Poage Bankshares, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.2 - EXHIBIT 31.2 - Poage Bankshares, Inc.	tv498610_ex31-2.htm
EX-32.1 - EXHIBIT 32.1 - Poage Bankshares, Inc.	tv498610_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - Poage Bankshares, Inc.	tv498610_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period ended June 30, 2018

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

For transition period from ______________________ to___________________

Commission File Number 001-35295

Poage Bankshares, Inc.

(Exact Name of Registrant as Specified in Charter)

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

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

606-324-7196

Registrant’s telephone number, including area code

Not Applicable

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

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

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

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

Large accelerated filer	¨	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	x

		Emerging growth company	¨

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

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

As of August 13, 2018, the number of shares of the Registrant’s common stock, par value $.01 per share, was 3,497,243.

POAGE BANKSHARES, INC.

Form 10-Q Quarterly Report

Table of Contents

	PART I. FINANCIAL INFORMATION

ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS – POAGE BANKSHARES, INC.	3

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	34

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	45

ITEM 4.	CONTROLS AND PROCEDURES	45

	PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	46

ITEM 1A.	RISK FACTORS	46

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	46

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	47

ITEM 4.	MINE SAFETY DISCLOSURES	47

ITEM 5.	OTHER INFORMATION	47

ITEM 6.	EXHIBITS	47

SIGNATURES		48

PART I

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in thousands except per share data)

	June 30,			December 31,
	2018			2017
ASSETS
Cash and due from financial institutions	$	26,401		$	20,499
Interest-bearing deposits in other financial institutions		3,735			2,988
Securities available for sale		67,087			64,130
Loans held for sale		258			256
Loans, net of allowance of $4,562 and $4,681		321,138			328,554
Restricted stock, at cost		3,276			3,276
Other real estate owned, net		732			1,462
Premises and equipment, net		10,240			10,500
Company owned life insurance		7,374			7,292
Accrued interest receivable		1,288			1,413
Goodwill		1,894			1,894
Other intangible assets, net		497			667
Deferred tax asset, net		2,023			2,128
Other assets		1,934			1,821
Total assets	$	447,877		$	446,880

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Non-interest bearing	$	56,025		$	52,577
Interest bearing		316,040			317,473
Total deposits		372,065			370,050
Federal Home Loan Bank advances		6,579			7,419
Subordinated debenture		2,922			2,890
Accrued interest payable		28			24
Other liabilities		4,936			4,782
Total liabilities		386,530			385,165

Commitments and contingent liabilities		-			-

Shareholders' equity
Common stock, $.01 par value, 30,000,000 shares authorized, 3,497,243 and 3,514,171 issued and outstanding at June 30, 2018 and December 31, 2017, respectively		35			35
Additional paid-in-capital		32,206			32,371
Retained earnings		31,935			31,423
Unearned Employee Stock Ownership Plan (ESOP) shares		(1,787	)		(1,854	)
Accumulated other comprehensive income (loss)		(1,042	)		(260	)
Total shareholders' equity		61,347			61,715
Total liabilities and shareholders' equity	$	447,877		$	446,880

See notes to unaudited consolidated financial statements.

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

(Dollar amounts in thousands except per share data)

	Three months ended					Six months ended
	June 30,					June 30,
	2018			2017		2018			2017
Interest and dividend income
Loans, including fees	$	4,104		$	4,262	$	8,243		$	8,580
Taxable securities		280			250		532			474
Tax-exempt securities		115			113		234			229
Federal funds sold and other		139			99		255			189
		4,638			4,724		9,264			9,472
Interest expense
Deposits		687			597		1,338			1,179
Federal Home Loan Bank advances and other borrowings		99			85		186			169
		786			682		1,524			1,348
Net interest income		3,852			4,042		7,740			8,124

Provision for loan losses		669			346		1,166			699
Net interest income after provision for loan losses		3,183			3,696		6,574			7,425

Non-interest income
Service charges on deposits		533			523		1,017			999
Other service charges		12			12		25			27
Net gain (loss) on disposal of land and equipment		(2	)		-		(3	)		16
Loan servicing fees		52			82		128			164
Gains on mortgage loans sold, net		46			56		59			73
Income from company owned life insurance		41			43		82			85
Insurance recovery on fictitious loans		850			-		875			-
Other		4			2		5			7
		1,536			718		2,188			1,371
Non-interest expense
Salaries and employee benefits		1,679			1,732		3,436			3,557
Occupancy and equipment		450			471		889			945
Data processing		724			691		1,389			1,266
Federal deposit insurance		32			32		64			67
Loan processing and collection		126			104		244			190
Foreclosed assets, net		25			54		17			147
Advertising		58			101		156			215
Professional fees		103			83		181			162
Other taxes		119			116		230			236
Director fees and expenses		51			39		91			79
Amortization of intangible assets		87			85		170			171
Conversion costs		55			-		155			-
Other		361			294		629			542
		3,870			3,802		7,651			7,577
Income before income taxes		849			612		1,111			1,219
Income tax expense		145			245		178			389
Net income	$	704		$	367	$	933		$	830
Earnings per common share:
Basic	$	0.21		$	0.11	$	0.28		$	0.24
Dilutive		0.21			0.11	$	0.28		$	0.24
Dividend per share	$	0.06		$	0.06	$	0.12		$	0.12

See notes to unaudited consolidated financial statements.

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Dollar amounts in thousands except per share data)

	Three months ended						Six months ended
	June 30,						June 30,
	2018			2017			2018			2017

Net income	$	704		$	367		$	933		$	830
Other comprehensive income (loss):
Unrealized holding gains (loss) on available for sale securities		(156	)		279			(991	)		711
Tax effect		33			(95	)		209			(242	)
Other comprehensive income (loss)		(123	)		184			(782	)		469
Comprehensive income	$	581		$	551		$	151		$	1,299

See notes to unaudited consolidated financial statements.

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Dollar amounts in thousands except per share data)

												Accumulated
			Additional						Unearned			Other			Total
	Common		Paid-In			Retained			ESOP			Comprehensive			Shareholders'
	Stock		Capital			Earnings			Shares			Loss			Equity
Balances, January 1, 2018	$	35	$	32,371		$	31,423		$	(1,854	)	$	(260	)	$	61,715
Net income		-		-			933			-			-			933
Stock repurchases, 16,928 shares repurchased		-		(326	)		-			-			-			(326	)
Dividends paid ($0.12/share)		-		-			(421	)		-			-			(421	)
ESOP compensation earned		-		63			-			67			-			130
Stock based compensation expense		-		98			-			-			-			98
Other comprehensive loss		-		-			-			-			(782	)		(782	)
Balances, June 30, 2018	$	35	$	32,206		$	31,935		$	(1,787	)	$	(1,042	)	$	61,347

See notes to unaudited consolidated financial statements.

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands except per share data)

	Six months ended
	June 30,
	2018			2017
Operating activities:
Net income	$	933		$	830
Adjustments to reconcile net income to net cash from operating activities:
Depreciation		334			378
Provision for loan losses		1,166			699
ESOP compensation expense		130			132
Stock based compensation expense		98			151
(Gain) Loss on sale of premises and equipment, net		3			(16	)
(Gain) Loss on sale and write-downs of other real estate owned, net		(33	)		97
Loss on sale of repossessed assets, net		1			1
Amortization of core deposit intangible		170			171
Accretion of fair value adjustments related to loans		(99	)		(219	)
Accretion of fair value adjustments related to deposits		(33	)		(32	)
Amortization of fair value related to subordinated debenture		32			32
Net amortization on securities		147			66
Deferred income tax expense		313			120
Net gain on mortgage banking activities		(59	)		(73	)
Origination of loans held for sale		(2,292	)		(2,995	)
Proceeds from loans held for sale		2,349			3,463
Increase in cash value of life insurance		(82	)		(85	)
Change in asset and liabilities, net assets and liabilities acquired:
Accrued interest receivable		125			77
Other assets		(121	)		(128	)
Accrued interest payable		4			11
Other liabilities		154			764
Net cash provided by operating activities		3,240			3,444

Investing activities:
Net increase in interest-bearing deposits with other institutions		(747	)		(249	)
Securities available for sale:
Proceeds from calls		-			65
Proceeds from maturities		690			435
Purchases		(8,647	)		(7,817	)
Principal payments received		3,863			3,288
Loan originations and principal payments on loans, net		5,652			6,306
Proceeds from the sale of other real estate owned		1,426			731
Proceeds from the sale of repossessed assets		41			20
Proceeds from the sale of premises and equipment		-			54
Purchase of premises and equipment		(77	)		(137	)
Net cash provided by investing activities		2,201			2,696

Financing activities:
Net change in deposits		2,048			(2,539	)
Proceeds from other borrowings		-			1,500
Proceeds from Federal Home Loan Bank borrowings		5,000			8,000
Payments on Federal Home Loan Bank borrowings		(5,840	)		(6,030	)
Cash dividend paid		(421	)		(442	)
Stock repurchases		(326	)		(3,630	)
Net cash provided by (used in) financing activities		461			(3,141	)

Net increase in cash and cash equivalents		5,902			2,999

Cash and cash equivalents at beginning of period		20,499			24,389

Cash and cash equivalents at the end of the period	$	26,401		$	27,388

Additional cash flows and supplementary information:
Cash paid during the year for:
Interest on deposits and debt	$	1,520		$	1,337
Income taxes payment		16			100
Other real estate owned and other repossessed assets acquired in settlement of loans	$	697		$	824

See notes to unaudited consolidated financial statements

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position as of June 30, 2018 and December 31, 2017 and the results of operations and cash flows for the interim periods ended June 30, 2018 and 2017. All interim amounts have not been audited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for the year or any other period. These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto filed as part of the Company’s 2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

NOTE 2 – REVENUE RECOGNITION

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

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

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

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

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

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

Service charges on deposit accounts: We earn fees from our deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees and overdraft fees are recognized at a point in time, since the customer generally has a right to cancel the depository arrangement at any time. The arrangement is considered a day-to-day contract with ongoing renewals and optional purchases, so the duration of the contract does not extend beyond the services already performed. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which we satisfy our performance obligation. Service charges on deposit accounts includes approximately $242,000, $466,000, $243,000 and $469,000 of revenue for the three and six months ended June 30, 2018 and 2017, respectively, within the scope of Topic 606.

