EX-99.2 3 d646837dex992.htm EX-99.2 EX-99.2

Exhibit 99.2

ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

 

     (Unaudited)        
     June 30,     December 31,  
     2018     2017  

ASSETS

    

Cash and due from banks

   $ 21,699,339     $ 28,464,600  

Federal funds sold

     11,283,000       8,027,000  

Interest-bearing deposits in banks

     17,228       17,121  
  

 

 

   

 

 

 

Total cash and cash equivalents

     32,999,567       36,508,721  

Securities available for sale

     69,482,585       76,807,971  

Investments, at cost

     4,720,200       4,479,750  

Loans, net of allowance for loan losses of $4,018,837 and $3,961,107 at June 30, 2018 and December 31, 2017, respectively

     338,168,253       319,228,764  

Premises and equipment, net

     7,823,106       7,511,829  

Accrued interest receivable

     1,380,433       1,363,208  

Cash surrender value of bank owned life insurance

     12,206,221       12,043,319  

Foreclosed real estate

     988,148       914,100  

Core Deposit Intangible

     2,848,669       3,030,499  

Other assets

     3,443,301       2,861,436  
  

 

 

   

 

 

 

Total assets

   $ 474,060,483     $ 464,749,597  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

LIABILITIES

    

Deposits:

    

Noninterest-bearing

   $ 60,376,803     $ 56,997,824  

Interest-bearing

     351,892,395       346,024,515  
  

 

 

   

 

 

 

Total deposits

     412,269,198       403,022,339  

Accrued interest payable

     201,703       236,028  

Securities sold under agreements to repurchase

     940,547       1,750,921  

Note payable to bank

     —         1,382,849  

Accrued expenses and other liabilities

     5,967,367       5,813,476  
  

 

 

   

 

 

 

Total liabilities

     419,378,815       412,205,613  
  

 

 

   

 

 

 

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 1,831,747 outstanding at June 30, 2018 and 1,806,084 outstanding at December 31, 2017

     18,317       18,061  

Additional paid-in capital

     19,115,448       18,799,708  

Common stock acquired by benefit plans:

    

Unallocated common stock held by: Employee Stock Ownership Plan Trust

     (1,036,840     (1,036,840

Retained earnings

     37,870,035       34,906,082  

Accumulated other comprehensive loss

     (1,285,292     (143,027
  

 

 

   

 

 

 

Total stockholders’ equity

     54,681,668       52,543,984  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 474,060,483     $ 464,749,597  
  

 

 

   

 

 

 

The Notes to Consolidated Financial Statements are an integral part of these statements

 

1


ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2018      2017      2018      2017  

Interest and dividend income:

           

Loans, including fees

   $ 4,485,233      $ 3,842,408      $ 8,813,537      $ 7,564,858  

Dividends

     131,662        126,125        178,439        164,611  

Securities and interest-bearing deposits in other banks

     575,831        486,132        1,177,644        924,251  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest and dividend income

     5,192,726        4,454,665        10,169,620        8,653,720  
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense:

           

Deposits

     471,644        435,594        919,282        858,018  

Fed funds purchased and securities sold under agreements to repurchase

     241        241        634        602  

Note payable to bank

     —          54,455        8,733        117,941  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense

     471,885        490,290        928,649        976,561  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income

     4,720,841        3,964,375        9,240,971        7,677,159  

Provision for loan losses

     63,669        94,487        89,653        276,014  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net interest income after provision for loan losses

     4,657,172        3,869,888        9,151,318        7,401,145  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest income:

           

Customer service fees

     671,864        641,570        1,292,725        1,229,959  

Other charges and fees

     748,489        504,705        1,266,802        1,030,864  

Investment sales commissions

     158,159        81,984        301,315        229,181  

Increase in cash surrender value of life insurance

     102,709        105,438        204,462        200,284  

Other noninterest income

     206,102        160,025        391,573        749,610  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest income

     1,887,323        1,493,722        3,456,877        3,439,898  
  

 

 

    

 

 

    

 

 

    

 

 

 

Noninterest expenses:

           

Salaries and employee benefits

     2,153,187        2,035,481        4,290,414        4,064,278  

Occupancy and equipment

     566,190        482,558        1,088,275        989,526  

Federal deposit insurance premiums

     48,000        52,300        83,000        89,950  

Data processing

     386,251        360,030        751,431        706,048  

Advertising

     94,476        71,039        171,145        144,590  

Other operating expenses

     1,199,311        888,091        2,125,633        1,754,138  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total noninterest expenses

     4,447,415        3,889,499        8,509,898        7,748,530  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     2,097,080        1,474,111        4,098,297        3,092,513  

Income tax expense

     491,714        509,943        963,329        1,087,731  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 1,605,366      $ 964,168      $ 3,134,968      $ 2,004,782  
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share

           

Basic

   $ 0.93      $ 0.58      $ 1.83      $ 1.20  

Diluted

   $ 0.86      $ 0.53      $ 1.69      $ 1.10  

Dividends per common share

   $ 0.05      $ 0.05      $ 0.10      $ 0.10  

The Notes to Consolidated Financial Statements are an integral part of these statements

 

2


ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2018     2017     2018     2017  

Net income

   $ 1,605,366     $ 964,168     $ 3,134,968     $ 2,004,782  

Other comprehensive income (loss), before tax:

        

Unrealized holding gains (losses) on securities available for sale

     (10,891     660,004       (1,546,527     799,898  

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

     2,847       (250,801     404,262       (303,961
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (8,044     409,203       (1,142,265     495,937  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 1,597,322     $ 1,373,371     $ 1,992,703     $ 2,500,719  
  

 

 

   

 

 

   

 

 

   

 

 

 

The Notes to Consolidated Financial Statements are an integral part of these statements

 

3


ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Six Months Ended June 30, 2018

(Unaudited)

 

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

Balance, December 31, 2017

     1,806,084      $ 18,061      $ 18,799,708      $ 34,906,082     $ (1,036,840   $ (143,027   $ 52,543,984  

