FELDMAN FINANCIAL ADVISORS, INC.
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1725 K STREET, NW O SUITE 205
WASHINGTON, DC 20006
202-467-6862
(FAX) 202-467-6963
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Community First Bank
Madisonville, Kentucky
Conversion Valuation Appraisal Report
Valued as of March 17, 2003
Prepared By
Feldman Financial Advisors, Inc.
Washington, D.C.
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FELDMAN FINANCIAL ADVISORS, INC.
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1725 K STREET, NW O SUITE 205
WASHINGTON, DC 20006
202-467-6862
(FAX) 202-467-6963
March 17, 2003
Board of Directors
Community First Bank
240 South Main Street
Madisonville, Kentucky 42431
Gentlemen:
At your request, we have completed and hereby provide an independent
appraisal (the "Appraisal") of the estimated pro forma market value of Community
First Bank ("Community First" or the "Bank") as of March 17, 2003 in conjunction
with the Bank's conversion (the "Conversion") from the mutual to stock form of
organization and simultaneous issuance of all of its capital stock to a newly
formed holding company, Community First Bancorp, Inc. (the "Company"). Pursuant
to the Conversion, the Company will concurrently offer its common stock for sale
in a subscription and community offering to certain members of Community First
and the general public. The Appraisal is furnished pursuant to the filing of the
Application for Approval of Conversion (the "Application") by Community First
with the Office of Thrift Supervision ("OTS").
Feldman Financial Advisors, Inc. ("Feldman Financial") is a financial
consulting and economic research firm that specializes in financial valuations
and analyses of business enterprises and securities in the thrift, banking, and
mortgage industries. The background of Feldman Financial is presented in Exhibit
I.
In preparing the Appraisal, we conducted an analysis of Community First
that included discussions with the Bank's management and the Bank's independent
auditor, EKW & Associates, llp. In addition, where appropriate, we considered
information based on other available published sources that we believe are
reliable; however, we cannot guarantee the accuracy and completeness of such
information.
We also reviewed, among other factors, the economy in the Bank's
primary market area and compared the Bank's financial condition and operating
performance with that of selected publicly traded thrift institutions. We
reviewed conditions in the securities markets in general and in the market for
thrift institution common stocks in particular.
The Appraisal is based on the Bank's representation that the
information contained in the Application and additional evidence furnished to us
by the Bank and its independent auditor are truthful, accurate, and complete. We
did not independently verify the financial statements and other information
provided by the Bank and its independent auditor, nor did we independently value
the assets or liabilities of the Bank. The Appraisal considers the Bank only as
a going concern and should not be considered as an indication of the liquidation
value of the Bank.
FELDMAN FINANCIAL ADVISORS, INC.
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Board of Directors
Community First Bank
March 17, 2003
Page Two
It is our opinion that, as of March 17, 2003, the aggregate estimated
pro forma market value of the Bank was within a range (the "Valuation Range") of
$1,487,500 to $2,012,500 with a midpoint of $1,750,000. The Valuation Range was
based upon a 15% decrease from the midpoint to determine the minimum and a 15%
increase from the midpoint to establish the maximum. Assuming an additional 15%
increase above the maximum value would result in an adjusted maximum of
$2,314,375 (rounded to $2,314,380 for stock offering purposes).
Our valuation is not intended, and must not be construed, to be a
recommendation of any kind as to the advisability of purchasing shares of common
stock in the Conversion. Moreover, because the valuation is necessarily based
upon estimates and projections of a number of matters, all of which are subject
to change from time to time, no assurance can be given that persons who purchase
shares of stock in the Conversion will thereafter be able to sell such shares at
prices related to the foregoing estimate of the Bank's pro forma market value.
Feldman Financial is not a seller of securities within the meaning of any
federal or state securities laws and any report prepared by Feldman Financial
shall not be used as an offer or solicitation with respect to the purchase or
sale of any securities.
The valuation reported herein will be updated as appropriate. These
updates will consider, among other factors, any developments or changes in the
Bank's operating performance, financial condition, or management policies, and
current conditions in the securities markets for thrift institution common
stocks. Should any such new developments or changes be material, in our opinion,
to the valuation of the Bank, appropriate adjustments to the estimated pro forma
market value will be made. The reasons for any such adjustments will be
explained in detail at that time.
Respectfully submitted,
Feldman Financial Advisors, Inc.
By: /s/Trent R. Feldman
-----------------------------
Trent R. Feldman
President
FELDMAN FINANCIAL ADVISORS, INC.
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TABLE OF CONTENTS
TAB PAGE
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INTRODUCTION ............................................................................. 1
I. Chapter One - BUSINESS OF COMMUNITY FIRST BANK
General Overview.......................................................................... 4
Financial Condition....................................................................... 8
Income and Expense Trends................................................................. 13
Interest Rate Risk Management............................................................. 19
Asset Quality............................................................................. 22
Market Area............................................................................... 24
Summary Outlook........................................................................... 30
II. Chapter Two - COMPARISONS WITH PUBLICLY HELD THRIFTS
General Overview.......................................................................... 32
Selection Criteria........................................................................ 33
Recent Financial Comparisons.............................................................. 37
III. Chapter Three - MARKET VALUE ADJUSTMENTS
General Overview.......................................................................... 48
Earnings Prospects........................................................................ 49
Market Area............................................................................... 50
Management................................................................................ 50
Dividend Policy........................................................................... 51
Liquidity of the Issue.................................................................... 52
Subscription Interest .................................................................... 53
Stock Market Conditions................................................................... 54
Recent Acquisition Activity............................................................... 56
New Issue Discount........................................................................ 58
Adjustments Conclusion.................................................................... 61
Valuation Approach........................................................................ 62
Valuation Conclusion...................................................................... 64
IV. Appendix - EXHIBITS
I Background of Feldman Financial Advisors, Inc.................................. I-1
II-1 Statement of Financial Condition............................................... II-1
II-2 Statement of Operations........................................................ II-2
II-3 Investment Portfolio Composition............................................... II-3
II-4 Loan Portfolio Composition..................................................... II-4
II-5 Loan Origination Activity...................................................... II-5
II-6 Deposit Account Distribution................................................... II-6
II-7 Borrowed Funds Distribution.................................................... II-6
III Financial and Market Data for All Public Thrifts............................... III-1
IV-1 Pro Forma Assumptions.......................................................... IV-1
IV-2 Pro Forma Valuation Range...................................................... IV-2
IV-3 Pro Forma Conversion Analysis at Maximum....................................... IV-3
IV-4 Comparative Valuation Ratios................................................... IV-4
IV-5 Comparative Discount and Premium Analysis...................................... IV-5
FELDMAN FINANCIAL ADVISORS, INC.
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LIST OF TABLES
TAB PAGE
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I. Chapter One - BUSINESS OF COMMUNITY FIRST BANK
Table 1 - Selected Financial Condition Data.......................................... 8
Table 2 - Relative Balance Sheet Concentrations...................................... 9
Table 3 - Income Statement Summary................................................... 16
Table 4 - Income Statement Ratios.................................................... 17
Table 5 - Yield and Cost Summary .................................................... 18
Table 6 - Interest Rate Risk Analysis................................................ 21
Table 7 - Nonperforming Asset and Loan Loss Allowance Summary ....................... 23
Table 8 - Employment by Industry in Hopkins County................................... 25
Table 9 - Largest Manufacturing Employers in Hopkins County.......................... 25
Table 10 - Selected Demographic Data.................................................. 27
Table 11 - Deposit Market Share in Hopkins County..................................... 29
II. Chapter Two - COMPARISONS WITH PUBLICLY HELD THRIFTS
Table 12 - Comparative Group Operating Summary........................................ 36
Table 13 - Key Financial Comparisons.................................................. 39
Table 14 - General Financial Performance Ratios....................................... 43
Table 15 - Income and Expense Analysis................................................ 44
Table 16 - Yield-Cost Structure and Growth Rates...................................... 45
Table 17 - Balance Sheet Composition.................................................. 46
Table 18 - Regulatory Capital, Credit Risk, and Loan Composition...................... 47
III. Chapter Three - MARKET VALUE ADJUSTMENTS
Table 18 - Comparative Stock Index Performance........................................ 55
Table 19 - Summary of Recent Kentucky Acquisition Activity............................ 57
Table 20 - Summary of Recent Standard Full Thrift Conversions......................... 59
Table 21 - Comparative Market Valuation Analysis...................................... 65
FELDMAN FINANCIAL ADVISORS, INC.
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INTRODUCTION
As requested, Feldman Financial Advisors, Inc. ("Feldman Financial")
has prepared an independent appraisal (the "Appraisal") of the estimated pro
forma market value of Community First Bank ("Community First" or the "Bank") as
of March 17, 2003 in conjunction with the Bank's conversion (the "Conversion")
from the mutual to stock form of organization and simultaneous issuance of all
of its capital stock to a newly formed holding company, Community First Bancorp,
Inc. (the "Company"). Pursuant to the Conversion, the Company will concurrently
offer its common stock for sale in a subscription and community offering to
certain members of Community First and the general public. The Appraisal is
furnished pursuant to the filing of the Application for Approval of Conversion
(the "Application") by Community First with the Office of Thrift Supervision
("OTS").
In the course of preparing the Appraisal, we reviewed and discussed
with the Bank's management and the Bank's independent auditor, EKW & Associates,
llp, the audited financial statements of the Bank's operations for the year
ended December 31, 2002. We also reviewed and discussed with management other
financial matters of the Bank.
Where appropriate, we considered information based upon other available
public sources, which we believe to be reliable; however, we cannot guarantee
the accuracy or completeness of such information. We visited the Bank's primary
market area and examined the prevailing economic conditions. We also examined
the competitive environment within which the Bank operates and assessed the
Bank's relative strengths and weaknesses.
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FELDMAN FINANCIAL ADVISORS, INC.
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We examined and compared the Bank's financial performance with selected
segments of the thrift industry and selected publicly traded thrift
institutions. We reviewed conditions in the securities markets in general and
the market for thrift institution common stocks in particular. We included in
our analysis an examination of the potential effects of the Conversion on the
Bank's operating characteristics and financial performance as they relate to the
estimated pro forma market value of the Bank.
In preparing the Appraisal, we have relied upon and assumed the
accuracy and completeness of financial and statistical information provided by
the Bank and its independent auditor. We did not independently verify the
financial statements and other information provided by the Bank and its
independent auditor, nor did we independently value the assets or liabilities of
the Bank. The Appraisal considers the Bank only as a going concern and should
not be considered as an indication of the liquidation value of the Bank.
Our Appraisal is not intended, and must not be construed, to be a
recommendation of any kind as to the advisability of purchasing shares of common
stock in the Conversion. Moreover, because such the Appraisal is necessarily
based on estimates and projections of a number of matters, all of which are
subject to change from time to time, no assurance can be given that persons who
purchase shares of common stock in the Conversion will thereafter be able to
sell such shares at prices related to the foregoing estimate of the Bank's pro
forma market value. Feldman Financial is not a seller of securities within the
meaning of any federal and state securities laws and any report prepared by
Feldman Financial shall not be used as an offer or solicitation with respect to
the purchase or sale of any securities.
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FELDMAN FINANCIAL ADVISORS, INC.
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The valuation reported herein will be updated as appropriate. These
updates will consider, among other factors, any developments or changes in the
Bank's financial performance or management policies, and current conditions in
the securities market for thrift institution common stocks. Should any such
developments or changes be material, in our opinion, to the Conversion valuation
of the Bank, appropriate adjustments to the estimated pro forma market value
will be made. The reasons for any such adjustments will be explained in detail
at that time.
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FELDMAN FINANCIAL ADVISORS, INC.
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I. BUSINESS OF COMMUNITY FIRST BANK
General Overview
Community First is a federally chartered mutual savings bank operating
through one office in Madisonville, Kentucky. The Bank was founded in 1923 as
the Madisonville Building and Loan Association and converted in 2002 to a
federal mutual savings bank charter and its current name. The primary business
of the Bank consists of attracting deposits from the general public and using
these funds to originate residential mortgage loans. The Bank is subject to
regulation by the OTS and its deposit accounts are insured up to applicable
limits by the Savings Association Insurance Fund ("SAIF") of the Federal Deposit
Insurance Corporation ("FDIC"). The Bank is a member of the Federal Home Loan
Bank ("FHLB") System. As of December 31, 2002, Community First had total assets
of $30.0 million, total deposits of $28.1 million, and total equity capital of
$1.7 million or 5.84% of total assets.
