Attached files

file filename
EX-32.1 - EXHIBIT 32.1 - Poage Bankshares, Inc.v437357_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - Poage Bankshares, Inc.v437357_ex31-1.htm
EX-31.2 - EXHIBIT 31.2 - Poage Bankshares, Inc.v437357_ex31-2.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

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

 

For the Quarterly Period ended March 31, 2016

 

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

 

For transition period from ______________________ to___________________

 

Commission File Number 001-35295

 

 

 

Poage Bankshares, Inc.

(Exact Name of Registrant as Specified in Charter)

 

 

 

Maryland   45-3204393
(State of Other Jurisdiction   (I.R.S Employer
of Incorporation)   Identification Number)

 

1500 Carter Avenue, Ashland, KY 41101   41101
(Address of Principal Executive Officer)   (Zip Code)

 

606-324-7196

Registrant’s telephone number, including area code

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

 

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 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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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 in Rule 12b-2 of the Exchange Act).    Yes  ¨     No  x

 

As of May 11, 2016, the number of shares of the Registrant’s common stock, par value $.01 per share, was 3,820,135

 

 

 

 

POAGE BANKSHARES, INC.

 

Form 10-Q Quarterly Report

 

Table of Contents

 

  PART I. FINANCIAL INFORMATION  
     
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS – POAGE BANKSHARES, INC. 3
     
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 29
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 37
     
ITEM 4. CONTROLS AND PROCEDURES 37
     
  PART II. OTHER INFORMATION  
     
ITEM 1. LEGAL PROCEEDINGS 38
     
ITEM 1A. RISK FACTORS 38
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 38
     
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 39
     
ITEM 4. MINE SAFETY DISCLOSURES 39
     
ITEM 5. OTHER INFORMATION 39
     
ITEM 6. EXHIBITS 39
   
SIGNATURES 40

 

 

 

 

PART I

 

ITEM 1.     FINANCIAL STATEMENTS

 

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands except per share data)

 

   March 31,   December 31, 
   2016   2015 
ASSETS          
Cash and due from financial institutions  $11,642   $23,876 
Interest-bearing deposits in other financial institutions   1,992    1,992 
Securities available for sale   66,675    63,975 
Loans held for sale   345    367 
Loans, net of allowance of $2,135 and $1,858   324,888    314,143 
Restricted stock, at cost   3,276    3,276 
Other real estate owned, net   1,648    1,306 
Premises and equipment, net   11,456    11,514 
Company owned life insurance   6,986    6,941 
Accrued interest receivable   1,463    1,340 
Goodwill   1,277    1,277 
Other intangible assets, net   1,266    1,353 
Deferred tax asset   1,344    1,617 
Other assets   1,871    2,111 
Total assets  $436,129   $435,088 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Deposits          
Non-interest bearing  $48,411   $49,222 
Interest bearing   296,399    293,908 
Total deposits   344,810    343,130 
Federal Home Loan Bank advances   15,036    15,803 
Subordinated debenture   2,777    2,761 
Accrued interest payable   68    38 
Other liabilities   2,697    2,115 
Total liabilities   365,388    363,847 
           
Commitments and contingent liabilities   -    - 
           
Shareholders' equity          
Common stock, $.01 par value, 30,000,000 shares authorized, 3,823,451 and 3,894,282 issued and outstanding at March 31, 2016 and December 31, 2015, respectively   38    39 
Additional paid-in-capital   37,612    38,673 
Retained earnings   34,539    34,270 
Unearned Employee Stock Ownership Plan (ESOP) shares   (2,091)   (2,125)
Accumulated other comprehensive income   643    384 
Total shareholders' equity   70,741    71,241 
Total liabilities and shareholders' equity  $436,129   $435,088 

 

See notes to unaudited consolidated financial statements.

 

 3 

 

 

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands except per share data) 

 

   Three months ended 
   March 31, 
   2016   2015 
Interest and dividend income          
Loans, including fees  $4,318   $4,210 
Taxable securities   256    261 
Tax exempt securities   110    102 
Federal funds sold and other   50    33 
    4,734    4,606 
Interest expense          
Deposits   472    447 
Federal Home Loan Bank advances and other   91    103 
    563    550 
Net interest income   4,171    4,056 
           
Provision for loan losses   375    91 
Net interest income after provision for loan losses   3,796    3,965 
           
Non-interest income          
Service charges on deposits   494    441 
Other service charges   13    10 
Loan servicing fees   66    91 
Gains on mortgage banking activity   42    68 
Income from company owned life insurance   45    45 
Gain on insurance settlement/claims   -    41 
Other   6    4 
    666    700 
Non-interest expense          
Salaries and employee benefits   1,878    1,843 
Occupancy and equipment   361    397 
Data processing   707    549 
Federal deposit insurance   64    64 
Loan processing and collection   75    71 
Foreclosed assets, net   54    106 
Advertising   48    38 
Professional fees   121    187 
Other taxes   108    95 
Director fees and expenses   57    54 
Amortization of intangible assets   87    81 
Other   226    270 
    3,786    3,755 
Income before income taxes   676    910 
Income tax expense   177    324 
Net income  $499   $586 
Earnings per common share:          
Basic  $0.14   $0.16 
Dilutive   0.14    0.16 
Dividend per share  $0.06   $0.05 

 

See notes to unaudited consolidated financial statements.

 

 4 

 

 

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollar amounts in thousands except per share data)

 

   Three months ended 
   March 31, 
   2016   2015 
         
Net income  $499   $586 
Other comprehensive income:          
Unrealized holding gains on available for sale securities   392    233 
Reclassification adjustments for (gains) losses recognized in income   -    - 
Net unrealized holding gains on available for sale securities   392    233 
Tax effect   (133)   (79)
Other comprehensive income   259    154 
Comprehensive income  $758   $740 

 

See notes to unaudited consolidated financial statements.

 

 5 

 

 

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Dollar amounts in thousands except per share data)

 

                   Accumulated     
       Additional       Unearned   Other   Total 
   Common   Paid-In   Retained   ESOP   Comprehensive   Shareholders' 
   Stock   Capital   Earnings   Shares   Income   Equity 
Balances,  January 1, 2016  $39   $38,673   $34,270   $(2,125)  $384   $71,241 
Net income   -    -    499    -    -    499 
Stock repurchasing, 70,831 shares repurchased   (1)   (1,233)   -    -    -    (1,234)
Dividends paid ($0.06/share)   -    -    (230)   -    -    (230)
ESOP compensation earned   -    24    -    34    -    58 
Stock based compensation expense   -    148    -    -    -    148 
Change in other comprehensive income   -    -    -    -    259    259 
Balances,  March 31, 2016  $38   $37,612   $34,539   $(2,091)  $643   $70,741 

 

See notes to unaudited consolidated financial statements.

 

 6 

 

 

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands except per share data)

 

   Three months ended 
   March 31, 
   2016   2015 
CASH FLOW FROM OPERATING ACTIVITIES:          
Net income  $499   $586 
Adjustments to reconcile net income to net cash from operating activities:          
Depreciation   183    150 
Provision for loan losses   375    91 
ESOP compensation expense   58    51 
Stock based compensation expense   148    130 
Gain on sale of premises and equipment   (92)   - 
Loss on sale of other real estate owned   8    51 
Gain on sale of repossessed assets   -    (1)
Amortization of core deposit intangible   87    81 
Accretion of fair value adjustments related to loans   (222)   (339)
Accretion of fair value adjustments related to deposits   (16)   (16)
Amortization of fair value related to subordinated debenture   16    16 
Net amortization on securities   98    116 
Deferred income tax expense (benefit)   140    (69)
Net gain on mortgage banking activities   (42)   (68)
Origination of loans held for sale   (1,472)   (2,078)
Proceeds from loans held for sale   1,536    2,268 
Increase in cash value of life insurance   (45)   (45)
Change in asset and liabilities, net assets and liabilities acquired:          
Accrued interest receivable   (123)   (67)
Other assets   272    920 
Accrued interest payable   30    42 
Other liabilities   588    844 
Net cash from operating activities   2,026    2,663 
           
CASH FLOW FROM INVESTING ACTIVITIES:          
Securities available for sale:          
Proceeds from calls   -    1,000 
Proceeds from maturities   -    405 
Purchases   (4,046)   (7,632)
Principal payments received   1,640    1,540 
Loan originations and principal payments on loans, net   (11,355)   1,916 
Proceeds from the sale of other real estate owned   69    108 
Proceeds from the sale of repossessed assets   -    34 
Purchase of properties and equipment   (33)   (407)
Net cash from investing activities   (13,725)   (3,036)
           
CASH FLOW FROM FINANCING ACTIVITIES          
Net change in deposits   1,696    3,308 
Proceeds from Federal Home Loan Bank borrowings   21,000    14,000 
Payments on Federal Home Loan Bank borrowings   (21,767)   (15,779)
Cash dividend paid   (230)   (193)
Stock repurchases   (1,234)   (1,234)
Net cash from financing activities   (535)   102 
           
CHANGE IN CASH AND CASH EQUIVALENTS   (12,234)   (271)
           
Cash and cash equivalents at beginning of period   23,876    16,967 
           
CASH AND CASH EQUIVALENTS AT END OF YEAR  $11,642   $16,696 
           
Additional cash flows and supplementary information:          
Cash paid during the year for:          
Interest on deposits and advances  $533   $508 
Real estate acquired in settlement of loans  $425   $- 

 

 

 

See notes to unaudited consolidated financial statements.