Debit card and ATM fees: Debit card and ATM fees include ATM usage fees and debit card interchange income. As with the transaction-based fees on deposit accounts, the ATM fees are recognized at the point in time that we fulfill the customer’s request. We earn interchange fees from cardholder transactions processed through card association networks. Interchange rates are generally set by the card associations based upon purchase volumes and other factors. Interchange fees represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. Debit card and ATM fees includes approximately $269,000, $503,000, $261,000 and $493,000 of revenue for the three and six months ended June 30, 2018 and 2017, respectively, within the scope of Topic 606.

Gains/Losses on Sales of OREO - The Company records a gain or loss from the sale of other real estate owned (“OREO”) when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. ASC 606 does not significantly change the pattern of revenue recognition unless the Company finances the sale. There are no instances of the Company financing the sale of one of its OREO properties during the three and six months ended June 30, 2018. Sales of OREO includes approximately $14,000 and $35,000 in net gains for the three months ended June 30, 2018 and 2017 and $36,000 in net gains and $38,000 in net losses for the six months ended June 30, 2018 and 2017, respectively, within the scope of Topic 606.

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

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments by making targeted improvements to GAAP as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. When a qualitative assessment indicates that impairment exists, an entity is required to measure the investment at fair value; (3) eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities; (4) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (5) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (6) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; (7) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (8) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. ASU No. 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. Early application is permitted as of the beginning of the fiscal year of adoption only for provisions (3) and (6) above. Early adoption of the other provisions mentioned above is not permitted. Starting with the first quarter of 2018, the Company began using an exit price notion when measuring the fair value of its loan portfolio for disclosure purposes. The adoption of ASU No. 2016-01 on January 1, 2018 did not have a material effect on the Company’s consolidated operating results or financial condition.

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

Newly Issued Accounting Standards Not Yet Effective

In February 2016, the FASB issued Accounting Standards Update 2016-02 Leases guidance requiring the recognition in the statement of financial position of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. The guidance requires that a lessee should recognize lease assets and lease liabilities as compared to previous GAAP that did not require lease assets and lease liabilities to be recognized for most leases. The guidance becomes effective for us on January 1, 2019. Poage is currently evaluating the impact on its leases to determine the impact on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments (the ASU), which introduces the current expected credit losses methodology. This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured as fair value through net income. Among other things, the ASU requires the measurement of all expected credit losses for financial assets, including loans and available-for-sale debt securities, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. In issuing the standard, the FASB is responding to criticism that today’s guidance delays recognition of credit losses. The new model, referred to as the current expected credit loss (“CECL”) model, will require institutions to calculate all probable and estimable losses that are expected to be incurred through the loan's entire life. ASU 2016-13 also requires the allowance for credit losses for purchased financial assets with credit deterioration since origination to be determined in a manner similar to that of other financial assets measured at amortized cost; however, the initial allowance will be added to the purchase price rather than recorded as credit loss expense. The disclosure of credit quality indicators related to the amortized cost of financing receivables will be further disaggregated by year of origination (or vintage). Institutions are to apply the changes through a cumulative-effect adjustment to their retained earnings as of the beginning of the first reporting period in which the standard is effective. The amendments are effective for fiscal years beginning after December 15, 2019. Early application will be permitted for fiscal years beginning after December 15, 2018. Management has formed a CECL committee that is evaluating the data gathering requirements, available economic forecasting and loss estimation models and potential software that would be employed by the Company to facilitate the adoption of this guidance and its required disclosures on the Company’s consolidated financial statements. Upon adoption, management anticipates an initial one-time increase in the allowance for loan losses along with a corresponding decrease in capital as permitted by the standard.

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

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

NOTE 4 - SECURITIES AVAILABLE FOR SALE

The amortized cost and fair value of securities available for sale at June 30, 2018 and December 31, 2017 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows (in thousands):

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
June 30, 2018
States and political subdivisions	$	18,253	$	103	$	(214	)	$	18,142
U.S. Government agencies and sponsored entities		5,000		-		(72	)		4,928
Mortgage-backed securities: residential		28,079		-		(654	)		27,425
Collateralized mortgage obligations		6,618		-		(168	)		6,450
SBA loan pools		10,456		-		(314	)		10,142
Total securities	$	68,406	$	103	$	(1,422	)	$	67,087

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

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

The amortized cost and fair value of the securities portfolio at June 30, 2018 are shown in the following table by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately (in thousands):

	June 30,
	2018
	Amortized		Fair
	Cost		Value

Within one year	$	1,297	$	1,299
One to five years		9,204		9,139
Five to ten years		9,179		9,154
Beyond ten years		3,573		3,478
Mortgage-backed securities and collateralized mortgage obligations		34,697		33,875
SBA loan pools		10,456		10,142
Total	$	68,406	$	67,087

The following table summarizes the securities with unrealized losses at June 30, 2018 and December 31, 2017, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):

	Less Than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
June 30, 2018
States and political subdivisions	$	6,042	$	(144	)	$	1,005	$	(70	)	$	7,047	$	(214	)
U.S. Government agencies and sponsored entities		997		(2	)		3,430		(70	)		4,427		(72	)
Mortgage-backed securities: residential		23,508		(512	)		3,917		(142	)		27,425		(654	)
Collateralized mortgage obligations		2,980		(63	)		2,470		(105	)		5,450		(168	)
SBA loan Pools		6,791		(179	)		3,351		(135	)		10,142		(314	)
Total available-for-sale securities	$	40,318	$	(900	)	$	14,173	$	(522	)	$	54,491	$	(1,422	)

	Less Than 12 Months					12 Months or Longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
December 31, 2017
States and political subdivisions	$	5,080	$	(56	)	$	1,024	$	(52	)	$	6,104	$	(108	)
U.S. Government agencies and sponsored entities		992		(8	)		2,458		(42	)		3,450		(50	)
Mortgage-backed securities: residential		19,256		(181	)		2,394		(45	)		21,650		(226	)
Collateralized mortgage obligations		1,954		(15	)		3,001		(78	)		4,955		(93	)
SBA loan Pools		6,565		(66	)		1,343		(19	)		7,908		(85	)
Total available-for-sale securities	$	33,847	$	(326	)	$	10,220	$	(236	)	$	44,067	$	(562	)

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

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

NOTE 5 – LOANS

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

	June 30,		December 31,
	2018		2017
Real estate:
One to four family	$	162,827	$	170,754
Multi-family		8,184		6,505
Commercial real estate		80,649		84,312
Construction and land		9,442		10,004
		261,102		271,575

Commercial and industrial		36,504		33,664

Consumer
Home equity loans and lines of credit		10,278		10,707
Motor vehicle		10,924		10,368
Other		7,394		7,420
		28,596		28,495

Total		326,202		333,734
Less: Net deferred loan fees		502		499
Allowance for loan losses		4,562		4,681
	$	321,138	$	328,554

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, 2018 and December 31, 2017. Accrued interest receivable and net deferred loan fees are not considered significant and therefore are not included in the loan balances presented in the table below (in thousands):

June 30, 2018

	Allowance for Loan Losses								Loan Balances
	Individually		Purchased		Collectively				Individually		Purchased		Collectively
	Evaluated for		Credit-Impaired		Evaluated for				Evaluated for		Credit-Impaired		Evaluated for
Loan Segment	Impairment		Loans		Impairment		Total		Impairment		Loans		Impairment		Total

Real estate	$	809	$	-	$	2,132	$	2,941	$	8,197	$	1,098	$	251,807	$	261,102
Commercial and industrial		990		-		421		1,411		4,828		-		31,676		36,504
Consumer		4		-		206		210		55		-		28,541		28,596
Total	$	1,803	$	-	$	2,759	$	4,562	$	13,080	$	1,098	$	312,024	$	326,202

December 31, 2017

	Allowance for Loan Losses								Loan Balances
	Individually		Purchased		Collectively				Individually		Purchased		Collectively
	Evaluated for		Credit-Impaired		Evaluated for				Evaluated for		Credit-Impaired		Evaluated for
Loan Segment	Impairment		Loans		Impairment		Total		Impairment		Loans		Impairment		Total
Real estate	$	624	$	-	$	2,232	$	2,856	$	5,523	$	1,305	$	264,747	$	271,575
Commercial and industrial		1,290		-		275		1,565		2,612		-		31,052		33,664
Consumer		5		-		255		260		60		-		28,435		28,495
Total	$	1,919	$	-	$	2,762	$	4,681	$	8,195	$	1,305	$	324,234	$	333,734

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

	June 30, 2018						December 31, 2017
					Allowance						Allowance
	Unpaid				for Loan		Unpaid				for Loan
	Principal		Recorded		Losses		Principal		Recorded		Losses
	Balance		Investment		Allocated		Balance		Investment		Allocated
With no related allowance recorded:
Real Estate:
One to four family	$	1,024	$	979	$	-	$	699	$	655	$	-
Multi-family		-		-		-		-		-		-
Commercial real estate		2,567		2,427		-		2,593		2,452		-
Construction and land		173		173		-		179		179		-
Commercial and industrial		3,375		2,608		-		136		136		-
Consumer:
Home equity and lines of credit		26		26		-		31		31		-
Motor vehicle		-		-		-		-		-		-
Other		-		-		-		-		-		-
Subtotal	$	7,165	$	6,213	$	-	$	3,638	$	3,453	$	-

