Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period ended March 31, 2013

Or

 

¨ 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

Of Incorporation

 

(I.R.S Employer

Identification Number)

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

606-324-7196

Registrant’s telephone number, including area code

Not Applicable

(Former name or former address, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨ .

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

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

 

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

As of May 10, 2013, 3,255,620 shares of the Registrant’s common stock, par value $0.01 per share, were outstanding.

 

 

 


Table of Contents

POAGE BANKSHARES, INC.

Form 10-Q Quarterly Report

Table of Contents

 

     PART I. FINANCIAL INFORMATION       

ITEM 1.

   CONSOLIDATED FINANCIAL STATEMENTS – POAGE BANKSHARES, INC.      1   

ITEM 2.

   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      21   

ITEM 3.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      28   

ITEM 4.

   CONTROLS AND PROCEDURES      29   
   PART II. OTHER INFORMATION   

ITEM 1.

   LEGAL PROCEEDINGS      31   

ITEM 1A.

   RISK FACTORS      31   

ITEM 2.

   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      31   

ITEM 3.

   DEFAULTS UPON SENIOR SECURITIES      31   

ITEM 4.

   MINE SAFETY DISCLOSURES      31   

ITEM 5.

   OTHER INFORMATION      32   

ITEM 6.

   EXHIBITS      32   

SIGNATURES

     33   


Table of Contents

PART I

 

ITEM 1. FINANCIAL STATEMENTS

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED BALANCE SHEETS

 

     March 31,
2013
    September 30,
2012
 
     (in thousands)  

ASSETS

    

Cash and due from financial institutions

   $ 21,564      $ 23,430   

Securities available for sale

     94,911        94,456   

Loans held for sale

     764        719   

Loans, net of allowance of $1,975, and $2,004

     173,470        179,998   

Federal Home Loan Bank stock, at cost

     1,953        1,953   

Other real estate owned, net

     634        1,001   

Premises and equipment, net

     5,986        6,078   

Company owned life insurance

     6,788        6,685   

Accrued interest receivable

     1,185        1,255   

Other assets

     1,430        1,584   
  

 

 

   

 

 

 
   $ 308,685      $ 317,159   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Deposits

    

Non-interest bearing

   $ 5,832      $ 6,422   

Interest bearing

     225,777        230,050   
  

 

 

   

 

 

 

Total deposits

     231,609        236,472   

Federal Home Loan Bank advances

     15,602        17,672   

Accrued interest payable

     141        376   

Other liabilities

     1,680        2,057   
  

 

 

   

 

 

 

Total liabilities

     249,032        256,577   

Commitments and contingent liabilities

     —          —     

Shareholders’ equity

    

Common stock, $.01 par value, 30,000,000 shares authorized, 3,283,330 and 3,372,375 issued and outstanding at March 31, 2013 and September 30, 2012

     33        34   

Additional paid-in-capital

     30,776        31,979   

Retained earnings

     30,026        29,416   

Unearned Employee Stock Ownership Plan (ESOP) shares

     (2,496     (2,563

Accumulated other comprehensive income

     1,314        1,716   
  

 

 

   

 

 

 

Total shareholders’ equity

     59,653        60,582   
  

 

 

   

 

 

 
   $ 308,685      $ 317,159   
  

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

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POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

 

     Three months ended
March  31,
     Six months ended
March  31,
 
     2013     2012      2013     2012  
           (revised)            (revised)  
     (in thousands)      (in thousands)  

Interest and dividend income

         

Loans, including fees

   $ 2,446      $ 2,646       $ 5,000      $ 5,374   

Taxable securities

     307        409         617        744   

Tax exempt securities

     160        216         306        444   

Federal funds sold and other

     30        30         63        65   
  

 

 

   

 

 

    

 

 

   

 

 

 
     2,943        3,301         5,986        6,627   

Interest expense

         

Deposits

     478        666         1,060        1,441   

Federal Home Loan Bank advances and other

     117        153         243        329   
  

 

 

   

 

 

    

 

 

   

 

 

 
     595        819         1,303        1,770   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

     2,348        2,482         4,683        4,857   

Provision for loan losses

     99        222         99        260   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     2,249        2,260         4,584        4,597   

Non-interest income

         

Service charges on deposits

     129        158         281        262   

Other service charges

     7        6         15        12   

Net gains on sales of loans

     222        89         383        227   

Net gains on sales of securities

     —          184         —          194   

Income from company owned life insurance

     50        54         103        110   

Loss on disposal of equipment

     (10     —           (10     —     

Other

     7        5         8        9   
  

 

 

   

 

 

    

 

 

   

 

 

 
     405        496         780        814   

Non-interest expense

         

Salaries and employee benefits

     883        1,061         1,971        2,029   

Occupancy and equipment

     223        211         432        404   

Data processing

     182        171         353        328   

Federal deposit insurance

     43        51         90        102   

Foreclosed assets, net

     36        59         113        101   

Advertising

     36        50         66        122   

Professional fees

     221        137         395        362   

Other taxes

     63        51         124        112   

Loss on fictious loans

     —          —           10        —     

Other

     349        357         597        456   
  

 

 

   

 

 

    

 

 

   

 

 

 
     2,036        2,148         4,151        4,016   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before income taxes

     618        608         1,213        1,395   

Income tax expense

     172        159         333        338   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 446      $ 449       $ 880      $ 1,057   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings per share:

         

Basic

   $ 0.14      $ 0.14       $ 0.28      $ 0.34   

Diluted

   $ 0.14      $ 0.14       $ 0.28      $ 0.34   

Dividend per share

   $ 0.04      $ 0.04       $ 0.08      $ 0.04   

See notes to unaudited consolidated financial statements.

