Company Quick10K Filing
Quick10K
Poage Bankshares
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
8-K 2018-10-30 Shareholder Vote
8-K 2018-10-16 Other Events
8-K 2018-09-27 Other Events
8-K 2018-07-16 Other Events
8-K 2018-07-11 Enter Agreement, Officers, Exhibits
8-K 2018-05-15 Officers, Exhibits
8-K 2018-04-17 Other Events
8-K 2018-02-20 Officers, Exhibits
8-K 2018-01-16 Other Events
IPHI Inphi 2,120
FRO Frontline 1,330
NX Quanex Building Products 555
ISRL Isramco 319
GLMD Galmed Pharmaceuticals 172
CCNI Command Center 26
WBHC Wilson Bank Holding 0
WCRS Western Capital Resources 0
RGBP Regen Biopharma 0
LWEL Luckwel Pharmaceuticals 0
PBSK 2018-09-30
Part I
Item 1. Consolidated Financial Statements
Note 1 - Basis of Presentation and Summary of Significant Accounting Policies
Note 2 - Revenue Recognition
Note 3 - Recent Accounting Pronouncements
Note 4 - Securities Available for Sale
Note 5 - Loans
Note 6 - Federal Home Loan Bank Advances and Other Borrowings
Note 7 - Fair Value
Note 8 - Esop
Note 9 - Earnings per Share
Note 10 - Stock Based Compensation
Note 11 - Accumulated Other Comprehensive Income (Loss)
Note 12 - Agreement and Plan of Merger
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 tv504825_ex31-1.htm
EX-31.2 tv504825_ex31-2.htm
EX-32.1 tv504825_ex32-1.htm

Poage Bankshares Earnings 2018-09-30

PBSK 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv504825_10q.htm 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

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

 

For the Quarterly Period ended September 30, 2018

 

¨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
 (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 every Interactive Data File required to be submitted 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 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 x 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 November 14, 2018, the number of shares of the Registrant’s common stock, par value $.01 per share, was 3,497,243.

 

 

 

 

 

 

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 34
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 45
     
ITEM 4. CONTROLS AND PROCEDURES 45
     
  PART II. OTHER INFORMATION  
     
ITEM 1. LEGAL PROCEEDINGS 46
     
ITEM 1A. RISK FACTORS 46
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 46
     
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 47
     
ITEM 4. MINE SAFETY DISCLOSURES 47
     
ITEM 5. OTHER INFORMATION 47
     
ITEM 6. EXHIBITS 47
   
SIGNATURES 48

 

 2 

 

 

PART I

 

ITEM 1.     CONSOLIDATED FINANCIAL STATEMENTS

 

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands except per share data)

 

   September 30,   December 31, 
   2018   2017 
ASSETS          
Cash and due from financial institutions  $22,852   $20,499 
Interest-bearing deposits in other financial institutions   3,735    2,988 
Securities available for sale   69,341    64,130 
Loans held for sale   508    256 
Loans, net of allowance of $3,124 and $4,681   315,290    328,554 
Restricted stock, at cost   3,276    3,276 
Other real estate owned, net   793    1,462 
Premises and equipment, net   10,278    10,500 
Company owned life insurance   7,413    7,292 
Accrued interest receivable   1,398    1,413 
Goodwill   1,894    1,894 
Other intangible assets, net   413    667 
Deferred tax asset, net   1,843    2,128 
Other assets   1,694    1,821 
Total assets  $440,728   $446,880 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Deposits          
Non-interest bearing  $56,135   $52,577 
Interest bearing   309,492    317,473 
Total deposits   365,627    370,050 
Federal Home Loan Bank advances   6,219    7,419 
Subordinated debenture   2,938    2,890 
Accrued interest payable   34    24 
Other liabilities   4,692    4,782 
Total liabilities   379,510    385,165 
           
Commitments and contingent liabilities   -    - 
           
Shareholders' equity          
Common stock, $.01 par value, 30,000,000 shares authorized, 3,497,243 and 3,514,171 issued and outstanding at September 30, 2018 and December 31, 2017, respectively   35    35 
Additional paid-in-capital   32,260    32,371 
Retained earnings   32,017    31,423 
Unearned Employee Stock Ownership Plan (ESOP) shares   (1,753)   (1,854)
Accumulated other comprehensive income (loss)   (1,341)   (260)
Total shareholders' equity   61,218    61,715 
Total liabilities and shareholders' equity  $440,728   $446,880 

 

See notes to unaudited consolidated financial statements.

 

 3 

 

 

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollar amounts in thousands except per share data) 

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2018   2017   2018   2017 
Interest and dividend income                    
Loans, including fees  $4,099   $4,297   $12,342   $12,877 
Taxable securities   301    255    833    729 
Tax-exempt securities   116    116    350    345 
Federal funds sold and other   159    113    415    302 
    4,675    4,781    13,940    14,253 
Interest expense                    
Deposits   713    629    2,051    1,808 
Federal Home Loan Bank advances and other borrowings   98    114    284    283 
    811    743    2,335    2,091 
Net interest income   3,864    4,038    11,605    12,162 
                     
Provision for loan losses   169    947    1,335    1,646 
Net interest income after provision for loan losses   3,695    3,091    10,270    10,516 
                     
Non-interest income                    
Service charges on deposits   541    496    1,558    1,495 
Other service charges   13    13    38    39 
Net gain (loss) on disposal of land and equipment   -    -    (3)   16 
Loan servicing fees   131    55    259    219 
Gains on mortgage loans sold, net   15    91    74    165 
Income from company owned life insurance   39    43    121    128 
Insurance recovery on fictitious loans   -    -    875    - 
Other   43    6    48    13 
    782    704    2,970    2,075 
Non-interest expense                    
Salaries and employee benefits   1,621    1,599    5,057    5,156 
Occupancy and equipment   470    458    1,360    1,403 
Data processing   712    698    2,101    1,965 
Federal deposit insurance   27    32    91    99 
Loan processing and collection   125    82    369    272 
Foreclosed assets, net   -    67    17    214 
Advertising   87    75    243    290 
Professional fees   820    303    1,000    464 
Other taxes   111    116    341    352 
Director fees and expenses   85    51    176    130 
Amortization of intangible assets   84    85    254    256 
Early contract termination subsequent measurement   (470)   -    (470)   - 
Conversion costs   14    -    169    - 
Other   239    298    868    840 
    3,925    3,864    11,576    11,441 
Income (loss) before income taxes   552    (69)   1,664    1,150 
Income tax expense (benefit)   260    (51)   439    338 
Net income (loss)  $292   $(18)  $1,225   $812 
Earnings (loss) per common share:                    
Basic  $0.09   $(0.01)  $0.37   $0.23 
Dilutive   0.09    (0.01)  $0.36   $0.23 
Dividend per share  $0.06   $0.06   $0.18   $0.18 

 

See notes to unaudited consolidated financial statements.

 

 4 

 

 

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollar amounts in thousands except per share data)

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2018   2017   2018   2017 
                 
Net income (loss)  $292   $(18)  $1,225   $812 
Other comprehensive income (loss):                    
Unrealized holding gains (loss) on available for sale securities   (379)   (103)   (1,370)   608 
Tax effect   80    35    289    (207)
Other comprehensive income (loss)   (299)   (68)   (1,081)   401 
Comprehensive income (loss)  $(7)  $(86)  $144   $1,213 

 

See notes to unaudited consolidated financial statements.

 

 5 

 

 

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Dollar amounts in thousands except per share data)

 

                   Accumulated     
       Additional       Unearned   Other   Total 
   Common   Paid-In   Retained   ESOP   Comprehensive   Shareholders' 
   Stock   Capital   Earnings   Shares   Loss   Equity 
Balances, January 1, 2018  $35   $32,371   $31,423   $(1,854)  $(260)  $61,715 
Net income   -    -    1,225    -    -    1,225 
Stock repurchases, 16,928 shares repurchased   -    (326)   -    -    -    (326)
Dividends paid ($0.18/share)   -    -    (631)   -    -    (631)
ESOP compensation earned   -    114    -    101    -    215 
Stock based compensation expense   -    101    -    -    -    101 
Other comprehensive loss   -    -    -    -    (1,081)   (1,081)
Balances, September 30, 2018  $35   $32,260   $32,017   $(1,753)  $(1,341)  $61,218 

 

See notes to unaudited consolidated financial statements.

 

 6 

 

 

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands except per share data)

 

   Nine months ended 
   September 30, 
   2018   2017 
Operating activities:          
Net income  $1,225   $812 
Adjustments to reconcile net income to net cash from operating activities:          
Depreciation   511    569 
Provision for loan losses   1,335    1,646 
ESOP compensation expense   215    195 
Stock based compensation expense   101    228 
(Gain) Loss on sale of premises and equipment, net   3    (16)
(Gain) Loss on sale and write-downs of other real estate owned, net   (58)   126 
Loss on sale of repossessed assets, net   1    6 
Loss on fictitious loans   -    25 
Amortization of core deposit intangible   254    256 
Accretion of fair value adjustments related to loans   (135)   (303)
Accretion of fair value adjustments related to deposits   (49)   (49)
Amortization of fair value related to subordinated debenture   48    48 
Net amortization on securities   207    97 
Deferred income tax (benefit) expense   573    (72)
Net gain on mortgage banking activities   (74)   (165)
Origination of loans held for sale   (3,178)   (5,475)
Proceeds from loans held for sale   3,000    6,251 
Increase in cash value of life insurance   (121)   (128)
Change in assets and liabilities, net assets and liabilities acquired:          
Accrued interest receivable   15    90 
Other assets   126    58 
Accrued interest payable   10    28 
Other liabilities   (90)   1,148 
Net cash provided by operating activities   3,919    5,375 
           
Investing activities:          
Net increase in interest-bearing deposits with other institutions   (747)   (498)
Securities available for sale:          
Proceeds from calls   -    65 
Proceeds from maturities   939    435 
Purchases   (17,038)   (11,762)
Principal payments received   9,312    5,374 
Loan originations and principal payments on loans, net   11,101    2,738 
Proceeds from the sale of other real estate owned   1,649    856 
Proceeds from the sale of repossessed assets   41    44 
Proceeds from the sale of premises and equipment   -    54 
Purchase of premises and equipment   (292)   (173)
Net cash provided by (used in) investing activities   4,965    (2,867)
           
Financing activities:          
Net change in deposits   (4,374)   254 
Proceeds from other borrowings   -    1,500 
Proceeds from Federal Home Loan Bank borrowings   5,000    13,000 
Payments on Federal Home Loan Bank borrowings   (6,200)   (11,527)
Cash dividend paid   (631)   (654)
Stock repurchases   (326)   (3,648)
Net cash (used in) financing activities   (6,531)   (1,075)
           
Net increase in cash and cash equivalents   2,353    1,433 
           
Cash and cash equivalents at beginning of period   20,499    24,389 
           
Cash and cash equivalents at the end of the period  $22,852   $25,822 
           
Additional cash flows and supplementary information:          
Cash paid during the year for:          
Interest on deposits and debt  $2,325   $2,064 
Income taxes payment   16    250 
Other real estate owned and other repossessed assets acquired in settlement of loans  $963   $2,124 

 

See notes to unaudited consolidated financial statements

 

 7 

 

 

NOTES TO UNAUDITED 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 consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position as of September 30, 2018 and December 31, 2017 and the results of operations and cash flows for the interim periods ended September 30, 2018 and 2017. 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 or any other period. These unaudited 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 2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

 

NOTE 2 – REVENUE RECOGNITION

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, creating FASB Topic 606, Revenue from Contracts with Customers. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in this update become effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. We finalized our assessment and identified the revenue line items within the scope of this new guidance. Neither the new standard, nor any of the amendments detailed below, resulted in a material change from our current accounting for revenue because the majority of Poage’s financial instruments are not within the scope of Topic 606, and those that are require no change in the accounting.

