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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 September 30, 2015

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 November 2, 2015, the number of shares of common stock outstanding was 1,806,275.

 

 

 


Table of Contents

ATHENS BANCSHARES CORPORATION

Table of Contents

 

         Page
No.
 

Part I. Financial Information

  

Item 1.

 

Financial Statements

  
 

Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014

     1   
 

Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)

     2   
 

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)

     3   
 

Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2015 (unaudited)

     4   
 

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 (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

     35   

Item 1A.

 

Risk Factors

     35   

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

 

     September 30,
2015
    December 31,
2014
 
     (Unaudited)        

ASSETS

    

Cash and due from banks

   $ 6,549,900      $ 9,909,563   

Interest-bearing deposits in banks

     1,015,978        2,015,978   
  

 

 

   

 

 

 

Total cash and cash equivalents

     7,565,878        11,925,541   

Securities available for sale

     26,665,871        28,771,754   

Investments, at cost

     3,855,350        3,449,000   

Loans, net of allowance for loan losses of $3,886,738 and $3,914,848 at September 30, 2015 and December 31, 2014, respectively

     256,535,822        238,558,389   

Premises and equipment, net

     4,155,843        4,024,176   

Accrued interest receivable

     958,074        1,007,115   

Cash surrender value of bank owned life insurance

     10,297,994        10,096,191   

Foreclosed real estate

     1,654,980        1,942,844   

Other assets

     2,710,255        2,629,334   
  

 

 

   

 

 

 

Total assets

   $ 314,400,067      $ 302,404,344   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

LIABILITIES

    

Deposits:

    

Noninterest-bearing

   $ 27,034,262      $ 23,978,164   

Interest-bearing

     225,670,264        224,594,067   
  

 

 

   

 

 

 

Total deposits

     252,704,526        248,572,231   

Accrued interest payable

     104,417        132,397   

Securities sold under agreements to repurchase

     1,282,668        1,512,993   

Federal Home Loan Bank advances

     11,500,000        5,000,000   

Accrued expenses and other liabilities

     4,082,794        4,506,841   
  

 

 

   

 

 

 

Total liabilities

     269,674,405        259,724,462   
  

 

 

   

 

 

 

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 1,806,275 outstanding at September 30, 2015 and 1,801,701 outstanding at December 31, 2014

     18,063        18,017   

Additional paid-in capital

     17,984,653        17,956,982   

Common stock acquired by benefit plans:

    

Restricted stock

     (157,617     (354,313

Unallocated common stock held by:

    

Employee Stock Ownership Plan Trust

     (1,481,200     (1,481,200

Retained earnings

     28,027,677        26,202,795   

Accumulated other comprehensive income

     334,086        337,601   
  

 

 

   

 

 

 

Total stockholders’ equity

     44,725,662        42,679,882   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 314,400,067      $ 302,404,344   
  

 

 

   

 

 

 

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
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  

Interest and dividend income:

        

Loans, including fees

   $ 3,329,161       $ 3,224,048       $ 9,791,705       $ 9,626,449   

Dividends

     38,023         44,083         170,182         138,191   

Securities and interest-bearing deposits in other banks

     165,019         181,194         514,332         543,721   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest income

     3,532,203         3,449,325         10,476,219         10,308,361   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

        

Deposits

     304,909         430,235         1,078,449         1,359,319   

Fed funds purchased and securities sold under agreements to repurchase

     292         283         826         797   

Federal Home Loan Bank advances

     2,452         276         6,176         276   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     307,653         430,794         1,085,451         1,360,392   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     3,224,550         3,018,531         9,390,768         8,947,969   

Provision for loan losses

     48,406         31,985         250,219         85,147   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     3,176,144         2,986,546         9,140,549         8,862,822   
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income:

        

Customer service fees

     536,470         545,509         1,571,388         1,553,094   

Other charges and fees

     525,202         457,235         1,448,211         1,224,991   

Investment sales commissions

     136,293         132,036         416,207         442,430   

Increase in cash surrender value of life insurance

     85,184         87,269         253,636         260,283   

Other noninterest income

     178,384         165,144         487,184         408,867   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     1,461,533         1,387,193         4,176,626         3,889,665   
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expenses:

        

Salaries and employee benefits

     1,866,172         1,784,930         5,637,843         5,358,682   

Occupancy and equipment

     371,337         402,069         1,118,617         1,194,000   

Federal deposit insurance premiums

     45,000         47,000         140,000         138,000   

Data processing

     292,082         266,156         838,795         760,929   

Advertising

     69,570         59,074         191,046         154,544   

Other operating expenses

     720,092         697,043         2,111,584         1,995,672   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expenses

     3,364,253         3,256,272         10,037,885         9,601,827   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     1,273,424         1,117,467         3,279,290         3,150,660   

Income tax expense

     430,015         367,483         1,094,678         1,070,745   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 843,409       $ 749,984       $ 2,184,612       $ 2,079,915   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share

        

Basic

   $ 0.51       $ 0.46       $ 1.32       $ 1.25   

Diluted

   $ 0.47       $ 0.43       $ 1.23       $ 1.17   

Dividends per common share

   $ 0.05       $ 0.05       $ 0.15       $ 0.15   

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
September 30,
    Nine Months Ended
September 30,
 
     2015     2014     2015     2014  

Net income

   $ 843,409      $ 749,984      $ 2,184,612      $ 2,079,915   

Other comprehensive income (loss), before tax:

    

Unrealized holding gains (losses) on securities available for sale

     158,420        66,857        (5,669     492,492   

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

     (60,200     (25,406     2,154        (187,147
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     98,220        41,451        (3,515     305,345   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 941,629      $ 791,435      $ 2,181,097      $ 2,385,260   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

Nine Months Ended September 30, 2015

(Unaudited)

 

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

Balance, December 31, 2014

     1,801,701      $ 18,017      $ 17,956,982      $ 26,202,795      $ (1,835,513   $ 337,601      $ 42,679,882   

Net income

       —          —          2,184,612        —          —          2,184,612   

Other comprehensive loss

       —          —          —          —          (3,515     (3,515

Dividends – $0.15 per share

       —          —          (247,880     —          —          (247,880

Release of restricted stock plan shares

       —          (196,696     —          196,696        —          —     

Stock compensation expense

       —          294,128        —          —          —          294,128   

Repurchase and retirement of Company common stock

     (7,300     (73     (69,642     (111,850     —          —          (181,565

Issuance of Company common stock

     11,874        119        (119     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2015

