10-K 1 d641718d10k.htm 10-K 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

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

For the fiscal year ended December 31, 2013

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)

Registrant’s telephone number, including area code: (423) 745-1111

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share   Nasdaq Stock Market, LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     x

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

 

Large accelerated filer   ¨    Accelerated filer    ¨
Non-accelerated filer   ¨    Smaller reporting company    x

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates was $31.4 million based upon the closing price of $18.00 per share as quoted on the Nasdaq Stock Market as of the last business day of the registrant’s most recently completed second fiscal quarter.

The number of shares outstanding of the registrant’s common stock as of March 10, 2014 was 1,850,590.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2014 Annual Meeting of Stockholders are incorporated by reference

in Part III of this Form 10-K.

 

 

 


Table of Contents

INDEX

 

         Page  
Part I   
Item 1.  

Business

     1   
Item 1A.  

Risk Factors

     17   
Item 1B.  

Unresolved Staff Comments

     21   
Item 2.  

Properties

     22   
Item 3.  

Legal Proceedings

     23   
Item 4.  

Mine Safety Disclosures

     23   
Part II   
Item 5.  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     23   
Item 6.  

Selected Financial Data

     25   
Item 7.  

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

     27   
Item 7A.  

Quantitative and Qualitative Disclosures About Market Risk

     47   
Item 8.  

Financial Statements and Supplementary Data

     47   
Item 9.  

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

     47   
Item 9A.  

Controls and Procedures

     48   
Item 9B.  

Other Information

     48   
Part III   
Item 10.  

Directors, Executive Officers and Corporate Governance

     49   
Item 11.  

Executive Compensation

     49   
Item 12.  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     50   
Item 13.  

Certain Relationships and Related Transactions, and Director Independence

     50   
Item 14.  

Principal Accountant Fees and Services

     50   
Part IV   
Item 15.  

Exhibits and Financial Statement Schedules

     51   

SIGNATURES

 


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This annual report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of Athens Bancshares Corporation. These forward-looking statements are generally identified by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project” or similar expressions. Athens Bancshares Corporation’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of Athens Bancshares Corporation and its subsidiary include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in Athens Bancshares Corporation’s market area, changes in real estate market values in Athens Bancshares Corporation’s market area, changes in relevant accounting principles and guidelines and inability of third party service providers to perform. Additional factors that may affect our results are discussed under Item 1A—Risk Factors of this annual report.

These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, Athens Bancshares Corporation does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

Unless the context indicates otherwise, all references in this annual report to “Company,” “we,” “us” and “our” refer to Athens Bancshares Corporation and its subsidiary.

PART I

 

Item 1. BUSINESS

General

Athens Bancshares Corporation (the “Company”) was incorporated in September 2009 to serve as the holding company for Athens Federal Community Bank (the “Bank”), a federally chartered savings bank. On January 6, 2010, the Bank converted from a mutual savings bank to a stock savings bank and became the wholly owned subsidiary of the Company. In the conversion, the Company sold an aggregate of 2,677,250 shares of common stock at a price of $10.00 per share to depositors of the Bank. In addition, in connection with the conversion, the Bank formed the Athens Federal Foundation, to which the Company contributed an additional 100,000 shares of common stock and $100,000 in cash.

The Company’s principal business activity is the ownership of the outstanding shares of common stock of the Bank. The Company does not own or lease any property for operations but instead uses the premises, equipment and other property of the Bank, with the payment of appropriate rental fees, as required by applicable laws and regulations, under the terms of an expense allocation agreement.

The Bank operates as a community-oriented financial institution offering traditional financial services to consumers and businesses in our primary market area. We attract deposits from the general public and use those funds to 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. We primarily conduct our lending and deposit activities primarily with individuals and small businesses in our primary market area.

Our website address is www.athensfederal.com. Information on our website should not be considered a part of this annual report.

Market Area

We are headquartered in Athens, Tennessee, which is located in southeastern Tennessee along Interstate 75, approximately half way between Knoxville and Chattanooga, Tennessee. We consider McMinn, Monroe and Bradley Counties, Tennessee, and the surrounding areas to be our primary market area. The top employment sectors

 

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in our primary market area currently consist of manufacturing services, particularly the automobile manufacturing industry, and, to a lesser extent, wholesale and retail trade services, government services and educational, health care and social assistance services. Our local economy has been negatively impacted by the economic recession in recent periods.

Competition

We face significant competition for the attraction of deposits and origination of loans. Our most direct competition for deposits has historically come from the several financial institutions operating in our primary market area and from other financial service companies such as securities brokerage firms, credit unions and insurance companies. We also face competition for investors’ funds from money market funds, mutual funds and other corporate and government securities.

Our competition for loans comes primarily from financial institutions, including credit unions, in our primary market area and from other financial service providers, such as mortgage companies and mortgage brokers. Competition for loans also comes from non-depository financial service companies entering the mortgage market, such as insurance companies, securities companies and specialty finance companies.

We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Competition for deposits and the origination of loans could limit our growth in the future.

Lending Activities

The largest segment of our loan portfolio is real estate mortgage loans, primarily one- to four-family residential mortgage loans. To a lesser extent, our loan portfolio includes non-residential real estate loans, construction loans, land and land development loans, multi-family real estate loans, consumer loans and commercial business loans. We originate loans for investment purposes, although we generally sell our fixed-rate residential mortgage loans into the secondary market with servicing retained. Our lending activities focus on serving small businesses and emphasizing relationship banking in our primary market area. We do not offer, and have not offered, Alt-A, sub-prime or no-documentation mortgage loans.

One-to Four-Family Residential Loans. At December 31, 2013, we had $88.4 million in one- to four-family residential loans, which represented 38.2% of our total loan portfolio. Our origination of residential mortgage loans enables borrowers to purchase or refinance existing homes located in our primary market area. In recent years, a significant portion of the residential mortgage loans that we have originated have been secured by non-owner occupied properties. Loans secured by non-owner occupied properties generally carry a greater risk of loss than loans secured by owner-occupied properties. See “Item 1A. Risk Factors—Our concentration in non-owner occupied real estate loans may expose us to increased credit risk.”

Our residential lending policies and procedures generally conform to the secondary market guidelines. We generally offer a mix of adjustable rate mortgage loans and fixed-rate mortgage loans with terms of up to 30 years. Borrower demand for adjustable-rate loans compared to fixed-rate loans is a function of the level of interest rates, the expectations of changes in the level of interest rates, and the difference between the interest rates and loan fees offered for fixed-rate mortgage loans as compared to an initially discounted interest rate and loan fees for multi-year adjustable-rate mortgages. The relative amount of fixed-rate mortgage loans and adjustable-rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment. We determine the loan fees, interest rates and other provisions of mortgage loans based on our own pricing criteria and competitive market conditions.

Interest rates and payments on our adjustable-rate mortgage loans generally adjust annually after an initial fixed period that typically ranges from one to five years. Interest rates and payments on our adjustable-rate loans generally are indexed to the Federal Cost of Funds or the one year U.S. Treasury Constant Maturity Index.

While one-to four-family residential real estate loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full either upon sale of the property pledged as security or upon refinancing the original loan. Therefore, average

 

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loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans on a regular basis. We do not offer residential mortgage loans with negative amortization and generally do not offer interest-only residential mortgage loans.

We generally do not make owner occupied one- to four-family residential real estate loans with loan-to-value ratios exceeding 95%. Loans with loan-to-value ratios in excess of 89% typically require private mortgage insurance. In addition, we generally do not make non-owner occupied one- to four-family residential real estate loans with loan-to-value ratios exceeding 85%. We generally require all properties securing mortgage loans to be appraised by a board-approved independent appraiser. We also generally require title insurance on all first mortgage loans. Borrowers must obtain hazard insurance, and flood insurance is required for all loans located in flood hazard areas.

Non-residential Real Estate Loans. We offer fixed- and adjustable-rate mortgage loans secured by non-residential real estate. At December 31, 2013, non-residential real estate loans totaled $65.4 million, or 28.3% of our total loan portfolio. Our non-residential real estate loans are generally secured by small to moderately-sized office and retail properties, churches, assisted living facilities, and hotels located both in and out of our primary market area. With respect to non-residential real estate loans, we typically require that either the borrower or the property securing the loan be located in our primary market area.

We originate fixed-rate non-residential real estate loans, generally with terms of three to five years and payments based on an amortization schedule of up to 30 years, resulting in “balloon” balances at maturity. We also offer adjustable-rate commercial real estate loans, generally with terms up to 30 years and with interest rates typically equal to the prime lending rate as reported in the Wall Street Journal plus an applicable margin. Loans are secured by first mortgages, generally are originated with a maximum loan-to-value ratio of 85% and may require specified debt service coverage ratios depending on the characteristics of the project. Rates and other terms on such loans generally depend on our assessment of credit risk after considering such factors as the borrower’s financial condition and credit history, loan-to-value ratio, debt service coverage ratio and other factors. Our non-residential real estate loans typically provide for an interest rate floor of 5.0%.

Construction Loans. We originate construction loans for one-to four-family homes and commercial properties, such as assisted living facilities, retail shops and office units, and multi-family properties. At December 31, 2013, the outstanding balance of residential and non-residential construction loans totaled $20.2 million, which represented 8.7% of our total loan portfolio. Construction loans are typically for a term of 12 months with monthly interest only payments, and generally are followed by an automatic conversion to a 15-year to 30-year permanent loan with monthly payments of principal and interest. Except for speculative loans, discussed below, residential construction loans are generally only made to homeowners and the repayment of such loans generally comes from the proceeds of a permanent mortgage loan for which a commitment is typically in place when the construction loan is originated. Interest rates on these loans are generally tied to either the Federal Cost of Funds or the One Year U.S. Treasury Constant Maturity Index. We generally require a maximum loan-to-value ratio of 80% for all construction loans. We generally disburse funds on a percentage-of-completion basis following an inspection by a third party inspector.

We also originate speculative construction loans to builders who have not identified a buyer for the completed property at the time of origination. We generally limit speculative construction loans to a group of well-established builders in our primary market area and we also limit the number of projects with each builder. At December 31, 2013, we had approved commitments for speculative construction loans of $3.9 million, of which $3.3 million was outstanding. We generally require a maximum loan-to-value ratio of 80% for speculative construction loans.

Land and Land Development Loans. We originate loans to individuals and developers for the purpose of developing vacant land in our primary market area, typically for building an individual’s future residence or, in the case of a developer, residential subdivisions. At December 31, 2013, land and land development loans totaled $10.5 million, which represented 4.6% of our total loan portfolio. Land development loans, which are offered for terms of up to 12 months, are generally indexed to the prime rate as reported in the Wall Street Journal plus an applicable margin. We generally require a maximum loan-to-value ratio of 75% of the discounted market value based upon expected cash flows upon completion of the project. We also originate loans to individuals secured by undeveloped land held for investment purposes.

 

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Multi-Family Real Estate Loans. We offer multi-family (5 or more units) mortgage loans that are generally secured by properties in our primary market area. At December 31, 2013, multi-family loans totaled $9.1 million, which represented 3.9% of our total loan portfolio. Multi-family loans are secured by first mortgages and generally are originated with a maximum loan-to-value ratio of 85% and generally require specified debt service coverage ratios depending on the characteristics of the project. Rates and other terms on such loans generally depend on our assessment of the credit risk after considering such factors as the borrower’s financial condition and credit history, loan-to-value ratio, debt service coverage ratio and other factors.

Consumer Loans. We offer a variety of consumer loans, including home equity loans and lines of credit, automobile loans, and loans secured by deposits. At December 31, 2013, consumer loans totaled $24.7 million, or 10.7% of our total loan portfolio. Our consumer loan portfolio consists primarily of home equity loans, with terms up to 15 years and adjustable rate lines of credit with interest rates indexed to the prime rate as published in the Wall Street Journal. Consumer loans typically have shorter maturities and higher interest rates than traditional one- to four-family lending. We typically do not originate home equity loans with loan-to-value ratios exceeding 89%, including any first mortgage loan balance. The procedures for underwriting consumer loans include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loan.

Through the Bank’s operating subsidiary, Southland Finance, Inc., the Bank also offers consumer finance loans secured by used automobiles, televisions and various other personal property to borrowers with historically lower credit scores. These loans are generally originated for terms of 12 to 36 months and are partially funded by a $1.0 million line of credit with the Bank. At December 31, 2013, there was no outstanding balance on that line of credit. We generally maintain separate underwriting standards and more aggressive collection activity for these consumer finance loans.

Commercial Business Loans. We typically offer commercial business loans to small businesses located in our primary market area. At December 31, 2013, commercial business loans totaled $13.1 million, which represented 5.6% of our total loan portfolio. Commercial business loans consist of floating rate loans indexed to the prime rate as published in the Wall Street Journal plus an applicable margin and fixed rate loans for terms of up to five years. Our commercial business loan portfolio consists primarily of loans that are secured by land or equipment but also includes a smaller amount of unsecured loans for purposes of financing expansion or providing working capital for general business purposes. Key loan terms vary depending on the collateral, the borrower’s financial condition, credit history and other relevant factors.

Loan Underwriting

Adjustable-Rate Loans. While we anticipate that adjustable-rate loans will better offset the adverse effects of an increase in interest rates as compared to fixed-rate mortgages, an increased monthly mortgage payment required of adjustable-rate loan borrowers in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying property also may be adversely affected in a high interest rate environment. In addition, although adjustable-rate mortgage loans make our asset base more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits.

Non-Owner Occupied Residential Real Estate Loans. Loans secured by rental properties represent a unique credit risk to us and, as a result, we adhere to special underwriting guidelines. Of primary concern in non-owner occupied real estate lending is the consistency of rental income of the property. Payments on loans secured by rental properties often depend on the maintenance of the property and the payment of rent by its tenants. Payments on loans secured by rental properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. To monitor cash flows on rental properties, we require borrowers and loan guarantors, if any, to provide annual financial statements and we consider and review a rental income cash flow analysis of the borrower and consider the net operating income of the property, the borrower’s expertise, credit history and profitability, and the value of the underlying property. We generally require collateral on these loans to be a first mortgage along with an assignment of rents and leases.

 

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Non-residential and Multi-Family Real Estate Loans. Loans secured by multi-family and commercial real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans. Of primary concern in multi-family and commercial real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to adverse conditions in the real estate market or the economy. We apply what we believe to be conservative underwriting standards when originating commercial loans and seek to limit our exposure to lending concentrations to related borrowers, types of business and geographies, as well as seeking to participate with other banks in both buying and selling larger loans of this nature. Management continues to hire experienced lending officers and credit management personnel in order to safely increase this type of lending. To monitor cash flows on income properties, we require borrowers and loan guarantors, if any, to provide annual financial statements on multi-family and commercial real estate loans. In reaching a decision on whether to make a multi-family or commercial real estate loan, we consider and review a global cash flow analysis of the borrower and consider the net operating income of the property, the borrower’s expertise, credit history and profitability, and the value of the underlying property. An environmental survey or environmental risk insurance is typically obtained when the possibility exists that hazardous materials may have existed on the site, or the site may have been impacted by adjoining properties that handled hazardous materials.

