Poage Bankshares, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - Poage Bankshares, Inc.	v465863_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Poage Bankshares, Inc.	v465863_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Poage Bankshares, Inc.	v465863_ex31-1.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, 2017

¨	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, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	¨	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	x

		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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, 2017, the number of shares of the Registrant’s common stock, par value $.01 per share, was 3,677,641.

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	31

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	39

ITEM 4.	CONTROLS AND PROCEDURES	39

	PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	40

ITEM 1A.	RISK FACTORS	40

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	40

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	41

ITEM 4.	MINE SAFETY DISCLOSURES	41

ITEM 5.	OTHER INFORMATION	41

ITEM 6.	EXHIBITS	41

SIGNATURES		42

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,
	2017			2016
ASSETS
Cash and due from financial institutions	$	31,867		$	24,389
Interest-bearing deposits in other financial institutions		1,992			1,992
Securities available for sale		59,208			58,261
Loans held for sale		441			611
Loans, net of allowance of $2,463 and $2,349		338,160			343,921
Restricted stock, at cost		3,276			3,276
Other real estate owned, net		864			718
Premises and equipment, net		10,997			11,115
Company owned life insurance		7,163			7,121
Accrued interest receivable		1,400			1,397
Goodwill		1,277			1,277
Other intangible assets, net		920			1,006
Deferred tax asset, net		1,306			1,454
Other assets		1,887			1,927
Total assets	$	460,758		$	458,465

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing	$	53,707		$	52,288
Interest bearing		323,247			322,420
Total deposits		376,954			374,708
Federal Home Loan Bank advances		8,794			9,332
Subordinated debenture		2,841			2,825
Accrued interest payable		70			52
Other liabilities		3,258			2,847
Total liabilities		391,917			389,764

Commitments and contingent liabilities		-			-

Shareholders' equity
Common stock, $.01 par value, 30,000,000 shares authorized, 3,683,956 and 3,704,704 issued and outstanding at March 31, 2017 and December 31, 2016, respectively		37			37
Additional paid-in-capital		35,322			35,742
Retained earnings		35,306			35,065
Unearned Employee Stock Ownership Plan (ESOP) shares		(1,956	)		(1,990	)
Accumulated other comprehensive income (loss)		132			(153	)
Total shareholders' equity		68,841			68,701
Total liabilities and shareholders' equity	$	460,758		$	458,465

See notes to unaudited consolidated financial statements.

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands except per share data)

	Three months ended
	March 31,
	2017		2016
Interest and dividend income
Loans, including fees	$	4,318	$	4,318
Taxable securities		224		256
Tax-exempt securities		116		110
Federal funds sold and other		90		50
		4,748		4,734
Interest expense
Deposits		582		472
Federal Home Loan Bank advances and other		84		91
		666		563
Net interest income		4,082		4,171

Provision for loan losses		353		375
Net interest income after provision for loan losses		3,729		3,796

Non-interest income
Service charges on deposits		476		494
Other service charges		15		13
Net gain on disposal of land and equipment		16		92
Loan servicing fees		82		66
Gains on mortgage loans sold, net		17		42
Income from company owned life insurance		42		45
Other		5		6
		653		758
Non-interest expense
Salaries and employee benefits		1,825		1,878
Occupancy and equipment		474		453
Data processing		575		707
Federal deposit insurance		35		64
Loan processing and collection		86		75
Foreclosed assets, net		93		54
Advertising		114		48
Professional fees		79		121
Other taxes		120		108
Director fees and expenses		40		57
Amortization of intangible assets		86		87
Other		248		226
		3,775		3,878
Income before income taxes		607		676
Income tax expense		144		177
Net income	$	463	$	499
Earnings per common share:
Basic	$	0.13	$	0.14
Dilutive		0.13		0.14
Dividend per share	$	0.06	$	0.06

See notes to unaudited consolidated financial statements.

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollar amounts in thousands except per share data)

	Three months ended
	March 31,
	2017			2016

Net income	$	463		$	499
Other comprehensive income:
Unrealized holding gains on available for sale securities		432			392
Reclassification adjustments for (gains) losses recognized in income		-			-
Net unrealized holding gains on available for sale securities		432			392
Tax effect		(147	)		(133	)
Other comprehensive income		285			259
Comprehensive income	$	748		$	758

See notes to unaudited consolidated financial statements.

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, 2017	$	37	$	35,742		$	35,065		$	(1,990	)	$	(153	)	$	68,701
Net income		-		-			463			-			-			463
Stock repurchases, 27,529 shares repurchased		-		(528	)		-			-			-			(528	)
Dividends paid ($0.06/share)		-		-			(222	)		-			-			(222	)
ESOP compensation earned		-		32			-			34			-			66
Stock based compensation expense		-		76			-			-			-			76
Other comprehensive income		-		-			-			-			285			285
Balances, March 31, 2017	$	37	$	35,322		$	35,306		$	(1,956	)	$	132		$	68,841

See notes to unaudited consolidated financial statements.

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands except per share data)

	Three months ended
	March 31,
	2017			2016
Operating activities:
Net income	$	463		$	499
Adjustments to reconcile net income to net cash from operating activities:
Depreciation		188			183
Provision for loan losses		353			375
ESOP compensation expense		66			58
Stock based compensation expense		76			148
Gain on sale of premises and equipment		(16	)		(92	)
Loss on sale and write-downs of other real estate owned		69			8
Amortization of core deposit intangible		86			87
Accretion of fair value adjustments related to loans		(110	)		(222	)
Accretion of fair value adjustments related to deposits		(16	)		(16	)
Amortization of fair value related to subordinated debenture		16			16
Net amortization on securities		85			98
Deferred income tax expense		1			140
Net gain on mortgage banking activities		(17	)		(42	)
Origination of loans held for sale		(1,306	)		(1,472	)
Proceeds from loans held for sale		1,493			1,536
Increase in cash value of life insurance		(42	)		(45	)
Change in asset and liabilities, net assets and liabilities acquired:
Accrued interest receivable		(3	)		(123	)
Other assets		60			272
Accrued interest payable		18			30
Other liabilities		411			588
Net cash provided by operating activities		1,875			2,026

Investing activities:
Securities available for sale:
Proceeds from maturities		140			-
Purchases		(2,497	)		(4,046	)
Principal payments received		1,757			1,640
Loan originations and principal payments on loans, net		5,056			(11,355	)
Proceeds from the sale of other real estate owned		227			69
Proceeds from the sale of premises and equipment		54			-
Purchase of premises and equipment, net		(108	)		(33	)
Net cash used in investing activities		4,629			(13,725	)

Financing activities:
Net change in deposits		2,262			1,696
Proceeds from Federal Home Loan Bank borrowings		-			21,000
Payments on Federal Home Loan Bank borrowings		(538	)		(21,767	)
Cash dividend paid		(222	)		(230	)
Stock repurchases		(528	)		(1,234	)
Net cash provided by financing activities		974			(535	)

Net increase (decrease) in cash and cash equivalents		7,478			(12,234	)

Cash and cash equivalents at beginning of period		24,389			23,876

Cash and cash equivalents at the end of the period	$	31,867		$	11,642

Additional cash flows and supplementary information:
Cash paid during the year for:
Interest on deposits and debt	$	648		$	533
Other real estate owned acquired in settlement of loans	$	442		$	425

See notes to unaudited consolidated financial statements

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” or “Poage”) 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, 2017 and December 31, 2016 and the results of operations and cash flows for the interim periods ended March 31, 2017 and 2016. 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 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Recently Adopted Accounting Pronouncements

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting. This ASU will require recognition of the income tax effects of share-based awards in the income statement when the awards vest or are settled (i.e., Additional Paid-in-Capital pools will be eliminated). The amendments are effective for public companies for annual periods beginning after December 15, 2016. The guidance in the ASU No. 2016-09 was adopted by the Company and did not have a material impact on its consolidated financial statements.