     1,806,275      $ 18,063      $ 17,984,653      $ 28,027,677      $ (1,638,817   $ 334,086      $ 44,725,662   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

     Nine Months Ended  
     September 30,
2015
    September 30,
2014
 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 2,184,612      $ 2,079,915   

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

    

Depreciation

     397,761        470,079   

Amortization of securities and other assets

     165,084        204,039   

Provision for loan losses

     250,219        85,147   

Deferred income taxes

     (176,198     106,388   

Other gains and losses, net

     (13,012     (39,918

Stock compensation expense

     294,128        262,821   

Net change in:

    

Cash surrender value of life insurance, net

     (201,803     (211,820

Accrued interest receivable

     49,041        16,973   

Accrued interest payable

     (27,980     (16,587

Other assets and liabilities

     (541,866     (402,391
  

 

 

   

 

 

 

Net cash provided by operating activities

     2,379,986        2,554,646   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Securities available for sale:

    

Purchases

     —          (2,896,702

Maturities, prepayments and calls

     1,990,130        5,150,224   

Sales

     —          398,763   

Proceeds from redemption of FHLB stock

     —          199,800   

Purchase of Federal Reserve Bank stock

     (406,350     —     

Loan originations and principal collections, net

     (18,418,997     (15,741,002

Purchases of premises and equipment

     (529,942     (82,494

Proceeds from sale of foreclosed real estate

     652,985        209,251   
  

 

 

   

 

 

 

Net cash used in investing activities

     (16,712,174     (12,762,160
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net increase (decrease) in deposits

     4,132,295        (1,284,853

Net decrease in securities sold under agreements to repurchase

     (230,325     (146,315

Net increase in FHLB advances

     6,500,000        7,500,000   

Repurchase and retirement of Company common stock

     (181,565     (1,963,811

Issuance of Company common stock

     —          82,121   

Dividends paid

     (247,880     (250,400
  

 

 

   

 

 

 

Net cash provided by financing activities

     9,972,525        3,936,742   
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (4,359,663     (6,270,772

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     11,925,541        15,135,387   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 7,565,878      $ 8,864,615   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

    

Interest paid on deposits and borrowed funds

   $ 1,113,431      $ 1,376,979   

Income taxes paid

     1,466,285        987,136   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:

    

Acquisition of real estate acquired through foreclosure

   $ 885,640      $ 1,272,086   

Financed sales of foreclosed real estate

   $ 479,756      $ 419,000   
  

 

 

   

 

 

 

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 nine months ended September 30, 2015, are not necessarily indicative of the results that may be expected for the full year or for any other period. For further information, refer to the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

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, National Association (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 all recently issued accounting pronouncements are not expected to 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 September 30, 2015 and 2014:

 

     Three Months Ended September 30,  
     2015      2014  

Basic earnings per share calculation:

     

Numerator: Net income

   $ 843,409       $ 749,984   
  

 

 

    

 

 

 

Denominator: Weighted average common shares outstanding

     1,660,030         1,638,797   

Effect of dilutive stock options

     124,919         116,772   
  

 

 

    

 

 

 

Diluted shares

     1,784,949         1,755,569   
  

 

 

    

 

 

 

Basic earnings per share

   $ 0.51       $ 0.46   
  

 

 

    

 

 

 

Diluted earnings per share

   $ 0.47       $ 0.43   
  

 

 

    

 

 

 

 

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 share (Continued)

 

The following is a summary of the basic and diluted earnings per share for the nine months ended September 30, 2015 and 2014:

 

     Nine Months Ended September 30,  
     2015      2014  

Basic earnings per share calculation:

     

Numerator: Net income

   $ 2,184,612       $ 2,079,915   
  

 

 

    

 

 

 

Denominator: Weighted average common shares outstanding

     1,653,712         1,663,191   

Effect of dilutive stock options

     126,581         108,856   
  

 

 

    

 

 

 

Diluted shares

   $ 1,780,293       $ 1,772,047   
  

 

 

    

 

 

 

Basic earnings per share

   $ 1.32       $ 1.25   
  

 

 

    

 

 

 

Diluted earnings per share

   $ 1.23       $ 1.17   
  

 

 

    

 

 

 

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 at September 30, 2015 and December 31, 2014 are as follows:

 

     September 30, 2015  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Securities of U.S. Government agencies and corporations

   $ 2,568,777       $ 21,531       $ (5,835    $ 2,584,473   

Mortgage-backed and related securities (1)

     10,841,447         222,478         (2,154      11,061,771   

State and municipal securities

     12,716,799         312,800         (9,972      13,019,627   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 26,127,023       $ 566,809       $ (17,961    $ 26,665,871   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

8


Table of Contents

ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 2. Securities (Continued)

 

     December 31, 2014  
     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

Securities of U.S. Government agencies and corporations

   $ 2,641,393       $ 9,564       $ (21,103    $ 2,629,854   

Mortgage-backed and related securities (1)

     12,835,109         204,492         (2,478      13,037,123   

State and municipal securities

     12,750,735         393,364         (39,322      13,104,777   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 28,227,237       $ 607,420       $ (62,903    $ 28,771,754   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

As of September 30, 2015 and December 31, 2014, the Company did not have any securities classified as held-to-maturity.

The amortized cost and estimated market value of securities at September 30, 2015, 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.

 

     September 30, 2015  
     Securities Available for Sale  
     Amortized
Cost
     Fair Value  

Due in one year or less

   $ 171,425       $ 172,489   

Due after one year through five years

     9,037,555         9,178,440   

Due five years to ten years

     4,918,172         5,081,931   

Due after ten years

     1,158,424         1,171,240   

Mortgage-backed securities

     10,841,447         11,061,771   
  

 

 

    

 

 

 

Total

   $ 26,127,023       $ 26,665,871   
  

 

 

    

 

 

 

The Company had no realized gains or losses for the nine month periods ended September 30, 2015 and 2014.

