- Quarterly Report (10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period ended June 30, 2012

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

For transition period from to

Commission File Number 001-35295

Poage Bankshares, Inc.

(Exact Name of Registrant as Specified in Charter)

Maryland

45-3204393

(State of Other Jurisdiction

Of Incorporation

(I.R.S Employer

Identification Number)


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

606-324-7196

Registrant’s telephone number, including area code

Not Applicable

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

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

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

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

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

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

As of August 8, 2012, 3,372,375 shares of the Registrant’s common stock, par value $.01 per share, were outstanding.

POAGE BANKSHARES, INC.

Form 10-Q Quarterly Report

Table of Contents


	PART I. FINANCIAL INFORMATION

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

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	18

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	25

ITEM 4.	CONTROLS AND PROCEDURES	25

	PART II. OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	26

ITEM 1A.	RISK FACTORS	26

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	26

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	26

ITEM 4.	MINE SAFETY DISCLOSURES	26

ITEM 5.	OTHER INFORMATION	26

ITEM 6.	EXHIBITS	26

SIGNATURES		27

PART I

ITEM 1.

FINANCIAL STATEMENTS

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED BALANCE SHEETS


	June 30, 2012			September 30, 2011
	(in thousands)
ASSETS
Cash and due from financial institutions	$	25,753		$	48,440
Securities available for sale		92,596			76,745
Loans held for sale		676			1,012
Loans, net of allowance of $1,593, and $1,658		181,735			183,696
Federal Home Loan Bank stock, at cost		1,953			1,906
Other real estate owned, net		987			87
Premises and equipment, net		6,202			6,322
Company owned life insurance		6,631			6,467
Accrued interest receivable		1,381			1,491
Other assets		1,448			1,786


	$	319,362		$	327,952


LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Non-interest bearing	$	7,099		$	1,139
Interest bearing		229,804			241,583

Total deposits		236,903			242,722
Federal Home Loan Bank advances		19,174			23,117
Accrued interest payable		293			435
Other liabilities		1,918			2,590

Total liabilities		258,288			268,864

Commitments and contingent liabilities		—			—

Shareholders’ equity
Common stock, $.01 par value, 30,000,000 shares authorized, 3,372,375 issued and outstanding		34			34
Additional paid-in-capital		31,971			31,955
Retained earnings		30,196			28,757
Unearned Employee Stock Ownership Plan (ESOP) shares		(2,597	)		(2,698	)
Accumulated other comprehensive income		1,470			1,040


Total shareholders’ equity		61,074			59,088

	$	319,362		$	327,952

See notes to unaudited consolidated financial statements.

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME


	Three months ended June 30,					Nine months ended June 30,
	2012			2011		2012		2011
	(in thousands)					(in thousands)

Interest and dividend income
Loans, including fees	$	2,605		$	2,766	$	7,988	$	8,314
Taxable securities		421			181		1,165		423
Tax exempt securities		188			291		632		870
Federal funds sold and other		27			22		92		66

		3,241			3,260		9,877		9,673
Interest expense
Deposits		615			894		2,056		2,832
Federal Home Loan Bank advances and other		146			195		475		623

		761			1,089		2,531		3,455


Net interest income		2,480			2,171		7,346		6,218

Provision for loan losses		57			160		317		460


Net interest income after provision for loan losses		2,423			2,011		7,029		5,758

Non-interest income
Service charges on deposits		146			107		408		296
Other service charges		1			6		13		14
Net gains on sales of loans		96			50		323		294
Net gains on sales of securities		46			28		240		28
Income from company owned life insurance		54			56		164		170
Other		3			3		12		12

		346			250		1,160		814
Non-interest expense
Salaries and employee benefits		1,023			946		3,052		2,659
Occupancy and equipment		216			203		620		561
Data processing		158			140		486		421
Federal deposit insurance		43			94		145		264
Foreclosed assets, net		(62	)		87		39		134
Advertising		83			73		205		203
Professional fees		153			7		516		143
Other taxes		61			75		173		152
Other		236			205		691		560

		1,911			1,830		5,927		5,097


Income before income taxes		858			431		2,262		1,475

Income tax expense		212			36		553		174


Net income	$	646		$	395	$	1,709	$	1,301

Earnings per share:
Basic	$	0.21			N/A	$	0.55		N/A
Diluted	$	0.21			N/A	$	0.55		N/A
Dividend per share	$	0.04				$	0.08

See notes to unaudited consolidated financial statements.

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


	Three months ended June 30,						Nine months ended June 30,
	2012			2011			2012			2011
	(in thousands)						(in thousands)

Net income	$	646		$	395		$	1,709		$	1,301

Other comprehensive income (loss):
Unrealized holding gains (losses) on available for sale securities		1,217			755			892			(1	)
Reclassification adjustments for (gains) losses included in net income		(46	)		(28	)		(240	)		(28	)

Net unrealized holding gains (losses) on available for sale securities		1,171			727			652			(29	)
Tax effect		(399	)		(247	)		(222	)		11

Other comprehensive income (loss):		772			480			430			(18	)


Comprehensive income (loss)	$	1,418		$	875		$	2,139		$	1,283

See notes to unaudited consolidated financial statements.

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY


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

Balances, October 1, 2011	$	34	$	31,955	$	28,757		$	(2,698	)	$	1,040	$	59,088

Net income		—		—		1,709			—			—		1,709
Dividends paid		—		—		(270	)		—			—		(270	)
ESOP compensation earned		—		16		—			101					117
Change in unrealized gain (loss) on securities available for sale, net of taxes		—		—		—			—			430		430


Balances, June 30, 2012	$	34	$	31,971	$	30,196		$	(2,597	)	$	1,470	$	61,074

See notes to unaudited consolidated financial statements.

