10-Q 1 v417553_10q.htm FORM 10-Q

 

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 June 30, 2015

 

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

 

For transition period from ______________________ to___________________

 

Commission File Number 001-35295

 

 

 

Poage Bankshares, Inc.

(Exact Name of Registrant as Specified in Charter)

 

 

 

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

  

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

 

606-324-7196

Registrant’s telephone number, including area code

 

Not Applicable

(Former name 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

 

As of August 13, 2015, the number of shares of the Registrant’s common stock, par value $.01 per share, was 3,948,244.

 

  

 

  

POAGE BANKSHARES, INC.

 

Form 10-Q Quarterly Report

 

Table of Contents

 

  PART I. FINANCIAL INFORMATION  
     
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS – POAGE BANKSHARES, INC. 3
     
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND  RESULTS OF OPERATIONS 29
     
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 39
     
ITEM 4. CONTROLS AND PROCEDURES 39
     
  PART II. OTHER INFORMATION  
     
ITEM 1. LEGAL PROCEEDINGS 40
     
ITEM 1A. RISK FACTORS 40
     
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 40
     
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 41
     
ITEM 4. MINE SAFETY DISCLOSURES 41
     
ITEM 5. OTHER INFORMATION 41
     
ITEM 6. EXHIBITS 41
   
SIGNATURES 42

  

 2 

 

  

PART I

 

ITEM 1.     FINANCIAL STATEMENTS

 

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED BALANCE SHEETS

 

   June 30,   December 31, 
   2015   2014 
   (in thousands) 
ASSETS          
Cash and due from financial institutions  $15,812   $16,967 
Securities available for sale   67,862    65,262 
Loans held for sale   -    712 
Loans, net of allowance of $2,073 and $1,911   317,487    302,012 
Restricted stock, at cost   3,276    2,921 
Other real estate owned, net   1,459    1,858 
Premises and equipment, net   10,789    9,257 
Company owned life insurance   6,850    6,760 
Accrued interest receivable   1,366    1,347 
Goodwill   1,277    1,082 
Other intangible assets, net   1,536    1,470 
Deferred tax asset   2,590    2,341 
Other assets   2,141    2,713 
Total Assets  $432,445   $414,702 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Deposits          
Non-interest bearing  $50,198   $49,646 
Interest bearing   290,218    273,492 
Total deposits   340,416    323,138 
Federal Home Loan Bank advances   14,948    17,952 
Subordinated debenture   2,729    2,697 
Accrued interest payable   123    47 
Other liabilities   3,711    2,717 
Total liabilities   361,927    346,551 
           
Commitments and contingent liabilities   -    - 
           
Shareholders' equity          
Common stock, $.01 par value, 30,000,000 shares authorized, 3,952,944 and 3,876,455 issued and outstanding at June 30, 2015 and December 31, 2014 respectively   40    39 
Additional paid-in-capital   38,611    37,978 
Retained earnings   33,815    31,933 
Unearned Employee Stock Ownership Plan (ESOP) shares   (2,192)   (2,259)
Accumulated other comprehensive income   244    460 
Total shareholders' equity   70,518    68,151 
Total liabilities and shareholders' equity  $432,445   $414,702 

 

See notes to unaudited consolidated financial statements.

 

 3 

 

  

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

 

   Three months ended   Six months ended 
   June 30,   June 30, 
   2015   2014   2015   2014 
   (in thousands)   (in thousands) 
Interest and dividend income                    
Loans, including fees  $4,180   $4,275   $8,389   $6,844 
Taxable securities   243    388    504    780 
Tax exempt securities   105    146    207    271 
Federal funds sold and other   36    34    70    60 
    4,564    4,843    9,170    7,955 
Interest expense                    
Deposits   450    439    897    797 
Federal Home Loan Bank advances and other   102    114    205    211 
    552    553    1,102    1,008 
                     
Net interest income   4,012    4,290    8,068    6,947 
                     
Provision for loan losses   394    -    485    - 
                     
Net interest income after provision for loan losses   3,618    4,290    7,583    6,947 
                     
Non-interest income                    
Service charges on deposits   491    489    932    727 
Other service charges   11    7    21    13 
Gains on mortgage banking activity   257    126    416    220 
Net gains on sales of securities   -    294    -    294 
Income from company owned life insurance   45    49    90    116 
Bargain purchase gain   1,555    -    1,555    - 
Other   2    5    47    8 
    2,361    970    3,061    1,378 
Non-interest expense                    
Salaries and employee benefits   1,870    2,172    3,713    3,447 
Occupancy and equipment   394    476    791    778 
Data processing   548    507    1,097    867 
Federal deposit insurance   55    58    120    87 
Loan processing and collection   90    92    161    121 
Foreclosed assets, net   63    58    169    87 
Advertising   42    51    80    91 
Professional fees   251    413    437    784 
Other taxes   87    58    182    117 
Director fees and expenses   57    55    110    112 
Amortization of intangible assets   80    74    161    74 
Early termination fee and conversion costs   418    53    418    872 
Other   294    470    565    744 
    4,249    4,537    8,004    8,181 
                     
Income before income taxes   1,730    723    2,640    144 
                     
Income tax expense   14    212    338    58 
                     
Net income   1,716    511    2,302    86 
                     
Basic and dilutive earnings per common share:                    
Net income, basic  $0.48   $0.14   $0.64   $0.03 
Basic weighted average shares outstanding   3,535,210    3,551,976    3,526,613    3,304,102 
                     
Net income, dilutive  $0.48   $0.14   $0.64   $0.03 
Diluted weighted average shares outstanding   3,535,210    3,551,976    3,526,613    3,304,102 
                     
Dividend per share  $0.06   $0.05   $0.11   $0.10 

 

 

See notes to unaudited consolidated financial statements.

 

 4 

 

  

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

   Three months ended   Six months ended 
   June 30,   June 30, 
   2015   2014   2015   2014 
                 
Net income  $1,716   $511   $2,302   $86 
                     
Other comprehensive income (loss):                    
Unrealized holding gains (losses) on available for sale securities   (561)   1,068    (327)   1,825 
Reclassification adjustments for (gains) losses recognized in income   -    (294)   -    (294)
Net unrealized holding gains (losses) on available for sale securities   (561)   774    (327)   1,531 
Tax effect   191    (263)   111    (520)
Other comprehensive income (loss):   (370)   511    (216)   1,011 
                     
Comprehensive income  $1,346   $1,022   $2,086   $1,097 

 

See notes to unaudited consolidated financial statements.

 

 5 

 

  

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

 

                   Accumulated     
       Additional       Unearned   Other   Total 
   Common   Paid-In   Retained   ESOP   Comprehensive   Shareholders' 
   Stock   Capital   Earnings   Shares   Income (Loss)   Equity 
   (in thousands) 
Balances,  January 1, 2015  $39   $37,978   $31,933   $(2,259)  $460   $68,151 
Net income   -    -    2,302    -    -    2,302 
Issuance of 166,221 common shares, net of issuance costs   2    1,673    -    -    -    1,675 
Stock repurchasing, 89,193 shares repurchased   (1)   (1,338)   -    -    -    (1,339)
Dividends paid ($0.11/share)   -    -    (420)   -    -    (420)
ESOP compensation earned   -    36    -    67    -    103 
Stock based compensation expense, net of 539 forfeited shares   -    262    -    -    -    262 
Other comprehensive income (loss)   -    -    -    -    (216)   (216)
                               
Balances,  June 30, 2015  $40   $38,611   $33,815   $(2,192)  $244   $70,518 

 

See notes to unaudited consolidated financial statements.

