News Column

NOTE 2 - REGULATORY MATTERS AND MANAGEMENT PLANS

August 8, 2014

Although the Company reported net income in 2012, 2013 and the first six months of 2014, the Company reported losses for each year from 2008 to 2011. The losses incurred by the Company were primarily the result of the economic recession that began in 2008 and the continued impacts of that recession and the resulting sluggish economic conditions. The Bank is a community bank that focuses heavily on commercial and residential development lending. As a result of the collapse of the housing market, many developments stalled, resulting in developers no longer being able to meet their payment obligations to the Bank. Also, during this time, market values for existing real estate properties decreased, which jeopardized the collateral securing the loans made by the Bank. The losses incurred by the Bank and the Company contributed to both the Bank and the Company becoming subject to additional regulatory scrutiny and increased supervisory actions by regulators. Banks and bank holding companies with total consolidated assets in excess of $500 million 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. - 13 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited)



NOTE 2 - REGULATORY MATTERS AND MANAGEMENT PLANS (Continued)

Prompt corrective action regulations classify banks into one of five capital categories depending on how well they meet their minimum capital requirements. Although these terms are not used to represent the overall financial condition of a bank, the classifications are: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. If adequately capitalized or worse, or subject to a written agreement, consent order, or cease and desist order requiring higher minimum capital levels as the Bank was as of June 30, 2014, regulatory approval is required for the Bank to accept, renew or rollover brokered deposits. If a bank is classified as undercapitalized or worse, its capital distributions are restricted, as is asset growth and expansion, and capital restoration plans are required. At June 30, 2014, 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 Consent Order (as defined below) and the written agreement that the Bank has entered into with the Tennessee Department of Financial Institutions (the "Department"). The Company's capital ratios are below what is required to be considered "adequately capitalized" under the regulatory framework. Two of the three capital ratios were considered "adequate"; however, the Tier 1 to Average Assets ratio was below the requirements to be considered "adequate", which prohibits the Company from being "adequately capitalized". On April 19, 2012, the Company entered into a written agreement (the "Written Agreement") with the Federal Reserve Bank of Atlanta (the "FRB"). Under the terms of the Written Agreement, the Company agreed to, among other things, take the following actions:



Take appropriate steps to fully utilize the Company's financial and

managerial resources to serve as a source of strength to the Bank,

including taking steps to ensure that the Bank complies with the Consent

Order (as defined below); Submit within 60 days of April 19, 2012 a written plan to maintain



sufficient capital at the Company on a consolidated basis, and within 10

days of approval of the plan by the FRB, adopt the approved capital plan; Submit within 60 days of April 19, 2012 a written statement of the



Company's planned sources and uses of cash for debt service, operating

expenses, and other purposes for 2012;



Provide notice in compliance with applicable federal law and regulations,

of any changes in directors or senior executive officer of the Company; Comply with applicable federal law and regulations restricting indemnification and severance payments; and



Provide within 45 days after the end of each calendar quarter, a written

progress report detailing the form and manner of all actions taken to secure compliance with the provisions of the Written Agreement. - 14 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited)



NOTE 2 - REGULATORY MATTERS AND MANAGEMENT PLANS (Continued)

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

Refrain from declaring or paying any dividends without prior approval of

the FRB; Not directly or indirectly take dividends or any other form of payment



representing a reduction in capital from the Bank without prior approval;

Not (along with the Company's non-bank subsidiary) make any distributions

of interest, principal, or other sums on subordinated debentures or trust preferred securities without prior approval;



Not (along with the Company's non-bank 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, 2014, 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, 2014.

At the request of the FRB, the board of directors of the Company, on January 18, 2011, adopted a board resolution agreeing that the Company would not incur additional debt, pay common or preferred dividends, or redeem treasury stock without approval from the FRB. The terms of the Written Agreement, which replaced the board resolution, among other things, similarly prohibit the Company from incurring debt, paying dividends or interest or redeeming shares of its capital stock. The Company requested permission to make dividend payments on its outstanding preferred stock (the "Preferred Stock") and interest payments on its subordinated debt that were scheduled for the first quarter of 2011. The FRB granted permission to pay the Preferred Stock dividends that were due on February 15, 2011, but denied permission to make interest payments on the Company's subordinated debt. As a result of the FRB's decision, the Company was required to begin the deferral of interest payments on each of its three issuances of subordinated debentures during the first quarter of 2011. The Company has the right to defer the payment of interest on its subordinated debentures at any time, for a period not to exceed 20 consecutive quarters. During the period in which it is deferring the payment of interest on its subordinated debentures, the Company may not pay any dividends on its common or preferred stock, and the Company's subsidiaries may not pay dividends on the subsidiaries' common or preferred stock owned by entities other than the Company and its subsidiaries. Accordingly, the Company was required to suspend dividend payments on the Preferred Stock beginning in the second quarter of 2011. - 15 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited)



NOTE 2 - REGULATORY MATTERS AND MANAGEMENT PLANS (Continued)

Consequently, at June 30, 2014, the Company had $4,112 of interest accrued on its subordinated debentures for which payment is being deferred. In addition, the Company had accumulated $3,515 in deferred dividends on the shares of Preferred Stock it had sold to the United States Department of the Treasury (the "U.S. Treasury") under the TARP Capital Purchase Program (the "CPP"). Under the terms of the CPP, failure to pay dividends for six dividend periods triggers the right of the holders of the Preferred Stock to elect two directors to an institution's board. Since the Company has deferred payment of dividends on its Preferred Stock for more than six quarters, the holders of the Preferred Stock voting together as a single class 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 shares of Preferred Stock it owned in a modified Dutch auction to multiple qualified investors, including certain members of the Company's board of directors and senior officers. The sale of the Preferred Stock 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 up to two directors to the Company's board of directors. However, the Company is 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 Preferred Stock. Similarly, the sole subsidiary of the Bank, Community First Properties, Inc., also suspended the payment of dividends on its preferred stock beginning with the dividend payment due on December 31, 2011. At June 30, 2014, Community First Properties, Inc. had $47 of preferred stock dividends accrued for which payment is being deferred. On September 20, 2011, the Bank consented to the issuance of a consent order (the "Consent Order") by the Federal Deposit Insurance Corporation (the "FDIC"). The Consent Order requires the Bank to attain and achieve regulatory capital ratios higher than those required by regulatory standards, improve, among other things, its processes for identifying and classifying problem loans, and improve its overall profitability. The Consent Order required the Bank to formulate written plans detailing how the Bank would achieve such requirements. The Bank has prepared and submitted all of the required plans to the FDIC and the FDIC has approved those plans as written. In addition, the terms of the Consent Order require the Bank to provide quarterly progress reports to the FDIC. 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 Tennessee Department of Financial Institutions (the "Department"), the terms of which are substantially the same as those of the Consent Order, including required minimum levels of capital that the Bank must maintain. - 16 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited)



NOTE 2 - REGULATORY MATTERS AND MANAGEMENT PLANS (Continued)

As a result of entering into the Consent Order, the Bank also is subject to additional limitations on its operations including a prohibition on accepting, rolling over, or renewing brokered deposits, which could adversely affect the Bank's liquidity and/or operating results. The existence of the Consent Order also limits the Bank from paying deposit rates above national rate caps published weekly by the FDIC unless the Bank is determined to be operating in a high-rate market area. On December 1, 2011, the Bank received notification from the FDIC that it is operating in a high-rate environment, which allows the Bank to pay rates higher than the national rate caps, but continues to limit the Bank to rates that do not exceed the prevailing rate in the Bank's market by more than 75 basis points. The Bank is also limited, as a result of its condition, in its ability to pay more than de minimis severance payments to its employees and must receive the consent of the FDIC and the Department to appoint new officers or directors. The Consent Order includes time frames to implement the foregoing and on-going compliance requirements for the Bank, such as quarterly progress reports that the Bank must submit to its regulators. In accordance with the terms of the Consent Order, management prepared and submitted a capital plan with the objective of attaining the capital ratios required by the Consent Order. At June 30, 2014, each of the Bank's regulatory capital ratios exceeded the regulatory capital ratios proscribed by the Consent Order and the written agreement with the Department. Management has submitted a written plan to the FDIC to bring the Bank into compliance with the loan concentration component of the Consent Order, and that plan was approved by the FDIC. The Company's principal source of funds for dividend 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 and 2013, and the first six months of 2014, the Bank is 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. The Company is also restricted in the types and amounts of dividends it can pay pursuant to the terms of the Preferred Stock 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. - 17 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited)



NOTE 2 - REGULATORY MATTERS AND MANAGEMENT PLANS (Continued)

Banks and bank holding companies with total consolidated assets in excess of $500 million 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, 2014 and December 31, 2013, were as follows: To Be Well Capitalized Under Required by For Capital Applicable terms of Adequacy Regulatory Consent Order Actual Purposes Provisions (1) with FDIC June 30, 2014 Amount Ratio Amount Ratio Amount Ratio Amount Ratio Total Capital to risk weighted assets Community First Bank & Trust $ 43,234 15.34 % $ 22,552 8.00 % $ 28,190 10.00 % $ 33,828 12.00 % Consolidated 26,746 9.47 % 22,598 8.00 % 28,247 10.00 % N/A N/A Tier 1 Capital to risk weighted assets Community First Bank & Trust $ 39,676 14.07 % $ 11,276 4.00 % $ 16,914 6.00 % $ 28,190 10.00 % Consolidated 15,454 5.47 % 11,299 4.00 % 16,948 6.00 % N/A N/A Tier 1 Capital to average assets Community First Bank & Trust $ 39,676 8.87 % $ 17,885 4.00 % $ 22,357 5.00 % $ 38,006 8.50 % Consolidated 15,454 3.44 % 17,984 4.00 % N/A N/A N/A N/A December 31, 2013 Total Capital to risk weighted assets Community First Bank & Trust $ 41,250 14.70 % $ 22,445 8.00 % $ 28,056 10.00 % $ 33,667 12.00 % Consolidated 24,905 8.87 % 22,474 8.00 % 28,092 10.00 % N/A N/A Tier 1 Capital to risk weighted assets Community First Bank & Trust $ 37,687 13.43 % $ 11,222 4.00 % $ 16,833 6.00 % $ 28,056 10.00 % Consolidated 14,225 5.06 % 11,237 4.00 % 16,855 6.00 % N/A N/A Tier 1 Capital to average assets Community First Bank & Trust $ 37,687 8.41 % $ 17,917 4.00 % $ 22,396 5.00 % $ 38,073 8.50 % Consolidated 14,225 3.16 % 18,008 4.00 % N/A N/A N/A N/A



(1) Because the Company's total assets were less than $500 million at June 30,

2014 and December 31, 2013, the Company was not at those dates subject to

capital level requirements at the Company level.

