2015 or December 31, 2014.

The following table summarizes securities with unrealized losses at June 30, 2015 and December 31, 2014 aggregated by major security type and length of time in a continuous unrealized loss position:


June 30, 2015	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss

U.S. Government sponsored entities	$	991	$	(9	)	$	12,986	$	(132	)	$	13,977	$	(141	)

Mortgage-backed (residential)		43,517		(455	)		4,990		(82	)		48,507		(537	)


Total temporarily impaired	$	44,508	$	(464	)	$	17,976	$	(214	)	$	62,484	$	(678	)


December 31, 2014	Less than 12 Months					12 Months or More					Total
Description of Securities	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss

U.S. Government sponsored entities	$	246	$	(4	)	$	15,106	$	(262	)	$	15,352	$	(266	)
Mortgage-backed (residential)		6,869		(26	)		6,963		(66	)		13,832		(92	)


Total temporarily impaired	$	7,115	$	(30	)	$	22,069	$	(328	)	$	29,184	$	(358	)

- 15 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 2 - SECURITIES AVAILABLE FOR SALE (Continued)

Other-Than-Temporary Impairment

Management evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments – securities in a loss position for less than 12 months and securities in a loss position for 12 months or more – and applying the appropriate OTTI model. Securities classified as available for sale are generally evaluated for OTTI under the provisions of ASC 320-10, Investments - Debt and Equity Securities. In determining OTTI, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.

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

As of June 30, 2015, the Company’s securities portfolio consisted of 99 securities, 48 of which were in an unrealized loss position. Because the decline in fair value is attributable to changes in interest rates and illiquidity, and not credit quality, and because the Company did not have at June 30, 2015 the intent to sell these securities and at that date it was likely that it would not be required to sell the securities before their anticipated recovery, the Company did not consider these securities to be other-than-temporarily impaired at June 30, 2015.

- 16 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 3 - FAIR VALUE

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

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

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

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

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

Investment Securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on matrix pricing which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities’ relationship to other benchmark quoted securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using estimates of current market rates for each type of security.

During times when trading is more liquid, broker quotes are used (if available) to validate the model agency and industry research reports as well as defaults, and deferrals on individual securities are reviewed and incorporated into the calculations.

- 17 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 3 - FAIR VALUE (Continued)

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

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

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

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

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

- 18 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 3 - FAIR VALUE (Continued)

Assets and Liabilities Measured on a Recurring Basis


			Fair Value Measurements at June 30, 2015 using
	Carrying Value		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Available for sale securities:
U.S. government sponsored entities	$	13,977	$	13,977	$	—
Mortgage-backed (residential)		85,941		85,941		—
State and municipals		1,799		1,697		102

Total available for sale securities		101,717		101,615		102
Loans held for sale		162		162		—


			Fair Value Measurements at December 31, 2014 using
	Carrying Value		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Available for sale securities:
U.S. government sponsored entities	$	15,352	$	15,352	$	—
Mortgage-backed (residential)		74,014		74,014		—
State and municipals		2,074		1,971		103

Total available for sale securities		91,440		91,337		103
Loans held for sale		106		106		—

There were no transfers among fair value pricing levels during the six months ended June 30, 2015 and 2014.

- 19 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 3 - 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-month and three-month periods ended June 30, 2015 and 2014:


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	State and County Municipal Securities
	Six months ended June 30,					Three months ended June 30,
	2015			2014		2015			2014
Beginning balance	$	103		$	105	$	103		$	106
Change in fair value		(1	)		—		(1	)		(1	)

Ending balance	$	102		$	105	$	102		$	105

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

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

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

State and Municipal Securities:

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

Corporate Securities:

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

- 20 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 3 - FAIR VALUE (Continued)

Assets and Liabilities Measured on a Non-Recurring Basis

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


	June 30, 2015
	Carrying Value		Fair Value Measurements using other significant unobservable inputs (Level 3)
Assets:
Impaired loans:
1-4 Family residential	$	241	$	241
Commercial real estate		211		211

Total impaired loans		452		452
Other real estate owned:
Construction and development		3,247		3,247
1-4 Family residential		665		665
Non-farm, non-residential		2,622		2,622

Total other real estate owned		6,534		6,534

- 21 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 3 - FAIR VALUE (Continued)


	December 31, 2014
	Carrying Value		Fair Value Measurements using other significant unobservable inputs (Level 3)
Assets:
Impaired loans:
Real estate construction	$	727	$	727
1-4 Family residential		244		244
Commercial real estate		1,410		1,410
Other loans		926		926

Total impaired loans		3,307		3,307
Other real estate owned:
Construction and development		4,815		4,815
1-4 Family residential		710		710
Non-farm, non-residential		3,557		3,557

Total other real estate owned		9,082		9,082

Impaired loans, with specific allocations or partial charge offs based on the fair value of the underlying collateral for collateral dependent loans, had a recorded investment of $518, with a valuation allowance of $66, resulting in no additional provision for loan losses for the six-month period ended June 30, 2015. No additional provision was recorded in the first six months of 2014 on impaired loans. Impaired loans, with specific allocations or partial charge offs based on the fair value of the underlying collateral for collateral dependent loans, had a recorded investment of $3,373, with a valuation allowance of $66, resulting in no additional provision for loan losses for the year ended December 31, 2014.

Other real estate owned, measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $6,534, which is made up of the outstanding balance of $7,845, net of a valuation allowance of $1,311 at June 30, 2015, resulting in a write-down of $166 charged to expense in the six months ended June 30, 2015, compared to a write-down of $221 charged to expense in the first six months of 2014. Net carrying amount was $9,082 at December 31, 2014, which was made up of the outstanding balance of $10,681, net of a valuation allowance of $1,599.

- 22 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 3 - FAIR VALUE (Continued)

The following table presents quantitative information about Level 3 fair value measurements for financial instruments at fair value on a non-recurring basis at June 30, 2015:


	Fair Value		Valuation Technique(s)	Unobservable Input(s)	Range (Weighted Average) (1)
Impaired Loans:
1-4 Family residential	$	241	Sales comparison approach	Adjustment for differences between the comparable sales	(0.0%) - (0.0%) (0.0%)
Commercial real estate	$	211	Sales comparison approach	Adjustment for differences between the comparable sales	(0.0%) - (8.5%) (7.2%)
Other real estate owned:
Construction and development	$	3,247	Sales comparison approach	Adjustment for differences between the comparable sales	(0.0%) - (9.5%) (0.3%)
1-4 Family residential	$	665	Sales comparison approach	Adjustment for differences between the comparable sales	(0.0%) - (10.0%) (4.1%)
Non-farm, non-residential	$	2,622	Sales comparison approach	Adjustment for differences between the comparable sales	(0.0%) - (0.0%) (0.0%)

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

- 23 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 3 - FAIR VALUE (Continued)

Carrying amount and estimated fair values of significant financial instruments at June 30, 2015 and December 31, 2014 were as follows:


	June 30, 2015
	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	34,276	$	34,276	$	34,276	$	—	$	—
Time deposits in other financial institutions		20,175		20,183		—		20,183		—
Securities available for sale		101,717		101,717		—		101,615		102
Loans held for sale, at fair value		162		162		—		162		—
Loans, net of allowance		262,395		255,838		—		—		255,838
Restricted equity securities		1,727		NA		NA		NA		NA
Accrued interest receivable		1,080		1,080		22		294		764
Financial liabilities
Deposits with stated maturities		239,426		240,413		—		240,413		—
Deposits without stated maturities		168,168		168,168		168,168		—		—
Accrued interest payable		5,392		5,392		1		472		4,919
Subordinated debentures		23,000		11,500		—		—		11,500


	December 31, 2014
	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	38,256	$	38,256	$	38,256	$	—	$	—
Time deposits in other financial institutions		22,177		21,999		—		21,999		—
Securities available for sale		91,440		91,440		—		91,337		103
Loans held for sale		106		106		—		106		—
Loans, net of allowance		251,265		246,506		—		—		246,506
Restricted equity securities		1,727		NA		NA		NA		NA
Accrued interest receivable		1,034		1,034		21		269		744
Financial liabilities
Deposits with stated maturities		208,386		209,376		—		209,376		—
Deposits without stated maturities		189,694		189,694		189,694		—		—
Accrued interest payable		4,921		4,921		1		400		4,520
Subordinated debentures		23,000		11,500		—		—		11,500

- 24 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 3 - FAIR VALUE (Continued)

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

NOTE 4 - LOANS

Loans outstanding by category at June 30, 2015 and December 31, 2014 were as follows:


	June 30, 2015		December 31, 2014
Real estate construction:
Residential construction	$	9,809	$	9,382
Other construction		8,846		16,520
1-4 Family residential:
Revolving, open ended		16,041		17,147
First liens		82,732		83,618
Junior liens		1,987		1,926
Commercial real estate:
Farmland		8,203		7,495
Owner occupied		50,440		42,383
Non-owner occupied		53,923		49,455
Other real estate secured loans		8,309		5,825
Commercial, financial and agricultural:
Agricultural		876		855
Commercial and industrial		17,225		14,659
Consumer		6,368		5,641
Tax exempt		24		31
Other		1,402		1,499

	$	266,185	$	256,436

- 25 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 4 – LOANS (Continued)

The following tables present activity in allowance for loan losses and the outstanding loan balance by portfolio segment and are based on impairment methods as of June 30, 2015 and 2014. The balances for “recorded investment” in the following tables related to credit quality do not include approximately $764, $790 and $744 in accrued interest receivable at June 30, 2015, June 30, 2014 and December 31, 2014, respectively. Accrued interest receivable is a component of the Company’s recorded investment in loans.


	Real Estate Construction			1-4 Family Residential			Commercial Real Estate			Other Real Estate Secured Loans			Commercial, Financial and Agricultural			Consumer			Tax Exempt		Other Loans			Unallocated			Total
Six months ended June 30, 2015
Activity in the allowance for loan losses:
Beginning Balance	$	892		$	2,332		$	994		$	22		$	399		$	22		$	—	$	—		$	510		$	5,171
Charge-offs		—			(87	)		—			—			(21	)		—			—		(15	)		—			(123	)
Recoveries		128			69			613			—			228			3			—		14			—			1,055
Provision		(245	)		(298	)		(765	)		—			(192	)		(7	)		—		1			(57	)		(1,563	)

Total ending allowance balance	$	775		$	2,016		$	842		$	22		$	414		$	18		$	—	$	—		$	453		$	4,540


Six months ended June 30, 2014
Activity in the allowance for loan losses:
Beginning Balance	$	1,249		$	3,235		$	1,273		$	33		$	704		$	24		$	—	$	929		$	592		$	8,039
Charge-offs		—			(100	)		—			—			—			—			—		(943	)		—			(1,043	)
Recoveries		44			9			17			—			9			2			—		29			—			110
Provision		(296	)		(584	)		(156	)		(19	)		(138	)		(2	)		—		450			(55	)		(800	)

Total ending allowance balance	$	997		$	2,560		$	1,134		$	14		$	575		$	24		$	—	$	465		$	537		$	6,306

- 26 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 4 – LOANS (Continued)


	Real Estate Construction			1-4 Family Residential			Commercial Real Estate			Other Real Estate Secured Loans			Commercial, Financial and Agricultural			Consumer			Tax Exempt		Other Loans			Unallocated			Total
Three months ended June 30, 2015
Activity in the allowance for loan losses:
Beginning Balance	$	863		$	2,125		$	889		$	14		$	434		$	16		$	—	$	—		$	486		$	4,827
Charge-offs		—			—			—			—			—			—			—		(7	)		—			(7	)
Recoveries		25			53			563			—			179			1			—		5			—			826
Provision		(113	)		(162	)		(610	)		8			(199	)		1			—		2			(33	)		(1,106	)

Total ending allowance balance	$	775		$	2,016		$	842		$	22		$	414		$	18		$	—	$	—		$	453		$	4,540