 

 6 

 

  

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Six months ended 
   June 30, 
   2015   2014 
   (in thousands) 
CASH FLOW FROM OPERATING ACTIVITIES:          
Net income  $2,302   $86 
Adjustments to reconcile net income (loss) to net cash from operating activities:          
Bargain purchase gain    (1,555)   - 
Depreciation   335    268 
Provision for loan losses   485    - 
ESOP compensation expense   103    95 
Stock based compensation expense   262    265 
Gain on sale of securities   -    (294)
Loss on sale of other real estate owned   84    65 
Gain on sale of repossessed assets   (1)   - 
Amortization of core deposit intangible   161    74 
Accretion of fair value adjustments related to loans   (581)   (214)
Accretion of fair value adjustments related to deposits   (33)   (21)
Amortization of fair value related to subordinated debenture   32    - 
Net amortization on securities   265    700 
Deferred income tax benefit   (9)   (75)
Net gain on mortgage banking activities   (416)   (220)
Origination of loans held for sale   (2,642)   (3,061)
Proceeds from loans held for sale   3,770    3,427 
Increase in cash value of life insurance   (90)   (115)
Change in asset and liabilities, net assets and liabilities acquired:          
Accrued interest receivable   38    185 
Other assets   591    43 
Accrued interest payable   61    116 
Other liabilities   772    351 
Net cash from operating activities   3,934    1,675 
           
CASH FLOW FROM INVESTING ACTIVITIES:          
Securities available for sale:          
Proceeds from sales   -    19,721 
Proceeds from calls   1,000    7,265 
Proceeds from maturities   405    120 
Purchases   (8,030)   - 
Principal payments received   3,433    2,814 
Purchase of FHLB stock   (56)   - 
Cash paid for acquisition, net of cash acquired   2,355    1,445 
Loan originations and principal payments on loans, net   (574)   (5,755)
Proceeds from the sale of other real estate owned   353    - 
Proceeds from the sale of repossessed assets   55    - 
Purchase of properties and equipment   (534)   (202)
Net cash from (used in) investing activities   (1,593)   25,408 
           
CASH FLOW FROM FINANCING ACTIVITIES          
Net change in deposits   1,908    (1,389)
Proceeds from Federal Home Loan Bank borrowings   23,000    26,000 
Payments on Federal Home Loan Bank borrowings   (28,320)   (28,362)
Cash dividend paid   (420)   (363)
Proceeds from issuance of common stock, net of costs   1,675    - 
Stock repurchases   (1,339)   (331)
Net cash used in financing activities   (3,496)   (4,445)
           
CHANGE IN CASH AND CASH EQUIVALENTS   (1,155)   22,638 
           
Cash and cash equivalents at beginning of year   16,967    6,684 
           
CASH AND CASH EQUIVALENTS AT END OF PERIOD  $15,812   $29,322 
           
Additional cash flows and supplementary information:          
Cash paid during the year for:          
Interest on deposits and advances  $1,026   $892 
Income taxes   350    - 
Stock issued for consideration paid in acquisition, net of issuance costs  $-   $7,836 
Real estate acquired in settlement of loans  $38   $292 

 

See notes to unaudited consolidated financial statements.

 

 7 

 

  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

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

 

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

 

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

 

In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position as of June 30, 2015 and December 31, 2014 and the results of operations and cash flows for the interim periods ended June 30, 2015 and 2014. 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 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

 

Effective May 31, 2015, the Company completed its previously reported acquisition of Commonwealth Bank, F.S.B., Mt. Sterling, Kentucky (“Commonwealth”), in a conversion merger transaction.  As result of the conversion merger transaction, Commonwealth converted from a mutual to stock institution and merged with and into the Bank, with the Bank as the surviving institution, and the Company issued and sold 166,221 shares of common stock at a price of $12.73 per share to depositor and borrower members of Commonwealth in a subscription offering and to stockholders of the Company and members of the general public in a community offering. Gross offering proceeds totaled approximately $2.1 million.  As a result of the stock offering, the Company had approximately 3,952,944 shares of common stock outstanding as of the close of business on May 31, 2015.  Commonwealth’s sole office, located in Mt. Sterling, Kentucky, has become a branch office of the Bank.

 

 8 

 

  

NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Newly Issued Not Yet Effective Accounting Standards

 

In May 2014 the FASB amended existing guidance related to revenue from contracts with customers. This amendment supersedes and replaces nearly all existing revenue recognition guidance, including industry-specific guidance, establishes a new control-based revenue recognition model, changes the basis for deciding when revenue is recognized over time or at a point in time, provides new and more detailed guidance on specific topics and expands and improves disclosures about revenue. In addition, this amendment specifies the accounting for some costs to obtain or fulfill a contract with a customer.

 

These amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is not permitted. The amendments should be applied retrospectively to all periods presented or retrospectively with the cumulative effect recognized at the date of initial application. The Company is currently evaluating the impact of this new accounting standard on the consolidated financial statements.

 

Adoptions of New Accounting Standards

 

In January 2014, the FASB amended existing guidance to clarify when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. These amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either: (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure, or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additional disclosures are required.

 

These amendments are effective for public business entities for annual periods and interim periods within those annual periods beginning after December 15, 2014. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

 9 

 

 

NOTE 3 - SECURITIES AVAILABLE FOR SALE

 

The amortized cost and fair value of securities available for sale at June 30, 2015 and December 31, 2014 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 
June 30, 2015                    
States and political subdivisions  $17,041   $482   $(18)  $17,505 
U.S. Government agencies and sponsored entities   13,248    13    (205)   13,056 
Government sponsored entities residential mortgage-backed:                    
FHLMC   12,827    132    (15)   12,944 
FNMA   12,867    103    (28)   12,942 
Collateralized mortgage obligations   7,597    13    (66)   7,544 
SBA loan pools   3,912    -    (41)   3,871 
Total securities  $67,492   $743   $(373)  $67,862 

 

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
December 31, 2014                    
States and political subdivisions  $17,121   $633   $(8)  $17,746 
U.S. Government agencies and sponsored entities   14,247    6    (267)   13,986 
Government sponsored entities residential mortgage-backed:                    
FHLMC   14,346    251    (7)   14,590 
FNMA   14,207    177    (9)   14,375 
Collateralized mortgage obligations   4,644    -    (79)   4,565 
Total securities  $64,565   $1,067   $(370)  $65,262 

 

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

 

   Three months ended   Six months ended 
   June 30,   June 30, 
   2015   2014   2015   2014 
Proceeds  $-   $19,721   $-   $19,721 
Gross gains   -    372    -    372 
Gross losses   -    (78)   -    (78)

 

The amortized cost and fair value of the securities portfolio at June 30, 2015 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. Securities not due at a single maturity date are shown separately (in thousands):

 

   June 30, 
   2015 
   Amortized   Fair 
   Cost   Value 
     
Within one year  $250   $251 
One to five years   12,829    12,870 
Five to ten years   14,444    14,566 
Beyond ten years   2,766    2,874 
Mortgage-backed securities and collateralized mortgage obligations   33,291    33,430 
SBA loan pools   3,912    3,871 
Total  $67,492   $67,862 

 

 10 

 

  

The following table summarizes the securities with unrealized losses at June 30, 2015 and December 31, 2014, 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 
June 30, 2015                              
States and political subdivisions  $814   $(17)  $628   $(1)  $1,442   $(18)
U.S. Government agencies and sponsored entities   2,985    (15)   8,560    (190)   11,545    (205)
Government sponsored entities residential mortgage backed:                              
FHLMC   1,561    (15)   -    -    1,561    (15)
FNMA   2,739    (28)   -    -    2,739    (28)
Collateralized mortgage obligations   2,879    (17)   2,571    (49)   5,450    (66)
SBA loan pools   3,871    (41)   -    -    3,871    (41)
Total available-for-sale securities  $14,849   $(133)  $11,759   $(240)  $26,608   $(373)
                               
December 31, 2014                              
States and political subdivisions  $1,072   $(8)  $-   $-   $1,072   $(8)
U.S. Government agencies and sponsored entities   -    -    12,482    (267)   12,482    (267)
Government sponsored entities residential mortgage backed:                              
FHLMC   -    -    1,131    (7)   1,131    (7)
FNMA   2,063    (3)   946    (6)   3,009    (9)
Collateralized mortgage obligations   1,652    (13)   2,913    (66)   4,565    (79)
Total available-for-sale securities  $4,787   $(24)  $17,472   $(346)  $22,259   $(370)

 

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

 

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

 

 11 

 

 

NOTE 4 – LOANS

 

Loans at June 30, 2015 and December 31, 2014 were as follows (in thousands):

 

   June 30   December 31, 
   2015   2014 
         
Real estate:          
One to four family  $189,537   $179,480 
Multi-family   5,407    5,916 
Commercial Real Estate   62,681    62,979 
Construction and land   3,708    5,142 
    261,333    253,517 
           