Newly Issued Accounting Standards Not Yet Effective

In May 2014, the FASB issued Accounting Standards Update 2014-09 Revenue from Contracts with Customers (Topic 606) developed as a joint project with the International Accounting Standards Board to remove inconsistencies in revenue requirements and provide a more robust framework for addressing revenue issues. The ASU's core principle is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued Accounting Standards Update 2015-14, which deferred the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). The ASU may be adopted using either a modified retrospective method or a full retrospective method. Poage intends to adopt the ASU during the first quarter of 2018, as required, using a modified retrospective approach. Poage’s preliminary analysis suggests that the adoption of this accounting guidance is not expected to have a material impact on the Company's consolidated financial statements as the majority of its revenue stream is generated from financial instruments which are not within the scope of this ASU. However, Poage is still evaluating the impact for other fee-based income. The FASB continues to release new accounting guidance related to the adoption of this ASU and the results of Poage's materiality analysis may change based on conclusions reached as to the application of this new guidance.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU makes several modifications to Subtopic 825-10 including the elimination of the available-for-sale classification of equity investments, and requires equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income. This ASU will become effective for the Company for interim and annual periods beginning after December 15, 2017. The adoption of ASU No. 2016-01 is not expected to have a material effect on the Company’s operating results or financial condition.

In February 2016, the FASB issued Accounting Standards Update 2016-02 Leases guidance requiring the recognition in the statement of financial position of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The guidance requires that a lessee should recognize lease assets and lease liabilities as compared to previous GAAP that did not require lease assets and lease liabilities to be recognized for most leases. The guidance becomes effective for us on January 1, 2019. The Company leases two facilities. Upon adoption of this standard, an asset will be recorded to recognize the right of the Company to use the leased facilities and a liability will be recorded representing the obligation to make all future lease payments on those facilities. Management is currently evaluating the impact of the new guidance on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (the ASU), which introduces the current expected credit losses methodology. Among other things, the ASU requires the measurement of all expected credit losses for financial assets, including loans and available-for-sale debt securities, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The new model will require institutions to calculate all probable and estimable losses that are expected to be incurred through the loan's entire life. ASU 2016-13 also requires the allowance for credit losses for purchased financial assets with credit deterioration since origination to be determined in a manner similar to that of other financial assets measured at amortized cost; however, the initial allowance will be added to the purchase price rather than recorded as credit loss expense. The disclosure of credit quality indicators related to the amortized cost of financing receivables will be further disaggregated by year of origination (or vintage). Institutions are to apply the changes through a cumulative-effect adjustment to their retained earnings as of the beginning of the first reporting period in which the standard is effective. The amendments are effective for fiscal years beginning after December 15, 2019. Early application will be permitted for fiscal years beginning after December 15, 2018. Poage is currently assessing the impact of the new guidance on its consolidated financial statements. Upon adoption, an initial increase in the allowance for loan losses is currently anticipated by management along with a corresponding decrease in capital as permitted by the standard.

In January 2017, FASB issued ASU 2017-4, Intangible—Goodwill and Other (Topic 350), to simplify accounting for goodwill impairment. The new guidance will simplify financial reporting because it eliminates the need to determine the fair value of individual assets and liabilities of a reporting unit to measure goodwill impairment. The revised guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for any impairment tests performed after January 1, 2017. Poage is currently evaluating the impact of the new guidance on its consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-08, Receivables—Nonrefundable Fee and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities. The amendments affect all entities that hold investments in callable debt securities that have an amortized cost basis in excess of the amount that is repayable by the issuer. The amendments requires the premium for certain callable debt securities to be amortized to the earliest call date. The amendments are effective for public companies for annual periods beginning after December 15, 2019. The adoption of ASU No. 2017-08 is not expected to have a material effect on the Company’s operating results or financial condition.

NOTE 2 - SECURITIES AVAILABLE FOR SALE

The amortized cost and fair value of securities available for sale at March 31, 2017 and December 31, 2016 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, 2017
States and political subdivisions	$	19,553	$	348	$	(85	)	$	19,816
U.S. Government agencies and sponsored entities		3,500		-		(66	)		3,434
Government sponsored entities residential mortgage-backed:
FHLMC		11,143		88		(33	)		11,198
FNMA		11,453		47		(30	)		11,470
Collateralized mortgage obligations		6,128		-		(70	)		6,058
SBA loan pools		7,232		23		(23	)		7,232
Total securities	$	59,009	$	506	$	(307	)	$	59,208

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
December 31, 2016
States and political subdivisions	$	19,785	$	291	$	(184	)	$	19,892
U.S. Government agencies and sponsored entities		3,500		-		(37	)		3,463
Government sponsored entities residential mortgage-backed:
FHLMC		10,954		29		(88	)		10,895
FNMA		11,349		19		(108	)		11,260
Collateralized mortgage obligations		5,495		-		(89	)		5,406
SBA loan pools		7,411		9		(75	)		7,345
Total securities	$	58,494	$	348	$	(581	)	$	58,261

There were no proceeds from sales and calls of securities for the three months ended March 31, 2017 and 2016.