Three months ended June 30, 2014
Activity in the allowance for loan losses:
Beginning Balance	$	1,081		$	2,586		$	1,196		$	15		$	663		$	26		$	—	$	466		$	580		$	6,613
Charge-offs		—			(79	)		—			—			—			—			—		(3	)		—			(82	)
Recoveries		39			5			9			—			3			1			—		18			—			75
Provision		(123	)		48			(71	)		(1	)		(91	)		(3	)		—		(16	)		(43	)		(300	)

Total ending allowance balance	$	997		$	2,560		$	1,134		$	14		$	575		$	24		$	—	$	465		$	537		$	6,306

- 27 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 4 – LOANS (Continued)


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

Ending allowance balance attributable to loans at June 30, 2015:
Individually evaluated for impairment	$	65	$	142	$	82	$	—	$	—	$	—	$	—	$	—	$	—		289
Collectively evaluated for Impairment		710		1,874		760		22		414		18		—		—		453		4,251

Total ending allowance balance	$	775	$	2,016	$	842	$	22	$	414	$	18	$	—	$	—	$	453	$	4,540


Ending allowance balance attributable to loans at December 31, 2014:

Individually evaluated for impairment	$	66	$	126	$	55	$	—	$	—	$	—	$	—	$	—	$	—	$	247
Collectively evaluated for Impairment		826		2,206		939		22		399		22		—		—		510		4,924

Total ending allowance balance	$	892	$	2,332	$	994	$	22	$	399	$	22	$	—	$	—	$	510	$	5,171


Loans at June 30, 2015:
Individually evaluated for impairment	$	1,361	$	2,075	$	1,685	$	—	$	—	$	5	$	—	$	1,351			$	6,477
Collectively evaluated for impairment		17,294		98,685		110,881		8,309		18,101		6,363		24		51				259,708

Total loans balance	$	18,655	$	100,760	$	112,566	$	8,309	$	18,101	$	6,368	$	24	$	1,402			$	266,185


Loans at December 31, 2014:
Individually evaluated for impairment	$	5,250	$	1,499	$	1,778	$	—	$	—	$	7	$	—	$	1,351			$	9,885
Collectively evaluated for impairment		20,652		101,192		97,555		5,825		15,514		5,634		31		148				246,551

Total loans balance	$	25,902	$	102,691	$	99,333	$	5,825	$	15,514	$	5,641	$	31	$	1,499			$	256,436

- 28 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 4 – LOANS (Continued)

Loans individually evaluated for impairment by class of loans as of and for the six months ended June 30, 2015:


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Income Recognized		Cash Basis Income Recognized
With no related allowance recorded:
Real estate construction:
Other construction	$	—	$	—	$	—	$	2,444	$	—	$	—
1-4 Family residential:
Revolving, open ended		53		53		—		54		2		1
Junior liens		—		—		—		54		—		—
Commercial real estate:
Non-owner occupied		33		33		—		829		1		1
Consumer		5		5		—		5		—		—
Other loans		6,652		1,351		—		1,351		—		—

Total with no related allowance recorded		6,743		1,442		—		4,737		3		2

With an allowance recorded:
Real estate construction:
Other construction		1,362		1,362		65		1,386		—		—
1-4 Family residential:
Revolving, open ended		33		33		33		36		1		1
First Liens		1,988		1,988		108		1,807		53		58
Commercial real estate:
Owner occupied		545		545		55		546		16		11
Non-owner occupied		1,107		1,107		28		554		31		31
Consumer		—		—		—		2		—		—

Total with an allocated allowance recorded		5,035		5,035		289		4,331		101		101


Total	$	11,778	$	6,477	$	289	$	9,068	$	104	$	103

- 29 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 4 – LOANS (Continued)

Loans individually evaluated for impairment by class of loans as of and for the three months ended June 30, 2015:


	Average Recorded Investment		Income Recognized		Cash Basis Income Recognized
With no related allowance recorded:
Real estate construction:
Other construction	$	1,742	$	—	$	—
1-4 Family residential:
Revolving, open ended		54		1		—
Junior liens		27		—		—
Commercial real estate:
Non-owner occupied		627		—		—
Consumer		5		—		—
Other loans		1,351		—		—

Total with no related allowance recorded		3,806		1		—

With an allowance recorded:
Real estate construction:
Other construction		1,379		—		—
1-4 Family residential:
Revolving, open ended		35		—		—
First Liens		2,062		15		20
Commercial real estate:
Owner occupied		546		10		9
Non-owner occupied		831		16		17
Consumer		1		—		—

Total with an allocated allowance recorded		4,854		41		46


Total	$	8,660	$	42	$	46

- 30 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 4 – LOANS (Continued)

Loans individually evaluated for impairment by class of loans as of and for the six months ended June 30, 2014:


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Income Recognized		Cash Basis Income Recognized
With no related allowance recorded:
Real estate construction:
Residential construction	$	956	$	956	$	—	$	1,094	$	—	$	—
Other construction		3,431		3,431		—		5,519		—		—
1-4 Family residential:
Revolving, open ended		5		5		—		38		—		—
First liens		849		849		—		1,032		7		8
Junior liens		—		—		—		55		—		(1	)
Commercial real estate:
Owner occupied		—		—		—		1,016		—		—
Non-owner occupied		3,532		1,576		—		1,107		—		—
Other real estate loans		115		115		—		78		—		—
Commercial, financial and agricultural:
Agricultural		1		—		—		1		—		—
Commercial and industrial		112		112		—		37		—		—
Consumer		—		—		—		1		—		—

Total with no related allowance recorded		9,001		7,044		—		9,978		7		7

With an allowance recorded:
Real estate construction:
Residential construction		1,183		1,183		—		1,233		58		58
Other construction		5,394		5,394		306		3,322		3		3
1-4 Family residential:
Revolving, open ended		68		68		34		113		1		1
First Liens		1,166		1,166		86		2,866		31		31
Junior Liens		—		—		—		—		—		—
Commercial real estate:
Owner occupied		579		545		82		797		35		35
Non-owner occupied		35		35		—		805		8		8
Commercial, financial and agricultural:
Commercial and industrial		44		15		9		122		—		—
Consumer		10		10		—		10		—		—
Other loans		6,227		926		463		1,235		—		—

Total with an allocated allowance recorded		14,706		9,342		980		10,503		136		136


Total	$	23,707	$	16,386	$	980	$	20,481	$	143	$	143

- 31 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 4 – LOANS (Continued)

Loans individually evaluated for impairment by class of loans as of and for the three months ended June 30, 2014:


	Average Recorded Investment		Income Recognized			Cash Basis Income Recognized
With no related allowance recorded:
Real estate construction:
Residential construction	$	1,641	$	—		$	—
Other construction		4,997					—
1-4 Family residential:
Revolving, open ended		3		—			—
First liens		967		1			2
Junior liens		42		1			(1	)
Commercial real estate:
Owner occupied		818		(1	)		—
Non-owner occupied		847		—			—
Other real estate loans		58		—			—
Commercial, financial and agricultural:
Commercial and industrial		56		—			—
Consumer		—		—			—

Total with no related allowance recorded		9,429		1			1

With an allowance recorded:
Real estate construction:
Residential construction		592		58			59
Other construction		3,837		3			3
1-4 Family residential:
Revolving, open ended		81		—			(1	)
First Liens		1,238		15			8
Commercial real estate:
Owner occupied		273		35			35
Non-owner occupied		1,207		(25	)		(28	)
Commercial, financial and agricultural:
Commercial and industrial		96		—			—
Consumer		10		—			—
Other loans		926		—			—

Total with an allocated allowance recorded		8,260		86			76


Total	$	17,689	$	87		$	77

- 32 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 4 – LOANS (Continued)

Loans individually evaluated for impairment by class of loans as of and for the year ended December 31, 2014:


	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Average Recorded Investment		Income Recognized		Cash Basis Income Recognized
With no related allowance recorded:
Real estate construction:
Residential construction	$	—	$	—	$	—	$	821	$	—	$	—
Other construction		3,952		3,849		—		5,102		—		—
1-4 Family residential:
Revolving, open ended		54		54		—		42		3		3
First liens		—		—		—		774		6		6
Junior liens		108		108		—		69		—		(1	)
Commercial real estate:
Owner occupied		—		—		—		353		—		—
Non-owner occupied		3,188		1,233		—		1,518		3		3
Other real estate loans		—		—		—		88		—		—
Commercial, financial and agricultural:
Commercial and industrial		—		—		—		28		—		—
Consumer		4		4		—		3		—		—
Other Loans		6,652		1,351		—		676		—		—

Total with no related allowance recorded		13,958		6,599		—		9,474		12		11

With an allowance recorded:
Real estate construction:
Residential construction		—		—		—		925		55		56
Other construction		1,402		1,402		66		2,842		1		1
1-4 Family residential:
Revolving, open ended		37		37		33		94		3		4
First Liens		1,299		1,299		93		2,474		65		69
Commercial real estate:
Owner occupied		545		545		55		734		64		66
Non-owner occupied		—		—		—		604		—		—
Commercial, financial and agricultural:
Commercial and industrial		—		—		—		92		—		—
Consumer		3		3		—		9		—		—
Other loans		—		—		—		926		—		—

Total with an allocated allowance recorded		3,286		3,286		247		8,700		188		196


Total	$	17,244	$	9,885	$	247	$	18,174	$	200	$	207

- 33 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 4 – LOANS (Continued)

Troubled Debt Restructurings

The Company has $6,443 of loans with allocated specific reserves of $257 to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2015 compared to $9,852 with allocated specific reserves of $214 at December 31, 2014. The Company lost $37 and $12 of interest income in the six months and $3 and $2 of interest income in the three months ended June 30, 2015 and 2014, respectively, that would have been recorded in interest income if the specific loans had not been restructured. The Bank had no commitments to lend additional funds to loans classified as troubled debt restructurings at June 30, 2015 or December 31, 2014.

During the first six months of 2015, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or granting of amortization terms for balloon notes that are longer than the Bank’s typical practice.

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

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

- 34 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 4 – LOANS (Continued)

The following table presents loans by class modified as troubled debt restructurings that occurred during the first six months of 2015 and 2014:


	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
June 30, 2015
Real estate construction:
Other construction		1	$	52	$	52
1-4 Family residential:
First liens		2		1,677		1,677
Commercial real estate:
Non-owner occupied		1		1,113		1,113

Total		4	$	2,842	$	2,842


June 30, 2014
1-4 Family residential:
Revolving, open ended		1	$	35	$	35
First liens		2		344		344
Commercial real estate:
Owner occupied		3		1,621		1,621
Non-owner occupied		1		35		35
Commercial, financial and agricultural
Commercial and industrial		5		130		130

Total		12	$	2,165	$	2,165

Troubled debt restructurings described above had an outstanding balance of $2,801 at June 30, 2015. There was no increase for the allowance for loan losses during the first six months of 2015. Troubled debt restructurings still accruing interest totaled $3,412 and $2,140 at June 30, 2015 and December 31, 2014, respectively.

A loan is considered to be in payment default once it is more than 90 days contractually past due under the modified terms. There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the first six months of 2015 or 2014.