Commercial and Industrial   32,418    25,523 
           
Consumer          
Home equity loans and lines of credit   8,300    7,973 
Motor vehicle   9,321    10,337 
Other   8,481    6,774 
    26,102    25,084 
           
Total   319,853    304,124 
Less: Net deferred loan fees   293    201 
  Allowance for loan losses   2,073    1,911 
           
   $317,487   $302,012 

 

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 June 30, 2015 and December 31, 2014. 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):

 

June 30, 2015                                
   Allowance for Loan Losses   Loan Balances 
   Individually   Purchased   Collectively       Individually   Purchased   Collectively     
   Evaluated for   Credit-Impaired   Evaluated for       Evaluated for   Credit-Impaired   Evaluated for     
Loan Segment  Impairment   Loans   Impairment   Total   Impairment   Loans   Impairment   Total 
                                 
Real estate  $23   $-   $1,877   $1,900   $1,881   $3,318   $256,134   $261,333 
Commercial and industrial   2    -    87    89    239    425    31,754    32,418 
Consumer   -    -    84    84    -    30    26,072    26,102 
                                         
Total  $25   $-   $2,048   $2,073   $2,120   $3,773   $313,960   $319,853 

 

December 31, 2014                                
   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  $-   $-   $1,806   $1,806   $324   $3,633   $249,560   $253,517 
Commercial and industrial   -    -    43    43    19    439    25,065    25,523 
Consumer   -    -    62    62    -    10    25,074    25,084 
                                         
Total  $-   $-   $1,911   $1,911   $343   $4,082   $299,699   $304,124 

  

 12 

 

  

The following table presents information related to impaired loans by class of loans as of June 30, 2015 and December 31, 2014.

 

   Unpaid
Principal
Balance
   Recorded
Investment
   Allowance
for Loan
Losses
Allocated
   Average
Recorded
Investment
   Interest
Income
Recognized
   Cash Basis
Interest
Recognized
 
June 30, 2015                              
With no related allowance recorded:                              
     Commercial  $275   $193   $-   $106   $-   $- 
     Commercial real estate:             -                
Construction   -    -    -         -    - 
Other   425    399    -    299    -    - 
     Residential real estate:                              
Nontraditional   -    -    -    -    -    - 
Other   1,202    886    -    506    -    - 
Subtotal  $1,902   $1,478    -   $911    -    - 
                               
With an allowance recorded:                              
     Commercial  $46   $46   $2   $23   $-   $- 
     Commercial real estate:                              
Construction   -    -    -    -    -    - 
Other   596    596    23    298    -    - 
     Residential real estate:                              
Nontraditional   -    -    -         -    - 
Other   -    -    -         -    - 
Subtotal   642    642    25    321    -    - 
                               
Total  $2,544   $2,120   $25   $1,232   $-   $- 

 

   Unpaid 
Principal
Balance
   Recorded
Investment
   Allowance 
for Loan 
Losses
Allocated
   Average
Recorded
Investment
   Interest
Income
Recognized
   Cash Basis
Interest
Recognized
 
December 31, 2014                              
With no related allowance recorded:                              
Commercial  $19   $19   $-   $5   $-   $- 
Commercial real estate:                              
Construction   -    -    -    -    -    - 
Other   199    199    -    50    -    - 
Residential real estate:                              
Nontraditional   -    -    -    -    -    - 
Other   125    125    -    31    -    - 
Subtotal   343    343    -    86    -    - 
                               
With an allowance recorded:                              
Commercial   -    -    -    -    -    - 
Commercial real estate:                              
Construction   -    -    -    -    -    - 
Other   -    -    -    -    -    - 
Residential real estate:                              
Nontraditional   -    -    -    -    -    - 
Other   -    -    -    -    -    - 
Subtotal   -    -    -    -    -    - 
Total  $343   $343   $-   $86   $-   $- 

  

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.

 

 13 

 

  

The following table sets forth an analysis of our allowance for loan losses for the three and six months ended June 30, 2015 and 2014 (in thousands):

 

Three Months Ended      Commercial             
June 30, 2015  Real Estate   and Industrial   Consumer   Unallocated   Total 
                     
Allowance for loan losses:                         
Beginning balance  $1,878   $72   $63   $-   $2,013 
Provision for loan losses   279    7    108    -    394 
Loans charged-off   (266)   -    (99)   -    (365)
Recoveries   9    10    12    -    31 
Total ending allowance balance  $1,900   $89   $84   $-   $2,073 

 

Three Months Ended      Commercial             
June 30, 2014  Real Estate   and Industrial   Consumer   Unallocated   Total 
                     
Allowance for loan losses:                         
Beginning balance  $1,767   $11   $41   $48   $1,867 
Provision for loan losses   (109)   4    16    89    - 
Loans charged-off   (116)   (8)   (7)   -    (131)
Recoveries   17    -    4    -    21 
Total ending allowance balance  $1,559   $7   $54   $137   $1,757 

 

Six Months Ended      Commercial             
June 30, 2015  Real Estate   and Industrial   Consumer   Unallocated   Total 
                     
Allowance for loan losses:                         
Beginning balance  $1,806   $43   $62   $-   $1,911 
Provision for loan losses   278    61    146    -    485 
Loans charged-off   (318)   (52)   (146)   -    (516)
Recoveries   134    37    22    -    193 
Total ending allowance balance  $1,900   $89   $84   $-   $2,073 

 

Six Months Ended      Commercial             
June 30, 2014  Real Estate   and Industrial   Consumer   Unallocated   Total 
                     
Allowance for loan losses:                         
Beginning balance  $1,818   $8   $52   $30   $1,908 
Provision for loan losses   (106)   (11)   10    107    - 
Loans charged-off   (172)   (8)   (12)   -    (192)
Recoveries   19    18    4    -    41 
Total ending allowance balance  $1,559   $7   $54   $137   $1,757 

 

There were $3.6 million and $5.4 million of purchased credit impaired loans which were acquired in a business combination completed on March 18, 2014 at June 30, 2015 and 2014, respectively. There were $94,000 of purchased credit impaired loans which were acquired in a business combination completed on May 31, 2015 at June 30, 2015. Impaired loans averaged $1.2 million and $0 for the six months ended June 30, 2015 and 2014, respectively.

  

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

 

 14 

 

 

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 June 30, 2015 and December 31, 2014 (in thousands):

 

   June 30, 2015   December 31, 2014 
       Loans Past Due       Loans Past Due 
       Over 90 Days       Over 90 Days 
   Nonaccrual   Still Accruing   Nonaccrual   Still Accruing 
Real estate:                    
One to four family  $2,687   $-   $2,223   $- 
Multi-family   -    -    -    - 
Commercial real estate   931    -    578    - 
Construction and land   46    -    103    - 
Commercial and industrial   303    -    396    - 
Consumer:                    
Home equity loans and lines of credit   23    -    1    - 
Motor vehicle   8    -    21    - 
Other   27    -    31    - 
                     
Total  $4,025   $-   $3,353   $- 

 

The following table presents the aging of the recorded investment in past due loans as of June 30, 2015 and December 31, 2014 by class of loans. Non-accrual loans of $4.0 million as of June 30, 2015 and $3.4 million at December 31, 2014 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 
June 30, 2015                                   
Real estate:                                   
One to four family  $1,151   $511   $1,706   $3,368   $1,233   $184,936   $189,537 
Multi-family   -    -    -    -    -    5,407    5,407 
Commercial real estate   216    -    732    948    1,818    59,915    62,681 
Construction and land   -    -    13    13    267    3,428    3,708 
Commercial and industrial   253    1    209    463    425    31,530    32,418 
Consumer:                                   
Home equity loans and lines of credit   -    12    23    35    6    8,259    8,300 
Motor vehicle   6    -    8    14    -    9,307    9,321 
Other   2    -    -    2    24    8,455    8,481 
Total  $1,628   $524   $2,691   $4,843   $3,773   $311,237   $319,853 

 

   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, 2014                                   
Real estate:                                   
One to four family  $2,028   $488   $1,259   $3,775   $1,262   $174,443   $179,480 
Multi-family   -    -    -    -    -    5,916    5,916 
Commercial real estate   1,102    124    38    1,264    2,031    59,684    62,979 
Construction and land   -    -    103    103    340    4,699    5,142 
Commercial and industrial   245    46    257    548    439    24,536    25,523 
Consumer:                                   
Home equity loans and lines of credit   86    23    -    109    7    7,857    7,973 
Motor vehicle   102    4    20    126    -    10,211    10,337 
Other   33    20    16    69    3    6,702    6,774 
Total  $3,596   $705   $1,693   $5,994   $4,082   $294,048   $304,124 

 

Troubled Debt Restructurings:

 

The Company had a recorded investment in four troubled debt restructurings which totaled $332,000 and two troubled debt restructurings which totaled $218,000, at June 30, 2015 and December 31, 2014, respectively. A less than market rate and extended term was granted as concessions for these troubled debt restructurings. No additional charge-off or provision has been made for the loan relationships. No additional commitments to lend have been made to the borrower.