The amortized cost and fair value of the securities portfolio at March 31, 2017 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,
	2017
	Amortized		Fair
	Cost		Value

Within one year	$	1,532	$	1,541
One to five years		9,856		9,871
Five to ten years		8,565		8,727
Beyond ten years		3,100		3,111
Mortgage-backed securities and collateralized mortgage obligations		28,724		28,726
SBA loan pools		7,232		7,232
Total	$	59,009	$	59,208

The following table summarizes the securities with unrealized losses at March 31, 2017 and December 31, 2016, 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, 2017
States and political subdivisions	$	5,496	$	(85	)	$	-	$	-	$	5,496	$	(85	)
U.S. Government agencies and sponsored entities		3,434		(66	)		-		-		3,434		(66	)
Government sponsored entities residential mortgage backed:
FHLMC		4,253		(33	)		-		-		4,253		(33	)
FNMA		4,608		(30	)		-		-		4,608		(30	)
Collateralized mortgage obligations		6,058		(70	)		-		-		6,058		(70	)
SBA loan pools		3,849		(23	)		-		-		3,849		(23	)
Total available-for-sale securities	$	27,698	$	(307	)	$	-	$	-	$	27,698	$	(307	)

	Less Than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
December 31, 2016
States and political subdivisions	$	6,952	$	(184	)	$	296	$	-		$	7,248	$	(184	)
U.S. Government agencies and sponsored entities		3,463		(37	)		-		-			3,463		(37	)
Government sponsored entities residential mortgage backed:
FHLMC		6,479		(88	)		-		-			6,479		(88	)
FNMA		6,930		(108	)		-		-			6,930		(108	)
Collateralized mortgage obligations		2,671		(33	)		2,735		(56	)		5,406		(89	)
SBA loan pools		5,865		(75	)		-		-			5,865		(75	)
Total available-for-sale securities	$	32,360	$	(525	)	$	3,031	$	(56	)	$	35,391	$	(581	)

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.

NOTE 3 – LOANS

Loans at March 31, 2017 and December 31, 2016 were as follows (in thousands):

	March 31,		December 31,
	2017		2016
Real estate:
One to four family	$	175,745	$	177,801
Multi-family		7,125		6,823
Commercial real estate		81,894		83,169
Construction and land		9,074		11,019
		273,838		278,812

Commercial and industrial		38,483		38,747

Consumer
Home equity loans and lines of credit		10,521		10,655
Motor vehicle		10,442		10,624
Other		7,781		7,877
		28,744		29,156

Total		341,065		346,715
Less: Net deferred loan fees		442		445
Allowance for loan losses		2,463		2,349
	$	338,160	$	343,921

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, 2017 and December 31, 2016. 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, 2017
	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	$	157	$	-	$	1,878	$	2,035	$	7,363	$	1,852	$	264,623	$	273,838
Commercial and industrial		6		-		225	$	231		92		-		38,391		38,483
Consumer		-		-		197	$	197		39		-		28,705		28,744
Unallocated		-		-		-		-		-		-		-		-
Total	$	163	$	-	$	2,300	$	2,463	$	7,494	$	1,852	$	331,719	$	341,065

December 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	$	23	$	-	$	1,923	$	1,946	$	4,844	$	1,871	$	272,097	$	278,812
Commercial and industrial		7		-		211		218		89		-		38,658		38,747
Consumer		-		-		185		185		40		1		29,115		29,156
Unallocated		-		-		-		-		-		-		-		-
Total	$	30	$	-	$	2,319	$	2,349	$	4,973	$	1,872	$	339,870	$	346,715

The following table presents information related to impaired loans by class of loans as of March 31, 2017 and December 31, 2016 (in thousands):

	March 31, 2017						December 31, 2016
					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	$	2,015	$	2,002	$	-	$	883	$	883	$	-
Multi-family		-		-		-		-		-		-
Commercial real estate		4,777		4,723		-		3,780		3,726		-
Construction and land		191		191		-		193		193		-
Commercial and industrial		274		86		-		270		82		-
Consumer:
Home equity and lines of credit		39		39		-		40		40		-
Motor vehicle		-		-		-		-		-		-
Other		-		-		-		-		-		-
Subtotal	$	7,296	$	7,041	$	-	$	5,166	$	4,924	$	-

With an allowance recorded:
Real Estate:
One to four family	$	604	$	447	$	157	$	42	$	42	$	23
Multi-family		-		-		-		-		-		-
Commercial real estate		-		-		-		-		-		-
Construction and land		-		-		-		-		-		-
Commercial and industrial		6		6		6		7		7		7
Consumer:
Home equity and lines of credit		-		-		-		-		-		-
Motor vehicle		-		-		-		-		-		-
Other		-		-		-		-		-		-
Subtotal		610		453		163		49		49		30
Total	$	7,906	$	7,494	$	163	$	5,215	$	4,973	$	30

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 tables present the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the three months ended March 31, 2017 and 2016 (in thousands):

	Three months ended March 31, 2017						Three months ended March 31, 2016
	Average		Interest		Cash Basis		Average		Interest		Cash Basis
	Recorded		Income		Interest		Recorded		Income		Interest
	Investment		Recognized		Recognized		Investment		Recognized		Recognized
Real Estate:
One to four family	$	1,614	$	14	$	-	$	913	$	2	$	-
Multi-family		-		-		-		-		-		-
Commercial real estate		3,325		36		-		448		-		-
Construction and land		119		1		-		-		-		-
Commercial and industrial		219		-		-		161		-		-
Consumer:
Home equity and lines of credit		33		-		-		23		-		-
Motor vehicle		-		-		-		-		-		-
Other		-		-		-		-		-		-
Total	$	5,310	$	51	$	-	$	1,545	$	2	$	-

The following tables set forth an analysis of our allowance for loan losses for the three months ended March 31, 2017 and 2016 (in thousands):

Three months ended				Commercial
March 31, 2017	Real Estate			and Industrial			Consumer			Unallocated		Total

Allowance for loan losses:
Beginning balance	$	1,946		$	218		$	185		$	-	$	2,349
Provision for loan losses		284			20			49			-		353
Loans charged-off		(198	)		(21	)		(55	)		-		(274	)
Recoveries		3			14			18			-		35
Total ending allowance balance	$	2,035		$	231		$	197		$	-	$	2,463

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

Nonaccrual loans, and loans past due 90 days still on accrual status, 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 status, by class of loans, as of March 31, 2017 and December 31, 2016 (in thousands):

	March 31, 2017				December 31, 2016
				Loans Past Due				Loans Past Due
				Over 90 Days				Over 90 Days
		Nonaccrual		Still Accruing		Nonaccrual		Still Accruing
Real estate:
One to four family	$	2,847	$	-	$	3,428	$	-
Multi-family		-		-		-		-
Commercial real estate		2,086		-		970		-
Construction and land		92		-		41		-
Commercial and industrial		98		-		90		-
Consumer:
Home equity loans and lines of credit		149		-		155		-
Motor vehicle		10		-		-		-
Other		7		-		5		-
Total	$	5,289	$	-	$	4,689	$	-

The following tables present the aging of the recorded investment in past due loans as of March 31, 2017 and December 31, 2016 by class of loans. Non-accrual loans of $5.3 million as of March 31, 2017 and $4.7 million at December 31, 2016 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, 2017
Real estate:
One to four family	$	2,820	$	345	$	906	$	4,071	$	1,004	$	170,670	$	175,745
Multi-family		-		-		-		-		-		7,125		7,125
Commercial real estate		845		358		1,756		2,959		848		78,087		81,894
Construction and land		191		-		52		243		-		8,831		9,074
Commercial and industrial		24		67		63		154		-		38,329		38,483
Consumer:
Home equity loans and lines of credit		-		-		149		149		-		10,372		10,521
Motor vehicle		45		4		-		49		-		10,393		10,442
Other		28		11		4		43		-		7,738		7,781
Total	$	3,953	$	785	$	2,930	$	7,668	$	1,852	$	331,545	$	341,065