The Bank's capital ratios at June 30, 2014 were above those levels necessary to be considered "well capitalized" under the regulatory framework for prompt corrective action, but the existence of the Consent Order requires regulators to continue to classify the Bank as "adequately capitalized" even though the capital levels would qualify as "well capitalized" if the Consent Order were not in place. - 18 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited)



NOTE 2 - REGULATORY MATTERS AND MANAGEMENT PLANS (Continued)

Because the Company's total assets were less than $500 million at June 30, 2014, the Company is not required to meet consolidated capital level requirements. Had the Company's total assets exceeded $500 million at that date, the Company's capital levels at June 30, 2014 would have been considered below those required to be considered "adequately capitalized" under applicable regulations because only two of the three capital ratios were above the levels necessary to be considered "adequate". The Company's Tier 1 to Average Assets ratio was below the requirements to be considered "adequate", which prohibits the Company from being considered "adequately capitalized".



Management's Plans

The Company is currently considering various options to increase capital levels at the Company and the Bank, including the sale of common or preferred stock of the Company or other assets, or alternatively the sale of the Company. Any sale of the Company's common stock would likely be at a price that would result in substantial dilution in ownership for the Company's existing common shareholders and could result in a change in control of the Company. If a change in control was deemed to have occurred, certain IRS regulations related to the preservation of net operating loss carryforwards could subject the Company to risk of forfeiture of these tax benefits. The loss of these tax benefits would not cause the Company to recognize a direct reduction in cash, but rather would eliminate the tax benefits that the Company would otherwise be able to utilize to offset future year's profits, if any, to reduce the Company's tax liabilities. Failure by the Bank or the Company to comply with the terms of the Consent Order, the Written Agreement or the written agreement that the Bank has entered into with the Department, as applicable, may result in additional adverse regulatory action. - 19 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited)



NOTE 3 - SECURITIES AVAILABLE FOR SALE

The following table summarizes the amortized cost and fair value of the available for sale securities portfolio at June 30, 2014 and December 31, 2013 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss), net of applicable income taxes: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value June 30, 2014 U.S. Government sponsored entities $ 26,356 $ 4 $ (646 )$ 25,714 Mortgage-backed (residential) 59,936 526 (204 ) 60,258 State and municipals 9,454 275 (12 ) 9,717 Total $ 95,746$ 805$ (862 )$ 95,689 December 31, 2013 U.S. Government sponsored entities $ 34,604 $ - $ (1,247 )$ 33,357 Mortgage-backed (residential) 42,294 488 (501 ) 42,281 State and municipals 6,228 78 (18 ) 6,288 Total $ 83,126$ 566$ (1,766 )$ 81,926 The proceeds from sales of securities and the associated gains and losses are listed below: Six months ended June 30, 2014 2013 Proceeds $ 11,762$ 3,675 Gross gains 105 182 Gross losses (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, 2014 Amortized Fair Cost Value Due in one year or less $ 926$ 933 Due after one through five years 12,237 12,032 Due after five through ten years 12,497 12,193 Due after ten years 10,150 10,273 Mortgage backed (residential) 59,936 60,258 Total $ 95,746$ 95,689 - 20 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited)



NOTE 3 - SECURITIES AVAILABLE FOR SALE (Continued)

At June 30, 2014 and December 31, 2013, respectively, securities totaling $40,118 and $37,182 were pledged to secure public deposits.

At June 30, 2014, the Company held one security for which the aggregate face amount of investments is greater than 10% of the Company's shareholders' equity as of June 30, 2014. Face Fair % of Type Issuer Value Value Capital State and municipals State of Texas $ 1,245$ 1,302 11.71 % At December 31, 2013, the Company held one security for which the aggregate face amount of investments is greater than 10% of shareholders' equity as of December 31, 2013. Face Fair % of Type Issuer Value Value Capital State and municipals State of Texas $ 1,245$ 1,248 14.45 % Other than the above investments, 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, 2014 or December 31, 2013. The following table summarizes securities with unrealized losses at June 30, 2014 and December 31, 2013 aggregated by major security type and length of time in a continuous unrealized loss position: Less than 12 Months 12 Months or More Total June 30, 2014 Fair Unrealized



Fair Unrealized Fair Unrealized Description of Securities

Value Loss Value Loss Value Loss



U.S. Government sponsored entities $ - $ -

$ 24,710$ (646 )$ 24,710$ (646 ) Mortgage-backed (residential)

21,765 (62 ) 7,475 (142 ) 29,240 (204 ) State and municipals 1,007 (12 ) - - 1,007 (12 ) Total temporarily impaired $ 22,772$ (74 )$ 32,185$ (788 )$ 54,957$ (862 ) Less than 12 Months 12 Months or More Total December 31, 2013 Fair Unrealized Fair Unrealized Fair Unrealized Description of Securities Value Loss Value Loss Value Loss



U.S. Government sponsored entities $ 32,376$ (1,228 )

$ 481 $ (19 ) $ 32,857$ (1,247 ) Mortgage-backed (residential)

27,902 (501 ) - - 27,902 (501 ) State and municipals 3,003 (18 ) - - 3,003 (18 ) Total temporarily impaired $ 63,281$ (1,747 )$ 481 $ (19 ) $ 63,762$ (1,766 ) - 21 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited)



NOTE 3 - SECURITIES AVAILABLE FOR SALE (Continued)

Other-Than-Temporary Impairment

Management evaluates securities for other-than-temporary impairment ("OTTI") at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. The securities portfolio is evaluated for OTTI by segregating the portfolio into two general segments and applying the appropriate OTTI model. Securities classified as available for sale are generally evaluated for OTTI under the provisions of ASC 320-10, Investments-Debt and Equity Securities. In determining OTTI, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time. When OTTI occurs, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment's amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all other factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in accumulated other comprehensive income becomes the new amortized cost basis of the investment. As of June 30, 2014, the Company's securities portfolio consisted of 118 securities, 56 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, 2014 the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery, the Company did not consider these securities to be other-than-temporarily impaired at June 30, 2014. - 22 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited)



NOTE 3 - SECURITIES AVAILABLE FOR SALE (Continued)

The table below presents a rollforward for the six-month and three-month periods ended June 30, 2014 and 2013 of the credit losses recognized in earnings:

Six months ended Three months ended June 30, June 30, 2014 2013 2014 2013 Beginning Balance $ - $ 6,338 $ - $ 6,338 Additions for credit losses on securities for which no previous other-than-temporary impairment was recognized - - - - Reduction for credit losses on securities for which no recovery has been received and for which no recovery is expected - (6,338 ) - (6,338 ) Ending Balance $ - $ - $ - $ -



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

NOTE 4 - FAIR VALUE

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



Level 1: Quoted prices (unadjusted) 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. - 23 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited)



NOTE 4 - FAIR VALUE (Continued)

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. Loans Held for Sale: Generally, the fair value of loans held for sale is based on what secondary markets are currently offering for loans with similar characteristics or based on an agreed upon sales price with third party investors and typically result in a Level 2 classification of the inputs for determining fair value. Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Other Real Estate Owned: Real estate acquired through foreclosure on a loan or by surrender of the real estate in lieu of foreclosure is called "OREO". OREO is initially recorded at the fair value of the property less estimated costs to sell, which establishes a new cost basis. OREO is subsequently accounted for at the lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Valuation adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Valuation adjustments are also required when the listing price to sell an OREO property has had to be reduced below the current carrying value. If there is a decrease in the fair value of the property from the last valuation, the decrease in value is charged to noninterest expense. All income produced from, changes in fair values in, and gains and losses on OREOs is also included in noninterest expense. During the time the property is held, all related operating and maintenance costs are expensed as incurred. Appraisals for both collateral dependent impaired loans and OREO are performed by certified general appraisers, certified residential appraisers or state licensed appraisers whose qualifications and licenses are annually reviewed and verified by the Bank. Once received, either Bank personnel or an independent review appraiser reviews the assumptions and approaches utilized in the appraisal, as well as the overall resulting fair value, and determines whether the appraisal is reasonable. Appraisals for collateral dependent impaired loans and OREO are updated annually. On an annual basis, the Company compares the actual selling costs of collateral that has been liquidated to the selling price to determine what additional adjustment should be made to the appraisal value to arrive at fair value. Beginning in the third quarter of 2010, the Company's analysis indicated that an additional discount of 15% should be applied to properties with appraisals performed within 12 months. Mortgage Banking Derivatives: Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market are accounted for as free standing derivatives. Fair values of these mortgage derivatives are estimated based on the anticipated gain from the sale of the underlying loan. Changes in the fair values of these derivatives are included in noninterest income as gain on sale of loans. - 24 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited)



NOTE 4 - FAIR VALUE (Continued)

Assets and Liabilities Measured on a Recurring Basis

Fair Value Measurements at June 30, 2014 using Significant Other Significant Observable Unobservable Carrying Inputs Inputs Value (Level 2) (Level 3) Assets:



Available for sale securities:

U.S. government sponsored entities $ 25,714$ 25,714 $ -

Mortgage-backed (residential) 60,258 60,258



-

State and municipals 9,717 9,612



105

Total available for sale securities 95,689 95,584 105 Loans held for sale 123 123 - Fair Value Measurements at December 31, 2013 using Significant Other Significant Observable Unobservable Carrying Inputs Inputs Value (Level 2) (Level 3) Assets:



Available for sale securities:

U.S. government sponsored entities $ 33,357$ 33,357 $ -

Mortgage-backed (residential) 42,281 42,281



-

State and municipals 6,288 6,183



105

Total available for sale securities 81,926 81,821 105 Loans held for sale - - -



There were no transfers among fair value pricing levels during the six months ended June 30, 2014 and 2013.

- 25 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited)



NOTE 4 - FAIR VALUE (Continued)

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six-month and three-month periods ended June 30, 2014 and 2013:

Fair Value Measurements Using Significant Unobservable Inputs (Level 3) Corporate Securities Six months Three months ended ended June 30, June 30, 2014 2013 2014 2013 Beginning balance $ - $ 987 $ - $ 989 Change in fair value - - - (2 ) Ending balance $ - $ 987 $ - $ 987 Fair Value Measurements Using Significant Unobservable Inputs (Level 3) State and County Municipal Securities Six months Three months ended ended June 30, June 30, 2014 2013 2014 2013 Beginning balance $ 105$ 108$ 106$ 108 Change in fair value - (1 ) (1 ) (1 ) Ending balance $ 105$ 107$ 105$ 107 - 26 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited)



NOTE 4 - FAIR VALUE (Continued)

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

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

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



State and Municipal Securities:

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



Corporate Securities:

For corporate securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows (Level 3) as determined by an independent third party. The significant unobservable inputs used in the valuation model include discount rates and yields or current spreads to U.S. Treasury rates. - 27 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited)



NOTE 4 - 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, 2014 Fair Value Measurements using other significant Carrying unobservable Value inputs (Level 3) Assets: Impaired loans: Real estate construction $ 704 $ 704 1-4 Family residential 1,611 1,611 Commercial real estate 240 240 Other loans 463 463 Total impaired loans 3,018 3,018 Other real estate owned: Construction and development 5,729 5,729 1-4 Family residential 711 711 Non-farm, non-residential 4,360 4,360 Total other real estate owned 10,800 10,800 - 28 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited)



NOTE 4 - FAIR VALUE (Continued)