The Company has pledged securities with carrying values of approximately $2,011,000 and $19,554,000 to secure deposits of public and private funds as of September 30, 2015 and December 31, 2014, 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 September 30, 2015 and December 31, 2014, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:

 

     September 30, 2015  
     Less than 12 Months     12 Months or Greater     Total  
     Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
 
     (dollars in thousands)  

Securities of U.S. Government agencies and corporations

   $ —         $ —        $ 994       $ (6   $ 994       $ (6

State and municipal securities

     1,491         (2     918         (8     2,409         (10
Mortgage-backed and related securities      1,367         (2     —           —          1,367         (2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 2,858       $ (4   $ 1,912       $ (14   $ 4,770       $ (18
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

     December 31, 2014  
     Less than 12 Months     12 Months or Greater     Total  
     Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
 
     (dollars in thousands)  

Securities of U.S. Government agencies and corporations

   $ —         $ —        $ 979       $ (21   $ 979       $ (21

State and municipal securities

     —           —          2,354         (39     2,354         (39
Mortgage-backed and related securities      986         (2     793         (1     1,779         (3
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 986       $ (2   $ 4,126       $ (61   $ 5,112       $ (63
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

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 September 30, 2015, the 8 securities with unrealized losses had depreciated 0.38 percent from the Company’s amortized cost basis. At December 31, 2014, the 5 securities with unrealized losses had depreciated 1.22 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 attributable to 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 securities 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 September 30, 2015.

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 September 30, 2015 and December 31, 2014 consists of:

 

     September 30,
2015
     December 31,
2014
 

Federal Home Loan Bank of Cincinnati common stock

   $ 2,549,000       $ 2,549,000   

Federal Reserve Bank stock

     406,350         —     

Tenth Street Fund III, L.P. investment

     900,000         900,000   
  

 

 

    

 

 

 
   $ 3,855,350       $ 3,449,000   
  

 

 

    

 

 

 

 

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 September 30, 2015 and December 31, 2014:

 

     September 30,
2015
     December 31,
2014
 

Mortgage loans on real estate:

     

Residential 1-4 family

   $ 97,716,450       $ 89,126,412   

Commercial real estate and multi-family

     98,445,169         87,742,414   

Construction and land

     21,130,908         27,301,773   
  

 

 

    

 

 

 
     217,292,527         204,170,599   

Commercial loans

     15,834,782         14,363,545   

Consumer and other

     28,289,332         24,698,430   
  

 

 

    

 

 

 

Total loans

     261,416,641         243,232,574   

Less: Allowance for loan losses

     (3,886,738      (3,914,848

Unearned interest and fees

     (477,514      (363,622

Net deferred loan origination fees

     (516,567      (395,715
  

 

 

    

 

 

 

Loans, net

   $ 256,535,822       $ 238,558,389   
  

 

 

    

 

 

 

The following presents activity in the allowance for loan losses for the nine months ended September 30, 2015 and the year ended December 31, 2014:

 

     September 30,
2015
     December 31,
2014
 

Beginning balance

   $ 3,914,848       $ 4,432,069   

Provision for loan losses

     250,219         109,621   

Loans charged-off

     (347,280      (696,602

Recoveries

     68,951         69,760   
  

 

 

    

 

 

 

Ending balance

   $ 3,886,738       $ 3,914,848   
  

 

 

    

 

 

 

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.

 

12


Table of Contents

ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

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

 

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

 

     September 30, 2015  
     Commercial      Residential
1-4 Family
     Commercial
Real Estate and
Multi-Family
     Construction
and Land
     Consumer and
Other
     Unallocated      Total  

Specified reserves- impaired loans

   $ 20,095       $ 190,849       $ 91,489       $ 26,417       $ 59,945       $ —         $ 388,795   

General reserves

     301,537         886,862         1,224,171         550,481         534,891         1         3,497,943   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total reserves

   $ 321,632       $ 1,077,711       $ 1,315,660       $ 576,898       $ 594,836       $ 1       $ 3,886,738   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans

   $ 1,755,796       $ 2,551,840       $ 467,586       $ 272,584       $ 313,087       $ —         $ 5,360,893   

Performing loans

     14,078,986         95,164,610         97,977,583         20,858,324         27,976,245         —           256,055,748   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 15,834,782       $ 97,716,450       $ 98,445,169       $ 21,130,908       $ 28,289,332       $ —         $ 261,416,641   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2014  
     Commercial      Residential
1-4 Family
     Commercial
Real Estate and
Multi-Family
     Construction
and Land
     Consumer and
Other
     Unallocated      Total  

Specified reserves- impaired loans

   $ 42,724       $ 282,532       $ 94,743       $ 26,803       $ 57,293       $ —         $ 504,095   

General reserves

     270,163         828,557         1,139,953         597,247         443,284         131,549         3,410,753   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total reserves

   $ 312,887       $ 1,111,089       $ 1,234,696       $ 624,050       $ 500,577       $ 131,549       $ 3,914,848   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans

   $ 1,794,552       $ 3,648,878       $ 487,519       $ 657,859       $ 369,708       $ —         $ 6,958,516   

Performing loans

     12,568,993         85,477,534         87,254,895         26,643,914         24,328,722         —           236,274,058   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14,363,545       $ 89,126,412       $ 87,742,414       $ 27,301,773       $ 24,698,430       $ —         $ 243,232,574   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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, 2013 to September 30, 2015 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, 2013

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

Provision (reallocation) for loan losses

     (10,828     (291,330     364,436        (156,990     134,168        70,165        109,621   

Loans charged-off

     (8,223     (43,999     (238,698     (175,686     (229,996     —          (696,602

Recoveries

     —          3,912        —          —          65,848        —          69,760   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2014

     312,887        1,111,089        1,234,696        624,050        500,577        131,549        3,914,848   

Provision (reallocation) for loan losses

     8,745        2,605        81,201        116,983        172,233        (131,548     250,219   

Loans charged-off

     —          (53,809     (237     (164,135     (129,099     —          (347,280

Recoveries

     —          17,826        —          —          51,125        —          68,951   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2015

   $ 321,632      $ 1,077,711      $ 1,315,660      $ 576,898      $ 594,836      $ 1      $ 3,886,738   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following tables present loans individually evaluated for impairment by class of loans as of September 30, 2015 and December 31, 2014:

 

     September 30, 2015  
     Commercial      Residential
1-4 Family
     Commercial
Real Estate
and Multi-
Family
     Construction
and Land
     Consumer
and Other
     Total  

Impaired loans:

                 

Without a valuation allowance

   $ 23,320       $ 1,556,473       $ 215,656       $ 197,108       $ 54,206       $ 2,046,763   

With a valuation allowance

     1,732,476         995,367         251,930         75,476         258,881         3,314,130   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Recorded investment in impaired loans