With a related allowance recorded:
Real Estate:
One to four family	$	3,253	$	3,253	$	555	$	1,091	$	988	$	367
Multi-family		-		-		-		-		-		-
Commercial real estate		1,365		1,365		254		1,249		1,249		257
Construction and land		-		-		-		-		-		-
Commercial and industrial		2,220		2,220		990		2,476		2,476		1,290
Consumer:
Home equity and lines of credit		29		29		4		29		29		5
Motor vehicle		-		-		-		-		-		-
Other		-		-		-		-		-		-
Subtotal		6,867		6,867		1,803		4,845		4,742		1,919
Total	$	14,032	$	13,080	$	1,803	$	8,483	$	8,195	$	1,919

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

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

	Three months ended June 30, 2018						Three months ended June 30, 2017
	Average		Interest		Cash Basis		Average		Interest		Cash Basis
	Recorded		Income		Interest		Recorded		Income		Interest
	Investment		Recognized		Recognized		Investment		Recognized		Recognized
Real Estate:
One to four family	$	4,034	$	31	$	31	$	2,101	$	1	$	1
Multi-family		-		-		-		-		-		-
Commercial real estate		3,740		29		29		3,352		29		29
Construction and land		175		2		2		153		2		2
Commercial and industrial		4,843		15		15		124		-		-
Consumer:
Home equity and lines of credit		56		-		-		34		-		-
Motor vehicle		-		-		-		-		-		-
Other		-		-		-		-		-		-
Total	$	12,848	$	77	$	77	$	5,764	$	32	$	32

	Six months ended June 30, 2018						Six months ended June 30, 2017
	Average		Interest		Cash Basis		Average		Interest		Cash Basis
	Recorded		Income		Interest		Recorded		Income		Interest
	Investment		Recognized		Recognized		Investment		Recognized		Recognized
Real Estate:
One to four family	$	3,237	$	71	$	62	$	1,498	$	15	$	15
Multi-family		-		-		-		-		-		-
Commercial real estate		3,727		61		54		2,868		70		65
Construction and land		176		4		4		107		4		3
Commercial and industrial		4,099		15		15		229		-		-
Consumer:
Home equity and lines of credit		57		-		-		31		-		-
Motor vehicle		-		-		-		-		-		-
Other		-		-		-		-		-		-
Total	$	11,296	$	151	$	135	$	4,733	$	89	$	83

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

Three months ended				Commercial
June 30, 2018	Real Estate			and Industrial			Consumer			Total

Allowance for loan losses:
Beginning balance	$	3,116		$	1,587		$	239		$	4,942
Provision for loan losses		128			565			(24	)		669
Loans charged-off		(312	)		(767	)		(20	)		(1,099	)
Recoveries		9			26			15			50
Total ending allowance balance	$	2,941		$	1,411		$	210		$	4,562

Three months ended				Commercial
June 30, 2017	Real Estate			and Industrial			Consumer			Total

Allowance for loan losses:
Beginning balance	$	2,035		$	231		$	197		$	2,463
Provision for loan losses		302			(9	)		53			346
Loans charged-off		(95	)		(2	)		(55	)		(152	)
Recoveries		2			13			15			30
Total ending allowance balance	$	2,244		$	233		$	210		$	2,687

Six months ended				Commercial
June 30, 2018	Real Estate			and Industrial			Consumer			Total

Allowance for loan losses:
Beginning balance	$	2,856		$	1,565		$	260		$	4,681
Provision for loan losses		635			579			(48	)		1,166
Loans charged-off		(564	)		(767	)		(52	)		(1,383	)
Recoveries		14			34			50			98
Total ending allowance balance	$	2,941		$	1,411		$	210		$	4,562

Six months ended				Commercial
June 30, 2017	Real Estate			and Industrial			Consumer			Total

Allowance for loan losses:
Beginning balance	$	1,946		$	218		$	185		$	2,349
Provision for loan losses		586			11			102			699
Loans charged-off		(293	)		(23	)		(110	)		(426	)
Recoveries		5			27			33			65
Total ending allowance balance	$	2,244		$	233		$	210		$	2,687

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

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual status, by class of loans, as of June 30, 2018 and December 31, 2017 (in thousands):

	June 30, 2018				December 31, 2017
			Loans Past Due				Loans Past Due
			Over 90 Days				Over 90 Days
	Nonaccrual		Still Accruing		Nonaccrual		Still Accruing
Real estate:
One to four family	$	2,177	$	-	$	2,911	$	-
Multi-family		-		-		-		-
Commercial real estate		1,597		-		1,677		-
Construction and land		31		-		34		-
Commercial and industrial		3,829		-		1,638		-
Consumer:
Home equity loans and lines of credit		55		-		66		-
Motor vehicle		24		-		26		-
Other		3		-		6		-
Total	$	7,716	$	-	$	6,358	$	-

The following tables present the aging of the recorded investment in past due loans as of June 30, 2018 and December 31, 2017 by class of loans. Non-accrual loans of $7.7 million as of June 30, 2018 and $6.3 million at December 31, 2017 are included in the tables below and have been categorized based on their payment status (in thousands):

	30 - 59		60 - 89		Greater than				Purchased
	Days		Days		89 Days		Total		Credit-Impaired		Loans Not
	Past Due		Past Due		Past Due		Past Due		Loans		Past Due		Total
June 30, 2018
Real estate:
One to four family	$	536	$	98	$	772	$	1,406	$	566	$	160,855	$	162,827
Multi-family		-		-		-		-		-		8,184		8,184
Commercial real estate		-		-		1,481		1,481		532		78,636		80,649
Construction and land		-		-		-		-		-		9,442		9,442
Commercial and industrial		18		481		3,825		4,324		-		32,180		36,504
Consumer:
Home equity loans and lines of credit		-		12		29		41		-		10,237		10,278
Motor vehicle		35		3		21		59		-		10,865		10,924
Other		22		-		-		22		-		7,372		7,394
Total	$	611	$	594	$	6,128	$	7,333	$	1,098	$	317,771	$	326,202

	30 - 59		60 - 89		Greater than				Purchased
	Days		Days		89 Days		Total		Credit-Impaired		Loans Not
	Past Due		Past Due		Past Due		Past Due		Loans		Past Due		Total
December 31, 2017
Real estate:
One to four family	$	1,615	$	628	$	1,199	$	3,442	$	590	$	166,722	$	170,754
Multi-family		-		-		-		-		-		6,505		6,505
Commercial real estate		249		315		1,367		1,931		715		81,666		84,312
Construction and land		-		-		-		-		-		10,004		10,004
Commercial and industrial		1,133		4		1,631		2,768		-		30,896		33,664
Consumer:
Home equity loans and lines of credit		-		-		60		60		-		10,647		10,707
Motor vehicle		40		-		21		61		-		10,307		10,368
Other		3		6		-		9		-		7,411		7,420
Total	$	3,040	$	953	$	4,278	$	8,271	$	1,305	$	324,158	$	333,734

Troubled Debt Restructurings (“TDRs”)

As of June 30, 2018, the Company had a recorded investment in seven TDRs which totaled $4.2 million. There were five TDRs which totaled $3.2 million at December 31, 2017. A less than market rate and extended term was granted as concessions for TDRs. No additional charge-off has been made for the loan relationships. No additional commitments to lend have been made to the borrower. The Company has allocated $153,000 of specific allowance for the loan relationships at June 30, 2018 and December 31, 2017.

June 30, 2018	TDRs on
(in thousands)	Non-accrual		Other TDRs		Total TDRs
Real Estate:
One to four family	$	26	$	16	$	42
Multi-family		-		-		-
Commercial real estate		914		2,195		3,109
Construction and land		-		-		-
Commercial and industrial		-		999		999
Consumer:
Home equity loans and lines of credit		-		-		-
Motor vehicle		-		-		-
Other		-		-		-
Total	$	940	$	3,210	$	4,150

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

There were no TDRs considered to be in default within twelve months of modification as of June 30, 2018. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. The following table presents TDRs that occurred during the three and six months ended June 30, 2018 and 2017 (dollars in thousands):

	Three months ended June 30, 2018						Three months ended June 30, 2017
Loan Class	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real Estate:
One to four family		-	$	-	$	-		1	$	34	$	34
Multi-family		-		-		-		-		-		-
Commercial real estate		-		-		-		1		117		117
Construction and land		-		-		-		-		-		-
Commercial and industrial		1		756		756		-		-		-
Consumer:
Home equity loans and lines of credit		-		-		-		-		-		-
Motor vehicle		-		-		-		-		-		-
Other		-		-		-		-		-		-
Total		1	$	756	$	756		2	$	151	$	151

	Six months ended June 30, 2018						Six months ended June 30, 2017
Loan Class	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Real Estate:
One to four family		-	$	-	$	-		2	$	148	$	148
Multi-family		-		-		-		-		-		-
Commercial real estate		-		-		-		1		117		117
Construction and land		-		-		-		-		-		-
Commercial and industrial		2		1,002		1,002		-		-		-
Consumer:
Home equity loans and lines of credit		-		-		-		-		-		-
Motor vehicle		-		-		-		-		-		-
Other		-		-		-		-		-		-
Total		2	$	1,002	$	1,002		3	$	265	$	265

CREDIT QUALITY INDICATORS:

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

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

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

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

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

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

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

			Special
June 30, 2018	Pass		Mention		Substandard		Doubtful		Loss		Total
One to four family	$	154,193	$	1,740	$	6,894	$	-	$	-	$	162,827
Multi-family		8,184		-		-		-		-		8,184
Commercial real estate		68,476		5,558		6,615		-		-		80,649
Construction and land		9,141		128		173		-		-		9,442
Commercial and industrial		27,973		1,360		5,242		1,929		-		36,504
Home equity loans and lines of credit		10,129		-		149		-		-		10,278
Motor vehicle		10,877		8		39		-		-		10,924
Other		7,391		-		3		-		-		7,394
Total	$	296,364	$	8,794	$	19,115	$	1,929	$	-	$	326,202

			Special
December 31, 2017	Pass		Mention		Substandard		Doubtful		Loss		Total
One to four family	$	163,709	$	1,673	$	5,372	$	-	$	-	$	170,754
Multi-family		6,505		-		-		-		-		6,505
Commercial real estate		76,226		2,957		5,129		-		-		84,312
Construction and land		9,825		-		179		-		-		10,004
Commercial and industrial		25,891		2,602		5,171		-		-		33,664
Home equity loans and lines of credit		10,549		0		158		-		-		10,707
Motor vehicle		10,291		9		68		-		-		10,368
Other		7,413		-		7		-		-		7,420
Total	$	310,409	$	7,241	$	16,084	$	-	$	-	$	333,734

There were $910,000 and $1.1 million purchased credit impaired (“PCI”) loans included in substandard loans at June 30, 2018 and December 31, 2017, respectively.

