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AFCB > SEC Filings for AFCB > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for ATHENS BANCSHARES CORP

Form 10-Q for ATHENS BANCSHARES CORP


9-Nov-2012

Quarterly Report


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, 2011 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 nine-month period ended September 30, 2012, 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, 2011 included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

Comparison of Financial Condition at September 30, 2012 and December 31, 2011

Assets. Total assets increased from $283.7 million at December 31, 2011 to $292.8 million at September 30, 2012.

Cash and Cash Equivalents. Total cash and cash equivalents remained relatively unchanged with a decrease of $120,000 from $23.6 million at December 31, 2011 to $23.5 million at September 30, 2012.

Loans. Net loans receivable increased $10.0 million, or 4.9% from $204.7 million at December 31, 2011 to $214.7 million at September 30, 2012, primarily as a result of $7.7 million, $1.7 million, and $1.2 million increases in commercial real estate loans, residential 1-4 family loans, and consumer and equity lines of credit, respectively. These increases were partially offset by a decrease in commercial loans of $861,000. The increase in commercial real estate loans was primarily due to the purchase of a $3.7 million loan participation interest secured by a hotel in Gatlinburg, Tennessee, a $1.5 million increase in principal for a loan secured by a hotel in Chattanooga, Tennessee, a $665,000 loan to a non-profit school located in Cleveland, Tennessee, a $420,000 loan secured by an apartment complex in Cleveland, Tennessee, and an $893,000 loan secured by an owner occupied physical therapy office in Ringgold, Georgia, which was reclassified from construction and land development to commercial real estate due to its conversion from construction to permanent financing. The increase in residential 1-4 family loans was due to an increase in volume along with the addition of a $502,000 loan secured by a primary residence in Loudon, Tennessee. The increase in consumer and equity lines of credit was due to an increased focus on consumer automobile lending. The decrease in commercial loans was due primarily to the payoff of an $806,000 commercial installment loan.

Securities. Total securities decreased $1.7 million, or 4.9% from $34.3 million at December 31, 2011 to $32.6 million at September 30, 2012, primarily as a result of $11.0 million in calls of agency securities and $2.2 million of principal payments on mortgage-backed securities. The decrease was partially offset by purchases of mortgage-backed, agency, and SBA securities of $6.6 million, $4.1 million, and $1.0 million, respectively. The purchases were funded from available cash.


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Deposits. Total deposits increased $11.3 million, or 5.0% from $224.1 million at December 31, 2011 to $235.4 million at September 30, 2012. The primary reason for the increase in deposits was a $10.5 million increase in demand and NOW accounts, primarily due to an increase in non-personal NOW accounts relating to two public entities and an overall increase in the number of accounts. Other significant increases were in savings deposit accounts of $2.9 million. These increases were partially offset by a $2.1 million decrease in money market accounts. Time deposit balances remained relatively unchanged period over period with an increase of $6,000.

Borrowings. Federal Home Loan Bank borrowings decreased $89,000 from December 31, 2011 to September 30, 2012. The slight decrease was due to principal payments on an amortizing advance.

Stockholders' Equity. Stockholders' equity decreased $2.0 million or 3.9% from December 31, 2011 to September 30, 2012. The primary reasons for the decrease include $3.9 million in repurchased and retired common stock and $362,000 in dividends declared and paid on outstanding shares (other than unallocated ESOP shares). These decreases were partially offset by net income for the first nine months of $2.0 million, an increase in unrealized gains on securities held for sale (net of taxes) of $19,000, and a $221,000 increase in additional paid-in capital related to stock compensation expense for the period on grants of options and restricted stock.

Results of Operations for the Three Months Ended September 30, 2012 and 2011

Overview. The Company reported net income of $746,000, or $0.33 basic earnings per share, for the three-month period ended September 30, 2012, compared to a net income of $463,000, or $0.18 basic earnings per share, for the same period in 2011.

Net Interest Income. Net interest income after provision for loan losses increased $311,000 or 13.7% for the three months ended September 30, 2012 compared to the same period in 2011, primarily as a result of decreases in provision for loan losses and interest expense on deposits and Federal Home Loan Bank borrowings.