 

 7 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying unaudited consolidated financial statements of Poage Bankshares, Inc. (the “Company”) and its wholly owned subsidiary Town Square Bank (which was formerly operated under the name “Home Federal Savings and Loan Association”) (the “Bank”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Estimates used in the preparation of the financial statements are based on various factors including the current interest rate environment and the general strength of the local economy.  Changes in the overall interest rate environment can significantly affect the Company’s net interest income and the value of its recorded assets and liabilities.  Actual results could differ from those estimates used in the preparation of the financial statements.

 

In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position as of March 31, 2016 and December 31, 2015 and the results of operations and cash flows for the interim periods ended March 31, 2016 and 2015. All interim amounts have not been audited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for the year. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto filed as part of the Company’s 2015 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

 

 8 

 

 

NOTE 2 - SECURITIES AVAILABLE FOR SALE

 

The amortized cost and fair value of securities available for sale at March 31, 2016 and December 31, 2015 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows (in thousands):

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
 March 31, 2016                    
States and political subdivisions  $18,879   $627   $(17)  $19,489 
U.S. Government agencies and sponsored entities   9,750    9    (4)   9,755 
Government sponsored entities residential mortgage-backed:                    
FHLMC   11,958    219    -    12,177 
FNMA   11,136    138    (6)   11,268 
Collateralized mortgage obligations   7,130    9    (52)   7,087 
SBA loan pools   6,848    54    (3)   6,899 
Total securities  $65,701   $1,056   $(82)  $66,675 

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
 December 31, 2015                    
States and political subdivisions  $17,398   $567   $(5)  $17,960 
U.S. Government agencies and sponsored entities   9,750    -    (112)   9,638 
Government sponsored entities residential mortgage-backed:                    
FHLMC   11,499    156    (11)   11,644 
FNMA   11,657    91    (21)   11,727 
Collateralized mortgage obligations   7,720    -    (86)   7,634 
SBA loan pools   5,370    17    (15)   5,372 
Total securities  $63,394   $831   $(250)  $63,975 

  

There were no sales of securities for the three months ended March 31, 2016 and March 31, 2015.

 

The amortized cost and fair value of the securities portfolio at March 31, 2016 are shown in the following table by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately (in thousands):

 

   March 31, 
   2016 
   Amortized   Fair 
   Cost   Value 
         
Within one year  $141   $141 
One to five years   17,038    17,181 
Five to ten years   7,434    7,855 
Beyond ten years   4,016    4,067 
Mortgage-backed securities and collateralized mortgage obligations   30,224    30,532 
SBA loan pools   6,848    6,899 
Total  $65,701   $66,675 

 

 9 

 

 

The following table summarizes the securities with unrealized losses at March 31, 2016 and December 31, 2015, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):

 

   Less Than 12 Months   12 Months or Longer   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
 March 31, 2016                              
States and political subdivisions  $1,722   $(17)  $-   $-   $1,722   $(17)
U.S. Government agencies and sponsored entities   3,000    -    2,496    (4)   5,496    (4)
Government sponsored entities residential mortgage backed:                              
FNMA   1,545    (6)   -    -    1,545    (6)
Collateralized mortgage obligations   2,574    (16)   2,673    (36)   5,247    (52)
SBA loan pools   1,830    (3)   -    -    1,830    (3)
Total available-for-sale securities  $10,671   $(42)  $5,169   $(40)  $15,840   $(82)

 

   Less Than 12 Months   12 Months or Longer   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
 December 31, 2015                              
States and political subdivisions  $1,357   $(5)  $-   $-   $1,357   $(5)
U.S. Government agencies and sponsored entities   4,212    (39)   5,426    (73)   9,638    (112)
Government sponsored entities residential mortgage backed:                              
FHLMC   1,429    (11)   -    -    1,429    (11)
FNMA   2,529    (21)   -    -    2,529    (21)
Collateralized mortgage obligations   5,387    (35)   2,247    (51)   7,634    (86)
SBA loan pools   1,845    (15)   -    -    1,845    (15)
Total available-for-sale securities  $16,759   $(126)  $7,673   $(124)  $24,432   $(250)

 

Unrealized losses on bonds have not been recognized into income because the issuers of the bonds are of high credit quality, management does not intend to sell and it is not more likely than not that management would be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the bonds approach maturity.

 

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.  For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement, and 2) OTTI related to other factors, which is recognized in other comprehensive income.  The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.

 

 10 

 

 

NOTE 3 – LOANS

 

Loans at March 31, 2016 and December 31, 2015 were as follows (in thousands):

 

   March 31,   December 31, 
   2016   2015 
Real estate:          
One to four family  $189,848   $184,613 
Multi-family   4,470    4,521 
Commercial real estate   62,242    62,726 
Construction and land   13,596    6,282 
    270,156    258,142 
           
Commercial and Industrial   30,371    31,841 
           
Consumer          
Home equity loans and lines of credit   8,723    8,287 
Motor vehicle   10,901    10,735 
Other   7,261    7,347 
    26,885    26,369 
           
Total   327,412    316,352 
Less: Net deferred loan fees   389    351 
Allowance for loan losses   2,135    1,858 
   $324,888   $314,143 

 

 11 

 

 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of March 31, 2016 and December 31, 2015. Accrued interest receivable and net deferred loan fees are not considered significant and therefore are not included in the loan balances presented in the table below (in thousands):

 

March 31, 2016

 

   Allowance for Loan Losses   Loan Balances 
   Individually   Purchased   Collectively       Individually   Purchased   Collectively     
   Evaluated for   Credit-Impaired   Evaluated for       Evaluated for   Credit-Impaired   Evaluated for     
Loan Segment  Impairment   Loans   Impairment   Total   Impairment   Loans   Impairment   Total 
                                 
Real estate  $41   $-   $1,863   $1,904   $1,361   $2,237   $266,558   $270,156 
Commercial and industrial   -    -    93   $93    161    -    30,210    30,371 
Consumer   13    -    125   $138    23    7    26,855    26,885 
Unallocated   -    -    -    -    -    -    -    - 
Total  $54   $-   $2,081   $2,135   $1,545   $2,244   $323,623   $327,412 

 

December 31, 2015

 

   Allowance for Loan Losses   Loan Balances 
   Individually   Purchased   Collectively       Individually   Purchased   Collectively     
   Evaluated for   Credit-Impaired   Evaluated for       Evaluated for   Credit-Impaired   Evaluated for     
Loan Segment  Impairment   Loans   Impairment   Total   Impairment   Loans   Impairment   Total 
Real estate  $2   $-   $1,674   $1,676   $1,497   $2,624   $254,021   $258,142 
Commercial and industrial   -    -    77    77    449    -    31,392    31,841 
Consumer   13    -    92    105    23    16    26,330    26,369 
Unallocated   -    -    -    -    -    -    -    - 
Total  $15   $-   $1,843   $1,858   $1,969   $2,640   $311,743   $316,352 

 

 12 

 

 

The following table presents information related to impaired loans by class of loans as of March 31, 2016 and December 31, 2015 (in thousands):

 

   March 31, 2016   December 31, 2015 
           Allowance           Allowance 
   Unpaid       for Loan   Unpaid       for Loan 
   Principal   Recorded   Losses   Principal   Recorded   Losses 
   Balance   Investment   Allocated   Balance   Investment   Allocated 
With no related allowance recorded:                              
Real Estate:                              
One to four family  $725   $706   $-   $1,416   $1,100   $- 
Multi-family   -    -    -    -    -    - 
Commercial real estate   448    448    -    183    183    - 
Construction and land   -    -    -    -    -    - 
Commercial and Industrial   273    161    -    582    449    - 
Consumer:                              
Home Equity and lines of credit   -    -    -    -    -    - 
Motor Vehicle   -    -    -    -    -    - 
Other   -    -    -    -    -    - 
Subtotal  $1,446   $1,315   $-   $2,181   $1,732   $- 
                               
With an allowance recorded:                              
Real Estate:                              
One to four family  $207   $207   $41   $-   $-   $- 
Multi-family   -    -    -    -    -    - 
Commercial real estate   -    -    -    214    214    2 
Construction and land   -    -    -    -    -    - 
Commercial and Industrial   -    -    -    -    -    - 
Consumer:                              
Home Equity and lines of credit   23    23    13    23    23    13 
Motor Vehicle   -    -    -    -    -    - 
Other   -    -    -    -    -    - 
Subtotal   230    230    54    237    237    15 
Total  $1,676   $1,545   $54   $2,418   $1,969   $15 

 

For the purpose of this disclosure, the unpaid balance is not reduced for partial charge-offs.