	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, 2016
Real estate:
One to four family	$	899	$	454	$	1,679	$	3,032	$	1,013	$	173,756	$	177,801
Multi-family		-		-		-		-		-		6,823		6,823
Commercial real estate		101		-		465		566		858		81,745		83,169
Construction and land		41		-		-		41		-		10,978		11,019
Commercial and industrial		1		47		76		124		-		38,623		38,747
Consumer:
Home equity loans and lines of credit		-		1		155		156		-		10,499		10,655
Motor vehicle		40		15		-		55		-		10,569		10,624
Other		2		20		-		22		1		7,854		7,877
Total	$	1,084	$	537	$	2,375	$	3,996	$	1,872	$	340,847	$	346,715

Troubled Debt Restructurings:

As of March 31, 2017, the Company had a recorded investment in four TDRs which totaled $3.2 million. There were three TDRs which totaled $3.2 million at December 31, 2016. A less than market rate and extended term was granted as concessions for TDRs. No additional charge-off has been made for the loan relationships. A provision of $23,000 was made during the three months ended March 31, 2017 for the loan relationships. No additional commitments to lend have been made to the borrower.

March 31, 2017	TDRs on
(in thousands)	Non-accrual		Other TDRs		Total TDRs
Real Estate:
One to four family	$	114	$	17	$	131
Multi-family		-		-		-
Commercial real estate		-		3,044		3,044
Construction and land		-		-		-
Commercial and industrial		-		-		-
Consumer:
Home equity loans and lines of credit		-		-		-
Motor vehicle		-		-		-
Other		-		-		-
Total	$	114	$	3,061	$	3,175

December 31, 2016	TDRs on
(in thousands)	Non-accrual		Other TDRs		Total TDRs
Real Estate:
One to four family	$	-	$	17	$	17
Multi-family		-		-		-
Commercial real estate		166		3,047		3,213
Construction and land		-		-		-
Commercial and industrial		19		-		19
Consumer:
Home equity loans and lines of credit		-		-		-
Motor vehicle		-		-		-
Other		-		-		-
Total	$	185	$	3,064	$	3,249

The following table presents TDRs that occurred during the three months ended March 31, 2017 and March 31, 2016 (dollars in thousands):

	Three months ended March 31, 2017						Three months ended March 31, 2016
Loan Class	Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Loans		Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
Real Estate:
One to four family		1	$	114	$	114		-	$	-	$	-
Multi-family		-		-		-		-		-		-
Commercial real estate		-		-		-		-		-		-
Construction and land		-		-		-		-		-		-
Commercial and industrial		-		-		-		-		-		-
Consumer:
Home equity loans and lines of credit		-		-		-		-		-		-
Motor vehicle		-		-		-		-		-		-
Other		-		-		-		-		-		-
Total		1	$	114	$	114		-	$	-	$	-

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, 2017	Pass		Mention		Substandard		Doubtful		Loss		Total
One to four family	$	167,948	$	2,310	$	5,487	$	-	$	-	$	175,745
Multi-family		7,125		-		-		-		-		7,125
Commercial real estate		72,624		3,169		6,101		-		-		81,894
Construction and land		8,883		-		191		-		-		9,074
Commercial and industrial		35,497		1,625		1,361		-		-		38,483
Home equity loans and lines of credit		10,271		36		214		-		-		10,521
Motor vehicle		10,411		2		29		-		-		10,442
Other		7,768		10		3		-		-		7,781
Total	$	320,527	$	7,152	$	13,386	$	-	$	-	$	341,065

			Special
December 31, 2016	Pass		Mention		Substandard		Doubtful		Loss		Total
One to four family	$	171,109	$	2,167	$	4,525	$	-	$	-	$	177,801
Multi-family		6,823		-		-		-		-		6,823
Commercial real estate		74,267		4,048		4,854		-		-		83,169
Construction and land		10,826		-		193		-		-		11,019
Commercial and industrial		36,172		1,802		773		-		-		38,747
Home equity loans and lines of credit		10,478		6		171		-		-		10,655
Motor vehicle		10,594		2		28		-		-		10,624
Other		7,872		-		5		-		-		7,877
Total	$	328,141	$	8,025	$	10,549	$	-	$	-	$	346,715

There were $1.8 million and $1.9 million purchased credit impaired (“PCI”) loans included in substandard loans at March 31, 2017 and December 31, 2016, respectively.

The Company holds purchased loans without evidence of credit quality deterioration. In addition, the Company holds 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 March 31, 2017 and December 31, 2016 (in thousands):

	Non-impaired		Credit-impaired
	Purchased		Purchased
Purchased Loans as of March 31, 2017	Loans		Loans
Real estate:
One to four family	$	29,177	$	1,004
Multi-family		2,079		-
Commercial real estate		18,282		848
Construction and land		625		-
Commercial and industrial		2,507		-
Consumer loans:
Home equity loans and lines of credit		1,359		-
Motor vehicle		127		-
Other		629		-
Total loans	$	54,785	$	1,852

	Non-impaired		Credit-impaired
	Purchased		Purchased
Purchased Loans as of December 31, 2016	Loans		Loans
Real estate:
One to four family	$	30,449	$	1,013
Multi-family		2,115		-
Commercial real estate		19,278		858
Construction and land		652		-
Commercial and industrial		2,783		-
Consumer loans:
Home equity loans and lines of credit		1,433		-
Motor vehicle		202		-
Other		706		1
Total loans	$	57,618	$	1,872

For the purchased loans disclosed above, the Company did not increase the allowance for loan losses for the three months ended March 31, 2017 or March 31, 2016.

The following table presents the composition of the acquired loans at March 31, 2017:

As of March 31, 2017
	Contractual		Remaining			Carrying
(in thousands)	Amount		Discount			Amount
Real estate:
One to four family	$	30,672	$	(491	)	$	30,181
Multi-family		2,090		(11	)		2,079
Commercial real estate		19,412		(282	)		19,130
Construction and land		628		(3	)		625
Commercial and industrial		2,520		(13	)		2,507
Consumer loans:
Home equity loans and lines of credit		1,368		(9	)		1,359
Motor vehicle		128		(1	)		127
Other		634		(5	)		629
Total loans	$	57,452	$	(815	)	$	56,637

The following tables 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, 2017 and December 31, 2016.

(in thousands)	March 31, 2017		December 31, 2016

Carrying amount	$	1,852	$	1,872
Non-accretable difference		270		272
Accretable yield		134		146
Contractually-required principal and interest payments	$	2,256	$	2,290

The Company adjusted interest income to recognize $12,000, and $67,000 of accretable yield on credit-impaired purchased loans for the three months ended March 31, 2017 and 2016, respectively.