Construction, Land and Land Development Loans. Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the estimated cost of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the building. If the estimate of value proves to be inaccurate, we may be confronted, at or before the maturity of the loan, with a building having a value which is insufficient to assure full repayment if liquidation is required. If we are forced to foreclose on a building before or at completion due to a default, we may be unable to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs. In addition, speculative construction loans, which are loans made to home builders who, at the time of loan origination, have not yet secured an end buyer for the home under construction, typically carry higher risks than those associated with traditional construction loans. These increased risks arise because of the risk that there will be inadequate demand to ensure the sale of the property within an acceptable time. As a result, in addition to the risks associated with traditional construction loans, speculative construction loans carry the added risk that the builder will have to pay the property taxes and other carrying costs of the property until an end buyer is found. Land and land development loans have substantially similar risks to speculative construction loans. To monitor cash flows on construction properties, we require borrowers and loan guarantors, if any, to provide annual financial statements and, in reaching a decision on whether to make a construction or land development loan, we consider and review a global cash flow analysis of the borrower and consider the borrower’s expertise, credit history and profitability. We also generally disburse funds on a percentage-of-completion basis following an inspection by a third party inspector.

Consumer Loans. Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are secured by assets that depreciate rapidly, such as motor vehicles. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and a small remaining deficiency often does not warrant further substantial collection efforts against the borrower. In the case of home equity loans, real estate values may be reduced to a level that is insufficient to cover the outstanding loan balance after accounting for the first mortgage loan balance. Consumer loan collections depend on the borrower’s continuing financial stability, and therefore are likely to be adversely affected by various factors, including job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

Commercial Business Loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment income or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

 

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Loan Approval Procedures and Authority. Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by our board of directors and management. Certain of our employees have been granted individual lending limits, which vary depending on the individual, the type of loan and whether the loan is secured or unsecured. Generally, all loan requests exceeding the individual officer lending limits are approved as follows: (i) the approval of any two members of our Loan Committee is required for residential loans up to $250,000; (ii) the approval of any three members of our Loan Committee (one of whom must be the President and Chief Executive Officer or Chief Credit Officer) is required for any single transaction of between $250,000 and $1.0 million and aggregate debt to one borrower transactions of between $250,000 and $1.0 million; and (iii) the approval of any four members of our board of directors is required for all single transactions exceeding $1.0 million and all loans to customers having aggregate outstanding debt to us exceeding $1.0 million. Our Loan Committee consists of our President and Chief Executive Officer, Chief Credit Officer, Vice President, Chief Operating Officer and Chief Financial Officer and certain other officers designated by the board of directors.

Loans to One Borrower. The maximum amount that we may lend to one borrower and the borrower’s related entities is limited, by regulation, to generally 15% of our unimpaired capital and surplus. At December 31, 2013, our regulatory limit on loans to one borrower was $5.5 million. At December 31, 2013, our largest lending relationship was $6.5 million and was performing according to its original terms at that date. When this loan was originated on June 13, 2013, our regulatory limit on loans to one borrower was $6.6 million.

Loan Commitments. We issue commitments for residential and commercial mortgage loans conditioned upon the occurrence of certain events. Commitments to originate mortgage loans are legally binding agreements to lend to our customers. Generally, our loan commitments expire after 30 days. See note 16 to the notes to the consolidated financial statements beginning on page F-1 of this annual report.

Investment Activities

We have legal authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various government-sponsored agencies and of state and municipal governments, mortgage-backed securities and certificates of deposit of federally insured institutions. Within certain regulatory limits, we also may invest a portion of our assets in other permissible securities. As a member of the Federal Home Loan Bank of Cincinnati, we also are required to maintain an investment in Federal Home Loan Bank of Cincinnati stock.

At December 31, 2013, our investment portfolio consisted primarily of U.S. government and agency securities, mortgage-backed securities and securities issued by government sponsored enterprises, and municipal securities. We do not currently invest in trading account securities. At December 31, 2013, we also maintained certain investments, at cost, which are described further in Note 4 of the notes to the consolidated financial statements beginning on page F-1 of this annual report.

Our investment objectives are: (i) to provide and maintain liquidity within the guidelines of the Office of the Comptroller of the Currency’s regulations; (ii) to manage interest rate risk; and (iii) to provide collateral for public unit deposits. Our board of directors has the overall responsibility for the investment portfolio, including approval of the investment policy. Our President and Chief Executive Officer and our Vice President, Chief Operating Officer and Chief Financial Officer are responsible for implementation of the investment policy and monitoring our investment performance. In addition, we have retained a third party registered investment advisor to serve as our investment manager and execute investment transactions, perform pre-purchase analysis and provide portfolio analysis on a quarterly basis. Our investment manager acts in a co-advisory capacity and does not have discretionary authority to execute trades on our behalf without the pre-approval of our President and Chief Executive Officer and/or Vice President, Chief Operating Officer and Chief Financial Officer. Our board of directors reviews the status of our investment portfolio on a monthly basis, or more frequently if warranted.

 

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Deposit Activities and Other Sources of Funds

Deposits, borrowings and loan repayments are the major sources of our funds for lending and other investment purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions.

Deposit Accounts. Deposits are attracted from within our primary market area through the offering of a broad selection of deposit instruments, including non-interest-bearing demand deposits (such as checking accounts), interest-bearing demand accounts (such as NOW and money market accounts), regular savings accounts and certificates of deposit. Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of our deposit accounts, we consider the rates offered by our competition, our liquidity needs, profitability to us, matching deposit and loan products and customer preferences and concerns. We generally review our deposit mix and pricing weekly. Our deposit pricing strategy has typically been to offer competitive rates on all types of deposit products, and to periodically offer special rates in order to attract deposits of a specific type or term.

Borrowings. We use advances from the Federal Home Loan Bank of Cincinnati to supplement our investable funds. The Federal Home Loan Bank functions as a central reserve bank providing credit for member financial institutions. As a member, we are required to own capital stock in the Federal Home Loan Bank of Cincinnati and are authorized to apply for advances on the security of such stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to creditworthiness have been met. Advances are made under several different programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth, the Federal Home Loan Bank’s assessment of the institution’s creditworthiness, collateral value and level of Federal Home Loan Bank stock ownership. We also utilize securities sold under agreements to repurchase and overnight repurchase agreements to supplement our supply of investable funds and to meet deposit withdrawal requirements.

Personnel

At December 31, 2013, we had 91 full-time employees and 18 flex-time employees, none of whom is represented by a collective bargaining unit. We believe our relationship with our employees is good.

REGULATION AND SUPERVISION

General

The Bank is examined and supervised by the Office of the Comptroller of the Currency (“OCC”), while the Company is examined and supervised by the Federal Reserve Board. This regulation and supervision establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the FDIC’s deposit insurance fund and depositors. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. The Bank is also a member of and owns stock in the Federal Home Loan Bank of Cincinnati, which is one of the twelve regional banks in the Federal Home Loan Bank System. The Bank also is regulated, to a lesser extent, by the FDIC with respect to insurance of deposit accounts and the Board of Governors of the Federal Reserve System, with respect to reserves to be maintained against deposits and other matters. The Bank’s relationship with its depositors and borrowers also is regulated to a great extent by both federal and state laws, especially in matters concerning the ownership of deposit accounts and the form and content of the Bank’s mortgage documents.

Any change in these laws or regulations, whether by the FDIC, the OCC, the Federal Reserve Board or Congress, could have a material adverse impact on the Bank, the Company, and their operations.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) made extensive changes in the regulation of federal savings banks such as the Bank. Under the Dodd-Frank Act, the Company’s former regulator, the Office of Thrift Supervision (“OTS”) was eliminated. Responsibility for the supervision and regulation of federal savings banks was transferred to the OCC, which is an agency that is

 

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responsible for the regulation and supervision of national banks. The OCC assumed responsibility for implementing and enforcing many of the laws and regulations applicable to federal savings banks. The transfer of regulatory functions became effective on July 21, 2011. At the same time, responsibility for the regulation and supervision of savings and loan holding companies, such as the Company was transferred to the Federal Reserve Board, which supervises bank holding companies.

Additionally, the Dodd-Frank Act created a new Consumer Financial Protection Bureau as an independent bureau of the Federal Reserve Board. The Consumer Financial Protection Bureau assumes responsibility for the implementation of the federal financial consumer protection and fair lending laws and regulations, a function previously assigned to prudential regulators, and has authority to impose new requirements. However, institutions of less than $10 billion in assets, such as the Bank, will continue to be examined for compliance with consumer protection and fair lending laws and regulations by, and be subject to the primary enforcement authority of, their prudential regulator rather than the Consumer Financial Protection Bureau.

In addition to eliminating the OTS and creating the Consumer Financial Protection Bureau, the Dodd-Frank Act, among other things, directs changes in the way that institutions are assessed for deposit insurance, mandates the imposition of consolidated capital requirements on savings and loan holding companies, requires originators of securitized loans to retain a percentage of the risk for the transferred loans, regulatory rate-setting for certain debit card interchange fees, repeals restrictions on the payment of interest on commercial demand deposits and contains a number of reforms related to mortgage originations. Many of the provisions of the Dodd-Frank Act are subject to delayed effective dates and/or require the issuance of implementing regulations. Their impact on operations cannot yet be fully assessed. However, there is a significant possibility that the Dodd-Frank Act will, at a minimum, result in increased regulatory burden, compliance costs and interest expense for the Company.

Certain of the regulatory requirements that are or will be applicable to the Bank and the Company are described below. This description of statutes and regulations is not intended to be a complete explanation of such statutes and regulations and their effect on the Bank and the Company and is qualified in its entirety by reference to the actual statutes and regulations.

Holding Company Regulation

General. The Company is a unitary savings and loan holding company within the meaning of the Home Owners’ Loan Act. The Company is a registered savings and loan holding company with the Federal Reserve Board and is subject to Federal Reserve Board regulations, examinations, supervision and reporting requirements. In addition, the Federal Reserve Board has enforcement authority over the Company, and its subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution.

The Dodd-Frank Act transferred to the Federal Reserve Board from the OTS the responsibility for regulating, and supervising savings and loan holding companies, effective July 21, 2011.

Permitted Activities. Pursuant to Section 10(o) of the Home Owners’ Loan Act and Federal Reserve Board regulations and policy, a federally chartered holding company such as the Company may engage in the following activities:

 

  (i) investing in the stock of a savings institution;

 

  (ii) acquiring a mutual savings bank through the merger of such savings institution into a savings institution subsidiary of such holding company or an interim savings bank subsidiary of such holding company;

 

  (iii) merging with or acquiring another holding company, one of whose subsidiaries is a savings institution;

 

  (iv) investing in a corporation, the capital stock of which is available for purchase by a savings institution under federal law or under the law of any state where the subsidiary savings institution or savings institutions share their home offices;

 

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  (v) furnishing or performing management services for a savings institution subsidiary of such company;

 

  (vi) holding, managing or liquidating assets owned or acquired from a savings subsidiary of such company;

 

  (vii) holding or managing properties used or occupied by a savings institution subsidiary of such company;

 

  (viii) acting as trustee under deeds of trust;

 

  (ix) any other activity (A) that the Federal Reserve Board, by regulation, has determined to be permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the Federal Reserve Board, by regulation, prohibits or limits any such activity for savings and loan holding companies; or (B) in which multiple savings and loan holding companies were authorized (by regulation) to directly engage on March 5, 1987;

 

  (x) any activity permissible for financial holding companies (if such status is elected by the Company) under Section 4(k) of the Bank Holding Company Act, including securities and insurance underwriting; and

 

  (xi) purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such savings and loan holding company is approved by the Federal Reserve Board. If a mutual holding company acquires or merges with another holding company, the holding company acquired or the holding company resulting from such merger or acquisition may only invest in assets and engage in activities listed in (i) through (xi) above, and has a period of two years to cease any nonconforming activities and divest of any nonconforming investments.

The Home Owners’ Loan Act prohibits a savings and loan holding company, including the Company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or holding company thereof, without prior written approval of the Federal Reserve Board. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a non-subsidiary company engaged in activities other than those permitted by the Home Owners’ Loan Act; or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community and competitive factors.

The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions.

The States vary in the extent to which they permit interstate savings and loan holding company acquisitions.

Capital. Historically, savings and loan holding companies have not been subject to regulatory capital requirements. The Dodd-Frank Act, however, requires the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves.

Source of Strength. The Dodd-Frank Act extends the “source of strength” doctrine to savings and loan holding companies. The regulatory agencies must promulgate regulations implementing the “source of strength” policy that requires holding companies act as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress. Federal Reserve Board policies also

 

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provide that holding companies should pay dividends only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. These policies may affect the ability of a savings and loan holding company to pay dividends or otherwise make capital distributions.

Acquisition of the Company. Under the Federal Change in Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a company), or group acting in concert, seeks to acquire direct or indirect “control” of a savings and loan holding company or savings association. Under certain circumstances, a change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the Company’s outstanding voting stock, unless the Federal Reserve Board has found that the acquisition will not result in control of the Company. A change in control definitively occurs upon the acquisition of 25% or more of the Company’s outstanding voting stock. Under the Change in Control Act, the Federal Reserve Board generally has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Any company that acquires control would then be subject to regulation as a savings and loan holding company.

Federal Securities Laws

The Company’s common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended. The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

The registration under the Securities Act of 1933 of shares of the common stock in the stock offering does not cover the resale of the shares. Shares of the common stock purchased by persons who are not affiliates of the Company may be resold without registration. Shares purchased by an affiliate of the Company will be subject to the resale restrictions of Rule 144 under the Securities Act of 1933. If the Company meets the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of the Company who complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three month period, the greater of 1% of the outstanding shares of the Company, or the average weekly volume of trading in the shares during the preceding four calendar weeks.

Sarbanes-Oxley Act of 2002

The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, the Chief Executive Officer and Chief Financial Officer are required to certify that its quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of internal control over financial reporting; they have made certain disclosures to its auditors and the audit committee of the Board of Directors about internal control over financial reporting; and they have included information in the quarterly and annual reports about their evaluation and whether there have been changes in internal control over financial reporting or in other factors that could materially affect internal control over financial reporting.

Federal Savings Association Regulation

Business Activities. The Bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and the regulations of the OCC. Under these laws and regulations, the Bank may originate mortgage loans secured by residential and commercial real estate, commercial business loans and consumer loans, and it may invest in certain types of debt securities and certain other assets. Certain types of lending, such as commercial real estate, commercial business and consumer loans, are subject to an aggregate limit calculated as a specified percentage of the Bank’s capital assets. The Bank also may establish subsidiaries that may engage in activities not otherwise permissible for the Bank, including real estate investment and securities and insurance brokerage.

 

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The Dodd-Frank Act removed federal statutory restrictions on the payment of interest on commercial demand deposit accounts, effective July 21, 2011.

Capital Requirements. OCC regulations require the Bank to meet three minimum capital standards: a 1.5% tangible capital ratio, a 4% leverage ratio (3% for savings banks receiving the highest regulatory rating) and an 8% risk-based capital ratio. The prompt corrective action standards discussed below, in effect, establish a minimum 2% tangible capital standard.

The risk-based capital standard requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100% assigned by federal regulations based on the risks believed inherent in the type of asset. Core capital is defined as common stockholders’ equity (including retained earnings but excluding accumulated other comprehensive income), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. Additionally, a savings bank that retains credit risk in connection with an asset sale may be required to maintain additional regulatory capital because of the recourse back to the savings bank. In assessing an institution’s capital adequacy, the federal regulators consider not only these numeric factors but also qualitative factors, and have the authority to establish higher capital requirements for individual associations where necessary.

At December 31, 2013, the Bank’s capital exceeded all applicable minimal capital requirements.

In July 2013, the federal banking agencies issued a final rule that will revise the leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with the agreements that were reached by the Basel Committee on Banking Supervision in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (“Basel III”) and the Dodd-Frank Act. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum tier 1 capital to risk-weighted assets requirement (from 4% to 6% of risk-weighted assets), and assigns a higher risk weighting (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain “available for sale” securities holdings to be included for purposes of calculating regulatory capital unless a one-time opt-out is exercised. Additional restraints will also be imposed on the inclusion in regulatory capital of mortgage-servicing assets, deferred tax assets and minority interests. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule becomes effective for the Bank on January 1, 2015. The capital conservation buffer requirements will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.