   $ 1,755,796       $ 2,551,840       $ 467,586       $ 272,584       $ 313,087       $ 5,360,893   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal balance of impaired loans

   $ 1,795,644       $ 2,943,867       $ 476,586       $ 797,741       $ 313,087       $ 6,326,925   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Valuation allowance related to impaired loans

   $ 20,095       $ 190,849       $ 91,489       $ 26,417       $ 59,945       $ 388,795   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average investment in impaired loans

   $ 1,776,355       $ 2,721,750       $ 477,621       $ 299,149       $ 313,689       $ 5,588,564   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income recognized on impaired loans

   $ 68,290       $ 99,758       $ 19,592       $ 7,813       $ 5,792       $ 201,245   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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, 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

   $ 22,262       $ 2,734,578       $ 230,238       $ 581,279       $ 194,798       $ 3,763,155   

With a valuation allowance

     1,772,290         914,300         257,281         76,580         174,910         3,195,361   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Recorded investment in impaired loans

   $ 1,794,552       $ 3,648,878       $ 487,519       $ 657,859       $ 369,708       $ 6,958,516   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Unpaid principal balance of impaired loans

   $ 1,834,400       $ 4,040,905       $ 487,519       $ 1,183,016       $ 369,867       $ 7,915,707   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Valuation allowance related to impaired loans

   $ 42,724       $ 282,532       $ 94,743       $ 26,803       $ 57,293       $ 504,095   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average investment in impaired loans

   $ 1,836,670       $ 4,233,405       $ 504,017       $ 950,946       $ 388,824       $ 7,913,862   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Interest income recognized on impaired loans

   $ 95,095       $ 200,797       $ 27,397       $ 29,784       $ 15,076       $ 368,149   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     September 30, 2015  
     30-89 Days
Past Due
     90 Days or
more 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

   $ 138,429       $ 823,100       $ 961,529       $ 96,754,921       $ 97,716,450       $ —     

Commercial real estate and multifamily

     —           78,177         78,177         98,366,992         98,445,169         —     

Construction and land

     1,585,722         165,430         1,751,152         19,379,756         21,130,908         —     

Commercial

     19,459         9,306         28,765         15,806,017         15,834,782         —     

Consumer and other

     125,206         131,329         256,535         28,032,797         28,289,332         45,477   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,868,816       $ 1,207,342       $ 3,076,158       $ 258,340,483       $ 261,416,641       $ 45,477   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2014  
     30-89 Days
Past Due
     90 Days or
more 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

   $ 1,177,389       $ 1,368,461       $ 2,545,850       $ 86,580,562       $ 89,126,412       $ —     

Commercial real estate and multifamily

     —           86,228         86,228         87,656,186         87,742,414         —     

Construction and land

     33,790         525,591         559,381         26,742,392         27,301,773         —     

Commercial

     14,448         —           14,448         14,349,097         14,363,545         —     

Consumer and other

     98,598         202,722         301,320         24,397,110         24,698,430         12,335   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,324,225       $ 2,183,002       $ 3,507,227       $ 239,725,347       $ 243,232,574       $ 12,335   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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:

 

     September 30, 2015  
     Pass      Special
Mention
     Substandard      Doubtful      Loss      Total  

Residential 1-4 family

   $ 92,893,978       $ 2,270,632       $ 2,551,840       $ —         $ —         $ 97,716,450   

Commercial real estate and multifamily

     97,977,583         —           467,586         —           —           98,445,169   

Construction and land

     19,235,188         1,623,136         272,584         —           —           21,130,908   

Commercial

     14,069,758         9,228         1,755,796         —           —           15,834,782   

Consumer and other

     27,721,307         254,938         313,087         —           —           28,289,332   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 251,897,814       $ 4,157,934       $ 5,360,893       $ —         $ —         $ 261,416,641   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2014  
     Pass      Special
Mention
     Substandard      Doubtful      Loss      Total  

Residential 1-4 family

   $ 83,606,922       $ 1,870,612       $ 3,648,878       $ —         $ —         $ 89,126,412   

Commercial real estate and multifamily

     87,254,895         —           487,519         —           —           87,742,414   

Construction and land

     24,981,671         1,662,243         657,859         —           —           27,301,773   

Commercial

     12,555,528         13,465         1,794,552         —           —           14,363,545   

Consumer and other

     24,062,048         266,674         369,708         —           —           24,698,430   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 232,461,064       $ 3,812,994       $ 6,958,516       $ —         $ —         $ 243,232,574   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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:

 

     Nine Months Ended September 30, 2015  
     Number
Of
Loans
     Pre-Modification
Outstanding
Recorded Investment
     Post-Modification
Outstanding
Recorded Investment
 

Residential 1-4 family

     —         $ —         $ —     

Commercial real estate and multifamily

     —           —           —     

Construction and land

     —           —           —     

Commercial

     —           —           —     

Consumer and other

     1         3,059         3,059   
  

 

 

    

 

 

    

 

 

 
     1       $ 3,059       $ 3,059   
  

 

 

    

 

 

    

 

 

 

 

     Nine Months Ended September 30, 2014  
     Number
Of
Loans
     Pre-Modification
Outstanding
Recorded Investment
     Post-Modification
Outstanding
Recorded Investment
 

Residential 1-4 family

     —         $ —         $ —     

Commercial real estate and multifamily

     —           —           —     

Construction and land

     —           —           —     

Commercial

     —           —           —     

Consumer and other

     10         10,921         10,921   
  

 

 

    

 

 

    

 

 

 
     10       $ 10,921       $ 10,921   
  

 

 

    

 

 

    

 

 

 

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

 

     Twelve Months Ended September 30, 2015  
     Number Of
Loans
     Outstanding Recorded
Investment at Default
 

Residential 1-4 family

     —         $ —     

Commercial real estate and multifamily

     —           —     

Construction and land

     —           —     

Commercial

     —           —     

Consumer and other

     —           —     
  

 

 

    

 

 

 
     —         $ —     
  

 

 

    

 

 

 

 

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ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

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

 

     Twelve Months Ended September 30, 2014  
     Number Of
Loans
     Outstanding Recorded
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   
  

 

 

    

 

 

 

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.

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.

 

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ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 5. Fair Value Disclosures (Continued)

 

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 September 30, 2015 and December 31, 2014.

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.

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

 

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ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 5. Fair Value Disclosures (Continued)

 

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 September 30, 2015, 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 collateral since the most recent appraisal. 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.