The Company holds purchased loans without evidence of credit quality deterioration. In addition, the Company holds purchased loans for which there was, at their acquisition date, evidence of deterioration of credit quality since their origination and it was probable that all contractually required payments would not be collected. A summary of non-impaired purchased loans and credit-impaired purchased loans with the carrying amount of those loans is as follows at June 30, 2018 and December 31, 2017 (in thousands):

	Non-impaired		Credit-impaired
	Purchased		Purchased
Purchased Loans as of June 30, 2018	Loans		Loans
Real estate:
One to four family	$	23,923	$	566
Multi-family		1,408		-
Commercial real estate		13,693		532
Construction and land		410		-
Commercial and industrial		727		-
Consumer loans:
Home equity loans and lines of credit		934		-
Motor vehicle		19		-
Other		467		-
Total loans	$	41,581	$	1,098

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

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

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

As of June 30, 2018
	Contractual		Remaining			Carrying
(in thousands)	Amount		Discount			Amount
Real estate:
One to four family	$	24,739	$	(250	)	$	24,489
Multi-family		1,409		(1	)		1,408
Commercial real estate		14,314		(89	)		14,225
Construction and land		410		-			410
Commercial and industrial		728		(1	)		727
Consumer loans:
Home equity loans and lines of credit		935		(1	)		934
Motor vehicle		20		(1	)		19
Other		467		-			467
Total loans	$	43,022	$	(343	)	$	42,679

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

The following tables presents the purchased loans that are included within the scope of ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, as of June 30, 2018 and December 31, 2017.

(in thousands)	June 30, 2018		December 31, 2017

Carrying amount	$	1,098	$	1,305
Non-accretable difference		171		214
Accretable yield		72		100
Contractually-required principal and interest payments	$	1,341	$	1,619

The Company adjusted interest income to recognize $6,000, $11,000 $12,000 and $24,000 of accretable yield on credit-impaired purchased loans for the three and six months ended June 30, 2018 and 2017, respectively.

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

	2018			2017

Balance at January 1	$	100		$	146
New Loans Purchased		-			-
Accretion of income		(11	)		(24	)
Reclassifications from nonaccretable difference		-			-
Disposals		(17	)		-
Balance at June 30	$	72		$	122

NOTE 6 – FEDERAL HOME LOAN BANK ADVANCES AND OTHER BORROWINGS

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

		June 30, 2018				December 31, 2017
Maturities July 2018 through January 2029, fixed rate at rates from 2.16% to 4.27%, weighted average rate of 2.41% at June 30, 2018 and 1.97% at December 31, 2017		$	6,579			$	7,419

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

remainder for year ending 2018	$	5,637
2019		429
2020		72
2021		71
2022		71
Thereafter		299
Total	$	6,579

There were no other borrowings at June 30, 2018 and December 31, 2017. On June 16, 2016, Poage Bankshares, Inc. executed a $2.0 million commercial line of credit secured with Town Square Bank common stock, with an unaffiliated lender. The initial variable rate on the line of credit was 4.0% with an interest rate equal to the Wall Street Prime plus 0.50%. The line of credit matured June 16, 2018 and was not renewed.

NOTE 7 – FAIR VALUE

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

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

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

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

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

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

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

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

Assets and liabilities measured at fair value on a recurring basis, at June 30, 2018 and December 31, 2017, are as follows (in thousands):

	Fair Value Measurements at
	June 30, 2018 Using:
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Securities:
States and political subdivisions	$	18,142	$	-	$	18,142	$	-
U.S. Government agencies and sponsored entities		4,928		-		4,928		-
Mortgage backed securities: residential		27,425		-		27,425		-
Collateralized mortgage obligations		6,450		-		6,450		-
SBA loan pools		10,142		-		10,142		-
Total securities	$	67,087	$	-	$	67,087	$	-

	Fair Value Measurements at
	December 31, 2017 Using:
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
Financial Assets
Securities:
States and political subdivisions	$	19,164	$	-	$	19,164	$	-
U.S. Government agencies and sponsored entities		3,450		-		3,450		-
Mortgage backed securities: residential		27,267		-		27,267		-
Collateralized mortgage obligations		4,955		-		4,955		-
SBA loan pools		9,294		-		9,294		-
Total securities	$	64,130	$	-	$	64,130	$	-

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

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

	Fair Value Measurements at
	June 30, 2018 Using:
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)

Impaired loans
Residential real estate, net	$	2,723	$	-	$	-	$	2,723
Commercial real estate, net		1,195		-		-		1,195
Commercial and industrial, net		1,718		-		-		1,718
Consumer loan HELOC, net		25		-		-		25

Other real estate owned
Residential real estate, net	$	65	$	-	$	-	$	65

	Fair Value Measurements at
	December 31, 2017 Using:
			Quoted Prices in		Significant		Significant
			Active Markets for		Other Observable		Unobservable
	Carrying		Identical Assets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
Impaired loans
Residential real estate, net	$	621	$	-	$	-	$	621
Commercial real estate, net		992		-		-		992
Commercial and industrial, net		1,186		-		-		1,186
Consumer loan HELOC, net		24		-		-		24

Other real estate owned
Residential real estate, net	$	610	$	-	$	-	$	610

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

At June 30, 2018, impaired loans recorded at fair value had a net carrying amount of $5.7 million equal to the outstanding balance of $7.5 million, net of a valuation allowance of $1.8 million. At December 31, 2017, impaired loans recorded at fair value had a net carrying amount of $2.8 million equal to the outstanding balance of $4.7 million, net of a valuation allowance of $1.9 million. There were charge-offs of $767,000, $767,000, $13,000 and $13,000 for the three and six months ended June 30, 2018 and 2017, respectively. The change in specific reserve on impaired loans resulted in an increase to the provision for loan losses of $431,000 and $1.3 million for the three and six months ended June 30, 2018. The change in specific reserve on impaired loans resulted in an increase of $255,000 and $524,000 for the three and six months ended June 30, 2017.

At June 30, 2018, OREO recorded at fair value had a net carrying amount of $65,000 equal to the outstanding balance of $126,000, net of a valuation allowance of $61,000. There were no write-downs for the three months ended June 30, 2018 and $3,000 in write-downs for the six months ended June 30, 2018. There were $48,000 in write-downs for the three months ended June 30, 2017 and $58,000 in write-downs for the six months ended June 30, 2017. At December 31, 2017, other real estate owned recorded at fair value had a net carrying amount of $610,000, equal to the outstanding balance of $1.03 million, net of a valuation allowance of $420,000.

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

	Carrying		Fair Value Measurements
June 30, 2018	Value		Level 1		Level 2		Level 3		Total

Financial assets
Cash and cash equivalents	$	26,401	$	26,401	$	-	$	-	$	26,401
Interest bearing deposits		3,735		-		3,735		-		3,735
Securities		67,087		-		67,087		-		67,087
Restricted stock		3,276		N/A		N/A		N/A		N/A
Loans held for sale		258		-		258		-		258
Loans, net		321,138		-		-		321,521		321,521
Accrued interest receivable		1,288		-		359		929		1,288

Financial liabilities
Deposits	$	372,065	$	216,175	$	155,152	$	-	$	371,327
Federal Home Loan Bank advances		6,579		4,999		1,570		-		6,569
Subordinated debenture		2,922		-		2,905		-		2,905
Accrued interest payable		28		-		28		-		28

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

Financial assets
Cash and cash equivalents	$	20,499	$	20,499	$	-	$	-	$	20,499
Interest bearing deposits		2,988		-		2,988		-		2,988
Securities		64,130		-		64,130		-		64,130
Restricted stock		3,276		N/A		N/A		N/A		N/A
Loans held for sale		256		-		256		-		256
Loans, net		328,554		-		-		328,236		328,236
Accrued interest receivable		1,413		-		333		1,080		1,413

Financial liabilities
Deposits	$	370,050	$	212,625	$	154,859	$	-	$	367,484
Federal Home Loan Bank advances		7,419		4,999		2,404		-		7,403
Subordinated debenture		2,890		-		2,873		-		2,873
Accrued interest payable		24		-		24		-		24

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

Cash and Cash Equivalents:

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

Restricted Stock:

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

Loans:

Fair values of loans, excluding loans held for sale, are estimated as follows: ASU 2016-1, "Recognition and Measurement of Financial Assets and Financial Liabilities," requires the Company to use the exit price notion when measuring fair value of financial instruments for disclosure purposes effective January 1, 2018, therefore the fair value presented in the following table may not be comparable to prior period. For performing loans, the fair value is determined based on a discounted cash flow analysis (income approach). The discounted cash flow was based on contractual maturity of the loan and market indications of rates, prepayment speeds, defaults and credit risk resulting in Level 3 classification. For non-performing loans, the fair value is determined based on the estimated values of the underlying collateral or individual analysis of receipts (asset approach) resulting in Level 3 classification. At December 31, 2017, the fair values of loans, excluding loans held for sale, were estimated as follows: for variable rate loans that reprice frequently and with no significant change in credit risk, fair values were based on carrying values resulting in a Level 3 classification. Fair values for other loans were estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans were valued as described previously.