Net income

     —          —          —          3,134,968       —         —         3,134,968  

Other comprehensive loss

     —          —          —          —         —         (1,142,265     (1,142,265

Dividends - $0.10 per share

     —          —          —          (171,015     —         —         (171,015

Stock compensation expense

     —          —          20,871        —         —         —         20,871  

Issuance of Company common stock

     25,663        256        294,869              —         —         295,125  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2018

     1,831,747      $ 18,317      $ 19,115,448      $ 37,870,035     $ (1,036,840   $ (1,285,292   $ 54,681,668  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

The Notes to Consolidated Financial Statements are an integral part of these statements

 

4


ATHENS BANCSHARES CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Six Months Ended  
     June 30,     June 30,  
     2018     2017  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 3,134,968     $ 2,004,782  

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

    

Depreciation

     392,052       381,271  

Amortization of securities and other assets

     327,115       336,907  

Provision for loan losses

     89,653       276,014  

Other gains and losses, net

     (2,023     (464,780

Stock compensation expense

     20,871       48,617  

Net change in:

    

Cash surrender value of life insurance, net

     (162,902     (161,049

Accrued interest receivable

     (17,225     (31,526

Accrued interest payable

     (34,325     (32,836

Other assets and liabilities

     357,137       67,207  
  

 

 

   

 

 

 

Net cash provided by operating activities

     4,105,321       2,424,607  
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Securities available for sale:

    

Purchases

     —         (12,409,962

Maturities, prepayments and calls

     5,633,575       5,064,088  

Investments at cost:

    

Purchases

     (240,450     (9,450

Loan originations and principal collections, net

     (19,482,017     (17,641,174

Purchases of premises and equipment

     (703,329     (153,126

Purchase of life insurance

     —         (1,075,000

Proceeds from sale of foreclosed real estate

     —         65,000  
  

 

 

   

 

 

 

Net cash used in investing activities

     (14,792,221     (26,159,624
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Net increase in deposits

     9,246,859       19,853,379  

Net decrease in securities sold under agreements to repurchase

     (810,374     (560,433

Net decrease in note payable to bank

     (1,382,849     (2,250,000

Issuance of Company common stock

     295,125       —    

Dividends paid

     (171,015     (166,884
  

 

 

   

 

 

 

Net cash provided by provided by financing activities

     7,177,746       16,876,062  
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (3,509,154     (6,858,955

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     36,508,721       58,624,749  
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 32,999,567     $ 51,765,794  
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

    

Interest paid on deposits and borrowed funds

   $ 962,974     $ 1,009,397  

Income taxes paid

     1,195,000       1,130,000  
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES:

    

Acquisition of real estate acquired through foreclosure

   $ 74,048     $ 65,000  

Financed sales of foreclosed real estate

     —         —    
  

 

 

   

 

 

 

The Notes to Consolidated Financial Statements are an integral part of these statements

 

5


ATHENS BANCSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies of Athens Bancshares Corporation (the “Company”) and subsidiary conform with United States generally accepted accounting principles (“GAAP”) and practices within the banking industry.

The policies that materially affect financial position and results of operations are summarized as follows:

Interim Financial Information (Unaudited)

The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X as promulgated by the SEC. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation of the financial condition and results of operations for the periods presented have been included. Operating results for the six months ended June 30, 2018, are not necessarily indicative of the results that may be expected for the full year or in any other period.

The Company has evaluated events and transactions for potential recognition and disclosure through the date the financial statements were issued.

Nature of Operations

The Company is a holding company whose principal activity is the ownership and management of its wholly owned subsidiary, Athens Federal Community Bank, National Association (the “Bank”). The Bank provides a variety of financial services to individuals and corporate customers through its ten branches located in Athens, Sweetwater, Etowah, Madisonville, Cleveland and Lenoir City, Tennessee. The Bank’s primary deposit products include checking, savings, certificates of deposit, and IRA accounts. Its primary lending products are one-to-four family residential, commercial real estate, and consumer loans. Southland Finance, Inc. (“Southland”) is a consumer finance company with one branch located in Athens, Tennessee and one branch located in Cleveland, Tennessee. Ti-Serv, Inc. (“Ti-Serv”) maintains the Bank’s investment in Valley Title Services, LLC (“Valley Title”). Southland and Ti-Serv are wholly-owned subsidiaries of the Bank. Valley Title is a wholly-owned subsidiary of Ti-Serv. Athens Muni Corp (“AMC”) is a wholly-owned subsidiary of the Bank.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, other-than-temporary impairment of securities, and the fair value of financial instruments.

 

6


ATHENS BANCSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Earnings Per Share

Basic earnings per share (“EPS”) is calculated by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted EPS is computed in a manner similar to that of basic EPS except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents such as stock options were vested during the period.

 

NOTE 2.

SECURITIES

The amortized cost and estimated fair value of securities classified as available for sale at June 30, 2018 and December 31, 2017, are as follows:

 

     June 30, 2018  
            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  

Securities of U.S. Government agencies and corporations

   $ 1,261,639      $ —        $ (4,664    $ 1,256,975  

Mortgage-backed and related securities (1)

     47,635,452        47,087        (1,968,248      45,714,291  

State and municipal securities

     22,325,667        250,168        (64,516      22,511,319  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 71,222,758      $ 297,255      $ (2,037,428    $ 69,482,585  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     December 31, 2017  
            Gross      Gross         
     Amortized      Unrealized      Unrealized      Fair  
     Cost      Gains      Losses      Value  

Securities of U.S. Government agencies and corporations

   $ 1,331,281      $ —        $ (2,506    $ 1,328,775  

Mortgage-backed and related securities (1)

     51,204,769        68,364        (948,415      50,324,718  

State and municipal securities

     24,465,566        696,627        (7,715      25,154,478  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 77,001,616      $ 764,991      $ (958,636    $ 76,807,971  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

7


ATHENS BANCSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2.