Loans to One Borrower. Generally, the Bank may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. At December 31, 2013, the Bank’s largest lending relationship with a single or related group of borrowers totaled $6.5 million, which represented 14.7% of unimpaired capital and surplus at the time the loan was originated. At December 31, 2013, the Bank was in compliance with the loans-to-one borrower limitations.

Qualified Thrift Lender Test. The Bank is subject to a qualified thrift lender, or “QTL,” test. Under the QTL test, the Bank must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” in at least nine months of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings institution, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings bank’s business.

 

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“Qualified thrift investments” includes various types of loans made for residential housing purposes, investments related to such purposes, including certain mortgage-backed and related securities, and loans for personal, family, household and certain other purposes up to a limit of 20% of portfolio assets. “Qualified thrift investments” also include 100% of an institution’s credit card loans, education loans and small business loans. The Bank also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code.

If the Bank were to fail the qualified thrift lender test, it must either convert to a commercial bank charter or operate under specified restrictions. The Dodd-Frank Act makes noncompliance with the QTL Test potentially subject to agency enforcement action for violation of law. At December 31, 2013, the Bank maintained approximately 76.4% of its portfolio assets in qualified thrift investments and, therefore, satisfied the QTL test.

Capital Distributions. OCC regulations govern capital distributions by the Bank, which include cash dividends, stock repurchases and other transactions charged to the capital account. The Bank must file an application for approval of a capital distribution if:

 

  (i) the total capital distributions for the applicable calendar year exceed the sum of the Bank’s net income for that year to date plus its retained net income for the preceding two years;

 

  (ii) the Bank would not be at least adequately capitalized following the distribution;

 

  (iii) the distribution would violate any applicable statute, regulation, agreement or OCC-imposed condition; or

 

  (iv) the Bank is not eligible for expedited treatment of its filings.

Even if an application is not otherwise required, the Bank, as a subsidiary of a holding company, must still file a notice with OCC at least 30 days before its board of directors declares a dividend or approves a capital distribution.

The OCC may disapprove a notice or application if:

 

  (i) the Bank would be undercapitalized following the distribution;

 

  (ii) the proposed capital distribution raises safety and soundness concerns; or

 

  (iii) the capital distribution would violate a prohibition contained in any statute, regulation or agreement.

In addition, the Federal Deposit Insurance Act provides that an insured depository institution shall not make any capital distribution if, after making such distribution, the institution would be undercapitalized.

Liquidity. The Bank is required to maintain a sufficient amount of liquid assets to ensure its safe and sound operation. The Bank had $29.2 million of liquid assets at December 31, 2013. The Bank believes its liquidity was sufficient at that date.

Community Reinvestment Act and Fair Lending Laws. All savings banks have a responsibility under the Community Reinvestment Act and related regulations of the OCC to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In connection with its examination of a federal savings bank, the OCC is required to assess the savings bank’s record of compliance with the Community Reinvestment Act. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. A savings bank’s failure to comply with the provisions of the Community Reinvestment Act could result in denial of certain corporate applications, such as branches or mergers, or in restrictions on its activities. The failure to comply with the Equal

 

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Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department of Justice. The Bank received a “satisfactory” Community Reinvestment Act rating in its most recent federal examination.

Transactions with Related Parties. A federal savings bank’s authority to engage in transactions with its “affiliates” is limited by OCC regulations and by Sections 23A and 23B of the Federal Reserve Act. The term “affiliate” for these purposes generally means any company that controls, is controlled by, or is under common control with an insured depository institution such as the Bank. The Company is an affiliate of the Bank. In general, transactions with affiliates must be on terms that are as favorable to the savings bank as comparable transactions with non-affiliates. In addition, certain types of these transactions are restricted to an aggregate percentage of the savings bank’s capital. Collateral in specified amounts must usually be provided by affiliates in order to receive loans from the savings bank. In addition, OCC regulations prohibit a savings bank from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices and may not involve low-quality assets. The OCC requires savings banks to maintain detailed records of all transactions with affiliates.

The Bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features, and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital. In addition, the Bank’s board of directors must approve extensions of credit in excess of certain limits. Extensions of credit to executive officers are subject to additional restrictions based on the category of loan.

At December 31, 2013, the Bank was in compliance with Regulation O.

Enforcement. The OCC has primary enforcement responsibility over federal savings institutions and has the authority to bring enforcement action against all “institution-affiliated parties,” including stockholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order, to removal of officers and/or directors of the institution, the appointment of a receiver or conservator, or the termination of deposit insurance. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1.0 million per day. The FDIC also has the authority to recommend to the OCC that enforcement action be taken with respect to a particular savings institution. If the OCC does not take action, the FDIC has authority to take action under specified circumstances.

Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit systems, credit underwriting, loan documentation, interest rate risk exposure, asset growth, compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan.

 

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Prompt Corrective Action Regulations. Under the prompt corrective action regulations, the OCC is authorized to take supervisory actions against undercapitalized savings banks. For this purpose, a savings bank is placed in one of the following five categories based on the savings bank’s capital:

 

  (i) “well-capitalized” (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% total risk-based capital);

 

  (ii) “adequately capitalized” (at least 4% leverage capital, 4% Tier 1 risk-based capital and 8% total risk-based capital);

 

  (iii) “undercapitalized” (less than 4% leverage capital, 4% Tier 1 risk-based capital or 8% total risk-based capital);

 

  (iv) “significantly undercapitalized” (less than 3% leverage capital, 3% Tier 1 risk-based capital or 6% total risk-based capital); and

 

  (v) “critically undercapitalized” (less than 2% tangible capital).

Generally, the OCC is required to appoint a receiver or conservator for a savings bank that is “critically undercapitalized” within specific time frames. “Undercapitalized” institutions are subject to certain restrictions, such as on capital distributions and growth. The regulations also provide that a capital restoration plan must be filed with the OCC within 45 days of the date a savings bank receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Any holding company for the savings bank required to submit a capital restoration plan must guarantee the lesser of: an amount equal to 5% of the savings bank’s assets at the time it was notified or deemed to be undercapitalized by the OCC, or the amount necessary to restore the savings bank to adequately capitalized status. This guarantee remains in place until the OCC notifies the savings bank that it has maintained adequately capitalized status for each of four consecutive calendar quarters. The OCC has the authority to require payment and collect payment under the guarantee. The failure of a holding company to provide the required guarantee will result in certain operating restrictions on the savings bank, such as restrictions on the ability to declare and pay dividends, pay executive compensation and management fees, and increase assets or expand operations. The OCC may also take any one of a number of discretionary supervisory actions against undercapitalized savings banks, including the issuance of a capital directive and the replacement of senior executive officers and directors.

At December 31, 2013, the Bank met the criteria for being considered “well-capitalized.”

Insurance of Deposit Accounts. The Bank is a member of the Deposit Insurance Fund, which is administered by the FDIC. Deposit accounts in the Bank are insured by the FDIC. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks and savings institutions to $250,000 per depositor. In addition, pursuant to a provision of the Dodd-Frank Act, certain non-interest-bearing transaction accounts were fully insured, regardless of the dollar amount, through December 31, 2012. This provision was not renewed by Congress and effectively ended on December 31, 2012.

The FDIC imposes an assessment for deposit insurance on all depository institutions. Under the FDIC’s risk-based assessment system, insured institutions are assigned to risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An institution’s assessment rate depends upon the category to which it is assigned and certain adjustments specified by FDIC regulations, with institutions deemed less risky paying lower rates. Assessment rates (inclusive of possible adjustments) currently range from 2  12 to 45 basis points of each institution’s total assets less tangible capital. The FDIC may increase or decrease the scale uniformly, except that no adjustment may deviate more than two basis points from the base scale without notice and comment rulemaking. The FDIC’s current system represents a change, as required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s volume of deposits.

The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC and the FDIC has exercised that discretion by establishing a long term fund ratio of 2%.

 

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The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what assessment rates will be in the future.

Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.

In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended December 31, 2013, the annualized FICO assessment was equal to one basis point of total assets less tangible capital.

Prohibitions Against Tying Arrangements. Federal savings banks are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.

Federal Home Loan Bank System. The Bank is a member of the Federal Home Loan Bank System, which consists of twelve regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of Cincinnati, the Bank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank. At December 31, 2013, the Bank was in compliance with this requirement.

Other Regulations

Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The Bank’s operations are also subject to federal laws applicable to credit transactions, such as the:

 

  (i) Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

 

  (ii) Real Estate Settlement Procedures Act, requiring that borrowers for one- to four-family residential real estate mortgage loans receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices;

 

  (iii) Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

 

  (iv) Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

 

  (v) Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;

 

  (vi) Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;

 

  (vii) Truth in Savings Act; and

 

  (viii) rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

 

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The operations of the Bank also are subject to the:

 

  (i) Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

 

  (ii) Electronic Funds Transfer Act and Regulation E, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

 

  (iii) Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;

 

  (iv) Title III of The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the “USA PATRIOT Act”), which significantly expanded the responsibilities of financial institutions, including savings and loan associations, in preventing the use of the United States financial system to fund terrorist activities. Among other provisions, the USA PATRIOT Act and the related regulations require savings banks operating in the United States to, among other things, establish broadened anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control Regulations; and

 

  (v) The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.

FEDERAL AND STATE INCOME TAXATION

Federal Income Taxation

General. We report our income on a fiscal year basis using the accrual method of accounting. The federal income tax laws apply to us in the same manner as to other corporations with some exceptions, including particularly our reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to us. For its 2013 fiscal year, the Bank’s maximum federal income tax rate was 34.0%.

The Company and the Bank have entered into a tax allocation agreement because the Company and the Bank are members of an affiliated group within the meaning of Section 1504(a) of the Internal Revenue Code, of which group the Company is the common parent corporation. As a result of this affiliation, the Bank may be included in the filing of a consolidated federal income tax return with the Company and, if a decision to file a consolidated tax return is made, the parties agree to compensate each other for their individual share of the consolidated tax liability and/or any tax benefits provided by them in the filing of the consolidated federal income tax return.

Bad Debt Reserves. For fiscal years beginning before June 30, 1996, thrift institutions that qualified under certain definitional tests and other conditions of the Internal Revenue Code were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans, generally secured by interests in real

 

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property improved or to be improved, under the percentage of taxable income method or the experience method. The reserve for non-qualifying loans was computed using the experience method. Federal legislation enacted in 1996 repealed the reserve method of accounting for bad debts and the percentage of taxable income method for tax years beginning after 1995 and require savings institutions to recapture or take into income certain portions of their accumulated bad debt reserves.

Distributions. If the Bank makes “non-dividend distributions” to the Company, the distributions will be considered to have been made from the Bank’s unrecaptured tax bad debt reserves, including the balance of its reserves as of December 31, 1987, to the extent of the “non-dividend distributions,” and then from the Bank’s supplemental reserve for losses on loans, to the extent of those reserves, and an amount based on the amount distributed, but not more than the amount of those reserves, will be included in the Bank’s taxable income. Non-dividend distributions include distributions in excess of the Bank’s current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends paid out of the Bank’s current or accumulated earnings and profits will not be so included in the Bank’s taxable income.

The amount of additional taxable income triggered by a non-dividend is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Therefore, if the Bank makes a non-dividend distribution to the Company, approximately one and one-half times the amount of the distribution not in excess of the amount of the reserves would be includable in income for federal income tax purposes, assuming a 34.0% federal corporate income tax rate. The Bank does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserves.

Audits. There have not been any audits of our federal income tax returns during the past five years.

State Taxation

Tennessee imposes franchise and excise taxes. The franchise tax ($0.25 per $100) is applied either to apportioned net worth or the value of property owned and used in Tennessee, whichever is greater, as of the close of the fiscal year. The excise tax (6.5%) is applied to net earnings derived from business transacted in Tennessee. Under Tennessee regulations, bad debt deductions are deductible from the excise tax.

Any cash dividends, in excess of a certain exempt amount, that would be paid with respect to the Company’s common stock to a shareholder (including a partnership and certain other entities) who is a resident of Tennessee will be subject to the Tennessee income tax (6%). Any distribution by a corporation from earnings according to percentage ownership is considered a dividend, and the definition of a dividend for Tennessee income tax purposes may not be the same as the definition of a dividend for federal income tax purposes. A corporate distribution may be treated as a dividend for Tennessee tax purposes if it is paid from funds that exceed the corporation’s earned surplus and profits under certain circumstances.

There have not been any audits of our state tax returns during the past five years.

 

ITEM 1A. RISK FACTORS

Our concentration in non-owner occupied real estate loans may expose us to increased credit risk.

At December 31, 2013, $31.8 million, or 35.9% of our residential mortgage loan portfolio and 13.7% of our total loan portfolio, consisted of loans secured by non-owner occupied residential properties. Loans secured by non-owner occupied properties generally expose us to greater risk of non-payment and loss than loans secured by owner occupied properties because the repayment of such loans depends primarily on the tenant’s continuing ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream. In addition, the physical condition of non-owner occupied properties is often below that of owner occupied properties due to lax property maintenance standards, which has a negative impact on the value of the collateral properties. Furthermore, some of our non-owner occupied residential loan borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one credit relationship may expose us to a greater risk of loss compared to an adverse development with respect to an owner occupied residential mortgage loan. At December 31, 2013, non-performing

 

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non-owner occupied residential mortgage loans totaled $120,000, or 0.38% of our non-owner occupied residential loan portfolio, of which all was attributable to one borrower. At December 31, 2013, we carried as real estate owned, $345,000 of non-owner occupied residential properties, which consisted of seven structures formerly utilized as overnight rentals. For more information about the credit risk we face, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management.

Our construction loan and land and land development loan portfolios may expose us to increased credit risk.

At December 31, 2013, $30.7 million, or 13.3% of our loan portfolio, consisted of construction loans and land and land development loans, and $3.3 million, or 10.7% of the construction loan and land and land development portfolio, consisted of speculative construction loans. While recently the demand for construction loans has decreased significantly due to the decline in the housing market, historically, construction loans, including speculative construction loans, have been a material part of our loan portfolio. Speculative construction loans are loans made to builders who have not identified a buyer for the completed property at the time of loan origination. Subject to market conditions, we intend to continue to emphasize the origination of construction loans and land and land development loans. These loan types generally expose a lender to greater risk of nonpayment and loss than residential mortgage loans because the repayment of such loans often depends on the successful operation or sale of the property and the income stream of the borrowers and such loans typically involve larger balances to a single borrower or groups of related borrowers. In addition, many borrowers of these types of loans have more than one loan outstanding with us so an adverse development with respect to one loan or credit relationship can expose us to significantly greater risk of non-payment and loss. Furthermore, we may need to increase our allowance for loan losses through future charges to income as the portfolio of these types of loans grows, which would decrease our earnings. For more information about the credit risk we face, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management.

Our consumer loan portfolio includes consumer loans secured by rapidly depreciable assets and may expose us to increased credit risk.

At December 31, 2013, $24.7 million, or 10.7% of our loan portfolio, consisted of consumer loans. Included in consumer loans at that date were $6.5 million in automobile loans and $2.3 million in consumer finance loans made to borrowers by our operating subsidiary, Southland Finance, Inc. These consumer finance loans are generally secured by used automobiles, televisions and various other personal property and are generally offered to borrowers with historically lower credit scores at higher risk-adjusted interest rates. At December 31, 2013, Southland Finance, Inc.’s average outstanding loan balance was approximately $3,400 and the weighted-average yield of its loan portfolio was 25.73%. Consumer loans secured by rapidly depreciable assets such as automobiles and other personal property may be subject to greater risk of loss than loans secured by real estate because any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance.