 

 13 

 

 

The following table presents the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the three months ended March 31, 2016. Impaired loans averaged $834,000 for the three months ended March 31, 2015. Interest income recognized on impaired loans for the three months ended March 31, 2015 was immaterial. The table includes loans acquired with deteriorated credit quality that are still individually evaluated for impairment.

 

   Average   Interest   Cash Basis 
Three months ended  Recorded   Income   Interest 
March 31, 2016  Investment   Recognized   Recognized 
Real Estate:               
One to four family  $913   $2   $- 
Multi-family   -    -    - 
Commercial real estate   448    -    - 
Construction and land   -    -    - 
Commercial and Industrial   161    -    - 
Consumer:               
Home Equity and lines of credit   23    -    - 
Motor Vehicle   -    -    - 
Other   -    -    - 
Total  $1,545   $2   $- 

 

   Average   Interest   Cash Basis 
Three months ended  Recorded   Income   Interest 
March 31, 2015  Investment   Recognized   Recognized 
Real Estate:               
One to four family  $506   $-   $- 
Multi-family   -    -    - 
Commercial real estate   751    -    - 
Construction and land   -    -    - 
Commercial and Industrial   244    -    - 
Consumer:               
Home Equity and lines of credit   -    -    - 
Motor Vehicle   -    -    - 
Other   -    -    - 
Total  $1,501   $-   $- 

 

The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality. For purposes of this disclosure, the unpaid balance is not reduced for partial charge-offs.

 

The following table sets forth an analysis of our allowance for loan losses for the three months ended March 31, 2016 and 2015 (in thousands):

 

Three months ended      Commercial             
March 31, 2016  Real Estate   and Industrial   Consumer   Unallocated   Total 
                     
Allowance for loan losses:                         
Beginning balance  $1,676   $77   $105   $-   $1,858 
Provision for loan losses   298    11    66    -    375 
Loans charged-off   (73)   -    (70)   -    (143)
Recoveries   3    5    37    -    45 
Total ending allowance balance  $1,904   $93   $138   $-   $2,135 

 

 14 

 

 

Three months ended      Commercial             
March 31, 2015  Real Estate   and Industrial   Consumer   Unallocated   Total 
                     
Allowance for loan losses:                         
Beginning balance  $1,806   $43   $62   $-   $1,911 
Provision for loan losses   (1)   54    38    -    91 
Loans charged-off   (52)   (52)   (47)   -    (151)
Recoveries   125    27    10    -    162 
Total ending allowance balance  $1,878   $72   $63   $-   $2,013 

 

Nonaccrual loans and loans past due 90 days still on accrual consist of smaller balance homogeneous loans that are collectively evaluated for impairment.

 

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2016 and December 31, 2015 (in thousands):

 

   March 31, 2016   December 31, 2015 
       Loans Past Due       Loans Past Due 
       Over 90 Days       Over 90 Days 
   Nonaccrual   Still Accruing   Nonaccrual   Still Accruing 
Real estate:                    
One to four family  $2,890   $-   $2,967   $- 
Multi-family   -    -    -    - 
Commercial real estate   779    -    773    - 
Construction and land   -    -    259    - 
Commercial and industrial   163    -    449    - 
Consumer:                    
Home equity loans and lines of credit   23    -    23    - 
Motor vehicle   -    -    -    - 
Other   8    -    31    - 
Total  $3,863   $-   $4,502   $- 

 

 15 

 

 

The following table presents the aging of the recorded investment in past due loans as of March 31, 2016 and December 31, 2015 by class of loans. As of March 31, 2016, consumer residential properties in process of foreclosure was $682,000. Non-accrual loans of $3.8 million as of March 31, 2016 and $4.5 million at December 31, 2015 are included in the tables below and have been categorized based on their payment status (in thousands):

 

   30 - 59   60 - 89   Greater than       Purchased         
   Days   Days   89 Days   Total   Credit-Impaired   Loans Not     
   Past Due   Past Due   Past Due   Past Due   Loans   Past Due   Total 
 March 31, 2016                                   
Real estate:                                   
One to four family  $600   $636   $1,087   $2,323   $1,329   $186,196   $189,848 
Multi-family   -    -    -    -    -    4,470    4,470 
Commercial real estate   -    18    209    227    908    61,107    62,242 
Construction and land   -    -    -    -    -    13,596    13,596 
Commercial and industrial   94    3    153    250    -    30,121    30,371 
Consumer:                                   
Home equity loans and lines of credit   123    -    23    146    -    8,577    8,723 
Motor vehicle   17    2    -    19    2    10,880    10,901 
Other   1    3    -    4    5    7,252    7,261 
Total  $835   $662   $1,472   $2,969   $2,244   $322,199   $327,412 

 

   30 - 59   60 - 89   Greater than       Purchased         
   Days   Days   89 Days   Total   Credit-Impaired   Loans Not     
   Past Due   Past Due   Past Due   Past Due   Loans   Past Due   Total 
 December 31, 2015                                   
Real estate:                                   
One to four family  $1,152   $35   $1,226   $2,413   $1,305   $180,895   $184,613 
Multi-family   -    -    -    -    -    4,521    4,521 
Commercial real estate   44    -    214    258    1,061    61,407    62,726 
Construction and land   -    -    -    -    258    6,024    6,282 
Commercial and industrial   3    19    362    384    -    31,457    31,841 
Consumer:                                   
Home equity loans and lines of credit   -    -    23    23    -    8,264    8,287 
Motor vehicle   21    1    -    22    4    10,709    10,735 
Other   25    2    1    28    12    7,307    7,347 
Total  $1,245   $57   $1,826   $3,128   $2,640   $310,584   $316,352 

 

 16 

 

 

Troubled Debt Restructurings:

 

As of March 31, 2016, the Company has a recorded investment in three TDRs which totaled $306,000. There were $307,000 at December 31, 2015. A less than market rate and extended term was granted as concessions for both TDRs. No additional charge-off or provision has been made for the loan relationships. No additional commitments to lend have been made to the borrower.

 

March 31, 2016  TDRs on 
Non-accrual
   Other TDRs   Total TDRs 
Real Estate:               
One to four family  $-   $105   $105 
Multi-family   -    -    - 
Commercial real estate   182    -    182 
Construction and land   -    -    - 
Commercial and Industrial   19    -    19 
Consumer:               
Home equity loans and lines of credit   -    -    - 
Motor Vehicle   -    -    - 
Other   -    -    - 
Total  $201   $105   $306 

 

December 31, 2015  TDRs on 
Non-accrual
   Other TDRs   Total TDRs 
Real Estate:               
One to four family  $-   $105   $105 
Multi-family   -    -    - 
Commercial real estate   183    -    183 
Construction and land   -    -    - 
Commercial and Industrial   19    -    19 
Consumer:               
Home equity loans and lines of credit   -    -    - 
Motor Vehicle   -    -    - 
Other   -    -    - 
Total  $202   $105   $307 

 

There were no TDR's that occurred during the three months ended March 31, 2016 and one TDR that occurred during the three months ended March 31, 2015.

 

The modification of the Residential real estate loan above occurred during the three months ended March 31, 2015. The modification did not include a permanent reduction of the recorded investment in the loans and did not increase the allowance for loan losses during the three months ended March 31, 2016 and 2015. There were no TDR’s that subsequently defaulted during the three months ended March 31, 2016 and 2015.

 

 17 

 

 

CREDIT QUALITY INDICATORS:

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes all non-homogeneous loans, such as commercial and commercial real estate loans. The analysis for residential real estate and consumer loans primarily includes review of past due status. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

 

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

 

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

Loss. Loans classified as loss are considered uncollectable and of such little value that continuing to carry them as an asset is not feasible.  Loans will be classified as a loss when it is not practical or desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.

 

Based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands):

 

       Special                 
 March 31, 2016  Pass   Mention   Substandard   Doubtful   Loss   Total 
One to four family  $182,430   $2,465   $4,953   $-   $-   $189,848 
Multi family   4,470    -    -    -    -    4,470 
Commercial real estate   59,924    289    2,029    -    -    62,242 
Construction and land   13,596    -    -    -    -    13,596 
Commercial and industrial   29,011    311    1,049    -    -    30,371 
Home equity loans and lines of credit   8,575    -    148    -    -    8,723 
Motor vehicle   10,869    8    24    -    -    10,901 
Other   7,246    5    10    -    -    7,261 
Total  $316,121   $3,078   $8,213   $-   $-   $327,412 

 

       Special                 
 December 31, 2015  Pass   Mention   Substandard   Doubtful   Loss   Total 
One to four family  $176,824   $2,716   $5,073   $-   $-   $184,613 
Multi family   4,521    -    -    -    -    4,521 
Commercial real estate   60,544    107    2,075    -    -    62,726 
Construction and land   6,023    0    259    -    -    6,282 
Commercial and industrial   30,551    5    1,285    -    -    31,841 
Home equity loans and lines of credit   8,262    0    25    -    -    8,287 
Motor vehicle   10,703    0    32    -    -    10,735 
Other   7,306    8    33    -    -    7,347 
Total  $304,734   $2,836   $8,782   $-   $-   $316,352 

 

There were $2.0 million and $2.3 million purchased credit impaired (“PCI”) loans included in substandard disclosure above at March 31, 2016 and December 31, 2015, respectively.