 

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POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     Three months ended
March  31,
    Six months ended
March  31,
 
     2013     2012     2013     2012  
           (revised)           (revised)  
     (in thousands)     (in thousands)  

Net income

   $ 446      $ 449      $ 880      $ 1,057   

Other comprehensive income (loss):

        

Unrealized holding gains (losses) on available for sale securities

     (164     (342     (610     (325

Reclassification adjustments for (gains) losses included in net income

     —          (184     —          (194
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized holding gains (losses) on available for sale securities

     (164     (526     (610     (519

Tax effect

     56        179        208        177   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

     (108     (347     (402     (342
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 338      $ 102      $ 478      $ 715   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

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POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

 

     Common
Stock
    Additional
Paid-In
Capital
    Retained
Earnings
    Unearned
ESOP
Shares
    Accumulated
Other
Comprehensive
Income
    Total
Shareholders’
Equity
 
     (in thousands)  

Balances, October 1, 2012

   $ 34      $ 31,979      $ 29,416      $ (2,563   $ 1,716      $ 60,582   

Net income

     —          —          880        —          —          880   

Stock repurchases

     (1     (1,269     —              (1,270

Dividends paid

     —          —          (270     —          —          (270

ESOP compensation earned

     —          66        —          67        —          133   

Change in unrealized gain (loss) on securities available for sale, net of taxes

     —          —          —          —          (402     (402
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances, March 31, 2013

   $ 33      $ 30,776      $ 30,026      $ (2,496   $ 1,314      $ 59,653   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

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POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Six months ended
March 31,
 
     2013     2012  
           (revised)  
     (in thousands)  

OPERATING ACTIVITY

    

Net income

   $ 880      $ 1,057   

Adjustments to reconcile net income to net cash from operating activities:

    

Depreciation

     204        194   

Provision for loan losses

     99        260   

ESOP compensation expense

     133        —     

Loss (gain) on sale of securities

       (194

Loss (gain) on disposal of assets

     10        —     

Loss (gain) on sale of other real estate owned

     30        —     

Net amortization on securities

     487        308   

Deferred income tax (benefit) expense

     130        106   

Net gain on sale of loans

     (383     (227

Origination of loans held for sale

     (4,048     (5,998

Proceeds from loans held for sale

     4,386        6,835   

Increase in cash value of life insurance

     (103     (110

Decrease (increase) in:

    

Accrued interest receivable

     70        7   

Other assets

     230        123   

Increase (decrease) in:

    

Accrued interest payable

     (235     (241

Other liabilities

     (377     (1,007
  

 

 

   

 

 

 

Net cash from operating activities

     1,513        1,113   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Securities available for sale:

    

Proceeds from sale

     —          15,969   

Proceeds from calls

     6,870        23,549   

Proceeds from maturities

     789        145   

Purchases

     (16,271     (64,947

Principal payments received

     7,061        1,857   

Loan originations and principal payments on loans, net

     6,318        4,095   

Proceeds from the sale of other real estate owned

     449        144   

Purchase of office properties and equipment

     (122     (138
  

 

 

   

 

 

 

Net cash from investing activities

     5,094        (19,326
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Net change in deposits

     (4,863     (5,867

Payments on Federal Home Loan Bank borrowings

     (2,070     (2,507

Cash dividends paid

     (270     (135

Stock repurchases

     (1,270     —     
  

 

 

   

 

 

 

Net cash from financing activities

     (8,473     (8,509
  

 

 

   

 

 

 

DECREASE IN CASH AND CASH EQUIVALENTS

     (1,866     (26,722

Cash and cash equivalents at beginning of year

     23,430        48,440   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

   $ 21,564      $ 21,718   
  

 

 

   

 

 

 

Additional cash flows and supplementary information:

    

Cash paid during the year for:

    

Interest on deposits and advances

   $ 1,538      $ 2,011   

Income taxes

   $ 95      $ —     

Real estate acquired in settlement of loans

   $ 129      $ 1,245   

See notes to unaudited consolidated financial statements.

 

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Poage Bankshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The accompanying unaudited consolidated financial statements of Poage Bankshares, Inc. (the “Company”) and its wholly owned subsidiary Home Federal Savings and Loans Association (the “Association”) 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 10-01 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 U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates used in the preparation of the financial statements are based on various factors including the current interest rate environment and the general strength of the local economy. Changes in the overall interest rate environment can significantly affect the Company’s net interest income and the value of its recorded assets and liabilities. Actual results could differ from those estimates used in the preparation of the financial statements.

In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position as of March 31, 2013 and September 30, 2012 and the results of operations and cash flows for the interim periods ended March 31, 2013 and 2012. All interim amounts have not been audited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for the year. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto filed as part of the Company’s 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

NOTE 2 – ADJUSTMENT FOR FICTITIOUS LOANS

The Company is applying relevant guidance from the SEC and FASB to adjust for the cumulative effect of immaterial errors relating to prior years in the carrying amount of assets and liabilities as of the beginning of the current fiscal year, with an offsetting adjustment to the opening balance of retained earnings in the year of adoption. The guidance also requires the adjustment of any prior quarterly financial statements within the fiscal year of adoption for the effects of such errors on the quarters when the information is next presented. Such adjustments do not require previously filed reports with the SEC to be amended. In accordance with the relevant guidance, the Company has adjusted its opening retained earnings for 2011 for the item described below. The Company considers these adjustments to be immaterial to prior periods.