 

The modification of the terms of such loans performed during the six and twelve month periods of June 30, 2015 and December 31, 2014, included a permanent reduction of the recorded investment in the loans. There were no interest rate concessions or term extensions during the six months ended June 30, 2015. The modification of the commercial real estate performed during the year ended December 31, 2014 included an extension of the maturity date at a stated rate of interest lower than the current market rate.

 

 

 15 

 

  

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.

 

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 
                     
June 30, 2015                    
One to four family  $181,162   $3,144   $5,231   $-   $- 
Multi family   5,407    -    -    -    - 
Commercial real estate   60,006    160    2,515    -    - 
Construction and land   3,012    -    696    -    - 
Commercial and industrial   30,248    1,461    709    -    - 
Home equity loans and lines of credit   8,255    -    45    -    - 
Motor vehicle   9,271    11    39    -    - 
Other   8,420    8    53    -    - 
                          
Total  $305,781   $4,784   $9,288   $-   $- 

 

   Pass   Special Mention   Substandard   Doubtful   Not Rated 
                     
December 31, 2014                    
One to four family  $171,324   $3,794   $4,362   $-   $- 
Multi family   5,916    -    -    -    - 
Commercial real estate   60,250    54    2,675    -    - 
Construction and land   4,402    52    688    -    - 
Commercial and industrial   22,162    2,332    1,029    -    - 
Home equity loans and lines of credit   7,935    30    8    -    - 
Motor vehicle   10,299    22    16    -    - 
Other   6,740    -    34    -    - 
                          
Total  $289,028   $6,284   $8,812   $-   $- 

  

 16 

 

  

The Company holds purchased loans without evidence of credit quality deterioration and purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable, at acquisition, 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:

 

June 30, 2015  Non-impaired   Credit-impaired 
  Purchased   Purchased 
(in thousands)  Loans   Loans 
Real estate mortgage loans:          
Residential:          
1-4 Family  $43,704   $1,233 
Multi-family   2,775    - 
Construction & Land   1,343    267 
Farm   5,753    18 
Nonresidential   24,396    1,800 
Commercial non-mortgage loans   9,171    425 
Consumer loans   4,280    30 
Total loans  $91,422   $3,773 

 

December 31, 2014  Non-impaired   Credit-impaired 
   Purchased   Purchased 
(in thousands)  Loans   Loans 
Real estate mortgage loans:          
 Residential:          
1-4 Family  $36,256   $1,300 
Multi-family   3,237    - 
Construction & Land   2,391    340 
Farm   6,299    23 
Nonresidential   25,545    1,970 
Commercial non-mortgage loans   11,073    439 
Consumer loans   4,363    10 
           
Total loans  $89,164   $4,082 

 

For those purchased loans disclosed above, the Company did not increase the allowance for loan losses for the six months ended June 30, 2015.

 

The following table presents the composition of the acquired loans at June 30, 2015:

 

   Contractual   Unaccreted   Amortized 
(in thousands)  Amount   Discount   Book Value 
Real estate mortgage loans:               
Residential:               
1-4 Family  $46,144   $(1,207)  $44,937 
Multi-family   2,818    (42)   2,776 
Construction & Land   1,634    (23)   1,611 
Farm   5,892    (121)   5,771 
Nonresidential   27,136    (940)   26,196 
Commercial non-mortgage loans   12,490    (2,895)   9,595 
Consumer loans   4,378    (69)   4,309 
Total loans  $100,492   $(5,297)  $95,195 

 

The following table presents the purchased loans that are included within the scope of ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality as of June 30, 2015. Loans purchased during the six months ended June 30, 2015 of $164,000 are included in the contractually-required principal and interest payments with a fair value of $94,000.

 

(in thousands)    
     
Contractually-required principal and interest payments  $7,686 
Non-Accretable difference   (3,431)
Accretable yield   (482)
Fair value of loans  $3,773 

 

The Company adjust interest income to recognize $38,000, $149,000, $85,000 and $85,000 of accretable yield on credit-impaired purchased loans for the three and six months ended June 30, 2015 and 2014, respectively.  

 

 17 

 

  

NOTE 5: FEDERAL HOME LOAN BANK ADVANCES

 

Advances from the FHLB at June 30, 2015 and December 31, 2014 were as follows (in thousands):

 

   June 30,   December 31, 
   2015   2014 
           
Maturities July 2015 through June 2025, fixed rate at rates from 0.17% to 6.70%, weighted average rate of 1.59% at June 30, 2015 and 1.55% at December 31, 2014  $14,948   $17,952 

  

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

 

June 30,    
2016  $9,887 
2017   2,013 
2018   1,629 
2019   915 
2020   95 
Thereafter   409 
Total  $14,948 

 

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).

 

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

 

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

 

 18 

 

  

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

 

   Fair Value Measurements at 
   June 30, 2015 Using: 
           Significant     
       Quoted Prices in   Other   Significant 
       Active Markets for   Observable   Unobservable 
   Carrying   Identical Assets   Inputs   Inputs 
   Value   (Level 1)   (Level 2)   (Level 3) 
                 
Financial Assets                    
Securities:                    
States and political subdivisions  $17,505   $-   $17,505   $- 
U.S. Government agencies and sponsored entities   13,056    -    13,056    - 
Mortgage backed securities: residential   25,886    -    25,886    - 
Collateralized mortgage obligations   7,544    -    7,544    - 
SBA loan pools   3,871    -    3,871    - 
Total securities  $67,862   $-   $67,862   $- 

 

   Fair Value Measurements at 
   December 31, 2014 Using: 
           Significant     
       Quoted Prices in   Other   Significant 
       Active Markets for   Observable   Unobservable 
   Carrying   Identical Assets   Inputs   Inputs 
   Value   (Level 1)   (Level 2)   (Level 3) 
                 
Financial Assets                    
Securities:                    
States and political subdivisions  $17,746   $-   $17,746   $- 
U.S. Government agencies and sponsored entities   13,986    -    13,986    - 
Mortgage backed securities: residential   28,965    -    28,965    - 
Collateralized mortgage obligations   4,565    -    4,565    - 
Total securities  $65,262   $-   $65,262   $- 

  

For the periods ended June 30, 2015 and December 31, 2014, there were no transfers between Level 1 and Level 2.

  

 19 

 

   

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

 

   Fair Value Measurements at 
   June 30, 2015 Using: 
           Significant     
       Quoted Prices in   Other   Significant 
       Active Markets for   Observable   Unobservable 
   Carrying   Identical Assets   Inputs   Inputs 
   Value   (Level 1)   (Level 2)   (Level 3) 
                 
Impaired loans                    
Commercial, net  $44   $-   $-   $44 
Commercial real estate, net   573    -    -    573 
                     
Other real estate owned                    
Commercial real estate, net  $115   $-   $-   $115 

   Fair Value Measurements at 
   December 31, 2014 Using: 
           Significant     
       Quoted Prices in   Other   Significant 
       Active Markets for   Observable   Unobservable 
   Carrying   Identical Assets   Inputs   Inputs 
   Value   (Level 1)   (Level 2)   (Level 3) 
                 
Other real estate owned                    
One to four family, net  $72   $-   $-   $72 
Commercial real estate, net   115    -    -    115 

  

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

 

At June 30, 2015, impaired loans recorded at fair value had a net carrying amount of $617,000 made up of outstanding balance of $642,000, net of a valuation allowance of $25,000. There were no impaired loans recorded at fair value at December 31, 2014 or June 30, 2014. There were write-downs of $200,000 for three and six months ended June 30, 2015. There were no write-downs for the three and six months ended June 30, 2014.