Total interest income decreased $37,000 or 1.0%, from the three months ended September 30, 2011 to the three months ended September 30, 2012. The decrease was primarily the result of a $78,000 decrease in interest on securities and interest-bearing deposits in other banks. These decreases were partially offset by a $39,000 increase in interest on loans and a $2,000 increase in dividend income. The decrease in interest income on securities and interest- bearing deposits in other banks was due primarily to decreases in average balances and decreases in market interest rates. The increase in interest on loans was due primarily to an increase in average balances.

Total interest expense decreased $184,000 or 22.1% from $832,000 for the three months ended September 30, 2011 to $648,000 for the three months ended September 30, 2012. The decrease was primarily a result of a $128,000 decrease in interest on deposits and a $56,000 decrease in interest on Federal Home Loan Bank borrowings. The primary reason for the decrease in interest on deposits was a reduction in market interest rates. The decrease in the interest paid on Federal Home Loan Bank borrowings was due to a decrease in the average balance of the advances outstanding.

Provision for Loan Losses. The provision for loan losses was $400,000 for the three months ended September 30, 2012 compared to $564,000 for the same period in 2011. The decrease in provision for loan losses was primarily due to a decrease in specific loss reserves recorded on impaired loans.

Non-performing loans increased $1.9 million from $2.5 million at June 30, 2012 to $4.4 million at September 30, 2012. Non-performing residential mortgage loans and consumer loans increased $1.9 million and $16,000, respectively. Non-performing construction and land loans decreased $4,000. The increase in non-performing mortgage loans was primarily due to a mortgage loan in the amount of $1.7 million being placed on nonaccrual status during the third quarter of 2012. The balance of non-performing loans at September 30, 2012 includes nonaccrual loans of $4.4 million. There were no residential mortgage loans that were over 90 days past due but still accruing interest at September 30, 2012. The balance of nonaccrual loans at September 30, 2012 consists of $2.8 million in residential mortgage loans, $1.6 million in construction and land loans and $32,000 in consumer loans.


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Net charge-offs were $131,000 for the three months ended September 30, 2012 compared to $114,000 for the same period in 2011. Charge-offs totaling $151,000 were recorded during the quarter ended September 30, 2012 in connection with residential mortgage loans ($93,000) and consumer loans ($58,000).

The allowance for loan losses was $4.5 million at September 30, 2012. 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 $152,000, or 11.9%, to $1.4 million for the three months ended September 30, 2012 compared to $1.3 million for the same period in 2011, primarily due to increases in fees related to the origination, sale and servicing of mortgage loans on the secondary market, increases of debit card usage income, increased income from Valley Title Services, LLC, and increased consumer and commercial loan servicing and origination fees of $98,000, $56,000, $37,000, and $22,000, respectively. These increases were partially offset by a $30,000 decrease in income related to non-sufficient funds charges on deposit accounts and a $31,000 decrease in income related to investment sales commissions.

Income related to the origination, sale and servicing of mortgage loans on the secondary market increased primarily due to increased volume of these loans during the three months ended September 30, 2012 as compared to the same period in 2011. The increased volume is primarily a result of a decrease in market rates period over period. Income related to debit card usage increased primarily due to efforts put forth to encourage customers to use debit cards as opposed to checks combined with an increase in the number of these accounts. Income from Valley Title Services, LLC increased primarily due to an increase in the volume of mortgage loan originations during the quarter ended September 30, 2012 as compared to the same period in 2011. Consumer and commercial loan origination and servicing fees increased primarily due to increased fee income on consumer loans generated by Southland Finance, Inc. The increase in consumer loan fees is attributable to increased volume of consumer loans period over period.

The decrease in income related to non-sufficient funds charges on deposit accounts is primarily due to Bank policy changes implemented during 2012 that limit the number of daily non-sufficient funds charges. Income from investment sales commissions decreased primarily due to decreased sales of investment products resulting from lower market rates and market volatility.

Non-interest Expense. Non-interest expense increased $43,000, or 1.5%, for the three months ended September 30, 2012 compared to the same period in 2011. The increase was primarily a result of increases in expenses related to data processing, occupancy and equipment, and federal deposit insurance premiums, of $43,000, $28,000, and $11,000, respectively. These increases were partially offset by reductions in advertising and other operating expenses, of $39,000. The primary reason for the increase in data processing expense was due to increased charges related to electronic banking services. The primary reason for the increase in occupancy and equipment expense was due to increased technology maintenance costs as well as additional depreciation expense on computer hardware due to purchases. The increase in federal deposit insurance premiums was due to a change in the calculation methodology of the premiums during the third quarter of 2011. The reduction in advertising and other expenses was primarily due to decreases in accounting fees and the effect of a one time charge at Valley Title Services, LLC in the third quarter of 2011. Accounting fees decreased primarily as a result of bringing certain external reporting functions in-house.