 

 18 

 

 

The Company holds purchased loans without evidence of credit quality deterioration and purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable that all contractually required payments would not be collected. A summary of non-impaired purchased loans and credit-impaired purchased loans with the carrying amount of those loans is as follows at (in thousands):

 

Purchased Loans as of March 31, 2016  Non-impaired   Credit-impaired 
   Purchased   Purchased 
(in thousands)  Loans   Loans 
Real estate:          
One to four family  $36,594   $1,329 
Commercial real estate   27,877    908 
Construction and land   1,031    - 
Commercial and Industrial   4,748    - 
Consumer loans:          
Home equity loans and lines of credit   1,555    - 
Motor vehicle   466    2 
Other   982    5 
Total loans  $73,253   $2,244 

 

Purchased Loans as of December 31, 2015  Non-impaired   Credit-impaired 
   Purchased   Purchased 
(in thousands)  Loans   Loans 
Real estate:          
One to four family  $37,557   $1,305 
Commercial real estate   28,322    1,061 
Construction and land   1,058    258 
Commercial and Industrial   7,122    - 
Consumer loans:          
Home equity loans and lines of credit   1,660    - 
Motor vehicle   605    4 
Other   1,107    12 
Total loans  $77,431   $2,640 

 

For the purchased loans disclosed above, the Company did not increase the allowance for loan losses for the three months ended March 31, 2016 and March 31, 2015.

 

 19 

 

 

The following table presents the composition of the acquired loans at March 31, 2016.

 

As of March 31, 2016            
   Contractual   Fair Value     
(in thousands)  Amount   Adjustments   Fair Value 
Real estate:               
One to four family  $38,702   $(779)  $37,923 
Commercial Real Estate   29,321    (536)   28,785 
Construction and land   1,043    (12)   1,031 
Commercial and Industrial   4,825    (77)   4,748 
Consumer loans:               
Home equity loans and lines of credit   1,573    (18)   1,555 
Motor vehicle   475    (7)   468 
Other   1,003    (16)   987 
Total loans  $76,942   $(1,445)  $75,497 

 

The following table presents the purchased loans that are included within the scope of ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, as of March 31, 2016.

 

(in thousands)  March 31, 2016   December 31, 2015 
         
Carrying Amount  $2,244   $2,640 
Non-Accretable difference   328    349 
Accretable yield   225    292 
Contractually-required principal and interest payments  $2,797   $3,281 

 

The Company adjusted interest income to recognize $67,000 and $110,000 of accretable yield on credit-impaired purchased loans for the three months ended March 31, 2016 and 2015, respectively.

 

(in thousands)  March 31, 2016   December 31, 2015 
Real Estate:          
One to four family  $1,329   $1,305 
Commercial real estate   908    1,061 
Construction and land   -    258 
Commercial and industrial   -    - 
Consumer:          
Home equity loans and lines of credit   -    - 
Motor vehicle   2    4 
Other   5    12 
Outstanding Balance  $2,244   $2,640 
           
Carrying amount, net of allowance of $0, and $0  $2,244   $2,640 

 

 20 

 

 

Accretable yield, or income expected to be collected, is as follows (in thousands):

 

   2016   2015 
         
Balance at January 1,  $292   $625 
New Loans Purchased   -    - 
Accretion of income   (67)   (110)
Reclassifications from nonaccretable difference   -    - 
Disposals   -    - 
Balance at March 31,  $225   $515 

 

NOTE 4 – FEDERAL HOME LOAN BANK ADVANCES

 

Advances from the FHLB at March 31, 2016 and December 31, 2015 were as follows (in thousands):

 

   March 31, 2016   December 31, 2015 
         
Maturities April 2016 through January 2029, fixed rate at rates from 0.45% to 6.86%, weighted average rate of 1.45% at March 31, 2016 and 1.52% at December 31, 2015  $15,036   $15,803 

 

Payments contractually required over the next five years are as follows (in thousands):

 

March 31,    
2017  $11,368 
2018   1,794 
2019   1,209 
2020   223 
2021   88 
Thereafter   354 
 Total  $15,036 

 

NOTE 5 – FAIR VALUE

 

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

 

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2 – Significant other observable inputs other than Level 1 prices such as 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.

 

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

The Company used the following methods and significant assumptions to estimate fair value:

 

Securities: The fair values for securities are determined by quoted market prices, if available (Level 1). If quoted market prices are not available, fair values are based on quoted market prices of similar securities (Level 2). This includes the use of “matrix pricing” used to value debt securities absent the exclusive use of quoted prices. For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows (Level 3).

 

 21 

 

 

Impaired Loans: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy.

 

Other Real Estate Owned : Nonrecurring adjustments to certain commercial and residential real estate properties classified as other real estate owned (OREO) are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized.

 

Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):

 

   Fair Value Measurements at 
   March 31, 2016 Using: 
       Quoted Prices in   Significant   Significant 
       Active Markets for   Other Observable   Unobservable 
   Carrying   Identical Assets   Inputs   Inputs 
   Value   (Level 1)   (Level 2)   (Level 3) 
Financial Assets                    
Securities:                    
States and political subdivisions  $19,489   $-   $19,489   $- 
U.S. Government agencies and sponsored entities   9,755    -    9,755    - 
Mortgage backed securities: residential   23,445    -    23,445    - 
Collateralized mortgage obligations   7,087    -    7,087    - 
SBA loan pools   6,899    -    6,899    - 
Total securities  $66,675   $-   $66,675   $- 

 

   Fair Value Measurements at 
   December 31, 2015 Using: 
       Quoted Prices in   Significant   Significant 
       Active Markets for   Other Observable   Unobservable 
   Carrying   Identical Assets   Inputs   Inputs 
   Value   (Level 1)   (Level 2)   (Level 3) 
Financial Assets                    
Securities:                    
States and political subdivisions  $17,960   $-   $17,960   $- 
U.S. Government agencies and sponsored entities   9,638    -    9,638    - 
Mortgage backed securities: residential   23,371    -    23,371    - 
Collateralized mortgage obligations   7,634    -    7,634    - 
SBA loan pools   5,372    -    5,372    - 
Total securities  $63,975   $-   $63,975   $- 

 

For the periods ended March 31, 2016 and December 31, 2015, there were no transfers between Level 1 and Level 2.

 

 22 

 

 

Assets measured at fair value on a non-recurring basis are summarized below (in thousands):

 

   Fair Value Measurements at 
   March 31, 2016 Using: 
       Quoted Prices in  Significant   Significant 
       Active Markets for  Other Observable   Unobservable 
   Carrying   Identical Assets  Inputs   Inputs 
   Value   (Level 1)  (Level 2)   (Level 3) 
                
Impaired loans                  
Home equity line of credit, net  $10   $ -  $-   $10 
Residential real estate, net   166   -   -    166 

 

   Fair Value Measurements at 
   December 31, 2015 Using: 
       Quoted Prices in  Significant   Significant 
       Active Markets for  Other Observable   Unobservable 
   Carrying   Identical Assets  Inputs   Inputs 
   Value   (Level 1)  (Level 2)   (Level 3) 
Impaired loans                  
Commercial real estate, net  $212   $ -  $-   $212 
Home equity line of credit, net   10   -   -    10 

 

Commercial and residential real estate properties classified as OREO are measured at fair value, less costs to sell. Fair values are based on recent real estate appraisals. These appraisals may use a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Appraisals for real estate properties classified as other real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Bank’s management. The appraisal values are discounted to allow for selling expenses and fees, and the discounts range from 5% to 10%.

 

At March 31, 2016, impaired loans recorded at fair value had a net carrying amount of $176,000 equal to the outstanding balance of $230,000, net of a valuation allowance of $54,000. There were no charge-offs for the three months ended March 31, 2016. At December 31, 2015, impaired loans recorded at fair value had a net carrying amount of $222,000 equal to the outstanding balance of $237,000, net of a valuation allowance of $15,000. There were charge-offs for the year ended December 31, 2015 in the amount of $252,000. At March 31, 2015, impaired loans recorded at fair value had a net carrying amount of $680,000 equal to the outstanding balance of $750,000, net of a valuation allowance of $70,000. There were no charge-offs for the three months ended March 31, 2015.

 

At March 31, 2016 and December 31, 2015 no OREO was recorded at fair value. At March 31, 2015, OREO recorded at fair value had a net carrying amount of $187,000 made up of the outstanding balance of $244,000, net of a valuation allowance of $57,000. There were no write-downs for the three months ended March 31, 2016 and March 31, 2015.