 

At June 30, 2015, OREO recorded at fair value had a net carrying amount of $115,000 made up of the outstanding balance of $167,000, net of a valuation allowance of $52,000. There were no write-downs for the three and six months ended June 30, 2015. At December 31, 2014, OREO recorded at fair value had a net carrying amount of $187,000 made up of the outstanding balance of $244,000, net of a valuation allowance of $57,000. At June 30, 2014, OREO recorded at fair value had a net carrying amount of $311,000 made up of the outstanding balance of $454,000, net of a valuation allowance of $143,000, which resulted in a write-down of $54,000 for the six months ended June 30, 2014.

 

 20 

 

  

The carrying amounts and estimated fair values of financial instruments at June 30, 2015 and December 31, 2014 are as follows (in thousands):

 

       Fair Value Measurements 
   Carrying                 
June 30, 2015  Value   Level 1   Level 2   Level 3   Total 
Financial assets                         
Cash and cash equivalents  $15,812   $15,812   $-   $-   $15,812 
Securities   67,862    -    67,862    -    67,862 
Restricted stock   3,276     N/A      N/A      N/A      N/A  
Loans held for sale   -    -    -    -    - 
Loans, net   317,487    -    -    333,361    333,361 
Accrued interest receivable   1,366    -    313    1,053    1,366 
Financial liabilities                         
Deposits  $340,416   $182,104   $157,312   $-   $339,416 
Federal Home Loan Bank advances   14,948    6,000    9,167    -    15,167 
Subordinated debenture   2,729    -    2,729    -    2,729 
Accrued interest payable   123    -    123    -    123 

 

         Fair Value Measurements  
    Carrying                       
December 31, 2014   Value    Level 1    Level 2    Level 3    Total 
Financial assets                         
Cash and cash equivalents  $16,967   $16,967   $-   $-   $16,967 
Securities   65,262    -    65,262    -    65,262 
Restricted stock   2,921     N/A      N/A      N/A      N/A  
Loans held for sale   712    -    712    -    712 
Loans, net   302,012    -    -    316,493    316,493 
Accrued interest receivable   1,347    -    293    1,054    1,347 
                          
Financial liabilities                         
Deposits  $323,138   $159,384   $165,190   $-   $324,574 
Federal Home Loan Bank advances   17,952    9,000    9,171    -    18,171 
Subordinated debenture   2,697    -    2,697    -    2,697 
Accrued interest payable   47    -    47    -    47 

  

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

 

Cash and Cash Equivalents:

 

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

 

Restricted Stock:

 

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

 21 

 

  

Loans:

 

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

    

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

 

Deposits:

 

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

 

Federal Home Loan Bank advances and subordinate debenture:

 

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

 

Accrued Interest Receivable/Payable:

 

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

  

NOTE 7 - ESOP PLAN

 

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

 

There were no contributions to the ESOP for the six months ended June 30, 2015 or 2014.

 

Shares held by the ESOP at June 30, 2015 and December 31, 2014 were as follows (dollars in thousands):

 

   June 30,   December 31, 
   2015   2014 
Allocated to participants  $43,457   $29,967 
Released, but unallocated   -    - 
Unearned   225,952    239,442 
           
Total ESOP shares   269,409    269,409 
           
Fair value of unearned shares  $3,464   $3,561 

  

 22 

 

 

  

NOTE 8 – EARNINGS PER SHARE

   

The factors used in the earnings per share computation for the three and six months ended June 30, 2015 and 2014, were as follows (in thousands):

 

   Three months ended   Six months ended 
   June 30,   June 30, 
  2015   2014   2015   2014 
Basic                
Net income  $1,716   $511   $2,302   $86 
Less:  Net income attributable to participating securities   32    18    49    3 
Net income available to common shareholders   1,684    493    2,253    83 
                     
Weighted average common shares outstanding   3,842,894    3,897,688    3,845,905    3,664,046 
Less:  Average unallocated ESOP shares   (235,436)   (239,439)   (237,427)   (239,439)
Average participating shares   (72,248)   (106,273)   (81,865)   (120,505)
Weighted average common shares outstanding for basic earnings per common share   3,535,210    3,551,976    3,526,613    3,304,102 
                     
Basic earnings per common share  $0.48   $0.14   $0.64   $0.03 
                     
Diluted                    
Net income available to common shareholders  $1,684   $493   $2,253   $83 
                     
Weighted average common shares outstanding for basic earnings per common share   3,535,210    3,551,976    3,526,613    3,304,102 
Add dilutive effects of potential additional common stock   -    -    -    - 
                     
Average shares and dilutive potential common shares   3,535,210    3,551,976    3,526,613    3,304,102 
                     
Earnings per common share assuming dilution  $0.48   $0.14   $0.64   $0.03 

 

There were no potentially dilutive securities outstanding at June 30, 2015. Stock options of 295,000 and 320,000 shares of common stock were not considered in computing diluted earnings per common share for 2015 or 2014 because they were antidilutive.

 

NOTE 9 – STOCK BASED COMPENSATION

 

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

 

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

 

 23 

 

    

The following table summarizes stock option activity for the six months ended June 30, 2015:

 

       Weighted Average 
   Options   Exercise Price 
           
Outstanding - December 31, 2014   299,500   $14.94 
Granted   5,000    15.44 
Exercised   -    - 
Forfeited   (5,000)   14.86 
Outstanding - June 30, 2015   299,500   $14.95 
Fully vested and exercisable at June 30, 2015   121,000      
Expected to vest in future periods   178,500      

 

The fair value for each option grant is estimated on the date of grant using the Black-Scholes-Merton option pricing model that uses the following assumptions. The Company uses the U.S. Treasury yield curve in effect at the time of the grant to determine the risk-free interest rate. The expected dividend yield is estimated using the projected annual dividend level and recent stock price of the Company’s common stock at the date of grant. Expected stock volatility is based on historical volatilities of the Company’s common stock. The expected term of the options is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable.

 

The weighted-average assumptions used in the Black-Scholes-Merton option pricing model to determine the fair value of options granted was as follows:

 

   Six months ended 
   June 30, 2015 
      
Risk-free interest rate   1.86%
Expected dividend yield   1.55%
Expected stock volatility   12.94 
Expected life (years)   7 
Weighted average fair value of options granted  $2.01 

 

 24 

 

 

 

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. 55,500 options vested during the six months ended June 30, 2015. Stock-based compensation expense for stock options included in salaries and benefits for the three and six months ended June 30, 2015 was $31,000 and $61,000, respectively. Stock-based compensation expense for stock options included in salaries and benefits for the three and six months ended June 30, 2014 was $32,000 and $61,000 respectively. Total unrecognized compensation cost related to non-vested stock options was $325,000 at June 30, 2015 and $386,000 at December 31, 2014 and is expected to be recognized over a period of 4-5 years.

 

The following table summarizes non-vested restricted stock activity for the six months ended June 30, 2015:

 

Balance - December 31, 2014   100,624 
Granted   - 
Forfeited   (539)
Vested   (31,573)
Balance - June 30, 2015   68,512 

 

The fair value of the restricted stock awards is amortized to compensation expense over the vesting period (generally five years) and is based on the market price of the Company’s common stock at the date of the grant multiplied by the number of shares granted that are expected to vest. Stock-based compensation expense for the restricted stock included in salaries and benefits for the three and six months ended June 30, 2015 was $101,000 and $201,000, respectively. Stock-based compensation expense for the restricted stock included in salaries and benefits for the three and six months ended June 30, 2014 was $102,000 and $204,000, respectively. Unrecognized compensation expense for non-vested restricted stock awards was $1.1 million at June 30, 2015 and $1.3 million at December 31, 2014 and is expected to be recognized over a weighted-average period of 4-5 years.

   

NOTE 10 – 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 six months ended June 30, 2015.