SECURITIES (Continued)

 

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

As of June 30, 2018 and December 31, 2017, the Company did not have any securities classified as held-to-maturity.

The amortized cost and estimated fair value of securities at June 30, 2018, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

     June 30, 2018  
     Amortized      Fair  
     Cost      Value  

Due in one year or less

   $ 1,212,995      $ 1,209,753  

Due after one year through five years

     5,666,151        5,729,164  

Due five years to ten years

     12,978,160        13,109,934  

Due after ten years

     3,730,000        3,719,443  

Mortgage-backed securities

     47,635,452        45,714,291  
  

 

 

    

 

 

 

Total

   $ 71,222,758      $ 69,482,585  
  

 

 

    

 

 

 

The Company had no realized gains or losses for the six month periods ended June 30, 2018 or 2017.

The Company has pledged securities with carrying values of approximately $41,615,000 and $33,532,000 (which approximates market values) to secure deposits of public and private funds as of June 30, 2018 and December 31, 2017, respectively.

Securities with gross unrealized losses at June 30, 2018 and December 31, 2017, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:

 

     June 30, 2018  
     Less than 12 Months     12 Months or Greater     Total  
            Gross            Gross            Gross  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  
     Value      Losses     Value      Losses     Value      Losses  
                  (dollars in thousands)               

Securities of U.S. Government agencies and corporations

   $ 1,253      $ (5   $ —        $ —       $ 1,253      $ (5

Mortgage-backed and related securities

     10,283        (406     32,350        (1,561     42,633        (1,967

State and municipal securities

     7,520        (60     695        (5     8,215        (65
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 19,056      $ (471   $ 33,045      $ (1,566   $ 52,101      $ (2,037
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

8


ATHENS BANCSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2.

SECURITIES (Continued)

 

     December 31, 2017  
     Less than 12 Months     12 Months or Greater     Total  
     Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
    Fair
Value
     Gross
Unrealized
Losses
 
                  (dollars in thousands)               

Securities of U.S.

               

Government agencies and corporations

   $ 1,283      $ (3   $ —        $ —       $ 1,283      $ (3

Mortgage-backed and related securities

     13,382        (109     33,170        (839     46,552        (948

State and municipal securities

     756        (4     697        (4     1,453        (8
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
   $ 15,421      $ (116   $ 33,867      $ (843   $ 49,288      $ (959
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Management performs periodic reviews for impairment in accordance with ASC Topic 320, Investments – Debt and Equity Securities.

At June 30, 2018, the 42 securities with unrealized losses had depreciated 3.76 percent from the Company’s amortized cost basis. At December 31, 2017, the 34 securities with unrealized losses had depreciated 1.91 percent from the Company’s amortized cost basis.

Most of these securities are guaranteed by either U.S. government corporations or agencies or had investment grade ratings upon purchase. Further, the issuers of these securities have not established any cause for default. The unrealized losses associated with these investment securities are primarily driven by changes in interest rates and are not due to the credit quality of the issuers. These securities will continue to be monitored as a part of the Company’s ongoing impairment analysis, but are expected to perform even if the rating agencies reduce the credit rating of the bond insurers. Management evaluates the financial performance of each issuer on a quarterly basis to determine if it is probable that the issuers can make all contractual principal and interest payments.

Upon acquisition of a security, the Company determines the appropriate impairment model that is applicable. If the security is a beneficial interest in securitized financial assets, the Company uses the beneficial interests in securitized financial assets impairment model. If the security is not a beneficial interest in securitized financial assets, the Company uses the debt and equity securities impairment model. The Company conducts periodic reviews to evaluate each security to determine whether an other-than-temporary impairment has occurred. The Company did not have any securities that were classified as other-than-temporarily-impaired at June 30, 2018.

 

NOTE 3.

INVESTMENTS, AT COST

The Bank carries the following investments at cost because they are not readily marketable and there is no established market price for the investments. These investments are normally redeemed by the issuer at par value and may carry call or put options under certain circumstances. Investments carried at cost at June 30, 2018 and December 31, 2017, consist of:

 

     June 30,      December 31,  
     2018      2017  

Federal Home Loan Bank of Cincinnati common stock

   $ 2,549,000      $ 2,549,000  

Federal Reserve Bank stock

     671,200        655,750  

Resolute Capital Partners Fund III L.P., F.K.A.

     

Tenth Street Fund III, L.P. investment

     1,275,000        1,275,000  

Resolute Capital Partners Fund IV L.P.

     225,000        —    
  

 

 

    

 

 

 
   $ 4,720,200      $ 4,479,750  
  

 

 

    

 

 

 

 

9


ATHENS BANCSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 3.

INVESTMENTS, AT COST (Continued)

 

The Bank, as a member of the Federal Home Loan Bank (“FHLB”) of Cincinnati, is required to maintain an investment in capital stock of the FHLB. Based on redemption provisions of the FHLB, the stock has no quoted market value and is carried at cost. Management reviews for impairment based on the ultimate recoverability of the cost basis in the FHLB stock.

The Bank also maintains an investment in the capital stock of the Federal Reserve Bank. This investment is carried at cost which approximates the fair value of such stock. The amount of Federal Reserve Bank stock required to be held by the Bank is adjusted quarterly based on a determination made by the Federal Reserve Bank.

 

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES

Portfolio Segmentation

The Company’s loans consist of the following at June 30, 2018 and December 31, 2017 (in thousands).

 

     June 30,      December 31,  
     2018      2017  

Mortgage loans on real estate:

     

Residential 1-4 family

   $ 108,608      $ 105,397  

Commercial real estate and multi-family (5 or more units)

     118,582        116,387  

Construction and land

     43,411        31,590  
  

 

 

    

 

 

 
     270,601        253,374  

Commercial loans

     26,615        26,827  

Consumer and other

     46,211        44,139  
  

 

 

    

 

 

 

Total loans

     343,427        324,340  

Less: Allowance for loan losses

     (4,019      (3,961

Unearned interest and fees

     (680      (569

Net deferred loan origination fees

     (560      (581
  

 

 

    

 

 

 

Loans, net

   $ 338,168      $ 319,229  
  

 

 

    

 

 

 

For purposes of the disclosures required pursuant to the adoption of ASC 310, the loan portfolio was disaggregated into segments. A portfolio segment is defined as the level at which an entity develops and documents a systematic method for determining its allowance for credit losses. There are five loan portfolio segments that include residential 1-4 family, commercial real estate and multi-family, construction and land, commercial loans, and consumer and other.