 

 23 

 

 

The carrying amounts and estimated fair values of financial instruments at March 31, 2016 and December 31, 2015 are as follows (in thousands):

 

       Fair Value Measurements 
   Carrying                 
   Value   Level 1   Level 2   Level 3   Total 
 March 31, 2016                         
Financial assets                         
Cash and cash equivalents  $11,643   $11,643   $-   $-   $11,643 
Interest-bearing deposits   1,992    1,992    -    -    1,992 
Securities   66,675    -    66,675    -    66,675 
Restricted stock   3,276     N/A     N/A     N/A     N/A 
Loans held for sale   345    -    345    -    345 
Loans, net   324,888    -    -    359,925    359,925 
Accrued interest receivable   1,463    -    369    1,094    1,463 
                          
Financial liabilities                         
Deposits  $344,810   $184,962   $161,392   $-   $346,354 
Federal Home Loan Bank advances   15,036    9,003    6,060    -    15,063 
Subordinated debenture   2,777    -    2,993    -    2,993 
Accrued interest payable   68    -    68    -    68 

 

       Fair Value Measurements 
   Carrying                 
   Value   Level 1   Level 2   Level 3   Total 
 December 31, 2015                         
Financial assets                         
Cash and cash equivalents  $23,876   $23,876   $-   $-   $23,876 
Interest bearing deposits   1,992    1,992    -    -    1,992 
Securities   63,975    -    63,975    -    63,975 
Restricted stock   3,276     N/A     N/A     N/A     N/A 
Loans held for sale   367    -    367    -    367 
Loans, net   314,143    -    -    356,337    356,337 
Accrued interest receivable   1,340    -    294    1,046    1,340 
                          
Financial liabilities                         
Deposits  $343,130   $184,284   $158,328   $-   $342,612 
Federal Home Loan Bank advances   15,803    9,770    10,943    -    20,713 
Subordinated debenture   2,761    -    2,761    -    2,761 
Accrued interest payable   38    -    38    -    38 

 

The methods and assumptions, not previously presented, used to estimate fair values are described as follows:

 

Cash and Cash Equivalents:

 

The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

 

Restricted Stock:

 

It is not practical to determine the fair value of FHLB and Bankers Bank of Kentucky stock due to restrictions placed on its transferability.

 

Loans:

 

Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

 

 24 

 

 

The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

 

Deposits:

 

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are by definition equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 1 classification. The carrying amounts of variable rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date resulting in a Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flows calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

 

Federal Home Loan Bank advances and subordinate debenture:

 

The fair values of the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

 

Accrued Interest Receivable/Payable:

 

The carrying amounts of accrued interest approximate fair value and are classified by level consistent with the level of the related assets or liabilities.

 

NOTE 6 - ESOP PLAN

 

Employees participate in an Employee Stock Ownership Plan (“ESOP”). The ESOP borrowed from the Company to purchase 269,790 shares of the Company’s common stock at $10 per share. The Company makes discretionary contributions to the ESOP, and pays dividends on unallocated shares to the ESOP, and the ESOP uses funds it receives to repay the loan. When loan payments are made, ESOP shares are allocated to participants based on relative compensation and expense is recorded. Dividends on allocated shares increase participant accounts. Participants receive the shares at the end of employment.

 

There were no contributions to the ESOP for the three months ended March 31, 2016 or 2015.

 

Shares held by the ESOP at March 31, 2016 and December 31, 2015 were as follows (dollars in thousands):

 

   March 31,   December 31, 
   2016   2015 
Allocated to participants   42,832    42,832 
Committed to be released   16,862    - 
Unearned   209,091    225,953 
Total ESOP shares   268,785    268,785 
           
Fair value of unearned shares  $3,469   $3,864 

 

 25 

 

 

NOTE 7 – EARNINGS PER SHARE

 

The factors used in the earnings per share computation for the three months ended March 31, 2016 and 2015, were as follows (dollar amounts in thousands, except per share data):

 

   Three months ended 
   March 31, 
   2016   2015 
Basic          
Net income  $499   $586 
Less: Earnings allocated to participating securities   12    14 
Net income available to common shareholders  $487   $572 
           
Weighted average common shares outstanding   3,847,409    3,848,948 
Less: Average unallocated ESOP shares   211,302    239,439 
Average participating shares   50,976    91,589 
Average shares   3,585,131    3,517,920 
           
Basic earnings per common share  $0.14   $0.16 
           
Diluted          
Net income available to common shareholders  $487   $572 
           
Weighted average common shares outstanding for basic earnings per common share   3,585,131    3,517,920 
Add: Dilutive effects of assumed exercises of stock options   17,091    - 
Average shares and dilutive potential common shares   3,602,222    3,517,920 
           
Diluted earnings per common share  $0.14   $0.16 

 

Stock options of 205,500 shares of common stock were considered in computing diluted earnings per common share at March 31, 2016. No stock options were excluded from the calculation of diluted earnings per common share for March 31, 2016. Stock options of 295,500 shares of common stock were not considered in computing diluted earnings per common share for March 31, 2015 because they were antidilutive.

 

NOTE 8 – STOCK BASED COMPENSATION

 

On January 8, 2013, the shareholders of Poage Bankshares, Inc. approved the Poage Bankshares, Inc. 2013 Equity Incentive Plan (the “Plan”) for employees and directors of the Company. The Plan authorizes the issuance of up to 472,132 shares of the Company’s common stock, with no more than 134,895 of shares as restricted stock awards and 337,237 as stock options, either incentive stock options or non-qualified stock options. The exercise price of options granted under the Plan may not be less than the fair market value on the date the stock option is granted. The compensation committee of the board of directors has sole discretion to determine the amount and to whom equity incentive awards are granted.

 

On April 16, 2013, the compensation committee of the board of directors approved the issuance of 134,895 shares of restricted stock to its directors and officers. In addition, on May 10, 2013, the compensation committee of the board of directors approved the issuance of 300,000 stock options to its directors and officers. An additional 20,000 stock option shares were issued on March 19, 2014 as a result of the acquisition of Town Square Financial Corporation by Poage Bankshares, Inc. An additional 5,000 stock option shares were issued on May 31, 2015 to employees. All stock options and restricted stock awards vest ratably over five years. Stock options expire ten years after issuance. Apart from the vesting schedule for both stock options and restricted stock, there are no performance-based conditions or any other material conditions applicable to the awards issued.

 

 26 

 

 

The following table summarizes stock option activity for the three months ended March 31, 2016:

 

       Weighted
Average
 
   Options   Exercise Price 
         
Outstanding - December 31, 2015   205,500   $14.93 
Granted   -    - 
Exercised and settled   -    - 
Forfeited   -    - 
Outstanding - March 31, 2016   205,500   $14.93 
           
Fully vested and exercisable at March 31, 2016   87,400      
Fully vested and exercisable at December 31, 2015   76,200      
Expected to vest in future periods   118,100      

 

Stock options are assumed to be earned ratably over their respective vesting periods and charged to compensation expense based upon their grant date fair value and the number of options assumed to be earned. During the three months ended March 31, 2016, 11,200 options vested. Stock-based compensation expense for stock options included in salaries and benefits for the three months ended March 31, 2016 and 2015 was $31,000 and $30,000, respectively. Total unrecognized compensation cost related to non-vested stock options was $177,000 at March 31, 2016 and $208,000 at December 31, 2015 and is expected to be recognized over a period of 4 – 4.5 years.

 

The following table summarizes non-vested restricted stock activity for the three months ended March 31, 2016:

 

Balance - December 31, 2015   53,947 
Granted   - 
Forfeited   - 
Vested   (4,991)
Balance - March 31, 2016   48,956 

 

The fair value of the restricted stock awards is amortized to compensation expense over the vesting period (generally five years) and is based on the market price of the Company’s common stock at the date of the grant multiplied by the number of shares granted that are expected to vest. Stock-based compensation expense for the restricted stock included in salaries and benefits for the three months ended March 31, 2016 and 2015 was $117,000 and $100,000, respectively. Unrecognized compensation expense for non-vested restricted stock awards was $505,000 at March 31, 2016 and $623,000 at December 31, 2015 and is expected to be recognized over a weighted-average period of 3 years.

 

 27 

 

 

NOTE 9 – ACCUMULATED OTHER COMPREHENSIVE INCOME

 

The following table is changes in Accumulated Other Comprehensive Income by component, net of tax for the three months ended March 31, 2016 and March 31, 2015 (in thousands):

 

   Unrealized Gains and Losses on Available-for-Sale
Securities
 
   Three months ended   Three months ended 
   March 31, 2016   March 31, 2015 
Beginning balance  $384   $460 
           
Other comprehensive income, net of tax before reclassification   259    154 
           
Amounts reclassified from accumulated to other comprehensive income for gains on sale of securities, net of tax expense of $0 and $0 respectively.   -    - 
           
Net current period other comprehensive income   259    154 
           
Ending Balance  $643   $614 

 

 28 

 

 

ITEM 2.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Critical Accounting Policies

 

There are no material changes to the critical accounting policies disclosed in the Annual Report on Form 10-K for Poage Bankshares, Inc. for the year ended December 31, 2015, as filed with the Securities and Exchange Commission.