POAGE BANKSHARES, INC.

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine months ended June 30,
	2012			2011
	(in thousands)
OPERATING ACTIVITY
Net income	$	1,709		$	1,301
Adjustments to reconcile net income to net cash from operating activities:
Depreciation		293			277
Provision for loan losses		317			460
Loss (gain) on sale of securities		(240	)		(28	)
Loss (gain) on sale of other real estate owned		(32	)		52
Net amortization on securities		496			360
Deferred income tax (benefit) expense		183			—
Net gain on sale of loans		(323	)		(294	)
Origination of loans held for sale		(9,117	)		(7,996	)
Proceeds from loans held for sale		9,776			9,673
Increase in cash value of life insurance		164			(172	)
Decrease (increase) in:
Accrued interest receivable		110			(179	)
Other assets		146			(591	)
Increase (decrease) in:
Accrued interest payable		(142	)		(158	)
Other liabilities		(885	)		(638	)

Net cash from operating activities		2,455			2,067


INVESTING ACTIVITIES
Securities available for sale:
Proceeds from sale		15,969			1,964
Proceeds from calls		41,559			15,283
Proceeds from maturities		665			445
Purchases		(77,232	)		(55,554	)
Principal payments received		3,584			61
Purchase of Federal Home Loan Bank Stock		(47	)		(23	)
Term deposits in other financial institutions:
Proceeds from maturities		—			100
Loan originations and principal payments on loans, net		99			(659	)
Proceeds from the sale of other real estate owned		466			358
Purchase of office properties and equipment		(173	)		(188	)

Net cash from investing activities		(15,110	)		(38,213	)


FINANCING ACTIVITIES
Net change in deposits		(5,819	)		13,792
Payments on Federal Home Loan Bank borrowings		(3,943	)		(7,231	)
Cash dividends paid		(270	)		—

Net cash from financing activities		(10,032	)		6,561


DECREASE IN CASH AND CASH EQUIVALENTS		(22,687	)		(29,585	)

Cash and cash equivalents at beginning of year		48,440			43,233


CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	25,753		$	13,648


Additional cash flows and supplementary information:
Cash paid during the year for:
Interest on deposits and advances	$	2,673		$	3,613
Income taxes	$	—		$	—
Real estate acquired in settlement of loans	$	1,334		$	508

See notes to unaudited consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

The accompanying unaudited consolidated financial statements of Poage Bankshares, Inc. (the “Company”) and its wholly owned subsidiary Home Federal Savings and Loans Association (the “Association”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.

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

In the opinion of management, the accompanying unaudited financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the Company’s financial position as of June 30, 2012 and September 30, 2011 and the results of operations and cash flows for the interim periods ended June 30, 2012 and 2011. All interim amounts have not been audited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for the year. These consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto filed as part of the Company’s 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission.

NOTE 2 – ADOPTION OF NEW ACCOUNTING STANDARDS

In May, 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and International accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this guidance are effective for interim and annual reporting periods beginning after December 15, 2011. The adoption of this guidance did not have a material impact on the Company’s financial statements, but the additional disclosures required by this amendment are included in Note 6.

In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in shareholder’s equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements. The amendments in this guidance are effective as of the beginning of a fiscal reporting year, and interim periods within that year, that begins after December 15, 2011. The adoption of this guidance did not have a material impact on the Company’s financial statements as the prior presentation of comprehensive income was in compliance with this statement.

NOTE 3 – SECURITIES AVAILABLE FOR SALE

The amortized cost and fair value of securities available for sale at June 30, 2012 and September 30, 2011 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) were as follows (in thousands):


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
June 30, 2012
States and political subdivisions	$	25,082	$	1,712	$	—		$	26,794
U.S. Government agencies and sponsored entities		21,530		23		(1	)		21,552
Government sponsored entities residential mortgage-backed:
FNMA		20,030		271		(6	)		20,295
FHLMC		23,726		229		—			23,955

Total securities	$	90,368	$	2,235	$	(7	)	$	92,596


September 30, 2011
States and political subdivisions	$	32,132	$	1,305	$	(20	)	$	33,417
U.S. Government agencies and sponsored entities		39,093		249		(11	)		39,331
Government sponsored entities residential mortgage-backed:
FNMA		3,944		58		(5	)		3,997

Total securities	$	75,169	$	1,612	$	(36	)	$	76,745

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


	Three months ended				Nine months ended
	June 30,				June 30,
	2012		2011		2012		2011
Proceeds	$	18,010	$	3,247	$	48,771	$	17,247
Gross gains		46		28		240		28
Gross losses		—		—		—		—

The provision for income taxes for the three months and nine months ended June 30, 2012 related to net realized securities gains was $16,000 and $82,000, respectively, based on an income tax rate of 34%.

The provision for income taxes for the three and nine months ended June 30, 2011 related to net realized securities gains was $10,000 based on an income tax rate of 34%.