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

- 35 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 4 – LOANS (Continued)

The following table presents the recorded investment in nonaccrual loans and loans past due over 90 days still accruing by class of loans as of June 30, 2015 and December 31, 2014:


	June 30, 2015				December 31, 2014
	Nonaccrual		Loans past due over 90 days still accruing		Nonaccrual		Loans past due over 90 days still accruing
Real estate construction:
Residential construction	$	—	$	—	$	—	$	—
Other construction		1,356		—		5,236		—
1-4 Family residential:
Revolving, open ended		—		—		78		—
First Liens		—		—		359		—
Junior Liens		—		—		—		—
Commercial real estate:
Farmland		—		—		—		—
Owner occupied		324		—		324		—
Non-owner occupied		—		—		1,199		—
Other real estate loans		—		—		108		—
Commercial, financial and agricultural:
Agricultural		—		—		—		—
Commercial and industrial		—		—		—		—
Consumer		—		—		—		—
Other loans		1,351		—		1,351		—

Total	$	3,031	$	—	$	8,655	$	—

- 36 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 4 – LOANS (Continued)

The following table presents the aging of the recorded investment in past due loans, including nonaccrual loans as of June 30, 2015 and December 31, 2014 by class of loans:


	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
June 30, 2015
Real estate construction:
Residential construction	$	—	$	—	$	—	$	—	$	9,809	$	9,809
Other construction		—		8		—		8		8,838		8,846
1-4 Family residential:
Revolving, open ended		4		8		—		12		16,029		16,041
First Liens		351		—		1		352		82,380		82,732
Junior Liens		17		—		—		17		1,970		1,987
Commercial real estate:
Farmland		—		81		—		81		8,122		8,203
Owner occupied		14		—		—		14		50,426		50,440
Non-owner occupied		—		—		—		—		53,923		53,923
Other real estate secured loans		—		—		—		—		8,309		8,309
Commercial, financial and agricultural:
Agricultural		—		—		—		—		876		876
Commercial and industrial		—		11		—		11		17,214		17,225
Consumer		13		—		—		13		6,355		6,368
Tax exempt		—		—		—		—		24		24
Other loans		—		—		926		926		476		1,402

Total	$	399	$	108	$	927	$	1,434	$	264,751	$	266,185


	30 – 59 Days Past Due		60 – 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
December 31, 2014
Real estate construction:
Residential construction	$	—	$	—	$	—	$	—	$	9,382	$	9,382
Other construction		66		8		—		74		16,446		16,520
1-4 Family residential:
Revolving, open ended		4		74		78		156		16,991		17,147
First Liens		1,111		215		359		1,685		81,933		83,618
Junior Liens		—		—		—		—		1,926		1,926
Commercial real estate:
Farmland		—		—		—		—		7,495		7,495
Owner occupied		—		—		—		—		42,383		42,383
Non-owner occupied		72		—		—		72		49,383		49,455
Other real estate secured loans		108		—		—		108		5,717		5,825
Commercial, financial and agricultural:
Agricultural		—		—		—		—		855		855
Commercial and industrial		31		—		—		31		14,628		14,659
Consumer		35		—		—		35		5,606		5,641
Tax exempt		—		—		—		—		31		31
Other loans		—		—		926		926		573		1,499

Total	$	1,427	$	297	$	1,363	$	3,087	$	253,349	$	256,436

- 37 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 4 – LOANS (Continued)

Credit Quality Indicators:

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

Watch. Loans 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 and 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.

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.

- 38 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 4 – 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, 2015 and December 31, 2014, and based on the most recent analysis performed, the risk categories of loans by class of loans are as follows:


	Pass		Watch		Special Mention		Substandard		Doubtful
June 30, 2015
Real estate construction:
Residential construction	$	9,615	$	194	$	—	$	—	$	—
Other construction		5,460		656		8		1,361		—
1-4 Family residential:
Revolving, open ended		15,638		32		—		285		—
First Liens		68,854		10,382		—		1,508		—
Junior Liens		1,987		—		—		—		—
Commercial real estate:
Farmland		5,971		901		—		1,331		—
Owner occupied		41,990		7,891		—		14		—
Non-owner occupied		49,946		1,889		—		947		—
Other real estate loans		8,309		—		—		—		—
Commercial, financial and agricultural:
Agricultural		866		10		—		—		—
Commercial and industrial		14,595		2,608		—		22		—
Consumer		6,342		6		—		15		—
Tax exempt		24		—		—		—		—
Other loans		51		—		—		—		—

Total	$	229,648	$	24,569	$	8	$	5,483	$	—


	Pass		Watch		Special Mention		Substandard		Doubtful
December 31, 2014
Real estate construction:
Residential construction	$	6,250	$	3,132	$	—	$	—	$	—
Other construction		6,673		3,756		—		840		—
1-4 Family residential:
Revolving, open ended		16,664		32		—		359		—
First Liens		66,655		11,256		—		4,408		—
Junior Liens		1,819		—		—		—		—
Commercial real estate:
Farmland		4,963		905		—		1,626		—
Owner occupied		37,204		4,634		—		—		—
Non-owner occupied		39,867		5,535		—		2,821		—
Other real estate loans		5,825		—		—		—		—
Commercial, financial and agricultural:
Agricultural		786		12		—		56		—
Commercial and industrial		13,626		978		—		56		—
Consumer		5,614		3		—		17		—
Tax exempt		31		—		—		—		—
Other loans		148		—		—		—		—

Total	$	206,125	$	30,243	$	—	$	10,183	$	—

- 39 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 5 - INCOME PER SHARE

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


	Six months ended June 30,						Three months ended June 30,
	2015			2014			2015			2014
Basic
Net income	$	2,441		$	1,592		$	1,503		$	798
Less: Earnings allocated to preferred stock		(834	)		(723	)		(419	)		(419	)
Less: Accretion of preferred stock discount		—			(33	)		—			—

Net Income available to common stock	$	1,607		$	836		$	1,084		$	379


Weighted average common shares		3,275,096			3,274,828			3,275,168			3,274,830


Basic net income per share	$	0.49		$	0.26		$	0.33		$	0.12


Diluted

Net income available to common stock	$	1,607		$	836		$	1,084		$	379


Weighted average common shares		3,275,096			3,274,828			3,275,168			3,274,830
Add: Dilutive effects of assumed exercises of stock options		—			—			—			—

Average common shares and dilutive potential common shares outstanding		3,275,096			3,274,828			3,275,168			3,274,830


Diluted net income per share	$	0.49		$	0.26		$	0.33		$	0.12

At June 30, 2015 and 2014, respectively, stock options for 47,800 and 55,400 shares of common stock were not considered in computing diluted net income per share for the six-month and three-month periods ended June 30, 2015 and 2014 because they were antidilutive.

- 40 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 6 - INCOME TAXES

The Company recorded no tax expense during the first six months of 2015. During 2010, the Company established a valuation allowance against all of its deferred tax assets and has maintained that valuation allowance through the first six months of 2015. The Company intends to maintain this valuation allowance until it determines it is more likely than not that the asset can be realized through current and future taxable income. Because the Company has recorded a valuation allowance against its deferred tax assets, any deferred tax benefit or expense will be offset by a corresponding increase or decrease, respectively, to the valuation allowance. Until the reversal of the deferred tax valuation allowance, tax benefit or expense from current year operations is expected to be minimal.

NOTE 7 – REGULATORY MATTERS

As a result of improvements in the Bank’s financial condition and results of operations and the Bank’s compliance with the terms thereof, the written agreement that the Bank had entered into with the Tennessee Department of Financial Institutions (the “Department”) on March 14, 2013 was terminated effective October 29, 2014. In addition, the Federal Deposit Insurance Corporation (“FDIC”) terminated the consent order that was entered into with the Bank on September 20, 2011 (the “Consent Order”), effective November 19, 2014.

In connection with the termination of the written agreement the Bank had entered into with the Department and the Consent Order, the Bank reached an understanding with the FDIC and the Department in the form of a single informal agreement with both agencies that became effective on October 27, 2014. The informal agreement significantly reduces the restrictions that were placed on the Bank under the Consent Order and the written agreement with the Department. The informal agreement requires that the Bank, among other things:

•

Maintain the following minimum regulatory capital ratios: Leverage Capital 8.0%; Tier 1 Risk Based Capital 10.00%; and Total Risk Based Capital 12.00%.

•

Receive prior written consent of each of the FDIC and the Department before the Bank declares or pays any cash dividends.

•

Develop a written profit plan to improve the Bank’s earnings.

Bank holding companies with total consolidated assets in excess of $500 million and banks are subject to regulatory capital requirements administered by state and federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet minimum capital requirements can initiate regulatory actions that could have a direct material effect on the financial statements.

- 41 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 7 – REGULATORY MATTERS (Continued)

Prompt corrective action regulations classify banks into one of five capital categories depending on how well they meet their minimum capital requirements. Although these terms are not used to represent the overall financial condition of a bank, the classifications are: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. If adequately capitalized or worse, or subject to a written agreement, consent order, or cease and desist order requiring higher minimum capital levels (as the Bank was prior to termination of the Consent Order), regulatory approval would be required for the Bank to accept, renew or rollover brokered deposits. If a bank is classified as undercapitalized or worse, its capital distributions are restricted, as is its asset growth and expansion, and capital restoration plans are required. At June 30, 2015, the Bank’s capital ratios were above those levels necessary to be considered “well capitalized” under the regulatory framework for prompt corrective action and all ratios were above those levels required by the informal agreement the Bank has entered into with the FDIC and the Department. Because the Company’s total assets were less than $500,000 at June 30, 2015, the Company is not required to maintain certain capital levels. Had the Company’s assets exceeded $500,000 at that date, the Company’s capital ratios would have been below what is required to be considered “adequately capitalized” under the regulatory framework. Two of the four capital ratios would have been considered “adequate”; however, the Tier 1 to Average Assets ratio and Common Equity Tier I ratio were below the requirements to be considered “adequate”, which would have prohibited the Company from being “adequately capitalized”.

Under the terms of the written agreement that the Company has entered into with the Federal Reserve Bank of Atlanta (the “Written Agreement”), the Company agreed to, among other things, take the following actions:

•

Take appropriate steps to fully utilize the Company’s financial and managerial resources to serve as a source of strength to the Bank, including taking steps to ensure that the Bank complies with the Consent Order while it remained in effect;

•

Submit within 60 days of April 19, 2012 a written plan to maintain sufficient capital at the Company on a consolidated basis, and within 10 days of approval of the plan by the Federal Reserve Bank of Atlanta (the “FRB”), adopt the approved capital plan;

•

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

•

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

•

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

•

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

- 42 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 7 – REGULATORY MATTERS (Continued)

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

•

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

•

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

•

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

•

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

•

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

As of June 30, 2015, all of the plans required to be submitted to the FRB have been submitted and approved. Management believes that the Company is in compliance with the requirements of the Written Agreement as of June 30, 2015. The Written Agreement remains in effect.

On September 20, 2011, the Bank consented to the issuance of the Consent Order. The Consent Order, which has been terminated effective November 19, 2014 in connection with the Bank’s entering into an informal agreement with the FDIC, required the Bank to attain and achieve regulatory capital ratios higher than those required by regulatory standards, improve, among other things, its processes for identifying and classifying problem loans, and improve its overall profitability. The Consent Order required the Bank to formulate written plans detailing how the Bank would achieve such requirements. The Bank prepared and submitted all of the plans required by the Consent Order to the FDIC and the FDIC approved those plans as written. In addition, the terms of the Consent Order required the Bank to provide quarterly progress reports to the FDIC. For more information regarding the Consent Order, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.” On March 14, 2013, the Bank entered into a written agreement with the Department, the terms of which were substantially the same as those of the Consent Order, including required minimum levels of capital that the Bank must maintain. As described above, the written agreement with the Department and the Consent Order with the FDIC have been terminated.

- 43 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 7 – REGULATORY MATTERS (Continued)

Prior to the termination of the Consent Order, the Bank was subject to additional limitations on its operations including a prohibition on accepting, rolling over, or renewing brokered deposits. The existence of the Consent Order also limited the Bank from paying deposit rates above national rate caps published weekly by the FDIC unless the Bank was determined to be operating in a high-rate market area. On December 1, 2011, the Bank received notification from the FDIC that it was operating in a high-rate environment, which allowed the Bank to pay rates higher than the national rate caps, but continued to limit the Bank to rates that did not exceed the prevailing rate in the Bank’s market by more than 75 basis points. In 2012, 2013 and portions of 2014, the Bank was also limited, as a result of its condition, in its ability to pay more than de minimis severance payments to its employees and was required to receive the consent of the FDIC and the Department to appoint new officers or directors. Following termination of the Consent Order, the Bank is no longer subject to limitations on its operations related to brokered deposits or its ability to pay interest above national rate caps. Moreover, the Bank is no longer subject to limitations on its ability to pay severance or appoint officers or directors.