On November 26, 2012, the Company determined that it was required to record a loss for certain fraudulent loans in the aggregate amount of $950,000 including accrued interest of $127,000 which, net of tax, is a loss of $627,000. The loss relates to the creation of fictitious loans by a former employee of the Company’s subsidiary and was discovered by management while in the process of upgrading the Company’s lending controls and procedures.

The Company has reported this event to its blanket bond insurance provider and is working with the provider to determine the extent of any coverage. No amount has been recorded related to potential recoveries from the blanket bond coverage. That amount, if any, will be recorded when it can be accurately measured and collectability can be reasonably ascertained.

 

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The applicable effect on the prior year statement of income related to these fictitious loans is as follows (in thousands):

 

     For the three months  ended
March 31, 2012
    For the six months  ended
March 31, 2012
 

Statement of Income:

    

Interest and dividend income as previously reported

   $ 3,305      $ 6,636   

Interest income fictitious loans

     (4     (9
  

 

 

   

 

 

 

Interest and dividend income as adjusted

   $ 3,301      $ 6,627   
  

 

 

   

 

 

 

Net interest income as previously reported

   $ 2,486      $ 4,866   

Interest income fictitious loans

     (4     (9
  

 

 

   

 

 

 

Net interest income as adjusted

   $ 2,482      $ 4,857   
  

 

 

   

 

 

 

Net-interest income after provision for loan loss as previously reported

   $ 2,264      $ 4,606   

Interest income fictitious loans

     (4     (9
  

 

 

   

 

 

 

Net interest income after provision for loan loss as adjusted

   $ 2,260      $ 4,597   
  

 

 

   

 

 

 

Income before income taxes previously reported

   $ 612      $ 1,404   

Interest income fictitious loans

     (4     (9
  

 

 

   

 

 

 

Income before income tax as adjusted

   $ 608      $ 1,395   
  

 

 

   

 

 

 

Income tax expense as previously reported

   $ 160      $ 341   

Tax impact of fictitious loans and related interest

     (1     (3
  

 

 

   

 

 

 

Income tax expense as adjusted

   $ 159      $ 338   
  

 

 

   

 

 

 

Net income as previously reported

   $ 452      $ 1,063   

Fictitious loans interest adjustment, net of tax

     (3     (6
  

 

 

   

 

 

 

Net income as adjusted

   $ 449      $ 1,057   
  

 

 

   

 

 

 

 

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NOTE 3 – SECURITIES AVAILABLE FOR SALE

The amortized cost and fair value of securities available for sale at March 31, 2013 and September 30, 2012 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income were as follows (in thousands):

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Fair
Value
 

March 31, 2013

          

States and political subdivisions

   $ 23,256       $ 1,459       $  —        $ 24,715   

U.S. Government agencies and sponsored entities

     31,964         22         (52     31,934   

Government sponsored entities residential mortgage-backed:

          

FHLMC

     20,993         275         —          21,268   

FNMA

     16,708         286         —          16,994   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities

   $ 92,921       $ 2,042       $ (52   $ 94,911   
  

 

 

    

 

 

    

 

 

   

 

 

 

September 30, 2012

          

States and political subdivisions

   $ 24,445       $ 1,743       $ —        $ 26,188   

U.S. Government agencies and sponsored entities

     22,250         16         (9     22,257   

Government sponsored entities residential mortgage-backed:

          

FHLMC

     25,330         444         —          25,774   

FNMA

     19,831         406         —          20,237   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total securities

   $ 91,856       $ 2,609       $ (9   $ 94,456   
  

 

 

    

 

 

    

 

 

   

 

 

 

The proceeds from sales and calls of securities and the associated gross gains and losses are listed below (in thousands):

 

     Three months ended
March 31,
     Six months ended
March 31,
 
     2013      2012      2013      2012  

Proceeds

   $ 2,500       $ 30,761       $ 6,870       $ 39,518   

Gross gains

     —           184         —           194   

Gross losses

     —           —           —           —     

The provision for income taxes for the three months and six months ended March 31, 2012 related to net realized securities gains was $62,000 and $65,000, respectively, based on an income tax rate of 34%.

The amortized cost and fair value of the securities portfolio at March 31, 2013 are shown in the following table by expected 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 (in thousands):

 

     March 31, 2013  
     Amortized      Fair  
     Cost      Value  

Within one year

   $ 414       $ 422   

One to five years

     4,718         4,868   

Five to ten years

     33,196         33,853   

Beyond ten years

     16,892         17,506   

Mortgage-backed securities

     37,701         38,262   
  

 

 

    

 

 

 

Total

   $ 92,921       $ 94,911   
  

 

 

    

 

 

 

 

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The following table summarizes the securities with unrealized losses at March 31, 2013 and September 30, 2012, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):

 

     Less Than 12 Months     12 Months or Longer      Total  
     Fair      Unrealized     Fair      Unrealized      Fair      Unrealized  
     Value      Losses     Value      Losses      Value      Losses  

March 31, 2013

                

U.S. Government agencies and sponsored entities

     16,202         (52     —           —           16,202         (52
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 16,202       $ (52   $  —         $  —         $ 16,202       $ (52
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2012

                

U.S. Government agencies and sponsored entities

     10         (9     —           —           10         (9
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 10       $ (9   $ —         $ —         $ 10       $ (9
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

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

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

 