The following describe the risk characteristics relevant to each of the portfolio segments:

Residential 1-4 Family: Residential 1-4 family loans include real estate loans secured by 1-4 family first mortgage loans, second liens, or open end real estate loans, such as home equity lines. These are repaid by various means such as a borrower’s income, sale of the property, or rental income derived from the property. Loans within this portfolio segment are particularly sensitive to unemployment factors and valuation of real estate.

 

10


ATHENS BANCSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Portfolio Segmentation (Continued)

 

Commercial Real Estate and Multi-Family: Commercial real estate and multi-family loans include owner-occupied commercial real estate loans, owner-occupied construction loans for commercial businesses, and loans secured by income producing properties. Owner-occupied commercial real estate loans to operating businesses are long-term financing of land and buildings. Owner-occupied construction loans for a commercial business are for the development of land or construction of a building. Both of these loans are repaid by cash flow generated from the business operation. Real estate loans for income-producing properties such as apartment buildings, office and industrial buildings, and retail shopping centers are repaid from rent income derived from the properties. Loans within this segment are particularly sensitive to the valuation of real estate.

Construction and Land: Loans for real estate construction and land development are repaid through cash flow related to the operations, sale or refinance of the underlying property. This portfolio segment includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of the real estate or income generated from the real estate collateral. Loans within this portfolio segment are particularly sensitive to the valuation of real estate.

Commercial: The commercial loan portfolio segment includes commercial and financial loans. These loans include those loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases, or expansion projects. Loans are repaid by business cash flows. Collection risk in this portfolio is driven by the creditworthiness of the underlying borrower, particularly cash flows from the customers’ business operations.

Consumer and Other: The consumer loan portfolio segment includes direct consumer installment loans, overdrafts and other revolving credit loans, and educational loans. Loans in this portfolio are sensitive to unemployment and other key consumer economic measures.

Credit Risk Management

The Company employs a credit risk management process with defined policies, accountability and routine reporting to manage credit risk in the loan portfolio segments. Credit risk management is guided by credit policies that provide for a consistent and prudent approach to underwriting and approval of credits. Within the Loan Policy, procedures exist that elevate the approval requirements as credits become larger and more complex. All loans are individually underwritten, risk-rated, approved, and monitored.

Responsibility and accountability for adherence to underwriting policies and accurate risk ratings lie in each portfolio segment. For the consumer portfolio segment, the risk management process focuses on managing customers who become delinquent in their payments. For the commercial and real estate portfolio segments, the risk management process focuses on underwriting new business and, on an ongoing basis, monitoring the credit of the portfolios, including a third party review of the largest credits on an annual basis or more frequently as needed. Credit quality and trends in the loan portfolio segments are measured and monitored regularly. Detailed reports, by product, collateral, accrual status, etc., are reviewed by the Directors Loan Committee.

The allowance for loan losses is a valuation reserve allowance established through provisions for loan losses charged against income. The allowance for loan losses, which is evaluated quarterly, is maintained at a level that management deems sufficient to absorb probable losses inherent in the loan portfolio. Loans deemed to be uncollectible are charged against the allowance for loan losses, while recoveries of previously charged-off amounts are credited to the allowance for loan losses. The allowance for loan losses is comprised of specific valuation allowances for loans evaluated individually for impairment, general allocations for pools of homogeneous loans with similar risk characteristics and trends, and an unallocated component that reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

 

11


ATHENS BANCSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Credit Risk Management (Continued)

 

The allowance for loan losses related to specific loans is based on management’s estimate of potential losses on impaired loans as determined by (1) the present value of expected future cash flows; (2) the fair value of collateral if the loan is determined to be collateral dependent or (3) the loan’s observable market price. The Company’s homogeneous loan pools include residential 1-4 family loans, commercial real estate and multi-family loans, construction and land loans, commercial loans, and consumer and other loans. The general allocations to these loan pools are based on the historical loss rates for specific loan types and the internal risk grade, if applicable, adjusted for both internal and external qualitative risk factors. The qualitative factors considered by management include, among other factors, (1) changes in local and national economic conditions; (2) changes in asset quality; (3) changes in loan portfolio volume; (4) the composition and concentrations of credit; (5) the impact of competition on loan structuring and pricing; (6) the impact of interest rate changes on portfolio risk and (7) effectiveness of the Company’s loan policies, procedures and internal controls. The total allowance established for each homogeneous loan pool represents the product of the historical loss ratio and the total dollar amount of the loans in the pool.

The following tables detail activity in the allowance for loan losses by portfolio segment for the periods ended June 30, 2018 and December 31, 2017 (in thousands). Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

 

                                            
     Residential    

Commercial

Real Estate

    Construction                          
     1-4     and     and           Consumer              
     Family     Multi-Family     Land     Commercial     and Other     Unallocated     Total  

Balance, December 31, 2016

   $ 1,114     $ 1,485     $ 298     $ 544     $ 676     $ 32     $ 4,149  

Provision (reallocation) for loan losses

     (103     (152     (92     (90     203       252       18  

Loans charged-off

     —         —         —         —         (317     —         (317

Recoveries

     —         —         —         20       91       —         111  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2017

     1,011       1,333       206       474       653       284       3,961  

Provision (reallocation) for loan losses

     41       49       33       (27     70       (76     90  

Loans charged-off

     —         —         —         —         (116     —         (116

Recoveries

     11       20       —         —         53       —         84  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2018