 

   Unrealized Gains and Losses on Available-for-Sale Securities 
(in thousands)  Three months
ended
   Three months
ended
   Six months
 ended
   Six months
ended
 
   June 30, 2015   June 30, 2014   June 30, 2015   June 30, 2014 
Beginning balance  $614   $(351)  $460   $(851)
                     
Other comprehensive income (loss), net of tax before reclassification   (370)   705    (216)   1,205 
                     
Amounts reclassified from accumulated to other comprehensive income for gains on sale of securities, net of tax expense of $0, $100, $0 and $100 respectively.   -    (194)   -    (194)
                     
Net current period other comprehensive income (loss)   (370)   511    (216)   1,011 
                     
Ending Balance  $244   $160   $244   $160 

 

 25 

 

  

NOTE 11 – BUSINESS COMBINATION

 

Effective May 31, 2015, the Company completed its previously reported acquisition of Commonwealth Bank, F.S.B., Mt. Sterling, Kentucky (“Commonwealth”), in a conversion merger transaction. The Company’s primary reason for undertaking the conversion merger is to fill-in its existing footprint along the Interstate 64 corridor between its main office in Ashland, Kentucky (Boyd County) and its Nicholasville branch office (Jessamine County). Montgomery County, where Commonwealth Bank is located, lies in between Boyd, Greenup and Lawrence Counties (to the northeast of Montgomery County) and Jessamine County (to the southwest of Montgomery County). As result of the conversion merger transaction, Commonwealth converted from a mutual to stock institution and merged with and into the Bank, with the Bank as the surviving institution, and the Company issued and sold 166,221 shares of common stock at a price of $12.73 per share, which reflected a 15% discount on the 30 day average price as prescribed in the merger agreement. The shares were offered to depositor and borrower members of Commonwealth in a subscription offering and to stockholders of the Company and members of the general public in a community offering. Gross offering proceeds totaled approximately $2.1 million. As a result of the stock offering, the Company had approximately 3,952,944 shares of common stock outstanding as of the close of business on May 31, 2015.  Commonwealth’s sole office, located in Mt. Sterling, Kentucky, has become a branch office of the Bank.

 

Acquisition costs of $617,000 are included in the Company’s consolidated statement of operations for the six months ended June 30, 2015. These costs include $418,000 in early termination fees and $199,000 in professional fees for attorneys, accountants and consultants. The Company has determined that the acquisition constitutes a business combination as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. Accordingly, the assets acquired and liabilities assumed are presented at their estimated fair values as required by the accounting guidance. Fair values were determined based on the requirements of ASC Topic 820, Fair Value Measurements.

 

In many cases, the determination of these fair values required management to make estimates about discount rates, future expected cash flows, market conditions and other future events which are highly subjective in nature and are subject to change. The assets acquired and liabilities assumed in the transaction are presented at estimated fair value on the acquisition date. These fair value estimates are considered preliminary, and are subject to change as additional information relative to acquisition date fair values becomes available. Given the short period of time between the closing date and the Form 10-Q filing date, we have not yet completed our evaluation of fair values. We continue to work to finalize these estimates.

 

The Company recorded the following assets and liabilities as of May 31, 2015. The discounts and premiums resulting from the fair value adjustments will be accreted and amortized over the anticipated lives of the underlying excess fair value of assets and liabilities. The excess fair value of assets acquired over liabilities assumed, resulted in an estimated $1.6 million bargain purchase gain. The bargain purchase gain is recorded in non-interest income in the Company’s consolidated statement of income for the three and six months ended June 30, 2015.

 

     
(in thousands)  May 31, 2015 
Recognized amounts of identifiable assets acquired and liabilities assumed
Fair value of assets acquired    
Cash and due from banks  $2,355 
Restricted stock   299 
Loans   14,898 
Premises and equipment, net   1,333 
Accrued interest receivable   57 
Prepaid expenses and other assets   17 
Deferred federal income taxes   325 
Core deposit intangible   227 
Total assets acquired  $19,511 
      
Fair value of liabilities assumed     
Deposits   15,403 
FHLB advances   2,316 
Accrued interest payable   22 
Other liabilities   215 
Total liabilities assumed  $17,956 

 

 26 

 

 

At the acquisition date, the Company recorded $14.6 million of loans without evidence of credit quality deterioration and $95,000 of purchased credit-impaired loans subject to nonaccretable difference of $64,000. The acquired loans were deemed impaired at the acquisition date if the Company did not expect to receive all contractually required cash flows due to concerns about credit quality. Fair values for loans were based on discounted cash flow methodology that considered factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting current market rates for new originations of comparable loans adjusted for the risk inherent in the cash flow estimates. Certain loans that were determined to be collateral dependent were valued based on the fair value of the underlying collateral. These estimates were based on the most recently available real estate appraisals with certain adjustments made based on the type of property, age of appraisal, current status of the property and other related factors to estimate the current value of the collateral. 

 

   Non-impaired
Purchased Loans
   Credit-impaired
Purchased Loans
 
Real estate mortgage loans:          
Residential:          
1-4 Family  $13,663   $72 
Nonresidential and land   438    - 
Consumer Loans   702    23 
Total Loans  $14,803   $95 

 

The composition of the acquired loans at May 31, 2015 follows:

 

  Contractual
Amount
   Fair Value
Adjustments
   Fair Value 
Real estate mortgage loans:            
Residential:               
1-4 Family  $13,892   $(266)  $13,626 
Nonresidential and land   450    (12)   438 
Consumer Loans   841    (7)   834 
Total Loans  $15,183   $(285)  $14,898 

 

 Loans purchased in the acquisition are accounted for using one of two following accounting standards:

 

·ASC Topic 310-20 is used to value loans that have not demonstrated post origination credit quality deterioration and the acquirer expect to collect all contractually required payments from the borrower. For these loans, the difference between fair value of the loan at acquisition and the amortized cost of the loan would be amortized or accreted into income using the interest method.

 

·ASC Topic 310-30 is used to value loans with post origination credit quality deterioration. For these loans, it is probable the acquirer will be unable to collect all contractually required payments from the borrower. Under ASC 310-30, the expected cash flows that exceed the initial investment in the loan (fair value) represent the “accretable yield,” which is recognized as interest income on a level-yield basis over the expected cash flow periods of the loans. The excess of the loan’s contractual principal and interest over the expected cash flows is the nonaccretable difference.

 

The following table presents the purchased loans that are included within the scope of ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality as of May 31, 2015.

 

Contractually-required principal and interest payments  $165 
Non-Accretable difference   (64)
Accretable yield   (6)
      
   $95 

 

 27 

 

  

The following table presents pro forma information as if the acquisition had occurred January 1, 2014.

 

   Three months ended   Six months ended 
   June 30,   June 30, 
(in thousands, except per share data)  2015   2014   2015   2014 
                 
Net Interest Income  $4,122   $4,473   $8,343   $7,300 
                     
Net Income before tax  $2,172   $728   $3,015   $(530)
Income tax expense   230    227    573    (140)
                     
Net Income  $1,942   $501   $2,442   $(390)
                     
Basic earnings per share  $0.52   $0.13   $0.65   $0.11 
Diluted earnings per share  $0.52   $0.13   $0.65   $0.11 

 

 

To determine pro forma information, the Company adjusted its three and six months ended June 30, 2015 and three and six months ended June 30, 2014 historical results to include the historical results for Commonwealth for the period January 1, 2014 to May 31, 2015 and the three and six months ended June 30, 2014.

 

The pro forma information includes adjustments for interest income on loans acquired, amortization of intangibles arising from the transaction, depreciation expense on property acquired, interest expense on deposits acquired, and the related income tax effects.

 

Expenses related to the acquisition including professional fees and integration costs are excluded from the period in which the amounts were recognized and included in earlier periods as if the acquisition occurred on January 1, 2014. During the three and six months ended June 30, 2015 and 2014, acquisition related expenses amounted to $634,000, $789,000, $65,000 and $74,000, respectively.

 

The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been effected on the assumed dates.

 

 28 

 

  

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

  

Critical Accounting Policies

 

There are no material changes to the critical accounting policies disclosed in the Annual Report on Form 10-K for Poage Bankshares, Inc. for the year ended December 31, 2014, as filed with the Securities and Exchange Commission.

 

Forward-Looking Statements

  

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

 

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

 

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. 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:

 

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.