Significant loan losses could require us to increase our allowance for loan losses through a charge to earnings.

When we loan money we incur the risk that our borrowers will not repay their loans. We provide for loan losses by establishing an allowance through a charge to earnings. The amount of this allowance is based on our assessment of loan losses inherent in our loan portfolio. The process for determining the amount of the allowance is critical to our financial condition and results of operations. It requires subjective and complex judgments about the future, including forecasts of economic or market conditions that might impair the ability of our borrowers to repay their loans. We might underestimate the loan losses inherent in our loan portfolio and have loan losses in excess of the amount recorded in our allowance for loan losses. We might increase the allowance because of changing economic conditions. For example, in a rising interest rate environment, borrowers with adjustable-rate loans could see their payments increase. There may be a significant increase in the number of borrowers who are unable or unwilling to repay their loans, resulting in our charging off more loans and increasing our allowance. In addition, when real estate values decline, the potential severity of loss on a real estate-secured loan can increase significantly, especially in the case of loans with high combined loan-to-value ratios. The recent decline in the national economy and the local economies of the areas in which the loans are concentrated could result in an increase in loan delinquencies, foreclosures or repossessions resulting in increased charge-off amounts and the need for additional loan loss allowances in future periods. In addition, our determination as to the amount of our allowance for loan losses is subject to review by our primary regulator, the Office of the Comptroller of the Currency, as part of its

 

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examination process, which may result in the establishment of an additional allowance based upon the judgment of the Office of the Comptroller of the Currency after a review of the information available at the time of its examination. Our allowance for loan losses amounted to $4.4 million, or 1.92% of total loans outstanding and 108.36% of non-performing loans, at December 31, 2013. Our allowance for loan losses at December 31, 2013 may not be sufficient to cover future loan losses. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would decrease our earnings.

In addition, at December 31, 2013, we had 45 loan relationships with outstanding balances that exceeded $1.0 million. Three loans in this group were classified as substandard as of December 31, 2013: (1) a $1.8 million commercial business loan secured by assets of radio stations located in East Tennessee, (2) a $1.1 million land development loan, which is a 7.5% participation interest in a land acquisition and development loan for a retail shopping complex in Sevierville, Tennessee, and (3) a $1.2 million one-to-four family residential loan, which is a 58.8% participation interest, secured by an owner-occupied residence and land located in Friendsville, Tennessee. The further deterioration of one or more of these large relationship loans could result in a significant increase in our non-performing loans and our provision for loan losses, which would negatively impact our results of operations.

A return to recessionary conditions could result in increases in our level of non-performing loans and/or reduce demand for our products and services, which would lead to lower revenue, higher loan losses and lower earnings.

Following a national home price peak in mid-2006, falling home prices and sharply reduced sales volumes, along with the collapse of the United States’ subprime mortgage industry in early 2007, significantly contributed to a recession that officially lasted until June 2009, although the effects have continued thereafter. Dramatic declines in real estate values and high levels of foreclosures resulted in significant asset write-downs by financial institutions, which have caused many financial institutions to seek additional capital, to merge with other institutions and, in some cases, to fail. Concerns over the United States’ credit rating (which was recently downgraded by Standard & Poor’s), the European sovereign debt crisis, and continued high unemployment in the United States, among other economic indicators, have contributed to increased volatility in the capital markets and diminished expectations for the economy. A return of recessionary conditions and/or continued negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Further declines in real estate values and sales volumes and continued high unemployment levels may result in higher than expected loan delinquencies, increases in our levels of nonperforming and classified assets and a decline in demand for our products and services. These negative events may cause us to incur losses and may adversely affect our capital, liquidity, and financial condition.

Increased and/or special Federal Deposit Insurance Corporation assessments will hurt our earnings.

The recent economic recession has caused a high level of bank failures, which has dramatically increased Federal Deposit Insurance Corporation resolution costs and led to a significant reduction in the balance of the Deposit Insurance Fund. As a result, the Federal Deposit Insurance Corporation has significantly increased the initial base assessment rates paid by financial institutions for deposit insurance. Increases in the base assessment rate have increased our deposit insurance costs and negatively impacted our earnings. Additional increases in the base assessment rate or additional special assessments would negatively impact our earnings.

Changing interest rates may decrease our earnings and asset value.

Our net interest income is the interest we earn on loans and investments less the interest we pay on our deposits and borrowings. Our net interest margin is the difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding. Changes in interest rates—up or down—could adversely affect our net interest margin and, as a result, our net interest income. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract until the yield catches up. This contraction could be more severe following a prolonged period of lower interest rates, as a larger proportion of our fixed rate residential loan portfolio will have been originated at those lower rates and borrowers may be more reluctant or unable to sell their homes in a higher interest rate environment.

 

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Changes in the slope of the “yield curve”—or the spread between short-term and long-term interest rates—could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets. For further discussion of how changes in interest rates could impact us, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Interest Rate Risk Management.”

Strong competition within our primary market area could negatively impact our profits and slow growth.

We face intense competition both in making loans and attracting deposits. This competition has made it more difficult for us to make new loans and attract deposits. Price competition for loans and deposits might result in us earning less on our loans and paying more on our deposits, which would reduce net interest income. Competition also makes it more difficult to grow loans and deposits. At June 30, 2013, which is the most recent date for which data is available from the Federal Deposit Insurance Corporation, we held approximately 22.80% of the deposits in McMinn County, Tennessee, 3.73% of the deposits in Monroe County, Tennessee and 2.00% of the deposits in Bradley County, Tennessee. Some of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to compete successfully in our primary market area. See “Item 1. Business— Market Area” and “Item 1. Business—Competition” for more information about our primary market area and the competition we face.

We are subject to federal regulations that seek to protect the Deposit Insurance Fund and the depositors and borrowers of the Bank, and our federal regulators may impose restrictions on our operations that are detrimental to holders of the Company’s common stock.

We are subject to extensive regulation, supervision and examination by the Federal Reserve Board and the Office of the Comptroller of the Currency, our primary federal regulators, and the Federal Deposit Insurance Corporation, as insurer of our deposits. Such regulation and supervision governs the activities in which an institution and its holding company may engage, and are intended primarily for the protection of the insurance fund and the depositors and borrowers of the Bank rather than for holders of the Company’s common stock. Our regulators may subject us to supervisory and enforcement actions, such as the imposition of certain restrictions on our operations, the classification of our assets and the determination of the level of our allowance for loan losses, that are aimed at protecting the insurance fund and the depositors and borrowers of the Bank but that are detrimental to holders of the Company’s common stock. Any change in our regulation or oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations.

In addition to the enactment of the Dodd-Frank Act, the federal regulatory agencies recently have begun to take stronger supervisory actions against financial institutions that have experienced increased loan losses and other weaknesses as a result of the recent economic crisis. The actions include the entering into of written agreements and cease and desist orders that place certain limitations on their operations. Federal bank regulators recently have also been using with more frequency their ability to impose individual minimal capital requirements on banks, which requirements may be higher than those imposed under the Dodd-Frank Act or which would otherwise qualify the bank as being “well capitalized” under the Office of the Comptroller of the Currency’s prompt corrective action regulations. If we were to become subject to a supervisory agreement or higher individual minimum capital requirements, such action may have a negative impact on our ability to execute our business plans, as well as our ability to grow, pay dividends or engage in mergers and acquisitions and may result in restrictions in our operations.

Risks associated with system failures, interruptions, or breaches of security could negatively affect our earnings and business reputation.

Information technology systems are critical to our business. We use various technology systems to manage our customer relationships, general ledger, securities investments, deposits, and loans. We have established policies and procedures to prevent or limit the impact of system failures, interruptions, and security breaches (including privacy breaches), but such events may still occur or may not be adequately addressed if they do occur. In addition, any compromise of our systems could deter customers from using our products and services. Although we rely on security systems to provide security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from compromises or breaches of security.

 

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In addition, we outsource a majority of our data processing to certain third-party providers. If these third-party providers encounter difficulties, or if we have difficulty communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected. Threats to information security also exist in the processing of customer information through various other vendors and their personnel.

The occurrence of any system failures, interruption, or breach of security could damage our business reputation and result in a loss of customers and business thereby subjecting us to additional regulatory scrutiny, or could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations and our business reputation.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

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ITEM 2. PROPERTIES

We conduct our business through our main office, branch offices and other offices. The following table sets forth certain information relating to these facilities at December 31, 2013.

 

Location

   Year
Opened
     Owned/
Leased
    Net Book Value
at
December 31, 2013
 
                  (In thousands)  

Main Office:

       

Athens Main Office

     1962         Owned      $ 903   

106 Washington Avenue

       

Athens, Tennessee 37303

       

Branch Offices:

       

Athens Decatur Pike Office

     1980         Owned        153   

1103 Decatur Pike

       

Athens, Tennessee 37303

       

Cleveland Ocoee Street Office

     2007         Leased  (1)      —     

3855 North Ocoee Street

       

Cleveland, Tennessee 37312

       

Cleveland 25th Street Office

     2007         Leased  (2)      —     

950 25th Street

       

Cleveland, Tennessee 37311

       

Etowah Office

     1977         Owned        527   

523 Tennessee Avenue

       

Etowah, Tennessee 37331

       

Madisonville Office

     2005         Owned        834   

4785 New Highway 68

       

Madisonville, Tennessee 37875

       

Sweetwater Office

     1995         Owned        162   

800 Highway 68

       

Sweetwater, Tennessee 37874

       

Other Offices:

       

Athens Lending Center

     1998         Owned        428   

106 Hornsby Street

       

Athens, Tennessee 37303

       

Southland Finance Company

     1996         Leased  (3)      —     

516 South Congress Parkway

       

Athens, Tennessee 37303

       

Valley Title Services, LLC

     2007         Leased  (4)      —     

d/b/a Sweetwater Valley Title

       

202 N. White Street

       

Athens, Tennessee 37303

       

Storage Facility

     2010         Owned        161   

718 South Jackson Street

       

Athens, Tennessee 37303

       

Property Adjacent to Branch

     2012         Owned        85   

1109 Summit Street

       

Athens, Tennessee 37303

       

 

(1) Lease expires in February 2017.
(2) Lease expires in December 2017.
(3) Lease expires in January 2014.
(4) Lease expires in December 2014.

 

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Item 3. LEGAL PROCEEDINGS

Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

 

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

 

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Common Equity and Related Stockholder Matters

The Company’s common stock is listed on the Nasdaq Capital Market (“Nasdaq”) under the trading symbol “AFCB.” At March 10, 2014, the Company had approximately 310 holders of record of common stock. The figure of shareholders of record does not reflect the number of persons whose shares are in nominee or “street” name accounts through brokers.

The following table lists quarterly market price and dividend information per common share for the years ended December 31, 2013 and December 31, 2012, as reported by NASDAQ.

 

     High
Sale
     Low
Sale
     Dividends      Market
price
end of
period
 

2013:

           

First Quarter:

   $ 18.50       $ 16.51       $ 0.05       $ 18.20   

Second Quarter

     18.99         17.12         0.05         18.00   

Third Quarter

     19.01         16.50         0.05         17.99   

Fourth Quarter

     20.61         17.95         0.05         19.82   

2012:

           

First Quarter

   $ 14.98       $ 11.11       $ 0.05       $ 14.98   

Second Quarter

     16.00         14.00         0.05         14.64   

Third Quarter

     19.35         14.13         0.05         16.49   

Fourth Quarter

     18.25         15.63         0.05         16.51   

 

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Purchase of Equity Securities

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 December 31, 2013, the Company had repurchased an aggregate of 886,260 shares under these programs.

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

The following table provides information with respect to purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company’s common stock during the fourth quarter of 2013.

 

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
 

October 1 through October 31, 2013

     4,700       $ 18.06         4,700         351,576   

November 1 through November 30, 2013

     147,451         20.00         147,451         204,125   

December 1 through December 31, 2013

     45,350         19.67         45,350         158,775   
  

 

 

       

 

 

    

Total

     197,501       $ 19.88         197,501         158,775   
  

 

 

       

 

 

    

 

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Item 6. SELECTED FINANCIAL DATA

The following tables contain certain information concerning our consolidated financial position and results of operations, which is derived in part from our consolidated financial statements. The following is only a summary and should be read in conjunction with the consolidated financial statements and notes beginning on page F-1 of this annual report.

 

     At December 31,  

(In thousands)

   2013      2012      2011      2010      2009  

Total assets

   $ 294,812       $ 291,632       $ 283,716       $ 278,015       $ 276,458   

Cash and cash equivalents

     15,135         20,252         23,577         14,316         40,707   

Securities available-for-sale

     31,580         32,150         34,281         41,538         23,585   

Investments, at cost

     3,649         3,394         2,899         2,899         2,899   

Loans receivable, net

     226,206         217,275         204,699         199,386         191,404   

Deposits

     248,172         234,248         224,112         215,687         236,064   

Securities sold under agreements to

repurchase

     1,304         2,110         2,265         795         899   

Advances from Federal Home Loan Bank

     —           3,000         3,099         8,214         10,324   

Stockholders’ equity (total equity before December 31, 2010)

     41,108         48,004         50,550         49,577         25,722   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     For the Year Ended December 31,  

(In thousands)

   2013      2012      2011      2010     2009  

Operating Data:

             

Interest income

   $ 13,698       $ 14,474       $ 14,646       $ 14,529      $ 14,668   

Interest expense

     2,134         2,638         3,338         4,360        5,657   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income

     11,564         11,836         11,308         10,169        9,011   

Provision for loan losses

     316         1,080         1,980         1,711        1,024   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan

losses

     11,248         10,756         9,328         8,458        7,987   

Non-interest income

     5,186         5,327         4,758         4,406        4,670   

Non-interest expense

     13,080         11,871         11,424         12,027        10,668   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income before income taxes

     3,354         4,212         2,662         837        1,989   

Income taxes (benefit)

     1,042         1,609         754         (6     644   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 2,312       $ 2,603       $ 1,908       $ 843      $ 1,345   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net income per share – basic

   $ 1.18       $ 1.12       $ 0.75       $ 0.34        N/A   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Net income per share – diluted

   $ 1.13       $ 1.09       $ 0.75       $ 0.34        N/A   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Cash dividends declared per share

   $ 0.20       $ 0.20       $ 0.20       $ 0.10        N/A   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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     At or for the Year Ended December 31,  
     2013     2012     2011     2010     2009  

Performance Ratios (1):

          

Return on average assets

     0.78     0.89     0.67     0.30     0.54

Return on average equity

     5.23        5.23        3.80        1.71        5.29   

Interest rate spread (1)

     4.03        4.15        4.04        3.59        3.67   

Net interest margin (2)

     4.19        4.36        4.30        3.92        3.89   

Other expenses to average assets

     4.42        4.07        4.02        3.77        4.28   

Efficiency ratio (3)

     78.08        69.17        71.11        82.52        77.98   

Dividend payout ratio (4)

     17.70        18.35        26.66        29.41        N/A   

Average interest-earning assets to average interest-bearing liabilities

     121.69        121.51        120.35        119.59        109.18   

Average equity to average assets

     14.92        17.06        17.66        17.67        10.20   

Capital Ratios (Bank only):

          

Total capital (to risk-weighted assets)

     17.0     21.3     22.0     20.8     15.3

Tier 1 capital (to risk-weighted assets)

     15.7        20.1        20.7        19.6        14.1   

Tier 1 capital (to adjusted total assets)

     10.8        13.4        14.1        13.5        9.1   

Asset Quality Ratios:

          

Allowance for loan losses as a percent of total loans

     1.92     2.02     1.99     1.94     1.75

Allowance for loan losses as a percent of non-performing loans

     108.36        114.80        126.28        194.46        169.54   

Net charge-offs to average outstanding loans during the period

     0.16        0.34        0.86        0.59        0.36   

Non-performing loans as a percent of total loans

     1.77        1.76        1.58        1.00        1.03   

Non-performing assets as a percent of total assets

     1.53        1.52        1.35        1.13        1.01   

Total non-performing assets and troubled debt restructurings as a percent of total assets

     2.71        3.17        3.52        3.19        2.28   

Other Data:

          

Number of offices

     7        7        7        7        7   

Number of deposit accounts

     18,364        18,288        17,013        16,144        15,837   

Number of loans

     3,827        3,765        3,522        3,534        3,696   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost on average interest-bearing liabilities. Tax exempt income is reported on a tax equivalent basis using a federal marginal tax rate of 34.0%.
(2) Represents net interest income as a percent of average interest-earning assets. Tax exempt income is reported on a tax equivalent basis using a federal marginal tax rate of 34.0%.
(3) Represents other expenses divided by the sum of net interest income and other income.
(4) Dividends declared per share divided by net income per share.