Accretable yield, or income expected to be collected, is as follows for the three months ended March 31, 2017 and 2016 (in thousands):

		2017			2016

Balance at January 1,	$	146		$	292
New Loans Purchased		-			-
Accretion of income		(12	)		(67	)
Reclassifications from nonaccretable difference		-			-
Disposals		-			-
Balance at March 31,	$	134		$	225

NOTE 4 – FEDERAL HOME LOAN BANK ADVANCES

Advances from the FHLB at March 31, 2017 and December 31, 2016 were as follows (in thousands):

		March 31, 2017		December 31, 2016

Maturities June 2017 through January 2029, fixed rate at rates from 0.83% to 4.27%, weighted average rate of 1.73% at March 31, 2017 and 1.80% at December 31, 2016	$	8,794	$	9,332

Payments contractually required over the next five years are as follows as of March 31, 2017 (in thousands):

March 31,
2018	$	6,921
2019		1,209
2020		223
2021		88
2022		74
Thereafter		279
Total	$	8,794

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).

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 estimated costs to sell, an impairment loss is recognized.

Assets and liabilities measured at fair value on a recurring basis, at March 31, 2017 and December 31, 2016, are as follows (in thousands):

	Fair Value Measurements at
	March 31, 2017 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	$	19,816	$	-	$	19,816	$	-
U.S. Government agencies and sponsored entities		3,434		-		3,434		-
Mortgage backed securities: residential		22,668		-		22,668		-
Collateralized mortgage obligations		6,058		-		6,058		-
SBA loan pools		7,232		-		7,232		-
Total securities	$	59,208	$	-	$	59,208	$	-

	Fair Value Measurements at
	December 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	$	19,892	$	-	$	19,892	$	-
U.S. Government agencies and sponsored entities		3,463		-		3,463		-
Mortgage backed securities: residential		22,155		-		22,155		-
Collateralized mortgage obligations		5,406		-		5,406		-
SBA loan pools		7,345		-		7,345		-
Total securities	$	58,261	$	-	$	58,261	$	-

There were no transfers between Level 1 and Level 2.

Assets measured at fair value on a non-recurring basis at March 31, 2017 and December 31, 2016 are summarized below (in thousands):

	Fair Value Measurements at
	March 31, 2017 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
Residential real estate, net	$	307	$	-	$	-	$	307
Commercial real estate, net		250		-		-		250
Commercial and industrial, net		58		-		-		58

Other real estate owned
One to four family, net	$	241	$	-	$	-	$	241

	Fair Value Measurements at
	December 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
Residential real estate, net	$	613	$	-	$	-	$	613
Commercial real estate, net		250		-		-		250
Commercial and industrial, net		58		-		-		58

Other real estate owned
One to four family, net	$	268	$	-	$	-	$	268
Commercial real estate, net		8		-		-		8

Commercial and residential real estate properties classified as OREO are measured at fair value, less estimated 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, 2017, impaired loans recorded at fair value had a net carrying amount of $615,000 equal to the outstanding balance of $778,000, net of a valuation allowance of $163,000. At December 31, 2016, impaired loans recorded at fair value had a net carrying amount of $921,000 equal to the outstanding balance of $951,000, net of a valuation allowance of $30,000. There were charge-offs of $13,000 for the three months March 31, 2017. There were no charge-offs for the three months ended March 31, 2016.

At March 31, 2017, other real estate owned recorded at fair value had a net carrying amount of $241,000 equal to the outstanding balance of $323,000, net of a valuation allowance of $82,000. There were $10,000 in write-downs for the three months ended March 31, 2017. There were no write-downs for the three months ended March 31, 2016. At December 31, 2016, other real estate owned recorded at fair value had a net carrying amount of $276,000, equal to the outstanding balance of $390,000, net of a valuation allowance of $114,000.

The carrying amounts and estimated fair values of financial instruments at March 31, 2017 and December 31, 2016 are as follows (in thousands):

			Fair Value Measurements
	Carrying
March 31, 2017	Value		Level 1		Level 2		Level 3		Total

Financial assets
Cash and cash equivalents	$	31,867	$	31,867	$	-	$	-	$	31,867
Interest-bearing deposits		1,992		-		1,992		-		1,992
Securities		59,208		-		59,208		-		59,208
Restricted stock		3,276		N/A		N/A		N/A		N/A
Loans held for sale		441		-		441		-		441
Loans, net		338,160		-		-		342,319		342,319
Accrued interest receivable		1,400		-		324		1,076		1,400

Financial liabilities
Deposits	$	376,954	$	189,681	$	171,505	$	-	$	361,186
Federal Home Loan Bank advances		8,794		4,930		3,824		-		8,754
Subordinated debenture		2,841		-		2,841		-		2,841
Accrued interest payable		70		-		70		-		70

			Fair Value Measurements
	Carrying
December 31, 2016	Value		Level 1		Level 2		Level 3		Total

Financial assets
Cash and cash equivalents	$	24,389	$	24,389	$	-	$	-	$	24,389
Interest bearing deposits		1,992		-		1,992		-		1,992
Securities		58,261		-		58,261		-		58,261
Restricted stock		3,276		N/A		N/A		N/A		N/A
Loans held for sale		611		-		611		-		611
Loans, net		343,921		-		-		341,288		341,288
Accrued interest receivable		1,397		-		300		1,097		1,397

Financial liabilities
Deposits	$	374,708	$	164,914	$	179,266	$	-	$	344,180
Federal Home Loan Bank advances		9,332		5,004		4,454		-		9,458
Subordinated debenture		2,825		-		2,825		-		2,825
Accrued interest payable		52		-		52		-		52

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.

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

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, 2017 and 2016.

Shares held by the ESOP at March 31, 2017 and December 31, 2016 were as follows (dollars in thousands):

	March 31,		December 31,
	2017		2016
Allocated to participants		54,165		54,165
Released, but unallocated		16,885		13,501
Unearned		195,574		198,958
Total ESOP shares		266,624		266,624

Fair value of unearned shares	$	3,814	$	3,740

NOTE 7 – EARNINGS PER SHARE

The factors used in the earnings per share computation for the three months ended March 31, 2017 and 2016, were as follows (dollar amounts in thousands, except per share data):

	Three months ended
	March 31,
	2017		2016
Basic
Net income	$	463	$	499
Less: Earnings allocated to participating securities		4		12
Net income available to common shareholders	$	459	$	487

Weighted average common shares outstanding		3,697,374		3,847,409
Less: Average unallocated ESOP shares		197,792		211,302
Average participating shares		30,471		50,976
Average shares		3,469,111		3,585,131

Basic earnings per common share	$	0.13	$	0.14

Diluted
Net income available to common shareholders	$	459	$	487

Weighted average common shares outstanding for basic earnings per common share		3,469,111		3,585,131
Add: Dilutive effects of assumed exercises of stock options		31,657		17,091
Average shares and dilutive potential common shares		3,500,768		3,602,222

Diluted earnings per common share	$	0.13	$	0.14

There were 31,657 potentially dilutive securities outstanding at March 31, 2017. Stock options of 149,900 were considered in computing diluted earnings per common share for the three months ended March 31, 2017. There were 17,091 potentially dilutive securities outstanding at March 31, 2016. Stock options of 205,500 shares of common stock were considered in computing diluted earnings per common share for the three months ended March 31, 2016. All shares of stock options were considered in computing diluted earnings per common share for the three months ended March 31, 2017 and 2016.