 

Forward-Looking Statement s

 

This Quarterly Report contains forward-looking statements, which can be identified by the use of such words as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may,” and similar expressions. These forward-looking statements include, but are not limited to:

 

  statements of our goals, intentions and expectations;
  statements regarding our business plans and prospects and growth and operating strategies;
  statements regarding the asset quality of our loan and investment portfolios;
  >  estimates of our risks and future costs and benefits;
  >  statements about the benefits of the acquisition of Town Square Financial Corporation and Town Square Bank and the acquisition of Commonwealth Bank FSB (“Commonwealth”), including future financial and operating results, cost savings, enhancements to revenue and accretion to reported earnings that may be realized from the acquisition; and
  >  statements about the financial condition, results of operations and business of Poage Bankshares.

 

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. Except as may be required by law, we do not take any obligation to update any forward-looking statements after the date of this Quarterly Report on form 10-Q. You should not place undue reliance on such forward-looking statements.

 

The following factors, among others, could cause the actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

>our ability to manage our operations under the current adverse economic conditions (including real estate values, loan demand, inflation, commodity prices and unemployment levels) nationally and in our market area;

 

>adverse changes in the financial industry, securities, credit and national local real estate markets (including real estate values);

 

>significant increases in our loan losses, including as a result of our inability to resolve classified assets, and management’s assumptions in determining the adequacy of the allowance for loan losses;

 

>credit risks of lending activities, including changes in the level and trend of loan delinquencies and write-offs and in our allowance for loan losses and provision for loan losses;

 

>our ability to successfully enhance internal controls;

 

>our business may not be combined successfully with the businesses of Town Square Financial Corporation and Commonwealth, or such combinations may take longer to accomplish than expected;

 

>the growth opportunities and cost savings from the acquisitions of Town Square Financial Corporation and Commonwealth may not be fully realized or may take longer to realize than expected;

 

>our ability to manage increased expenses following the acquisitions of Town Square Financial Corporation and Commonwealth, including salary and employee benefit expenses and occupation expenses;

 

 29 

 

 

>operating costs, customer losses and business disruption following the acquisitions of Town Square Financial Corporation and Commonwealth, including adverse effects of relationships with employees, may be greater than expected;

 

>competition among depository and other financial institutions;

 

>our success in increasing our originations of adjustable-rate mortgage loans;

 

>our success in increasing our commercial business and commercial real estate loans;

 

>our ability to improve our asset quality even as we increase our commercial business, commercial real estate and multi-family lending, including as a result of the acquisitions of Town Square Financial Corporation and Commonwealth;

 

>our ability to retain customers and name recognition in the communities we serve as a result of changing our name to “Town Square Bank”;

 

>our success in introducing new financial products;

 

>our ability to attract and maintain deposits, including depositors of the former Town Square Bank and former depositors of Commonwealth Bank;

 

>decreases in our asset quality;

 

>changes in interest rates generally, including changes in the relative differences between short term and long term interest rates and in deposit interest rates, that may affect our net interest margin and funding sources;

 

>fluctuations in the demand for loans, which may be affected by the number of unsold homes, land and other properties in our market areas and by declines in the value of real estate in our market area;

 

>changes in consumer spending, borrowing and savings habits;

 

>declines in the yield on our assets resulting from the current low interest rate environment;

 

>risks related to a high concentration of loans secured by real estate located in our market area;

 

>the results of examinations by our regulators, including the possibility that our regulators may, among other things, require us to increase our reserve for loan losses, write down assets, change our regulatory capital position, limit our ability to borrow funds or maintain or increase deposits, or prohibit us from paying dividends, which could adversely affect our dividends and earnings;

 

>changes in laws or government regulations or policies affecting financial institutions, including the Dodd-Frank Act and the JOBS Act, which could result in, among other things, increased deposit insurance premiums and assessments, capital requirements (particularly the new capital regulations), regulatory fees and compliance costs and the resources we have available to address such changes;

 

>changes in the level of government support of housing finance;

 

>our ability to enter new markets successfully and capitalize on growth opportunities

 

>changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

 

>changes in our organization, compensation and benefit plans and our ability to retain key members of our senior management team;

 

>loan delinquencies and changes in the underlying cash flows of our borrowers;

 

>the failure or security breaches of computer systems on which we depend;

 

>the ability of key third-party providers to perform their obligations to us; and

 

>changes in the financial condition or future prospects of issuers of securities that we own.

 

 30 

 

 

Comparison of Financial Condition at March 31, 2016 and December 31, 2015

 

At March 31, 2016, the Company’s assets totaled $436.1 million, an increase of $1.0 million, or 0.2%, from $435.1 million at December 31, 2015. The increase was attributed to growth in real estate loans during the quarter funded by growth in interest bearing deposits.

 

Cash and Cash equivalents decreased by $12.3 million, or 51.2%, to $11.6 million at March 31, 2016 from $23.9 million at December 31, 2015. The decrease was attributable to loan growth of $11.1 million, the purchase of $4.0 million in available for sale securities, and a decrease in outstanding FHLB advances of $767,000, offset by principal payments on securities of $1.6 million and an increase in deposits of $1.7 million.

 

Loans held for sale decreased $22,000, or 6.0%, to $345,000 at March 31, 2016 from $367,000 at December 31, 2015 due to the decrease in mortgage banking activity.

 

Loans, net, increased $11.1 million, or 3.4%, to $324.9 million at March 31, 2016 from $314.1 million at December 31, 2015. The increase was primarily attributable to an increase in construction loans and one-to four-family mortgage loans, offset by the decrease in commercial and industrial loans. Real estate secured loans increased $12.0 million, commercial loans decreased $1.5 million and consumer loans increased $516,000 during the three month period ending March 31, 2016. Non-performing loans decreased $639,000, or 14.2%, to $3.9 million at March 31, 2016 from $4.5 million at December 31, 2015.

 

Securities available for sale increased by $2.7 million, or 4.2%, to $66.7 million at March 31, 2016 from $64.0 million at December 31, 2015. This increase is primarily due to $4.0 million in purchases, offset by $1.6 million in principal payments.

 

Deposits increased $1.7 million, or 0.5%, to $344.8 million at March 31, 2016 from $343.1 million at December 31, 2015. The increase was attributable to the accounts and normal fluctuation in customer balances.

 

Federal Home Loan Bank advances decreased $767,000, or 4.9%, to $15.0 million at March 31, 2016 from $15.8 million at December 31, 2015. This decrease in borrowings was primarily due to regular principal payments and maturities.

 

Other borrowings increased by $16,000, or 0.6%, to $2.8 million at March 31, 2016 from $2.8 million at December 31, 2015 due to the amortization of the fair value related to the subordinated debenture assumed in conjunction with acquisition of Town Square Financial Corporation. In December 2006, Town Square Statutory Trust I, a trust formed by Town Square Financial Corporation, closed a pooled private offering of 4,124 trust preferred securities with a liquidation amount of $1,000 per security. The subordinated debt of $2.8 million is shown as a liability because the Company is not considered the primary beneficiary of the Trust. The investment in common stock of the trust is $124,000 and is included in other assets. The subordinated debt has a variable rate of interest equal to the three month London Interbank Offered Rate (LIBOR) plus 1.83%, which was 2.46% at March 31, 2016.

 

Total shareholders’ equity decreased by $500,000, or 0.7%, to $70.7 million at March 31, 2016 from $71.2 million at December 31, 2015. The decrease resulted from the repurchase of common stock totaling $1.2 million and the payment of cash dividends totaling $230,000, offset by an increase in accumulated other comprehensive income by $259,000 and net income of $499,000.

 

 31 

 

 

Average Balance and Yields

 

The following table sets forth average balance sheets, average yields and costs, and certain other information at the dates and for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the tables as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income. Interest income and rates exclude the effects of a tax equivalent adjustment to adjust tax exempt investment income on tax exempt investment securities to a fully taxable basis due to immateriality (dollars in thousands).