 

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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.

Overview

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), debit card interchange fee income, 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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Table of Contents

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, 2013, our total assets were $294.8 million, an increase of $3.2 million from December 31, 2012. The increase during the year ended December 31, 2013 was primarily the result of an increase in net loans of $8.9 million, partially offset by decreases in cash and cash equivalents and securities available for sale of $ 5.1 million and $570,000, 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 $88.4 million, or 38.2%, and $7.7 million, or 3.3% of the total loan portfolio, at December 31, 2013, respectively. At December 31, 2012, these loans totaled $83.2 million, or 37.4%, and $4.3 million, or 1.9% of the total loan portfolio, respectively. The increase in residential mortgage loans was primarily a result of an increase in market demand resulting from the low interest rate environment.

Commercial real estate loans, including non-residential, multi-family, land and construction loans on these types of properties, comprised $97.6 million, or 42.2% of the total loan portfolio, at December 31, 2013. At December 31, 2012, these loans totaled $94.4 million, or 42.4% of the total loan portfolio. The increase was primarily due to an increase in non-residential and non-residential construction loans of $18.7 million, partially offset by decreases in multi-family real estate and land loans of $12.7 million and $2.8 million, respectively. The balance of commercial real estate loans has increased primarily due to greater opportunity to originate these types of loans. Management continues to focus on pursuing non-residential loan opportunities in order to further diversify the loan portfolio.

Commercial business loans were $13.1 million, or 5.6% of the total loan portfolio, at December 31, 2013, as compared to $12.6 million, or 5.7% of the total loan portfolio, at December 31, 2012. Consumer loans decreased to $24.7 million, or 10.7% of the total loan portfolio, at December 31, 2013 as compared to $28.0 million, or 12.6% of the total loan portfolio, at December 31, 2012. The decrease in consumer loans was primarily due to a decrease in home equity lines of credit year over year.

 

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

 

     At December 31,  
     2013     2012     2011     2010     2009  

(Dollars in thousands)

   Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent     Amount     Percent  

Real estate mortgage:

                    

Residential one- to four-family

   $ 88,415        38.20   $ 83,159        37.38   $ 80,667        38.52   $ 79,374        38.93   $ 79,573        40.75

Non-residential

     65,446        28.28        54,969        24.71        47,900        22.87        43,734        21.45        37,905        19.41   

Multi-family

     9,051        3.91        21,784        9.79        21,157        10.10        20,851        10.23        14,625        7.49   

Residential construction

     7,657        3.31        4,327        1.94        4,618        2.20        3,680        1.80        5,489        2.81   

Multi-family construction

     —          —          —          —          16        0.01        —          —          624        0.32   

Non-residential construction

     12,532        5.42        4,306        1.93        2,078        0.99        1,499        0.74        2,709        1.39   

Land

     10,532        4.55        13,366        6.01        14,346        6.85        14,658        7.19        14,690        7.52   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     193,633        83.67        181,911        81.76        170,782        81.54        163,796        80.34        155,615        79.69   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commercial business

     13,059        5.64        12,591        5.66        12,616        6.02        12,766        6.26        12,001        6.15   

Consumer:

                    

Home equity loans and lines of credit

     12,003        5.19        15,159        6.81        15,613        7.46        16,887        8.28        16,552        8.48   

Auto loans

     6,532        2.82        6,402        2.88        4,590        2.19        4,394        2.15        4,725        2.42   

Loans secured by deposits

     1,397        0.60        1,636        0.73        1,385        0.66        1,728        0.85        1,367        0.70   

Consumer finance loans

     2,301        1.00        2,459        1.11        2,124        1.02        1,992        0.98        1,970        1.01   

Other

     2,499        1.08        2,337        1.05        2,321        1.11        2,333        1.14        3,023        1.55   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     24,732        10.69        27,993        12.58        26,033        12.44        27,334        13.40        27,637        14.16   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

     231,424        100     222,495        100     209,431        100     203,896        100     195,253        100
    

 

 

     

 

 

     

 

 

     

 

 

     

 

 

 

Less: unearned interest and fees

     (397       (448       (362       (324       (271  

Less: net deferred loan origination fees

     (389       (297       (204       (221       (165  

Less: allowance for loan losses

     (4,432       (4,475       (4,166       (3,965       (3,413  
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

Loans receivable, net

   $ 226,206        $ 217,275        $ 204,699        $ 199,386        $ 191,404     
  

 

 

     

 

 

     

 

 

     

 

 

     

 

 

   

 

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Loan Maturity

The following table sets forth certain information at December 31, 2013 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, 2013  

(Dollars in thousands)

   Residential
Real
Estate
     Non-residential
Real Estate (1)
     Construction
(2)
     Land      Commercial
Business
     Consumer      Total
Loans
 

Amounts due in:

                    

One year or less

   $ 4,093       $ 6,308       $ 7,427       $ 3,383       $ 4,035       $ 3,751       $ 28,997   

More than one year through two years

     4,218         3,997         320         518         1,089         2,569         12,711   

More than two years through three years

     4,592         20,103         —           1,428         2,725         2,669         31,517   

More than three years through five years

     19,445         27,692         8,362         2,555         3,668         5,916         67,638   

More than five years through ten years

     5,781         9,072         4         786         1,540         4,580         21,763   

More than ten years through fifteen years

     8,663         2,269         —           673         —           4,993         16,598   

More than fifteen years

     41,623         5,056         4,075         1,190         2         254         52,200   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 88,415       $ 74,497       $ 20,188       $ 10,533       $ 13,059       $ 24,732       $ 231,424   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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, 2013 that are due after December 31, 2014, and that have either fixed interest rates or floating or adjustable interest rates. The amounts shown below exclude unearned loan origination fees.

 

(In thousands)

   Fixed
Rates
     Floating or
Adjustable
Rates
     Total  

Residential real estate

   $ 27,263       $ 57,059       $ 84,322   

Non-residential real estate

     35,276         32,913         68,189   

Construction

     8,441         4,320         12,761   

Land

     1,801         5,349         7,150   

Commercial business

     6,324         2,700         9,024   

Consumer

     10,654         10,327         20,981   
  

 

 

    

 

 

    

 

 

 

Total

   $ 89,759       $ 112,668       $ 202,427   
  

 

 

    

 

 

    

 

 

 

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)

   2013      2012      2011  

Total loans at beginning of period

   $ 221,750       $ 208,865       $ 203,351   
  

 

 

    

 

 

    

 

 

 

Loans originated:

        

Residential real estate

     44,309         67,282         54,690   

Non-residential real estate

     17,830         13,939         16,142   

Land

     1,915         3,444         3,019   

Construction

     22,027         10,730         8,514   

Commercial business

     8,650         8,462         7,564   

Consumer

     16,428         18,839         16,338   
  

 

 

    

 

 

    

 

 

 

Total loans originated

     111,159         122,696         106,267   
  

 

 

    

 

 

    

 

 

 

Loans purchased:

        

Residential real estate

     —           —           238   

Non-residential real estate

     3,927         —           —     

Construction

     —           —           —     

Commercial business

     —           10         575   

Consumer

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total loans purchased

     3,927         10         813   
  

 

 

    

 

 

    

 

 

 

Deduct:

        

Loan principal repayments

     68,157         59,922         81,299   

Loan sales

     38,041         49,899         20,267   
  

 

 

    

 

 

    

 

 

 

Total repayments and sales

     106,198         109,821         101,566   
  

 

 

    

 

 

    

 

 

 

Net loan activity

     8,888         12,885         5,514   
  

 

 

    

 

 

    

 

 

 

Total loans at end of period

   $ 230,638       $ 221,750       $ 208,865   
  

 

 

    

 

 

    

 

 

 

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, 2013, our participation interests totaled $10.5 million, most of which were secured by properties outside of our primary market area but within a 75-mile radius of it.

Securities

At December 31, 2013, 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, 2013, 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, 2013, $31.6 million of our securities portfolio was classified as available for sale. In addition, at December 31, 2013, we had $3.6 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 $750,000.

Total securities decreased by $315,000, or 0.9%, for the year ended December 31, 2013 primarily as a result of calls and principal repayments of agency, mortgage-backed, and municipal securities of $8.2 million, $3.1 million, and $460,000, respectively. These items were partially offset by purchases of municipal, mortgage-backed, and agency securities of $6.4 million, $5.1 million, and $1.0 million, respectively. The remaining change in securities was due to mark-to-market adjustments and amortization.

 

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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, 2013, 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,  
     2013      2012      2011  

(In thousands)

   Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

U.S. government agencies and corporations

   $ 5,825       $ 5,746       $ 13,234       $ 13,351       $ 19,495       $ 19,733   

States and political subdivisions

     11,351         11,197         5,436         5,822         4,995         5,279   

Mortgage-backed and related securities

     14,515         14,637         12,605         12,977         8,864         9,269   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale and held to maturity

     31,691         31,580         31,275         32,150         33,354         34,281   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

     750         750         495         495         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investments, at cost

     3,649         3,649         3,394         3,394         2,899         2,899   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 35,340       $ 35,229       $ 34,669       $ 35,544       $ 36,253       $ 37,180   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Year Ended December 31,  

(In thousands)

   2013     2012     2011  

Mortgage-backed and related securities:

      

Mortgage-backed and related securities,

beginning of period (1)

   $ 12,977      $ 9,269      $ 6,671   
  

 

 

   

 

 

   

 

 

 

Purchases

     5,068        6,650        4,900   

Sales

     —          —          —     

Repayments and prepayments

     (3,069     (2,850     (2,326

Increase (decrease) in net unrealized gain

     (339     (92     24   
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in mortgage-backed securities

     1,660        3,708        2,598   
  

 

 

   

 

 

   

 

 

 

Mortgage-backed and related securities, end of period (1)

     14,637        12,977        9,269   
  

 

 

   

 

 

   

 

 

 

Investment securities: (excluding mortgage-backed and related securities)

      

Investment securities, beginning of period (1)

     19,173        25,012        34,867   
  

 

 

   

 

 

   

 

 

 

Purchases

     7,394        5,537        8,619   

Sales

     —          —          (378

Maturities

     (8,641     (11,102     (18,471

Increase (decrease) in net unrealized gain

     (983     (274     375   
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in investment securities

     (2,230     (5,839     (9,855
  

 

 

   

 

 

   

 

 

 

Investment securities (excluding mortgage-backed and related securities), end of period (1)

   $ 16,943      $ 19,173      $ 25,012   
  

 

 

   

 

 

   

 

 

 

 

(1) At fair value.

 

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Table of Contents

The following tables set forth the stated maturities and weighted average yields of securities at December 31, 2013. 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.

 

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

(Dollars in thousands)

   Carrying
Value
     Weighted
Average
Yield
    Carrying
Value
     Weighted
Average
Yield
    Carrying
Value
     Weighted
Average
Yield
    Carrying
Value
     Weighted
Average
Yield
    Carrying
Value
     Weighted
Average
Yield
 

U.S. government agencies and corporations

   $ 3,114         1.39   $ 1,252         1.64   $ 1,381         1.85   $ —           —     $ 5,747         1.55

States and political subdivisions

     —           —          2,417         2.28        7,468         3.12        1,312         1.93        11,197         2.80   

Mortgage-backed and related securities

     2,948         2.42        7,781         2.10        2,684         1.84        1,223         4.04        14,636         2.28   

Federal Home Loan Bank of Cincinnati common stock

     —           —          —           —          —           —          2,899         4.19        2,899         4.19   

Tenth Street Fund III, L.P. investment

     —           —          —           —          —           —          750         6.90        750         6.90   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 6,062         1.89   $ 11,450         2.09   $ 11,533         2.67   $ 6,184         4.01   $ 35,229         2.58

 

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Bank Owned Life Insurance. We invest in bank owned life insurance to provide us with a funding source for our benefit plan obligations. Bank owned life insurance also generally provides us non-interest income that is non-taxable. Federal regulations generally limit our investment in bank owned life insurance to 25% of our Tier 1 capital plus our allowance for loan losses at the time of investment. This investment is accounted for using the cash surrender value method and is recorded at the amount that can be realized under the insurance policies at the balance sheet date. At December 31, 2013 and December 31, 2012, the aggregate cash surrender value of these policies was $9.8 million and $9.5 million, respectively. The increase in bank owned life insurance was primarily due to the increase in cash value.

Deposits. We accept deposits primarily from individuals and businesses who are located in our primary market area or who have a pre-existing lending relationship with us. We rely on competitive pricing, customer service, account features and the location of our branch offices to attract and retain deposits. Deposits serve as the primary source of funds for our lending and investment activities. Deposit accounts offered include individual and business checking accounts, money market accounts, individual NOW accounts, savings accounts and certificates of deposit. Non-interest-bearing accounts consist of free checking and commercial checking accounts.

The following table sets forth the balances of our deposit accounts at the dates indicated.

 

     At December 31,  

(In thousands)

   2013      2012      2011  

Non-interest-bearing accounts

   $ 18,253       $ 15,640       $ 12,490   

Demand and NOW accounts

     65,299         59,560         57,222   

Money market accounts

     51,562         49,720         49,009   

Passbook savings accounts

     19,219         17,423         14,328   

Certificates of deposit

     93,839         91,905         91,063   
  

 

 

    

 

 

    

 

 

 

Total

   $ 248,172       $ 234,248       $ 224,112   
  

 

 

    

 

 

    

 

 

 

Non-interest-bearing accounts increased $2.6 million or 16.7% for the year ended December 31, 2013, and increased $3.1 million or 25.2% for the year ended December 31, 2012. The increase in non-interest-bearing accounts is primarily related to an increase in the number of free and commercial checking accounts as a result of marketing programs.

Demand deposit and NOW accounts increased $5.7 million or 9.6% for the year ended December 31, 2013, and increased $2.3 million or 4.1% for the year ended December 31, 2012. The increase in demand deposit and NOW accounts at December 31, 2013 is primarily due to an increase in senior checking accounts as a result of marketing programs and the popularity of the Bank’s senior travel program.

Money market accounts increased $1.8 million or 3.7% for the year ended December 31, 2013, and increased $711,000 or 1.5% for the year ended December 31, 2012. The primary reason for the increase in money market accounts for 2013 was customer’s placement of funds in liquid deposits due to the continued low interest rate environment.

Passbook savings accounts increased $1.8 million or 10.3% for the year ended December 31, 2013, and increased $3.1 million or 21.6% for the year ended December 31, 2012. The primary reason for the increase in passbook savings accounts was customer’s placement of funds in liquid deposits due to the continued low interest rate environment.

Certificates of deposit increased $1.9 million or 2.1% for the year ended December 31, 2013, and increased by $842,000 or 0.9% during the year ended December 31, 2012. The increase in certificates of deposit is primarily due to interest crediting to customer’s accounts as well as increased marketing efforts.