   $ 1,063     $ 1,402     $ 239     $ 447     $ 660     $ 208     $ 4,019  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The composition of loans by primary loan classification as well as impaired and performing loan status at June 30, 2018 and December 31, 2017, is summarized in the tables below (in thousands):

 

     Year Ending June 30, 2018  
            Commercial                                     
     Residential      Real Estate      Construction                              
     1-4      and      and             Consumer                
     Family      Multi-Family      Land      Commercial      and Other      Unallocated      Total  

Specified reserves – impaired loans

   $ 270      $ 67      $ 5      $ 44      $ 33      $ —        $ 419  

General reserves

     793        1,335        234        403        627        208        3,600  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total reserves

   $ 1,063      $ 1,402      $ 239      $ 447      $ 660      $ 208      $ 4,019  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans

   $ 2,770      $ 183      $ 41      $ 1,520      $ 171      $ —        $ 4,685  

Performing loans

     105,838        118,399        43,370        25,095        46,040        —          338,742  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 108,608      $ 118,582      $ 43,411      $ 26,615      $ 46,211      $ —        $ 343,427  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

12


ATHENS BANCSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Credit Risk Management (Continued)

 

 

     Year Ending December 31, 2017  
            Commercial                                     
     Residential      Real Estate      Construction                              
     1-4      and      and             Consumer                
     Family      Multi-Family      Land      Commercial      and Other      Unallocated      Total  

Specified reserves – impaired loans

   $ 256      $ 69      $ 9      $ 67      $ 60      $ —        $ 461  

General reserves

     755        1,264        197        407        593        284        3,500  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total reserves

   $ 1,011      $ 1,333      $ 206      $ 474      $ 653      $ 284      $ 3,961  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans

   $ 2,702      $ 242      $ 58      $ 1,568      $ 242      $ —        $ 4,812  

Performing loans

     102,695        116,145        31,532        25,259        43,897        —          319,528  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 105,397      $ 116,387      $ 31,590      $ 26,827      $ 44,139      $ —        $ 324,340  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

A description of the general characteristics of the risk grades used by the Company is as follows:

Pass: Loans in this risk category include borrowers of acceptable to strong credit quality and risk who have the apparent ability to satisfy their loan obligations. Loans in this risk grade would possess sufficient mitigating factors, such as adequate collateral or strong guarantors possessing the capacity to repay the debt if required, for any weakness that may exist.

Special Mention: Loans in this risk grade are the equivalent of the regulatory definition of “Other Assets Especially Mentioned” classification. Loans in this category possess some credit deficiency or potential weakness, which requires a high level of management attention. Potential weaknesses include declining trends in operating earnings and cash flows and/or reliance on the secondary source of repayment. If left uncorrected, these potential weaknesses may result in noticeable deterioration of the repayment prospects for the asset or in the Company’s credit position.

Substandard: Loans in this risk grade are inadequately protected by the borrower’s current financial condition and payment capability or the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the orderly repayment of debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans in this risk grade have all weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimated loss is deferred until its more exact status may be determined.

Loss: Loans in this risk grade are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future. Charge-offs against the allowance for loan losses are taken in the period in which the loan becomes uncollectible. Consequently, the Company typically does not maintain a recorded investment in loans within this category.

When the Company classifies an asset as substandard or doubtful, a specific allowance for loan losses may be established.

 

13


ATHENS BANCSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Credit Risk Management (Continued)

 

The following tables outline the amount of each loan classification and the amount categorized into each risk rating as of June 30, 2018 and December 31, 2017 (in thousands):

 

     Period Ending June 30, 2018  
            Commercial                              
     Residential      Real Estate      Construction                       
     1-4      and      and             Consumer         
     Family      Multi-Family      Land      Commercial      and Other      Total  

Pass

   $ 104,387      $ 118,209      $ 43,317      $ 25,095      $ 45,816      $ 336,824  

Special mention

     1,451        190        53        —          224        1,918  

Substandard

     2,770        183        41        1,520        171        4,685  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 108,608      $ 118,582      $ 43,411      $ 26,615      $ 46,211      $ 343,427  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Year Ending December 31, 2017  
            Commercial                              
     Residential      Real Estate      Construction                       
     1-4      and      and             Consumer         
     Family      Multi-Family      Land      Commercial      and Other      Total  

Pass

   $ 101,099      $ 115,939      $ 31,476      $ 25,259      $ 43,710      $ 317,483  

Special mention

     1,596        206        56        —          187        2,045  

Substandard

     2,702        242        58        1,568        242        4,812  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 105,397      $ 116,387      $ 31,590      $ 26,827      $ 44,139      $ 324,340  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Past Due Loans

A loan is considered past due if any required principal and interest payments have not been received as of the date such payments were required to be made under the terms of the loan agreement. Generally, management places loans on nonaccrual when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 120 days past due. The following tables present the aging of the recorded investment in loans as of June 30, 2018 and December 31, 2017 (in thousands):

 

     Period Ending June 30, 2018  
            Past Due                              
     Past Due      90 Days                              
     30-89 Days      or More                              
     and      and             Total      Current      Total  
     Accruing      Accruing      Nonaccrual      Past Due      Loans      Loans  

Residential 1-4 family

   $ 79      $ —        $ 854      $ 933      $ 107,675      $ 108,608  

Commercial real estate and
multi-family

     —          —          —          —          118,582        118,582  

Construction and land

     —          —          22        22        43,389        43,411  

Commercial

     —          —          —          —          26,615        26,615  

Consumer and other

     45        —          65        110        46,101        46,211  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 124      $ —        $ 941      $ 1,065      $ 342,362      $ 343,427  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

14


ATHENS BANCSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Credit Risk Management (Continued)

 

     Year Ending December 31, 2017  
            Past Due                              
     Past Due      90 Days                              
     30-89 Days      or More                              
     and      and             Total      Current      Total  
     Accruing      Accruing      Nonaccrual      Past Due      Loans      Loans  