 

   For the Three Months Ended March 31, 
   2016   2015 
   Average   Interest and       Average   Interest and     
   Balance   Dividends   Yield/ Cost   Balance   Dividends   Yield/ Cost 
Assets:                              
Interest-earning assets:                              
Loans  $320,160   $4,318    5.42%  $302,024   $4,210    5.58%
Investment securities   65,043    366    2.26%   67,018    363    2.17%
FHLB stock   3,036    30    3.97%   2,681    27    4.03%
Other interest-earning assets   14,687    20    0.55%   16,066    6    0.15%
Total interest-earning assets   402,926    4,734    4.73%   387,789    4,606    4.75%
                               
Noninterest-earning assets   27,014              26,365           
Total assets   429,940              414,154           
                               
Liabilities and equity:                              
Interest bearing liabilities:                              
Interest bearing deposits:                              
NOW, savings, money market, and other   136,028    60    0.18%   118,053    57    0.19%
Certificates of deposit   159,632    412    1.04%   161,047    390    0.97%
Total interest bearing deposits   295,660    472    0.64%   279,100    447    0.64%
                               
FHLB advances   10,974    51    1.87%   17,074    67    1.57%
Subordinated debenture   2,768    40    5.81%   2,708    36    5.32%
 Total borrowings   13,742    91    2.66%   19,782    103    2.11%
                               
Total interest bearing liabilities   309,402    563    0.73%   298,882    550    0.74%
                               
Non-interest bearing liabilities:                              
Non-interest bearing deposits   47,581              45,070           
Accrued interest payable   116              150           
Other liabilities   2,253              1,986           
Total non-interest bearing liabilities   49,950              47,206           
Total liabilities   359,352              346,088           
                               
Total equity   70,588              68,066           
Total liabilities and equity   429,940              414,154           
                               
Net interest income        4,171              4,056      
Interest rate spread             3.99%             4.01%
Net interest margin             4.16%             4.18%
Average interest-earning assets to average interest-bearing liabilities             130.23%             129.75%

 

 32 

 

 

Liquidity and Capital Resources

 

Our primary sources of funds are deposits and the proceeds from principal and interest payments on loans and investment securities. We also utilize Federal Home Loan Bank advances. While maturities and scheduled amortization of loans and securities are predicable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. We generally manage the pricing of our deposits to be competitive within our market and to increase core deposit relationships.

 

Liquidity management is both a daily and long-term responsibility of management. We adjust our investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and investment securities, and (iv) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits, federal funds sold, and short and intermediate-term investment securities. If we require funds beyond our ability to generate them internally we have additional borrowing capacity with the Federal Home Loan Bank of Cincinnati. At March 31, 2016, we had $15.0 million in advances from the Federal Home Loan Bank of Cincinnati and an additional borrowing capacity of $93.6 million.

 

Poage Bankshares, Inc. is a separate legal entity from Town Square Bank and must provide its own liquidity to pay dividends, repurchase stock and to fund other general corporate activities. Poage Bankshares, Inc.’s primary source of liquidity is dividend payments from Town Square Bank. The ability of Town Square Bank to pay dividends is subject to regulatory requirements. At March 31, 2016, Poage Bankshares, Inc. (on an unconsolidated basis) had liquid assets of $742,000.

 

Federal regulations require FDIC-insured depository institutions to meet several minimum capital standards: a common equity Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8%, and a 4% Tier 1 capital to total assets leverage ratio. The existing capital requirements were effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on recommendations of the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.

 

For purposes of the regulatory capital requirements, common equity Tier 1 capital is generally defined as common shareholders’ equity and retained earnings. Tier 1 capital is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions that made such an election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Institutions that have not exercised the AOCI opt-out have AOCI incorporated into common equity Tier 1 capital (including unrealized gains and losses on available-for-sale-securities). We have exercised the AOCI opt-out. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.

 

In determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets (e.g., recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one- to four-family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified factors.

 

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019. When fully implemented, the capital conservation buffer will be 2.50% of risk weighted assets over and above the regulatory minimum capital ratios for Common Equity Tier 1 Capital (CET1) to risk weighted assets, Tier 1 Capital to risk weighted assets, and Total Capital to risk weighted assets.  The consequences of not meeting the capital conservation buffer thresholds include restrictions on the payment of dividends, restrictions on the payment of discretionary bonuses, and restrictions on the repurchasing of common shares by the Company. At March 31, 2016, the actual capital conservation buffer for Town Square Bank was 15.86% compared to the capital conservation buffer requirement of 0.625%.

 

In assessing an institution’s capital adequacy, the OCC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish higher capital requirements for individual institutions when deemed necessary.

 

As of March 31, 2016, the capital of the Town Square Bank exceeded all required regulatory guidelines.

 

 33 

 

 

The following table reflects the Bank’s current regulatory capital levels in more detail, including comparisons to the regulatory minimums at March 31, 2016 and December 31, 2015 (in thousands).

 

                   To Be Well 
                   Capitalized Under 
           For Capital Adequacy   Prompt Corrective 
   Actual   Purposes   Action Regulations 
As of March 31, 2016  Amount   Ratio   Amount   Ratio   Amount   Ratio 
Total Risk-Based Capital                              
(to Risk-weighted Assets)  $68,594    23.86%  $22,996    8.00%  $28,744    10.00%
Tier I Capital                              
(to Risk-weighted Assets)   66,427    23.11%   17,247    6.00%   22,996    8.00%
Common Equity                              
(to Risk-weighted Assets)   66,427    23.11%   12,935    4.50%   18,684    6.50%
Tier I Capital                              
(to Adjusted Total Assets)   66,427    15.51%   17,131    4.00%   21,414    5.00%

 

                   To Be Well 
                   Capitalized Under 
           For Capital Adequacy   Prompt Corrective 
   Actual   Purposes   Action Regulations 
As of December 31, 2015  Amount   Ratio   Amount   Ratio   Amount   Ratio 
Total Risk-Based Capital                              
(to Risk-weighted Assets)  $67,705    24.36%  $22,237    8.00%  $27,796    10.00%
Tier I Capital                              
(to Risk-weighted Assets)   65,816    23.68%   16,678    6.00%   22,237    8.00%
Common Equity                              
(to Risk-weighted Assets)   65,816    23.68%   12,508    4.50%   18,067    6.50%
Tier I Capital                              
(to Adjusted Total Assets)   65,816    15.31%   17,190    4.00%   21,488    5.00%

 

Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. 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 and lines of credit. These arrangements are not expected to have a material impact on the Company’s financial condition or results of operations.

 

 34 

 

 

Comparison of Operating Results for the Three Months Ended March 31, 2016 and March 31, 2015

 

General. Net income decreased $87,000 to $499,000 for the three months ended March 31, 2016 from net income of $586,000 for the three months ended March 31, 2015. The decrease in net income is attributable to a decrease in non-interest income of $34,000, to $666,000 for the three months ended March 31, 2016 compared to $700,000 for the three months ended March 31, 2015, an increase in provision for loan losses of $284,000 to $375,000 for the three months ended March 31, 2016 compared to $91,000 for the three months ending March 31, 2015, and an increase in interest expense of $13,000 to $563,000 for the three months ended March 31, 2016 compared to $550,000 for the three months ended March 31, 2015, offset by an increase in interest income of $128,000 to $4.7 million for the three months ended March 31, 2016 compared to from $4.6 million for the three months ended March 31, 2015. In addition, tax expense decreased $147,000 to $177,000 for the three months ended March 31, 2016 from $324,000 for the three months ended March 31, 2015.

 

Interest Income. Interest income increased $128,000, or 2.8%, to $4.7 million for the three months ended March 31, 2016 from $4.6 million for the three months ended March 31, 2015. The average balance of interest-earning assets increased $15.1 million, or 2.5%, to $402.9 million from $387.8 million. The increase in primarily attributable to the acquisition of Commonwealth on May 31, 2015.

 

Interest income on loans increased $108,000, or 2.6%, to $4.3 million for the three months ended March 31, 2016 from $4.2 million for the three months ended March 31, 2015. The average yields on loans decreased 16 basis points to 5.42% for the three months ended March 31, 2016, compared to 5.58% for the three months ended March 31, 2015. The average balance of loans increased $18.1 million, or 6.0%, to $320.2 million for the three months ended March 31, 2016 from $302.0 million for the three months ended March 31, 2015. Interest income on investment securities increased $3,000, or 0.8%, to $366,000 for the three months ended March 31, 2016 from $363,000 for the three months ended March 31, 2015. The average yield on securities increased 9 basis points to 2.26% for the three months ended March 31, 2016, compared to 2.17% for the three months ended March 31, 2015. The average balance of investment securities decreased $2.0 million, or 2.9%, to $65.0 million for the three months ended March 31, 2016 from $67.0 million for the three months ended March 31, 2015. Interest income on other interest-earning assets increased $14,000, or 233.3%, to $20,000 for the three months ended March 31, 2016 from $6,000 for the three months ended March 2015. The average yield on other interest-earning assets increased 40 basis points to 0.55% for the three months ended March 31, 2016 compared to 0.15% for the three months ended March 31, 2016. The average balance of other interest earning assets decreased $1.4 million, or 8.6%, to $14.7 million for the three months ended March 31, 2016 from $16.1 million for the three months ended March 31, 2015. The increase in other interest-earning assets is attributable to $2.0 million in interest bearing deposits with other financial institutions.

 

Interest Expense. Interest expense increased $13,000, or 2.4%, to $563,000 for the three months ended March 31, 2016 from $550,000 for the three months ended March 31, 2015. Interest expense on interest bearing deposits increased $25,000, or 5.6% to $472,000 for the three months ended March 31, 2016 from $447,000 for the three months ended March 31, 2015. The average balance of interest bearing deposits increased $16.6 million to $295.7 million for the three months ended March 31, 2016 from $279.1 million for the three months ended March 31, 2015, while the average interest rate paid on interest bearing deposits was 0.64% for both periods.