 

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The following table indicates the amount of jumbo certificates of deposit by time remaining until maturity at December 31, 2013, none of which are brokered deposits. Jumbo certificates of deposit require minimum deposits of $100,000.

 

Maturity Period

   Amount  
     (In thousands)  

Three months or less

   $ 4,762   

Over three through six months

     4,948   

Over six through twelve months

     6,432   

Over twelve months

     31,105   
  

 

 

 

Total

   $ 47,247   
  

 

 

 

The following table sets forth time deposits classified by rates at the dates indicated.

 

     At December 31,  

(Dollars in thousands)

   2013      2012      2011  

0.00—1.00%

   $ 38,876       $ 29,341       $ 26,174   

1.01—2.00%

     20,312         13,013         6,098   

2.01—3.00%

     20,109         29,213         28,758   

3.01—4.00%

     14,195         18,064         18,298   

4.01—5.00%

     277         1,842         4,844   

5.01—6.00%

     —           356         6,816   

6.01—7.00%

     —           —           —     

7.01—8.00%

     —           —           —     

8.01—9.00%

     70         75         75   
  

 

 

    

 

 

    

 

 

 

Total

   $ 93,839       $ 91,904       $ 91,063   
  

 

 

    

 

 

    

 

 

 

The following table sets forth the amount and maturities of time deposits at December 31, 2013.

 

     Amount Due                

(Dollars in thousands)

   Less
Than

One
Year
     More
Than

One
Year to

Two
Years
     More
Than

Two
Years to

Three
Years
     More
Than

Three
Years
     Total      Percent
of Total
Time
Deposit

Accounts
 

0.00—1.00%

   $ 21,625       $ 11,340       $ 2,328       $ 3,583       $ 38,876         41.43

1.01—2.00%

     9,554         8,908         959         891         20,312         21.64   

2.01—3.00%

     1,626         6,713         8,206         3,564         20,109         21.43   

3.01—4.00%

     3,578         10,617         —           —           14,195         15.13   

4.01—5.00%

     277         —           —           —           277         0.30   

5.01—6.00%

     —           —           —           —           —           —     

6.01—7.00%

     —           —           —           —           —           —     

7.01—8.00%

     —           —           —           —           —           —     

8.01—9.00%

     —           —           70         —           70         0.07   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 36,660       $ 37,578       $ 11,563       $ 8,038       $ 93,839         100.00
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table sets forth deposit activity for the periods indicated.

 

     Year Ended December 31,  

(In thousands)

   2013      2012      2011  

Beginning balance

   $ 234,248       $ 224,112       $ 215,687   
  

 

 

    

 

 

    

 

 

 

Increase before interest credited

     11,943         8,113         5,998   

Interest credited

     1,982         2,023         2,427   
  

 

 

    

 

 

    

 

 

 

Net increase in deposits

     13,924         10,136         8,425   
  

 

 

    

 

 

    

 

 

 

Ending balance

   $ 248,172       $ 234,248       $ 224,112   
  

 

 

    

 

 

    

 

 

 

 

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Borrowings. We use borrowings from the Federal Home Loan Bank of Cincinnati and repurchase agreements to supplement our supply of funds for loans and investments and for interest rate risk management.

 

     Year Ended December 31,  

(Dollars in thousands)

   2013     2012     2011  

Maximum balance outstanding at any month-end during period:

      

Federal Home Loan Bank advances

   $ 3,000      $ 3,089      $ 8,204   

Securities sold under agreements to repurchase

     1,949        2,436        2,265   

Average balance outstanding during period:

      

Federal Home Loan bank advances

   $ 1,804      $ 3,038      $ 7,714   

Securities sold under agreements to repurchase

     1,528        1,888        1,868   

Weighted average interest rate during period:

      

Federal Home Loan bank advances

     4.34     4.32     4.36

Securities sold under agreements to repurchase

     0.10     0.10     0.10

Balance outstanding at end of period:

      

Federal Home Loan bank advances

   $ —        $ 3,000      $ 3,099   

Securities sold under agreements to repurchase

     1,304        2,110        2,265   

Weighted average interest rate at end of period:

      

Federal Home Loan bank advances

     —       4.33     4.31

Securities sold under agreements to repurchase

     0.10     0.10     0.10
  

 

 

   

 

 

   

 

 

 

Results of Operations for the Years Ended December 31, 2013 and 2012

Overview. Net income decreased $291,000, or 11.2%, to $2.3 million for the year ended December 31, 2013, compared to $2.6 million for the year ended December 31, 2012. Our primary source of income during each of the years ended December 31, 2013 and 2012 was net interest income, which decreased from $11.8 million for the year ended December 31, 2012 to $11.6 million for the year ended December 31, 2013.

Net Interest Income. Net interest income decreased by $272,000, or 2.3%, to $11.6 million for the year ended December 31, 2013, as compared to $11.8 million for the year ended December 31, 2012. Total interest income decreased by $776,000, or 5.4%, and loan interest income decreased by $624,000, or 4.6%, during the year ended December 31, 2013, due primarily to repricing throughout the year to lower market interest rates. Total interest expense decreased by $504,000, or 19.1%, during the year ended December 31, 2013, while average interest-bearing liabilities increased $3.3 million, or 1.5%. The primary reason for the decrease in interest expense was repricing of deposits throughout the year to lower market interest rates.

Provision for Loan Losses. The provision for loan losses was $316,000 for the year ended December 31, 2013, as compared to $1.1 million for the year ended December 31, 2012. The decrease in the provision was primarily attributable to a decrease in net charge offs period over period.

Non-performing loans increased $173,000 from $3.9 million at December 31, 2012 to $4.1 million at December 31, 2013. Non-performing residential mortgage, commercial real estate and multifamily, commercial, and consumer loans increased $152,000, $96,000, $47,000, and $30,000, respectively, while non-performing construction and land loans decreased $152,000. The balance of non-performing loans at December 31, 2013, includes nonaccrual loans of $4.0 million. Residential mortgage loans of $20,000 were over 90 days past due but still accruing interest at December 31, 2013. The balance of nonaccrual loans at December 31, 2013 consists of $2.4 million in residential mortgage loans, $1.4 million in construction and land loans, $96,000 in commercial real estate and multifamily loans, $57,000 in consumer loans, and $47,000 in commercial loans.

Net charge-offs were $360,000 for the year ended December 31, 2013, compared to $771,000 for the year ended December 31, 2012. Charge-offs totaling $594,000 were recorded during the year ended December 31, 2013, in connection with residential mortgage loans ($195,000), construction and land loans ($97,000), and consumer loans ($302,000).

The allowance for loan losses was $4.4 million at December 31, 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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Average Balances and Yields

The following tables present information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using daily balances. Nonaccrual loans are included in average balances only. Loan fees are included in interest income on loans and are not material. Tax exempt income on loans and on investment and mortgage-backed securities has been calculated on a tax equivalent basis using a federal marginal tax rate of 34.0%.

 

     Year Ended December 31,  
     2013     2012     2011  

(Dollars in thousands)

   Average
Balance
     Interest
and
Dividends
     Yield/
Cost
    Average
Balance
     Interest
and
Dividends
     Yield/
Cost
    Average
Balance
     Interest
and
Dividends
     Yield/
Cost
 

Assets:

                        

Interest-bearing deposits at other financial institutions

   $ 24,332       $ 62         0.25   $ 20,420       $ 51         0.25   $ 14,732       $ 40         0.27

Loans

     218,287         12,794         5.86        211,183         13,418         6.35        201,425         13,297         6.60   

Investment securities

     20,764         571         2.75        24,578         662         2.70        35,672         992         2.78   

Mortgage-backed and related securities

     12,463         271         2.18        12,977         337         2.60        8,389         310         3.70   

Other interest-earning assets

     —           —           —          2,176         6         0.26        2,729         7         0.25   
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     275,846         13,698         4.97        271,334         14,474         5.33        262,947         14,646         5.57   
     

 

 

         

 

 

         

 

 

    

Non-interest-earning assets

     20,326              20,394              20,978         
  

 

 

         

 

 

         

 

 

       

Total assets

   $ 296,172            $ 291,728            $ 283,925         
  

 

 

         

 

 

         

 

 

       

Liabilities and equity:

                        

Demand and NOW accounts

   $ 60,946       $ 114         0.19   $ 62,974       $ 190         0.30   $ 52,876       $ 227         0.43

Money market accounts

     51,126         248         0.49        47,388         225         0.48        49,169         312         0.64   

Passbook savings accounts

     18,674         22         0.12        16,469         21         0.13        13,925         19         0.14   

Certificates of deposit

     92,597         1,670         1.80        91,539         2,069         2.26        92,940         2,441         2.63   
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing deposits

     223,343         2,054         0.92        218,370         2,505         1.15        208,910         2,999         1.44   

Federal Home Loan Bank advances

     1,804         78         4.34        3,038         131         4.32        7,715         337         4.36   

Securities sold under agreements to repurchase

     1,528         2         0.10        1,888         2         0.10        1,868         2         0.10   
  

 

 

    

 

 

      

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     226,675         2,134         0.94        223,296         2,638         1.18        218,493         3,338         1.53   
     

 

 

         

 

 

         

 

 

    

Non-interest-bearing deposits

     20,944              14,604              11,276         

Other non-interest-bearing liabilities

     4,367              4,063              4,011         
  

 

 

         

 

 

         

 

 

       

Total liabilities

     251,986              241,963              233,780         

Total equity

     44,186              49,765              50,145         
  

 

 

         

 

 

         

 

 

       

Total liabilities and equity

   $ 296,172            $ 291,728            $ 283,925         
  

 

 

         

 

 

         

 

 

       

Net interest income

      $ 11,564            $ 11,836            $ 11,308      
     

 

 

         

 

 

         

 

 

    

Interest rate spread

           4.03              4.15              4.04   

Net interest margin

           4.19              4.36              4.30   

Average interest-earning assets to average interest-bearing liabilities

           121.69           121.51           120.35
        

 

 

         

 

 

         

 

 

 

 

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Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. Changes attributable to changes in both rate and volume have been allocated proportionally based on the absolute dollar amounts of change in each.

 

     Year Ended December 31, 2013
Compared to
Year Ended December 31, 2012
    Year Ended December 31, 2012
Compared to
Year Ended December 31, 2011
 
     Increase (Decrease)
Due to
          Increase (Decrease)
Due to
       

(In thousands)

   Volume     Rate     Net     Volume     Rate     Net  

Interest income:

            

Interest-bearing deposits at other financial institutions

   $ 10      $ 1      $ 11      $ 15      $ (4   $ 11   

Loans receivable

     451        (1,074     (623     644        (523     121   

Investment securities

     (103     11        (92     (308     (22     (330

Mortgage-backed and related securities

     (13     (53     (66     170        (143     27   

Other interest-earning assets

     (6     —          (6     (1     —          (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     339        (1,115     (776     520        (692     (172
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

            

Deposits

     39        (490     (451     (1     (493     (494

Federal Home Loan Bank advances

     (53     —          (53     (204     (2     (206

Securities sold under agreement to repurchase

     —          —          —          —          —          —     

Total interest-bearing liabilities

     (14     (490     (504     (205     (495     (700
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in interest income

   $ 353      $ (625   $ (272   $ 725      $ (197   $ 528   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-interest Income. Total non-interest income was $5.2 and $5.3 for the years ended December 31, 2013 and 2012, respectively. During the year ended December 31, 2013, total non-interest income decreased $140,000, or 2.6%, as compared to the year ended December 31, 2012, primarily due to decreases in fees related to the origination and servicing of mortgage loans on the secondary market and income related to non-sufficient funds charges on deposit accounts of $319,000 and $184,000, respectively. These decreases were partially offset by increases in income related to investment sales commissions, debit card usage income, and income from other deposit related fees of $183,000, $109,000, and $80,000, respectively. All other non-interest income decreased $9,000, net.

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 year ended December 31, 2013 as compared to the year ended December 31, 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 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 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 other deposit related fees increased primarily due to a restructuring of deposit accounts which requires customers to pay a small fee for paper statements.

Non-interest Expense. Non-interest expense increased by $1.2 million, or 10.2%, to $13.1 million for the year ended December 31, 2013 as compared to $11.9 million for the year ended December 31, 2012. The primary factors effecting the change were increases in expenses related to salary and employee benefits, data processing, occupancy and equipment, and advertising and other expenses of $570,000, $284,000, $168,000, and $129,000, 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. The primary reason for the increase in occupancy and equipment expense was increased technology maintenance costs as well as additional

 

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depreciation expense on purchases of computer hardware. 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 remaining $58,000 increase in non-interest expense was due to an increase in federal deposit insurance premiums.

Income Tax Expense. Income tax expense for the year ended December 31, 2013, was $1.0 million compared to $1.6 million for the year ended December 31, 2012. The decrease in income tax expense was due primarily to the decrease in taxable income year over year.

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 $1.7 million and $2.6 million for the years ended December 31, 2013 and 2012, respectively. The decrease in total comprehensive income resulted from a $291,000 decrease in net income and a $578,000 increase in unrealized losses on securities available for sale, net of tax.

Risk Management

Overview. Managing risk is an essential part of successfully managing a financial institution. Our most prominent risk exposures are credit risk, interest rate risk and market risk. Credit risk is the risk of not collecting the interest and/or the principal balance of a loan or investment when it is due. Interest rate risk is the potential reduction of interest income as a result of changes in interest rates. Market risk arises from fluctuations in interest rates that may result in changes in the values of financial instruments, such as available-for-sale securities that are accounted for on a mark-to-market basis. Other risks that we face are operational risk, liquidity risks and reputation risk. Operational risks include risks related to fraud, regulatory compliance, processing errors, technology and disaster recovery. Liquidity risk is the possible inability to fund obligations to depositors, lenders or borrowers. Reputation risk is the risk that negative publicity or press, whether true or not, could cause a decline in our customer base or revenue.

Credit Risk Management. Our strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans. We do not offer, and have not offered, Alt-A, sub-prime or no-documentation mortgage loans.

When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status. When the loan becomes 15 day past due, a late notice is sent to the borrower. When the loan becomes 30 days past due, a more formal letter is sent. Between 15 and 30 days past due, telephone calls are also made to the borrower. After 30 days, we regard the borrower in default. At 60 days delinquent, the borrower may be sent a letter from our attorney and we may commence collection proceedings. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. Generally, when a consumer loan becomes 60 days past due, we institute collection proceedings and attempt to repossess any personal property that secures the loan. Management informs the board of directors monthly of the amount of loans delinquent more than 30 days, all loans in foreclosure and repossessed property that we own.

Analysis of Non-performing and Classified Assets. We consider repossessed assets and loans that are 90 days or more past due to be non-performing assets. Loans are generally placed on nonaccrual status when they become 90 days delinquent at which time the accrual of interest ceases and the allowance for any uncollectible accrued interest is established and charged against operations. Typically, payments received on a nonaccrual loan are first applied to the outstanding principal balance.

Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired it is recorded at the lower of its cost, which is the unpaid balance of the loan plus foreclosure costs, or fair market value at the date of foreclosure. Any holding costs and declines in fair value after acquisition of the property result in charges against income.

 

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The following table provides information with respect to our non-performing assets at the dates indicated.