The fair value of loans held for sale is based upon estimated values received from independent third-party purchasers. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans resulting in a Level 2 classification.

Deposits:

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

Other borrowings, Federal Home Loan Bank advances and Subordinate debenture:

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

Accrued Interest Receivable/Payable:

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

NOTE 8 - ESOP

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

There were no contributions to the ESOP for the three and six months ended June 30, 2018 and 2017.

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

	June 30,		December 31,
	2018		2017
Allocated to participants		64,148		64,148
Committed to be released		20,281		13,538
Unearned		178,677		185,420
Total ESOP shares		263,106		263,106

Fair value of unearned shares	$	3,513	$	3,894

NOTE 9 – EARNINGS PER SHARE

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

	Three months ended				Six months ended
	June 30,				June 30,
	2018		2017		2018		2017
Basic
Net income	$	704	$	367	$	933	$	830
Less: Earnings allocated to participating securities		1		2		2		5
Net income available to common shareholders	$	703	$	365		931		825

Weighted average common shares outstanding		3,497,930		3,663,708		3,503,872		3,680,448
Less: Average unallocated ESOP shares		180,881		194,409		182,558		196,091
Average participating shares		2,622		17,848		8,887		24,125
Average shares		3,314,427		3,451,451		3,312,427		3,460,232

Basic earnings per common share	$	0.21	$	0.11	$	0.28	$	0.24

Diluted
Net income available to common shareholders	$	703	$	365	$	931	$	825

Weighted average common shares outstanding for basic earnings per common share		3,314,427		3,451,451		3,312,427		3,460,232
Add: Dilutive effects of assumed exercises of stock options		31,850		29,740		31,850		30,321
Average shares and dilutive potential common shares		3,346,277		3,481,191		3,344,277		3,490,553

Diluted earnings per common share	$	0.21	$	0.11	$	0.28	$	0.24

There were no stock options considered antidilutive for the three and six months ended June 30, 2018 and 2017.

NOTE 10 – 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.

The following table summarizes stock option activity for the six months ended June 30, 2018:

			Weighted Average
	Options		Exercise Price

Outstanding -December 31, 2017		141,850	$	14.99
Granted		-		-
Exercised and settled		-		-
Forfeited		-		-
Outstanding -June 30, 2018		141,850	$	14.99

Fully vested and exercisable at June 30, 2018		134,850	$	14.90
Fully vested and exercisable at December 31, 2017		99,600	$	14.90
Expected to vest in future periods		7,000

Stock options are assumed to be earned ratably over their respective vesting periods and charged to compensation expense based upon their grant date fair value and the number of options assumed to be earned. At June 30, 2018, 141,850 options were outstanding, and 134,850 options were fully vested and exercisable with intrinsic value of $662,000 and $630,000, respectively. At December 31, 2017, 141,850 options were outstanding, and 99,600 options were fully vested and exercisable with intrinsic value of $853,000 and $599,000, respectively.

During the six months ended June 30, 2018, 35,250 options vested. Stock-based compensation expense for stock options included in salaries and benefits for the three and six months ended June 30, 2018 and 2017 was $11,000, $29,000, $18,000 and $36,000, respectively. Total unrecognized compensation cost related to non-vested stock options was $10,000 at June 30, 2018 and is expected to be recognized over a period of 1.8 years.

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

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

The fair value of the restricted stock awards is amortized to compensation expense over the vesting period (generally five years) and is based on the market price of the Company’s common stock at the date of the grant multiplied by the number of shares granted that are expected to vest. Stock-based compensation expense for the restricted stock included in salaries and benefits for the three and six months ended June 30, 2018 and 2017 was $11,000, $69,000, $57,000 and $115,000, respectively. Unrecognized compensation expense for non-vested restricted stock awards was $1,000 at June 30, 2018 and is expected to be recognized over a weighted-average period of 5 months.

NOTE 11 – ACCUMULATED OTHER COMPREHENSIVE INCOME

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

	Unrealized Gains and Losses on Available-for-Sale Securities
	Three months ended					Six months ended
	June 30,					June 30,
	2018			2017		2018			2017
Beginning balance	$	(919	)	$	132	$	(260	)	$	(153	)

Other comprehensive income (loss), net of tax before reclassification		(123	)		184		(782	)		469

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

Net current period other comprehensive income (loss)		(123	)		184		(782	)		469

Ending Balance	$	(1,042	)	$	316	$	(1,042	)	$	316

NOTE 12 – SUBSEQUENT EVENT

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

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

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

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

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

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

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

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

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

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

Critical Accounting Policies

There are no material changes to the critical accounting policies disclosed in the Annual Report on Form 10-K for Poage Bankshares, Inc. for the year ended December 31, 2017, as filed with the Securities and Exchange Commission.

Forward-Looking Statements

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

statements of our goals, intentions and expectations;

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

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

estimates of our risks and future costs and benefits;

non-historical statements about our financial condition, results of operations and business of Poage Bankshares.

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

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

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

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

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

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

our ability to successfully enhance and maintain internal controls;

competition among depository and other financial institutions;

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

our ability to improve our asset quality even as we increase our commercial business, commercial real estate and multi-family lending;

our success in introducing new financial products;

our ability to attract and maintain deposits;

decreases in our asset quality;

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

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

changes in consumer spending, borrowing and savings habits;

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

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

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

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

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

changes in the level of government support of housing finance;

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

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

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

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

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

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

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

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

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

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

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

Total assets at June 30, 2018 increased $1.0 million, or 0.2%, to $447.9 million from $446.9 million at December 31, 2017. The increase was attributed to an increase of $2.0 million in deposits, offset by a decrease of $840,000 in FHLB advances.

Cash and Cash equivalents increased by $5.9 million, or 28.8%, to $26.4 million at June 30, 2018 from $20.5 million at December 31, 2017. The increase in cash was primarily attributable to an increase in deposits combined with a decrease in loans outstanding, offset by cash used to purchase securities available for sale.

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

Securities available for sale increased by $3.0 million, or 4.6%, to $67.1 million at June 30, 2018 from $64.1 million at December 31, 2017. This increase is primarily due to $8.6 million in purchases, offset by a decrease of $1.0 million in fair value on securities available for sale and by maturities, calls and principal payments of $4.6 million.

Loans held for sale increased $2,000, or 0.8%, to $258,000 at June 30, 2018 from $256,000 at December 31, 2017 due to a slight increase in secondary market mortgage lending activity.

Loans, net, decreased $7.5 million, or 2.3%, to $321.1 million at June 30, 2018 from $328.6 million at December 31, 2017. The decrease was primarily attributable to a decrease in one to four family loans, construction and land loans, and commercial real estate loans, offset by an increase in multi-family loans. Non-performing loans increased $1.3 million, or 21.4%, to $7.7 million at June 30, 2018 from $6.4 million at December 31, 2017.

Deposits increased $2.0 million or 0.5%, to $372.1 million at June 30, 2018 from $370.1 million at December 31, 2017. The increase was attributable to an increase of $3.4 million in non-interest bearing demand deposits and an increase of $5.7 million in savings accounts, offset by a decrease of $3.0 million in NOW accounts, a decrease of $2.6 million money market accounts and a decrease of $1.5 million in certificates of deposits.

Federal Home Loan Bank advances decreased $840,000, or 11.3%, to $6.6 million at June 30, 2018 from $7.4 million at December 31, 2017 attributable to $5.8 million in maturities and principal payments, offset by $5.0 million in advances.

Subordinated debenture increased by $32,000, or 1.1%, and remained unchanged at $2.9 million at June 30, 2018 and December 31, 2017 due to the amortization of the fair value related to the subordinated debenture assumed in conjunction with acquisition of Town Square Financial Corporation. In December 2006, Town Square Statutory Trust I, a trust formed by Town Square Financial Corporation, closed a pooled private offering of 4,124 trust preferred securities with a liquidation amount of $1,000 per security. The subordinated debt of $2.9 million is shown as a liability because the Company is not considered the primary beneficiary of the Trust. The investment in common stock of the trust is $124,000 and is included in other assets. The subordinated debt has a variable rate of interest equal to the three month London Interbank Offered Rate (LIBOR) plus 1.83%, which was 4.17% at June 30, 2018.

Total shareholders’ equity decreased by $368,000, or 0.6%, to $61.3 million at June 30, 2018 from $61.7 million at December 31, 2017. The decrease resulted from the repurchase of common stock totaling $326,000, the payment of cash dividends totaling $421,000 and a decrease in accumulated other comprehensive income of $782,000, offset by net income of $933,000 and the expense related to the stock based compensation plans of $228,000.