 

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). The amendments relate to when another party, along with the entity, is involved in providing a good or service to a customer. Topic 606 requires an entity to determine whether the nature of its promise is to provide that good or service to the customer (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). This determination is based upon whether the entity controls the good or the service before it is transferred to the customer. Topic 606 includes indicators to assist in this evaluation. The amendments in this update affect the guidance in ASU No. 2014-09 above. The effective date is the same as the effective date of ASU No. 2014-09.

 

In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. The amendments clarify the following two aspects of Topic 606: identifying performance obligations, and the licensing implementation guidance. Before an entity can identify its performance obligations in a contract with a customer, the entity first identifies the promised goods or services in the contract. The amendments in this update are expected to reduce the cost and complexity of applying the guidance on identifying promised goods or services. To identify performance obligations in a contract, an entity evaluates whether promised goods and services are distinct. Topic 606 includes two criteria for assessing whether promises to transfer goods or services are distinct. One of those criteria is that the promises are separately identifiable. This update will improve the guidance on assessing that criterion. Topic 606 also includes implementation guidance on determining whether as entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property, which is satisfied at a point in time, or a right to access the entity’s intellectual property, which is satisfied over time. The amendments in this update are intended to improve the operability and understandability of the licensing implementation guidance. The amendments in this update affect the guidance in ASU No. 2014-09 above. The effective date is the same as the effective date of ASU No. 2014-09.

 

In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. The amendments do not change the core revenue recognition principle in Topic 606. The amendments provide clarifying guidance in certain narrow areas and add some practical expedients in ASU No. 2014-09 above. The effective date is the same as the effective date of ASU No. 2014-09.

 

 8 

 

 

In December 2016, the FASB issued ASU No. 2016-20, Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements. The FASB board decided to issue a separate update for technical corrections and improvements to Topic 606 and other Topics amended by ASU No. 2014-09 to increase awareness of the proposals and to expedite improvements to ASU No. 2014-09. The amendment affects narrow aspects of the guidance issued in ASU No. 2014-09.

 

On January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers and all subsequent amendments to the ASU (collectively, “Topic 606”). We elected to implement using the modified retrospective application, with the cumulative effect recorded as an adjustment to opening retained earnings at January 1, 2018. Due to immateriality, we had no cumulative effect to record. Since interest income on loans and securities are both excluded from this topic, a significant majority of our revenues are not subject to the new guidance. Our services that fall within the scope of Topic 606 are presented within noninterest income and are recognized as revenue as we satisfy our obligation to the customer. A description of the Company’s revenue that falls within the scope of Topic 606 as well as an explanation of why they are not impacted are as follows:

 

Service charges on deposit accounts: We earn fees from our deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees and overdraft fees are recognized at a point in time, since the customer generally has a right to cancel the depository arrangement at any time. The arrangement is considered a day-to-day contract with ongoing renewals and optional purchases, so the duration of the contract does not extend beyond the services already performed. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which we satisfy our performance obligation. Service charges on deposit accounts includes approximately $257,000, $723,000, $239,000 and $709,000 of revenue for the three and nine months ended September 30, 2018 and 2017, respectively, within the scope of Topic 606.

 

Debit card and ATM fees: Debit card and ATM fees include ATM usage fees and debit card interchange income. As with the transaction-based fees on deposit accounts, the ATM fees are recognized at the point in time that we fulfill the customer’s request. We earn interchange fees from cardholder transactions processed through card association networks. Interchange rates are generally set by the card associations based upon purchase volumes and other factors. Interchange fees represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Debit card and ATM fees includes approximately $262,000, $766,000, $235,000 and $728,000 of revenue for the three and nine months ended September 30, 2018 and 2017, respectively, within the scope of Topic 606.

 

Gains/Losses on Sales of OREO - The Company records a gain or loss from the sale of other real estate owned (“OREO”) when control of the property transfers to the buyer, which generally occurs at the time of an executed deed.  ASC 606 does not significantly change the pattern of revenue recognition unless the Company finances the sale. There are no instances of the Company financing the sale of one of its OREO properties during the three and nine months ended September 30, 2018. Sales of OREO includes approximately $25,000 and $12,000 in net gains for the three months ended September 30, 2018 and 2017 and $60,000 in net gains and $26,000 in net losses for the nine months ended September 30, 2018 and 2017, respectively, within the scope of Topic 606.

 

The adoption of Topic 606 did not have a material impact on our consolidated financial position, results of operations, equity, or cash flows as of the adoption date or for the three and nine months ended September 30, 2018.

 

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

 

Recently Adopted Accounting Pronouncements

 

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.  This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Early application is permitted as of the beginning of the fiscal year of adoption only for provisions (3) and (6) above. Early adoption of the other provisions mentioned above is not permitted. Starting with the first quarter of 2018, the Company began using an exit price notion when measuring the fair value of its loan portfolio for disclosure purposes. The adoption of ASU No. 2016-01 on January 1, 2018 did not have a material effect on the Company’s consolidated operating results or financial condition.

 

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In May 2017, the FASB issued ASU No. 2017-09, Scope of Modification Accounting which amends the scope of modification accounting for share-based payment arrangements. The ASU provided guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718, Compensation-Stock Compensation. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The adoption of ASU No. 2017-09 on January 1, 2018 did not have a material effect on the Company’s consolidated operating results or financial condition.

 

Newly Issued Accounting Standards Not Yet Effective

 

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. Poage is currently evaluating the impact on its leases to determine the impact 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. This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured as fair value through net income. 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. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The new model, referred to as the current expected credit loss (“CECL”) 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. Management has formed a CECL committee that is evaluating the data gathering requirements, available economic forecasting and loss estimation models and potential software that would be employed by the Company to facilitate the adoption of this guidance and its required disclosures on the Company’s consolidated financial statements. Upon adoption, management anticipates an initial one-time increase in the allowance for loan losses 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 require 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 consolidated operating results or financial condition. 

 

In August 2018, the FASB issued ASU 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement—the ASU improves the disclosure requirements on fair value measurements in ASC 820, Fair Value Measurement. Effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of this Update. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this Update and delay adoption of the additional disclosures until their effective date. Poage is currently evaluating the impact of adopting the new guidance on its consolidated financial statements, but it is not expected to have a material impact.

 

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NOTE 4 - SECURITIES AVAILABLE FOR SALE

 

The amortized cost and fair value of securities available for sale at September 30, 2018 and December 31, 2017 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 
September 30, 2018                    
States and political subdivisions  $18,185   $55   $(258)  $17,982 
U.S. Government agencies and sponsored entities   5,000    -    (85)   4,915 
Mortgage-backed securities: residential   27,664    -    (811)   26,853 
Collateralized mortgage obligations   9,256    -    (199)   9,057 
SBA loan pools   10,934    -    (400)   10,534 
Total securities  $71,039   $55   $(1,753)  $69,341 

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
December 31, 2017                    
States and political subdivisions  $19,082   $190   $(108)  $19,164 
U.S. Government agencies and sponsored entities   3,500    -    (50)   3,450 
Mortgage-backed securities: residential   27,449    44    (226)   27,267 
Collateralized mortgage obligations   5,048    -    (93)   4,955 
SBA loan pools   9,379    -    (85)   9,294 
Total securities  $64,458   $234   $(562)  $64,130 

  

There were no sales of securities for the three and nine months ended September 30, 2018 and 2017.

 

The amortized cost and fair value of the securities portfolio at September 30, 2018 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):

 

   September 30, 
   2018 
   Amortized   Fair 
   Cost   Value 
         
Within one year  $2,521   $2,521 
One to five years   7,972    7,882 
Five to ten years   9,168    9,086 
Beyond ten years   3,524    3,408 
Mortgage-backed securities and collateralized mortgage obligations   36,920    35,910 
SBA loan pools   10,934    10,534 
Total  $71,039   $69,341 

 

 11 

 

 

The following table summarizes the securities with unrealized losses at September 30, 2018 and December 31, 2017, 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 
September 30, 2018                              
States and political subdivisions  $4,850   $(89)  $2,920   $(169)  $7,770   $(258)
U.S. Government agencies and sponsored entities   1,486    (14)   3,429    (71)   4,915    (85)
Mortgage-backed securities: residential   14,878    (327)   11,975    (484)   26,853    (811)
Collateralized mortgage obligations   5,161    (57)   3,896    (142)   9,057    (199)
SBA loan Pools   3,612    (76)   6,922    (324)   10,534    (400)
Total available-for-sale securities  $29,987   $(563)  $29,142   $(1,190)  $59,129   $(1,753)
                               
   Less Than 12 Months   12 Months or Longer   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
   Value   Losses   Value   Losses   Value   Losses 
December 31, 2017                              
States and political subdivisions  $5,080   $(56)  $1,024   $(52)  $6,104   $(108)
U.S. Government agencies and sponsored entities   992    (8)   2,458    (42)   3,450    (50)
Mortgage-backed securities: residential   19,256    (181)   2,394    (45)   21,650    (226)
Collateralized mortgage obligations   1,954    (15)   3,001    (78)   4,955    (93)
SBA loan Pools   6,565    (66)   1,343    (19)   7,908    (85)
Total available-for-sale securities  $33,847   $(326)  $10,220   $(236)  $44,067   $(562)

 

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. 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.