 

     At December 31,  

(Dollars in thousands)

   2013     2012     2011     2010     2009  

Non-accrual loans:

          

Residential real estate

   $ 2,440      $ 2,288      $ 1,447      $ 569      $ 1,377   

Non-residential real estate

     96        —          —          273        410   

Construction

     1,403        1,555        1,748        974        —     

Commercial business

     47        —          —          38        36   

Consumer

     57        27        59        58        174   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     4,043        3,870        3,254        1,912        1,997   

Accruing loans past due 90 days or more:

          

Residential real estate

     20        10        21        64        1   

Non-residential real estate

     —          —          —          54        —     

Construction

     —          —          —          —          —     

Commercial business

     —          —          —          —          —     

Consumer

     27        18        24        9        15   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     47        28        45        127        16   

Total of non-accrual and 90 days or more past due loans

     4,090        3,898        3,299        2,039        2,013   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Real estate owned

     413        509        526        1,087        779   

Other non-performing assets

     8        37        11        16        10   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing assets

     4,511        4,444        3,836        3,142        2,802   

Troubled debt restructurings

     4,134 (1)      5,232 (1)      6,808 (1)      6,057 (1)      3,515 (1) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Troubled debt restructurings and total non-performing assets

   $ 7,975      $ 9,257      $ 9,974      $ 8,878      $ 6,317   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing loans to total loans

     1.77     1.76     1.58     1.00     1.03

Total non-performing loans to total assets

     1.39     1.34     1.16     0.73     0.73

Total non-performing assets and troubled debt restructurings to total assets

     2.71     3.17     3.52     3.19     2.28
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Troubled debt restructurings include $670,000, $419,000, $670,000, $321,000 and $112,000 in non-accrual loans at December 31, 2013, 2012, 2011, 2010 and 2009, respectively, which are also included in non-accrual loans at those respective dates.

We periodically modify loans to extend the term or make other concessions to help borrowers stay current on their loan and to avoid foreclosure. We do not forgive principal or interest on loans or modify the interest rates on loans to rates that are below market rates. At December 31, 2013, we had $4.1 million of these modified loans, which are also referred to as troubled debt restructurings, as compared to $5.2 million at December 31, 2012. At December 31, 2013, $374,000 of the total $4.1 million of troubled debt restructurings were not current and $670,000 were on non-accrual status and included in the non-accrual amounts in the table above. See Note 5 to the notes to the consolidated financial statements for additional information.

Interest income that would have been recorded for the year ended December 31, 2013, and the year ended December 31, 2012, had non-accruing loans and troubled debt restructurings been current according to their original terms, amounted to $363,000 and $94,000, respectively. Interest income of $207,000 and $366,000 related to non-accrual loans and troubled debt restructurings was included in interest income for the year ended December 31, 2013, and the year ended December 31, 2012, respectively.

Federal regulations require us to review and classify our assets on a regular basis. In addition, the Office of the Comptroller of the Currency has the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets; substandard, doubtful and loss. “Substandard assets” must have one or more defined weakness 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 we classify an asset as substandard or doubtful we may establish a specific allowance for loan losses. If we classify an asset as loss, we charge off an amount equal to 100% of the portion of the asset classified loss.

 

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The following table shows the aggregate amounts of our classified assets at the dates indicated.

 

     At December 31,  

(In thousands)

   2013      2012      2011  

Special mention assets

   $ 3,429       $ 1,808       $ 1,690   

Substandard assets

     10,316         11,879         13,715   

Doubtful assets

     —           —           —     

Loss assets

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Total classified assets

   $ 13,745       $ 13,687       $ 15,405   
  

 

 

    

 

 

    

 

 

 

Classified assets include loans that are classified due to factors other than payment delinquencies, such as lack of current financial statements and other required documentation, insufficient cash flows or other deficiencies, and, therefore are not included as non-performing assets. Other than as disclosed in the above tables, there are no other loans where management has serious doubts about the ability of the borrowers to comply with the present loan repayment terms.

Delinquencies. The following table provides information about delinquencies (excluding non-accrual loans) in our loan portfolio at the dates indicated.

 

     At December 31, 2013  
     30-89 Days      90 Days or More  

(Dollars in thousands)

   Number
of
Loans
     Principal
Balance
of Loans
     Number
of
Loans
     Principal
Balance
of Loans
 

Residential real estate

     11       $ 916         1       $ 20   

Non-residential real estate

     —           —           —           —     

Construction

     4         381         —           —     

Commercial business

     1         24         —           —     

Consumer

     55         342         5         27   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     71       $ 1,663         6       $ 47   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     At December 31,  
     2012      2011  
     30-89 Days      90 Days or More      30-89 Days      90 Days or More  

(Dollars in thousands)

   Number
of
Loans
     Principal
Balance
of Loans
     Number
of
Loans
     Principal
Balance
of Loans
     Number
of
Loans
     Principal
Balance
of Loans
     Number
of
Loans
     Principal
Balance
of Loans
 

Residential real estate

     4       $ 108         1       $ 10         10       $ 753         1       $ 21   

Non-residential real estate

     1         99         —           —           1         163         —           —     

Construction

     2         1,704         —           —           —           —           —           —     

Commercial business

     —           —           —           —           —           —           —           —     

Consumer

     39         183         4         18         39         277         10         24   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     46       $ 2,094         5       $ 28         50       $ 1,193         11       $ 45   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Analysis and Determination of the 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. Our methodology for assessing the appropriateness of the allowance for loan losses is reviewed periodically by the board of directors. The board of directors also reviews the allowance for loan losses established on a quarterly basis.

General Valuation Allowance. We establish a general valuation allowance for loans that should be adequate to reserve for the estimated credit losses inherent in each segment of our loan portfolio, given the facts and circumstances as of the valuation date for all loans in the portfolio that have not been classified. The allowance is based on our average annual rate of net charge offs experienced over the previous three years on each segment of the

 

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portfolio and is adjusted for current qualitative factors. If historical loss data is not available for a segment, the estimates used will be no less than the industry average for that segment. For purposes of determining the estimated credit losses, the loan portfolio is segmented as follows: (i) residential real estate loans (one- to four-family); (ii) commercial real estate loans; (iii) commercial loans (secured); (iv) commercial loans (unsecured and leases); and (v) consumer loans. Qualitative factors that are considered in determining the adequacy of the allowance for loan losses are as follows: (i) trends of delinquent and non-accrual loans; (ii) economic factors; (iii) concentrations of credit; (iv) changes in the nature and volume of the loan portfolio; and (v) changes in lending staff and loan policies.

Specific Valuation Allowance. In accordance with Accounting Standards Codification Topic 310, “Receivablesall adversely classified loans meeting the following loan balance thresholds will be individually reviewed: (i) residential loans greater than $100,000; (ii) commercial real estate loans and land loans greater than $50,000; (iii) consumer loans greater than $25,000; and (iv) all other commercial loans. Any portion of the recorded investment in excess of the fair value of the collateral that can be identified as uncollectible will be charged off against the allowance for loan losses.

We establish a specific allowance for loan losses for 100% of the assets or portions thereof classified as loss. The amount of the loss will be the excess of the recorded investment in the loan over the fair value of collateral estimated on the date that a probable loss is identified. Lending management will use updated appraisals, National Automobile Dealers Association values, or other prudent sources for determining collateral value.

All other adversely classified loans as well as special mention and watch loans will be reviewed in accordance with Accounting Standards Codification Topic 450, “Contingencies.” Our historical loss experience in each category of loans will be utilized in determining the allowance for that group. The loss history will be based on the average actual loss sustained. If we have not experienced any losses in a particular category, the factor will be determined from either the loss history of a reasonably similar category or the peer group industry average. The determined loss factor in each loan category may be adjusted for qualitative factors as determined by management.

Unallocated Valuation Allowance. Our allowance for loan losses methodology also includes an unallocated component to reflect the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the loan portfolio.

 

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The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.

 

     At December 31,  
     2013     2012  

(Dollars in thousands)

   Amount      % of
Allowance
to Total
Allowance
    % of
Loans in
Category
to Total
Loans
    Amount      % of
Allowance
to Total
Allowance
    % of
Loans in
Category
to Total
Loans
 

Residential real estate

   $ 1,442         32.55     38.20   $ 1,349         30.14     37.38

Non-residential real estate (1)

     2,066         46.61        45.47        1,894         42.32        44.38   

Commercial business

     332         7.49        5.64        686         15.33        5.66   

Consumer

     531         11.97        10.69        545         12.19        12.58   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

     4,371         98.62        100.00     4,474         99.98        100.00
       

 

 

        

 

 

 

Unallocated

     61         1.38          1         0.02     
  

 

 

    

 

 

     

 

 

    

 

 

   

Total allowance for loan losses

   $ 4,432         100.00     $ 4,475         100.00  
  

 

 

    

 

 

     

 

 

    

 

 

   

 

     At December 31,  
     2011     2010     2009  

(Dollars in thousands)

   Amount      % of
Allowance
to Total
Allowance
    % of
Loans in
Category
to Total
Loans
    Amount      % of
Allowance
to Total
Allowance
    % of
Loans in
Category
to Total
Loans
    Amount      % of
Allowance
to Total
Allowance
    % of
Loans in
Category
to Total
Loans
 

Residential real estate

   $ 1,345         32.28     38.65   $ 1,064         26.83     49.09   $ 986         28.90     52.11

Non-residential real estate (1)

     1,688         40.52        42.89        2,033         51.27        39.67        1,279         37.47        36.18   

Commercial business

     565         13.56        6.03        524         13.22        6.27        605         17.73        6.16   

Consumer

     541         12.99        12.43        319         8.05        4.97        512         15.00        5.55   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total

     4,139         99.35        100.00     3,940         99.37        100.00     3,382         99.10        100.00
       

 

 

        

 

 

        

 

 

 

Unallocated

     27         0.65          25         0.63          31         0.90     
  

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

   

Total allowance for loan losses

   $ 4,166         100.00     $ 3,965         100.00     $ 3,413         100.00  
  

 

 

    

 

 

     

 

 

    

 

 

     

 

 

    

 

 

   

 

(1) Includes construction loans.

Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that the Office of the Comptroller of the Currency, in reviewing our loan portfolio, will not require us to increase our allowance for loan losses. The Office of the Comptroller of the Currency may require us to increase our allowance for loan losses based on judgments different from ours. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operation.

 

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Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the periods indicated.

 

     Year Ended December 31,  

(Dollars in thousands)

   2013     2012     2011     2010     2009  

Allowance for loan losses at beginning of period

   $ 4,475      $ 4,166      $ 3,965      $ 3,413      $ 3,083   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for loan losses

     316        1,080        1,980        1,711        1,024   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Charge offs:

          

Residential real estate

     195        664        123        545        60   

Non-residential real estate

     —          —          244        198        196   

Construction

     97        —          912        —          —     

Commercial business

     —          16        278        119        228   

Consumer

     302        229        325        411        274   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total charge-offs

     594        909        1,882        1,273        758   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Recoveries:

          

Residential real estate

     31        12        26        1        20   

Non-residential real estate

     —          —          13        34        —     

Construction

     —          72        —          —          —     

Commercial business

     147        10        4        —          1   

Consumer

     57        44        60        79        43   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     235        138        103        114        64   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net charge-offs (recoveries)

     359        771        1,779        1,159        694   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses at end of period

   $ 4,432      $ 4,475      $ 4,166      $ 3,965      $ 3,413   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for loan losses to non-performing

loans

     108.36     114.80     126.28     194.46     169.54

Allowance for loan losses to total loans outstanding at the end of the period

     1.92     2.02     1.99     1.94     1.75

Net charge-offs (recoveries) to average loans outstanding during the period

     0.16     0.34     0.86     0.59     0.36
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest Rate Risk Management. Our goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest and net income. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect our earnings while decreases in interest rates may beneficially affect our earnings. 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, 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. Measurements which we use to help us manage interest rate sensitivity include earnings at risk simulation model and economic value of equity model.

Rate sensitivity/Earnings at Risk – The goal is to achieve a strong acceptable and consistent level of earnings over time. The ALCO has established risk tolerances for changes in net interest income from a base case of no change in interest rates to simulate changes in net interest income from rate shocks over a one-year period. The established risk limits for changes both up and down in rates from the base case, limits in the decline in net interest income are for a 400bp change should not result in a decrease of more than 20%, a 300bp change should not result in a decrease of more than 15%, a 200bp change should not result in a decrease of more than 10% and a 100bp change should not result in a decrease of more than 5%.

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

 

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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 200bp 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%.

At December 31, 2013, our model results indicated that we were in compliance with the policies noted above and that our balance sheet is slightly liability-sensitive. Liability-sensitive implies that our liabilities will reprice faster than our assets indicating an increase in interest rates would decrease our net interest margin. We continue to seek opportunities to decrease our cost of funding by reducing the level of funding provided by certificates of deposit and reducing rates as current certificates mature.

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

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 its 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 operating, financing, lending and investing activities during any given period. At December 31, 2013, cash and cash equivalents totaled $15.1 million. Securities classified as available-for-sale, amounting to $31.6 million at December 31, 2013, provide an additional source of liquidity. In addition, at December 31, 2013, the Bank had the ability to borrow a total of approximately $38.5 million from the Federal Home Loan Bank of Cincinnati. At December 31, 2013, the Bank had $11.8 million in letters of credit to secure public funds deposits and no outstanding advances from the Federal Home Loan Bank of Cincinnati.

At December 31, 2013, the Bank had $30.0 million in commitments to extend credit outstanding. Certificates of deposit due within one year of December 31, 2013 totaled $36.7 million, or 39.1% of certificates of deposit. The Bank believes that the large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long periods due to the recent low interest rate environment and local competitive pressure. If these maturing deposits do not remain with the Bank, the Bank will be required to seek other sources of funds, including other certificates of deposit and borrowings. Depending on market conditions, the Bank may be required to pay higher rates on such deposits or other borrowings than it currently pays on the certificates of deposit due on or before December 31, 2014. The Bank believes, however, based on past experience that a significant portion of those certificates of deposit will remain with the Bank. The Bank has the ability to attract and retain deposits by adjusting the interest rates offered.

 

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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 requires its own funds to pay any dividends to its shareholders and to pay for any repurchases of shares of its common stock. The Company’s primary source of income is dividends received from the Bank. The amount of dividends 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. At December 31, 2013, the Company (on an unconsolidated basis) had liquid assets of $7.2 million.

The following tables present certain of our contractual obligations at December 31, 2013.

 

            Payments due by period  

Contractual Obligations

   Total      Less than
One Year
     One to
Three Years
     Three to
Five Years
     More Than
Five Years
 
     (In thousands)  

Deferred director fee arrangements

   $ 520       $ 68       $ 180       $ 155       $ 117   

Deferred compensation arrangements

     1,711         42         59         312         1,298   

Operating lease obligations

     587         208         379         —           —     

Total

   $ 2,818       $ 318       $ 618       $ 467       $ 1,415   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Our primary investing activities are the origination of loans and the purchase of securities. Our primary financing activities consist of activity in deposit accounts and Federal Home Loan Bank advances. Deposit flows are affected by the overall level of interest rates, the interest rates and product offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive. Occasionally, we offer promotional rates on certain deposit products to attract deposits.

Financing and Investing Activities

The following table presents our primary investing and financing activities during the periods indicated.

 

     Year Ended December 31,  

(In thousands)

   2013     2012     2011  

Investing activities:

      

Loan purchases

   $ 3,927      $ 10      $ 813   

Loan originations

     111,159        122,696        106,267   

Loan principal repayments

     68,157        59,922        81,299   

Loan sales

     38,041        49,899        20,267   

Proceeds from calls, maturities and principal repayments of investment securities

     8,641        11,102        18,471   

Proceeds from calls, maturities and principal repayments of mortgage-backed and related securities

     3,069        2,850        2,326   

Proceeds from sales of investment securities available- for-sale

     —          —          378   

Proceeds from sales of mortgage-backed and related securities available-for-sale

     —          —          —     

Purchases of investment securities

     7,394        5,537        8,619   

Purchases of mortgage-backed and related securities

     5,068        6,650        4,900   

Financing activities:

      

Increase (decrease) in deposits

   $ 13,924      $ 10,136      $ 8,425   

Increase (decrease) in Federal Home Loan Bank advances

     (3,000     (99     (5,115

Increase (decrease) in securities sold under agreements to repurchase

     (806     (155     1,470   
  

 

 

   

 

 

   

 

 

 

 

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Capital Management. We are subject to various regulatory capital requirements administered by the Office of the Comptroller of the Currency, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At December 31, 2013, we exceeded all of our regulatory capital requirements and were considered “well capitalized” under regulatory guidelines. See “Item 1. Business—Regulation and Supervision—Regulation of Federal Savings Associations—Capital Requirements” and note 10 of the notes to consolidated financial statements beginning on page F-1 of this annual report.