Average Balances and Yields

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

	For the Three Months Ended June 30,
	2018							2017
	Average		Interest and					Average		Interest and
	Balance		Dividends		Yield/ Cost			Balance		Dividends		Yield/ Cost
Assets:
Interest earning assets:
Loans	$	330,831	$	4,104		4.98	%	$	339,489	$	4,262		5.04	%
Investment securities		66,639		395		2.38	%		61,433		363		2.37	%
Restricted Stock		3,276		43		5.26	%		3,276		36		4.41	%
Other interest earning assets		24,752		96		1.56	%		27,618		63		0.91	%
Total interest earning assets		425,498		4,638		4.37	%		431,816		4,724		4.39	%

Non-interest earning assets		23,224							25,121
Total assets		448,722							456,937

Liabilities and equity:
Interest bearing liabilities:
Interest bearing deposits:
NOW, savings, money market, and other		162,407		131		0.32	%		152,961		104		0.27	%
Certificates of deposit		156,658		556		1.42	%		167,549		493		1.18	%
Total interest bearing deposits		319,065		687		0.86	%		320,510		597		0.75	%

FHLB advances		6,730		41		2.44	%		8,402		36		1.72	%
Subordinated debenture		2,913		58		7.99	%		2,848		47		6.62	%
Other borrowings		-		-		-			181		2		4.43	%
Total borrowings		9,643		99		4.12	%		11,431		85		2.98	%

Total interest bearing liabilities		328,708		786		0.96	%		331,941		682		0.82	%

Non-interest bearing liabilities:
Non-interest bearing deposits		54,113							52,506
Accrued interest payable		104							132
Other liabilities		4,681							3,361
Total non-interest bearing liabilities		58,898							55,999
Total liabilities		387,606							387,940

Total equity		61,116							68,997
Total liabilities and equity		448,722							456,937

Net interest income				3,852							4,042
Interest rate spread						3.41	%						3.57	%
Net interest margin						3.63	%						3.75	%
Average interest-earning assets to average interest-bearing liabilities						129.45	%						130.09	%

	For the Six Months Ended June 30,
	2018							2017
	Average		Interest and					Average		Interest and
	Balance		Dividends		Yield/ Cost			Balance		Dividends		Yield/ Cost
Assets:
Interest earning assets:
Loans	$	331,198	$	8,243		5.02	%	$	340,965	$	8,580		5.07	%
Investment securities		65,998		766		2.34	%		60,197		703		2.36	%
Restricted Stock		3,276		87		5.36	%		3,276		70		4.31	%
Other interest earning assets		23,915		168		1.42	%		28,258		119		0.85	%
Total interest earning assets		424,387		9,264		4.40	%		432,696		9,472		4.41	%

Non-interest earning assets		23,667							25,441
Total assets		448,054							458,137

Liabilities and equity:
Interest bearing liabilities:
Interest bearing deposits:
NOW, savings, money market, and other		161,370		254		0.32	%		149,941		194		0.26	%
Certificates of deposit		157,002		1,084		1.39	%		171,977		985		1.15	%
Total interest bearing deposits		318,372		1,338		0.85	%		321,918		1,179		0.74	%

FHLB advances		6,918		76		2.22	%		8,667		75		1.75	%
Subordinated debenture		2,904		110		7.64	%		2,841		92		6.53	%
Other borrowings		-		-		-			91		2		4.43	%
Total borrowings		9,822		186		3.82	%		11,599		169		2.94	%

Total interest bearing liabilities		328,194		1,524		0.94	%		333,517		1,348		0.82	%

Non-interest bearing liabilities:
Non-interest bearing deposits		53,668							52,313
Accrued interest payable		104							131
Other liabilities		4,673							3,129
Total non-interest bearing liabilities		58,445							55,573
Total liabilities		386,639							389,090

Total equity		61,415							69,047
Total liabilities and equity		448,054							458,137

Net interest income				7,740							8,124
Interest rate spread						3.46	%						3.59	%
Net interest margin						3.68	%						3.79	%
Average interest-earning assets to average interest-bearing liabilities						129.31	%						129.74	%

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, 2018, we had $6.6 million in advances from the Federal Home Loan Bank of Cincinnati and an additional borrowing capacity of $76.7 million.

Poage Bankshares, Inc. is a separate legal entity from Town Square Bank and must provide its own liquidity to pay dividends, repurchase stock and to fund other general corporate activities. Poage Bankshares, Inc.’s primary source of liquidity is dividend payments from Town Square Bank. The ability of Town Square Bank to pay dividends is subject to regulatory requirements. At June 30, 2018, Poage Bankshares, Inc. (on an unconsolidated basis) had liquid assets of $3.2 million.

On June 16, 2016, Poage Bankshares, Inc. executed a $2.0 million commercial line of credit secured with Town Square Bank common stock, with an unaffiliated lender. The line of credit matured June 16, 2018 and was not renewed. The variable interest rate on the line of credit was 5.00% with an interest rate equal to the Wall Street Prime plus 0.50% adjusting monthly.

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

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

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

In addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the institution does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets above the amount necessary to meet its minimum risk-based capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented at 2.5% on January 1, 2019. When fully implemented, the capital conservation buffer will be 2.50% of risk weighted assets over and above the regulatory minimum capital ratios for Common Equity Tier 1 Capital (CET1) to risk weighted assets, Tier 1 Capital to risk weighted assets, and Total Capital to risk weighted assets. The consequences of not meeting the capital conservation buffer thresholds include restrictions on the payment of dividends, restrictions on the payment of discretionary bonuses, and restrictions on the repurchasing of common shares by the Company. At June 30, 2018, the actual capital conservation buffer for Town Square Bank was 10.24% compared to the capital conservation buffer requirement of 1.875%.

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

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

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

											To Be Well
											Capitalized Under
						For Capital Adequacy					Prompt Corrective
	Actual					Purposes					Action Regulations
As of June 30, 2018	Amount		Percent			Amount		Percent			Amount		Percent
Total Risk-Based Capital
(to Risk-weighted Assets)	$	59,370		18.24	%	$	26,044		8.00	%	$	32,555		10.00	%
Tier I Capital
(to Risk-weighted Assets)		55,293		16.98			19,533		6.00			26,044		8.00
Common Equity
(to Risk-weighted Assets)		55,293		16.98			14,650		4.50			21,161		6.50
Tier I Capital
(to Adjusted Total Assets)		55,293		12.39			17,853		4.00			22,316		5.00

											To Be Well
											Capitalized Under
						For Capital Adequacy					Prompt Corrective
	Actual					Purposes					Action Regulations
As of December 31, 2017	Amount		Percent			Amount		Percent			Amount		Percent
Total Risk-Based Capital
(to Risk-weighted Assets)	$	57,678		19.10	%	$	24,159		8.00	%	$	30,198		10.00	%
Tier I Capital
(to Risk-weighted Assets)		53,891		17.85			18,119		6.00			24,159		8.00
Common Equity
(to Risk-weighted Assets)		53,891		17.85			13,589		4.50			19,629		6.50
Tier I Capital
(to Adjusted Total Assets)		53,891		11.80			18,272		4.00			22,840		5.00

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

Comparison of Operating Results for the Three and Six Months Ended June 30, 2018 and June 30, 2017

General. Net income for the three months ended June 30, 2018 increased $337,000, or 91.8%, to $704,000 from net income of $367,000 for the three months ended June 30, 2017. The increase in net income is primarily attributable to the insurance recovery of $850,000 on fictitious loans for the three months ended June 30, 2018 and a decrease of $100,000 in income tax expense to $145,000 for the three months ended June 30, 2018 compared to a tax expense of $245,000 for the three months ended June 30, 2017. The reduction in tax expense is primarily attributable to the tax rate change enacted with the 2017 Tax Cuts & Job Act. The increase in income is offset by a decrease in net interest income of $190,000 to $3.9 million for the three months ended June 30, 2018 from $4.0 million for the three months ended June 30, 2017, an increase in the provision for loan losses of $323,000 to $669,000 for the three months ended June 30, 2018 from $346,000 for the three months ended June 30, 2017 and an increase in non-interest expense of $68,000 to $3.9 million for the three months ended June 30, 2018 from $3.8 million for the three months ended June 30, 2017. Additionally, non-interest income, excluding the recovery on fictitious loans, decreased $32,000 to $686,000 for the three months ended June 30, 2018 from $718,000 for the three months ended June 30, 2017.

Net income for the six months ended June 30, 2018 increased $103,000, or 12.4%, to a $933,000 from net income of $830,000 for the six months ended June 30, 2017. The increase in net income is primarily attributable to the recovery of $875,000 on fictitious loans for the six months ended June 30, 2018 and a decrease of $211,000 in income tax expense to $178,000 for the three months ended June 30, 2018 compared to a tax expense of $389,000 for the six months ended June 30, 2017. The reduction in tax expense is primarily attributable to the tax rate change enacted with the 2017 Tax Cuts & Job Act. The increase in income is offset by a decrease in net interest income of $384,000 to $7.7 million for the six months ended June 30, 2018 from $8.1 million for the six months ended June 30, 2017, an increase in the provision for loan losses of $467,000 to $1.2 million for the six months ended June 30, 2018 from $699,000 for the six months ended June 30, 2017 and an increase in non-interest expense of $74,000 to $7.7 million for the six months ended June 30, 2018 from $7.6 million for the six months ended June 30, 2017. Additionally, non-interest income, excluding the recovery on fictitious loans, decreased $58,000 to $1.3 million for the six months ended June 30, 2018 from $1.4 million for the six months ended June 30, 2017.

Interest Income. Interest income decreased $86,000, or 1.8%, to $4.6 million for the three months ended June 30, 2018 from $4.7 million for the three months ended June 30, 2017. The average balance of interest-earning assets decreased $6.3 million, or 1.5%, to $425.5 million for the three months ended June 30, 2018 from $431.8 million for the three months ended June 30, 2017.

Interest income on loans decreased $158,000, or 3.7%, to $4.1 million for the three months ended June 30, 2018 from $4.3 million for the three months ended June 30, 2017. The average yields on loans decreased 6 basis points to 4.98% for the three months ended June 30, 2018 compared to 5.04% for the three months ended June 30, 2017. The average balance of loans decreased $8.7 million, or 2.6%, to $330.8 million for the three months ended June 30, 2018 from $339.5 million for the three months ended June 30, 2017. Income recognized from purchase discounts attributable to the Town Square and Commonwealth acquisitions decreased $79,000, or 72.5%, to $30,000 for the three months ended June 30, 2018 from $109,000 for the three months ended June 30, 2017 and contributed to the decrease in the average yields on loans.