 

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NOTE 5 – LOANS

 

Loans at September 30, 2018 and December 31, 2017 were as follows (in thousands):

 

   September 30,   December 31, 
   2018   2017 
Real estate:          
One to four family  $155,357   $170,754 
Multi-family   7,777    6,505 
Commercial real estate   82,225    84,312 
Construction and land   9,253    10,004 
    254,612    271,575 
           
Commercial and industrial   34,930    33,664 
           
Consumer          
Home equity loans and lines of credit   10,974    10,707 
Motor vehicle   11,049    10,368 
Other   7,354    7,420 
    29,377    28,495 
           
Total   318,919    333,734 
Less: Net deferred loan fees   505    499 
  Allowance for loan losses   3,124    4,681 
   $315,290   $328,554 

 

 13 

 

 

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 September 30, 2018 and December 31, 2017. 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):

 

September 30, 2018                                
   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  $321   $-   $2,085   $2,406   $5,039   $1,075   $248,498   $254,612 
Commercial and industrial   93    -    407    500    3,849    -    31,081    34,930 
Consumer   4    -    214    218    54    -    29,323    29,377 
Total  $418   $-   $2,706   $3,124   $8,942   $1,075   $308,902   $318,919 
                                         
December 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  $624   $-   $2,232   $2,856   $5,523   $1,305   $264,747   $271,575 
Commercial and industrial   1,290    -    275    1,565    2,612    -    31,052    33,664 
Consumer   5    -    255    260    60    -    28,435    28,495 
Total  $1,919   $-   $2,762   $4,681   $8,195   $1,305   $324,234   $333,734 

 

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The following table presents information related to impaired loans by class of loans as of September 30, 2018 and December 31, 2017 (in thousands):

  

   September 30, 2018   December 31, 2017 
           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  $743   $699   $-   $699   $655   $- 
Multi-family   -    -    -    -    -    - 
Commercial real estate   2,556    2,416    -    2,593    2,452    - 
Construction and land   170    170    -    179    179    - 
Commercial and industrial   3,616    2,849    -    136    136    - 
Consumer:                              
Home equity and lines of credit   25    25    -    31    31    - 
Motor vehicle   -    -    -    -    -    - 
Other   -    -    -    -    -    - 
Subtotal  $7,110   $6,159   $-   $3,638   $3,453   $- 
                               
With a related allowance recorded:                              
Real Estate:                              
One to four family  $389   $389   $42   $1,091   $988   $367 
Multi-family   -    -    -    -    -    - 
Commercial real estate   1,365    1,365    279    1,249    1,249    257 
Construction and land   -    -    -    -    -    - 
Commercial and industrial   1,000    1,000    93    2,476    2,476    1,290 
Consumer:                              
Home equity and lines of credit   29    29    4    29    29    5 
Motor vehicle   -    -    -    -    -    - 
Other   -    -    -    -    -    - 
Subtotal   2,783    2,783    418    4,845    4,742    1,919 
Total  $9,893   $8,942   $418   $8,483   $8,195   $1,919 

 

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.

 

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The following tables present the average balance of loans individually evaluated for impairment and interest income recognized on these loans for the three and nine months ended September 30, 2018 and 2017 (in thousands):

 

   Three months ended September 30, 2018   Three months ended September 30, 2017 
   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  $2,660   $4   $4   $2,345   $1   $1 
Multi-family   -    -    -    -    -    - 
Commercial real estate   3,787    19    19    3,358    29    29 
Construction and land   172    2    2    169    2    2 
Commercial and industrial   4,339    12    3    96    1    1 
Consumer:                              
Home equity and lines of credit   55    -    -    33    -    - 
Motor vehicle   -    -    -    -    -    - 
Other   -    -    -    -    -    - 
Total  $11,013   $37   $28   $6,001   $33   $33 

 

   Nine months ended September 30, 2018   Nine months ended September 30, 2017 
   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  $3,144   $75   $67   $1,710   $16   $16 
Multi-family   -    -    -    -    -    - 
Commercial real estate   3,740    80    73    2,991    99    94 
Construction and land   175    6    6    122    6    5 
Commercial and industrial   4,037    27    18    196    1    1 
Consumer:                              
Home equity and lines of credit   57    -    -    32    -    - 
Motor vehicle   -    -    -    -    -    - 
Other   -    -    -    -    -    - 
Total  $11,153   $188   $164   $5,051   $122   $116 

 

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The following tables set forth an analysis of our allowance for loan losses for the three and nine months ended September 30, 2018 and 2017 (in thousands):

 

Three months ended      Commercial         
September 30, 2018  Real Estate   and Industrial   Consumer   Total 
                 
Allowance for loan losses:                    
Beginning balance  $2,941   $1,411   $210   $4,562 
Provision for loan losses   79    57    33    169 
Loans charged-off   (616)   (974)   (36)   (1,626)
Recoveries   2    6    11    19 
Total ending allowance balance  $2,406   $500   $218   $3,124 

  

Three months ended      Commercial         
September 30, 2017  Real Estate   and Industrial   Consumer   Total 
                 
Allowance for loan losses:                    
Beginning balance  $2,244   $233   $210   $2,687 
Provision for loan losses   811    123    13    947 
Loans charged-off   (449)   -    (27)   (476)
Recoveries   4    9    15    28 
Total ending allowance balance  $2,610   $365   $211   $3,186 

 

Nine months ended      Commercial         
September 30, 2018  Real Estate   and Industrial   Consumer   Total 
                 
Allowance for loan losses:                    
Beginning balance  $2,856   $1,565   $260   $4,681 
Provision for loan losses   714    636    (15)   1,335 
Loans charged-off   (1,180)   (1,741)   (88)   (3,009)
Recoveries   16    40    61    117 
Total ending allowance balance  $2,406   $500   $218   $3,124 

 

Nine months ended      Commercial         
September 30, 2017  Real Estate   and Industrial   Consumer   Total 
                 
Allowance for loan losses:                    
Beginning balance  $1,946   $218   $185   $2,349 
Provision for loan losses   1,397    134    115    1,646 
Loans charged-off   (742)   (23)   (137)   (902)
Recoveries   9    36    48    93 
Total ending allowance balance  $2,610   $365   $211   $3,186 

 

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

 

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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 September 30, 2018 and December 31, 2017 (in thousands):

 

   September 30, 2018   December 31, 2017 
       Loans Past Due       Loans Past Due 
       Over 90 Days       Over 90 Days 
   Nonaccrual   Still Accruing   Nonaccrual   Still Accruing 
Real estate:                    
One to four family  $1,481   $-   $2,911   $- 
Multi-family   -    -    -    - 
Commercial real estate   1,586    -    1,677    - 
Construction and land   29    -    34    - 
Commercial and industrial   3,333    -    1,638    - 
Consumer:                    
Home equity loans and lines of credit   54    -    66    - 
Motor vehicle   23    -    26    - 
Other   7    -    6    - 
Total  $6,513   $-   $6,358   $- 

 

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The following tables present the aging of the recorded investment in past due loans as of September 30, 2018 and December 31, 2017 by class of loans (in thousands). Non-accrual loans of $6.5 million as of September 30, 2018 and $6.3 million at December 31, 2017 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 
September 30, 2018                                   
Real estate:                                   
One to four family  $1,119   $228   $409   $1,756   $549   $153,052   $155,357 
Multi-family   -    -    -    -    -    7,777    7,777 
Commercial real estate   -    -    1,480    1,480    526    80,219    82,225 
Construction and land   32    -    -    32    -    9,221    9,253 
Commercial and industrial   23    -    3,333    3,356    -    31,574    34,930 
Consumer:                                   
Home equity loans and lines of credit   -    -    29    29    -    10,945    10,974 
Motor vehicle   53    -    20    73    -    10,976    11,049 
Other   8    7    7    22    -    7,332    7,354 
Total  $1,235   $235   $5,278   $6,748   $1,075   $311,096   $318,919 
                                    
   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, 2017                                   
Real estate:                                   
One to four family  $1,615   $628   $1,199   $3,442   $590   $166,722   $170,754 
Multi-family   -    -    -    -    -    6,505    6,505 
Commercial real estate   249    315    1,367    1,931    715    81,666    84,312 
Construction and land   -    -    -    -    -    10,004    10,004 
Commercial and industrial   1,133    4    1,631    2,768    -    30,896    33,664 
Consumer:                                   
Home equity loans and lines of credit   -    -    60    60    -    10,647    10,707 
Motor vehicle   40    -    21    61    -    10,307    10,368 
Other   3    6    -    9    -    7,411    7,420 
Total  $3,040   $953   $4,278   $8,271   $1,305   $324,158   $333,734 

 

 19 

 

 

Troubled Debt Restructurings (“TDRs”)

 

As of September 30, 2018, the Company had a recorded investment in seven TDRs which totaled $4.1 million. There were five TDRs which totaled $3.2 million at December 31, 2017. A less-than-market interest rate and an extended term were granted as concessions for TDRs. No additional charge-off has been made for the loan relationships. No additional commitments to lend have been made to the borrower. The Company allocated $176,000 and $153,000 of specific allowance for the loan relationships at September 30, 2018 and December 31, 2017.

 

September 30, 2018  TDRs on         
(in thousands)  Non-accrual   Other TDRs   Total TDRs 
Real Estate:               
One to four family  $23   $15   $38 
Multi-family   -    -    - 
Commercial real estate   906    2,195    3,101 
Construction and land   -    -    - 
Commercial and industrial   -    998    998 
Consumer:               
Home equity loans and lines of credit   -    -    - 
Motor vehicle   -    -    - 
Other   -    -    - 
Total  $929   $3,208   $4,137 

 

December 31, 2017  TDRs on         
(in thousands)  Non-accrual   Other TDRs   Total TDRs 
Real Estate:               
One to four family  $30   $16   $46 
Multi-family   -    -    - 
Commercial real estate   933    2,195    3,128 
Construction and land   -    -    - 
Commercial and industrial   -    -    - 
Consumer:               
Home equity loans and lines of credit   -    -    - 
Motor vehicle   -    -    - 
Other   -    -    - 
Total  $963   $2,211   $3,174 

 

 20 

 

 

There was one TDR in the amount of $831,000 considered to be in default within twelve months of modification as of September 30, 2018. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. The following table presents TDRs that occurred during the three and nine months ended September 30, 2018 and 2017 (dollars in thousands):

 

   Three months ended September 30, 2018   Three months ended September 30, 2017 
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   -   $-   $-    -   $-   $- 
Multi-family   -    -    -    -    -    - 
Commercial real estate   -    -    -    -    -    - 
Construction and land   -    -    -    -    -    - 
Commercial and industrial   -    -    -    -    -    - 
Consumer:                              
Home equity loans and lines of credit   -    -    -    -    -    - 
Motor vehicle   -    -    -    -    -    - 
Other   -    -    -    -    -    - 
Total   -   $-   $-    -   $-   $- 
                               
   Nine months ended September 30, 2018   Nine months ended September 30, 2017 
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   -   $-   $-    2   $148   $148 
Multi-family   -    -    -    -    -    - 
Commercial real estate   -    -    -    1    117    117 
Construction and land   -    -    -    -    -    - 
Commercial and industrial   2    1,002    1,002    -    -    - 
Consumer:                              
Home equity loans and lines of credit   -    -    -    -    -    - 
Motor vehicle   -    -    -    -    -    - 
Other   -    -    -    -    -    - 
Total   2   $1,002   $1,002    3   $265   $265 

 

 21 

 

 

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                 
September 30, 2018  Pass   Mention   Substandard   Doubtful   Loss   Total 
One to four family  $150,092   $1,702   $3,563   $-   $-   $155,357 
Multi-family   7,777    -    -    -    -    7,777 
Commercial real estate   70,168    5,420    6,637    -    -    82,225 
Construction and land   8,754    329    170    -    -    9,253 
Commercial and industrial   27,529    770    5,767    864    -    34,930 
Home equity loans and lines of credit   10,828    -    146    -    -    10,974 
Motor vehicle   11,005    8    36    -    -    11,049 
Other   7,351    -    3    -    -    7,354 
Total  $293,504   $8,229   $16,322   $864   $-   $318,919 
                               
       Special                 
December 31, 2017  Pass   Mention   Substandard   Doubtful   Loss   Total 
One to four family  $163,709   $1,673   $5,372   $-   $-   $170,754 
Multi-family   6,505    -    -    -    -    6,505 
Commercial real estate   76,226    2,957    5,129    -    -    84,312 
Construction and land   9,825    -    179    -    -    10,004 
Commercial and industrial   25,891    2,602    5,171    -    -    33,664 
Home equity loans and lines of credit   10,549    0    158    -    -    10,707 
Motor vehicle   10,291    9    68    -    -    10,368 
Other   7,413    -    7    -    -    7,420 
Total  $310,409   $7,241   $16,084   $-   $-   $333,734 

 

There were $888,000 and $1.1 million of purchased credit impaired (“PCI”) loans included in substandard loans at September 30, 2018 and December 31, 2017, respectively.