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. Other real estate is included in Level 2 of the valuation hierarchy.

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.

 

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ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 5. Fair Value Disclosures (Continued)

 

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.

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

 

     Balance as of
September 30,
2015
     Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Other
Unobservable
Inputs
(Level 3)
 

Securities of U.S. Government agencies and corporations

   $ 2,584,473       $ —         $ 2,584,473       $ —     

Mortgage-backed securities

     11,061,771         —           11,061,771         —     

State and municipal securities

     13,019,627         —           13,019,627         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 26,665,871       $ —         $ 26,665,871       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 5. Fair Value Disclosures (Continued)

 

     Balance as of
December 31,
2014
     Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Other
Unobservable
Inputs
(Level 3)
 

Securities of U.S. Government agenciesand corporations

   $ 2,629,854       $ —         $ 2,629,854       $ —     

Mortgage-backed securities

     13,037,123         —           13,037,123         —     

State and municipal securities

     13,104,777         —           13,104,777         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 28,771,754       $ —         $ 28,771,754       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2015 and December 31, 2014, 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 nine months ended September 30, 2015.

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

 

     Balance as of
September 30,
2015
     Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Other
Unobservable
Inputs
(Level 3)
 

Impaired loans

   $ 2,925,335       $ —         $ 1,215,892       $ 1,709,443   

Foreclosed real estate

     1,654,980         —           1,654,980         —     
     Balance as of
December 31,
2014
     Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Other
Unobservable
Inputs
(Level 3)
 

Impaired loans

   $ 2,691,266       $ —         $ 966,265       $ 1,725,001   

Foreclosed real estate

     1,942,844         —           1,942,844         —     

For Level 3 assets measured at fair value on a non-recurring basis as of September 30, 2015, the significant unobservable inputs used in the fair value measurements are presented below.

 

     Carrying
Amount
     Valuation
Technique
   Significant
Unobservable
Input
   Weighted
Average
of Input
 

Impaired loans

   $ 1,709,443       Present
Value
   Discounted
Cash Flows
     6.50

 

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ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 5. Fair Value Disclosures (Continued)

 

The carrying amount and estimated fair value of the Company’s financial instruments at September 30, 2015 and December 31, 2014 are as follows:

 

     September 30, 2015      December 31, 2014  
     Carrying
Amount
     Estimated Fair
Value
     Carrying
Amount
     Estimated Fair
Value
 

Financial assets:

           

Cash and cash equivalents

   $ 7,565,878       $ 7,565,878       $ 11,925,541       $ 11,925,541   

Securities available for sale

     26,665,871         26,665,871         28,771,754         28,771,754   

Investments, at cost

     3,855,350         3,855,350         3,449,000         3,449,000   

Loans, net

     256,535,822         255,886,032         238,558,389         239,013,615   

Accrued interest receivable

     958,074         958,074         1,007,115         1,007,115   

Financial liabilities:

           

Deposits

     252,704,526         254,450,774         248,572,231         252,393,127   

Securities sold under agreements to repurchase

     1,282,668         1,282,668         1,512,993         1,512,993   

Federal Home Loan Bank advances

     11,500,000         11,499,995         5,000,000         5,000,112   

Accrued interest payable

     104,417         104,417         132,397         132,397   

Unrecognized financial instruments (net of contract amount):

           

Commitments to extend credit

     —           —           —           —     

Letter of credit

     —           —           —           —     

Lines of credit

     —           —           —           —     

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

 

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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)

 

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 nine months ended September 30, 2015 and 2014, the Company recorded stock compensation expense of $71,920 and $40,612, respectively. At September 30, 2015, the total remaining compensation cost to be recognized on non-vested options is approximately $177,000.

A summary of the activity in the 2010 Plan for the nine months ended September 30, 2015, is presented in the following table:

 

     Nine Months Ended September 30, 2015  
     Shares      Average
Exercise
Price
     Aggregate
Intrinsic
Value (1)
 

Outstanding at December 31, 2014

     270,584       $ 13.60         —     

Granted

     —           N/A         —     

Exercised

     20,829       $ 11.50         —     

Forfeited

     —           N/A         —     
  

 

 

       

Outstanding at September 30, 2015

     249,755       $ 13.78       $ 4,048,437   
  

 

 

       

Options exercisable at September 30, 2015

     160,880       $ 11.50       $ 2,974,664   
  

 

 

       

 

(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 September 30, 2015. This amount changes based on changes in the market value of the Company’s stock.

Other information regarding options outstanding and exercisable as of September 30, 2015, is as follows:

 

    Options Outstanding     Options Exercisable  

Exercise
Price

  Number
of
Shares
    Weighted-
Average
Exercise
Price
    Weighted-
Average
Remaining
Contractual
Life In
Years
    Number
of
Shares
    Weighted-
Average
Exercise
Price
 
$11.50     208,092      $ 11.50        5.25        160,880      $ 11.50   
$25.17     41,663      $ 25.17        9.25        —        $ 25.17   

 

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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)

 

Information pertaining to non-vested options for the three months ended September 30, 2015, is as follows:

 

     Number of Shares      Weighted Average
Grant Date Fair Value
 

Non-vested options, December 31, 2014

     88,875       $ 3.29   

Granted

     —           —     

Vested

     —           —     

Forfeited

     —           —     
  

 

 

    

 

 

 

Non-vested options, September 30, 2015

     88,875       $ 3.29   
  

 

 

    

 

 

 

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 nine months ended September 30, 2015 and 2014, the Company recognized $222,208 and $222,209, respectively, in compensation expense attributable to restricted shares that have been awarded. At September 30, 2015, the total remaining compensation cost to be recognized on non-vested restricted stock is approximately $426,000.

A summary of activity for unvested restricted awards for the nine months ended September 30, 2015 is as follows:

 

     Number      Grant Date Weighted-
Average Cost
 

Unvested at December 31, 2014

     47,769       $ 13.56   

Shares awarded

     —           —     

Restrictions lapsed and shares released

     (18,885      12.75   

Shares forfeited

     —           —     
  

 

 

    

 

 

 

Unvested at September 30, 2015

     28,884       $ 14.09   
  

 

 

    

 

 

 

 

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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)

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 nine months ended September 30, 2015 or 2014.