The Bank is a traditional thrift institution emphasizing permanent
mortgage loans on residential properties and, to a lesser extent, commercial
real estate and consumer loans. Over the past decade, the Bank's lending
activity declined due to competitive factors and the Bank deployed an increased
concentration of its assets into investment securities as opposed to generally
higher yielding mortgage loans. Total loans outstanding declined from $23.5
million or 78.5% of total assets at year-end 1990 to $18.6 million or 65.1% of
total assets at year-end 1999. Consequently, the Bank experienced increased
pressure on its net interest margin as a result of the shrinking loan portfolio
and its net interest income was no longer sufficient to cover its noninterest
operating expenses. The Bank began in 1998 to record progressively larger
operating losses. The negative trend in earnings continued through 2002 and the
Bank's equity capital
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FELDMAN FINANCIAL ADVISORS, INC.
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declined from $2.1 million or 7.04% of total assets at year-end 1998 to $1.7
million or 5.84% at year-end 2002.
In 2001, Community First sought to hire a new chief executive officer
with an aim toward restoring the Bank's profitability and improving its
competitive position. William Tandy was hired in November 2001 as President and
Chief Executive Officer of the Bank. Mr. Tandy had previously been involved in
three bank turnaround situations. The Bank's efforts to restore profitability
have focused on increasing the net interest margin and controlling operating
expenses. Community First has attempted to improve its net interest margin by
shifting a greater proportion of its assets from lower yielding investments into
higher yielding loans and by diversifying the portfolio to include additional
commercial and multi-family real estate loans. The Bank has also sought to
control interest expense by reducing its reliance on higher rate, long-term
certificates of deposit and borrowings.
In addition to changing its corporate name, Community First also
commenced efforts to become more aggressive in marketing promotion and product
introduction. New products have included debit cards, equity loans, and internet
banking. The Bank revised the pricing on most of its product offerings to make
them more competitive and renovated its office building to achieve a more
customer-friendly environment. In conjunction with implementation of its new
strategic direction, the Bank has concurrently focused on becoming a more
efficient provider of financial services by curtailing unnecessary expenses.
As a result of the various initiatives undertaken to improve
profitability, the Bank's net interest margin has improved considerably and
total loans outstanding have increased steadily. However, the Bank still
recorded a net operating loss of $84,000 for 2002. The continued
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FELDMAN FINANCIAL ADVISORS, INC.
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erosion of the Bank's capital has resulted in a decline of its equity to assets
ratio from 7.20% at year-end 1999 to 5.84% at year-end 2002. The Bank believes
that it is important to sustain its competitive momentum by growing and
increasing its local market share for loans and deposits.
There have been a number of financial institution mergers in the local
market, which has increased the opportunity for Community First to attract new
customers willing to change their banking relationships to a community-oriented,
locally owned bank. Community First plans to open a new branch office in a
rapidly developing area of northern Madisonville in order to attract more
customers. The investment in its new branch office in the form of added
personnel, premises and equipment, and technology will require some lead time
for implementation and development before improved earnings results are
immediately achievable. However, the Bank believes that it is important to
broaden its reach in the local market and enhance customer convenience.
In order to achieve its growth objectives and maintain an appropriate
level of capital, the Bank plans to convert from the mutual to stock form of
organization and offer shares of common stock for sale through the Company. The
Board of Directors ("Board") of Community First has determined that the
Conversion is in the best interests of the Bank, and has also noted specific
business purposes for effecting the proposed Conversion.
The capital raised through the Conversion will allow the Bank to
further grow and diversify its loan portfolio and facilitate expansion into
faster growing segments of the local market area. The ability to issue common
stock also will enable the Bank to establish stock benefit plans for management
and employees, thereby improving the Bank's capacity to attract and retain
qualified personnel. Utilizing the holding company structure to effect the
Conversion
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FELDMAN FINANCIAL ADVISORS, INC.
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will provide the Company with greater flexibility to diversify business
operations, expand through mergers or acquisitions, and repurchase common stock
without adverse tax consequences. Finally, the Bank believes that the Conversion
will strengthen its ties to the community by allowing customers to become
stockholders and share in the Bank's future performance.
The remainder of Chapter I examines in more detail the trends addressed
in this section, including the impact of changes in the Bank's economic and
competitive environment, and recent management initiatives. The discussion is
supplemented by the exhibits in the Appendix. Exhibit II-1 summarizes the Bank's
statements of financial condition as of fiscal year-ends December 31, 2000 to
2002. Exhibit II-2 presents the Bank's statements of income for the fiscal years
ended December 31, 2001 and 2002.
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Financial Condition
Table 1 presents selected data concerning Community First's financial
position as of the year-end periods December 31, 1999 to 2002. Table 2 displays
relative balance sheet concentrations for the Bank as of similar periods.
Table 1
Selected Financial Condition Data
As of December 31, 1999 to 2002
(Dollars in Thousands)
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December 31,
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2002 2001 2000 1999
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Total Assets $29,968 $29,530 $27,691 $28,650
Loans Receivable, net 25,710 22,158 19,101 18,640
Cash and Cash Equivalents 758 2,307 2,058 3,394
Investment Securities 1,902 3,824 5,324 5,421
Total Deposits 28,128 26,611 25,422 26,310
FHLB Advances -- 1,000 162 177
Equity Capital 1,749 1,838 1,952 2,063
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Source: Community First, financial statements and regulatory thrift
financial reports.
Asset Composition
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The Bank's total assets experienced relatively modest growth over the
past three years, increasing by a compound annual rate of 1.5% from $28.7
million at December 31, 1999 to $30.0 million at December 31, 2002. However, as
a result of the increased emphasis on improving its lending competitiveness, the
Bank's loan portfolio grew at an 11.3% compound annual rate or $7.1 million over
the same time period. The concentration of loans to assets increased from 65.1%
at year-end 1999 to 85.8% at year-end 2002, while the balance of cash and
investments declined from 30.8% of total assets at year-end 1999 to 8.9% at
year-end 2002.
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Table 2
Relative Balance Sheet Concentrations
As of December 31, 1999 to 2002
(Percent of Total Assets)
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December 31,
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2002 2001 2000 1999
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Assets
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Cash and cash equivalents 2.53 7.81 7.43 11.85
Investment securities 6.35 12.95 19.23 18.92
Loans receivable, net 85.79 75.04 68.98 65.06
FHLB stock 2.12 2.05 2.05 1.84
Premises and equipment 2.58 1.41 1.55 1.58
Other assets 0.63 0.74 0.76 0.75
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Total assets 100.00 100.00 100.00 100.00
====== ====== ====== ======
Liabilities and Equity
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Total deposits 93.86 90.12 91.81 91.83
FHLB advances 0.00 3.39 0.59 0.62
Other liabilities 0.30 0.27 0.55 0.35
Equity capital 5.84 6.22 7.05 7.20
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Total liabilities and equity 100.00 100.00 100.00 100.00
====== ====== ====== ======
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Source: Community First, financial statements and regulatory thrift
financial reports.
Exhibit II-3 presents a summary composition of the Bank's investment
portfolio as of December 31, 2001 and 2002. The investment portfolio primarily
consisted of U.S. government and agency securities in the form of FHLB bonds and
mortgage-backed securities issued by the Government National Mortgage
Association ("GNMA"). The Bank's reduced portfolio of investments and short-term
liquidity reflects the shift of assets into higher yielding loans.
The Bank's loan portfolio composition is presented in Exhibit II-4 as
of December 31, 2001 and 2002. The Bank's chief lending focus is the origination
of one- to four-family residential first mortgage loans secured by properties
located in its primary market area. Residential first mortgages composed 86.1%
or $22.4 million of the Bank's gross total loans of
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$26.0 million at year-end 2002. The Bank generally originates fixed-rate
residential mortgage loans for sale into the secondary mortgage market, while it
generates adjustable-rate residential mortgages for portfolio retention.
Approximately 9.4% of the Bank's residential first mortgage portfolio had
predetermined rates and 90.6% had floating or adjustable rates as of year-end
2002. Exhibit II-5 displays the Bank's loan origination activity for 2001 and
2002. The Bank's originations of residential first mortgages amounted to $10.1
million and $9.3 million for 2001 and 2002, respectively.
Over the past year, the Bank sought to increase its originations of
commercial and multi-family real estate loans in order to diversify the loan
portfolio and serve the needs of the market. Commercial and multi-family real
estate loans outstanding increased from $467,000 or 2.1% of the overall loan
portfolio at year-end 2001 to $1.2 million or 4.8% at year-end 2002. The Bank
generally makes these loans for terms of up to 20 years and with interest rates
that are fixed for a period of one to seven years and adjust annually
thereafter. As of year-end 2002, the Bank's two largest commercial real estate
loans outstanding were a $450,000 loan secured by a 28-unit apartment complex in
Madisonville and a $348,000 loan secured by a personal care facility in
Madisonville.
The Bank also makes a limited amount of consumer, residential
construction, and commercial business loans. Consumer loans totaled $1.5 million
or 5.7% of the entire loan portfolio as of year-end 2002. Automobile loans
accounted for approximately one-half of the consumer loans outstanding. Other
types of consumer loans consist of personal unsecured loans, passbook loans,
home improvement loans, and equipment loans. Residential construction loans and
commercial business loans outstanding amounted to $207,000 and $102,000,
respectively, at
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FELDMAN FINANCIAL ADVISORS, INC.
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year-end 2002. The Bank originates a selective number of construction loans to
borrowers on owner-occupied residential properties. The Bank engages in
commercial business lending on a limited basis, and mainly extends such loans as
an accommodation for existing customers.
Liability Composition
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Deposit are the Bank's major external source of funds for lending and
other investment purposes. Exhibit II-5 presents a summary of the Bank's deposit
account composition as of December 31, 2002. Total deposits amounted to $28.1
million or 93.9% of total assets and 99.7% of total liabilities at such date.
The Bank attracts deposits within its market area through the offering of a
basic selection of accounts, such as regular passbook savings, money market,
basic checking, NOW, and term certificate accounts. Community First competes for
deposits through competitive rate pricing in its market area. The Bank's deposit
rates are established weekly by senior management. The Bank places special
emphasis periodically on certain accounts to meet its funding objectives.
The Bank has historically relied chiefly on certificates of deposit for
liability funding. Certificates of deposit constituted $20.4 million or 72.3% of
the deposit portfolio, of which $3.5 million were certificates with balances of
$100,000 or more. The Bank has recently attempted to reduce its reliance on
certificate accounts by attracting more transaction accounts, such as checking,
NOW, and money market accounts. As a result, transaction accounts increased from
$2.7 million or 10.1% of total deposits at year-end 2001 to $4.6 million or
16.4% at year-end 2002. Passbook savings accounts remained relatively stable,
increasing slightly from $3.0 million at year-end 2001 to $3.2 million at
year-end 2002. Community First had no brokered deposits outstanding as of
year-end 2002. Approximately 72.6% or $14.8 million of the Bank's
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FELDMAN FINANCIAL ADVISORS, INC.
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$20.4 million of certificate accounts had maturities of 24 months or less as of
December 31, 2002.
The Bank has periodically utilized FHLB borrowings as supplemental
source of funds. The Bank had no FHLB advances outstanding as of year-end 2002,
as compared to $1.0 million outstanding as of year-end 2001. The Bank's average
amount of FHLB borrowings outstanding was $540,000 in 2001 and $530,000 in 2002.
FHLB advances are typically secured by a pledge of the Bank's stock investment
in the FHLB of Cincinnati, a portion of its first mortgage loans, and other
assets. The Bank's stock investment in the FHLB of Cincinnati amounted to
$634,000 as of year-end 2002.
Equity Capital
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The Bank had equity capital of $1.7 million or 5.84% of total assets as
of December 31, 2002, reflecting a decline from $1.8 million or 6.22% of total
assets at year-end 2001. Contributing to the lowered equity level between
year-end 2001 and year-end 2002 were the Bank's net operating loss of $84,000
for 2002 and a net reduction of $5,000 in unrealized gains on available-for-sale
securities. The Bank's regulatory capital ratios of Tier 1 core, Tier 1
risk-based, and total risk-based capital were 5.83%, 10.48%, and 11.12%,
respectively, as of December 31, 2002. In comparison, the minimum regulatory
requirements were 4.00%, 4.00%, and 8.00%, and the threshold requirements for
well-capitalized levels were 5.00%, 6,00%, and 10.00%, respectively.