The Company’s principal source of funds for dividend and/or interest payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid by the Bank in any calendar year is limited to the current year’s net income, combined with the retained net income of the preceding two years, subject to the capital requirements described above. Although the Bank was profitable in each of 2012, 2013, 2014 and the first six months of 2015, the Bank was prohibited under the terms of the Consent Order with the FDIC and the written agreement with the Department from paying dividends to the Company without prior approval from the FDIC and the Department. These restrictions remain in place as a result of the informal agreement that the Bank entered into in connection with termination of the Consent Order and written agreement with the Department. The Company is also restricted in the types and amounts of dividends it can pay pursuant to the terms of the preferred stock it issued to the U.S. Treasury pursuant to the U.S. Treasury’s Capital Purchase Program under the Troubled Assets Relief Program, and by the terms of the Written Agreement, which prohibits the Company from paying interest or dividends (including interest on the Company’s subordinated debentures and dividends on the Company’s preferred stock) without the FRB’s prior approval.

- 44 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 7 – REGULATORY MATTERS (Continued)

Bank holding companies and banks are subject to various regulatory capital requirements administered by State and Federal banking agencies. The Company’s and the Bank’s capital amounts and ratios at June 30, 2015 and December 31, 2014, were as follows:


	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Applicable Regulatory Provisions⁽¹⁾					Required by terms of Regulatory Agreement ⁽²⁾
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2015
Total Capital to risk weighted assets
Community First Bank & Trust	$	47,958		16.25	%	$	23,615		8.00	%	$	29,519		10.00	%	$	35,423		12.00	%
Consolidated		30,535		10.33	%		23,636		8.00	%		29,545		10.00	%		N/A		N/A

Common Equity Tier 1 Capital to risk weighted assets
Community First Bank & Trust	$	44,257		14.99	%	$	13,283		4.50	%	$	19,187		6.50	%		N/A		N/A
Consolidated		N/A		N/A			N/A		N/A			N/A		N/A			N/A		N/A

Tier 1 Capital to risk weighted assets
Community First Bank & Trust	$	44,257		14.99	%	$	17,711		6.00	%	$	23,615		8.00	%	$	29,519		10.00	%
Consolidated		17,887		6.05	%		11,818		4.00	%		17,727		6.00	%		N/A		N/A

Tier 1 Capital to average assets
Community First Bank & Trust	$	44,257		9.88	%	$	17,916		4.00	%	$	22,394		5.00	%	$	38,070		8.50	%
Consolidated		17,887		3.97	%		18,031		4.00	%		N/A		N/A			N/A		N/A

December 31, 2014
Total Capital to risk weighted assets
Community First Bank & Trust	$	44,173		16.32	%	$	21,654		8.00	%	$	27,068		10.00	%	$	32,481		12.00	%
Consolidated		26,624		9.83	%		21,668		8.00	%		27,086		10.00	%		N/A		N/A

Tier 1 Capital to risk weighted assets
Community First Bank & Trust	$	40,768		15.06	%	$	10,827		4.00	%	$	16,241		6.00	%	$	27,068		10.00	%
Consolidated		15,477		5.71	%		10,834		4.00	%		16,251		6.00	%		N/A		N/A

Tier 1 Capital to average assets
Community First Bank & Trust	$	40,768		9.32	%	$	17,490		4.00	%	$	21,862		5.00	%	$	34,979		8.50	%
Consolidated		15,477		3.52	%		17,586		4.00	%		N/A		N/A			N/A		N/A

(1)	Because the Company’s total assets were less than $500,000 at June 30, 2015, the Company was not, at that date, subject to capital level requirements at that level.

(2)	Reflects minimum capital ratios required by the informal agreement the Bank entered into with the FDIC and the Department on October 27, 2014.

- 45 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 7 – REGULATORY MATTERS (Continued)

The Bank’s capital ratios at June 30, 2015 were above those levels necessary to be considered “well capitalized” under the regulatory framework for prompt corrective action.

Because the Company’s total assets were less than $500,000 at June 30, 2015, the Company is not required to meet certain capital level requirements. Had the Company’s assets exceeded $500,000 at that date, the Company’s capital levels at June 30, 2015 would have been considered below those required to be considered “adequately capitalized” under applicable regulations because only two of the four capital ratios were above the levels necessary to be considered “adequate”. The Company’s Tier 1 to Average Assets ratio and Common Equity Tier I ratio were below the requirements to be considered “adequate”, which would have prohibited the Company from being considered “adequately capitalized”.

In July 2013, the Federal banking regulators, in response to the statutory requirements of The Dodd-Frank Wall Street Reform and Consumer Protection Act, adopted new regulations implementing the Basel Capital Adequacy Accord (“Basel III”) and the related minimum capital ratios. The new capital requirements which were effective January 1, 2015 and apply to banks and bank holding companies with in excess of $500,000 in assets, include a new “Common Equity Tier 1 Ratio”, which has stricter rules as to what qualifies as Common Equity Tier 1 Capital. A summary of the changes to the regulatory capital ratios are as follows:


	Guideline in Effect At December 31, 2014						Basel III Requirements
	Adequately Capitalized			Well Capitalized			Adequately Capitalized			Well Capitalized

Common Equity Tier 1 Ratio (Common Equity to Risk Weighted Assets)		Not Applicable			Not Applicable			4.5	%		6.5	%

Tier 1 Capital to Risk Weighted Assets		4	%		6	%		6	%		8	%

Total Capital to Risk Weighted Assets		8	%		10	%		8	%		10	%

Tier 1 Leverage Ratio		4	%		5	%		4	%		5	%

- 46 -

COMMUNITY FIRST, INC.

Notes to Consolidated Financial Statements

June 30, 2015

(Unaudited)

NOTE 7 – REGULATORY MATTERS (Continued)

The guidelines under Basel III also establish a 2.5% capital conservation buffer requirement that is phased in over three years beginning January 1, 2016. The buffer is related to risk weighted assets. The Basel III minimum requirements for capital adequacy after giving effect to the buffer are as follows:


	2016			2017			2018			2019

Common Equity Tier 1 Ratio		5.125	%		5.75	%		6.375	%		7.0	%

Tier 1 Capital to Risk-Weighted Assets Ratio		6.625	%		7.25	%		7.875	%		8.5	%

Total Capital to Risk-Weighted Assets Ratio		8.625	%		9.25	%		9.875	%		10.5	%

As described above, because the Company’s total assets are less than $500,000, the Company will not be required to comply with these new capital guidelines required under Basel III until its total assets exceed $500,000 (or, if currently proposed regulations are adopted, $1,000,000).

In order to avoid limitations on capital distributions such as dividends and certain discretionary bonus payments to executive officers, a banking organization must maintain capital ratios above the minimum ratios including the buffer. The requirements of Basel III also place additional restrictions on the inclusion of deferred tax assets and capitalized mortgage servicing rights as a percentage of Tier 1 Capital. In addition, the risk weights assigned to certain assets such as past due loans and certain real estate loans have been increased. The requirements of Basel III allowed banks and bank holding companies with less than $250 billion in assets a one-time opportunity to opt-out of a requirement to include unrealized gains and losses in accumulated other comprehensive income in their capital calculation. The Company and the Bank have opted out of this requirement.

- 47 -

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

OVERVIEW

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

The following discussion compares the financial condition of the Company at June 30, 2015 to December 31, 2014, and the results of operations for the six months and three months ended June 30, 2015 and 2014. 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, 2014, filed with the SEC on February 27, 2015 (File No. 000-49966) (the “2014 Form 10-K”) and in other reports we file with the SEC from time to time, and the following:

•

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

•

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

•

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

•

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

•

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

•

the inability to comply with regulatory capital requirements and required capital maintenance levels, including those resulting from the implementation of the Basel III capital guidelines, and to secure any required regulatory approvals for capital actions;

•

the vulnerability of our network and our online banking portals to unauthorized access, computer viruses, phishing schemes, spam attacks, human errors, natural disasters, power loss and other security breaches;

•

the inability to grow our loan portfolio;

- 48 -

OVERVIEW (Continued)

•

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

•

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

•

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

•

the ability to retain large, uninsured deposits;

•

rapid fluctuations or unanticipated changes in interest rates;

•

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

•

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

•

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

•

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

•

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

•

further deterioration in the valuation of other real estate owned;

•

changes in accounting policies, rules and practices;

•

the actions of the owners of the preferred securities (the “Preferred Stock”) we sold through our participation in the United States Department of the Treasury’s (the “U.S. Treasury”) Capital Purchase Program (“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.

- 49 -

FINANCIAL CONDITION

At June 30, 2015, total assets were $455,791 and total liabilities were $443,599. Total assets increased $12,236 or 2.8% compared to $443,555 at December 31, 2014. Total liabilities increased $10,930 or 2.5%, compared to $432,669 at December 31, 2014. The increase in assets was caused by increases in securities available for sale and net loans offset by decreases in cash and cash equivalents and other real estate owned. The increase in liabilities was caused by an increase in both noninterest-bearing and interest-bearing deposits. Total equity increased 12.0%, or $1,306, to $12,192 at June 30, 2015 compared to $10,886 at December 31, 2014. The increase in equity is primarily due to net income offset by gains in other comprehensive income during the first six months of 2015 caused by market fluctuations in securities available for sale.

Cash and Cash Equivalents

Cash and cash equivalents were $35,026 at June 30, 2015 compared to $38,256 at December 31, 2014. This decrease is primarily due to the use of cash to invest in securities available for sale and to fund loan growth.

Time Deposits in Other Financial Institutions

Time deposits in other financial institutions totaled $20,175 at June 30, 2015 compared to $22,177 at December 31, 2014. Management has begun utilizing time deposits in other financial institutions in conjunction with the Bank’s securities portfolio in order to maximize yield and maintain a reasonable total duration for the Bank’s assets outside of the loan portfolio. Original maturities of time deposits in other financial institutions range from six months to 5 years. Most of the CDs with maturities beyond three years are callable with minimal early withdrawal penalties. All of the deposits are in FDIC or National Credit Union Administration insured institutions and the amount on deposit with each individual institution does not exceed the deposit insurance limit of $250. As of June 30, 2015, time deposits in other financial institutions had a weighted average rate of 1.009% and a weighted average remaining life of 0.992 years.

Loans

Total loans (excluding loans held for sale) at June 30, 2015 were $266,185, compared to $256,436 at December 31, 2014, an increase of $9,749 or 3.8%. The increase in loans during the first six months of 2015 is due to an increased demand for new loans and decreased foreclosure activity.

Loans in the portfolio at June 30, 2015 of approximately $42,224, or 15.9%, are at a variable rate of interest while $220,929, or 83.0%, are at a fixed rate, and $3,032, or 1.1%, are nonaccrual. $43,081, or 16.1%, of total loans reprice within one year of June 30, 2015. As market rates dropped during the economic recession, management implemented rate floors for many variable rate loans in an effort to protect the Bank’s net interest margin. As a result, when market rates begin to rise, loans at their floor will not reprice at higher rates until market rates rise above their contractual floor rates. Only the loans noted above that have variable rates not at a floor rate will reprice with the first increase in market rates. The existence of these rate floors may negatively impact our net interest margin when rates begin to rise, at least until rates rise above these floors.

On June 30, 2015, the Company’s loan to deposit ratio (including loans held for sale) was 65.3%, compared to 64.4% at December 31, 2014. Management expects loan demand to modestly improve through the remainder of 2015, though foreclosure activity could result in some additional decreases in loan balances. Management anticipates that there will not be significant growth in loans until there are indicators of significant improvements in both the local and national economy, leading customers to begin spending more and resulting in increased demand. If the Company’s deposit growth among core deposit customers continues to outpace its loan demand, the Company’s net interest margin may be adversely affected as the funds from these deposits may be invested in securities and other interest earning assets, like time deposits in other financial institutions, that offer lower yields than loans.