December 31, 2013 Fair Value Measurements using other significant unobservable Carrying inputs Value (Level 3) Assets: Impaired loans: Real estate construction $ 4,321$ 4,321 1-4 Family residential 6,173 6,173 Commercial real estate 3,382 3,382 Commercial, financial and agricultural 1 1 Other loans 926 926 Total impaired loans 14,803 14,803 Other real estate owned: Construction and development 6,079 6,079 1-4 Family residential 228 228 Non-farm, non-residential 4,707 4,707 Total other real estate owned 11,014 11,014 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 $3,687 as of June 30, 2014, with a valuation allowance of $669, resulting in no additional provision for loan losses for the six-month period ended June 30, 2014, compared to an additional provision of $262 in the first six months of 2013. 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 $17,223 at December 31, 2013, with a valuation allowance of $2,420, resulting in an additional provision for loan losses of $45 for the year ended December 31, 2013. Other real estate owned, measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $10,800, which is made up of the outstanding balance of $13,008, net of a valuation allowance of $2,208 at June 30, 2014, resulting in a write-down of $221 charged to expense in the six months ended June 30, 2014, compared to a write-down of $384 charged to expense in the first six months of 2013. Net carrying amount was $11,014 at December 31, 2013, which was made up of the outstanding balance of $13,163, net of a valuation allowance of $2,149. - 29 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited)



NOTE 4 - 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, 2014: Fair Valuation Unobservable Range (Weighted Value Technique(s) Input(s) Average) (1) Impaired Loans: Real estate $704 Sales comparison Adjustment for (0.0%) - (21.0%) construction approach differences (6.98%) between the comparable sales 1-4 Family 1,611 Sales comparison Adjustment for (0.0%) - (0.0%) residential approach differences (0.0%) between the comparable sales Commercial real 240 Sales comparison Adjustment for (0.0%) - (20.0%) estate approach differences (4.09%) between the comparable sales Other loans 463 Sales comparison Adjustment for (0.0%) - (15.0%) approach differences (15.0%) between the comparable sales Other real estate owned: Construction and 5,729 Sales comparison Adjustment for (0.0%) - (22.0%) development approach differences (7.17%) between the comparable sales 1-4 Family 711 Sales comparison Adjustment for (0.0%) - (0.0%) residential approach differences (0.0%) between the comparable sales Non-farm, 4,360 Sales comparison Adjustment for (0.0%) - (11.0%) non-residential approach differences (8.15%) between the comparable sales



(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. - 30 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited)



NOTE 4 - FAIR VALUE (Continued)

Carrying amount and estimated fair values of significant financial instruments at June 30, 2014 and December 31, 2013 were as follows:

June 30, 2014 Carrying Amount Total Level 1 Level 2 Level 3 Financial assets Cash and cash equivalents $ 32,280$ 32,280$ 32,280 $ - $ - Time deposits in other financial institutions 21,452 21,429 - 21,429 - Securities available for sale 95,689 95,689 - 95,584 105 Loans held for sale, at fair value 123 123 - 123 - Loans, net of allowance 257,958 254,555 - - 254,555 Restricted equity securities 1,727 NA NA NA NA Accrued interest receivable 1,218 1,218 14 414 790 Financial liabilities Deposits with stated maturities 217,089 217,939 - 217,939 - Deposits without stated maturity 191,010 191,010 191,010 - - Accrued interest payable 4,595 4,595 1 482 4,112 Subordinated debentures 23,000 12,500 - - 12,500 December 31, 2013 Carrying Amount Total Level 1 Level 2 Level 3 Financial assets Cash and cash equivalents $ 49,036$ 49,036$ 49,036 $ - $ - Time deposits in other financial institutions 6,500 6,524 - 6,524 - Securities available for sale 81,926 81,926 - 81,821 105 Loans, net of allowance 265,668 264,613 - - 264,613 Restricted equity securities 1,727 NA NA NA NA Accrued interest receivable 1,225 1,225 5 311 909 Financial liabilities Deposits with stated maturities 233,777 234,984 - 234,984 - Deposits without stated maturity 173,755 173,755 173,755 - - Accrued interest payable 4,287 4,287 1 564 3,722 Subordinated debentures 23,000 12,500 - - 12,500 - 31 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited)



NOTE 4 - 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 5 - LOANS

Loans outstanding by category at June 30, 2014 and December 31, 2013 were as follows: June 30, December 31, 2014 2013 Real estate construction: Residential construction $ 9,083 $



8,454

Other construction 23,048



21,684

1-4 Family residential:

Revolving, open ended 19,783 22,513 First liens 84,002 86,318 Junior liens 1,936 1,991



Commercial real estate:

Farmland 8,241 7,667 Owner occupied 40,168 41,286 Non-owner occupied 51,398 48,137

Other real estate secured loans 2,913



4,800

Commercial, financial and agricultural:

Agricultural 686



839

Commercial and industrial 16,954

22,346 Consumer 4,948 5,474 Tax exempt 51 51 Other 1,053 2,147 $ 264,264$ 273,707 - 32 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited) NOTE 5 - LOANS (Continued) The following tables present activity in the allowance for loan losses and the outstanding loan balance by portfolio segment and are based on impairment methods as of and for the six-month and three-month periods ended June 30, 2014 and 2013. The balances for "recorded investment" in the following tables related to credit quality do not include approximately $790, $925 and $909 in accrued interest receivable at June 30, 2014, June 30, 2013 and December 31, 2013, respectively. Accrued interest receivable is a component of the Company's recorded investment in loans. Other Real Commercial, Estate Financial Real Estate 1-4 Family Commercial Secured and Tax Other Construction Residential Real Estate Loans Agricultural Consumer Exempt Loans Unallocated Total 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 (Reversal of) 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

Six months ended June 30, 2013 Activity in the allowance for loan losses: Beginning Balance $ 1,938$ 4,133$ 1,514$ 226 $ 994 $ 14 $ - $ 368 $ 580 $ 9,767 Charge-offs - (706 ) (2 ) - (449 ) (4 ) - (33 ) - (1,194 ) Recoveries 3 60 21 - 76 6 - 15 - 181 (Reversal of) provision (432 ) 84 483 (144 ) 3 8 - 353 (55 ) 300



Total ending allowance balance $ 1,509$ 3,571

$ 2,016$ 82 $ 624 $ 24 $ - $ 703 $ 525 $ 9,054 - 33 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited)



NOTE 5 - LOANS (Continued)

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

Three months ended June 30, 2013 Activity in the allowance for loan losses: Beginning Balance $ 1,805$ 4,417$ 1,458$ 200 $ 958 $ 14 $ - $ 603 $ 578 $ 10,033 Charge-offs - (651 ) (2 ) - (353 ) (1 ) - (24 ) - (1,031 ) Recoveries - 4 13 - 25 1 - 9 - 52 (Reversal of) provision (296 ) (199 ) 547 (118 ) (6 ) 10 - 115 (53 ) -



Total ending allowance balance $ 1,509$ 3,571

$ 2,016$ 82 $ 624 $ 24 $ - $ 703 $ 525 $ 9,054 - 34 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited) NOTE 5 - LOANS (Continued) Other Real Commercial, Estate Financial Real Estate 1-4 Family Commercial Secured and Tax Other Construction Residential Real Estate Loans Agricultural Consumer Exempt



Loans Unallocated Total Ending allowance balance attributable to loans at June 30, 2014: Individually evaluated for impairment $ 172 $ 120

$ 99 $ - $ 127 $ - $ -

$ 463 $ - $ 981 Collectively evaluated for Impairment 825 2,440 1,035 14 448 24 - 2 537 5,325



Total ending allowance balance $ 997 $ 2,560

$ 1,134$ 14 $ 575 $ 24 $ -

$ 465 $ 537 $ 6,306

Ending allowance balance attributable to loans at December 31, 2013:

Individually evaluated for impairment $ 476 $ 592

$ 276 $ - $ 176 $ - $ -

$ 926 $ - $ 2,446 Collectively evaluated for Impairment 773 2,643 997 33 528 24 - 3 592 5,593



Total ending allowance balance $ 1,249$ 3,235

$ 1,273$ 33 $ 704 $ 24 $ -

$ 929 $ 592 $ 8,039

Loans at June 30, 2014: Individually evaluated for impairment $ 10,963$ 2,088



$ 2,156$ 115 $ 127 $ 10 $ -

$ 927$ 16,386 Collectively evaluated for impairment 21,168 103,633 97,651 2,798 17,513 4,938 51 126 247,878 Total loans balance $ 32,131$ 105,721$ 99,807$ 2,913$ 17,640$ 4,948$ 51$ 1,053$ 264,264 Loans at December 31, 2013: Individually evaluated for impairment $ 11,370$ 7,658



$ 4,883$ 119 $ 176 $ 12 $ -

$ 1,853$ 26,071 Collectively evaluated for impairment 18,768 103,164 92,207 4,681 23,009 5,462 51 294 247,636 Total loans balance $ 30,138$ 110,822$ 97,090$ 4,800$ 23,185$ 5,474$ 51$ 2,147$ 273,707 - 35 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited) NOTE 5 - LOANS (Continued)



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

Allowance Unpaid for Loan Average Cash Basis Principal Recorded Losses Recorded Income Income Balance Investment Allocated Investment Recognized Recognized With no related allowance recorded: Real estate construction: Residential construction $ 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 - 36 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited) NOTE 5 - LOANS (Continued)



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

Average Cash Basis Recorded Income Income Investment Recognized 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 - 37 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited) NOTE 5 - LOANS (Continued)



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

Allowance Unpaid for Loan Average Cash Basis Principal Recorded Losses Recorded Income Income Balance Investment Allocated Investment Recognized Recognized With no related allowance recorded: Real estate construction: Residential construction $ - $ - $ - $ 843 $ - $ - Other construction 7,262 7,262 - 7,821 15 15 1-4 Family residential: Revolving, open ended 598 598 - 213 1 7 First liens 1,251 1,251 - 1,918 15 18 Junior liens 57 57 - 66 2 2 Commercial real estate: Owner occupied 1,094 1,094 - 1,096 23 25 Non-owner occupied - - - 1,371 - - Other real estate secured loans 122 122 - 124 - - Commercial, financial and agricultural: Commercial and industrial 32 21 - 124 1 1 Consumer 1 1 - - - - Total with no related allowance recorded 10,417 10,406 - 13,576 57 68 With an allowance recorded: Real estate construction: Residential construction 2,898 2,898 268 2,968 - - Other construction 5,994 4,038 456 3,046 19 19 1-4 Family residential: Revolving, open ended 180 180 132 443 1 3 First Liens 5,349 5,349 426 4,897 91 82 Junior Liens - - - 116 - - Commercial real estate: Owner occupied 1,864 1,864 280 1,867 64 69 Non-owner occupied 2,256 2,257 621 1,512 70 70 Other real estate secured loans - - - 1,466 - - Commercial, financial and agricultural: Agricultural 2 1 - 1 - - Commercial and industrial 451 451 186 440 - - Consumer 15 15 - 5 - - Other loans 6,227 1,853 700 1,853 - - Total with an allocated allowance recorded 25,236 18,906 3,069 18,614 245 243 Total $ 35,653$ 29,312$ 3,069$ 32,190$ 302$ 311 - 38 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited) NOTE 5 - LOANS (Continued)