 

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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:

 

     September 30,
2015
     December 31,
2014
 

Allocated shares

     74,060         74,060   

Unallocated shares

     148,120         148,120   
  

 

 

    

 

 

 

Total ESOP shares

     222,180         222,180   
  

 

 

    

 

 

 

Fair value of unallocated shares

   $ 4,442,119       $ 3,762,248   
  

 

 

    

 

 

 

Note 7. Federal Home Loan Bank Advances

At September 30, 2015, the Bank had two short term advances outstanding of $2,000,000 and $9,500,000 with interest accruing at a rate of 0.18% and 0.20%, respectively. Pursuant to collateral agreements with the FHLB, the advance described above is secured by the Bank’s FHLB stock and qualifying first mortgage loans.

 

27


Table of Contents

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, 2014 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 three-month period ended September 30, 2015, 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, 2014 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

Comparison of Financial Condition at September 30, 2015 and December 31, 2014

Assets. Total assets increased from $302.4 million at December 31, 2014 to $314.4 million at September 30, 2015.

Cash and Cash Equivalents. Total cash and cash equivalents decreased $4.3 million, or 36.6%, from $11.9 million at December 31, 2014 to $7.6 million at September 30, 2015. This is due primarily to an increase in loans of $18.0 million, $530,000 purchases of premises and equipment, $406,000 purchase of Federal Reserve Bank stock, decreases of securities sold under agreements to repurchase of $230,000, dividends of $248,000 and repurchases of Company common stock in the amount of $182,000. These decreases in cash and cash equivalents were partially offset by an increase in Federal Home Loan Bank advances of $6.5 million, a $4.1 million increase in deposits, a $2.1 million decrease in securities, $652,000 received from the sale of foreclosed real estate and other net increases in cash and cash equivalents of $1.8 million.

Securities. Securities decreased $2.1 million, or 7.3%, from $28.8 million at December 31, 2014 to $26.7 million at September 30, 2015, primarily as a result of $1.9 million of principal payments on mortgage-backed securities. The remaining change in securities was due primarily to amortization and mark-to-market adjustments.

Loans. Net loans receivable increased $17.9 million, or 7.5%, from $238.6 million at December 31, 2014 to $256.5 million at September 30, 2015, primarily as a result of $10.7 million, $8.6 million, $3.6 million and $1.5 million increases in commercial real estate and multifamily loans, residential 1-4 family real estate loans, consumer and equity lines of credit, and commercial loans, respectively. These increases were partially offset by a $6.2 million decrease in construction and land loans. The increase in commercial real estate and multifamily loans was primarily due to the purchase of a $5.0 million participation interest in a commercial real estate loan secured by a retail development, the origination of a $2.2 million loan secured by an office building, a $1.4 million increase to an existing hotel loan, a $4.2 million increase from the conversion of an assisted living facility to permanent financing from a construction loan and an origination of a $2.3 million loan secured by a skilled nursing facility. These increases were partially offset by payoffs of $4.6 million of two non-residential real estate secured loans during the period. The increase in 1-4 family residential real estate loans was primarily due to the origination of new loans as a result of an improvement in the local economy as evidenced by lower unemployment and the conversion of

 

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construction loans to permanent financing. Consumer and equity loans increased primarily due to increased marketing efforts and the offering of more competitive pricing programs. The increase in commercial loans is primarily due to new originations as a result of the Bank’s lending calling programs. The decrease in construction and land loans was primarily due to the conversions of construction loans to permanent financing partially offset by new loan originations.

Deposits. Total deposits increased $4.1 million, or 1.7%, from $248.6 million at December 31, 2014 to $252.7 million at September 30, 2015. The primary reasons for the increase in deposits were $2.6 million, $2.1 million and $1.4 million increases in savings accounts, money market accounts and demand and NOW accounts, respectively, partially offset by a $2.0 million decrease in certificates of deposit accounts. Savings accounts increased primarily due to an increase in the number of accounts and an increase in the balance of existing accounts, Demand and NOW accounts increased primarily due to increases in two public funds accounts. Money market accounts increased primarily due to increases in the number and balances of money market accounts primarily due to special rate incentives offered. The decrease in certificates of deposit accounts was primarily due to closure of maturing certificates at maturity due to current low market interest rates.

Borrowings. Borrowings from the Federal Home Loan Bank increased $6.5 million or 130.0% from $5.0 million at December 31, 2014 to $11.5 million at September 30, 2015. The borrowings were used primarily to fund loan originations. No other borrowings were outstanding.

Stockholders’ Equity. Stockholders’ equity increased $2.0 million, or 4.8%, from $42.7 million at December 31, 2014 to $44.7 million at September 30, 2015. The primary reasons for the increase include net income for the first nine months of 2015 of $2.2 million and a $294,000 increase in additional paid-in capital related to stock compensation expense for the period, partially offset by decreases related to dividends paid of $248,000, repurchase of Company common stock of $182,000 and unrealized losses on securities available for sale (net of taxes) of $4,000.

Results of Operations for the Three Months Ended September 30, 2015 and 2014

Overview. The Company reported net income of $843,000, or $0.51 basic earnings per share, for the three-month period ended September 30, 2015, compared to net income of $750,000, or $0.46 basic earnings per share, for the same period in 2014.

Net Interest Income. Net interest income after provision for loan losses increased $190,000, or 6.4%, to $3.2 million for the three months ended September 30, 2015 compared to the same period in 2014.

Total interest income increased $83,000, or 2.4%, from $3.5 million for the three months ended September 30, 2014 to $3.5 million for the three months ended September 30, 2015. The increase was primarily the result of a $105,000 increase in interest on loans, partially offset by decreases of $16,000 and $6,000 in securities and interest bearing deposits in banks, and dividends, respectively. The increase in interest on loans was due primarily to higher balances in the current period.

Total interest expense decreased $123,000, or 28.6%, from $431,000 for the three months ended September 30, 2014 to $308,000 for the three months ended September 30, 2015. The decrease was primarily a result of an $125,000 decrease in interest on deposits. The primary reason for the decrease in interest on deposits was a reduction in market interest rates.

Provision for Loan Losses. The provision for loan losses was $48,000 for the three months ended September 30, 2015 compared to $32,000 for the same period in 2014.