 

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

 

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

 

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

 

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

 

>our ability to successfully enhance internal controls;

 

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

 

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

 

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

 

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

 

>competition among depository and other financial institutions;

 

 29 

 

  

 

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

 

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

 

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

 

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

 

>our success in introducing new financial products;

 

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

 

>decreases in our asset quality;

 

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

 

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

 

>changes in consumer spending, borrowing and savings habits;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 30 

 

Comparison of Financial Condition at June 30, 2015 and December 31, 2014

 

At June 30, 2015, the Company’s assets totaled $ 432.4 million, an increase of $17.7 million, or 4.3%, from $414.7 million at December 31, 2014. The increase was primarily attributed to the acquisition of Commonwealth, growth in deposit accounts resulting from the migration of customers from a competitor in the Louisa, Kentucky market following their acquisition and new accounts and increased balances for city governments in Flatwoods and Ashland, Kentucky. See Footnote 11 under “Item 1: Financial Information” for information on the Commonwealth acquisition.

 

Cash and Cash equivalents decreased by $1.2 million, or 6.8%, to $15.8 million at June 30, 2015 from $17.0 million at December 31, 2014. The decrease was attributable to the purchase of $8.0 million in available for sale securities and decrease in outstanding FHLB advance balances of $3.0 million offset by the increase in deposits.

 

Loans held for sale decreased $712,000, or 100%, to $0 at June 30, 2015 from $712,000 at December 31, 2014.

 

Loans receivable, net, increased $15.5 million, or 5.1%, to $317.5 million at June 30, 2015 from $302.0 million at December 31, 2014. The increase was primarily attributable to the acquisition of Commonwealth. Real estate secured loans increased $7.8 million, commercial loans increased $6.9 million and consumer loans increased $1.0 million during the six month period ending June 30, 2015. Non-performing loans increased $672,000, or 20.0%, to $4.0 million at June 30, 2015 from $3.4 million at December 31, 2014. The loans acquired from Commonwealth consist primarily of smaller one to four family residential mortgages.

 

Securities available for sale increased by $2.6 million, or 4.0%, to $67.9 million at June 30, 2015 from $65.3 million at December 31, 2014. This increase is due to $8.0 million in purchases, offset by $5.4 million in calls, regular maturities and principal payments.

 

Deposits increased $17.3 million, or 5.3%, to $340.4 million at June 30, 2015 from $323.1 million at December 31, 2014. The increase was primarily attributable to the Commonwealth acquisition and new accounts and increased balances for city governments in two markets we serve.

 

Federal Home Loan Bank advances decreased $3.0 million, or 16.7%, to $14.9 million at June 30, 2015 from $17.9 million at December 31, 2014. This decrease in borrowings was primarily due to regular principal payments and maturities offset by advances as a result of the Commonwealth acquisition.

 

Other borrowings increased by $32,000 to $2.7 million at June 30, 2015 from $2.7 million at December 31, 2014 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 $2.7 million is shown as a liability because the Company is not considered the primary beneficiary of the Trust. The investment in common stock of the trust is $124,000 and is included in other assets. The subordinated debt has a variable rate of interest equal to the three month London Interbank Offered Rate (LIBOR) plus 1.83%, which was 2.11% at June 30, 2015.

 

Total shareholders’ equity increased by $2.4 million, or 3.5%, to $70.5 million at June 30, 2015, compared to $68.2 million at December 31, 2014. The increase resulted primarily from shares issued in the offering, completed in connection with the Commonwealth acquisition and net income of $2.3 million for the six months ended June 30, 2015, offset by the repurchase of common stock totaling $1.3 million, the payment of a cash dividends totaling $420,000 and a decrease in other comprehensive income of $216,000.

 

 31 

 

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. 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.

 

The average balance, interest and dividends paid and received, and yield/cost of assets and liabilities include assets and liabilities acquired through the Town Square and Commonwealth acquisitions. Because the Town Square acquisition was consummated on March 18, 2014, the information for the three and six months ended June 30, 2015 and three months ended June 30, 2014 reflects the accretive benefits and costs from the transaction, but the information for the six months ended June 30, 2014 only partially reflects the benefits and costs from the transactions. Because the Commonwealth acquisition was consummated on May 31, 2015, the information for the three months ended June 30, 2015, only partially reflects the benefits and costs from the transaction.

 

 

   For the Three Months Ended June 30, 
   2015   2014 
   Average
Balance
   Interest and
Dividends
   Yield/
Cost
   Average
Balance
   Interest and
Dividends
   Yield/
Cost
 
   (Dollars in thousands) 
Assets:                              
Interest-earning assets:                              
Loans  $309,397   $4,180    5.40%  $304,264   $4,275    5.62%
Investment securities   69,400    348    2.01%   87,234    534    2.45%
FHLB stock   2,823    27    3.83%   2,681    27    4.03%
Other interest-earning assets   17,736    9    0.20%   13,251    7    0.21%
Total interest-earning assets   399,356    4,564    4.57%   407,430    4,843    4.75%
                               
Noninterest-earning assets   26,293              26,476           
Total assets   425,649              433,906           
                               
Liabilities and equity:                              
Interest bearing liabilities:                              
Interest bearing deposits:                              
NOW, savings, money market, and other   126,326    55    0.17%   123,754    52    0.17%
Certificates of deposit   159,441    395    0.99%   165,651    387    0.93%
Total interest bearing deposits   285,767    450    0.63%   289,405    439    0.61%
                               
FHLB advances   15,663    64    1.63%   33,958    92    1.08%
Subordinated Debenture   2,720    38    5.59%   2,665    22    3.30%
Total interest bearing liabilities   304,150    552    0.73%   326,028    553    0.68%
                               
Non-interest bearing liabilities:                              
Non-interest bearing deposits   47,878              38,723           
Accrued interest payable   185              157           
Other liabilities   5,193              3,080           
Total non-interest bearing liabilities   53,256              41,960           
Total liabilities   357,406              367,988           
                               
Total equity   68,243              65,918           
Total liabilities and equity   425,649              433,906           
                               
Net interest income        4,012              4,290      
Interest rate spread             3.84%             4.08%
Net interest margin             4.02%             4.21%
Average interest-earning assets to average interest-bearing liabilities        131.30%             124.97%     

 

 32 

 

  

   For the Six Months Ended June 30, 
   2015   2014 
   Average
Balance
   Interest and
Dividends
   Yield/
Cost
   Average
Balance
   Interest and
Dividends
   Yield/
Cost
 
   (Dollars in thousands) 
Assets:                              
Interest-earning assets:                              
Loans  $305,732   $8,389    5.49%  $250,364   $6,844    5.47%
Investment securities   68,213    711    2.08%   85,122    1,051    2.47%
FHLB stock   2,752    54    3.92%   2,387    49    4.11%
Other interest-earning assets   17,036    16    0.19%   11,857    11    0.19%
Total interest-earning assets   393,733    9,170    4.66%   349,730    7,955    4.55%
                               
Noninterest-earning assets   26,216              23,571           
Total assets   419,949              373,301           
                               
Liabilities and equity:                              
Interest bearing liabilities:                              
Interest bearing deposits:                              
NOW, savings, money market, and other   122,223    111    0.18%   112,024    90    0.16%
Certificates of deposit   160,240    786    0.98%   140,389    707    1.01%
Total interest bearing deposits   282,463    897    0.64%   252,413    797    0.63%
                               
FHLB advances   16,361    130    1.59%   29,175    186    1.28%
Subordinated Debenture   2,712    75    5.53%   1,510    25    3.31%
Total interest bearing liabilities   301,536    1,102    0.73%   283,098    1,008    0.71%
                               
Non-interest bearing liabilities:                              
Non-interest bearing deposits   45,819              25,192           
Accrued interest payable   164              151           
Other liabilities   4,279              2,903           
Total non-interest bearing liabilities   50,262              28,246           
Total liabilities   351,798              311,344           
                               
Total equity   68,151              61,958           
Total liabilities and equity   419,949              373,302           
                               
Net interest income        8,068              6,947      
Interest rate spread             3.93%             3.84%
Net interest margin             4.10%             3.97%
Average interest-earning assets to average interest-bearing liabilities        130.58%             123.54%     

 

 33 

 

  

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 June 30, 2015, we had $14.9 million in advances from the Federal Home Loan Bank of Cincinnati and an additional borrowing capacity of $87.0 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 June 30, 2015, Poage Bankshares, Inc. (on an unconsolidated basis) had liquid assets of $5.2 million.

 

The Bank 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 Bank and the consolidated financial statements. Under the regulatory capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines involving quantitative measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices.

 

The Bank'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.