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 information about our loan commitments, unused lines of credit and letters of credit, see note 16 of the notes to consolidated financial statements.

For the year ended December 31, 2013, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Impact of Recent Accounting Pronouncements

For a discussion of the impact of recent accounting pronouncements, see note 1 of the notes to consolidated financial statements beginning on page F-1 of this annual report.

Effect of Inflation and Changing Prices

The consolidated financial statements and related financial data presented in this prospectus have been prepared according to generally accepted accounting principles in the United States, which require the measurement of financial positions and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

 

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this item is incorporated herein by reference to Part II, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

 

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is included herein beginning on page F-1.

 

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

 

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Item 9A. CONTROLS AND PROCEDURES

Disclosure 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 or year ended December 31, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Internal Control Over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control process has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.

Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013, utilizing the framework established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2013 is effective.

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements are prevented or timely detected.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

There have been no changes in the Company’s internal control over financial reporting during the quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Item 9B. OTHER INFORMATION

None.

 

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PART III

 

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Board of Directors

The information relating to the directors of the Company, information regarding compliance with Section 16(a) of the Exchange Act and information regarding the audit committee and audit committee financial expert is incorporated herein by reference to the Company’s Proxy Statement for the 2014 Annual Meeting of Shareholders.

Executive Officers

The executive officers of the Company and the Bank are elected annually by the board of directors and serve at the board’s discretion. The executive officers of the Company and the Bank are:

 

Name

  

Position

Jeffrey L. Cunningham

   President and Chief Executive Officer of both Athens Bancshares Corporation and Athens Federal Community Bank

Michael R. Hutsell

   Treasurer and Chief Financial Officer of Athens Bancshares Corporation; and Vice President, Chief Operating Officer and Chief Financial Officer of Athens Federal Community Bank

Jay Leggett, Jr.

   City President—Cleveland, of Athens Federal Community Bank

Ross A. Millsaps

   Vice President and Chief Credit Officer of Athens Federal Community Bank

Below is information regarding our other executive officers who are not also directors. Each individual has held his current position for at least the last five years, unless otherwise stated. Ages presented are as of December 31, 2013.

Michael R. Hutsell is Treasurer and Chief Financial Officer of the Company and Vice President, Chief Operating Officer and Chief Financial Officer of the Bank. Mr. Hutsell joined the Bank in August 1998. Age 47.

Jay Leggett, Jr. has served as City President of the Bank’s Cleveland Division since March 2006. From November 2003 to March 2006, Mr. Leggett was Senior Vice President of Lending for Bradley and Hamilton Counties, Tennessee at First Citizens Bank. Age 49.

Ross A. Millsaps has served as Vice President and Chief Credit Officer of the Bank since April 2006. Before that time, Mr. Millsaps was a bank regulatory examiner with the Office of Thrift Supervision. Age 47.

Code of Ethics

The Company has adopted a code of ethics and business conduct which applies to all of the Company’s and the Bank’s directors, officers and employees. A copy of the code of ethics and business conduct is available to stockholders on the Investor Relations portion of the Bank’s website at www.athensfederal.com.

 

Item 11. EXECUTIVE COMPENSATION

The information regarding executive compensation, compensation committee interlocks and insider participation is incorporated herein by reference to the Company’s Proxy Statement for the 2014 Annual Meeting of Shareholders.

 

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Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

  (a) Security Ownership of Certain Beneficial Owners.

Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Company’s Proxy Statement for the 2014 Annual Meeting of Shareholders.

 

  (b) Security Ownership of Management

Information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Company’s Proxy Statement for the 2014 Annual Meeting of Shareholders.

 

  (c) Changes in Control

Management of the Company knows of no arrangements, including any pledge by any person or securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant.

 

  (d) Equity Compensation Plan Information

Equity Compensation Plan Information as of December 31, 2013

 

Plan category

  

Number of
securities
to be issued
upon
exercise of
outstanding
options,
warrants
and rights

(a)

    

Weighted-
average
exercise
price of
outstanding
options,
warrants
and rights

(b)

    

Number of
securities
remaining
available for
future
issuance
under equity
compensation
plans
(excluding
securities
reflected in
column (a))

(c)

 

Equity compensation plans approved by security holders

     236,062         11.50         41,663   

Equity compensation plans not approved by security holders

     N/A         N/A         N/A   

Total

     236,062         11.50         41,663   

The Company does not maintain any equity compensation plans that have not been approved by its security holders.

 

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information relating to certain relationships and related transactions and director independence is incorporated herein by reference to the Company’s Proxy Statement for the 2014 Annual Meeting of Shareholders.

 

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information relating to the principal accountant fees and expenses is incorporated herein by reference to the Company’s Proxy Statement for the 2014 Annual Meeting of Shareholders.

 

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PART IV

 

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

  (1) The financial statements required in response to this item are incorporated by reference from Item 8 of this Annual Report on Form 10-K.

 

  (2) All financial statement schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto.

 

  (3) Exhibits

 

No.

  

Description

3.1    Amended and Restated Charter of Athens Bancshares Corporation (1)
3.2    Amended and Restated Bylaws of Athens Bancshares Corporation (2)
4.1    Specimen Stock Certificate of Athens Bancshares Corporation (3)
10.1    Employment Agreement between Athens Federal Community Bank and Jeffrey L. Cunningham* (4)
10.2    Employment Agreement between Athens Federal Community Bank and Michael R. Hutsell* (4)
10.3    Employment Agreement between Athens Federal Community Bank and Jay Leggett, Jr* (5)
10.4    Employment Agreement between Athens Bancshares Corporation and Jeffrey L. Cunningham* (4)
10.5    Employment Agreement between Athens Bancshares Corporation and Michael R. Hutsell* (4)
10.6    Supplemental Executive Retirement Plan Agreement between Athens Federal Community Bank and Jeffrey L.
Cunningham* (4)
10.7    Supplemental Executive Retirement Plan Agreement between Athens Federal Community Bank and Michael R. Hutsell* (5)
10.8    Supplemental Executive Retirement Plan Agreement between Athens Federal Community Bank and Jay Leggett, Jr* (5)
10.9    2010 Equity Incentive Plan (6)
21.0    Subsidiaries
23.0    Consent of Mauldin & Jenkins, LLC
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 Annual Report on Form 10-K for the year ended December 31, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Comprehensive Income, (ii) the Consolidated Statements of Income, (iv) the Consolidated Statement of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.

 

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

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Athens Bancshares Corporation

Athens, Tennessee

We have audited the accompanying consolidated balance sheet of Athens Bancshares Corporation and subsidiary (the “Company”) as of December 31, 2013, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements of Athens Bancshares Corporation and subsidiary as of December 31, 2012 and for the year then ended were audited by other auditors who have ceased operations and whose report dated March 14, 2013, expressed an unqualified opinion on these statements.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Athens Bancshares Corporation and subsidiary as of December 31, 2013, and the results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted account principles.

/s/ MAULDIN & JENKINS, LLC

Chattanooga, Tennessee

March 14, 2014

 

 

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Table of Contents

The report below is a copy of the report issued by the Company’s previous independent auditors Hazlett, Lewis & Bieter, PLLC

Report of Independent Registered Public Accounting Firm

To the Board of Directors

Athens Bancshares Corporation

Athens, Tennessee

We have audited the accompanying consolidated balance sheets of Athens Bancshares Corporation and subsidiary (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Athens Bancshares Corporation and subsidiary as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

Hazlett, Lewis & Bieter, PLLC

Chattanooga, Tennessee

March 14, 2013

 

Market Court, Suite 300    •    537 Market Street    •    Chattanooga, Tennessee 37402-1239    •    Telephone (423)756-6133
Fax: (423)756-2727    •    E-mail: hlb@hlbcpa.com    •    Website: http://www.hlbcpa.com

 

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Table of Contents

ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

December 31, 2013 and 2012

 

      2013     2012  

ASSETS

    

Cash and due from banks

   $ 11,119,410      $ 16,236,135   

Interest-bearing deposits in banks

     4,015,977        4,015,977   
  

 

 

   

 

 

 

Total cash and cash equivalents

     15,135,387        20,252,112   

Interest-bearing time deposits in banks

     —          249,000   

Securities available for sale

     31,580,183        32,150,108   

Investments, at cost

     3,648,800        3,393,800   

Loans, net of allowance for loan losses of $4,432,069 and $4,475,302 at December 31, 2013 and December 31, 2012, respectively

     226,206,014        217,274,617   

Premises and equipment, net

     4,532,838        4,604,882   

Accrued interest receivable

     978,201        914,361   

Cash surrender value of bank owned life insurance

     9,812,685        9,512,171   

Foreclosed real estate

     413,150        508,529   

Other assets

     2,505,156        2,772,917   
  

 

 

   

 

 

 

Total assets

   $ 294,812,414      $ 291,632,497   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

LIABILITIES

    

Deposits:

    

Noninterest-bearing

   $ 18,252,633      $ 15,640,110   

Interest-bearing

     229,919,419        218,607,993   
  

 

 

   

 

 

 

Total deposits

     248,172,052        234,248,103   

Accrued interest payable

     152,897        158,299   

Securities sold under agreements to repurchase

     1,303,789        2,109,541   

Federal Home Loan Bank advances

     —          3,000,000   

Accrued expenses and other liabilities

     4,075,481        4,112,150   
  

 

 

   

 

 

 

Total liabilities

     253,704,219        243,628,093   
  

 

 

   

 

 

 

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 1,890,990 outstanding at December 31, 2013 and 2,358,568 outstanding at December 31, 2012

     18,910        23,586   

Additional paid-in capital

     18,523,039        22,774,875   

Common stock acquired by benefit plans:

    

Restricted stock

     (616,575     (878,732

Unallocated common stock held by:

    

Employee Stock Ownership Plan Trust

     (1,629,320     (1,777,440

Retained earnings

     24,880,822        27,319,933   

Accumulated other comprehensive income

     (68,681     542,182   
  

 

 

   

 

 

 

Total stockholders’ equity

     41,108,195        48,004,404   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 294,812,414      $ 291,632,497   
  

 

 

   

 

 

 

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

 

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ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2013 and 2012

 

      2013      2012  

Interest and dividend income:

     

Loans, including fees

   $ 12,794,430       $ 13,418,112   

Dividends

     177,048         146,700   

Securities and interest-bearing deposits in other banks

     726,740         909,541   
  

 

 

    

 

 

 

Total interest income

     13,698,218         14,474,353   
  

 

 

    

 

 

 

Interest expense:

     

Deposits

     2,054,429         2,504,873   

Federal funds purchased and securities sold under agreements to repurchase

     1,527         1,878   

Federal Home Loan Bank advances

     78,278         131,220   
  

 

 

    

 

 

 

Total interest expense

     2,134,234         2,637,971   
  

 

 

    

 

 

 

Net interest income

     11,563,984         11,836,382   

Provision for loan losses

     316,393         1,080,277   
  

 

 

    

 

 

 

Net interest income after provision for loan losses

     11,247,591         10,756,105   
  

 

 

    

 

 

 

Noninterest income:

     

Customer service fees

     2,029,982         2,036,032   

Other charges and fees

     1,651,307         1,776,849   

Investment sales commissions

     570,227         387,347   

Increase in cash surrender value of life insurance

     361,647         339,310   

Other noninterest income

     573,748         787,029   
  

 

 

    

 

 

 

Total noninterest income

     5,186,911         5,326,567   
  

 

 

    

 

 

 

Noninterest expenses:

     

Salaries and employee benefits

     7,483,639         6,913,896   

Occupancy and equipment

     1,578,089         1,409,960   

Federal deposit insurance premiums

     212,248         153,327   

Data processing

     1,191,684         907,661   

Advertising

     173,515         180,160   

Other operating expenses

     2,440,887         2,305,741   
  

 

 

    

 

 

 

Total noninterest expenses

     13,080,062         11,870,745   
  

 

 

    

 

 

 

Income before income taxes

     3,354,440         4,211,927   

Income tax expense

     1,042,347         1,608,652   
  

 

 

    

 

 

 

Net income

   $ 2,312,093       $ 2,603,275   
  

 

 

    

 

 

 

Earnings per common share:

     

Basic

   $ 1.18       $ 1.12   

Diluted

   $ 1.13       $ 1.09   

Dividends per common share

   $ 0.20       $ 0.20   

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

 

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ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2013 and 2012

 

      2013     2012  

Net income

   $ 2,312,093      $ 2,603,275   

Other comprehensive income (loss), before tax:

    

Unrealized holding losses on securities available for sale

     (985,263     (53,254

Income tax benefit related to other comprehensive income items

     374,400        20,236   
  

 

 

   

 

 

 

Other comprehensive loss, net of tax

     (610,863     (33,018
  

 

 

   

 

 

 

Comprehensive income

   $ 1,701,230      $ 2,570,257   
  

 

 

   

 

 

 

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

 

F-5


Table of Contents

ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended December 31, 2013 and 2012

 

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

Balance, December 31, 2011

     2,686,060      $ 26,860      $ 25,745,943      $ 27,222,837      $ (3,020,527   $ 575,200      $ 50,550,313   

Net income

       —          —          2,603,275        —          —          2,603,275   

Other comprehensive loss

     —          —          —          —          —          (33,018     (33,018

Dividends—$0.20 per share

     —          —          —          (473,169     —          —          (473,169

Release of restricted stock plan shares

     —          —          (216,236     —          216,236        —          —     

Shares released by ESOP trust

     —          —          74,505        —          148,119        —          222,624   

Stock compensation expense

     —          —          294,937        —          —          —          294,937   

Repurchase and retirement of Company common stock

     (327,492     (3,274     (3,124,274     (2,033,010     —          —          (5,160,558
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2012

     2,358,568        23,586        22,774,875        27,319,933        (2,656,172     542,182        48,004,404   

Net income

       —          —          2,312,093        —          —          2,312,093   

Other comprehensive loss

       —          —          —          —          (610,863     (610,863

Dividends—$0.20 per share

       —          —          (401,217     —          —          (401,217

Release of restricted stock plan shares

       —          (262,157     —          262,157        —          —     

Shares released by ESOP trust

       —          120,587        —          148,120        —          268,707   

Stock compensation expense

       —          350,428        —          —          —          350,428   

Repurchase and retirement of Company common stock

     (467,578     (4,676     (4,460,694     (4,349,987     —          —          (8,815,357
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2013

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

F-6


Table of Contents

ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2013 and 2012

 

     2013     2012  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 2,312,093      $ 2,603,275   

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

    

Depreciation

     588,215        476,818   

Amortization of securities and other assets

     393,850        385,867   

Provision for loan losses

     316,393        1,080,277   

Deferred income taxes

     60,322        (102,768

Other gains and losses, net

     (89,739     (91,092

Stock based compensation expense

     619,135        517,561   

Net change in:

    

Cash surrender value of life insurance

     (300,514     (288,324

Accrued interest receivable

     (63,840     53,001   

Accrued interest payable

     (5,402     (12,116