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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

(Mark one)

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

For the quarterly period ended June 30, 2014

OR

 

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

For the transition period from                      to                     

Commission file number: 1-34534

 

 

ATHENS BANCSHARES CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Tennessee   27-0920126

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

106 Washington Avenue, Athens, Tennessee   37303
(Address of principal executive offices)   (Zip Code)

(423) 745-1111

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

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

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

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

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

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

As of August 4, 2014, the number of shares of common stock outstanding was 1,798,788.

 

 

 


Table of Contents

ATHENS BANCSHARES CORPORATION

Table of Contents

 

          Page
No.
 

Part I. Financial Information

  

Item 1.

   Financial Statements   
  

Consolidated Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013

     1   
  

Consolidated Statements of Income for the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)

     2   
  

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2014 and 2013 (unaudited)

     3   
  

Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2014 (unaudited)

     4   
  

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013 (unaudited)

     5   
  

Notes to Consolidated Financial Statements (unaudited)

     6   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     28   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     33   

Item 4.

  

Controls and Procedures

     34   

Part II. Other Information

  

Item 1.

  

Legal Proceedings

     34   

Item 1A.

  

Risk Factors

     34   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     35   

Item 3.

  

Defaults Upon Senior Securities

     35   

Item 4.

  

Mine Safety Disclosures

     35   

Item 5.

  

Other Information

     35   

Item 6.

  

Exhibits

     36   

Signatures

     37   


Table of Contents

Part I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

 

     (Unaudited)
June 30,

2014
    December 31,
2013
 
ASSETS     

Cash and due from banks

   $ 12,305,224      $ 11,119,410   

Interest-bearing deposits in banks

     4,015,978        4,015,977   
  

 

 

   

 

 

 

Total cash and cash equivalents

     16,321,202        15,135,387   

Securities available for sale

     29,474,482        31,580,183   

Investments, at cost

     3,299,000        3,648,800   

Loans, net of allowance for loan losses of $3,953,124 and $4,432,069 at June 30, 2014 and December 31, 2013, respectively

     231,329,996        226,206,014   

Premises and equipment, net

     4,256,936        4,532,838   

Accrued interest receivable

     764,470        978,201   

Cash surrender value of bank owned life insurance

     9,953,596        9,812,685   

Foreclosed real estate

     1,292,056        413,150   

Other assets

     2,399,176        2,505,156   
  

 

 

   

 

 

 

Total assets

   $ 299,090,914      $ 294,812,414   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

LIABILITIES

    

Deposits:

    

Noninterest-bearing

   $ 24,282,218      $ 18,252,633   

Interest-bearing

     228,662,080        229,919,419   
  

 

 

   

 

 

 

Total deposits

     252,944,298        248,172,052   

Accrued interest payable

     137,268        152,897   

Securities sold under agreements to repurchase

     1,121,961        1,303,789   

Accrued expenses and other liabilities

     4,033,848        4,075,481   
  

 

 

   

 

 

 

Total liabilities

     258,237,375        253,704,219   
  

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES

    

STOCKHOLDERS’ EQUITY

    

Preferred stock, $0.01 par value; 10,000,000 shares authorized; none issued

     —          —     

Common stock, $0.01 par value; 50,000,000 shares authorized; 2,777,250 shares issued and 1,799,299 outstanding at June 30, 2014 and 1,890,990 outstanding at December 31, 2013

     17,993        18,910   

Additional paid-in capital

     17,692,390        18,523,039   

Common stock acquired by benefit plans:

    

Restricted stock

     (485,444     (616,575

Unallocated common stock held by:

    

Employee Stock Ownership Plan Trust

     (1,629,320     (1,629,320

Retained earnings

     25,062,707        24,880,822   

Accumulated other comprehensive income (loss)

     195,213        (68,681
  

 

 

   

 

 

 

Total stockholders’ equity

     40,853,539        41,108,195   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 299,090,914      $ 294,812,414   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

1


Table of Contents

ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

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

Interest and dividend income:

           

Loans, including fees

   $ 3,185,420       $ 3,151,272       $ 6,402,401       $ 6,460,794   

Dividends

     64,882         48,811         94,108         79,779   

Securities and interest-bearing deposits in other banks

     177,322         174,742         362,527         360,946   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     3,427,624         3,374,825         6,859,036         6,901,519   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Deposits

     455,086         507,528         929,084         1,042,653   

Fed funds purchased and securities sold under agreements to repurchase

     215         387         514         872   

Federal Home Loan Bank advances

     —           32,349         —           64,342   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     455,301         540,264         929,598         1,107,867   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     2,972,323         2,834,561         5,929,438         5,793,652   

Provision for loan losses

     26,890         72,223         53,162         207,672   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     2,945,433         2,762,338         5,876,276         5,585,980   
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income:

           

Customer service fees

     516,240         526,596         1,007,585         999,832   

Other charges and fees

     400,194         434,350         767,756         831,204   

Investment sales commissions

     133,039         147,192         310,394         268,527   

Increase in cash surrender value of life insurance

     86,948         89,114         173,014         178,270   

Other noninterest income

     137,925         178,647         243,723         344,862   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     1,274,346         1,375,899         2,502,472         2,622,695   
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expenses:

           

Salaries and employee benefits

     1,770,903         1,761,712         3,573,752         3,553,883   

Occupancy and equipment

     390,675         390,640         791,931         751,072   

Federal deposit insurance premiums

     48,000         42,933         91,000         87,372   

Data processing

     252,801         300,870         494,773         594,313   

Advertising

     51,409         35,197         95,470         74,522   

Other operating expenses

     669,005         658,475         1,298,629         1,365,210   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expenses

     3,182,793         3,189,827         6,345,555         6,426,372   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,036,986         948,410         2,033,193         1,782,303   

Income tax expense

     367,413         298,101         703,262         575,870   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 669,573       $ 650,309       $ 1,329,931       $ 1,206,433   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share

           

Basic

   $ 0.41       $ 0.33       $ 0.79       $ 0.59   

Diluted

   $ 0.38       $ 0.31       $ 0.75       $ 0.57   

Dividends per common share

   $ 0.05       $ 0.05       $ 0.10       $ 0.10   

The accompanying notes are an integral part of these consolidated financial statements.

 

2


Table of Contents

ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

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

Net income

   $ 669,573      $ 650,309      $ 1,329,931      $ 1,206,433   

Other comprehensive income (loss), before tax:

        

Unrealized holding gains (losses) on securities available for sale

     184,433        (461,219     425,635        (545,958

Income tax (expense) benefit related to other comprehensive income items

     (70,084     175,263        (161,741     207,464   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     114,349        (285,956     263,894        (338,494
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 783,922      $ 364,353      $ 1,593,825      $ 867,939   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

3


Table of Contents

ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Six Months Ended June 30, 2014

(Unaudited)

 

                             Common     Accumulated        
     Shares of           Additional           Stock     Other        
     Common     Common     Paid-In     Retained     Acquired By     Comprehensive        
     Stock     Stock     Capital     Earnings     Benefit Plans     Income (loss)     Total  

Balance, December 31, 2013

     1,890,990      $ 18,910      $ 18,523,039      $ 24,880,822      $ (2,245,895   $ (68,681   $ 41,108,195   

Net income

       —          —          1,329,931        —          —          1,329,931   

Other comprehensive income

       —          —          —          —          263,894        263,894   

Dividends - $0.10 per share

       —          —          (168,607     —          —          (168,607

Release of restricted stock plan shares

       —          (131,131     —          131,131        —          —     

Stock compensation expense

       —          175,214        —          —          —          175,214   

Repurchase and retirement of Company common stock

     (91,691     (917     (874,732     (979,439     —          —          (1,855,088
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2014

     1,799,299      $ 17,993      $ 17,692,390      $ 25,062,707      $ (2,114,764   $ 195,213      $ 40,853,539   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

4


Table of Contents

ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Six Months Ended  
     June 30,     June 30,  
     2014     2013  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 1,329,931      $ 1,206,433   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     325,644        264,320   

Amortization of securities and other assets

     145,111        211,040   

Provision for loan losses

     53,162        207,672   

Deferred income taxes

     148,425        506   

Other gains and losses, net

     (55,466     (59,352

Stock compensation expense

     175,214        175,214   

Net change in:

    

Cash surrender value of life insurance, net

     (140,911     (148,288

Accrued interest receivable

     213,731        83,743   

Accrued interest payable

     (15,629     (6,124

Prepaid FDIC assessment

     —          427,353   

Other assets and liabilities

     (90,888     1,133,267   
  

 

 

   

 

 

 

Net cash provided by operating activities

     2,088,324        3,495,784   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Securities available for sale:

    

Purchases

     (2,384,289     (6,801,386

Maturities, prepayments and calls

     4,408,542        6,756,666   

Sales

     398,763        —     

Investments, at cost:

    

Proceeds from redemption of FHLB stock

     349,800        —     

Loan originations and principal collections, net

     (6,636,750     1,498,867   

Purchases of premises and equipment

     (49,742     (253,301

Proceeds from sale of foreclosed real estate

     444,444        199,987   
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (3,469,232     1,400,833   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net increase in deposits

     4,772,246        10,945,449   

Net decrease in securities sold under agreements to repurchase

     (181,828     (842,595

Repurchase and retirement of Company common stock

     (1,855,088     (3,968,652

Dividends paid

     (168,607     (207,875
  

 

 

   

 

 

 

Net cash provided by financing activities

     2,566,723        5,926,327   
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     1,185,815        10,822,944   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     15,135,387        20,252,112   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 16,321,202      $ 31,075,056   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

    

Interest paid on deposits and borrowed funds

   $ 945,227      $ 1,113,991   

Income taxes paid

     817,366        705,903   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:

    

Acquisition of real estate acquired through foreclosure

   $ 1,272,056      $ 127,578   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

5


Table of Contents

ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 1. Summary of Significant Accounting Policies

The accounting and reporting policies of Athens Bancshares Corporation (the “Company”) and subsidiary conform with United States generally accepted accounting principles (“GAAP”) and practices within the banking industry. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) are also sources of authoritative GAAP for SEC registrants.