 

 22 

 

 

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 September 30, 2018 and December 31, 2017 (in thousands):

 

   Non-impaired   Credit-impaired 
   Purchased   Purchased 
Purchased Loans as of September 30, 2018  Loans   Loans 
Real estate:          
One to four family  $22,587   $549 
Multi-family   1,389    - 
Commercial real estate   13,002    526 
Construction and land   400    - 
Commercial and industrial   683    - 
Consumer loans:          
Home equity loans and lines of credit   981    - 
Motor vehicle   16    - 
Other   450    - 
Total loans  $39,508   $1,075 

 

   Non-impaired   Credit-impaired 
   Purchased   Purchased 
Purchased Loans as of December 31, 2017  Loans   Loans 
Real estate:          
One to four family  $25,437   $590 
Multi-family   1,829    - 
Commercial real estate   15,157    715 
Construction and land   510    - 
Commercial and industrial   1,359    - 
Consumer loans:          
Home equity loans and lines of credit   959    - 
Motor vehicle   43    - 
Other   521    - 
Total loans  $45,815   $1,305 

 

For the purchased loans disclosed above, the Company did not increase the allowance for loan losses for the three and nine months ended September 30, 2018 and 2017.

 

 23 

 

 

The following table presents the composition of the acquired loans at September 30, 2018 and December 31, 2017:

 

As of September 30, 2018            
   Contractual   Remaining   Carrying 
(in thousands)  Amount   Discount   Amount 
Real estate:               
One to four family  $23,362   $(226)  $23,136 
Multi-family   1,389    -    1,389 
Commercial real estate   13,608    (80)   13,528 
Construction and land   400    -    400 
Commercial and industrial   683    -    683 
Consumer loans:               
Home equity loans and lines of credit   982    (1)   981 
Motor vehicle   16    -    16 
Other   450    -    450 
Total loans  $40,890   $(307)  $40,583 

 

As of December 31, 2017            
   Contractual   Remaining   Carrying 
(in thousands)  Amount   Discount   Amount 
Real estate:               
One to four family  $26,335   $(308)  $26,027 
Multi-family   1,832    (3)   1,829 
Commercial real estate   16,050    (178)   15,872 
Construction and land   511    (1)   510 
Commercial and industrial   1,360    (1)   1,359 
Consumer loans:               
Home equity loans and lines of credit   962    (3)   959 
Motor vehicle   44    (1)   43 
Other   522    (1)   521 
Total loans  $47,616   $(496)  $47,120 

  

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 September 30, 2018 and December 31, 2017.

 

(in thousands)  September 30, 2018   December 31, 2017 
         
Carrying amount  $1,075   $1,305 
Non-accretable difference   167    214 
Accretable yield   67    100 
Contractually-required principal and interest payments  $1,309   $1,619 

 

The Company adjusted interest income to recognize $5,000, $16,000, $9,000 and $33,000 of accretable yield on credit-impaired purchased loans for the three and nine months ended September 30, 2018 and 2017, respectively.

 

 24 

 

 

Accretable yield, or income expected to be collected, is as follows for the nine months ended September 30, 2018 and 2017 (in thousands):

 

   2018   2017 
         
Balance at January 1  $100   $146 
New Loans Purchased   -    - 
Accretion of income   (16)   (33)
Reclassifications from nonaccretable difference   -    - 
Disposals   (17)   - 
Balance at September 30  $67   $113 

 

 25 

 

 

NOTE 6 – FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS

 

Advances from the FHLB at September 30, 2018 and December 31, 2017 were as follows (dollars in thousands):

 

   September 30, 2018   December 31, 2017 
Maturities December 2018 through January 2029, fixed rate at rates from 2.16% to 3.35%, weighted average rate of 2.39% at September 30, 2018 and 1.97% at December 31, 2017  $6,219   $7,419 
           

  

Payments contractually required over the next five years are as follows as of September 30, 2018 (in thousands): 

 

remainder for year ending 2018  $5,298 
2019   442 
2020   93 
2021   78 
2022   66 
Thereafter   242 
Total  $6,219 

 

There were no other borrowings at September 30, 2018 and December 31, 2017.

 

NOTE 7 – 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).

 

 26 

 

 

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 estimated 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 September 30, 2018 and December 31, 2017, are as follows (in thousands):

 

   Fair Value Measurements at 
   September 30, 2018 Using: 
       Quoted Prices in   Significant   Significant 
       Active Markets for   Other Observable   Unobservable 
   Carrying   Identical Assets   Inputs   Inputs 
   Value   (Level 1)   (Level 2)   (Level 3) 
Financial Assets                    
Securities:                    
States and political subdivisions  $17,982   $        -   $17,982   $       - 
U.S. Government agencies and sponsored entities   4,915    -    4,915    - 
Mortgage backed securities: residential   26,853    -    26,853    - 
Collateralized mortgage obligations   9,057    -    9,057    - 
SBA loan pools   10,534    -    10,534    - 
Total securities  $69,341   $-   $69,341   $- 
                     
   Fair Value Measurements at 
   December 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  $19,164   $ -   $19,164   $   - 
U.S. Government agencies and sponsored entities   3,450    -    3,450    - 
Mortgage backed securities: residential   27,267    -    27,267    - 
Collateralized mortgage obligations   4,955    -    4,955    - 
SBA loan pools   9,294    -    9,294    - 
Total securities  $64,130   $-   $64,130   $- 

 

There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2018.

 

 27 

 

 

Assets measured at fair value on a non-recurring basis at September 30, 2018 and December 31, 2017 are summarized below (in thousands):

 

   Fair Value Measurements at 
   September 30, 2018 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  $369   $-   $-   $369 
Commercial real estate, net   1,161    -    -    1,161 
Commercial and industrial, net   1,638    -    -    1,638 
Consumer loan HELOC, net   25    -    -    25 
                     
Other real estate owned                    
Residential real estate, net  $65   $-   $-   $65 
                     
   Fair Value Measurements at 
   December 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  $621   $-   $-   $621 
Commercial real estate, net   992    -    -    992 
Commercial and industrial, net   1,186    -    -    1,186 
Consumer loan HELOC, net   24    -    -    24 
                     
Other real estate owned                    
Residential real estate, net  $610   $-   $-   $610 

 

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 estimated selling expenses and fees, and the discounts range from 5% to 10%.

 

At September 30, 2018, impaired loans recorded at fair value had a net carrying value of $3.2 million, which was equal to the outstanding balance of $3.6 million, net of a valuation allowance of $418,000. At December 31, 2017, impaired loans recorded at fair value had a net carrying value of $2.8 million, which was equal to the outstanding balance of $4.7 million, net of a valuation allowance of $1.9 million. There were charge-offs of $1.5 million, $2.2 million, $353,000 and $391,000 for the three and nine months ended September 30, 2018 and 2017, respectively. The change in specific reserve on impaired loans resulted in a provision for loan losses of $93,000 and $744,000 for the three and nine months ended September 30, 2018. The change in specific reserve on impaired loans resulted in an increase of $294,000 and $488,000 for the three and nine months ended September 30, 2017.

 

At September 30, 2018, OREO recorded at fair value had a net carrying value of $65,000, which was equal to the outstanding balance of $126,000, net of a valuation allowance of $61,000. There were no write-downs for the three months ended September 30, 2018 and $3,000 in write-downs for the nine months ended September 30, 2018. There were $42,000 in write-downs for the three months ended September 30, 2017 and $100,000 in write-downs for the nine months ended September 30, 2017. At December 31, 2017, other real estate owned recorded at fair value had a net carrying value of $610,000, which was equal to the outstanding balance of $1.03 million, net of a valuation allowance of $420,000.

 

 28 

 

 

The carrying amounts and estimated fair values of financial instruments at September 30, 2018 and December 31, 2017 are as follows (in thousands):

 

   Carrying   Fair Value Measurements 
September 30, 2018  Value   Level 1   Level 2   Level 3   Total 
                     
Financial assets                         
Cash and cash equivalents  $22,852   $22,852   $-   $-   $22,852 
Interest bearing deposits   3,735    -    3,735    -    3,735 
Securities   69,341    -    69,341    -    69,341 
Restricted stock   3,276     N/A     N/A     N/A     N/A 
Loans held for sale   508    -    508    -    508 
Loans, net   315,290    -    -    314,342    314,342 
Accrued interest receivable   1,398    -    362    1,036    1,398 
                          
Financial liabilities                         
Deposits  $365,627   $210,147   $151,904   $-   $362,051 
Federal Home Loan Bank advances   6,219    4,999    1,212    -    6,211 
Subordinated debenture   2,938    -    2,921    -    2,921 
Accrued interest payable   34    -    34    -    34 

  

   Carrying   Fair Value Measurements 
December 31, 2017  Value   Level 1   Level 2   Level 3   Total 
                     
Financial assets                         
Cash and cash equivalents  $20,499   $20,499   $-   $-   $20,499 
Interest bearing deposits   2,988    -    2,988    -    2,988 
Securities   64,130    -    64,130    -    64,130 
Restricted stock   3,276     N/A     N/A     N/A     N/A 
Loans held for sale   256    -    256    -    256 
Loans, net   328,554    -    -    328,236    328,236 
Accrued interest receivable   1,413    -    333    1,080    1,413 
                          
Financial liabilities                         
Deposits  $370,050   $212,625   $154,859   $-   $367,484 
Federal Home Loan Bank advances   7,419    4,999    2,404    -    7,403 
Subordinated debenture   2,890    -    2,873    -    2,873 
Accrued interest payable   24    -    24    -    24 

 

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 their transferability. 