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NOTE 4 – LOANS

Loans at March 31, 2013 and September 30, 2012 were as follows (in thousands):

 

     March 31,      September 30,  
     2013      2012  

Real estate:

     

One to four family

   $ 133,819       $ 141,307   

Multi-family

     911         985   

Commercial real estate

     15,578         16,333   

Construction and land

     4,483         3,095   
  

 

 

    

 

 

 
     154,791         161,720   

Commercial and Industrial

     5,564         4,895   

Consumer

     

Home equity lines of credit

     5,349         5,911   

Motor vehicle

     7,626         6,968   

Other

     2,189         2,592   
  

 

 

    

 

 

 
     15,164         15,471   
  

 

 

    

 

 

 

Total

     175,519         182,086   

Less: Net deferred loan fees

     74         84   

          Allowance for loan losses

     1,975         2,004   
  

 

 

    

 

 

 
   $ 173,470       $ 179,998   
  

 

 

    

 

 

 

 

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The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment based on impairment method as of March 31, 2013 and September 30, 2012. Accrued interest receivable of $648,000 and $746,000 at March 31, 2013 and September 30, 2012, respectively, and net deferred loans fees of $74,000 at March 31, 2013 and $84,000 at September 30, 2012, are not considered significant and therefore are not included in the loan balances presented in the table below (in thousands):

 

March 31, 2013:                                          
     Allowance for Loan Losses      Loan Balances  
     Individually      Collectively             Individually      Collectively         
     Evaluated for      Evaluated for             Evaluated for      Evaluated for         

Loan Segment

   Impairment      Impairment      Total      Impairment      Impairment      Total  

Real estate

   $ —         $ 1,926       $ 1,926       $ —         $ 154,791       $ 154,791   

Commercial and industrial

     —           11         11         —           5,564         5,564   

Consumer

     —           38         38         —           15,164         15,164   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 1,975       $ 1,975       $ —         $ 175,519       $ 175,519   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
September 30, 2012:                                          
     Allowance for Loan Losses      Loan Balances  
     Individually      Collectively             Individually      Collectively         
     Evaluated for      Evaluated for             Evaluated for      Evaluated for         

Loan Segment

   Impairment      Impairment      Total      Impairment      Impairment      Total  

Real estate

   $  —         $ 1,824       $ 1,824       $
 

  
 
  
   $ 161,720       $ 161,720   

Commercial and industrial

     —           47         47         —           4,895         4,895   

Consumer

     —           133         133         —           15,471         15,471   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $  —         $ 2,004       $ 2,004       $
 

  
 
  
   $ 182,086       $ 182,086   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table sets forth an analysis of our allowance for loan losses for the three and six months ended March 31, 2013 and 2012 (in thousands):

 

     Three months ended March 31,     Six months ended March 31,  
     2013     2012     2013     2012  

Balance at beginning of period

   $ 1,991      $ 1,533      $ 2,004      $ 1,658   

Provision for loan losses:

        

Commercial and Industrial

     3        80        3        80   

Real Estate:

        

Commercial

     43        367        43        371   

Residential

     54        (109     54        (75

Consumer

     (1     (116     (1     (116
  

 

 

   

 

 

   

 

 

   

 

 

 

Total provision

     99        222        99        260   

Amounts charged off:

        

Commercial and Industrial

     —          —          —          —     

Real Estate:

        

Commercial

     —          (151     —          (151

Residential

     (152     (95     (171     (243

Consumer

     —          (12     (9     (32
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans charged off

     (152     (258     (180     (426

Recoveries of amounts previously charged off:

        

Commercial and Industrial

     —          —          —          —     

Real Estate:

        

Commercial

     36        —          48        —     

Residential

     1        30        4        31   

Consumer

     —          14        —          18   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total recoveries

     37        44        52        49   

Net charge-offs

     (115     (214     (128     (377
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 1,975      $ 1,541      $ 1,975      $ 1,541   
  

 

 

   

 

 

   

 

 

   

 

 

 

There were no loans individually evaluated for impairment at or during the three or six month period ended March 31, 2013, the year ended September 30, 2012 or during the three or six month periods ended March 31, 2012.

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

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2013 and September 30, 2012 (in thousands):

 

     As of March 31, 2013      As of September 30, 2012  
            Loans Past Due             Loans Past Due  
            Over 90 Days             Over 90 Days  
     Nonaccrual      Still Accruing      Nonaccrual      Still Accruing  

Real estate:

           

One to four family

   $ 994       $ 179       $ 976       $ —     

Multi-family

     —           —           —           —     

Commercial real estate

     —           35         —           307   

Construction and land

     —           79         —           —     

Commercial and industrial

     —           —           —           14   

Consumer:

           

Home equity loans and lines of credit

     —           —           15         —     

Motor vehicle

     19         —           —           —     

Other

     —           —           4         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,013       $ 293       $ 995       $ 321   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table presents the aging of the recorded investment in past due loans as of March 31, 2013 and September 30, 2012 by class of loans (in thousands). Non-accrual loans of $1,013,000 as of March 31, 2013 and $995,000 as of September 30, 2012 are included in the tables below and have been categorized based on their payment status.