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.

The following table summarizes stock option activity for the three months ended March 31, 2017:

				Weighted Average
	Options			Exercise Price

Outstanding -December 31, 2016		179,900		$	14.92
Granted		-			-
Exercised and settled		(30,000	)		14.99
Forfeited		-			-
Outstanding -March 31, 2017		149,900		$	14.91

Fully vested and exercisable at March 31, 2017		75,400
Fully vested and exercisable at December 31, 2016		101,400
Expected to vest in future periods		74,500

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. At March 31, 2017, 149,900 options were outstanding and 75,400 options were fully vested and exercisable with intrinsic value of $688,000 and $346,000, respectively. At December 31, 2016, 179,900 options were outstanding and 101,400 options were fully vested and exercisable with intrinsic value of $698,000 and $393,000, respectively.

During the three months ended March 31, 2017, 4,000 options vested. Stock-based compensation expense for stock options included in salaries and benefits for the three months ended March 31, 2017 and 2016 was $18,000 and $31,000, respectively. Total unrecognized compensation cost related to non-vested stock options was $94,000 at March 31, 2017 and $112,000 at December 31, 2016 and is expected to be recognized over a period of 3.2 years. During the three months ended March 31, 2017, the aggregate intrinsic value of the options exercised under the plan was $132,000 determined as of the date of the option exercise.

The following table summarizes non-vested restricted stock activity for the three months ended March 31, 2017:

Balance -December 31, 2016			30,471
Granted			-
Forfeited			-
Vested			-
Balance -March 31, 2017			30,471

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, 2017 and 2016 was $58,000 and $117,000, respectively. Unrecognized compensation expense for non-vested restricted stock awards was $241,000 at March 31, 2017 and $299,000 at December 31, 2016 and is expected to be recognized over a weighted-average period of 1.8 years.

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, 2017 and 2016 (in thousands):

	Unrealized Gains and Losses on Available- for-Sale Securities
	Three months ended
	March 31,
	2017			2016
Beginning balance	$	(153	)	$	384

Other comprehensive income, net of tax before reclassification		285			259

Amounts reclassified from accumulated other comprehensive income for gains on sale of securities, net of tax expense of $0 and $0, respectively		-			-

Net current period other comprehensive income		285			259

Ending Balance	$	132		$	643

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, 2016, as filed with the Securities and Exchange Commission.

Forward-Looking Statements

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 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 and maintain internal controls;

competition among depository and other financial institutions;

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;

our success in introducing new financial products;

our ability to attract and maintain deposits;

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, 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.

Comparison of Financial Condition at March 31, 2017 and December 31, 2016

At March 31, 2017, total assets were $460.8 million, an increase of $2.3 million, or 0.5%, from $458.5 million at December 31, 2016. The increase was attributed to growth in deposits during the quarter attributable to our customer acquisition and growth program. This program includes direct mail marketing targeting non-customers, both business and personal, in the markets served by the Bank.

Cash and Cash equivalents increased by $7.5 million, or 30.7%, to $31.9 million at March 31, 2017 from $24.4 million at December 31, 2016. The increase in cash was primarily attributable to deposit growth of $2.2 million combined with a decrease of $4.9 million in real estate secured loans.

Loans held for sale decreased $170,000, or 27.8%, to $441,000 at March 31, 2017 from $611,000 at December 31, 2016 due to a decrease in secondary market mortgage lending activity.

Loans, net, decreased $5.8 million, or 1.7%, to $338.2 million at March 31, 2017 from $343.9 million at December 31, 2016. The decrease was primarily attributable to a decrease in one to four family, commercial real estate and construction loans. Non-performing loans increased $600,000, or 12.8%, to $5.3 million at March 31, 2017 from $4.7 million at December 31, 2016.

Securities available for sale increased by $947,000, or 1.6%, to $59.2 million at March 31, 2017 from $58.3 million at December 31, 2016. This increase is primarily due to $2.5 million in purchases and an increase of $432,000 in unrealized gain on securities held for sale, offset by maturities and principal payments of $1.9 million.

Deposits increased $2.2 million, or 0.6%, to $376.9 million at March 31, 2017 from $374.7 million at December 31, 2016. The increase was attributable to an increase in non-interest bearing accounts, savings accounts and money market accounts of $9.3 million, offset by a decrease in certificates of deposits of $7.1 million which included the maturity of $4.0 million in short-term non-brokered deposits acquired in the national market.

Federal Home Loan Bank advances decreased $538,000, or 5.8%, to $8.8 million at March 31, 2017 from $9.3 million at December 31, 2016. This decrease in borrowings was due to payments on amortizing advances.

Other borrowings increased by $16,000, or 0.6%, and remained unchanged at $2.8 million at March 31, 2017 and at December 31, 2016 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 2.96% at March 31, 2017.

Total shareholders’ equity increased by $140,000, or 0.2%, to $68.8 million at March 31, 2017 from $68.7 million at December 31, 2016. The increase resulted from net income of $463,000, an increase in accumulated other comprehensive income of $285,000 and an increase in additional paid-in capital of $140,000 related to the stock based compensation plans, offset by the repurchase of common stock totaling $528,000 and the payment of cash dividends totaling $222,000.

Average Balances and Yields

The following table sets forth average balances, 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 are 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,
	2017							2016
	Average		Interest and					Average		Interest and
	Balance		Dividends		Yield/ Cost			Balance		Dividends		Yield/ Cost
Assets:
Interest-earning assets:
Loans	$	342,458	$	4,318		5.11	%	$	320,160	$	4,318		5.42	%
Investment securities		58,947		340		2.34	%		65,043		366		2.26	%
FHLB stock		3,036		34		4.54	%		3,036		30		3.97	%
Other interest-earning assets		29,392		56		0.77	%		14,687		20		0.55	%
Total interest-earning assets		433,833		4,748		4.44	%		402,926		4,734		4.73	%

Noninterest-earning assets		25,517							27,014
Total assets		459,350							429,940

Liabilities and equity:
Interest bearing liabilities:
Interest bearing deposits:
NOW, savings, money market, and other		146,888		90		0.25	%		136,028		60		0.18	%
Certificates of deposit		176,454		492		1.13	%		159,632		412		1.04	%
Total interest bearing deposits		323,342		582		0.73	%		295,660		472		0.64	%

FHLB advances		8,936		39		1.77	%		10,974		51		1.87	%
Subordinated debenture		2,832		45		6.44	%		2,768		40		5.81	%
Total borrowings		11,768		84		2.89	%		13,742		91		2.66	%

Total interest bearing liabilities		335,110		666		0.81	%		309,402		563		0.73	%

Non-interest bearing liabilities:
Non-interest bearing deposits		52,118							47,581
Accrued interest payable		130							116
Other liabilities		2,895							2,253
Total non-interest bearing liabilities		55,143							49,950
Total liabilities		390,253							359,352

Total equity		69,097							70,588
Total liabilities and equity		459,350							429,940

Net interest income				4,082							4,171
Interest rate spread						3.63	%						4.00	%
Net interest margin						3.82	%						4.16	%
Average interest-earning assets to average interest-bearing liabilities						129.46	%						130.23	%

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, 2017, we had $8.8 million in advances from the Federal Home Loan Bank of Cincinnati and an additional borrowing capacity of $76.2 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, 2017, Poage Bankshares, Inc. (on an unconsolidated basis) had liquid assets of $2.9 million.