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

Average Cash Basis Recorded Income Income Investment Recognized Recognized With no related allowance recorded: Real estate construction: Residential construction $ 357 $ (8 ) $ (8 ) Other construction 6,907 15 15 1-4 Family residential: Revolving, open ended 319 1 7 First liens 1,655 3 7 Junior liens 62 1 1 Commercial real estate: Owner occupied 1,095 11 11 Non-owner occupied 1,061 (32 ) (32 ) Other real estate secured loans 124 - - Commercial, financial and agricultural: Commercial and industrial 14 1 1 Consumer 1 - - Total with no related allowance recorded 11,595 (8 ) 2 With an allowance recorded: Real estate construction: Residential construction 3,011 (11 ) (11 ) Other construction 4,063 6 6 1-4 Family residential: Revolving, open ended 378 - 2 First Liens 5,680 54 55 Junior Liens 42 (1 ) (1 ) Commercial real estate: Owner occupied 1,940 29 31 Non-owner occupied 1,203 67 67 Other real estate secured loans 1,097 (35 ) (36 ) Commercial, financial and agricultural: Agricultural 1 - - Commercial and industrial 641 25 - Consumer 8 - - Other loans 1,853 - - Total with an allocated allowance recorded 19,917 134 113 Total $ 31,512$ 126$ 115 - 39 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited) NOTE 5 - LOANS (Continued) Loans individually evaluated for impairment by class of loans as of and for the year ended December 31, 2013: Allowance Unpaid for Loan Average Cash Basis Principal Recorded Losses Recorded Income Income Balance Investment Allocated Investment Recognized Recognized With no related allowance recorded: Real estate construction: Residential construction $ - $ - $ - $ 633 $ - $ - Other construction 6,564 6,564 - 7,507 1 1 1-4 Family residential: Revolving, open ended 110 110 - 184 4 5 First liens 1,163 1,163 - 1,751 29 33 Junior liens 83 83 - 70 4 3 Commercial real estate: Farmland - - - - - - Owner occupied 1,411 1,411 - 1,159 58 64 Non-owner occupied 3,582 1,627 - 1,354 - - Other real estate loans 119 119 - 123 - - Commercial, financial and agricultural: Agricultural 1 1 - 93 - - Commercial and industrial - - - 1 - - Consumer 1 1 - - - - Other Loans - - - - - - Total with no related allowance recorded 13,034 11,079 - 12,875 96 106 With an allowance recorded: Real estate construction: Residential construction 2,515 2,515 62 2,868 - - Other construction 2,291 2,291 414 2,866 15 15 1-4 Family residential: Revolving, open ended 179 179 132 377 3 5 First Liens 6,122 6,122 460 5,167 272 255 Junior Liens - - - 87 - - Commercial real estate: Farmland - - - - - - Owner occupied 1,845 1,845 276 1,862 129 126 Non-owner occupied - - - 1,224 - - Other real estate loans - - - 1,100 - - Commercial, financial and agricultural: Commercial and industrial 176 176 176 374 (35 ) - Consumer 11 11 - 7 1 1 Other loans 6,227 1,853 926 1,853 - - Total with an allocated allowance recorded 19,366 14,992 2,446 17,785 385 402 Total $ 32,400$ 26,071$ 2,446$ 30,660$ 481$ 508 - 40 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited) NOTE 5 - LOANS (Continued) Troubled Debt Restructurings The Company has $19,328 of loans with allocated specific reserves of $845 to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2014 compared to $24,667 with allocated specific reserves of $2,122 at December 31, 2013. The Company lost $12 and $85 of interest income in the six months and $2 and $38 of interest income in the three months ended June 30, 2014 and 2013, 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, 2014 or December 31, 2013. During the first six months of 2014, 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.

- 41 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited) NOTE 5 - LOANS (Continued)



The following table presents loans by class modified as troubled debt restructurings that occurred during the first six months of 2014 and 2013:

Pre-Modification Post-Modification Outstanding Outstanding Number of Recorded Recorded June 30, 2014 Contracts Investment Investment 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 June 30, 2013 Real estate construction: Other construction 3 $ 1,365 $ 1,365 1-4 Family residential: Revolving, open ended 1 6 6 First liens 5 5,515 5,515 Commercial real estate: Owner occupied 1 162 162 Commercial, financial and agricultural Agricultural 1 1 1 Commercial and industrial 2 21 21 Consumer 5 16 16 Total 18 $ 7,086 $ 7,086 Troubled debt restructurings described above had an outstanding balance of $2,165 at June 30, 2014. There was no increase for the allowance for loan losses during the first six months of 2014. Troubled debt restructurings still accruing interest totaled $1,655 and $9,014 at June 30, 2014 and December 31, 2013, respectively.



A loan is considered to be in payment default once it is more than 90 days contractually past due under the modified terms.

- 42 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited) NOTE 5 - LOANS (Continued)



The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the first six months of 2014.

Pre-Modification Post-Modification Outstanding Outstanding Number of Recorded Recorded June 30, 2014 Contracts Investment Investment 1-4 Family residential: First liens 1 $ 263 $ 263 Commercial real estate: Owner occupied 1 221 221 Total 2 $ 484 $ 484 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 2013.



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.

- 43 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited) NOTE 5 - 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, 2014 and December 31, 2013: June 30, 2014 December 31, 2013 Loans past due Loans past due over 90 days still over 90 days still Nonaccrual accruing Nonaccrual accruing Real estate construction: Residential construction $ 2,139 $ - $ 2,514 $ - Other construction 8,807 - 8,833 - 1-4 Family residential: Revolving, open ended 34 - 230 - First Liens 778 - 868 - Junior Liens - - - - Commercial real estate: Farmland - - - - Owner occupied 324 - 324 - Non-owner occupied 1,577 - 1,627 - Other real estate loans 115 - 119 - Commercial, financial and agricultural: Agricultural - - - - Commercial and industrial 1,102 - 1,784 - Consumer - - - - Other loans 927 - 1,853 - Total $ 15,803 $ - $ 18,152 $ - - 44 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited) NOTE 5 - LOANS (Continued) The following table presents the aging of the recorded investment in past due loans, including nonaccrual loans as of June 30, 2014 and December 31, 2013 by class of loans: 30 - 59 60 - 89 Greater than Loans Days Days 90 Days Past Total Past Not Past June 30, 2014 Past Due Past Due Due Due Due Total Real estate construction: Residential construction $ - $ - $ - $ - $ 9,083$ 9,083 Other construction 10 55 - 65 22,983 23,048 1-4 Family residential: Revolving, open ended 291 156 34 481 19,302 19,783 First Liens 443 18 73 534 83,468 84,002 Junior Liens - - - - 1,936 1,936 Commercial real estate: Farmland - 157 - 157 8,084 8,241 Owner occupied 198 - - 198 39,970 40,168 Non-owner occupied 26 - - 26 51,372 51,398 Other real estate secured loans - - 115 115 2,798 2,913 Commercial, financial and agricultural: Agricultural - - - - 686 686 Commercial and industrial 20 - 1,102 1,122 15,832 16,954 Consumer 30 - - 30 4,918 4,948 Tax exempt - - - - 51 51 Other loans - - 926 926 127 1,053 Total $ 1,018$ 386$ 2,250$ 3,654$ 260,610$ 264,264 30 - 59 60 - 89 Greater than Loans Days Days 90 Days Past Total Past Not Past December 31, 2013 Past Due Past Due Due Due Due Total Real estate construction: Residential construction $ - $ - $ - $ - $ 8,454$ 8,454 Other construction 110 13 - 123 21,561 21,684 1-4 Family residential: Revolving, open ended 48 33 230 311 22,202 22,513 First Liens 295 358 162 815 85,503 86,318 Junior Liens 83 - - 83 1,908 1,991 Commercial real estate: Farmland 216 - - 216 7,451 7,667 Owner occupied 747 221 324 1,292 39,994 41,286 Non-owner occupied - - - - 48,137 48,137 Other real estate secured loans - 119 - 119 4,681 4,800 Commercial, financial and agricultural: Agricultural - - - - 839 839 Commercial and industrial 1,058 - 1,784 2,842 19,504 22,346 Consumer 22 26 - 48 5,426 5,474 Tax exempt - - - - 51 51 Other loans - - 1,853 1,853 294 2,147 Total $ 2,579$ 770$ 4,353$ 7,702$ 266,005$ 273,707 - 45 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited)



NOTE 5 - LOANS (Continued)

Credit Quality Indicators:

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



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

Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date. Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.



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

- 46 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited) NOTE 5 - LOANS (Continued)



Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of June 30, 2014 and December 31, 2013, and based on the most recent analysis performed, the risk categories of loans by class of loans are as follows:

Special June 30, 2014 Pass Watch Mention Substandard Doubtful Real estate construction: Residential construction $ 6,404$ 540 $ - $ - $ - Other construction 6,875 6,508 - 840 - 1-4 Family residential: Revolving, open ended 19,210 6 - 494 - First Liens 66,016 10,204 - 5,767 - Junior Liens 1,936 - - - - Commercial real estate: Farmland 5,522 911 - 1,808 - Owner occupied 35,748 3,875 - - - Non-owner occupied 41,669 5,281 - 2,837 - Other real estate loans 2,798 - - - - Commercial, financial and agricultural: Agricultural 630 - - 56 - Commercial and industrial 14,685 1,990 - 152 - Consumer 4,797 3 - 138 - Tax exempt 51 - - - - Other loans 127 - - - - Total $ 206,468$ 29,318 $ - $ 12,092 $ - Special December 31, 2013 Pass Watch Mention Substandard Doubtful Real estate construction: Residential construction $ 5,241$ 698 $ - $ - $ - Other construction 5,525 6,447 - 857 - 1-4 Family residential: Revolving, open ended 20,837 194 - 1,193 - First Liens 69,877 3,807 - 5,349 - Junior Liens 1,660 248 - - - Commercial real estate: Farmland 4,934 1,141 - 1,592 - Owner occupied 34,594 1,580 - 1,856 - Non-owner occupied 39,463 4,107 - 2,940 - Other real estate loans 2,993 1,688 - - - Commercial, financial and agricultural: Agricultural 782 56 - - - Commercial and industrial 19,761 2,098 - 311 - Consumer 5,292 4 1 165 - Tax exempt 51 - - - - Other loans 294 - - - - Total $ 211,304$ 22,068$ 1$ 14,263 $ - - 47 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited) NOTE 6 - 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 Three months ended June 30, June 30, 2014 2013 2014 2013 Basic Net income $ 1,592$ 593$ 798$ 390 Less: Earnings allocated to preferred stock (723 ) (481 ) (419 ) (242 ) Less: Accretion of preferred stock discount (33 ) (98 ) - (50 ) Net Income available to common stock $ 836$ 14