 

     30 - 59      60 - 89      Greater than                       
     Days      Days      90 Days      Total      Loans Not         
     Past Due      Past Due      Past Due      Past Due      Past Due      Total  

March 31, 2013

                 

Real estate:

                 

One to four family

   $ 2,929       $ 816       $ 1,173       $ 4,918       $ 128,901       $ 133,819   

Multi-family

     —           —           —           —           911         911   

Commercial real estate

     —           —           35         35         15,543         15,578   

Construction and land

     40         —           79         119         4,364         4,483   

Commercial and industrial

     10         —           —           10         5,554         5,564   

Consumer:

                 

Home equity loans and lines of credit

     74         —           —           74         5,275         5,349   

Motor vehicle

     14         30         19         63         7,563         7,626   

Other

     —           2         —           2         2,187         2,189   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,067       $ 848       $ 1,306       $ 5,221       $ 170,298       $ 175,519   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     30 - 59      60 - 89      Greater than                       
     Days      Days      90 Days      Total      Loans Not         
     Past Due      Past Due      Past Due      Past Due      Past Due      Total  

September 30, 2012

                 

Real estate:

                 

One to four family

   $ 1,117       $ 169       $ 803       $ 2,089       $ 139,218       $ 141,307   

Multi-family

     —           —           —           —           985         985   

Commercial real estate

     139         —           307         446         15,887         16,333   

Construction and land

     525         —           —           525         2,570         3,095   

Commercial and industrial

     4         135         14         153         4,742         4,895   

Consumer:

                 

Home equity loans and lines of credit

     —           —           15         15         5,896         5,911   

Motor vehicle

     87         28         —           115         6,853         6,968   

Other

     2         —           —           2         2,590         2,592   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,874       $ 332       $ 1,139       $ 3,345       $ 178,741       $ 182,086   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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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.

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):

 

     Pass      Special
Mention
     Substandard      Doubtful      Not Rated  

March 31, 2013

              

One to four family

   $ 129,248       $ 1,896       $ 2,675       $  —         $  —     

Multi family

     911         —           —           —           —     

Commercial and land

     19,192         9         860         —           —     

Commercial and industrial

     5,564         —           —           —           —     

Home equity loans and lines of credit

     5,328         14         7         —           —     

Motor vehicle

     7,542         24         60         —           —     

Other

     2,189         —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 169,974       $ 1,943       $ 3,602       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

September 30, 2012

              

One to four family

   $ 137,968       $ 954       $ 2,385       $ —         $ —     

Multi family

     985         —           —           —           —     

Commercial and land

     17,749         810         869         —           —     

Commercial and industrial

     4,895         —           —           —           —     

Home equity loans and lines of credit

     5,874         15         22         —           —     

Motor vehicle

     6,907         20         41         —           —     

Other

     2,592         —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 176,970       $ 1,799       $ 3,317       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company had no troubled debt restructuring at March 31, 2013 or September 30, 2012.

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For all loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity on a quarterly basis.

 

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NOTE 5: FEDERAL HOME LOAN BANK ADVANCES

Advances from the FHLB at March 31, 2013 and September 30, 2012 were as follows (in thousands):

 

     March 31,      September 30,  
     2013      2012  

Maturities February 2016 through June 2024, fixed rate at rates from 2.16% to 6.70%, weighted average rate of 2.94%at March 31, 2013 and 2.95% at September 30, 2012

   $ 15,602       $ 17,676   

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

 

March 31,

      

2014

   $ 4,267   

2015

     3,319   

2016

     2,697   

2017

     2,160   

2018

     1,733   

Thereafter

     1,426   
  

 

 

 

Total

   $ 15,602   
  

 

 

 

NOTE 6: 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).

Other Real Estate Owned : Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize 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.

 

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Table of Contents

Assets and liabilities measured at fair value on a recurring basis, including financial assets and liabilities for which the Company has elected the fair value option, are summarized below (in thousands):

 

     Fair Value Measurements at
March 31, 2013 Using:
 
     Carrying
Value
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Financial Assets

           

Securities:

           

States and political subdivisions

   $ 24,715       $  —         $ 24,715       $  —     

U.S. Government agencies and sponsored entitites

     31,934         —           31,934         —     

Mortgage backed securities: residential

     38,262         —           38,262         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 94,911       $ —         $ 94,911       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     Fair Value Measurements at
September 30, 2012 Using:
 
     Carrying
Value
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Financial Assets

           

Securities:

           

States and political subdivisions

   $ 26,188       $ —         $ 26,188       $ —     

U.S. Government agencies and sponsored entitites

     22,257         —           22,257         —     

Mortgage backed securities: residential

     46,011         —           46,011         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities

   $ 94,456       $ —         $ 94,456       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

There were no transfers between Level 1 and Level 2.

 

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Table of Contents

Assets measured at fair value on a non-recurring basis are summarized below:

 

            Fair Value Measurements at
March 31, 2013 Using:
 
     Carrying
Value
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Other real estate owned

           

(Commercial Real Estate), net

   $ 147       $  —         $  —         $ 147   
            Fair Value Measurements at
September 30, 2012 Using:
 
     Carrying
Value
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Other real estate owned

           

(One to four family), net

   $ 268       $ —         $ —         $ 268   

Commercial and residential real estate properties classified as other real estate owned (OREO) are measured at fair value. 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 Association’s management. The appraisal values are discounted to allow for selling expenses and fees, and the discounts range from 5% to 10%.

At March 31, 2013, other real estate owned had a net carrying amount of $147,000 made up of the outstanding balance of $165,000 net of a valuation allowance of $18,000, which resulted in a write-down of $18,000 for the six months ended March 31, 2013. At September 30, 2012, other real estate owned had a net carrying amount of $268,000 made up of the outstanding balance of $336,000, net of a valuation allowance of $68,000.