On June 16, 2016, Poage Bankshares, Inc. executed a $2.0 million commercial line of credit secured with Town Square Bank common stock, with an unaffiliated lender. The initial variable interest rate on the line of credit is 4.00% with an interest rate equal to the Wall Street Prime plus 0.50%. The line of credit matures June 16, 2018. The line of credit will be used for general working capital purposes. At March 31, 2017, we had $2.0 million available on the line of credit.

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 assets 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, 2017, the actual capital conservation buffer for Town Square Bank was 13.47% compared to the capital conservation buffer requirement of 1.25%.

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, 2017, the capital of the Town Square Bank exceeded all required regulatory guidelines and Town Square Bank was categorized as well-capitalized.

The following table reflects the Bank’s current regulatory capital levels in more detail, including comparisons to the regulatory minimums at March 31, 2017 and December 31, 2016 (in thousands).

											To Be Well
											Capitalized Under
						For Capital Adequacy					Prompt Corrective
	Actual					Purposes					Action Regulations
As of March 31, 2017	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Risk-Based Capital
(to Risk-weighted Assets)	$	65,597		21.48	%	$	24,431		8.00	%	$	30,539		10.00	%
Tier I Capital
(to Risk-weighted Assets)		63,060		20.65			18,324		6.00			24,431		8.00
Common Equity
(to Risk-weighted Assets)		63,060		20.65			13,743		4.50			19,850		6.50
Tier I Capital
(to Adjusted Total Assets)		63,060		13.79			18,293		4.00			22,866		5.00

											To Be Well
											Capitalized Under
						For Capital Adequacy					Prompt Corrective
	Actual					Purposes					Action Regulations
As of December 31, 2016	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total Risk-Based Capital
(to Risk-weighted Assets)	$	64,925		21.01	%	$	24,722		8.00	%	$	30,903		10.00	%
Tier I Capital
(to Risk-weighted Assets)		62,513		20.23			18,542		6.00			24,722		8.00
Common Equity
(to Risk-weighted Assets)		62,513		20.23			13,906		4.50			20,087		6.50
Tier I Capital
(to Adjusted Total Assets)		62,513		13.52			18,501		4.00			23,126		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.

Comparison of Operating Results for the Three Months Ended March 31, 2017 and March 31, 2016

General. Net income for the three months ended March 31, 2017 decreased $36,000, or 7.2%, to $463,000 from net income of $499,000 for the three months ended March 31, 2016. The decrease in net income is attributable to a decrease in net interest income of $89,000 to $4.1 million for the three months ended March 31, 2017 from $4.2 million for the three months ended March 31, 2016 and a decrease in non-interest income of $13,000 to $653,000 for the three months ended March 31, 2017 from $666,000 for the three months ended March 31, 2016. The decreases in income are offset by a decrease of $22,000 in the provision for loan losses to $353,000 for the three months ended March 31, 2017 from $375,000 for the three months ended March 31, 2016, a decrease in non-interest expense of $11,000 to remain unchanged at $3.8 million for the three months ended March 31, 2017 and 2016, and a decrease of $33,000 in income taxes to $144,000 for the three months ended March 31, 2017 compared to $177,000 for the three months ended March 31, 2016.

Interest Income. Interest income increased $14,000, or 0.3%, to remain constant at $4.7 million for the three months ended March 31, 2017 and 2016. The average balance of interest-earning assets increased $30.9 million, or 7.7%, to $433.8 million from $402.9 million. The increase is primarily attributable to growth in commercial real estate, construction loans and commercial and industrial loans.

Interest income on loans remained unchanged at $4.3 million for the three months ended March 31, 2017 and 2016. The average yields on loans decreased 31 basis points to 5.11% for the three months ended March 31, 2017 compared to 5.42% for the three months ended March 31, 2016. The average balance of loans increased $22.3 million, or 7.0%, to $342.5 million for the three months ended March 31, 2017 from $320.2 million for the three months ended March 31, 2016. The decrease of $112,000, or 50.4%, from $222,000 for the three months ended March 31, 2016 in income recognized from purchase discounts attributable to the Town Square and Commonwealth acquisitions to $110,000 for the three months ended March 31, 2017 contributed to the decrease in the average yields on loans. Interest income on investment securities decreased $26,000, or 7.1%, to $340,000 for the three months ended March 31, 2017 from $366,000 for the three months ended March 31, 2016. The average yield on securities increased 8 basis points to 2.34% for the three months ended March 31, 2017, compared to 2.26% for the three months ended March 31, 2016. The average balance of investment securities decreased $6.1 million, or 9.4%, to $58.9 million for the three months ended March 31, 2017 from $65.0 million for the three months ended March 31, 2016.

Interest income on FHLB stock increase $4,000 to $34,000 for the three months ended March 31, 2017 from $30,000 for the three months ended March 31, 2016. The average yield on FHLB stock increased 57 basis points to 4.54% for the three months ended March 31, 2017 compared to 3.97% for the three months ended March 31, 2016. The average balance of FHLB stock remained constant at $3.0 million for the three months ended March 31, 2017 and 2016. Interest income on other interest-earning assets increased $36,000, or 180.0%, to $56,000 for the three months ended March 31, 2017 from $20,000 for the three months ended March 31, 2016. The average yield on other interest-earning assets increased 22 basis points to 0.77% for the three months ended March 31, 2017 compared to 0.55% for the three months ended March 31, 2016. The average balance of other interest earning assets increased $14.7 million, or 100.1%, to $29.4 million for the three months ended March 31, 2017 from $14.7 million for the three months ended March 31, 2016.

Interest Expense. Interest expense increased $103,000, or 18.3%, to $666,000 for the three months ended March 31, 2017 from $563,000 for the three months ended March 31, 2016. Interest expense on interest bearing deposits increased $110,000, or 23.3% to $582,000 for the three months ended March 31, 2017 from $472,000 for the three months ended March 31, 2016. The average balance of interest bearing deposits increased $27.6 million, or 9.4%, to $323.3 million for the three months ended March 31, 2017 from $295.7 million for the three months ended March 31, 2016 while the average interest rate paid on interest bearing deposits increased 9 basis points to 0.73% for the three months ended March 31, 2017 compared to 0.64% for the three months ended March 31, 2016. The increase in average balance on interest bearing deposits is primarily attributable to an increase in NOW and money market accounts combined with $9.2 million in short-term non-brokered deposits acquired in the national market.