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Income and Expense Trends
Table 3 displays the main components of the Bank's earnings performance
over the years ended December 31, 2001 and 2002. Table 4 displays the Bank's
principal income and expense ratios as a percent of average assets for the
corresponding periods. Table 5 displays the Bank's weighted average yields on
interest-earning assets and weighted average costs of interest-bearing
liabilities for various periods.
Community First recorded a net operating loss of $84,000 in 2002. The
Bank had also experienced a net loss in 2001, amounting to an operating deficit
of $125,000. The Bank has incurred net losses in each of the last five fiscal
years. The Bank's lack of profitability has been mainly attributable to its
decreased levels of net interest income, which have not sufficiently covered its
noninterest operating expenses. As noted earlier, the Bank's curtailed lending
activities resulted in a dramatically shrinking net interest margin. However,
during 2002, the emphasis on lending and asset portfolio management produced an
increased net interest margin and a decreased level of operating losses.
Net interest income increased by 25.0% from $784,000 in 2001 to
$980,000 in 2002. Total interest income decreased by $77,000 from $2.0 million
to $1.9 million, whereas total interest expense decreased by $274,000 from $1.2
million to $961,000. The growth in net interest income reflected an increase in
the Bank's net interest spread by 71 basis points from 2.73% in 2001 to 3.44% in
2002. The Bank's yield on earning assets declined by 56 basis points from 7.56%
to 7.00%, while its cost of funds declined by 127 basis points. As evident, the
declining interest rate environment had a more significant impact on the Bank's
interest-earning liabilities than its interest-earning assets. Also contributing
to the improvement in net interest
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income was a $1.0 million increase in average interest-earning assets during
2002. Reflecting its improved spreads, the Bank's net interest margin widened
from 2.94% in 2001 to 3.54% in 2002.
The Bank made an $18,000 provision for loan losses in 2002, as compared
to $94,000 for 2001. Net loan charge-offs were higher in 2002 at $17,000 versus
$49,000 in 2001. The Bank reduced its provision for loan losses in 2002 due to
the lower level of net charge-offs. The Bank's allowance for loan losses
amounted to $106,000 or 0.41% of the gross loan portfolio at year-end 2002.
Noninterest income declined by $57,000 from $130,000 in 2001 to $73,000
for 2002. In relation to average assets, the noninterest income ratio declined
from 0.45% to 0.24%. The decrease in noninterest revenue was primarily due to a
$33,000 decrease in service charges and fees. Since the Bank does not originate
fixed-rate residential mortgage loans for portfolio, an increasing volume of the
Bank's residential loans are originated for sale into the secondary market
versus being retained in portfolio. The fee income from the Bank's secondary
market transactions has been lower than on portfolio loans.
Noninterest operating expense increased by $131,000 or 13.4% from
$978,000 in 2001 to $1.1 million for 2002. The Bank's ratio of noninterest
expense to average assets increased from 3.40% in 2001 to 3.66% for 2002. The
increase in noninterest expense largely reflects employee staff additions,
including a new President, and additional occupancy costs related to higher
depreciation expenses resulting from the renovation of the Bank's main office.
Also contributing to the increase in operating expenses were increases in
advertising and office supplies expenses, both reflecting the change in the
Bank's corporate name and associated promotional activity.
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As of December 31, 2002, the Community First had 12 full-time
employees. The Bank anticipates an increase in compensation and occupancy
expense in connection with the proposed new branch office. In December 2002, the
Bank entered into a real estate purchase contract to purchase property for the
new branch location at a cost of $360,000. In addition, the Bank anticipates
that it will invest $500,000 in remodeling and equipping the existing structure
to serve as a branch office.
The Bank also plans to convert to a new data processing system that
will provide management with more timely and useful information at a lower cost
than its current provider. However, the Bank may be required to pay significant
termination fees to its current provider and incur additional programming and
other expenses in order to effect the transition to the new system. The Bank's
current provider has presented the Bank with a termination contract that calls
for termination related penalties and costs of approximately $400,000. Also, the
Bank could incur other unanticipated costs in conjunction with the systems
conversion. The Bank believes that it is not currently obligated to pay
termination fees under its current contracts and does not plan to enter into the
termination contract or otherwise obligate the Bank to pay contract termination
penalties.
The Bank incurred a federal tax expense of $10,000 for 2002, as
compared to a federal tax benefit of $33,000 for 2001. The tax expense during
2002 related to the establishment of a valuation allowance for the Bank's net
deferred tax assets based on its current earnings. As of year-end 2002, the Bank
had a net operating loss carryforward of approximately $557,000 that will
commence to expire in 2012 and expire in 2023.
15
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
Table 3
Income Statement Summary
For the Years Ended December 31, 2001 and 2002
(Dollars in Thousands)
================================================================================
Year Ended December 31,
-----------------------
2002 2001
---- ----
Total interest income $ 1,941 $ 2,018
Total interest expense 961 1,234
------- -------
Net interest income 980 784
Provision for loan losses 18 94
------- -------
Net interest income after provision 962 690
Service charges and other fees 64 97
Loss on sale of fixed assets (4) --
Gain (loss) on sale of other real estate (7) 10
Foreclosed real estate expense, net (1) (14)
Insurance commissions and premiums 5 10
Other income 17 28
------- -------
Total noninterest income 73 130
Compensation and benefits 450 344
Occupancy expense 131 96
Data processing 161 168
Other expenses 367 370
------- -------
Total noninterest expense 1,109 978
Loss before income taxes (74) (158)
Income tax expense (benefit) 10 (33)
------- -------
Net loss $ (84) $ (125)
======= =======
================================================================================
Source: Community First, financial statements.
16
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
Table 4
Income Statement Ratios
For the Years Ended December 31, 2001 and 2002
(Percent of Average Assets)
================================================================================
Year Ended December 31,
----------------------
2002 2001
------- -------
Total interest income 6.41 7.02
Total interest expense 3.17 4.29
----- -----
Net interest income 3.24 2.73
Provision for loan losses 0.06 0.33
----- -----
Net interest income after provision 3.18 2.40
Service charges and other fees 0.21 0.34
Loss on sale of fixed assets (0.01) --
Gain (loss) on sale of other real estate (0.02) 0.03
Foreclosed real estate expense, net (0.00) (0.05)
Insurance commissions and premiums 0.02 0.03
Other income 0.06 0.10
----- -----
Total noninterest income 0.24 0.45
Compensation and benefits 1.49 1.20
Occupancy expense 0.43 0.34
Data processing 0.53 0.58
Other expenses 1.21 1.29
----- -----
Total noninterest expense 3.66 3.40
Loss before income taxes (0.24) (0.55)
Income tax expense (benefit) 0.03 (0.12)
----- -----
Net loss (0.28) (0.43)
===== =====
================================================================================
Source: Community First, financial statements and internal data.
17
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
Table 5
Yield and Cost Summary
For the Years Ended December 31, 2001 and 2002
And as of December 31, 2002
================================================================================
Year Ended
As of December 31,
Dec. 31, ----------------
2002 2002 2001
---- ---- ----
Weighted Average Yields
-----------------------
Loans receivable, net (1) 6.53% 7.52% 8.12%
Investment securities 6.00 5.75 6.35
Other investments 4.40 2.33 4.40
Total interest-earning assets 6.45 7.00 7.56
Weighted Average Costs
----------------------
Deposits 3.55 3.58 4.84
Borrowings -- 2.26 4.44
Total interest-bearing liabilities 3.55 3.56 4.83
Net interest spread (2) 2.90 3.44 2.73
Net interest margin (3) 3.47 3.54 2.94
Ratio of average interest-earning assets
to average interest-bearing liabilities 105.89 102.59 104.49
================================================================================
(1) Includes nonaccruing loans, less allowance for loan losses and deferred
fees.
(2) Difference between the weighted average yield on interest-earning assets
and the weighted average cost of interest-bearing liabilities.
(3) Net interest income divided by average interest-earning assets.
Source: Community First, internal data.
18
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
Interest Rate Risk Management
Community First has sought to reduce its earnings vulnerability to
changes in market interest rates by managing the mismatch between asset and
liability maturities and interest rates. The principal elements of the Bank's
interest rate risk management are to evaluate the interest rate risk included in
certain balance sheet accounts, to determine the level of risk appropriate given
the Bank's business strategy, operating environment, performance objectives, and
capital and liquidity requirements, and manage the risk consistent with the
Board's approved policies.
The Bank seeks to mitigate interest rate risk by pursuing certain
strategies designed to decrease the vulnerability of earnings to material and
prolonged changes in interest rates. The Bank's interest rate risk management
strategies includes: (i) emphasizing the origination of adjustable-rate mortgage
loans for portfolio retention; (ii) purchasing investment securities with
relatively short maturities, normally three years or less; and (iii) lengthening
the maturities of its liabilities when it would be cost-effective.
The Bank measures its interest rate sensitivity based on the net
portfolio value ("NPV") of market equity as facilitated by the OTS's analytical
framework. NPV reflects the simulated equity of the Bank as obtained by
estimating the economic value of its assets, liabilities, and off-balance sheet
items under different interest rate scenarios. Table 6 summarizes the interest
rate sensitivity of the Bank's NPV as of December 31, 2002, assuming
instantaneous, parallel shifts in the Treasury yield curve of 100 to 300 basis
points either up or down in 100 basis point increments. Because of the current
level of interest rates, the OTS does not calculate the effect of a decline in
interest rates greater than 200 basis points.
19
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
In the current interest rate environment, the Bank's interest rate risk
exposure is moderate. The Bank has significantly improved the sensitivity of its
interest-earning asset base through the emphasis of retaining adjustable-rate
residential mortgages in portfolio and selling long-term, fixed-rate residential
mortgage into the secondary market. In addition, the Bank's historical reliance
on term certificates for deposit funding has effectively lengthened the average
maturities of a major portion of its interest-bearing liabilities. The
combination of these factors has added to the stability of the Bank's NPV. The
Board of Community First has established a policy setting forth maximum NPV
variances as a result of the assumed interest rate movements. As of December 31,
2002, the Board's NPV sensitivity was within the policy guidelines established
by the Board.
As shown in Table 6, a rising interest rate scenario of 200 basis
points would have a negative effect on the Bank's NPV and projected net interest
income production with a resulting NPV ratio of 6.60% of assets. While the
relative change in NPV was only 83 basis points from the base NPV ratio of 7.43%
under the plus-200 basis point scenario, the Bank's leveraged capital position
further strains its ability to absorb market rate risk. A downward movement in
market rates by 200 basis points would result in a change of NPV of only 6 basis
points as the Bank's NPV ratio measured 7.38% under the declining rate scenario.
20
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
Table 6
Interest Rate Risk Analysis
Net Portfolio Value of Market Equity
As of December 31, 2002
================================================================================
Interest Rate NPV Change Change Basis Point
Scenario (basis Amount from Base from Base NPV Change in
points) ($000s) ($000s) (%) Ratio NPV Ratio
================================================================================
Up 300 1,726 (595) (25.6)% 5.79% -164 b.p.
- --------------------------------------------------------------------------------
Up 200 2,001 (320) (13.8)% 6.60% -83 b.p.
- --------------------------------------------------------------------------------
Up 100 2,206 (115) (5.0)% 7.16% -27 b.p.
- --------------------------------------------------------------------------------
Base 2,321 -- -- 7.43% 0 b.p.
- --------------------------------------------------------------------------------
Down 100 2,335 14 0.6% 7.40% -3 b.p.
- --------------------------------------------------------------------------------
Down 200 2,360 26 1.7% 7.38% -6 b.p.
================================================================================
Source: Community First, internal data.
21
FELDMAN FINANCIAL ADVISORS, INC.
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Asset Quality
Table 7 summarizes the Bank's nonperforming assets as of December 31,
2001 and 2002. Community First's overall asset quality has remained
satisfactory, due primarily to its emphasis on residential mortgage lending. As
of December 31, 2002, nonperforming loans totaled $86,000 or 0.33% of total
loans net loans and 0.29% of total assets. The Bank's nonperforming loans had
previously amounted to $47,000 at year-end 2001. Nonperforming loans as of
year-end 2002 were composed of loans on one- to four-family residential
properties. The Bank reviews the overall loan portfolio on a monthly basis and
places loans on a nonaccrual basis when the loan becomes more than 90 days
delinquent or when it considers the collection of additional interest doubtful.