The amortized cost and fair value of the securities portfolio at June 30, 2012 is shown in the following table by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. (in thousands)


	June 30, 2012
	Amortized Cost		Fair Value

Within one year	$	470	$	478
One to five years		8,853		8,964
Five to ten years		25,684		26,379
Beyond ten years		11,605		12,525
Mortgage-backed securities		43,756		44,250

Total	$	90,368	$	92,596

The following table summarizes the securities with unrealized losses at June 30, 2012 and September 30, 2011, 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 Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

June 30, 2012
U.S. Government agencies and sponsored entities	$	2,010	$	(1	)	$	—	$	—		$	2,010	$	(1	)
Government sponsored entities residential mortgage-backed:
FHLMC		1,874		(6	)		—		—			1,874		(6	)

Total securities	$	3,884	$	(7	)	$	—	$	—		$	3,884	$	(7	)


September 30, 2011
States and political subdivisions	$	—	$	—		$	1,747	$	(20	)	$	1,747	$	(20	)
U.S. Government agencies and sponsored entities		5,102		(11	)		—		—			5,102		(11	)
Government sponsored entities residential mortgage-backed:
FNMA		1,547		(5	)		—		—			1,547		(5	)

Total securities	$	6,649	$	(16	)	$	1,747	$	(20	)	$	8,396	$	(36	)

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

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

NOTE 4 – LOANS

Loans at June 30, 2012 and September 30, 2011 were as follows (in thousands):


	June 30, 2012		September 30, 2011

Real estate:
One to four family	$	143,339	$	147,733
Multi-family		996		2,016
Commercial real estate		13,016		9,786
Construction and land		4,577		5,209

		161,928		164,744

Commercial and Industrial		4,672		3,722

Consumer
Home equity lines of credit		5,736		5,796
Motor vehicle		7,232		7,299
Other		3,847		3,885

		16,815		16,980


Total		183,415		185,446
Less: Net deferred loan fees		87		92
Allowance for loan losses		1,593		1,658


	$	181,735	$	183,696

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, 2012 and September 30, 2011. Accrued interest receivable of $851,000 and $872,000 at June 30, 2012 and September 30, 2011, respectively, and net deferred loans fees of $87,000 at June 30, 2012 and $94,000 at September 30, 2011, are not considered significant and therefore are not included in the loan balances presented in the table below (in thousands):


June 30, 2012:
	Allowance for Loan Losses						Loan Balances
Loan Segment	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total

Real estate	$	—	$	1,331	$	1,331	$	—	$	161,928	$	161,928
Commercial and industrial		—		140		140		—		4,672		4,672
Consumer		—		122		122		—		16,815		16,815


Total	$	—	$	1,593	$	1,593	$	—	$	183,415	$	183,415


September 30, 2011:
	Allowance for Loan Losses						Loan Balances
Loan Segment	Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total		Individually Evaluated for Impairment		Collectively Evaluated for Impairment		Total

Real estate	$	—	$	1,368	$	1,368	$	—	$	164,744	$	164,744
Commercial and industrial		—		49		49		—		3,722		3,722
Consumer		—		241		241		—		16,980		16,980


Total	$	—	$	1,658	$	1,658	$	—	$	185,446	$	185,446

The following table sets forth an analysis of our allowance for loan losses for the three and nine months ended June 30, 2012 and 2011 (in thousands):


	Three months ended June 30,						Nine months ended June 30,
	2012			2011			2012			2011
Balance at beginning of period	$	1,541		$	1,372		$	1,658		$	1,134
Provision for loan losses:					—
Commercial		11			28			91			82
Commercial real estate		41			84			412			240
Residential real estate		(6	)		—			(81	)		—
Consumer		11			48			(105	)		138

Total provision		57			160			317			460
Amounts charged off:
Commercial		—			—			—			—
Commercial real estate		—			—			(151	)		—
Residential real estate		(34	)		(3	)		(277	)		(3	)
Consumer		—			(7	)		(32	)		(69	)

Total loans charged off		(34	)		(10	)		(460	)		(72	)
Recoveries of amounts previously charged off:
Commercial		—			—			—			—
Commercial real estate		22			—			22			—
Residential real estate		7			—			38			—
Consumer		—			1			18			1

Total recoveries		29			1			78			1
Net charge-offs		(57	)		(9	)		(382	)		(71	)

Balance at end of period	$	1,593		$	1,523		$	1,593		$	1,523

There were no impaired loans as of or during the three and nine months ended June 30, 2012 or 2011, or as of or during the year ended September 30, 2011.

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

The following table presents the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of June 30, 2012 and September 30, 2011 (in thousands):


	As of June 30, 2012				As of September 30, 2011
	Nonaccrual		Loans Past Due Over 90 Days Still Accruing		Nonaccrual		Loans Past Due Over 90 Days Still Accruing
Real estate:
One to four family	$	997	$	—	$	2,158	$	—
Multi-family		—		—		495		—
Commercial real estate		—		—		—		—
Construction and land		—		—		—		—
Commercial and industrial		10		—		—		—
Consumer:
Home equity loans and lines of credit		8		—		19		—
Motor vehicle		29		—		21		—
Other		10		—		4		—


Total	$	1,054	$	—	$	2,697	$	—

The following table presents the aging of the recorded investment in past due loans as of June 30, 2012 and September 30, 2011 by class of loans. Non-accrual loans of $1,054,000 as of June 30, 2012 and $2,697,000 at September 30, 2011 are included in the tables below and have been categorized based on their payment status (in thousands).