 

On July 9, 2013, the Federal Reserve and the FDIC approved rules that implement the “Basel III” regulatory capital reforms, as well as certain changes required by the Dodd-Frank Act.  The rules include a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets, which is in addition to the Tier 1 and Tier 2 risk-based capital requirements.  The capital conservation buffer will be phased in over four years beginning on January 1, 2016, with a maximum buffer of 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter.  Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers.  Based on the Company’s current capital composition and levels, management does not presently anticipate that the rules present a material risk to the Company’s financial condition or results of operations.

 

As of June 30, 2015, the capital of the Bank exceeded all required regulatory guidelines.

 

 34 

 

  

The following table reflects the current regulatory capital levels in more detail, including comparisons to the regulatory minimums at June 30, 2015 and December 31, 2014. December 31, 2014 ratios and requirements are being presented based on current regulatory requirements rather than those in effect at December 31, 2014.

 

   Actual   Required   Excess 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
As of June 30, 2015:                        
                               
Risk-based capital:                              
Common equity tier 1 capital  $63,026    22.22%  $12,763    4.50%  $50,263    17.72%
Tier 1 capital   63,026    22.22%   17,018    6.00%   46,008    16.22%
Total capital   65,124    22.96%   22,690    8.00%   42,434    14.96%
Tier 1 leverage ratio   63,026    14.90%   16,924    4.00%   46,102    10.90%

 

   Actual   Required   Excess 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
As of December 31, 2014:                              
                               
Risk-based capital:                              
Common equity tier 1 capital  $62,068    23.61%  $11,832    4.50%  $50,236    19.11%
Tier 1 capital   62,068    23.61%   10,057    4.00%   46,292    17.61%
Total capital   64,002    24.34%   21,034    8.00%   42,968    16.34%
Tier 1 leverage ratio   62,068    15.07%   16,477    4.00%   45,591    11.07%

   

Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. These arrangements are not expected to have a material impact on the Company’s financial condition or results of operations.

 

 35 

 

  

Comparison of Operating Results for the Three and Six Months Ended June 30, 2015 and June 30, 2014

 

General. Net income increased $1.2 million to $1.7 million for the three months ended June 30, 2015 from net income of $511,000 for the three months ended June 30, 2014. The increase in net income reflected a gain on the Commonwealth business combination of $1.6 million for the three month period ending June 30, 2015 with no such gain for the three month period ending June 30, 2014, a decrease in non-interest expense of $288,000 to $4.2 million for the three months ended June 30, 2015 from $4.5 million for the three months ending June 30, 2014, and a decrease in federal income tax expense of $198,000 to $14,000 for the three months ending June 30, 2015 from $212,000 for the 3 months ending June 30, 2014, offset by a decrease in net interest income of $278,000 to $4.0 million for the three months ended June 30, 2015 from $4.3 million for the three months ended June 30, 2014, a decrease in non-interest income of $164,000 to $806,000 for the three months ended June 30, 2015 from $970,000, for the three months ended June 30, 2014, an increase in provision for loan losses of $394,000 to $394,000 for the three months ended June 30, 2015 from no provision for the three months ended June 30, 2014.

 

Net income increased $2.2 million to $2.3 million for the six months ended June 30, 2015 from net income of $86,000 for the six months ended June 30, 2014. The increase in net income reflected a $1.6 million gain on the Commonwealth business combination for the six month period ending June 30, 2015 with no such gain for the six month period ending June 30, 2014, an increase in net interest income of $1.1 million to $8.1 million for the six months ended June 30, 2015 from $6.9 million for the six months ended June 30, 2014, an increase in non-interest income of $128,000 to $1.5 million for the six months ended June 30, 2015 from $1.4 million, a decrease in non-interest interest expense of $177,000 to $8.0 million for the six months ended June 30, 2015, from $8.2 million for the six months ended June 30, 2014, offset by an increase in provision for loan losses of $485,000 to $485,000 for the six months ended June 30, 2015 from no provision for the six months ended June 30, 2014 and an increase in income tax expense of $280,000 to $338,000 for the six months ended June 30, 2015 from $58,000 for the six months ended June 30, 2014.

 

Interest Income. Interest income decreased $279,000, or 5.8%, to $4.6 million for the three months ended June 30, 2015 from $4.8 million for the three months ended June 30, 2014. The average balance of interest-earning assets decreased $8.1 million, or 2%, from $407.4 million to $399.3 million. Because the Commonwealth acquisition was consummated on May 31, 2015, the information for the three months ended June 30, 2015 and 2014 does not reflect the accretive benefits from the transaction.

 

Interest income increased $1.2 million, or 15.3%, to $9.2 million for the six months ended June 30, 2015 from $8.0 million for the six months ended June 30, 2014. Because the Town Square Financial Corporation acquisition was consummated on March 18, 2014, the information for the six months ended June 30, 2015 reflects the accretive benefits from the transaction, but the information for the six months ended June 30, 2014 only partially reflects the benefits from the transactions.

 

Interest income on loans decreased $95,000, or 2.2%, to $4.2 million for the three months ended June 30, 2015 from $4.3 million for the three months ended June 30, 2014. The average yields on loans decreased 22 basis points to 5.40% for the three months ended June 30, 2015, compared to 5.62% for the three months ended June 30, 2014. The average balance of loans increased $5.1 million, or 1.7%, to $309.4 million for the three months ended June 30, 2015 from $304.3 million for the three months ended June 30, 2014. Interest income on investment securities decreased $186,000, or 34.8%, to $348,000 for the three months ended June 30, 2015 from $534,000 for the three months ended June 30, 2014. The average yield on securities decreased 44 basis points to 2.01% for the three months ended June 30, 2015, compared to 2.45% for the three months ended June 30, 2014. The average balance of investment securities decreased $17.8 million, or 20.4%, to $69.4 million for the three months ended June 30, 2015 from $87.2 million for the three months ended June 30, 2014 due to the sale of $19.7 million in investment securities during the three months ended June 30, 2014.

 

Interest income on loans increased $1.5 million, or 22.6%, to $8.4 million for the six months ended June 30, 2015 from $6.8 million for the six months ended June 30, 2014. The average yields on loans increased 2 basis points to 5.49% for the six months ended June 30, 2015, compared to 5.47% for the six months ended June 30, 2014. The average balance of loans increased $55.4 million, or 22.1%, to $305.7 million for the six months ended June 30, 2015 from $250.4 million for the six months ended June 30, 2014. The increase in interest income is attributable to the acquisition of Town Square Financial Corporation on March 18, 2014. Interest income on investment securities decreased $340,000, or 32.4%, to 711,000 for the six months ended June 30, 2015 from $1.1 million for the six months ended June 30, 2014. The average yield on securities decreased 39 basis points to 2.08% for the six months ended June 30, 2015, compared to 2.47% for the six months ended June 30, 2014. The average balance of investment securities decreased $16.9 million, or 19.9%, to $68.2 million for the six months ended June 30, 2015 from $85.1 million for the six months ended June 30, 2014 due to the sale of $19.7 million in investment securities during the six months ended June 30, 2014.

 

 36 

 

  

Interest Expense. Interest expense decreased $1,000, or 0.2%, to $552,000 for the three months ended June 30, 2015 from $553,000 for the three months ended June 30, 2014. The decrease reflected a decrease of $3.6 million, or 1.2%, in the average balance of interest bearing deposits to $285.8 million for the three months ended June 30, 2015 from $289.4 million for the three months ended June 30, 2014, offset by an increase of 2 basis points in the average interest rate paid on interest bearing deposits to 0.63% from 0.61% for the same periods. Interest expense on Federal Home Loan Bank advances and subordinated debentures decreased $12,000, or 10.5%, to $102,000 for the three months ended June 30, 2015 from $114,000 for the three months ended June 30, 2014. This decrease was the result of an $18.3 million decrease in the average balance of Federal Home Loan Bank advances, offset by an 55 basis point increase in the average rate paid on these Federal Home Loan Bank advances to 1.63% from 1.08% as short-term borrowings with lower interest rates matured and a 229 basis point increase in the average rate paid on subordinated debentures to 5.59% from 3.30% resulting from the amortization of fair value.

  

Interest expense on certificates of deposit increased $79,000, or 11.2%, to $786,000 for the six months ended June 30, 2015 from $707,000