The Bank had no foreclosed real estate or other nonperforming assets at year-end
2002.
The Bank's allowance for loan losses totaled $106,000 at December 31,
2002, measuring 0.41% of total loans and 123.26% of nonperforming loans. Net
loan charge-offs amounted to $17,000 in 2002, down from $49,000 in 2001. Because
of the lower level of charge-offs in 2001, the Bank's provision for loan losses
was reduced to $18,000 in 2002 versus $94,000 in 2001. The Bank's loan loss
allowance was allocated as follows at year-end 2002: $53,000 for residential
mortgages (50.0%), $15,000 for nonresidential and construction mortgages
(14.2%), $35,000 for consumer loans (33.0%), and $3,000 for commercial business
loans (2.8%).
22
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
Table 7
Nonperforming Asset and Loan Loss Allowance Summary
As of December 31, 2001 and 2002
(Dollars in Thousands)
================================================================================
December 31,
-------------------
2002 2001
Nonaccrual loans
----------------
One- to four-family residential first $ 53 $ --
Other loans -- --
---- ----
Total nonaccrual loans 53 --
Accruing loans past due 90 days or more
---------------------------------------
One- to four-family residential first 31 44
Other loans 2 3
---- ----
Total nonaccrual loans past due 90 days or more 33 47
---- ----
Total nonperforming loans 86 47
Foreclosed real estate -- 17
---- ----
Total nonperforming assets $ 86 $ 64
==== ====
Nonperforming loans as a % of total loans 0.33% 0.21%
Nonperforming assets as a % of total assets 0.29% 0.22%
- --------------------------------------------------------------------------------
Allowance for loan losses $106 $105
==== ====
Allowance as a % of total loans 0.41% 0.47%
Allowance as a % of nonperforming loans 123.26% 223.40%
------ ------
================================================================================
Source: Community First, financial statements and internal data.
23
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
Market Area
Community First operates one office in Madisonville, Kentucky.
Madisonville, the seat of Hopkins County, was founded in 1807 and named for
President James Madison. Madisonville and Hopkins County are located in the
heart of Western Kentucky. Madisonville had an estimated 2002 population of
approximately 19,000. Hopkins County had an estimated 2002 population of
approximately 46,000. The area is located approximately 50 miles south of
Evansville, Indiana, 100 miles northwest of Nashville, Tennessee, and 150 miles
southwest of Louisville, Kentucky. Madisonville is home to Madisonville
Community College, which has a total enrollment of approximately 3,000 students.
Table 8 presents the summary of employment by industry sector in
Hopkins County. Services, trade, and manufacturing ranked as the leading
employment sectors. Healthcare is included among the services sector. The Trover
Regional Medical Center, one of the major healthcare facilities in Kentucky, is
located in Madisonville and employs approximately 2,000 persons. Hopkins
County's relative employment concentrations in services, trade, and
manufacturing closely tracked national trends, while mining and quarrying
exhibited an above-average level of employment in the county and government and
finance, insurance, and real estate displayed below-average levels.
Table 9 presents the largest manufacturing employers in Hopkins County.
The healthcare and manufacturing industries represent the largest sectors of the
Madisonville economy. The largest manufacturing employers in the area include
General Electric Company (aircraft engine, turbine, blade, and vane
manufacturer), Lear Corporation (plastic automotive component manufacturer), and
Carrhartt, Inc. (clothing and work wear manufacturer).
24
FELDMAN FINANCIAL ADVISORS, INC.
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Table 8
Employment by Industry in Hopkins County
As of 2000
================================================================================
Industry Employment Percent
-------- ---------- -------
Services 5,067 29.2
Retail and Wholesale Trade 4,371 25.2
Manufacturing 2,689 15.5
Transportation and Public Utilities 871 5.0
Mining and Quarrying 661 3.8
Contract Construction 626 3.6
State and Local Government 583 3.4
Finance, Insurance, and Real Estate 494 2.9
Agriculture, Forestry, and Fishing 138 0.8
================================================================================
Source: U.S. Department of Labor, Bureau of Labor Statistics.
Table 9
Largest Manufacturing Employers in Hopkins County
As of March 2003
=================================================================================================
Company Products Employees
------- -------- ---------
General Electric Company Aircraft engines, turbines, blades and vanes 780
Lear Corporation Plastic automotive components 320
Carhartt, Inc. Work coats, jackets, and jeans 282
UC Milk Company, LLC Liquid milk, fruit juices, and plastic jugs 150
Period Furniture Dormitory and government facility furniture 94
Hibbs Electric Inc. AC and DC motor electric form coils 65
Electro Cylce, Inc. Aluminum recycling 41
Royal Crown Bottling Co. Soft drinks 35
The Messenger Newspaper publishing, printing, and typesetting 32
Gemtron Corporation Appliance components 31
=================================================================================================
Source: Kentucky Cabinet for Economic Development.
25
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
Table 10 displays selected demographic data for the United States, the
state of Kentucky, Hopkins County, and Madisonville. Total population in Hopkins
County was estimated at 46,135 in 2002 and is projected to decline over the next
five years. The population in Madisonville was estimated at 19,036 for 2002.
Madisonville's population had declined by 3.6% from 1990 to 2002, and is
projected to decline by 3.2% from 2002 to 2007. Both Madisonville and Hopkins
County exhibited an older age distribution with 55% of the population in the
category of age 35 and older, as compared to the statewide and nationwide levels
of 52% and 51% respectively, in the same age group. Population growth in the
state overall is projected at 2.6% over the next five years, trailing the
estimated national growth rate of 4.8%.
Per capital and household income levels were much lower in the Bank's
local market area as compared to state and national statistics. The median
household income for Hopkins County was estimated at $28,586 in 2002, below the
corresponding state and national income levels of $35,427 and $47,065,
respectively. Madisonville exhibited a median household income of $28,549,
comparable to that of Hopkins County. The household growth rate over the next
five years is expected to be slightly negative in Madisonville and relatively
flat in Hopkins County, in contrast to the range of 4%-5% household expansion
projected statewide and nationally.
The average annual unemployment rate was 5.8% in Hopkins County during
2002, down from 7.0% in 2001. The average annual unemployment rate increased
from 5.4% in 2001 for the state of Kentucky to 5.6% in 2002. Similarly, the
national unemployment rate also increased from 4.8% in 2001 to 5.8% in 2002.
Kentucky's overall job growth in 2002 was concentrated in the services sector,
while the construction and mining sectors were relatively unchanged and the
manufacturing sector experienced net job losses.
26
FELDMAN FINANCIAL ADVISORS, INC.
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Table 10
Selected Demographic Data
United States, Kentucky, Hopkins County, and Madisonville
=======================================================================================================
Demographic United Hopkins
Data States Kentucky County Madisonville
- -------------------------------------------------------------------------------------------------------
Population
----------
Total Population - 2002 286,815,104 4,077,458 46,135 19,036
1990-2002 actual change 15.32% 10.64% 0.02% -3.61%
2002-2007 projected change 4.78% 2.61% -1.58% -3.18%
Households
----------
Total Households - 2002 107,753,800 1,616,159 18,811 8,033
1990-2002 actual change 17.19% 17.13% 5.92% 1.89%
2002-2007 projected change 5.40% 4.48% 0.39% -1.07%
Per Capita Income
-----------------
Per Capita Income - 2002 $24,636 $19,962 $15,382 $16,976
1990-2002 actual change 71.25% 79.26% 43.66% 44.56%
2002-2007 projected change 21.64% 23.90% 12.66% 13.17%
Median Household Income
-----------------------
Median Household Income - 2002 $47,065 $35,427 $28,586 $28,549
1990-2002 actual change 56.60% 57.22% 29.04% 24.12%
2002-2007 projected change 16.31% 15.36% 6.82% 8.14%
Household Income Distribution
-----------------------------
$0 - $24,999 25% 36% 45% 45%
$25,000 - $49,999 27% 29% 31% 30%
$50,000+ 48% 35% 24% 25%
Age Group Distribution
----------------------
0 - 14 years 21% 20% 20% 20%
15 - 34 years 28% 28% 25% 25%
35 - 54 years 29% 30% 30% 28%
55+ years 22% 22% 25% 27%
Unemployment Rate
-----------------
Annual - 2002 5.8% 5.6% 5.8% N.A.
Annual - 2001 4.8% 5.4% 7.0% N.A.
=======================================================================================================
Source: SNL Financial; Claritas; U.S. Department of Labor, Bureau of Labor
Statistics.
27
FELDMAN FINANCIAL ADVISORS, INC.
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Table 11 summarizes deposit market data for all commercial banks and
thrift institutions with branches in Hopkins County. Based on deposit data as of
June 30, 2002 and adjusted for any subsequent merger transactions, Community
First ranked last among the six financial institutions with offices in Hopkins
County. As of such date, the Bank had total deposits of $27.1 million, which
reflected a 5.0% market share based on the county's total deposits of $538.3
million. Regional commercial banks headquartered outside of Kentucky ranked as
the top three deposit leaders in Hopkins County, led by Old National Bancorp
(Indiana), Fifth Third Bancorp (Ohio), and U.S. Bancorp (Minnesota). Integra
Bank Corporation (Indiana) recently entered the Hopkins County market through
its acquisition in 2001 of Webster Bancorp, Inc. Community First is the only
thrift institution with a branch office in Hopkins County.
Along with Community First, First United Bancorp is the only other
locally based financial institution with branch offices in Hopkins County. First
United Bancorp operates First United Bank of Hopkins County, which had total
assets of $91.2 million as of December 31, 2002 and operates two offices in
Madisonville. Most of the financial institutions operating in Hopkins County
have a presence in northern Madisonville, where Community First plans to open
its new branch office.
28
FELDMAN FINANCIAL ADVISORS, INC.
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Table 11
Deposit Market Share in Hopkins County
Data as of June 30, 2002
=======================================================================================
Total Market
Financial No. of Inst. Deposits Share
Rank Institution Offices Type ($000s) (%)
---------------------------------------------------------------------------------------
1 Old National Bancorp (IN) 4 Bank $154,504 28.70
2 Fifth Third Bancorp (OH) 5 Bank 128,401 23.85
3 U.S. Bancorp (MN) 6 Bank 104,480 19.41
4 First United Bancorp, Inc. (KY) 2 Bank 74,102 13.77
5 Integra Bank Corporation (IN) 3 Bank 49,664 9.23
6 Community First Bank (KY) 1 Thrift 27,113 5.04
-- -------- ------
Market Total 21 $538,264 100.00
== ======== ======
=======================================================================================
Source: SNL Financial.
29
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
Summary Outlook
The overall earnings outlook of Community First continues to be
restrained based on operating fundamentals that have lingered over the past
several years. The Bank's profitability has suffered from a diminished net
interest margin that resulted from curtailed lending activity and a shifting
emphasis on investments in a declining interest rate environment. In addition,
as typical of most small financial institutions, operating expenses tend to be
relatively high because of the lack of scale in key lines of business. Finally,
the Bank's cost of funds has been heightened by its significant reliance on term
certificates. As a result of these factors, the Bank's net interest income has
not covered its operating expenses on a yearly basis and the Bank produced a
successive series of net losses.
The Bank has installed a new President to assist in restoring
profitability at Community First and rejuvenating its competitive position. The
introduction of new products and services and the opening of a new branch are
among the business strategies being pursued by the Bank. The Bank believes that
it has a loyal customer base from which it can develop additional and untapped
banking relationships. Also, the Bank believes that it can gain additional
competitive advantages by positioning itself as the principal
community-oriented, hometown financial institution of choice among local
customers
The depth of the Bank's recent stream of operating losses has been
reversed by an increased net interest margin stemming from expanded lending
activity and core deposit growth. Although the Bank has reduced its losses and
actually reported a modest profit for the quarter ending December 31, 2002, it
has yet to begin reporting positive earnings on a sustained basis. Moreover, the
Bank's improving operating fundamentals will be challenged again by the
30
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
increased compensation and occupancy costs associated with the new branch
office. Thus, the Bank's near-term profitability is not expected to improve
measurably since the Bank estimates that it may require at least a year after
the branch opens before it generates sufficient income to offset additional
expenses related to staffing and operating the new branch.