The policies that materially affect financial condition and results of operations are summarized as follows:

Interim Financial Information (Unaudited)

The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X as promulgated by the SEC. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation of the financial condition and results of operations for the periods presented have been included. Operating results for the three and six months ended June 30, 2014, are not necessarily indicative of the results that may be expected for the full year or in any other period. For further information, refer to the Company’s consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

The Company has evaluated events and transactions for potential recognition and disclosure through the date the financial statements were issued.

Nature of operations

The Company is a holding company whose principal activity is the ownership and management of its wholly owned subsidiary, Athens Federal Community Bank (the “Bank”). The Bank provides a variety of financial services to individuals and corporate customers through its seven branches located in Athens, Sweetwater, Etowah, Madisonville, and Cleveland, Tennessee. The Bank’s primary deposit products include checking, savings, certificates of deposit, and IRA accounts. Its primary lending products are one-to-four family residential, commercial real estate, and consumer loans. Southland Finance, Inc. (“Southland”) is a consumer finance company with one branch located in Athens, Tennessee. Ti-Serv, Inc. (“Ti-Serv”) maintains the Bank’s investment in Valley Title Services, LLC (“Valley Title”). Southland and Ti-Serv are wholly-owned subsidiaries of the Bank. Valley Title is a wholly-owned subsidiary of Ti-Serv.

 

6


Table of Contents

ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 1. Summary of Significant Accounting Policies (Continued)

 

Use of estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, other-than-temporary impairment of securities, and the fair value of financial instruments.

Recent Accounting Pronouncements

The Company has determined that recently issued accounting pronouncements will not have a material impact on its consolidated financial statements or do not apply to its operations.

Earnings Per Common Share

Basic earnings per share are computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.

The following is a summary of the basic and diluted earnings per share for the three months ended June 30, 2014 and 2013:

 

     Three Months Ended June 30,  
     2014      2013  

Numerator:

     

Net income

   $ 669,573       $ 650,309   
  

 

 

    

 

 

 

Denominator:

     

Weighted average common shares outstanding

     1,642,295         1,993,217   

Effect of dilutive stock options

     110,031         86,326   
  

 

 

    

 

 

 

Diluted shares

     1,752,326         2,079,543   
  

 

 

    

 

 

 

Basic earnings per share

   $ 0.41       $ 0.33   
  

 

 

    

 

 

 

Diluted earnings per share

   $ 0.38       $ 0.31   
  

 

 

    

 

 

 

 

7


Table of Contents

ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 1. Summary of Significant Accounting Policies (Continued)

 

Earnings Per Common Share (Continued)

 

The following is a summary of the basic and diluted earnings per share for the six months ended June 30, 2014 and 2013:

 

     Six Months Ended June 30,  
     2014      2013  

Basic earnings per share calculation:

     

Numerator: Net income

   $ 1,329,931       $ 1,206,433   
  

 

 

    

 

 

 

Denominator: Weighted average common shares outstanding

     1,675,591         2,043,349   

Effect of dilutive stock options

     104,832         85,116   
  

 

 

    

 

 

 

Diluted shares

     1,780,423         2,128,465   
  

 

 

    

 

 

 

Basic earnings per share

   $ 0.79       $ 0.59   
  

 

 

    

 

 

 

Diluted earnings per share

   $ 0.75       $ 0.57   
  

 

 

    

 

 

 

Reclassifications

Certain amounts from prior period financial statements have been reclassified to conform to the current period’s presentation. The reclassifications had no effect on net income, total assets or stockholders’ equity as previously reported.

 

Note 2. Securities

The amortized cost and estimated fair value of securities classified as available for sale and held to maturity at June 30, 2014 and December 31, 2013 are as follows:

 

     June 30, 2014  
            Gross      Gross        
     Amortized      Unrealized      Unrealized     Fair  
     Cost      Gains      Losses     Value  

Securities of U.S. Government agencies and corporations

   $ 2,686,314       $ 6,182       $ (49,377   $ 2,643,119   

Mortgage-backed and related securities (1)

     14,212,923         211,595         (8,258     14,416,260   

State and municipal securities

     12,260,386         264,266         (109,549     12,415,103   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 29,159,623       $ 482,043       $ (167,184   $ 29,474,482   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

8


Table of Contents

ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 2. Securities (Continued)

 

     December 31, 2013  
            Gross      Gross        
     Amortized      Unrealized      Unrealized     Fair  
     Cost      Gains      Losses     Value  

Securities of U.S. Government agencies and corporations

   $ 5,825,027       $ 14,733       $ (93,496   $ 5,746,264   

Mortgage-backed and related securities (1)

     14,514,702         189,224         (66,861     14,637,065   

State and municipal securities

     11,351,230         153,436         (307,812     11,196,854   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 31,690,959       $ 357,393       $ (468,169   $ 31,580,183   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Collateralized by residential mortgages and guaranteed by U.S. Government sponsored entities.

As of June 30, 2014 and December 31, 2013, the Company did not have any securities classified as held-to-maturity or as trading securities.

The amortized cost and estimated market value of securities at June 30, 2014, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     Amortized      Fair  
     Cost      Value  

Due in one year or less

   $ 301,442       $ 304,087   

Due after one year through five years

     4,917,781         4,918,749   

Due five years to ten years

     7,851,884         7,952,396   

Due after ten years

     1,875,593         1,882,990   

Mortgage-backed securities

     14,212,923         14,416,260   
  

 

 

    

 

 

 

Total

   $ 29,159,623       $ 29,474,482   
  

 

 

    

 

 

 

The Company had no realized gains or losses for the six month periods ended June 30, 2014 and 2013.

The Company has pledged securities with carrying values of approximately $17,678,000 and $17,507,000 to secure deposits of public and private funds as of June 30, 2014 and December 31, 2013, respectively.

 

9


Table of Contents

ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 2. Securities (Continued)

 

Securities with gross unrealized losses at June 30, 2014 and December 31, 2013, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:

 

     June 30, 2014  
     Less than 12 Months     12 Months or Greater     Total  
            Gross            Gross            Gross  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  
     Value      Losses     Value      Losses     Value      Losses  
     (dollars in thousands)  

Securities of U.S. Government agencies and corporations

   $ 995       $ (4   $ 955       $ (45   $ 1,950       $ (49

State and municipal securities

     —           —          3,089         (110     3,089         (110

Mortgage-backed and related securities

     873         (3     873         (5     1,746         (8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 1,868       $ (7   $ 4,917       $ (160   $ 6,785       $ (167
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     December 31, 2013  
     Less than 12 Months     12 Months or Greater     Total  
            Gross            Gross            Gross  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  
     Value      Losses     Value      Losses     Value      Losses  
     (dollars in thousands)  

Securities of U.S. Government agencies and corporations

   $ 1,905       $ (93   $ —         $ —        $ 1,905       $ (93

State and municipal securities

     5,104         (283     411         (25     5,515         (308

Mortgage-backed and related securities

     8,332         (67     —           —          8,332         (67
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     $15,341       $ (443   $ 411       $ (25   $ 15,752       $ (468
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Management performs periodic reviews for impairment in accordance with ASC Topic 320, Investments – Debt and Equity Securities.

 

10


Table of Contents

ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 2. Securities (Continued)

 

At June 30, 2014, the 10 securities with unrealized losses had depreciated 2.41 percent from the Company’s amortized cost basis. At December 31, 2013, the 22 securities with unrealized losses had depreciated 2.89 percent from the Company’s amortized cost basis.

Most of these securities are guaranteed by either U.S. government corporations or agencies or had investment grade ratings upon purchase. Further, the issuers of these securities have not established any cause for default. The unrealized losses associated with these investment securities are primarily driven by changes in interest rates and are not due to the credit quality of the securities. These securities will continue to be monitored as a part of the Company’s ongoing impairment analysis, but are expected to perform even if the rating agencies reduce the credit rating of the bond insurers. Management evaluates the financial performance of each issuer on a quarterly basis to determine if it is probable that the issuers can make all contractual principal and interest payments.