 

Interest expense on FHLB advances and subordinated debentures decreased $12,000, or 11.7%, to $91,000 for the three months ended March 31, 2016 from $103,000 for the three months ended March 31, 2015. The average balance on FHLB advances decreased $6.1 million to $11.0 million for the three months ended March 31, 2016 from $17.1 million for the three months ended March 31, 2015, offset by a 30 basis point increase in the average rate paid on the FHLB advances to 1.87% from 1.57% as short-term borrowings with lower interest rates matured. The average balance on subordinated debentures increased $60,000, or 2.2%, to $2.8 million for the three months ended March 31, 2016 from $2.7 million for the three months ended March 31, 2015. The average interest rate paid on subordinated debentures increased 49 basis points to 5.81% for the three months ended March 31, 2016 from 5.32% for the three months ended March 31, 2015.

 

Net Interest Income. Net interest income increased $115,000, or 2.8%, to $4.2 million for the three months ended March 31, 2016 from $4.1 million for the three months ended March 31, 2015. Net interest income increased due to an increase in the ratio of average interest earning assets to average interest bearing liabilities to 130.23% for the three months ended March 31, 2016 from 129.75% for the three months ended March 31, 2015. However, the interest rate spread and interest margin decreased 2 basis points to 3.99% and 4.16% for the three months ended March 31, 2016 from 4.01% and 4.18% for the three months ended March 31, 2015, respectively.

 

The interest rate spread and net interest margin for the three months ended March 31, 2016 decreased due to the lower yields on assets for the three months ended March 31, 2016 as compared the three months ended March 31, 2015. Income recognized from purchase discounts attributable to the Town Square acquisition decreased $117,000 to $222,000 for the three months ended March 31, 2016 compared to $339,000 for the three months ended March 31, 2015.

 

Provision for Loan Losses. We recorded $375,000 in provision for loan losses for the three months ended March 31, 2016 and $91,000 provision for loan losses for the three months ended March 31, 2015. The provisions for each period were based on management’s quarterly calculations and reflect the minimal levels of nonperforming loans and charge-offs, net of recoveries, during the periods. The increase in the provision for three months ended March 31, 2016 is primarily attributable to loan growth, charge-offs and newly down-graded one-to four- family mortgage loans.

 

 35 

 

 

Noninterest Income. Noninterest income decreased $34,000, or 4.9%, to $666,000 for the three months ended March 31, 2016 from $700,000 for the three months ended March 31, 2015. The decrease in noninterest income was primarily attributable to the decrease in mortgage banking activity of $26,000, or 38.2%, to $42,000 for the three months ending March 31, 2016 from $68,000 for the three months ended March 31, 2015, a decrease in loan servicing fees of $25,000, or 27.5%, to $66,000 for the three months ended March 31, 2016 from $91,000 for the three months ended March 31, 2015 and a decrease in gains on insurance settlement/claims of $41,000, or $100%, to $0 for the three months ended March 31, 2016 primarily due to a reimbursement of $30,000 for a settlement related to Town Square Financial Corporation and a $10,000 claim for a bank vehicle totaled during icy weather for the three months ended March 31, 2015. The decrease is offset by an increase in service charges on deposits of $53,000, or 12.0%, to $494,000 for the three months ended March 31, 2016 from $441,000 for the three months ended March 31, 2015.

 

Noninterest Expense. Noninterest expense increased $31,000, or 0.8%, to $3.8 million for the three months ended March 31, 2016 from $3.8 million for the three months ended March 31, 2015. This increase was largely due to the increase in data processing of $158,000, or 28.8%, to $707,000 for the three months ended March 31, 2016 from $549,000 for the three months ended March 31, 2015 due to the Commonwealth acquisition in May 2015 and preparation to re-open the Midtown branch located on Martin Luther King Boulevard in Ashland, Kentucky in the second quarter of 2016. Due to Midtown’s close proximity to the main office, the branch was closed in July 2014 following the acquisition of Town Square Financial in an effort to reduce the number of facilities. However, after terminating our lease in December 2015 on a building used for loan operations, management and the board of directors chose to utilize the previously closed branch for office space and offer retail banking services.

 

Salaries and employee benefits increased $35,000, or 1.9%, to $1.9 million for the three months ended March 31, 2016 from $1.8 million for the three months ended March 31, 2015 due to the increase in the number of employees due to the Commonwealth acquisition. The increase in non-interest expense is offset by a decrease in professional fees of $66,000, or 35.3%, to $121,000 for the three months ended March 31, 2016 from $187,000 for the three months ended March 31, 2015 primarily attributable to the Commonwealth acquisition, a decrease in occupancy expense of $36,000, or 9.1%, to $361,000 for the three months ended March 31, 2016 from $397,000 for the three months ended March 31, 2015 primarily attributable to a $92,000 gain on the sale of a piece of unimproved land owned by the bank and a decrease in foreclosed assets of $52,000, or 49.1%, to $54,000 for the three months ended March 31, 2016 from $106,000 for the three months ended March 31, 2015.

 

Income Tax Expense. The provision for income taxes decreased $147,000, or 45.4%, to $177,000 for the three months ended March 31, 2016 compared to a $324,000 tax expense for the three months ended March 31, 2015 due to lower pre-tax income. Our effective tax rate for the three months ended March 31, 2016 was 26.2%.

 

 36 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Disclosures of quantitative and qualitative market risk are not required by smaller reporting companies, such as the Company.

 

ITEM 4. CONTROLS AND PROCEDURES

 

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) promulgated under the Securities and Exchange Act of 1934, as amended). Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

 

During the quarter ended March 31, 2016, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 37 

 

 

PART II

OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The Company and its subsidiaries are subject to various legal actions that are considered ordinary routine litigation incidental to the business of the Company, and no claim for money damages exceeds ten percent of the Company’s consolidated assets. In the opinion of management, based on currently available information, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s results of operations.

 

ITEM 1A. RISK FACTORS

 

Disclosures of risk factors are not required by smaller reporting companies, such as the Company.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

(a)None.

 

(b)Not applicable.

 

(c)Issuer repurchases. The following table sets forth information in connection with repurchases of the Company’s common stock for the period January 1, 2016 through March 31, 2016. On November 23, 2015, the Board of Directors of Poage Bankshares, Inc. authorized a program to repurchase of up to 100,000 shares, which represented approximately 2.55% of the shares outstanding.  The repurchase program was effective upon adoption.

 

The Company’s stock repurchases pursuant to the repurchase programs are dependent on certain factors, including but not limited to, market conditions and prices, available funds and alternative uses of capital. The repurchase program may be carried out through open-market purchases, block trades, negotiated private transactions and pursuant to a trading plan adopted in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. Any repurchased shares will be treated by the Company as authorized but unissued shares.

 

           Shares   May Yet be 
           Purchased   Purchased 
   Total       as Part of   Under 
   Number of   Average   Publicly   Publicly 
   Shares   Price Paid   Announced   Announced 
   Purchased   Per Share   Plan   Plan 
                 
January 1 - January 31, 2016   58,327   $17.52    58,327    12,504 
February 1 - February 29, 2016   12,504    17.40    12,504    - 
Total   70,831   $17.50    70,831      

 

 38 

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

Exhibit    
number   Description
     
3.1   Articles of Incorporation of Poage Bankshares, Inc. (1)
     
3.2   Bylaws of Poage Bankshares, Inc. (2)
     
10.1   Change in Control Agreement between Town Square Bank and Miles R. Armentrout (3)
     
31.1   Certification of President, and Chief Executive Officer, Pursuant to Rule 13a-14(a) and Rule 15-d-14(a).
     
31.2   Certification of Chief Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
     
32.1   Certification of President and Chief Executive Officer, and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
101   The following material from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) Unaudited Consolidated Balance Sheets, (ii) Unaudited Consolidated Statements of Income, (iii) Unaudited Consolidated Statements of Comprehensive Income, (iv) Unaudited Consolidated Statement of Shareholders’ Equity, (v) Unaudited Consolidated Statements of Cash Flows, and (vi) Notes to the Consolidated Financial Statements.

 

 

 

(1) Incorporated by reference to the Registration Statement on Form S-1 (File No. 333-172192, originally filed on February 11, 2011, and as subsequently amended)

 

(2) Incorporated by reference to the Current Report on Form 8-K (File No. 001-35295, filed on August 29, 2013)

 

(3) Incorporated by reference to the Current Report on Form 8-K (File No. 001-35295, filed on January 22, 2016)

 

 39 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  

  Poage Bankshares, Inc.
Date: May 11, 2016  
   
  /s/ Bruce VanHorn
  Bruce VanHorn
  President  & Chief Executive Officer
   
  /s/ Jane Gilkerson
  Jane Gilkerson
  Chief Financial Officer

 

 40