 

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Loans:

 

Fair values of loans, excluding loans held for sale, are estimated as follows: ASU 2016-1, "Recognition and Measurement of Financial Assets and Financial Liabilities," requires the Company to use the exit price notion when measuring fair value of financial instruments for disclosure purposes effective January 1, 2018, therefore the fair value presented in the following table may not be comparable to prior period.  For performing loans, the fair value is determined based on a discounted cash flow analysis (income approach).  The discounted cash flow was based on contractual maturity of the loan and market indications of rates, prepayment speeds, defaults and credit risk resulting in Level 3 classification.  For non-performing loans, the fair value is determined based on the estimated values of the underlying collateral or individual analysis of receipts (asset approach) resulting in Level 3 classification.  At September 30, 2018, the fair values of loans, excluding loans held for sale, were estimated as follows: for variable rate loans that reprice frequently and with no significant change in credit risk, fair values were based on carrying values resulting in a Level 3 classification. Fair values for other loans were 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. Impaired loans were valued as described previously.

  

The fair value of loans held for sale is based upon estimated values received from independent third-party purchasers. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans 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.

 

Other borrowings, 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 8 - 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 in the Company’s initial public offering. 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 and nine months ended September 30, 2018 and 2017.

 

Shares held by the ESOP at September 30, 2018 and December 31, 2017 were as follows (dollars in thousands):

 

   September 30,   December 31, 
   2018   2017 
Allocated to participants   73,168    64,148 
Committed to be released   10,115    13,538 
Unearned   175,305    185,420 
Total ESOP shares   258,588    263,106 
           
Fair value of unearned shares  $4,444   $3,894 

 

 30 

 

 

NOTE 9 – EARNINGS PER SHARE

 

The factors used in the earnings per share computation for the three and nine months ended September 30, 2018 and 2017, were as follows (dollar amounts in thousands, except per share data):

 

   Three months ended   Nine months ended 
   September 30,   September 30, 
   2018   2017   2018   2017 
Basic                    
Net income (loss)  $292   $(18)  $1,225   $812 
Less: Earnings (loss) allocated to participating securities   -    -    2    5 
Net income (loss) available to common shareholders  $292   $(18)   1,223    807 
                     
Weighted average common shares outstanding   3,497,243    3,522,121    3,501,638    3,627,092 
Less: Average unallocated ESOP shares   177,525    191,037    180,862    194,388 
 Average participating shares   134    15,357    5,937    21,170 
Average shares   3,319,584    3,315,727    3,314,839    3,411,534 
                     
Basic earnings (loss) per common share  $0.09   $(0.01)  $0.37   $0.23 
                     
Diluted                    
Net income (loss) available to common shareholders  $292   $(18)  $1,223   $807 
                     
Weighted average common shares outstanding for basic earnings per common share   3,319,584    3,315,727    3,314,839    3,411,534 
Add: Dilutive effects of assumed exercises of stock options   58,336    -    42,510    29,765 
Average shares and dilutive potential common shares   3,377,920    3,315,727    3,357,349    3,441,299 
                     
Diluted earnings (loss) per common share  $0.09   $(0.01)  $0.36   $0.23 

 

There were no stock options considered anti-dilutive for the three and nine months ended September 30, 2018 and the nine months ended September 30, 2017. All stock options were considered anti-dilutive for the three months ended September 30, 2017.

 

NOTE 10 – STOCK BASED COMPENSATION

 

On January 8, 2013, the Company’s shareholders 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.

 

The following table summarizes stock option activity for the nine months ended September 30, 2018:

 

       Weighted
Average
 
   Options   Exercise Price 
         
Outstanding -December 31, 2017   141,850   $14.88 
Granted   -    - 
Exercised and settled   -    - 
Forfeited   -    - 
Outstanding -September 30, 2018   141,850   $14.88 
           
Fully vested and exercisable at September 30, 2018   135,850   $14.90 
Fully vested and exercisable at December 31, 2017   99,600   $14.90 
Expected to vest in future periods   6,000      

 

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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 September 30, 2018, 141,850 options were outstanding, and 135,850 options were fully vested and exercisable with intrinsic value of $1.5 million and $1.4 million, respectively. At December 31, 2017, 141,850 options were outstanding, and 99,600 options were fully vested and exercisable with intrinsic value of $868,000 and $610,000, respectively.

 

During the nine months ended September 30, 2018, 36,250 options vested. Stock-based compensation expense for stock options included in salaries and benefits for the three and nine months ended September 30, 2018 and 2017 was $3,000, $32,000, $18,000 and $54,000, respectively. Total unrecognized compensation cost related to non-vested stock options was $7,000 at September 30, 2018 and is expected to be recognized over a period of 1.5 years.

 

The following table summarizes non-vested restricted stock activity for the nine months ended September 30, 2018:

 

Balance -December 31, 2017   15,222 
Granted   - 
Forfeited   - 
Vested   (15,088)
Balance -September 30, 2018   134 

 

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. The fair value of the restricted stock awards vested during the nine months ended September 30, 2018 was $287,000. Stock-based compensation expense for the restricted stock included in salaries and benefits for the three and nine months ended September 30, 2018 and 2017 was $700, $69,000, $58,000 and $173,000, respectively. Unrecognized compensation expense for non-vested restricted stock awards was $300 at September 30, 2018 and is expected to be recognized over a weighted-average period of 2 months.

 

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NOTE 11 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

The following table is changes in Accumulated Other Comprehensive Income (Loss) by component, net of tax, for the three and nine months ended September 30, 2018 and 2017 (in thousands):

 

   Unrealized Gains and Losses on Available-for-Sale Securities 
   Three months ended   Nine months ended 
   September 30,   September 30, 
   2018   2017   2018   2017 
Beginning balance  $(1,042)  $316   $(260)  $(153)
                     
Other comprehensive income (loss), net of tax before reclassification   (299)   (68)   (1,081)   401 
                     
Amounts reclassified from accumulated other comprehensive income for loss on call of securities, net of tax expense of $0, $0, $0 and $0 respectively   -    -    -    - 
                     
Net current period other comprehensive income (loss)   (299)   (68)   (1,081)   401 
                     
Ending Balance  $(1,341)  $248   $(1,341)  $248 

 

NOTE 12 – AGREEMENT AND PLAN OF MERGER

 

On July 11, 2018, City Holding Company (“City”) and Poage entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which City will acquire Poage.

 

Under the terms of the Merger Agreement, each outstanding share of Poage common stock will be converted into the right to receive 0.335 shares of City common stock. In addition, each outstanding option to acquire shares of Poage common stock will convert into the right to receive a cash payment equal to the product of (i) the number of shares of Poage common stock subject to the stock option and (ii) the amount by which the per-share merger consideration exceeds the exercise price.

 

City and City National will increase the size of their respective Board of Directors by one member and will appoint Thomas L. Burnette, current Chairman of the Poage Board of Directors, to the Board of Directors of each of City and City National.

 

Following the acquisition of Poage by City, Town Square Bank, the wholly-owned subsidiary of Poage (“Town Square”), will merge with and into, City National Bank of West Virginia (“City National”), the wholly-owned subsidiary of City, with City National being the surviving institution.

 

The Merger Agreement contains customary representations and warranties from Poage and City, and each party has agreed to customary covenants, including, among others, covenants relating to (1) the conduct of Poage’s businesses during the interim period between the execution of the Merger Agreement and the closing of the merger, (2) Poage’s obligations to facilitate its shareholders’ consideration of, and voting upon, the merger, (3) the recommendation by the Board of Directors of Poage in favor of approval of the merger by its shareholders, and (4) Poage’s non-solicitation obligations relating to alternative business combination transactions.

 

The merger was unanimously approved by the Board of Directors of each of City and Poage and is expected to close in the fourth quarter of 2018.

 

Consummation of the merger is subject to certain customary conditions, including, among others, approval of the merger by Poage’s shareholders, the receipt of all required regulatory approvals and expiration of applicable waiting periods, the accuracy of specified representations and warranties of each party, the performance in all material respects by each party of its obligations under the Merger Agreement and the absence of any injunctions or other legal restraints.

 

The Merger Agreement provides certain termination rights for both City and Poage and further provides that, upon termination of the Merger Agreement under certain circumstances, Poage is obligated to pay City a termination fee of $4.0 million.

 

In connection with the execution of the Merger Agreement, all Poage directors entered into a voting agreement with City and Poage pursuant to which such individuals, in their capacities as shareholders, have agreed, among other things, to vote their respective shares of Poage common stock in favor of the approval of the merger.

 

 33 

 

 

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, 2017, 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 credit quality of our loan and investment portfolios;
     
  >  estimates of our risks and future costs and benefits;
     
  >  non-historical statements about our 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 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;

 

 34 

 

 

>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 interest rate environment;

 

>increases in the cost of funds resulting from the general economic conditions;

 

>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;

 

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

 

>actual results of the pending merger with City Holding Company could vary materially as a result of a number of factors, including, without limitations, the possibility that various closing conditions may not be satisfied or waived and the merger agreement could be terminated under certain circumstances;

 

>potential impact of the pending merger on relationships with third parties, including customers, employees and competitors; and

 

>delays in closing the pending merger, or failure to close the merger.

 

 35 

 

 

Comparison of Financial Condition at September 30, 2018 and December 31, 2017

  

Total assets at September 30, 2018 decreased $6.2 million, or 1.4%, to $440.7 million from $446.9 million at December 31, 2017. The decrease was attributed to a decrease of $4.4 million in deposits and a decrease of $1.2 million in FHLB advances.

 

Cash and Cash equivalents increased by $2.4 million, or 11.5%, to $22.9 million at September 30, 2018 from $20.5 million at December 31, 2017. The increase in cash was primarily attributable to a decrease of $13.3 million in loans, net, outstanding, offset by cash used to purchase $5.2 million in securities available for sale.

 

Interest-bearing deposits in other financial institutions increased $747,000, or 25.0%, to $3.7 million at September 30, 2018 from $3.0 million at December 31, 2017 due to the purchase of three certificate of deposits.

 

Securities available for sale increased by $5.2 million, or 8.1%, to $69.3 million at September 30, 2018 from $64.1 million at December 31, 2017. This increase is primarily due to $17.0 million in purchases, offset by a decrease of $1.4 million in fair value on securities available for sale and by maturities, calls, principal payments and amortization of $10.4 million.

 

Loans held for sale increased $252,000, or 98.4%, to $508,000 at September 30, 2018 from $256,000 at December 31, 2017. The increase is attributable to the timing of the loans closing after origination.

 

Loans, net, decreased $13.3 million, or 4.0%, to $315.3 million at September 30, 2018 from $328.6 million at December 31, 2017. The decrease was primarily attributable to a decrease in one to four family loans, construction and land loans, and commercial real estate loans, offset by an increase in multi-family loans and commercial and industrial loans. Non-performing loans increased $155,000, or 2.4%, to $6.5 million at September 30, 2018 from $6.4 million at December 31, 2017.