Upon acquisition of a security, the Company determines the appropriate impairment model that is applicable. If the security is a beneficial interest in securitized financial assets, the Company uses the beneficial interests in securitized financial assets impairment model. If the security is not a beneficial interest in securitized financial assets, the Company uses the debt and equity securities impairment model. The Company conducts periodic reviews to evaluate each security to determine whether an other-than-temporary impairment has occurred. The Company does not have any securities that have been classified as other-than-temporarily-impaired at June 30, 2014.

 

Note 3. Investments, at Cost

The Bank carries the following investments at cost because they are not readily marketable and there is no established market price for the investments. These investments are normally redeemed by the issuer at par value and may carry call or put options under certain circumstances. Investments carried at cost at June 30, 2014 and December 31, 2013 consist of:

 

     June 30,
2014
     December 31,
2013
 

Federal Home Loan Bank of Cincinnati common stock

   $ 2,549,000       $ 2,898,800   

Tenth Street Fund III, L.P. investment

     750,000         750,000   
  

 

 

    

 

 

 
   $  3,299,000       $ 3,648,800   
  

 

 

    

 

 

 

 

11


Table of Contents

ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 4. Loans and Allowances for Loan Losses

The Bank and Southland provide mortgage, consumer, and commercial lending services to individuals and businesses primarily in the East Tennessee area.

The Company’s loans consist of the following at June 30, 2014 and December 31, 2013:

 

     June 30,     December 31,  
     2014     2013  

Mortgage loans on real estate:

    

Residential 1-4 family

   $ 88,707,131      $ 88,414,921   

Commercial real estate and multi-family

     79,378,173        74,497,078   

Construction and land

     28,588,793        30,720,741   
  

 

 

   

 

 

 
     196,674,097        193,632,740   

Commercial loans

     15,081,946        13,058,544   

Consumer and equity lines of credit

     24,286,922        24,732,518   
  

 

 

   

 

 

 

Total loans

     236,042,965        231,423,802   

Less: Allowance for loan losses

     (3,953,124     (4,432,069

Unearned interest and fees

     (354,741     (396,470

Net deferred loan origination fees

     (405,104     (389,249
  

 

 

   

 

 

 

Loans, net

   $ 231,329,996      $ 226,206,014   
  

 

 

   

 

 

 

The following presents activity in the allowance for loan losses for the six months ended June 30, 2014 and the year ended December 31, 2013:

 

     June 30,
2014
    December 31,
2013
 

Beginning balance

   $ 4,432,069      $ 4,475,302   

Provision for loan losses

     53,162        316,393   

Loans charged-off

     (568,289     (594,470

Recoveries

     36,182        234,844   
  

 

 

   

 

 

 

Ending balance

   $ 3,953,124      $ 4,432,069   
  

 

 

   

 

 

 

 

12


Table of Contents

ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 4. Loans and Allowances for Loan Losses (Continued)

 

Loan impairment and any related valuation allowance is determined under the provisions established by ASC Topic 310. For all periods presented, impaired loans without a valuation allowance represent loans for which management believes that the collateral value of the loan is higher than the carrying value of that loan.

The allocation of the allowance for loan losses and recorded investment in loans by portfolio segment are as follows:

 

     June 30, 2014  
     Commercial      Residential
1-4 Family
     Commercial
Real Estate
and Multi-
Family
     Construction
and Land
     Consumer
and Other
     Unallocated      Total  

Specified reserves- impaired loans

   $ 60,545       $ 261,182       $ 103,471       $ 11,650       $ 59,082       $ —         $ 495,930   

General reserves

     287,924         978,232         1,059,874         603,726         447,952         79,486         3,457,194   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total reserves

   $ 348,469       $ 1,239,414       $ 1,163,345       $ 615,376       $ 507,034       $ 79,486       $ 3,953,124   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans

   $ 1,819,754       $ 4,180,727       $ 500,554       $ 681,246       $ 415,844       $ —         $ 7,598,125   

Performing loans

     13,262,192         84,526,404         78,877,619         27,907,547         23,871,078         —           228,444,840   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,081,946       $ 88,707,131       $ 79,378,173       $ 28,588,793       $ 24,286,922       $ —         $ 236,042,965   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2013  
     Commercial      Residential
1-4 Family
     Commercial
Real Estate
and Multi-
Family
     Construction
and Land
     Consumer
and Other
     Unallocated      Total  

Specified reserves- impaired loans

   $ 86,958       $ 545,126       $ 85,175       $ 303,752       $ 69,049       $ —         $ 1,090,060   

General reserves

     244,980         897,380         1,023,783         652,974         461,508         61,384         3,342,009   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total reserves

   $ 331,938       $ 1,442,506       $ 1,108,958       $ 956,726       $ 530,557       $ 61,384       $ 4,432,069   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans

   $ 1,901,209       $ 5,821,575       $ 449,597       $ 1,815,293       $ 328,373       $ —         $ 10,316,047   

Performing loans

     11,157,335         82,593,346         74,047,481         28,905,448         24,404,145         —           221,107,755   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,058,544       $ 88,414,921       $ 74,497,078       $ 30,720,741       $ 24,732,518       $ —         $ 231,423,802   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

13


Table of Contents

ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 4. Loans and Allowances for Loan Losses (Continued)

 

The following table details the changes in the allowance for loan losses from December 31, 2012 to June 30, 2014 by class of loan:

 

     Commercial     Residential
1-4 Family
    Commercial
Real Estate
and Multi-
Family
    Construction
and Land
    Consumer
and Other
    Unallocated      Total  

Balance, December 31, 2012

   $ 686,065      $ 1,348,922      $ 1,074,995      $ 818,984      $ 545,476      $ 860       $ 4,475,302   

Provision (reallocation) for loan losses

     (500,574     257,300        33,963        235,242        229,938        60,524         316,393   

Loans charged-off

     —          (194,671     —          (97,500     (302,299     —           (594,470

Recoveries

     146,447        30,955        —          —          57,442        —           234,844   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, December 31, 2013

     331,938        1,442,506        1,108,958        956,726        530,557        61,384         4,432,069   

Provision (reallocation) for loan losses

     16,531        (170,147     293,086        (165,664     61,254        18,102         53,162   

Loans charged-off

     —          (35,087     (238,699     (175,686     (118,817     —           (568,289

Recoveries

     —          2,142        —          —          34,040        —           36,182   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Balance, June 30, 2014

   $ 348,469      $ 1,239,414      $ 1,163,345      $ 615,376      $ 507,034      $ 79,486       $ 3,953,124   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

The following tables present loans individually evaluated for impairment by class of loans as of June 30, 2014 and December 31, 2013:

 

     June 30, 2014  
     Commercial      Residential
1-4 Family
     Commercial
Real Estate
and Multi-
Family
     Construction
and Land
     Consumer
and Other
     Total  

Impaired loans:

                 

Without a valuation allowance

   $ 26,993       $ 3,047,971       $ 238,517       $ 603,579       $ 206,567       $ 4,123,627   

With a valuation allowance

     1,792,761         1,132,756         262,037         77,667         209,277         3,474,498   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Recorded investment in impaired loans

   $ 1,819,754       $ 4,180,727       $ 500,554       $ 681,246       $ 415,844       $ 7,598,125   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal balance of impaired loans

   $ 1,859,602       $ 4,572,754       $ 500,554       $ 1,206,403       $ 416,003       $ 8,555,316   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Valuation allowance related to impaired loans

   $ 60,545       $ 261,182       $ 103,471       $ 11,650       $ 59,082       $ 495,930   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average investment in impaired loans

   $ 1,863,946       $ 4,627,498       $ 514,713       $ 1,231,008       $ 363,481       $ 8,006,646   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income recognized on impaired loans

   $ 45,555       $ 82,583       $ 13,762       $ 23,588       $ 7,166       $ 172,654   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

14


Table of Contents

ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 4. Loans and Allowances for Loan Losses (Continued)

 

     December 31, 2013  
     Commercial      Residential
1-4 Family
     Commercial
Real Estate
and Multi-
Family
     Construction
and Land
     Consumer
and Other
     Total  

Impaired loans:

                 

Without a valuation allowance

   $ 47,141       $ 3,285,685       $ 247,422       $ 346,571       $ 78,393       $ 4,005,212   

With a valuation allowance

     1,854,068         2,535,890         202,175         1,468,722         249,980         6,310,835   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Recorded investment in impaired loans

   $ 1,901,209       $ 5,821,575       $ 449,597       $ 1,815,293       $ 328,373       $ 10,316,047   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal balance of impaired loans

   $ 1,941,056       $ 6,232,048       $ 449,597       $ 2,752,396       $ 328,843       $ 11,703,940   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Valuation allowance related to impaired loans

   $ 86,958       $ 545,126       $ 85,175       $ 303,752       $ 69,049       $ 1,090,060   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average investment in impaired loans

   $ 1,878,458       $ 8,658,167       $ 880,839       $ 1,869,016       $ 327,904       $ 13,614,384   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income recognized on impaired loans

   $ 101,112       $ 353,260       $ 55,697       $ 7,275       $ 20,066       $ 537,410   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following tables present an aged analysis of past due loans:

 

     June 30, 2014  
     30-89 Days
Past Due
     Greater Than
90 Days
Past Due
and Non-
Accrual
     Total Past
Due
     Current Loans      Total Loans      Recorded
Investment ³
90 Days Past
Due and
Accruing
 

Residential 1-4 family

   $ 529,456       $ 2,148,542       $ 2,677,998       $ 86,029,133       $ 88,707,131       $ 52,552   

Commercial real estate and multifamily

     61,579         90,526         152,105         79,226,068         79,378,173         —     

Construction and land

     34,877         225,968         260,845         28,327,948         28,588,793         —     

Commercial

     49,593         —           49,593         15,032,353         15,081,946         —     

Consumer and other

     281,415         137,789         419,204         23,867,718         24,286,922         14,049   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 956,920       $ 2,602,825       $ 3,559,745       $ 232,483,220       $ 236,042,965       $ 66,601   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2013  
     30-89 Days
Past Due
     Greater Than
90 Days
Past Due
and Non-
Accrual
     Total
Past Due
     Current Loans      Total Loans      Recorded
Investment ³
90 Days Past
Due and
Accruing
 

Residential 1-4 family

   $ 915,785       $ 2,440,384       $ 3,356,169       $ 85,058,752       $ 88,414,921       $ 20,128   

Commercial real estate and multifamily

     —           96,055         96,055         74,401,023         74,497,078         —     

Construction and land

     381,336         1,402,960         1,784,296         28,936,445         30,720,741         —     

Commercial

     24,515         47,141         71,656         12,986,888         13,058,544         —     

Consumer and other

     341,647         56,953         398,600         24,333,918         24,732,518         27,182   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,663,283       $ 4,043,493       $ 5,706,776       $ 225,717,026       $ 231,423,802       $ 47,310   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents

ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 4. Loans and Allowances for Loan Losses (Continued)

 

Credit quality indicators:

Federal regulations require the Company to review and classify its assets on a regular basis. There are three classifications for problem assets: substandard, doubtful, and loss. “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The regulations also provide for a “special mention” category, described as assets which do not currently expose an institution to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving close attention. When the Company classifies an asset as substandard or doubtful, it may establish a specific allowance for loan losses.

The following outlines the amount of each loan classification and the amount categorized into each risk rating class:

 

     June 30, 2014  
     Pass      Special
Mention
     Substandard      Doubtful      Loss      Total  

Residential 1-4 family

   $ 81,948,375       $ 2,578,029       $ 4,180,727       $ —         $ —         $ 88,707,131   

Commercial real estate and multifamily

     78,750,294         127,325         500,554         —           —           79,378,173   

Construction and land

     26,208,449         1,699,098         681,246         —           —           28,588,793   

Commercial

     13,245,359         16,833         1,819,754         —           —           15,081,946   

Consumer and other

     23,562,375         308,703         415,844         —           —           24,286,922   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 223,714,852       $ 4,729,988       $ 7,598,125       $ —         $ —         $ 236,042,965   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2013  
     Pass      Special
Mention
     Substandard      Doubtful      Loss      Total  

Residential 1-4 family

   $ 81,288,044       $ 1,305,302       $ 5,821,575       $ —         $ —         $ 88,414,921   

Commercial real estate and multifamily

     73,918,715         128,766         449,597         —           —           74,497,078   

Construction and land

     27,155,327         1,750,121         1,815,293         —           —           30,720,741   

Commercial

     11,157,335         —           1,901,209         —           —           13,058,544   

Consumer and other

     24,159,285         244,860         328,373         —           —           24,732,518   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 217,678,706       $ 3,429,049       $ 10,316,047       $ —         $ —         $ 231,423,802   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

A modification of a loan constitutes a troubled debt restructuring (“TDR”) when a borrower is experiencing financial difficulty and the modification constitutes a concession. By granting the concession, the Company expects to increase the probability of collection by more than would be expected by not granting the concession. The Company’s determination of whether a modification is a TDR considers the facts and circumstances surrounding each respective modification.

 

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ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 4. Loans and Allowances for Loan Losses (Continued)

 

The following tables present information related to loans modified in a TDR:

 

     Six Months Ended June 30, 2014  
     Number      Pre-Modification      Post-Modification  
     Of      Outstanding      Outstanding  
     Loans      Recorded Investment      Recorded Investment  

Residential 1-4 family

     —         $ —         $ —     

Commercial real estate and multifamily

     —           —           —     

Construction and land

     —           —           —     

Commercial

     —           —           —     

Consumer and other

     6         10,921         10,921   
  

 

 

    

 

 

    

 

 

 
     6       $ 10,921       $ 10,921   
  

 

 

    

 

 

    

 

 

 

 

     Six Months Ended June 30, 2013  
     Number      Pre-Modification      Post-Modification  
     Of      Outstanding      Outstanding  
     Loans      Recorded Investment      Recorded Investment  

Residential 1-4 family

     1       $ 64,586       $ 64,586   

Commercial real estate and multifamily

     —           —           —     

Construction and land

     —           —           —     

Commercial

     —           —           —     

Consumer and other

     6         18,081         18,081   
  

 

 

    

 

 

    

 

 

 
     7       $ 82,667       $ 82,667   
  

 

 

    

 

 

    

 

 

 

The following tables set forth loans modified in a TDR from July 1 through June 30, for each respective period, that subsequently defaulted (i.e., 60 days or more past due following a modification):

 

     Six Months Ended June 30, 2014  
     Number         
     Of      Outstanding Recorded  
     Loans      Investment at Default  

Residential 1-4 family

     —         $ —     

Commercial real estate and multifamily

     —           —     

Construction and land

     —           —     

Commercial

     —           —     

Consumer and other

     2         11,258   
  

 

 

    

 

 

 
     2       $ 11,258   
  

 

 

    

 

 

 

 

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ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 4. Loans and Allowances for Loan Losses (Continued)

 

     Six Months Ended June 30, 2013  
     Number         
     Of      Outstanding Recorded  
     Loans      Investment at Default  

Residential 1-4 family

     —         $ —     

Commercial real estate and multifamily

     1         5,353   

Construction and land

     —           —     

Commercial

     —           —     

Consumer and other

     4         50,593   
  

 

 

    

 

 

 
     5       $ 55,946   
  

 

 

    

 

 

 

Note 5. Fair Value Disclosures

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with ASC Topic 820, Fair Value Measurements and Disclosures, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

ASC Topic 820 provides a consistent definition of fair value, which focuses on exit price in an orderly transaction between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

 

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ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 5. Fair Value Disclosures (Continued)

 

ASC Topic 820 also establishes a three-tier fair value which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value, as follows:

Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

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

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

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There have been no changes in the methodologies used at June 30, 2014 and December 31, 2013.

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments.

Cash, cash equivalents, and interest-bearing deposits in banks:

The carrying amounts of cash, cash equivalents, and interest-bearing deposits in banks approximate fair values based on the short-term nature of the assets. These assets are included in Level 1 of the valuation hierarchy.

Securities:

Fair values are estimated using pricing models and discounted cash flows that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, and credit spreads. Securities classified as available for sale are reported at fair value utilizing Level 2 inputs.

Investments, at cost:

The carrying value of investments at cost approximate fair value. These assets are included in Level 3 of the valuation hierarchy.

 

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ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 5. Fair Value Disclosures (Continued)

 

Loans:

For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair value for fixed-rate loans are estimated using discounted cash flow analyses, using market interest rates for comparable loans. These are reflected within Level 3 of the valuation hierarchy. The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC Topic 310, Receivables. The fair value of impaired loans is estimated using several methods including collateral value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2014, substantially all of the total impaired loans were evaluated based on the fair value of collateral. In accordance with ASC Topic 310, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on the observable market price or a current, independent appraised value, the Company records the impaired loan as nonrecurring Level 2. The Company records the impaired loan as nonrecurring Level 3 when management has become aware of events that have significantly impacted the condition or marketability of the collateral since the most recent appraisal which are not observable market prices. Also, certain impaired loans recorded as nonrecurring Level 3 are evaluated based on a discounted cash flow methodology comparing the contractual rate against the modified rate. In this case, management will reduce the appraisal value based on factors determined by their judgment and collective knowledge of the collateral and market conditions.

Cash surrender value of bank owned life insurance:

The carrying amounts of cash surrender value of bank owned life insurance approximate their fair value. The carrying amount is based on information received from the insurance carriers indicating the financial performance of the policies and the amount the Company would receive should the policies be surrendered. The Company reflects these assets within Level 2 of the valuation hierarchy.

Foreclosed real estate:

Foreclosed real estate consisting of properties obtained through foreclosure or in satisfaction of loans is initially recorded at fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for estimated selling costs. At the time of foreclosure, any excess of the loan balance over the fair value of the real estate held as collateral is treated

as a charge against the allowance for loan losses. Gains or losses on sale and any subsequent adjustments to the fair value are recorded as a component of foreclosed real estate expense. Foreclosed real estate is included in Level 2 of the valuation hierarchy.

