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AFCB > SEC Filings for AFCB > Form 10-K on 14-Mar-2013All Recent SEC Filings

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Annual Report


Operating Strategy

Our primary objective is to operate and grow a profitable community-oriented financial institution serving customers in our primary market areas. We have sought to achieve this through the adoption of a business strategy designed to maintain a strong capital position and high asset quality. Most of our senior management team has been in place for the past ten years. We have implemented a plan to diversify our product offerings by expanding our commercial deposit and lending products, expanding our branch network into nearby communities, and emphasizing high asset quality standards. Our operating strategy includes the following:

remaining a community-oriented financial institution;

continuing our historical focus on residential mortgage lending;

expanding our commercial real estate and multi-family lending activities;

emphasizing lower cost core deposits to maintain low funding costs; and

expanding our market share within our primary market area.


Income. Our primary source of pre-tax income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Other significant sources of pre-tax income are service charges (mostly from service charges on deposit accounts and loan servicing fees), fees from the sale of mortgage loans originated for sale in the secondary market, and commissions on sales of securities and investment products. We also recognize income from the sale of securities.

Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a monthly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.

Expenses. The non-interest expense we incur in operating our business consists of salaries and employee benefits expenses, occupancy expenses, federal deposit insurance premiums and assessments, data processing expenses and other miscellaneous expenses.

Critical Accounting Policies

We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. The following represent our critical accounting policies:

Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance monthly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, periodically reviews our allowance for loan losses and may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings. See note 5 of the notes to the consolidated financial statements beginning on page F-1 of this annual report.

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Fair Value of Investments. Securities are characterized as available for sale or held to maturity based on management's ability and intent regarding such investment at acquisition. On an ongoing basis, management must estimate the fair value of its investment securities based on information and assumptions it deems reliable and reasonable, which may be quoted market prices or if quoted market prices are not available, fair values extrapolated from the quoted prices of similar instruments. Based on this information, an assessment must be made as to whether any decline in the fair value of an investment security should be considered an other-than-temporary impairment and recorded in non-interest income as a loss on investments. The determination of such impairment is subject to a variety of factors, including management's judgment and experience. See note 3 of the notes to the consolidated financial statements beginning on page F-1 of this annual report.

Deferred Compensation and Executive Benefit Plans. We have several deferred compensation arrangements for key executive officers and directors as well as certain executive benefit plans. Each plan has unique characteristics management must consider when recording the related liabilities and expenses at each reporting date of the consolidated financial statements and during the reporting period. The related liabilities are considered accounting estimates and are subject to judgments and assumptions by management which affect the recorded amounts of liabilities and expenses recorded during the period as well as disclosure of contingent liabilities. Actual results could differ from those estimates. See notes 12 and 13 of the notes to the consolidated financial statements beginning on page F-1 of this annual report.

Balance Sheet Analysis

Assets. At December 31, 2012, our total assets were $291.6 million, an increase of $7.9 million from December 31, 2011. The increase during the year ended December 31, 2012 was primarily the result of increases in net loans, investments at cost, and cash surrender value of bank owned life insurance of $12.6 million, $495,000, and $288,000, respectively. These increases were partially offset by decreases in cash and cash equivalents and securities available for sale of $3.3 million and $2.1 million, respectively.

Loans. Our primary lending activity is the origination of loans secured by real estate. We originate primarily residential mortgage loans and, to a lesser extent, non-residential real estate loans, construction loans, land and land development loans, multi-family real estate loans, consumer loans and commercial business loans.

Residential mortgage loans and residential construction loans totaled $83.2 million, or 37.4%, and $4.3 million, or 1.9% of the total loan portfolio, at December 31, 2012, respectively. At December 31, 2011, these loans totaled $80.7 million, or 38.5%, and $4.6 million, or 2.2% of the total loan portfolio, respectively. The increase in residential mortgage loans was primarily a result of an increase in market demand.

Commercial real estate loans, including non-residential, multi-family, land and construction loans on these types of properties, comprised $94.4 million, or 42.4% of the total loan portfolio, at December 31, 2012. At December 31, 2011, these loans totaled $85.5 million, or 40.8% of the total loan portfolio. The increase was primarily due to an increase of $7.1 million in non-residential loans. During the year ended December 31, 2012, non-residential and non-residential construction loans increased $9.3 million and multi-family real estate loans increased $627,000, while land loans decreased $980,000. The balance of commercial real estate loans has increased primarily due to greater opportunity to originate these types of loans and increased commercial lending personnel. Management continues to focus on pursuing non-residential loan opportunities in order to further diversify the loan portfolio.

Commercial business loans were $12.6 million, or 5.7% of the total loan portfolio, at December 31, 2012, as compared to $12.6 million, or 6.0% of the total loan portfolio, at December 31, 2011. Consumer loans increased to $28.0 million, or 12.6% of the total loan portfolio, at December 31, 2012 as compared to $26.0 million, or 12.4% of the total loan portfolio, at December 31, 2011. The increase in consumer loans was primarily due to an increased focus on automobile lending.

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The following table sets forth the composition of our loan portfolio at the dates indicated.

                                                                                                          At December 31,
                                                     2012                         2011                         2010                         2009                         2008
(Dollars in thousands)                       Amount        Percent        Amount        Percent        Amount        Percent        Amount        Percent        Amount        Percent
Real estate mortgage:
Residential one- to four-family             $  83,159         37.38 %    $  80,667         38.52 %    $  79,374         38.93 %    $  79,573         40.75 %    $  75,297         37.62 %
Non-residential                                54,969         24.71         47,900         22.87         43,734         21.45         37,905         19.41         32,295         16.14
Multi-family                                   21,784          9.79         21,157         10.10         20,851         10.23         14,625          7.49         11,255          5.62
Residential construction                        4,327          1.94          4,618          2.20          3,680          1.80          5,489          2.81         13,059          6.52
Multi-family construction                          -             -              16          0.01             -             -             624          0.32          3,865          1.93
Non-residential construction                    4,306          1.93          2,078          0.99          1,499          0.74          2,709          1.39         11,390          5.69
Land                                           13,366          6.01         14,346          6.85         14,658          7.19         14,690          7.52         10,893          5.44

Total                                         181,911         81.76        170,782         81.54        163,796         80.34        155,615         79.69        158,054         78.96

Commercial business                            12,591          5.66         12,616          6.02         12,766          6.26         12,001          6.15         14,565          7.28
Home equity loans and lines of credit          15,159          6.81         15,613          7.46         16,887          8.28         16,552          8.48         14,671          7.33
Auto loans                                      6,402          2.88          4,590          2.19          4,394          2.15          4,725          2.42          4,905          2.45
Loans secured by deposits                       1,636          0.73          1,385          0.66          1,728          0.85          1,367          0.70          1,546          0.77
Consumer finance loans                          2,459          1.11          2,124          1.02          1,992          0.98          1,970          1.01          2,600          1.30
Other                                           2,337          1.05          2,321          1.11          2,333          1.14          3,023          1.55          3,815          1.91

Total                                          27,993         12.58         26,033         12.44         27,334         13.40         27,637         14.16         27,537         13.76

Total loans                                   222,495           100 %      209,431           100 %      203,896           100 %      195,253           100 %      200,156        100.00 %

Less: unearned interest and fees                 (448 )                       (362 )                       (324 )                       (271 )                       (361 )
Less: net deferred loan origination fees         (297 )                       (204 )                       (221 )                       (165 )                       (192 )
Less: allowance for loan losses                (4,475 )                     (4,166 )                     (3,965 )                     (3,413 )                     (3,083 )

Loans receivable, net                       $ 217,275                    $ 204,699                    $ 199,386                    $ 191,404                    $ 196,520

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Loan Maturity

The following table sets forth certain information at December 31, 2012 regarding the dollar amount of loan principal repayments becoming due during the periods indicated. The table does not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.

                                                                                                At December 31, 2012
                                              Residential         Non-residential                                              Commercial                        Total
(Dollars in thousands)                        Real  Estate        Real Estate (1)        Construction (2)         Land          Business        Consumer         Loans
Amounts due in:
One year or less                             $        2,256      $          15,632      $            6,086      $  4,158      $      5,952      $   5,088      $  39,172
More than one year through two years                  4,497                  6,930                     243         2,525               343          3,085         17,623
More than two years through three years               4,516                  6,320                     241           585               982          4,597         17,241
More than three years through five years             16,635                 34,314                     921         3,745             3,942          4,738         64,295
More than five years through ten years                4,540                  7,152                      -            485             1,372          4,498         18,047
More than ten years through fifteen years             7,023                  1,061                      -            805                -           5,795         14,684
More than fifteen years                              43,692                  5,344                   1,142         1,063                -             192         51,433

Total                                        $       83,159      $          76,753      $            8,633      $ 13,366      $     12,591      $  27,993      $ 222,495

(1) Includes multi-family real estate loans.

(2) Includes residential real estate construction loans, non-residential real estate construction loans and multi-family real estate construction loans.

Fixed vs. Adjustable Rate Loans

The following table sets forth the dollar amount of all loans at December 31,
2012 that are due after December 31, 2013, and that have either fixed interest
rates or floating or adjustable interest rates. The amounts shown below exclude
unearned loan origination fees.

                                                        Floating or
    (In thousands)                 Fixed Rates       Adjustable  Rates        Total
    Residential real estate       $      19,754     $            61,149     $  80,903
    Non-residential real estate          21,312                  39,809        61,121
    Construction                          1,622                     925         2,547
    Land                                  1,236                   7,972         9,208
    Commercial business                   5,136                   1,503         6,639
    Consumer                             10,494                  12,411        22,905

    Total                         $      59,554     $           123,769     $ 183,323

Most of our adjustable rate loans contain floor rates. Some adjustable rate loan products contain floor rates equal to the initial interest rate on the loan. When market interest rates fall below the floor rate, as has occurred in recent months, loan rates do not adjust further downward. As market interest rates rise in the future, the interest rates on these loans may rise based on the contract rate (index plus the margin) exceeding the initial interest floor rate; however, contract interest rates will only increase when the index plus margin exceed the imposed floor rate.

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Loan Activity

The following table shows loans originated, purchased and sold during the
periods indicated.

                                                    Year Ended December 31,
        (In thousands)                         2012          2011          2010
        Total loans at beginning of period   $ 208,865     $ 203,351     $ 194,817

        Loans originated:
        Residential real estate                 67,282        54,690        57,456
        Non-residential real estate             13,939        16,142        18,990
        Land                                     3,444         3,019         2,219
        Construction                            10,730         8,514         8,783
        Commercial business                      8,462         7,564         8,227
        Consumer                                18,839        16,338        18,398

        Total loans originated                 122,696       106,267       114,073

        Loans purchased:
        Residential real estate                     -            238            38
        Non-residential real estate                 -             -            530
        Construction                                -             -             -
        Commercial business                         10           575         1,383
        Consumer                                    -             -             -

        Total loans purchased                       10           813         1,951

        Loan principal repayments               59,922        81,299        82,103
        Loan sales                              49,899        20,267        25,387

        Total repayments and sales             109,821       101,566       107,490

        Net loan activity                       12,885         5,514         8,534

        Total loans at end of period         $ 221,750     $ 208,865     $ 203,351

Loan originations come from a number of sources. The primary sources of loan originations are existing customers, walk-in traffic, advertising and referrals from customers. We generally sell in the secondary market long-term fixed-rate residential mortgage loans that we originate. Our decision to sell loans is based on prevailing market interest rate conditions, interest rate management and liquidity needs. Occasionally, we have purchased participation interests in commercial real estate loans to supplement our loan portfolio. We underwrite participation interests using the same underwriting standards for loans that we originate for our portfolio. At December 31, 2012, our participation interests totaled $7.0 million, most of which were secured by properties outside of our primary market area but within a 75-mile radius of it.


At December 31, 2012, our securities portfolio consisted of securities of U.S. government agencies and corporations, securities of various government-sponsored agencies and of state and municipal governments and mortgage-backed securities issued by Freddie Mac, Fannie Mae and Ginnie Mae. At December 31, 2012, we also held an investment in the common stock of the Federal Home Loan Bank of Cincinnati. A portion of this investment is required in order to collateralize borrowings from the Federal Home Loan Bank of Cincinnati and the investment is periodically increased by stock dividends paid by the Federal Home Loan Bank. Our securities portfolio is used to invest excess funds for increased yield, manage interest rate risk and as collateralization for public unit deposits.

At December 31, 2012, $32.2 million of our securities portfolio was classified as available for sale. In addition, at December 31, 2012, we had $3.4 million of other investments, at cost, which consisted of Federal Home Loan Bank of Cincinnati common stock of $2.9 million and a limited partnership investment of $495,000.

Total securities decreased by $1.6 million, or 4.4%, for the year ended December 31, 2012 primarily as a result of $11.0 million in calls of agency securities and $2.9 million of principal repayments on mortgage-backed securities, partially offset by purchases of mortgage-backed, agency, SBA, and municipal securities of $6.6 million, $4.1 million, $1.0 million, and $446,000, respectively.

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Total securities decreased by $7.3 million, or 17.5%, for the year ended December 31, 2011 primarily as a result of purchases of mortgage-backed and agency securities of $13.5 million offset by $2.3 million in repayments on mortgage backed securities, $18.9 million in calls, sales and repayments on agency securities and an increase in net unrealized gain of $400,000. We hold no stock in Fannie Mae or Freddie Mac and have not held stock in these entities throughout the periods presented. In addition, for all periods presented, our mortgage-backed and related securities did not include any private label issues or real estate mortgage investment conduits.

At December 31, 2012, we had no investments in securities of an issuer (except for investments in securities issued by the U.S. Government or by U.S. Government agencies and corporations), the aggregate book value of which exceeded 10% of our consolidated stockholders' equity at that date.

The following table sets forth the amortized costs and fair values of our investment securities at the dates indicated.

                                                                      At December 31,
                                               2012                         2011                         2010
                                      Amortized        Fair        Amortized        Fair        Amortized        Fair
(In thousands)                          Cost          Value          Cost          Value          Cost          Value
U.S. government agencies and
corporations                         $    13,234     $ 13,351     $    19,495     $ 19,733     $    29,389     $ 29,339
States and political subdivisions          5,436        5,822           4,995        5,279           5,674        5,528
Mortgage-backed and related
securities                                12,605       12,977           8,864        9,269           6,269        6,671

Total securities available for
sale and held to maturity                 31,275       32,150          33,354       34,281          41,332       41,538

Federal Home Loan Bank of
Cincinnati common stock                    2,899        2,899           2,899        2,899           2,899        2,899
Tenth Street Fund III, L.P.
investment                                   495          495              -            -               -            -

Total investments, at cost                 3,394        3,394           2,899        2,899           2,899        2,899

Total                                $    34,669     $ 35,544     $    36,253     $ 37,180     $    44,231     $ 44,437

The following table sets forth the activity in our investment securities portfolio during the periods indicated.

                                                                   Year Ended
                                                                  December 31,
(In thousands)                                       2012             2011             2010
Mortgage-backed and related securities:
Mortgage-backed and related securities,
beginning of period (1)                            $   9,269        $   6,671        $ 10,534

Purchases                                              6,650            4,900              -
Sales                                                     -                -               -
Repayments and prepayments                            (2,850 )         (2,326 )        (3,806 )
Increase (decrease) in net unrealized gain               (92 )             24             (57 )

Net increase (decrease) in mortgage-backed
securities                                             3,708            2,598          (3,863 )

Mortgage-backed and related securities, end of
period (1)                                            12,977            9,269           6,671

Investment securities:
Investment securities, beginning of period (1)        25,012           34,867          13,051

Purchases                                              5,537            8,619          24,115
Sales                                                     -              (378 )            -
Maturities                                           (11,102 )        (18,471 )        (2,231 )
Increase (decrease) in net unrealized gain              (274 )            375             (68 )

Net increase (decrease) in investment
securities                                            (5,839 )         (9,855 )        21,816

Investment securities, end of period (1)           $  19,173        $  25,012        $ 34,867

(1) At fair value.

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The following tables set forth the stated maturities and weighted average yields of securities at December 31, 2012. Weighted average yields on tax-exempt securities are presented on a tax equivalent basis using a federal marginal tax rate of 34.0%. Certain mortgage-backed securities have adjustable interest rates and will reprice annually within the various maturity ranges. These repricing schedules are not reflected in the table below. Weighted average yield calculations on investments available for sale do not give effect to changes in fair value that are reflected as a component of equity.

                                                                                     More than                       More than
                                                     One Year                       One Year to                    Five Years to                      More than
                                                     or Less                        Five Years                       Ten Years                        Ten Years                          Total
. . .
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