$ 379$ 98

Weighted average common shares 3,274,828 3,274,469

3,274,830 3,274,545

Basic net income per common share $ 0.26$ 0.00$ 0.12$ 0.03

Diluted

Net income available to common stock $ 836$ 14



$ 379$ 98

Weighted average common shares 3,274,828 3,274,469

3,274,830 3,274,545 Add: Dilutive effects of assumed exercises of stock options - - - - Average common shares and dilutive potential common shares outstanding 3,274,828 3,274,469



3,274,830 3,274,545

Diluted net income per common share $ 0.26$ 0.00$ 0.12$ 0.03 At June 30, 2014 and 2013, respectively, stock options for 55,400 and 64,700 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, 2014 and 2013 because they were antidilutive. - 48 -



--------------------------------------------------------------------------------

Table of Contents COMMUNITY FIRST, INC. Notes to Consolidated Financial Statements June 30, 2014 (Unaudited) NOTE 7 - INCOME TAXES The Company recorded no tax expense during the first six months of 2014. 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 2014. 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. - 49 -



--------------------------------------------------------------------------------

Table of Contents ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS

OF OPERATIONS OVERVIEW



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

The following discussion compares the financial condition of the Company at June 30, 2014 to December 31, 2013, and the results of operations for the six months and three months ended June 30, 2014 and 2013. 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, 2013, filed with the SEC on February 27, 2014 (File No. 000-49966) (the "2013 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 orders and 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, including those

resulting from recently adopted changes to capital calculation methodologies

and required capital maintenance levels, and to secure any required regulatory approvals for capital actions;



the continued reduction of our loan balances and, conversely, the inability

to ultimately grow our loan portfolio; governmental monetary and fiscal policies, as well as legislative and



regulatory changes, including changes in banking, securities and tax laws and

regulations; - 50 -



--------------------------------------------------------------------------------

Table of Contents OVERVIEW (Continued)



the risks of changes in interest rates on the levels, composition and costs

of deposits, loan demand, and the values of loan collateral, securities, and

interest sensitive assets and liabilities;



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

the ability to retain large, uninsured deposits; 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 sold through our



participation in the United States Department of the Treasury's (the "U.S.

Treasury") Capital Purchase Program (the "CPP");



changes in technology or products that may be more difficult, or costly, or

less effective, than anticipated;



the effects of war or other conflict, acts of terrorism or other catastrophic

events that may affect general economic conditions; and



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

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



FINANCIAL CONDITION

At June 30, 2014, total assets were $452,139 and total liabilities were $441,510. Total assets increased $3,696 or 0.8% compared to $448,443 at December 31, 2013. Total liabilities increased $1,683, or 0.4%, compared to $439,827 at December 31, 2013. The increase in assets was caused by increases in time deposits in other financial institutions, securities available for sale and premises and equipment offset in part by decreases in cash and cash equivalents, net loans and other real estate owned. The increase in liabilities was caused by an increase in noninterest-bearing deposits offset in part by a decrease in interest-bearing deposits. Total equity increased 23.4%, or $2,013, to $10,629 at June 30, 2014 compared to $8,616 at December 31, 2013. The increase in equity is primarily due to net income and gains in other comprehensive income during the first six months of 2014 caused by market fluctuations in securities available for sale. - 51 -



--------------------------------------------------------------------------------

Table of Contents

FINANCIAL CONDITION (Continued)

Cash and Cash Equivalents

Cash and cash equivalents were $32,280 at June 30, 2014 compared to $49,036 at December 31, 2013. This decrease is primarily due to the use of cash to invest in time deposits in other financial institutions and securities available for sale. The Bank has continued to maintain high levels of liquid resources during 2014 due to the availability of excess liquidity in the Bank's market area coupled with reduced loan demand as a result of weak economic conditions.



Time Deposits in Other Financial Institutions

Time deposits in other financial institutions totaled $21,452 at June 30, 2014 compared to $6,500 at December 31, 2013. 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 three 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 insured institutions and the amount on deposit with each individual institution does not exceed the FDIC insurance limit of $250. As of June 30, 2014, time deposits in other financial institutions had a weighted average rate of 0.793% and a weighted average remaining life of 1.10 years.



Loans

Total loans (excluding loans held for sale) at June 30, 2014 were $264,264, compared to $273,707 at December 31, 2013, a decrease of $9,443 or 3.5%. The decrease in loans during the first six months of 2014 is due to regular loan payments outpacing demand for new loans and additional foreclosure activity. Loans in the portfolio at June 30, 2014 of approximately $54,349, or 20.6%, are at a variable rate of interest, $194,112, or 73.4%, are at a fixed rate, and $15,803, or 6.0%, are nonaccrual. $101,912, or 38.6%, of total loans reprice within one year of June 30, 2014. 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, 2014, the Company's loan to deposit ratio (including loans held for sale) was 64.8%, compared to 67.2% at December 31, 2013. Management expects loan demand to modestly improve through the remainder of 2014, which should slow or stop the decline in gross loans, though excessive amounts of paydowns and 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. - 52 -



--------------------------------------------------------------------------------

Table of Contents

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, 2014 and December 31, 2013: June 30, 2014 December 31, 2013 % of % of Amount Total Amount Total



U.S. government sponsored entities $ 25,714 26.8 % $ 33,357 40.7 %

Mortgage-backed (residential) 60,258 63.0 % 42,281 51.6 % State and municipal 9,717 10.2 % 6,288 7.7 % Total $ 95,689 100.0 % $ 81,926 100.0 % 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, 2014, the carrying value of securities increased $13,763 to $95,689, compared to $81,926 at December 31, 2013. Securities available for sale as a percentage of total assets was 21.2% at June 30, 2014, compared to 18.3% at December 31, 2013. Net unrealized loss on securities available for sale was $57 at June 30, 2014, compared to a net unrealized loss of $1,200 at December 31, 2013. Changes in interest rates in the securities market and some re-positioning of the portfolio caused this fluctuation in the net unrealized loss. Management is continually monitoring the credit quality of the Bank's investments and believes that the unrealized losses that existed in the Bank's portfolio at June 30, 2014 were temporary based on the bond ratings and anticipated recovery of bonds held. At June 30, 2014, 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.



During the first six months of 2014, the Bank sold a group of securities in an effort to reduce price volatility in the portfolio. The sale of securities resulted in a net gain of $40. The proceeds were reinvested in new mortgage-backed securities and taxable municipal securities.

Other Real Estate Owned

At June 30, 2014, other real estate owned ("ORE") totaled $15,851, a decrease of $2,463 from $18,314 at December 31, 2013. This decrease is primarily due to the sale of properties during the first two quarters of 2014. The balance of ORE is comprised of properties acquired through or in lieu of foreclosure on real estate loans, property acquired by the Company for future Bank branch locations that is no longer intended for that purpose and is currently held for sale, and loans made to facilitate the sale of ORE properties that are required to be reported as ORE ("FAS 66 Loans"). The balances recorded for each individual property are based on appraisals that are not more than twelve months old, discounted by an additional 15%. The additional 15% discount was adopted by the Company beginning in the third quarter of 2010 based on an analysis of actual recoveries of ORE balances, including selling costs. Based on that analysis, the Company recorded a valuation allowance of $346 (recognized through ORE expense) in the third quarter of 2010. In addition, the Company began applying the additional 15% discount in its determination of specific reserves for impaired loans that are collateral dependent. As a result, the majority of the financial loss incurred by the Company as a result of the 15% discount has been recognized through loan charge-offs and the provision for loan losses at the time the property is transferred to ORE, with the foreclosed property being transferred into ORE at the discounted value. The Company annually updates its analysis regarding the additional 15% discount. Should such updates indicate that a change in the 15% discount is warranted, the Company would implement the change accordingly and that change would be applied to all properties that are subsequently moved into ORE. Additional write-downs of individual properties typically occur when the results of updated appraisals and further application of the 15% discount on the value reflected in the updated appraisal indicates that the value of the respective property has declined. The Company obtains updated appraisals for ORE properties at least annually. These write-downs are recognized in the quarterly period in which the appraisal is accepted by the Company. - 53 -



--------------------------------------------------------------------------------

Table of Contents

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, 2014 March 31, 2014 December 31, 2013 September 30, 2013 Bank Premises $ - 0.0 % $ 484 2.8 % $ 484 2.6 % $ 484 2.2 % Rental 7,246 45.7 % 7,614 43.2 % 7,616 41.6 % 11,382 51.5 % Non-rental 1,135 7.2 % 1,083 6.1 % 1,126 6.2 % 1,083 4.9 % Auction - 0.0 % 15 0.1 % 21 0.1 % 21 0.1 % Land 7,470 47.1 % 8,432 47.8 % 9,067 49.5 % 9,147 41.3 % Total $ 15,851 100.0 % $ 17,628 100.0 % $ 18,314 100.0 % $ 22,117 100.0 % 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. - 54 -



--------------------------------------------------------------------------------

Table of Contents

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, 2014 Foreclosures 1 2 - 1 Sales 5 1 3 6 Three Months Ended June 30, 2013 Foreclosures 8 1 - - Sales 13 1 5 2 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

Six Months Ended June 30, 2013 Foreclosures 11 1 - 3 Sales 18 3 7 5 Weighted average age of properties held at period end (months) 14.7 6.5



50.5 18.4

The following table sets forth information related to the largest five ORE properties held by the Company as of June 30, 2014:

Charge-off Write-down Original loan Original Loan prior to transfer after transfer Carrying Property Description classification Amount into ORE into ORE Balance Unimproved land Real estate construction $ 5,000 $ 905 $ 536 $ 2,949 Unimproved land Real estate construction 3,103 1,896 204 961 Unimproved land Real estate construction 2,546 196 85 927 Mixed use commercial property Commercial real estate 3,684 1,536 196 850 Unimproved land Real estate construction 1,134 402 - 799



The following table sets forth information related to the largest five ORE properties held by the Company as of December 31, 2013:

Charge-off Write-down Original loan Original Loan prior to transfer after transfer Carrying Property Description classification Amount into ORE into ORE Balance Unimproved land Real estate construction $ 5,000 $ 905 $ 374 $ 3,111 Unimproved land Real estate construction 3,103 1,896 204 961 Unimproved land Real estate construction 2,546 196 85 927 Mixed use commercial property Commercial real estate 3,684 1,536 196 850 Unimproved land Real estate construction 1,134 402 - 799 - 55 -



--------------------------------------------------------------------------------

Table of Contents

FINANCIAL CONDITION (Continued)

Each of the ORE properties identified in the June 30, 2014 table above is listed with a real estate agent and/or listed as available for sale on the Bank's website. The four 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 properties carried at $961, $927 and $799 are located in residential areas that were also negatively impacted by the downturn in the economy. Although there are some positive indicators of improvements in the local markets where the properties are located, management believes it will likely require a significant amount of time to sell the properties. The commercial real estate property is income producing rental property that is being managed by a third party property manager on behalf of the Company. The Company continues to market this rental property, but because of the income producing nature of the property, it is likely that management will resist selling the property for less than the current carrying value of the property.