	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
June 30, 2012
Real estate:
One to four family	$	1,520	$	502	$	997	$	3,019	$	140,320	$	143,339
Multi-family		—		—		—		—		996		996
Commercial real estate		957		—		—		957		12,059		13,016
Construction and land		—		—		—		—		4,577		4,577
Commercial and industrial		—		6		10		16		4,656		4,672
Consumer:
Home equity loans and lines of credit		—		24		8		32		5,704		5,736
Motor vehicle		52		59		29		140		7,092		7,232
Other		—		—		10		10		3,837		3,847

Total	$	2,529	$	591	$	1,054	$	4,174	$	179,241	$	183,415


	30 - 59 Days Past Due		60 - 89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due		Total
September 30, 2011
Real estate:
One to four family	$	100	$	11	$	2,158	$	2,269	$	145,464	$	147,733
Multi-family		—		—		495		495		1,521		2,016
Commercial real estate		302		59		—		361		9,425		9,786
Construction and land		—		20		—		20		5,189		5,209
Commercial and industrial		1,030		1		—		1,031		2,691		3,722
Consumer:
Home equity loans and lines of credit		—		—		19		19		5,777		5,796
Motor vehicle		49		59		21		129		7,170		7,299
Other		7		1		4		12		3,873		3,885

Total	$	1,488	$	151	$	2,697	$	4,336	$	181,110	$	185,446

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 commerical and commercial real estate loans. 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 instituion’s credit position at some future date.

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

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

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

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


	Pass		Special Mention		Substandard		Doubtful		Not Rated
June 30, 2012
Commercial and industrial	$	4,215	$	—	$	457	$	—	$	—
Commercial Real Estate		11,817		775		424		—		—

Total	$	16,032	$	775	$	881	$	—	$	—

The Company had no troubled debt restructurings at June 30, 2012 or September 30, 2011.

The Company considers the performance of the loan portfolio and its impact on the allowance for loan losses. For all loan classes, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity on a quarterly basis. The following table presents the recorded investment in loans based on payment activity as of June 30, 2012 and September 30, 2011 (in thousands):


	June 30, 2012				September 30, 2011
	Performing		Nonperforming		Performing		Nonperforming
Real estate:
One to four family	$	142,342	$	997	$	145,575	$	2,158
Multi-family		996		—		1,521		495
Commercial real estate		13,016		—		9,786		—
Construction and land		4,577		—		5,209		—
Commercial and industrial		4,662		10		3,722		—
Consumer:
Home equity loans and lines of credit		5,728		8		5,777		19
Motor vehicle		7,203		29		7,278		21
Other		3,837		10		3,881		4

	$	182,361	$	1,054	$	182,749	$	2,697

NOTE 5: FEDERAL HOME LOAN BANK ADVANCES

Advances from the FHLB at June 30, 2012 and September 30, 2011 were as follows: (in thousands)


	June 30, 2012		September 30, 2011

Maturities November 2011 through June 2024, fixed rate at rates from 1.94% to 6.75%, weighted average rate of 2.97% at June 30, 2012 and 2.95% at September 30, 2011	$	19,174	$	23,117

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


June 30,
2013	$	5,582
2014		3,668
2015		2,996
2016		2,433
2017		1,949

Total	$	16,628

NOTE 6: FAIR VALUE

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

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

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

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

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

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

Other Real Estate Owned : Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Assets and liabilities measured at fair value on a recurring basis are summarized below:


	Fair Value Measurements at June 30, 2012 Using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		TOTAL
(Dollars in thousands)
Financial Assets
Securities:
States and political subdivisions	$	—	$	26,794	$	—	$	26,794
U.S. Government agencies and sponsored entities		—		21,552		—		21,552
Mortgage backed securities: residential		—		44,250		—		44,250

Total securities	$	—	$	92,596	$	—	$	92,596


	Fair Value Measurements at September 30, 2011 Using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		TOTAL
(Dollars in thousands)
Financial Assets
Securities:
States and political subdivisions	$	—	$	33,417	$	—	$	33,417
U.S. Government agencies and sponsored entities		—		39,331		—		39,331
Mortgage backed securities: residential		—		3,997		—		3,997

Total securities	$	—	$	76,745	$	—	$	76,745

There were no transfers between Level 1 and Level 2.

There were no assets or liabilities measured at fair value on a nonrecurring basis as of June 30, 2012.

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


	Fair Value Measurements at September 30, 2011 Using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		TOTAL
(Dollars in thousands)
Other real estate owned, net:
Residential:
One to four family	$	—	$	—	$	87	$	87

At September 30, 2011, other real estate owned had a net carrying amount of $87,000 with no valuation allowance.

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

The carrying amounts and estimated fair values of financial instruments, at June 30, 2012 and September 30, 2011 are as follows (in thousands):


			Fair Value Measurements at June 30, 2012 Using:
	Carrying Value		Level 1		Level 2		Level 3		Total

Financial assets
Cash and cash equivalents	$	25,753	$	27,753	$	—	$	—	$	27,753
Securities		92,596		—		92,596		—		92,596
Federal Home Loan Bank stock		1,953		N/A		N/A		N/A		N/A
Loans held for sale		676		—		695		—		695
Loans, net		181,735		—		—		201,271		201,271
Accrued interest receivable		1,381		—		529		852		1,381

Financial liabilities
Deposits	$	236,903	$	95,637	$	142,937	$	—	$	238,574
Federal Home Loan Bank advances		19,174		—		20,331		—		20,331
Accrued interest payable		293		—		293		—		293


September 30, 2011	Carrying Amount		Fair Value

Financial assets
Cash and cash equivalents	$	48,440	$	48,440
Securities		76,745		76,745
Federal Home Loan Bank stock		1,906		N/A
Loans held for sale		1,012		1,037
Loans, net		183,696		190,737
Accrued interest receivable		1,491		1,491

Financial liabilities
Deposits	$	242,722	$	244,812
Federal Home Loan Bank advances		23,117		24,642
Accrued interest payable		435		435

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

Cash and Cash Equivalents

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

FHLB Stock

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

Loans

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

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

Deposits

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

Other Borrowings

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

Accrued Interest Receivable/Payable

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

Off-balance Sheet Instruments

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

NOTE 7 – ESOP PLAN

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

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

Contributions to the ESOP for the three and nine months ended June 30, 2012 totaled $46,000. There was no contribution to the ESOP during the three and nine months ended June 30, 2011.