Interest expense on FHLB advances and subordinated debentures decreased $7,000, or 7.7%, to $84,000 for the three months ended March 31, 2017 from $91,000 for the three months ended March 31, 2016. The average balance on FHLB advances decreased $2.1 million, or 18.6%, to $8.9 million for the three months ended March 31, 2017 from $11.0 million for the three months ended March 31, 2016 combined with a 10 basis point decrease in the average rate paid on the FHLB advances to 1.77% from 1.87%. The average balance on subordinated debentures increased $64,000, or 2.3%, to remain unchanged at $2.8 million for the three months ended March 31, 2017 and 2016. The average interest rate paid on subordinated debentures increased 63 basis points to 6.44% for the three months ended March 31, 2017 from 5.81% for the three months ended March 31, 2016.

Net Interest Income. Net interest income decreased $89,000, or 2.1%, to $4.1 million for the three months ended March 31, 2017 from $4.2 million for the three months ended March 31, 2016. The average interest earning assets to average interest bearing liabilities decreased to 129.46% for the three months ended March 31, 2017 from 130.23% for the three months ended March 31, 2016. The interest rate spread decreased 37 basis points to 3.63% for the three months ended March 31, 2017 from 4.00% for the three months ended March 31, 2016. Net interest margin decreased 34 basis points to 3.82% for the three months ended March 31, 2017 from 4.16% for the three months ended March 31, 2016.

Provision for Loan Losses. We recorded $353,000 in provision for loan losses for the three months ended March 31, 2017 compared to $375,000 in provision for loan losses for the three months ended March 31, 2016 despite an increase in charge-offs related to real estate loans and a decrease in recoveries for the same periods.

Noninterest Income. Noninterest income decreased $105,000, or 13.9%, to $653,000 for the three months ended March 31, 2017 from $758,000 for the three months ended March 31, 2016. The decrease in noninterest income was primarily attributable to a decrease in net gain on disposal of land and equipment of $76,000, or 82.6%, to $16,000 for the three months ended March 31, 2017 from $92,000 for the three months ended March 31, 2016, a decrease in gains on mortgage loans sold of $25,000, or 59.5%, to $17,000 for the three months ended March 31, 2017 from $42,000 for the three months ended March 31, 2016 and a decrease in service charges on deposits of $18,000, or 3.6%, to $476,000 for the three months ended March 31, 2017 from $494,000 for the three months ended March 31, 2016, offset by an increase in loan servicing fees of $16,000, or 24.2%, to $82,000 for the three months ended March 31, 2017 from $66,000 for the three months ended March 31, 2016.

Noninterest Expense. Noninterest expense decreased $103,000, or 2.7%, to $3.8 million for the three months ended March 31, 2017 from $3.9 million for the three months ended 2016. This decrease was primarily attributable to the decrease in data processing of $132,000, or 18.7%, to $575,000 for the three months ended March 31, 2017 from $707,000 for the three months ended March 31, 2016. Data processing decreased approximately $90,000 for the three months ended March 31, 2017 when compared to the three months ended March 31, 2016 due to non-recurring charges accessed during the first quarter of 2016 combined with a credit of approximately $30,000 applied during the first quarter of 2017 for excess network charges paid during 2016 and 2015. Salaries and employee benefits decreased $53,000, or 2.8%, to $1.8 million for the three months ended March 31, 2017 from $1.9 million for the three months ended March 31, 2016 primarily due a decrease in expenses associated with the stock based compensation plan. In addition, professional fees decreased $42,000, or 34.7%, to $79,000 for the three months ended March 31, 2017 from $121,000 for the three months ended March 31, 2016.

The decreases above were offset by an increase in advertising of $66,000, or 137.5%, to $114,000 for the three months ended March 31, 2017 from $48,000 for the three months ended March 31, 2016 and an increase in foreclosed assets expense of $39,000, or 72.2%, to $93,000 for the three months ended March 31, 2017 from $54,000 for the three months ended March 31, 2016. Advertising expense increased primarily due increased media advertising and our recently developed customer acquisition and growth program. Occupancy and equipment expense increased $21,000, or 4.6%, to $474,000 for the three months ended March 31, 2017 compared to $453,000 for the three months ended March 31, 2016 primarily due to communication expenses that were previously reported as data processing expenses due to vendor billing.

Income Tax Expense. The provision for income taxes decreased $33,000, or 18.6%, to $144,000 for the three months ended March 31, 2017 compared to a $177,000 tax expense for the three months ended March 31, 2016 due to lower pre-tax income for the three months ended March 31, 2017. Our effective tax rate for the three months ended March 31, 2017 was 23.7% compared to 26.2% for the three months ended March 31, 2016.

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, 2017, 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.

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 consolidated financial condition and 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, 2017 through March 31, 2017. On June 2, 2016, Poage Bankshares, Inc. commenced a stock repurchase program. The Board of Directors of Poage Bankshares, Inc. authorized program to repurchase up to 150,000 shares, which represented approximately 3.9% of the Company’s then issued and outstanding shares of common stock through open-market purchases, block trades, negotiated private transactions and pursuant to a trading plan that was adopted in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. The Company repurchased 118,238 shares at a weighted average price of $18.13 per share and there remained 31,762 shares to be repurchased under this plan at March 31, 2017.

On December 20, 2016, the Board of Directors of Poage Bankshares, Inc. authorized a new program to repurchase up to 185,000 shares, which represents approximately 5% of the Company’s then issued and outstanding shares of common stock through open-market purchases, block trades, negotiated private transactions and pursuant to a trading plan that was adopted in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. The Company repurchased 32,400 shares at a weighted average price of $19.19 per share and there remained 152,600 shares to be repurchased under this plan at March 31, 2017.

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.

					Total Number		Number of Shares
					of Shares		That May Yet
	Total				Purchased as		Be Purchased
	Number of		Average		Part of		Under Publicly
	Shares		Price Paid		Publicly		Announced
	Purchased		Per Share		Announced Plan		Plan
January 1 - January 31, 2017		11,757	$	18.78		11,757		200,134
February 1 - February 28, 2017		2,000		19.40		2,000		198,134
March 1 - March 31, 2017		13,772		19.49		13,772		184,362
Total		27,529	$	19.18		27,529

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⁾

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, 2017, 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 September 21, 2016)

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, 2017

	/s/ Bruce VanHorn
	Bruce VanHorn
	President & Chief Executive Officer

	/s/ Jane Gilkerson
	Jane Gilkerson
	Chief Financial Officer

Poage Bankshares, Inc. - FORM 10-Q - May 11, 2017

Attached files

Poage Bankshares, Inc. Reports