Income Tax Expense. The Company had an income tax expense of $348,000 for the three month period ended September 30, 2012 as compared to $210,000 for the same period in 2011. The increase in income tax expense was due primarily to the increase in taxable income period over period.

Total Comprehensive Income. Total comprehensive income for the periods presented consists of net income and the change in unrealized gains (losses) on securities available for sale, net of tax. Total comprehensive income was $752,000 for the three month period ended September 30, 2012 compared to total comprehensive income of $547,000 for the three month period ended September 30, 2011. The increase was primarily a result of the $282,000 increase in net income period over period and a $77,000 decrease in unrealized gains on securities available for sale, net of tax.


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Results of Operations for the Nine Months Ended September 30, 2012 and 2011

Overview. The Company reported net income of $2.0 million, or $0.85 basic earnings per share, for the nine-month period ended September 30, 2012, compared to a net income of $1.2 million or $0.47 basic earnings per share, for the same period in 2011.

Net Interest Income. Net interest income after provision for loan losses increased $1.4 million or 19.8% for the nine months ended September 30, 2012 compared to the same period in 2011, primarily as a result of a decrease in provision for loan losses and a decrease in interest expense on deposits and Federal Home Loan Bank borrowings.

Total interest income decreased $144,000 or 1.3%, from $11.0 million for the nine months ended September 30, 2011 to $10.8 million for the nine months ended September 30, 2012. The decrease was primarily the result of a $250,000 decrease in interest on securities and interest-bearing deposits in other banks, partially offset by increases in interest on loans and dividend income of $95,000 and $11,000, respectively. The decrease in interest income on securities and interest-bearing deposits in other banks was due to the combined effect of decreases in average balances and decreases in market interest rates. The increase in interest income on loans was primarily a result of an increase in average balances.

Total interest expense decreased $546,000 or 21.3% from $2.6 million for the nine months ended September 30, 2011 to $2.0 million for the nine months ended September 30, 2012. The decrease was primarily a result of a $378,000 decrease in interest on deposits and a $168,000 decrease in interest on Federal Home Loan Bank borrowings. The primary reason for the decrease in interest on deposits was a reduction in market interest rates. The decrease in the interest paid on Federal Home Loan Bank borrowings was due to a decrease in the average balance of the advances outstanding.

Provision for Loan Losses. The provision for loan losses was $606,000 for the nine months ended September 30, 2012 compared to $1.6 million for the same period in 2011. The decrease in provision for loan losses was primarily due to a decrease in net charge offs period over period as well as a decrease in specific loss reserves recorded on impaired loans, from $2.5 million at September 30, 2011 to $1.8 million at September 30, 2012.

Non-performing loans increased $1.1 million from $3.3 million at December 31, 2011 to $4.4 million at September 30, 2012. Non-performing residential mortgage loans increased $1.3 million, while non-performing construction and land and consumer loans decreased $162,000 and $39,000, respectively. The increase in non-performing mortgage loans was primarily due to a mortgage loan in the amount of $1.7 million being placed on nonaccrual status during the third quarter of 2012. The balance of non-performing loans at September 30, 2012 includes nonaccrual loans of $4.4 million. There were no residential mortgage loans that were over 90 days past due but still accruing interest at September 30, 2012. The balance of nonaccrual loans at September 30, 2012 consists of $2.8 million in residential mortgage loans, $1.6 million in construction and land loans and $32,000 in consumer loans.

Net charge-offs were $285,000 for the nine months ended September 30, 2012 compared to $524,000 for the same period in 2011. Charge-offs totaling $416,000 were recorded during the nine months ended September 30, 2012 in connection with residential mortgage loans ($259,000), commercial loans ($16,000), and consumer loans ($141,000).

The allowance for loan losses was $4.5 million at September 30, 2012. 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 $372,000, or 10.7%, to $3.9 million for the nine months ended September 30, 2012 compared to $3.5 million for the same period in 2011, primarily due to increases in fees related to the origination and servicing of mortgage loans on the secondary market, increases of debit card usage income, increased income from Valley Title Services, LLC, and increased consumer and commercial loan servicing and origination fees of $222,000, $160,000, $80,000, and $27,000, respectively. These increases were partially offset by a $62,000 decrease in income related to non-sufficient funds charges on deposit accounts and a $55,000 decrease in income related to investment sales commissions.


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Income related to the origination, sale and servicing of mortgage loans on the secondary market increased primarily due to increased volume of these loans during the nine months ended September 30, 2012 as compared to the same period in 2011. The increased volume is primarily a result of a decrease in market rates period over period. Income related to debit card usage increased primarily due to increased efforts to encourage customers to use debit cards as opposed to checks combined with an increase in the number of these accounts. Income from Valley Title Services, LLC increased primarily due to an increase in the volume of mortgage loan originations during the period ended September 30, 2012 as compared to the same period in 2011. Consumer and commercial loan origination and servicing fees increased primarily due to increased fee income on consumer loans generated by Southland Finance, Inc. The increase in consumer loan fees is attributable to increased volume of consumer loans period over period.

Income from investment sales commissions decreased primarily due to decreased sales of investment products resulting from lower market rates and market volatility. The decrease in income related to non-sufficient funds charges on deposit accounts is primarily due to Bank policy changes implemented during 2012 that limit the number of daily non-sufficient funds charges.

Non-interest Expense. Non-interest expense increased $126,000, or 1.5%, to $8.7 million for the nine months ended September 30, 2012 compared to $8.6 million for the same period in 2011, primarily due to increases in expenses related to data processing and occupancy and equipment of $122,000 and $63,000, respectively. These increases were partially offset by a $40,000 reduction in federal deposit insurance premiums and a $22,000 decrease in advertising and other operating expenses. The primary reason for the increase in data processing expense was due to increased charges related to electronic banking services. The primary reason for the increase in occupancy and equipment expense was due to increased technology maintenance costs as well as additional depreciation expense on computer hardware due to purchases. The reduction in federal deposit insurance premiums was due to a change in the calculation methodology of the premiums during the third quarter of 2011. The reduction in advertising and other expenses was primarily due to decreases in accounting fees and the effect of a one time charge at Valley Title Services, LLC in the third quarter of 2011. Accounting fees decreased primarily as a result of bringing certain external reporting functions in-house.

Income Tax Expense. The Company had an income tax expense of $1.3 million for the nine month period ended September 30, 2012 as compared to $552,000 for the same period in 2011. 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 the net income and the change in unrealized gains (losses) on securities available for sale, net of tax. Total comprehensive income was $2.0 million for the nine-month period ended September 30, 2012 compared to total comprehensive income of $1.7 million for the nine-month period ended September 30, 2011. The increase was primarily a result of the $828,000 increase in net income period over period and a $466,000 decrease in unrealized gains on securities available for sale, net of tax.

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 time deposits. The level of these assets depends on the Bank's operating, financing, lending and investing activities during any given period. At September 30, 2012, cash and cash equivalents totaled $23.5 million.


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At September 30, 2012, securities classified as available-for-sale, which amounted to $32.6 million, and interest-bearing time deposits in banks of $249,000, provide additional sources of liquidity. In addition, at September 30, 2012, the Bank had the ability to borrow a total of approximately $31.1 million from the Federal Home Loan Bank of Cincinnati. At September 30, 2012, the Bank had $3.0 million in Federal Home Loan Bank advances outstanding and $11.8 million in letters of credit to secure public funds deposits.

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

The Company is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, the Company, on a stand-alone basis, is responsible for paying any dividends declared to its shareholders. The Company'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 $2.8 million at September 30, 2012.

Capital Management. The Bank is required to maintain specific amounts of capital pursuant to federal regulatory requirements. As of September 30, 2012, the Bank was in compliance with all regulatory capital requirements, which were effective as of such date, with tangible, core and risk-based capital ratios of 14.5%, 14.5% and 23.0%, respectively. The regulatory requirements at that date were 1.5%, 4.0% and 8.0%, respectively. At September 30, 2012, 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 $362,000 in the aggregate during the nine months ended September 30, 2012. The dividend payout ratio for the first nine months of 2012, representing dividends per share divided by diluted earnings per share, was 18.1%. 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, 2012, 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.

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