  

Deposits decreased $4.4 million or 1.2%, to $365.6 million at September 30, 2018 from $370.1 million at December 31, 2017. The decrease was attributable to a decrease of $6.5 million in NOW accounts, a decrease of $2.9 million money market accounts and a decrease of $1.9 million in certificates of deposits, offset by an increase of $3.6 million in non-interest bearing demand deposits and an increase of $3.3 million in savings accounts

 

Federal Home Loan Bank advances decreased $1.2 million, or 16.2%, to $6.2 million at September 30, 2018 from $7.4 million at December 31, 2017 attributable to $6.2 million in maturities and principal payments, offset by $5.0 million in advances.

 

Subordinated debenture increased by $48,000, or 1.7%, and remained unchanged at $2.9 million at September 30, 2018 and December 31, 2017 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 $2.9 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 4.16% at September 30, 2018.

 

Total shareholders’ equity decreased by $497,000, or 0.8%, to $61.2 million at September 30, 2018 from $61.7 million at December 31, 2017. The decrease resulted from the repurchase of common stock totaling $326,000, the payment of cash dividends totaling $631,000 and a decrease in accumulated other comprehensive income of $1.1 million, offset by net income of $1.2 million and the expense related to the stock based compensation plans of $316,000.

 

 36 

 

 

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 are 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 September 30, 
   2018   2017 
   Average   Interest and       Average   Interest and     
   Balance   Dividends   Yield/ Cost   Balance   Dividends   Yield/ Cost 
Assets:                              
Interest earning assets:                              
Loans  $322,163   $4,099    5.05%  $339,956   $4,297    5.01%
Investment securities   68,849    417    2.40%   63,809    371    2.31%
Restricted Stock   3,276    45    5.45%   3,276    40    4.84%
Other interest earning assets   25,923    114    1.74%   27,280    73    1.06%
Total interest earning assets   420,211    4,675    4.41%   434,321    4,781    4.37%
                               
Non-interest earning assets   24,446              25,096           
Total assets   444,657              459,417           
                               
Liabilities and equity:                              
Interest bearing liabilities:                              
Interest bearing deposits:                              
NOW, savings, money market, and other   159,554    132    0.33%   155,047    114    0.29%
Certificates of deposit   155,047    581    1.49%   165,065    515    1.24%
Total interest bearing deposits   314,601    713    0.90%   320,112    629    0.78%
                               
FHLB advances   6,319    38    2.39%   10,932    47    1.71%
Subordinated debenture   2,928    60    8.13%   2,865    49    6.79%
Other borrowings   -    -    -    1,500    18    4.76%
Total borrowings   9,247    98    4.20%   15,297    114    2.96%
                               
Total interest bearing liabilities   323,848    811    0.99%   335,409    743    0.88%
                               
Non-interest bearing liabilities:                              
Non-interest bearing deposits   54,451              53,710           
Accrued interest payable   103              148           
Other liabilities   4,816              3,688           
Total non-interest bearing liabilities   59,370              57,546           
Total liabilities   383,218              392,955           
                               
Total equity   61,439              66,462           
Total liabilities and equity   444,657              459,417           
                               
Net interest income        3,864              4,038      
Interest rate spread             3.42%             3.49%
Net interest margin             3.65%             3.69%
Average interest-earning assets to average interest-bearing liabilities             129.76%             129.49%

 

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   For the Nine Months Ended September 30, 
   2018   2017 
   Average   Interest and       Average   Interest and     
   Balance   Dividends   Yield/ Cost   Balance   Dividends   Yield/ Cost 
Assets:                              
Interest earning assets:                              
Loans  $328,153   $12,342    5.03%  $340,625   $12,877    5.05%
Investment securities   66,959    1,183    2.36%   61,414    1,074    2.34%
Restricted Stock   3,276    132    5.39%   3,276    110    4.49%
Other interest earning assets   24,450    283    1.55%   27,773    192    0.92%
Total interest earning assets   422,838    13,940    4.41%   433,088    14,253    4.40%
                               
Non-interest earning assets   22,071              25,480           
Total assets   444,909              458,568           
                               
Liabilities and equity:                              
Interest bearing liabilities:                              
Interest bearing deposits:                              
NOW, savings, money market, and other   160,758    386    0.32%   151,661    308    0.27%
Certificates of deposit   156,343    1,665    1.42%   169,648    1,500    1.18%
Total interest bearing deposits   317,101    2,051    0.86%   321,309    1,808    0.75%
                               
FHLB advances   6,716    114    2.27%   9,430    122    1.73%
Subordinated debenture   2,912    170    7.81%   2,849    141    6.62%
Other borrowings   -    -    -    566    20    4.72%
Total borrowings   9,628    284    3.94%   12,845    283    2.95%
                               
Total interest bearing liabilities   326,729    2,335    0.96%   334,154    2,091    0.84%
                               
Non-interest bearing liabilities:                              
Non-interest bearing deposits   53,932              52,784           
Accrued interest payable   104              137           
Other liabilities   2,721              3,319           
Total non-interest bearing liabilities   56,757              56,240           
Total liabilities   383,486              390,394           
                               
Total equity   61,423              68,174           
Total liabilities and equity   444,909              458,568           
                               
Net interest income        11,605              12,162      
Interest rate spread             3.45%             3.56%
Net interest margin             3.67%             3.75%
Average interest-earning assets to average interest-bearing liabilities             129.42%             129.61%

 

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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 September 30, 2018, we had $6.2 million in advances from the Federal Home Loan Bank of Cincinnati and an additional borrowing capacity of $77.7 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 September 30, 2018, Poage Bankshares, Inc. (on an unconsolidated basis) had liquid assets of $2.1 million.

 

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 September 30, 2018, the actual capital conservation buffer for Town Square Bank was 12.06% compared to the capital conservation buffer requirement of 1.875%.

 

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. 

 

Management believes that as of September 30, 2018, the Bank met all capital adequacy requirements to which it was subject at that date.

 

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The following table reflects the Bank’s current regulatory capital levels in more detail, including comparisons to the regulatory minimums at September 30, 2018 and December 31, 2017 (dollars in thousands).

 

                   To Be Well 
                   Capitalized Under 
           For Capital Adequacy   Prompt Corrective 
   Actual   Purposes   Action Regulations 
As of September 30, 2018  Amount   Percent   Amount   Percent   Amount   Percent 
Total Risk-Based Capital                              
(to Risk-weighted Assets)  $59,940    20.06%  $23,903    8.00%  $29,879    10.00%
Tier I Capital                              
(to Risk-weighted Assets)   56,657    18.96    17,928    6.00    23,903    8.00 
Common Equity                              
(to Risk-weighted Assets)   56,657    18.96    13,446    4.50    19,421    6.50 
Tier I Capital                              
(to Adjusted Total Assets)   56,657    12.81    17,689    4.00    22,112    5.00 

 

                   To Be Well 
                   Capitalized Under 
           For Capital Adequacy   Prompt Corrective 
   Actual   Purposes   Action Regulations 
As of December 31, 2017  Amount   Percent   Amount   Percent   Amount   Percent 
Total Risk-Based Capital                              
(to Risk-weighted Assets)  $57,678    19.10%  $24,159    8.00%  $30,198    10.00%
Tier I Capital                              
(to Risk-weighted Assets)   53,891    17.85    18,119    6.00    24,159    8.00 
Common Equity                              
(to Risk-weighted Assets)   53,891    17.85    13,589    4.50    19,629    6.50 
Tier I Capital                              
(to Adjusted Total Assets)   53,891    11.80    18,272    4.00    22,840    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 consolidated financial condition or results of operations.

 

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Comparison of Operating Results for the Three and Nine months Ended September 30, 2018 and September 30, 2017

 

General. Net income for the three months ended September 30, 2018 increased $310,000, or 1,722.2%, to $292,000 from a net loss of $18,000 for the three months ended September 30, 2017. The increase in net income is primarily attributable to a decrease in the provision for loan losses of $778,000 to $169,000 for the three months ended September 30, 2018 from $947,000 for the three months ended September 30, 2017 and a subsequent measurement to decrease the estimated early contract termination fees by $470,000. The early contract termination fees decreased because the core processor conversion is rescheduled to the fourth quarter of 2018 from the third quarter of 2018. The early termination fee was originally calculated and recorded in December 2017 assuming the conversion was going to occur in August 2018, eight months before the data processing contract was to expire. Additionally, non-interest income increased $78,000 to $782,000 for the three months ended September 30, 2018 from $704,000 for the three months ended September 30, 2017. The increase in income is offset by a decrease in net interest income of $174,000 to $3.9 million for the three months ended September 30, 2018 from $4.0 million for the three months ended September 30, 2017, and an increase in non-interest expense, excluding the early contract termination fee subsequent measurement, of $531,000 to $4.4 million for the three months ended September 30, 2018 from $3.9 million for the three months ended September 30, 2017 due to the profession fees related to the merger. Income tax expense increased $311,000 to $260,000 for the three months ended September 30, 2018 compared to a tax benefit of $51,000 for the three months ended September 30, 2017.

  

Net income for the nine months ended September 30, 2018 increased $413,000, or 50.9%, to $1.2 million from net income of $812,000 for the nine months ended September 30, 2017. The increase in net income is primarily attributable to the recovery of $875,000 on fictitious loans for the nine months ended September 30, 2018, a decrease in the provision for loan losses of $311,000 to $1.3 million for the nine months ended September 30, 2018 from $1.6 million for the nine months ended September 30, 2017 and a subsequent re-measurement to decrease the estimated early contract termination fees by $470,000. The early contract termination fees decreased because the core processor conversion is rescheduled to the fourth quarter of 2018 from the third quarter of 2018. The increase in income is offset by a decrease in net interest income of $557,000 to $11.6 million for the nine months ended September 30, 2018 from $12.2 million for the nine months ended September 30, 2017 and an increase in non-interest expense of $605,000, excluding the early contract termination fee subsequent measurement, to $12.0 million for the nine months ended September 30, 2018 from $11.4 million for the nine months ended September 30, 2017. Additionally, income tax expense increased $101,000 to $439,000 for the nine months ended September 30, 2018 compared to tax expense of $338,000 for the nine months ended September 30, 2017.

 

Interest Income. Interest income decreased $106,000, or 2.2%, to $4.7 million for the three months ended September 30, 2018 from $4.8 million for the three months ended September 30, 2017. The average balance of interest-earning assets decreased $14.1 million, or 3.2%, to $420.2 million for the three months ended September 30, 2018 from $434.3 million for the three months ended September 30, 2017.

 

Interest income on loans decreased $198,000, or 4.6%, to $4.1 million for the three months ended September 30, 2018 from $4.3 million for the three months ended September 30, 2017. The average yields on loans increased 4 basis points to 5.05% for the three months ended September 30, 2018 compared to 5.01% for the three months ended September 30, 2017. The average balance of loans decreased $17.8 million, or 5.2%, to $322.2 million for the three months ended September 30, 2018 from $340.0 million for the three months ended September 30, 2017. The decrease in the average loan balance is primarily attributable to a decrease in one to four family residential mortgages. Income recognized from purchase discounts attributable to the Town Square and Commonwealth acquisitions decreased $48,000, or 57.1%, to $36,000 for the three months ended September 30, 2018 from $84,000 for the three months ended September 30, 2017. and contributed to the decrease in the average yield on loans.