Shares held by the ESOP at June 30, 2012 were as follows (in thousands):


	June 30, 2012
Allocated to participants		3,372
Unearned		266,418

Total ESOP shares		269,790

Fair value of unearned shares	$	3,364,859

NOTE 8 – EARNINGS PER SHARE

The factors used in the earnings per share computation, at three and nine months ended June 30, 2012, follow (in thousands):


	Three months ended June 30, 2012			Nine months ended June 30, 2012
Basic
Net income	$	646,000		$	1,709,000


Weighted average common shares outstanding		3,372,375			3,372,375
Less: Average unallocated ESOP shares		(267,525	)		(267,525	)


Average shares		3,104,850			3,104,850


Basic earnings per common share	$	0.21		$	0.55


Diluted
Net income	$	646,000		$	1,709,000


Weighted average common shares outstanding for basic earnings per common share		3,104,850			3,104,850
Add: Dilutive effects of assumed exercises of stock options		—			—


Average shares and dilutive potential common shares		3,104,850			3,104,850


Diluted earnings per common share	$	0.21		$	0.55

There were no potentially dilutive securities outstanding at June 30, 2012.

Earnings per share is not presented for the three and nine months ended June 30, 2011 because the Company did not issue shares of common stock until September 12, 2011.

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

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

•

statements of our goals, intentions and expectations;

•

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

•

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

•

estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic, and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this Quarterly Report.

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

•

our ability to manage our operations during the current United States economic recession;

•

our ability to manage the risk from the growth of our commercial real estate lending;

•

significant increases in our loan losses, exceeding our allowance;

•

changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments and inflation;

•

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

•

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

•

significant increases in our loan losses;

•

risks relating to acquisitions and an ability to integrate and operate profitably any financial institution that we may acquire;

•

our ability to pay dividends;

•

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

•

general economic conditions, either nationally or in our market area;

•

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

•

potential increases in deposit assessments;

•

significantly increased competition among depository and other financial institutions;

•

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

•

legislative or regulatory changes, including increased deposit or premium assessments and increased compliance costs, that adversely affect our business and earnings;

•

changes in the level of government support of housing finance;

•

risks and costs related to becoming a publicly traded company; and

•

changes in our organization, compensation and benefit plans.

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

Critical Accounting Policies

There are no material changes to the critical accounting policies disclosed in Poage Bankshares, Inc.’s Annual Report on Form 10-K/A, as filed with the Securities and Exchange Commission on January 18, 2012.

Comparison of Financial Condition at June 30, 2012 and September 30, 2011

Our total assets decreased $8.6 million, or 2.6% to $319.4 million at June 30, 2012 from $328.0 million at September 30, 2011. The decrease was primarily due to a decrease of cash and due from financial institutions of $22.6 million, or 46.7%, to $25.8 million at June 30, 2012 from $48.4 million at September 30, 2011, partially offset by an increase in securities available for sale of $15.9 million, or 20.7%, to $92.6 million at June 30, 2012 from $76.7 million at September 30, 2011.

Loans held for sale decreased $336,000, or 33.2% to $676,000 at June 30, 2012 from $1.0 million at September 30, 2011. This decrease was largely due to reduced one-to-four family mortgage loan originations.

Loans receivable, net, decreased $2.0 million, or 1.1% to $181.7 million at June 30, 2012 from $183.7 million at September 30, 2011. This decrease was largely due to reduced one-to-four family loan originations, caused by the reduced level of refinancing and transfers to other real estate owned. Non-performing loans decreased $1.6 million, or 59.3%, from $2.7 million at September 30, 2011 to $1.1 million at June 30, 2012.

Securities available for sale increased to $92.6 million at June 30, 2012 from $76.7 million at September 30, 2011. This increase was primarily due to the deployment of excess cash and cash equivalents for the purchase of higher-yielding residential mortgage backed securities.

Deposits decreased $5.8 million, or 2.4 %, to $236.9 million at June 30, 2012 from $242.7 million at September 30, 2011. The decrease was primarily attributable to an increase in savings and NOW accounts of $2.0 million, or 2.1%, offset by a decrease of $7.8 million, or 5.2%, in certificates of deposit.

Federal Home Loan Bank advances decreased $3.9 million, or 16.9%, to $19.2 million at June 30, 2012 from $23.1 million at September 30, 2011. This decrease in borrowings was primarily the result of regular principal payments and maturities.

Total shareholders’ equity increased to $61.1 million at June 30, 2012, compared to $59.1 million at September 30, 2011. The increase resulted primarily from net income of $1.7 million for the nine months ended June 30, 2012, an increase in other comprehensive income of $430,000 and partially offset by cash dividends of $270,000.

Average Balance and Yields

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


	For the Three Months Ended June 30,
	2012								2011
	Average Balance		Interest and Dividends			Yield/ Cost			Average Balance		Interest and Dividends			Yield/ Cost

Assets:
Interest-earning assets:
Loans	$	180,048	$	2,605			5.79	%	$	182,062	$	2,766			6.08	%
Investment securities		99,557		609			2.45	%		75,265		472			2.51	%
FHLB stock		1,947		20			4.11	%		1,903		21			4.41	%
Other interest-earning assets		19,712		7			0.14	%		16,907		1			0.02	%

Total interest-earning assets		301,264		3,241			4.30	%		276,137		3,260			4.72	%

Noninterest-earning assets		19,392								19,384

Total assets		320,656								295,521

Liabilities and equity:
Interest bearing liabilities:
Interest bearing deposits:
NOW, savings, money market, and other		93,919		82			0.35	%		84,485		179			0.85	%
Certificates of deposit		142,258		533			1.50	%		152,944		715			1.87	%