The persistent losses experienced by the Bank have eroded its capital
position. The infusion of additional capital from the Conversion will enable the
Bank to strengthen its equity base and to continue implementation of its planned
expansion strategies. However, the return to steady profitability will be
predicated on the Bank's successful ability to achieve expansion of higher
yielding assets while simultaneously controlling its operating expenses, funding
costs, and asset quality.
31
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
II. COMPARISONS WITH PUBLICLY HELD THRIFTS
General Overview
The comparative market approach provides a sound basis for determining
estimates of going-concern valuations where a regular and active market exists
for the stocks of peer institutions. The comparative market approach was
utilized in determining the estimated pro forma market value of Community First
because: (i) reliable market and financial data are readily available for
comparable institutions; (ii) the comparative market method is required by the
applicable regulatory guidelines; and (iii) other alternative valuation methods
(such as income capitalization, liquidation analysis, or discounted cash flow)
are unlikely to produce a valuation relevant to the future trading patterns of
the related equity interest. The generally employed valuation method in initial
public offerings, where possible, is the comparative market approach, which also
can be relied upon to determine pro forma market value in a thrift stock
conversion.
The comparative market approach derives valuation benchmarks from the
trading patterns of selected peer institutions which, due to certain factors
such as financial performance and operating strategies, enable the appraiser to
estimate the potential value of the subject institution in a stock conversion
offering. The pricing and trading history of recent initial public offerings of
thrifts are also examined to provide evidence of the "new issue discount" that
must be considered. In Chapter II, our valuation analysis focuses on the
selection and comparison of Community First with a comparable group of publicly
traded thrift institutions (the "Comparative Group"). Chapter III will detail
any additional discounts or premiums that we believe are appropriate to the
Bank's pro forma market value.
32
FELDMAN FINANCIAL ADVISORS, INC.
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Selection Criteria
Selected market price and financial performance data for thrifts listed
on the New York and American Stock Exchanges and those thrifts traded on the
Nasdaq over-the-counter ("OTC") markets are shown in Exhibit III. Several
criteria, discussed below, were used to select the individual members of the
Comparative Group from the overall universe of publicly held thrifts.
o Operating characteristics - An institution's operating
----------------------------
characteristics are the most important factors because they
affect investors' expected rates of return on a company's stock
under various business/economic scenarios, and they influence the
market's general perception of the quality and attractiveness of
a given company. Operating characteristics, which may vary in
importance during the business cycle, include financial variables
such as profitability, balance sheet growth, capitalization,
asset quality, and other factors such as lines of business and
management strategies.
o Degree of marketability and liquidity - Marketability of a stock
--------------------------------------
reflects the relative ease and promptness with which a security
may be sold when desired, at a representative current price,
without material concession in price merely because of the
necessity of sale. Marketability also connotes the existence of
buying interest as well as selling interest and is usually
indicated by trading volumes and the spread between the bid and
asked price for a security. Liquidity of the stock issue refers
to the organized market exchange process whereby the security can
be converted into cash. We attempted to limit our selection to
companies that have access to a regular trading market. We
eliminated from the comparative group companies with market
prices that were materially influenced by publicly announced or
widely rumored acquisitions. However, the expectation of
continued industry consolidation is currently embedded in thrift
equity valuations.
o Geographic Location - The region of the country where a company
--------------------
operates is also of importance in selecting the comparative
group. The operating environment for thrift institutions varies
from region to region with respect to business and economic
environments, real estate market conditions, speculative takeover
activity, and investment climates. Economic and investor climates
can also vary greatly within a region, particularly due to
takeover activity.
33
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
The operations of Community First fit the general profile of a small
thrift institution. The Bank's balance sheet is concentrated heavily in
residential mortgage loans, and its liability funding structure consists
entirely of deposits. In determining the Comparative Group composition, we
focused on the Bank's poor earnings results and certain balance sheet
fundamentals. Attempting to concentrate on the Bank's performance
characteristics, we expanded the size criteria for comparable thrifts to include
more institutions that match these important factors. As with any composition of
a group of comparable companies, the selection criteria were broadened
sufficiently to assemble a meaningful number of members for inclusion.
Specifically, we initiated a search for companies by applying the following
selection criteria:
o Publicly traded thrift - thrifts organized under the stock-form
-----------------------
corporate structure and whose shares are traded on a major stock
exchange or listed on the Nasdaq and OTC Bulletin Board markets.
o Non-acquisition target - company not subject to a pending
-----------------------
acquisition.
o Non-mutual holding company - company's stock ownership interest
---------------------------
is not held in whole or in part by a mutual holding company
("MHC").
o Current financial data - comparative financial data available for
----------------------
most recent period ending December 31, 2002.
o Small asset size - total assets of less than $150 million.
----------------
o Below-average profitability - earnings for the last twelve months
---------------------------
("LTM") period of 0.50% or below relative to average assets.
As a result of applying the above criteria, the screening process
produced a reliable representation of publicly traded thrifts with operations
comparable to those of Community First. A general operating summary of the 16
members selected for the Comparative Group is presented in Table 12.
34
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
Because of the Bank's negative profitability, our selection criteria
focused heavily on public thrifts with poor earnings results. We believe that
this characteristic would be an overriding factor in any market assessment of
the Bank versus a peer group of similar companies. From our historical
observation, thrifts with persistently negative or extraordinarily low earnings
results tend to trade at substantial discounts to market norms. Other factors
such as geography, asset size, and stock exchange listing do not have a
distinguishing effect on thrifts with such continually poor earnings prospects
in the current market environment.
Primarily because of the limited number of small thrifts that are
publicly traded, the Comparative Group companies were drawn from the all parts
of the country. Most of the Comparative Group companies are located in the
Midwest and South, drawn from the states of Ohio, Indiana, Illinois, South
Carolina, North Carolina, Alabama, and Louisiana. The asset sizes of the
Comparative Group companies range from approximately $39 million at First
Capital Bancshares to $150 million at Home City Financial Corporation with an
overall average asset size of $106 million. Most of the selected companies
operate small branch networks comprising two or three offices.
In comparison to recent performance trends of the aggregate industry,
the Comparative Group companies generally exhibited below-average profitability
ratios, slightly higher balance sheet concentrations of investments, higher
levels of nonperforming assets and lower levels of reserves in relation to the
nonperforming assets, and comparable capital ratios. While some differences
inevitably exist between the Bank and the individual companies, we believe that
the chosen Comparative Group on the whole provides a meaningful basis of
financial comparison for valuation purposes.
35
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
Table 12
Comparative Group Operating Summary
As of December 31, 2002
=========================================================================================================================
Initial Total Equity/
No. of Conv. Assets Assets
Company City State Offices Date ($000s) (%)
- -------------------------------------------------------------------------------------------------------------------------
Community First Bank Madisonville KY 1 NA $ 29,968 5.84
Comparative Group
-----------------
Allied First Bancorp, Inc. Naperville IL 1 12/31/01 94,283 10.90
Blue River Bancshares, Inc. Shelbyville IN 4 06/24/98 109,338 10.24
Crazy Woman Creek Bancorp Buffalo WY 3 03/29/96 75,441 17.97
Fidelity Federal Bancorp Evansville IN 5 08/31/87 132,290 7.25
First Capital Bancshares, Inc. Bennettsville SC 2 10/29/99 38,544 9.85
Grand Central Financial Corp. Wellsville OH 3 12/30/98 113,450 15.66
Home City Financial Corp. Springfield OH 2 12/30/96 149,735 7.72
Homestead Bancorp, Inc. Ponchatoula LA 3 07/20/98 135,472 9.98
Indian Village Bancorp Inc. Gnadenhutten OH 2 07/02/99 94,430 9.03
Lawrence Financial Holdings, Inc. Ironton OH 5 12/29/00 134,389 10.99
Lenox Bancorp, Inc. Cincinnati OH 2 07/18/96 59,374 9.08
Mutual Community Svgs. Bank Durham NC 3 06/29/93 77,930 10.14
Sobieski Bancorp, Inc. South Bend IN 3 03/31/95 130,867 8.02
Southern Banc Company, Inc. Gadsden AL 4 10/05/95 112,642 16.56
SouthFirst Bancshares, Inc. Sylacauga AL 5 02/14/95 136,946 10.04
StateFed Financial Corporation Clive IA 3 01/05/94 98,889 14.15
=========================================================================================================================
Source: Community First; SNL Financial.
36
FELDMAN FINANCIAL ADVISORS, INC.
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Recent Financial Comparisons
Table 13 summarizes certain key financial comparisons between Community
First and the Comparative Group. Tables 14 through 18 contain the detailed
financial comparisons of the Bank with the individual Comparative Group
companies based on measures of profitability, income and expense components,
yield-cost structure, capital levels, credit risk, balance sheet composition,
and growth rates. Financial data for Community First and the Comparative Group
companies were utilized as of or for the LTM period ending December 31, 2002.
Community First's LTM return on average assets ("ROAA") was negative
0.28%, reflecting a loss not quite as deep as the average loss recorded by the
Comparative Group with an average ROAA of negative 0.39%. Seven members of the
Comparative Group reported net losses for the recent LTM period and nine were
profitable. The Bank's core earnings, which exclude the impact of gains on sale
of securities and other nonrecurring items, measured negative 0.28% of average
assets as compared to the Comparative Group average of negative 0.18%. On the
whole, the Comparative Group exhibited many of the operating fundamentals that
contributed to the Bank's below-average profitability - high funding costs and
high operating expenses. However, the Bank's core operating deficit was larger
due to it significantly higher level of operating expenses, which measured 3.66%
over the observed period versus the Comparative Group and all public thrift
averages of 3.26% and 2.52%, respectively.
The Bank's net interest income level of 3.24% relative to average
assets was positioned above the Comparative Group average of 2.90%. Community
First's higher level of interest income production was attributable to its
higher yield on earning assets and lower cost of funds during the period as
compared to the Comparative Group averages. The Bank's net interest
37
FELDMAN FINANCIAL ADVISORS, INC.
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spread of 3.44% for the LTM period was well above the Comparative Group and all
public thrift averages of 2.72% and 3.09%, respectively.
The Bank's earning asset yield measured 7.00% and exceeded the
Comparative Group average of 6.52%. The Bank's asset yield was attributable to
its larger concentration of higher yielding loans and lower levels of cash and
securities. Community First ratio of net loans to total assets was 85.8% versus
the Comparative Group average of 64.7%. In addition, the Bank's cost of funds at
3.56% was lower than the Comparative Group average cost of funds of 3.80%. The
Bank's liability costs were helped by its reliance on deposits as opposed to
borrowings as Community First had no borrowings as of December 31, 2002 versus
the Comparative Group average borrowing level of 16.9% of total assets.
Community First's noninterest operating income totaled only 0.24% in
relation to average assets, trailing the Comparative Group average of 0.49%. As
characteristic of many small savings institutions, Community First has not
developed a broad offering of fee-producing services and products beyond its
traditional loan and deposit operations. The Bank's production of nonrecurring
gains on sale was insignificant during this recent LTM period. The Bank's level
of net gains on sale amounted to 0.00% of average assets versus the Comparative
Group average of 0.30% in relation to average assets.
The Comparative Group exhibited a relatively high level of provisions,
as evidenced by an average loss provision of 0.56% relative to average assets
compared to Community First's level of provisions of 0.06%. The Bank's asset
quality compared favorably to the Comparative Group as measured by ratios of
nonperforming assets to total assets. The Bank's loan quality is partially
attributable to its high concentration of less risky residential mortgages
versus other loans.
38
FELDMAN FINANCIAL ADVISORS, INC.