 

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ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 5. Fair Value Disclosures (Continued)

 

Deposits:

The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits and NOW, money market, and savings accounts, is equal to the amount payable on demand at the reporting date. The fair value of time deposits is based on the discounted value of contractual cash flows, and is included in Level 3 of the valuation hierarchy. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Securities sold under agreements to repurchase:

The estimated fair value of these liabilities, which are extremely short term, approximates their carrying value. These liabilities are included in Level 3 of the valuation hierarchy.

Federal Home Loan Bank advances:

Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt. These liabilities are included in Level 3 of the valuation hierarchy.

Accrued interest:

The carrying amounts of accrued interest approximate fair value. These assets and liabilities are included in Level 3 of the valuation hierarchy.

Commitments to extend credit, letters of credit and lines of credit:

The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.

 

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ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 5. Fair Value Disclosures (Continued)

 

The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis:

 

            Quoted Prices in      Significant      Significant  
            Active Markets      Other      Other  
     Balance as of      for Identical      Observable      Unobservable  
     June 30,      Assets      Inputs      Inputs  
     2014      (Level 1)      (Level 2)      (Level 3)  

Securities available for sale:

           

Securities of U.S.

           

Government agencies and corporations

   $ 2,643,119       $ —         $ 2,643,119       $ —     

Mortgage-backed securities

     14,416,260         —           14,416,260         —     

State and municipal securities

     12,415,103         —           12,415,103         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 29,474,482       $ —         $ 29,474,482       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
            Quoted Prices in      Significant      Significant  
            Active Markets      Other      Other  
     Balance as of      for Identical      Observable      Unobservable  
     December 31,      Assets      Inputs      Inputs  
     2013      (Level 1)      (Level 2)      (Level 3)  

Securities available for sale:

           

Securities of U.S.

           

Government agencies and corporations

   $ 5,746,264       $ —         $ 5,746,264       $ —     

Mortgage-backed securities

     14,637,065         —           14,637,065         —     

State and municipal securities

     11,196,854         —           11,196,854         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 31,580,183       $ —         $ 31,580,183       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2014 and December 31, 2013, the Company had no assets or liabilities whose fair values are measured on a recurring basis using Level 3 inputs. Additionally, there were no transfers between Levels 1 and 2 during the six months ended June 30, 2014.

 

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ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 5. Fair Value Disclosures (Continued)

 

The tables below present information about assets and liabilities for which a nonrecurring change in fair value was recorded:

 

            Quoted Prices in      Significant      Significant  
            Active Markets      Other      Other  
     Balance as of      for Identical      Observable      Unobservable  
     June 30,      Assets      Inputs      Inputs  
     2014      (Level 1)      (Level 2)      (Level 3)  

Impaired loans

   $ 2,978,568       $ —         $ 1,244,155       $ 1,734,413   

Foreclosed real estate

     1,292,056         —           1,292,056         —     
            Quoted Prices in      Significant      Significant  
            Active Markets      Other      Other  
     Balance as of      for Identical      Observable      Unobservable  
     December 31,      Assets      Inputs      Inputs  
     2013      (Level 1)      (Level 2)      (Level 3)  

Impaired loans

   $ 5,220,775       $ —         $ 2,623,325       $ 2,597,450   

Foreclosed real estate

     413,150         —           413,150         —     

The carrying amount and estimated fair value of the Company’s financial instruments at June 30, 2014 and December 31, 2013 are as follows:

 

     June 30, 2014      December 31, 2013  
     Carrying      Estimated      Carrying      Estimated  
     Amount      Fair Value      Amount      Fair Value  

Financial assets:

           

Cash and cash equivalents

   $ 16,321,202       $ 16,321,202       $ 15,135,387       $ 15,135,387   

Securities available for sale

     29,474,482         29,474,482         31,580,183         31,580,183   

Investments, at cost

     3,299,000         3,299,000         3,648,800         3,648,800   

Loans, net

     231,329,996         232,296,285         226,206,014         227,272,387   

Cash surrender value of bank owned life insurance

     9,953,596         9,953,596         9,812,685         9,812,685   

Accrued interest receivable

     764,470         764,470         978,201         978,201   

Financial liabilities:

           

Deposits

     252,944,298         256,965,779         248,172,052         252,724,560   

Securities sold under agreements to repurchase

     1,121,961         1,121,961         1,303,789         1,303,789   

Accrued interest payable

     137,268         137,268         152,897         152,897   

Unrecognized financial instruments (net of contract amount):

           

Commitments to extend credit

     —           —           —           —     

Letter of credit

     —           —           —           —     

Lines of credit

     —           —           —           —     

 

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ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 6. Stock Options, ESOP, and Restricted Shares

2010 Equity Incentive Plan

The Athens Bancshares Corporation 2010 Equity Incentive Plan (“the 2010 Plan”) was approved by the Company’s stockholders at the annual meeting of stockholders held on July 14, 2010. Under the terms of the 2010 Plan, the Company may grant restricted stock awards and stock options to its employees, officers, and directors. The purpose of the 2010 Plan is to promote the success of the Company by linking the personal interests of its employees, officers, and directors to the interest of the Company’s shareholders, and by providing participants with an incentive for remarkable performance. All of the Company’s employees, officers, and directors are eligible to participate in the 2010 Plan.

Under terms of the 2010 Plan, the Company is authorized to issue up to 277,725 stock options and up to 111,090 shares of restricted stock.

Stock Options:

The Company granted stock options to its directors, officers, and employees on December 15, 2010. Both incentive stock options and non-qualified stock options were granted under the 2010 Plan. The exercise price for each option was equal to the market price of the Company’s stock on the date of grant and the maximum term of each option is ten years. The vesting period for all options is five years, pro rata, from the date of grant. The Company recognizes compensation expense over the vesting period, based on the grant-date fair value of the options granted. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. For the six months ended June 30, 2014 and 2013, the Company recorded stock compensation expense of $27,075. At June 30, 2014, the total remaining compensation cost to be recognized on non-vested options is approximately $67,688.

A summary of the activity in the 2010 Plan for the six months ended June 30, 2014, is presented in the following table:

 

     Six Months Ended June 30, 2014  
            Average      Aggregate  
            Exercise      Intrinsic  
     Shares      Price      Value (1)  

Outstanding at December 31, 2013

     236,062       $ 11.50      

Granted

     —           N/A      

Exercised

     —           N/A      

Forfeited

     —           N/A      
  

 

 

       

Outstanding at June 30, 2014

     236,062       $ 11.50       $ 2,511,670   
  

 

 

       

Options exercisable at June 30, 2014

     141,637       $ 11.50       $ 1,507,020   
  

 

 

       

 

(1) The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on June 30, 2014. This amount changes based on changes in the market value of the Company’s stock.

 

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ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 6. Stock Options, ESOP, and Restricted Shares (Continued)

 

2010 Equity Incentive Plan (Continued)

 

Other information regarding options outstanding and exercisable as of June 30, 2014, is as follows:

 

   

Options Outstanding

 

Options Exercisable

            Weighted-        
            Average        
        Weighted-   Remaining       Weighted-
    Number   Average   Contractual   Number   Average
Exercise   of   Exercise   Life   of   Exercise

Price

 

Shares

 

Price

 

In Years

 

Shares

 

Price

$11.50

  236,062   $11.50   6.50   141,637   $11.50

Information pertaining to non-vested options for the six months ended June 30, 2014, is as follows:

 

     Number of
Shares
     Weighted Average
Grant Date Fair Value
 

Non-vested options, December 31, 2013

     94,425       $ 1.27   

Granted

     —           —     

Vested

     —           —     

Forfeited

     —           —     
  

 

 

    

 

 

 

Non-vested options, June 30, 2014

     94,425       $ 1.27   
  

 

 

    

 

 

 

Restricted Stock:

On January 19, 2011, the Company awarded 94,426 shares of restricted stock to its directors, officers, and employees pursuant to the terms of the 2010 Plan. Compensation expense associated with the performance-based share awards is recognized over the time period that the restrictions associated with the awards lapse based on the total cost of the award, which is the fair market value of the stock on the date of the grant. The closing price on the date of the grants issued on January 19, 2011 was $12.75 per share.

On December 19, 2012, the Company awarded 16,664 shares of restricted stock to its officers and employees pursuant to the terms of the 2010 Plan. The closing price on the date of the grants issued on December 19, 2012 was $16.65.

For the six months ended June 30, 2014 and 2013, the Company recognized $148,139 in compensation expense attributable to restricted shares that have been awarded. At June 30, 2014, the total remaining compensation cost to be recognized on non-vested restricted stock is approximately $795,930.

 

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ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 6. Stock Options, ESOP, and Restricted Shares (Continued)

 

2010 Equity Incentive Plan (Continued)

 

A summary of activity for unvested restricted awards for the six months ended June 30, 2014 is as follows:

 

     Number     Grant Date Weighted-
Average Cost
 

Unvested at December 31, 2013

     69,987      $ 13.49   

Shares awarded

     —          —     

Restrictions lapsed and shares released

     (18,885     12.75   

Shares forfeited

     —          —     
  

 

 

   

 

 

 

Unvested at June 30, 2014

     51,102      $ 13.76   
  

 

 

   

 

 

 

Employee Stock Ownership Plan (ESOP)

The Bank sponsors a leveraged ESOP that covers substantially all employees who meet certain age and eligibility requirements. As part of the Company’s initial public offering, the ESOP purchased 222,180 shares, or approximately 8% of the 2,777,250 shares issued, with the proceeds of a 15 year loan from the Company which is payable in annual installments and bears interest at 3.25% per annum.