Residential 1-4 family

   $ 362      $ 129      $ 837      $ 1,328      $ 104,069      $ 105,397  

Commercial real estate and
multi-family

     —          —          56        56        116,331        116,387  

Construction and land

     21        —          24        45        31,545        31,590  

Commercial

     —          —          —          —          26,827        26,827  

Consumer and other

     139        —          23        162        43,977        44,139  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 522      $ 129      $ 940      $ 1,591      $ 322,749      $ 324,340  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired Loans

A loan held for investment is considered impaired when based on current information and events, it is probable that the Company will be unable to collect all amounts due (both principal and interest) according to the terms of the loan agreement. The following tables detail impaired loans, by portfolio segment as of June 30, 2018 and December 31, 2017 (in thousands):

 

     As of June 30, 2018      For the Period Ended
June 30, 2018
 
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Impaired loans without a valuation allowance:

              

Residential 1-4 family

   $ 1,184      $ 1,184      $ —        $ 1,196      $ 9  

Commercial real estate and
multi-family

     —          —          —          —          —    

Construction and land

     22        22        —          22        —    

Commercial

     9        9        —          10        —    

Consumer and other

     17        17        —          46        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,232        1,232        —          1,274        9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans with a valuation allowance:

              

Residential 1-4 family

     1,586        1,586        270        1,578        58  

Commercial real estate and multi-family

     183        183        67        184        7  

Construction and land

     19        19        5        26        1  

Commercial

     1,511        1,511        44        1,513        38  

Consumer and other

     154        154        33        175        2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3,453        3,453        419        3,476        106  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 4,685      $ 4,685      $ 419      $ 4,750      $ 115  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

15


ATHENS BANCSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Impaired Loans (Continued)

 

     As of December 31, 2017      For the Year Ended
December 31, 2017
 
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Impaired loans without a valuation allowance:

              

Residential 1-4 family

   $ 1,200      $ 1,200      $ —        $ 1,168      $ 140  

Commercial real estate and multi-family

     56        56        —          62        —    

Construction and land

     24        24        —          26        2  

Commercial

     11        11        —          13        3  

Consumer and other

     26        26        —          41        8  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,317        1,317        —          1,310        153  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans with a valuation allowance:

              

Residential 1-4 family

     1,502        1,502        256        1,458        —    

Commercial real estate and multi-family

     186        186        69        221        13  

Construction and land

     34        34        9        25        —    

Commercial

     1,557        1,557        67        1,580        79  

Consumer and other

     216        216        60        208        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3,495        3,495        461        3,492        92  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 4,812      $ 4,812      $ 461      $ 4,802      $ 245  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

16


ATHENS BANCSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 4.

LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

 

Impaired Loans (Continued)

 

Troubled Debt Restructurings

At June 30, 2018 and December 31, 2017, impaired loans included loans that were classified as Troubled Debt Restructurings (“TDRs”). The restructuring of a loan is considered a TDR if both (i) the borrower is experiencing financial difficulties and (ii) the creditor has granted a concession.

The following tables present a summary of loans that were modified as troubled debt restructurings during the six months ended June 30, 2018 and year ended December 31, 2017 (in thousands):

 

     Six Months Ended June 30, 2018
     Number of
Loans
   Pre-Modification
Outstanding Recorded
Investment
   Post-Modification
Outstanding Recorded
Investment

Residential 1-4 family

   1    $52    $52

Consumer and other

   2        9        9
     Year Ended December 31, 2017
     Number of
Loans
   Pre-Modification
Outstanding Recorded
Investment
   Post-Modification
Outstanding
Recorded Investment

Consumer and other

   5    $14    $14

The Company did not have any loans that were modified as troubled debt restructurings during the twelve months ended June 30, 2018 and 2017, for which there was a subsequent payment default during the year.

 

NOTE 5.

STOCK OPTIONS, ESOP AND RESTRICTED SHARES

2010 Equity Incentive Plan

The Athens Bancshares Corporation 2010 Equity Incentive Plan (the “2010 Plan”) was approved by the Company’s stockholders at the annual meeting of stockholders held on July 14, 2010. Under the terms of the 2010 Plan, the Company may grant restricted stock awards and stock options to its employees, officers, and directors. The purpose of the 2010 Plan is to promote the success of the Company by linking the personal interests of its employees, officers, and directors to the interest of the Company’s shareholders, and by providing participants with an incentive for remarkable performance. All of the Company’s employees, officers, and directors are eligible to participate in the 2010 Plan.

Under terms of the 2010 Plan, the Company is authorized to issue up to 277,725 stock options and up to 111,090 shares of restricted stock.

 

17


ATHENS BANCSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 5.

STOCK OPTIONS, ESOP AND RESTRICTED SHARES (Continued)

 

Stock Options:

The Company granted stock options to its directors, officers, and employees on December 15, 2010 and December 17, 2014. Both incentive stock options and non-qualified stock options were granted under the 2010 Plan. The exercise price for each option was equal to the market price of the Company’s stock on the date of grant and the maximum term of each option is ten years. The vesting period for all options is five years, pro rata, from the date of grant. The Company recognizes compensation expense over the vesting period, based on the grant-date fair value of the options granted. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. For each of the six months ended June 30, 2018 and 2017, the Company recorded stock compensation expense of $20,871 and $20,871. At June 30, 2018, the total remaining compensation cost to be recognized on non-vested options is approximately $62,614.

A summary of the activity in the 2010 Plan for the six months ended June 30, 2018, is presented in the following table:

 

     Six months ended June 30, 2018  
     Number
of Shares
     Weighted Average
Exercise Price
 

Outstanding at beginning of year

     217,024      $ 14.12  

Options exercised

     (25,663      11.50  
  

 

 

    

Outstanding at end of period

     191,361      $ 14.47  
  

 

 

    

Option exercisable at end of period

     174,696      $ 13.46  
  

 

 

    

The aggregate intrinsic value of options outstanding at June 30, 2018, is $7,209,291.