- 50 -

FINANCIAL CONDITION (Continued)

Securities Available for Sale

Set forth below is a table showing the carrying amount and breakdown of the Company’s securities available for sale at June 30, 2015 and December 31, 2014:


	June 30, 2015					December 31, 2014
	Amount		% of Total			Amount		% of Total

U.S. government sponsored entities	$	13,978		13.7	%	$	15,352		16.8	%
Mortgage-backed (residential)		85,940		84.5	%		74,014		80.9	%
State and municipal		1,799		1.8	%		2,074		2.3	%

Total	$	101,717		100.0	%	$	91,440		100.0	%

The Company’s securities portfolio is used to, among other things, provide yield and for pledging purposes to secure public fund deposits. As of June 30, 2015, the carrying value of securities increased $10,277 to $101,717, compared to $91,440 at December 31, 2014. Securities available for sale as a percentage of total assets was 22.3% at June 30, 2015, compared to 20.6% at December 31, 2014. Net unrealized loss on securities available for sale was $328 at June 30, 2015, compared to a net unrealized gain of $233 at December 31, 2014. Changes in interest rates in the securities market caused this fluctuation in the net unrealized loss/gain. Management is continually monitoring the credit quality of the Bank’s investments and believes that the unrealized losses that existed in the Bank’s portfolio at June 30, 2015 are temporary based on the bond ratings and anticipated recovery of bonds held. At June 30, 2015, the Company did not have the intent to sell these securities and it is more likely than not that it will not be required to sell the securities before their anticipated recovery.

Other Real Estate Owned

At June 30, 2015, other real estate owned (“ORE”) totaled $10,226, a decrease of $3,508 from $13,734 at December 31, 2014. This decrease is primarily due to the sale of properties during the first two quarters of 2015. The balance of ORE is comprised of properties acquired through or in lieu of foreclosure on real estate loans, and loans made to facilitate the sale of ORE properties that are required to be reported as ORE (“FAS 66 Loans”). The balances recorded for each individual property are based on appraisals that are not more than twelve months old, discounted by 15%. The 15% discount was adopted by the Company beginning in the third quarter of 2010 based on an analysis of actual recoveries of ORE balances, including selling costs. Based on that analysis, the Company recorded a valuation allowance of $346 (recognized through ORE expense) in the third quarter of 2010. In addition, the Company began applying the 15% discount in its determination of specific reserves for impaired loans that are collateral dependent. As a result, the majority of the financial loss incurred by the Company as a result of the 15% discount has been recognized through loan charge-offs and the provision for loan losses at the time the property is transferred to ORE, with the foreclosed property being transferred into ORE at the discounted value. The Company annually updates its analysis regarding the 15% discount. Should such updates indicate that a change in the 15% discount is warranted, the Company would implement the change accordingly and that change would be applied to all properties that are subsequently moved into ORE. Additional write-downs of individual properties typically occur when the results of updated appraisals and further application of the 15% discount on the value reflected in the updated appraisal indicates that the value of the respective property has declined. The Company obtains updated appraisals for ORE properties at least every twelve months. These write-downs are recognized in the quarterly period in which the appraisal is accepted by the Company.

- 51 -

FINANCIAL CONDITION (Continued)

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

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


	June 30, 2015				March 31, 2015				December 31, 2014				September 30, 2014
Rental	$	4,947	48.4	%	$	5,217	41.2	%	$	5,949	43.3	%	$	7,114	50.2	%
Non-rental		941	9.2	%		1,556	12.3	%		1,904	13.9	%		986	7.0	%
Land		4,338	42.4	%		5,881	46.5	%		5,881	42.8	%		6,072	42.8	%

Total	$	10,226	100.0	%	$	12,654	100.0	%	$	13,734	100.0	%	$	14,172	100.0	%

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

- 52 -

FINANCIAL CONDITION (Continued)

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


	Rental		Non-rental		Auction		Land
Three Months Ended June 30, 2015
Foreclosures		1		1		—		1
Sales		—		2		—		3

Three Months Ended June 30, 2014
Foreclosures		1		2		—		1
Sales		5		1		3		6

Six Months Ended June 30, 2015
Foreclosures		1		2		—		1
Sales		3		5		—		3
Weighted average age of properties held at period end (months)		40.2		26.1		—		46.3

Six Months Ended June 30, 2014
Foreclosures		2		2		—		1
Sales		10		2		3		9
Weighted average age of properties held at period end (months)		25.1		13.0		—		32.0

The following table sets forth information related to the largest five ORE properties held by the Company as of June 30, 2015:


Property Description	Original loan classification	Original Loan Amount			Charge-off prior to transfer into ORE		Write-down after transfer into ORE		Carrying Balance
Unimproved land	Real estate construction	$	5,000		$	905	$	536	$	2,949
Mini storage facility	Commercial real estate		3,934	⁽¹⁾		—		—		848
Unimproved land	Real estate construction		1,134			402		—		799
Mixed Use Commercial Property	Commercial real estate		3,934	⁽¹⁾		—		82		765
Single family residence	Residential real estate		731			—		104		627

(1)	These two properties were pledged as collateral for the same loan relationship.

- 53 -

FINANCIAL CONDITION (Continued)

The following table sets forth information related to the largest five ORE properties held by the Company as of December 31, 2014:


Property Description	Original loan classification	Original Loan Amount			Charge-off prior to transfer into ORE		Write-down after transfer into ORE		Carrying Balance
Unimproved land	Real estate construction	$	5,000		$	905	$	536	$	2,949
Unimproved land	Real estate construction		3.103			1,896		204		961
Mini storage facility	Commercial real estate		3,934	⁽¹⁾		—		—		848
Unimproved land	Real estate construction		1,134			402		—		799
Mixed Use Commercial Property	Commercial real estate		3,934	⁽¹⁾		—		82		765

(1)	These two properties were pledged as collateral for the same loan relationship.

Each of the OREO properties identified in the June 30, 2015 table above is listed with a real estate agent and is also listed as available for sale on the Bank’s website. The two properties classified as unimproved land were, at the time the loans were made, intended to be developed. The property carried at $2,949 is commercial property located in an area that remains significantly and negatively impacted by the downturn in the real estate market. Although the Company continues to actively market the property, management anticipates that it could take a significant amount of time to sell the property. The property carried at $799 is located in a residential area that was also negatively impacted by the downturn in the economy. Although there are some positive indicators of improvements in the local market where the property is located, management believes it will likely require a significant amount of time to sell the property. The single family residence property carried at $627 is currently an income producing rental property. The Company is actively marketing the property; however, since the home is more high-end than the typical home in our market are, we anticipate that it could take a significant amount of time to sell the property. The commercial real estate properties are income producing rental properties that are being managed by a third party property manager on behalf of the Company. The Company continues to market these rental properties, but because of the income producing nature of the properties, it is likely that management will resist selling the properties in the near term for less than the current carrying value of the properties.

- 54 -

FINANCIAL CONDITION (Continued)

Deposits

The Company relies on the Bank’s deposit growth, as well as alternative funding sources such as other borrowed money, Federal Home Loan Bank (“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, 2015 and December 31, 2014.


	June 30, 2015					December 31, 2014
	Amount		% of Total			Amount		% of Total

Noninterest-bearing demand accounts	$	66,546		16.3	%	$	60,780		15.3	%
Interest-bearing demand accounts		131,958		32.4	%		129,152		32.4	%
Savings accounts		28,416		7.0	%		27,709		7.0	%
Time deposits greater than $100		89,003		21.8	%		83,633		21.0	%
Other time deposits		91,671		22.5	%		96,806		24.3	%

Total	$	407,594		100.0	%	$	398,080		100.0	%

The following table sets forth all time deposits greater than $100 broken down by remaining maturity at June 30, 2015:


Three months or less	$	20,314
Over three months through six months		11,764
Over six months through one year		24,971
Over one year		31,954

Total	$	89,003

Total deposits were $407,594 at June 30, 2015, compared to $398,080 at December 31, 2014, an increase of $9,514. The increase was primarily due to increases in noninterest-bearing demand deposits.

- 55 -

FINANCIAL CONDITION (Continued)

Shareholders’ Equity

At June 30, 2015, shareholders’ equity totaled $12,192, an increase of $1,306, or 12.0%, from $10,866 at December 31, 2014. The increase was primarily due to net income offset by an increase in the unrealized loss on securities available for sale.

The 17,806, Series A shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the “Senior Preferred Shares”) have a $22,643 liquidation value and had a cumulative dividend rate of 5% per year, until May 15, 2014, and a dividend rate of 9% thereafter. In addition, under the terms of the CPP, the Company issued warrants to U.S. 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 warrants immediately upon investment in the Senior Preferred shares, which resulted in issuance of 890 shares of Fixed Rate Perpetual Preferred Shares, Series B (the “Warrant Preferred Shares” and together with the Senior Preferred Shares, the “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 was amortized over a five year period, which ended on February 27, 2014. The $1,250 liquidation value Warrant Preferred Shares have a cumulative dividend rate of 9% per year until redeemed. Dividends on both Senior Preferred Shares and Warrant Preferred Shares are required to be paid quarterly. Total required annual dividends for both Senior Preferred Shares and Warrant Preferred Shares are expected to be $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.

On April 14, 2014, the U.S. Treasury, the holder of all the Senior Preferred and Warrant Preferred Shares issued by the Company, closed on the sale of the securities in a modified Dutch auction. The clearing price for the Senior Preferred Shares was $300.50 per share and the clearing price for the Warrant Preferred Shares was $521.75 per share. The sale was to unaffiliated third party investors as well as certain directors and executive officers of the Company. Subsequent to the initial auction, certain of the Company’s directors and executive officers have acquired additional Senior Preferred Shares from the purchasers that acquired the shares from the U.S. Treasury, and in the second quarter of 2015 they acquired additional shares resulting in those individuals owning in the aggregate approximately 57.5% of the outstanding Senior Preferred Shares.

The Company received none of the proceeds from the sale of the Preferred Shares by the U.S. Treasury, and the sale of the securities had no effect on the terms of the outstanding securities, including the Company’s obligation to satisfy accrued and unpaid dividends or the holders’ right to elect two members to the board of directors of the Company. Further, the sale of the Preferred Shares by the U.S. Treasury had no effect on the Company’s capital, regulatory capital, financial condition or results of operations. Upon the closing of the sale of the securities, the Company was no longer subject to various executive compensation and corporate governance requirements to which participants in the CPP were subject while the U.S. Treasury held the securities.

- 56 -

FINANCIAL CONDITION (Continued)

At the request of the FRB, the board of directors of the Company, on January 18, 2011, adopted a board resolution agreeing that the Company would not incur additional debt, pay common or preferred dividends, or redeem treasury stock without approval from the FRB. The board resolution was replaced by the Written Agreement that the Company entered into with the FRB on April 19, 2012, the terms of which similarly prohibit the Company from incurring debt, paying dividends or interest or redeeming shares of its capital stock. The Company requested permission to make dividend payments on its Preferred Shares and interest payments on its subordinated debt that were scheduled for the first quarter of 2011. The FRB granted permission to pay the preferred dividends that were due on February 15, 2011, but denied permission to make interest payments on the Company’s subordinated debt. As a result of the FRB’s decision, the Company was required to begin the deferral of interest payments on each of its three issues of 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. During the period in which it is deferring the payment of interest on its subordinated debentures, the Company may not pay any dividends on its common or preferred stock, including the Preferred Shares, and the Company’s subsidiaries may not pay dividends on the subsidiaries’ common or preferred stock owned by entities other than the Company and its subsidiaries. Accordingly, the Company was required to suspend dividend payments on the Preferred Shares beginning in the second quarter of 2011. The Company will reach 20 consecutive quarters of deferral during the first quarter of 2016 and if the deferred interest payments are not paid in full prior to that time the Company will be in default under the related indentures. The Company and the Bank have entered into discussions with the Company’s and the Bank’s regulators to secure permission to pay the deferred interest payments with available cash of the Company and the proceeds of a dividend from the Bank prior to the Company being in default. If the Company and the Bank are able to secure the required approvals and the Company makes the deferred interest payments, the Company expects that it would likely be required to begin deferring interest payments again beginning in the first or second quarter of 2016. At June 30, 2015, the Company has $4,919 of interest on its subordinated debentures accrued for which payment is being deferred. In addition, the Company has accumulated $5,198 in deferred dividends on the Preferred Shares as of June 30, 2015. The Bank’s subsidiary Community First Properties, Inc. suspended the payment of dividends on its preferred stock beginning with the dividend payment due on December 31, 2011. At June 30, 2015, Community First Properties, Inc. has $63 of preferred stock dividends accrued for which payment is being deferred.