The Bank has committed to make contributions to the ESOP sufficient to support the debt service of the loan. The loan is secured by the unallocated shares, which are held in a suspense account, and are allocated among the participants as the loan is repaid. Cash dividends paid on allocated shares are distributed to the participant and cash dividends paid on unallocated shares are used to repay the outstanding debt of the ESOP.

ESOP shares are held by the plan trustee in a suspense account until allocated to participant accounts. Shares released from the suspense account are allocated to participants on the basis of their relative compensation in the year of allocation. Participants become vested in the allocated shares upon four years of employment with the Bank. Any forfeited shares are allocated to other participants in the same proportion as contributions.

As ESOP shares are allocated to participants, the Bank recognizes compensation expense equal to the fair value of the earned ESOP shares. No compensation expense has been recorded for the six months ended June 30, 2014 or 2013.

 

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ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 6. Stock Options, ESOP, and Restricted Shares (Continued)

 

Employee Stock Ownership Plan (ESOP) (Continued)

 

A detail of ESOP shares is as follows:

 

     June 30, 2014      December 31, 2013  

Allocated shares

     59,248         59,248   

Unallocated shares

     162,932         162,932   
  

 

 

    

 

 

 

Total ESOP shares

     222,180         222,180   
  

 

 

    

 

 

 

Fair value of unallocated shares

   $ 3,607,314       $ 3,229,312   
  

 

 

    

 

 

 

 

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

Safe Harbor Statement for Forward-Looking Statements

This report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts; rather they are statements based on the Company’s current expectations regarding its business strategies and their intended results and its future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.

Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause or contribute to the Company’s actual results, performance and achievements being materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include, without limitation, general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government; legislative and regulatory changes; the quality and composition of the loan and investment securities portfolio; loan demand; deposit flows; competition; and changes in accounting principles and guidelines. Additional factors that may affect our results are discussed in our Annual Report on Form 10-K for the year ended December 31, 2013 under “Item 1A. Risk Factors.” These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company assumes no obligation and disclaims any obligation to update any forward-looking statements.

Critical Accounting Policies

During the six-month period ended June 30, 2014, there was no significant change in the Company’s critical accounting policies or the application of critical accounting policies as disclosed in the Company’s audited consolidated financial statements and related footnotes for the year ended December 31, 2013 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Comparison of Financial Condition at June 30, 2014 and December 31, 2013

Assets. Total assets increased from $294.8 million at December 31, 2013 to $299.1 million at June 30, 2014.

Cash and Cash Equivalents. Total cash and cash equivalents increased $1.2 million, or 7.8%, from $15.1 million at December 31, 2013 to $16.3 million at June 30, 2014. This increase is due primarily to a $4.7 million increase in deposits and a $2.5 million decrease in securities and investments at cost and $444,000 proceeds from sale of foreclosed real estate, partially offset by reductions in cash as a result of a $4.6 million increase in gross loans and repurchases of Company common stock in the amount of $1.9 million. Other changes resulted in cash inflow of approximately $56,000.

Securities. Securities decreased $2.1 million, or 6.7%, from $31.6 million at December 31, 2013 to $29.5 million at June 30, 2014, primarily as a result of calls and principal repayments of agency, mortgage-backed and municipal securities of $3.1 million, $1.3 million and $55,000, respectively along with the sale of $399,000 of municipal securities. These items were partially offset by purchases of $1.4 million in municipal securities and $1.0 million in mortgage-backed securities. The remaining change in securities was due primarily to amortization and mark-to-market adjustments.

Loans. Net loans receivable increased $5.1 million, or 2.3%, from $226.2 million at December 31, 2013 to $231.3 million at June 30, 2014, primarily as a result of $2.0 million, $4.9 million, and $292,000 increases in commercial loans, commercial real estate and multifamily loans, and 1-4 family residential real estate, respectively. These increases were partially offset by decreases in construction and land loans and consumer and equity lines of credit of $2.1 million and $446,000, respectively. The increase in commercial real estate and multifamily loans was due primarily to the conversion of a $4.1 million hotel construction loan to permanent financing, partially offset by advances of other commercial construction lines for a hotel and a retail development.

Deposits. Total deposits increased $4.7 million, or 1.9%, from $248.2 million at December 31, 2013 to $252.9 million at June 30, 2014. The primary reason for the increase in deposits was a $9.4 million increase in

 

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demand and NOW accounts, primarily due to an increase in non-personal demand and NOW accounts relating to three public entities and several small businesses and an overall increase in the number of accounts. The remaining change in deposits was attributable to a $2.2 million increase in savings deposit accounts and decreases in money market accounts and certificates of deposit of $2.6 million and $4.3 million, respectively.

Borrowings. As of June 30, 2014 and December 31, 2013, no Federal Home Loan Bank or other borrowings were outstanding.

Stockholders’ Equity. Stockholders’ equity decreased $255,000, or 0.6%, from $41.1 million at December 31, 2013 to $41.0 million at June 30, 2014. The primary reasons for the decrease include $1.9 million in repurchased and retired common stock and $169,000 in dividends declared and paid on outstanding shares (other than unallocated ESOP shares). These decreases were partially offset by net income for the first six months of 2014 of $1.3 million, an unrealized gain on securities available for sale (net of taxes) of $264,000 and a $175,000 increase in additional paid-in capital related to stock compensation expense for the period.

Results of Operations for the Three Months Ended June 30, 2014 and 2013

Overview. The Company reported net income of $670,000, or $0.41 basic earnings per share, for the three-month period ended June 30, 2014, compared to net income of $650,000, or $0.33 basic earnings per share, for the same period in 2013.

Net Interest Income. Net interest income after provision for loan losses increased $183,000, or 6.6%, to $3.0 million for the three months ended June 30, 2014 compared to the same period in 2013.

Total interest income increased $53,000, or 1.6%, from $3.4 million for the three months ended June 30, 2013 to $3.4 million for the three months ended June 30, 2014. The increase was primarily the result of a $34,000 increase in interest on loans as well as increases in dividends and securities and interest bearing deposits in other banks of $16,000 and $3,000, respectively. The increase in interest on loans was due primarily to the combined effect of larger outstanding balances and slightly higher interest rates. Dividends increased primarily due to dividends being received on the investment in Tenth Street Fund during the 2014 period.

Total interest expense decreased $85,000, or 15.7%, from $540,000 for the three months ended June 30, 2013 to $455,000 for the three months ended June 30, 2014. The decrease was primarily a result of a $53,000 decrease in interest on deposits as well as a $32,000 decrease in interest on Federal Home Loan Bank advances. The primary reason for the decrease in interest on deposits was a reduction in market interest rates. The decrease in interest on Federal Home Loan Bank advances was due to the payoff of maturing advances.

Provision for Loan Losses. The provision for loan losses was $27,000 for the three months ended June 30, 2014 compared to $72,000 for the same period in 2013.

Non-performing loans decreased $1.6 million from $4.2 million at March 31, 2014 to $2.6 million at June 30, 2014. Non-performing residential mortgage loans, commercial real estate and multifamily loans, construction and land loans and commercial loans decreased $195,000, $242,000, $1.1 million and $47,000, respectively, while nonperforming consumer loans increased $5,000. The decrease in construction and land loans was primarily due to the foreclosure and transfer to other real estate owned of a $1.1 million participation interest in a commercial development secured by land in Sevierville, Tennessee. The balance of non-performing loans at June 30, 2014 includes nonaccrual loans of $2.5 million. Residential mortgage loans of $53,000 were over 90 days past due but still accruing interest at June 30, 2014. The balance of nonaccrual loans at June 30, 2014 consists of $2.1 million in residential mortgage loans, $226,000 in construction and land loans, $90,000 in commercial real estate and multifamily and $124,000 in consumer loans.

Net charge-offs were $464,000 for the three months ended June 30, 2014 compared to $105,000 for the same period in 2013. Charge-offs totaling $485,000 were recorded during the quarter ended June 30, 2014 in connection with residential mortgage loans ($8,000), commercial real estate ($239,000), construction and land ($175,000) and consumer loans ($63,000).

 

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The allowance for loan losses was $4.0 million at June 30, 2014. Management has deemed this amount as adequate at that date based on its best estimate of probable known and inherent loan losses at that date.

Non-interest Income. Non-interest income decreased $102,000, or 7.4%, to $1.3 million for the three months ended June 30, 2014 compared to the same period in 2013, primarily due to decreases in fees related to the origination, sale and servicing of mortgage loans on the secondary market, a reduction of investment sales commissions, a reduction in income from Valley Title Services, LLC and a reduction in deposit related fees of $118,000, 14,000, 11,000 and $8,000, respectively. These decreases were partially offset by a $50,000 gain on sale of foreclosed property.