Other information regarding options outstanding and exercisable as of June 30, 2018, is as follows:

 

     Options Outstanding      Options Exercisable  

Exercise

Prices

   Number
Outstanding
     Weighted
Average
Remaining
Life
   Weighted
Average
Exercise
Price
     Number
Exercisable
     Weighted
Average
Exercise
Price
 

$11.50

     149,698      2.50 Years    $ 11.50        149,698      $ 11.50  

25.17

     41,663      6.50 Years      25.17        24,998        25.17  
  

 

 

             

Outstanding at end of period

     191,361              
  

 

 

             

Information pertaining to non-vested options for the six months ended June 30, 2018, is as follows:

 

            Weighted Average  
     Number      Grant Date Fair  
     of Shares      Value  

Non-vested options, December 31, 2017

     16,665      $ 5.57  

Vested

     —          —    
  

 

 

    

Non-vested options, June 30, 2018

     16,665      $ 5.57  
  

 

 

    

 

18


ATHENS BANCSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 5.

STOCK OPTIONS, ESOP AND RESTRICTED SHARES (Continued)

 

Restricted Stock:

On January 19, 2011, the Company awarded 94,426 shares of restricted stock to its directors, officers, and employees pursuant to the terms of the 2010 Plan. Compensation expense associated with the performance-based share awards is recognized over the time period that the restrictions associated with the awards lapse based on the total cost of the award, which is the fair market value of the stock on the date of the grant. The closing price on the date of the grants issued on January 19, 2011, was $12.75 per share.

On December 19, 2012, the Company awarded 16,664 shares of restricted stock to its officers and employees pursuant to the terms of the 2010 Plan. The closing price on the date of the grants issued on December 19, 2012, was $16.65.

The Company recognized no in compensation expense attributable to shares that have been awarded for the six months ended June 30, 2018 and $27,746 for the six months ended June 30, 2017. There is no total remaining compensation cost to be recognized on non-vested restricted stock.

Employee Stock Ownership Plan (ESOP)

The Bank sponsors a leveraged ESOP that covers substantially all employees who meet certain age and eligibility requirements. The ESOP purchased 222,180 shares with the proceeds of a 15 year loan from the Company which is payable in annual installments and bears interest at 3.25% per annum.

The Bank has committed to make contributions to the ESOP sufficient to support the debt service of the loan. The loan is secured by the unallocated shares, which are held in a suspense account, and are allocated among the participants as the loan is repaid. Cash dividends paid on allocated shares are distributed to the participant and cash dividends paid on unallocated shares are used to repay the outstanding debt of the ESOP.

ESOP shares are held by the plan trustee in a suspense account until allocated to participant accounts. Shares released from the suspense account are allocated to participants on the basis of their relative compensation in the year of allocation. Participants become vested in the allocated shares upon four years of employment with the Bank. Any forfeited shares are allocated to other participants in the same proportion as contributions.

As ESOP shares are allocated to participants, the Bank recognizes compensation expense equal to the fair value of the earned ESOP shares. No compensation expense has been recorded for the six months ended June 30, 2018 or 2017.

A detail of ESOP shares is as follows:

 

     June 30,      December 31,  
     2018      2017  

Allocated shares

     118,496        118,496  

Unallocated shares

     103,684        103,684  
  

 

 

    

 

 

 

Total ESOP Shares

     222,180        222,180  
  

 

 

    

 

 

 

Fair value of unreleased shares

   $ 5,401,936      $ 3,991,834  
  

 

 

    

 

 

 

 

19


ATHENS BANCSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 6.

FAIR VALUE DISCLOSURES

 

Determination of Fair Value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with ASC Topic 820, Fair Value Measurements and Disclosures, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

Fair Value Hierarchy

In accordance with this guidance, the Company groups its financial assets and financial liabilities generally measured at fair value in three levels, based on markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 - Valuation is based on quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2 - Valuation is based on inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability.

Level 3 - Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation.

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. There have been no changes in the methodologies used at December 31, 2017 and June 30, 2018.

The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments.

Cash and Cash Equivalents: The carrying amounts of cash and cash equivalents approximate fair values based on the short-term nature of the assets.

 

20


ATHENS BANCSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 6.

FAIR VALUE DISCLOSURES (Continued)

 

Fair Value Hierarchy (Continued)

 

Securities Available for Sale: Fair values are estimated using pricing models and discounted cash flows that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, and credit spreads. Securities classified as available for sale are reported at fair value utilizing Level 2 inputs.

Investments, at Cost: The carrying value of investments at cost is a reasonable estimate of fair value.

Accrued Interest: The carrying amounts of accrued interest approximate fair value.

Loans: The fair value of loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates, adjusted for credit risk and servicing costs. The estimate of maturity is based on the Company’s historical experience with repayments for each loan classification, modified, as required, by an estimate of the effect of current economic and lending conditions. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with ASC Topic 310, Accounting by Creditors for Impairment of a Loan.

Deposits: The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits and NOW, money market, and savings accounts, is equal to the amount payable on demand at the reporting date. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Securities Sold under Agreements to Repurchase: The carrying value of these liabilities, which are extremely short term, approximates their fair value.

Note Payable to Bank: Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.

Assets Measured at Fair Value on a Recurring Basis: Assets measured at fair value on a recurring basis are summarized below (in thousands):

 

            Quoted Prices in      Significant      Significant  
            Active Markets      Other      Other  
     Balance as of      for Identical      Observable      Unobservable  
     June 30,      Assets      Inputs      Inputs  
     2018      (Level 1)      (Level 2)      (Level 3)  

Securities available for sale:

           

Securities of U.S. Government agencies and corporations

   $ 1,257      $ —        $ 1,257      $ —    

Mortgage-backed and related securities

     45,714        —          45,714        —    

State and municipal securities

     22,512        —          22,512        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 69,483      $ —        $ 69,483      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

21


ATHENS BANCSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 6.