RESULTS OF OPERATIONS

Net Income

The Company had net income of $2,441 for the six months ended June 30, 2015 compared to net income of $1,592 for the same period in 2014, an increase in net income of $849. Net income available to common shareholders was $1,607 for the first six months of 2015 compared to $836 for the same period in 2014.

The Company had net income of $1,503 for the three months ended June 30, 2015 compared to net income of $798 for the same period in 2014, an increase in net income of $705. Net income available to common shareholders was $1,084 for the first three months of 2015 compared to $379 for the same period in 2014.

- 57 -

RESULTS OF OPERATIONS (Continued)

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, 2015 and 2014. 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, 2015								June 30, 2014								Change
	Average Balance			Interest Rate			Revenue/ Expense		Average Balance			Interest Rate			Revenue/ Expense		Due to Volume (1)			Due to Rate (2) (3)			Total

Gross loans (a and b)	$	262,424			5.31	%	$	6,910	$	266,708			5.22	%	$	6,907	$	(111	)	$	114		$	3
Taxable securities available for sale		98,428			1.87	%		915		85,134			2.13	%		899		140			(124	)		16
Tax exempt securities available for sale		1,728			2.92	%		25		2,918			3.25	%		47		(19	)		(3	)		(22	)
Federal funds sold and other		52,794			0.68	%		177		55,784			0.54	%		150		(8	)		35			27


Total interest earning assets		415,374			3.90	%		8,027		410,544			3.93	%		8,003		2			22			24

Cash and due from banks		3,449								3,611
Other nonearning assets		36,174								43,525
Allowance for loan losses		(5,118	)							(7,305	)


Total assets	$	449,879							$	450,375


Deposits:
NOW & money market investments	$	128,067			0.38	%	$	243	$	127,180			0.43	%	$	272	$	2		$	(31	)	$	(29	)
Savings		27,890			0.10	%		14		25,990			0.10	%		13		1			—			1
Time deposits $100 and over		87,424			0.90	%		390		91,288			0.95	%		429		(18			(21	)		(39	)
Other time deposits		94,361			0.75	%		349		107,585			0.81	%		431		(53	)		(29	)		(82	)

Total interest-bearing deposits		337,742			0.59	%		996		352,043			0.66	%		1,145		(68	)		(81	)		(149	)

Subordinated debentures		23,000			3.51	%		400		23,000			3.42	%		390		—			10			10

Total other borrowings		23,000			3.51	%		400		23,000			3.42	%		390		—			10			10
Total interest-bearing liabilities		360,742			0.78	%		1,396		375,043			0.83	%		1,535		(68	)		(71	)		(139	)
Noninterest-bearing liabilities		77,633								65,993

Total liabilities		438,375								441,036
Shareholders’ equity		33,504								9,339

Total liabilities and shareholders’ equity	$	449,879							$	450,375

Net interest income							$	6,631							$	6,468	$	70		$	93		$	163


Net interest margin					3.22	%							3.18	%

(a)	Interest income includes fees on loans of $232 and $217 in 2015 and 2014, respectively.

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

(1)	Changes in volume multiplied by prior rate

(2)	Changes in rate multiplied by prior volume

(3)	Changes in rate multiplied by change in volume

- 58 -

RESULTS OF OPERATIONS (Continued)

Net Interest Income

Net interest income for the first six months of 2015 was $6,631, an increase of $163, or 2.5%, compared to $6,468 for the same period in 2014. The increase in net interest income is primarily due to decreases in the average balance of and rate paid on time deposits.

Total interest income for the first six months of 2015 was $8,027, an increase of $24 from $8,003 for the same period in 2014. The increase in interest income is primarily due to an increase in income from federal funds sold and other combined with an increase in income from securities available for sale offset by a decrease in income from tax exempt securities available for sale.

The average balance of federal funds sold and other during the first six months of 2015 was $52,794, a decrease of $2,990 from $55,784 during the same period in 2014. The average rate earned on federal funds sold and other in the first six months of 2015 was 0.68% compared to 0.54% for the same period in 2014. The increase in rate is due to the Company’s utilization of excess cash by investing in time deposits in financial institutions.

Interest income on taxable securities increased $16 to $915 in the first six months of 2015 compared to $899 in the first six months of 2014. The increase is primarily due to an increase in the average balance of taxable securities offset by a decrease in the average rate earned on taxable securities.

Total interest expense was $1,396 in the first six months of 2015, a decrease of $139 from $1,535 in the first six months of 2014. The decrease in interest expense is largely due to a reduction in the average rate paid on deposits and the average balance of deposits in the first six months of 2015 compared to the same period in 2014.

Total interest expense on deposits was $996 in the first six months of 2015, a reduction of $149 from $1,145 in the first six months of 2014. The average rate paid on deposits was 0.59% in the first six months of 2015 compared to 0.66% for the same period in 2014. 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.

Net interest income for the three months ended June 30, 2015 was $3,339, an increase of $79, or 2.4%, compared to $3,260 for the same period in 2014. The increase in net interest income is primarily due to decreases in the average balance of and rate paid on time deposits, similar to factors noted above for the first six months of 2015.

Total interest income for the three months ended June 30, 2015 was $4,042, an increase of $29 from $4,013 for the same period in 2014. The increase in interest income is primarily due to an increase in income from loans, which is from a combination of increased deferred loan fees and a significant recovery received on a loan paid off during the quarter that was formerly on nonaccrual status.

Total interest expense was $703 in the three months ended June 30, 2015, a decrease of $50 from $753 from the same period in 2014. The decrease in interest expense is largely due to a reduction in the average rate paid on deposits and the average balance of deposits, similar to factors noted above for the first six months of 2015.

- 59 -

RESULTS OF OPERATIONS (Continued)

Provisions for Loan Losses

In the first six months of 2015, the Bank reversed $1,563 of the allowance for loan loss as a result of improvements in asset quality and reductions in gross loans. In the first six months of 2014, the Bank reversed $800 of the allowance for loan loss. The ratio of allowance for loan losses to gross loans was 1.70% at June 30, 2015 compared to 2.02% at December 31, 2014.

Management’s determination of the appropriate level of the provision for loan losses and the adequacy of the allowance for loan losses is based, in part, on an evaluation of specific loans, as well as the consideration of historical loss, 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 regulatory examinations, reviews of updated real estate appraisals, and the creditworthiness of the Bank’s borrowers and other qualitative factors.

Nonperforming loans decreased from $10,794 at December 31, 2014 to $6,443 at June 30, 2015. The decrease in nonperforming loans is primarily due to decreases in our nonaccrual loans. During the first six months of 2015, a significant number of nonaccrual loans have been paid off. A number of these payoffs resulted in significant recoveries on loan interest income, which contributed to the reversal of the provision for loan loss. The ratio of the allowance to nonperforming loans was 70.46% at June 30, 2015, compared to 47.91% at December 31, 2014. The portion of the allowance attributable to impaired loans was $289 at June 30, 2015 compared to $247 at December 31, 2014. Total impaired loans totaled $6,477 at June 30, 2015 compared to $9,885 at December 31, 2014. As economic conditions continue to improve, we expect that we will continue to see reductions in nonaccrual loans and we believe that we may continue to experience recoveries on certain of these loans, which recoveries may be meaningful.

The portion of the allowance attributable to historical and environmental factors has decreased since December 31, 2014. Management’s evaluation of the allowance for loan losses, in addition to specific loan allocations, is based on volume of non-impaired loans and changes in credit quality and environmental factors. The improvement in the portion of the allowance attributable to historical and environmental factors occurred during the first six months of 2015 due to improvement in credit quality and environmental factors.

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 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 established borrowers that are reasonably margined by collateral, but where potential for improvement in financial capacity is limited.

- 60 -

RESULTS OF OPERATIONS (Continued)

Substandard. Loans inadequately protected by the payment capacity of the borrower or the pledged collateral.

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, 2015 and December 31, 2014, based on the most recent analysis performed, the risk category of loans by segment of loans is as follows:


June 30, 2015	Pass		Watch		Special Mention		Substandard		Doubtful

Real estate construction	$	15,075	$	850	$	8	$	1,361	$	—
1-4 Family residential		86,479		10,414		—		1,793		—
Commercial real estate		97,907		10,681		—		2,292		—
Other real estate loans		8,309		—		—		—		—
Commercial, financial and agricultural		15,461		2,618		—		22		—
Consumer		6,342		6		—		15		—
Tax exempt		24		—		—		—		—
Other loans		651		—		—		—		—

Total	$	229,648	$	24,569	$	8	$	5,483	$	—


December 31, 2014	Pass		Watch		Special Mention		Substandard		Doubtful

Real estate construction	$	12,923	$	6,888	$	—	$	840	$	—
1-4 Family residential		85,138		11,288		—		4,767		—
Commercial real estate		82,034		11,074		—		4,447		—
Other real estate loans		5,825		—		—		—		—
Commercial, financial and agricultural		14,412		990		—		112		—
Consumer		5,614		3		—		17		—
Tax exempt		31		—		—		—		—
Other loans		148		—		—		—		—

Total	$	206,125	$	30,243	$	—	$	10,183	$	—

- 61 -

RESULTS OF OPERATIONS (Continued)

The table below illustrates changes in the AFLL ratio (the ratio, expressed as a percentage, of the allowance for loan losses to total gross loans) over the past five quarters and the changes in related risk metrics over the same periods:


Quarter Ended	June 30, 2015			March 31, 2015			December 31, 2014			September 30, 2014			June 30, 2014

AFLL Ratio		1.71	%		1.85	%		2.02	%		2.32	%		2.39	%
ASC 450 allowance ratio (1)		1.64	%		1.78	%		2.00	%		2.06	%		2.15	%

Specifically impaired loans (ASC 310 component)	$	289		$	377		$	247		$	983		$	981
Historical and environmental (ASC 450-10 component)		4,251			4,450			4,924			5,122			5,325

Total allowance for loan loss	$	4,540		$	4,827		$	5,171		$	6,105		$	6,306

Nonperforming loans to gross loans (2)		2.42	%		5.00	%		4.21	%		7.52	%		7.92	%
Impaired loans to gross loans		2.43	%		4.52	%		3.85	%		5.78	%		6.20	%
Allowance to nonperforming loans ratio		70.46	%		36.92	%		47.91	%		30.85	%		30.15	%
Quarter-to-date net charge offs to average gross loans (3)		(0.31	%)		(0.40	%)		0.35	%		0.08	%		0.00	%

(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, and troubled debt restructurings still accruing interest as a percentage of gross loans.

(3)	Annualized.

As reflected in the table above, the Company continues to make steady progress at improving its asset quality. Nonperforming loans as a percentage of gross loans are down nearly 70% year over year, and the Company anticipates that it will continue to make progress in this area throughout the remainder of 2015.