Interest income on investment securities increased $32,000, or 8.8%, to $395,000 for the three months ended June 30, 2018 from $363,000 for the three months ended June 30, 2017. The average yield on securities increased 1 basis point to 2.38% for the three months ended June 30, 2018, compared to 2.37% for the three months ended June 30, 2017. The average balance of investment securities increased $5.2 million, or 8.5%, to $66.6 million for the three months ended June 30, 2018 from $61.4 million for the three months ended June 30, 2017.

Interest income on restricted stock increased $7,000, or 19.4%, to $43,000 for the three months ended June 30, 2018 from $36,000 for the three months ended June 30, 2017. The average yield on restricted stock increased 85 basis points to 5.26% for the three months ended June 30, 2018 compared to 4.41% for the three months ended June 30, 2017. The average balance of restricted stock remained constant at $3.3 million for the three months ended June 30, 2018 and 2017. Interest income on other interest-earning assets increased $33,000, or 52.4%, to $96,000 for the three months ended June 30, 2018 from $63,000 for the three months ended June 30, 2017. The average yield on other interest-earning assets increased 65 basis points to 1.56% for the three months ended June 30, 2018 compared to 0.91% for the three months ended June 30, 2017. The average balance of other interest earning assets decreased $2.8 million, or 10.4%, to $24.8 million for the three months ended June 30, 2018 from $27.6 million for the three months ended June 30, 2017.

Interest income decreased $208,000, or 2.2%, to $9.3 million for the six months ended June 30, 2018 from $9.5 million for the six months ended June 30, 2017. The average balance of interest-earning assets decreased $8.3 million, or 1.9%, to $424.4 million for the six months ended June 30, 2018 from $432.7 million for the six months ended June 30, 2017.

Interest income on loans decreased $337,000, or 3.9%, to $8.2 million for the six months ended June 30, 2018 from $8.6 million for the six months ended June 30, 2017. The average yields on loans decreased 5 basis points to 5.02% for the six months ended June 30, 2018 compared to 5.07% for the six months ended June 30, 2017. The average balance of loans decreased $9.8 million, or 2.9%, to $331.2 million for the six months ended June 30, 2018 from $341.0 million for the six months ended June 30, 2017. Income recognized from purchase discounts attributable to the Town Square and Commonwealth acquisitions decreased $120,000, or 54.9%, to $99,000 for the six months ended June 30, 2018 from $219,000 for the six months ended June 30, 2017 and contributed to the decrease in the average yields on loans.

Interest income on investment securities increased $63,000, or 9.0%, to $766,000 for the six months ended June 30, 2018 from $703,000 for the six months ended June 30, 2017. The average yield on securities decreased 2 basis points to 2.34% for the six months ended June 30, 2018, compared to 2.36% for the six months ended June 30, 2017. The average balance of investment securities increased $5.8 million, or 9.6%, to $66.0 million for the six months ended June 30, 2018 from $60.2 million for the six months ended June 30, 2017.

Interest income on restricted stock increased $17,000, or 24.3%, to $87,000 for the six months ended June 30, 2018 from $70,000 for the six months ended June 30, 2017. The average yield on restricted stock increased 105 basis points to 5.36% for the six months ended June 30, 2018 compared to 4.31% for the six months ended June 30, 2017. The average balance of restricted stock remained constant at $3.3 million for the six months ended June 30, 2018 and 2017. Interest income on other interest-earning assets increased $49,000, or 41.2%, to $168,000 for the six months ended June 30, 2018 from $119,000 for the six months ended June 30, 2017. The average yield on other interest-earning assets increased 57 basis points to 1.42% for the six months ended June 30, 2018 compared to 0.85% for the six months ended June 30, 2017. The average balance of other interest earning assets decreased $4.4 million, or 15.4%, to $23.9 million for the six months ended June 30, 2018 from $28.3 million for the six months ended June 30, 2017.

Interest Expense. Interest expense increased $104,000, or 15.2%, to $786,000 for the three months ended June 30, 2018 from $682,000 for the three months ended June 30, 2017. The average balance of interest bearing liabilities decreased $3.2 million, or 1.0%, to $328.7 million for the three months ended June 30, 2018 from $331.9 million for the three months ended June 30, 2017.

Interest expense on interest bearing deposits increased $90,000, or 15.1% to $687,000 for the three months ended June 30, 2018 from $597,000 for the three months ended June 30, 2017. The average balance of interest bearing deposits decreased $1.4 million, or 0.5%, to $319.1 million for the three months ended June 30, 2018 from $320.5 million for the three months ended June 30, 2017. The average interest rate paid on interest bearing deposits increased 11 basis points to 0.86% for the three months ended June 30, 2018 compared to 0.75% for the three months ended June 30, 2017. The decrease in average balance on interest bearing deposits is attributable to a decrease in certificates of deposits, offset by an increase in NOW and money market accounts.

Interest expense on FHLB advances, subordinated debentures and other borrowings increased $14,000, or 16.5%, to $99,000 for the three months ended June 30, 2018 from $85,000 for the three months ended June 30, 2017. The average balance on FHLB advances decreased $1.7 million, or 19.9%, to $6.7 million for the three months ended June 30, 2018 from $8.4 million for the three months ended June 30, 2017. The average interest rate paid on FHLB advances increased 72 basis points to 2.44% from 1.72%. The average balance on subordinated debentures increased $65,000, or 2.3%, to $2.9 million for the three months ended June 30, 2018 from $2.8 million for the three months ended June 30, 2017. The average interest rate paid on subordinated debentures increased 137 basis points to 7.99% for the three months ended June 30, 2018 from 6.62% for the three months ended June 30, 2017. The average balance on other borrowings decreased $181,000, or 100.0%, to $0 for the three months ended June 30, 2018 from $181,000 for the three months ended June 30, 2017. The average interest rate paid on other borrowings decreased 443 basis points to 0% for the three months ended June 30, 2018 from 4.43% for the three months ended June 2017.

Interest expense increased $176,000, or 13.1%, to $1.5 million for the six months ended June 30, 2018 from $1.3 million for the six months ended June 30, 2017. The average balance of interest bearing liabilities decreased $5.3 million, or 1.6%, to $328.2 million for the six months ended June 30, 2018 from $333.5 million for the six months ended June 30, 2017.

Interest expense on interest bearing deposits increased $159,000, or 13.5% to $1.3 million for the six months ended June 30, 2018 from $1.2 million for the six months ended June 30, 2017. The average balance of interest bearing deposits decreased $3.5 million, or 1.1%, to $318.4 million for the six months ended June 30, 2018 from $321.9 million for the six months ended June 30, 2017. The average interest rate paid on interest bearing deposits increased 11 basis points to 0.85% for the six months ended June 30, 2018 compared to 0.74% for the six months ended June 30, 2017. The decrease in average balance on interest bearing deposits is primarily attributable to a decrease in certificates of deposits which included $7.9 million in short-term non-brokered deposits acquired in the national market, offset by an increase in NOW and money market accounts.

Interest expense on FHLB advances, subordinated debentures and other borrowings increased $17,000, or 10.1%, to $186,000 for the six months ended June 30, 2018 from $169,000 for the six months ended June 30, 2017. The average balance on FHLB advances decreased $1.8 million, or 20.2%, to $6.9 million for the six months ended June 30, 2018 from $8.7 million for the six months ended June 30, 2017. The average interest rate paid on FHLB advances increased 47 basis points to 2.22% from 1.75%. The average balance on subordinated debentures increased $63,000, or 2.2%, to $2.9 million for the six months ended June 30, 2018 from $2.8 million for the six months ended June 30, 2017. The average interest rate paid on subordinated debentures increased 111 basis points to 7.64% for the six months ended June 30, 2018 from 6.53% for the six months ended June 30, 2017. The average balance on other borrowings decreased $91,000, or 100.0%, to $0 for the six months ended June 30, 2018 from $91,000 for the six months ended June 30, 2017. The average interest rate paid on other borrowings decreased 443 basis points to 0% for the six months ended June 30, 2018 from 4.43% for the six months ended June 2017

Net Interest Income. Net interest income decreased $190,000, or 4.7%, to $3.8 million for the three months ended June 30, 2018 from $4.0 million for the three months ended June 30, 2017. The ratio of average interest earning assets to average interest bearing liabilities decreased to 129.45% for the three months ended June 30, 2018 from 130.09% for the three months ended June 30, 2017. The interest rate spread decreased 16 basis points to 3.41% for the three months ended June 30, 2018 from 3.57% for the three months ended June 30, 2017. Net interest margin decreased 12 basis points to 3.63% for the three months ended June 30, 2018 from 3.75% for the three months ended June 30, 2017.

Net interest income decreased $384,000, or 4.7%, to $7.7 million for the six months ended June 30, 2018 from $8.1 million for the six months ended June 30, 2017. The ratio of average interest earning assets to average interest bearing liabilities decreased to 129.31% for the six months ended June 30, 2018 from 129.74% for the six months ended June 30, 2017. The interest rate spread decreased 13 basis points to 3.46% for the six months ended June 30, 2018 from 3.59% for the six months ended June 30, 2017. Net interest margin decreased 11 basis points to 3.68% for the six months ended June 30, 2018 from 3.79% for the six months ended June 30, 2017.

Provision for Loan Losses. We recorded $669,000 in provision for loan losses for the three months ended June 30, 2018 compared to $346,000 in provision for loan losses for the three months ended June 30, 2017. The increase is primarily attributable to an additional provision of $376,000 to increase an allowance to $895,000 on one commercial relationship classified as substandard, which had an outstanding balance of $974,000 at June 30, 2018.