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Table 13
Key Financial Comparisons
Community First and the Comparative Group
As of or for the Last Twelve Months Ended December 31, 2002
================================================================================
Comp. All Public
Community Group Thrift
First Average Average
Profitability
- -------------
LTM Return on Average Assets (0.28) % (0.39) % 0.86 %
Core Return on Average Assets (0.28) (0.18) 0.83
LTM Return on Average Equity (4.50) (5.13) 8.87
Core Return on Average Equity (4.50) (2.98) 8.50
Income and Expense (% of avg. assets)
- ------------------
Total Interest Income 6.41 6.19 6.18
Total Interest Expense 3.17 3.28 2.96
------ ----- -----
Net Interest Income 3.24 2.90 3.22
Provision for Loan Losses 0.06 0.56 0.21
Other Operating Income 0.24 0.49 0.51
Net Gains and Nonrecurring Income 0.00 0.30 0.33
General and Administrative Expense 3.66 3.26 2.52
Intangibles Amortization Expense 0.00 0.05 0.03
Real Estate Expense 0.00 0.01 0.00
Pre-tax Core Earnings (0.24) (0.49) 0.97
Efficiency Ratio 105.32 91.69 63.50
Yield-Cost Data
- ---------------
Yield on Earning Assets 7.00 6.52 6.52
Cost of Funds 3.56 3.80 3.43
------ ----- -----
Net Interest Spread 3.44 2.72 3.09
Asset Utilization (% of avg. assets)
- -----------------
Avg. Interest-earning Assets 91.52 94.99 91.58
Avg. Interest-bearing Liabilities 89.21 86.27 83.33
------ ----- -----
Avg. Net Interest-earning Assets 2.31 8.24 8.25
================================================================================
39
FELDMAN FINANCIAL ADVISORS, INC.
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Table 13 (continued)
Key Financial Comparisons
Community First and the Comparative Group
As of or for the Last Twelve Months Ended December 31, 2002
================================================================================
Comp. All Public
Community Group Thrift
First Average Average
- --------------------------------------------------------------------------------
Balance Sheet Composition (% of assets)
- -------------------------
Cash and Securities 10.99 % 31.95 % 28.33 %
Loans Receivable, net 85.79 64.66 67.75
Real Estate 0.00 0.36 0.19
Intangible Assets 0.00 0.20 0.48
Other Assets 3.22 4.13 3.28
Total Deposits 93.86 70.86 68.47
Borrowed Funds 0.00 16.94 19.34
Other Liabilities 0.30 1.07 1.40
Total Equity 5.84 11.12 10.31
Loan Portfolio (% of total loans)
- --------------
Residential Mortgage Loans 88.34 61.44 59.17
Other Real Estate Mortgage Loans 5.60 19.55 27.26
Non-mortgage Loans 6.06 19.02 13.59
Growth Rates
- ------------
Total Assets 1.48 2.43 8.76
Total Loans 16.03 (2.34) 5.15
Total Deposits 5.70 4.86 10.07
Regulatory Capital Ratios
- -------------------------
Tangible Capital Ratio 5.83 10.92 9.91
Tier 1 Risk-based Capital 10.48 18.68 15.83
Total Risk-based Capital 11.12 20.87 16.94
Credit Risk Ratios
- ------------------
Nonperforming Loans / Total Loans 0.33 1.60 1.02
Nonperforming Assets / Total Assets 0.29 1.13 0.67
Reserves / Total Loans 0.41 1.04 1.04
Reserves / Nonperforming Assets 123.26 121.79 188.96
================================================================================
Source: Community First; SNL Financial; Feldman Financial.
40
FELDMAN FINANCIAL ADVISORS, INC.
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Community First's nonperforming asset ratio measured 0.29% of total
assets versus the Comparative Group average of 1.13%. In contrast, the all
public thrift average nonperforming asset ratio of 0.67% was lower than that
displayed by the Comparative Group but higher than Community First. In keeping
with Community First's lower nonperforming asset ratio relative to total assets,
its nonperforming loan ratio as a percent of total loans was 0.33% and was well
below the corresponding Comparative Group ratio of 1.60%. The Bank maintained a
lower level of loan loss reserves at 0.41% of total loans versus the Comparative
Group average of 1.04%.
The Bank's operating expense ratio was much higher than the Comparative
Group average. The Bank's general and administrative expense ratio of 3.66% was
above the Comparative Group average of 3.26% and the all public thrift average
of 2.52%. The Bank's efficiency ratio (operating expense divided the sum of net
interest income and noninterest operating income) was high at 105.32% due to its
very low level of noninterest income and high level of expenses. The Comparative
Group companies similarly displayed high efficiency ratios with an overall
average of 91.69%. The overall thrift industry average efficiency ratio measured
63.50%.
The Bank's balance sheet composition ratio reveals its high loan
concentration. Total net loans amounted to 85.8% of assets at Community First,
while cash and securities (including FHLB stock) aggregated only 11.0%. Only one
member of the Comparative Group had a lower level of cash and securities as a
percentage of total assets and the Comparative Group's average level of cash and
securities measured 32.0%. The majority of Comparative Group companies had
levels of cash and securities above the all public thrift average of 28.3%,
which contributed to their lower net interest margins collectively.
41
FELDMAN FINANCIAL ADVISORS, INC.
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Community First's borrowings level at 0.0% of assets reflected its
major reliance on deposits as a source of funds. The Comparative Group is
characterized by wide variance of borrowed funds usage. On the average, the
Comparative Group's borrowing level of 16.9% of total assets was comparable to
the all public thrift benchmark of 19.3% of total assets.
The Bank's equity level on a pre-conversion basis of 5.84% relative to
assets was below the Comparative Group average of 11.12%. The Bank's 91.5% ratio
of average interest-earning assets to average total assets reflects the Bank's
higher than average level of non-earning assets such as cash and fixed assets.
Community First had no intangible assets on its balance sheet as of December 31,
2002.
The Bank's growth rates reflect its attempt to reverse its sluggish
operating posture of recent years. The Bank's asset base increased by only 1.5%
over the past twelve months, while its net total loans increased substantially
by 16.0%. The Comparative Group was characterized by a higher level of asset
growth, but lower level of loan expansion. In contrast, the all public thrift
group displayed more aggressive growth trends with total assets increasing by
8.8% and deposits by 10.1% on the average. Acquisition activity has enabled many
public thrifts to achieve growth beyond internally generated rates of expansion.
In summary, the Bank's core earnings performance was lower than the
negative profitability levels exhibited by the Comparative Group. Community
First was marked by a very low level of noninterest income and higher levels of
operating expenses, which offset the Bank's net interest margin advantage versus
the Comparative Group.
42
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
[Table 14]
43
FELDMAN FINANCIAL ADVISORS, INC.
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[Table 15]
44
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
[Table 16]
45
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
[Table 17]
46
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
[Table 18]
47
FELDMAN FINANCIAL ADVISORS, INC.
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III. MARKET VALUE ADJUSTMENTS
General Overview
This concluding chapter of the Appraisal identifies certain additional
adjustments to the Bank's estimated pro forma market value relative to the
Comparative Group selected in Chapter II. The adjustments discussed in this
chapter are made from the viewpoints of potential investors, which would include
depositors holding subscription rights and unrelated parties who may purchase
stock in a community offering. It is assumed that these potential investors are
aware of all relevant and necessary facts as they would pertain to the value of
the Bank relative to other publicly held thrift institutions and relative to
alternative investments.
Our appraised value is predicated on a continuation of the current
operating environment for the Bank and thrift institutions in general. Changes
in the Bank's operating performance along with changes in the local and national
economy, the stock market, interest rates, the regulatory environment, and other
external factors may occur from time to time, often with great unpredictability,
which could impact materially the pro forma market value of the Bank or thrift
stocks in general. Therefore, the Valuation Range provided herein is subject to
a more current re-evaluation prior to the actual completion of the Conversion.
In addition to the comparative operating fundamentals discussed in
Chapter II, it is important to address additional market value adjustments based
on certain financial and other criteria, which include, among other factors:
(1) Earnings Prospects
(2) Market Area
(3) Management
48
FELDMAN FINANCIAL ADVISORS, INC.
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(4) Dividend Policy
(5) Liquidity of the Issue
(6) Subscription Interest
(7) Stock Market Conditions
(8) New Issue Discount
Earnings Prospects
- ------------------
Earnings prospects are dependent upon the sensitivity of asset yields
and liability costs to changes in market interest rates, the credit quality of
assets, the stability of noninterest components of income and expense, and the
ability to leverage the balance sheet. Each of the foregoing is an important
factor to investors in assessing earnings prospects. The Bank's profitability in
recent years has been impaired by a shrinking asset base, declining net interest
margin, and above-average operating expenses. Decreased lending activity
contributed to the weakening of the Bank's operating fundamentals. With the
installation of a new President and implementation of new business strategies,
the Bank seeks to restore positive earnings results by becoming a more
aggressive lender and a more competitive and efficient provider of a broader
line of financial services. As a result of these initiatives, the Bank has
reduced its operating losses but has not yet become profitable on a sustained
basis.
The Bank's efforts to improve its competitiveness and efficiency will
entail additional costs to its operating infrastructure. Most prominently, the
planned new branch office will pose another hurdle to generating profitability
over the near term and the data processing system conversion could result in
unanticipated costs. Finally, following the Conversion, the Bank will likely
incur additional reporting and other costs related to being a public company,
along with additional compensation expenses related to its stock benefit plans.
While the Comparative Group's average ROAA was negative and generally paralleled
that of Community First, its
49
FELDMAN FINANCIAL ADVISORS, INC.
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median ROAA was 0.25% and nine of the 16 members were profitable. Overall, we
believe that the compound operating pressures facing the Bank heighten its
earnings vulnerability relative to the Comparative Group. The Bank's small size
also renders it more susceptible to even the most minor variances of income and
expense items. We therefore believe that the Bank's earnings profile is more
vulnerable to potentially adverse business circumstances than the Comparative
Group as a whole. Based on these considerations, we believe a downward
adjustment is warranted for the Bank's earnings prospects with respect to the
Comparative Group.
Market Area
- -----------
The members of the Comparative Group were drawn predominantly from the
Midwest and Southeast regions of the country. The Comparative Group companies
are based mainly in small cities along with a lesser number of companies located
in urban and suburban communities of larger metropolitan areas. Nine members of
the Comparative Group are located in Ohio, Indiana, and Illinois, states
adjacent to the Bank's home state of Kentucky. The Bank's primary market area is
characterized by a slightly declining population base with below-average income
levels in a diversifying economic base. Analogous to the Bank, many of the
Comparative Group companies are located in cities exhibiting similar demographic
trends. We do not believe that, on the whole, the market area conditions of the
Comparative Group are notably different from those facing the Bank. Accordingly,
we believe that no adjustment is warranted for market area considerations.
Management
- ----------
Management's principal challenge is to generate profitable results,
monitor credit risks, and control operating costs while the Bank competes in an
increasingly competitive financial
50
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
services environment. The challenges facing Community First in attempting to
restore profitability and enhance its competitiveness are paramount because of
its recent history of operating losses. The Bank hired in November 2001 a new
President who has prior experience in three different bank turnaround
situations. Although the new President has been in place for a relatively short
time, several of the initiatives undertaken to improve profitability over the
last year have already begun to produced desired results.
While the individual companies within the Comparative Group face
corresponding challenges as well, the ability to attract and retain competent
personnel is especially important for a small financial institution seeking to
maintain its competitive viability such as Community First. We believe that
investors will take into account that a new and experienced executive officer is
managing the Bank, but also note that investors will likely rely upon
bottom-line earnings results as the means of evaluating the performance of
management. Based on these considerations, we believe no adjustment is warranted
at this time.
Dividend Policy
- ---------------
The Company does not anticipate paying cash dividends on its common
stock following the Conversion. The Board believes that it is preferable for the
Bank to retain future earnings to the fullest extent possible in order to
finance its future growth and expansion. Because the Company will only retain a
small amount of net proceeds from the stock offering, it will be unable to pay
dividends unless the Bank is able to pay dividends. The Bank must obtain OTS
approval to pay a dividend in excess of its year-to-date earnings plus its
retained earnings for the prior two years. The Bank is further prohibited from
paying a dividend that would cause it to be
51
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
undercapitalized or would reduce its regulatory below the amount required for
its liquidation account.
The Board will periodically review the possible adoption of dividend
policy. The dividend policy will be subject to determination and declaration by
the Board in its discretion, which will take into account such factors as the
Company's consolidated financial condition and operating results, tax
considerations, industry standards, economic conditions, capital levels,
regulatory restrictions on dividend payments by the Bank to the Company, and
general business practices. Of the 16 members of the Comparative Group, 11
companies currently pay dividends. Furthermore, payment of cash dividends has
become commonplace among publicly owned thrifts with relatively high capital
levels. Because the Company does not currently plan to pay dividends following
the Conversion and may be hindered in the foreseeable future by the Bank's
earnings results, we believe that a downward adjustment is warranted for this
factor.