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 troubled debt restructurings and the gross income that would have been recorded in the six-month and three-month periods ended June 30, 2015 and 2014 if the loans had been current:


	Six months ended				Three months ended
	June 30, 2015		June 30, 2014		June 30, 2015		June 30, 2014
Nonaccrual interest	$	383	$	579	$	142	$	273
Troubled debt restructurings interest		37		12		3		2

- 62 -

RESULTS OF OPERATIONS (Continued)

Noninterest Income

Total noninterest income for the first six months of 2015 was $1,197, a decrease of $35, or 2.8% from $1,232 for the same period in 2014. The decrease is due to a decrease in gains on sale of securities available for sale and ATM income offset slightly by an increase in gain on sale of loans.

Gains on sale of securities available for sale for the first six months of 2015 was $1, a decrease of $39, or 97.5%, from $50 for the same period in 2014. This is due to the Company selling fewer securities during the first six months of 2015 than in the same period in 2014.

ATM income for the first six months of 2015 was $40, a decrease of $26, or 39.4%, from $66 for the same period in 2014. This is due to changes in the portion of transaction interchange fees that is allocated to the Bank under contracts with the Bank’s card services vendor.

Gain on sale of loans for the first six months of 2015 was $49, an increase of $27, or 122.7%, from $22 for the same period in 2014. This is a result of an increase in mortgage banking activity during the first six months of 2015 primarily driven by increased refinancing activity.

Total noninterest income for the three months ended June 30, 2015 was $633, a decrease of $32, or 4.8% from $665 for the same period in 2014. The decrease is due to a decrease in the gain on sale of securities available for sale and ATM income offset slightly by an increase in gain on sale of loans, similar to factors noted above for the six month period ended June 30, 2015.

The table below shows noninterest income for the six-month and three-month periods ended June 30, 2015 and 2014.


	Six Months Ended				Three Months Ended
	June 30,				June 30,
	2015		2014		2015		2014
Service charge on deposit accounts	$	870	$	854	$	460	$	447
Gain on sale of loans		49		22		26		12
Gain on sale of securities available for sale		1		40		—		40
Other:
Investment service income		66		74		37		46
Safe deposit box rental		14		15		7		7
Credit life insurance commissions		2		2		2		2
Bank Owned Life Insurance income		133		128		67		65
ATM income		40		66		20		32
Other customer fees		21		20		12		11
Other equity investment income		—		8		—		2
Other service charges, commissions and fees		1		3		2		1

Total noninterest income	$	1,197	$	1,232	$	633	$	665

- 63 -

RESULTS OF OPERATIONS (Continued)

Noninterest Expense

Noninterest expense for the first six months of 2015 was $6,950, an increase of $42, or 0.6% from $6,908 for the same period in 2014. The increase is primarily due to an increase in salaries and employee benefits, occupancy expense, operational expense and data processing offset by decreases in regulatory and compliance expense and other real estate expense.

Salaries and employee benefits totaled $3,464 in the first six months of 2015, an increase of $166, or 5.0%, from $3,298 for the same period in 2014. This increase is primarily the result of the addition of commercial loan officers combined with cost of living salary increases.

Occupancy expense totaled $477 in the first six months of 2015, an increase of $105, or 28.2%, from $372 for the same period in 2014. The increase is primarily due to a one-time adjustment of deferred rent expense related to a long-term lease on property utilized for one of the Bank’s branch locations that occurred during the first six months of 2014, resulting in lower than normal expense in that period. The adjustment reduced occupancy expense by $108 in the first six months of 2014. The Bank purchased the property from the lessor in 2014, terminating the lease.

Regulatory and compliance expense totaled $347 in the first six months of 2015, a decrease of $185, or 34.8%, from $532 for the same period in 2014. The decrease is primarily due to a reduction in the Bank’s FDIC insurance expense premium as a result of the lifting of the Consent Order.

Other real estate expense totaled $253 for the first six months of 2015, a decrease of $125, or 33.1%, from $378 for the same period in 2014. Other real estate expense decreased during the first six months of 2015 as a result of fewer properties being sold at a loss and fewer properties experiencing writedowns as a result of stabilization of real estate prices.

Noninterest expense for the three months ended June 30, 2015 was $3,575, an increase of $148, or 4.3% from $3,427 for the same period in 2014. The increase is primarily due to an increase in salaries and employee benefits and other real estate expense and data processing offset by decreases in regulatory and compliance expense, similar to factors noted above for the six-month period ended June 30, 2015.

Other real estate expense totaled $210 for the three months ended June 30, 2015, an increase of $71, or 51.1%, from $139 for the same period in 2014. Other real estate expense increased during the three months ended June 30, 2015 as a result of two properties selling with losses during the second quarter of 2015.

- 64 -

RESULTS OF OPERATIONS (Continued)

The table below shows noninterest expense for the six-month and three-month periods ended June 30, 2015 and 2014:


	Six Months Ended					Three Months Ended
	June 30,					June 30,
	2015		2014			2015		2014
Salaries and employee benefits	$	3,464	$	3,298		$	1,731	$	1,651
Regulatory and compliance		347		532			175		268
Occupancy		477		372			236		226
Furniture and equipment		148		154			74		77
Data processing fees		601		568			305		293
Advertising and public relations		97		102			47		47
Operational expense		241		206			128		106
Other real estate expense		253		378			210		139
Other:
Loan expense		45		24			21		2
Legal		46		25			22		3
Audit and accounting fees		165		156			83		77
Postage and freight		126		145			59		74
Director expense		117		124			63		63
ATM expense		344		326			182		167
Amortization of intangible asset		69		69			35		35
Holding losses on loans held for sale		—		(12	)		—		(12	)
Insurance expense		158		196			76		98
Printing		32		36			16		18
Other employee expenses		43		51			23		25
Dues & memberships		27		24			14		12
Miscellaneous taxes and fees		23		21			6		2
Federal Reserve and other bank charges		15		21			8		10
Other		112		92			61		46

Total noninterest expense	$	6,950	$	6,908		$	3,575	$	3,427

- 65 -

RESULTS OF OPERATIONS (Continued)

Income Taxes

During 2010, the Company established a valuation allowance against all of its deferred tax assets and has maintained that valuation allowance through the first six months of 2015.

Deferred income taxes, including net operating losses, arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets within the jurisdictions from which they arose, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income, we begin with historical results and changes in accounting policies and incorporate assumptions including the amount of future pretax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses.

The Company is in the process of seeking approval to pay the deferred interest payments on its subordinated debentures. If the Company is allowed to make the requested interest payments, it is likely that we will be able to reinstate some or all of the unrecognized deferred tax assets.

As of June 30, 2015, we have federal and state income tax net operating loss (NOL) carryforwards of $26,185 and $54,130, which will expire at various dates from 2020 through 2032. Such NOL carryforwards expire as follows:


	Federal		State
2020-2024	$	—	$	18,222
2025-2029		—		35,908
2030-2032		26,185		—

- 66 -

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, the possible sale or pledge of investment securities, and federal funds purchased.

The Bank’s primary uses of cash are lending to its borrowers and investing in securities and short-term interest-earning assets. During 2014, regular loan repayments outpaced loan demand, resulting in a decrease in gross loans and contributing to the increase in cash and cash equivalents. However, during the first six months of 2015, loan growth has outpaced deposit growth, and management believes this trend will continue throughout the remainder of 2015. In addition to funding loan growth, management plans to continue to utilize excess liquidity to invest in securities available for sale and time deposits in other financial institutions.

In connection with the termination of the written agreement the Bank had entered into with the Tennessee Department of Financial Institutions (the “Department”) and the termination of the Consent Order, the Bank reached an understanding with the FDIC and the Department in the form of a single informal agreement with both agencies. The informal agreement significantly reduces the restrictions that were placed on the Bank under the Consent Order and the written agreement with the Department. The informal agreement requires that the Bank, among other things:

•

Maintain the following minimum regulatory capital ratios: Leverage Capital 8.0%; Tier I Risk Based Capital 10.00%; and Total Risk Based Capital 12.00%.

•

Receive prior written consent of each of the FDIC and the Department before the Bank declares or pays any cash dividends.

•

Develop a written profit plan to improve the Bank’s earnings.

On April 19, 2012, the Company entered into the Written Agreement with the FRB. The Written Agreement replaces the board resolution adopted by the Board of Directors on January 18, 2011. Under the terms of the Written Agreement, the Company has agreed to, among other things, take the following actions:

•

Take appropriate steps to fully utilize the Company’s financial and managerial resources to serve as a source of strength to the Bank, including taking steps to ensure that the Bank complied with the Consent Order while it remained in effect;

•

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

- 67 -

LIQUIDITY AND CAPITAL RESOURCES (Continued)

•

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

•

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

•

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

•

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

•

Refrain from declaring or paying any dividends without prior approval;

•

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

•

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

•

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

•

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

As of June 30, 2015 all of the plans required to be submitted to the FRB have been submitted and approved. Management believes that the Company is in compliance with the requirements of the Written Agreement as of June 30, 2015.

The Company’s principal source of liquidity for dividend payments is dividends received from the Bank. Although the Bank was profitable in each of 2012, 2013, 2014, and the first six months of 2015, the Bank was prohibited under the terms of the Consent Order with the FDIC and the written agreement with the Department, and is currently prohibited under the terms of the informal agreement entered into by the Bank, from paying dividends to the Company without prior approval from the FDIC and the Department. Moreover, because the Bank has negative retained earnings, approval of the FDIC is required for the Bank to pay a dividend to the Company.

- 68 -

LIQUIDITY AND CAPITAL RESOURCES (Continued)

At the request of the FRB, the board of directors of the Company, on January 18, 2011, adopted a board resolution agreeing that the Company will not incur additional debt, pay common or preferred dividends, or redeem treasury stock without approval from the FRB. The terms of the Written Agreement, which replaced the board resolution, among other things, similarly prohibit the Company from incurring debt, paying dividends or interest or redeeming shares of its capital stock without the approval of the FRB. The Company requested permission to make dividend payments on the Preferred Shares and interest payments on its subordinated debt that were scheduled for the first quarter of 2011. The FRB granted permission to pay the preferred dividends that were due on February 15, 2011, but denied permission to make interest payments on the Company’s subordinated debt. As a result of the FRB’s decision, the Company was required to begin the deferral of interest payments on each of its three issuances of 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. During the period in which it is deferring the payment of interest on its subordinated debentures, the Company may not pay any dividends on its common stock or preferred stock, including the Preferred Shares, and the Company’s subsidiary may not pay dividends on the subsidiary’s common or preferred stock owned by entities other than the Company and its subsidiaries. Accordingly, the Company was required to suspend dividend payments on the Preferred Shares beginning in the second quarter of 2011. At June 30, 2015, the Company has $4,919 of interest accrued for which payment is being deferred. In addition, the Company has accumulated $5,198 in deferred dividends on the Preferred Shares as of June 30, 2015. The Company will reach 20 consecutive quarters of deferral of interest on its subordinated debentures during the first quarter of 2016 and if the deferred interest payments are not paid in full prior to that time the Company will be in default under the related indentures. The Company and the Bank have entered into discussions with the Company’s and the Bank’s regulators to secure permission to pay the deferred interest payments with available cash of the Company and the proceeds of a dividend from the Bank prior to the Company being in default. If the Company and the Bank are able to secure the required approvals and the Company makes the deferred interest payments, the Company expects that it would likely be required to begin deferring interest payments again beginning in the first or second quarter of 2016. The Company’s subsidiary Community First Properties, Inc. suspended payment of its dividends on its preferred stock beginning with the dividend payment due December 31, 2011. At June 30, 2015, Community First Properties, Inc. has $63 of preferred stock dividends accrued for which payment is being deferred. Since the Company has deferred payment of dividends on the Preferred Shares for more than six quarters, the holders of the Preferred Shares now have the right to elect up to two directors to the Company’s board of directors. On April 14, 2014, the U.S. Treasury sold all of the Preferred Shares of it owned in a modified Dutch auction. The Company received none of the proceeds from the sale by the U.S. Treasury of the Preferred Shares.