Deposits

The Company relies on the Bank's deposit growth, as well as alternative funding sources such as other borrowed money, FHLB advances, and federal funds purchased from correspondent banks, to fund its operations. The following table sets forth the composition of the deposits at June 30, 2014 and December 31, 2013. June 30, 2014 December 31, 2013 % of % of Amount Total Amount Total



Noninterest-bearing demand accounts $ 58,857 14.4 % $ 53,980 13.2 %

Interest-bearing demand accounts 132,401 32.4 % 120,259 29.5 %

Savings accounts 26,518 6.5 %



24,770 6.1 %

Time deposits greater than $100 86,587 21.2 % 97,294 23.9 % Other time deposits 103,736 25.5 % 111,229 27.3 % Total $ 408,099 100.0 % $ 407,532 100.0 %



The following table sets forth all time deposits broken down by remaining maturity at June 30, 2014:

Less than three months $ 41,323 Three months through twelve months 107,628 One year through three years 26,585 More than three years 14,787 Total $ 190,323



Total deposits were $408,099 at June 30, 2014, compared to $407,532 at December 31, 2013, an increase of $567. The increase was primarily due to increases in noninterest-bearing demand deposits offset in part by decreases in interest-bearing deposits.

- 56 -



--------------------------------------------------------------------------------

Table of Contents

FINANCIAL CONDITION (Continued)

During 2012 and 2013 and through June 30, 2014, the Bank has maintained higher levels of liquid assets due to the availability of excess liquidity in the Bank's market area coupled with reduced loan demand as a result of weak economic conditions. Management has been utilizing the available cash to pay off national market and broker deposits as they have matured, resulting in significant reductions in cost of funds. Management has been seeking additional core customer deposits during 2014 and anticipates that it will continue to do so in order to improve the Bank's overall liquidity position as well as net interest income and to continue to reduce the Bank's reliance on national market and broker deposits.



Shareholders' Equity

At June 30, 2014, shareholders' equity totaled $10,629, an increase of $2,013 from $8,616 at December 31, 2013. The increase was primarily due to net income combined with gains in other comprehensive income. The 17,806 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (the "Senior Preferred Shares") have a $21,041 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 Warrant Preferred Shares have a liquidation value of $1,170 and 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 as follows: 2014: $1,564; 2015 and thereafter: $1,683 per year. The Company is permitted to redeem all or a portion of the Preferred Shares at any time after consultation with its primary federal regulator, but may not redeem the Warrant Preferred Shares until all of the Senior Preferred Shares have been redeemed. Holders of both the Senior Preferred and Warrant Preferred shares would be entitled to receive accrued but unpaid dividends in conjunction with any such 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. The Company received none of the proceeds from the sale of the Senior Preferred or Warrant Preferred shares by the U.S. Treasury. 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 securities has 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 is 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. - 57 -



--------------------------------------------------------------------------------

Table of Contents

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. At June 30, 2014, the Company has $4,112 of interest on its subordinated debentures accrued for which payment is being deferred. In addition, the Company has accumulated $3,515 in deferred dividends on the Preferred Shares. 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, 2014, Community First Properties, Inc. has $47 of preferred stock dividends accrued for which payment is being deferred. RESULTS OF OPERATIONS Net Income The Company had net income of $1,592 for the six months ended June 30, 2014 compared to net income of $593 for the same period in 2013, an increase in net income of $999. Net income available to common shareholders was $836 for the first six months of 2014 compared to $14 for the same period in 2013. The Company had net income of $798 for the three months ended June 30, 2014 compared to net income of $390 for the same period in 2013, an increase in net income of $408. Net income available to common shareholders was $379 for the three months ended June 30, 2014 compared to net income available to common shareholders of $98 for the same period in 2013. - 58 -



--------------------------------------------------------------------------------

Table of Contents

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, 2014 and 2013. 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, 2014 June 30, 2013 Change Due to Due to Average Interest Revenue/ Average Interest Revenue/ Volume Rate Balance Rate Expense Balance Rate Expense (1) (2) (3) Total Gross loans (a and b) $ 266,708 5.22 % $ 6,907$ 298,975 5.50 % $ 8,149$ (880 )$ (362 )$ (1,242 ) Taxable securities available for sale 85,134 2.13 % 899 65,030 1.77 % 571 177 151 328 Tax exempt securities available for sale 2,918 3.25 % 47 4,735 3.32 % 78 (30 ) (1 ) (31 ) Federal funds sold and other 55,784 0.54 % 150 89,378 0.34 % 151 (57 ) 56 (1 ) Total interest earning assets 410,544 3.93 % 8,003 458,118 3.94 % 8,949 (790 ) (156 ) (946 ) Cash and due from banks 3,611 3,631 Other nonearning assets 43,525 43,494 Allowance for loan losses (7,305 ) (9,823 ) Total assets $ 450,375$ 495,420 Deposits: NOW & money market investments $ 127,180 0.43 % $ 272$ 113,167 0.56 % $ 315$ 39$ (82 )$ (43 ) Savings 25,990 0.10 % 13 21,609 0.12 % 13 2 (2 ) - Time deposits $100 and over 91,288 0.95 % 429 119,798 1.13 % 671 (160 ) (82 ) (242 ) Other time deposits 107,585 0.81 % 431 135,211 1.12 % 749 (153 ) (165 ) (318 ) Total interest-bearing deposits 352,043 0.66 % 1,145 389,785 0.90 % 1,748 (272 ) (331 ) (603 ) Federal Home Loan Bank advances - 0.00 % - 8,812 2.47 % 108 (108 ) - (108 ) Subordinated debentures 23,000 3.42 % 390 23,000 3.45 % 393 - (3 ) (3 ) Repurchase agreement - 0.00 % - 5,685 3.33 % 94 (94 ) - (94 ) Federal funds purchased and other - 0.00 % - 4 0.00 % 0 - - - Total other borrowings 23,000 3.42 % 390 37,501 3.20 % 595 (202 ) (3 ) (205 ) Total interest-bearing liabilities 375,043 0.83 % 1,535 427,286 1.11 % 2,343 (474 ) (334 ) (808 ) Noninterest-bearing liabilities 65,993 57,975 Total liabilities 441,036 485,261 Shareholders' equity 9,339 10,159 Total liabilities and shareholders' equity $ 450,375$ 495,420 Net interest income $ 6,468$ 6,606$ (316 )$ 178$ (138 ) Net interest margin 3.18 % 2.91 %



(a) Interest income includes fees on loans of $217 and $286 in 2014 and 2013,

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

- 59 -



--------------------------------------------------------------------------------

Table of Contents

RESULTS OF OPERATIONS (Continued)

Net Interest Income

Net interest income for the first six months of 2014 was $6,468, a decrease of $138, or 2.1% compared to $6,606 for the same period in 2013. The decrease in net interest income is primarily due to decreases in the average balance of earning assets offset in part by decreases in the average balance of time deposits, FHLB advances and the repurchase agreement in addition to decreases in the average rate paid on time deposits. Despite the decrease in absolute dollars of net interest income, the Bank's net interest margin improved from 2.91% at June 30, 2013 to 3.18% at June 30, 2014. This improvement is primarily due to a decrease in the average rate paid on interest-bearing liabilities. Beginning in 2013 and continuing through the first six months of 2014, the Bank had several high-priced interest-bearing liabilities mature, and these funding sources did not have to be replaced due to the Bank's excess liquidity. The Bank also decreased the rate paid on interest-bearing core deposits. The improvement in net interest margin is further due to the Bank's efforts to mitigate the effect of weakened loan demand on interest income by investing excess liquidity in available for sale securities and time deposits in other financial institutions. Total interest income for the first six months of 2014 was $8,003 a decrease of $946 from $8,949 for the same period in 2013. The decrease is primarily due to a decline in loan interest income as a result of the decrease in loan balances. The average balance of loans during the first six months of 2014 was $266,708, a decrease of $32,267 from $298,975 during the same period in 2013. The decrease in the average balance of loans is due to continued weak loan demand. The decrease in net interest income is further due to a decrease in the average rate earned on loans in the first six months of 2014 compared to the same period in 2013. Interest income on taxable securities increased $328 to $899 in the first six months of 2014 compared to $571 in the first six months of 2013. The increase is primarily due to an increase in the average balance of taxable securities combined with an increase in the average rate earned on taxable securities. The average balance of federal funds sold and other during the first six months of 2014 was $55,784, a decrease of $33,594 from $89,378 during the same period in 2013. This decrease is due to excess liquidity being invested in available for sale securities. The average rate earned on federal funds sold and other in the first six months of 2014 was 0.54% compared to 0.34% for the same period in 2013. The increase in rate is due to the Company's utilization of excess cash by investing in time deposits in other financial institutions. Total interest expense was $1,535 in the first six months of 2014, a decrease of $808 from $2,343 in the first six months of 2013. 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 2014 compared to the same period in 2013. The decrease is further due to the maturity of FHLB advances and the repurchase agreement in 2013. Total interest expense on deposits was $1,145 in the first six months of 2014, a reduction of $603 from $1,748 in the first six months of 2013. The average rate paid on deposits was 0.66% in the first six months of 2014 compared to 0.90% for the same period in 2013. 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 as well as some shift in the Bank's deposit mix from time deposits into NOW and money market accounts. Management believes this shift in deposit mix is due to the current rate environment. Net interest income for the three months ended June 30, 2014 was $3,260, an increase of $22, or 0.7% compared to $3,238 for the same period in 2013. The increase in net interest income is primarily due to decreases in the average rate paid for deposits and the average balance of FHLB advances and the repurchase agreement offset in part by decreases in the average balance of earning assets, similar to factors noted above for the first six months of 2014. - 60 -



--------------------------------------------------------------------------------

Table of Contents

RESULTS OF OPERATIONS (Continued)

Total interest income for the three months ended June 30, 2014 was $4,013 a decrease of $328 from $4,341 for the same period in 2013. The decrease is primarily due to a decline in loan interest income as a result of the decrease in loan balances, similar to factors noted above.

Total interest expense was $753 for the three months ended June 30, 2014, a decrease of $350 from $1,103 for the same period in 2013. The decrease in interest expense is largely due to a reduction in the average rate paid on deposits and the average balance of deposits combined with the maturity of FHLB advances and the repurchase agreement in the three months ended June 30, 2013.

- 61 -



--------------------------------------------------------------------------------

Table of Contents

RESULTS OF OPERATIONS (Continued)

Provisions for Loan Losses

In the first six months of 2014, the Bank reversed $800 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 2013, the Bank recorded provision for loan loss of $300. The ratio of allowance for loan losses to gross loans was 2.39% at June 30, 2014 compared to 2.94% at December 31, 2013. 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 $27,166 at December 31, 2013 to $18,566 at June 30, 2014. The decrease in nonperforming loans is due to improved credit standing for problem loan relationships, foreclosure activity and some decreases in troubled debt restructurings ("TDRs"). Management has been focused on reducing the Bank's overall level of problem assets. Elimination of those problem assets often requires foreclosure of problem loans, resulting in charge-offs and the balance of the loan moving to ORE. Once the Bank has control of the collateral, it is then able to undertake efforts to liquidate the assets. The ratio of the allowance to nonperforming loans was 30.15% at June 30, 2014, compared to 29.59% at December 31, 2013. The portion of the allowance attributable to impaired loans was $981 at June 30, 2014, a decrease from $2,446 at December 31, 2013. Total impaired loans totaled $16,386 at June 30, 2014 compared to $26,071 at December 31, 2013. The portion of the allowance attributable to historical and environmental factors has decreased since December 31, 2013. 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 balance of non-impaired loans decreased during the first six months of 2014 due to the reduction in gross loans. 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: - 62 -



--------------------------------------------------------------------------------

Table of Contents

RESULTS OF OPERATIONS (Continued)

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

Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution's credit position at some future date. Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.