 

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Table of Contents

The carrying amounts and estimated fair values of financial instruments, at March 31, 2013 and September 30, 2012 are as follows (in thousands):

 

            Fair Value Measurements  
     Carrying Value      Level 1      Level 2      Level 3      Total  

March 31, 2013

              

Financial assets

              

Cash and cash equivalents

   $ 21,564       $ 21,564       $ —         $ —         $ 21,564   

Securities

     94,911                 94,911         —           94,911   

Federal Home Loan Bank stock

     1,953         N/A         N/A         N/A         N/A   

Loans held for sale

     764         —           783         —           783   

Loans, net

     173,470         —           —           189,044         189,044   

Accrued interest receivable

     1,185         —           429         756         1,185   

Financial liabilities

              

Deposits

   $ 231,609       $ 95,959       $ 137,271       $ —         $ 233,230   

Federal Home Loan Bank advances

     15,602         —           16,462         —           16,462   

Accrued interest payable

     141         —           141         —           141   

 

            Fair Value Measurements  
     Carrying Amount      Level 1      Level 2      Level 3      Total  

September 30, 2012

              

Financial assets

              

Cash and cash equivalents

   $ 23,430       $ 23,430       $ —         $ —         $ 23,430   

Securities

     94,456         —           94,456         —         $ 94,456   

Federal Home Loan Bank stock

     1,953         N/A         N/A         N/A         N/A   

Loans held for sale

     719         —           739         —         $ 739   

Loans, net

     179,998         —           —           202,153       $ 202,153   

Accrued interest receivable

     1,255         —           509         746       $ 1,255   

Financial liabilities

              

Deposits

   $ 236,472       $ 96,176       $ 141,826       $ —         $ 238,002   

Federal Home Loan Bank advances

     17,672         —           18,764         —           18,764   

Accrued interest payable

     376         —           376         —           376   

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.

FHLB Stock

It is not practical to determine the fair value of FHLB stock due to restrictions place on its transferability.

Loans

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

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

 

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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

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.

Off-balance Sheet Instruments

Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of commitments is not material.

NOTE 7 – ESOP PLAN

Employees participate in an Employee Stock Option Plan (ESOP). The ESOP borrowed from the Company to purchase 269,790 shares of the Company’s common stock at $10.00 per share. The Company makes discretionary contributions to the ESOP, and pays dividends on unallocated shares to the ESOP, and the ESOP uses funds it receives to repay the loan. When loan payments are made, ESOP shares are allocated to participants based on relative compensation and expense is recorded. Dividends on allocated shares increase participant accounts.

Participants receive the shares at the end of employment. A participant may require stock received to be repurchased unless the stock is traded on an established market.

Contributions to the ESOP totaled $143,000 for the three and six months ended March 31, 2013 and $46,000 for the three and six months ended March 31, 2012.

Shares held by the ESOP at March 31, 2013 were as follows:

 

     March 31, 2013      September 30, 2012  

Allocated to participants

     16,862         3,372   

Unallocated

     3,372         10,117   

Unearned

     249,556         256,301   
  

 

 

    

 

 

 

Total ESOP shares

     269,790         269,790   
  

 

 

    

 

 

 

Fair value of unearned shares (in thousands)

   $ 3,731       $ 3,158   
  

 

 

    

 

 

 

 

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NOTE 8 – EARNINGS PER SHARE

The factors used in the earnings per share computation, at three and six months ended March 31, 2013 and 2012, follow:

 

     Three months ended     Three months ended     Six months ended     Six months ended  
     March 31, 2013     March 31, 2012     March 31, 2013     March 31, 2012  
           (revised)           (revised)  

Basic

        

Net income

   $ 446,000      $ 449,000      $ 880,000      $ 1,057,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding

     3,346,989        3,372,375        3,359,821        3,372,375   

Less: Average unallocated ESOP shares

     (252,928     (268,085     (259,673     (268,085
  

 

 

   

 

 

   

 

 

   

 

 

 

Average shares

     3,094,061        3,104,290        3,100,148        3,104,290   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

   $ 0.14      $ 0.14      $ 0.28      $ 0.34   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

        

Net income

   $ 446,000      $ 449,000      $ 880,000      $ 1,057,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common shares outstanding for basic earnings per common share

     3,094,061        3,104,290        3,100,148        3,104,290   

Add: Dilutive effects of assumed exercises of stock options

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Average shares and dilutive potential common shares

     3,094,061        3,104,290        3,100,148        3,104,290   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

   $ 0.14      $ 0.14      $ 0.28      $ 0.34   
  

 

 

   

 

 

   

 

 

   

 

 

 

There were no potentially dilutive securities outstanding at March 31, 2013 or 2012; therefore, basic and diluted earnings per share are the same.

NOTE 9 – STOCK REPURCHASE PROGRAM

On December 18, 2012, the Board of Directors of Poage Bankshares, Inc. (the “Company”) authorized a stock repurchase program pursuant to which the Company intends to purchase up to 168,619 of its issued and outstanding shares of common stock, which represents approximately 5.0% of the Company’s issued and outstanding shares. The timing of the purchases will depend on certain factors, including but not limited to, market conditions and prices, available funds and alternative uses of capital. The stock repurchase program may be carried out through open-market purchases, block trades, negotiated private transactions and pursuant to a trading plan that will be adopted in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. Any repurchased shares will be held by the Company as authorized but unissued shares. The Company has repurchased 89,045 shares of its common stock under the repurchase program at an average price of $14.26 per share through March 31, 2013.