Total interest bearing deposits		236,177		615			1.04	%		237,429		894			1.51	%

FHLB advances		19,758		146			2.96	%		25,741		195			3.03	%

Total interest bearing liabilities		255,935		761			1.19	%		263,170		1,089			1.66	%

Non-interest bearing liabilities:
Non-interest bearing deposits		1,013								1,005
Accrued interest payable		353								420
Other liabilities		2,898								2,383

Total non-interest bearing liabilities		4,264								3,808

Total liabilities		260,199								266,978

Total equity		60,457								28,543

Total liabilities and equity	$	320,656							$	295,521

Net interest income				2,480								2,171
Interest rate spread							3.11	%							3.07	%
Net interest margin							3.29	%							3.14	%
Average interest-earning assets to average interest-bearing liabilities				117.71	%							104.93	%


	For the Nine Months Ended June 30,
	2012								2011
	Average Balance		Interest and Dividends			Yield/ Cost			Average Balance		Interest and Dividends			Yield/ Cost

Assets:
Interest-earning assets:
Loans	$	181,056	$	7,988			5.88	%	$	182,746	$	8,314			6.07	%
Investment securities		96,671		1,797			2.48	%		70,368		1,293			2.45	%
FHLB stock		1,919		61			4.24	%		1,889		61			4.31	%
Other interest-earning assets		22,711		31			0.18	%		17,838		5			0.04	%

Total interest-earning assets		302,357		9,877			4.36	%		272,841		9,673			4.73	%

Noninterest-earning assets		20,555								18,934

Total assets		322,912								291,775

Liabilities and equity:
Interest bearing liabilities:
Interest bearing deposits:
NOW, savings, money market, and other		91,526		292			0.43	%		75,794		488			0.86	%
Certificates of deposit		144,471		1,764			1.63	%		156,909		2,344			1.99	%

Total interest bearing deposits		235,997		2,056			1.16	%		232,703		2,832			2.43	%

FHLB advances		21,057		475			3.01	%		27,491		623			3.02	%

Total interest bearing liabilities		257,054		2,531			1.31	%		260,194		3,455			1.77	%

Non-interest bearing liabilities:
Non-interest bearing deposits		956								943
Accrued interest payable		380								465
Other liabilities		4,651								2,194

Total non-interest bearing liabilities		5,987								3,602

Total liabilities		263,041								263,796

Total equity		59,871								27,979

Total liabilities and equity	$	322,912							$	291,755

Net interest income				7,346								6,218
Interest rate spread							3.04	%							2.96	%
Net interest margin							3.24	%							3.04	%
Average interest-earning assets to average interest-bearing liabilities				117.62	%							104.86	%

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, 2012, we had $19.2 million in advances from the Federal Home Loan Bank of Cincinnati and an additional borrowing capacity of $54.5 million.

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

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

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

As of June 30, 2012, based on the most recent notification from the OCC, the Association was categorized as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since the most recent notification that management believes have changed the Association’s prompt corrective action category.

Actual and required capital amounts (in thousands) and ratios for the Association are presented below at June 30, 2012 and year-end:


	Actual						For Capital Adequacy Purpose						To Be Well Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio				Amount			Ratio			Amount		Ratio
As of June 30 2012:
Total Risk-Based Capital (to Risk-weighted Assets)	$	45,679		29.57	%	³	$	12,382	³		8.00	%	$	15,448		10.00	%
Tier I Capital (to Risk-weighted Assets)		44,086		28.53	%	³		6,179	³		4.00	%		9,269		6.00	%
Tier I Capital (to Adjusted Total Assets)		44,086		13.51	%	³		12,771	³		4.00	%		15,963		5.00	%


	Actual						For Capital Adequacy Purposes						To Be Well Capitalized Under Prompt Corrective Action Regulations
	Amount		Ratio				Amount			Ratio			Amount			Ratio
As of September 30, 2011:
Total Risk-Based Capital (to Risk-weighted Assets)	$	43,748		28.52	%	³	$	12,270	³		8.00	%	$	15,388	³		10.00	%
Tier I Capital (to Risk-weighted Assets)	$	42,090		27.44	%	³	$	6,135	³		4.00	%	$	9,203	³		6.00	%
Tier I Capital (to Adjusted Total Assets)	$	42,090		12.88	%	³	$	13,076	³		4.00	%	$	16,346	³		5.00	%
Tangible Capital (to Adjusted Total Assets)	$	42,090		12.88	%	³	$	4,904	³		1.50	%		N/A			N/A

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.

Comparison of Operating Results for the Three and Nine Months Ended June 30, 2012 and June 30, 2011

General. Net income increased to $646,000 for the three months ended June 30, 2012 from $395,000 for the three months ended June 30, 2011. The increase reflected an increase in net interest income of $309,000 for the three months ended June 30, 2012, offset by an increase in non-interest expense of $81,000 to $1.9 million for the three months ended June 30, 2012 from $1.8 million for the three months ended June 30, 2011.

Net income increased to $1.7 million for the nine months ended June 30, 2012 from $1.3 million for the nine months ended June 30, 2011. The increase reflected an increase in net interest income of $1.13 million for the nine months ended June 30, 2012, offset by an increase in non-interest expense of $830,000 to $5.9 million for the nine months ended June 30, 2012 from $5.1 million for the nine months ended June 30, 2011.

Interest Income. Interest income decreased slightly to $3.2 million for the three months ended June 30, 2012 from $3.3 million for the three months ended June 30, 2011.