Non-performing loans decreased $133,000 from $1.3 million at June 30, 2015 to $1.2 million at September 30, 2015. Non-performing residential mortgage loans, commercial real estate and multifamily loans and construction and land loans decreased $175,000, $3,000 and $5,000, respectively. These decreases were partially offset by increases in non-performing commercial loans and consumer loans of $9,000 and $41,000, respectively. The balance of non-performing loans at September 30, 2015 includes nonaccrual loans of $1.2 million. Consumer loans of $45,000 were over 90 days past due but still accruing interest at September 30, 2015. The balance of nonaccrual loans at September 30, 2015 consists of $823,000 in residential mortgage loans, $166,000 in construction and land loans, $78,000 in commercial real estate and multifamily, $86,000 in consumer loans and $9,000 in commercial loans.

 

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Net charge-offs were $49,000 for the three months ended September 30, 2015 compared to $23,000 for the same period in 2014. Charge-offs totaling $25,000 and $45,000 were recorded during the quarter ended September 30, 2015 in connection with residential real estate loans and consumer loans, respectively. The primary reason for the increase in provisions was loan growth.

The allowance for loan losses was $3.9 million at September 30, 2015. Management has deemed this amount as adequate at that date based on their best estimate of probable known and inherent loan losses at that date.

Non-interest Income. Non-interest income increased $74,000, or 5.4%, to $1.5 million for the three months ended September 30, 2015 compared to the same period in 2014, primarily due to an increase in income from Valley Title Services, LLC, increases in fees related to the origination, sale and servicing of mortgage loans on the secondary market, an increase in fees from the origination and servicing of consumer and commercial loans, an increase in income related to debit cards and an increase in investment sales commissions of $37,000, $23,000, $19,000, $11,000 and $4,000, respectively. These increases were partially offset by decreases in fees related to deposit accounts and a decrease in the change of the cash surrender value of bank owned life insurance period over period of $19,000 and $2,000, respectively. All other non-interest income increased $1,000, net.

The increase in fees related to the origination, sale and servicing of mortgage loans on the secondary market, fees related to the origination and servicing of consumer and commercial loans and income from Valley Title Services, LLC is primarily due an increase in volume of loans during the three months ended September 30, 2015 as compared to the same period in 2014. The increased volume is primarily a result of stable market rates period over period and a general improvement in the local economy. Debit card income increased due to the continued shift of customers’ use of debit cards from traditional check writing. The increase in investment sales commissions was related to an increase in sales volume period over period. Deposit related fees decreased primarily due to a reduction in paper statement fees period over period that were initially implemented in the quarter ended September 30, 2014.

Non-interest Expense. Non-interest expense increased $108,000, or 3.3%, to $3.4 million for the three months ended September 30, 2015 compared to the same period in 2014. The primary factors effecting the change were increases in salary and employee benefits expense, advertising and other operating expense and data processing expense of $81,000, $34,000 and $26,000, respectively. These increases were partially offset by a $31,000 decrease in occupancy and equipment expense and a $2,000 decrease in FDIC insurance premiums.

The increases in salary and other benefits expense increased primarily due to cost of living and merit increases, as well as increased cost of company paid insurance benefits and expenses related to stock options issued to certain employees in December 2014. Increases in advertising and other operating expenses were primarily a result of increased marketing efforts, expenses related to foreclosure and losses on the sale of other real estate owned and increases in communication expense related to conversion of fiber optic communications lines implemented throughout the branch network. Data processing expense increased due to incremental costs related to the number of accounts. The decrease in occupancy and equipment expense was primarily due to lower levels of depreciation on computer hardware and software.

Income Tax Expense. The Company had income tax expense of $430,000 for the three month period ended September 30, 2015 as compared to $367,000 for the same period in 2014. 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 on securities available for sale, net of tax. Total comprehensive income was $942,000 for the three month period ended September 30, 2015 compared to total comprehensive income of $791,000 for the three month period ended September 30, 2014. The increase was primarily a result of an increase of $57,000 in unrealized gains and losses on securities available for sale, net of tax, and an increase in net income period over period of $93,000.

 

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Results of Operations for the Nine Months Ended September 30, 2015 and 2014

Overview. The Company reported net income of $2.2 million, or $1.32 basic earnings per share, for the nine-month period ended September 30, 2015, compared to net income of $2.1 million, or $1.25 basic earnings per share, for the same period in 2014.

Net Interest Income. Net interest income after provision for loan losses increased $278,000, or 3.1%, to $9.1 million for the nine months ended September 30, 2015 compared to the same period in 2014.

Total interest income increased $168,000, or 1.6%, from $10.3 million for the nine months ended September 30, 2014 to $10.5 million for the nine months ended September 30, 2015. The increase was primarily the result of a $165,000 and $32,000 increase in interest on loans and dividends, respectively, partially offset by a decrease of $29,000 on securities and interest bearing deposits in other banks. The increase in interest on loans was due primarily to an increase in the average outstanding balances of loans, partially offset by 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. The decrease in interest on securities and interest-bearing deposits in other banks was due to decreases in the average balances, period over period.

Total interest expense decreased $275,000, or 20.2%, from $1.4 million for the nine months ended September 30, 2014 to $1.1 million for the nine months ended September 30, 2015. The decrease was primarily a result of a $281,000 decrease in interest on deposits, partially offset by a $6,000 increase 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.

Provision for Loan Losses. The provision for loan losses was $250,000 for the nine months ended September 30, 2015 compared to $85,000 for the same period in 2014. The primary reason for the increase in the provision was loan growth.

Non-performing loans decreased $976,000 from $2.2 million at December 31, 2014 to $1.2 million at September 30, 2015. Non-performing residential mortgage loans, commercial real estate and multifamily loans, construction and land loans and consumer and other loans decreased $545,000, $8,000, $360,000 and $71,000, respectively. These decreases were partially offset by an increase of $9,000 in commercial loans. The decrease in residential mortgage loans is primarily due to the foreclosure of two residential mortgage loans with one being secured by a 1-4 family residence in Athens, Tennessee and the other a 1-4 family residence in Decatur, Tennessee. The decrease in construction and land loans was primarily due to the foreclosure of two loans secured by land with subsequent sale of the properties. The balance of non-performing loans at September 30, 2015 includes nonaccrual loans of $1.2 million. No residential mortgage loans were over 90 days past due but still accruing interest at September 30, 2015. The balance of nonaccrual loans at September 30, 2015 consists of $823,000 in residential mortgage loans, $78,000 in commercial real estate and multifamily loans, $166,000 in construction and land loans, $9,000 in commercial loans and $86,000 in consumer loans.

Net charge-offs were $278,000 for the nine months ended September 30, 2015 compared to $555,000 for the same period in 2014. Charge-offs totaling $347,000 were recorded during the nine months ended September 30, 2015 in connection with residential mortgage loans ($54,000), construction and land loans ($164,000), and consumer loans ($129,000).