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

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, 2014 and December 31, 2013, based on the most recent analysis performed, the risk category of loans by segment of loans is as follows:

June 30, 2014 Special Pass Watch Mention Substandard Doubtful Real estate construction $ 13,279$ 7,048 $ - $ 840 $ - 1-4 Family residential 87,162 10,210 - 6,261 - Commercial real estate 82,939 10,067 - 4,645 - Other real estate loans 2,798 - - - - Commercial, financial and agricultural 15,315 1,990 - 208 - Consumer 4,797 3 - 138 - Tax exempt 51 - - - - Other loans 127 - - - - Total $ 206,468$ 29,318 $ - $ 12,092 $ - December 31, 2013 Special Pass Watch Mention Substandard Doubtful Real estate construction $ 10,766$ 7,145 $ - $ 857 $ - 1-4 Family residential 92,374 4,249 - 6,542 - Commercial real estate 78,991 6,828 - 6,388 - Other real estate loans 2,993 1,688 - - - Commercial, financial and agricultural 20,543 2,154 - 311 - Consumer 5,292 4 1 165 - Tax exempt 51 - - - - Other loans 294 - - - - Total $ 211,304$ 22,068$ 1$ 14,263 $ - - 63 -



--------------------------------------------------------------------------------

Table of Contents

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: June 30, March 31, December 31, September 30, June 30, Quarter Ended 2014 2014 2013 2013 2013 AFLL Ratio 2.39 % 2.51 % 2.94 % 2.94 % 3.07 % ASC 450 allowance ratio (1) 2.15 % 2.20 % 2.26 % 2.22 % 2.25 % Specifically impaired loans (ASC 310 component) $ 981$ 1,234$ 2,446 $ 2,609 $ 3,069 Historical and environmental (ASC 450-10 component) 5,325 5,379 5,593 5,754 5,985



Total allowance for loan loss $ 6,306$ 6,613 $

8,039 $ 8,363 $ 9,054

Nonperforming loans to gross loans (2) 7.92 % 7.55 % 9.93 % 9.85 % 12.29 % Impaired loans to gross loans 6.20 % 7.21 % 9.53 % 9.14 % 9.94 % Allowance to nonperforming loans ratio 30.15 % 33.27 % 29.59 % 29.83 % 24.97 % Quarter-to-date net charge offs to average gross loans (3) 0.00 % 0.33 % 0.02 % 0.23 % 0.33 %



(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. 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, 2014 and 2013 if the loans had been current: Six months ended Three months ended June 30, June 30, June 30, June 30, 2014 2013 2014 2013 Nonaccrual interest $ 579$ 3,464$ 273$ 384 Troubled debt restructurings interest 12 85 2 38 - 64 -



--------------------------------------------------------------------------------

Table of Contents

RESULTS OF OPERATIONS (Continued)

Noninterest Income

Total noninterest income for the first six months of 2014 was $1,232, a decrease of $197, or 13.8% from $1,429 for the same period in 2013. The decrease is due to a decrease in gain on sale of securities available for sale and other service charges, commissions and fees. Gain on sale of securities available for sale for the first six months of 2014 was $40, a decrease of $142, or 78.0%, from $182 for the same period in 2012. This is due to the Company selling fewer securities during the first six months of 2014 than in the same period in 2013. There were no other service charges, commissions and fees for the first six months of 2014 compared to $66 for the same period in 2013. The decrease in other service charges, commissions and fees is a result of a decrease in income from an equity investment in a development partnership and a decrease in check printer income due to a change in service provider. Total noninterest income for the three months ended June 30, 2014 was $665, a decrease of $167, or 20.1%, from $832 for the same period in 2012. The decrease is due to a decrease in the gain on sale of securities available for sale and a decrease in other service charges, commissions and fees, similar to factors noted above for the six month period ended June 30, 2014.



The table below shows noninterest income for the six-month and three-month periods ended June 30, 2014 and 2013.

Six Months Three Months Ended Ended June 30, June 30, 2014 2013 2014 2013

Service charge on deposit accounts $ 854$ 832$ 447$ 448 Gain on sale of loans 22 49 12 19 Gain on sale of securities available for sale 40 182 40 182 Other: Investment service income 74 44 46 26 Safe deposit box rental 15 14 7 6 Credit life insurance commissions 2 2 2 - Bank Owned Life Insurance income 128 138 65 70 ATM income 66 64 32 32 Other customer fees 20 29 11 16 Other equity investment income 8 9 2 2 Other service charges, commissions and fees 3 66 1 31 Total noninterest income $ 1,232$ 1,429$ 665$ 832 - 65 -



--------------------------------------------------------------------------------

Table of Contents

RESULTS OF OPERATIONS (Continued)

Noninterest Expense

Noninterest expense for the first six months of 2014 was $6,908, a decrease of $234, or 3.3% from $7,142 for the same period in 2013. The decrease is primarily due to decreases in occupancy expense, legal fees, audit and accounting fees, regulatory and compliance expense and furniture and equipment expense. The decrease was offset in part by slight increases in advertising and public relations expense, data processing expense and salaries and employee benefits. Occupancy expense totaled $372 in the first six months of 2014, a decrease of $119, or 24.2%, from $491 for the same period in 2013. The decrease 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. During the first quarter of 2014, the Bank purchased the property from the lessor, terminating the lease. In addition, this purchase eliminated the regular monthly lease payment, which created ongoing savings. Legal fees totaled $25 in the first six months of 2014, a decrease of $90, or 78.3%, from $115 for the same period in 2013. The decrease is primarily due to the Company being involved in fewer activities requiring legal consultation in 2014 compared to 2013.



Audit and accounting fees totaled $156 in the first six months of 2014, a decrease of $68, or 30.4%, from $224 for the same period in 2013. The decrease is primarily due to a reduction in the use of outsourced internal audit services.

Regulatory and compliance expense totaled $532 in the first six months of 2014, a decrease of $66, or 11.0%, from $598 for the same period in 2013. The decrease is primarily due to a reduction in the Bank's FDIC insurance expense premium as higher equity levels at the Bank have resulted in lower assessments. Furniture and equipment expense totaled $154 in the first six months of 2014, a decrease of $50, or 24.5%, from $204 for the same period in 2013. The decrease is primarily due to a large amount of our furniture, fixtures and equipment reaching full depreciation during 2013. Advertising and public relations expense totaled $102 in the first six months of 2014, an increase of $52, or 104.0%, from $50 for the same period in 2013. This increase is primarily due to increased support of the community donations and some additional marketing efforts during 2014. Data processing expense totaled $568 in the first six months of 2014, an increase of $46, or 8.8%, from $522 for the same period in 2013. This increase is primarily due to an expanded relationship with our payroll processor, ADP, which began in late 2013. Through this expanded relationship, ADP now provides electronic human resources and benefits administration services in addition to payroll processing services.



Salaries and employee benefits totaled $3,298 in the first six months of 2014, an increase of $41, or 1.3%, from $3,257 for the same period in 2013. This increase is due to cost of living salary adjustments and an increase in the Bank's portion of employee medical insurance costs.

Noninterest expense for the three months ended June 30, 2014 was $3,427, a decrease of $253, or 6.9% from $3,680 for the same period in 2013. The decrease is primarily due to reductions in other real estate expense, legal expense, audit and accounting fees, regulatory and compliance expense and furniture and equipment expense. The decrease was offset in part by slight increases in salaries and employee benefits, advertising and public relations expense and data processing expense. Other real estate expense totaled $139 for the three months ended June 30, 2014, a decrease of $256, or 64.8%, from $395 for the same period in 2013. This is primarily due to the decrease of valuation losses based on reappraisals. - 66 -



--------------------------------------------------------------------------------

Table of Contents

The decreases in legal expense, audit and accounting fees, regulatory and compliance expense and furniture and equipment expense and increases in salaries and employee benefits, advertising and public relations expense and data processing expense in each case for the three-month period ended June 30, 2014, when compared to the comparable period in 2013, were caused by similar factors to those noted above for the six-month period ended June 30, 2014. - 67 -



--------------------------------------------------------------------------------

Table of Contents

RESULTS OF OPERATIONS (Continued)

The table below shows noninterest expense for the six-month and three-month periods ended June 30, 2014 and 2013:

Six Months Ended Three Months Ended June 30, June 30, 2014 2013 2014 2013 Salaries and employee benefits $ 3,298$ 3,257$ 1,651$ 1,605 Regulatory and compliance 532 598 268 304 Occupancy 372 491 226 225 Furniture and equipment 154 204 77 103 Data processing fees 568 522 293 259 Advertising and public relations 102 50 47 8 Operational expense 206 202 106 102 Other real estate expense 378 369 139 395 Other: Loan expense 24 15 2 (27 ) Legal 25 115 3 62 Audit and accounting fees 156 224 77 115 Postage and freight 145 125 74 61 Director expense 124 111 63 55 ATM expense 326 299 167 157 Amortization of intangible asset 69 69 35 35 Holding losses on loans held for sale (12 ) (1 ) (12 ) (1 ) Insurance expense 196 195 98 98 Printing 36 41 18 21 Other employee expenses 51 37 25 16 Dues & memberships 24 24 12 13 Miscellaneous taxes and fees 21 32 2 11 Federal Reserve and other bank charges 21 23 10 12 Other 92 140 46 51 Total noninterest expense $ 6,908$ 7,142$ 3,427$ 3,680 - 68 -



--------------------------------------------------------------------------------

Table of Contents

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 2014.