Interest income on loans decreased $161,000, or 5.8%, to $2.6 million for the three months ended June 30, 2012 from $2.8 million for the three months ended June 30, 2011. Likewise, the average yields on loans decreased to 5.79% for the three months ended June 30, 2012, compared to 6.08% for the three months ended June 30, 2011. Interest income on investment securities increased $137,000, or 29.0%, to $609,000 for the three months ended June 30, 2012 from $472,000 for the three months ended June 30, 2011, reflecting an increase in the average balance of such securities to $99.6 million at June 30, 2012 from $75.3 million at June 30, 2011. The average yield decreased slightly to 2.45% for the three months ended June 30, 2012, compared to 2.51% for the three months ended June 30, 2011.

Interest income increased $204,000, or 2.1%, to $9.9 million for the nine months ended June 30, 2012 from $9.7 million for the nine months ended June 30, 2011. The increase was largely due to a $742,000 increase in interest income on taxable securities, partially offset by a decrease of $238,000 in interest income from tax exempt securities as well as a decrease of $326,000 in loan interest income.

Interest income on loans decreased $326,000, or 3.9%, to $8.0 million for the nine months ended June 30, 2012, from $8.3 million for the nine months ended June 30, 2011. The average yields on loans decreased to 5.88% for the nine months ended June 30, 2012, compared to 6.07% for the nine months ended June 30, 2011. Interest income on investment securities increased $504,000, or 39.0%, to $1.8 million for the nine months ended June 30, 2012 from $1.3 million for the nine months ended June 30, 2011, reflecting an increase in the average balance of such securities to $96.7 million at June 30, 2012 from $70.4 million at June 30, 2011. The average yield increased slightly to 2.48% for the nine months ended June 30, 2012, compared to 2.45% for the nine months ended June 30, 2011.

Interest Expense. Interest expense decreased $328,000, or 30.5%, to $761,000 for the three months ended June 30, 2012 from $1.1 million for the three months ended June 30, 2011. The decrease reflected a decrease in the average rate paid on deposits to 1.04% for the three months ended June 30, 2012 from 1.51% for the three months ended June 30, 2011 and a decrease in the average balance of such deposits of $1.3 million. Interest expense on Federal Home Loan Bank Advances decreased $49,000 or 25.1% to $146,000 for the three months ended June 30, 2012 from $195,000 for the three months ended June 30, 2011. This decrease was due to a decrease of $6.0 million in the average balance of these borrowings and a 7 basis point decrease in the average rate paid on these borrowings.

Interest expense decreased $924,000, or 26.7%, to $2.5 million for the nine months ended June 30, 2012 from $3.5 million for the nine months ended June 30, 2011. The decrease reflected a decrease in the average rate paid on deposits to 1.16% for the nine months ended June 30, 2012 from 2.43% for the nine months ended June 30, 2011, which more than offset increases in the average balance of such deposit from $236.0 to $232.7 for the same periods. Interest expense on Federal Home Loan Bank Advances decreased $148,000 or 23.8% to $475,000 for the nine months ended June 30, 2012 from $623,000 for the nine months ended June 30, 2011. This decrease was due to a decrease of $6.4 million in the average balance of these borrowings and a basis point decrease in the average rate paid on these borrowings.

Interest expense on certificates of deposit decreased $182,000, or 25.4%, to $533,000 for the three months ended June 30, 2012 from $715,000 for the three months ended June 30, 2011. This decrease reflected a decrease in the average rate paid on certificates of deposits to 1.50% for the three months ended June 30, 2012 from 1.87% for the three months ended June 30, 2011, as well as a decrease in the average balance of such certificates to $142.3 million from $152.9 million. Interest expense on money market deposits, savings, and NOW and demand deposits decreased $97,000, or 54.2%, to $82,000 for the three months ended June 30, 2012 from $179,000 for the three months ended June 30, 2011. The decrease was due to the lower average cost on the NOW and demand deposits as well as savings and money market accounts to .35% for the three months ended June 30, 2012 from .85% for the three months ended June 30, 2011, which more than offset a $9.4 million increase in the average balance of such deposits to $93.9 million.

Interest expense on certificates of deposit decreased $580,000, or 24.7%, to $1.8 million for the nine months ended June 30, 2012 from $2.3 million for the nine months ended June 30, 2011. This decrease reflected a decrease in the average rate paid on certificates of deposits to 1.63% for the nine months ended June 30, 2012 from 1.99% for the nine months ended June 30, 2011, as well as a decrease in the average balance of such certificates to $144.5 million from $156.9 million. Interest expense on money market deposits, savings, and NOW and demand deposits decreased $196,000, or 40.2%, to $292,000 for the nine months ended June 30, 2012 from $488,000 for the nine months ended June 30, 2011. The decrease was due to the lower average cost on the NOW and demand deposits as well as savings and money market accounts to .43% for the nine months ended June 30, 2012 from .86% for the nine months ended June 30, 201, which more than offset a $15.7 million increase in the average balance of such deposits to $91.5 million.

Net Interest Income. Net interest income increased $309,000, or 14.2%, to $2.5 million for the three months ended June 30, 2012 from $2.2 million for the three months ended June 30, 2011. The interest rate spread increased slightly to 3.11% from 3.07%, along with an increase in the ratio of our average interest earning assets to average interest bearing liabilities to 117.71% from 104.93%. Our net interest margin increased to 3.29% from 3.14%. The increases in our interest rate spread and net interest margin were largely due to a reduction of rates paid on deposits.