The decrease in fees related to the origination, sale and servicing of mortgage loans on the secondary market is primarily due to decreased volume of these loans during the three months ended June 30, 2014 as compared to the same period in 2013. The decreased volume is primarily a result of an increase in market rates period over period. The reduction in income from Valley Title Services, LLC is primarily due to a decrease in mortgage volumes period over period. Income from investment sales commissions decreased primarily due to decreased sales of investment products. Income from other deposit related fees decreased primarily due to continuing reductions in non-sufficient funds related fees partially offset by restructuring of deposit account fees.

Non-interest Expense. Non-interest expense decreased $7,000, or 0.2%, to $3.2 million for the three months ended June 30, 2014 compared to the same period in 2013. The primary factors effecting the change was a decrease in data processing expense of $48,000, partially offset by increases in advertising and other operating expense, salary and employee benefits expense and FDIC premiums of $27,000, $9,000 and $5,000, respectively.

The decreases in data processing expenses were the result of certain one-time costs from the Bank’s conversion to a new core processing system incurred in 2013, which were not repeated in 2014. The primary reason for the increase in advertising and other operating expense was increased marketing efforts and increase in charges related to debit cards due to an increase in the number of cards issued. Salary and benefits expenses increased primarily because of cost of living adjustments.

Income Tax Expense. The Company had income tax expense of $367,000 for the three month period ended June 30, 2014 as compared to $298,000 for the same period in 2013. The increase in income tax expense was due primarily to the increase in taxable income period over period.

Total Comprehensive Income. Total comprehensive income for the periods presented consists of net income and the change in unrealized gains (losses) on securities available for sale, net of tax. Total comprehensive income was $784,000 for the three month period ended June 30, 2014 compared to total comprehensive income of $364,000 for the three month period ended June 30, 2013. The increase was primarily a result of a positive change of $400,000 in unrealized gains and losses on securities available for sale, net of tax and an increase in net income period over period of $19,000.

Results of Operations for the Six Months Ended June 30, 2014 and 2013

Overview. The Company reported net income of $1.3 million, or $0.79 basic earnings per share, for the six-month period ended June 30, 2014, compared to net income of $1.2 million, or $0.59 basic earnings per share, for the same period in 2013.

Net Interest Income. Net interest income after provision for loan losses increased $290,000, or 5.2%, to $5.9 million for the six months ended June 30, 2014 compared to the same period in 2013.

Total interest income decreased $42,000, or 0.6%, from $6.9 million for the six months ended June 30, 2013 to $6.9 million for the six months ended June 30, 2014. The decrease was primarily the result of a $58,000 decrease in interest on loans partially offset by increases of $14,000 and $2,000, respectively, of dividends and interest on securities and interest bearing deposits in other banks. The decrease in interest on loans was due primarily to a decrease in market interest rates. The increase in dividends was primarily due to dividends received on the Bank’s limited partnership investment in Tenth Street Fund.

 

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Total interest expense decreased $178,000, or 16.1%, from $1.1 million for the six months ended June 30, 2013 to $929,000 for the six months ended June 30, 2014. The decrease was primarily a result of a $114,000 decrease in interest on deposits as well as a $64,000 decrease in interest on Federal Home Loan Bank advances. The primary reason for the decrease in interest on deposits was a reduction in market interest rates. The decrease in interest on Federal Home Loan Bank advances was due to the payoff of maturing advances.

Provision for Loan Losses. The provision for loan losses was $53,000 for the six months ended June 30, 2014 compared to $208,000 for the same period in 2013.

Non-performing loans decreased $1.4 million from $4.1 million at December 31, 2013 to $2.7 million at June 30, 2014. Non-performing residential mortgage loans, commercial real estate and multifamily loans, construction and land loans and commercial loans decreased $312,000, $6,000, $1.2 million and $47,000, respectively, while nonperforming consumer loans increased $54,000. The decrease in construction and land loans was primarily due to the foreclosure and transfer to other real estate owned of a $1.1 million participation interest in a commercial development secured by land in Sevierville, Tennessee. The balance of non-performing loans at June 30, 2014 includes nonaccrual loans of $2.5 million. Residential mortgage loans of $53,000 were over 90 days past due but still accruing interest at June 30, 2014. The balance of nonaccrual loans at June 30, 2014 consists of $2.1 million in residential mortgage loans, $226,000 in construction and land loans, $90,000 in commercial real estate and multifamily and $124,000 in consumer loans.

Net charge-offs were $532,000 for the six months ended June 30, 2014 compared to $68,000 for the same period in 2013. Charge-offs totaling $568,000 were recorded during the six months ended June 30, 2014 in connection with residential mortgage loans ($35,000), commercial real estate and multifamily loans ($239,000), construction and land loans ($175,000), and consumer loans ($119,000).

The allowance for loan losses was $4.0 million at June 30, 2014. Management has deemed this amount as adequate at that date based on its best estimate of probable known and inherent loan losses at that date.

Non-interest Income. Non-interest income decreased $120,000, or 4.6%, to $2.5 million for the six months ended June 30, 2014 compared to $2.6 million for the same period in 2013, primarily due to decreases in fees related to the origination, sale and servicing of mortgage loans on the secondary market and income from Valley Title Services, LLC of $200,000 and $29,000, respectively. These decreases were partially offset by increases income related to investment sales commissions, a gain on sale of foreclosed real estate and other repossessed assets and an increase of fees on deposit accounts of $42,000, $54,000 and $18,000, respectively. All other non-interest income decreased $5,000, net.

The decrease in fees related to the origination, sale and servicing of mortgage loans on the secondary market is primarily due to decreased volume of these loans during the six months ended June 30, 2014 as compared to the same period in 2013. The decreased volume is primarily a result of an increase in market rates period over period. The reduction in income from Valley Title Services, LLC is primarily due to a decrease in mortgage volumes period over period. The increase in income related to investment sales commission was primarily due to increased sales of investment products during the first three months of 2014 as a result of a partial recovery of investment markets and customers seeking higher yielding investment alternatives in the continued low rate environment. The gain on sale of foreclosed real estate and other repossessed assets was primarily the result of gain on sale of real estate in Reliance, TN. The increase in deposit related fees was primarily the result of increased debit card related fees and the restructuring of deposit account fee structures, partially offset by a reduction in non-sufficient funds charges.

Non-interest Expense. Non-interest expense decreased $81,000, or 1.3%, to $6.3 million for the six months ended June 30, 2014 compared to $6.4 million for the same period in 2013. The primary factors effecting the change were decreases in expenses related to data processing and advertising and other operating expenses of $100,000 and $46,000, respectively. These decreases were partially offset by increases in occupancy and equipment expense and salary and employee benefits expense of $41,000 and $20,000, respectively. The remaining $4,000 increase in non-interest expense was due to an increase in federal deposit insurance premiums.

 

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The decreases in data processing and other operating expenses were the result of certain one-time costs from the Bank’s conversion to a new core processing system incurred in 2013, which were not repeated in 2014. The primary reason for the increase in occupancy and equipment expense was additional depreciation expense on computer hardware and software due to purchases. Salary and benefits expenses increased primarily because of cost of living adjustments.

Income Tax Expense. The Company had an income tax expense of $703,000 for the six month period ended June 30, 2014 as compared to $576,000 for the same period in 2013. The increase in income tax expense was due primarily to the increase in taxable income period over period.

Total Comprehensive Income. Total comprehensive income for the periods presented consists of net income and the change in unrealized gains (losses) on securities available for sale, net of tax. Total comprehensive income was $1.6 million for the six-month period ended June 30, 2014 compared to total comprehensive income of $868,000 for the six-month period ended June 30, 2013. The increase was primarily a result of a change of $602,000 in unrealized gains and losses on securities available for sale, net of tax and an increase in net income period over period of $123,000.

Liquidity and Capital Resources

Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-term nature. The Bank’s primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of investment securities and borrowings from the Federal Home Loan Bank of Cincinnati. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.

The Bank regularly adjusts its investments in liquid assets based upon an assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and securities and (iv) the objectives of its asset/liability management policy.

The Bank’s most liquid assets are cash and cash equivalents and interest-bearing deposits. The level of these assets depends on the Bank’s operating, financing, lending and investing activities during any given period. At June 30, 2014, cash and cash equivalents totaled $16.3 million. At June 30, 2014, securities classified as available-for-sale, which amounted to $29.5 million, provide an additional source of liquidity. In addition, at June 30, 2014, the Bank had the ability to borrow a total of approximately $44.6 million from the Federal Home Loan Bank of Cincinnati. At June 30, 2014, the Bank had $11.8 million in letters of credit with the Federal Home Loan Bank to secure public funds deposits.

The Bank must maintain an adequate level of liquidity to ensure the availability of sufficient funds to support loan growth and deposit withdrawals, to satisfy financial commitments and to take advantage of investment opportunities. Historically, the Bank has been able to retain a significant amount of its deposits as they mature.