 

Interest income on investment securities increased $46,000, or 12.4%, to $417,000 for the three months ended September 30, 2018 from $371,000 for the three months ended September 30, 2017. The average yield on securities increased 9 basis point to 2.40% for the three months ended September 30, 2018, compared to 2.31% for the three months ended September 30, 2017. The average balance of investment securities increased $5.0 million, or 7.9%, to $68.8 million for the three months ended September 30, 2018 from $63.8 million for the three months ended September 30, 2017.

 

Interest income on restricted stock increased $5,000, or 12.5%, to $45,000 for the three months ended September 30, 2018 from $40,000 for the three months ended September 30, 2017. The average yield on restricted stock increased 61 basis points to 5.45% for the three months ended September 30, 2018 compared to 4.84% for the three months ended September 30, 2017. The average balance of restricted stock remained constant at $3.3 million for the three months ended September 30, 2018 and 2017. Interest income on other interest-earning assets increased $41,000, or 56.2%, to $114,000 for the three months ended September 30, 2018 from $73,000 for the three months ended September 30, 2017. The average yield on other interest-earning assets increased 68 basis points to 1.74% for the three months ended September 30, 2018 compared to 1.06% for the three months ended September 30, 2017. The average balance of other interest earning assets decreased $1.4 million, or 5.0%, to $25.9 million for the three months ended September 30, 2018 from $27.3 million for the three months ended September 30, 2017.

 

Interest income decreased $313,000, or 2.2%, to $13.9 million for the nine months ended September 30, 2018 from $14.3 million for the nine months ended September 30, 2017. The average balance of interest-earning assets decreased $10.3 million, or 2.4%, to $422.8 million for the nine months ended September 30, 2018 from $433.1 million for the nine months ended September 30, 2017.

 

Interest income on loans decreased $535,000, or 4.2%, to $12.3 million for the nine months ended September 30, 2018 from $12.9 million for the nine months ended September 30, 2017. The average yield on loans decreased 2 basis points to 5.03% for the nine months ended September 30, 2018 compared to 5.05% for the nine months ended September 30, 2017. The average balance of loans decreased $12.4 million, or 3.7%, to $328.2 million for the nine months ended September 30, 2018 from $340.6 million for the nine months ended September 30, 2017. Income recognized from purchase discounts attributable to the Town Square and Commonwealth acquisitions decreased $168,000, or 55.5%, to $135,000 for the nine months ended September 30, 2018 from $303,000 for the nine months ended September 30, 2017 and contributed to the decrease in the average yields on loans.

 

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Interest income on investment securities increased $109,000, or 10.1%, to $1.2 million for the nine months ended September 30, 2018 from $1.1 million for the nine months ended September 30, 2017. The average yield on securities increased 2 basis points to 2.36% for the nine months ended September 30, 2018, compared to 2.34% for the nine months ended September 30, 2017. The average balance of investment securities increased $5.6 million, or 9.0%, to $67.0 million for the nine months ended September 30, 2018 from $61.4 million for the nine months ended September 30, 2017.

 

Interest income on restricted stock increased $22,000, or 20.0%, to $132,000 for the nine months ended September 30, 2018 from $110,000 for the nine months ended September 30, 2017. The average yield on restricted stock increased 90 basis points to 5.39% for the nine months ended September 30, 2018 compared to 4.49% for the nine months ended September 30, 2017. The average balance of restricted stock remained constant at $3.3 million for the nine months ended September 30, 2018 and 2017. Interest income on other interest-earning assets increased $91,000, or 47.4%, to $283,000 for the nine months ended September 30, 2018 from $192,000 for the nine months ended September 30, 2017. The average yield on other interest-earning assets increased 63 basis points to 1.55% for the nine months ended September 30, 2018 compared to 0.92% for the nine months ended September 30, 2017. The average balance of other interest earning assets decreased $3.3 million, or 12.0%, to $24.5 million for the nine months ended September 30, 2018 from $27.8 million for the nine months ended September 30, 2017.

 

Interest Expense. Interest expense increased $68,000, or 9.2%, to $811,000 for the three months ended September 30, 2018 from $743,000 for the three months ended September 30, 2017. The average balance of interest bearing liabilities decreased $11.6 million, or 3.4%, to $323.8 million for the three months ended September 30, 2018 from $335.4 million for the three months ended September 30, 2017.

 

Interest expense on interest bearing deposits increased $84,000, or 13.4% to $713,000 for the three months ended September 30, 2018 from $629,000 for the three months ended September 30, 2017. The average balance of interest bearing deposits decreased $5.5 million, or 1.7%, to $314.6 million for the three months ended September 30, 2018 from $320.1 million for the three months ended September 30, 2017. The average interest rate paid on interest bearing deposits increased 12 basis points to 0.90% for the three months ended September 30, 2018 compared to 0.78% for the three months ended September 30, 2017. The decrease in average balance on interest bearing deposits is attributable to a decrease in certificates of deposits, offset by an increase in NOW and money market accounts.

 

Interest expense on FHLB advances, subordinated debentures and other borrowings decreased $16,000, or 14.0%, to $98,000 for the three months ended September 30, 2018 from $114,000 for the three months ended September 30, 2017. The average balance on FHLB advances decreased $4.6 million, or 42.2%, to $6.3 million for the three months ended September 30, 2018 from $10.9 million for the three months ended September 30, 2017. The average interest rate paid on FHLB advances increased 68 basis points to 2.39% from 1.71%. The average balance on subordinated debentures increased $63,000, or 2.2%, and remained unchanged at $2.9 million for the three months ended September 30, 2018 and 2017. The average interest rate paid on subordinated debentures increased 134 basis points to 8.13% for the three months ended September 30, 2018 from 6.79% for the three months ended September 30, 2017. The average balance on other borrowings decreased $1.5 million, or 100.0%, to $0 for the three months ended September 30, 2018 from $1.5 million for the three months ended September 30, 2017. The average interest rate paid on other borrowings decreased 476 basis points to 0% for the three months ended September 30, 2018 from 4.76% for the three months ended September 30, 2017.

 

Interest expense increased $244,000, or 11.7%, to $2.3 million for the nine months ended September 30, 2018 from $2.1 million for the nine months ended September 30, 2017. The average balance of interest bearing liabilities decreased $7.5 million, or 2.2%, to $326.7 million for the nine months ended September 30, 2018 from $334.2 million for the nine months ended September 30, 2017.

 

Interest expense on interest bearing deposits increased $243,000, or 13.4% to $2.1 million for the nine months ended September 30, 2018 from $1.8 million for the nine months ended September 30, 2017. The average balance of interest bearing deposits decreased $4.2 million, or 1.3%, to $317.1 million for the nine months ended September 30, 2018 from $321.3 million for the nine months ended September 30, 2017. The average interest rate paid on interest bearing deposits increased 11 basis points to 0.86% for the nine months ended September 30, 2018 compared to 0.75% for the nine months ended September 30, 2017. The decrease in average balance on interest bearing deposits is primarily attributable to a decrease in certificates of deposits which included $7.9 million in short-term non-brokered deposits acquired in the national market, offset by an increase in NOW and money market accounts.

 

Interest expense on FHLB advances, subordinated debentures and other borrowings increased $1,000, or 0.4%, to $284,000 for the nine months ended September 30, 2018 from $283,000 for the nine months ended September 30, 2017. The average balance on FHLB advances decreased $2.7 million, or 28.8%, to $6.7 million for the nine months ended September 30, 2018 from $9.4 million for the nine months ended September 30, 2017. The average interest rate paid on FHLB advances increased 54 basis points to 2.27% from 1.73%. The average balance on subordinated debentures increased $63,000, or 2.2%, to $2.9 million for the nine months ended September 30, 2018 from $2.8 million for the nine months ended September 30, 2017. The average interest rate paid on subordinated debentures increased 119 basis points to 7.81% for the nine months ended September 30, 2018 from 6.62% for the nine months ended September 30, 2017. The average balance on other borrowings decreased $566,000, or 100.0%, to $0 for the nine months ended September 30, 2018 from $566,000 for the nine months ended September 30, 2017. The average interest rate paid on other borrowings decreased 472 basis points to 0% for the nine months ended September 30, 2018 from 4.72% for the nine months ended September 30, 2017.

 

Net Interest Income. Net interest income decreased $174,000, or 4.3%, to $3.9 million for the three months ended September 30, 2018 from $4.0 million for the three months ended September 30, 2017. The ratio of average interest earning assets to average interest bearing liabilities increased to 129.76% for the three months ended September 30, 2018 from 129.49% for the three months ended September 30, 2017. The interest rate spread decreased 7 basis points to 3.42% for the three months ended September 30, 2018 from 3.49% for the three months ended September 30, 2017. Net interest margin decreased 4 basis points to 3.65% for the three months ended September 30, 2018 from 3.69% for the three months ended September 30, 2017.

 

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Net interest income decreased $557,000, or 4.6%, to $11.6 million for the nine months ended September 30, 2018 from $12.2 million for the nine months ended September 30, 2017. The ratio of average interest earning assets to average interest bearing liabilities decreased to 129.42% for the nine months ended September 30, 2018 from 129.61% for the nine months ended September 30, 2017. The interest rate spread decreased 11 basis points to 3.45% for the nine months ended September 30, 2018 from 3.56% for the nine months ended September 30, 2017. Net interest margin decreased 8 basis points to 3.67% for the nine months ended September 30, 2018 from 3.75% for the nine months ended September 30, 2017.

 

Provision for Loan Losses. We recorded $169,000 in provision for loan losses for the three months ended September 30, 2018 compared to $947,000 in provision for loan losses for the three months ended September 30, 2017. The decrease is primarily attributable to the decrease in loans outstanding and no new impaired loans requiring a specific allowance. The provision for the three months ended September 30, 2017 was attributable to charge-offs and the establishment of an allowance of $434,000 on five large commercial relationships classified as substandard.

 

We recorded $1.3 million in provision for loan losses for the nine months ended September 30, 2018 compared to $1.6 million in provision for loan losses for the nine months ended September 30, 2017. The decrease in the provision is primarily attributable to the decrease in loans outstanding, offset by the establishment of an allowance of $478,000 on one residential loan relationship classified as substandard, which had an outstanding balance of $0 at September 30, 2018 and an additional provision of $376,000 to increase an allowance to $895,000 on one commercial relationship classified as substandard, which had an outstanding balance of $0 at September 30, 2018. The aforementioned loans were charged-off in the third quarter. The provision for the nine months ended September 30, 2017 was attributable to charge-offs and an increase in loans classified as substandard.