Liquidity of the Issue
- ----------------------
Increasingly, newly converted thrifts with relatively small market
capitalizations are listed on the Nasdaq SmallCap Market or quoted on the OTC
Bulletin Board or pink sheet listings. With the increased number of market
makers and institutional investors following thrift stocks, even smaller thrift
stock conversions are able to develop a public market for their stock issues.
However, most publicly held thrift stocks continue to be traded on the Nasdaq
National Market. The improved financial conditions of thrifts overall help them
to meet initial listing requirements and adhere to such guidelines thereafter.
Of the 16 members of the Comparative Group, two are traded on the
American Stock Exchange, seven are listed on the Nasdaq National Market, and
seven are quoted on the OTC
52
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
Bulletin Board. Due to the Bank's relatively small pro forma market
capitalization, the Company does not expect an active trading market to develop
or be maintained for its common stock issue. Following completion of the
Conversion, the Company intends to list its common stock on the OTC Bulletin
Board. While many small-cap thrift and bank stocks have moved from pure pink
sheet status to the OTC Bulletin Board in pursuit of increased liquidity,
discounts to exchange-listed stocks are still apparent as well as volatile
bid-ask spreads. Since more than half of the Comparative Group companies are
traded in more active markets, we believe that a slight downward adjustment is
necessary to address this factor.
Subscription Interest
- ---------------------
In recent years, initial public offerings ("IPOs") of thrift stocks
have attracted a great deal of investor interest and this speculative fervor
continued through 2002. Contributing to this huge demand is the growing scarcity
factor of mutual candidates for thrift stock conversions and the favorable
after-market performance experienced by many of these issues. Conversion
activity continued at a slow pace in late 2002 and early 2003 on the heels of
attractive after-market performances of several thrift IPOs. It remains to be
seen if the recent downturn in the financial sector has a dampening effect on
investor interest in thrift stock conversions.
Notwithstanding the demand for thrift IPOs, a strong subscription
offering does not always indicate that the valuation should be increased or the
offering should be priced in the upper end of the range. Many thrift IPO
investors do not routinely purchase in the after-market, particularly at higher
stock prices or involving stock issues with limited liquidity. As such, absent
actual results of the Bank's subscription offering (as well as actual market
conditions prevailing during the offering), we do not believe any adjustment is
warranted at this time.
53
FELDMAN FINANCIAL ADVISORS, INC.
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Stock Market Conditions
- -----------------------
Table 19 graphically displays the performance of the SNL Thrift Index
of all publicly traded thrifts as compared to the Standard & Poor's 500-Stock
Index ("S&P 500") over the past two years. The SNL Thrift Index substantially
outperformed the broader stock index, advancing by 62.1% during the period from
December 31, 1999 to March 17, 2003, as compared to the S&P 500 declining by
57.0%. The SNL Small Thrift Index (all public thrifts less than $250 million in
assets) increased by 80.6% and evidenced much less volatility as is typical of
the small-cap thrift stocks. In particular, the SNL Small Thrift Index exhibited
stronger resiliency during 2002 when the prolonged rally in financial stocks
began to stall. The SNL Thrift Index is down 0.7% since year-end 2001, while the
SNL Small Thrift Index is up 34.2% and the S&P 500 is down 45.0%.
The positive trend in thrift stocks has been in contrast to the
dampened performance of the overall market. The series of interest rate
reductions implemented by the Federal Reserve in 2001 helped to sustain the
rally in bank and thrift stocks. The overall stock market had begun to stabilize
in the summer of 2001 as prospects surfaced about economic recovery and stronger
corporate earnings. However, the terrorist attacks on September 11, 2001 halted
the rebound in the stock market and sent index levels plummeting.
Lower short-terms interest rates and a steeper yield curve continued to
benefit thrift profitability into 2002. In addition, the more conservative
operating profiles of most thrifts found favor among financial stock investors
increasingly nervous about bank credit exposure to Argentina, Enron, credit
cards, subprime lending, and other problem areas confronting the current
economy. Also, consolidation in the form of mergers and acquisitions continued
to spur thrift stock values, especially among the large-cap stock issues.
54
FELDMAN FINANCIAL ADVISORS, INC.
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[Table 19]
55
FELDMAN FINANCIAL ADVISORS, INC.
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The small-cap thrift issues continued to advance at a moderate but
steady pace, as the improvement in net interest margins among the smaller
thrifts materialized slower due to their distinct balance sheet composition.
While momentum has been curbed in the thrift equity markets due to the spillover
effects of concerns about the financials sector in general, overall economic and
business fundamentals remain favorable for thrift industry earnings performance.
However, more recently, the sluggish economic recovery has sent stock prices
into a downward spiral and financial stocks have participated actively in the
broad-based slump. Recent inaction by the Federal Reserve to effect further rate
cuts fueled continued uncertainty about the extent and timing of the expected
pickup in production and employment. In addition, the threat of war against Iraq
adds even more uncertainty to the prospects of a solid economic turnaround.
On March 17, 2003, the SNL Thrift Index closed at 1085.3, representing
a slight 1.1% increase from year-end 2002. The protracted slide of the S&P 500
slowed as it stood at 862.8 at March 17, 2003, down 1.9% since year-end 2002.
The SNL Small Thrift Index continued to display greater momentum, increasing by
5.0% since year-end 2002 to 1062.7 at March 17, 2003. Larger thrifts, which have
a disproportionate effect on the market-value weighted SNL Thrift Index,
suffered more active sell-offs in recent months due to concerns about prepayment
risks, sustainability of increased refinancing volumes, and mortgage servicing
rights impairment.
Recent Acquisition Activity
- ---------------------------
Acquisition speculation is one factor impacting the prices of newly
converted thrifts in the after-market. Table 20 summarizes recent acquisition
activity involving banks and thrifts based in Kentucky. Since 2000, there have
been 14 acquisitions involving Kentucky banks and thrifts. During 2002, the
tally of acquisition transactions declined to three for the entire year.
56
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
[Table 20]
57
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
Overall acquisition premiums for Kentucky financial institutions were
similar to the ratios reported nationwide on a price-to-earnings basis, but
slightly lower on a price-to-book basis. The higher equity ratios of most of the
Kentucky bank and thrift sellers had a restraining effect on the offer
price-to-book acquisition premiums. The major transactions in recent years
involved acquisitions of mid-tier banks with assets approximating the $2-$3
billion range such as AREA Bancshares Corp. and Mid-America Bancorp. Both of
these banks were acquired by BB&T Corp. As the large out-of-state regional bank
holding companies (National City Corp., Bank One Corp., BB&T Corp., Fifth Third
Bancorp, U.S. Bancorp, and PNC Financial Services) control the top deposit
market shares in the state, future consolidation activity will likely center
around the remaining handful mid-tier independent banks as both buyers and
sellers. We believe that while acquisition premiums are not a significant factor
to consider in determining the Bank's pro forma market value, such speculative
interest may be reflected to some degree in the general trading values of thrift
stocks and encompass members of the Comparative Group as well.
New Issue Discount
- ------------------
A "new issue" discount that reflects investor concerns and investment
risks inherent in all IPOs is a factor to be considered for purposes of valuing
converting thrifts. The magnitude of the new issue discount typically expands
during periods of declining thrift stock prices as investors require larger
inducements, and narrows during strong market conditions. The thrift conversion
market continues to respond to the after-market performance of recent offerings.
Table 21 presents a summary of publicly traded thrifts that have completed
standard full conversions since January 1, 2001. The recent after-market
performance of thrift conversions has been favorable, with issues moving up
steadily from initial offering prices.
58
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
[Table 21]
59
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
As shown in the table, pro forma market valuations at the time of
conversion have also advanced as the thrift stock market has demonstrated its
ability to sustain trading prices at higher valuation ratios. The average pro
forma price-to-book ratio increased from 57.9% in 2001 to 69.2% in 2002. The
average pro forma price-to-earnings ratio increased from 14.5x in 2001 to 16.9x
in 2002.
Two standard thrift conversions have been completed thus far in 2003.
Provident Financial Services in New Jersey completed its stock offering on
January 16, 2003, and was priced at an initial valuation of 72.1% of pro forma
book value and 17.5x relative to pro forma earnings. With total assets of $3.1
billion, Provident Financial Services had a strong financial profile and raised
gross proceeds of $596.2 million. At the other end of the scale, CCSB Financial
Corp. in Missouri completed its stock offering on January 9, 2003 by raising
$9.8 million in gross proceeds. CCSB Financial Corp. was priced at an initial
valuation measuring 67.2% of pro forma book value and with a non-meaningful
("NM") price-to-earnings ratio due to its low earnings level that produced a
distortedly high valuation ratio.
Another recently converted thrift characterized by low earnings is
Monarch Community Bancorp in Michigan, which completed its stock offering on
August 30, 2002. Monarch Community Bancorp was valued initially at 66.2% on a
pro forma price-to-book basis with an NM price-to-earnings ratio. Since the
second half of 2002, every standard thrift conversion has been concluded with a
price-to-book ratio at 70.0% or higher, except for the two aforementioned
thrifts with low earnings results. CCSB Financial Corp. and Monarch Community
Bancorp have both traded up in the after-market, but have not experienced the
same degree of significant price advancement exhibited by other recent thrift
conversions.
60
FELDMAN FINANCIAL ADVISORS, INC.
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In the after-market, standard thrift conversions had been trading
upward to a range between 80% and 90% of book value, but find resistance at this
level until a discernible trend in earnings improvement is evident. To price a
new offering at 90% of pro forma book value, because of the mathematics of the
calculation, would require very large increases in valuations and produce very
marginal returns on equity. This would likely produce price declines in the
after-market. Accordingly, thrift conversions continue to be priced at discounts
to publicly traded companies. This is due to the relatively high pro forma
equity ratios, expected low returns on equity, and the uncertainty regarding the
prospects of an institution to suitably leverage the balance sheet in the
currently low interest rate environment.
Investors are aware that at initial pro forma price-to-book ratios
approaching the current trading range of a majority of public thrifts,
price-to-earnings ratios of converting thrifts would be excessive, returns on
equity very low, and capital levels dramatically high. Based upon the
price-to-book ratio measure, standard thrift conversions recently have been
discounted by 30% to 40% relative to the overall thrift trading market.
Adjustments Conclusion
- ----------------------
The Bank's pro forma valuation should be discounted relative to the
Comparative Group because of earnings prospects, dividend policy, liquidity of
the issue, and the new issue discount. Individual discounts and premiums are not
necessarily additive and may, to some extent, offset or overlay each other.
Currently, converting thrifts are often valued at substantial discounts to peer
institutions relative to price-to-book ratios, but at lesser discounts to the
comparable institutions' price-to-earnings ratios. It is the role of the
appraiser to balance the relative dynamics of price-to-book and
price-to-earnings discounts and premiums.
61
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
Valuation Approach
- ------------------
In determining the estimated pro forma market value of the Bank, we
have employed the comparative company approach and considered the following
pricing ratios: price-to-earnings per share ("P/E"), price-to-book value per
share ("P/B"), price-to-tangible book value per share ("P/TB"), and
price-to-assets ("P/A"). Table 22 displays the market price and valuation ratios
of the Comparative Group as of March 17, 2003. Table 22 also includes the pro
forma valuation ratios attributable to Community First. Exhibit IV displays the
pro forma assumptions and calculations utilized in analyzing the Bank's
valuation ratios. In reaching our conclusions of the Valuation Range, we
evaluated the relationship of the Bank's pro forma valuation ratios relative to
the Comparative Group valuation data and recent conversion valuations.
Investors continue to make decisions to purchase thrift conversion
stocks and more seasoned thrift issues based upon consideration of core earnings
profitability and P/B comparisons. The P/E ratio is an important valuation ratio
in the current thrift stock environment and was a central focus in developing
our estimate of the Bank's pro forma market value. Based on the Bank's lack of
positive earnings for the recent LTM period, utilization of the P/E produces
non-meaningful results for purposes of valuing the Bank on a pro forma basis.