The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company, on a stand-alone basis, is responsible for paying any dividends declared to its shareholders. The Company also seeks liquidity to fund any repurchases of its common stock. The Company’s primary source of income is dividends received from the Bank. The amount of dividends that the Bank may declare and pay to the Company in any calendar year, without the receipt of prior approval from the Office of the Comptroller of the Currency but with prior notice to the Federal Reserve Board, cannot exceed net income for that year to date plus retained net income (as defined) for the preceding two calendar years. On a stand-alone basis, the Company had liquid assets of $5.1 million at June 30, 2014.

Capital Management. The Bank is required to maintain specific amounts of capital pursuant to federal regulatory requirements. As of June 30, 2014, the Bank was in compliance with all regulatory capital requirements, which were effective as of such date, with tangible, core, tier 1 risk-based capital, and total risk-based capital ratios of 11.2%, 11.2 %, 15.7%, and 16.9%, respectively. The regulatory requirements at that date were 1.5%, 4.0%, 4.0%, and 8.0%, respectively. At June 30, 2014, the Bank was considered “well-capitalized” under applicable regulatory guidelines.

 

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Dividends. The Board of Directors of the Company declared and paid dividends on the Company’s common stock of $169,000 during the six months ended June 30, 2014. The dividend payout ratio for the first six months of 2014, representing dividends per share divided by diluted earnings per share, was 13.3%. The dividend payout is continually reviewed by management and the Board of Directors.

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, unused lines of credit and letters of credit.

For the six months ended June 30, 2014, the Company did not engage in any off-balance sheet transactions reasonably likely to have a material effect on the Company’s financial condition, results of operations or cash flows.

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Qualitative Aspects of Market Risk

We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits. To reduce the potential volatility of our earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Our strategy for managing interest rate risk emphasizes: adjusting the maturities of borrowings; adjusting the investment portfolio mix and duration and generally selling in the secondary market substantially all newly originated fixed rate one-to-four-family residential real estate loans. We currently do not participate in hedging programs, interest rate swaps or other activities involving the use of derivative financial instruments.

We have an Asset/Liability Management Committee (“ALCO”), which includes members of management selected by the board of directors, to communicate, coordinate and control all aspects involving asset/liability management. The committee establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.

Our goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest margin and net interest income. Measurements which we use to help us manage interest rate sensitivity include earnings at risk simulation model and economic value of equity model.

Rate sensitivity/Earnings at Risk – The goal is to achieve a strong acceptable and consistent level of earnings over time. The ALCO has established risk tolerances for changes in net interest income from a base case of no change in interest rates to simulate changes in net interest income from rate shocks over a one-year period.

The established risk limits for changes both up and down in rates from the base case, limits in the decline in net interest income are for a 400bp change should not result in a decrease of more than 20%, a 300bp change should not result in a decrease of more than 15%, a 200bp change should not result in a decrease of more than 10% and a 100bp change should not result in a decrease of more than 5%.

Economic Value of Equity (“EVE”) identifies changes in the market value of capital based on exposure to interest rate risk resulting from a change in market value of the bank’s assets and liabilities due to changes in interest rates. The change in value is prepared by discounting the projected cash flows of all balance sheet categories.

The EVE is the difference between the present values of assets and liabilities. The measured change of this economic value, over a range of rate shocks indicates the degree of possible long-term exposure to future earnings. The bank’s EVE risk tolerance limits are that for a 400bp change in interest rates up or down, the EVE should not decrease by more than 25% from the base case; for a 300bp change in interest rates up or down, the EVE should not decrease by more than 20%; for a 200pb change in interest rates up or down the EVE should not decrease by more than 15%; and for a 100bp change in interest rates up or down the EVE should not decrease by more than 10%.

 

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Our model results indicated that we were in compliance with the policies noted above and that our balance sheet is slightly liability-sensitive. Liability-sensitive implies that our liabilities will reprice faster than our assets indicating an increase in interest rates would decrease our net interest margin. We continue to seek opportunities to decrease our cost of funding by reducing the level of funding provided by certificates of deposit and reducing rates as current certificates mature.

Each of the above analyses may not, on its own, be an accurate indicator of how our net interest income will be affected by changes in interest rates. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates and the market values of certain assets under differing interest rate scenarios, among others. As with any method of measuring interest rate risk, certain shortcomings are inherent in the methods of analysis presented in the foregoing tables. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, if there is a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed. Prepayment rates can have a significant impact on interest income. Because of the large percentage of loans and mortgage-backed securities we hold, rising or falling interest rates have a significant impact on the prepayment speeds of our earning assets that in turn affect the rate sensitivity position. When interest rates rise, prepayments tend to slow. When interest rates fall, prepayments tend to rise. Our liability sensitivity would be increased if prepayments slow and vice versa. While we believe these assumptions to be reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security and loan repayment activity.

 

Item 4. Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. The Bank’s management believes that such routine legal proceedings, in the aggregate, are immaterial to the Bank’s financial condition and results of operations.

 

Item 1A. Risk Factors

For information regarding the Company’s risk factors, see “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission on March 14, 2014. As of June 30, 2014, the risk factors of the Company have not changed materially from those disclosed in the Form 10-K.

 

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

Since the Company completed its initial public offering in January 2010, the Company’s board of directors has authorized seven stock repurchase programs for an aggregate of 1,032,207 shares. All of the repurchase programs have been publicly announced. As of June 30, 2014, the Company had repurchased an aggregate of 977,951 shares under these programs.

Under each repurchase programs, repurchases were or will be conducted through open market purchases, which may include purchases under a trading plan adopted pursuant to SEC Rule 10b5-1, or through privately negotiated transactions. Repurchases will be made from time to time, depending on market conditions and other factors. There is no guarantee as to the exact number of shares to be repurchased by the Company.

The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the first quarter of 2014.

 

Period

   Total Number of
Shares
Purchased
     Average Price
Paid Per Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
     Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs
 

April 1 through April 30, 2014

     —         $ —           —           74,810   

May 1 through May 31, 2014

     —           —           —           74,810   

June 1 through June 30, 2014

     7,726         21.53         7,726         67,084   
  

 

 

       

 

 

    

Total

     7,726       $ 21.53         7,726         67,084   
  

 

 

       

 

 

    

 

Item 3. Defaults Upon Senior Securities

Not applicable.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information.

Not applicable.

 

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Item 6. Exhibits

 

No.

  

Description

    3.1    Amended and Restated Charter of Athens Bancshares Corporation (1)
    3.2    Amended and Restated Bylaws of Athens Bancshares Corporation (2)
    4.1    Specimen Stock Certificate of Athens Bancshares Corporation (3)
  10.1    Employment Agreement between Athens Federal Community Bank and Jeffrey L. Cunningham* (4)
  10.2    Employment Agreement between Athens Federal Community Bank and Michael R. Hutsell* (4)
  10.3    Employment Agreement between Athens Federal Community Bank and Jay Leggett, Jr*(5)
  10.4    Employment Agreement between Athens Bancshares Corporation and Jeffrey L. Cunningham* (4)
  10.5    Employment Agreement between Athens Bancshares Corporation and Michael R. Hutsell* (4)
  10.6    Supplemental Executive Retirement Plan Agreement between Athens Federal Community Bank and Jeffrey L. Cunningham* (4)
  10.7    Supplemental Executive Retirement Plan Agreement between Athens Federal Community Bank and Michael R. Hutsell*(5)
  10.8    Supplemental Executive Retirement Plan Agreement between Athens Federal Community Bank and Jay Leggett, Jr*(5)
  10.9    Athens Bancshares Corporation 2010 Equity Incentive Plan (6)
  31.1    Rule 13a-14(a)/15d-14(a) Certificate of Chief Executive Officer
  31.2    Rule 13a-14(a)/15d-14(a) Certificate of Chief Financial Officer
  32.0    Section 1350 Certificate of Chief Executive Officer and Chief Financial Officer
101.0    The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Statements of Income, (iv) the Consolidated Statement of Changes in Stockholders’ Equity (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.

 

* Management contract or compensatory plan, contract or arrangement
(1) Incorporated herein by reference to the exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 10, 2009.
(2) Incorporated herein by reference to the exhibit to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 23, 2009.
(3) Incorporated herein by reference to the exhibits to the Company’s Registration Statement on Form S-1 (File No. 333-144454), as amended, initially filed with the Securities and Exchange Commission on September 17, 2009.
(4) Incorporated herein by reference to the exhibits to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 6, 2010.
(5) Incorporated herein by reference to the exhibits of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 27, 2010.
(6) Incorporated herein by reference to the Company’s Definitive Proxy Statement filed with the Securities and Exchange Commission on June 7, 2010.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

      ATHENS BANCSHARES CORPORATION
Dated: August 8, 2014     By:  

/s/ Jeffrey L. Cunningham

      Jeffrey L. Cunningham
      President and Chief Executive Officer
      (principal executive officer)
Dated: August 8, 2014     By:  

/s/ Michael R. Hutsell

      Michael R. Hutsell
      Treasurer and Chief Financial Officer
      (principal accounting and financial officer)

 

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