NOTE 10 – 2013 EQUITY INCENTIVE PLAN

On February 19, 2013, the Company’s shareholders approved the 2013 Equity Incentive Plan. On April 16, 2013 the Board of Directors granted restrictive stock to eligible participants of this plan. The plan awards 134,895 shares to all Directors and certain employees. Company shares were valued at $15.10 per share at the award date. Shares vest over a five year period, commencing on the first anniversary date of the award.

NOTE 11 – DEFINED BENEFIT PENSION PLAN

The Company’s defined benefit pension plan was “frozen” as of February 1, 2013. Contributions will be limited to sustaining earned participate benefits.

 

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

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

 

   

statements of our goals, intentions and expectations;

 

   

statements regarding our business plans and prospects and growth and operating strategies;

 

   

statements regarding the asset quality of our loan and investment portfolios; and

 

   

estimates of our risks and future costs and benefits.

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. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Quarterly Report.

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

 

   

our ability to manage our operations under the current adverse economic conditions nationally and in our market area;

 

   

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

 

   

our ability to attract and maintain deposits;

 

   

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;

 

   

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

 

   

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

 

   

our ability to increase multi-family, commercial real estate and commercial loan portfolio while maintaining asset quality;

 

   

risks relating to acquisitions and an ability to integrate and operate profitably any financial institution that we may acquire and to manage the risks related to growth in these types of lending;

 

   

our ability to pay dividends;

 

   

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

 

   

changes in consumer spending, borrowing and savings habits, including a lack of consumer confidence in financial institutions;

 

   

significantly increased competition among depository and other financial institutions;

 

   

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the SEC and the authoritative accounting and auditing bodies;

 

   

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, regulatory fees and compliance costs, and changes in the level of government support of housing finance;

 

   

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;

 

   

significantly increased competition with financial institutions;

 

   

risks and costs related to being a publicly traded company;

 

   

changes in our organization, compensation and benefit plans; and

 

   

other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing, products and services.

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

 

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Critical Accounting Policies

There are no material changes to the critical accounting policies disclosed in Poage Bankshares, Inc.’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on December 19, 2012.

Comparison of Financial Condition at March 31, 2013 and September 30, 2012

Our total assets decreased $8.5 million, or 2.7% to $308.7 million at March 31, 2013 from $317.2 million at September 30, 2012. The decrease was primarily due to a decrease of cash and due from financial institutions of $1.8 million, or 7.7%, to $21.6 million at March 31, 2013 from $23.4 million at September 30, 2012 and a decrease in loans receivable of $6.5 million, or 3.6%, to $173.5 million at March 31, 2013 from $180.0 million at September 30, 2012.

Loans held for sale increased $45,000, or 6.3% to $764,000 at March 31, 2013 from $719,000 at September 30, 2012.

Loans receivable, net, decreased $6.5 million, or 3.6% to $173.5 million at March 31, 2013 from $180.0 million at September 30, 2012. This decrease was largely due to reduced one-to-four family loan in house originations, caused by increases in loans sold in the secondary market and the reduced level of refinancing. Non-performing loans were relatively constant at $1.3 million at March 31, 2013 and September 30, 2012.

Securities available for sale increased to $94.9 million at March 31, 2013 from $94.5 million at September 30, 2012.

Deposits decreased $4.8 million, or 2.0%, to $231.6 million at March 31, 2013 from $236.5 million at September 30, 2012. The decrease was primarily attributable to a decrease of $4.6 million, or 3.3%, in certificates of deposit, offset by an increase in savings and NOW accounts of $0.3 million, or 0.3%. The decrease in certificates of deposit is primarily related to depositors seeking better yields on their funds through other sources given the low interest rate environment.

Federal Home Loan Bank advances decreased $2.1 million, or 11.9%, to $15.6 million at March 31, 2013 from $17.7 million at September 30, 2012. This decrease in borrowings was primarily the result of regular principal payments and maturities.

Total shareholders’ equity decreased to $59.7 million at March 31, 2013, compared to $60.6 million at September 30, 2012. The decrease resulted primarily from net income of $0.9 million for the six months ended March 31, 2013, offset by a decrease in other comprehensive income of $0.4 million, cash dividends of $0.3 million and repurchases of common stock in the amount of $1.3 million.

 

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Average Balance and Yields

The following tables set forth average balance sheets, average yields and costs, and certain other information at the dates and for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the tables as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income.

 

     For the Three Months Ended March 31,  
     2013     2012  
     Average
Balance
     Interest
and
Dividends
    Yield/
Cost
    Average
Balance
     Interest
and
Dividends
    Yield/
Cost
 
                               (revised)        

Assets:

              

Interest-earning assets:

              

Loans

   $ 175,715       $ 2,446        5.57   $ 181,926       $ 2,646        5.82

Investment securities

     96,998         467        1.93     100,738         625        2.48

FHLB stock

     1,953         21        4.30     1,927         22        4.57

Other interest-earning assets

     19,441         9        0.19     18,421         8        0.17
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest-earning assets

     294,107         2,943        4.00     303,012         3,301        4.36

Noninterest-earning assets

     17,056             19,684        
  

 

 

        

 

 

      

Total assets

     311,163             322,696        

Liabilities and equity:

              

Interest bearing liabilities:

              

Interest bearing deposits:

              

NOW, savings, money market, and other

     86,197         49        0.23     92,507         83        0.36

Certificates of deposit

     139,597         429        1.23     144,855         583        1.61
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest bearing deposits