The allowance for loan losses was $3.9 million at September 30, 2015. 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 increased $287,000, or 7.4%, to $4.2 million for the nine months ended September 30, 2015 compared to $3.9 million for the same period in 2014, primarily due to increases in fees related to the origination, sale and servicing of mortgage loans on the secondary market, income from Valley Title Services, LLC and deposit related fees of $184,000, $125,000 and $17,000, respectively. These increases were partially offset by decreases in income related to investment sales commissions, consumer and commercial loan servicing and origination fees and the change in cash value of bank owned life insurance of $26,000, $7,000 and $7,000, respectively. All other non-interest income increased $1,000, net.

 

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The increase in fees related to the origination, sale and servicing of mortgage loans on the secondary market and income from Valley Title Services, LLC is primarily due to increased volume of mortgage loans during the nine months ended September 30, 2015 as compared to the same period in 2014. The increased volume is primarily a result of stable market rates period over period and a general improvement in the local economy. Deposit related fees increased primarily due to income from debit card usage, which has been actively promoted by the Bank as an alternative to writing checks. The decrease in income related to investment sales commission was primarily due to a slight decrease in the sales of investment products during the first nine months of 2015 as compared to the same period in 2014. The decrease in consumer and commercial loan servicing and origination fees is primarily a result of consumer loan specials offered during the period with reduced origination fees to promote an increase in originations in a competitive market. The change in cash value of bank owned life insurance decreased period over period due to decreased crediting rates on various policies.

Non-interest Expense. Non-interest expense increased $436,000, or 4.5%, to $10.0 million for the nine months ended September 30, 2015 compared to $9.6 million for the same period in 2014. The primary factors effecting the change were increases in salary and employee benefits expense, advertising and other operating expense, data processing expense and federal deposit insurance premiums of $279,000, $152,000, $78,000 and $2,000, respectively. These increases were partially offset by a $75,000 reduction in occupancy and equipment expenses.

The increases in salary and other benefits expense increased primarily due to cost of living and merit increases, as well as increased cost of company paid insurance benefits and expenses related to stock options issued to certain employees in December 2014. Data processing expense increased due to incremental costs related to the number of accounts and increased cost of processing debit card transactions due to an increase in volume. Advertising and other operating expenses were primarily a result of increased marketing efforts and expenses related to foreclosure and losses on the sale of other real estate owned. The decrease in occupancy and equipment expense was primarily due to lower levels of depreciation on computer hardware and software.

Income Tax Expense. The Company had an increase in income tax expense of $24,000 to $1.1 million for the nine month period ended September 30, 2015 as compared to the same period in 2014. 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 and losses on securities available for sale, net of tax. Total comprehensive income was $2.2 million for the nine-month period ended September 30, 2015 compared to total comprehensive income of $2.4 million for the nine-month period ended September 30, 2014. The decrease was primarily a result of a change of $309,000 in unrealized gains and losses on securities available for sale, net of tax and an increase in net income period over period of $105,000.

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 September 30, 2015, cash and cash equivalents totaled $7.6 million. At September 30, 2015, un-pledged securities classified as available-for-sale, which amounted to $24.7 million, provide an additional source of liquidity. In addition, at September 30, 2015, the Bank had the ability to borrow a total of approximately $25.5 million from the Federal Home Loan Bank of Cincinnati. At September 30, 2015, the Bank had $23.7 million in letters of credit with the Federal Home Loan Bank to secure public funds deposits.

 

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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 Office of the Comptroller of the Currency, 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 $4.5 million at September 30, 2015.

Capital Management. The Bank is required to maintain specific amounts of capital pursuant to federal regulatory requirements. As of September 30, 2015, the Bank was in compliance with all regulatory capital requirements, which were effective as of such date, with common equity tier 1, tier 1 risk-based capital, total risk-based capital, and leverage ratios of 15.9%, 15.9 %, 17.2%, and 12.1%, respectively. The regulatory requirements at that date were 4.5%, 6.0%, 8.0%, and 4.0%, respectively. At September 30, 2015, the Bank was considered “well-capitalized” under applicable regulatory guidelines.

Dividends. The Board of Directors of the Company declared and paid dividends on the Company’s common stock of $248,000 during the nine months ended September 30, 2015. The dividend payout ratio for the first nine months of 2015, representing dividends per share divided by diluted earnings per share, was 12.2%. 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 nine months ended September 30, 2015, 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.

 

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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%.

Our model results indicated that we were in compliance with the policies noted above and that our balance sheet is 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 September 30, 2015 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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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 Company’s management believes that such routine legal proceedings, in the aggregate, are immaterial to the Company’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, 2014, filed with the Securities and Exchange Commission on March 13, 2015. As of September 30, 2015, the risk factors of the Company have not changed materially from those disclosed in the Form 10-K.

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 September 30, 2015, the Company had repurchased an aggregate of 977,162 shares under these programs.

Under each repurchase program, 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 second quarter of 2015.

 

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
 

July 1 through July 31, 2015

     —         $ —           —           57,345   

August 1 through August 31, 2015

     —           —           —           57,345   

September 1 through September 30, 2015

     2,300         25.55         2,300         55,045   
  

 

 

    

 

 

    

 

 

    

Total

     2,300       $ 25.55         2,300         55,045   
  

 

 

       

 

 

    

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* (4)
  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* (5)
  10.7    Supplemental Executive Retirement Plan Agreement between Athens Federal Community Bank and Michael R. Hutsell* (6)
  10.8    Supplemental Executive Retirement Plan Agreement between Athens Federal Community Bank and Jay Leggett, Jr* (6)
  10.9    Athens Bancshares Corporation 2010 Equity Incentive Plan (7)
  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 September 30, 2015, 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 January 23, 2015.
(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 April 6, 2010.
(6) Incorporated herein by reference to the Company’s Definitive Proxy Statement filed with the Securities and Exchange Commission on June 7, 2010.
(7) 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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Table of Contents

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: November 6, 2015     By:   /s/ Jeffrey L. Cunningham
      Jeffrey L. Cunningham
     

President and Chief Executive Officer

(principal executive officer)

 

Dated: November 6, 2015     By:   /s/ Michael R. Hutsell
      Michael R. Hutsell
     

Treasurer and Chief Financial Officer

(principal accounting and financial officer)

 

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