Similarly, consideration of the Bank's annualized results for the quarter ending
December 31, 2002 also produces distortedly high P/E ratios on a pro forma
basis, which are reflected as NM for comparative valuation purposes. Therefore,
we have relied on the other measures of valuation and have valued the Bank at a
midpoint value of 55.7% of pro forma book value, which reflects an aggregate
midpoint value of $1.75 million. This pro forma midpoint value approximates the
Bank's current net worth of $1.75 million as of December 31, 2002. Since the P/B
ratio is the
62
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
dominant valuation metric applied in establishing the Bank's pro forma value,
any changes in the Bank's equity level in the near future will have a pivotal
effect on its pro forma market value.
Employing a range of 15.0% above and below the midpoint, the
resulting minimum value of approximately $1.49 million reflects a 51.4% P/B
ratio and the resulting maximum value of approximately $2.01 million reflects a
59.3% P/B ratio. The adjusted maximum, an additional 15.0% above the maximum, is
positioned at approximately $2.31 million and a 62.8% P/B ratio. The Bank's pro
forma maximum P/B ratio of 59.3% reflects a 30.5% discount to the Comparative
Group average P/B ratio of 85.3% and a 55.2% discount to the all public thrift
average of 132.2%. Six of the 16 Comparative Group companies were trading at P/B
ratios below 80%, with the lowest including Mutual Community Savings Bank at
50.5%, Lenox Bancorp at 64.6%, Allied First Bancorp at 70.1%, and Southern Banc
Company at 70.4%. The aggregate of all five public Kentucky thrifts exhibited an
average P/B ratio of 107.1%, below the all public thrift average of 132.2%
Based on the P/A measure, the Bank's pro forma midpoint of $1.75
million reflects a ratio of 5.58%, which ranges from 4.78% at the minimum to
6.37% and 7.25% at the maximum and adjusted maximum, respectively. The Bank's
P/A ratio of 5.58% at the maximum reflects a discount of 31.6% to the
Comparative Group average of 9.31% and a 48.3% discount to the all public thrift
average of 12.32%. Based on the maximum valuation of $2.01 million, the Bank's
pro forma equity to assets ratio is projected at 10.74%, versus the respective
Comparative Group and all public thrift averages of 11.10% and 13.15%.
63
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
Valuation Conclusion
- --------------------
It is our opinion that, as of March 17, 2003, the aggregate estimated
pro forma market value of the Bank was within the Valuation Range of $1,487,500
to $2,012,500 with a midpoint of $1,750,000. The Valuation Range was based upon
a 15% decrease from the midpoint to determine the minimum and a 15% increase to
establish the maximum. An additional 15% increase above the maximum results in
an adjusted maximum of $2,341,375 (rounded to $2,314,380 for stock offering
purposes). Exhibit IV displays the assumptions and calculations utilized in
determining the Bank's estimated pro forma market value.
64
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
[Table 22]
65
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
Exhibit I
Background of Feldman Financial Advisors, Inc.
Overview of Firm
- ----------------
Feldman Financial Advisors provides consulting and advisory services to
financial institutions and mortgage companies in the areas of corporate
valuations, mergers and acquisitions, strategic planning, branch sales and
purchases, developing and implementing regulatory business and capital plans,
and expert witness testimony and analysis. Our senior staff members have been
involved in the stock conversion process since 1982 and have valued more than
350 converting institutions.
Feldman Financial Advisors was incorporated in February 1996 by a group of
consultants who were previously associated with Kaplan Associates. Each of the
principals at Feldman Financial Advisors has more than 10 years experience in
consulting and all were officers of their prior firm. Our senior staff
collectively has worked with more than 1,000 banks, thrifts and mortgage
companies nationwide. The firm's office is located in Washington, D.C.
Background of Senior Professional Staff
- ---------------------------------------
Trent Feldman - President. Trent is a nationally recognized expert in providing
strategic advice to and valuing service companies, and advising on mergers and
acquisitions. Trent was with Kaplan Associates for 14 years and was one of three
founding principals at that firm. Trent also has worked at the Federal Home Loan
Bank Board and with the California legislature. Trent holds Bachelors and
Masters degrees from the University of California at Los Angeles.
Peter Williams - Principal. Peter specializes in merger and acquisition
- ---------------
analysis, stock and other corporate valuations, strategic business plans and
retail delivery analysis. Peter was with Kaplan Associates for 13 years. Peter
also served as a Corporate Planning and Development Analyst with the Wilmington
Trust Company in Delaware. Peter holds a BA in Economics from Yale University
and an MBA in Finance and Investments from George Washington University.
Michael Green - Principal. Mike is an expert in mergers and acquisition
- --------------
analysis, financial institution and corporate valuations, and strategic and
business plans. During Mike's 10 years at Kaplan Associates, his experience also
included business restructurings, litigation support, mark-to-market analysis,
and goodwill valuations. Mike holds a BA in Finance and Economics from Rutgers
College.
Gerard Feil - Director. Jerry has performed valuations for banks, insurance
- -----------
companies, specialty lenders, and other service companies. Previously, Jerry was
a Director in the Global Financial Strategies Practice of KPMG LLP (New York
City). He joined KPMG following 15 years as an investment banker at First
Boston, Alex Sheshunoff & Co. Investment Banking, and Kaplan Associates. Jerry
holds a BA in Mathematics from St. John's University and MBA and JD degrees from
Cornell University.
Greg Izydorczyk - Senior Vice President. Greg specializes in merger and
- ----------------
acquisition analysis and corporate valuations and also has experience in
mark-to-market analysis and business plans. Greg was with Kaplan Associates for
three years. Previous, Greg worked as a Senior Auditor for First Virginia Bank
and Integra Financial and as a Financial Analyst with Airbus Industrie of N.A.
Greg holds a BS in Finance from Pennsylvania State University and an MBA in
Finance from the Katz Graduate School, University of Pittsburgh.
I-1
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
Exhibit II-1
Statement of Financial Condition
As of December 31, 2000 to 2002
(Dollars in Thousands)
================================================================================
December 31,
-----------------------------
2002 2001 2000
---- ---- ----
ASSETS
- ------
Cash and cash equivalents $ 758 $ 2,307 $ 2,058
Investment securities 1,902 3,824 5,324
Loans receivable, net 25,710 22,158 19,101
Federal Home Loan bank stock 634 606 568
Accrued interest receivable 135 162 185
Premises and equipment, net 773 416 429
Foreclosed real estate -- 17 --
Other assets 56 41 26
------- ------- -------
TOTAL ASSETS $29,968 $29,530 $27,691
======= ======= =======
LIABILITIES AND EQUITY
- ----------------------
Total deposits $28,128 $26,611 $25,422
Federal Home Loan Bank advances -- 1,000 162
Accrued expenses and other liabilities 91 81 155
------- ------- -------
TOTAL LIABILITIES 28,219 27,692 25,739
Retained earnings 1,749 1,833 1,952
Unrealized gain on securities available-for-sale -- 5 --
------- ------- -------
EQUITY CAPITAL 1,749 1,838 1,952
------- ------- -------
TOTAL LIABILITIES AND EQUITY $29,968 $29,530 $27,691
======= ======= =======
================================================================================
Source: Community First, financial statements and regulatory thrift financial
report.
IV-1
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
Exhibit II-2
Statement of Operations
For the Years Ended December 31, 2001 and 2002
(Dollars in Thousands)
================================================================================
Year Ended December 31,
-------------------------
2002 2001
------- -------
Total interest income $ 1,941 $ 2,018
Total interest expense 961 1,234
------- -------
Net interest income 980 784
Provision for loan losses 18 94
------- -------
Net interest income after provision 962 690
Service charges and other fees 64 97
Loss on sale of fixed assets (4) --
Gain (loss) on sale of other real estate (7) 10
Foreclosed real estate expense, net (1) (14)
Insurance commissions and premiums 5 10
Other income 17 28
------- -------
Total noninterest income 73 130
Compensation and benefits 450 344
Occupancy expense 131 96
Data processing 161 168
Other expenses 367 370
------- -------
Total noninterest expense 1,109 978
Loss before income taxes (74) (158)
Income tax expense (benefit) 10 (33)
------- -------
Net loss $ (84) $ (125)
======= =======
================================================================================
Source: Community First, financial statements.
IV-2
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
Exhibit II-3
Investment Portfolio Composition
As of December 31, 2001 and 2002
(Dollars in Thousands)
================================================================================
Dec. 31, Dec. 31,
2002 2001
- --------------------------------------------------------------------------------
Securities available for sale
- -----------------------------
U.S. government and agency securities $ -- $ 754
Securities held to maturity
- ---------------------------
U.S. government and agency securities 1,700 2,400
Mortgage-backed securities 202 670
------ ------
1,902 3,070
Total investment securities $1,902 $3,824
====== ======
================================================================================
Source: Community First, financial statements.
IV-3
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
Exhibit II-4
Loan Portfolio Composition
As of December 31, 2001 and 2002
(Dollars in Thousands)
================================================================================
December 31,
------------------------------------------
2002 2001
------------------- -------------------
Amount % Amount %
- --------------------------------------------------------------------------------
Real estate mortgage loans
--------------------------
1-4 family residential first $22,353 86.10 $19,101 85.72
1-4 family residential second 582 2.24 626 2.81
Multi-family 450 1.73 108 0.48
Commercial 798 3.07 359 1.62
Construction 207 0.80 61 0.27
------- ------ ------- ------
Subtotal 24,390 93.94 20,255 90.90
Other loans
-----------
Consumer installment 283 1.09 1,194 5.36
Commercial 102 0.39 8 0.04
Automobile 740 2.85 555 2.49
Passbook 238 0.92 270 1.21
Other 209 0.81 1 0.00
1,572 6.06 2,028 9.10
Subtotal ------- ------ ------- ------
Total loans, gross 36,962 100.00 22,284 100.00
====== ======
Less:
Unearned interest 1 2
Allowance for loan losses 106 105
Loans in process 145 19
------- -------
$25,710 $22,158
======= =======
Total loans, net
================================================================================
Source: Community First, financial statements and internal data.
IV-4
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
Exhibit II-5
Loan Origination Activity
For the Years Ended December 31, 2001 and 2002
(Dollars in Thousands)
================================================================================
Year Ended December 31,
---------------------------------------------
2002 2001
----------------------- ---------------------
Amount % Amount %
- --------------------------------------------------------------------------------
Real estate mortgage loans
--------------------------
1-4 family residential first $ 9,332 78.26 $10,130 87.77
1-4 family residential second 181 1.52 227 1.97
Multi-family 450 3.77 -- --
Commercial 434 3.64 -- --
Construction 264 2.21 -- --
------- ------ ------- ------
Subtotal 10,661 89.41 10,357 89.73
Other loans
-----------
Consumer installment 262 2.20 343 2.97
Commercial 110 0.92 -- --
Automobile 637 5.34 486 4.21
Passbook 80 0.67 186 1.61
Other 174 1.46 170 1.47
------- ------ ------- ------
Subtotal 1,263 10.59 1,185 10.27
Total loans originated $11,924 100.00 $11,542 100.00
======= ====== ======= ======
================================================================================
Source: Community First, internal data.
IV-5
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
Exhibit II-6
Deposit Account Distribution
As of December 31, 2001 and 2002
(Dollars in Thousands)
================================================================================
December 31,
-------------------------------------------
2002 2001
---------------------- --------------------
Amount % Amount %
- --------------------------------------------------------------------------------
Basic checking accounts $ 1,430 5.08 $ 1,015 3.81
NOW accounts 1,107 3.94 933 3.51
Money market accounts 2,072 7.37 1,742 6.55
Passbook savings accounts 3,169 11.27 3,011 11.31
Certificate of deposit accounts 20,350 72.34 19,910 74.82
------- ------ ------- ------
Total deposits $28,128 100.00 $26,611 100.00
======= ====== ======= ======
================================================================================
Source: Community First, financial statements.
IV-6
FELDMAN FINANCIAL ADVISORS, INC.
- --------------------------------
Exhibit II-7
Borrowed Funds Distribution
As of or for the Years Ended December 31, 2001 and 2002
(Dollars in Thousands)
================================================================================
Year Ended December 31,
----------------------
2002 2001
- -------------------------------------------------------------------------------
Balance outstanding at end of period $ -- $1,000
Average balance outstanding during period 530 540
Maximum outstanding at any month end 1,000 1,000
Weighted average interest rate at end of period -- 4.17%
Weighted average interest rate during the period 2.47% 4.17%
================================================================================
Source: Community First, financial statements and internal data.
IV-7