Although the Bank was profitable in each of 2012, 2013, 2014, and the first six months of 2015, the Bank is prohibited under the terms of the informal agreement with the FDIC and the Department (and, until it was terminated, the Consent Order) from paying dividends to the Company without prior approval from the FDIC and the Department. The Company is also restricted in the types and amounts of dividends it can pay by the terms of the Preferred Shares and by the terms of the Written Agreement, which prohibits the Company from paying interest or dividends (including interest on the Company’s subordinated debentures and dividends on the Preferred Shares) without the FRB’s prior approval. The Company is currently considering the options available to it to increase capital levels at the Bank and the Company, including the sale of common or preferred stock of the Company, 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. This change in control would likely qualify as a change in control under the IRS’s regulations related to the preservation of net operating loss carryforwards causing the Company to likely forfeit this benefit. The loss of this benefit would not cause the Company to recognize a cash charge, but rather would eliminate the benefit that the Company would otherwise be able to utilize to offset future year’s profits, if any, to reduce the Company’s tax liability.

- 69 -

LIQUIDITY AND CAPITAL RESOURCES (Continued)

In late 2010, the Basel Committee on Banking Supervision issued “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (“Basel III”), a new capital framework for banks and bank holding companies. Basel III will impose a stricter definition of capital, with more focus on common equity for those banks to which it is applicable. In July 2013, the federal bank regulatory agencies, including the Federal Reserve and the FDIC, adopted final rules that would revise their risk-based and leverage capital requirements and their method for calculating risk-weighted assets to make them consistent with the agreements that were reached by the Basel Committee on Banking Supervision in Basel III and certain provisions of the Dodd-Frank Act. The rules, which became effective January 1, 2015, apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $500,000 (or, if currently proposed regulatory changes are approved, $1,000,000) or more, and top-tier savings and loan holding companies (“banking organizations”). Among other things, the rules establish a new common equity Tier 1 minimum capital requirement of 4.5% and a minimum Tier 1 capital requirement of 6% (up from 4%) and assign higher risk weightings (150%) to exposures that are more than 90 days past due or are on nonaccrual status. In order to be considered “well-capitalized” beginning on January 1, 2015, the Bank must maintain at least the following minimum capital ratios: common equity Tier 1 capital of 6.5%; tier 1 risk-based capital of 8% (up from 6%); total risk-based capital of 10%; and tier 1 leverage capital of 5%. The rules limit a banking organization’s capital distributions and certain discretionary bonus payments as well as a banking organization’s ability to repurchase its own shares if the banking organization does not hold a “capital conservation buffer” consisting of an additional 2.5% of Tier 1 capital (when the buffer is fully phased in) in addition to the amount necessary to meet its minimum risk-based capital requirements. As a result, when fully phased in, the minimum capital requirements, inclusive of the capital conservation buffer, would be a Tier 1 leverage ratio of 4%, a Tier 1 common risk-based equity capital ratio of 7%, a Tier 1 equity risk-based capital ratio of 8.5% and a total risk-based capital ratio of 10.5%. Under the new rules, Tier 1 capital generally consists of common stock (plus related surplus) and retained earnings, limited amounts of minority interest in the form of additional Tier 1 capital instruments and non-cumulative preferred stock and related surplus, subject to certain eligibility standards, less goodwill and other specified intangible assets and other regulatory deductions. The Company’s cumulative stock and trust preferred securities will continue to be considered Tier 1 capital under grandfathering provisions included in the new rules. The new rules also introduce a new regulatory capital ratio, common equity Tier 1 capital, which will generally consist of common stock (plus related surplus) and retained earnings plus limited amounts of minority interest in the form of common stock, less goodwill and other specified intangible assets and other regulatory deductions. The rules allowed banks and their holding companies with less than $250,000,000 in assets a one-time opportunity to opt out of a requirement to include unrealized gains and losses in Accumulated Other Comprehensive Income, which the Bank and the Company has exercised. Because the Company’s total consolidated assets are below $500,000, these capital rules are not applicable to the Company on a consolidated basis. The Bank, though, is subject to these rules. Should the Company’s total consolidated assets increase to more than $500,000 (or if currently proposed regulatory changes are approved $1,000,000), the Company would then be subject to these rules.

At June 30, 2015, the Company had unfunded loan commitments outstanding of $36,504 and unfunded letters of credit of $1,714. 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 the Company needed to fund these outstanding commitments, it has 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, the Company could sell participations in these or other loans to correspondent banks.

- 70 -

LIQUIDITY AND CAPITAL RESOURCES (Continued)

At June 30, 2015 and December 31, 2014, the Bank’s and the Company’s risk-based capital ratios and the minimums to be considered “well-capitalized” under prompt corrective action guidelines and the ratios required by the Consent Order were as follows:


	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Regulatory Provisions⁽¹⁾					Required by terms of Regulatory Agreements⁽²⁾
June 30, 2015	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital to risk weighted assets
Community First Bank & Trust	$	47,958		16.25	%	$	23,615		8.00	%	$	29,519		10.00	%	$	35,423		12.00	%
Consolidated		30,535		10.33	%		23,636		8.00	%		29,545		10.00	%		N/A		N/A

Common Equity Tier 1 Capital to risk weighted assets
Community First Bank & Trust	$	44,257		14.99	%	$	13,283		4.50	%	$	19,187		6.50	%		N/A		N/A
Consolidated		N/A		N/A			N/A		N/A			N/A		N/A			N/A		N/A

Tier 1 Capital to risk weighted assets
Community First Bank & Trust	$	44,257		14.99	%	$	17,711		6.00	%	$	23,615		8.00	%	$	29,519		10.00	%
Consolidated		17,887		6.05	%		11,818		4.00	%		17,727		6.00	%		N/A		N/A

Tier 1 Capital to average assets
Community First Bank & Trust	$	44,257		9.88	%	$	17,916		4.00	%	$	22,394		5.00	%	$	38,070		8.50	%
Consolidated		17,887		3.97	%		18,031		4.00	%		N/A		N/A			N/A		N/A

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Regulatory Provisions⁽¹⁾					Required by terms of Regulatory Agreements⁽²⁾
December 31, 2014	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Capital to risk weighted assets
Community First Bank & Trust	$	44,173		16.32	%	$	21,654		8.00	%	$	27,068		10.00	%	$	32,481		12.00	%
Consolidated		26,624		9.83	%		21,668		8.00	%		27,086		10.00	%		N/A		N/A

Tier 1 Capital to risk weighted assets
Community First Bank & Trust	$	40,768		15.06	%	$	10,827		4.00	%	$	16,241		6.00	%	$	27,068		10.00	%
Consolidated		15,477		5.71	%		10,834		4.00	%		16,251		6.00	%		N/A		N/A

Tier 1 Capital to average assets
Community First Bank & Trust	$	40,768		9.32	%	$	17,490		4.00	%	$	21,862		5.00	%	$	34,979		8.00	%
Consolidated		15,477		3.52	%		17,586		4.00	%		N/A		N/A			N/A		N/A

(1)	Because the Company’s total assets were less than $500,000 at June 30, 2015, the Company was not, at that date, subject to capital level requirements at that level.

(2)	Reflects minimum capital ratios required by the informal agreement the Bank entered into with the FDIC and the Department on October 27, 2014.

- 71 -

LIQUIDITY AND CAPITAL RESOURCES (Continued)

At its current capital ratios, the Bank is considered “well capitalized”. The Company’s capital ratios are below what is required to be considered “adequately capitalized” were the Company subject to consolidated capital maintenance requirements. Two of the four capital ratios were considered “adequate”; however, the Tier 1 Capital to average assets ratio and Common Equity Tier 1 Ratio were below the requirements to be considered “adequate”, which would prohibit the Company from being considered “adequately capitalized” if it were subject to consolidated capital maintenance requirements.

Management continually monitors the Bank’s sources and uses of cash in order to plan for future liquidity needs. The Bank’s most potentially volatile funding liabilities are national market time deposits. The Bank reduced its reliance on these funding sources during 2013 and 2014, but in the first six months of 2015 the Bank’s national market CDs increased to $8,035 at June 30, 2015 compared to $7,240 at December 31, 2014. The increase in national market CDs is due to management’s decision to take advantage of the favorable rates in that sector of the deposit market.

- 72 -

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 on securities. Non-maturing balances such as money markets, savings, and negotiable order of withdrawal (“NOW”) accounts have no contractual or stated maturities. A challenge in the rate risk analysis is to determine the impact of the non-maturing balances on the net interest margin as the interest rates change. Because these balances do not “mature” it is difficult to know how they will reprice as rates change. It is possible to glean some understanding by reviewing our pricing history on these categories relative to interest rates. Using the interest rate history from the Asset Liability Management software database spanning up to 20 quarters of data, we can derive the relationship between interest rates changes and the offering rates themselves. The analysis uses the T-Bill rate as an indicator of rate changes. The gap analysis uses beta factors to spread balances to reflect repricing speed. In the gap analysis the model considers deposit rate movements to determine what percentage of interest-bearing deposits that is actually repriceable within a year. Our cumulative one year gap position at June 30, 2015, was 0.74% of total assets. Our policy states that our one-year cumulative gap should not exceed 15% of total assets.

At June 30, 2015, $148,916 of $453,680 of interest earning assets will reprice or mature within one year. Loans maturing or repricing within one year totaled $91,426, or 34.8% of total loans, including loans held for sale at June 30, 2015. As of June 30, 2015, we had $132,282 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 move up and down. In addition, the prepayment speeds and repricing speeds are changed. Rate shock is a method for stress testing the net interest margin over the next four quarters under several rate change levels. These levels span four 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 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.


June 30, 2015
Basis Point Change	+200 bps		+100 bps		-100 bps		-200 bps
Increase (decrease) in net interest income	(3.23	%)	(1.14	%)	(2.02	%)	(6.56	%)

December 31, 2014
Basis Point Change	+200 bps		+100 bps		-100 bps		-200 bps
Increase (decrease) in net interest income	(8.55	)%	(3.11	%)	(1.13	%)	(5.64	%)

- 73 -

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (Continued)

Our Economic Value of Equity simulation measures our long-term interest rate risk. The economic value is the difference between the market value of the assets and the liabilities and, technically, it is our liquidation.

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


June 30, 2015
Basis Point Change	+200 bps		+100 bps		-100 bps		-200 bps
Increase (decrease) in equity at risk	(10.44	%)	(4.39	%)	1.42	%	(1.68	%)

December 31, 2014
Basis Point Change	+200 bps		+100 bps		-100 bps		-200 bps
Increase (decrease) in equity at risk	(13.33	%)	(5.53	%)	2.05	%	(0.64	%)

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

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 on their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

There were no changes in the Company’s internal control over financial reporting that occurred during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

- 74 -

PART II.

OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

Not applicable.

ITEM 1A.

RISK FACTORS

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, 2014.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Because the Company is currently deferring the payment of interest on its outstanding subordinated debentures, the Company is not currently permitted to pay dividends on its outstanding Preferred Shares originally issued to the U.S. Treasury pursuant to the CPP. The Company has not paid these dividends since the dividend payment on February 15, 2011. The total aggregate amount of dividends due but unpaid on the Preferred Shares as of the date of this report is $5,198.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

Not applicable.

- 75 -

ITEM 6.

EXHIBITS


Exhibit Number		Description

31.1		Certification of Chief Executive Officer 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 Chief Executive Officer 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.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Extension Calculation Linkbase

101.DEF		XBRL Taxonomy Extension Definition Linkbase

101.LAB		XBRL Taxonomy Extension Label Linkbase

101.PRE		XBRL Taxonomy Extension Presentation Linkbase

- 76 -

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 7, 2015						/s/ Louis E. Holloway
(Date)						Louis E. Holloway, President and Chief Executive Officer

August 7, 2015						/s/ Jon Thompson
(Date)						Jon Thompson, Chief Financial Officer

- 77 -

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