 

Noninterest Income. Noninterest income increased $78,000, or 11.1%, to $782,000 for the three months ended September 30, 2018 from $704,000 for the three months ended September 30, 2017. The increase in noninterest income was primarily attributable an increase in service charges on deposits of $45,000, or 9.1%, to $541,000 for the three months ended September 30, 2018 from $496,000 for the three months ended September 30, 2017, an increase in loan servicing fees of $76,000, or 138.2% to $131,000 for the three months ended September 30, 2018 from $55,000 for the three months ended September 30, 2017 and an increase in other non-interest income of $37,000, or 616.7%, to $43,000 for the three months ended September 30, 2018 from $6,000 for the three months ended September 30, 2017. The increase in loan servicing fees is due to the receipt of funds from the Federal Home Loan Bank for loans sold and serviced. The increase in other non-interest income is attributable to the sale of 487 shares of Class B Common Stock of Visa Inc. The increase in noninterest income is offset by a decrease in gains on mortgage loans sold of $76,000, or 83.5%, to $15,000 for the three months ended September 30, 2018 from $91,000 for the three months ended September 30, 2017.

 

Noninterest income, including the recovery on fictitious loans, increased $895,000, or 43.1%, to $3.0 million for the nine months ended September 30, 2018 from $2.1 million for the nine months ended September 30, 2017. The increase in noninterest income was primarily attributable to the recovery of $875,000 on fictitious loans identified in September 2017, an increase in service charges on deposits of $63,000, or 4.2%, to $1.6 million for the nine months ended September 30, 2018 from $1.5 million for the nine months ended September 30, 2017, an increase in loan servicing fees of $40,000, or 18.3%, to $259,000 for the nine months ended September 30, 2018 from $219,000 for the nine months ended September 30, 2017 and an increase in other non-interest income of $35,000, or 269.2%, to $48,000 for the three months ended September 30, 2018 from $13,000 for the three months ended September 30, 2017. The increase in other non-interest income is attributable to the sale of 487 shares of Class B Common Stock of Visa Inc. These increases in noninterest income were partially offset by a decrease in net gain on disposal of land and equipment of $19,000, or 118.8%, to a net loss of $3,000 for the nine months ended September 30, 2018 from a net gain of $16,000 for the nine months ended September 30, 2017, and a decrease in gains on mortgage loans sold of $91,000, or 55.2%, to $74,000 for the nine months ended September 30, 2018 from $165,000 for the nine months ended September 30, 2017.

 

Noninterest Expense. Noninterest expense increased $61,000, or 1.6%, to remain unchanged at $3.9 million for the three months ended September 30, 2018 and 2017. This increase was primarily attributable to an increase professional fees of $517,000, or 170.6%, to $820,000 for the three months ended September 30, 2018 from $303,000 for the three months ended September 30, 2017 and director fees increased $34,000, or 66.7%, to $85,000 for the three months ended September 30, 2018 from $51,000 for the three months ended September 30, 2017. The increased professional fees and director fees are related to the pending merger. In addition, loan processing and collection increased $43,000, or 52.4%, to $125,000 for the three months ended September 30, 2018 from $82,000 for the three months ended September 30, 2017, salaries and employee benefits increased $22,000, or 1.4%, to remain unchanged at $1.6 million for the three months ended September 30, 2018 and 2017, occupancy and equipment increased $12,000, or 2.6%, to $470,000 for the three months ended September 30, 2018 from $458,000 for the three months ended September 30, 2017 and advertising increased $12,000, or 16.0%, to $87,000 for the three months ended September 30, 2018 from $75,000 for the three months ended September 30, 2017. Data processing increased $14,000, or 2.0%, to $712,000 for the three months ended September 30, 2018 from $698,000 for the three months ended September 30, 2017 and conversion expense increased $14,000, or 100.0%, to $14,000 for the three months ended September 30, 2018 from $0 for the three months ended September 30, 2017. The increase in data processing is attributable to increased activity for internet banking and volume for data processing charges. Conversion expense is related to the contract signed in December 2017 with the new data processing provider.

 

The increase in noninterest expense is offset by a subsequent re-measurement to decrease the estimated early contract termination fees by $470,000. The early contract termination fees decreased because the core processor conversion was rescheduled to the fourth quarter of 2018 from the third quarter of 2018 after the July announcement of Poage’s merger with City. The early termination fee was originally calculated and recorded in December 2017 assuming the conversion was going to occur in August 2018, eight months before the data processing contract was to expire. The early termination fee is 80% of the average monthly data processing charges for the previous six months multiplied by the number of months the conversion occurs prior to the contract end date of April 2019. Foreclosed assets expense, net decreased $67,000, or 100.0%, to $0 for the three months ended September 30, 2018 from $67,000 for the three months ended September 30, 2017.

  

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Noninterest expense increased $135,000, or 1.2%, to $11.6 million for the nine months ended September 30, 2018 from $11.4 million for the nine months ended September 30, 2017. This increase was primarily attributable to an increase in professional fees of $536,000, or 115.5%, to $1.0 million for the nine months ended September 30, 2018 from $464,000 for the nine months ended September 30, 2017 and an increase in director fees of $46,000, or 35.4%, to $176,000 for the nine months ended September 30, 2018 from $130,000 for the nine months ended September 30, 2017. The increased professional fees and director fees are related to the pending merger. In addition, loan processing and collection increased $97,000, or 35.7%, to $369,000 for the nine months ended September 30, 2018 from $272,000 for the nine months ended September 30, 2017, data processing increased $136,000, or 6.9%, to $2.1 million for the nine months ended September 30, 2018 from $2.0 million for the nine months ended September 30, 2017 and conversion expense increased $169,000, or 100.0%, to $169,000 for the nine months ended September 30, 2018 from $0 for the nine months ended September 30, 2017. The increase in data processing is attributable to increased activity for internet banking and volume for data processing charges. Conversion expense is related to the contract signed in December 2017 with the new data processing provider.

 

The increase in noninterest expense is offset by a subsequent re-measurement to decrease the estimated early contract termination fees by $470,000. The early contract termination fees decreased because the core processor conversion is rescheduled to the fourth quarter of 2018 from the third quarter of 2018. The early termination fee was originally calculated and recorded in December 2017 assuming the conversion was going to occur in August 2018, eight months before the data processing contract was to expire. Additionally, the increase in noninterest expense is offset by a decrease in salaries and employee benefits of $99,000, or 1.9%, for the nine months ended September 30, 2018 and 2017, a decrease in foreclosed assets expense of $197,000, or 92.1%, to $17,000 for the nine months ended September 30, 2018 from $214,000 for the nine months ended September 30, 2017, a decrease in advertising of $47,000, or 16.2%, to $243,000 for the nine months ended September 30, 2018 from $290,000 for the nine months ended September 30, 2017 and a decrease in occupancy expense of $43,000, or 3.1%, to remain unchanged at $1.4 million for the nine months ended September 30, 2018 and 2017.

  

Income Tax Expense. The provision for income tax expense was $260,000 for the three months ended September 30, 2018 compared the tax benefit of $51,000 for the three months ended September 30, 2017. The federal statutory tax rate was 21% for 2018 and 34% for 2017. The following discusses reasons for the effective rate varying from the statutory rate. Our effective tax rate was 47.1% for the three months ended September 30, 2018 compared to 73.9% for the three months ended September 30, 2017 due to nondeductible merger related expenses of $725,000 for the three months ended September 30, 2018. In addition, the 73.9% effective tax rate for the three months ended September 30, 2017 was due to sustaining a net operating loss.

 

The provision for income tax expense was $439,000 for the nine months ended September 30, 2018 compared to $338,000 for the nine months ended September 30, 2017. Our effective tax rate for the nine months ended September 30, 2018 was 26.4% compared to 29.4% for the nine months ended September 30, 2017. The effective tax rate for the nine months ended September 30, 2018 was 26.4% due to nondeductible merger related expenses of $771,000. The effective tax rate for the nine months ended September 30, 2017 was 29.4% due to tax expense related to nondeductible incentive stock options.

 

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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

 

Management is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As of September 30, 2018, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that, as of the evaluation date, our disclosure controls and procedures were not effective, because of the material weakness described below, to enable us to provide that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and to ensure that the information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosures.

 

During the three months ended September 30, 2017, the Company uncovered evidence of suspected fraud involving the origination of fictitious loans by an employee of the Bank. Management discovered that an employee had been using falsified brokerage statements, financial statements, tax returns, deeds and mortgages to make fictitious loans. The employee is no longer with the Company. The Company’s internal audit department has conducted an extensive internal review of our internal controls with the assistance of an outside independent professional firm, with specific focus on our loan underwriting, approval and administration procedures. As a result of the internal review, management discovered a material weakness in the operating effectiveness of procedures and documentation related to loan underwriting. Additionally, these processes lacked effective supervision and oversight by lending management personnel. Our management, overseen by the Audit Committee, implemented new procedures to improve this process and remediate this control weakness.

 

During the nine months ended September 30, 2018, the Company’s management made certain changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934, as amended) that have materially affected, or reasonably likely to materially effect, the Company’s internal control over financial reporting, which were identified during the year ended December 31, 2017 in connection with management’s and the Audit Committee’s evaluation of the effectiveness of the system of internal control over financial reporting.

  

To address the material weakness identified by management in the operating effectiveness of procedures and documentation related to loan underwriting and in the supervision and oversight of the lending management personnel, which weakness was related to the discovery of an employee originating fictitious loans, management implemented procedures to verify the authenticity of the information related to loan underwriting.

 

Although the Company’s remediation efforts are completed, the material weakness will not be considered remediated until the new internal controls are operational for a period of time and are tested and management concludes that these controls are operating effectively.

 

There was no other change in our internal control over financial reporting that occurred during the quarter ended September 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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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. 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 3,325 shares at a weighted average price of $19.46 per share and there remained 17,720 shares to be repurchased under this plan at September 30, 2018.

 

On December 5, 2017, the Board of Directors of Poage Bankshares, Inc. authorized a new stock repurchase program for the repurchase of up to $180,000 shares of common stock, which represents approximately 5% of the Company’s issued and outstanding shares of common stock. The Company repurchased 10,000 shares at a weighted average price of $19.30 per share and there remained 163,500 shares to be repurchased under this plan at September 30, 2018.

 

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.

 

The following table sets forth information in connection with repurchases of the Company’s common stock for the period July 1, 2018 through September 30, 2018.

 

           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 
July 1 - July 31, 2018           -   $      -               -    181,220 
August 1 - August 31, 2018   -    -    -    181,220 
September 1 - September 30, 2018   -    -    -    181,220 
Total   -   $-    -      

 

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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 September 30, 2018, 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 (Loss), (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)

 

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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: November 14, 2018  
   
  /s/ Bruce VanHorn
  Bruce VanHorn
  President & Chief Executive Officer
   
  /s/ Jane Gilkerson
  Jane Gilkerson
  Chief Financial Officer

 

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