Net interest income increased $1.1 million, or 17.7%, to $7.3 million for the nine months ended June 30, 2012 from $6.2 million for the nine months ended June 30, 2011. The interest rate spread increased to 3.04% from 2.96%, along with an increase in the ratio of our average interest earning assets to average interest bearing liabilities to 117.62% from 104.86%. Our net interest margin increased to 3.24% from 3.04%. The increases in our interest rate spread and net interest margin were largely due to a reduction of rates paid on deposits.

Provision for Loan Losses. We recorded a provision for loan losses of $57,000 and $160,000, respectively, for the three months ended June 30, 2012 and 2011, and a provision for loan losses of $317,000 and $460,000, respectively, for the nine months ended June 30, 2012 and 2011, reflecting the minimal levels of nonperforming loans and charge-offs during the periods, as well as management’s conservative lending policies. The provisions for each period were based on management’s quarterly calculations and resulted primarily from increased subjective factors applied to its loan portfolio.

Noninterest Income. Noninterest income increased $96,000 or 38.4%, to $346,000 for the three months ended June 30, 2012 from $250,000 for the three months ended June 30, 2011. The increase in noninterest income was primarily attributable to an increase in service charges on deposits to $146,000 for the three months ended June 30, 2012 from $107,000 for the three months ended June 30, 2011, and an increase in net gains on sales of loans of $96,000 for the three months ended June 30, 2012, from $50,000 for the three months ended June 30, 2011.

Noninterest income increased to $1.2 million for the nine months ended June 30, 2012 from $814,000 for the nine months ended June 30, 2011. The increase in noninterest income was primarily attributable to an increase in service charges on deposits to $408,000 for the nine months ended June 30, 2012 from $296,000 for the nine months ended June 30, 2011 and an increase in net gains on sales of securities to $240,000 for the nine months ended June 30, 2012 from $28,000 for the nine months ended June 30, 2011.

The increase in service fees on deposits is largely due to an automated bounce protection program implemented in January 2012, which increased the NSF and overdraft fee income, while reducing the number of fee waivers by Company personnel. Also electronic banking fee income has continued to grow as more customers are utilizing our internet based banking services.

Noninterest Expense. Noninterest expense increased $81,000, or 4.4%, to $1.9 million for the three months ended June 30, 2012, compared to $1.8 million for the three months ended June 30, 2011. This increase was due largely to an increase in salaries and employee benefits to $1.0 million for the three months ended June 30, 2012 from $946,000 for the three months ended June 30, 2011 as well as an increase in other expenses of $163,000 to $450,000 for the three months ended June 30, 2012, compared to $287,000 for the three months ended June 30, 2011 partially offset by a decline in foreclosed assets, net expenses of $149,000.

Noninterest expense increased $830,000, or 16.3%, to $5.9 million for the nine months ended June 30, 2012, compared to $5.1 million for the nine months ended June 30, 2011. This increase was due largely to an increase in salaries and employee benefits to $3.1 million for the nine months ended June 30, 2012 from $2.7 million for the nine months ended June 30, 2011 as well as an increase in other expenses of $525,000 to $1.4 million for the nine months ended June 30, 2012 compared to $855,000 for the nine months ended June 30, 2011.

The total number of employees has steadily increased from 50 at September 30, 2010 to 62 at June 30, 2012.

It is expected that personnel expenses will continue to increase. In late June, 2012 a seasoned Chief Credit Officer and seasoned Retail Lending Manager joined the management team. They will be responsible for directing the continued transition of this former Thrift into the additional areas of consumer and commercial lending. These positions were necessary in order to complete the year-end retirement transition of the former Co-CEO’s into their respective new roles as consultants. In addition to these key positions, it is anticipated the future addition of a dual-functioned position as Director of Human Resources and Training.

Income Tax Expense. The provision for income taxes was $212,000 for the three months ended June 30, 2012, compared to $36,000 for the three months ended June 30, 2011. Our effective tax rates for the three months ended June 30, 2012 and 2011 were 24.7% and 8.4%, respectively. This increase in income tax expense is largely due to increased earnings during the three months ended June 30, 2012. The increase in the effective tax rate is largely due to a reduction in tax exempt income of $103,000 to $188,000 for the three months ended June 30, 2012 from $291,000 for the three months ended June 30, 2011.

The provision for income taxes was $553,000 for the nine months ended June 30, 2012, compared to $174,000 for the nine months ended June 30, 2011. Our effective tax rates for the nine months ended June 30, 2012 and 2011 were 24.4% and 11.8%, respectively. This increase in income tax expense is largely due to increased earnings during the nine months ended June 30, 2012. The increase in the effective tax rate is largely due to a reduction in tax exempt income of $238,000 to $632,000 for the nine months ended June 30, 2012 from $870,000 for the nine months ended June 30, 2011.

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 Registrant.

ITEM 4.

CONTROLS AND PROCEDURES

As of the end of the period covered by the report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended). Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended June 30, 2012, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

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

Not applicable.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

None.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

The exhibits required by Item 601 of Regulation S-K are included with this Form 10-Q and are listed on the “Index to Exhibits” immediately following the Signatures.

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 10, 2012

/s/ R. E. Coffman, Jr.

R. E. Coffman, Jr.

President & Chief Executive Officer

/s/ Jeffery W. Clark

Jeffery W. Clark,

Chief Financial Officer

INDEX TO EXHIBITS


Exhibit number		Description

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

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

32.1		Certification of R. E. Coffman, Jr., President and Chief Executive Officer, and Jeffery W. Clark, 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, 2012, formatted in XBRL (Extensible Business Reporting Language) :(i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Other Comprehensive Income (Loss), (iv) Consolidated Statements of Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to the Consolidated Financial Statements. (*)