     225,794         478        0.85     237,362         666        1.12

FHLB advances

     15,836         117        2.96     21,120         153        2.90
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest bearing liabilities

     241,630         595        0.98     258,482         819        1.27

Non-interest bearing liabilities:

              

Non-interest bearing deposits

     7,377             864        

Accrued interest payable

     163             240        

Other liabilities

     3,041             2,753        
  

 

 

        

 

 

      

Total non-interest bearing liabilities

     10,581             3,857        
  

 

 

        

 

 

      

Total liabilities

     252,211             262,339        

Total equity

     58,952             60,357        
  

 

 

        

 

 

      

Total liabilities and equity

   $ 311,163           $ 322,696        

Net interest income

        2,348             2,482     

Interest rate spread

          3.02          3.09

Net interest margin

          3.19          3.28

Average interest-earning assets to average interest-bearing liabilities

        121.72          117.23  

 

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     For the Six Months Ended March 31,  
     2013     2012  
     Average
Balance
     Interest
and
Dividends
    Yield/
Cost
    Average
Balance
     Interest
and
Dividends
    Yield/
Cost
 
                               (revised)        

Assets:

              

Interest-earning assets:

              

Loans

   $ 177,494       $ 5,000        5.63   $ 181,558       $ 5,374        5.92

Investment securities

     96,828         923        1.91     95,235         1,188        2.49

FHLB stock

     1,953         44        4.51     1,906         41        4.30

Other interest-earning assets

     19,635         19        0.19     24,203         24        0.20
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest-earning assets

     295,910         5,986        4.05     302,902         6,627        4.38

Noninterest-earning assets

     18,576             21,127        
  

 

 

        

 

 

      

Total assets

     314,486             324,029        

Liabilities and equity:

              

Interest bearing liabilities:

              

Interest bearing deposits:

              

NOW, savings, money market, and other

     87,812         156        0.36     93,108         210        0.45

Certificates of deposit

     140,030         904        1.29     145,572         1,231        1.69
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest bearing deposits

     227,842         1,060        0.93     238,680         1,441        1.21

FHLB advances

     16,505         243        2.94     21,703         329        3.03
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total interest bearing liabilities

     244,347         1,303        1.07     260,383         1,770        1.36

Non-interest bearing liabilities:

              

Non-interest bearing deposits

     5,793             971        

Accrued interest payable

     339             395        

Other liabilities

     3,889             2,738        
  

 

 

        

 

 

      

Total non-interest bearing liabilities

     10,021             4,104        
  

 

 

        

 

 

      

Total liabilities

     254,368             264,487        

Total equity

     60,118             59,542        
  

 

 

        

 

 

      

Total liabilities and equity

   $ 314,486           $ 324,029        

Net interest income

        4,683             4,857     

Interest rate spread

          2.98          3.02

Net interest margin

          3.17          3.21

Average interest-earning assets to average interest-bearing liabilities

        121.10          116.33  

 

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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 maintain core deposit relationships.

Liquidity management is both a daily and long-term responsibility of management. We adjust our investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) expected deposit flows, (iii) yields available on interest-earning deposits and investment securities, and (iv) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning overnight deposits, federal funds sold and short and intermediate-term investment securities. If we require funds beyond our ability to generate them internally we have additional borrowing capacity with the Federal Home Loan Bank of Cincinnati. At March 31, 2013, we had $15.6 million in advances from the Federal Home Loan Bank of Cincinnati and an additional borrowing capacity of $58.1 million.

The Association is subject to various regulatory capital requirements administered by its primary federal regulator, the Office of the Comptroller of the Currency (“OCC”). Failure to meet the minimum regulatory capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators, that if undertaken, could have a direct material effect on the Association and the consolidated financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Association must meet specific capital guidelines involving quantitative measures of the Association’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.

The Association’s capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Association to maintain minimum amounts and ratios of: total risk-based capital and Tier I capital to risk-weighted assets (as defined in the regulations), Tier I capital to adjusted total assets (as defined), and tangible capital to adjusted total assets (as defined).

As of March 31, 2013, based on the most recent notification from the OCC, the Association was categorized as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the most recent notification that management believes have changed or are likely to change the Association’s prompt corrective action category.

 

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Actual and required capital amounts (in thousands) and ratios for the Association are presented below at March 31, 2013 and year-end:

 

     Actual     For Capital Adequacy
Purposes
    To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
 
     Amount      Ratio     Amount             Ratio     Amount             Ratio  

As of March 31, 2013:

                     

Total Risk-Based Capital
(to Risk-weighted Assets)

   $ 46,622         30.98   $ 12,039       ³           8.00   $ 15,049       ³           10.00

Tier I Capital
(to Risk-weighted Assets)

     44,730         29.72     6,020       ³           4.00     9,024       ³           6.00

Tier I Capital
(to Adjusted Total Assets)

     44,730         14.49     12,347       ³           4.00     15,434       ³           5.00

 

     Actual     For Capital Adequacy
Purposes
    To Be Well
Capitalized Under
Prompt Corrective
Action Regulations
 
     Amount      Ratio     Amount             Ratio     Amount             Ratio  

As of September 30, 2012:

                     

Total Risk-Based Capital
(to Risk-weighted Assets)

   $ 45,499         29.29   $ 12,429       ³           8.00   $ 15,388       ³           10.00

Tier I Capital
(to Risk-weighted Assets)

     43,547         28.03     6,214       ³           4.00     9,203       ³           6.00

Tier I Capital
(to Adjusted Total Assets)