FAIR VALUE DISCLOSURES (Continued)

 

Fair Value Hierarchy (Continued)

 

            Quoted Prices in      Significant      Significant  
            Active Markets      Other      Other  
     Balance as of      for Identical      Observable      Unobservable  
     December 31,      Assets      Inputs      Inputs  
     2017      (Level 1)      (Level 2)      (Level 3)  

Securities available for sale:

           

Securities of U.S. Government agencies and corporations

   $ 1,329      $ —        $ 1,329      $ —    

Mortgage-backed and related securities

     50,325        —          50,325        —    

State and municipal securities

     25,154        —          25,154        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 76,808      $ —        $ 76,808      $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company has no assets or liabilities whose fair values are measured on a recurring basis using Level 3 inputs.

Assets Measured at Fair Value on a Nonrecurring Basis: Under certain circumstances management makes adjustments to fair value for assets and liabilities although they are not measured at fair value on an ongoing basis. The following tables present the financial instruments carried on the consolidated balance sheets by caption and by level in the fair value hierarchy, for which a nonrecurring change in fair value has been recorded (in thousands):

 

            Quoted Prices in      Significant      Significant  
            Active Markets      Other      Other  
     Balance as of      for Identical      Observable      Unobservable  
     June 30,      Assets      Inputs      Inputs  
     2018      (Level 1)      (Level 2)      (Level 3)  

Impaired loans

   $ 3,034      $ —        $ 1,568      $ 1,466  

Foreclosed real estate

     988        —          —          988  

 

            Quoted Prices in      Significant      Significant  
            Active Markets      Other      Other  
     Balance as of      for Identical      Observable      Unobservable  
     December 31,      Assets      Inputs      Inputs  
     2017      (Level 1)      (Level 2)      (Level 3)  

Impaired loans

   $ 3,034      $ —        $ 1,560      $ 1,474  

Foreclosed real estate

     914        —          —          914  

Impaired Loans: Loans considered impaired under ASC 310-10-35, Receivables, are loans for which, based on current information and events, it is probable that the Company will be unable to collect all principal and interest payments due in accordance with the contractual terms of the loan agreement. Impaired loans can be measured based on the present value of expected payments using the loan’s original effective rate as the discount rate, the loan’s observable market price, or the fair value of the collateral less selling costs if the loan is collateral dependent.

The fair value of impaired loans were primarily measured based on the value of the collateral securing these loans. Collateral may be real estate and/or business assets including equipment, inventory, and/or accounts receivable.

 

22


ATHENS BANCSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 6.

FAIR VALUE DISCLOSURES (Continued)

 

Fair Value Hierarchy (Continued)

 

The Company determines the value of the collateral based on independent appraisals performed by qualified licensed appraisers. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Appraised values are discounted for costs to sell and may be discounted further based on management’s historical knowledge, changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts by management are subjective and are typically significant unobservable inputs for determining fair value. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly, based on the same factors discussed above.

Foreclosed Assets: Foreclosed real estate, consisting of properties obtained through foreclosure or in satisfaction of loans, is initially recorded at fair value less estimated costs to sell upon transfer of the loan to other real estate. Subsequently, other real estate is carried at the lower of carrying value or fair value less costs to sell. Fair values are generally based on third party appraisals of the property and are classified within Level 3 of the fair value hierarchy. The appraisals are sometimes further discounted based on management’s historical knowledge, and/or changes in market conditions from the date of the most recent appraisal, and/or management’s expertise and knowledge of the customer and the customer’s business. Such discounts are typically significant unobservable inputs for determining fair value. In cases where the carrying amount exceeds the fair value, less cost to sell, a loss is recognized in noninterest expense.

The carrying amount and estimated fair value of the Company’s financial instruments at June 30, 2018 and December 31, 2017, are as follows (in thousands):

 

     June 30, 2018      December 31, 2017  
     Carrying      Estimated      Carrying      Estimated  
     Amount      Fair Value      Amount      Fair Value  

Assets:

           

Cash and cash equivalents

   $ 33,000      $ 33,000      $ 36,509      $ 36,509  

Securities available for sale

     69,483        69,483        76,808        76,808  

Investments, at cost

     4,720        4,720        4,480        4,480  

Loans, net

     338,168        336,136        319,229        319,526  

Accrued interest receivable

     1,380        1,380        1,363        1,363  

Liabilities:

           

Deposits

     412,269        414,628        403,022        405,342  

Securities sold under agreements to repurchase

     941        941        1,751        1,751  

Note payable to bank

     —          —          1,383        1,383  

Accrued interest payable

     202        202        236        236  

 

23


ATHENS BANCSHARES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 7.

EARNINGS PER COMMON SHARE

The following is a summary of the basic and diluted earnings per share for the three months ended June 30, 2018 and 2017:

 

     2018      2017  

Basic earnings per share calculation:

     

Numerator: Net income

   $ 1,605,366      $ 964,168  
  

 

 

    

 

 

 

Denominator: Weighted average common shares outstanding

     1,721,799        1,672,748  

Effect of dilutive stock options

     134,842        148,412  
  

 

 

    

 

 

 

Diluted shares

     1,856,641        1,821,160  
  

 

 

    

 

 

 

Basic earnings per share

   $ 0.93      $ 0.58  
  

 

 

    

 

 

 

Diluted earnings per share

   $ 0.86      $ 0.53  
  

 

 

    

 

 

 

The following is a summary of the basic and diluted earnings per share for the six months ended June 30, 2018 and 2017:

 

     2018      2017  

Basic earnings per share calculation:

     

Numerator: Net income

   $ 3,134,969      $ 2,004,782  
  

 

 

    

 

 

 

Denominator: Weighted average common shares outstanding

     1,714,639        1,669,682  

Effect of dilutive stock options

     135,174        146,685  
  

 

 

    

 

 

 

Diluted shares

     1,849,813        1,816,367  
  

 

 

    

 

 

 

Basic earnings per share

   $ 1.83      $ 1.20  
  

 

 

    

 

 

 

Diluted earnings per share

   $ 1.69      $ 1.10  
  

 

 

    

 

 

 

 

24