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. As of June 30, 2014, we have federal and state income tax net operating loss (NOL) carryforwards of $25,648 and $53,753, which will expire at various dates from 2020 through 2032. Such NOL carryforwards expire as follows: Federal State 2020-2024 $ - $ 19,738 2025-2029 - 34,015 2030-2032 25,648 - - 69 -



--------------------------------------------------------------------------------

Table of Contents

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 2013, regular loan repayments outpaced loan demand, resulting in a decrease in gross loans and contributing to the increase in cash and cash equivalents. During the first six months of 2014, this trend continued and management began utilizing some of the available liquidity to invest in securities available for sale and time deposits in other financial institutions. Although management expects loan demand to modestly improve through the remainder of 2014, which should slow or stop the decline in gross loans, 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. On September 20, 2011, the Bank consented to the issuance of the Consent Order by the FDIC. Under the terms of the Consent Order, the Bank has agreed to, among other things, take the following actions:



Establish, within 30 days after September 20, 2011, a board committee to oversee the Bank's compliance with the Consent Order;

Make, within 30 days after September 20, 2011, provisions to its allowance for loan and lease losses (the "ALLL") in an amount equal to those loans required to be charged off by the Consent Order, and thereafter maintain a reasonable ALLL and quarterly have its board of directors review the adequacy of the ALLL; Review, within 30 days after September 20, 2011, the Bank's Consolidated Reports on Condition and Income filed with the FDIC after December 31, 2010, and amend such reports if necessary to accurately reflect the Bank's financial condition as of such dates; Use, within 30 days after September 20, 2011, Financial Accounting Standards Board Accounting Standards Codification Numbers 450 and 310 for determining the Bank's ALLL reserve adequacy; Retain, within 60 days after September 20, 2011, a bank consultant to develop, within 90 days after September 20, 2011, a written analysis and assessment of the Bank's management and staffing needs for the purpose of providing qualified management; Formulate and submit to the FDIC and the Department, within 60 days after September 20, 2011, a written policy covering expense reimbursement to the Bank's directors, officers and employees, and while the Consent Order is in effect have the Board conduct monthly reviews of all expenses submitted for customer entertainment, business development and/or any other expense submitted by the Bank's officers and directors;



Prepare and submit, within 120 days after September 20, 2011, to its supervisory authorities a budget and profit plan for calendar year 2012;

On or before December 31, 2011, achieve, and thereafter, maintain the Bank's Tier 1 leverage capital ratio, Tier 1 risk-based capital ratio and Total risk-based capital ratios equal to or greater than 8.5%, 10.0% and 12.0%, respectively;

If the Bank's capital ratios fall below the minimum levels set out in the previous bullet as of the date of any of the Bank's Reports on Condition and Income, submit within 30 days of receiving a request to do so, to the FDIC and the Department a capital plan to increase the Bank's capital to levels above these minimum levels; then initiate action within 30 days after the FDIC and the Department respond to the plan; - 70 -



--------------------------------------------------------------------------------

Table of Contents

LIQUIDITY AND CAPITAL RESOURCES (Continued)

Refrain from paying cash dividends to the Company without the prior written consent of the FDIC and the Department;

Increase, within 30 days after September 20, 2011, the participation of the Bank's board of directors in the affairs of the Bank by assuming full responsibility for the approval of the Bank's policies and objectives and for the supervision of management, including all Bank activities; Develop, within 120 days after September 20, 2011, a strategic plan that addresses issues including plans for sustaining adequate liquidity, strategies for pricing policies and asset/liability management, goals for reducing problem loans, plans for attracting and retaining qualified individuals to fill vacancies in the lending and accounting functions, financial goals and formulation of a mission statement; Not extend, directly or indirectly, any additional credit to or for the benefit of any borrower whose extension of credit is classified "Doubtful" and/or "Substandard" by the FDIC or the Department unless the Bank's board of directors has signed a detailed written statement giving reasons why the failure to extend such credit would be detrimental to the Bank; Take, within 30 days after September 20, 2011, specific actions to eliminate all assets classified as "Loss" as of March 14, 2011, and, within 60 days of September 20, 2011 submit a written plan to reduce the level of assets classified "Doubtful" or "Substandard" with a balance in excess of $1,000,000, in each case as of March 14, 2011; Refrain from extending any additional credit to, or for the benefit of, any borrower who has a loan or other extension of credit from the Bank that has been charged off or classified in a certain specified manner and is uncollected; Take, within 120 days after September 20, 2011, specified actions to reduce concentrations of construction and development loans in the Bank's portfolio to not more than 100% of the Bank's Tier 1 capital and commercial real estate loans (other than owner-occupied commercial real estate loans) to not more than 300% of the Bank's Tier 1 capital;



Take, within 60 days after September 20, 2011, specified action for the reduction and collection of delinquent loans;

Eliminate, within 30 days after September 20, 2011, and/or correct all applicable violations of law and regulation as discussed in the Bank's most recent exam report and implement procedures to ensure future compliance with all applicable laws and regulations;

Refrain from entering into any new line of business without the prior written consent of the FDIC while the Consent Order is in effect;

Establish, within 30 days after September 20, 2011, a loan review committee (at least two-thirds of the members of which shall be independent directors) to periodically review the Bank's loan portfolio and identify and categorize problem credits;



Review, within 90 days after September 20, 2011, and annually thereafter, the Bank's loan policy and procedures for effectiveness; and

Furnish, within 30 days following the end of each calendar quarter, quarterly progress reports to the banking regulators.

- 71 -



--------------------------------------------------------------------------------

Table of Contents

LIQUIDITY AND CAPITAL RESOURCES (Continued)

On March 14, 2013, the Bank entered into a written agreement with the Tennessee Department of Financial Institutions (the "Department"), the terms of which are substantially the same as those of the Consent Order, including as to required minimum levels of capital the Bank must maintain. As of June 30, 2014, we believe that we are in compliance with all provisions of the Consent Order that were required to be completed by June 30, 2014, including the minimum capital ratios required by the Consent Order. All plans required by the Consent Order have been prepared and submitted to the FDIC and have been accepted by the FDIC. As a result of entering into the Consent Order, the Bank is subject to additional limitations on its operations including accepting, rolling over, or renewing brokered deposits, which could adversely affect the Bank's liquidity and/or operating results. The Bank is also limited, as a result of its condition, in its ability to pay more than de minimis severance payments to its employees and must receive the consent of the FDIC and the Department to appoint new officers or directors. By virtue of entering into the Consent Order, the Bank is also limited from paying deposit rates above national rate caps published weekly by the FDIC, unless the Bank is determined to be operating in a high-rate market area. On December 1, 2011, the Bank received notification from the FDIC that it is operating in a high-rate environment, which allows the Bank to pay rates higher than the national rate caps, but continues to limit the Bank to rates that do not exceed the prevailing rate in the Bank's market by more than 75 basis points. The Company's principal source of liquidity for dividend payments is dividends received from the Bank. Although the Bank was profitable in each of 2012 and 2013, and the first six months of 2014, the Bank is 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. - 72 -



--------------------------------------------------------------------------------

Table of Contents

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, 2014, the Company has $4,112 of interest accrued on its subordinated debt for which payment is being deferred. In addition, the Company has accumulated $3,515 in deferred dividends on the Preferred Shares as of June 30, 2014. 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, 2014, Community First Properties, Inc. has $47 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 shares of Preferred Stock 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 and 2013, and the first six months of 2014, the Bank is 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. 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 Company's 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. - 73 -



--------------------------------------------------------------------------------

Table of Contents

LIQUIDITY AND CAPITAL RESOURCES (Continued)

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 complies with the Consent

Order (as defined below); Submit within 60 days of April 19, 2012 a written plan to maintain



sufficient capital at the Company on a consolidated basis, and within 10

days of approval of the plan by the FRB, adopt the approved capital plan;

Submit within 60 days of April 19, 2012 a written statement of the



Company's planned sources and uses of cash for debt service, operating

expenses, and other purposes for 2012;



Provide notice in compliance with applicable federal law and regulations,

of any changes in directors or senior executive officer of the Company; Comply with applicable federal law and regulations restricting indemnification and severance payments; and



Provide within 45 days after the end of each calendar quarter, a written

progress report detailing the form and manner of all actions taken to secure compliance with the provisions of the Written Agreement.



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, 2014 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, 2014.

- 74 -



--------------------------------------------------------------------------------

Table of Contents

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 final rules apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million 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 the currently required 4%) and assign higher risk weightings (150%) to exposures that are more than 90 days past due or are on nonaccrual status. The rules, which become effective as to the Bank on January 1, 2015, 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 in addition to the amount necessary to meet its minimum risk-based capital requirements. As a result, when fully phased in, the 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 will generally consist 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, subject to certain eligibility standards, less specified intangible assets and other regulatory deductions. The Company's Preferred Shares 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 specified intangible assets and other regulatory deductions. The final rules allow banks and their 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. Because the Company's total consolidated assets are below $500 million, these new capital rules will not be applicable to the Company on a consolidated basis. The Bank, though, will be subject to these rules once they become effective. Should the Company's total consolidated assets increase to more than $500 million, the Company would then be subject to these new rules. At June 30, 2014, the Company had unfunded loan commitments outstanding of $19,729 and unfunded letters of credit of $1,625. 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. - 75 -



--------------------------------------------------------------------------------

Table of Contents

LIQUIDITY AND CAPITAL RESOURCES (Continued)

At June 30, 2014 and December 31, 2013, 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: To Be Well Capitalized Under For Capital Applicable Required by terms Adequacy Regulatory of Consent Order Actual Purposes Provisions with FDIC June 30, 2014 Amount Ratio Amount Ratio Amount Ratio Amount Ratio Total Capital to risk weighted assets Community First Bank & Trust $ 43,234 15.34 % $ 22,552 8.00 % $ 28,190 10.00 % $ 33,828 12.00 % Consolidated 26,746 9.47 % 22,598 8.00 % 28,247 10.00 % N/A N/A Tier 1 Capital to risk weighted assets Community First Bank & Trust $ 39,676 14.07 % $ 11,276 4.00 % $ 16,914 6.00 % $ 28,190 10.00 % Consolidated 15,454 5.47 % 11,299 4.00 % 16,948 6.00 % N/A N/A Tier 1 Capital to average assets Community First Bank & Trust $ 39,676 8.87 % $ 17,885 4.00 % $ 22,357 5.00 % $ 38,006 8.50 % Consolidated 15,454 3.44 % 17,983 4.00 % N/A N/A N/A N/A To Be Well For Capital Capitalized Under Required by terms Adequacy Prompt Corrective of Consent Order Actual Purposes Action Provisions with FDIC December 31, 2013 Amount Ratio Amount Ratio Amount Ratio Amount Ratio Total Capital to risk weighted assets Community First Bank & Trust $ 41,250 14.70 % $ 22,445 8.00 % $ 28,056 10.00 % $ 33,667 12.00 % Consolidated 24,905 8.87 % 22,474 8.00 % 28,092 10.00 % N/A N/A Tier 1 Capital to risk weighted assets Community First Bank & Trust $ 37,687 13.43 % $ 11,222 4.00 % $ 16,833 6.00 % $ 28,056 10.00 % Consolidated 14,225 5.06 % 11,237 4.00 % 16,855 6.00 % N/A N/A Tier 1 Capital to average assets Community First Bank & Trust $ 37,687 8.41 % $ 17,917 4.00 % $ 22,396 5.00 % $ 38,073 8.50 % Consolidated 14,225 3.16 % 18,008 4.00 % N/A N/A N/A N/A At its current capital ratios, the Bank is considered "well capitalized"; however, the Bank will continue to be considered "adequately capitalized" until termination of the Consent Order. The Company's capital ratios are below what is required to be considered "adequately capitalized". Two of the three capital ratios were considered "adequate"; however, the Tier 1 Capital to average assets ratio was below the requirements to be considered "adequate", which prohibits the Company from being considered "adequately capitalized". 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 has reduced its reliance on these funding sources during the first six months of 2014 and it continues to do so as part of management's efforts to utilize the Bank's excess liquidity. National market CDs totaled $12,039 at June 30, 2014 compared to $18,429 at December 31, 2013. - 76 -



--------------------------------------------------------------------------------

Table of Contents


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters