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AFCB > SEC Filings for AFCB > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for ATHENS BANCSHARES CORP

Form 10-Q for ATHENS BANCSHARES CORP


8-Nov-2013

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, 2012 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, 2013, 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, 2012 included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012.

Comparison of Financial Condition at September 30, 2013 and December 31, 2012

Assets. Total assets increased from $291.6 million at December 31, 2012 to $295.7 million at September 30, 2013.

Cash and Cash Equivalents. Total cash and cash equivalents increased $1.3 million, or 6.4%, from $20.3 million at December 31, 2012 to $21.6 million at September 30, 2013. This is due primarily to an $11.8 million increase in deposits and a $1.9 million decrease in securities, partially offset by a $5.0 million increase in loans, repurchases of Company common stock in the amount of $4.9 million, and the payoff of Federal Home Loan Bank borrowings of $3.0 million. Other activities resulted in a net cash inflow of approximately $500,000.

Securities. Securities decreased $1.9 million, or 5.9%, from $32.2 million at December 31, 2012 to $30.3 million at September 30, 2013, primarily as a result of $5.2 million in calls of agency securities, $2.5 million of principal payments on mortgage-backed securities, and $460,000 in calls of municipal securities. The decrease was partially offset by purchases of taxable and tax-exempt municipal securities of $4.3 million, purchases of mortgage-backed securities of $2.0 million, and purchases of agency securities of $1.0 million. The purchases were funded from available cash. The remaining change in securities was due to amortization and mark-to-market adjustments.

Loans. Net loans receivable increased $5.0 million, or 2.3%, from $217.3 million at December 31, 2012 to $222.3 million at September 30, 2013, primarily as a result of $4.7 million and $4.2 million increases in residential 1-4 family real estate loans and construction and land loans, respectively. These increases were partially offset by decreases in consumer and equity lines of credit and commercial loans of $3.6 million and $200,000, respectively. The increase in residential 1-4 family real estate loans was primarily due to an increase in the proportion of mortgages originated in-house as opposed to the secondary market. This increase was due primarily to higher rates on the secondary market period over period. The increase in construction and land loans was due primarily to draws on a construction line of credit secured by a hotel in Knoxville, Tennessee. The decrease in consumer and equity lines of credit and commercial loans were due to an increase in pay downs of existing loans period over period.


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Deposits. Total deposits increased $11.8 million, or 5.0%, from $234.2 million at December 31, 2012 to $246.0 million at September 30, 2013. The primary reason for the increase in deposits was a $6.3 million increase in demand and NOW accounts, primarily due to an overall increase in the number of accounts. Other increases were in money market accounts of $2.1 million, savings deposit accounts of $1.7 million, and certificates of deposit of $1.7 million.

Borrowings. All outstanding Federal Home Loan Bank borrowings matured during the third quarter of 2013 and were paid off as of September 30, 2013. Federal Home Loan Bank borrowings totaled $3.0 million at December 31, 2012.

Stockholders' Equity. Stockholders' equity decreased $3.7 million, or 7.7%, from $48.0 million at December 31, 2012 to $44.3 million at September 30, 2013. The primary reasons for the decrease include $4.9 million in repurchased and retired common stock, an unrealized loss on securities available for sale (net of taxes) of $506,000, and $306,000 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 2013 of $1.7 million and a $263,000 increase in additional paid-in capital related to stock compensation expense for the period.

Results of Operations for the Three Months Ended September 30, 2013 and 2012

Overview. The Company reported net income of $497,000, or $0.26 basic earnings per share, for the three-month period ended September 30, 2013, compared to net income of $746,000, or $0.33 basic earnings per share, for the same period in 2012.

Net Interest Income. Net interest income after provision for loan losses increased $197,000, or 7.63%, to $2.8 million for the three months ended September 30, 2013 compared to the same period in 2012.

Total interest income decreased $252,000, or 6.9%, from $3.6 million for the three months ended September 30, 2012 to $3.4 million for the three months ended September 30, 2013. The decrease was primarily the result of a $220,000 decrease in interest on loans as well as a $32,000 decrease in interest on securities and interest-bearing deposits in other banks. The decrease in interest on loans was due primarily to a decrease in market interest rates. The 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.

Total interest expense decreased $122,000, or 18.8%, from $648,000 for the three months ended September 30, 2012 compared to $526,000 for the three months ended September 30, 2013. The decrease was primarily a result of a $103,000 decrease in interest on deposits as well as a $19,000 decrease in interest on Federal Home Loan Bank advances. The primary reason for the decrease in interest on deposits was a reduction in market interest rates. The decrease in interest on Federal Home Loan Bank advances was due to the payoff of maturing advances.

Provision for Loan Losses. The provision for loan losses was $73,000 for the three months ended September 30, 2013 compared to $400,000 for the same period in 2012.

Non-performing loans decreased $281,000 from $7.6 million at June 30, 2013 to $7.4 million at September 30, 2013. Non-performing residential mortgage loans increased $60,000 while construction and land loans and consumer loans decreased $338,000 and $3,000, respectively. The balance of non-performing loans at September 30, 2013 includes nonaccrual loans of $7.4 million. There were no residential mortgage loans that were over 90 days past due but still accruing interest at September 30, 2013. The balance of nonaccrual loans at September 30, 2013 consists of $6.2 million in residential mortgage loans, $1.1 million in construction and land loans and $47,000 in consumer loans.

Net charge-offs (recoveries) were $114,000 for the three months ended September 30, 2013 compared to $131,000 for the same period in 2012. Charge-offs totaling $148,000 were recorded during the quarter ended September 30, 2013 in connection with residential mortgage loans ($68,000) and consumer loans ($80,000).

The allowance for loan losses was $4.5 million at September 30, 2013. 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.


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Non-interest Income. Non-interest income decreased $165,000, or 11.5%, to $1.3 million for the three months ended September 30, 2013 compared to $1.4 million for the same period in 2012, primarily due to decreases in fees related to the origination, sale and servicing of mortgage loans on the secondary market and a reduction in income related to non-sufficient funds charges on deposit accounts of $167,000 and $44,000, respectively. These decreases were partially offset by a $28,000 increase in other deposit related fees and a $17,000 increase in debit card usage income. All other non-interest income increased $1,000, net.

The decrease in fees related to the origination, sale and servicing of mortgage loans on the secondary market is primarily due to decreased volume of these loans during the three months ended September 30, 2013 as compared to the same period in 2012. The decreased volume is primarily a result of an increase in market rates 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. The Bank has also broadened its efforts to discontinue overdraft privileges for accounts with a history of excessive usage.

Income from other deposit related fees increased primarily due to a restructuring of deposit accounts which requires customers to pay a small fee for paper statements. 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.

Non-interest Expense. Non-interest expense increased $434,000, or 14.8%, to $3.4 million for the three months ended September 30, 2013 compared to $2.9 million for the same period in 2012. The primary factors effecting the change were increases in expenses related to data processing, salary and employee benefits, and advertising and other expenses of $187,000, $112,000, and $85,000, respectively. The increase in data processing expense was due to a combination of increased debit card transactions and certain costs resulting from the Bank's conversion to a new core processing system. Salary and benefits expenses increased primarily because of an increase in the total number of employees. Advertising and other expenses increased primarily due to additional costs arising from the Bank's transition to a new core processing system. The remaining $50,000 increase in non-interest expense was due to an increase in occupancy and equipment expenses and federal deposit insurance premiums of $26,000 and $24,000, respectively.

Income Tax Expense. The Company had income tax expense of $194,000 for the three month period ended September 30, 2013 as compared to $348,000 for the same period in 2012. The decrease in income tax expense was due primarily to the decrease 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 $329,000 for the three month period ended September 30, 2013 compared to total comprehensive income of $752,000 for the three month period ended September 30, 2012. The decrease was primarily a result of a decrease in net income period over period of $249,000 and a negative change of $174,000 in unrealized gains and losses on securities available for sale, net of tax.


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Results of Operations for the Nine Months Ended September 30, 2013 and 2012

Overview. The Company reported net income of $1.7 million, or $0.85 basic earnings per share, for the nine-month period ended September 30, 2013, compared to net income of $2.0 million, or $0.85 basic earnings per share, for the same period in 2012.

Net Interest Income. Net interest income after provision for loan losses increased $162,000, or 1.97%, to $8.4 million for the nine months ended September 30, 2013 compared to the same period in 2012.

Total interest income decreased $547,000, or 5.1%, from $10.8 million for the nine months ended September 30, 2012 to $10.3 million for the nine months ended September 30, 2013. The decrease was primarily the result of a $384,000 decrease in interest on loans as well as a $163,000 decrease in interest on securities and interest-bearing deposits in other banks. The decrease in interest on loans was due primarily to a decrease in market interest rates. The 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.

Total interest expense decreased $384,000, or 19.0%, from $2.0 million for the nine months ended September 30, 2012 to $1.6 million for the nine months ended September 30, 2013. The decrease was primarily a result of a $364,000 decrease in interest on deposits as well as a $20,000 decrease in interest on Federal Home Loan Bank advances. The primary reason for the decrease in interest on deposits was a reduction in market interest rates. The decrease in interest on Federal Home Loan Bank advances was due to the payoff of maturing advances.

Provision for Loan Losses. The provision for loan losses was $281,000 for the nine months ended September 30, 2013 compared to $606,000 for the same period in 2012.

Non-performing loans increased $3.5 million from $3.9 million at December 31, 2012 to $7.4 million at September 30, 2013. Non-performing residential mortgage loans and consumer loans increased $3.9 million and $2,000, respectively, while construction and land loans decreased $431,000. The increase in non-performing residential mortgage loans is primarily due to the classification of a $3.9 million loan secured by 50 residential rental units located in the Chattanooga, Tennessee area. The classification of this loan did not result in a significant increase to the allowance for loan losses due to the adequacy of the value of the collateral securing the loan. The balance of non-performing loans at September 30, 2013, includes nonaccrual loans of $7.4 million. There were no residential mortgage loans that were over 90 days past due but still accruing interest at September 30, 2013. The balance of nonaccrual loans at September 30, 2013 consists of $6.2 million in residential mortgage loans, $1.1 million in construction and land loans and $47,000 in consumer loans.

Net charge-offs were $280,000 for the nine months ended September 30, 2013 compared to $285,000 for the same period in 2012. Charge-offs totaling $503,000 were recorded during the nine months ended September 30, 2013 in connection with residential mortgage loans ($194,000), construction and land loans ($98,000), and consumer loans ($211,000).

The allowance for loan losses was $4.5 million at September 30, 2013. 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 $40,000, or 1.0%, to $3.9 million for the nine months ended September 30, 2013 compared to the same period in 2012, primarily due to increases in debit card usage income, income related to investment sales commissions, income from Valley Title Services, LLC, and income from other deposit related fees of $104,000, $97,000, $51,000, and $47,000, respectively. These increases were partially offset by a $127,000 decrease in income related to non-sufficient funds charges on deposit accounts and a $125,000 decrease in fees related to the origination, sale and servicing of mortgage loans on the secondary market. All other non-interest income decreased $7,000, net.

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 investment sales commissions increased primarily due to increased sales of investment products resulting from a partial recovery of investment markets and customers seeking higher yielding investment alternatives in the continued low rate environment. Income from Valley Title Services, LLC increased primarily due to an increase in the volume of mortgage loan originations during the nine months ended September 30, 2013 as compared to the same period in 2012. Income from other deposit related fees increased primarily due to a restructuring of deposit accounts which requires customers to pay a small fee for paper statements.


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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. The Bank has also broadened its efforts to discontinue overdraft privileges for accounts with a history of excessive usage. Income related to the origination, sale and servicing of mortgage loans on the secondary market decreased primarily due to decreased volume of these loans during the nine months ended September 30, 2013 as compared to the same period in 2012. The decreased volume is primarily a result of a increase in market rates period over period.

Non-interest Expense. Non-interest expense increased $1.1 million, or 12.3%, to $9.8 million for the nine months ended September 30, 2013 compared to $8.7 million for the same period in 2012. The primary factors effecting the change were increases in expenses related to salary and employee benefits, data processing, advertising and other expenses, and occupancy and equipment of $398,000, $361,000, $195,000, and $92,000, respectively. Salary and benefits expenses increased primarily because of an increase in the total number of employees. The increase in data processing expense was due to a combination of increased debit card transactions and certain costs resulting from the Bank's conversion to a new core processing system. Advertising and other expenses increased primarily due to additional costs arising from the Bank's transition to a new core processing system as well as an offsetting gain on the sale of foreclosed real-estate during 2012, which was not repeated in 2013. The primary reason for the increase in occupancy and equipment expense was increased technology maintenance costs as well as additional depreciation expense on computer hardware due to purchases. The remaining $28,000 increase in non-interest expense was due to an increase in federal deposit insurance premiums.

Income Tax Expense. The Company had an income tax expense of $770,000 for the nine month period ended September 30, 2013 as compared to $1.3 million for the same period in 2012. The decrease in income tax expense was due primarily to the decrease in taxable income period over period.

Total Comprehensive Income. Total comprehensive income for the periods presented consists of net income and the change in unrealized gains (losses) on securities available for sale, net of tax. Total comprehensive income was $1.2 million for the nine-month period ended September 30, 2013 compared to total comprehensive income of $2.0 million for the nine-month period ended September 30, 2012. The decrease was primarily a result of a negative change of $525,000 in unrealized gains and losses on securities available for sale, net of tax and a decrease in net income period over period of $319,000.

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 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, 2013, cash and cash equivalents totaled $21.6 million.

At September 30, 2013, securities classified as available-for-sale, which amounted to $30.3 million, provide an additional source of liquidity. In addition, at September 30, 2013, the Bank had the ability to borrow a total of approximately $34.0 million from the Federal Home Loan Bank of Cincinnati. At September 30, 2013, the Bank had $11.8 million in letters of credit with the Federal Home Loan Bank to secure public funds deposits.

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


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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 $11.0 million at September 30, 2013.

Capital Management. The Bank is required to maintain specific amounts of capital pursuant to federal regulatory requirements. As of September 30, 2013, the Bank was in compliance with all regulatory capital requirements, which were effective as of such date, with tangible, core, tier 1 risk-based capital, and total risk-based capital ratios of 10.5%, 10.5%, 15.4% and 16.7%, respectively. The regulatory requirements at that date were 1.5%, 4.0%, 4.0% and 8.0%, respectively. At September 30, 2013, 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 $306,000 in the aggregate during the nine months ended September 30, 2013. The dividend payout ratio for the first nine months of 2013, representing dividends per share divided by diluted earnings per share, was 18.5%. 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, 2013, 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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