We recorded $1.2 million in provision for loan losses for the six months ended June 30, 2018 compared to $699,000 in provision for loan losses for the six months ended June 30, 2017. The increase in the provision is primarily attributable to the establishment of an allowance of $478,000 on one residential loan relationship classified as substandard, which had an outstanding balance of $2.9 million at June 30, 2018 and an additional provision of $376,000 to increase an allowance to $895,000 on one commercial relationship classified as substandard, which had an outstanding balance of $974,000 at June 30, 2018.

Noninterest Income. Noninterest income, including the insurance recovery on fictitious loans, increased $818,000, or 113.9%, to $1.5 million for the three months ended June 30, 2018 from $718,000 for the three months ended June 30, 2017. The increase in noninterest income was primarily attributable to the insurance recovery of $850,000 on fictitious loans identified in September 2017 and an increase in service charges on deposits of $10,000, or 1.9%, to $533,000 for the three months ended June 30, 2018 from $523,000 for the three months ended June 30, 2017. The increase in noninterest income is offset by a decrease in loan servicing fees of $30,000, or 36.6%, to $52,000 for the three months ended June 30, 2018 from $82,000 for the three months ended June 30, 2017 and a decrease in gains on mortgage loans sold of $10,000, or 17.9%, to $46,000 for the three months ended June 30, 2018 from $56,000 for the three months ended June 30, 2017.

Noninterest income, including the recovery on fictitious loans, increased $817,000, or 59.6%, to $2.2 million for the six months ended June 30, 2018 from $1.4 million for the six months ended June 30, 2017. The increase in noninterest income was primarily attributable to the recovery of $875,000 on fictitious loans identified in September 2017 and an increase in service charges on deposits of $18,000, or 1.8%, to remain unchanged at $1.0 million for the six months ended June 30, 2018 and 2017. These increases in noninterest income were partially offset by a decrease in net gain on disposal of land and equipment of $19,000, or 118.8%, to a net loss of $3,000 for the six months ended June 30, 2018 from a net gain of $16,000 for the six months ended June 30, 2017, a decrease in loan servicing fees of $36,000, or 22.0%, to $128,000 for the six months ended June 30, 2018 from $164,000 for the six months ended June 30, 2017 and a decrease in gains on mortgage loans sold of $14,000, or 19.2%, to $59,000 for the six months ended June 30, 2018 from $73,000 for the six months ended June 30, 2017.

Noninterest Expense. Noninterest expense increased $68,000, or 1.8%, to $3.9 million for the three months ended June 30, 2018 from $3.8 million for the three months ended June 30, 2017. This increase was primarily attributable to an increase in other expenses of $67,000, or 22.8% to 361,000 for the three months ended June 30, 2018 from $294,000 for the three months ended June 30, 2017 which included the provision for loan loss on unfunded commitments of $70,000 and debit card losses of $17,000. Professional fees increased $20,000, or 24.1%, to $103,000 for the three months ended June 30, 2018 from $83,000 for the three months ended June 30, 2017 and director fees increased $12,000, or 30.8%, to $51,000 for the three months ended June 30, 2018 from $39,000 for the three months ended June 30, 2017. The increased professional fees and director fees are related to the merger agreement signed on July 10, 2018. In addition, loan processing and collection increased $22,000, or 21.2%, to $126,000 for the three months ended June 30, 2018 from $104,000 for the three months ended June 30, 2017, data processing increased $33,000, or 4.8%, to $724,000 for the three months ended June 30, 2018 from $691,000 for the three months ended June 30, 2017 and conversion expense increased $55,000, or 100.0%, to $55,000 for the three months ended June 30, 2018 from $0 for the three months ended June 30, 2017. The increase in data processing is attributable to increased activity for internet banking and volume for data processing charges. Conversion expense is related to the contract signed in December 2017 with the new data processing provider.

The increase in noninterest expense is offset by a decrease in salaries and employee benefits of $53,000, or 3.1%, to remain unchanged at $1.7 million for the three months ended June 30, 2018 and 2017, a decrease in foreclosed assets expense of $29,000, or 53.7%, to $25,000 for the three months ended June 30, 2018 from $54,000 for the three months ended June 30, 2017, a decrease in advertising of $43,000, or 42.6%, to $58,000 for the three months ended June 30, 2018 from $101,000 for the three months ended June 30, 2017 and a decrease in occupancy expense of $21,000, or 4.5%, to $450,000 for the three months ended June 30, 2018 from $471,000 for the three months ended June 30, 2017.

Noninterest expense increased $74,000, or 1.0%, to $7.7 million for the six months ended June 30, 2018 from $7.6 million for the six months ended June 30, 2017. This increase was primarily attributable to an increase in other expenses of $87,000, or 16.1% to 629,000 for the six months ended June 30, 2018 from $542,000 for the six months ended June 30, 2017 which included the provision for loan loss on unfunded commitments of $82,000, an increase in professional fees of $19,000, or 11.7%, to $181,000 for the six months ended June 30, 2018 from $162,000 for the six months ended June 30, 2017 and an increase in director fees of $12,000, or 15.2%, to $91,000 for the six months ended June 30, 2018 from $79,000 for the six months ended June 30, 2017. The increased professional fees and director fees are related to the merger agreement signed on July 10, 2018. In addition, loan processing and collection increased $54,000, or 28.4%, to $244,000 for the six months ended June 30, 2018 from $190,000 for the six months ended June 30, 2017, data processing increased $123,000, or 9.7%, to $1.4 million for the six months ended June 30, 2018 from $1.3 million for the six months ended June 30, 2017 and conversion expense increased $155,000, or 100.0%, to $155,000 for the six months ended June 30, 2018 from $0 for the six months ended June 30, 2017. The increase in data processing is attributable to increased activity for internet banking and volume for data processing charges. Conversion expense is related to the contract signed in December 2017 with the new data processing provider.

The increase in noninterest expense is offset by a decrease in salaries and employee benefits of $121,000, or 3.4%, to $3.4 million for the six months ended June 30, 2018 from $3.5 million for the six months ended June 30, 2017, a decrease in foreclosed assets expense of $130,000, or 88.4%, to $17,000 for the six months ended June 30, 2018 from $147,000 for the six months ended June 30, 2017, a decrease in advertising of $59,000, or 27.4%, to $156,000 for the six months ended June 30, 2018 from $215,000 for the six months ended June 30, 2017 and a decrease in occupancy expense of $56,000, or 5.9%, to $889,000 for the six months ended June 30, 2018 from $945,000 for the six months ended June 30, 2017.

Income Tax Expense. The provision for income tax expense was $145,000 for the three months ended June 30, 2018 compared to $245,000 for the three months ended June 30, 2017. Our effective tax rate for the three months ended June 30, 2018 was 17.1% compared to 40.0% for the three months ended June 30, 2017. The reduction in the effective tax rate is attributable to the tax rate change enacted with the 2017 Tax Cuts & Job Act. In addition, the 40.0% effective tax rate for the three months ended June 30, 2017 was attributable to nondeductible incentive stock options.

The provision for income tax expense was $178,000 for the six months ended June 30, 2018 compared to $389,000 for the six months ended June 30, 2017. Our effective tax rate for the six months ended June 30, 2018 was 16.0% compared to 31.9% for the six months ended June 30, 2017. The reduction in the effective tax rate is attributable to the tax rate change enacted with the 2017 Tax Cuts & Job Act.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

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

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

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

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

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

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

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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

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

(a)

None.

(b)

Not applicable.

(c)

Issuer repurchases. On June 2, 2016, Poage Bankshares, Inc. commenced a stock repurchase program. The Board of Directors of Poage Bankshares, Inc. authorized program to repurchase up to 150,000 shares, which represented approximately 3.9% of the Company’s then issued and outstanding shares of common stock through open-market purchases, block trades, negotiated private transactions and pursuant to a trading plan that was adopted in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. The Company repurchased 3,325 shares at a weighted average price of $19.46 per share and there remained 17,720 shares to be repurchased under this plan at June 30, 2018.

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

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

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

					Total Number		Number of Shares
					of Shares		That May Yet
	Total				Purchased as		Be Purchased
	Number of		Average		Part of		Under Publicly
	Shares		Price Paid		Publicly		Announced
	Purchased		Per Share		Announced Plan		Plan
April 1 - April 30, 2018		-	$	-		-		181,220
May 1 - May 31, 2018		-		-		-		181,220
June 1 - June 30, 2018		-		-		-		181,220
Total		-	$	-		-

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit
number		Description

3.1		Articles of Incorporation of Poage Bankshares, Inc. ⁽¹⁾

3.2		Bylaws of Poage Bankshares, Inc. ⁽²⁾

31.1		Certification of President, and Chief Executive Officer, Pursuant to Rule 13a-14(a) and Rule 15-d-14(a).

31.2		Certification of Chief Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).

32.1		Certification of President and Chief Executive Officer, and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following material from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, formatted in XBRL (Extensible Business Reporting Language): (i) Unaudited Consolidated Balance Sheets, (ii) Unaudited Consolidated Statements of Income, (iii) Unaudited Consolidated Statements of Comprehensive Income (Loss), (iv) Unaudited Consolidated Statement of Shareholders’ Equity, (v) Unaudited Consolidated Statements of Cash Flows, and (vi) Notes to the Consolidated Financial Statements.

(1)

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

(2)

Incorporated by reference to the Current Report on Form 8-K (File No. 001-35295, filed on September 21, 2016)

SIGNATURES

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

	Poage Bankshares, Inc.
Date: August 13, 2018

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

	/s/ Jane Gilkerson
	Jane Gilkerson
	Chief Financial Officer

Poage Bankshares, Inc. - FORM 10-Q - August 13, 2018

Attached files

Poage Bankshares, Inc. Reports